AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1998
REGISTRATION NOS. 333-46495
333-46495-01
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
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>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</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
SMITHFIELD FOODS, INC.
200 COMMERCE STREET
SMITHFIELD, VIRGINIA 23430
(757) 365-3000
(Name, address, including Zip Code, and telephone number, including area code,
of agent for service)
-------------
SMITHFIELD CANADA LIMITED
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
ONTARIO 2011 Not Applicable
<S> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
SMITHFIELD FOODS, INC.
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
SMITHFIELD FOODS, INC.
200 COMMERCE STREET
SMITHFIELD, VIRGINIA 23430
(757) 365-3000
(Name, address, including Zip Code, and telephone number, including area code,
of agent for service)
COPY TO:
<TABLE>
<S> <C>
ROBERT L. BURRUS, JR. RENE SORELL
McGUIRE, WOODS, BATTLE & BOOTHE LLP McCARTHY TETRAULT
ONE JAMES CENTER TORONTO DOMINION BANK TOWER, SUITE 4700
901 EAST CARY STREET TORONTO-DOMINION CENTRE
RICHMOND, VIRGINIA 23219 TORONTO, CANADA M5K 1E6
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective
and the conditions of the Offers are satisfied or, at the option of the
registrants, waived.
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. [ ]
-------------
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 STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
[SMITHFIELD FOODS, INC. LETTERHEAD]
o, 1998
Dear Schneider Shareholder:
I am pleased to enclose Smithfield Canada's offers to acquire the Class A
Shares and Common Shares of Schneider Corporation.
Under the enclosed offers, Schneider shareholders will have an opportunity
to exchange each Schneider share for 0.5415 of an Exchangeable Share of
Smithfield Canada. Smithfield Canada is a newly incorporated, wholly-owned
subsidiary of Smithfield Foods, the largest combined hog slaughterer and
further processor of pork in the United States.
The Exchangeable Shares will provide the same voting, liquidation and
dividend rights as accrue to shares of Smithfield Foods common stock and have
been designed to allow Canadian shareholders a tax deferral in certain
circumstances. The Exchangeable Shares will be exchangeable at any time for
common shares of Smithfield Foods, which trade on the Nasdaq market in the
United States. Based on the Nasdaq closing price of Smithfield Foods' common
shares on o, 1998 (U.S. $o per share), the value of our offers is Cdn. $o per
Schneider share.
Since 1975, when our current management assumed control, Smithfield Foods
has successfully expanded its production capacity and markets through a
combination of strong internal growth and acquisitions of regional and
multi-regional companies with well recognized brand identities. If our offers
for Schneider are successful, we expect to create one of the largest pork
marketing and processed meats companies in North America. Smithfield believes
that acquiring Schneider will complement Smithfield Foods' product mix and pork
marketing capabilities, as well as enhance Smithfield's international processed
meats business.
The enclosed materials are lengthy because one document is being used to
satisfy the legal and regulatory requirements of both Canada and the United
States. These materials provide a detailed description of Smithfield Canada's
offers, the terms of the Exchangeable Shares, historical financial statements
and other information relating to Smithfield Foods and Schneider and pro forma
financial statements for the combined company.
These materials are intended to assist you in making your decision as to
whether to tender your Schneider shares to Smithfield Canada. The summary of
this information beginning on page 1 is a useful place for you to begin your
review. I urge you to read this information carefully and, if you require
assistance, you should consult with your own legal and financial advisors.
Yours very truly,
SMITHFIELD FOODS, INC.
Joseph W. Luter, III
Chairman and Chief Executive Officer
<PAGE>
This document is important and requires your immediate attention. If you have
any questions as to how to deal with it, you should consult your professional
advisors. No securities commission or similar authority in Canada or the United
States has in any way passed upon the merits of the securities offered
hereunder and any representation to the contrary is an offence. Information
relating to Smithfield Foods has been incorporated by reference from documents
filed by Smithfield with the United States Securities and Exchange Commission.
Copies of such documents will be filed with Canadian securities regulatory
authorities concurrently with the filing of this Offer and Circular and may be
obtained on request without charge from the Secretary of Smithfield Foods at
200 Commerce Street, Smithfield, Virginia, 23430.
OFFERS TO PURCHASE
any and all of the outstanding Common Shares, Class A non-voting Shares and
Options of
SCHNEIDER CORPORATION
by
SMITHFIELD CANADA LIMITED
a wholly-owned subsidiary of
SMITHFIELD FOODS, INC.
Smithfield Canada Limited offers to purchase, upon the terms and subject
to the conditions described in the attached Offers to Purchase, each
outstanding Common Share and each Class A non-voting Share of Schneider
Corporation for 0.5415 of an Exchangeable Share of Smithfield Canada. Each
whole Exchangeable Share will be exchangeable for one share of the common stock
of Smithfield Foods, Inc. of Norfolk, Virginia. Smithfield Canada is a
newly-incorporated, wholly-owned subsidiary of Smithfield Foods. Smithfield
Canada also offers to purchase the outstanding Options to acquire Class A
Shares of Schneider Corporation. Holders may exchange their Options for
Exchangeable Shares on the basis of 0.5415 of an Exchangeable Share for each
C$25.00 of "in the money" value (being the difference between the Option
exercise price and C$25.00).
According to Schneider's shareholder list, as at April 9, 1998 there were
738,954 Common Shares and 6,105,565 Class A Shares outstanding. In addition,
Schneider has reported that there were outstanding Options to acquire an
additional 545,100 Class A Shares as of November 18, 1997. As of the date
hereof, there are 37,537,362 shares of Smithfield Common Stock outstanding and
10 shares of Smithfield Canada Common Shares outstanding. Assuming that all of
the outstanding Schneider Shares and Options are tendered in acceptance of the
Offers, and assuming that Smithfield Canada takes up and pays for such
securities under the Offers, Smithfield Canada will issue approximately
3,852,274 Exchangeable Shares. Assuming that all of the holders of Exchangeable
Shares will, over time, exchange their Exchangeable Shares for shares of
Smithfield Common Stock, Smithfield will issue approximately 3,852,274 shares
of Smithfield Common Stock.
The holders of Exchangeable Shares will be entitled to dividends and other
rights equivalent to those of shares of Smithfield Common Stock and will be
entitled, through a voting trust, to vote at meetings of the shareholders of
Smithfield Foods. The Exchangeable Shares will be redeemed, if not previously
exchanged, on April 30, 2008. The Exchangeable Shares are designed to provide
an opportunity for shareholders of Schneider Corporation to achieve a Canadian
tax deferral in certain circumstances. The Exchangeable Shares will not be
foreign property under the Income Tax Act (Canada). If sufficient Schneider
Shares are tendered in acceptance of these Offers, Schneider Corporation will
become an indirect subsidiary of Smithfield Foods.
The Schneider Family (defined below) has agreed to tender its Common
Shares (representing approximately 75% of the outstanding Common Shares) and
Class A Shares (representing approximately 17% of the outstanding Class A
Shares) in acceptance of the Offers. Under the terms of the Lock-up Agreement,
these shares may not be withdrawn and tendered into any competing offer. The
Offer to purchase Common Shares is subject to certain conditions, including
that no change occurs in the business or financial condition of Schneider
Corporation that is materially adverse to a purchaser of Schneider Shares and
that all necessary regulatory consents and approvals be obtained.
On April 8, 1998, The Toronto Stock Exchange conditionally approved the
listing of the Exchangeable Shares, subject to the fulfilment of all of the
requirements of the TSE on or before July 7, 1998. The outstanding shares of
Smithfield Common Stock are quoted for trading on the Nasdaq National Market.
The closing price of the shares of Smithfield Common Stock on the Nasdaq
National Market on April 13, 1998 was US$31.37. Based on such closing price and
using the United States/Canada currency exchange rate in effect on that date
(the Noon Spot Rate), the value of 0.5415 of a share of Smithfield Common Stock
was C$24.32.
The disclosure in this document regarding Smithfield Foods has been
prepared in accordance with the requirements of United States federal
securities laws. Canadian shareholders should be aware that these requirements
differ from those of the provinces and territories of Canada. In addition, the
financial statements of Smithfield Foods included in this document have not
been prepared in accordance with Canadian GAAP and may not be comparable to the
financial statements of Canadian public companies.
The dealer manager for the Offers is First Marathon Securities Limited.
Questions and requests for assistance may be directed to the Dealer Manager or
to CIBC Mellon Trust Company, the Depositary for the Offers. Additional copies
of this document and related materials may be obtained without charge on
request from the Depositary at its Toronto office specified on the back page of
this document.
For a discussion of risk factors to be considered by Shareholders and
Option holders in evaluating whether to accept the Offers, see "Risk Factors"
beginning on page 17 of this Offer and Circular.
o, 1998
<PAGE>
In any jurisdiction in which the Offers are required to be made by a
licensed broker or dealer, the Offers shall be made on behalf of Smithfield
Canada by brokers or dealers licensed under the laws of that jurisdiction.
Available Information
Smithfield is subject to the informational reporting requirements of the
United States Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and, in accordance therewith, files reports, proxy statements and other
information with the United States Securities and Exchange Commission (the
"SEC"). Such reports, proxy statements and other information may be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at
the SEC's Regional Offices in New York (Seven World Trade Center, 13th Floor,
New York, New York 10048), and Chicago (Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661). Copies of these materials may be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the SEC 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 SEC.
Smithfield Canada is not currently subject to the information reporting
requirements of the Exchange Act. Smithfield Canada will become subject to such
requirements upon the effectiveness of the Registration Statement, although
Smithfield Canada intends to seek and expects to receive exemptions therefrom.
Instead of filing such reports (which would include separate financial
statements for Smithfield Canada), Smithfield Canada will furnish holders of
Exchangeable Shares with the reports filed by Smithfield pursuant to the
informational reporting requirements of the Exchange Act. Such reports by
Smithfield will include [summarized financial information for Smithfield
Canada, information regarding the Exchangeable Shares and any other material
information pertaining to the Exchangeable Shares.] See also "Regulatory
Matters -- Securities Regulatory Matters."
This Offer and Circular constitutes a part of a Registration Statement on
Form S-4, as amended (the "Registration Statement"), filed by Smithfield and
Smithfield Canada with the SEC under the United States Securities Act of 1933,
as amended. This Offer and Circular omits certain of the information contained
in the Registration Statement in accordance with the rules and regulations of
the SEC. Reference is hereby made to the Registration Statement and related
exhibits for further information with respect to Smithfield and the Offers.
Statements contained herein concerning the provisions of any documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the SEC. Each such statement is qualified in its entirety by such
reference.
Incorporation of Certain Documents by Reference
Smithfield's Annual Report on Form 10-K for the fiscal year ended April
27, 1997, its Quarterly Reports on Form 10-Q for the quarterly periods ended
July 27, 1997, October 26, 1997 and February 1, 1998 and its Current Reports on
Form 8-K dated January 17, 1997, August 11, 1997, September 5, 1997, December
24, 1997 and February 10, 1998 have been filed by Smithfield (SEC File No.
000-02258) with the SEC and are incorporated herein by reference.
All documents filed by Smithfield with the SEC 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 Offer and Circular shall
be deemed to be incorporated by reference into this Offer and Circular and to
be a part of this Offer and Circular 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 Offer and Circular 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 Offer and Circular. As used herein, the terms "Offer
and Circular" and "herein" mean this Offer and Circular, including the
documents incorporated or deemed incorporated by reference, as the same may be
amended, supplemented or otherwise modified from time to time. Statements
contained in this Offer and Circular as to the contents of any contract or
other document referred to herein do not purport to be complete and are
qualified in all respects by reference to all of the provisions of such
contract or other document.
Smithfield will furnish without charge to each person to whom this Offer
and Circular 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.
(continued on next page)
i
<PAGE>
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE
MADE BY o, 1998.
Statement Regarding Forward-Looking Information
Certain statements in the Circular under the captions "Purpose of the
Offers and Smithfield's Plans for Schneider" and "Effect of the Offers on
Market and Listings," in Annex A -- Pro Forma Consolidated Condensed Financial
Statements Compilation Report, and in Annex B under the captions "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" 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 Smithfield 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.
Schneider Information
While this document contains information concerning Schneider insofar as
it is known or reasonably available to Smithfield Foods and Smithfield Canada,
neither Smithfield Foods nor Smithfield Canada is affiliated with Schneider.
Smithfield Foods and Smithfield Canada were not involved in the preparation of
the information and statements relating to Schneider contained in this document
and are not able to verify any such information or statements.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFER
AND CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
ENFORCEMENT
Enforcement by investors of civil remedies under the United States federal
securities laws may be affected adversely by the fact that Smithfield Canada is
incorporated under the laws of the Province of Ontario, that some of the
officers and directors of Smithfield Canada and some or all of the experts
named in the Registration Statement are resident outside of the United States,
and that substantially all of the assets of Smithfield Canada are located
outside the United States.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY .................................................................. 1
DEFINITIONS .............................................................. 12
RISK FACTORS ............................................................. 17
EXCHANGE RATES OF CANADIAN AND US DOLLARS ................................ 19
OFFERS TO PURCHASE ....................................................... 20
1. The Offers .......................................................... 20
2. Conditions to the Offers ............................................ 20
3. Payment for Deposited Schneider Shares and Options .................. 22
4. Terms of the Exchangeable Shares and the Voting, Support
and Exchange Trust Agreement ........................................ 23
5. Time and Manner for Acceptance ...................................... 23
6. Procedure for Guaranteed Delivery ................................... 23
7. Acceptance Alternative for Holding Companies ........................ 24
8. Extensions and Variations of the Offers ............................. 25
9. Right to Withdraw Deposited Schneider Shares and Options ............ 26
10. Return of Withdrawn Schneider Shares and Assignments of Options ..... 27
11. Mail Service Interruption ........................................... 27
12. Dividends, Distributions and Proxies ................................ 27
13. Notice and Delivery ................................................. 28
14. Market Purchases during the Offers .................................. 28
15. General ............................................................. 29
16. Other Terms of the Offers ........................................... 29
OFFERING CIRCULAR ........................................................ 30
Smithfield Foods, Inc. .................................................. 30
Smithfield Canada Limited ............................................... 32
Schneider Corporation ................................................... 37
Background to the Offers ................................................ 38
Litigation relating to the Maple Leaf Offer ............................. 40
Lock-up Agreement ....................................................... 41
Accounting Treatment .................................................... 41
Purpose of the Offers and Smithfield's Plans for Schneider .............. 42
Canadian Federal Income Tax Considerations .............................. 42
United States Federal Income Tax Considerations ......................... 50
Regulatory Matters ...................................................... 56
Acquisition of Shares Not Deposited and Appraisal Rights ................ 57
Comparison of Shareholder Rights ........................................ 58
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Price Range and Trading Volumes of Class A Shares of Schneider .................... 63
Price Range and Trading Volumes of Common Shares of Schneider ..................... 63
Price Range and Trading Volumes of Shares of Common Stock of Smithfield Foods ..... 64
Eligibility for Investment in Canada .............................................. 64
Ownership of Securities of Schneider .............................................. 65
Trading in Securities of Schneider ................................................ 65
Commitments to Acquire Securities of Schneider .................................... 65
Arrangements, Agreements or Understandings ........................................ 65
Acceptance of the Offers .......................................................... 65
Material Changes and Other Information ............................................ 65
Effect of the Offers on Market and Listings ....................................... 66
Depositary ........................................................................ 66
Soliciting Dealer Arrangements .................................................... 66
Legal Matters ..................................................................... 66
Experts ........................................................................... 67
Statutory Rights .................................................................. 67
CONSENTS OF COUNSEL ................................................................ 68
CONSENT OF AUDITORS ................................................................ 69
APPROVAL AND CERTIFICATE ........................................................... 71
ANNEX A -- PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ................... A-1
ANNEX B -- INFORMATION CONCERNING SMITHFIELD FOODS, INC. ........................... B-1
ANNEX C -- INFORMATION CONCERNING SCHNEIDER CORPORATION ............................ C-1
ANNEX D -- FORM OF VOTING, SUPPORT AND EXCHANGE TRUST AGREEMENT .................... D-1
ANNEX E -- FORM OF SMITHFIELD CANADA SHARE PROVISIONS .............................. E-1
ANNEX F -- FORM OF SPECIAL VOTING STOCK PROVISIONS ................................. F-1
ANNEX G -- INFORMATION CONCERNING SMITHFIELD CANADA LIMITED ........................ G-1
</TABLE>
iv
<PAGE>
This is a summary of certain provisions of the Offer and Circular and is
qualified by reference to the more detailed information contained in those
documents. Holders of Schneider Shares and Options should read the Offer and
Circular in their entirety. Capitalized terms are defined under the heading
"Definitions."
SUMMARY
The Offers
Smithfield Canada is offering, on the terms and subject to the conditions
of the Offers, to purchase all of the issued and outstanding Common Shares and
Class A Shares on the basis of 0.5415 of an Exchangeable Share for each
Schneider Share. According to Schneider's shareholder list, as at April 9, 1998
there were 738,954 Common Shares and 6,105,565 Class A Shares outstanding.
Smithfield Canada is also offering, on the terms and subject to the sole
condition of the Class A Offer, to acquire all of the currently outstanding
Options to acquire Class A Shares issued by Schneider to its employees. Holders
may exchange their Options for Exchangeable Shares on the basis of 0.5415 of an
Exchangeable Share for each C$25.00 of "in the money" value (being the
difference between the Option exercise price and C$25.00). For example, a
holder of Options on 2,500 Class A Shares exercisable at C$13.75 may exchange
such Options for 609 Exchangeable Shares. This 609 Exchangeable Shares is
obtained by multiplying each Option's "in the money" value of C$11.25 (or,
C$25.00 less C$13.75) by 2,500 Class A Shares, dividing such value by C$25.00,
then multiplying such quotient by the 0.5415 exchange factor. As at November
18, 1997, Schneider reported that it had outstanding Options to acquire 545,100
Class A Shares at exercise prices ranging from C$10.50 to C$14.75.
Smithfield Canada will not issue fractional Exchangeable Shares. Instead
of any fractional Exchangeable Share, the Shareholder or Option holder will
receive, at the option of Smithfield Canada, either a cash payment or a whole
Exchangeable Share.
Assuming that all of the outstanding Schneider Shares and Options are
tendered in acceptance of the Offers, and assuming that Smithfield Canada takes
up and pays for such securities under the Offers, Smithfield Canada will issue
approximately 3,852,274 Exchangeable Shares. Assuming that all of the holders
of Exchangeable Shares will, over time, exchange their Exchangeable Shares for
shares of Smithfield Common Stock, Smithfield will issue approximately
3,852,274 shares of Smithfield Common Stock. Each Exchangeable Share is
exchangeable for one share of Smithfield Common Stock. On April 13, 1998, the
closing price of the Smithfield Common Stock on the Nasdaq National Market was
US$31.37. Based on such closing price and converting the United States dollars
in Canada dollars using the Noon Spot Rate on such date, the value of 0.5415 of
a share of Smithfield Common Stock was C$24.32.
See Section 1 of the Offer.
Smithfield Canada Limited
Smithfield Canada is a wholly-owned subsidiary of Smithfield and was
incorporated under the OBCA on January 19, 1998, for the purpose of making the
Offers. Smithfield Canada has no material assets or liabilities and no
operating history. Smithfield Canada's registered office is located at Suite
4700, Toronto Dominion Bank Tower, Toronto-Dominion Centre, Toronto, Ontario
M5K 1E6. Smithfield Canada's principal executive office is located at 200
Commerce Street, Smithfield, Virginia, 23430, telephone number (757) 365-3000.
See the Circular under the heading "Smithfield Canada Limited."
Smithfield Foods, Inc.
Smithfield Foods believes it is the largest combined hog slaughterer and
further processor of pork in the United States. Smithfield produces a wide
variety of fresh pork and processed meat products which it markets across the
United States, and increasingly, to over 25 markets outside the United States,
including Japan, Russia and Mexico. Since 1975, when current management assumed
control of Smithfield, Smithfield 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. Smithfield'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, Smithfield
has vertically integrated into hog production through an 86-percent owned
subsidiary and through a joint hog production arrangement with one of the
United States' largest hog producers. These hog production operations
collectively accounted for 10.1% of the hogs Smithfield slaughtered in fiscal
1997. In addition, Smithfield obtains a substantial portion of its hogs
1
<PAGE>
under market-indexed, multi-year agreements with several of the United States'
largest suppliers of high quality hogs, strategically located in proximity to
Smithfield's hog slaughtering and further processing operations in North
Carolina and Virginia. These suppliers accounted for 41.5% of the hogs
Smithfield slaughtered in fiscal 1997.
In a number of U.S. markets, Smithfield's brands are among the leaders in
selected product categories. In recent years, as consumers have become more
health conscious, Smithfield 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, Smithfield has
developed, and is marketing on a national basis in the United States, 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 fiscal year ended April 27, 1997, Smithfield had sales of US$3.9
billion and net income of US$44.9 million.
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.
See Annex B -- "Information Concerning Smithfield Foods, Inc."
For a discussion of risk factors to be considered by Shareholders and
Option holders in evaluating whether to accept the Offers, see "Risk Factors"
beginning on page 17 of this Offer and Circular.
Schneider Corporation
Schneider, which was founded in 1890, is one of Canada's largest producers
of premium quality food products. Schneider has approximately 4,000 employees
and operates processed meat operations in Kitchener, Ontario; Winnipeg,
Manitoba; Surrey, British Columbia; and St-Anselme, Quebec. Schneider also has
baked goods plants in Port Perry, Ontario and St-Anselme, Quebec and
participates in the poultry sector through major facilities in Hanover, St.
Marys and Ayr, Ontario. Its products are sold throughout Canada and in the
United States, Japan and other foreign markets.
For the fiscal year ended October 25, 1997, Schneider reported sales of
approximately C$813.4 million, earnings from operations of C$12.7 million and
net earnings of approximately C$3.1 million. As of November 21, 1997, Schneider
reported that there were outstanding 738,954 Common Shares, 6,105,565 Class A
Shares and Options to acquire an additional 545,100 Class A Shares.
Schneider is incorporated under the laws of the Province of Ontario and
its head office is located at 321 Courtland Avenue East, Kitchener, Ontario,
N2G 3X8.
See Annex C -- "Information Concerning Schneider Corporation."
Conflicts of Interest
Each of the five Schneider executives has an employment agreement with
Schneider entitling him to receive between 18 and 30 months' remuneration if
his employment is terminated following a change of control of Schneider,
subject to certain conditions. In addition, all five of the Schneider
executives are Option holders and three of them are also Shareholders. Based on
their publicly disclosed annual salaries for the year ended December 31, 1997,
the aggregate amount payable by Schneider to the Schneider executives under
these change of control arrangements would be approximately $2.3 million.
See Annex C -- "Information Concerning Schneider Corporation."
Conditions of the Offers
Smithfield Canada reserves the right to withdraw the Common Share Offer
and not take up and pay for any Common Shares deposited under the Common Share
Offer unless all of the conditions of the Common Share Offer contained in
Section 2 of the Offers to Purchase are satisfied. These conditions include
that no change occurs in the business or financial condition of Schneider that
is materially adverse to a purchaser of Schneider Shares and that all necessary
regulatory approvals be received on terms satisfactory to Smithfield Canada.
The Common Share Offer is not conditional on any minimum number of Schneider
Shares being tendered by any party other than the Schneider Family.
The Class A Offer is conditional only upon Smithfield Canada acquiring any
Common Shares under the Common Share Offer.
See Section 2 of the Offers to Purchase and the Circular under the heading
"Regulatory Matters."
2
<PAGE>
Lock-up Agreement and Litigation
In the Lock-up Agreement, Smithfield agreed to cause Smithfield Canada to
make the Offers and the Schneider Family agreed to tender its Common Shares
(representing approximately 75% of the outstanding Common Shares) and their
Class A Shares (representing approximately 17% of the outstanding Class A
Shares) into the Offers. Under the terms of the Lock-up Agreement, the
Schneider Family Shares may not be withdrawn and tendered into any competing
offer.
On January 14, 1998, two Shareholders commenced an action in the Ontario
Court (General Division) seeking, among other things, a declaration that
Schneider's board of directors have acted in a manner that unfairly disregarded
the interests of all Shareholders, an order that each holder of Class A Shares
has the right to convert such holder's Class A Shares into Common Shares and an
injunction to enjoin the making of the Offers. The plaintiffs allege that the
Class A Shares should be convertible into Common Shares because the specific
language used in the Maple Leaf Offer makes that offer an "Exclusionary Offer"
for purposes of the Schneider Articles. Subsequently, Maple Leaf and three
Shareholders (two of which are affiliates of Maple Leaf's financial advisor)
commenced their own actions seeking substantially the same remedies. Generally,
an "Exclusionary Offer" is an offer to purchase Common Shares that is not
accompanied by an identical offer to purchase Class A Shares, in terms of the
price per share and in all other material respects. The Maple Leaf Offer, like
the Offers made hereby, offers identical consideration and is made on the same
terms for both the Common Shares and the Class A Shares. The Schneider board of
directors have stated publicly that the Maple Leaf Offer is not an Exclusionary
Offer and Smithfield agrees with that position.
Smithfield and Smithfield Canada contested this litigation in a single
trial that commenced on April 14, 1998 and ended April 24, 1998. On May 11,
1998, the Ontario Court (General Division) dismissed all of the claims made by
the plaintiffs, finding that there was no oppression by either Schneider or the
Schneider Family and declaring that the Maple Leaf Offer is not an Exclusionary
Offer. The trial decision means that neither the Maple Leaf Offer nor the
Offers made hereby will engage the conversion rights described above. In light
of the fact that the Offers made hereby are able to proceed as contemplated by
the Lock-up Agreement, the Court dismissed Smithfield's counterclaim against
Maple Leaf. To date, none of the plaintiffs has announced an intention to
appeal this decision. The applicable appeal period will not expire until
mid-June 1998.
See the Circular under the headings "Background to the Offers" and
"Litigation relating to the Maple Leaf Offer."
Terms of the Exchangeable Shares
The Exchangeable Shares will be exchangeable, at any time at the option of
the holder, on a one-for-one basis for shares of Smithfield Common Stock.
Pursuant to the Voting, Support and Exchange Trust Agreement, the Trustee, as
holder of the sole share of Special Voting Stock, will be entitled to a number
of votes on all matters on which holders of Smithfield Common Stock are
entitled to vote equal to the number of Exchangeable Shares outstanding from
time to time that are not held by Smithfield or its subsidiaries. By furnishing
instructions to the Trustee, holders of Exchangeable Shares will be able to
exercise the same voting rights with respect to Smithfield as they would have
if they held the same number of shares of Smithfield Common Stock directly. The
Trustee will exercise such voting rights through its holding of the Special
Voting Share. Holders of Exchangeable Shares will also be entitled to receive
dividends equivalent to any dividends paid on the Smithfield Common Stock. The
Voting, Support and Exchange Trust Agreement will restrict Smithfield from
paying dividends on the shares of Smithfield Common Stock unless equivalent
dividends are paid on the Exchangeable Shares. Holders of Exchangeable Shares
will also be entitled to participate in any liquidation of Smithfield on the
same basis as holders of Smithfield Common Stock.
A holder of the Exchangeable Shares will be entitled at any time, upon
delivery of a certificate representing Exchangeable Shares and a properly
signed Retraction Request, to require Smithfield Canada to redeem such holder's
Exchangeable Shares in exchange for an equivalent number of shares of
Smithfield Common Stock. Smithfield Canada must notify Smithfield and
Smithfield Sub of all such requests for redemption, whereupon Smithfield and
Smithfield Sub, instead of Smithfield Canada, will have the overriding right,
but not the obligation, to purchase the Exchangeable Shares that are the
subject of the request for redemption in exchange for an equivalent number of
shares of Smithfield Common Stock. If this right is not exercised, Smithfield
Canada is required to effect the requested redemption, unless the Shareholder
withdraws the Retraction Request.
On April 30, 2008, Smithfield Canada will redeem all outstanding
Exchangeable Shares in exchange for an equivalent number of shares of
Smithfield Common Stock. Smithfield Canada will also have the right,
exercisable at any time on or before April 30, 2008, to redeem all of the
outstanding Exchangeable Shares on the same terms if there are fewer than
500,000 Exchangeable Shares outstanding. In either case, Smithfield and
Smithfield Sub will have the overriding right, but not the obligation, to
acquire the outstanding Exchangeable Shares in exchange for an equivalent
number of shares of Smithfield Common Stock on the last business day prior to
the relevant Company Redemption Date. If either Smithfield or
3
<PAGE>
Smithfield Sub exercises such overriding right, Smithfield Canada's right to
redeem the Exchangeable Shares on the relevant Company Redemption Date will
terminate.
See the Circular under the heading "Smithfield Canada Limited," Annex D --
"Form of Voting, Support and Exchange Trust Agreement," Annex E -- "Form of
Smithfield Canada Share Provisions" and Annex F -- "Form of Special Voting
Stock Provisions."
Manner and Time for Acceptance
The Offers commence on the date hereof and are open for acceptance until
the Expiry Time or until such later time and date to which an Offer or the
Offers may be extended by Smithfield Canada at its discretion, unless withdrawn
by Smithfield Canada.
An Offer may be accepted by Shareholders by depositing certificates
representing Schneider Shares that are being tendered, together with a duly
completed and signed Letter of Transmittal (printed on yellow paper), at the
offices of the Depositary specified in the Letter of Transmittal at or before
the Expiry Time. An Offer will be deemed to be accepted by Smithfield Canada
only if the Depositary has actually received these documents at or before the
Expiry Time. Holders of Schneider Shares registered in the name of a broker,
dealer, bank, trust company or other nominee should request that nominee to
effect the transaction. Holders of Schneider Shares for which certificates are
not immediately available may use the procedures for guaranteed delivery set
forth in the Notice of Guaranteed Delivery (printed on blue paper). Holders of
Options who do not wish to exercise those Options but wish to tender their
Options under the Class A Offer should complete and sign the accompanying
Assignment (printed on green paper) in accordance with the instructions and
deposit the completed Assignment at one of the offices of the Depositary
specified in the Assignment at or before the Expiry Time. See Section 5 of the
Offers to Purchase.
An Offer may also be accepted by a Shareholder by depositing all of such
Shareholder's shares of a Special Holdco pursuant to the Acceptance
Alternative. See Section 7 of the Offers to Purchase.
Payment for Deposited Shares and Options
If all of the conditions of the relevant Offer have been satisfied or are
waived by Smithfield Canada, Smithfield Canada will become obligated to take up
and pay for Schneider Shares and Options validly deposited under, and not
withdrawn from, such Offer within the time periods prescribed by applicable
securities laws. Any Schneider Shares or Options deposited under the Offers
after the first date on which Schneider Shares or Options have been taken up
and paid for by Smithfield Canada will be taken up and paid for within 10 days
of that deposit.
Right to Withdraw Deposited Shares and Options
All deposits of Schneider Shares or Options pursuant to the Offers are
irrevocable, except as provided in Section 9 of the Offers to Purchase. Section
9 of the Offers to Purchase permits, among other things, withdrawal at any time
before 5:00 p.m. local time on o, 1998, and at any time after o, 1998, if the
Schneider Shares or Options deposited under the relevant Offer have not been
taken up and paid for by Smithfield Canada.
Purpose of the Offers and Acquisition of Remaining Shares
The purpose of the Offers is to enable Smithfield Canada to acquire as
many of the Schneider Shares and Options as possible. The successful completion
of the Offers will enable Smithfield to build a solid base of operations in
Canada and to expand its product mix, pork marketing capabilites and
international processed meats business. Smithfield expects to cause Schneider
to conduct its business operations in substantially the same way as Schneider
has conducted its operations in the past. Smithfield has no current intention
of making any changes to the composition of Schneider's management, although it
has not made any commitments in that respect.
If, within 120 days of the date hereof, holders of not less than 90% of
the Class A Shares or Common Shares (or both) have accepted the Offers and
Smithfield Canada purchases such Schneider Shares, Smithfield Canada intends to
acquire the Schneider Shares held by those Shareholders who have not accepted
the Offers by effecting a Compulsory Acquisition pursuant to the provisions of
Section 188 of the OBCA. If a Compulsory Acquisition is not available or if
Smithfield Canada decides not to proceed with a Compulsory Acquisition,
Smithfield Canada will consider acquiring any Schneider Shares not acquired
under the Offers by effecting a Subsequent Acquisition Transaction, if
permitted by applicable law, on such terms and conditions as Smithfield Canada
at the time believes to be fair and reasonable to Schneider and its remaining
Shareholders. The timing and details of any such transaction necessarily will
depend upon various factors, including the number
4
<PAGE>
of Schneider Shares acquired pursuant to the Offers. In a Compulsory
Acquisition and in certain types of Subsequent Acquisition Transactions,
holders of Schneider Shares may have the right to dissent under the OBCA and to
be paid the fair value for their Schneider Shares, as determined by a court,
which amount could be more or less than the amount paid per Schneider Share
pursuant to the Offers.
Canadian Income Tax Considerations
Smithfield and Smithfield Canada have obtained an opinion from their
Canadian legal counsel, McCarthy Tetrault, as to the material Canadian federal
income tax considerations to certain Shareholders and Option holders in
relation to the Offers. The Offers have been structured to permit Shareholders
who hold Schneider Shares as capital property and who would generally otherwise
be subject to Canadian tax on the disposition of their Schneider Shares to
obtain a full or partial deferral of such tax by making a joint election under
the Canadian Tax Act. A joint election is an election under certain provisions
of the Canadian Tax Act made jointly by a Shareholder and Smithfield Canada in
the manner and within the time set out in the Circular under the heading
"Canadian Federal Income Tax Considerations -- Shareholders Resident in Canada
- -- Joint Election -- Procedure."
HOLDERS OF SCHNEIDER SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS IN
RELATION TO THEIR PARTICULAR TAX SITUATION, TO DETERMINE THE TAX CONSEQUENCES
TO THEM AS A RESULT OF TENDERING THEIR SCHNEIDER SHARES PURSUANT TO THE OFFERS.
UNLESS A HOLDER MAKES A JOINT ELECTION UNDER THE CANADIAN TAX ACT, THE HOLDER
WILL NOT BE ENTITLED TO A DEFERRAL OF ANY CANADIAN INCOME TAX THAT MIGHT
OTHERWISE ARISE ON THE DISPOSITION OF THAT HOLDER'S SCHNEIDER SHARES.
An Option holder who received Options as an employee of Schneider and who
tenders such Options under the Class A Offer will realize an employee benefit
to the extent such Option holder's proceeds of disposition exceed the adjusted
cost base of the Options to such holder.
See the Circular, under the heading "Canadian Federal Income Tax
Considerations."
United States Income Tax Considerations
Smithfield and Smithfield Canada have received an opinion from McGuire,
Woods, Battle & Boothe LLP, that the Shareholders that are United States
persons, including citizens or residents of the United States, United States
corporations or partnerships, and certain estates and trusts that are subject
to United States federal income tax, should not be subject to United States
federal income tax on the receipt of Exchangeable Shares pursuant to the
Offers. However, there is no authority directly addressing the characterization
for U.S. federal income tax purposes of shares with the attributes of
Exchangeable Shares, and it is possible that the exchange of Schneider Shares
for Exchangeable Shares could be treated as a taxable exchange, in which case
Shareholders that are United States persons could be required to recognize
taxable gain or loss.
HOLDERS OF SCHNEIDER SHARES THAT ARE UNITED STATES PERSONS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS IN RELATION TO THEIR PARTICULAR TAX SITUATION TO
DETERMINE THE UNITED STATES TAX CONSEQUENCES TO THEM AS A RESULT OF THEIR
TENDERING THEIR SCHNEIDER SHARES PURSUANT TO THE OFFERS.
See the Circular, under the heading "United States Federal Income Tax
Considerations."
Stock Exchange Listings
On April 8, 1998, the TSE conditionally approved the listing of the
Exchangeable Shares, subject to the fulfilment of all of the requirements of
the TSE on or before July 7, 1998, including distributing such securities to a
minimum number of public holders. There is no intention to list the
Exchangeable Shares on any other stock exchange in Canada or the United States.
The outstanding shares of Smithfield Common Stock are quoted on the Nasdaq
National Market and Smithfield has notified the Nasdaq National Market of the
number of additional shares of Smithfield Common Stock that will be issuable
upon exchange of the Exchangeable Shares.
Comparative Market Price Data
On November 5, 1997, Maple Leaf announced its intention to make the Maple
Leaf Offer. On December 18, 1997, Smithfield announced its intention to make
the Offers described herein. The following table shows the closing prices on
for
5
<PAGE>
the Schneider Common Shares and Class A Shares on the TSE and the Smithfield
Common Stock on the Nasdaq National Market, for each of the dates indicated:
<TABLE>
<CAPTION>
Schneider Common Schneider Class A
TSE TSE
------------------ -------------------
<S> <C>
November 4, 1997 .......... C$13.80 C$13.00
December 17, 1997 ......... C$23.75 C$23.00
April 13, 1998 ............ C$27.00 C$26.00
<CAPTION>
Smithfield Common Smithfield Common
(Nasdaq) (1) (Nasdaq) x 0.5415
--------------------------------- ------------------------------
<S> <C>
November 4, 1997 .......... US$32.625 (C$45.796) US$17.67 (C$24.80)
December 17, 1997 ......... US$31.50 (C$44.82) US$17.06 (C$24.27)
April 13, 1998 ............ US$31.37 (C$44.92) US$16.99 (C$24.33)
</TABLE>
- ---------
(1) Canadian dollar amounts represent US dollar amounts converted into Canadian
dollar amounts at the Noon Spot Rate for such dates.
Depositary
CIBC Mellon Trust Company is acting as Depositary under the Offers. The
Depositary will be responsible for receiving certificates representing
deposited Schneider Shares, Assignments and accompanying Letters of Transmittal
and other documents. The Depositary is also responsible for receiving Notices
of Guaranteed Delivery, giving notices, if required, and making payment for all
Schneider Shares and Options purchased by Smithfield Canada pursuant to the
terms of the Offers.
Dealer Manager
Smithfield Canada has retained First Marathon Securities Limited to act as
its dealer manager for the Offers. The Dealer Manager will form and manage a
soliciting dealer group comprised of members of the Investment Dealers
Association of Canada and members of Canadian stock exchanges to solicit
acceptances of the Offers from holders of Schneider Shares and Options. Holders
of Schneider Shares and Options will not be required to pay any fee or
commission if they accept the Offers by transmitting their Schneider Shares or
Options directly to the Depositary or utilizing the services of a member of the
soliciting dealer group.
6
<PAGE>
SMITHFIELDS FOODS, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
data and other data of Smithfield which should be read in conjunction with and
is qualified in its entirety by reference to the consolidated financial
statements and the unaudited consolidated condensed financial statements and
the notes thereto included elsewhere and incorporated by reference herein. The
selected consolidated financial data for the fiscal years ended April 27, 1997,
April 28, 1996, April 30, 1995, May 1, 1994, and May 2, 1993 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 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 only
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>
40 Weeks 39 Weeks
Ended Ended
--------------- ---------------
February 1, January 26,
1998 1997
--------------- ---------------
(In thousands of US Dollars,
except per share amounts)
<S> <C>
Statement of Operations Data: ...........
Sales .................................. $ 2,993,661 $ 2,943,075
Cost of sales .......................... 2,707,844 2,722,032
----------- -----------
Gross profit ........................... 285,817 221,043
Selling, general and administrative
expenses .............................. 166,526 135,296
Depreciation expense ................... 31,086 26,141
Interest expense ....................... 23,827 20,378
Plant closing costs .................... -- --
Nonrecurring charge (1) ................ 12,600 --
----------- -----------
Income from continuing operations
before income taxes and change in
accounting for income taxes ........... 51,778 39,228
Income taxes ........................... 19,052 13,731
----------- -----------
Income from continuing operations
before change in accounting for
income taxes .......................... 32,726 25,497
Income (loss) from discontinued
operations ............................ -- --
Cumulative effect of change in
accounting for income taxes ........... -- --
----------- -----------
Net income ............................. $ 32,726 $ 25,497
=========== ===========
Basic Net Income (Loss) Per Share: ......
Continuing operations before
cumulative effect of change in
accounting for income taxes ........... $ .87 $ .68
Discontinued operations ................ -- --
Cumulative effect of change in
accounting for income taxes ........... -- --
----------- -----------
Net income ............................. $ .87 $ .68
=========== ===========
Diluted Net Income (Loss) Per Share: ....
Continuing operations before
cumulative effect of change in
accounting for income taxes ........... $ .82 $ .66
Discontinued operations ................ -- --
Cumulative effect of change in
accounting for income taxes ........... -- --
----------- -----------
Net income ............................. $ .82 $ .66
=========== ===========
Average Shares Outstanding
(thousands): ...........................
Basic ................................. 37,531 36,046
=========== ===========
Diluted ............................... 39,687 37,137
=========== ===========
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------
April 27, April 28, April 30, May 1, May 2,
1997 1996 1995 1994 1993
--------------- ------------- ------------- --------------- -------------
(In thousands of US Dollars, except per share amounts)
<S> <C>
Statement of Operations Data: ...........
Sales .................................. $ 3,870,611 $2,383,893 $1,526,518 $ 1,403,485 $1,113,712
Cost of sales .......................... 3,549,673 2,203,626 1,380,586 1,287,880 1,037,628
----------- ---------- ---------- ----------- ----------
Gross profit ........................... 320,938 180,267 145,932 115,605 76,084
Selling, general and administrative
expenses .............................. 191,225 103,095 61,723 50,738 42,924
Depreciation expense ................... 35,825 25,979 19,717 21,327 18,418
Interest expense ....................... 26,211 20,942 14,054 11,605 6,183
Plant closing costs .................... -- -- -- -- 3,598
Nonrecurring charge (1) ................ -- -- -- -- --
----------- ---------- ---------- ----------- ----------
Income from continuing operations
before income taxes and change in
accounting for income taxes ........... 67,677 30,251 50,438 31,935 4,961
Income taxes ........................... 22,740 10,465 18,523 12,616 1,690
----------- ---------- ---------- ----------- ----------
Income from continuing operations
before change in accounting for
income taxes .......................... 44,937 19,786 31,915 19,319 3,271
Income (loss) from discontinued
operations ............................ -- (3,900) (4,075) 383 (420)
Cumulative effect of change in
accounting for income taxes ........... -- -- -- -- 1,138
----------- ---------- ---------- ----------- ----------
Net income ............................. $ 44,937 $ 15,886 $ 27,840 $ 19,702 $ 3,989
=========== ========== ========== =========== ==========
Basic Net Income (Loss) Per Share: ......
Continuing operations before
cumulative effect of change in
accounting for income taxes ........... $ 1.21 $ .55 $ .95 $ .57 $ .09
Discontinued operations ................ -- $ (.11) $ (.12) $ .01 $ (.01)
Cumulative effect of change in
accounting for income taxes ........... -- -- -- -- $ .03
----------- ---------- ---------- ----------- ----------
Net income ............................. $ 1.21 $ .44 $ .83 $ .58 $ .11
=========== ========== ========== =========== ==========
Diluted Net Income (Loss) Per Share: ....
Continuing operations before
cumulative effect of change in
accounting for income taxes ........... $ 1.17 $ .53 $ .92 $ .55 $ .09
Discontinued operations ................ -- $ (.11) $ (.12) $ .01 $ (.01)
Cumulative effect of change in
accounting for income taxes ........... -- -- -- -- $ .03
----------- ---------- ---------- ----------- ----------
Net income ............................. $ 1.17 $ .42 $ .80 $ .56 $ .11
=========== ========== ========== =========== ==========
Average Shares Outstanding
(thousands): ...........................
Basic ................................. 36,121 33,865 32,705 32,552 32,525
=========== ========== ========== =========== ==========
Diluted ............................... 37,265 35,000 33,923 33,697 33,395
=========== ========== ========== =========== ==========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
40 Weeks 39 Weeks
Ended Ended Fiscal Year Ended
------------- ------------- -----------------------------------------------------------
February 1, January 26, April 27, April 28, April 30, May 1, May 2,
1998 1997 1997 1996 1995 1994 1993
------------- ------------- ------------ ------------ ----------- ---------- ----------
(In thousands of US Dollars, except per share amounts)
<S> <C>
Balance Sheet Data (end of period): ....
Working capital ...................... $ 232,255 $ 125,868 $ 164,312 $ 88,026 $ 60,911 $ 81,529 $ 64,671
Total assets ......................... 1,062,568 974,846 995,254 857,619 550,225 452,279 399,567
Long-term debt and capital lease
obligations ......................... 386,211 265,123 288,486 188,618 155,047 118,942 124,517
Stockholders' equity ................. 340,336 268,271 307,486 242,516 184,015 154,950 135,770
Operating Data (in thousands):
Fresh pork sales (pounds) ............ 1,897,666 1,794,885 2,320,477 1,635,300 955,290 820,203 588,284
Processed meats sales (pounds) ....... 1,015,783 900,172 1,218,835 839,341 774,615 661,783 631,521
Total hogs slaughtered ............... 13,312 12,811 16,869 12,211 8,678 7,414 5,767
</TABLE>
(1) Reflects nonrecurring charge of $12.6 million ($.32 per share) for the
forty weeks ended February 1, 1998 related to civil penalties in an
environmental case.
(2) Adjusted for 2-for-1 stock split, effective September 26, 1997.
8
<PAGE>
SCHNEIDER CORPORATION
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
and other data of Schneider which should be read in conjunction with and is
qualified in its entirety by reference to the consolidated financial statements
and notes thereto included in Annex C to the Circular.
(in thousands of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
Forty Weeks Ended Fiscal Years Ended
----------------------------- ----------------------------------------
February 14, February 15, October 25, October 26, October 28,
1998 1997 1997 1996 1995
-------------- -------------- ------------- ------------- ------------
<S> <C>
Operating results:
Sales .......................................... $ 271,696 $ 244,116 $ 813,363 $826,100 $ 827,521
Net earnings (loss) ............................ 3,639 109 3,103 (9,804) 7,502
Financial position:
Working capital ................................ 26,500 10,732 20,126 20,977 39,345
Total assets ................................... 277,680 254,332 278,013 250,994 246,832
Long-term debt ................................. 82,178 67,926 82,562 67,718 63,827
Shareholders' equity ........................... 98,546 87,692 95,513 88,155 101,103
Per share (dollars):
Net earnings (loss):
First quarter ................................ 0.53 0.02 0.02 0.03 0.38
Second quarter ............................... na na 0.02 (0.09) 0.09
Third quarter ................................ na na 0.03 (0.22) 0.29
Fourth quarter ............................... na na 0.42 (1.26) 0.46
--------- --------- --------- -------- ---------
0.53 0.02 0.49 (1.54) 1.22
Dividends paid ................................. 0.09 (2) 0.09 (2) 0.36 0.36 0.35
Shareholders' equity, end of year .............. 14.39 (2) 13.81 (2) 13.96 13.88 15.92
Key ratios:
Return on sales ................................ 1.34% 0.04% 0.38% (1.19)% 0.91%
Return on opening shareholders' equity ......... 3.81% 0.12% 3.52% (9.70)% 8.07%
Current ratio .................................. 1.30:1 1.12:1 1.21:1 1.24:1 1.52:1
Debt to equity ratio (1) ....................... 1.14:1 1.18:1 1.15:1 1.12:1 0.80:1
Long-term debt to equity ratio ................. 0.83:1 0.77:1 0.86:1 0.77:1 0.63:1
</TABLE>
- ---------
(1) Debt is defined as current and long-term debentures and loans and bank
advances.
(2) Based on best estimate of shares outstanding at period end.
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents historical per share data of Smithfield and
Schneider and pro forma combined data per whole share of Smithfield Common
Stock and per 0.5415 of a share of Smithfield Common Stock, as if the Offers
had been completed as at the beginning of the periods indicated. The pro forma
combined information in the table is based upon the historical financial
statements of Smithfield and Schneider, conformed to Smithfield's periods, and
is unaudited. The pro forma combined information is presented for comparison
purposes only, to show on a pro forma basis the amounts attributable to a full
share of Smithfield Common Stock. The pro forma equivalent information is
presented to reflect the 0.5415 of a share of Smithfield Common Stock that will
be received, indirectly, for each Schneider Share acquired under the Offers.
The pro forma information is hypothetical and is not intended to predict
Smithfield's actual operating results and financial position following
completion of the acquisition. The pro forma data is presented for both pooling
of interests and purchasing methods of accounting for the acquisition.
The table should be read in conjunction with Smithfield's Annual Report
for the fiscal year ended April 27, 1997, Smithfield's unaudited financial
statements for the forty weeks ended February 1, 1998, the accompanying
historical financial statements and notes of Schneider for the years ended
October 25, 1997, October 26, 1996 and October 28, 1995, Schneider's unaudited
financial statements for the sixteen weeks ended February 14, 1998 and the
twenty-eight weeks ended May 10, 1997, May 11, 1996, May 13, 1995 and May 14,
1994.
<TABLE>
<CAPTION>
Smithfield Foods, Inc. Schneider Corporation
------------------------------------- ------------------------------------
Pro Forma Combined Pro Forma Equivalent
---------------------- ---------------------
Historical Pooling Purchase Historical Pooling Purchase
(in US dollars) ------------ --------- ---------- ------------ --------- ---------
<S> <C>
Income (loss) per share from continuing
operations:(1)
Forty weeks ended February 1, 1998:
Basic .................................... $ .87 .88 .86 $ .70 .48 .47
Diluted .................................. .82 .84 .82 .66 .45 .44
Fiscal year 1997: (3)
Basic .................................... 1.21 1.03 1.01 (.29) .56 .55
Diluted .................................. 1.17 1.01 .98 (.29) .55 .53
Fiscal year 1996: (3)
Basic .................................... .55 .58 -- .77 .31 --
Diluted .................................. .53 .57 -- .74 .31 --
Fiscal year 1995:
Basic .................................... .95 1.00 -- .96 .54 --
Diluted .................................. .92 .97 -- .96 .53 --
Book value per share: (2)
As at February 1, 1998 9.09 9.59 11.07 10.37 5.19 5.99
Fiscal year 1997 ........................... 8.25 -- -- 10.03 -- --
Fiscal year 1996 ........................... 7.16 -- -- 10.11 -- --
Fiscal year 1995 ........................... 5.91 -- -- 11.44 -- --
Cash dividends per share: (1)
Forty weeks ended February 1, 1998 ......... -- .03 .03 .19 .02 .02
Fiscal year 1997 ........................... -- .04 .04 .26 .02 .02
Fiscal year 1996 ........................... -- .04 -- .26 .02 --
Fiscal year 1995 ........................... -- .04 -- .24 .02 --
</TABLE>
- ---------
(1) The historical periods for Schneider have been conformed to Smithfield's
periods in the income (loss) per share from continuing operations and cash
dividends per share presentations. Schneider periods presented are the
forty weeks ended February 14, 1998 and fifty-two weeks ended May 10,
1997, May 11, 1996 and May 13, 1995 (all unaudited) compared to
Smithfield's forty weeks ended February 1, 1998 (unaudited) and audited
fiscal years ended April 27, 1997, April 28, 1996 and April 30, 1995,
respectively.
(2) The historical periods for Schneider in the book value per share
presentation are February 14, 1998, October 25, 1997, October 26, 1996 and
October 28, 1995.
(3) The fiscal 1997 presentation for Schneider is before a restructuring charge
of US$4.9 million, net of tax. The fiscal 1996 presentation for Schneider
is before a gain on divestiture of US$1.7 million, net of tax.
10
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The following table presents selected pro forma consolidated condensed
financial information for Smithfield as at and for the periods noted, giving
effect to the completion of the Offers. Although Smithfield intends to account
for the transaction under the pooling of interests method of accounting, this
treatment cannot be guaranteed. Smithfield will be able to account for this
transaction using the pooling of interests method of accounting if, among other
things, at least 90% of the aggregate number of Schneider Shares are taken up
and paid for by Smithfield Canada under the Offers. Therefore, the pro forma
financial statements are presented using both the pooling of interests method
of accounting and the purchase method of accounting. This financial information
is unaudited and, in the opinion of Smithfield, includes all adjustments
necessary to present fairly such information. The information below is
presented in accordance with U.S. GAAP and is qualified in its entirety by, and
should be read in conjunction with, the unaudited Pro Forma Consolidated
Condensed Financial Statements of Smithfield, including the notes thereto,
contained in Annex A to the Circular.
<TABLE>
<CAPTION>
Pro Forma Consolidated Condensed Results for the:
--------------------------------------------------------------------------
Forty Fiscal Year Fiscal Year Fiscal Year
Weeks Ended Ended Ended Ended
February 1, 1998 April 27, 1997 April 28, 1996 April 30, 1995
------------------ ---------------- ---------------- ---------------
(In thousands of US Dollars, except per share amounts)
<S> <C>
Pooling of Interests
Sales .......................................... $3,469,375 $ 4,471,417 $2,985,209 $ 2,091,761
Net income ..................................... 36,581 42,600 23,109 37,339
Net income per share of Smithfield Common Stock:
Basic ........................................ .88 1.03 .58 1.00
Diluted ...................................... .84 1.01 .57 .97
Purchase Method
Sales .......................................... 3,469,375 4,471,417
Net income ..................................... 35,732 41,495
Net income per share of Smithfield Common Stock:
Basic ........................................ .86 1.01
Diluted ...................................... .82 .98
</TABLE>
<TABLE>
<CAPTION>
Pooling of Purchase
Balance Sheet as at February 1, 1998 Interests Method
- ------------------------------------------------------ ------------ -------------
<S> <C>
Total assets ......................................... $1,240,394 $1,306,362
Long-term debt and capital lease obligations ......... 443,160 443,160
Stockholders' equity ................................. 397,813 463,587
</TABLE>
11
<PAGE>
DEFINITIONS
In the Offer and Circular, unless the context otherwise requires, the
following terms shall have the meanings set forth below:
"Acceptance Alternative" means the option of a holder of Schneider Shares
held indirectly through one or more Special Holdcos to participate in an Offer
by depositing (in lieu of such Schneider Shares) all of such person's Holdco
Shares to such Offer, for consideration identical to the consideration that
would have been received if such Schneider Shares had been deposited directly
under such Offer.
"Ancillary Rights" means any and all rights granted by Smithfield to
Schneider Shareholders in connection with the Offer and the documents related
thereto (including the Voting Rights and the Exchange Rights).
"Annex" means an Annex attached to the Circular.
"Antitrust Division" means the Antitrust Division of the United States
Department of Justice.
"Assignment" means the accompanying Assignment of Options (printed on
green paper).
"business day" means any day other than a Saturday, Sunday or a statutory
holiday in Toronto, Ontario.
"C$" means Canadian dollars.
"Call Rights" means the Liquidation Call Right, the Redemption Call Right
and the Retraction Call Right, collectively.
"Canadian Dollar Equivalent" means the product obtained by multiplying the
relevant US dollar amount by the noon spot exchange rate on such date for US
dollars expressed in Canadian dollars as reported by the Bank of Canada.
"Canadian GAAP" means generally accepted accounting principles in Canada.
"Canadian Tax Act" means the Income Tax Act (Canada), as amended.
"Circular" means the Offering Circular accompanying the Offers to
Purchase.
"Class A Offer" means Smithfield Canada's offer to purchase Class A Shares
and Options (exercisable for Class A Shares) made hereby, the terms and sole
condition of which are set forth in the Offers to Purchase, the Letter of
Transmittal, the Notice of Guaranteed Delivery and the Assignment.
"Class A Shares" means the Class A non-voting shares in the capital of
Schneider.
"Common Share Offer" means Smithfield Canada's offer to purchase Common
Shares made hereby, the terms and conditions of which are set forth in the
Offers to Purchase, the Letter of Transmittal and the Notice of Guaranteed
Delivery.
"Common Shares" means the common shares in the capital of Schneider.
"Company Redemption Date" means the earlier of (i) April 30, 2008 and (ii)
any date established by the board of directors of Smithfield Canada for the
redemption of Exchangeable Shares on which there are less than 500,000
Exchangeable Shares outstanding (other than Exchangeable Shares held by
Smithfield and its subsidiaries and subject to adjustment to such number of
shares to reflect permitted changes to the Exchangeable Shares), as described
in the Circular under the heading "Smithfield Canada Limited -- Terms of the
Exchangeable Shares."
"Competition Act" means the Competition Act (Canada), as amended.
"Compulsory Acquisition" has the meaning set forth in the Circular, under
the heading "Acquisition of Shares Not Deposited and Appraisal Rights."
"Current Market Price" has the meaning set forth in the Exchangeable Share
Provisions.
"CVMQ" means the Commission des valeurs mobilieres du Quebec.
"Dealer Manager" means First Marathon Securities Limited.
"Depositary" means CIBC Mellon Trust Company.
"Eligible Institution" means a Canadian chartered bank, a trust company in
Canada, a commercial bank or trust company having an office or correspondent in
Toronto, Ontario or a firm that is a member of a recognized stock exchange in
Canada, the Investment Dealers Association of Canada, a national securities
exchange in the United States of America or the National Association of
Securities Dealers, Inc.
12
<PAGE>
"Eligible Shareholder" means a Shareholder whose Schneider Shares (or
Holdco Shares) are disposed of pursuant to an Offer or whose Schneider Shares
are disposed of pursuant to a Compulsory Acquisition and either (i) who is
resident in Canada, holds such Schneider Shares (or Holdco Shares) as capital
property and is not exempt from tax on income, or (ii) who is not resident in
Canada, whose Schneider Shares (or Holdco Shares) constitute "taxable Canadian
property" and who is not, by reason of any exemption contained in any
applicable tax convention, exempt from tax in respect of any gain realized on
the disposition of such Schneider Shares (or Holdco Shares) pursuant to the
Offers or a Compulsory Acquisition, all as determined for purposes of the
Canadian Tax Act.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Rights" means the optional exchange right granted to the Trustee
for the use and benefit of the holders of the Exchangeable Shares pursuant to
the Voting, Support and Exchange Trust Agreement to require Smithfield to
exchange, or cause Smithfield Sub to exchange, Exchangeable Shares for shares
of Smithfield Common Stock, plus an additional amount equivalent to any
declared and unpaid dividends on such Exchangeable Shares, upon the occurrence
of a Smithfield Canada Insolvency Event.
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares, which are reproduced in
Annex E -- "Smithfield Canada Share Provisions."
"Exchangeable Shares" means the Exchangeable Shares of Smithfield Canada.
"Expiry Time" means 5:00 p.m. (local time at the place of deposit) on the
Termination Date.
"FTC" means the United States Federal Trade Commission and all successors
thereto.
"Holdco Shares" means the shares of a Special Holdco.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"IRS" means the United States Internal Revenue Service.
"Joint Election" means a joint election between an Eligible Shareholder
and Smithfield Canada under subsection 85(1) (where the Eligible Shareholder is
not a partnership) or 85(2) (where the Eligible Shareholder is a partnership)
of the Canadian Tax Act (and the corresponding provisions of any applicable
provincial income tax legislation) in respect of the disposition of the
Eligible Shareholder's Schneider Shares (or Holdco Shares) pursuant to an Offer
or the disposition of the Eligible Shareholder's Schneider Shares pursuant to a
Compulsory Acquisition.
"Letter of Transmittal" means the Letter of Acceptance and Transmittal
(printed on yellow paper) delivered to holders of Schneider Shares which, when
duly completed and returned with a certificate for Schneider Shares, will
enable such Shareholder to exchange such certificate for a certificate for
Exchangeable Shares.
"Liquidation Call Right" means the overriding right of Smithfield and
Smithfield Sub, in the event of a proposed liquidation, dissolution or
winding-up of Smithfield Canada, to purchase all of the outstanding
Exchangeable Shares (other than Exchangeable Shares held by Smithfield or
Smithfield Sub) from the holders thereof on the effective date of any such
liquidation, dissolution or winding-up in exchange for shares of Smithfield
Common Stock, plus an additional amount equivalent to all declared and unpaid
dividends on such Exchangeable Shares, pursuant to the Exchangeable Share
Provisions.
"Lock-up Agreement" means the agreement dated December 18, 1997 entered
into by Smithfield with the Schneider Family pursuant to which Smithfield
agreed to cause Smithfield Canada to make the Offers and the Schneider Family
agreed to tender their Schneider Shares in acceptance of the Offers.
"Maple Leaf Offer" means, collectively, the offers made by Maple Leaf
Foods Inc. and/or its wholly-owned subsidiary, SCH Acquisition Inc., to
purchase all of the Schneider Shares pursuant to separate offers to purchase
dated November 14, 1997 and the related notices of variation dated December 5,
1997, December 12, 1997, December 22, 1997, January 8, 1998, January 28, 1998,
February 17, 1998, March 9, 1998, March 27, 1998, April 16, 1998 and May 6,
1998.
"Nasdaq National Market" means the Nasdaq National Market segment of The
Nasdaq Stock Market, an electronic securities market operated by The Nasdaq
Stock Market, Inc., a wholly-owned subsidiary of the National Association of
Securities Dealers, Inc.
"Noon Spot Rate" has the meaning ascribed to such term under the heading
"Exchange Rates of Canadian and US Dollars."
13
<PAGE>
"Notice of Guaranteed Delivery" means the accompanying Notice of
Guaranteed Delivery (printed on blue paper).
"OBCA" means the Business Corporations Act (Ontario), as amended.
"Offer" means either the Common Share Offer or the Class A Offer, and
"Offers" means the Common Share Offer and the Class A Offer, collectively, made
by Smithfield Canada and contained in Section 1 of the Offers to Purchase. For
greater certainty, each of the Class A Offer and the Common Share Offer is a
separate offer to purchase and either Offer may be extended, varied or changed,
and the condition or conditions of either offer to purchase may be waived
without similarly extending, varying or changing the other Offer or waiving a
condition or the conditions of the other Offer.
"Offer and Circular" means the Offers to Purchase, the Circular and the
Annexes, collectively.
"Offer Period" means the period commencing on the date hereof and ending
at the Expiry Time.
"Ontario Securities Act" means the Securities Act (Ontario), as amended,
and the rules and regulations made thereunder.
"Option holders" means holders of Options.
"Options" means currently outstanding options issued by Schneider
entitling the holders thereof to acquire Class A Shares.
"OSC" means the Ontario Securities Commission.
"Other Securities" means dividends (other than the regular quarterly
dividend in the amount of C$0.09), securities, rights, warrants or other
interests or distributions accrued, declared, paid, issued, transferred, made
or distributed on or in respect of the Schneider Shares on or after the date of
the Offers.
"Purchased Securities" means Schneider Shares and Options purchased by
Smithfield Canada pursuant to the Offers.
"Redemption Call Right" means the overriding right of Smithfield and
Smithfield Sub to purchase all of the outstanding Exchangeable Shares (other
than Exchangeable Shares held by Smithfield or Smithfield Sub) from the holders
thereof on the date fixed for redemption thereof in exchange for shares of
Smithfield Common Stock, plus an additional amount equivalent to all declared
and unpaid dividends on such Exchangeable Shares, pursuant to the Exchangeable
Share Provisions.
"Retraction Call Right" means the overriding right of Smithfield and
Smithfield Sub, in the event of a proposed redemption of Exchangeable Shares
pursuant to a Retraction Request given by the holder thereof, to purchase from
such holder on the Retraction Date all of the Exchangeable Shares tendered for
redemption in exchange for shares of Smithfield Common Stock, plus an
additional amount equivalent to all declared and unpaid dividends on such
Exchangeable Shares, pursuant to the Exchangeable Share Provisions.
"Retraction Date" means a date, determined by a holder of Exchangeable
Shares on which such holder can require Smithfield Canada to redeem such
holder's Exchangeable Shares as further set out in the Exchangeable Share
Provisions and described in the Circular under the heading "Smithfield Canada
Limited -- Terms of the Exchangeable Shares."
"Retraction Request" means a duly executed notice given by a holder of
Exchangeable Shares in the form of Schedule A to the Exchangeable Share
Provisions, or in such other form as may be acceptable to Smithfield Canada,
pursuant to which such holder can require Smithfield Canada to redeem such
holder's Exchangable Shares.
"Schneider" means Schneider Corporation, a corporation amalgamated under
the OBCA.
"Schneider Affiliate" means each affiliate (as such term is defined in
Rule 405 under the U.S. Securities Act) of Schneider.
"Schneider Articles" means Schneider's articles of amalgamation.
"Schneider By-laws" means the by-laws of Schneider.
"Schneider executives" means, collectively, Messrs. Douglas W. Dodds,
Gerald A. Hooper, Paul E. Lang, John E. Lauer and Eric N. Schneider.
"Schneider Family" means, collectively, the individual members of the
Schneider family or their holding companies who entered into the Lock-up
Agreement, being Anne C. Fontana, Harbour Glen Securities Limited, Kinspan
Investments Limited, Laurel Ridge Investments Limited, Frederick P. Schneider,
Jadebridge Holdings Limited, Eric N. Schneider, J.M. Schneider Family Holdings
Limited and Herbert J. Schneider.
14
<PAGE>
"Schneider Family Shares" means the 549,587 Common Shares and the
1,019,212 Class A Shares owned by the Schneider Family that are subject to the
Lock-up Agreement.
"Schneider Shares" means, collectively, the Common Shares and the Class A
Shares of Schneider and includes a reference to shares of either class where
the context requires.
"SEC" means the United States Securities and Exchange Commission.
"Securities" means, collectively, the Purchased Securities and Other
Securities.
"Shareholders" means holders of Schneider Shares.
"Smithfield" or "Smithfield Foods" means Smithfield Foods, Inc., a
corporation incorporated under the laws of the Commonwealth of Virginia.
"Smithfield Articles" means Smithfield's articles of incorporation, as
amended.
"Smithfield By-laws" means Smithfield's by-laws.
"Smithfield Canada" means Smithfield Canada Limited, a single purpose
wholly-owned subsidiary of Smithfield incorporated under the OBCA for the
purpose of making the Offers.
"Smithfield Canada Articles" means Smithfield Canada's articles of
incorporation.
"Smithfield Canada Board of Directors" means the board of directors of
Smithfield Canada.
"Smithfield Canada By-laws" means Smithfield Canada's by-laws.
"Smithfield Canada Common Shares" means the common shares in the capital
of Smithfield Canada.
"Smithfield Canada Insolvency Event" means the institution by Smithfield
Canada of any proceeding to be adjudicated a bankrupt or insolvent or to be
dissolved or wound up, or the consent of Smithfield Canada to the institution
of bankruptcy, insolvency, dissolution or winding-up proceedings against it, or
the filing of a petition, answer or consent seeking dissolution or winding-up
under any bankruptcy, insolvency or analogous laws, including without
limitation the Companies Creditors' Arrangement Act (Canada) and the Bankruptcy
and Insolvency Act (Canada), and the failure by Smithfield Canada to contest in
good faith any such proceedings commenced in respect of Smithfield Canada
within 15 days of becoming aware thereof, or the consent by Smithfield Canada
to the filing of any such petition or to the appointment of a receiver, or the
making by Smithfield Canada of a general assignment for the benefit of
creditors, or the admission in writing by Smithfield Canada of its inability to
pay its debts generally as they become due, or Smithfield Canada not being
permitted, pursuant to solvency requirements of applicable law, to redeem any
Exchangeable Shares pursuant to the Exchangeable Share Provisions.
"Smithfield Canada Transfer Agent" means CIBC Mellon Trust Company, or any
successor thereto that is appointed by Smithfield Canada to act as transfer
agent and registrar for the Exchangeable Shares.
"Smithfield Common Stock" means the common stock, par value US$0.50, of
Smithfield.
"Smithfield Liquidation Event" means (i) any determination by Smithfield's
board of directors to institute voluntary liquidation, dissolution or
winding-up proceedings (not including a reorganization under applicable
bankruptcy laws) with respect to Smithfield or to effect any other distribution
of assets of Smithfield among its shareholders for the purpose of winding up
its affairs or (ii) receipt by Smithfield of notice of, or Smithfield otherwise
becoming aware of, any threatened or instituted claim, suit, petition or other
proceeding with respect to the involuntary liquidation, dissolution or winding
up (not including a reorganization under applicable bankruptcy laws) of
Smithfield or to effect any other distribution of assets of Smithfield among
its shareholders for the purpose of winding up its affairs.
"Smithfield Sub" means Smithfield Sub Limited, a wholly-owned subsidiary
of Smithfield incorporated under the OBCA.
"Special Holdco" means a single-purpose holding company, incorporated
under the laws of Ontario which is a resident of Canada for the purposes of the
Canadian Tax Act, owns Schneider Shares and has no assets other than Schneider
Shares and no liabilities whatsoever.
"Special Voting Stock" means the Series B Special Voting Preferred Share,
par value US$1.00 per share, of Smithfield, having terms substantially in the
form attached as Annex F, one share (the "Special Voting Share") of which will
be issued by Smithfield and deposited with the Trustee pursuant to the Voting,
Support and Exchange Trust Agreement.
15
<PAGE>
"Subsequent Acquisition Transaction" has the meaning set forth in the
Circular under the heading "Acquisition of Shares Not Deposited and Appraisal
Rights."
"Tender Agreement" has the meaning set forth in Section 7 of the Offers to
Purchase.
"Termination Date" means o, 1998 or such later date or dates as may be
fixed by Smithfield Canada from time to time by notice given pursuant to
Section 8 of the Offers to Purchase.
"Trustee" means CIBC Mellon Trust Company, or any successor thereto that
is appointed to act as trustee under the Voting, Support and Exchange Trust
Agreement.
"TSE" means The Toronto Stock Exchange.
"US$" means United States dollars.
"U.S. Code" means the United States Internal Revenue Code of 1986, as
amended.
"U.S. GAAP" means generally accepted accounting principles in the United
States.
"U.S. Securities Act" means the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"VSCA" means the Virginia Stock Corporation Act, as amended.
"Voting Rights" means the rights of the holders of Exchangeable Shares,
other than Smithfield and its subsidiaries, to direct the votes attached to the
share of Special Voting Stock in accordance with the Voting, Support and
Exchange Trust Agreement.
"Voting, Support and Exchange Trust Agreement" means the Voting, Support
and Exchange Trust Agreement to be entered into between Smithfield Canada,
Smithfield Foods and the Trustee, substantially in the form attached as Annex
D.
16
<PAGE>
RISK FACTORS
The following risk factors should be considered by Shareholders and Option
holders in evaluating whether to accept the Offers. These risk factors should
be considered in conjunction with the other information included herein.
Litigation Relating to the Offers
On January 14, 1998, two Shareholders commenced an action in the Ontario
Court (General Division) seeking, among other things, a declaration that
Schneider's board of directors have acted in a manner that unfairly disregarded
the interests of all Shareholders, an order that each holder of Class A Shares
has the right to convert such holder's Class A Shares into Common Shares and an
injunction to enjoin the making of the Offers. The plaintiffs allege that the
Class A Shares should be convertible into Common Shares because the specific
language used in the Maple Leaf Offer makes that offer an "Exclusionary Offer"
for purposes of the Schneider Articles. Subsequently, Maple Leaf and three
Shareholders (two of which are affiliates of Maple Leaf's financial advisor)
commenced their own actions seeking substantially the same remedies. Generally,
an "Exclusionary Offer" is an offer to purchase Common Shares that is not
accompanied by an identical offer to purchase Class A Shares, in terms of the
price per share and in all other material respects. The Maple Leaf Offer, like
the Offers made hereby, offers identical consideration and is made on the same
terms for both the Common Shares and the Class A Shares. The Schneider board of
directors' have stated publicly that the Maple Leaf Offer is not an
Exclusionary Offer and Smithfield agrees with that position.
Smithfield and Smithfield Canada contested this litigation in a single
trial that commenced on April 14, 1998 and ended on April 24, 1998. On May 11,
1998, the Ontario Court (General Division) dismissed all of the claims made by
the plaintiffs, finding that there was no oppression by either Schneider or the
Schneider Family and declaring that the Maple Leaf Offer is not an Exclusionary
Offer. The trial decision means that neither the Maple Leaf Offer nor the
Offers made hereby will engage the conversion rights described above. In light
of the fact that the Offers made hereby are able to proceed as contemplated by
the Lock-up Agreement, the Court dismissed Smithfield's counterclaim against
Maple Leaf. To date, none of the plaintiffs has announced an intention to
appeal this decision. The applicable appeal period will not expire until mid-
June, 1998.
Effect of the Offers on Market and Listings for the Schneider Shares
The purchase of the Schneider Shares by Smithfield Canada pursuant to the
Offers will reduce the number of Schneider Shares that might otherwise trade
publicly, as well as the number of Shareholders, and, depending on the number
of Shareholders depositing and the number of Schneider Shares purchased under
the Offers, the Offers could adversely affect the liquidity and market value of
the remaining Schneider Shares held by the public. After the purchase of the
Schneider Shares under the Offers, it may be possible for Schneider to take
steps towards the elimination of any applicable public reporting requirements
under applicable securities legislation in any province in which it has an
insignificant number of security holders.
The rules and regulations of the TSE establish certain criteria which, if
not met, could lead to the delisting of the Schneider Shares from the TSE.
Among such criteria are the number of Shareholders, the number of Schneider
Shares publicly held and the aggregate market value of the Schneider Shares
publicly held. Depending on the number of Schneider Shares purchased pursuant
to the Offers, it is possible that the Schneider Shares would fail to meet the
criteria for continued listing on the TSE. If this were to happen, the
Schneider Shares could be delisted and this could, in turn, adversely affect
the market or result in a lack of an established market for such Schneider
Shares. Smithfield Canada intends to cause Schneider to apply to delist the
Schneider Shares from the TSE as soon as practicable after the completion of
the Offers, any Compulsory Acquisition or Subsequent Acquisition Transaction.
Absence of Fairness Opinion
No fairness opinion has been or will be obtained by Smithfield or
Smithfield Canada in connection with the Offers. On December 17, 1997, the
Special Committee of the Board of Directors of Schneider was advised by the
financial advisor to the Special Committee, Nesbitt Burns, that in Nesbitt
Burns' view, the consideration being offered under Smithfield's proposal was,
at that date, inadequate to Shareholders from a financial point of view.
Nesbitt Burns also advised the Special Committee of its view that, if no
control transaction involving Schneider were consummated, the Common Shares and
the Class A Shares would settle in a trading range of between C$18.00 and
C$20.00 per share. However, to date, Nesbitt Burns has not provided any formal
fairness opinion in respect of the Offers. See "Background to the Offers" and
"Lock-up Agreement."
17
<PAGE>
Canadian Income Tax Considerations
The Offers have been structured to permit Shareholders who hold Schneider
Shares as capital property and who would generally otherwise be subject to
Canadian tax on the disposition of their Schneider Shares to obtain a full or
partial deferral of such tax by making a joint election under the Canadian Tax
Act. A joint election is an election under certain provisions of the Canadian
Tax Act made jointly by a Shareholder and Smithfield. Unless a Shareholder
makes a joint election in the manner and within the time set out in the
Circular under the heading "Canadian Federal Income Tax Considerations --
Shareholders Resident in Canada -- Joint Election -- Procedure," the
Shareholder will not be entitled to a deferral of any Canadian tax that might
otherwise arise on the disposition of that Shareholder's Schneider Shares.
Potential Tax Impact for United States Shareholders
Smithfield and Smithfield Canada have received an opinion from McGuire,
Woods, Battle & Boothe LLP, that Shareholders that are United States persons
should not be required to recognize taxable gain or loss on the exchange of
Schneider Shares for Exchangeable Shares. Under amendments to the Internal
Revenue Code that were enacted in 1997, however, Shareholders that are United
States persons (citizens or residents of the United States, United States
corporations or partnerships, and certain estates and trusts) could be taxable
if the Exchangeable Shares were deemed to be "nonqualified preferred stock."
Although the Exchangeable Shares should not be characterized as nonqualified
preferred stock, in the absence of specific administrative guidance there is
the possibility that the Internal Revenue Service could take the position that
the Exchangeable Shares should be treated as nonqualified preferred stock. See
"United States Federal Income Tax Considerations -- Shareholders That Are
United States Holders -- Receipt of Exchangeable Shares."
Stringent Environmental Regulation; Environmental Litigation, Proceedings and
Investigations
The past and present business operations of Smithfield and the past and
present ownership and operation of real property by Smithfield are subject to
extensive and increasingly stringent United States, 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 Smithfield's business. Smithfield 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 Smithfield's
facilities have been in operation for many years and, over such time,
Smithfield 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 Smithfield's present or former properties or manufacturing facilities and/or
waste disposal sites could require Smithfield to incur material unforeseen
expenses. Occurrences of any such events may have a material adverse affect on
Smithfield's financial condition. For a description of significant
environmental litigation and investigations, including discussion of an ongoing
federal grand jury investigation concerning Smithfield's pork processing
facilities in Smithfield, Virginia, see Annex B "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Regulation."
Cyclicality
Smithfield'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 Smithfield 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 Smithfield's, are highly cyclical, being characterized by
periods of supply and demand imbalance and to sensitivity to 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 Smithfield 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 Smithfield
charges for its products, have at times had, and may in the future have,
material adverse effects on Smithfield's results of operations. There can be no
assurance that all or part of any increased costs experienced by Smithfield
from time to time can be passed along to consumers of Smithfield's products
directly or in a timely manner.
18
<PAGE>
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; United States, 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 Smithfield will substantially depend on Smithfield's ability to
integrate newly acquired operations successfully with its existing operations.
See Annex B -- "Information Concerning Smithfield Foods, Inc. -- Business."
Governmental Regulation
Smithfield'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 Smithfield's
products, including food safety standards. Smithfield's manufacturing
facilities and products are subject to constant inspection by United States,
state and local authorities. Smithfield 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 Smithfield is in compliance with such laws and
regulations or that it will be able to comply with any future laws and
regulations. Failure by Smithfield to comply with applicable laws and
regulations could subject Smithfield to civil remedies, including fines,
injunctions, recalls or seizures, as well as potential criminal sanctions,
which could have a material adverse effect on Smithfield. See Annex B --
"Information Concerning Smithfield Foods Inc. -- Business -- Regulation."
Risks of International Sales and Operations
Non-U.S. sales accounted for approximately 6% of Smithfield's sales in
fiscal 1997. International sales are subject to risks related to general
economic conditions, imposition of tariffs, quotas, trade barriers and other
non-U.S. restrictions, enforcement of remedies in foreign jurisdictions and
compliance with applicable laws, and other economic and political
uncertainties. Furthermore, to the extent that in the future Smithfield
conducts non-U.S. operations, such operations would be subject to the types of
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.
EXCHANGE RATES OF CANADIAN AND US DOLLARS
The following table sets forth, for each period indicated, the high and
low exchange rates for one Canadian dollar expressed in US dollars, the average
of such exchange rates on the last day of each month during such period, and
the exchange rate at the end of such period, based upon the noon buying rate in
New York City for cable transfers in Canadian dollars, as certified for customs
purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"):
<TABLE>
<CAPTION>
Schneider Fiscal Year Ended
-----------------------------------------------------------
16 Weeks Ended
February 14, 1998 October 25, 1997 October 26, 1996 October 28, 1995
------------------- ------------------ ------------------ -----------------
<S> <C>
High ............... US$0.7153 US$0.7513 US$0.7462 US$0.7527
Low ................ 0.6832 0.7145 0.7235 0.7024
Average ............ 0.7005 0.7285 0.7322 0.7269
Period End ......... 0.6930 0.7184 0.7438 0.7297
</TABLE>
On April 13, 1998, the exchange rate for one Canadian dollar expressed in
US dollars, based on the Noon Buying Rate, was US$0.6982.
The following table sets forth, for each period indicated, the high and
low exchange rates for one US dollar expressed in Canadian dollars, the average
of such exchange rates on the last day of each month during such period, and
the exchange rate at the end of such period, based upon the noon spot rate of
the Bank of Canada (the "Noon Spot Rate"):
19
<PAGE>
<TABLE>
<CAPTION>
40 Weeks Smithfield Foods Fiscal Year Ended
Ended -----------------------------------------------------
February 1, 1998 April 27, 1997 April 28, 1996 April 30, 1995
----------------- ---------------- ---------------- ---------------
<S> <C>
High ............... C$1.3995 C$1.3993 C$1.3860 C$1.4235
Low ................ 1.3669 1.3306 1.3282 1.3408
Average ............ 1.3837 1.3636 1.3616 1.3818
Period End ......... 1.3916 1.3965 1.3626 1.3596
</TABLE>
On April 13, 1998, the exchange rate for one US dollar expressed in
Canadian dollars was C$1.4321, based on the Noon Spot Rate.
20
<PAGE>
OFFERS TO PURCHASE
To: Holders of Schneider Shares and Options
The accompanying Circular contains important information and should be read
carefully before making a decision with respect to the Offers. These Offers to
Purchase and the Circular which is incorporated into and forms part of these
Offers to Purchase constitute the take-over bid circular required under
Canadian provincial securities legislation and is a prospectus for purposes of
United States federal securities laws.
1. The Offers
Subject to the terms and conditions set forth in Section 2 below and in
the Letter of Transmittal and the Notice of Guaranteed Delivery, Smithfield
Canada hereby offers to purchase any and all of the issued and outstanding
Schneider Shares, including Schneider Shares which may become outstanding on
the exercise of Options prior to the Expiry Time. The Offers are for the
purchase of each outstanding Schneider Share in exchange for 0.5415 of an
Exchangeable Share of Smithfield Canada. According to Schneider's shareholder
list, as at April 9, 1998 there were 738,954 Common Shares and 6,105,565 Class
A Shares outstanding.
Subject to the terms and sole condition of the Class A Offer and the
Assignment, Smithfield Canada also hereby offers to purchase all of the
outstanding Options. Option holders may accept the Class A Offer by exchanging
their Options for Exchangeable Shares on the basis of 0.5415 of an Exchangeable
Share for each C$25.00 of "in the money" value (being the difference between
the Option exercise price and C$25.00). For example, a holder of Options to buy
2,500 Class A Shares exercisable at C$13.75 may exchange such Options for 609
Exchangeable Shares. This 609 Exchangeable Shares is obtained by multiplying
each Option's "in the money" value of C$11.25 (or, C$25.00 less C$13.75) by
2,500 Class A Shares, dividing such value by C$25.00, then multiplying such
quotient by the 0.5415 exchange factor. As at November 18, 1997, Schneider
reported outstanding Options to acquire 545,100 Class A Shares at exercise
prices ranging from C$10.50 to C$14.75. The Offers are not made for any
securities convertible or exercisable for Schneider Shares other than the
Options.
Smithfield Canada will not issue fractional Exchangeable Shares. Instead
of any fractional Exchangeable Share, the Shareholder or Option holder will
receive, at the option of Smithfield Canada, either a cash payment or a whole
Exchangeable Share. For the purposes of determining the amount of any such
payment, the Schneider Shares and Options owned by a holder will be aggregated.
The Offers will be open for acceptance until the Expiry Time, unless
withdrawn or extended at Smithfield Canada's sole discretion.
2. Conditions to the Offers
The Class A Share Offer
The Class A Offer is conditional only upon Smithfield Canada acquiring any
Common Shares pursuant to the Common Share Offer. Smithfield Canada reserves
the right to withdraw the Class A Offer and not take up and pay for any Class A
Shares or Options deposited under the Class A Offer if Smithfield Canada does
not acquire any Common Shares pursuant to the Common Share Offer. Accordingly,
if the conditions to the Common Share Offer are not satisfied or waived, the
sole condition to the Class A Offer will not be satisfied.
Common Share Offer
Smithfield Canada reserves the right to withdraw the Common Share Offer
and not take up and pay for any Common Shares deposited under the Common Share
Offer unless all of the following conditions are satisfied or waived by
Smithfield Canada prior to the Expiry Time:
(a) there shall not have occurred or, if there shall have previously
occurred, there shall not have been disclosed prior to the commencement of the
Common Share Offer, any change (or any condition, event or development
involving a prospective change) in the business, operations, assets,
capitalization, financial condition, prospects, licenses, permits, rights,
privileges or liabilities, whether contractual or otherwise, of Schneider
which, in the judgment of Smithfield Canada, acting reasonably, is materially
adverse to a purchaser of Schneider Shares;
(b) the applicable waiting period under the Competition Act shall have
expired and the Director of Investigation and Research (the "Director")
appointed under the Competition Act shall have advised Smithfield Canada that
the Director shall
21
<PAGE>
not oppose or threaten to oppose the purchase of any of the Schneider Shares
under the Common Share Offer, or make or threaten to make an application under
Part VIII of the Competition Act in respect of the purchase of any of the
Schneider Shares;
(c) all governmental or regulatory consents or approvals that Smithfield
Canada, in its sole discretion, views as necessary or desirable to enable
Smithfield Canada to consummate the Common Share Offer shall have been received
on terms and conditions satisfactory to Smithfield Canada (see the Circular
under the heading "Regulatory Matters");
(d) there shall not be (i) any outstanding act, action, suit or proceeding
taken before or by any domestic or foreign arbitrator, court or tribunal or any
governmental agency or other regulatory authority or any administrative agency
or commission by any elected or appointed public official or private person
(including without limitation any individual, corporation, firm, group or other
entity) in Canada or elsewhere, whether or not having the force of law, or (ii)
any law, regulation or policy proposed, enacted, promulgated or applied, in
each case: (A) to cease trade, enjoin, prohibit or impose material limitations
or conditions on the purchase by or the sale to Smithfield Canada in relation
to the Schneider Shares or the right of Smithfield Canada to own or exercise
full rights of ownership of the Schneider Shares, (B) which has had or would
have a material adverse effect upon Schneider or (C) which would prevent
completion of the acquisition by Smithfield Canada of the Schneider Shares
pursuant to a subsequent acquisition transaction;
(e) there shall not exist any prohibition at law against Smithfield Canada
taking up and paying for the Schneider Shares pursuant to the Common Share
Offer;
(f) Smithfield Canada shall not have become aware of, in any document
filed by or on behalf of Schneider with any securities commission or similar
securities regulatory authority in any of the provinces of Canada prior to the
date of the Common Share Offer, any untrue statement of material fact or any
omission to state a material fact that is required to be stated or that is
necessary to make a statement not misleading in light of the circumstances in
which it was made and at the date it was made (after giving effect to all
subsequent filings in relation to all matters covered in earlier filings),
including without limitation as contained in any annual information form,
financial statement, material change report or management proxy circular or in
any document so filed or released by Schneider to the public;
(g) Schneider shall not, or permit any of its subsidiaries to, have
entered into any new agreements, commitments or undertakings of a material
nature or undertaken any other material action except in the ordinary course of
business;
(h) Schneider shall not have declared or paid any dividend (other than its
regular, historical quarterly dividend in the amount of C$0.09 per share),
authorized any redemption of securities or otherwise proposed a distribution of
assets to Shareholders;
(i) Schneider shall not have entered into any agreement for the issuance
of any securities other than with respect to the issuance of Schneider Shares
by Schneider pursuant to currently outstanding Options;
(j) all Options or other rights to acquire the Schneider Shares that are
"out of the money" Options or rights shall have been terminated;
(k) Smithfield Canada shall have determined in its discretion, acting
reasonably, that no material right, franchise or license of Schneider or any of
its subsidiaries has been or may be impaired (which impairment has not been
cured or waived) or otherwise adversely affected, whether as a result of the
making of the Common Share Offer, the taking up and paying for the Schneider
Shares deposited under the Common Share Offer or otherwise, which might make it
inadvisable for Smithfield Canada to proceed with the Common Share Offer and/or
the taking up and paying for the Schneider Shares under the Common Share Offer
and/or completing a subsequent acquisition transaction;
(l) Schneider shall have received waivers relating to any change of
control provisions in any note, bond, mortgage, indenture, license, lease,
contract, agreement or other instrument or obligation to which Schneider or any
of its subsidiaries is a party or by which any of them or any of their
properties or assets may be bound, except such waivers the absence of which
would not in the aggregate materially and adversely affect Schneider and its
subsidiaries; and
(m) The Schneider Family shall not be in breach of or default under any
material provision of the Lock-up Agreement and neither the Schneider Family
nor Smithfield Canada shall have exercised its right to terminate the Lock-up
Agreement or any portion thereof.
The foregoing conditions are for the exclusive benefit of Smithfield
Canada and may be asserted by Smithfield Canada regardless of the circumstances
(including any action or inaction by Smithfield Canada or any of its
affiliates) giving rise to any such condition or may be waived by Smithfield
Canada in its sole discretion, in whole or in part, at any time and
22
<PAGE>
from time to time without prejudice to any other rights which Smithfield Canada
may have under either Offer. The failure by Smithfield Canada at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
rights and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. Any determination by Smithfield
Canada concerning the events described in this Section 2 will be final and
binding upon all parties.
Any waiver of a condition or the withdrawal of either Offer shall be
effective upon written notice or other communication confirmed in writing by
Smithfield Canada to that effect to the Depositary at its principal office in
Toronto. Smithfield Canada, forthwith after giving any such notice, shall make
a public announcement of such waiver or withdrawal, shall cause the Depositary
as soon as practicable thereafter to notify Shareholders and Option holders in
the manner set forth in Section 13 of the Offers to Purchase and shall provide
a copy of such notice to the TSE. Any notice of waiver will be deemed to have
been given and to be effective on the day on which it is delivered or otherwise
communicated to the Depositary at its principal office in Toronto. In the event
of any waiver, all Schneider Shares and Options deposited previously and not
taken up or withdrawn will remain subject to the relevant Offer and may be
accepted for purchase by Smithfield Canada in accordance with the terms of such
Offer. If either Offer is withdrawn, Smithfield Canada shall not be obligated
to take up or pay for any Schneider Shares or Options deposited under such
Offer and the Depositary will promptly return all certificates for deposited
Schneider Shares, Letters of Transmittal, Notices of Guaranteed Delivery,
Assignments and related documents to the parties by whom they were deposited in
acceptance of such Offer.
3. Payment for Deposited Schneider Shares and Options
If all of the conditions referred to in Section 2 of the relevant Offer
have been fulfilled or waived at the Expiry Time, Smithfield Canada will become
obligated to take up and pay for the Schneider Shares and the Options (if
applicable) deposited under such Offer and not withdrawn no later than 10 days
from the Termination Date, and to pay for the Schneider Shares and the Options
taken up as soon as possible, but in any event not later than three days after
taking up the Schneider Shares and the Options. In accordance with applicable
law, Smithfield Canada will take up and pay for Schneider Shares and Options
deposited under an Offer after the date on which it first takes up Schneider
Shares and Options deposited under such Offer not later than 10 days after the
deposit of such Schneider Shares and Options.
Subject to applicable law, Smithfield Canada may, in its discretion, at
any time before the Expiry Time if the applicable rights to withdraw any
deposited Schneider Shares or Options have expired, take up and pay for all
such Schneider Shares and Options then deposited under the Class A Offer,
Common Share Offer or both Offers, provided that Smithfield Canada agrees to
take up and pay for all additional Schneider Shares and Options validly
deposited under such Offer or Offers thereafter.
Smithfield Canada will be deemed to have taken up and accepted for payment
Schneider Shares and Options validly deposited and not withdrawn pursuant to an
Offer if, as and when Smithfield Canada gives written notice or other
communication confirmed in writing to the Depositary to that effect.
Smithfield Canada will pay for Schneider Shares and Options validly
deposited pursuant to an Offer and not withdrawn by providing the Depositary
with sufficient certificates for Exchangeable Shares for transmittal to persons
depositing Schneider Shares and Options pursuant to the Offer. Under no
circumstances will interest accrue or be paid by Smithfield Canada or the
Depositary to persons depositing Schneider Shares or Options on the purchase
price of Schneider Shares or Options purchased by Smithfield Canada pursuant to
the Offers, regardless of any delay in making such payment. Smithfield Canada
will not issue fractional Exchangeable Shares. Instead of any fractional
Exchangeable Share, the Shareholder or Option holder will receive, at the
option of Smithfield Canada, either a cash payment or a whole Exchangeable
Share. For the purposes of determining the amount of any such payment, the
Schneider Shares and Options beneficially owned by a holder will be aggregated.
The Depositary will act as the agent of the persons who have deposited
Schneider Shares and Options pursuant to the Offers for the purposes of
receiving Exchangeable Shares and cash, if any, from Smithfield Canada and
transmitting Exchangeable Shares and cash, if any, to such persons. Receipt of
payment by the Depositary shall be deemed to constitute receipt of payment by
persons depositing Schneider Shares and Options.
Settlement will be made by the Depositary issuing or causing to be issued
to each person who has validly deposited and not withdrawn Schneider Shares or
Options under an Offer a certificate representing Exchangeable Shares to which
such person is entitled, together with, if Smithfield Canada elects to pay cash
for fractional interests, a cheque in Canadian dollars in lieu of any fraction
of an Exchangeable Share. Unless otherwise directed by the Letter of
Transmittal or Assignment, as the case may be, the certificate for such
Exchangeable Shares and cheque, if any, will be issued in the name of the
holder of the Schneider Shares or Options so deposited.
23
<PAGE>
Unless a holder depositing Schneider Shares or Options instructs the
Depositary to hold the certificate for such Exchangeable Shares and cheque, if
any, for pick-up by checking the appropriate box on the Letter of Transmittal
or the Assignment, as applicable, certificates and cheques, if any, will be
forwarded by first class insured mail to such holder at the address specified
in the Letter of Transmittal or the Assignment, as the case may be. If no
address is specified therein, certificates and cheques, if any, will be
forwarded to the address of the holder as shown on the register maintained by
Schneider.
Depositing Shareholders and Option holders will not be obligated to pay
brokerage commissions. Transfer taxes, if any, on the purchase of Schneider
Shares or Options will be paid by Smithfield Canada.
4. Terms of the Exchangeable Shares and the Voting, Support and Exchange Trust
Agreement
Upon the terms and subject to the conditions described herein, Smithfield
Canada is offering to purchase the outstanding Common Shares, Class A Shares
and Options in consideration for the issue of Exchangeable Shares. For a
summary description of the provisions of the Exchangeable Shares and the
related Voting, Support and Exchange Trust Agreement, see the Circular under
the heading "Smithfield Canada Limited," which summary is qualified in its
entirety by reference to the full text of the Voting, Support and Exchange
Trust Agreement and Exchangeable Share Provisions contained in Annexes D and E,
respectively.
5. Time and Manner for Acceptance
The Offers will expire, unless withdrawn or extended at the sole
discretion of Smithfield Canada, at the Expiry Time.
Schneider Shares
An Offer may be accepted by holders of Schneider Shares by depositing the
following documents with the Depositary at the offices specified in the Letter
of Transmittal on or before the Expiry Time:
(a) the certificate or certificates representing Schneider Shares in
respect of which the Offer is being accepted;
(b) a properly completed and duly signed copy of the Letter of Transmittal
(or a manually signed facsimile copy), with the signature or signatures
guaranteed in accordance with the instructions set out in the Letter of
Transmittal; and
(c) any other relevant document required by the instructions set forth on
the Letter of Transmittal.
An Offer will be deemed to be accepted only if the Depositary actually has
received these documents at or before the Expiry Time. Holders of Schneider
Shares who cannot comply on a timely basis with these procedures for deposit of
the requisite certificates for Schneider Shares may deposit certificates
representing Schneider Shares pursuant to the procedures for guaranteed
delivery described below.
Options
The Class A Offer may be accepted by holders of Options, on or before the
Expiry Time, by depositing with the Depositary, at any of its offices set out
in the Assignment, a properly completed and duly signed Assignment, with the
signature guaranteed in accordance with the instructions set out in the
Assignment. The Class A Offer will be deemed to be accepted by a holder of
Options only if the Depositary has actually received the Assignment at or
before the Expiry Time.
6. Procedure for Guaranteed Delivery
If a holder wishes to accept an Offer and either (i) the certificates
representing such holder's Schneider Shares are not immediately available or
(ii) such holder cannot deliver the certificates and Letter of Transmittal to
the Depositary by the Expiry Time, those Schneider Shares may nevertheless be
deposited pursuant to such Offer, provided that all of the following conditions
are met:
(a) such deposit is made only at the principal office of the Depositary in
Toronto by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed Delivery
(or a manually signed facsimile) is received by the Depositary at its principal
office in Toronto at or before the Expiry Time; and
(c) the certificate or certificates representing the deposited Schneider
Shares, in proper form for transfer, together with a properly completed and
duly signed Letter of Transmittal (or a manually signed facsimile copy) and
other documents required by such Letter of Transmittal, are received at the
Toronto office of the Depositary by 5:00 p.m. Toronto time on the third
business day after the Expiry Time.
24
<PAGE>
The Notice of Guaranteed Delivery may be delivered by hand, transmitted by
electronic facsimile or mailed to the Depositary only at its principal office
in Toronto and must include a guarantee by an Eligible Institution in the form
set forth in the Notice of Guaranteed Delivery.
7. Acceptance Alternative for Holding Companies
Holders who hold Schneider Shares indirectly through a Special Holdco will
be permitted to participate in the Offers by depositing all of such holder's
shares of that Special Holdco pursuant to the Offers, in lieu of depositing
such Schneider Shares, for consideration identical to that which the
Shareholder would have been entitled to receive had such Schneider Shares been
deposited under the Offers.
Provided the terms and conditions set forth below have been satisfied and
the applicable conditions of the relevant Offer have been satisfied or waived
prior to the time by which Smithfield Canada is obliged to take up and pay for
the Schneider Shares under such Offer, Smithfield Canada will purchase all of a
holder's Holdco Shares from such holder where the holder has advised Smithfield
Canada that it wishes to take advantage of the Acceptance Alternative.
Smithfield Canada currently intends to wind up each Special Holdco the shares
of which have been acquired under the Acceptance Alternative into Smithfield
Canada under the voluntary winding-up or dissolution procedures of the OBCA, or
to amalgamate the Special Holdco with Smithfield Canada (thereby directly
holding the Schneider Shares previously held by the Special Holdco) or
Schneider.
The Acceptance Alternative will be available to an indirect holder of
Schneider Shares provided all of the following terms and conditions are
satisfied:
(a) the holder holds such Schneider Shares indirectly through a Special
Holdco;
(b) the holder advises Smithfield Canada in writing, with a copy to the
Depositary, at or before 5:00 p.m. Toronto time on a date that is at least 10
days prior to the Termination Date, that it wishes to take advantage of the
Acceptance Alternative should it accept the Offer;
(c) if required by Smithfield Canada, the holder properly completes and
signs a letter of acceptance and transmittal (in a form to be provided by
Smithfield Canada for such purpose) in respect of its Holdco Shares and
deposits such letter of acceptance and transmittal, together with the
certificates representing such holder's Holdco Shares and the Schneider Shares
in respect of which such Holdco Shares are being tendered, with the Depositary
prior to the Expiry Time;
(d) all of the issued and outstanding shares of the Special Holdco are
tendered to the Offer in accordance with the procedures set out herein;
(e) the holder and the Special Holdco enter into an agreement (a "Tender
Agreement") with Smithfield Canada on terms and conditions satisfactory to
Smithfield Canada, and containing representations and warranties concerning the
Special Holdco and the Holdco Shares (including, among other things, that the
Special Holdco owns the Schneider Shares and has no assets other than its
holding of Schneider Shares and no liabilities or obligations of any kind
whatsoever, contingent or otherwise, and that the sole business or activity of
the Special Holdco is and has always been the holding for investment purposes
of Schneider Shares, other marketable securities and cash and ancillary
activities, together with evidence to the satisfaction of Smithfield Canada in
respect thereof), with such representations and warranties being effective both
as of the date of the Tender Agreement and the date the Holdco Shares are
acquired by Smithfield Canada;
(f) the holder enters into an indemnity agreement (the "Indemnity
Agreement") with Smithfield Canada, in the form required by Smithfield Canada,
acting reasonably and provides Smithfield Canada with security satisfactory to
Smithfield Canada in respect of such indemnification;
(g) Smithfield Canada determines, in its sole discretion, that the
purchase of the Holdco Shares will not have a material adverse consequence
(whether tax or otherwise) to Smithfield Canada, Schneider or Smithfield;
(h) the Special Holdco will not, other than by way of stock dividends,
have effected any dividends or other distributions, except in an aggregate
amount equal to the sum of (i) the after-tax amount of any dividends received
by the Special Holdco on its Schneider Shares and any other marketable
securities held by it, and (ii) the after-tax amount of any interest received
by it on any cash held by it;
(i) the holder will ensure the preparation and filing of all income tax
returns of the Special Holdco in respect of the taxation year of the Special
Holdco ending immediately prior to the acquisition of the Holdco Shares by
Smithfield Canada
25
<PAGE>
and any prior taxation years for which income tax returns have not been filed,
subject to Smithfield Canada's right to approve all such returns as to form and
substance;
(j) if the holder is a non-resident of Canada, such holder provides to
Smithfield Canada on or before the Expiry Time a certificate under section 116
of the Canadian Tax Act in form and substance satisfactory to Smithfield Canada
or enters into an agreement with Smithfield Canada in form and substance
satisfactory to Smithfield Canada entitling Smithfield Canada to withhold in
accordance with the Canadian Tax Act from amounts payable to the holder for the
Holdco Shares and, if a certificate under section 116 of the Canadian Tax Act
is not received by an agreed date, to remit the amounts withheld by it to the
Receiver General of Canada in accordance with the Canadian Tax Act;
(k) where the holder is a non-resident of Canada, the holder provides
evidence sufficient to Smithfield Canada, acting reasonably, that the Special
Holdco has withheld and/or remitted, on a timely basis, any amounts required to
be withheld and/or remitted pursuant to Part XIII of the Canadian Tax Act,
prior to the acquisition of the Holdco Shares by Smithfield Canada; and
(l) the holder agrees that the rights and obligations of Smithfield Canada
under the Tender Agreement will terminate if the applicable conditions of the
Offer are not satisfied or waived prior to the time by which Smithfield Canada
is obliged to take up and pay for the Schneider Shares under the Offer.
Any holder wishing to take advantage of the Acceptance Alternative is
encouraged to discuss such arrangements with Smithfield Canada at the earliest
possible time and in any event within the time limit set forth in Section 7(b)
above. Copies of the form of Tender Agreement and Indemnity Agreement may be
obtained from Smithfield Canada on request by Shareholders wishing to use the
Acceptance Alternative. Smithfield Canada will treat a valid deposit of Holdco
Shares under an Offer as an acceptance of such Offer and, for purposes of the
Offer, a valid deposit of Holdco Shares by a holder under the Offer will be
considered to be a valid deposit of the Schneider Shares in respect of which
such Holdco Shares are being tendered and such holder will be considered a
Shareholder.
Acceptance of the Offers through the Acceptance Alternative will have
income tax consequences to a particular indirect holder of Schneider Shares
that are not described in this document. Shareholders wishing to use the
Acceptance Alternative should consult with their own tax advisors.
8. Extensions and Variations of the Offers
The Offers will be open for acceptance at the places of deposit specified
in the Letter of Transmittal and Assignment until, but not after, the Expiry
Time.
Smithfield Canada may, at any time and from time to time while an Offer is
open for acceptance, vary the terms of such Offer or extend the Expiry Time by
giving notice in writing to the Depositary at its principal office in Toronto.
Upon the giving of such notice to the Depositary, the Expiry Time shall be
deemed to be extended to the date specified in such notice or such Offer shall
be deemed to be varied in the manner described in such notice, as the case may
be. Smithfield Canada will, as soon as practicable after giving any such notice
to the Depositary, publicly announce the extension or variation to the Offer
and cause the Depositary to mail a copy of any such notice to holders of
Schneider Shares and Options as required by applicable securities legislation
at their respective addresses appearing in the applicable registers of
Schneider. In addition, Smithfield Canada will provide a copy of such notice to
the TSE. In the case of an extension, such announcement shall be made not later
than 9:00 a.m. Toronto time on the next business day after the previously
scheduled Expiry Time. Any notice of extension or variation will be deemed to
have been given and be effective on the day on which it is delivered or
otherwise communicated to the Depositary at its principal office in Toronto.
During any extension, all Schneider Shares and Options previously deposited and
not taken up and paid for or withdrawn will remain subject to the Offer and,
subject to applicable law, may be accepted for purchase by Smithfield Canada on
or before the Expiry Time in accordance with the terms of the Offer.
An extension of the Expiry Time shall not in and of itself constitute a
waiver by Smithfield Canada of any of its rights under Section 2 of the Offers
to Purchase.
Under applicable Canadian provincial securities legislation, if there is a
variation in the terms of an Offer, the period during which Schneider Shares or
Options may be deposited pursuant to such Offer shall not expire before 10 days
after the notice of variation has been delivered. If, prior to the Expiry Time,
Smithfield Canada in its sole discretion shall increase the consideration
offered to holders of Schneider Shares and Options under an Offer, such
increase shall be applicable to all holders whose Schneider Shares or Options
are taken up pursuant to such Offer.
26
<PAGE>
Notwithstanding the foregoing, an Offer may not be extended by Smithfield
Canada if all the terms and conditions of such Offer have been complied with,
except those waived by Smithfield Canada, unless Smithfield Canada first takes
up and pays for all Schneider Shares and Options validly deposited under the
Offer and not withdrawn.
9. Right to Withdraw Deposited Schneider Shares and Options
Except as otherwise provided in this Section 9, all deposits of Schneider
Shares and Options pursuant to an Offer are irrevocable. Schneider Shares and
Options may be withdrawn by or on behalf of a depositing Shareholder or Option
holder (unless otherwise required or permitted by applicable law):
(a) at any time before 5:00 p.m. local time, on o, 1998;
(b) at any time before the expiration of the tenth day after the date upon
which either:
(i) a notice of change relating to a change which has occurred in the
information contained in the Offer, which change is one that would
reasonably be expected to affect the decision of a holder of Schneider
Shares or Options to accept or reject the Offer (other than a change that
is not within the control of Smithfield Canada or any affiliate of
Smithfield Canada, unless it is a change in a material fact relating to the
Exchangeable Shares) in the event that such change occurs before the Expiry
Time or after the Expiry Time but prior to the expiry of all rights of
withdrawal in respect of such Offer; or
(ii) a notice of variation concerning a variation in the terms of the
Offer (other than a variation consisting solely of an increase in the
consideration offered for the Schneider Shares or Options pursuant to such
Offer where the time for deposit is not extended for a period of greater
than 10 days),
is mailed, delivered or otherwise properly communicated, but only if such
deposited Schneider Shares or Options have not been taken up and paid for by
Smithfield Canada at the time of the notice, subject to abridgement of that
period pursuant to such order or orders as may be granted by Canadian courts or
securities regulatory authorities; and
(c) at any time after o, 1998, if the Schneider Shares or Options
deposited under the Offer have not then been taken up and paid for.
A notice of withdrawal of deposited Schneider Shares or Options must:
(a) be made by a method that provides the Depositary with a written or
printed copy of such notice (which includes a telegraphic or electronic
facsimile communication);
(b) be made by or on behalf of the depositing holder;
(c) be signed by or on behalf of the person who signed the Letter of
Transmittal (or Notice of Guaranteed Delivery) that accompanied the Schneider
Shares being withdrawn or the Assignment relating to the Options being
withdrawn;
(d) specify that person's name, the number of Schneider Shares or Options
to be withdrawn, the name of the registered holder of, and the certificate
number shown on each certificate evidencing, the Schneider Shares to be
withdrawn; and
(e) actually be received by the Depositary at the place of deposit within
the applicable time specified above.
In addition, any signature in the withdrawal notice must be guaranteed in
the same manner as in the Letter of Transmittal, Notice of Guaranteed Delivery
or Assignment, except where the Schneider Shares were deposited for the account
of an Eligible Institution.
None of Smithfield Canada, the Depositary, the Dealer Manager or any other
person will be under any duty to give notice of any defect or irregularity in
any notice of withdrawal or shall incur any liability for failure to give such
notice.
Withdrawals may not be rescinded and any Schneider Shares or Options
withdrawn will thereafter be deemed not validly deposited for purposes of the
Offer. However, withdrawn Schneider Shares or Options may be redeposited at any
time before the Expiry Time by again following one of the procedures described
in Section 5 of the Offers to Purchase.
In addition to the foregoing rights of withdrawal, holders of Schneider
Shares and Options in certain provinces of Canada are entitled to statutory
rights of rescission in certain circumstances. See the description in the
Circular under the heading "Statutory Rights."
All questions as to the validity (including timely receipt) and form of
notices of withdrawal shall be determined by Smithfield Canada in its sole
discretion and such determinations shall be final and binding.
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10. Return of Withdrawn Schneider Shares and Assignments of Options
If any deposited Schneider Shares are not taken up by Smithfield Canada
pursuant to the terms and conditions of an Offer for any reason, or if
certificates are submitted for more Schneider Shares than are deposited,
certificates for Schneider Shares that are not purchased will be returned, at
the expense of Smithfield Canada, to the depositing Shareholder by first class
registered or insured mail to the address of the depositing Shareholder
specified in the Letter of Acceptance or, if no such address is specified, to
the address of such Shareholder as shown on the share register maintained by
Schneider. If any deposited Options are not taken up pursuant to the terms and
conditions of the Class A Offer for any reason, the Assignments for Options
that are not purchased will be returned, at the expense of Smithfield Canada,
to the depositing Option holder by first class registered or insured mail to
the address of the depositing Option holder specified in the Assignment or, if
no such address is specified, to the address of such Option holder as shown on
the appropriate register maintained by Schneider. Certificates and other
relevant documents will be returned as promptly as practicable following the
Expiry Time or withdrawal or early termination of the relevant Offer.
11. Mail Service Interruption
Notwithstanding the provisions of the Offers, certificates and cheques (if
any) for Exchangeable Shares to be mailed by the Depositary will not be mailed
if Smithfield Canada determines that delivery thereof by mail may be delayed. A
person entitled to certificates and cheques (if any) which are not mailed for
the foregoing reason may take delivery thereof at the office of the Depositary
at which the Schneider Shares or Options in respect of which the certificates
and cheques (if any) are being issued were deposited, upon application to the
Depositary, until such time as Smithfield Canada has determined that delivery
by mail will no longer be delayed. Notwithstanding Section 13 of the Offers to
Purchase, the deposit of certificates and cheques (if any) with the Depositary
in such circumstance shall constitute delivery to the persons entitled thereto
and the Schneider Shares and Options shall be deemed to have been paid for
immediately upon such deposit. Notice of any determination regarding mail
service delay or interruption made by Smithfield Canada shall be given in
accordance with Section 13 of the Offers to Purchase.
12. Dividends, Distributions and Proxies
The execution of the Letter of Transmittal by a holder of Schneider
Shares, or the Assignment by a holder of Options, irrevocably appoints
Smithfield Canada as the true and lawful agent, attorney and attorney in fact
of that holder with respect to the holder's Purchased Securities and with
respect to all of the holder's Other Securities. This appointment is effective
from the date that Smithfield Canada purchases the Purchased Securities and
affords Smithfield Canada full power of substitution, in the name and on behalf
of the holder, to register, record, transfer and enter the transfer of such
Purchased Securities and such Other Securities on the books of Schneider and to
exercise any and all of the rights of the holder in respect of the Purchased
Securities and any Other Securities. In addition, a holder of Schneider Shares
who executes a Letter of Transmittal (and a holder of Options who executes an
Assignment) agrees, from and after the date on which Smithfield Canada
purchases the Purchased Securities:
(a) not to vote any of the Purchased Securities or Other Securities at any
meeting of holders of those securities;
(b) not to exercise any other rights or privileges attached to any of
those securities; and
(c) to deliver to Smithfield Canada any and all instruments of proxy,
authorizations or consents received in respect of all of those securities.
At the date on which Smithfield Canada purchases the Purchased Securities,
all prior proxies given by the holder of such Purchased Securities with respect
thereto and to any Other Securities shall be revoked and no subsequent proxies
may be given by that holder with respect thereto.
If, on or after the date of the Offers, Schneider should subdivide,
consolidate or otherwise change any of the Schneider Shares or Options or its
capitalization or disclose that it has taken any such action, Smithfield Canada
may (in its sole discretion) make such adjustments as it deems appropriate to
reflect such subdivision, consolidation or other change in the consideration
and other terms of the Offers including (without limitation) the type of
securities offered to be purchased and the amounts payable therefor.
If Schneider should declare or pay any dividend (other than normal
quarterly dividends not exceeding $0.09 per Schneider Share) or make any other
distribution on or issue any rights, or other interests or distributions in
respect of the Purchased Securities after the date of these Offers, that
dividend, distribution or issue will be received and held by the depositing
holder of Purchased Securities for the account of Smithfield Canada.
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Purchased Securities and Other Securities shall be acquired by Smithfield
Canada free and clear of all liens, charges, encumbrances, claims and equities
and together with all rights and benefits arising therefrom including the right
to any and all dividends, distributions, payments, securities, assets or other
interests which may be accrued, declared, paid, issued, distributed, made or
transferred on or in respect of those Securities and which are made payable or
distributable to the holders of record of those Securities on a date on or
after the date of these Offers (other than normal quarterly dividends not
exceeding $0.09 per Schneider Share). However, if Smithfield Canada is the
holder of Purchased Securities on the record date for any dividend, Smithfield
Canada shall be entitled to receive the dividend payable to holders of record
on that date.
13. Notice and Delivery
Without limiting any other lawful means of giving notice, any notice which
Smithfield Canada or the Depositary may give or cause to be given under an
Offer will be deemed to have been properly given to holders of Schneider Shares
and Options if it is mailed by prepaid, first class mail to the registered
holders of such securities at their respective addresses appearing in the
appropriate registers maintained by Schneider and will be deemed to have been
received on the first business day following the date of mailing. These
provisions apply notwithstanding any accidental omission to give notice to any
one or more holders of Schneider Shares and Options and notwithstanding any
interruption of mail service following mailing. In the event of any
interruption of mail service, Smithfield Canada intends to make reasonable
efforts to disseminate the notice by other means such as publication. In the
event that post offices are not open for the deposit of mail, or there is
reason to believe there is or could be a disruption in all or any part of the
postal service, any notice which Smithfield Canada or the Depositary may give
or cause to be given under the Offer will be deemed to have been properly given
and to have been received by holders of Schneider Shares and Options if it is
given to the TSE for dissemination through their facilities or if it is
published in a newspaper or newspapers of general circulation in Toronto and
Montreal or if it is given to the Canada News Wire Service.
At Smithfield Canada's request, Schneider has provided a list of the names
and addresses of the holders of Schneider Shares and Options for the purposes
of disseminating the Offers and any required notices to such holders.
Unless post offices are not open for the deposit of mail, the Offers to
Purchase, the Circular, the Letter of Transmittal, Notice of Guaranteed
Delivery and the Assignment will be mailed to registered holders of Schneider
Shares and Options. In addition, Smithfield Canada will use its reasonable
efforts to furnish such documents to brokers, banks and similar persons whose
names, or the names of whose nominees, appear on the security holder list, or,
if applicable, who are listed as participants in a clearing agency's security
position listing, for subsequent transmission to beneficial owners of Schneider
Shares and Options when such list or listing is received.
Wherever the Offers to Purchase calls for documents to be delivered to the
Depositary, such documents will not be considered delivered unless and until
they have been received at one of the offices specified in the Letter of
Transmittal or the Assignment, as applicable.
14. Market Purchases during the Offers
Smithfield Canada has no present intention of acquiring beneficial
ownership of Schneider Shares while the Offers are outstanding other than as
described in the Circular and the Offers to Purchase. However, Smithfield
Canada reserves the right to, and may, acquire, or cause an affiliate to
acquire, beneficial ownership of Class A Shares or Common Shares of Schneider
by making purchases through the facilities of the TSE, subject to applicable
law, at any time prior to the Expiry Time. In no event will Smithfield Canada
make any such purchases of Class A Shares or Common Shares until the third
business day following the date of the Offers. The aggregate number of Class A
Shares or Common Shares beneficially acquired by Smithfield Canada through the
facilities of the TSE while the Offers are outstanding shall not exceed 5% of
the outstanding shares of each class, and Smithfield Canada will issue and file
a press release disclosing the information prescribed by law forthwith after
the TSE's close of business on each day on which Schneider Shares are
purchased.
15. General
The method of delivery of certificates representing Schneider Shares and
Options and all other documents is at the option and risk of each holder and
delivery will be effective only when such documents are actually received by
the Depositary. Smithfield Canada recommends that certificates and accompanying
Letters of Transmittal and Assignments be delivered by hand to the Depositary
and that a receipt be obtained for their deposit. If the documents are mailed,
Smithfield Canada recommends that registered mail with return receipt or
acknowledgment of receipt be used and that proper insurance be obtained.
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Holders of Schneider Shares registered in the name of a broker, investment
dealer, bank, trust company or other nominee should contact that nominee for
assistance in depositing those Schneider Shares under the Offers.
No fee or commission will be payable by a holder of Schneider Shares or
Options who delivers Schneider Shares or Options directly to the Depositary or
uses the facility of a soliciting dealer to accept the Offers.
Smithfield Canada reserves the right to permit a holder of Schneider
Shares or Options to accept the Offers in a manner other than as set out above.
All questions as to validity, form, eligibility (including timely receipt)
and acceptance of any Purchased Securities or Other Securities deposited
pursuant to an Offer or the Offers, including the propriety and effect of the
execution of the Letter of Transmittal will be determined by Smithfield Canada
in its sole discretion, and depositing holders of Purchased Securities or Other
Securities agree that such determination shall be final and binding. Smithfield
Canada reserves the absolute right to reject any and all deposits which it
determines not to be in proper form, or which, in the opinion of counsel, it
may be unlawful to accept under the laws of any jurisdiction. Smithfield
Canada's interpretation of the terms and conditions of the Offers, the
Circular, the Letter of Transmittal, Notice of Guaranteed Delivery and
Assignment will be final and binding.
The deposit of Schneider Shares and Options pursuant to the procedures
described in the Offers to Purchase will constitute a binding agreement between
the depositing Shareholder or Option holder, as the case may be, and Smithfield
Canada and such agreement shall be subject to the conditions of the relevant
Offer and include representations and warranties of the depositing Shareholders
and Option holders that (i) such person has full power and authority to
deposit, sell, assign and transfer the Schneider Shares and/or Options (and any
Other Securities) being deposited; (ii) such person owns the Schneider Shares
and/or Options (and any Other Securities) being deposited; (iii) the deposit of
such Schneider Shares and/or Options (and any Other Securities) complies with
applicable securities laws; and (iv) when such Schneider Shares and/or Options
are taken up and paid for by Smithfield Canada, Smithfield Canada will acquire
good title thereto free and clear of all liens, restrictions, charges,
encumbrances, claims and equities.
16. Other Terms of the Offers
No broker, dealer or other person has been authorized to give any
information or to make any representation on behalf of Smithfield Canada other
than as contained in the Offers to Purchase, and, if any such information or
representation is given or made, it must not be relied upon as having been
authorized.
The provisions of the Circular, the Letter of Transmittal, the Notice of
Guaranteed Delivery and the Assignment accompanying the Offers to Purchase,
including the instructions and rules contained therein, as applicable, form
part of the terms and conditions of the Offers to Purchase.
The Offers and all contracts resulting from the acceptance thereof shall
be governed by and construed in accordance with the laws of the Province of
Ontario and the federal laws of Canada applicable therein.
The Offers are not being made to (nor will deposits be accepted from or on
behalf of) holders of Schneider Shares or Options residing in any jurisdiction
in which the making of the Offers or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. Smithfield Canada may, in its
sole discretion, take such action as it may deem necessary to make the Offers
in any such jurisdiction and extend the Offers to holders of Schneider Shares
or Options in any such jurisdiction.
Dated: o, 1998 SMITHFIELD CANADA LIMITED
By: (Signed) o
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OFFERING CIRCULAR
This Circular accompanies the Offers made by Smithfield Canada to acquire
any and all of the Schneider Shares and Options issued by Schneider to acquire
Class A Shares. Shareholders are referred to the Offers to Purchase for details
of its terms and conditions, including details as to payment and withdrawal
rights which are incorporated herein by reference. Defined terms used in the
Offers to Purchase are used herein with the same meaning unless the context
otherwise requires.
The information concerning Schneider contained in this Circular, including
in Annex C, has been taken from or based upon publicly available documents and
records on file with Canadian securities regulatory authorities and other
public sources. Smithfield Canada was not involved in the preparation of the
information and statements relating to Schneider contained in the Circular in
reliance upon publicly available information and, although Smithfield Canada
has no knowledge that would indicate that any statements contained herein taken
from or based on such documents and records are untrue or incomplete,
Smithfield Canada does not assume any responsibility for the accuracy or
completeness of the information taken from or based upon such documents and
records, or for any failure by Schneider to disclose events that may have
occurred or may affect the significance or accuracy of any such information.
Smithfield Foods, Inc.
Corporate Overview
Smithfield Foods believes it is the largest combined hog slaughterer and
further processor of pork in the United States. Smithfield produces a wide
variety of fresh pork and processed meat products which it markets across the
United States, and increasingly, to over 25 markets outside the United States,
including Japan, Russia and Mexico. Since 1975, when current management assumed
control, 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.
Smithfield'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, Smithfield has vertically
integrated into hog production through an 86-percent owned subsidiary and
through a joint hog production arrangement with one of the United States'
largest hog producers. These hog production operations collectively accounted
for 10.1% of the hogs Smithfield slaughtered in fiscal 1997. In addition,
Smithfield obtains a substantial portion of its hogs under market-indexed,
multi-year agreements with several of the United States' largest suppliers of
high quality hogs, strategically located in proximity to Smithfield's hog
slaughtering and further processing operations in North Carolina and Virginia.
These suppliers accounted for 41.5% of the hogs Smithfield slaughtered in
fiscal 1997.
In a number of U.S. markets, Smithfield's brands are among the leaders in
selected product categories. In recent years, as consumers have become more
health conscious, Smithfield 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, Smithfield has
developed, and is marketing on a national basis in the United States, 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 fiscal year ended April 27, 1997, Smithfield had sales of US$3.9
billion and net income of US$44.9 million.
The shares of Smithfield Common Stock are quoted on the Nasdaq National
Market. On April 13, 1998, the closing price of Smithfield Common Stock on the
Nasdaq National Market was US$31.37.
Description of Smithfield Foods Capital Stock
The authorized capital stock of Smithfield Foods consists of 100,000,000
shares of Smithfield Common Stock, par value US$0.50 per share, and 1,000,000
shares of Preferred Stock, par value US$1.00 per share.
Smithfield Foods Common Stock. Holders of Smithfield Common Stock are
entitled to one vote per share on all matters to be voted upon by the
shareholders. Holders of Smithfield Common Stock do not have cumulative voting
rights, and therefore holders of a majority of the shares voting for the
election of directors can elect all of the directors. In such event, the
holders of the remaining shares will not be able to elect any directors.
Holders of Smithfield Common Stock are entitled to receive such dividends as
may be declared from time to time by Smithfield's board of directors out of
funds legally available therefor, after payment of dividends required to be
paid on outstanding Smithfield Foods Preferred Stock, if any. In the event of
the liquidation, dissolution or winding up of Smithfield Foods, the holders of
Smithfield Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of Preferred
Stock then
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outstanding, if any. The Smithfield Common Stock has no preemptive or
conversion rights and is not subject to further calls or assessments by
Smithfield Foods. The Smithfield Common Stock issuable in exchange for
Exchangeable Shares has been duly authorized and will be validly issued, fully
paid and non-assessable. The Transfer Agent and Registrar for Smithfield Common
Stock is Harris Trust and Savings Bank, New York, New York.
Smithfield Foods Preferred Stock. Smithfield's board of directors has the
authority, without any vote or action by the shareholders, to issue Smithfield
Foods Preferred Stock in one or more series and to fix the designations,
preferences, rights, qualifications, limitations and restrictions thereof,
including the voting rights, dividend rights, dividend rate, conversion rights,
terms of redemption (including sinking fund provisions), redemption price or
prices, liquidation preferences and the number of shares constituting any
series. Under certain circumstances Smithfield's board of directors could
utilize the issuance of Smithfield Foods Preferred Stock as a method of
preventing a takeover of Smithfield Foods. There are no shares of Smithfield
Foods Preferred Stock outstanding, and there are no agreements or
understandings for the designation of any series of Smithfield Foods Preferred
Stock or the issuance of shares thereunder, except pursuant to the preferred
share purchase rights plan, and except for the single share of Special Voting
Stock, each summarized below.
Preferred Share Purchase Rights Plan. Effective September 2, 1997,
Smithfield's board of directors declared a dividend distribution of one Right
on each outstanding share of Smithfield Common Stock pursuant to a preferred
share purchase rights plan and a related Rights Agreement, as amended, between
Smithfield Foods and the Rights Agent (as amended, the "Rights Plan"). In
general, the number of Rights outstanding equals the number of shares of
Smithfield Common Stock outstanding from time to time, and the issuance of
shares of Smithfield Common Stock (including without limitation issuances upon
the exchange or redemption of Exchangeable Shares) will be accompanied by the
issuance of a corresponding number of Rights. The Rights will expire on May 31,
2001 unless previously exercised or unless redeemed at the option of
Smithfield's board of directors for US$.0001 per Right.
Under the Rights Plan, the Rights will be exercisable only if a person or
group acquires 20% or more of Smithfield Common Stock or announces a tender
offer the consummation of which would result in ownership by a person or group
of 20% or more of the Smithfield Common Stock. Each Right entitles its holder
to buy one one-thousandth of a share of Series A Junior Participating Preferred
Stock, par value US$1.00 per share ("Series A Preferred Shares"), at an
exercise price of US$37.50, subject to further adjustment. Each Series A
Preferred Share will entitle its holder to 1,000 votes and will have an
aggregate dividend rate of 1,000 times the amount, if any, paid to holders of
Smithfield Common Stock. Smithfield's board of directors has authorized 100,000
Series A Preferred Shares for issuance pursuant to the Rights Plan, none of
which has been issued.
Under the Rights Plan, if Smithfield Foods 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 more of the outstanding Smithfield 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 Smithfield Common Stock having a market value of twice such price.
Special Voting Stock (Series B Special Voting Preferred Share). In
connection with the Offers, made hereby, including the proposed issuance of
Exchangeable Shares by Smithfield Canada, Smithfield Foods' board of directors
has authorized the issuance of one Series B Special Voting Preferred Share,
being the Special Voting Share referred to elsewhere in this document. The
Special Voting Share will be issued to the Trustee to be held for the benefit
of holders of Exchangeable Shares pursuant to the Voting, Support and Exchange
Trust Agreement. The Special Voting Share will entitle the Trustee to an
aggregate number of votes at a Smithfield Foods shareholders' meeting equal to
the number of Exchangeable Shares outstanding (other than Exchangeable Shares
held by Smithfield and its subsidiaries). Pursuant to the Voting, Support and
Exchange Trust Agreement, the Trustee will provide to each holder of
Exchangeable Shares all proxy and other materials relating to a Smithfield
Foods shareholders' meeting and such holder may instruct the Trustee as to how
their Exchangeable Shares are to be voted or may require the Trustee to provide
a proxy so that the holder may attend the meeting in person and exercise such
holder's Voting Rights. The terms of the Special Voting Share will be
substantially in the form reproduced in Annex F hereto.
Further Information
Further information with respect to Smithfield and its share capital is
set forth in Annex B hereto, which is incorporated into and forms part of this
Circular.
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Smithfield Canada Limited
Corporate Overview
Smithfield Canada Limited was incorporated under the OBCA on January 19,
1998 for the purpose of making the Offers. Smithfield Canada is a wholly-owned
subsidiary of Smithfield and has no material assets, capital or liabilities and
no operating history. For additional information regarding the financial
statements of Smithfield Canada, see Annex G -- Information Concerning
Smithfield Canada Limited. Smithfield Canada has not entered into any material
agreements, but will enter into the Voting, Support and Exchange Trust
Agreement in connection with the closing of the Offers.
The authorized capital of Smithfield Canada consists of an unlimited
number of common shares and an unlimited number of Exchangeable Shares. As at
the date hereof, all of the outstanding Smithfield Canada Common Shares are
owned by Smithfield and there are no Exchangeable Shares outstanding.
Upon the filing of this Circular with the securities regulatory
authorities in each of the Provinces of Canada, Smithfield Canada will become a
reporting issuer (or its equivalent) in each of those jurisdictions. In
addition, on April 8, 1998, the TSE conditionally approved the listing of the
Exchangeable Shares, subject to the fulfilment by Smithfield Canada of all the
requirements of the TSE on or before July 7, 1998.
Immediately following consummation of the Offers, Smithfield Canada will
own all of the Schneider Shares and Options that are validly tendered under the
Offers and not withdrawn prior to the Expiry Time and former holders of
Schneider Shares and Options that are acquired by Smithfield Canada pursuant to
the Offers will own all of the outstanding Exchangeable Shares of Smithfield
Canada. If all of the outstanding Schneider Shares and Options are acquired by
Smithfield Canada in connection with the Offers, Smithfield Canada will issue a
maximum of 4,001,479 Exchangeable Shares. Each Exchangeable Share will be
exchangeable for one share of Smithfield Common Stock. As at April 13, 1998,
there were 37,537,362 shares of Smithfield Common Stock outstanding.
Smithfield Canada's and Smithfield Sub's principal offices are located at
Suite 4700, Toronto Dominion Bank Tower, Toronto-Dominion Centre, Toronto,
Ontario M5K 1E6. Smithfield Canada's principal executive offices are located at
200 Commerce Street, Smithfield, Virginia, 23430, telephone number (757)
365-3000.
Terms of the Exchangeable Shares
The following is a summary description of the material provisions of the
Exchangeable Shares and is qualified in its entirety by reference to the full
text of the form of Smithfield Canada share provisions which are attached as
Annex E hereto.
Ranking. The Exchangeable Shares will rank prior to the Smithfield Canada
Common Shares and any other shares ranking junior to the Exchangeable Shares
with respect to the payment of dividends and the distribution of assets in the
event of the liquidation, dissolution or winding up of Smithfield Canada.
Dividends. Holders of Exchangeable Shares will be entitled to receive
dividends equivalent to dividends, if any, paid from time to time by Smithfield
on shares of Smithfield Common Stock. The declaration date, record date and
payment date for dividends on the Exchangeable Shares will be the same as that
for the corresponding dividends on the shares of Smithfield Common Stock. See
Annex B -- "Information Concerning Smithfield Foods, Inc. -- Dividend Policy."
Certain Restrictions. Smithfield Canada will not without obtaining the
approval of the holders of the Exchangeable Shares as set forth below under the
sub-heading " -- Amendment and Approval":
(a) pay any dividend on the Smithfield Canada Common Shares or any other
shares ranking junior to the Exchangeable Shares, other than stock dividends
payable in Smithfield Canada Common Shares or any such other shares ranking
junior to the Exchangeable Shares, as the case may be;
(b) redeem, purchase or make any capital distribution in respect of
Smithfield Canada Common Shares or any other shares ranking junior to the
Exchangeable Shares;
(c) redeem or purchase any other shares of Smithfield Canada ranking
equally with the Exchangeable Shares with respect to the payment of dividends
or on any liquidation distribution; or
(d) issue any shares other than Exchangeable Shares, Smithfield Canada
Common Shares and any other shares not ranking superior to the Exchangeable
Shares.
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Notwithstanding the foregoing, the restrictions in clauses (a), (b) and
(c) above will not apply at any time when the dividends on the outstanding
Exchangeable Shares corresponding to any dividends declared on the Smithfield
Common Stock have been declared and paid in full.
Liquidation of Smithfield Canada. In the event of the liquidation,
dissolution or winding up of Smithfield Canada or any other proposed
distribution of the assets of Smithfield Canada among its shareholders for the
purpose of winding up its affairs, a holder of Exchangeable Shares will be
entitled to receive for each Exchangeable Share on the effective date of such
liquidation, dissolution, winding up or other distribution (the "Liquidation
Date") an amount to be satisfied by issuance of one share of Smithfield Common
Stock, plus an additional amount equivalent to the full amount of all declared
and unpaid dividends, if any, on the Exchangeable Share (the "Liquidation
Amount").
On or after the Liquidation Date, a holder of Exchangeable Shares may
surrender certificates representing such Exchangeable Shares, together with
such other documents as may be required, to Smithfield Canada's registered
office or the office of the Smithfield Canada Transfer Agent. Upon receipt of
the certificates and other documents and subject to the exercise by Smithfield
or Smithfield Sub of the Liquidation Call Right, Smithfield Canada will deliver
the Liquidation Amount to such holder at the address recorded in Smithfield
Canada's securities register or will hold the Liquidation Amount for pick up by
the holder at Smithfield Canada's registered office or the office of the
Smithfield Canada Transfer Agent, as specified by Smithfield Canada in a notice
to such holders.
Upon the occurrence of a liquidation, dissolution or winding up of
Smithfield Canada, Smithfield and Smithfield Sub will have the right to
purchase all but not less than all of the Exchangeable Shares then outstanding
(other than Exchangeable Shares held by Smithfield or Smithfield Sub) at a
purchase price per Exchangeable Share equal to the Liquidation Amount and, upon
the exercise of the Liquidation Call Right, the holders thereof will be
obligated to sell such Exchangeable Shares to Smithfield or Smithfield Sub, as
applicable. The purchase by Smithfield or Smithfield Sub of all of the
outstanding Exchangeable Shares upon the exercise of the Liquidation Call Right
will occur on the Liquidation Date.
The Liquidation Call Right may be exercised, at the election of
Smithfield, by either Smithfield or Smithfield Sub.
Upon the occurrence of a Smithfield Canada Insolvency Event, the Trustee
on behalf of the holders of Exchangeable Shares will have the right to require
Smithfield or Smithfield Sub to purchase any or all of the Exchangeable Shares
then outstanding and held by such holders for the Liquidation Amount as
described under the sub-heading "Voting, Support and Exchange Trust Agreement
- -- Optional Exchange Right in case of a Smithfield Canada Insolvency Event."
Automatic Exchange on Liquidation of Smithfield. In the event of a
Smithfield Liquidation Event, Smithfield or Smithfield Sub will be required to
purchase each outstanding Exchangeable Share (other than Exchangeable Shares
held by Smithfield or Smithfield Sub) and holders of Exchangeable Shares will
be required to sell the Exchangeable Shares held by them at that time, by
exchanging one share of Smithfield Common Stock for each such Exchangeable
Share, plus an additional amount equivalent to the full amount of all declared
and unpaid dividends, if any, on the Exchangeable Share.
Upon a holder's request and surrender of Exchangeable Share certificates,
duly endorsed in blank and accompanied by such instrument of transfer as
Smithfield may reasonably require, Smithfield will deliver to such holder
certificates representing an equivalent number of shares of Smithfield Common
Stock plus an additional amount equivalent to the full amount of all declared
and unpaid dividends, if any, on the Exchangeable Shares.
Retraction of Exchangeable Shares by Holders. Subject to the Retraction
Call Right of Smithfield and Smithfield Sub described below, a holder of
Exchangeable Shares will be entitled at any time to require Smithfield Canada
to redeem any or all of the Exchangeable Shares held by such holder for a
retraction price per Exchangeable Share to be satisfied by issuance of one
share of Smithfield Common Stock, plus an additional amount equivalent to the
full amount of all declared and unpaid dividends, if any, on the Exchangeable
Shares. Holders of the Exchangeable Shares may request redemption by presenting
a certificate or certificates to Smithfield Canada or the Smithfield Canada
Transfer Agent representing the number of Exchangeable Shares the holder
desires to have redeemed, together with a duly executed Retraction Request and
such other documents as may be required to effect the redemption of the
Exchangeable Shares (which may include, in the case of a holder having a
registered address in the United States, a properly completed Substitute Form
W-9). The redemption will become effective five business days after the date on
which Smithfield Canada receives the Retraction Request from the holder.
When a holder requests Smithfield Canada to redeem the Exchangeable
Shares, Smithfield and Smithfield Sub will have an overriding right (the
"Retraction Call Right") to purchase on the Retraction Date all but not less
than all of the Exchangeable Shares that the holder has requested Smithfield
Canada to redeem at a purchase price per Exchangeable Share
34
<PAGE>
equal to one share of Smithfield Common Stock, plus an additional amount
equivalent to the full amount of all declared and unpaid dividends, if any, on
the Exchangeable Share.
At the time of a Retraction Request by a holder of Exchangeable Shares,
Smithfield Canada will immediately notify Smithfield and Smithfield Sub.
Smithfield or Smithfield Sub must then advise Smithfield Canada within two
business days as to whether the Retraction Call Right will be exercised. If
either Smithfield or Smithfield Sub so advises Smithfield Canada within such
two business day period, Smithfield Canada will notify the holder of
Exchangeable Shares as soon as possible thereafter that the Retraction Call
Right will be exercised. A holder may revoke his or her Retraction Request at
any time prior to the close of business on the business day preceding the
Retraction Date, in which case the holder's Exchangeable Shares will neither be
purchased by Smithfield or Smithfield Sub nor be redeemed by Smithfield Canada.
If the holder does not revoke his or her Retraction Request, on the Retraction
Date the Exchangeable Shares that the holder has requested Smithfield Canada to
redeem will be purchased by Smithfield or Smithfield Sub or redeemed by
Smithfield Canada, as the case may be, in each case at a purchase price per
Exchangeable Share equal to one share of Smithfield Common Stock, plus an
additional amount equivalent to the full amount of all declared and unpaid
dividends, if any, on the Exchangeable Share.
The Retraction Call Right may be exercised, at the election of Smithfield,
by either Smithfield or Smithfield Sub.
If, as a result of solvency provisions of applicable law, Smithfield
Canada is not permitted to redeem all Exchangeable Shares tendered by a
retracting holder, Smithfield Canada will redeem only those Exchangeable Shares
tendered by the holder as would not be contrary to such provisions of
applicable law. The holder of any Exchangeable Shares not redeemed by
Smithfield Canada will be deemed to have required Smithfield to purchase such
unretracted Exchangeable Shares in exchange for Smithfield Common Stock on the
Retraction Date pursuant to the optional Exchange Right.
Redemption of Exchangeable Shares. Subject to applicable law and the
Redemption Call Right of Smithfield and Smithfield Sub, on the Company
Redemption Date, Smithfield Canada will redeem all but not less than all of the
then outstanding Exchangeable Shares for a redemption price per Exchangeable
Share to be satisfied by the issuance of one share of Smithfield Common Stock,
plus an additional amount equivalent to the full amount of all declared and
unpaid dividends, if any, on the Exchangeable Shares (the "Redemption Price").
Smithfield Canada will, at least 90 days prior to the Company Redemption Date,
provide the registered holders of the Exchangeable Shares with written notice
of the proposed redemption of the Exchangeable Shares by Smithfield Canada. On
or after the date such notice is provided, upon the holder's presentation and
surrender of the certificates representing the Exchangeable Shares and such
other documents as may be required (which may include, in the case of a holder
having a registered address in the United States, a properly completed
Substitute Form W-9) at the office of the Smithfield Canada Transfer Agent or
the registered office of Smithfield Canada, Smithfield Canada will deliver the
Redemption Price to the holder at the address of the holder recorded in
Smithfield Canada's securities register or by holding the Redemption Price for
pick up by the holder at the registered office of Smithfield Canada or the
office of the Smithfield Canada Transfer Agent as specified in the written
notice.
Smithfield and Smithfield Sub will be granted a right (the "Redemption
Call Right"), notwithstanding a proposed redemption of the Exchangeable Shares
by Smithfield Canada on the Company Redemption Date pursuant to the
Exchangeable Share Provisions, to purchase on the Company Redemption Date all
but not less than all of the Exchangeable Shares then outstanding (other than
Exchangeable Shares held by Smithfield or Smithfield Sub) in exchange for the
Redemption Price and, upon the exercise of the Redemption Call Right, the
holders of all of the then outstanding Exchangeable Shares will be obligated to
sell such shares to Smithfield or Smithfield Sub, as applicable. If either
Smithfield or Smithfield Sub exercises the Redemption Call Right, Smithfield
Canada's right to redeem the Exchangeable Shares on the Company Redemption Date
will terminate. The Redemption Call Right may be exercised, at the election of
Smithfield, by either Smithfield or Smithfield Sub.
Voting Rights. Except as required by applicable law, the holders of the
Exchangeable Shares are not entitled as such to receive notice of or attend any
meeting of the shareholders of Smithfield Canada or to vote at any such
meeting.
Amendment and Approval. The rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares may be changed only with the
approval of the holders thereof. Any such approval or any other approval or
consent to be given by the holders of the Exchangeable Shares will be
sufficiently given if given in accordance with applicable law and subject to a
minimum requirement that such approval or consent be evidenced by a resolution
passed by not less than two-thirds of the votes cast thereon (other than shares
beneficially owned by Smithfield and its subsidiaries) at a meeting of the
holders of Exchangeable Shares duly called and held at which holders of at
least 50% of the then outstanding Exchangeable Shares are present in person or
represented by proxy. In the event that no such quorum is present at such
meeting within one-half hour after the time appointed therefor, then the
meeting will be adjourned to such place and time (not less than 10 days later)
as may be determined at the original meeting and the holders of Exchangeable
Shares present in person or represented
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<PAGE>
by proxy at the adjourned meeting will constitute a quorum thereat and may
transact the business for which the meeting was originally called. At the
adjourned meeting, a resolution passed by the affirmative vote of not less than
two-thirds of the votes cast thereon will constitute the approval or consent of
the holders of the Exchangeable Shares.
Actions by Smithfield Canada under Voting, Support and Exchange Trust
Agreement. Under the Exchangeable Share Provisions, Smithfield Canada will
agree to take all such actions and do all such things as are necessary or
advisable to perform and comply with its obligations under, and to facilitate
the performance and compliance by Smithfield with its obligations under, the
Voting, Support and Exchange Trust Agreement.
Voting, Support and Exchange Trust Agreement
The following is a summary description of the material provisions of the
Voting, Support and Exchange Trust Agreement and is qualified in its entirety
by reference to the full text of the form of Voting, Support and Exchange Trust
Agreement which appears as Annex D hereto and the form of Special Voting Share
provisions which appears as Annex F hereto.
Voting Rights
Pursuant to the Voting, Support and Exchange Trust Agreement, Smithfield
will issue the Special Voting Share to the Trustee for the benefit of the
holders (other than Smithfield and its subsidiaries) of the Exchangeable
Shares. At any meeting at which Smithfield shareholders are entitled to vote,
the Special Voting Share will have a number of votes equal to the number of
outstanding Exchangeable Shares (other than shares held by Smithfield and its
subsidiaries).
Each holder of Exchangeable Shares on the record date for any meeting at
which Smithfield stockholders are entitled to vote will be entitled to instruct
the Trustee to exercise the vote attached to the Special Voting Share for each
Exchangeable Share held by such holder. The Trustee will exercise each vote
attached to the Special Voting Share only as directed by the relevant holder of
Exchangeable Shares and, in the absence of instructions from a holder as to
voting, will not exercise such vote. A holder may, upon instructing the
Trustee, obtain a proxy from the Trustee entitling the holder or the holder's
nominee to vote directly at the relevant meeting the votes attached to the
Special Voting Share to which the holder is entitled.
The Trustee will send to the holders of the Exchangeable Shares notice of
each meeting at which the Smithfield shareholders are entitled to vote,
together with the related meeting materials and a statement as to the manner in
which the holders may instruct the Trustee to exercise the votes attaching to
the Special Voting Share, at the same time as Smithfield sends such notice and
materials to the Smithfield shareholders. The Trustee will also send to the
holders copies of all information statements, interim and annual financial
statements, reports and other materials sent by Smithfield to the holders of
shares of Smithfield Common Stock at the same time as such materials are sent
to the Smithfield shareholders. To the extent such materials are provided to
the Trustee by Smithfield, the Trustee will also send to the holders all
materials sent by third parties to Smithfield shareholders, including dissident
proxy circulars and tender and exchange offer circulars, as soon as possible
after such materials are first sent to Smithfield shareholders.
All rights of a holder of Exchangeable Shares to exercise votes attached
to the Special Voting Share will cease upon the exchange of all of such
holder's Exchangeable Shares for shares of Smithfield Common Stock.
Optional Exchange Right in case of a Smithfield Canada Insolvency Event.
Upon the occurrence and during the continuance of a Smithfield Canada
Insolvency Event, a holder of Exchangeable Shares will be entitled to instruct
the Trustee to exercise the optional Exchange Right with respect to any or all
of the Exchangeable Shares held by such holder, thereby requiring Smithfield or
Smithfield Sub to purchase such Exchangeable Shares from the holder.
Immediately upon the occurrence of a Smithfield Canada Insolvency Event or any
event which may, with the passage of time or the giving of notice, become a
Smithfield Canada Insolvency Event, Smithfield Canada and Smithfield will give
written notice thereof to the Trustee. As soon as practicable thereafter, the
Trustee will then notify each holder of Exchangeable Shares of such event or
potential event and will advise the holder of its rights with respect to the
optional Exchange Right.
The purchase price payable by Smithfield or Smithfield Sub for each
Exchangeable Share to be purchased under the optional Exchange Right will be
satisfied by the issuance of one share of Smithfield Common Stock plus an
additional amount equivalent to the full amount of all declared and unpaid
dividends, if any, on the Exchangeable Share.
If, as a result of solvency provisions of applicable law, Smithfield
Canada is unable to redeem all of a holder's Exchangeable Shares which such
holder is entitled to have redeemed in accordance with the Exchangeable Share
Provisions, the holder will be deemed to have exercised the optional Exchange
Right with respect to the unredeemed Exchangeable Shares and Smithfield or
Smithfield Sub will be required to purchase such shares from the holder in the
manner set forth above.
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<PAGE>
Smithfield Support Obligation
Under the Voting, Support and Exchange Trust Agreement, Smithfield will
agree that: (i) it will not declare or pay dividends on the Smithfield Common
Stock unless Smithfield Canada simultaneously pays an equivalent dividend on
the Exchangeable Shares; (ii) it will advise Smithfield Canada in advance of
the declaration of any dividend on the Smithfield Common Stock and ensure that
the declaration date, record date and payment date for dividends on the
Exchangeable Shares are the same as that for the Smithfield Common Stock and
that such dates will correspond with any requirement of any stock exchange on
which the Exchangeable Shares are then listed; (iii) it will ensure that the
record date for any dividend declared on the Smithfield Common Stock is not
less than 10 business days after the declaration date for such dividend or such
shorter period within which applicable law may be complied with; (iv) it will
take all actions and do all things necessary to ensure that Smithfield Canada
is able to pay to the holders of the Exchangeable Shares the equivalent number
of shares of Smithfield Common Stock plus any additional amount equivalent to
the full amount of all declared and unpaid dividends, if any, on the
Exchangeable Shares in the event of a liquidation, dissolution or winding up of
Smithfield Canada, the giving of a Retraction Request by a holder of
Exchangeable Shares or a redemption of Exchangeable Shares by Smithfield
Canada; (v) it will not vote or otherwise take any action or omit to take any
action causing the liquidation, dissolution or winding up of Smithfield Canada;
and (vi) it will enable Smithfield Canada to maintain a listing for the
Exchangeable Shares on a Canadian stock exchange.
The Voting, Support and Exchange Trust Agreement also provides that,
without the prior approval of Smithfield Canada and the holders of the
Exchangeable Shares (as set forth in this Circular under "Smithfield Canada
Limited -- Terms of the Exchangeable Shares -- Amendment and Approval"),
Smithfield will not distribute additional shares of Smithfield Common Stock or
rights to subscribe therefor or other property or assets to all or
substantially all holders of shares of Smithfield Common Stock, nor change any
of the rights, privileges or other terms of the Smithfield Common Stock, unless
the same or an equivalent distribution on, or change to the Exchangeable Shares
(or in the rights of the holders thereof) is made simultaneously. In the event
of any proposed tender offer, share exchange offer, issuer bid, take-over bid
or similar transaction affecting the Smithfield Common Stock, Smithfield will
use reasonable efforts to take all actions necessary or desirable to enable
holders of Exchangeable Shares to participate in such transaction to the same
extent and on an economically equivalent basis as the holders of Smithfield
Common Stock.
The Voting, Support and Exchange Trust Agreement also provides that, as
long as any outstanding Exchangeable Shares are owned by any person or entity
other than Smithfield or any of its subsidiaries, Smithfield will, unless
approval to do otherwise is obtained from the holders of the Exchangeable
Shares, remain the direct or indirect beneficial owner of more than 50% of all
issued and outstanding voting securities of Smithfield Canada.
With the exception of administrative changes for the purpose of adding
covenants for the protection of the holders of the Exchangeable Shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that the board of directors of Smithfield, the Smithfield Canada
Board of Directors, the Trustee and the Trustee's counsel are of the opinion
that such amendments are not prejudicial to the interests of the holders of the
Exchangeable Shares), the Voting, Support and Exchange Trust Agreement may not
be amended without the approval of the holders of the Exchangeable Shares as
set forth in this Circular under the heading "Smithfield Canada Limited --
Terms of the Exchangeable Shares -- Amendment and Approval".
Under the Voting, Support and Exchange Trust Agreement, Smithfield has
agreed not to exercise any voting rights attached to the Exchangeable Shares
owned by it or any of its subsidiaries on any matter considered at meetings of
holders of Exchangeable Shares (including any approval sought from such holders
in respect of matters arising under the Voting, Support and Exchange Trust
Agreement).
Delivery of Smithfield Common Stock
Smithfield will make such filings and seek such regulatory consents and
approvals as are necessary so that the shares of Smithfield Common Stock
issuable upon the exchange of Exchangeable Shares will be issued in compliance
with applicable securities laws in Canada and the United States and may be
traded freely on the Nasdaq National Market or such other United States stock
market or quotation system on which such shares may be listed, quoted or posted
for trading from time to time.
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Directors and Officers
The names, municipalities and principal occupations for the directors and
officers of Smithfield Canada are as follows:
<TABLE>
<CAPTION>
Position with
Name and Municipality of Residence Smithfield Canada Principal Occupation
- ------------------------------------ ---------------------------- --------------------------------------------------
<S> <C>
Joseph W. Luter, III President and Director Chairman of the Board and Chief Executive Officer
Smithfield, Virginia of Smithfield Foods, Inc.
Aaron D. Trub Vice President, Secretary, Vice President, Secretary and Treasurer of
Virginia Beach, Virginia Treasurer and Director Smithfield Foods, Inc.
Rene R. Sorell Director Partner, McCarthy Tetrault (law firm)
Toronto, Ontario
Graham P.C. Gow Director Partner, McCarthy Tetrault (law firm)
Toronto, Ontario
Robert J. Richardson Director Associate, McCarthy Tetrault (law firm)
Ajax, Ontario
</TABLE>
Each of the persons listed above has held his principal occupation for the
last five years except for Mr. Richardson, who was an associate at Tory Tory
DesLauriers & Binnington (a law firm) prior to March 1994. None of the
directors or officers of the Smithfield Canada receives any remuneration in
respect of his appointment in such capacities.
Auditors, Registrar and Transfer Agent
Arthur Andersen LLP, 8000 Towers Crescent Drive, Vienna, Virginia, 22182,
are the auditors of Smithfield Canada. CIBC Mellon Trust Company at its office
in Toronto, Ontario is the registrar and transfer agent for the Exchangeable
Shares.
Further Information
Further information with respect to Smithfield Canada Limited is set forth
in Annex G hereto, which is incorporated into and forms part of this Circular.
Schneider Corporation
Corporate Overview
Schneider Corporation of Kitchener, Ontario is one of Canada's largest
producers of premium quality food products. The business was founded in 1890 by
John Metz Schneider. Schneider is publicly owned and has 4,000 employees
manufacturing and selling its branded and private label products in retail and
food service markets. These products are sold throughout Canada and the United
States, Japan and other foreign markets. Schneider is governed by the OBCA and
its head office is located at 321 Courtland Avenue East, Kitchener, Ontario,
N2G 3X8.
Conflicts of Interest
Each of Douglas W. Dodds, Gerald A. Hooper, Paul E. Lang, John E. Lauer
and Eric N. Schneider (collectively, the "Schneider executives") has an
agreement in respect of his employment with Schneider and its affiliates. Under
these agreements, each of the Schneider executives, other than Mr. Dodds, will
be entitled to resign his employment within one year immediately following a
change of control of Schneider. Under their respective agreements, if either
Mr. Hooper or Mr. Schneider resigns, he will be entitled to receive 24 months'
remuneration. If either Mr. Lang or Mr. Lauer resigns, he will be entitled to
receive 18 months' remuneration. In the event of a change of control of
Schneider, Mr. Dodds' employment agreement permits him to elect to resign and
receive 30 months' remuneration. Based on their publicly disclosed annual
salaries for the year ended December 31, 1997, the aggregate amount payable by
Schneider to the Schneider executives under these change of control
arrangements would be approximately $2.3 million. Although Smithfield Canada
has no present intention of making any changes to the senior management of
Schneider if the Offers are successful, no assurances of continued employment
have been given to the Schneider executives.
In addition, Messrs. Dodds, Hooper and Schneider are Shareholders and each
of the Schneider executives is an Option holder. Reference is made to the
Schneider Corporation Management Information Circular dated February 18, 1998,
a copy of which is reproduced on page C-2 of this Offer and Circular.
Further Information
Further information with respect to Schneider and the Schneider Shares is
set forth in Annex C hereto, which is incorporated into and forms part of this
Circular. All such information has been taken from or based upon publicly
available
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<PAGE>
information, including documents and records on file with Canadian securities
regulatory authorities and other public sources. Neither Smithfield Foods nor
Smithfield Canada is affiliated with Schneider. Smithfield Foods and Smithfield
Canada were not involved in the preparation of the information and statements
relating to Schneider contained in this document, are not able to verify any
such information or statements, and make no representation or warranty as to
its accuracy or completeness.
Background to the Offers
Certain of the information presented to explain the background to the
Offers is derived from filings with Canadian securities regulators by Maple
Leaf Foods, Inc. ("Maple Leaf") or Schneider. Smithfield and Smithfield Canada
are not able to verify all of such information independently.
On November 5, 1997, Maple Leaf announced its intention to offer to
purchase all of the Schneider Shares at a price per share of C$19.00 in cash.
On November 4, 1997, the day preceding Maple Leaf's announcement, the TSE
closing price of the Class A Shares was C$13.80. The Maple Leaf Offer was made
by a wholly-owned subsidiary of Maple Leaf, SCH Acquisition Inc. ("SCH"), to
Shareholders pursuant to a takeover bid circular of SCH dated November 14,
1997. The Maple Leaf Offer was open initially for acceptance until December 6,
1997 and was subject to several conditions, including that at least 66 2/3% of
each class of Schneider Shares, calculated on a diluted basis, be deposited
under the Maple Leaf Offer and not withdrawn (the "Minimum Condition").
On November 6, 1997, Schneider responded to the Maple Leaf Offer by
appointing a special committee of independent directors (the "Special
Committee") to consider and advise the full board on the Maple Leaf Offer and
other possible offers that might come from other interested parties. The
Special Committee engaged Nesbitt Burns Inc. ("Nesbitt Burns") as its
independent financial adviser and also retained independent legal counsel.
Nesbitt Burns began canvassing various potentially interested parties to
determine if a more advantageous transaction could be found for the
Shareholders.
On about November 19, 1997, a representative of Nesbitt Burns contacted
Joseph W. Luter, III, the Chairman and Chief Executive Officer of Smithfield
Foods, to inquire whether Smithfield would be interested in making a takeover
bid for Schneider. Mr. Luter indicated to Nesbitt Burns that Smithfield would
consider the possibility of making such an offer and, at the request of the
Special Committee, Smithfield signed a confidentiality agreement with Schneider
dated November 20, 1997 (the "Confidentiality Agreement"). The Confidentiality
Agreement contained a "standstill" provision, under which Smithfield agreed,
among other things, that it would not acquire any Schneider shares during the
two-year period following the date of the Confidentiality Agreement without the
prior authorization of Schneider's board of directors.
On November 23, 1997, Schneider's board of directors issued a directors'
circular recommending that Shareholders reject the Maple Leaf Offer, and
advising the Shareholders that the Maple Leaf Offer was inadequate, unfair and
opportunistic. The November 23, 1997, directors' circular stated also that the
Maple Leaf Offer was not an "Exclusionary Offer," as such term is defined in
the Schneider Articles.
On November 24, 1997, Mr. Luter and another Smithfield executive attended
a formal presentation arranged by Nesbitt Burns. The presentation was attended
by representatives of Nesbitt Burns and senior executives of Schneider. Mr.
Luter did not propose any transaction with Schneider at the November 24 meeting
and had little further contact with Nesbitt Burns or Schneider during the
ensuing two weeks.
On December 2, 1997, on the recommendation of the Special Committee,
Schneider adopted a shareholder rights plan, which was announced by a notice of
change to the Schneider's directors' circular dated December 3, 1997. On
December 5, 1997, the expiry date of the Maple Leaf Offer was extended to
December 16, 1997.
On or about December 9, 1997, Schneider advised Smithfield that its board
of directors would be meeting within the next few days and that proposals from
interested parties should be presented in that time. On December 10, 1997, Mr.
Luter and other members of Smithfield's management visited Schneider's offices
and also reviewed materials in a data room that had been established at the
Toronto offices of the legal advisors to the Special Committee. By this date,
the only publicly announced bid for the Schneider Shares was the C$19.00 Maple
Leaf Offer.
On December 11, 1997, Mr. Luter proposed an exchange offer to Schneider's
board of directors under which, in effect, C$24.00 of Smithfield Common Stock
would be exchanged for each Schneider Share. In this oral proposal, one share
of Smithfield Common Stock was valued at US$35.00 and an exchange rate of
C$1.00 = US$0.70 was used. Smithfield later learned that Schneider had written
to Maple Leaf, urging Maple Leaf to deliver an enhanced proposal for
Schneider's consideration, as the negotiation process was drawing to a close.
Smithfield learned from public filings by both Schneider and Maple Leaf that
Maple Leaf was urged to put forth an offer on a basis that most appropriately
and fairly reflected the inherent and strategic values to Maple Leaf of
Schneider.
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<PAGE>
On December 12, 1997, Maple Leaf and SCH announced that the Maple Leaf
Offer was amended by increasing the cash price under the Maple Leaf Offer from
C$19.00 per share to C$22.00 per share and adding Maple Leaf as a new offeror
to permit Shareholders to elect to receive, in lieu of cash, 1.35 common shares
of Maple Leaf for each Schneider Share, up to a maximum of 4.65 million Maple
Leaf common shares. The December 12, 1997 amendment also removed certain
conditions, but not the "Minimum Condition", from the original Maple Leaf
Offer. Though the changes made on December 12, 1997 and later by Maple Leaf to
the original offer were characterized as amendments for purposes of Canadian
securities laws, Smithfield believes that such changes produced a new and
legally distinct offer for the Schneider Shares because Maple Leaf was added as
an offeror and certain other terms of the original Maple Leaf Offer were
changed.
The Schneider Family, the Special Committee and their respective advisers
each considered the amended Maple Leaf Offer during the weekend of December 13
and 14, 1997. The Special Committee also received and considered advice from
Schneider's management that a strategic merger would be in the best long-term
interests of Schneider and the Shareholders.
On December 15, 1997, Smithfield and its advisers continued discussions
with Nesbitt Burns and Schneider's management, with a view to proposing a
transaction that would be both acceptable to Smithfield and offer greater value
to Shareholders than the C$22.00 per Schneider share then being offered under
the amended Maple Leaf Offer. The Schneider Family had indicated to the
Schneider board of directors that the Schneider Family preferred an offer that
would enable Shareholders, including the Schneider Family, to retain an
investment in the Schneider business.
On December 16, 1997, Smithfield offered to enhance its original proposal
on the conditions that such proposal would be final, that it had to be accepted
or rejected as made, and that it could not be used as a basis for further
negotiation either with Smithfield or with rival bidders. Smithfield also
advised the Schneider Family that, if the Schneider Family decided to support
an offer by Smithfield, the Schneider Family would be required to enter into an
irrevocable lock-up agreement with Smithfield.
On these conditions, Smithfield proposed an offer to purchase all of the
outstanding Schneider Shares and Options, with payment to be made in shares of
Smithfield Common Stock. Under the proposal, C$25.00 of Smithfield Common Stock
was to be offered for each of the Schneider Shares using a value of US$32.50
per share for Smithfield Common Stock. This produced an exchange ratio of
0.5415 of a share of Smithfield Common Stock for each Schneider Share using an
exchange rate of C$1.00 = US$0.704. Smithfield also agreed to structure its
offer with exchangeable shares of a Canadian corporation, so as to allow
certain Shareholders a Canadian tax deferral.
On December 17, 1997, Schneider's board of directors met to consider,
among other things, the amended Maple Leaf Offer and Smithfield's proposed
offer. Following this meeting, a meeting of Schneider's Special Committee was
convened. At that meeting, Nesbitt Burns orally advised the Special Committee
of its view that the consideration being offered under Smithfield's proposal
was, at that date, inadequate to Shareholders from a financial point of view.
Nesbitt Burns also advised the Special Committee of its view that, if no
control transaction involving Schneider were consummated, the Common Shares and
the Class A Shares would settle in a trading range of between C$18.00 and
C$20.00 per share. Smithfield Canada has been advised that, to date, Nesbitt
Burns has not provided any formal fairness opinion in respect of the Offers.
Following the December 17, 1997 meeting of Schneider's board of directors,
Smithfield was advised that Schneider's board of directors had waived the
standstill provision contained in each of the confidentiality agreements that
had been signed and redeemed the rights issued on December 2, 1997 under
Schneider's shareholder rights plan. Smithfield and the Schneider Family then
instructed their lawyers to settle the terms of the Lock-up Agreement, which
was completed on December 18, 1997. On December 18, 1997, press releases were
issued by Schneider and Smithfield describing the terms of the Lock-up
Agreement. Smithfield and its advisors then commenced to prepare the Offers,
the Circular and the related applications for regulatory approvals.
On December 22, 1997, Maple Leaf and SCH again amended the Maple Leaf
Offer, producing a further legally distinct offer, by increasing the cash price
to C$29.00 per Schneider Share and by increasing the share consideration to
1.767 Maple Leaf common shares for each Schneider Share, to a maximum of 6.2
million Maple Leaf common shares. The amendment to the Maple Leaf Offer did not
change the "Minimum Condition," despite the fact that Smithfield and Schneider
had announced in their respective press releases that the Schneider Family had
agreed irrevocably, in the Lock-up Agreement, to tender the Schneider Family
Shares (representing approximately 75% of the Common Shares and 17% of the
Class A Shares) to Smithfield under the Offers.
Nesbitt Burns, the financial adviser to the Special Committee, delivered
an opinion with effect on December 30, 1997 to Schneider's board of directors
that the consideration of C$29.00 or 1.767 Maple Leaf common shares offered by
Maple
40
<PAGE>
Leaf on December 22, 1997 for each Schneider Share was fair from a financial
point of view to Shareholders. On December 31, 1997, the Schneider board of
directors declined to endorse the new C$29.00 Maple Leaf Offer because that
offer could not succeed without the support of the Schneider Family, which such
offer did not have.
In a further notice of variation dated January 8, 1998, Maple Leaf
extended the Maple Leaf Offer until January 29, 1998 and asserted publicly for
the first time that the Maple Leaf Offer was an Exclusionary Offer for the
purposes of the Schneider Articles. No such disclosure had been made by Maple
Leaf in its first takeover bid circular dated November 14, 1997 or in any of
the three notices of variation that had been mailed to Shareholders by Maple
Leaf after November 14, 1997 and before January 8, 1998. In essence, an
Exclusionary Offer is an offer to purchase Common Shares that is not made
concurrently with an offer to purchase Class A Shares on identical terms.
Subject to certain conditions (described below), an Exclusionary Offer entitles
the holders of outstanding Class A Shares to convert such shares into Common
Shares for the purpose of tendering such shares in acceptance of the
Exclusionary Offer. If such conversion rights came into effect and all of the
outstanding Class A Shares were converted, the Schneider Family Shares would
represent only 20% of the outstanding Common Shares instead of the 75% which
Smithfield intended to acquire under the Offers. See "Litigation Relating to
the Maple Leaf Offer".
By further notices of variation dated January 28, 1998, February 17, 1998,
March 9, 1998, March 27, 1998, April 16, 1998 and May 6, 1998, the time for
acceptance of the Maple Leaf Offer has been successively extended until May 27,
1998.
Litigation relating to the Maple Leaf Offer
On January 14, 1998, a Shareholder and another party having control or
direction over Schneider Shares commenced an action in the Ontario Court
(General Division) seeking, among other things, an order certifying the action
as a class action, a declaration that Schneider's board of directors have acted
in an oppressive manner that unfairly disregarded the interests of all
Shareholders, an order permitting each holder of Class A Shares to convert
Class A Shares into Common Shares pursuant to the conversion rights described
below and an order enjoining the making of the Offers by Smithfield Canada. On
February 10, 1998, Maple Leaf commenced its own action seeking substantially
the same remedies. On February 23, 1998 Royal Mutual Funds Inc. and Royal Bank
Investment Management Inc. (both of which are affiliates of Maple Leaf's
financial adviser) and MacKenzie Financial Corporation, on behalf of accounts
managed by them holding approximately 26.3% of the outstanding Class A Shares,
commenced an action against the defendants in the Maple Leaf action, including
Smithfield, seeking substantially the same remedies as Maple Leaf in its
action, as well as an order setting aside the Lock-up Agreement. All of the
actions were heard together in a single trial before the Ontario Court (General
Division), which began on April 14, 1998 and ended on April 24, 1998.
The plaintiffs alleged that the Class A Shares should be convertible into
Common Shares because the specific language of the Maple Leaf Offer makes that
offer an Exclusionary Offer for purposes of the Schneider Articles. Prior to
the announcement by Smithfield that it had entered into the Lock-up Agreement
with the Schneider Family, neither Maple Leaf nor the two plaintiff
Shareholders had asserted that the Maple Leaf Offer was an Exclusionary Offer.
In fact, on November 23, 1997, Schneider's board of directors stated in their
directors' circular that the Maple Leaf Offer was not an Exclusionary Offer.
Neither Maple Leaf nor any other person publicly challenged this interpretation
by Schneider's board of directors until it became expedient to do so in order
to interfere with Smithfield's and the Schneider Family's respective rights
under the Lock-up Agreement.
The Schneider Articles provide that, if an Exclusionary Offer is made,
each outstanding Class A Share becomes convertible into one Common Share for a
limited period at the option of the holder. An election by a holder of a Class
A Share to exercise this conversion right is deemed also to constitute an
irrevocable election by such holder to deposit the Common Shares resulting from
such conversion pursuant to the Exclusionary Offer. An "Exclusionary Offer"
means an offer to purchase Common Shares that (i) must, by reason of applicable
securities legislation or the requirements of the stock exchange on which the
Common Shares are listed, be made to all or substantially all holders of Common
Shares who are in a province of Canada to which this requirement applies; and
(ii) is not made concurrently with an offer to purchase Class A Shares that is
identical to the offer to purchase Common Shares, in terms of price per share
and percentage of outstanding shares to be taken up and in all other material
respects, and that has no condition attached other than the right not to take
up and pay for Schneider Shares tendered if no Schneider Shares are tendered to
the offer to purchase Common Shares.
These conversion rights, commonly referred to as "coat-tails", are
intended to encourage any person considering acquiring control of Schneider by
making an offer to acquire Common Shares to also make an offer to acquire the
Class A Shares on the same terms.
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The Schneider Articles provide also that these conversion rights are
deemed not to come into effect if, prior to the time that an Exclusionary Offer
is made or, if an Exclusionary Offer has been made, within seven days of the
date of the Exclusionary Offer, there is delivered to Schneider's corporate
secretary and its transfer agent a certificate or certificates signed by or on
behalf of one or more Shareholders owning, in the aggregate, as at the time the
Exclusionary Offer is made, more than 50% of the then outstanding Common Shares
confirming that each such Shareholder (i) will not accept the Exclusionary
Offer, (ii) will not make or is not making any Exclusionary Offer, (iii) is not
an associate or affiliate of, or acting jointly or in concert with, any person
or company that makes or that has made any Exclusionary Offer, and (iv) will
not transfer any Common Shares, directly or indirectly, during the time which
any Exclusionary Offer is outstanding. Smithfield understands that the
Schneider Family has delivered such certificates on several occasions in
connection with the Maple Leaf Offer.
Smithfield contested the allegations made by Maple Leaf and the two
plaintiff Shareholders in this litigation and brought its own claim against
Maple Leaf seeking, among other things, damages for interference with the
Lock-up Agreement. On May 11, 1998, the Ontario Court (General Division)
dismissed all of the claims made by the plaintiffs, finding that there was no
oppression by either Schneider or the Schneider Family and declaring that the
Maple Leaf Offer is not an Exclusionary Offer. The trial decision means that
neither the Maple Leaf Offer nor the Offers made hereby will engage the
conversion rights described above. In light of the fact that the Offers made
hereby are able to proceed as contemplated by the Lock-up Agreement, the Court
dismissed Smithfield's counterclaim against Maple Leaf. To date, none of the
plaintiffs has announced an intention to appeal this decision. The applicable
appeal period will not expire until mid-June 1998.
Smithfield is proceeding with the Offers in reliance on the Schneider
board of directors' advice contained in the November 23, 1997 directors'
circular that the Maple Leaf Offer is not an Exclusionary Offer and in reliance
on the Court's decision that the Maple Leaf Offer is not an Exclusionary Offer.
The condition attaching to Smithfield Canada's Class A Offer is expressed using
substantially the same language that is used in the Maple Leaf Offer.
Smithfield Canada's obligations under the Offers are subject to certain
conditions, including that there shall not be any outstanding action before any
court to enjoin, prohibit or impose material limitations or conditions on the
purchase by Smithfield Canada in relation to the Schneider Shares or which
would prevent completion of the acquisition by Smithfield Canada of the
Schneider Shares pursuant to a subsequent acquisition transaction. Similarly,
it is a condition of Smithfield Canada's obligations under the Offers that
there shall not have occurred prior to the commencement of the Common Share
Offer any change (or any condition, event or development involving a
prospective change) in the capitalization of Schneider which, in the judgment
of Smithfield Canada, is materially adverse to a purchaser of Schneider Shares.
Lock-Up Agreement
On December 18, 1997, Smithfield entered into the Lock-up Agreement with
the Schneider Family under which the Schneider Family agreed irrevocably to
tender all of the Schneider Family Shares (being 549,587 Common Shares and
1,019,212 Class A Shares) in acceptance of the Offers. In addition, the
Schneider Family agreed not to sell, transfer, pledge or otherwise encumber the
Schneider Family Shares, except to Smithfield Canada under the Offers and to
take steps to give effect to the Lock-up Agreement and to refrain from
soliciting offers to purchase the Schneider Family Shares or take any action
that would interfere with or delay the completion of the Offers.
In the Lock-up Agreement, Smithfield agreed to cause a new Canadian
subsidiary to make the Offers by March 18, 1998, unless delayed beyond such
date due to the regulatory review process. The regulatory review process was
not completed until the date hereof. In the Lock-up Agreement, Smithfield also
agreed to use its reasonable commercial efforts to have a representative of the
Schneider Family appointed to Smithfield's board of directors at the next
annual Smithfield shareholders meeting. In addition, Smithfield agreed not to
resell any Schneider Shares or cause to be sold any substantial portion of the
assets of Schneider within a period of two years from the date Smithfield
Canada takes up and pays for the Schneider Shares under the Offers.
The Schneider Family's obligations under the Lock-up Agreement will
terminate if all of the conditions of the Offers are satisfied or waived and
Smithfield, through Smithfield Canada, fails to take up and pay for the
Schneider Family Shares pursuant to the Offers.
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Accounting Treatment
Smithfield intends to account for the acquisition of Schneider using the
pooling of interests method of accounting in accordance with U.S. GAAP. In
order to account for the acquisition as a pooling-of-interests, the combining
companies must meet certain specified criteria including among other things,
(i) Smithfield Canada must acquire Schneider within one year of "initiation" of
the Offers (which commenced on the date of signing the Lock-up Agreement), and
at least 90% of the Schneider Shares must be acquired in exchange for
Exchangeable Shares (the "Pooling Percentage Requirement"), and (ii) no
Schneider Affiliate may dispose of Schneider Shares or shares of Smithfield
Common Stock during the period (the "Pooling Period") beginning 30 days prior
to consummation of the Offers and ending upon the date of publication of
financial statements of Smithfield covering operations of Smithfield for at
least 30 days following consummation of the Offers (the "Pooling Period
Requirement").
If Smithfield Canada is unable to obtain at least 90% of the aggregate
number of the Schneider Shares outstanding prior to the Expiry Time, Smithfield
Canada may (subject to the outcome of the litigation relating to the Maple Leaf
Offer and the satisfaction or waiver of the other conditions of the Offers)
extend the Offers or initiate a Subsequent Acquisition Transaction. If
Smithfield Canada takes up and pays for any Schneider Shares tendered under the
Offers or acquires any additional Schneider Shares under a Subsequent
Acquisition Transaction, but does not acquire at least 90% of the aggregate
number of Schneider Shares by December 18, 1998, the transaction would be
accounted for as a purchase, unless that delay is caused by factors outside the
control of Smithfield, Smithfield Canada, Smithfield Sub or Schneider. Factors
beyond the control of such companies would include litigation seeking to enjoin
the transaction or regulatory approval delays.
Under the pooling of interests method of accounting, the recorded assets
and liabilities of Schneider will be carried forward to Smithfield at their
recorded amounts, income of Smithfield for the fiscal year in which the
consummation of the Offers occurs will include income of Schneider for such
fiscal year and reported income of the separate companies for prior periods
will be combined and restated as income of Smithfield. No recognition of
purchase price in excess of the carrying value of the net assets of Schneider
is required of Smithfield.
In the event that the completion of the Offers may not be accounted for as
a pooling of interests, Smithfield intends to account for the acquisition of
Schneider using the purchase method of accounting in accordance with U.S. GAAP.
See Annex A -- "Pro Forma Condensed Consolidated Financial Statements."
Purpose of the Offers and Smithfield's Plans for Schneider
The purpose of the Offers is to enable Smithfield Canada to acquire as
many as possible of the outstanding Schneider Shares and Options. Smithfield
Canada's current intention is to acquire, if possible, any Schneider Shares not
deposited under the Offers. See "Acquisition of Shares Not Deposited and
Appraisal Rights." The exact timing and details of any Compulsory Acquisition
or Subsequent Acquisition Transaction involving Schneider will depend
necessarily upon a variety of factors, including the number of Schneider Shares
acquired pursuant to the Offers.
If sufficient Schneider Shares are tendered in acceptance of the Offers,
Schneider will become an indirect subsidiary of Smithfield Foods. Smithfield
believes that the acquisition of Schneider will enable Smithfield to build a
solid base of operations in Canada and to expand its product mix, pork
marketing capabilities and international processed meats business. Smithfield
expects to cause Schneider to conduct its business operations in substantially
the same manner as Schneider has conducted such operations in the recent past.
Based on preliminary discussions held with Schneider in early December 1997,
and subject to further consideration by Smithfield following completion of the
Offers, Smithfield is generally supportive of Schneider's long-term plans to
make improvements to Schneider's meat processing plant in Kitchener, Ontario
and to continue renovating and modernizing Schneider's pork slaughtering and
processing facilities in Winnipeg, Manitoba. Under the terms of the Lock-up
Agreement, Smithfield has agreed that it will not resell any Schneider Shares
or cause to be sold any substantial portion of the assets of Schneider within
the two period after the date that Smithfield takes up and pays for the
Schneider Shares under the Offers.
Canadian Federal Income Tax Considerations
The following is the opinion of McCarthy Tetrault, Canadian counsel to
Smithfield and Smithfield Canada, as to all material consequences under the
Canadian Tax Act generally applicable to certain Shareholders and Option
holders as set out below in respect of: (i) the disposition of Schneider Shares
pursuant to the Offers or a Compulsory Acquisition, (ii) the disposition of
Options pursuant to the Class A Offer or a Compulsory Acquisition, (iii) the
receipt of Exchangeable Shares by a holder pursuant to the Offers or a
Compulsory Acquisition and the holding of such shares, (iv) a redemption of
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Exchangeable Shares, an acquisition of such shares by Smithfield or Smithfield
Sub or another disposition of such shares, and (v) the acquisition, holding and
disposition of the shares of Smithfield Common Stock.
This opinion is based on the current provisions of the Canadian Tax Act
and the Regulations thereunder (the "Canadian Tax Regulations") in force as of
the date hereof, the current published administrative policies of Revenue
Canada and all specific proposals (the "Tax Proposals") to amend the Canadian
Tax Act and the Canadian Tax Regulations publicly announced by the Minister of
Finance of Canada prior to the date hereof. This opinion is not exhaustive of
all possible Canadian federal income tax consequences and, except for the Tax
Proposals, does not take into account or anticipate any changes in law, whether
by legislative, governmental or judicial action, and does not take into account
provincial, territorial or foreign tax consequences which may differ
significantly from those discussed herein. With respect to the Tax Proposals,
no assurance can be given that the Tax Proposals will be enacted in the form
proposed or at all.
This opinion is not intended to be, nor should it be construed to be,
legal or tax advice to any particular Shareholder or Option holder.
Accordingly, Shareholders and Option holders, and particularly those to whom
this summary is not applicable (such as holders of Holdco Shares), should
consult with their own tax advisors for advice with respect to the tax
consequences to them having regard to their own particular circumstances.
Shareholders Resident in Canada
This part of the opinion is applicable to Shareholders who, for purposes
of the Canadian Tax Act and at all relevant times, are resident in Canada, hold
their Schneider Shares and will hold their Exchangeable Shares and any shares
of Smithfield Common Stock as capital property and deal at arm's length with
Schneider, Smithfield and Smithfield Canada.
Shareholders should consult their own tax advisors as to whether they hold
their Schneider Shares and will hold their Exchangeable Shares and any shares
of Smithfield Common Stock as capital property for purposes of the Canadian Tax
Act. Shares in the capital of a corporation will generally be considered to be
capital property to a shareholder unless the shareholder holds the shares in
the course of carrying on a business of trading or dealing in securities or
otherwise as part of a business of buying and selling securities, the
Shareholder acquired the shares in an adventure in the nature of trade or the
Shareholder is a "financial institution" and the shares are "mark-to-market
property" of such Shareholder (as those terms are defined in the Canadian Tax
Act). Certain Shareholders whose shares might not otherwise be considered to be
capital property may be entitled to have their shares deemed to be capital
property by making the irrevocable election permitted by subsection 39(4) of
the Canadian Tax Act.
The Offers
A Shareholder whose Schneider Shares are taken up and paid for by
Smithfield Canada pursuant to the Offers will be considered to have disposed of
such Schneider Shares for purposes of the Canadian Tax Act. On such
disposition, the Shareholder will realize a capital gain (or a capital loss)
equal to the amount by which the Shareholder's proceeds of disposition in
respect of the disposition of such Schneider Shares exceed (or are exceeded by)
the total of (i) the adjusted cost base of such Schneider Shares to the
Shareholder, and (ii) any reasonable costs of disposition. Shareholders who
held Schneider Shares on December 31, 1971 and thereafter without interruption,
or who acquired Schneider Shares in certain non-arm's length transactions, may
be subject to the "tax-free zone" rules in determining the adjusted cost base
of the Schneider Shares to them and such Shareholders should consult their own
tax advisors on the application of the rules to them.
A Shareholder's proceeds of disposition in respect of the disposition of
the Shareholder's Schneider Shares will depend on whether the Shareholder is an
Eligible Shareholder and, if the Shareholder is an Eligible Shareholder,
whether the Shareholder makes a Joint Election. Subject to the comments under
"Ancillary Rights and Call Rights" below, in the case of (i) a Shareholder who
is not an Eligible Shareholder, or (ii) a Shareholder who is an Eligible
Shareholder but who does not make a Joint Election, the Shareholder will be
considered to have disposed of such Shareholder's Schneider Shares for proceeds
of disposition equal to the total of (i) the amount of any cash, and (ii) the
fair market value of the Exchangeable Shares, received by the Shareholder
pursuant to the Offers.
In the case of a Shareholder who is an Eligible Shareholder and who makes
a Joint Election, the Shareholder will be considered to have disposed of such
Shareholder's Schneider Shares for proceeds of disposition equal to the amount
at which such Shareholder and Smithfield Canada elect in the Joint Election.
There are detailed rules set out in the Canadian Tax Act prescribing limits as
to the amount at which a Shareholder and Smithfield Canada can elect in a Joint
Election. Subject to the comments under "Ancillary Rights and Call Rights"
below, in general, the elected amount cannot be less than (i) the amount of any
cash received by the Shareholder pursuant to the Offers or (ii) the lesser of
the adjusted cost base of such Shareholder's Schneider Shares to such
Shareholder and the fair market value of such Shareholder's Schneider Shares
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at the time such shares are taken up and paid for pursuant to the Offers, nor
can the elected amount be greater than the fair market value of such
Shareholder's Schneider Shares at such time. For the procedure to be followed
by an Eligible Shareholder to make a Joint Election, refer to the description
under the sub-heading "Joint Election -- Procedure."
Absent the making of a Joint Election, Eligible Shareholders may realize a
capital gain on the disposition of their Schneider Shares pursuant to the
Offers. Consequently, Eligible Shareholders should consult their own tax
advisors as to whether they should make a Joint Election.
A Shareholder must include in income three-quarters of the amount of any
resulting capital gain as a "taxable capital gain" for the taxation year in
which such Shareholder's Schneider Shares are taken up and paid for pursuant to
the Offers and will generally be entitled to deduct three-quarters of the
amount of any resulting capital loss as an "allowable capital loss" against
taxable capital gains realized in such taxation year or in any of the three
preceding taxation years or in any subsequent taxation year to the extent and
under the circumstances described in the Canadian Tax Act.
A corporate Shareholder that is throughout the relevant taxation year a
"Canadian controlled private corporation" may be liable to pay, in addition to
the tax otherwise payable under the Canadian Tax Act, a refundable tax of
6 2/3% determined by reference to its aggregate investment income for the year,
which is defined to include an amount in respect of taxable capital gains.
Capital gains realized by individuals or trusts, other than certain
specified trusts, may be subject to alternative minimum tax. The Canadian Tax
Act provides that the tax payable by individuals and such trusts is the greater
of the tax otherwise determined and an alternative minimum tax. For purposes of
computing the alternative minimum tax, one-quarter of the total of all capital
gains is added back to the individual's or the trust's income as otherwise
determined.
A capital loss otherwise arising on the disposition of Schneider Shares by
a Shareholder which is a corporation may in certain circumstances be reduced by
the amount of dividends, if any, received or deemed to have been received on
such Schneider Shares. Similar rules apply where a corporation is a member of a
partnership or a beneficiary of a trust (other than a certain specified trust)
which owns Schneider Shares. The Tax Proposals will extend those rules to apply
where a trust (other than a certain specified trust) is a member of a
partnership or a partnership or trust is a beneficiary of a trust (other than a
certain specified trust).
Subject to the comments under "Ancillary Rights and Call Rights" below,
the adjusted cost base to a Shareholder of Exchangeable Shares received by the
Shareholder pursuant to the Offers will be equal to the Shareholder's proceeds
of disposition in respect of the disposition of such Shareholder's Schneider
Shares as described above, reduced by the amount of any cash received by the
Shareholder pursuant to the Offers.
Ancillary Rights and Call Rights
A Shareholder is required to determine the fair market value of the
Ancillary Rights on a reasonable basis for purposes of the Canadian Tax Act in
computing the Shareholder's proceeds of disposition in respect of the
disposition of the Shareholder's Schneider Shares pursuant to the Offers and
the grant of the Call Rights by the shareholder. Further, Shareholders must
make a similar fair market value determination with respect to the Call Rights
granted by them to Smithfield and Smithfield Sub. Smithfield and Smithfield
Canada believe and have advised counsel that the Ancillary Rights and the Call
Rights will have only nominal value. If that view is correct, a Shareholder's
receipt or grant of such rights will not result in any material Canadian
federal income tax consequences. Such determinations of value are not binding
on Revenue Canada and, while counsel believes it unlikely, Revenue Canada could
take the position that the Ancillary Rights or the Call Rights have greater
than nominal value.
If Revenue Canada successfully asserts that the Ancillary Rights when
received by a Shareholder have more than nominal value, such greater value must
be taken into account in determining the Shareholder's proceeds of disposition
in respect of the disposition of the Shareholder's Schneider Shares and the
grant of the Call Rights by the Shareholder, the elected amount in any Joint
Election made by the Shareholder and the adjusted cost base of the
Shareholder's Exchangeable Shares to such Shareholder. In such case, the
Shareholder's cost of the Ancillary Rights will equal such greater value. If
Revenue Canada successfully asserts that the Call Rights when granted by a
Shareholder have more than nominal value, the Shareholder may realize a capital
gain in respect of the granting of the Call Rights equal to the amount of such
greater value. In such case, in general terms, the fair market value of the
Call Rights (other than the portion thereof attributable to the grant of the
Ancillary Rights) will be included in computing the adjusted cost base of the
Exchangeable Shares to such holder.
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Joint Election - Procedure
Smithfield Canada will make a Joint Election with an Eligible Shareholder
to permit the Eligible Shareholder to obtain a full or partial deferral of any
tax that might otherwise arise on the disposition of the Shareholder's
Schneider Shares pursuant to the Offers or a Compulsory Acquisition. The Joint
Election allows the Eligible Shareholder, together with Smithfield Canada, to
elect an amount (the "Elected Amount") which will be treated as the Eligible
Shareholder's proceeds of disposition in respect of the disposition of the
Shareholder's Schneider Shares. The Elected Amount will be the amount(s)
determined by the Shareholder subject to the limitations under the Canadian Tax
Act as described above under "The Offers." No Joint Election will be made with
any Shareholder who is not an Eligible Shareholder.
An Eligible Shareholder who wishes to make a Joint Election must duly
complete and forward to the Depositary a package of documents described below
(a "Tax Election Filing Package") in the manner and within the time set out
below. An Eligible Shareholder should obtain a Tax Election Filing Package from
the Depositary. The Joint Election forms may also be obtained directly from
Revenue Canada and the Ministere du Revenu du Quebec. An Eligible Shareholder
interested in obtaining a Tax Election Filing Package should indicate same on
the Letter of Transmittal accompanying these Offers in the space provided
therein. The Tax Election Filing Package consists of:
(a) two copies of Federal Election Form T-2057 or, if the Shareholder is a
partnership as indicated on the Letter of Transmittal, two copies of Federal
Election Form T-2058;
(b) if the Eligible Shareholder is required to file in Quebec as indicated
on the Letter of Transmittal, then two copies of the Quebec Tax Election Form
TP-518V or, if the shareholder is required to file in Quebec and is a
partnership as indicated on the Letter of Transmittal, then three copies of
Quebec Tax Election Form TP-529V; and
(c) a letter authorizing the making of the Joint Election (two copies if
the holder is required to file in Quebec as indicated on the Letter of
Transmittal).
A duly completed Tax Election Filing Package together with any required
supporting schedules must be signed and forwarded by an Eligible Shareholder to
the Depositary on or before March 31, 1999. Smithfield Canada will not execute
any Joint Election received by the Depositary after March 31, 1999. Any
Eligible Shareholder who does not ensure that the Depositary has received a
duly completed Tax Election Filing Package on or before March 31, 1999 will not
be able to benefit from the "rollover" provisions of the Canadian Tax Act.
Smithfield Canada agrees to execute any properly completed Joint Election
contained in a Tax Election Filing Package received by the Depositary from an
Eligible Shareholder and to forward such Tax Election Filing Package by mail
within 30 days after the receipt thereof by the Depositary to the appropriate
tax authority (authorities) with a copy to such Shareholder. In order for
Revenue Canada (and where applicable the Ministere du Revenu du Quebec) to
accept a Tax Election Filing Package without a late filing penalty being paid
by an Eligible Shareholder, the Tax Election Filing Package, duly completed and
executed by both the Shareholder and Smithfield Canada, must be received by
such tax authority (authorities) on or before the day that is the earliest date
on or before which either Smithfield Canada or the Eligible Shareholder is
required to file an income tax return for the taxation year in which such
Shareholder's Schneider Shares are taken up and paid for pursuant to the Offers
or a Compulsory Acquisition, as the case may be. Smithfield Canada has a
taxation year ending on the last Saturday in April of each year and is required
to file an income tax return within six months of the end of its taxation year.
Eligible Shareholders which are not individuals may be required to forward a
Tax Election Filing Package to the Depositary prior to March 31, 1999 in order
to avoid late filing penalties.
Where Schneider Shares are held in joint ownership and two or more of the
co-owners wish to elect, one of the co-owners designated for such purpose
should file the designation and a Federal Election Form T-2057 (and, where
applicable, the corresponding provincial form) for each co-owner along with a
list of all co-owners electing, which list should contain the address and
social insurance number, or the corporation account or business number for each
co-owner. Where the Schneider Shares are held as partnership property, a
partner designated by the partnership should file a Federal Election Form
T-2058 on behalf of (but not for) each member of the partnership (and, where
applicable, the corresponding provincial form). Such Federal Election Form
T-2058 (and corresponding provincial form, if applicable) must be accompanied
by a list containing the address and social insurance number, or the
corporation account or business number, for each partner as well as the letter
signed by each partner authorizing the designated partner to complete and file
the form.
An Eligible Shareholder who completes the Tax Election Filing Package and
forwards such package to the Depositary will be considered to have represented
to Smithfield Canada that the Shareholder complies with the conditions of being
an Eligible Shareholder. Compliance with the requirements to ensure the
validity of a Joint Election will be the sole responsibility of the Eligible
Shareholder making the election. Smithfield Canada will not be responsible for
the proper completion
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of any Joint Election and, except for Smithfield Canada's obligation to file a
properly completed Tax Election Filing Package within 30 days of its being
received by the Depositary, the Shareholder will be solely responsible for the
payment of any late filing penalty. Smithfield Canada will not be responsible
or liable for taxes, interest, penalties, damages or expenses resulting from
the failure by anyone to properly complete any Joint Election, nor will
Smithfield Canada be responsible or liable for taxes, interest, penalties,
damages or expenses resulting from the failure by anyone to properly file a
Joint Election in the prescribed form and manner and within the time prescribed
in the Canadian Tax Act and the corresponding provisions of any applicable
provincial income tax legislation (except any failure by Smithfield Canada to
file a properly completed Tax Election Filing Package within 30 days of its
being received by the Depositary).
Eligible Shareholders who wish to make a Joint Election are referred for
further information to Information Circular 76-19R3 and Interpretation Bulletin
IT-291R2 issued by Revenue Canada.
Acquisition of Schneider Shares Not Deposited
As discussed in the Circular under the heading "Acquisition of Shares Not
Deposited and Appraisal Rights", Smithfield Canada may, in certain
circumstances, acquire Schneider Shares not deposited under the Offers pursuant
to a Compulsory Acquisition. A Shareholder whose Schneider Shares are acquired
by Smithfield Canada pursuant to a Compulsory Acquisition or pursuant to the
exercise of dissent rights on such an acquisition will realize a capital gain
(or a capital loss) generally calculated in the same manner, and subject to the
same tax treatment, as described above with respect to a disposition of
Schneider Shares pursuant to the Offers.
If Smithfield Canada is unable to use a Compulsory Acquisition, Smithfield
Canada may propose a Subsequent Acquisition Transaction as described in the
Circular under the heading "Acquisition of Shares Not Deposited and Appraisal
Rights". The tax treatment of such a transaction to a Shareholder will depend
upon the manner in which the transaction is carried out and may be
substantially the same as or materially different from that described above. A
Shareholder may realize a capital gain (or a capital loss) and/or a deemed
dividend. Except with respect to the Subsequent Acquisition Transaction set out
below, this opinion does not describe the tax consenquences of a Subsequent
Acquisition Transaction to a Shareholder.
As discussed in the Circular under the heading "Acquisition of Shares Not
Deposited and Appraisal Rights", Smithfield Canada will consider an
amalgamation of Schneider with an affiliate of Smithfield Canada on the basis
that outstanding Schneider Shares be exchanged for Exchangeable Shares at the
same rate and with the same terms as in the Offers. On such amalgamation, a
Shareholder will realize a capital gain (or a capital loss) generally
calculated in the same manner, and subject to the same tax treatment, as
described above with respect to a disposition of Schneider Shares pursuant to
the Offers. Subject to the comments under "Ancillary Rights and Call Rights"
above, for purposes of computing such capital gain (or capital loss), the
proceeds of disposition in respect of the disposition of a Shareholder's
Schneider Shares will be equal to the total of (i) the amount of any cash, and
(ii) the fair market value of the Exchangeable Shares, received by the
Shareholder on the amalgamation.
It is understood that, under the current administrative practice of
Revenue Canada, Shareholders who receive payment for their Schneider Shares
pursuant to the exercise of their right of dissent from such an amalgamation
will be considered to have disposed of their Schneider Shares and to have
realized a capital gain (or a capital loss) generally calculated in the same
manner, and subject to the same tax treatment, as described above with respect
to a disposition of Schneider Shares pursuant to the Offers.
If the Schneider Shares cease to be listed on a prescribed stock exchange
in Canada, the Schneider Shares may no longer be qualified investments under
the Canadian Tax Act for trusts governed by registered retirement savings
plans, registered retirement income funds and deferred profit sharing plans.
Any Shareholder that is such a trust may be subject to a penalty tax of 1% per
month of the fair market value of the Shareholder's Schneider Shares at the
time such Schneider Shares were acquired by the Shareholder for each month
following the date the Schneider Shares cease to be qualified investments under
the Canadian Tax Act at the end of which the Shareholder continues to hold the
Schneider Shares and, in addition, any Shareholder that is a trust governed by
a registered retirement savings plan or a registered retirement income fund may
be subject to tax on dividends and on capital gains arising from the
disposition of such Shareholder's Schneider Shares.
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Dividends
(a) Exchangeable Shares
A Shareholder who is an individual will be required to include dividends
received or deemed to be received on the Exchangeable Shares in computing the
Shareholder's income, subject to the gross-up and dividend tax credit rules
normally applicable to taxable dividends received from taxable Canadian
corporations.
A Shareholder that is a corporation will be required to include dividends
received or deemed to be received on the Exchangeable Shares in computing the
corporation's income and, subject to the special rules and limitations
described below, such dividends will normally be deductible in computing the
corporation's taxable income. In the case of a corporate Shareholder that is a
specified financial institution, such dividends will be deductible in computing
the Shareholder's taxable income only to the extent that either:
(i) the Shareholder did not acquire the Exchangeable Shares in the
ordinary course of the business carried on by it; or
(ii) at the time a dividend is received or deemed to be received, the
Exchangeable Shares are listed on a prescribed stock exchange in Canada
(which currently includes the TSE) and the Shareholder, either alone or
together with persons with whom it does not deal at arm's length, does not
receive (and is not deemed to receive) dividends in respect of more than 10
percent of the issued and outstanding Exchangeable Shares.
A corporation is a specified financial institution if it is a bank, a trust
company, a credit union, an insurance corporation, a corporation whose
principal business is the lending of money to persons with whom the corporation
is dealing at arm's length or the purchasing of debt obligations issued by such
persons or a combination thereof, a corporation controlled by one or more such
corporations, or a corporation related to any corporation described above.
Subject to the exemption described below, dividends received or deemed to
be received on the Exchangeable Shares by a Shareholder that is a corporation
will not be deductible in computing the Shareholder's taxable income to the
extent Smithfield or any other person with whom Smithfield does not deal at
arm's length is a specified financial institution when a dividend is paid or is
deemed to be paid. Smithfield believes and has advised counsel that none of
Smithfield, Smithfield Sub, nor any person with whom they do not deal at arm's
length is a specified financial institution at present, but there can be no
assurance that this status will not change prior to any dividend being received
or being deemed to be received by a corporate Shareholder. The foregoing denial
of the dividend deduction will not apply in respect of a Shareholder to the
extent that, at the time a dividend is received or deemed to be received, the
Exchangeable Shares are listed on a prescribed stock exchange in Canada,
Smithfield controls Smithfield Canada, and the Shareholder, either alone or
together with persons with whom it does not deal at arm's length, does not
receive (and is not deemed to receive) dividends in respect of more than 10% of
the issued and outstanding Exchangeable Shares.
A corporate Shareholder that is a "private corporation" (as defined in the
Canadian Tax Act) or resident in Canada and controlled or deemed to be
controlled by or for the benefit of an individual or a related group of
individuals may be liable under Part IV of the Canadian Tax Act to pay a
refundable tax of 33 1/3% on dividends received or deemed to be received on the
Exchangeable Shares to the extent that such dividends are deductible in
computing the Shareholder's taxable income.
A corporate Shareholder that is throughout the relevant taxation year a
"Canadian controlled private corporation" may be liable to pay, in addition to
the tax otherwise payable under the Canadian Tax Act, a refundable tax of
6 2/3% determined by reference to its aggregate investment income for the year,
which is defined to include any non-deductible dividends.
The Exchangeable Shares will be "taxable preferred shares" and "short-term
preferred shares" for purposes of the Canadian Tax Act. Accordingly, Smithfield
Canada will be subject to a 66 2/3% tax under Part VI.1 of the Canadian Tax Act
on dividends paid or deemed to be paid on the Exchangeable Shares and will be
entitled to deduct 9/4 of such tax in computing its taxable income under Part I
of the Canadian Tax Act. Dividends received or deemed to be received by a
corporate Shareholder on the Exchangeable Shares will not be subject to the 10%
tax under Part IV.1 of the Canadian Tax Act applicable to certain corporations.
In the event the IRS imposes United States non-resident withholding tax
with respect to dividends paid on the Exchangeable Shares as set out below
under the heading "United States Federal Income Tax Considerations," it is
unlikely that a Canadian resident holder would be entitled to a foreign tax
credit in Canada with respect to such U.S. withholding tax.
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(b) Smithfield Common Stock
Dividends on Smithfield Common Stock will be required to be included in
computing a Shareholder's income for the purposes of the Canadian Tax Act. Such
dividends received by a Shareholder who is an individual will not be subject to
the gross-up and dividend tax credit rules in the Canadian Tax Act. A
shareholder that is a corporation will generally not be entitled to deduct the
amount of such dividends in computing its taxable income. A shareholder that is
a Canadian-controlled private corporation may be liable to pay an additional
refundable tax of 6 2/3% on such dividends. United States non-resident
withholding tax on such dividends will be eligible for foreign tax credit or
deduction treatment where applicable under the Canadian Tax Act.
Redemption or Exchange of Exchangeable Shares
A Shareholder will be considered to have disposed of Exchangeable Shares
on (i) a redemption (including pursuant to a Retraction Request) of such
Exchangeable Shares by Smithfield Canada, or (ii) an acquisition of such
Exchangeable Shares by Smithfield or Smithfield Sub. Although such a
disposition is a taxable transaction for the Shareholder whether it arises on a
redemption or acquisition, the Canadian federal income tax consequences of the
disposition are quite different for the Shareholder depending on whether the
event giving rise to the disposition is a redemption or an acquisition. A
Shareholder who exercises the right to require redemption of an Exchangeable
Share by giving a Retraction Request cannot control whether the Exchangeable
Share will be acquired by Smithfield or Smithfield Sub under the Retraction
Call Right or redeemed by Smithfield Canada; however, the holder will be
notified if the Retraction Call Right will not be exercised in which case the
holder may cancel the Retraction Request and retain the Exchangeable Share.
On a redemption (including pursuant to a Retraction Request) of an
Exchangeable Share by Smithfield Canada, a portion of the redemption proceeds
may be deemed to be a dividend received by the Shareholder. The deemed dividend
is equal to the amount, if any, by which the redemption proceeds exceed the
paid-up capital (for purposes of the Canadian Tax Act) at the time of the
redemption of the Exchangeable Share so redeemed. The deemed dividend is
subject to the tax treatment described above under "Dividends -- Exchangeable
Shares." For this purpose, the redemption proceeds of an Exchangeable Share
will be equal to the fair market value of a share of Smithfield Common Stock at
the time of the redemption plus the amount of all declared but unpaid
dividends, if any, on the Exchangeable Share. In the case of a shareholder that
is a corporation, in some circumstances the amount of such deemed dividend may
be treated as proceeds of disposition and not as a dividend.
Further, on such a redemption, the Shareholder is also considered to
dispose of the Exchangeable Share for proceeds of disposition equal to the
redemption proceeds less the amount of the deemed dividend described above. A
Shareholder will in general realize a capital loss (or a capital gain) equal to
the amount by which the adjusted cost base to the holder of the Exchangeable
Share exceeds (or is exceeded by) such proceeds of disposition.
Where an Exchangeable Share of a Shareholder is acquired by Smithfield or
Smithfield Sub for a share of Smithfield Common Stock or on any other
disposition or deemed disposition of an Exchangeable Share by a holder, in
general the holder will realize a capital gain (or a capital loss) equal to the
amount by which the holder's proceeds of disposition in respect of the
disposition of the Exchangeable Share exceed (or are exceeded by) the total of
(i) the adjusted cost base of the Exchangeable Share to the holder, and (ii)
any reasonable costs of disposition. For this purpose, where the disposition
arises on an acquisition of an Exchangeable Share by Smithfield or Smithfield
Sub for a share of Smithfield Common Stock, the proceeds of disposition in
respect of the disposition of the Exchangeable Share will be equal to the fair
market value of the share of Smithfield Common Stock at the time of the
exchange plus the amount of all declared but unpaid dividends, if any, on the
Exchangeable Share. The acquisition of an Exchangeable Share of a Shareholder
by Smithfield or Smithfield Sub should not result in a deemed dividend to the
Shareholder.
See the description of the Canadian federal income tax treatment of
capital gains and capital losses under "The Offers" above.
Acquisition and Disposition of Smithfield Common Stock
The cost of a share of Smithfield Common Stock to a Shareholder received
on the redemption or acquisition of an Exchangeable Share will be equal to the
fair market value of the share of Smithfield Common Stock at the time of such
redemption or acquisition.
A disposition or deemed disposition of shares of Smithfield Common Stock
by a holder will generally result in a capital gain (or a capital loss) equal
to the amount by which the holder's proceeds of disposition in respect of the
disposition of the shares exceed (or are exceeded by) the total of (i) the
adjusted cost base of the holder's shares to such holder, and
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(ii) any reasonable costs of disposition. See the description of the Canadian
federal income tax treatment of capital gains and capital losses under "The
Offers" above.
Foreign Property Information Reporting
A holder of shares of Smithfield Common Stock who is a "specified Canadian
entity" and whose cost amount for such shares at any time in a year or fiscal
period exceeds C$100,000 will be required to file an information return in
respect of such shares disclosing the holder's cost amount, any dividends
received in the year and any gains or losses realized in the year in respect of
such shares. A specified Canadian entity means a taxpayer resident in Canada in
the year, other than a corporation or a trust exempt from tax under Part I of
the Canadian Tax Act, a non-resident-owned investment corporation, a mutual
fund corporation, a mutual fund trust and certain other trusts and
partnerships.
Schneider Option Holders
This part of the summary is applicable to Option holders who, for purposes
of the Canadian Tax Act and at all relevant times, are resident in Canada and
deal at arm's length with Schneider, Smithfield and Smithfield Canada.
An Option holder who received the holder's Options in respect of, in the
course of, or by virtue of, employment with Schneider and whose Options are
taken up and paid for by Smithfield Canada pursuant to the Class A Offer will
be considered to have realized an employment benefit to the extent that the
holder's proceeds of disposition in respect of the disposition of the holder's
Options exceed the adjusted cost base of the holder's Options to such holder.
Such benefit will be required to be included in computing the holder's
employment income in the taxation year in which the holder's Options are taken
up and paid for pursuant to the Class A Offer.
An Option holder who holds the Options as capital property for purposes of
the Canadian Tax Act and whose Options are taken up and paid for by Smithfield
Canada pursuant to the Class A Offer will realize a capital gain (or a capital
loss) on the disposition of the holder's Options equal to the amount by which
the holder's proceeds of disposition in respect of the disposition of the
holder's Options exceed (or are exceeded by) the total of (i) the adjusted cost
base of the holder's Options to such holder, and (ii) any reasonable costs of
disposition. See the description of the Canadian federal income tax treatment
of capital gains and capital losses under "The Offers" above.
Subject to the comments under "Ancillary Rights and Call Rights" above,
for purposes of determining either the employment benefit or the capital gain
(or the capital loss) described above, the holder's proceeds of disposition in
respect of the disposition of the holder's Options will be equal to the total
of (i) the amount of any cash and (ii) the fair market value of the
Exchangeable Shares, received by the holder under the Offers and the adjusted
cost base to an Option holder of Exchangeable Shares received by the Option
holder pursuant to the Class A Offer will be equal to the fair market value of
the holder's Options disposed of pursuant to the Class A Offer, reduced by the
amount of any cash received by the Option holder pursuant to the Class A Offer.
An Option holder whose Options are acquired by Smithfield Canada pursuant
to a Compulsory Acquisition will be subject to the same tax treatment as
described above with respect to an Option holder whose options are acquired by
Smithfield Canada pursuant to the Class A Offer. This opinion does not describe
the tax consequences of any Subsequent Acquisition Transaction to an Option
Holder. Option holders will be subject to the same tax treatment as described
above with respect to Shareholders under "Ancillary Rights and Call Rights,"
"Dividends," "Redemption or Exchange of Exchangeable Shares," "Acquisition and
Disposition of Smithfield Common Stock" and "Foreign Property Information
Reporting."
Shareholders Not Resident in Canada
This part of the opinion is applicable to Shareholders who, for purposes
of the Canadian Tax Act and at all relevant times, are not resident or deemed
to be resident in Canada, deal at arm's length with Smithfield, Smithfield
Canada and Schneider, hold their Schneider Shares and will hold their
Exchangeable Shares and any shares of Smithfield Common Stock as capital
property and do not use or hold, and are not deemed to use or hold, such shares
in, or in the course of, carrying on a business in Canada and to whom such
shares do not otherwise constitute "taxable Canadian property." Generally, a
Shareholder's shares of Smithfield Common Stock will not constitute taxable
Canadian property to the Shareholder and a Shareholder's Schneider Shares or
Exchangeable Shares will not constitute such property to the Shareholder at the
time of a disposition of such shares if, at that time, the shares are listed on
a prescribed stock exchange (which currently includes the TSE and the Nasdaq
National Market), the Shareholder does not use or hold, and is not deemed to
use or hold, the shares in connection with carrying on a business in Canada and
none of the Shareholder, persons with whom the Shareholder does not deal at
arms length or the Shareholder and such persons together has owned (or had
under option), at any time during the immediately preceding five year period,
25 percent or more of the issued shares of any class or series of the capital
stock
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of Schneider or Smithfield Canada, as the case may be. A Shareholder's
Schneider Shares and/or Exchangeable Shares can be deemed to be "taxable
Canadian property" in certain circumstances set out in the Canadian Tax Act. In
particular, where a Shareholder's Schneider Shares are taxable Canadian
property and the Shareholder makes a Joint Election in respect of the
disposition of the Shareholder's Schneider Shares pursuant to the Offers or a
Compulsory Acquisition, the Shareholder's Exchangeable Shares will be deemed to
be taxable Canadian property.
A Shareholder will not be subject to tax under the Canadian Tax Act on any
capital gain realized upon the disposition of the Shareholder's Schneider
Shares pursuant to the Offers, on an exchange of an Exchangeable Share for a
share of Smithfield Common Stock (except to the extent the exchange is effected
by way of a redemption of an Exchangeable Share) or on a sale or other
disposition of an Exchangeable Share or a share of Smithfield Common Stock. A
holder whose Exchangeable Shares are redeemed (either under Smithfield Canada's
redemption right or pursuant to the holder's rights to require a redemption)
will be deemed to have received a dividend computed in the same manner as
described above for Shareholders resident in Canada under "Redemption or
Exchange of Exchangeable Shares." The amount of the deemed dividend will be
subject to the tax treatment accorded to dividends described below.
Dividends paid or deemed to be paid on the Exchangeable Shares are subject
to non-resident withholding tax under the Canadian Tax Act at the rate of 25
percent, although such rate may be reduced under the provisions of an
applicable income tax treaty. Under the Canada-United States Income Tax
Convention, the rate is generally reduced to 15 percent in respect of dividends
paid to a person who is the beneficial owner of the dividends and who is
resident in the United States for purposes of the treaty.
Except as set out below, this opinion does not describe the tax
consequences of any Compulsory Acquisition or Subsequent Acquisition
Transaction as described in the Circular under "Acquisition of Shares not
Deposited and Appraisal Rights." It is possible that such a transaction could
result in a Shareholder being deemed to have received a dividend in respect of
the Shareholder's Schneider Shares, which dividend will be subject to the
withholding tax treatment described above.
United States Federal Income Tax Considerations
Shareholders That Are United States Holders
The following discussion is the opinion of McGuire, Woods, Battle & Boothe
LLP, United States counsel to Smithfield and Smithfield Canada ("U.S. Counsel")
with respect to the material United States federal income tax considerations
generally applicable to Shareholders that are "United States persons," as
defined for United States federal income tax purposes, and that hold Schneider
Shares as capital assets ("U.S. Holders"), arising from the exchange of
Schneider Shares for Exchangeable Shares and the receipt of shares of
Smithfield Common Stock in exchange for Exchangeable Shares. For United States
federal income tax purposes, "United States persons" are United States citizens
or residents, corporations or partnerships organized under the laws of the
United States or any state thereof, estates subject to United States federal
income tax on their income regardless of source and trusts subject to the
primary supervision of a court within the United States and control of a United
States fiduciary as described in Section 7701(a)(30) of the U.S. Code.
This discussion is based on applicable provisions of the U.S. Code,
Treasury regulations promulgated thereunder, and administrative and judicial
interpretation thereof, as in effect on the date hereof, all of which are
subject to change, possibly with retroactive effect. No statutory, judicial, or
administrative authority exists which directly addresses certain of the United
States federal income tax consequences of the issuance and ownership of
instruments and rights comparable to the Exchangeable Shares and the Ancillary
Rights. Consequently (as discussed more fully below), some aspects of the
United States federal income tax treatment of the receipt and ownership of
Exchangeable Shares and the exchange of Exchangeable Shares for shares of
Smithfield Common Stock are not certain under current law. No advance income
tax ruling has been sought or obtained from the United States Internal Revenue
Service ("IRS") regarding the United States federal income tax consequences of
any of the transactions described herein.
This discussion does not address aspects of United States taxation other
than United States federal income tax, nor does it address all aspects of
United States federal income tax that may be applicable to particular U.S.
Holders, including, without limitation, Option holders, holders of Schneider
Shares acquired as a result of the exercise of Options and U.S. Holders that
own, or have owned during a five-year lookback period, 10% or more of the
voting power of the voting stock of Schneider. In addition, this discussion
does not address the United States state or local tax consequences or the
foreign tax consequences of the receipt and ownership of the Exchangeable
Shares or shares of Smithfield Common Stock.
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HOLDERS OF SCHNEIDER SHARES THAT ARE UNITED STATES PERSONS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS IN RELATION TO THEIR PARTICULAR TAX SITUATION TO
DETERMINE THE UNITED STATES TAX CONSEQUENCES TO THEM AS A RESULT OF THEIR
TENDERING THEIR SCHNEIDER SHARES PURSUANT TO THE OFFERS.
Receipt of Exchangeable Shares.
Assuming the Exchangeable Shares are respected as stock of Smithfield
Canada for United States federal income tax purposes, the transfer of Schneider
Shares to Smithfield Canada in exchange for the Exchangeable Shares should be
characterized as a transfer described in section 351 of the U.S. Code.
If the exchange of Schneider Shares for Exchangeable Shares qualifies
under section 351, a U.S. Holder receiving Exchangeable Shares pursuant to the
Offers would have the following treatment:
(a) The U.S. Holder would not recognize taxable gain or loss on the
receipt of the Exchangeable Shares;
(b) The U.S. Holder's adjusted basis in the Exchangeable Shares would be
equal to such Holder's adjusted basis in the Schneider Shares exchanged
therefor; and
(c) The U.S. Holder's holding period in the Exchangeable Shares would
include the period during which the Schneider Shares were held, provided the
Schneider Shares were held as capital assets.
In the case of a U.S. Holder who owns 5% or more of the value of all
outstanding shares of Smithfield Canada stock immediately after the exchange,
this treatment would be available only if the U.S. Holder enters into a "gain
recognition agreement" with the IRS.
Although U.S. Counsel is of the opinion that the exchange of Schneider
Shares for Exchangeable Shares should qualify as a tax-free exchange under
section 351, in the absence of specific administrative guidance it is possible
that a U.S. Holder could be required to recognize taxable gain on the receipt
of Exchangeable Shares. Under 1997 amendments to section 351, a U.S. Holder
could be required to recognize gain if the Exchangeable Shares are
characterized as "nonqualified preferred stock." In general, "nonqualified
preferred stock" includes any preferred stock if (i) (A) the holder has the
right to require the issuer or a related person to redeem or purchase the
stock, (B) the issuer or a related person is required to redeem or purchase the
stock, or (C) the issuer or a related person has the right to redeem or
purchase the stock, and (ii) as of the issue date, it is more likely than not
that such right will be exercised, if the right or obligation referred to in
clause (i) may be exercised within 20 years of the date of issuance. For
purposes of the preceding sentence, "preferred stock" means stock that is
limited and preferred as to dividends and does not participate in corporate
growth to any significant extent.
Because the dividend payable on the Exchangeable Shares is not limited to
a specified amount, and because the Exchangeable Shares have the potential to
appreciate in the same manner as Smithfield Common Stock, U.S. Counsel is of
the opinion that the Exchangeable Shares do not constitute "preferred stock"
and therefore do not come within the definition of "nonqualified preferred
stock", and U.S. Counsel believes that this is the position that would be taken
by the IRS. To date, however, the IRS has not issued any administrative
guidance regarding the scope of the term "nonqualified preferred stock" and
therefore there can be no assurance that this interpretation is correct. If the
IRS were to take the position that the Exchangeable Shares constitute
nonqualified preferred stock for purposes of section 351, and if such position
were sustained by the courts, a U.S. Holder would have the following tax
treatment on the receipt of Exchangeable Shares:
(a) The U.S. Holder would recognize taxable gain to the extent the fair
market value of the Exchangeable Shares on the date of the exchange exceeds
such Holder's adjusted basis in the Schneider Shares surrendered in the
exchange;
(b) If the U.S. Holder's adjusted basis in the Schneider Shares exceeds
the fair market value of the Exchangeable Shares on the date of the exchange
such loss would not be recognized;
(c) The U.S. Holder's holding period in the Exchangeable Shares would
begin on the day after the date of the exchange; and
(d) The U.S. Holder's basis in the Exchangeable Shares would be equal to
their fair market value on the date of the exchange.
Possible Characterization of Exchangeable Shares as Smithfield Common
Stock
The discussion of the federal income tax consequences of the receipt of
Exchangeable Shares set forth in the preceding section is based on the
assumption that the Exchangeable Shares are characterized as shares of
Smithfield Canada for
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United States federal income tax purposes. Smithfield and Smithfield Canada
intend to treat the Exchangeable Shares as shares of Smithfield Canada for
United States federal income tax purposes. There is, however, no direct
authority addressing the proper characterization of instruments similar to the
Exchangeable Shares for United States federal income tax purposes. Because the
Exchangeable Shares are exchangeable into shares of Smithfield Common Stock and
have dividend rights based on the dividends paid with respect to Smithfield
Common Stock, it is possible that the Internal Revenue Service could take the
position that the Exchangeable Shares should be recharacterized as shares of
Smithfield Common Stock for United States federal income tax purposes.
In the event of such a recharacterization, a United States person
exchanging Schneider Shares for Exchangeable Shares would not be required to
recognize taxable gain or loss on the receipt of Exchangeable Shares.
Therefore, such a recharacterization would not adversely affect the federal
income tax treatment of the receipt of Exchangeable Shares by a United States
person.
Receipt of Ancillary Rights and Call Rights.
Although the value of the Ancillary Rights received and any Call Rights
deemed to be conveyed by Schneider Shareholders who receive Exchangeable Shares
pursuant to the transaction is uncertain, Smithfield believes that such
Ancillary Rights and Call Rights will have only nominal value and, therefore,
that their receipt or conveyance, as the case may be, will not result in any
material United States federal income tax consequences.
Receipt of Cash in Lieu of Fractional Shares.
U.S. Holders who receive cash in lieu of their right to receive fractional
Exchangeable Shares generally will recognize capital gain on the receipt of
such cash, to the extent that the fair market value of their Schneider Shares
on the date of the exchange exceeds their adjusted tax basis in their Schneider
Shares.
Exchange of Exchangeable Shares.
It is anticipated that (subject to certain exceptions described below) a
U.S. Holder that exercises such holder's rights to exchange the Exchangeable
Shares for shares of Smithfield Common Stock generally will recognize gain or
loss on the receipt of the shares of Smithfield Common Stock in exchange for
such Exchangeable Shares. Such gain or loss will be equal to the difference
between the fair market value of the shares of Smithfield Common Stock at the
time of the exchange and the U.S. Holder's tax basis in the Exchangeable Shares
exchanged therefor. The gain or loss will be capital gain or loss, except that
ordinary income may be recognized by the holder on the receipt of Smithfield
Common Stock in exchange for the right to receive accrued but unpaid dividends.
Capital gain or loss will be long-term capital gain or loss if the U.S.
Holder's holding period in the Exchangeable Shares exceeds one year at the time
of the exchange. Gain recognized on the exchange of Exchangeable Shares for
shares of Smithfield Common Stock generally will be treated as United States
source gain. The U.S. Holder will take as such holder's tax basis in the shares
of Smithfield Common Stock the fair market value of the shares of Smithfield
Common Stock received by the U.S. Holder in the exchange, and such holder's
holding period will begin on the day after such exchange.
In view of the likelihood of the recognition of gain or loss upon the
exchange of the Exchangeable Shares for Smithfield Common Stock, U.S. Holders
may wish to consider delaying such exchange until such time as they intend to
dispose of the Smithfield Common Stock receivable in exchange for their
Exchangeable Shares or (as discussed below) until such time as Smithfield will
own at least 80% of all of the then issued and outstanding Exchangeable Shares.
Under certain limited circumstances, the exchange by a U.S. Holder of
Exchangeable Shares for shares of Smithfield Common Stock may be characterized
as a tax-free exchange. First, an exchange of Exchangeable Shares for
Smithfield Common Stock generally may be characterized as a tax-free exchange
if, at the time of such exchange, (i) at least 80% of the then-outstanding
Exchangeable Shares (and at least 80% of any other class of outstanding shares
of Smithfield Canada) are held by Smithfield or Smithfield Sub and (ii) in such
exchange, Smithfield or Smithfield Sub, respectively, rather than Smithfield
Canada, acquires the Exchangeable Shares in exchange for shares of Smithfield
Common Stock pursuant to the exercise of its Call Rights. In any case, the
exchange would not be tax free unless certain other requirements are satisfied,
which, in turn, will depend upon facts and circumstances existing at the time
of the exchange and cannot be accurately predicted as of the date hereof. If
such exchange did qualify as a tax-free exchange, a U.S. Holder's tax basis in
the shares of Smithfield Common Stock received would be equal to such holder's
tax basis in the Exchangeable Shares exchanged therefor. The holding period of
the Smithfield Common Stock received by such U.S. Holder should include the
holding period of the Exchangeable Shares exchanged therefor, which in turn,
should include the holding period of the Schneider Shares exchanged pursuant to
the Offers, provided that such Schneider Shares and Exchangeable Shares have
been held as capital assets immediately prior to their disposition.
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Receipt of Dividends on the Exchangeable Shares.
A U.S. Holder of Exchangeable Shares generally will be required to include
in gross income as ordinary income dividends paid on the Exchangeable Shares to
the extent paid out of the earnings and profits of Smithfield Canada, as
determined under United States federal income tax principles. Such dividends
generally will be treated as foreign source passive income for foreign tax
credit limitation purposes. Under the Canada-United States Income Tax
Convention, such distributions will be subject to Canadian withholding tax at a
rate of 15%. Subject to certain limitations of United States federal income tax
law, a U.S. Holder generally should be entitled to credit such withholding tax
against such holder's United States federal income tax liability or to deduct
such tax in computing United States taxable income.
The preceding paragraph assumes that dividends, if any, that may be paid
on the Exchangeable Shares will be treated as dividends from Smithfield Canada,
rather than from Smithfield. As described above, however, there is no direct
authority addressing the proper characterization of instruments such as the
Exchangeable Shares for United States federal income tax purposes, and it is
possible that the Internal Revenue Service could take the position that the
Exchangeable Shares are shares of Smithfield rather than Smithfield Canada. See
" -- Possible Characterization of Exchangeable Shares as Smithfield Common
Stock" above. If the Exchangeable Shares were characterized as shares of
Smithfield, dividends paid with respect to the Exchangeable Shares would be
includible in the gross income of a U.S. Holder as ordinary income. However,
such dividends would be characterized as United States-source income rather
than foreign-source income, with the result that any Canadian withholding tax
imposed on such dividends would not be creditable against the United States
federal income tax imposed on such dividends, in the absence of an agreement
between the IRS and Revenue Canada as to the proper treatment of such
dividends.
Passive Foreign Investment Company Considerations.
For United States federal income tax purposes, Schneider or Smithfield
Canada generally will be classified as a passive foreign investment company (a
"PFIC") for any taxable year during which either (i) 75% or more of its gross
income is passive income (as defined for United States federal income tax
purposes) or (ii) on average for such taxable year, 50% or more of its assets
(by value) produce or are held for the production of passive income. For
purposes of applying the foregoing tests, the assets of Schneider will be
attributed to Smithfield Canada.
While there can be no assurance with respect to the classification of
Smithfield Canada as a PFIC, Schneider believes that it did not constitute a
PFIC during its taxable years ending prior to consummation of the Offers. At
the present time, Schneider and Smithfield intend to endeavour to cause
Smithfield Canada to avoid PFIC status in the future, although there can be no
assurance that they will be able to do so or that their intent will not change.
For purposes of applying the 50% asset test following the Offers,
Schneider's assets must be measured by their adjusted tax bases (as calculated
in order to compute earnings and profits for United States federal income tax
purposes) instead of by value, subject to certain adjustments. As a result, it
is possible that Smithfield Canada will be a PFIC for taxable years ending
after the consummation of the Offers even though less than 50% of Schneider's
assets (measured by the fair market value of such assets) constitute passive
assets. Smithfield Canada intends to monitor its status regularly, and promptly
following the end of each taxable year it will notify U.S. Holders of
Exchangeable Shares if it believes that it was a PFIC for that taxable year.
Although the matter is not free from doubt, if Schneider has been a PFIC
at any time during a particular U.S. Holder's holding period for its Schneider
Shares, and the U.S. Holder has not made an election to treat Schneider as a
qualified electing fund (a "QEF") under Section 1295 of the U.S. Code (a "QEF
Election"), then such U.S. Holder might be required to recognize gain upon the
exchange of its Schneider Shares for Exchangeable Shares. In the event that
gain recognition were so required, the amount of such gain would be equal to
the excess of the fair market value of the Schneider Shares over the U.S.
Holder's adjusted tax basis in the Schneider Shares. Further, in such event,
any exchange of Exchangeable Shares for shares of Smithfield Common Stock would
be taxable under the rules described below.
If Smithfield Canada is a PFIC during a U.S. Holder's holding period for
such holder's Exchangeable Shares, and the U.S. Holder does not make a QEF
Election, then (i) the U.S. Holder would be required to allocate income
recognized upon receiving certain excess dividends with respect to, and gain
recognized upon the disposition of, such U.S. Holder's Exchangeable Shares
(including upon the exchange of Exchangeable Shares for shares of Smithfield
Common Stock) ratably over the U.S. Holder's holding period for such
Exchangeable Shares, (ii) the amount allocated to each year other than (x) the
year of the excess dividend payment or disposition of the Exchangeable Shares
or (y) any year prior to the beginning of the first taxable year of Schneider
for which it was a PFIC, would be subject to tax at the highest rate applicable
to individuals or corporations, as the case may be, for the taxable year to
which such income is allocated, and an interest charge would be
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imposed upon the resulting tax attributable to each such year (which charge
would accrue from the due date of the return for the taxable year to which such
tax is allocated), and (iii) amounts allocated to periods described in (x) and
(y) will be taxable to the U.S. Holder as ordinary income.
If the U.S. Holder makes a QEF Election, then the U.S. Holder generally
will be taxable currently on such holder's pro rata share of Smithfield
Canada's ordinary earnings and net capital gains (at ordinary income and
capital gains rates respectively) for each taxable year of Smithfield Canada in
which Smithfield Canada is classified as a PFIC, even if no dividend
distributions are received by such U.S. Holder, unless such U.S. Holder makes
an election to defer such taxes. If Smithfield Canada believes that it was a
PFIC for a taxable year, it will provide U.S. Holders of Exchangeable Shares
with information sufficient to allow eligible holders to make a QEF Election
and report and pay any current or deferred taxes due with respect to their pro
rata shares of Smithfield Canada's ordinary earnings and profits and net
capital gains for such taxable year. U.S. Holders should consult their tax
advisors concerning the merits and mechanics of making a QEF Election and other
relevant tax considerations if Smithfield Canada is a PFIC for any taxable
year.
The foregoing discussion of the possible application of the PFIC rules to
Schneider, Smithfield Canada and the U.S. Holders describes only certain
material aspects of those rules. Because the United States federal tax
consequences to a U.S. Holder under the PFIC provisions are significant, U.S.
Holders are urged to discuss those consequences with their tax advisors.
Shareholders That Are Not United States Holders
The following summary is applicable to Shareholders that are not U.S.
Holders ("non-U.S. Holders").
Receipt of Exchangeable Shares.
A non-U.S. Holder generally will not be subject to United States federal
income tax on gain (if any) recognized on the exchange of Schneider Shares for
Exchangeable Shares, unless (i) such gain is attributable to an office or fixed
place of business and effectively connected with a trade or business of the
non-U.S. Holder in the United States, or, if a tax treaty applies, is
attributable to a permanent establishment maintained by the non-U.S. Holder in
the United States, or (ii) the non-U.S. Holder is an individual who holds the
Schneider Shares as capital assets and is present in the United States for 183
days or more in the taxable year of disposition, and certain other conditions
are satisfied.
Receipt of Dividends on Exchangeable Shares.
Dividends received by a non-U.S. Holder with respect to the Exchangeable
Shares should not be subject to United States withholding tax, and Smithfield
Canada and Smithfield do not intend that Smithfield Canada or Smithfield will
withhold any amounts in respect of such tax from such dividends. The treatment
described in the preceding sentence is based on the position of Smithfield and
Smithfield Canada that the Exchangeable Shares should be treated as shares of
Smithfield Canada for United States federal income tax purposes and that
dividends paid on Exchangeable Shares do not constitute United States-source
income.
As described above, however, there is no direct authority addressing the
proper characterization of instruments such as the Exchangeable Shares for
United States federal income tax purposes, and it is possible that the Internal
Revenue Service could take the position that the Exchangeable Shares are shares
of Smithfield rather than Smithfield Canada. See "Shareholders That Are United
States Holders -- Possible Characterization of Exchangeable Shares as
Smithfield Common Stock" above. If the Exchangeable Shares were characterized
as shares of Smithfield, a non-U.S. Holder of Exchangeable Shares could be
subject to United States withholding tax at a rate of 30%, which rate may be
reduced by an applicable income tax treaty in effect between the United States
and the non-U.S. Holder's country of residence (generally 15% on dividends paid
to residents of Canada under the Canada-United States Income Tax Convention).
See "Canadian Federal Income Tax Considerations -- Shareholders Resident in
Canada -- Dividends" above.
Sale of Exchangeable Shares or Smithfield Common Stock.
A non-U.S. Holder generally will not be subject to United States federal
income tax on gain (if any) recognized on the exchange of Exchangeable Shares
for shares of Smithfield Common Stock, or on the sale or exchange of shares of
Smithfield Common Stock, unless (i) such gain is attributable to an office or
fixed place of business and effectively connected with a trade or business of
the non-U. S. Holder in the United States, or, if a tax treaty applies, is
attributable to a permanent establishment maintained by the non-U.S. Holder in
the United States, or (ii) the non-U.S. Holder is an individual who holds the
Exchangeable Shares or shares of Smithfield Common Stock (as the case may be)
as capital assets and is present in the United States for 183 days or more in
the taxable year of disposition, and certain other conditions are satisfied.
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Under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"),
gain or loss recognized by a non-U.S. Holder on the sale or exchange of
Exchangeable Shares or Smithfield Common Stock will be subject to regular
United States federal income tax, as if such gain or loss were effectively
connected with a U.S. trade or business, if (a) Smithfield is a "U.S. real
property holding corporation" ("USRPHC") and (b) such non-U.S. Holder is a
"greater than 5% shareholder" of Smithfield. Smithfield will be a USRPHC with
respect to any greater than 5% shareholder if at any time during the shorter of
(x) the five-year period ending on the date of the sale or exchange of
Exchangeable Shares or Smithfield Common Stock (as the case may be) or (y) the
period during which such greater than 5% shareholder held such Exchangeable
shares or shares of Smithfield Common Stock (as the case may be) (such period
the "FIRPTA holding period"), the fair market value of Smithfield's interests
in United States real property equal or exceed 50% of the sum of the fair
market values of all of its interests in real property and all of its other
assets used or held for use in a trade or business (as defined in applicable
regulations). Smithfield considers it unlikely that Smithfield will become a
USRPHC in the future unless its interests in United States real property
increase significantly as a result of one or more acquisitions, but there can
be no assurance that Smithfield will not in any event become a USRPHC in the
future. Smithfield intends to monitor its USRPHC status regularly and will
provide information as to its USRPHC status to holders of Exchangeable Shares
who are greater than 5% shareholders at the Expiry Time, if such holders have
properly requested such information prior to the Expiry Time.
The definition of a "greater than 5% shareholder" is complex and subject
to some uncertainty. In the case of a non-U.S. Holder who owns only shares of
Smithfield Common Stock (actually and constructively), such non-U.S. Holder
will be a greater than 5% shareholder if such non-U.S. Holder holds more than
5% of the total fair market value of the Smithfield Common Stock outstanding
(on a non-diluted basis). In the case of a non-U.S. Holder who owns only
Exchangeable Shares (actually and constructively, other than shares of
Smithfield Common Stock constructively owned by reason of ownership of
Exchangeable Shares), such non-U.S. Holder will be a greater than 5%
shareholder if either (a) such non-U.S. Holder holds more than 5% of the total
fair market value of the Exchangeable Shares outstanding and the Exchangeable
Shares are treated as "regularly traded on an established securities market" or
(b) such non-U.S. Holder holds Exchangeable Shares with a fair market value on
the relevant date of determination greater than 5% of the total fair market
value of the Smithfield Common Stock outstanding (on a non-diluted basis) on
such date and the Exchangeable Shares are not treated as "regularly traded on
an established securities market." The Exchangeable Shares will be traded on
the TSE which should be considered an "established securities market" for this
purpose. The Exchangeable Shares will be treated as regularly traded on that
market if they are registered by Smithfield under Section 12 of the Exchange
Act or Smithfield makes certain filings with the IRS, and certain other
conditions are met. Smithfield intends to register the Exchangeable Shares
under Section 12 of the Exchange Act. Notwithstanding the foregoing, the
Exchangeable Shares will not be considered regularly traded on the TSE during
any calendar quarter in which 100 or fewer persons own 50% or more of the
Exchangeable Shares. If a non-U.S. Holder which is a greater than 5%
shareholder during a period in which Smithfield is a USRPHC subsequently
disposes of sufficient Exchangeable Shares or Smithfield Common Stock so that
such non-U.S. Holder is no longer a greater than 5% shareholder, such non-U.S.
Holder will still be subject to United States federal income tax on subsequent
dispositions until Smithfield has ceased to be a USRPHC for at least five
years. If at any time, the shares of Smithfield Common Stock were not regularly
traded on an established securities market, or the Exchangeable Shares were
traded on an established securities market located in the United States,
different rules, not described herein, may apply. Non-U.S. Holders who believe
they may be greater than 5% shareholders are particularly urged to consult
their own tax advisors to determine the possible application of FIRPTA to them.
A non-U.S. Holder that is a greater than 5% shareholder may be subject to
withholding on the sale or exchange of Exchangeable Shares, if at the time of
such sale or exchange, such Exchangeable Shares are not treated as regularly
traded on an established securities market. Upon the sale or exchange of
Exchangeable Shares, the transferee of such Exchangeable Shares would be
required to withhold ten percent of the amount realized in the sale or
exchange, unless, in general, the non-U.S. Holder obtains from Smithfield and
provides to the transferee a statement signed under penalties of perjury to the
effect that Smithfield is not a USRPHC and was not a USRPHC at any time during
the FIRPTA holding period (described above). Any tax withheld may be credited
against the United States federal income tax owed by the non-U.S. Holder for
the year in which the sale or exchange occurs.
The foregoing summary of the possible application of the FIRPTA rules to
non-U.S. Holders is only a summary of certain material aspects of these rules.
Because the United States federal income tax consequences to a non-U.S. Holder
under FIRPTA may be significant and are complex, non-U.S. Holders are urged to
discuss those consequences with their tax advisors.
Federal Estate Tax Treatment.
Shares of Smithfield Common Stock (or a previously triggered obligation of
Smithfield or Smithfield Canada to deliver Smithfield Common Stock along with
unpaid dividends) held by an individual non-U.S. Holder at the time of his or
her
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death generally will be subject to United States federal estate tax, except as
may otherwise be provided by an applicable estate tax treaty between the United
States and the individual's country of residence.
The Exchangeable Shares should not be treated as United States situs
assets for purposes of United States federal estate tax law. However, there is
no direct authority addressing the proper treatment of instruments similar to
the Exchangeable Shares for United States federal estate tax purposes, and
therefore this treatment is subject to some uncertainty. See "Shareholders That
Are United States Shareholders -- Possible Characterization of Exchangeable
Shares as Smithfield Common Stock". There can be no assurance that the IRS
would not take the position that Exchangeable Shares are United States situs
assets for federal estate tax purposes.
Regulatory Matters
Smithfield Canada's obligation to take up and pay for Schneider Shares and
Options tendered under the Offers is conditional upon obtaining all
governmental or regulatory consents or approvals that Smithfield Canada, in its
sole discretion, views as necessary or desirable to enable Smithfield Canada to
consummate the Offers, on terms and conditions satisfactory to Smithfield
Canada.
Hart-Scott-Rodino Act
Under the HSR Act and the rules promulgated thereunder by the FTC, certain
transactions, including the completion of the Offers, may not be consummated
unless notification has been given and certain information has been furnished
to the FTC and the Antitrust Division and certain waiting period requirements
have been satisfied. In February 1998, Smithfield and Schneider filed the
required information with the FTC and the Antitrust Division for review in
connection with the Offers and, on March 8, 1998, the waiting period under the
HSR Act expired.
Competition Act (Canada)
Unless the Director of Investigation and Research of the Bureau of
Competition Policy (the "Director") issues an advance ruling certificate under
the Competition Act in respect of a proposed transaction, that Act requires a
notification filing to be submitted to the Director in respect of a transaction
that surpasses certain prescribed size and other thresholds. The acquisition
contemplated by the Offers exceeds the relevant thresholds.
The Competition Act also establishes a procedure whereby a merger, which
is defined to include the acquisition of control through the purchase of
shares, may be subject to review by the Competition Tribunal on the application
of the Director. If the Tribunal finds that a merger or a proposed merger
prevents or lessens, or is likely to prevent or lessen, competition
substantially, the Competition Tribunal may order, among other things, that the
acquisition not proceed, that the acquisition be dissolved, or that the shares
acquired be disposed of in whole or in part.
On February 18, 1998 the Director issued an advance ruling certificate in
respect of the Offers, which provides assurance that the Director will not
challenge the completion of the acquisition contemplated by the Offers or
initiate proceedings under the merger provisions of the Competition Act after
the completion of the Offers.
Investment Canada Act
The acquisition contemplated by the Offers is reviewable under the
Investment Canada Act, a Canadian statute governing the acquisition of control
of Canadian businesses by non-Canadians. A reviewable investment is one for
which the acquiror must submit an application for review with prescribed
information to Industry Canada.
Before a reviewable investment may be completed, the Minister of the
federal Cabinet responsible for Industry Canada must determine that the
investment is likely to be of "net benefit to Canada." The Minister has an
initial 45-day period to make his determination. The Minister may extend the
period for a further 30 days by giving notice to the prospective acquiror. If
the Minister is not satisfied that the investment is likely to be of net
benefit to Canada, he must send a notice to that effect to the prospective
acquiror, and the acquiror has 30 days to make representations and submit
undertakings to the Minister in an attempt to change his decision.
An application for review under the Investment Canada Act was filed by
Smithfield Canada on February 4, 1998. The initial 45 day review period expired
on March 23, 1998. However, the Minister has extended the period for a further
30 days, or such longer period as may be agreed with Smithfield Canada, by a
notice given to Smithfield Canada.
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Securities Regulatory Matters
Upon the filing of this Circular with the Canadian securities regulatory
authorities, Smithfield Canada will become a reporting issuer (or its
equivalent) in each of the Canadian provinces. Smithfield Canada has obtained
relief from statutory financial and other reporting requirements imposed by
Canadian provincial securities legislation, including relief exempting insiders
of Smithfield Canada from the requirements to file insider reports with respect
to trades of Smithfield Canada securities. As a consequence of such relief,
Smithfield will file with such Canadian securities regulators copies of certain
of the reports filed by Smithfield with the SEC and holders of Exchangeable
Shares will receive certain materials that are sent by Smithfield to holders of
Smithfield Common Stock.
In addition, Smithfield Canada obtained relief from certain form and
content requirements imposed by Canadian securities legislation with respect to
the disclosure in the Circular concerning Smithfield. In particular, the
disclosure concerning Smithfield has been prepared in accordance with United
States securities laws and the financial statements of Smithfield included in
this Circular have been prepared in accordance with U.S. GAAP.
As a consequence of obtaining this regulatory relief, certain protections,
rights and remedies afforded under Canadian securities legislation with respect
to a prospectus, including statutory rights of rescission and damages, will not
be available in respect of the Smithfield Common Stock. In addition, the shares
of Smithfield Common Stock issuable on exercise of the Exchangeable Shares will
not be freely tradeable within Canada. However, in accordance with the terms of
the securities regulatory relief obtained by Smithfield Canada in connection
with the Offers, such shares of Smithfield Common Stock can be traded through
the facilities of Nasdaq in accordance with Nasdaq's rules.
Acquisition of Shares Not Deposited and Appraisal Rights
Compulsory Acquisition
If within 120 days after the date hereof, holders of not less than 90% of
either the issued and outstanding Class A Shares or Common Shares (or both)
have accepted the Offers, and such Schneider Shares have been taken up and paid
for by Smithfield Canada, Smithfield Canada intends to acquire pursuant to the
provisions of section 188 of the OBCA the remaining Schneider Shares of the
relevant class on the same terms as the Schneider Shares acquired under the
Offers.
To exercise such statutory rights, Smithfield Canada must give notice (the
"Offeror's Notice") to each holder of Schneider Shares who did not accept the
relevant Offer (and each person who subsequently acquires any such Schneider
Shares) (in each case, an "Offeree") and to the Director under the OBCA of such
proposed acquisition on or before the earlier of 60 days from the Expiry Time
and 180 days from the date of the Offers. Within 20 days after giving the
Offeror's Notice, Smithfield Canada must pay or transfer to Schneider the
consideration Smithfield Canada would have had to pay or transfer to the
Offerees if they had elected to accept the relevant Offer, to be held in trust
for the Offerees. In accordance with section 188 of the OBCA, within 20 days
after receipt of the Offeror's Notice, each Offeree must send the certificates
representing the Schneider Shares held by such Offeree to Schneider, and must
elect either to transfer such Schneider Shares to Smithfield Canada on the
terms of the relevant Offer or to demand payment of the fair value of such
Schneider Shares held by such holder by so notifying Smithfield Canada. If an
Offeree has elected to demand payment of the fair value of such Schneider
Shares, Smithfield Canada may apply to a court having jurisdiction to hear an
application to fix the fair value of such Schneider Shares of that Offeree. If
Smithfield Canada fails to apply to such court within 20 days after it made the
payment or transferred the consideration to Schneider referred to above, the
Offeree may then apply to the court within a further period of 20 days to have
the court fix the fair value. If there is no such application made by the
Offeree within such period, the Offeree will be deemed to have elected to
transfer such Shares to Smithfield Canada on the terms of the relevant Offer.
Any judicial determination of the fair value of the Schneider Shares could be
more or less than the amount paid pursuant to the Offers. The foregoing is a
summary only. Reference is made to section 188 of the OBCA for the text of the
relevant statutory provisions.
Subsequent Acquisition Transaction
If the statutory right of compulsory acquisition described above is not
available, or if Smithfield Canada elects not to proceed under such provisions,
Smithfield Canada will consider other methods of acquiring all of the Schneider
Shares without the consent of the Shareholders in accordance with applicable
law, including an amalgamation, reclassification, statutory arrangement,
consolidation or other transaction (each, a "Subsequent Acquisition
Transaction") involving Smithfield Canada or one of its affiliates on such
terms and conditions as Smithfield Canada at the time believes to be fair and
equitable to Smithfield Canada and the other Shareholders. In particular,
Smithfield Canada will consider an amalgamation of
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Schneider with an affiliate of Smithfield Canada on the basis that outstanding
Schneider Shares be exchanged for Exchangeable Shares on the same basis as in
the Offers. The timing and details of any such transaction would necessarily
depend upon a variety of factors, including the number of Schneider Shares
acquired pursuant to the Offers.
In any amalgamation, statutory arrangement or other Subsequent Acquisition
Transaction, Shareholders may have the right of dissent under the OBCA to be
paid fair value for their Schneider Shares, with such fair value to be
determined by a court.
Policy Statement 9.1 of the OSC ("Policy 9.1") and Policy Statement Q-27
of the Quebec Securities Commission ("Policy Q-27") may deem certain types of
Subsequent Acquisition Transactions to be "related party transactions." Policy
9.1 and Policy Q-27 provide that, unless exempted, a corporation proposing to
carry out a related party transaction should prepare a valuation of the
affected securities (and any non-cash consideration being offered therefor) and
provide the holders of the affected securities a summary of such valuation. An
exemption is available where the price to be offered to security holders was
arrived at within the 12 months immediately preceding the date of the
announcement of the transaction through an arm's length negotiation with a
selling security holder of a control block of securities or a selling security
holder of a sizeable block of securities where the selling security holder had
full knowledge and access to information concerning the offeree issuer such
that the underlying value of the offeree issuer was a material factor
considered by the selling security holder in arriving at the price. Smithfield
Canada believes that the negotiation between Smithfield and the Schneider
Family leading to the execution of the Lock-up Agreement should provide grounds
for Smithfield Canada to rely on the exemption from the valuation requirement.
It is a condition of the exemption that if there are non-financial factors or
factors peculiar to the selling security holder known to the offeror after
reasonable inquiry which are considered relevant by the selling security holder
in assessing the price offered by the offeror, disclosure must be made of these
factors and why such factors did not have the effect of reducing the price
which would otherwise have been considered acceptable by the selling security
holder. The Lock-up Agreement contains a representation from the Schneider
Family that there were no such non-financial factors or factors peculiar to the
Schneider family which it considered relevant in assessing the price negotiated
with Smithfield. Smithfield Canada certifies that it is not aware of any prior
event in the affairs of Schneider which was undisclosed at the time the Lock-up
Agreement was negotiated which, if disclosed, could reasonably be expected to
have affected the price arrived at in the negotiation with the Schneider Family
and no intervening event has occurred that could reasonably be expected to
increase the value of the Schneider Shares, other than increases which have
occurred in the market for the shares of Smithfield Common Stock and changes in
the Canadian and United States currency exchange rate.
Policy 9.1 and Policy Q-27 also require that, unless exempted and in
addition to any other required security holder approval, a related party
transaction be approved by a simple or two-thirds majority (depending on the
nature of the transaction) of the votes cast by "minority" shareholders of the
affected securities.
Comparison of Shareholder Rights
In the event that the acquisition contemplated by the Offers is
consummated, Shareholders who tender Schneider Shares under the Offers will
have their Schneider Shares and/or Options exchanged for Exchangeable Shares. A
holder of Exchangeable Shares will have the right to exchange these shares for
an equivalent number of shares of Smithfield Common Stock. Schneider is a
corporation governed by the OBCA. Smithfield is a corporation governed by the
VSCA. While the rights and privileges of shareholders of an Ontario corporation
are, in many instances, comparable to those of shareholders of a Virginia
corporation, there are certain differences. These differences arise from
differences between Ontario and Virginia law and between the Schneider Articles
and Schneider By-laws and the Smithfield Articles and Smithfield By-laws. For a
description of the rights of the holders of Schneider Shares, see Annex C --
"Information Concerning Schneider Corporation." For a description of the rights
of holders of Smithfield Common Stock, see this Circular under the heading --
"Smithfield Foods, Inc. -- Description of Smithfield Foods Common Stock." Set
forth below is a discussion of all such material differences.
Vote Required for Extraordinary Transactions
Under the OBCA, certain extraordinary corporate actions, such as certain
amalgamations, continuances and sales, leases or exchanges of all or
substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions and (if ordered by a court) arrangements, are
required to be approved by special resolution. A special resolution is a
resolution passed at a meeting by not less than two-thirds of the votes cast by
the shareholders entitled to vote on the resolution. In certain cases, a
special resolution to approve an extraordinary corporate action is also
required to be approved separately by the holders of a class or series of
shares.
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Under the Smithfield Articles, such transactions and any share exchange in
which shares of Smithfield Common Stock are acquired by another corporation
must be approved by holders of a majority of the issued and outstanding shares
of each voting group entitled to vote. In addition, consistent with Virginia
law, the board of directors of Smithfield may condition its submission of such
plan of merger or share exchange or such a sale or disposition of assets to the
shareholders on any basis, including the requirement of a greater vote than
otherwise required.
Amendment to Governing Documents
Under the OBCA, any amendment to the articles generally requires approval
by special resolution. The OBCA provides that unless the articles or bylaws
otherwise provide, the directors may, by resolution, make, amend or repeal any
bylaws that regulate the business or affairs of a corporation. Where the
directors make, amend or repeal a by-law, such action is effective on the date
approved by the board of directors, but the board of directors is required
under the OBCA to submit the by-law, amendment or repeal to the shareholders at
the next meeting of shareholders, and the shareholders may confirm, reject or
amend the by-law, amendment or repeal by an ordinary resolution, which is a
resolution passed by a majority of the votes cast by shareholders entitled to
vote on the resolution.
The Smithfield Articles generally can be amended by the vote of a majority
of the issued and outstanding shares of each voting group of Smithfield
entitled to vote. The Smithfield Bylaws may be amended by either the board of
directors or the shareholders by a majority vote.
Dissenters' Rights
The OBCA provides that shareholders of an Ontario corporation entitled to
vote on certain matters are entitled to exercise dissent rights and to be paid
the fair value of their shares in connection with such matters. The OBCA does
not distinguish for this purpose between listed and unlisted shares. Such
matters include (a) any amalgamation with another corporation (other than with
certain affiliated corporations); (b) an amendment to the corporation's
articles to add, change or remove any provisions restricting the issue,
transfer or ownership of shares; (c) an amendment to the corporation's articles
to add, change or remove any restriction upon the business or businesses that
the corporation may carry on or upon the powers that the corporation may
exercise; (d) a continuance under the laws of another jurisdiction; (e) a sale,
lease or exchange of all or substantially all the property of the corporation
other than in the ordinary course of business; (f) a court order permitting a
shareholder to dissent in connection with an application to the court for an
order approving an arrangement proposed by the corporation; and (g) certain
amendments to the articles of a corporation which require a separate class or
series vote, provided that a shareholder is not entitled to dissent if an
amendment to the articles is effected by a court order approving a
reorganization or by a court order made in connection with an action for an
oppression remedy.
The VSCA provides that shareholders have the right, in some circumstances,
to dissent from certain corporate mergers and share exchanges and instead to
demand payment of the fair value of their shares. The VSCA generally does not
provide for dissenters' rights if no vote of the shareholders of the surviving
corporation is required. Further, dissenters' rights are not available under
the VSCA for shares listed on a securities exchange, including the Nasdaq
National Market, or held by at least 2,000 shareholders of record, unless the
articles of incorporation otherwise provide or unless the holders are required
to accept anything in exchange for their shares other than cash, stock or stock
and cash in lieu of fractional shares of the surviving or acquiring entity or
of any other entity which are listed on a national securities exchange, or held
by at least 2,000 shareholders of record, or a combination of the foregoing.
Oppression Remedy
The OBCA provides an oppression remedy that enables the court to make any
order, both interim and final, to rectify the matters complained of where it is
satisfied upon application by a complainant (as defined below) that: (a) any
act or omission of the corporation or an affiliate effects or threatens to
effect a result; (b) the business or affairs of the corporation or an affiliate
are, have been or are threatened to be carried on or conducted in a manner; or
(c) the powers of the directors of the corporation or an affiliate are, have
been or are threatened to be exercised in a manner, that is oppressive or
unfairly prejudicial to or that unfairly disregards the interest of any
security holder, creditor, director or officer of the corporation. A
complainant includes: (a) a present or former registered holder or beneficial
owner of securities of a corporation or any of its affiliates; (b) a present or
former officer or director of the corporation or any of its affiliates; and (c)
any other person who in the discretion of the court is a proper person to make
such application.
The VSCA does not provide for a similar remedy.
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Derivative Action
Under the OBCA, a complainant may apply to the court for leave to bring an
action in the name of and on behalf of a corporation or any subsidiary, or to
intervene in an existing action to which any such body corporate is a party,
for the purpose of prosecuting, defending or discontinuing the action on behalf
of the body corporate. Under the OBCA, no action may be brought and no
intervention in an action may be made unless the complainant has given 14 days'
notice to the directors of the corporation or its subsidiary of the
complainant's intention to apply to the court and the court is satisfied that
(a) the directors of the corporation or its subsidiary will not bring,
diligently prosecute or defend or discontinue the action; (b) the complainant
is acting in good faith; and (c) it appears to be in the interests of the
corporation or its subsidiary that the action be brought, prosecuted, defended
or discontinued. Where a complainant makes an application without having given
the required notice, the OBCA permits the court to make an interim order
pending the complainant giving the required notice, provided that the
complainant can establish that at the time of seeking the interim order it was
not expedient to give the required notice.
Under the OBCA, the court in a derivative action may make any order it
thinks fit. In addition, under the OBCA, a court may order a corporation or its
subsidiary to pay the complainant's interim costs, including reasonable legal
fees and disbursements. Although the complainant may be held accountable for
the interim costs on final disposition of the complaint, it is not required to
give security for costs in a derivative action.
Derivative actions may be brought in Virginia by a shareholder on behalf
of, and for the benefit of, the corporation. A shareholder must aver in the
complaint that he or she was a shareholder of the corporation at the time of
the transaction of which he or she complains, that his or her share thereafter
devolved on him or her by operation of law or that he or she became a
shareholder before public disclosure and without knowledge of the act or
omission. The complaint must also allege the efforts made by the shareholder to
obtain the action he or she desires from the corporation and that 90 days have
expired from the date the demand was made, unless irreparable harm would result
by waiting.
Shareholder Consent in Lieu of Meeting
Under the OBCA, shareholder action without a meeting may only be taken by
written resolution signed by all shareholders who would be entitled to vote
thereon at a meeting. Special meetings of shareholders may be called by the
board of directors or, in certain circumstances, requisitioned by a holder of
at least 5% of the outstanding shares or a court.
As permitted by the VSCA, the Smithfield By-laws provide that no action
may be taken by shareholders without a meeting. Special meetings of
shareholders may be called only by the Board of Directors, the Executive
Committee, the Chairman of the Board or the President of Smithfield.
Director Qualifications
Under the OBCA, a corporation that has completed a public offering of its
securities must have not fewer than three directors and a majority of the
directors generally must be resident Canadians. The OBCA also requires that at
least one-third of the directors of such a corporation must not be officers or
employees of the corporation or any of its affiliates.
The VSCA does not impose comparable requirements.
Fiduciary Duties of Directors
Directors of corporations governed by the OBCA have fiduciary obligations
to the corporation. Under the OBCA, the duty of loyalty requires directors of
an Ontario corporation to act honestly and in good faith with a view to the
best interests of the corporation, and the duty of care requires that the
directors exercise the care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances.
Directors of corporations incorporated or organized under the VSCA have
fiduciary obligations to the corporation and its shareholders. Pursuant to
these fiduciary obligations, the directors must act in accordance with the
so-called duties of "due care" and "loyalty." The duty of care generally
requires that the directors act in an informed and deliberative manner and that
they inform themselves, prior to making a business decision, of all material
information reasonably available to them. The duty of loyalty can be summarized
as the duty to act in good faith in a manner which the directors reasonably
believe to be in the best interests of the shareholders, without regard to the
director's self-interest.
Indemnification of Officers and Directors
Under the OBCA, a corporation may indemnify a director or officer, a
former director or officer or a person who acts or acted at the corporation's
request as a director or officer of a subsidiary of which the corporation is or
was a shareholder
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<PAGE>
or creditor, and his or her heirs and legal representatives (an "Indemnifiable
Person"), against all costs, charges and expenses, including an amount paid to
settle an action or satisfy a judgment, reasonably incurred by him or her in
respect of any civil, criminal or administrative action or proceeding to which
he or she is made a party by reason of being or having been a director or
officer of such corporation or such body corporate, if: (a) he or she acted
honestly and in good faith with a view to the best interests of such
corporation; and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful. An Indemnifiable
Person is entitled to such indemnity from the corporation if he or she was
substantially successful on the merits in his or her defense of the action or
proceeding and fulfilled the conditions set out in (a) and (b), above. A
corporation may, with the approval of a court, also indemnify an Indemnifiable
Person in respect of an action by or on behalf of the corporation or body
corporate to procure a judgment in its favor, to which such person is made a
party by reason of being or having been a director or an officer of the
corporation or body corporate, if he or she fulfills the conditions set out in
(a) and (b), above. The Schneider By-laws provide for indemnification of
directors and officers to the fullest extent authorized by the OBCA.
To the fullest extent permitted by Virginia law, the Smithfield Articles
require Smithfield Foods 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 Foods 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 Foods. 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 Foods must indemnify any person who is or was serving at the written
request of Smithfield Foods as a director, officer, employee or agent of
another corportion, partnership, joint venture, trust or other enterprise, to
the full extent provided by Virginia law. The indemnification provisions also
require Smithfield Foods to pay reasonable expenses incurred by a director or
officer of Smithfield Foods in a proceeding in advance of the final disposition
of any such proceeding, provided that the indemnified person undertakes to
repay Smithfield Foods 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 shareholders or disinterested directors or
otherwise. In addition, the Smithfield Articles authorize Smithfield Foods to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Smithfield Foods, whether or not
Smithfield Foods 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.
Director Liability
The OBCA does not permit the limitation of a director's liability for
breach of fiduciary liability through the charter of a corporation.
The Smithfield Articles eliminate the personal liability of each director
of Smithfield to Smithfield or any of its shareholders for damages resulting
from breaches of fiduciary duty as a director involving any act or omission of
any such director. Under Virginia law, the liability of a director cannot be
limited or eliminated with respect to matters in which the 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.
Anti-Takeover Provisions and Interested Shareholder Transactions
Other than the requirement to obtain shareholder approval for certain
amalgamations, arrangements and sales of all or substantially all of a
corporation's assets, the OBCA does not contain any restrictive provision with
respect to business combinations. However, policies of certain Canadian
securities regulatory authorities, including Policy 9.1 of the OSC, contain
requirements in connection with related party transactions. A related party
transaction means, generally, any transaction by which an issuer, directly or
indirectly, acquires or transfers an asset or acquires or issues treasury
securities or assumes or transfers a liability from or to, as the case may be,
a related party by any means in any one or any combination of transactions.
"Related party" is defined in Policy 9.1 and includes directors, senior
officers and holders of at least 10 percent of the voting securities of the
issuer.
Policy 9.1 requires more detailed disclosure in the proxy material sent to
security holders in connection with a related party transaction, and, subject
to certain exceptions, the preparation of a formal valuation of the subject
matter of the related
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<PAGE>
party transaction and any non-cash consideration offered therefor and the
inclusion of a summary of the valuation in the proxy material. Policy 9.1 also
requires, subject to certain exceptions, that the minority shareholders of the
issuer separately approve the transaction, by either a simple majority or
two-thirds of the votes cast, depending on the circumstances.
The VSCA contains provisions governing "Affiliated Transactions."
Affiliated Transactions include certain mergers and share exchanges, certain
material dispositions of corporate assets not in the ordinary course of
business, any dissolution of a corporation proposed by or on behalf of an
Interested Shareholder (as defined below), and reclassifications, including
reverse stock splits, recapitalizations or mergers of a corporation with its
subsidiaries, or distributions or other transactions which have the effect of
increasing the percentage of voting shares beneficially owned by an Interested
Shareholder by more than 5%. For purposes of the VSCA, an Interested
Shareholder is defined as any beneficial owner of more than 10% of any class of
the voting securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds
of the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined). A Disinterested
Director is defined in the VSCA as a member of a corporation's board of
directors who (i) was a member before the later of January 1, 1988 or the date
on which an Interested Shareholder became an Interested Shareholder or (ii) was
recommended for election by, or was elected to fill a vacancy and received the
affirmative vote of, a majority of the Disinterested Directors then on the
corporation's board of directors. At the expiration of the three year period
after a shareholder becomes an Interested Shareholder, these provisions require
approval of the Affiliated Transaction by the affirmative vote of the holders
of two-thirds of the outstanding shares of the corporation entitled to vote,
other than those beneficially owned by the Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that the shareholders must receive the higher of the highest per share
price for their shares as was paid by the Interested Shareholder for his, her
or its shares, or the fair market value of the shares. The fair price
requirements also require that, during the three years preceding the
announcement of the proposed Affiliated Transaction, all required dividends
have been paid and no special financial accommodations have been accorded the
Interested Shareholder, unless approved by a majority of the Disinterested
Directors.
In addition, the VSCA provides that, by affirmative vote of a majority of
the voting shares other than shares owned by any Interested Shareholder, a
corporation may adopt, by meeting certain voting requirements, an amendment to
its articles of incorporation or by-laws providing that the Affiliated
Transactions provisions shall not apply to the corporation. Smithfield has not
adopted such an amendment.
The Virginia Control Share Acquisitions statute also is designed to afford
shareholders of a public company incorporated in Virginia protection against
certain types of non-negotiated acquisitions in which a person, entity, or
group ("Acquiring Person") seeks to gain voting control of that corporation.
With certain exceptions, the statute applies to acquisitions of shares of a
corporation which would result in an Acquiring Person's ownership of the
corporation's shares entitled to vote in the election of directors falling
within any one of the following ranges: 20% to 33- 1/3%, 33- 1/3% to 50% or
more than 50% (a "Control Share Acquisition"). Shares that are subject to a
Control Share Acquisition ("Control Shares") will not be entitled to voting
rights unless the holders of a majority of the "Disinterested Shares" vote at
an annual or special meeting of shareholders of the corporation to accord the
Control Shares with voting rights. Disinterested Shares do not include shares
owned by the Acquiring Person or by officers and inside directors of the target
company. Under certain circumstances, the statute permits an Acquiring Person
to call a special shareholders' meeting for the purpose of granting voting
rights to the holders of the Control Shares. As a condition to having this
matter considered at either an annual or a special meeting, the Acquiring
Person must provide shareholders with detailed disclosures about his identity,
the method and financing of the Control Share Acquisition and any plans to
engage in certain transactions with, or to make fundamental changes to, the
corporation, its management or business. Under certain circumstances, the
statute grants dissenters' rights to shareholders who vote against granting
voting rights to the Control Shares. The Virginia Control Share Acquisitions
statute also enables a corporation to make provision for redemption of Control
Shares with no voting rights. A corporation may opt out of the statute by so
providing in its by-laws. Smithfield has not adopted such a provision. Among
the acquisitions specifically excluded from the statute are acquisitions to
which the corporation is a party and which, in the case of mergers or share
exchanges, have been approved by the corporation's shareholders under other
provisions of the VSCA.
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<PAGE>
Price Range and Trading Volumes of Class A Shares of Schneider
The Class A Shares are listed and posted for trading on the TSE. The
volume of trading and the price ranges of the Class A Shares on the TSE (as
reported by the TSE) are set forth in the following table for the periods
indicated:
<TABLE>
<CAPTION>
High Low Volume
------------ ------------ ----------
<S> <C>
Fiscal 1996 (ending October 26, 1996)
Second Quarter .................................... C$14.25 C$13.00 309,679
Third Quarter ..................................... 14.50 12.50 425,777
Fourth Quarter .................................... 12.05 10.00 613,348
Fiscal 1997 (ending October 25, 1997)
First Quarter ..................................... 11.30 10.00 428,222
Second Quarter .................................... 11.75 10.70 297,589
Third Quarter ..................................... 13.50 11.00 505,565
Fourth Quarter .................................... 14.00 12.80 59,292
Fiscal 1998
First Quarter (ending February 14, 1998) .......... 26.00 12.80 1,226,524
Calendar
February, 1998 (commencing February 15, 1998) ..... 25.80 24.50 36,700
March, 1998 ....................................... 25.10 23.25 115,200
April, 1998 (to April 13) ......................... 26.50 25.50 9,600
</TABLE>
Smithfield announced its intention to make the Offers on December 18,
1997. The closing trading price of the Class A Shares on the TSE on December
17, 1997, the last day on which the Schneider Class A Shares traded prior to
the announcement by Smithfield of its intention to make the Offers, was
C$23.00.
Price Range and Trading Volumes of Common Shares of Schneider
The Common Shares are listed and posted for trading on the TSE. The volume
of trading and the price ranges of the Common Shares on the TSE (as reported by
the TSE) are set forth in the following table for the periods indicated:
<TABLE>
<CAPTION>
High Low Volume
------------ ------------ -------
<S> <C>
Fiscal 1996 (ending October 26, 1996)
Second Quarter ................................... C$13.75 C$12.50 15,975
Third Quarter ..................................... 13.50 12.75 2,872
Fourth Quarter .................................... 12.75 11.50 4,282
Fiscal 1997 (ending October 25, 1997)
First Quarter ..................................... 12.00 10.50 14,224
Second Quarter .................................... 12.25 11.00 9,752
Third Quarter ..................................... 14.25 11.05 19,852
Fourth Quarter .................................... 13.90 13.00 10,562
Fiscal 1998
First Quarter (ending February 14, 1998) .......... 25.50 13.00 74,728
Calendar
February, 1998 (commencing February 15, 1998) ..... 29.00 25.50 38,300
March, 1998 ....................................... 29.00 27.00 4,700
April, 1998 (to April 13) ......................... 28.00 27.00 1,500
</TABLE>
Smithfield announced its intention to make the Offers on December 18,
1997. The closing trading price of the Common Shares on the TSE on December 17,
1997, the last day on which the Common Shares traded prior to the announcement
by Smithfield of its intention to make the Offers, was C$23.75.
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<PAGE>
Price Range and Trading Volumes of Shares of Common Stock of Smithfield Foods
Shares of Smithfield Common Stock are quoted on the Nasdaq National
Market. The volume of trading and the price ranges of the shares of Smithfield
Common Stock on the Nasdaq National Market (as reported by Nasdaq) are set
forth in the following table for the periods indicated:
<TABLE>
<CAPTION>
High(1) Low(1) Volume(1)
------------- ------------- ------------
<S> <C>
Fiscal 1996 (ending April 28, 1996)
Fourth Quarter .............................. US$15.53 US$12.62 9,558,030
Fiscal 1997 (ending April 27, 1997)
First Quarter ............................... 15.00 11.31 10,161,144
Second Quarter .............................. 16.25 11.62 14,261,066
Third Quarter ............................... 19.31 14.25 12,773,850
Fourth Quarter .............................. 24.75 16.19 23,779,262
Fiscal 1998
First Quarter ............................... 31.12 22.00 27,079,838
Second Quarter .............................. 31.62 22.75 16,878,366
Third Quarter (ending February 1, 1998) ..... 35.62 24.37 11,460,705
Calendar
February, 1998 .............................. 36.37 30.12 4,771,425
March, 1998 ................................. 35.25 28.62 5,735,893
April, 1998 (to April 13) ................... 34.75 30.62 1,595,030
</TABLE>
Note:
(1) All share prices and share volumes have been adjusted to reflect a
two-for-one stock split effected in September 1997.
Smithfield announced its intention to make the Offers on December 18,
1997. The closing price of shares of Smithfield Common Stock on the Nasdaq
National Market on December 17, 1997, the last day on which shares of
Smithfield Common Stock traded prior to the announcement by Smithfield of its
intention to make the Offers, was US$31.50. The closing price of shares of
Smithfield Common Stock on April 13, 1998 was US$31.37.
Eligibility for Investment in Canada
In the opinion of McCarthy Tetrault, Canadian counsel to Smithfield and
Smithfield Canada, if the Offers were to be completed effective on the date
hereof, the Exchangeable Shares would not be precluded as investments under or
by the following statutes (and, where applicable, the regulations thereunder):
<TABLE>
<S> <C>
Insurance Companies Act (Canada) Pension Benefits Act (Ontario)
Pension Benefits Standards Act, 1985 (Canada) Supplemental Pension Plans Act (Quebec)
Trust and Loan Companies Act (Canada) An Act respecting insurance (Quebec)
Loan and Trust Corporations Act (Ontario)
</TABLE>
subject to compliance with the prudent investment standards and general
investment provisions and restrictions of the statutes referred to above (and,
where applicable, the regulations thereunder) and, in certain cases, subject to
the satisfaction of additional requirements relating to investment or lending
policies or goals and, in certain cases, the filing of such policies or goals.
Provided the Exchangeable Shares and the shares of Smithfield Common Stock
are listed on a prescribed stock exchange (which currently includes the TSE and
Nasdaq), such securities will be qualified investments under the Canadian Tax
Act for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans. The Ancillary Rights
will not be qualified investments under the Canadian Tax Act. However, as noted
above, Smithfield believes that the fair market value of such rights is
nominal.
Provided the Exchangeable Shares are listed on a prescribed stock exchange
in Canada and Smithfield Canada continues to maintain a substantial presence in
Canada, the Exchangeable Shares will not be foreign property under the Canadian
Tax Act for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit
65
<PAGE>
sharing plans or for certain other tax-exempt persons. Smithfield Canada will
be considered to have a substantial presence in Canada if it satisfies certain
asset tests or if it maintains an office in Canada and it, or a corporation
controlled by it, employs more than five employees in Canada full time other
than primarily in connection with an investment activity or a business carried
on through a partnership of which the corporation carrying on the business is
not a majority interest partner. Smithfield believes that following the
completion of the Offers, Smithfield Canada will satisfy this test and expects
that Smithfield Canada will continue to satisfy this test in the future.
The shares of Smithfield Common Stock and the Ancillary Rights will be
foreign property under the Canadian Tax Act.
Ownership of Securities of Schneider
Smithfield Canada has the right to acquire 549,587 Common Shares and
1,019,212 Class A Shares under the Lock-up Agreement described in the Circular
under the heading "Lock-up Agreement." No other securities of Schneider are
owned beneficially, directly or indirectly, nor is control or direction
exercised over any other securities of Schneider, by Smithfield Canada or by
directors or senior officers of Smithfield Canada or, to the knowledge of the
directors and senior officers of Smithfield Canada after reasonable enquiry, by
any associate or affiliate of Smithfield Canada or by any associate of a
director or senior officer of Smithfield Canada. No person other than
Smithfield is acting jointly or in concert with Smithfield Canada with respect
to the Offers. To the knowledge of the directors and senior officers of
Smithfield Canada after reasonable enquiry, no person or company other than
Smithfield beneficially owns, directly or indirectly, more than 10% of any
class of equity securities of Smithfield Canada.
Trading in Securities of Schneider
No securities of Schneider have been traded during the 6 month period
preceding the date of the Offers by Smithfield Canada or by directors or senior
officers of Smithfield Canada or, to the knowledge of directors and senior
officers of Smithfield Canada after reasonable enquiry, by associates or
affiliates of Smithfield Canada or by associates of the directors or senior
officers of Smithfield Canada.
Commitments to Acquire Securities of Schneider
Except pursuant to the Lock-up Agreement, neither Smithfield Canada, nor
any director or senior officer of Smithfield Canada, nor to the knowledge of
directors and senior officers of Smithfield Canada after reasonable enquiry,
any associate or affiliate of Smithfield Canada or any associate of any
director or senior officer of Smithfield Canada, has entered into any
commitments to acquire any equity securities of Schneider.
Arrangements, Agreements or Understandings
There are no arrangements or agreements made or proposed to be made
between Smithfield or Smithfield Canada and any of the directors or senior
officers of Schneider and no payments or other benefits are proposed to be made
or given by Smithfield or Smithfield Canada to such directors or senior
officers as compensation for loss of office or as compensation for remaining in
or retiring from office. Except for the Lock-up Agreement described above,
there are no contracts, arrangements or understandings, formal or informal,
between Smithfield or Smithfield Canada and any security holder of Schneider
with respect to the Offers or between Smithfield Canada and any person or
company with respect to any securities of Schneider in relation to the Offers.
Acceptance of the Offers
Except pursuant to the Lock-up Agreement described above, Smithfield
Canada has no knowledge as to whether any Shareholders will accept the Offers.
Material Changes and Other Information
Except for these Offers and as otherwise disclosed publicly by Schneider,
Smithfield Canada is not aware of any information which indicates that any
material change has occurred in the affairs of Schneider since the date of the
last available published financial statements of Schneider.
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<PAGE>
Effect of the Offers on Market and Listings for the Schneider Shares
The purchase of the Schneider Shares by Smithfield Canada pursuant to the
Offers will reduce the number of Schneider Shares that might otherwise trade
publicly, as well as the number of Shareholders, and, depending on the number
of Shareholders depositing and the number of Schneider Shares purchased under
the Offers, could adversely affect the liquidity and market value of the
remaining Schneider Shares held by the public. After the purchase of the
Schneider Shares under the Offers, it may be possible for Schneider to take
steps towards the elimination of any applicable public reporting requirements
under applicable securities legislation in any province in which it has an
insignificant number of security holders.
The rules and regulations of the TSE establish certain criteria which, if
not met, could lead to the delisting of the Schneider Shares from the TSE.
Among such criteria are the number of Shareholders, the number of Schneider
Shares publicly held and the aggregate market value of the Schneider Shares
publicly held. Depending on the number of Schneider Shares purchased pursuant
to the Offers, it is possible that the Schneider Shares would fail to meet the
criteria for continued listing on the TSE. If this were to happen, the
Schneider Shares could be delisted and this could, in turn, adversely affect
the market or result in a lack of an established market for such Schneider
Shares. Smithfield Canada intends to cause Schneider to apply to delist the
Schneider Shares from the TSE as soon as practicable after the completion of
the Offers, any Compulsory Acquisition or Subsequent Acquisition Transaction.
Depositary
Smithfield Canada has engaged the Depositary for the receipt of the
certificates in respect of the Schneider Shares, the Options, the Letters of
Transmittal, the Assignments and other documents. The Depositary will also
receive Notices of Guaranteed Delivery deposited under the Offers, give notices
where necessary and make payment for all Schneider Shares and Options purchased
by Smithfield Canada under the Offers. The Depositary will receive reasonable
and customary compensation from Smithfield Canada for its services in
connection with the Offers, will be reimbursed for certain out-of-pocket
expenses and will be indemnified against certain liabilities, including
liabilities under securities laws and expenses in connection therewith.
Soliciting Dealer Arrangements
Smithfield Canada has engaged the services of First Marathon Securities
Limited (the "Dealer Manager") to provide financial advisory services to
Smithfield Canada and to solicit acceptances of the Offers.
In Canada, the Dealer Manager has undertaken to form a soliciting dealer
group comprised of members of the Investment Dealers Association of Canada and
of the stock exchanges in Canada to solicit acceptances of the Offers. Each
member of the soliciting dealer group, including the Dealer Manager, is
referred to in this Circular as a "Soliciting Dealer." Smithfield Canada has
agreed to pay each Soliciting Dealer whose name appears in the appropriate
space in the Letter of Transmittal accompanying a deposit of Schneider Shares a
fee of C$0.20 for each such Schneider Share deposited and taken up by
Smithfield Canada under the Offers. The aggregate amount payable with respect
to any single depositing holder of Smithfield Shares will be not less than
C$85.00 nor more than C$1,500. Where Schneider Shares deposited and registered
in a single name are beneficially owned by more than one person, the minimum
and maximum amounts will be applied separately in respect of each such
beneficial owner. Smithfield Canada may require the Soliciting Dealer to
furnish evidence of such beneficial ownership satisfactory to Smithfield Canada
at the time of deposit.
No brokerage fees or commissions will be payable by any holder of
Schneider Shares who transmits Schneider Shares directly to the Depositary or
who uses the services of a Soliciting Dealer to accept the Offers. Shareholders
should contact the Depositary, the Dealer Manager or a broker or dealer for
assistance in accepting the Offers and in depositing the Schneider Shares with
the Depositary.
Legal Matters
The validity of the Exchangeable Shares offered hereby by Smithfield
Canada will be passed upon for Smithfield Canada and Smithfield Foods, and the
opinions contained under the headings "Canadian Federal Income Tax
Considerations" and "Eligibility for Investment in Canada" have been provided,
by McCarthy Tetrault, Canadian counsel to Smithfield Foods and Smithfield
Canada. Rene R. Sorell, Graham P. C. Gow and Robert J. Richardson are lawyers
with McCarthy Tetrault and are also directors of Smithfield Canada. The
validity of the shares of Smithfield Common Stock, the Rights and the Special
Voting Stock offered hereby by Smithfield Foods will be passed upon for
Smithfield Foods and Smithfield
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<PAGE>
Canada, and the opinions contained under the heading "United States Federal
Income Tax Considerations" have been provided, by McGuire, Woods, Battle &
Boothe LLP, Richmond, Virginia, a limited liability partnership, which is U.S.
counsel to Smithfield Foods and Smithfield Canada. Robert L. Burrus, Jr., a
partner of McGuire, Woods, Battle & Boothe LLP, is a director of Smithfield
Foods and owns 1,000 shares of Smithfield Common Stock.
Experts
The audited consolidated financial statements and schedules of Smithfield
Foods and Smithfield Canada Limited included and incorporated by reference in
this Offer and Circular and elsewhere in the Registration Statement of which
this Offer and Circular is a part have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto dated June 6, 1997 and February 17, 1998, respectively, and appearing
in Annex B and Annex G, respectively, of the Offer and Circular, and are
included herein in reliance upon the authority of such firm as experts in
giving such 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 of Smithfield Foods, Inc. by reference to
the Current Report on Form 8-K of Smithfield Foods, Inc. 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's successful defense
of any legal action or proceeding that arises as a result of inclusion of Price
Waterhouse LLP's audit report on the combined financial statements of Lykes
Meat Group included in Smithfield Foods, Inc.'s Prospectus and Registration
Statement.
Statutory Rights
Securities legislation in certain of the provinces and territories of
Canada provides holders of Schneider Shares and Options with, in addition to
any other rights they may have at law, rights of recission or to damages, or
both, if there is a misrepresentation in a circular or a notice that is
required to be delivered to the holders of Schneider Shares and Options.
However, such rights must be exercised within prescribed time limits. Holders
of Schneider Shares and Options should refer to the applicable provisions of
the securities legislation of their province or territory for particulars of
those rights or consult with a lawyer.
68
<PAGE>
CONSENTS OF COUNSEL
TO: The Directors of Smithfield Canada Limited
We hereby consent to the reference to our opinions contained under
"Canadian Federal Income Tax Considerations" and "Eligibility for Investment in
Canada" in the Circular included in the Offers to Purchase dated o, 1998 made
by Smithfield Canada Limited to the holders of Common Shares, Class A Shares
and Options of Schneider Corporation.
Toronto, Ontario (Signed) o
o, 1998
TO: The Directors of Smithfield Canada Limited
We hereby consent to the reference to our opinion contained under "United
States Federal Income Tax Considerations" in the Circular included in the
Offers to Purchase dated o , 1998 made by Smithfield Canada Limited to the
holders of Common Shares, Class A Shares and Options of Schneider Corporation.
Richmond, Virginia (Signed) o
o , 1998
69
<PAGE>
CONSENT OF AUDITORS
o, 1998
Ontario Securities Commission,
British Columbia Securities Commission,
Alberta Securities Commission,
Saskatchewan Securities Commission,
Manitoba Securities Commission,
Commission des valeurs mobilieres du Quebec,
Nova Scotia Securities Commission,
Administrator of Securities, New Brunswick,
Registrar of Securities, Prince Edward Island,
Registrar of Deeds, Companies and Securities, Newfoundland.
Dear Sirs:
Re: Smithfield Foods, Inc. (the "Company")
--------------------------------------
We refer to the Offer and Circular which includes the Offers to Purchase dated
o, 1998 by Smithfield Canada Limited to the holders of Common Shares, Class A
Shares and Options of Schneider Corporation.
We consent to the use in the above mentioned Offer and Circular of our
auditors' report dated June 6, 1997 to the stockholders of Smithfield Foods,
Inc. on the following financial statements:
o consolidated balance sheets as at April 27, 1997 and April 28, 1996;
o consolidated statements of income, cash flows and stockholders' equity for
each of the fiscal years in the three year period ended April 27, 1997.
We also consent to the use in the above mentioned Offer and Circular of
our auditors' report dated February 17, 1998 to the stockholders of Smithfield
Canada Limited on the following financial statements:
o balance sheet as at February 1, 1998.
We report that we have read the Offer and Circular referred to above and
have no reason to believe that there are any misrepresentations in the
information contained therein that is derived from the financial statements
upon which we have reported or that is within our knowledge as a result of our
audit of such financial statements.
This letter is provided to the securities regulatory authorities to which
it is addressed pursuant to the requirements of their securities regulations
and not for any other purpose.
Richmond, Virginia o (signed)
o,1998
70
<PAGE>
CONSENT OF ARTHUR ANDERSEN & CO.
o, 1998
Ontario Securities Commission,
British Columbia Securities Commission,
Alberta Securities Commission,
Saskatchewan Securities Commission,
Manitoba Securities Commission,
Commission des valeurs mobilieres du Quebec,
Nova Scotia Securities Commission,
Administrator of Securities, New Brunswick,
Registrar of Securities, Prince Edward Island,
Registrar of Deeds, Companies and Securities, Newfoundland.
Dear Sirs:
Re: Smithfield Foods, Inc. (the "Company")
--------------------------------------
We refer to the Offer and Circular which includes the Offers to Purchase dated
o, 1998 by Smithfield Canada Limited to the holders of Common Shares, Class A
Shares and Options of Schneider Corporation.
We consent to the use in the above mentioned Offer and Circular of our
compilation report dated o, 1998 to the Directors of Smithfield Foods, Inc. and
Smithfield Canada Limited on the following financial statements:
o pro forma consolidated condensed balance sheets as at February 1, 1998 which
have been prepared assuming both the pooling of interests methods of
accounting and the purchase method of accounting;
o pro forma consolidated condensed statements of income for the forty weeks
ended February 1, 1998 and the fiscal years ended April 27, 1997, April 28,
1996 and April 30, 1995 which have been prepared assuming the pooling
method of accounting.
o pro forma consolidated statements of income for the forty weeks ended
February 1, 1998 and the fiscal year ended April 27, 1997 which have been
prepared assuming the purchase method of accounting.
We report that we have read the Offer and Circular referred to above and
have no reason to believe that there are any misrepresentations in the
information contained therein that is derived from the financial statements
upon which we have reported or that is within our knowledge as a result of our
audit of such financial statements.
This letter is provided to the securities regulatory authorities to which
it is addressed pursuant to the requirements of their securities regulations
and not for any other purpose.
Toronto, Ontario o (signed)
o,1998
71
<PAGE>
APPROVAL AND CERTIFICATE
The contents of the Offers to Purchase and the Offering Circular have been
approved, and the sending, communication or delivery thereof to the
Shareholders and Option holders of Schneider Corporation has been authorized
by, the Board of Directors of Smithfield Canada Limited. The foregoing,
together with the Annexes attached hereto, contains no untrue statement of a
material fact and does not omit to state a material fact that is required to be
stated or that is necessary to make a statement not misleading in the light of
the circumstances in which it was made. In addition, the foregoing does not
contain any misrepresentation likely to affect the value or the market price of
the securities which are the subject of the Offers.
Dated: o , 1998.
(Signed) o (Signed) o
Chief Executive Officer Chief Financial Officer
On behalf of the Board of Directors
(Signed) o (Signed) o
Director Director
72
<PAGE>
This compilation report is presented solely to satisfy the regulatory
requirements in Canada. The rules governing the issuance of such report in
Canada differ from those under United States Generally Accepted Auditing
Standards ("US GAAS".) US GAAS does not provide for an expression of an opinion
on a compilation report. Furthermore, in order to issue a compilation report in
conformity with US GAAS, an examination greater in scope than that performed
would be required and, therefore, no opinion is expressed under US GAAS. No
accounting firm has performed an audited or limited review of the financial
information of Schneider in connection with the issuance of this compilation
report.
ANNEX A
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
COMPILATION REPORT
To the Directors of Smithfield Foods, Inc. and Smithfield Canada Limited:
We have reviewed, as to compilation only, the accompanying pro forma
consolidated condensed balance sheets of Smithfield Foods, Inc. as at February
1, 1998 and the pro forma consolidated condensed statements of income for the
forty weeks ended February 1, 1998 and the fiscal years ended April 27, 1997,
April 28, 1996 and April 30, 1995 which have been prepared assuming the pooling
of interests method of accounting. We have reviewed, as to compilation only,
the accompanying pro forma consolidated balance sheets of Smithfield Foods,
Inc. as at February 1, 1998 and the pro forma consolidated condensed statements
of income for the forty weeks ended February 1, 1998 and the fiscal year ended
April 27, 1997 which have been prepared assuming the purchase method of
accounting. These pro forma consolidated condensed statements have been
prepared for inclusion in the Offer and Circular which includes the Offers to
Purchase dated o , 1998 made by Smithfield Canada Limited to the holders of
Common Shares and Class A Shares and Options of Schneider Corporation. In our
opinion, the pro forma consolidated condensed balance sheets and the pro forma
consolidated condensed statements of income have been properly compiled to give
effect to the proposed acquisition and the assumptions described in the
accompanying notes thereto.
Toronto, Ontario (signed) o
o, 1998
Other Matters
This compilation report is presented solely to satisfy the regulatory
requirements in Canada. The rules governing the issuance of such report in
Canada differ from those under United States Generally Accepted Auditing
Standards ("US GAAS".) US GAAS does not provide for an expression of an opinion
on a compilation report. Furthermore, in order to issue a compilation report in
conformity with US GAAS, an examination greater in scope than that performed
would be required and, therefore, no opinion is expressed under US GAAS. No
accounting firm has performed an audited or limited review of the financial
information of Schneider in connection with the issuance of this compilation
report.
A-1
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
INDEX TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------------
<S> <C>
Pooling of Interests Method of Accounting Assumption
Pro Forma Consolidated Condensed Balance Sheet (Unaudited) as at February 1, 1998 ........ A-4
Pro Forma Consolidated Condensed Income Statement (Unaudited) for the Forty Weeks
Ended February 1, 1998 .................................................................. A-5
Pro Forma Consolidated Condensed Income Statement (Unaudited) for the Fiscal Year Ended
April 27, 1997 .......................................................................... A-6
Pro Forma Consolidated Condensed Income Statement (Unaudited) for the Fiscal Year Ended
April 28, 1996 .......................................................................... A-7
Pro Forma Consolidated Condensed Income Statement (Unaudited) for the Fiscal Year Ended
April 30, 1995 .......................................................................... A-8
Purchase Method of Accounting Assumption
Pro Forma Consolidated Condensed Balance Sheet (Unaudited) as at February 1, 1998 ........ A-9
Pro Forma Consolidated Condensed Income Statement (Unaudited) for the Forty Weeks
Ended February 1, 1998 .................................................................. A-10
Pro Forma Consolidated Condensed Income Statement (Unaudited) for the Fiscal Year Ended
April 27, 1997 .......................................................................... A-11
Notes To Pro Forma Consolidated Condensed Financial Statements (Unaudited)
1) Basis of Reporting .................................................................... A-12 to A-13
2) Consolidated Condensed Balance Sheet Pro Forma Adjustments -- Pooling of Interests A-14
Assumption
3) Consolidated Condensed Statements of Income Pro Forma Adjustments -- Pooling of
Interests Assumption ........................................................................ A-14
4) Consolidated Condensed Balance Sheet Pro Forma Adjustments -- Purchase Assumption ..... A-14
5) Consolidated Condensed Statements of Income Pro Forma Adjustments -- Purchase A-14
Assumption
</TABLE>
ACCOUNTING TREATMENT
Smithfield intends to account for the acquisition of Schneider using the
pooling of interests method of accounting in accordance with U.S. GAAP. In
order to account for the acquisition as a pooling of interests, the combining
companies must meet certain specified criteria including among other things,
(i) Smithfield Canada must acquire Schneider within one year of "initiation" of
the Offers (which commenced on the date of signing the Lock-up Agreement), and
at least 90% of the aggregate number of Schneider Shares must be acquired in
exchange for Exchangeable Shares (the "Pooling Percentage Requirement"), and
(ii) no Schneider Affiliate may dispose of Schneider Shares or shares of
Smithfield Common Stock during the period (the "Pooling Period") beginning 30
days prior to consummation of the Offers and ending upon the date of
publication of financial statements of Smithfield covering operations of
Smithfield for at least 30 days following consummation of the Offers (the
"Pooling Period Requirement").
If Smithfield Canada is unable to obtain at least 90% of the aggregate
number of the Schneider Shares outstanding prior to the Expiry Time, Smithfield
Canada may (subject to the outcome of the litigation relating to the Maple Leaf
Offer and the satisfaction or waiver of the other conditions of the Offers)
extend the Offers or initiate a Subsequent Acquisition Transaction. If
Smithfield Canada takes up and pays for any Schneider Shares tendered under the
Offers or acquires any additional Schneider Shares under a Subsequent
Acquisition Transaction, but does not acquire at least 90% of the aggregate
number of Schneider Shares by December 18, 1998, the transaction would be
accounted for as a purchase, unless that delay is caused by factors outside the
control of Smithfield, Smithfield Canada, Smithfield Sub or Schneider. Factors
beyond the control of such companies would include shareholder litigation
seeking to enjoin the transaction or regulatory approval delays.
Under the pooling of interests method of accounting, the recorded assets
and liabilities of Schneider will be carried forward to Smithfield at their
recorded amounts, income of Smithfield for the fiscal year in which the
consummation of the Offers occurs will include income of Schneider for such
fiscal year and reported income of the separate companies for prior periods
will be combined and restated as income of Smithfield. No recognition of
purchase price in excess of the carrying value of the net assets of Schneider
is required of Smithfield.
A-2
<PAGE>
In the event that the completion of the Offers may not be accounted for as
a pooling of interests, Smithfield intends to account for the acquisition of
Schneider using the purchase method of accounting in accordance with U.S. GAAP.
PERIODS INCLUDED
The Pro Forma Consolidated Condensed Balance Sheets (unaudited) as at
February 1, 1998 present the combined financial position of Smithfield as at
February 1, 1998 (unaudited) and Schneider as at February 14, 1998 (unaudited)
for both the pooling of interests and purchase methods of accounting
assumptions.
The Pro Forma Consolidated Condensed Income Statements (unaudited) for the
forty weeks ended February 1, 1998 present the combined results of operations
of Smithfield for the forty weeks ended February 1, 1998 (unaudited) and of
Schneider for the forty weeks ended February 14, 1998 (unaudited) for both the
pooling of interests and purchase methods of accounting assumptions.
The Pro Forma Consolidated Condensed Income Statements (unaudited) for the
fiscal year ended April 27, 1997 present the combined results of operations of
Smithfield for the fiscal year ended April 27, 1997 (audited) and of Schneider
for the fifty-two weeks ended May 10, 1997 (unaudited) for both the pooling of
interests and purchase methods of accounting assumption.
The Pro Forma Consolidated Condensed Income Statements (unaudited) for the
fiscal years ended April 28, 1996 and April 30, 1995 present the combined
results of operations of Smithfield for the fiscal years ended April 28, 1996
(audited) and April 30, 1995 (audited), respectively, and of Schneider for the
fiscal years ended October 28, 1995 (audited) and October 29, 1994 (audited),
respectively, for the pooling of interests method of accounting assumption.
Accordingly, the results of operations of Schneider for the period from
October 29, 1995 to May 11, 1996 have been excluded. The results of operations
for this period are summarized below:
<TABLE>
<CAPTION>
Twenty-eight
Weeks ended
(in thousands of Canadian dollars, except per share data) May 11, 1996
<S> <C>
Sales ........................................... $ 418,386
Gross profit .................................... 44,473
Net income ...................................... 239
Earnings per share:
Basic .......................................... $ .04
Diluted ........................................ $ .04
</TABLE>
A-3
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
Pooling of Interests Assumption
As at February 1, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------
Smithfield Schneider
Foods, Inc. Corporation Pro Forma
as at as at Adjustments Pro Forma
Feb. 1, 1998 Feb. 14, 1998 (Note 2) Consolidated
(In thousands of US dollars) -------------- --------------- -------------------- -------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 36,416 $ -- $ -- $ 36,416
Accounts receivable, net ............................ 161,227 42,190 -- 203,417
Inventories ......................................... 252,460 34,137 -- 286,597
Other current assets ................................ 55,101 3,450 -- 58,551
----------- --------- ----------- -----------
Total current assets ............................. 505,204 79,777 -- 584,981
Net property, plant and equipment .................... 464,590 86,832 -- 551,422
Other assets ......................................... 92,774 25,824 (14,607) (a) 103,991
----------- --------- ----------- -----------
$ 1,062,568 $ 192,433 $ (14,607) $ 1,240,394
=========== ========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ....................................... $ -- $ -- $ -- $ --
Current portion of long-term debt and capital lease
obligations ....................................... 9,036 3,351 -- 12,387
Accounts payable .................................... 120,836 58,061 -- 178,897
Accrued liabilities ................................. 143,077 695 -- 145,578
1,806 (b)
----------- --------- ----------- -----------
Total current liabilities ........................ 272,949 62,107 1,806 336,862
Long-term debt and capital lease obligations ......... 386,211 56,949 -- 443,160
Other noncurrent liabilities ......................... 63,072 14,094 (14,607) (a) 62,559
Common stockholders' equity .......................... 340,336 59,283 (1,806) (b) 397,813
----------- --------- ----------- -----------
$ 1,062,568 $ 192,433 $ (14,607) $ 1,240,394
=========== ========= =========== ===========
</TABLE>
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
A-4
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT (UNAUDITED)
Pooling of Interests Assumption
Forty Weeks Ended February 1, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------
Smithfield Schneider
Foods, Inc. Corporation
for the 40 for the 40 Pro Forma
Weeks Ended Weeks Ended Adjustments Pro Forma
Feb. 1, 1998 Feb. 14, 1998 (Note 3) Consolidated
---------------- --------------- ------------------- ----------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ 2,993,661 $ 475,871 $ (157) (c) $ 3,469,375
Cost of sales ........................................ 2,707,844 417,356 (157) (c) 3,125,043
------------ --------- --------- ------------
Gross profit ......................................... 285,817 58,515 -- 344,332
Selling, general and administrative expenses ......... 166,526 38,370 -- 204,896
Depreciation expense ................................. 31,086 8,209 -- 39,295
Interest expense ..................................... 23,827 4,436 68 28,331
Gain on divestitures ................................. -- (808) 808 (e) --
Nonrecurring item .................................... 12,600 -- -- 12,600
------------ --------- --------- ------------
Income before income taxes ........................... 51,778 8,308 (876) 59,210
Income taxes ......................................... 19,052 3,963 (386) (f) 22,629
------------ --------- --------- ------------
Net income ........................................... $ 32,726 $ 4,345 $ (490) $ 36,581
============ ========= ========= ============
Net income available to common stockholders .......... $ 32,726 $ 36,581
============ ============
Net income per share:
Basic ............................................... $ .87 $ .88
============ ============
Diluted ............................................. $ .82 $ .84
============ ============
Average common shares outstanding:
Basic ............................................... 37,531 41,383
============ ============
Diluted ............................................. 39,687 43,539
============ ============
</TABLE>
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
A-5
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
Pooling of Interests Assumption
Fiscal Year Ended April 27, 1997
<TABLE>
<CAPTION>
Historical
------------------------------------------
Smithfield Schneider
Foods, Inc. Corporation
for the Year for the 52 Weeks
Ended Apr. 27, 1997 Ended May 10, 1997
--------------------- --------------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ 3,870,611 $ 601,015
Cost of sales ........................................ 3,549,673 540,924
------------ ---------
Gross profit ......................................... 320,938 60,091
Selling, general and administrative expenses ......... 191,225 46,025
Depreciation expense ................................. 35,825 10,653
Interest expense ..................................... 26,211 5,443
Restructuring charge ................................. -- 8,801
------------ ---------
Income (loss) before income taxes .................... 67,677 (10,831)
Income taxes (benefit) ............................... 22,740 (3,700)
------------ ---------
Net income (loss) .................................... $ 44,937 $ (7,131)
============ =========
Net income available to common stockholders .......... $ 43,699
============
Net income per share:
Basic ............................................... $ 1.21
============
Diluted ............................................. $ 1.17
============
Average common shares outstanding:
Basic ............................................... 36,121
============
Diluted ............................................. 37,265
============
<CAPTION>
Pro Forma
Adjustments Pro Forma
(Note 3) Consolidated
------------------- ----------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ (209) (c) $ 4,471,417
Cost of sales ........................................ (209) (c) 4,090,388
--------- ------------
Gross profit ......................................... -- 381,029
Selling, general and administrative expenses ......... -- 237,250
Depreciation expense ................................. -- 46,478
Interest expense ..................................... 134 (d) 31,788
Restructuring charge ................................. (8,801)(g) --
--------- ------------
Income (loss) before income taxes .................... 8,667 65,513
Income taxes (benefit) ............................... 3,873 (f) 22,913
--------- ------------
Net income (loss) .................................... $ 4,794 $ 42,600
========= ============
Net income available to common stockholders .......... $ 41,362
============
Net income per share:
Basic ............................................... $ 1.03
============
Diluted ............................................. $ 1.01
============
Average common shares outstanding:
Basic ............................................... 39,973
============
Diluted ............................................. 41,117
============
</TABLE>
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
A-6
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
Pooling of Interests Assumption
Fiscal Year Ended April 28, 1996
<TABLE>
<CAPTION>
Historical
-------------------------------------------
Smithfield Schneider
Foods, Inc. Corporation
for the Year for the Year
Ended Apr. 28, 1996 Ended Oct. 28, 1995
--------------------- ---------------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ 2,383,893 $ 601,525
Cost of sales ........................................ 2,203,626 533,476
------------ ---------
Gross profit ......................................... 180,267 68,049
Selling, general and administrative expenses ......... 103,095 45,107
Depreciation expense ................................. 25,979 10,607
Interest expense ..................................... 20,942 5,660
Gain on divestitures ................................. -- (2,965)
------------ ---------
Income from continuing operations before income
taxes ................................................ 30,251 9,640
Income taxes ......................................... 10,465 4,590
------------ ---------
Net income ........................................... 19,786 $ 5,050
============ =========
Net income available to common stockholders .......... $ 18,634
============
Net income per share:
Basic ............................................... $ .55
============
Diluted ............................................. $ .53
============
Average common shares outstanding:
Basic ............................................... 33,865
============
Diluted ............................................. 35,000
============
<CAPTION>
Pro Forma
Adjustments Pro Forma
(Note 3) Consolidated
------------------- ----------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ (209) (c) $ 2,985,209
Cost of sales ........................................ (209) (c) 2,736,893
--------- ------------
Gross profit ......................................... -- 248,316
Selling, general and administrative expenses ......... -- 148,202
Depreciation expense ................................. -- 36,586
Interest expense ..................................... 138 (d) 26,740
Gain on divestitures ................................. 2,965 (e) --
--------- ------------
Income from continuing operations before income
taxes ................................................ (3,103) 36,788
Income taxes ......................................... (1,376) 13,679
--------- ------------
Net income ........................................... $ (1,727) $ 23,109
========= ============
Net income available to common stockholders .......... $ 21,957
============
Net income per share:
Basic ............................................... $ .58
============
Diluted ............................................. $ .57
============
Average common shares outstanding:
Basic ............................................... 37,717
============
Diluted ............................................. 38,852
============
</TABLE>
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
A-7
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
Pooling of Interests Assumption
Fiscal Year Ended April 30, 1995
<TABLE>
<CAPTION>
Historical
-------------------------------------------
Smithfield Schneider
Foods, Inc. Corporation
for the Year for the Year
Ended Apr. 30, 1995 Ended Oct. 29, 1994
--------------------- ---------------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ 1,526,518 $ 565,452
Cost of sales ........................................ 1,380,586 499,151
------------ ---------
Gross profit ......................................... 145,932 66,301
Selling, general and administrative expenses ......... 61,723 41,128
Depreciation expense ................................. 19,717 9,750
Interest expense ..................................... 14,054 5,720
------------ ---------
Income from continuing operations before income
taxes ................................................ 50,438 9,703
Income taxes ......................................... 18,523 4,203
------------ ---------
Net income ........................................... $ 31,915 $ 5,500
============ =========
Net income available to common stockholders .......... $ 31,240
============
Net income per share:
Basic ............................................... $ .95
============
Diluted ............................................. $ .92
============
Average common shares outstanding:
Basic ............................................... 32,705
============
Diluted ............................................. 33,923
============
<CAPTION>
Pro Forma
Adjustments Pro Forma
(Note 3) Consolidated
------------------- ----------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ (209) (c) $ 2,091,761
Cost of sales ........................................ (209) (c) 1,879,528
--------- ------------
Gross profit ......................................... -- 212,233
Selling, general and administrative expenses ......... -- 102,851
Depreciation expense ................................. --- 29,467
Interest expense ..................................... 125 (d) 19,899
--------- ------------
Income from continuing operations before income
taxes ................................................ (125) 60,016
Income taxes ......................................... (49) (f) 22,677
--------- ------------
Net income ........................................... $ (76) $ 37,339
========= ============
Net income available to common stockholders .......... $ 36,664
============
Net income per share:
Basic ............................................... $ 1.00
============
Diluted ............................................. $ .97
============
Average common shares outstanding:
Basic ............................................... 36,557
============
Diluted ............................................. 37,775
============
</TABLE>
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
A-8
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
Purchase Assumption
As at February 1, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------
Smithfield Schneider
Foods, Inc. Corporation Pro Forma
as at as at Adjustments Pro Forma
Feb. 1, 1998 Feb. 14, 1998 (Note 4) Consolidated
-------------- --------------- -------------------- -------------
(In thousands of US dollars)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 36,416 $ -- $ -- $ 36,416
Accounts receivable, net ............................ 161,227 42,190 -- 203,417
Inventories ......................................... 252,460 34,137 -- 286,597
Other current assets ................................ 55,101 3,450 -- 58,551
----------- --------- ----------- -----------
Total current assets .............................. 505,204 79,777 -- 584,981
Net property, plant and equipment .................... 464,590 86,832 -- 551,422
Other assets ......................................... 92,774 25,824 (14,607) (h) 169,959
2,000 (j)
63,968 (i)
----------- --------- ----------- -----------
$ 1,062,568 $ 192,433 $ 51,361 $ 1,306,362
=========== ========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ....................................... $ -- $ -- $ -- $ --
Current portion of long-term debt and capital lease
obligations ....................................... 9,036 3,351 -- 12,387
Accounts payable .................................... 120,836 58,060 -- 178,896
Accrued liabilities ................................. 143,077 696 2,000 (j) 145,773
----------- --------- ----------- -----------
Total current liabilities ......................... 272,949 62,107 2,000 337,056
Long-term debt and capital lease obligations ......... 386,211 56,949 -- 443,160
Other noncurrent liabilities ......................... 63,072 14,094 (14,607) (h) 62,559
Common stockholders' equity .......................... 340,336 59,283 63,968 (i) 463,587
----------- --------- ----------- -----------
$ 1,062,568 $ 192,433 $ 51,361 $ 1,306,362
=========== ========= =========== ===========
</TABLE>
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
A-9
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT (UNAUDITED)
Purchase Assumption
Forty Weeks Ended February 1, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------
Smithfield Schneider
Foods, Inc. Corporation
for the 40 for the 40 Pro Forma
Weeks Ended Weeks Ended Adjustments Pro Forma
Feb. 1, 1998 Feb. 14, 1998 (Note 5) Consolidated
---------------- --------------- -------------------- ---------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ 2,993,661 $475,871 $ (157) (k) $ 3,469,375
Cost of sales ........................................ 2,707,844 417,356 (157) (k) 3,125,043
------------ -------- ---------- -----------
Gross profit ......................................... 285,817 58,515 -- 344,332
Selling, general and administrative expenses ......... 166,526 38,370 1,499 (l) 206,395
Depreciation expense ................................. 31,086 8,209 -- 39,295
Interest expense ..................................... 23,827 4,436 102 (m) 28,365
Gain on divestitures ................................. -- (808) 808 (n) --
Nonrecurring item .................................... 12,600 -- -- 12,600
------------ -------- ---------- -----------
Income before income taxes ........................... 51,778 8,308 (2,409) 57,677
Income taxes ......................................... 19,052 3,963 (1,070) (o) 21,945
------------ -------- ---------- -----------
Net income ........................................... $ 32,726 $ 4,345 $ (1,339) $ 35,732
============ ======== ========== ===========
Net income available to common stockholders .......... $ 32,726 $ 35,732
============ ===========
Net income per share
Basic ............................................... $ 0.87 $ 0.86
============ ===========
Diluted ............................................. $ 0.82 $ 0.82
============ ===========
Average common shares outstanding:
Basic ............................................... 37,531 41,383
============ ===========
Diluted ............................................. 39,687 43,539
============ ===========
</TABLE>
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
A-10
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
Purchase Assumption
Fiscal Year Ended April 27, 1997
<TABLE>
<CAPTION>
Historical
------------------------------------------
Smithfield Schneider
Foods, Inc. Corporation
for the Year for the 52 Weeks
Ended Apr. 27, 1997 Ended May 10, 1997
--------------------- --------------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ 3,870,611 $ 601,015
Cost of sales ........................................ 3,549,673 540,924
------------ ---------
Gross profit ......................................... 320,938 60,091
Selling, general and administrative expenses ......... 191,225 46,025
Depreciation expense ................................. 35,825 10,653
Interest expense ..................................... 26,211 5,443
Restructuring charge ................................. -- 8,801
------------ ---------
Income (loss) before income taxes .................... 67,677 (10,831)
Income taxes (benefit) ............................... 22,740 (3,700)
------------ ---------
Net income (loss) .................................... $ 44,937 $ (7,131)
============ =========
Net income available to common stockholders .......... $ 43,699
============
Net income per share:
Basic ............................................... $ 1.21
============
Diluted ............................................. $ 1.17
============
Average common shares outstanding:
Basic ............................................... 36,121
============
Diluted ............................................. 37,265
============
<CAPTION>
Pro Forma
Adjustments Pro Forma
(Note 5) Consolidated
------------------- ----------------
(In thousands of US dollars)
<S> <C>
Sales ................................................ $ (209) (k) $ 4,471,417
Cost of sales ........................................ (209) (k) 4,090,388
---------- ------------
Gross profit ......................................... -- 381,029
Selling, general and administrative expenses ......... 1,999 (l) 239,249
Depreciation expense ................................. -- 46,478
Interest expense ..................................... 134 (m) 31,788
Restructuring charge ................................. (8,801) (n) --
---------- ------------
Income (loss) before income taxes .................... 6,668 63,514
Income taxes (benefit) ............................... 2,979 (o) 22,019
---------- ------------
Net income (loss) .................................... $ 3,689 $ 41,495
========== ============
Net income available to common stockholders .......... $ 40,257
============
Net income per share:
Basic ............................................... $ 1.01
============
Diluted ............................................. $ .98
============
Average common shares outstanding:
Basic ............................................... 39,973
============
Diluted ............................................. 41,117
============
</TABLE>
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial
Statements.
A-11
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF REPORTING
The unaudited Pro Forma Consolidated Condensed Financial Statements of
Smithfield Foods, Inc. and subsidiaries ("Smithfield" or "Smithfield Foods")
are provided to give effect to the offer to purchase of each of the outstanding
Common Shares, Class A Shares and Options of Schneider Corporation
("Schneider") in exchange for 0.5415 of an Exchangeable Share of Smithfield
Canada Limited ("Smithfield Canada"), a wholly-owned subsidiary of Smithfield.
The pro forma information is based on the historical consolidated
financial statements of the Smithfield and Schneider giving effect to the
acquisition under both the pooling of interests method of accounting and the
purchase method of accounting, Smithfield intends to account for the
acquisition under the pooling of interests method of accounting. However, since
the pooling of interests method cannot be guaranteed, pro forma information is
being presented giving effect to the acquisition under both methods of
accounting. Schneider financial information has been translated to U.S. dollars
and is presented in accordance with U.S. GAAP, using estimates and assumptions
that could affect the information presented. Actual results could differ from
these estimates. 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 Consolidated Condensed Financial Statements should be read
in conjunction with Smithfield's Annual Report for the fiscal year ended April
27, 1997, Smithfield's unaudited financial statements for the forty weeks ended
February 1, 1998, the accompanying historical financial statements and notes of
Schneider for the years ended October 25, 1997, October 26, 1996 and October
28, 1995, and Schneider's unaudited financial statements for the sixteen weeks
ended February 14, 1998 and the twenty-eight weeks ended May 10, 1997.
Key Assumptions
Certain assumptions have been made in the preparation of these unaudited
Pro Forma Consolidated Condensed Financial Statements. These assumptions are
noted below to assist in interpretation of the statements.
(A) Smithfield's fiscal year ends on the Sunday nearest April 30. Each
Smithfield fiscal quarter is thirteen weeks long. Scheider's fiscal year ends
on the last Saturday of October. The first Schneider fiscal quarter is sixteen
weeks long with the remaining fiscal quarters being twelve weeks long.
Accordingly, the first two quarters of Smithfield's fiscal 1997 (from April 28,
1997 to February 1, 1998) are forty weeks long as are the corresponding three
quarters for Schneider (from May 11, 1997 to February 14, 1998).
(B) Certain historical financial statements of Schneider are included in
Annex C to this Circular and were used by Smithfield in compiling these
unaudited Pro Forma Consolidated Condensed Financial Statements of Smithfield.
Such historical financial statements of Schneider were obtained from
Schneider's public filings with Canadian securities regulatory authorities.
Smithfield Foods and Smithfield Canada were not involved in the preparation of
such information or statements relating to Schneider contained in this
document, are not able to verify any such information or statements and make no
representation or warranty as to its accuracy or completeness. Therefore,
certain differences between Canadian GAAP and U.S. GAAP cannot be accurately
quantified and are subject to estimation as noted below:
i) U.S. GAAP requires accrual of post-retirement benefit costs which are
not required under Canadian GAAP. Preliminary discussions with Schneider's
management indicated the total accrual could be as high as US$9.0 million,
with an annual charge of US$0.7 million. Accordingly, Schneider's balance
sheets reflect the estimated accrual and the statements of income reflect
the estimated change. These are unaudited amounts with no representation of
accuracy.
ii) Under Canadian GAAP, Schneider accounts for its 50%-owned joint
ventures using proportionate consolidation with respect to the joint
ventures' assets, liabilities, revenues and expenses. U.S. GAAP requires
accounting for investments in joint ventures under the equity method of
accounting. The pertinent information on Schneider joint ventures is
available only in condensed format and only for Schneider's fiscal years.
Smithfield does not have access to detailed non-public information
necessary to accurately reflect this difference in the pro forma
statements. Therefore, the Schneider historical information presented in
these Pro Forma Consolidated Condensed Financial Statements is not adjusted
to remove the joint venture proportionate share of any of the amounts.
A-12
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF REPORTING -- Continued:
The proportionate share in joint ventures for Schneider's fiscal 1997,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands of US dollars) ----------- ----------- ----------
<S> <C>
Current assets ........................... $ 13,385 $ 10,470 $ 6,360
Noncurrent assets ........................ 15,127 11,213 5,880
Current liabilities ...................... 10,226 7,923 4,430
Noncurrent liabilities ................... 7,850 4,396 351
Sales .................................... 89,568 79,932 57,218
Expenses, including income taxes ......... 88,087 78,403 55,392
Net income ............................... 1,482 1,528 1,826
</TABLE>
iii) The historical Schneider financial statements were translated from
Canadian dollars to US dollars. No foreign currency translation gains or
losses are computed for any of the income statement fiscal periods.
iv) Smithfield is not aware of any materially significant differences
between the fair value of identifiable assets and liabilities and the
historical book value reported on Schneider's balance sheet.
v) These Pro Forma Consolidated Condensed Financial Statements assume 3.9
million common shares will be issued on exchange of Smithfield Canada's
Exchangeable Shares.
(C) Smithfield management estimates acquisition costs will total US$2.0
million. This current period nonrecurring charge is not reflected in any of the
pooling of interests method of accounting pro forma consolidated condensed
income statements. In the purchase method of accounting pro forma consolidated
condensed income statements, the cost is reflected as a recurring amortization
charge in pro forma adjustment (l). These acquisition costs are reflected in
the pro forma consolidated condensed balance sheets in pro forma adjustments
(b) and (j).
Pooling of Interests Method of Accounting
Under this assumption, the pro forma consolidated condensed balance sheet
presents the combined financial position of Smithfield as at February 1, 1998
(unaudited) and Schneider as at February 14, 1998 (unaudited), assuming the
acquisition had been completed as at February 1, 1998. A pro forma consolidated
condensed statement of income presents the results of operations of the
combined Smithfield and Schneider entities for the forty weeks ended February
1, 1998 (unaudited) and February 14, 1998 (unaudited), respectively, assuming
that the acquisition had been completed at the beginning of the period.
Additionally, pro forma consolidated condensed statements of income are
presented combining the results of operations of Smithfield for Smithfield's
fiscal years ended April 27, 1997, April 28, 1996 and April 30, 1995 (all
audited) with the results of operations of Schneider for Schneider's fifty-two
weeks ended May 10, 1997 (unaudited), fiscal years ended October 28, 1995
(audited) and October 29, 1994 (audited), respectively, assuming that the
acquisition had been completed at the beginning of each period.
Purchase Method of Accounting
Under this assumption, the pro forma consolidated condensed balance sheet
presents the combined financial position of Smithfield as at February 1, 1998
(unaudited) and Schneider as at February 14, 1998 (unaudited), assuming the
acquisition had been completed as of that date. The pro forma consolidated
condensed statements of income present the combined results of operations of
the Smithfield and Schneider entities for the forty weeks ended February 1,
1998 (unaudited) and February 14, 1998 (unaudited), respectively, and the
combined results of operations for Smithfield's fiscal year ended April 27,
1997 (audited) and for Schneider's fifty-two weeks ended May 10, 1997
(unaudited), assuming that the acquisition had been completed at the beginning
of each period.
A-13
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(2) CONSOLIDATED CONDENSED BALANCE SHEET PRO FORMA ADJUSTMENTS -- POOLING OF
INTERESTS ASSUMPTION
Under the pooling of interest method of accounting, the Pro Forma
Consolidated Condensed Balance Sheet gives effect to the adjustments described
below:
(a) To reclassify Schneider long-term prepaid pension expense to offset
Smithfield long-term accrued pension expense.
(b) To accrue estimated acquisition costs of US$2.0 million, net of the
income tax payable benefit on the estimated deductible portion at
Smithfield's marginal tax rate of 38.9% and the corresponding reduction of
retained earnings.
(3) CONSOLIDATED CONDENSED STATEMENTS OF INCOME PRO FORMA ADJUSTMENTS --
POOLING OF INTERESTS ASSUMPTION
Under the pooling of interests method of accounting, the Pro Forma
Consolidated Condensed Statements of Income give effect to the adjustments
described below:
(c) To eliminate estimated intercompany sales.
(d) To record the interest costs related to the estimated acquisition
costs borrowed under Smithfield's revolving credit facilities. The weighted
average interest rate is 6.8%, 6.7%, 6.9% and 6.3% for the forty weeks
ended February 1, 1998, and for fiscal 1997, 1996 and 1995, respectively.
(e) To remove the impact of gains on divestitures for the forty weeks
ended February 1, 1998 and the fiscal year ended April 28, 1996 which do
not have a continuing impact on the combined entities.
(f) To record the tax effect of the pro forma adjustments at Smithfield's
marginal tax rate of 38.9% with the exception of income taxes associated
with adjustments (e) and (g) which are tax effected at Schneider's marginal
rate of 44.6%.
(g) To remove the restructuring charge for the fiscal year ended April
27, 1997 which does not have a continuing impact on the combined entities.
(4) CONSOLIDATED CONDENSED BALANCE SHEET PRO FORMA ADJUSTMENTS -- PURCHASE
ASSUMPTION
Under the purchase method of accounting, the Pro Forma Consolidated
Condensed Balance Sheet gives effect to the adjustments described below:
(h) To reclassify Schneider long-term prepaid pension expense to offset
Smithfield long-term accrued pension expense.
(i) To record estimated purchase price in excess of the preliminary value
of net assets acquired. The estimated purchase price is equal to the
issuance of Smithfield Common Stock with an estimated value of US$123.3
million which exceeds the estimated preliminary net assets of Schneider in
US GAAP of US$59.3 million. These estimates are preliminary and are based
on the information available in public reports of Schneider. The allocation
will become final upon verification of estimated information, which will
include any and all procedures necessary to determine, on the basis of
materiality, the fair value of assets acquired and liabilities assumed.
Smithfield believes much of this information is available from Schneider
and will be made available to Smithfield after the current litigation is
resolved. Any material adjustments that may result from finalizing the
allocation will be handled as adjustment to the assets and liabilities at
acquisition. Any adjustments of this nature will be made within one year of
the business combination.
(j) To record estimated acquisition costs to other assets and the related
accrued expense.
(5) CONSOLIDATED CONDENSED STATEMENTS OF INCOME PRO FORMA ADJUSTMENTS --
PURCHASE ASSUMPTION
Under the purchase method of accounting, the Pro Forma Consolidated
Condensed Statements of Income give effect to the adjustments described below:
(k) To eliminate estimated intercompany sales.
(l) To record amortization of the cost in excess of net assets acquired
and acquisition costs. These costs are amortized over 40 years and 5 years,
respectively.
A-14
<PAGE>
(m) To record the interest costs related to the estimated acquisition
costs borrowed under Smithfield's revolving credit facilities. The weighted
average interest rate is 6.8% and 6.7% for the forty weeks ended February
1, 1998, and for fiscal 1997, respectively.
(n) To remove the impact of gain on divestitures for the forty weeks
ended February 1, 1998 and the restructuring charge for the fiscal year
ended April 27, 1997 which do not have continuing impact on the combined
entities.
(o) To record the tax effect of the pro forma adjustments at Smithfield's
marginal tax rate of 38.9% (except for taxes on adjustment (n) which is
effected at Schneider's marginal tax rate of 44.6%) adjusted for the
estimated non-deductible portion of amortization on acquisition costs.
A-15
<PAGE>
ANNEX B
INFORMATION CONCERNING SMITHFIELD FOODS, INC.
INDEX
<TABLE>
<S> <C>
Management's Discussion and Analysis
of Financial Condition and Results of Operations ......... B-1
Business .................................................. B-6
Management ................................................ B-13
Principal Shareholders .................................... B-14
Dividend Policy ........................................... B-15
Related Party Transactions ................................ B-15
Index to Financial Statements ............................. B-17
</TABLE>
The following information is qualified in its entirety by, and should be
read in conjunction with, the more detailed information appearing elsewhere in
the Offer and Circular. All references to fiscal year in this Annex B 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
"Smithfield" 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 Offer and Circular have been
adjusted to reflect a two-for-one split of the Smithfield Common Stock
effective September 26, 1997.
For a discussion of risk factors to be considered by Shareholders and
Option holders in evaluating whether to accept the Offers, see "Risk Factors"
beginning on page 17 of the Offer and Circular.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Smithfield, 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. Smithfield 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 Smithfield 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
Smithfield's pork processing plants in Bladen County, North Carolina and
Smithfield, Virginia. Smithfield 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.
On February 9, 1998, Smithfield Foods issued US$200.0 million aggregate
principal amount of 7- 5/8% Senior Subordinated Notes due 2008 ("Senior
Subordinated Notes") in a transaction exempt from the registration requirements
of the U.S. Securities Act. Substantially all of the net proceeds from the sale
of the Senior Subordinated Notes were used to repay indebtedness under
Smithfield Foods' revolving credit facilities, with the balance to be invested
temporarily in short-term marketable debt securities. Smithfield Foods expects
to use availability under such facilities, together with internal funds, for
additional capital expenditures and general corporate purposes, including
expansion of Smithfield Foods' processed meats business, strategic
acquisitions, further vertical integration and joint ventures.
Results of Operations
In December 1995, Smithfield acquired all of the capital stock of John
Morrell. Smithfield'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, Smithfield 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
B-1
<PAGE>
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, Smithfield 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.
Smithfield uses recognized price-risk management and commodities hedging
techniques to enhance sales and to reduce the effect of adverse price changes
on Smithfield's profitability. Smithfield'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. Smithfield recognizes
gains and losses resulting from hedging transactions when the related sales are
made and the hedges are lifted.
40 Weeks Ended February 1, 1998 Compared To 39 Weeks Ended January 26, 1997
Sales in the first nine months of fiscal 1998 increased US$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 US$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 US$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 US$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 Smithfield's processing
plants.
Interest expense increased US$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 US$12.6 million reflected the imposition of civil
penalties against Smithfield by the U.S. District Court for the Eastern
District of Virginia in a civil action brought by the U.S. Environmental
Protection Agency. Smithfield 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 US$12.5 million profit at Smithfield's hog production group
compared to a US$16.8 million profit in the same period of fiscal 1997. During
the 40 weeks ended February 1, 1998, Smithfield 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 US$45.3 million, or
US$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
US$32.7 million, or US$.82 per diluted share, compared to net income of US$25.5
million, or US$.66 per diluted share, in the comparable period in fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Sales in fiscal 1997 increased US$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
B-2
<PAGE>
increased sales of fresh pork related to an increase in the number of hogs
slaughtered at Smithfield's Bladen County, North Carolina plant. The increase
in unit sales prices reflected the pass-through of higher raw material costs
due to an 18.8% increase in live hog costs. The increase in sales reflected a
41.9% increase in fresh pork tonnage and a 45.2% increase in processed meats
tonnage, primarily related to the John Morrell and Lykes acquisitions.
Cost of sales increased US$1.4 billion, or 61.1%, in fiscal 1997,
reflecting the increased sales tonnage and increased live hog costs.
Gross profit increased US$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 Smithfield'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 Smithfield's hog production group totalling US$20.7
million in fiscal 1997 compared to US$10.8 million in fiscal 1996. During
fiscal 1997, Smithfield obtained 10.1% of the hogs it processed from Brown's
and Smithfield-Carroll's.
As of April 27, 1997, Smithfield had deferred US$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 US$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 US$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 US$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 non-U.S. sales and a
reduction in the effective rate of state income taxes. Smithfield 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 US$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 Smithfield's hog production group.
Reflecting the factors discussed above, net income increased to US$44.9
million in fiscal 1997, up from US$15.9 million in fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995
Sales in fiscal 1996 increased US$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 Smithfield'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 US$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 US$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 US$10.8 million at
Smithfield's hog production group. In fiscal 1995, gross profit was adversely
affected by a US$0.2 million loss at the hog production group. During fiscal
1996, Smithfield obtained 11.3% of
B-3
<PAGE>
the hogs it processed from Brown's and Smithfield-Carroll's. As of April 28,
1996, Smithfield had deferred US$2.2 million of unrealized hedging gains on
outstanding futures contracts pending the completion of open sales transactions
and lifting of the related hedges.
Selling, general and administrative expenses increased US$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 US$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 US$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 non-U.S. 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 US$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 Smithfield's overall profitability in fiscal
1996.
In fiscal 1996, Smithfield 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 US$3.9 million.
Reflecting the factors discussed above, net income decreased to US$15.9
million in fiscal 1996 from US$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, Smithfield considers its inventories and accounts receivable
highly liquid and readily convertible into cash. Borrowings under Smithfield'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, Smithfield maintained US$300 million in credit
facilities, consisting of a 364-day US$225 million revolver and a two-year
US$75 million revolver (the "Old Credit Facilities"). In July 1997, Smithfield,
certain subsidiaries of Smithfield and a bank syndicate led by The Chase
Manhattan Bank entered into loan agreements providing for US$350 million in
senior secured revolving credit facilities, consisting of a five-year US$300
million revolving credit facility and a 364-day US$50 million revolving credit
facility (together, the "Revolving Credit Facilities"). In connection with this
refinancing, Smithfield 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 Smithfield's accounts receivable and
inventory. All borrowings outstanding at October 26, 1997 were borrowed under
the five-year revolving credit facility and are reflected as long-term in
Smithfield's financial statements. Borrowings under the Revolving Credit
Facilities are secured by substantially all of Smithfield'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
completion of the Offers is permitted under the Revolving Credit Facilities.
Borrowings under the Revolving Credit Facilities are guaranteed by certain
existing and future subsidiaries of Smithfield, the assets of which are
included in the calculation of Smithfield's borrowing base.
B-4
<PAGE>
Weighted average borrowings under the Old Credit Facilities were US$165.1
million in fiscal 1997, US$133.4 million in fiscal 1996 and US$69.9 million in
fiscal 1995, at weighted average interest rates of approximately 7%, 7% and 6%,
respectively. Maximum borrowings were US$215.0 million in fiscal 1997, US$179.8
million in fiscal 1996 and US$117.0 million in fiscal 1995. The outstanding
balances under the Old Credit Facilities totaled US$150.0 million and US$151.3
million as of April 27, 1997 and April 28, 1996, respectively, at a weighted
average interest rate of 7% for both years. The outstanding balances under the
Revolving Credit Facilities totaled US$207.0 million as of October 26, 1997 at
an interest rate of 6.5%.
During fiscal 1997, Smithfield privately placed US$140 million of senior
secured notes with a group of institutional lenders. The placement consisted of
US$40 million of seven-year 8.34% notes and US$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 US$65.2 million of long-term bank debt and
reduce short-term borrowings. In conjunction with the placement of the senior
secured notes, Smithfield refinanced US$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.
Completion of the Offers is permitted under the Senior Secured Notes.
During fiscal 1997, all of Smithfield's Series C 6.75% preferred stock was
converted into 1,333,332 shares of Smithfield Common Stock at US$15.00 per
share.
In November 1996, Smithfield acquired substantially all of the assets and
business of Lykes from Lykes Bros. Inc. for US$34.8 million in cash, which was
borrowed under the Old Credit Facilities, and the assumption of US$10.6 million
of current liabilities.
Smithfield expended US$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. Smithfield expended another US$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, Smithfield 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 US$15.9 million in cash plus
US$11.8 million of assumed liabilities. The capital expenditures and the
business acquisitions were funded with internally generated funds and net
borrowings under the Company's revolving credit facilities.
As of February 1, 1998, Smithfield had definitive commitments of US$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. Smithfield believes that the total costs of the Year 2000
issue will not have a material effect on Smithfield's results of operations nor
pose significant operational problems. Smithfield 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 Smithfield from its sale
of the Senior Subordinated Notes, 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. Smithfield 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.
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<PAGE>
Quarterly Results
Smithfield'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 Annex B 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
--------------------------- -------------------------------------------------------
3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- ------------- ------------- ------------- ------------- -------------
(In thousands of US$)
(Unaudited)
<S> <C>
Sales ................ $687,000 $873,766 $892,870 $969,226 $1,080,979 $927,536
Gross profit ......... 56,319 67,513 58,762 73,577 88,704 99,895
Income (loss)
from
continuing
operations
before
income taxes 16,460 10,776 1,161 14,100 23,967 28,449
EBITDA ............... 29,422 25,212 16,679 30,314 41,064 44,888
<CAPTION>
Fiscal 1998
----------------------------------------
1st Quarter 2nd Quarter 3rd Quarter
------------- ------------- ------------
(In thousands of US$)
(Unaudited)
<S> <C>
Sales ................ $914,963 $982,699 $1,095,999
Gross profit ......... 75,184 93,970 116,663
Income (loss)
from
continuing
operations
before
income taxes (3,690) 22,404 33,064
EBITDA ............... 26,748 41,618 53,431
</TABLE>
BUSINESS
General
Smithfield Foods believes it is the largest combined hog slaughterer and
further processor of pork in the United States. Smithfield produces a wide
variety of fresh pork and processed meat products which it markets throughout
the United States, and increasingly, to over 25 markets outside of the United
States, including Japan, Russia and Mexico. Since 1975, when current management
assumed control of Smithfield, Smithfield 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. Smithfield'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, Smithfield
has vertically integrated into hog production through an 86-percent owned
subsidiary and through a joint hog production arrangement with one of the
United States' largest hog producers. These hog production operations
collectively accounted for 10.1% of the hogs Smithfield slaughtered in fiscal
1997. In addition, Smithfield obtains a substantial portion of its hogs under
market-indexed, multi-year agreements with several of the United States largest
suppliers of high quality hogs, strategically located in proximity to
Smithfield's hog slaughtering and further processing operations in North
Carolina and Virginia. These suppliers accounted for 41.5% of the hogs
Smithfield slaughtered in fiscal 1997.
Smithfield's fresh pork and processed meats are available across the
United States. In a number of markets, Smithfield's brands are among the
leaders in selected product categories. In recent years, as consumers have
become more health conscious, Smithfield 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,
Smithfield has developed, and is marketing throughout the United States, 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, Smithfield
acquired Gwaltney, then Smithfield Packing's principal Mid-Atlantic United
States competitor. This acquisition doubled Smithfield's sales and slaughter
capacity and added
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<PAGE>
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, Smithfield
Foods acquired Patrick Cudahy, which added a prominent line of dry sausage
products to Smithfield's existing line of processed meats. In fiscal 1986,
Smithfield Foods 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, Smithfield Foods acquired the Mash's brand
name and a ham processing plant in Landover, Maryland. In fiscal 1993,
Smithfield acquired the Valleydale brand name and a bacon processing plant in
Salem, Virginia.
In December 1995, Smithfield Foods acquired John Morrell, a major
Midwestern United States pork processor with primary markets in the Midwestern,
Northeastern and Western United States. This acquisition changed Smithfield's
character from a large multi-regional pork processor to one with distribution
capabilities across the United States. It also doubled Smithfield's sales and
slaughter capacity, added several popular lines of branded processed meat
products along with four efficient processing facilities and more than doubled
Smithfield's sales outside the United States. Smithfield 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
Smithfield's Eastern United States 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, Smithfield acquired the assets and businesses of Lykes.
Lykes is a pork processor with primary markets in the Southern and Southeastern
United States. Lykes produces branded processed meats, including bacon, hot
dogs, and breakfast and dinner sausages, under the Lykes and Sunnyland brands.
In June 1997, Smithfield 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.
Smithfield Foods' business is based on four strategic initiatives: (i)
vertical integration into hog production through Smithfield-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 Smithfield to market highly
differentiated pork products; (iii) continued growth through strategic
acquisitions; and (iv) a heightened emphasis on expansion into non-U.S.
markets.
As a complement to Smithfield Foods' hog processing operations, Smithfield
has vertically integrated into highly efficient hog production through Brown's
and Smithfield-Carroll's. In addition, Smithfield is supplementing the hogs it
obtains from these hog production operations with market-indexed, multi-year
agreements with several of the United States largest suppliers of high quality
hogs, strategically located in proximity to Smithfield'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 Smithfield Foods' strategic
partners. The hogs produced from these genetic lines are among the leanest hogs
commercially available, and enable Smithfield to market highly differentiated
pork products. Management believes that the leanness and increased meat yields
of these hogs will, over time, improve Smithfield's profitability with respect
to both fresh pork and processed meat. In fiscal 1997, Smithfield processed 1.6
million NPD hogs and expects to increase that number substantially in future
years.
B-7
<PAGE>
Revenues by Source
Smithfield Foods' sales are in one industry segment, meat processing. The
following table shows for the fiscal periods indicated the percentages of
Smithfield's revenues derived from fresh pork, processed meats and other
products.
<TABLE>
<CAPTION>
First Nine
1993 1994 1995 1996 1997 Months of 1998
-------- -------- -------- -------- -------- ---------------
<S> <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
Smithfield Foods is one of the largest fresh pork processors in the United
States. Smithfield slaughters hogs at five of its plants (three in the
Southeastern and two in the Midwestern United States), with an aggregate
slaughter capacity of 81,000 hogs per day. Smithfield owns a fourth plant in
the Southeastern United States not currently in operation, which has the
capacity to slaughter an additional 6,500 hogs per day. A substantial portion
of Smithfield's fresh pork is sold to retail customers as unprocessed, trimmed
cuts such as loins (including roasts and chops), butts, picnics and ribs.
Smithfield Foods also sells hams, bellies and trimmings to other further
processors. Smithfield 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, Smithfield provides its own processing operations with
raw material of much higher quality and freshness than that generally available
through open market purchases.
Smithfield Foods 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 Smithfield's
fresh pork products.
Processed Meat Products
Smithfield Foods 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.
Smithfield 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. Smithfield also sells a substantial quantity of processed meats as
private label products. Smithfield Foods 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, Smithfield has for several years emphasized production of more
closely-trimmed, leaner and lower-salt processed meats, such as 40
percent-lower-fat bacon. Smithfield Foods 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
Smithfield Foods' 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.
B-8
<PAGE>
Smithfield produces its own hogs through Brown's and Smithfield-Carroll's
and purchases hogs from several of the largest hog producers in the U.S.,
strategically located in proximity to Smithfield'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
Eastern, Southeastern and Midwestern United States. Smithfield Foods obtained
10.1% of the hogs it processed in fiscal 1997 from Brown's and
Smithfield-Carroll's. Smithfield'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 Smithfield Foods'
strategic initiative of vertical integration and reduces Smithfield's exposure
to fluctuations in profitability historically experienced by the pork
processing industry. Smithfield has also established multi-year agreements with
Carroll's Foods, Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and
Prestage Farms, Inc. which provide Smithfield with a stable supply of
high-quality hogs at market-indexed prices. These producers supplied 41.5% of
the hogs processed by Smithfield in fiscal 1997.
Smithfield Foods purchases its hogs on a daily basis at its Southeastern
and Midwestern United States slaughter plants; at Smithfield-owned buying
stations in three Southeastern and five Midwestern U.S. states; from certain
Canadian sources; and through certain exclusive dealer-operated buying stations
in the Midwestern United States. Smithfield Foods 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
Smithfield Foods has significant market presence in the United States, and
strong market positions in the Mid-Atlantic, Southeastern, Southern and
Midwestern United States. Smithfield'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. Smithfield Foods
uses both in-house salesmen as well as independent commission brokers to sell
its products. In fiscal 1997, Smithfield sold its products to more than 3,500
customers, none of whom accounted for as much as 10% of Smithfield's revenues.
Smithfield Foods 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.
Smithfield Foods in recent years has placed major emphasis on growing and
expanding its non-U.S. sales. In fiscal 1997, non-U.S. sales comprised
approximately 6% of Smithfield's total dollar sales. Smithfield 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, Smithfield Foods maintains a distributorship arrangement with Sumitomo
Corporation of America. To serve other non-U.S. markets, Smithfield may also
enter into similar distribution and sales arrangements, as well as make
international acquisitions or establish strategic joint ventures in countries
other than the United States not only for product sales but also for hog
production and pork processing. Smithfield also had export sales to Russia,
Mexico and to more than two dozen other countries in fiscal 1997. Smithfield
Foods expects continued growth in its international sales for the foreseeable
future. Non-U.S. sales are subject to factors beyond Smithfield's control, such
as general economic conditions, tariffs, exchange rate fluctuations and changes
in governmental policies. Smithfield conducts all of its export sales in U.S.
dollars and therefore bears no currency translation risk.
Smithfield'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. Smithfield
Foods typically builds substantial inventories of hams in anticipation of its
seasonal holiday business.
B-9
<PAGE>
Smithfield Foods uses recognized price-risk management and commodities
hedging techniques to enhance sales and to reduce the effect of adverse price
changes on Smithfield's profitability. Smithfield'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
Smithfield Foods owns and uses numerous marks, which are registered
trademarks of Smithfield or are otherwise subject to protection under
applicable intellectual property laws. Smithfield considers these marks and the
accompanying goodwill and customer recognition valuable and material to its
business.
Distribution
Smithfield Foods 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. Smithfield coordinates deliveries and uses
backhauling to reduce overall transportation costs. Smithfield 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, Smithfield Foods 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. Smithfield's products compete with a large
number of other protein sources, including beef, chicken, turkey and seafood,
but Smithfield'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 Smithfield'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 Smithfield
Foods. 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 March 31, 1998, Smithfield Foods had approximately 18,800 employees,
approximately 10,800 of whom are covered by collective bargaining agreements
expiring between May 3, 1998 and March 29, 2002. Except as noted below,
Smithfield believes that its relationship with its employees is good. On April
13, 1998, the United Food and Commercial Workers Union (UFCW) Local 1625 at
Smithfield's Plant City, Florida processing plant went on strike after
rejecting the latest wage and benefits offer proposed by Smithfield during
negotiations to renew an expiring collective bargaining agreement. The Plant
City plant employs approximately 600 persons, of whom approximately 382 are
covered by the collective bargaining agreement. Smithfield intends to continue
to operate the Plant City plant and to hire replacements for striking workers.
Management does not currently expect this matter to have a material impact on
Smithfield's financial condition or its results of operations.
Legal Proceedings
Smithfield Foods 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 Smithfield'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, Smithfield Foods is subject to various laws and regulations
administered by United States, state and other government entities, including
the Environmental Protection Agency ("EPA") and corresponding state agencies
such as the Virginia State Water Control Board ("VSWCB"), the Virginia
Department of Environmental Quality ("VDEQ"), the North Carolina Department of
Environment and Natural Resources ("DENR"), the Iowa Department of Natural
Resources and the South Dakota Department of Environment and
B-10
<PAGE>
Natural Resources, as well as the United States Department of Agriculture, the
United States Food and Drug Administration and the United States Occupational
Safety and Health Administration. Management believes that Smithfield 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,
Smithfield Foods believes that the ultimate resolution of these suits will not
have a material adverse effect on Smithfield's financial position or annual
results of operations.
Permit Violations At Smithfield Packing And Gwaltney Plants;
Administrative Consent Orders; Connection To HRSD System. The National
Pollutant Discharge Elimination System permit (the "discharge permit") for the
Smithfield Packing and Gwaltney plants in Smithfield, Virginia, as modified by
the VSWCB in 1990, imposed more stringent effluent limitations on phosphorus
and two species of nitrogen (ammonia and Total Kjeldahl Nitrogen) than the
wastewater treatment facilities at those plants were designed to meet. To
achieve compliance with these new limitations, Smithfield Foods 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.
Smithfield Foods 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, Smithfield made
more than US$2.7 million in capital expenditures to upgrade its existing
wastewater treatment facilities. Smithfield must continue to operate these
facilities to produce a wastewater suitable for treatment in the HRSD system
and, in addition, pay the HRSD approximately US$1.8 million per year for
wastewater treatment. Smithfield 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, Smithfield Foods
regularly tested wastewater to determine compliance with applicable effluent
limitations. United States 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, Smithfield
learned that records of many tests conducted from 1991 through early 1994 could
not be found. Despite a careful search, most of these records were never found
and are believed to have been destroyed. The employee responsible for the
supervision of the tests and the maintenance of the test records was replaced
and subsequently terminated. In October 1996, that former employee entered a
guilty plea and was convicted in the United States District Court for the
Eastern District of Virginia of 23 violations of the United States Clean Water
Act, including records destruction and making false reports. Eight of these
violations related to his duties as Smithfield's employee, while 15 violations
were committed during his outside consulting activities for public and private
entities unrelated to Smithfield. In January 1998, several Smithfield Foods
employees responsible for wastewater treatment were subpoenaed and testified
before a federal grand jury in Norfolk, Virginia. Subsequently, the grand jury
issued subpoenas requiring production of various environmental materials
relating to Smithfield's Smithfield, Virginia wastewater. Neither Smithfield
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 US$12.6
million civil penalty on Smithfield Foods and its Smithfield Packing and
Gwaltney subsidiaries. Smithfield recognized a nonrecurring charge of US$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 United States Clean
Water Act before Smithfield's wastewater treatment facilities were connected to
the HRSD system. The court found 6,982 days of violation. Smithfield Foods
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. Smithfield 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.
B-11
<PAGE>
Suit by Commonwealth Of Virginia. On August 30, 1996, VDEQ filed a civil
suit under the laws of the Commonwealth of Virginia against Smithfield Foods in
the Circuit Court of the County of Isle of Wight, Virginia. This suit alleged a
total of 22,517 discharge permit violations at the Gwaltney and Smithfield
Packing facilities during the period from 1986 until such facilities were
connected to the HRSD system in 1996 and 1997, respectively. The difference in
the number of total violations charged by the EPA and the Commonwealth of
Virginia is mainly attributable to their different methods of counting
violations. The same categories of violations were involved in both suits,
except that the Commonwealth of Virginia did not charge Smithfield with any
permit violation excused by the 1991 and 1994 Orders. The Commonwealth's total
was larger in part because the Commonwealth counted every missing record as a
separate violation, and the EPA counted the number of days records were
missing. In addition, the Commonwealth's suit alleged a separate violation for
each failure to test chlorine levels every hour, failure to make certain
required reports, and failure on certain days to properly staff Smithfield's
facilities. While each violation is subject to a maximum penalty of US$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 Smithfield should pay a total of US$6 million for the violations
alleged, which included an alleged economic benefit of US$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. Smithfield 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, Smithfield will argue that no economic benefit accrued to
Smithfield and that no environmental damage was caused by the violations. There
can be no assurance as to the outcome of any such proceeding.
B-12
<PAGE>
MANAGEMENT
Directors and Executive Officers of Smithfield Foods
The directors and executive officers of Smithfield Foods are set forth
below.
<TABLE>
<S> <C>
Years in Pork
Name Age Industry Positions with Smithfield and Other Information
- -------------------------- -- --- ----------------------------------------------------------------
Joseph W. Luter, III 58 29 Director; Chairman of the Board and Chief Executive Officer
of Smithfield Foods
Lewis R. Little 54 34 Director; President and Chief Operating Officer of Smithfield
Foods 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 Smithfield
Foods
C. Larry Pope 43 16 Vice President and Controller of Smithfield Foods
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 annex, this producer is a party to various hog
supply contracts and/or hog production arrangements with Smithfield. For
further information, see "Business -- Business Strategy," " -- Raw
Materials" and "Related Party Transactions."
B-13
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning (i) the
share ownership of each person known to Smithfield Foods to be the beneficial
owner of more than five percent of the outstanding shares of Smithfield's
Common Stock and (ii) the share ownership of Smithfield's Common Stock by all
Directors and executive officers as a group, in each case as of March 31, 1998.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
Name and Address of (Number of Shares Percent
Beneficial Owner Beneficially Owned) of Class
- --------------------------------------------- --------------------- ---------
<S> <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. 2,346,000 (3) 6.2%
101 California Street
San Francisco, CA 94111
Directors and Executive Officers as a group 8,542,246 (4) 22.1%
</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 Smithfield Foods.
(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 Smithfield Foods,
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) The number of shares in the table is based upon a Schedule 13G, dated
January 30, 1998, filed by Montgomery Asset Management, LLC
("Montgomery"), according to which Montgomery holds sole dispositive power
with respect to all such shares and sole voting power with respect to
1,658,000 shares.
(4) Includes 1,180,000 shares subject to presently exercisable stock options.
B-14
<PAGE>
DIVIDEND POLICY
Smithfield Foods has never paid a cash dividend on the Smithfield Common
Stock and does not anticipate paying any cash dividend on the Smithfield Common
Stock in the forseeable future. In addition, certain of Smithfield's financing
agreements prohibit payment of dividends.
RELATED PARTY TRANSACTIONS
Joseph W. Luter, III, a Director and the Chairman of the Board and Chief
Executive Officer of Smithfield Foods, 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. Smithfield sold US$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 Smithfield Foods in the
ordinary course of its business, and in the opinion of Smithfield's management,
the terms of those transactions were as favorable to Smithfield Foods as those
made to unaffiliated parties. In addition, Gwaltney purchased US$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. Smithfield 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
Smithfield Foods, 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 Smithfield's pork processing plants.
The arrangements involve, among other things, (i) the lease of certain hog
production facilities by B&G to Brown's until December 31, 2009 at an annual
rent of approximately US$465,000 per year, and (ii) advances by B&G to Brown's
of cash for working capital. Working capital advances totaling US$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 Smithfield's lending banks. Brown's hog production operations on the B&G
land generated US$6.4 million of sales to other subsidiaries of Smithfield
Foods in fiscal 1997 and Smithfield anticipates about the same volume of
business in fiscal 1998. Smithfield Foods believes that the terms of the
foregoing arrangements are no less favorable to Smithfield than if entered into
with unaffiliated parties.
F. J. Faison, Jr., a director of Smithfield, 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").
Smithfield Foods has arrangements with CFI and its affiliates for production of
hogs for Smithfield'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 Smithfield Foods, and CFAV, which
partnership owns hog raising facilities and leases them to CFOV, and (ii)
contracts between Smithfield and CFOV and CFI which obligate Smithfield 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 US$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 US$93,049,000 and US$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. Smithfield 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 Smithfield 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 Smithfield (as compared
to market costs) of US$5,245,000 in fiscal 1997 compared to decreased raw
material costs of US$2,617,000 in fiscal 1996.
Wendell H. Murphy, a director of Smithfield, 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.
Smithfield Foods has a contract with MFF which obligates Smithfield to purchase
hogs finished by MFF in the Southeastern United States. Pursuant to the
purchase agreement, Smithfield purchased US$433,861,000 of live hogs from MFF
in fiscal 1997 and anticipates a greater volume of business under this
agreement in fiscal 1998. Smithfield believes that the prices paid under the
purchase agreement with MFF are equivalent to market.
William H. Prestage, a director of Smithfield Foods, 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.
Smithfield has a contract
B-15
<PAGE>
with PFI which obligates Smithfield to purchase hogs produced by PFI in the
states of Virginia, North Carolina and South Carolina. Pursuant to the purchase
agreement, Smithfield Foods purchased US$182,576,000 of live hogs from PFI in
fiscal 1997 and anticipates a greater volume of business under this agreement
in fiscal 1998. Smithfield 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
Smithfield Foods, 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. 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 Smithfield Foods, is
the president and a director, (ii) West Isle Partners, Inc., of which Wendell
H. Murphy, a director of Smithfield Foods, 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 Smithfield, 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
US$12,673,000 to the arrangement and had a 33-percent interest in its profits
or losses. Smithfield believes that the terms of the joint arrangement are no
less favorable to Smithfield Foods than if entered into with unaffiliated
parties.
Cecil W. Gwaltney, who was serving as a director of Smithfield Foods at
the time of his death in September 1997, was chairman of the board of Gwaltney
Motor Company ("GMC"), which was paid US$677,000 by the Company in fiscal 1997
for automotive equipment and parts, and maintenance and leasing services.
Smithfield Foods leases substantially all of its automobiles under three-year
leases arranged by GMC. As of April 27, 1997, Smithfield was obligated to make
a total of US$1,008,000 in future lease payments under such leases in effect on
that date. Smithfield 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 Smithfield, is a director and owns
50% of the voting stock of Maxwell Foods, Inc. ("MFI"), a hog producer located
in Goldsboro, North Carolina. Smithfield has a contract with MFI which
obligates Smithfield to purchase hogs produced by MFI in the State of North
Carolina. Under the purchase agreement, Smithfield purchased US$109,470,000 of
live hogs from MFI in fiscal 1997 and anticipates a greater volume of business
under this agreement in fiscal 1998. Smithfield 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, Smithfield purchased
US$971,000 of comminuted chicken meat from CTI. Smithfield Foods believes that
the terms under which it made such purchases were as advantageous to Smithfield
as those it would have received from any other comminuted chicken meat
producer.
B-16
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
On Pages B-17 to B-43, the financial statements of Smithfield Foods have
been prepared using US GAAP and references to "$" refer to United States
dollars.
<TABLE>
<CAPTION>
Page(s)
-------------
<S> <C>
Audited Year-End Financial Statements
Report of Independent Public Accountants ................................................. B-17
Consolidated Balance Sheets at April 27, 1997 and April 28, 1996 ......................... B-18
Consolidated Statements of Income for the Years Ended April 27, 1997, April 28, 1996,
and April 30, 1995 ...................................................................... B-19
Consolidated Statements of Cash Flows for the Years ended April 27, 1997, April 28, 1996,
and April 30, 1995 ...................................................................... B-20
Consolidated Statements of Stockholders' Equity for the Years ended April 27, 1997,
April 28, 1996 and April 30, 1995 ....................................................... B-21
Notes to Consolidated Financial Statements ............................................... B-22 to B-38
Unaudited Interim Financial Statements
Consolidated Condensed Balance Sheets at February 1, 1998 and April 27, 1997 ............. B-39
Consolidated 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, 1997 ... B-40
Consolidated Statements of Cash Flows for the 40 Weeks ended February 1, 1998 and 39
Weeks ended January 26, 1997 ............................................................ B-41
Notes to Consolidated Condensed Financial Statements ..................................... B-42 to B-43
</TABLE>
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
B-17
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------
April 27, April 28,
1997 1996
------------- -------------
(In thousands)
<S> <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.
B-18
<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>
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.
B-19
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(In thousands)
<S> <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.
B-20
<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>
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.
B-21
<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 pork processing operations are conducted through five principal
wholly-owned subsidiaries: Gwaltney of Smithfield, Ltd. ("Gwaltney"), John
Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc. ("Lykes"), Patrick
Cudahy Incorporated ("Patrick Cudahy") and The Smithfield Packing Company,
Incorporated ("Smithfield Packing"). The Company also conducts hog production
operations principally through its 86-percent owned subsidiary, Brown's of
Carolina, Inc. ("Brown's"). 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. Cost includes direct materials, labor and applicable
manufacturing and production overhead. Inventories consist of the following:
<TABLE>
<CAPTION>
April 27, April 28,
1997 1996
----------- ----------
(In thousands)
<S> <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.
Revenue Recognition
Revenues from product sales are recorded upon shipment to customers.
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).
B-22
<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 diluted net income (loss) per common share
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <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>
B-23
<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>
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.
B-24
<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>
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.
B-25
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 -- JOINT HOG PRODUCTION ARRANGEMENTS -- 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 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>
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>
B-26
<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>
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
B-27
<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 and the acquisition, disposition and leasing of
assets. The Company is restricted from paying cash dividends on its common
stock.
NOTE 5 -- INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <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>
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>
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>
B-28
<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>
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>
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).
B-29
<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>
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.
B-30
<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>
$ 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 common share based on the fair value method as defined in SFAS
123 for fiscal 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C>
Net income, as reported ........................................ $ 44,937 $ 19,786
Pro forma net income ........................................... 44,553 19,715
Income per common share from continuing operations, as reported:
Basic ......................................................... $ 1.21 $ .55
Diluted ....................................................... 1.17 .53
Pro forma income per common share from continuing operations:
Basic ......................................................... $ 1.20 $ .55
Diluted ....................................................... 1.16 .53
</TABLE>
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.
B-31
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued:
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.
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>
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>
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>
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>
B-32
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued:
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.
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.
B-33
<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 obligations. 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.
B-34
<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
B-35
<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.
B-36
<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>
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.
B-37
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 14 -- DIFFERENCES BETWEEN US AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (UNAUDITED)
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States ("U.S.
GAAP"). In certain respects, U.S. GAAP differs from generally accepted
accounting principles in Canada ("Canadian GAAP").
The only adjustment required to reflect Smithfield Foods financial
statements in accordance with Canadian GAAP relate to accounting for
investments in joint ventures. U.S. GAAP requires accounting for investments in
joint ventures under the equity method of accounting, while under Canadian GAAP
investments in joint ventures are accounted for under the proportionate
consolidation method. The equity method of accounting will produce the same
results as the proportionate consolidation method for income from continuing
operations, net income, income per common share and stockholder's equity. The
reconciliation of the equity method of accounting to the proportionate
consolidation method for certain financial statement captions is as follows:
<TABLE>
<CAPTION>
February 1, 1998 January 26, 1997 April 27, 1997 April 28, 1996 April 30, 1995
(In thousands) ------------------ ------------------ ---------------- ---------------- ---------------
<S> <C>
Sales under U.S. GAAP ......... $2,993,661 $2,943,075 $3,870,611 $2,383,893 $1,526,518
Joint venture sales ........... 8,620 2,565 5,612 1,490 750
---------- ---------- ---------- ---------- ----------
Sales under Canadian GAAP ..... $3,002,281 $2,945,640 $3,876,223 $2,385,383 $1,527,268
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
February 1, 1998 April 27, 1997 April 28, 1996
(In thousands) ------------------ ---------------- ---------------
<S> <C>
Current assets under U.S. GAAP ...... $ 505,204 $ 488,378 $ 420,407
Joint venture current assets ........ 8,884 6,653 3,966
--------- --------- ---------
Current assets under Canadian GAAP .. $ 514,088 $ 495,031 $ 424,373
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
February 1, 1998 April 27, 1997 April 28, 1996
(In thousands) ------------------ ---------------- ---------------
<S> <C>
Total assets under U.S. GAAP ...... $1,062,568 $ 995,254 $857,619
Joint venture total assets ........ 40,668 38,723 35,007
---------- ---------- --------
Total assets under Canadian GAAP .. $1,103,236 $1,033,977 $892,626
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
February 1, 1998 April 27, 1997 April 28, 1996
(In thousands) ------------------ ---------------- ---------------
<S> <C>
Current liabilities under U.S. GAAP ...... $272,949 $324,066 $332,381
Joint venture current liabilities ........ 8,517 6,774 6,251
-------- -------- --------
Current liabilities under Canadian GAAP .. $281,466 $330,840 $338,632
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
February 1, 1998 April 27, 1997 April 28, 1996
(In thousands) ------------------ ---------------- ---------------
<S> <C>
Total liabilities under U.S. GAAP ...... $722,232 $687,768 $615,102
Joint venture total liabilities ........ 40,668 38,723 35,007
-------- -------- --------
Total liabilities under Canadian GAAP .. $762,900 $726,491 $650,109
======== ======== ========
</TABLE>
B-38
<PAGE>
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
February 1, 1998 April 27, 1997
------------------ ---------------
(Unaudited)
<S> <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 ......................................................................... 39,487 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.
B-39
<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>
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.
B-40
<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>
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.
B-41
<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>
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>
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.
B-42
<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.
B-43
<PAGE>
ANNEX C
INFORMATION CONCERNING SCHNEIDER CORPORATION
The information in this Annex C has been obtained form Schneider's public
filings with Canadian securities regulatory authorities. While Smithfield Foods
and Smithfield Canada have included such information concerning Schneider
insofar as it is known or reasonably available to Smithfield Foods and
Smithfield Canada, neither Smithfield Foods nor Smithfield Canada is affiliated
with Schneider. Smithfield Foods and Smithfield Canada were not involved in the
preparation of the information and statements relating to Schneider contained
in this document, are not able to verify any such information or statements,
and make no representation or warranty as to its accuracy or completeness.
In this Annex C, all references to "$" refer to Canadian dollars and all
references to "the Corporation" or "the issuer" refer to Schneider Corporation.
INDEX TO SCHNEIDER INFORMATION
<TABLE>
<S> <C>
Schneider Corporation Management Information Circular dated February 18, 1998 for the
Annual Meeting of Shareholders held on April 22, 1998 ...................................................... C-2
Schneider Corporation audited Consolidated Financial Statements for the fiscal years
ended October 25, 1997, October 26, 1996 and October 28, 1995 ...............................................C-14
Schneider Corporation Annual Information Form concerning the fiscal year ended October
25, 1997, as of February 10, 1997 ...........................................................................C-26
Excerpts from Schneider Corporation's 1997 Annual Report (including management's
discussion and analysis) that are incorporated by reference in the Annual Information
Form concerning the fiscal year ended October 25, 1997 ......................................................C-30
Schneider Corporation unaudited interim financial statements for the sixteen weeks ended
February 14, 1998 ...........................................................................................C-40
</TABLE>
C-1
<PAGE>
SCHNEIDER CORPORATION
MANAGEMENT INFORMATION CIRCULAR
Solicitation of Proxies
THIS INFORMATION CIRCULAR IS FURNISHED IN CONNECTION WITH THE SOLICITATION
OF PROXIES BY AND ON BEHALF OF THE MANAGEMENT OF SCHNEIDER CORPORATION
(HEREINAFTER CALLED THE "CORPORATION") FOR USE AT THE ANNUAL MEETING OF THE
COMMON SHAREHOLDERS TO BE HELD AT THE TIME AND PLACE AND FOR THE PURPOSES SET
FORTH IN THE ACCOMPANYING NOTICE OF THE MEETING OR ANY ADJOURNMENT THEREOF. It
is expected that the solicitation will be primarily by mail. Proxies may also
be solicited personally by regular employees of the Corporation at nominal
cost. The cost of solicitation by or on behalf of management will be borne by
the Corporation.
The Corporation is distributing copies of the Notice of the Annual Meeting
of Shareholders, this circular, form of proxy and the annual report
(collectively, the "documents") to clearing agencies, banks and trust
companies, or their nominees ("intermediaries") for onward distribution to
shareholders of the Corporation whose shares are held by or in the custody of
those intermediaries ("non-registered shareholders"). The intermediaries are
required to forward the documents to non-registered shareholders.
The solicitation of proxies from non-registered shareholders will be
carried out by intermediaries or by the Corporation if the names and addresses
of non-registered shareholders are provided by the intermediaries. The cost of
the solicitation will be borne by the Corporation.
Non-registered shareholders who wish to file proxies should follow the
directions of their intermediary with respect to the procedure to be followed.
Generally, non-registered shareholders will either:
(a) be provided with a form of proxy executed by their intermediary but
otherwise uncompleted. The non-registered shareholder may complete the
proxy and return it directly to the Corporation's transfer agent;
or
(b) be provided by their intermediary with a request for voting
instructions. The intermediary is required to send the Corporation an
executed form of proxy completed in accordance with any voting
instructions received by it.
Appointment and Revocation of Proxies
The persons named in the enclosed form of Proxy are officers of the
Corporation. A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO ATTEND, ACT AND VOTE FOR SUCH SHAREHOLDER AT THE SAID MEETING
OTHER THAN THOSE NAMED IN THE ENCLOSED FORM OF PROXY. A SHAREHOLDER DESIRING TO
APPOINT SOME PERSON OTHER THAN THOSE NAMED IN THE ENCLOSED FORM OF PROXY TO
REPRESENT SUCH SHAREHOLDER AT THE MEETING MAY DO SO EITHER BY INSERTING SUCH
PERSON'S NAME IN THE BLANK SPACE PROVIDED IN THE ENCLOSED FORM OF PROXY AND
STRIKING OUT THE NAMES OF THE TWO SPECIFIED PERSONS OR BY COMPLETING ANOTHER
FORM OF PROXY.
All proxies to be used at the aforesaid meeting must be deposited with the
Corporation (321 Courtland Avenue East, P.O. Box 130, Kitchener, Ontario, N2G
3X8) or its agent, CIBC Mellon Trust Company (by mail: Corporate Trust
Services, P.O. Box 12005, Stn. BRM B, Toronto, Ontario, M7Y 2K5; by hand
delivery: 393 University Avenue, 5th Floor, Toronto, Ontario) prior to 9:00
a.m. on Tuesday, the 21st day of April, 1998. A Shareholder who has given a
Proxy may revoke it at any time before it is exercised. Section 110(4) of the
Business Corporations Act (Ontario) sets out a procedure for revoking proxies
by the deposit of an instrument in writing at the registered office of the
Corporation (321 Courtland Avenue East, Kitchener, Ontario) at any time up to
and including the last business day preceding the day of the meeting or any
adjournment thereof or with the Chairman on the day of such meeting.
Exercise of Discretion by Proxies
The persons named in the enclosed form of Proxy will vote the shares in
respect of which they are appointed in accordance with the directions of the
Shareholders appointing them. IF NO DIRECTION IS MADE IN A PROXY WITH RESPECT
TO ANY MATTER SET OUT THEREIN, THE PROXY WILL BE VOTED FOR SUCH MATTER.
C-2
<PAGE>
The enclosed form of Proxy confers discretionary authority upon the
persons named therein with respect to amendments or variations to matters
identified in the Notice of Meeting to which the Proxy relates and with respect
to other matters which may properly come before the meeting. Management of the
Corporation knows of no such amendment, variation or other matters to come
before the meeting referred to herein other than the matters referred to in the
Notice of Meeting. However, if any other matters which are not now known to
management should properly come before the meeting, the Proxy will be voted on
such matters in accordance with the best judgment of the person or persons
voting the Proxy.
Common Shares
As at February 18, 1998, the Corporation had outstanding 738,954 Common
shares carrying the right to one vote per share shown as registered in the name
of the shareholder on the list of shareholders which is available for
inspection during usual business hours at CIBC Mellon Trust Company, 393
University Avenue, 5th Floor, Toronto, and at the meeting of shareholders. A
list of shareholders will be prepared as of March 11, 1998, the record date
fixed for determining shareholders entitled to notice of the meeting. A person
who acquires ownership of shares after that date may establish such ownership
and demand, not later than ten days before the meeting, that the name of such
person be included in the list of shareholders.
Principal Holders of Common Shares
As at February 18, 1998, the only persons or corporations to the knowledge
of the directors or officers of the Corporation who beneficially own directly
or indirectly, or exercise control or direction over Common shares of the
Corporation carrying more than 10% of the voting rights attached to all Common
shares of the Corporation outstanding and the number and percentage of Common
shares so owned, controlled, or directed, are:
<TABLE>
<CAPTION>
Common Shares % of Voting Shares
--------------- -------------------
<S> <C>
Frederick P. Schneider .......... 215,012 29.1
Betty L. Schneider .............. 121,348 16.4
Herbert J. Schneider ............ 102,230 13.8
Jean M. Hawkings ................ 82,500 11.2
</TABLE>
The above named individuals hold the preponderance of their interests in
the Common shares of the Corporation through J.M. Schneider Family Holdings
Limited ("Family Holdco") a holding company controlled by them, which holds
515,104 Common shares of the Corporation. The said 515,104 Common shares are
included in the figures above for the named individuals. Subsequent to the 1997
fiscal year end, Family Holdco entered into a "lock-up" agreement with
Smithfield Foods, Inc. ("Smithfield") of Norfolk, Virginia, pursuant to which
Smithfield agreed to make an offer to acquire any and all Common shares and
Class A shares of the Corporation on the basis of .5415 of an exchangeable
share of a newly incorporated wholly-owned Canadian subsidiary of Smithfield.
Each whole exchangeable share is to be exchangeable for one share of common
stock of Smithfield. The exchangeable shares are to have voting, dividend and
liquidation rights that are, as nearly as practicable, equivalent to those of
the Smithfield common stock. Smithfield's offer is expected to be made in
March, 1998. THE BOARD OF DIRECTORS OF THE CORPORATION HAS NOT MADE ANY
RECOMMENDATION ON THE OFFER TO BE MADE BY SMITHFIELD. THE BOARD OF DIRECTORS OF
THE CORPORATION WILL RESPOND FORMALLY TO THE OFFER TO BE MADE BY SMITHFIELD, AS
IS REQUIRED BY LAW, ONCE IT HAS RECEIVED AND REVIEWED SUCH OFFER.
Class A Shares
The Class A shares are restricted shares in that they are generally
non-voting and only vote in very limited circumstances on matters respecting
the attributes of the class itself or in relation to the Common shares where
class approval is specifically required.
A "coat-tail provision" has been attached to the Class A shares and would
come into effect in the event of an Exclusionary Offer (as defined below). This
is designed to ensure that all holders of the Class A shares will have an equal
opportunity to participate with the holders of the Common shares in any premium
offered to Common shareholders in the context of a change of control
transaction involving the Corporation. If an Exclusionary Offer is made, each
outstanding Class A share shall be convertible into one Common share at the
option of the holder during the period commencing on the eighth day after the
date of the Exclusionary Offer and terminating on the last day upon which
holders of Common shares may accept the Exclusionary Offer. An election by a
holder of a Class A share to exercise this conversion right shall be deemed to
also constitute irrevocable elections by such holder to deposit the Common
shares resulting from such conversion ("Converted Shares") pursuant to the
Exclusionary Offer (subject to such holder's right to subsequently withdraw the
C-3
<PAGE>
Converted Shares from the Exclusionary Offer) and to exercise the right to
reconvert any such Converted Shares in respect of which such holder exercises
his, her or its right of withdrawal, or which are otherwise not taken up under
the Exclusionary Offer, into Class A shares. An Exclusionary Offer means an
offer to purchase Common shares that (i) must, by reason of applicable
securities legislation or the requirements of a stock exchange on which the
Common shares are listed, be made to all or substantially all holders of Common
shares who are in a province of Canada to which the requirement applies; and
(ii) is not made concurrently with an offer to purchase Class A shares that is
identical to the offer to purchase Common shares in terms of price per share
and percentage of outstanding shares to be taken up and in all other material
respects. The conversion right referred to above is deemed not to come into
effect if, prior to the time the Exclusionary Offer is made or, if the
Exclusionary Offer has been made, within seven days of the date of the
Exclusionary Offer, a certificate or certificates are delivered to the transfer
agent and the Secretary of the Corporation on behalf of one or more
shareholders owning more than 50% of the then outstanding Common shares to the
effect that, inter alia, such holders do not intend on accepting any
Exclusionary Offer.
Full details of all share attributes (including the "coat-tail provision")
are available to all shareholders from the Secretary of the Corporation, 321
Courtland Avenue East, P.O. Box 130, Kitchener, Ontario N2G 3X8.
Election of Directors
The Corporation currently has nine (9) directors, all of whom are to be
elected annually by the Common shareholders for one (1) year terms. The persons
named in the enclosed form of Proxy solicited in respect of the meeting of
Common shareholders intend to vote such Proxies for the election of the
directors shown in the table below.
IN THE EVENT THAT PRIOR TO THE MEETING ANY VACANCIES OCCUR IN THE
FOREGOING SLATE OF NOMINEES, IT IS INTENDED THAT DISCRETIONARY AUTHORITY SHALL
BE EXERCISED TO VOTE THE PROXIES SOLICITED IN RESPECT OF THE MEETING FOR THE
ELECTION OF ANOTHER PERSON OR PERSONS AS DIRECTORS. Each Director so elected
will hold office until the next Annual Meeting of the Common shareholders of
the Corporation or until his or her successor is elected or appointed.
C-4
<PAGE>
Information Concerning Nominees as Directors
<TABLE>
<CAPTION>
Approximate Number of
Name & Principal Occupation Year First Became Common Shares Beneficially
and/or Position with Corporation Director Owned Directly or Indirectly
------------------------------------- ------------------- -----------------------------
<S> <C>
Douglas W. Dodds, FCMA 1987 13,750
Chairman and
Chief Executive Officer of the
Corporation
Anne C. Fontana, P.Eng. 1989 4,783
Director of Logistics
of the Corporation's affiliate, J.M.
Schneider Inc.
Gerald A. Hooper, C.A. 1988 8,200
Vice President and
Chief Financial Officer of the
Corporation
* Frederick D. Morash, FCMA 1993 100
President and Chief Executive
Officer
The Island Telephone Company
Limited
* Larry J. Pearson 1996 --
* Brian J. Ruby, C.A. 1989 200
President
Krug Furniture Inc.
Eric N. Schneider 1996 24,934
Vice President, Secretary and
General Counsel of the
Corporation
* Ronald J. Simmons 1996 --
President
Waterloo Furniture Components
Limited
Hugh W. Sloan 1987 100
President
Woodbridge Automotive Group
</TABLE>
- ---------
* Member of the Audit Committee
Mr. Pearson held the position of Chief Operating Officer of Linamar Corporation
until October, 1997 and the position of President of Linamar Corporation until
the end of February, 1998.
The information as to shares beneficially owned, not being within the knowledge
of the Corporation, has been furnished by the respective directors
individually.
Corporate Governance Practices
The Toronto Stock Exchange (the "Exchange") requires annual disclosure by
each listed corporation of its approach to corporate governance with reference
to Guidelines For Improved Corporate Governance in Canada (the "Guidelines")
published by the Exchange. The Guidelines address matters such as the
constitution and independence of corporate boards, the functions to be
performed by boards and their committees and the effectiveness and education of
board members. The Exchange recognizes that the Guidelines are not suitable for
total adoption by all corporations, and there is no requirement, expectation or
desire on the part of the Exchange that every corporation follow all of the
Guidelines.
The Board of Directors of the Corporation (the "Board") is charged with
supervising the management of the business and affairs of the Corporation. The
Board has explicitly assumed responsibility for stewardship of the Corporation,
including a strategic planning process, risk management system, succession
planning, communications policy and integrity of internal control systems.
C-5
<PAGE>
Family Holdco owns approximately 70% of the Common shares of the
Corporation and is therefore a "significant shareholder" as defined in the
Guidelines. The Board elected in March, 1997 comprised 9 members, four of whom
(D.W. Dodds, A.C. Fontana, G.A. Hooper and E.N. Schneider) were full time
officers or employees of the Corporation or its subsidiaries and were "related"
as defined in the Guidelines. A.C. Fontana and E.N. Schneider also have
interests in the significant shareholder. The remaining five members of the
Board were "unrelated" directors. The composition of the Board is accordingly
within the Guidelines as they relate to the holders of Common shares. The
Guidelines recognize that a number of Canadian corporations have significant
shareholders with an equity interest which is less than the voting interest.
Such is the case of the Corporation. No separate numerical target for
"unrelated" directors is specified in the Guidelines for such corporations.
Taking into account the total shareholders' equity of the Corporation,
including Common and Class A shares, the Corporate Governance and Nominating
Committee is of the view that the proportion of directors unrelated to both the
Corporation and its significant shareholder is not inappropriate to fairly
reflect the investment in the Corporation by other shareholders.
The Board has the following committees:
Audit Committee -- Comprising solely unrelated directors, this committee
has a minimum of three (3) members and is responsible for reviewing the
integrity of the Corporation's internal control and management information
systems, the audited and unaudited financial statements, changes in accounting
practices or policies, the corporate code of conduct, appointment of auditors
and material claims and contingencies. In 1997, the members of the Audit
Committee were:
B.J. Ruby - Chairman, unrelated
F.D. Morash - unrelated
L.J. Pearson - unrelated
R.J. Simmons - unrelated
Compensation and Human Resources Committee -- Comprising solely unrelated
directors, this committee has a minimum of three (3) members and is responsible
for succession planning, monitoring the performance of the Chief Executive
Officer and other senior managers, reviewing the compensation of the Chief
Executive Officer, senior managers and board members and the Corporation's
compensation policies, labour relations, and human resource policies. In 1997,
the members of the Compensation and Human Resources Committee were:
H.W. Sloan - Chairman, unrelated
L.J. Pearson - unrelated
R.J. Simmons - unrelated
Corporate Governance and Nominating Committee -- Comprising a majority of
unrelated directors, this committee has a minimum of three (3) directors and is
responsible for nominating directors and assessing the effectiveness of the
Board and for enunciating a process and structure to be used by the Corporation
to direct and manage its business and affairs. In 1997, the members of the
Corporate Governance and Nominating Committee were:
B.J. Ruby - Chairman, unrelated
E.N. Schneider - related
H.W. Sloan - unrelated
Pension Fund Investment Committee -- Comprising both related and
unrelated directors, this committee has a minimum of three (3) members and is
responsible for establishing and annually reviewing the policies and objectives
of the Corporation's pension plans, selecting fund managers, consultants,
performance measurement services, auditors and trustee. In 1997, the members of
the Pension Fund Investment Committee were:
G.A. Hooper - Chairman, related
D.W. Dodds - related
A.C. Fontana - related
F.D. Morash - unrelated
R.J. Simmons - unrelated
All committees are mandated to examine particular issues and report back
to the Board with a recommendation, rather than to act on behalf of the Board,
except for matters of an administrative nature.
C-6
<PAGE>
The following matters require prior approval by the Board:
(a) three year strategic plans and changes in strategic direction
(b) annual business plans and corporate objectives
(c) capital expenditures in excess of $500,000
(d) share issuance
(e) acquisitions
(f) executive compensation
The Board recruits new directors and assesses Board performance through
the Corporate Governance and Nominating Committee.
Shareholder feedback is sought via an investor relations function provided
by the office of the Corporate Secretary and via a shareholders' inquiry "800"
service provided by the Corporation's transfer agent. Contact particulars for
both the above are provided in the Corporation's annual report. Any significant
shareholder concerns are brought to the attention of the full Board.
The Board's expectations of management are enunciated in the Corporation's
values and mission, its annual business plan and three year strategic plan, and
its Code of Ethics and Standards of Conduct.
Executive Compensation
Composition of the Compensation and Human Resources Committee
Members of the Compensation and Human Resources Committee of the Board of
Directors of the Corporation (the "Committee") during 1997 were H.W. Sloan
(Chairman), L.J. Pearson and R.J. Simmons. No member of the Committee was an
officer or employee, or was formerly an officer or employee, of the Corporation
or any of its subsidiaries.
Report on Executive Compensation
The Committee is responsible for recommending to the Board the
compensation of designated executives. Through its overall compensation program
for executives, the Corporation aims to attract, retain and motivate top
quality people at the executive level and influence and reward individual and
team performance which increases shareholder value, promotes corporate
development, corporate business strategies and the annual business plan, and
supports the basic commitment and values of the Corporation's mission.
The Corporation's direct compensation program for executives comprises
base salary, annual cash incentive and long term incentive. At target
performance, the variable portion of executives' (other than the Chief
Executive Officer's) direct compensation will be about one third of total
direct compensation. The Corporation's policy is to pay a base salary for a
fully qualified and experienced executive which is between the median and 75th
percentile of similarly sized autonomous Canadian companies. The positioning of
an executive's salary within the comparator group will reflect the level of
sustained contribution by the executive. The annual cash incentive is
performance based and is designed to provide median incentive compensation at
target performance. Corporate, team and individual performance is assessed by
measuring results achieved compared with predetermined objectives. Fiscal 1997
was considered to be a year in which it was critical that the Corporation's
strategic repositioning objectives be achieved and accordingly, such objectives
were given predominance by the Committee in assessing performance. Long term
incentives are seen as playing an important role in aligning the interests of
executive officers with the Corporation's shareholders. The Corporation's
compensation program design includes long term incentives based on stock
options to be granted annually at the market price. The number of options is
based generally on the median competitive practices of the comparator group.
In 1997, the Board resolved, subject to shareholder approval, to grant
options to the Named Executive Officers (as defined below) in accordance with
the compensation program design. Such options were not ultimately granted due
to the Corporation's decision not to proceed with the special meeting of
shareholders scheduled to be held on November 14, 1997, at which meeting the
underlying share capital approvals for the options were to be sought. The Board
accordingly rescinded its resolution granting options and in lieu thereof made
payments against each Named Executive Officer's loan outstanding under the
Share Purchase Plan, the Corporation's previous long term incentive
compensation program, along with a payment to Revenue Canada in respect of tax
liability on the deemed benefit arising from such Share Purchase Plan loan
reduction.
The Corporation also provides pensions and benefits which are designed to
be similar to plans provided within the industry and by other similarly sized
employers, with emphasis on the retention of executive officers.
C-7
<PAGE>
The Committee engages independent compensation consultants to gather
information regarding the compensation levels and practices of other companies.
The Corporation through its human resources staff and the Committee through its
consultants regularly survey the market independently and review and refine the
Corporation's compensation levels and practices in response to the changing
business environment to ensure that they continue to reflect the Corporation's
mission, values and performance.
Compensation of Chief Executive Officer
The compensation philosophy described above applies equally to the Chief
Executive Officer. As the most senior officer, the Chief Executive Officer's
actions have more impact on the Corporation's performance and accordingly, his
compensation is tied generally more closely to the overall performance of the
Corporation. At target performance, the variable portion of the Chief Executive
Officer's direct compensation will be slightly less than one half of the Chief
Executive Officer's total direct compensation. The targeted levels of annual
incentive and long term incentive are equal to the median levels of similarly
sized autonomous Canadian companies.
The Chief Executive Officer's salary is based on assessments of
competitive rates of other similarly sized autonomous Canadian companies. The
Corporation's intended range for the Chief Executive Officer's base salary is
between the median and 75th percentile of the comparator group. D.W. Dodds'
base salary level places him in this range.
The important strategic objectives achieved which were heavily weighted in
assessing the Chief Executive Officer's performance in 1997 were focused on
changing the mix of the Corporation's business, emphasizing geographic
expansion and value-added products, and repositioning manufacturing
capabilities to be competitive. These initiatives included completion of the
first phase of the Winnipeg hog processing facility, completion of a new
western distribution facility, expansion of Fleetwood production, expansion of
bacon production, expansion of Italian deli line, expansion of the
Corporation's grocery product offering, and discontinuance of pork slaughter
and cut operations in Kitchener.
No options were granted to the Chief Executive Officer as outlined above
under the section of this circular entitled "Report on Executive Compensation".
Submitted by the Compensation and Human Resources Committee of the Board
of Directors:
H.W. Sloan (Chairman)
L.J. Pearson
R.J. Simmons
C-8
<PAGE>
SUMMARY COMPENSATION TABLE
The following table states information concerning compensation during the
last three fiscal years of the Corporation's Chief Executive Officer and the
four other executive officers who had the highest total annual salary and bonus
during fiscal 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------- ---------------
Other Annual Securities All Other
Salary Bonus Compensation Under Options Compensation
Name and Principal Position Year ($) ($) ($)(1) (#) ($)(2)
- -------------------------------- ------ --------- --------- -------------- --------------- -------------
<S> <C>
Douglas W. Dodds 1997 400,000 350,000 11,449 nil 527,308
Chairman & CEO 1996 400,000 nil 25,261 75,000 34,409
Schneider Corporation 1995 360,000 230,000 28,526 30,000 18,186
Gerald A. Hooper 1997 210,000 150,000 5,263 nil 219,288
Vice President & CFO 1996 210,000 nil 11,506 25,000 2,623
Schneider Corporation 1995 205,000 90,000 13,033 10,000 2,071
Paul E. Lang 1997 210,000 150,000 4,333 nil 207,096
President, Consumer Foods 1996 210,000 nil 9,598 25,000 6,906
J.M. Schneider Inc. 1995 180,000 100,000 10,824 10,000 11,363
John E. Lauer 1997 190,000 150,000 2,062 nil 127,746
President, Agribusiness 1996 190,000 nil 4,779 25,000 2,200
J.M. Schneider Inc. 1995 180,000 90,000 5,450 10,000 8,685
Eric N. Schneider
Vice President, Secretary & 1997 160,000 100,000 9,365 nil 103,725
General Counsel 1996 160,000 nil 18,976 15,000 3,518
Schneider Corporation 1995 145,000 65,000 20,310 5,000 410
</TABLE>
Notes: (1) Reflects imputed interest under securities purchase program. See
"Indebtedness of Executive and Senior Officers under Securities
Purchase Program". Perquisites do not exceed the lesser of $50,000
and ten percent of a Named Executive Officer's salary plus bonus.
(2) Reflects the dollar value of insurance premiums paid by the
Corporation with respect to term life insurance for the benefit of the
Named Executive Officer and buyout of foregone vacation. In addition,
the 1997 figures include loan reductions and associated payments to
Revenue Canada in lieu of granting options under the Corporation's
long term incentive program discussed more fully in the section of
this circular entitled "Report on Executive Compensation." The
payments against loans and in respect of associated income taxes for
the Named Executive Officers were as follows: Mr. Dodds, $250,000 loan
reduction and $250,000 tax payment; Messrs. Hooper and Lang, $100,000
loan reduction and $100,000 tax payment; Mr. Lauer, $60,000 loan
reduction and $60,000 tax payment; Mr. Schneider, $50,000 loan
reduction and $50,000 tax payment.
C-9
<PAGE>
Long Term Incentive Plan
No options were granted during fiscal 1997. See note 2 under the Summary
Compensation Table and the section of this circular entitled "Report on
Executive Compensation." The following table states information concerning
exercise of options during fiscal 1996 and the financial year-end value of
unexercised options for each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED
FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Unexercised in-the-Money
Options at Options/SARs at
FY-End FY-End
(#) $
----------------------- -----------------------
Securities Acquired on Aggregate Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ------------------- ------------------------ ---------------- ----------------------- -----------------------
<S> <C>
80,700 exercisable/ $15,000 exercisable/
Douglas W. Dodds nil nil 126,600 unexercisable $206,250 unexercisable
29,300 exercisable/ $5,000 exercisable/
Gerald A. Hooper nil nil 43,400 unexercisable $68,750 unexercisable
19,750 exercisable/ $3,750 exercisable/
Paul E. Lang nil nil 39,250 unexercisable $68,750 unexercisable
19,950 exercisable/ $3,750 exercisable/
John E. Lauer nil nil 39,350 unexercisable $68,750 unexercisable
13,950 exercisable/ $2,500 exercisable/
Eric N. Schneider nil nil 23,850 unexercisable $41,250 unexercisable
</TABLE>
Notes: (1) Financial year end market price for shares was $13.25 per share.
Pension Plans
The Corporation provides retirement benefits to executive officers from a
registered defined benefit pension plan and, for certain executives designated
by the Board, additional retirement benefits from a funded supplementary
executive retirement plan which relates solely to years of executive service.
These plans provide a retirement income with 60% payable to the surviving
spouse in the event of death after retirement. Normal retirement age is
sixty-five and unreduced benefits are available at age sixty. Benefits from
these plans are in addition to any other entitlement with respect to the Canada
Pension Plan.
Table 1 shows the estimated annual retirement income payable for
non-executive years of service from the registered pension plan. Benefits are
based on the highest average annual earnings (salary, excluding bonus or other
compensation) over thirty-six consecutive months during the final ten years of
employment.
Table 1
<TABLE>
<CAPTION>
Years of Non-Executive Service
Remuneration ------------------------------------------------------------------------
($) 5 10 15 20 25 30 35
- ---------------- ------- -------- -------- -------- -------- -------- -------
<S> <C>
100,000 and up 8,610 17,220 25,830 34,440 43,050 51,660 60,270
</TABLE>
C-10
<PAGE>
Table 2 shows the estimated annual retirement income at normal retirement
age payable for executive years of service from the registered pension plan and
the supplementary executive retirement plan. Benefits are based on the highest
average annual earnings (salary plus actual or target bonus, whichever is the
lesser) over thirty-six consecutive months during the final ten years of
employment.
Table 2
<TABLE>
<CAPTION>
Years of Executive Service
Remuneration ---------------------------------------------------------
($) 15 20 25 30 35
- ------------- --------- --------- --------- --------- ---------
<S> <C>
125,000 37,500 50,000 62,500 75,000 87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000 52,500 70,000 87,500 105,000 122,500
200,000 60,000 80,000 100,000 120,000 140,000
225,000 67,500 90,000 112,500 135,000 157,500
250,000 75,000 100,000 125,000 150,000 175,000
300,000 90,000 120,000 150,000 180,000 210,000
400,000 120,000 160,000 200,000 240,000 280,000
500,000 150,000 200,000 250,000 300,000 350,000
600,000 180,000 240,000 300,000 360,000 420,000
</TABLE>
The aggregate retirement income for an executive is the total of Table 1
for years of non-executive service and Table 2 for years of executive service.
The maximum number of years of service from a combination of non-executive and
executive service is thirty-five.
The current credited years of service for the Named Executive Officers
are: Mr. Dodds -- 10 years non-executive and 18 years executive; Mr. Hooper --
11 years executive; Mr. Lang -- 24 years non-executive and 9 years executive;
Mr. Lauer -- 15 years non-executive and 20 years executive; Mr. Schneider -- 1
year non-executive and 6 years executive.
Termination of Employment, Change in Responsibilities and Employment Contracts
Each of the Named Executive Officers has an agreement in respect of his
employment with the Corporation and its affiliates. The salaries payable under
the employment agreements are determined following annual reviews by the
Compensation and Human Resources Committee. These employment agreements contain
restrictions on employment of the Named Executive Officers in competition with
the Corporation for a period of time after the termination of their employment
which varies from 24 months to 30 months. The employment agreements also
provide for life insurance, health, pension (see "Pension Plans") and other
benefits. For the Named Executive Officers other than the Chairman and Chief
Executive Officer, if the executive's employment is terminated by the
Corporation without just cause, the Corporation is required to pay the
executive from 24 to 30 months remuneration in lieu of notice of termination.
If the Chairman and Chief Executive Officer's employment is terminated by the
Corporation without just cause, the Corporation is required to pay him 30 to 36
months remuneration in lieu of notice of termination. In the event of a change
of control, the Chairman and Chief Executive Officer may elect to resign and
receive 30 months remuneration.
On November 14, 1997, in order to ensure that the Named Executive Officers
would not be distracted from the business of the Corporation and would continue
to act in the best interests of the Corporation and shareholders in the context
of a proposed change of control transaction, the Board of Directors approved
the entering into of employment amending agreements with the Named Executive
Officers. Pursuant to these amending agreements, each of the Named Executive
Officers (other than the Chairman and Chief Executive Officer) would be
entitled to resign his employment within a one year period immediately
following a change of control upon three month's notice. Such Named Executive
Officers would be entitled, upon such resignation, to receive 24 months
remuneration in the case of the Vice President and Chief Financial Offer and
the Vice President, Secretary and General Counsel and 18 months remuneration in
the case of President, Consumer Foods and President, Agribusiness.
Indebtedness of Executive and Senior Officers Under Securities Purchase
Programs
A Share Purchase Plan was previously established for the purpose of
providing interest-free loans to key employees of the Corporation and its
affiliates to purchase Common shares and/or Class A shares of the Corporation
at prevailing market prices. The specific key employees entered into
arrangements with the Canadian Imperial Bank of Commerce for a loan for such
purpose. All loans have a term of 10 years. The loans are secured by pledges of
the shares which are the subject of
C-11
<PAGE>
the loans and by assignments of life insurance and other amounts payable by the
Corporation to the key employees. The Corporation did not assume any
responsibility for the repayment of the principal amount of the loan, but
incurred an imputed cost by placing a compensating balance on deposit with the
bank. During the 1997 fiscal year, there were 9 participants in the Share
Purchase Plan and the imputed cost to the Corporation in connection with the
said loans was approximately $44,900. New participation in the Share Purchase
Plan has not been permitted after the end of the 1992 fiscal year. Any existing
loan arrangement will expire in accordance with its contractual terms. The
aggregate indebtedness of all officers, directors, employees and former
officers, directors and employees of the Corporation and its subsidiaries
outstanding as at February 18, 1998 was $637,740. See the section of this
circular entitled "Report on Executive Compensation" and Note 2 to the Summary
Compensation Table for further information regarding loans. The following table
states, for those participants in the Share Purchase Plan who are executive or
senior officers, the largest aggregate amount of such indebtedness outstanding
during fiscal 1997 and the aggregate amount of such indebtedness outstanding at
February 18, 1998:
TABLE OF INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
UNDER SECURITIES PURCHASE PROGRAMS
<TABLE>
<CAPTION>
Involvement of Largest Amount Amount
Name and Issuer or Outstanding During Outstanding as at Security for
Principal Position Subsidiary Fiscal 1997 $ February 18, 1998 $ Indebtedness (1)
(a) (b) (c) (d) (e)
- ----------------------------- ---------------- -------------------- --------------------- -----------------
<S> <C>
Douglas W. Dodds Issuer -
Chairman & CEO compensating
Schneider Corporation balance 348,797 82,561 36,000
Gerald A. Hooper Issuer -
Vice President & CFO compensating
Schneider Corporation balance 158,507 50,389 18,000
Paul E. Lang Issuer -
President, Consumer Foods compensating
J.M. Schneider Inc. balance 132,653 26,749 13,090
John E. Lauer Issuer -
President, Agribusiness compensating
J.M. Schneider Inc. balance 65,597 1,447 8,980
Eric N. Schneider
Vice President, Secretary & Issuer -
General Counsel compensating
Schneider Corporation balance 262,341 200,800 25,590
</TABLE>
Notes: (1) Class A and/or Common shares of the Corporation.
Compensation of Directors
Directors who were full time officers or employees of the Corporation or
its affiliates were not compensated for Board activities as such. Directors who
were not full time officers or employees of the Corporation or its affiliates
each received compensation of:
(1) an annual retainer of $10,000;
(2) an additional annual retainer of $2,500 for the Chairman of the Board
and for the chairman of each committee thereof;
(3) $900 for each Board or committee meeting attended;
(4) $450 for each meeting attended by telephone; and
(5) $450 for each meeting attended in a municipality other than the
municipality in which the Director resides.
Directors and Officers Insurance and Indemnification
The Corporation maintains at its expense a policy of insurance in the
amount of $15,000,000 (subject to a $100,000 deductible) for the protection of
Directors and officers in respect of liabilities which they may incur in their
capacities as Directors or officers of the Corporation or its affiliates. The
Corporation paid a premium of $28,000 for such insurance in the 1997 fiscal
year.
C-12
<PAGE>
Appointment of Auditors
It is intended to vote the Proxies solicited in respect of the meeting of
Common shareholders to appoint KPMG, Chartered Accountants, Kitchener, Ontario,
as Auditors of the Corporation to hold office until the next Annual Meeting of
the Common shareholders or until their successors are appointed and to
authorize the directors to fix their remuneration.
Normal Course Issuer Bid
The Corporation received approval to make a normal course issuer bid
through the facilities of The Toronto Stock Exchange commencing January 22,
1997. The Corporation Purchased 6,200 Class A shares and no Common shares
during fiscal 1997 and 2,200 Class A shares and no Common shares subsequent to
the fiscal 1997 year end. The bid terminated January 22, 1998.
Directors' Approval
The Board of Directors of the Corporation has approved the contents and
the sending of this Information Circular.
DATED at Kitchener, Ontario, this 18th day of February, 1998.
(signed) ERIC N. SCHNEIDER
Secretary, Schneider
Corporation
C-13
<PAGE>
Consolidated Financial Statements of
SCHNEIDER CORPORATION
Years ended October 25, 1997, October 26, 1996 and
October 28, 1995
C-14
<PAGE>
SCHNEIDER CORPORATION
CONSOLIDATED BALANCE SHEETS
October 25, 1997 and October 26, 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(in thousands of
dollars)
<S> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable .................................. $ 57,775 $ 51,593
Inventories .......................................... 50,600 52,228
Income taxes recoverable ............................. 743 2,391
Other ................................................ 4,756 3,128
-------- --------
TOTAL CURRENT ASSETS ................................ 113,874 109,340
PROPERTY, PLANT AND EQUIPMENT .......................... 127,825 115,760
Other assets:
Deferred pension ..................................... 18,599 12,504
Production licences and rights ....................... 1,870 2,005
Goodwill ............................................. 9,287 9,762
Other ................................................ 6,558 1,623
-------- --------
TOTAL OTHER ASSETS .................................. 36,314 25,894
-------- --------
TOTAL ASSETS ........................................... $278,013 $250,994
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank advances ........................................ $ 22,667 $ 25,635
Accounts payable and accrued liabilities ............. 66,108 57,007
Principal due within one year on debentures and loans 4,973 5,721
-------- --------
TOTAL CURRENT LIABILITIES ........................... 93,748 88,363
DEBENTURES AND LOANS ................................... 82,562 67,718
OTHER LIABILITIES:
Deferred liability ................................... 744 2,952
Deferred income taxes ................................ 3,908 1,655
Deferred gains ....................................... 1,538 2,151
-------- --------
TOTAL OTHER LIABILITIES ............................. 6,190 6,758
SHAREHOLDERS' EQUITY:
Capital stock ........................................ 29,018 22,425
Retained earnings .................................... 66,495 65,730
-------- --------
TOTAL SHAREHOLDERS' EQUITY .......................... 95,513 88,155
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............. $278,013 $250,994
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
On behalf of the Board:
(signed) DOUGLAS W. DODDS (signed) GERALD A. HOOPER
Director Director
C-15
<PAGE>
SCHNEIDER CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended October 25, 1997, October 26, 1996 and October 28, 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(in thousands of dollars, except per
share amounts)
<S> <C>
Sales ......................................................... $813,363 $ 826,078 $827,521
Expenses:
Cost of products sold ....................................... 721,458 745,146 733,905
Selling, marketing and administrative ....................... 65,097 61,411 61,595
Depreciation and amortization ............................... 14,157 14,664 14,592
Unusual item ................................................ -- 12,000 --
-------- --------- --------
800,712 833,221 810,092
-------- --------- --------
Earnings (loss) from operations ............................... 12,651 (7,143) 17,429
Interest expense .............................................. 7,432 7,753 7,787
Gain on divestitures .......................................... (1,132) -- (4,079)
-------- --------- --------
6,300 7,753 3,708
-------- --------- --------
Earnings (loss) before income taxes and minority interest ..... 6,351 (14,896) 13,721
Income taxes (recovery) ....................................... 3,248 (5,092) 6,760
-------- --------- --------
Earnings (loss) before minority interest ...................... 3,103 (9,804) 6,961
Minority interest ............................................. -- -- 541
-------- --------- --------
Net earnings (loss) ........................................... $ 3,103 $ (9,804) $ 7,502
======== ========= ========
Earnings (loss) per share ..................................... $ 0.49 $ (1.54) $ 1.22
======== ========= ========
Fully diluted earnings (loss) per share ....................... $ 0.47 $ (1.54) $ 1.18
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
C-16
<PAGE>
SCHNEIDER CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years ended October 25, 1997, October 26, 1996 and October 28, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
(in thousands of dollars)
<S> <C>
Balance, beginning of year .............. $65,730 $ 77,820 $72,654
Net earnings (loss) ..................... 3,103 (9,804) 7,502
------- -------- -------
68,833 68,016 80,156
Dividends:
Class A shares ........................ 2,020 2,020 1,884
Common shares ......................... 266 266 262
------- -------- -------
2,286 2,286 2,146
Adjustment for share redemption ......... 52 -- 190
------- -------- -------
Balance, end of year .................... $66,495 $ 65,730 $77,820
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
C-17
<PAGE>
SCHNEIDER CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Years ended October 25, 1997, October 26, 1996 and October 28, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(in thousands of dollars)
<S> <C>
Operating activities
Cash from operations ....................................................... $ 8,188 $ 9,924 $ 11,147
Net change in non-cash working capital balances relating to operations ..... 5,672 (14,599) 7,066
--------- --------- ---------
Cash provided by (used in) operating activities ........................... 13,860 (4,675) 18,213
Investing activities:
Additions to property, plant and equipment ................................. (26,582) (22,840) (15,458)
Proceeds on divestitures ................................................... 1,443 16,344 2,783
(Increase) decrease in other assets ........................................ (5,046) (1,439) 2,184
Proceeds on sale of property, plant and equipment .......................... 943 365 298
Investment in subsidiaries ................................................. -- -- (4,550)
--------- --------- ---------
Cash used in vesting activities ........................................... (29,242) (7,570) (14,743)
Financing activities:
Decrease in debentures and loans ........................................... (5,493) (16,939) (14,499)
Proceeds from debentures and loans ......................................... 19,588 11,471 26,572
Dividends .................................................................. (2,286) (2,286) (2,146)
Issuance of shares (adjustment) ............................................ 6,622 (858) 3,056
Purchase of shares ......................................................... (81) -- (224)
--------- --------- ---------
Cash provided by (used in) financing activities ........................... 18,350 (8,612) 12,759
--------- --------- ---------
Increase (decrease) in bank advances ........................................ (2,968) 20,857 (16,229)
Bank advances, beginning of year ............................................ 25,635 4,778 21,007
--------- --------- ---------
Bank advances, end of year .................................................. $ 22,667 $ 25,635 $ 4,778
========= ========= =========
Cash from operations is derived as follows:
Net earnings (loss) ........................................................ $ 3,103 $ (9,804) $ 7,502
Adjustment for non-cash items:
Depreciation and amortization ............................................. 14,157 14,664 14,592
Unusual item .............................................................. (3,903) 12,000 --
Deferred pension .......................................................... (6,095) (3,954) (5,217)
Deferred income tax increase (reduction) .................................. 2,253 (2,928) (1,042)
Gain on divestitures ...................................................... (1,132) -- (4,079)
Other ..................................................................... (195) (54) (609)
--------- --------- ---------
$ 8,188 $ 9,924 $ 11,147
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
C-18
<PAGE>
SCHNEIDER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended October 25, 1997, October 26, 1996 and October 28, 1995
(tabular amounts only in thousands of dollars)
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of consolidation:
The consolidated financial statements include the accounts of Schneider
Corporation, subsidiaries and 50% owned joint ventures. Interests in joint
ventures are accounted for using the proportionate consolidation method to
consolidate the Corporation's share of the joint ventures' assets, liabilities,
revenues and expenses.
(b) Inventories:
Products are valued at the lower of cost and net realizable value. Since
most products can be sold at any stage in their production, it is not practical
to segregate them into raw materials, work in process or finished goods. Cost
includes laid down material cost, manufacturing labour and certain elements of
overhead to the stage of production completion. Net realizable value is based
on the adjusted wholesale trading price at the balance sheet date.
Certain raw materials and supplies, which include packaging, maintenance
and manufacturing materials, are valued at the lower of cost and replacement
cost.
(c) Property, plant and equipment:
Property, plant and equipment are stated at cost which includes
capitalized interest incurred on major projects during the period of
construction. Depreciation is provided on a straight-line basis to amortize the
cost of the assets over their estimated useful lives with estimated useful
lives not to exceed certain limits. Depreciation is not provided on assets
under construction.
<TABLE>
<CAPTION>
Maximum Annual rates of
useful lives depreciation
-------------- ----------------
<S> <C>
Buildings of solid construction ............................ 40 years 2.5% to 5%
Buildings of frame construction and improved areas ......... 25 years 4% to 10%
Machinery and equipment .................................... 10 years 10% to 20%
</TABLE>
(d) Other assets:
Production licences and rights and goodwill are being amortized on a
straight-line basis over their estimated lives. The carrying amount of goodwill
is regularly evaluated for impairment based on the undiscounted cash flows from
operations of the related businesses. Any permanent impairment in the value of
the goodwill is written off against earnings.
<TABLE>
<CAPTION>
Maximum Annual rates of
useful lives depreciation
-------------- ----------------
<S> <C>
Production licences and rights ......... 20 years 5 to 6%
Goodwill ............................... 40 years 2.5% to 3%
</TABLE>
Costs related to plant start-up are deferred and amortized on a
straight-line basis over three years with the commencement of normal commercial
operations.
(e) Derivative financial instruments:
The Corporation uses derivative financial instruments to manage its
exposure to interest rate fluctuations as described in note 5. These financial
instruments are accounted for on an accrual basis. Net payments on interest
rate instruments are included in income as part of interest expense.
(f) Deferred gains:
Deferred gains, which relate to asset transfers to joint ventures, will be
included in income when amounts receivable from a joint venture partner are
paid or through amortization over the remaining estimated useful lives of the
transferred assets.
C-19
<PAGE>
SCHNEIDER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
1. SIGNIFICANT ACCOUNTING POLICIES -- Continued:
(g) Pensions:
Pension obligations are determined by independent actuarial valuation
using the projected benefit method and based on management's best estimates.
Pension costs related to current service are charged to earnings as services
are rendered, and past service costs, as well as variations between plan
experience and the actuarial estimates, are amortized over the expected average
remaining service life of each employee group.
(h) Post employment benefits:
The Corporation has post employment benefit plans that provide defined
health and dental benefits for retirees and eligible dependents. The
Corporation expenses post employment benefit costs, other than pension, as
incurred.
(i) Earnings per share:
Earnings per share are calculated based on the weighted average number of
all classes of shares outstanding during the year. Fully diluted earnings per
share are calculated based on the weighted average number of all classes of
shares outstanding during the year assuming that all outstanding stock options
were exercised at the beginning of the year or when granted, except when the
loss would be anti-dilutive.
(j) Management's estimates:
The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent liabilities, and the
reported amount of revenue and expenses during the reporting period. Actual
results could differ from these estimates.
2. ACQUISITIONS AND DIVESTITURES:
During the year, the Corporation sold property and facilities related to
its poultry operations for a net gain of $1,132,000.
During fiscal 1996, the Corporation acquired 50% of Cappola Food Inc. as
well as 50% of J & S Foods, Inc.
The acquisitions have been accounted for by the purchase method. A
financial summary of these acquisitions is as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net assets acquired at assigned values:
Property, plant and equipment and other long-term assets ................ $ 2,436
Net working capital deficiency .......................................... 1,811
Other liabilities ....................................................... (2,926)
Excess cost of shares over assigned values of net identified assets ..... 3
--------
$ 1,324
========
Consideration given at fair value:
Cash .................................................................... $ 168
Fiorentina business ..................................................... 1,156
--------
Net assets acquired ....................................................... $ 1,324
========
</TABLE>
C-20
<PAGE>
SCHNEIDER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
3. JOINT VENTURES:
The Corporation's proportionate share in joint ventures is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C>
Current assets ...................................... $ 18,385 $ 14,094 $ 8,707
Long-term assets .................................... 21,060 15,091 8,049
Current liabilities ................................. 14,236 10,665 6,064
Long-term liabilities ............................... 10,928 5,918 480
Sales ............................................... 124,695 107,594 78,327
Expenses, including income taxes .................... 122,632 105,537 75,827
Net earnings ........................................ 2,063 2,057 2,500
Cash provided by operating activities ............... 2,129 1,242 5,615
Cash used in investing activities ................... (7,295) (5,699) (737)
Cash provided by (used in) financing activities ..... 5,083 1,663 (2,177)
</TABLE>
The 50% interest in Cappola Food Inc. was acquired and proportionately
consolidated effective October 29, 1995. The 50% interest in J & S Foods, Inc.
was acquired and proportionately consolidated effective April 1, 1996.
4. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
Accumulated Net book Net book
Cost depreciation value value
---------- -------------- ---------- -----------
<S> <C>
Land and improved areas ..... $ 10,326 $ 934 $ 9,392 $ 8,852
Buildings ................... 102,311 45,544 56,767 46,106
Machinery and equipment ..... 148,118 88,492 59,626 50,830
Projects in progress ........ 2,040 -- 2,040 9,972
-------- -------- -------- --------
$262,795 $134,970 $127,825 $115,760
======== ======== ======== ========
</TABLE>
The Board of Directors has approved capital expenditures of $5,000,000 for
1998 projects. Interest of $543,000 was capitalized in the year (1996 --
$203,000).
5. DEBENTURES AND LOANS:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C>
Bankers acceptances ............................................. $50,672 $31,942
9.7% Sinking fund debentures, maturing September 2010 ........... 20,000 20,000
8.56% Sinking fund debentures, maturing September 2003 .......... 16,200 18,200
Loans, interest at 9.25%, maturing February 1997 ................ -- 2,500
Other ........................................................... 663 797
------- -------
87,535 73,439
Principal included in current liabilities ....................... 4,973 5,721
------- -------
$82,562 $67,718
======= =======
Interest for the year ........................................... $ 6,711 $ 7,015
======= =======
</TABLE>
C-21
<PAGE>
SCHNEIDER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
5. DEBENTURES AND LOANS -- Continued:
Debenture and loan maturities in each of the next five years are as
follows:
<TABLE>
<S> <C>
1998 ......... $ 4,973
1999 ......... 14,931
2000 ......... 9,720
2001 ......... 11,144
2002 ......... 15,324
</TABLE>
The Corporation maintains credit facilities with a number of lending
institutions to enable direct borrowings under bankers acceptances and interest
rate swap agreements. These facilities enable the Corporation to refinance
short-term borrowings on a long-term basis. Therefore, short-term borrowings
intended to be refinanced are classified as long-term debt. Interest rate swap
agreements maturing in 1999 through 2004 effectively fix an interest rate of
7.06% on $50,672,000 of borrowings.
The sinking fund debentures are secured by specific charges on certain
assets of the Corporation.
A trust indenture securing the sinking fund debentures contains certain
covenants which limit the creation of additional debentures and the entering
into of long-term leases, and restrict the use of proceeds from the sale of a
substantial part of the Corporation's property, plant and equipment. The
Corporation has undertaken not to declare or pay dividends or otherwise make
changes in its capital which would have the effect of reducing the
Corporation's equity below $70,000,000 as defined in the trust indenture. In
addition, the Corporation is required to maintain certain financial ratios.
6. CAPITAL STOCK:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C>
Authorized:
10,802,000 Class A non-voting shares ...............
747,254 Common shares ...........................
Issued:
6,104,965 Class A shares (1996--5,611,165) ......... $ 28,786 $22,193
738,954 Common shares ............................ 232 232
-------- -------
$ 29,018 $22,425
======== =======
</TABLE>
(a) Share attributes:
The holders of the Class A shares are entitled to a 12(cent) preferential
cumulative annual dividend and equal participation with the holders of Common
shares in annual dividends thereafter and in any distribution of assets of the
Corporation to its shareholders.
The Class A shares are restricted shares in that they are generally
non-voting and only vote in very limited circumstances on matters respecting
the attributes of the class itself, or in relation to the Common shares where
class approval is specifically required.
A "coat-tail" provision has been attached to the Class A shares which is
designed to ensure that all holders of the Class A shares have an equal
opportunity to participate with the holders of the Common shares in any premium
paid on a take-over bid.
(b) Purchase of shares:
The Corporation received approval from The Toronto Stock Exchange to make
a Normal Course Issuer Bid and has purchased and cancelled 6,200 Class A shares
at a cost of $81,000 (1996 -- no shares were purchased). The cost in excess of
the share capital amount, net of expenses, has been allocated to retained
earnings.
C-22
<PAGE>
SCHNEIDER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
6. CAPITAL STOCK: -- Continued:
(c) Issue of shares:
During the year, 500,000 Class A shares were issued for cash consideration
of $6,525,000 (1996 -- no shares were issued).
(d) Capital stock adjustment:
The Corporation increased the stated capital of the Class A shares by
$97,000 ($858,000 decrease in 1996) to reflect an adjustment in the
consideration paid for a prior year acquisition satisfied with the issue of
Class A shares.
(e) Stock option plan:
The Corporation maintains a stock option plan for certain officers and key
employees of the corporation and its subsidiaries.
At October 25, 1997, options to purchase 547,900 Class A shares were
outstanding at share prices ranging from $10.50 to $14.75 and expiring during
the period from 2002 to 2006.
7. INCOME TAXES:
The Corporation's effective income tax rate on earnings is made up as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
% % %
--------- ---------- ---------
<S> <C>
Combined basic Canadian federal and provincial rate .......... 44.6 (44.6) 44.6
Adjustment in income tax rate resulting from:
Manufacturing and processing deduction ..................... (6.4) 6.4 (6.2)
Non-deductible expenses .................................... 10.6 6.0 14.1
Large corporations tax in excess of federal surtax ......... 5.8 2.1 1.3
Recognition of subsidiaries' loss carry forward ............ -- -- (3.6)
Other ...................................................... (3.5) (4.1) (0.9)
----- ------ -----
Effective income tax (recovery) rate ......................... 51.1 (34.2) 49.3
===== ====== =====
</TABLE>
8. PENSION PLANS:
The Corporation provides retirement benefits for most employees under
several defined benefit and defined contribution plans. The defined benefit
plans provide benefits based on contributions, employees' compensation levels
and years of service at the time of retirement. The defined contribution plan
restricts the Corporation's obligations to contributions based on the plan
formula.
The comparison of defined benefit obligations with assets of the pension
plans is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C>
Pension plan assets at market value .................. $ 249,506 $214,396
Estimated present value of pension plan obligations .. 199,796 191,112
</TABLE>
The Corporation has been required to make contributions in excess of the
expense included in the statement of earnings. As a result, a deferred pension
asset is reflected in the balance sheet.
C-23
<PAGE>
SCHNEIDER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
9. COMMITMENTS:
The following is a schedule of future rental payments required under
operating leases as of the year end:
<TABLE>
<S> <C>
1998 ................ $ 6,800
1999 ................ 4,400
2000 ................ 2,392
2001 ................ 1,416
2002 ................ 1,070
Later years ......... 11,347
-------
$27,425
=======
</TABLE>
10. SEGMENTED FINANCIAL INFORMATION:
Information is presented according to the following industry segments:
Consumer Foods:
Comprises processed meats and grocery products sold to the retail and food
service markets.
Agribusiness:
Comprises the fresh pork and poultry business sectors.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ -----------
<S> <C>
Sales to customers:
Consumer Foods ................ $540,733 $ 523,201 $542,166
Agribusiness .................. 272,630 302,877 285,355
-------- --------- --------
$813,363 $ 826,078 $827,521
======== ========= ========
Earnings (loss) from operations:
Consumer Foods ................ $ 21,458 $ 17,413 $ 27,030
Agribusiness .................. (778) (5,956) (4,215)
Corporate/unallocated ......... (8,029) (6,600) (5,386)
Unusual item .................. -- (12,000) --
-------- --------- --------
$ 12,651 $ 7,143 $ 17,429
======== ========= ========
Depreciation and amortization:
Consumer Foods ................ $ 8,906 $ 9,105 $ 9,741
Agribusiness .................. 3,857 3,530 3,775
Corporate/unallocated ......... 1,394 2,029 1,076
-------- --------- --------
$ 14,157 $ 14,664 $ 14,592
======== ========= ========
Capital expenditures:
Consumer Foods ................ $ 11,316 $ 9,201 $ 7,106
Agribusiness .................. 15,232 13,628 7,933
Corporate/unallocated ......... 34 11 419
-------- --------- --------
$ 26,582 $ 22,840 $ 15,458
======== ========= ========
Total assets:
Consumer Foods ................ $169,502 $ 147,306 $155,178
Agribusiness .................. 85,575 81,113 66,842
Corporate/unallocated ......... 22,936 22,575 24,812
-------- --------- --------
$278,013 $ 250,994 $246,832
======== ========= ========
</TABLE>
All of the Corporation's operations, employees and assets are located in
Canada.
C-24
<PAGE>
SCHNEIDER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
10. SEGMENTED FINANCIAL INFORMATION -- Continued:
Sales to customers in foreign countries amounted to $85,135,000 in 1997
(1996 -- $103,069,000, 1995 -- $94,074,000).
11. UNUSUAL ITEM:
On October 24, 1996, the Corporation approved the plan to change the
operating functionality of the Kitchener plant of J. M. Schneider Inc., a
wholly-owned subsidiary of the Corporation. The pork slaughter and cut process
was discontinued in February 1997 and other manufacturing processes were moved
to other corporate locations during the year. A charge of $12,000,000 was
recorded in the fourth quarter of 1996 as follows:
<TABLE>
<S> <C>
Severance and pension expenses ................... $ 9,100
Fixed asset write-down and demolition expenses ... 2,900
-------
$12,000
=======
</TABLE>
Of the $12,000,000, the remaining amounts to be paid are $2,721,000 in
1998 and $744,000 in 1999.
12. FINANCIAL INSTRUMENTS:
a) Derivative financial instruments:
The Corporation uses interest rate swap contracts with approved
credit-worthy counterparties to manage the Corporation's current and
anticipated exposure to interest rate risks. The Corporation does not trade in
derivatives for speculative purposes and believes that its exposure to credit
and market risks on interest rate swap contracts is negligible.
b) Fair value of financial instruments:
For financial instruments which are short-term in nature, such as accounts
receivable, bank advances, bankers acceptances and accounts payable and accrued
liabilities, carrying value approximates fair value.
The Corporation is unable to determine the fair value of its sinking fund
debentures as it cannot estimate with sufficient reliability the prevailing
market rate of interest for instruments having substantially the same terms and
characteristics.
The estimated fair value of interest rate swaps at October 25, 1997 was
$2,600,000 unfavourable (1996 -- $1,500,000 unfavourable) based on relevant
market prices and information available at that time. The estimated fair values
are not necessarily indicative of the amounts that the Corporation might
receive or incur in actual market transactions.
13. SUBSEQUENT EVENT:
On December 2, 1997, the Board of Directors adopted a temporary
shareholder rights plan. Pursuant to the rights plan, in the event that a third
party (an "Acquiring Person") acquires in excess of 10% of either class of the
Corporation's shares, otherwise than pursuant to a Permitted Bid (as defined
therein), the shareholder rights plan gives Shareholders, other than the
Acquiring Person, the ability to purchase upon payment of the $60 Exercise
Price, $120 of Class A shares at a price of $13.25 per share, subject to
adjustments, provided that sufficient authorized and unissued Class A shares
are then available for distribution to all holders of rights issued under the
shareholder rights plan.
14. OTHER INFORMATION:
(a) The Corporation is incorporated under the laws of Ontario.
(b) Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted in the current year.
C-25
<PAGE>
ANNUAL INFORMATION FORM
OF
SCHNEIDER CORPORATION
Concerning the year ended October 25, 1997
C-26
<PAGE>
SCHNEIDER CORPORATION
FISCAL 1997 ANNUAL INFORMATION FORM
Item 1
(1) Incorporation or Organization of the Issuer
The business of the issuer was originally established in 1890 in
Kitchener, Ontario by John Metz Schneider. The business was incorporated under
the Corporations Act of Ontario by supplementary letters patent dated December
30, 1930. The corporation converted to a public company by supplementary
letters patent dated February 18, 1965, and its shares were listed on the
Toronto Stock Exchange in 1969. Effective October 26, 1975, the name of the
corporation was changed to Schneider Corporation. Effective October 28, 1978,
the corporation and a wholly owned subsidiary amalgamated under the name J.M.
Schneider Inc. Effective April 30, 1980, the corporation changed its name to
The Heritage Group Inc. Effective April 29, 1986, the corporation changed its
name to Schneider Corporation. Effective April 26, 1988, a "coat-tail
provision" was added to the Class A shares of the corporation. See pages 2 and
3 of the Information Circular of the corporation dated February 18, 1998, (the
"Information Circular") incorporated herein by reference. Effective August 11,
1992, the Common and Class A Non-voting shares of the corporation were split
two-for-one. Effective October 29, 1995, the corporation amalgamated with a
wholly owned subsidiary Schneider Horizon Inc. and continued under the name of
Schneider Corporation.
(2) Subsidiaries
The following table 1(2) shows the subsidiaries and joint ventures of
Schneider Corporation, their jurisdiction of incorporation, the percentage of
voting securities beneficially owned or over which control or direction is
exercised by Schneider Corporation, and the percentage of each class of
non-voting securities owned by Schneider Corporation.
TABLE 1(2)
<TABLE>
<CAPTION>
Name Jurisdiction % Voting
- --------------------------------------------- -------------- ---------
<S> <C>
J.M. Schneider Inc. ............... Ontario 100
Charcuterie Roy Inc. .............. Quebec 100
Consolidated Food Brands Inc. ..... Ontario 100
National Meats Inc. ............... Ontario 50
Cappola Food Inc. ................. Canada 50
The Prince Group .................. Quebec 50
</TABLE>
Item 2
General Development of the Business
See inside cover and pages 2, 3 and 20 of the 1997 Annual Report
incorporated herein by reference.
Item 3
Narrative Description of the Business
See inside cover and pages 1 and 19 of the 1997 Annual Report incorporated
herein by reference.
(1)(c) 89.5% of the corporation's sales are made in Canada.
(2)(b) In fiscal 1997, the corporation spent $989,000 on research and
development activities.
(2)(d) The corporation had 4,000 employees at year end.
C-27
<PAGE>
Item 4
Selected Consolidated Financial Information
(1) See pages 4-9 and 11-20 of the 1997 Annual Report incorporated herein
by reference.
(2) The following table 4(2) shows the net sales or total revenue and net
earnings (in total and on a per equity share and fully diluted equity
share basis) for each of the last eight quarters ending with the fourth
quarter of fiscal 1997.
TABLE 4(2)
(In thousands, except for per share figures)
<TABLE>
<CAPTION>
97 Q4 97 Q3 97 Q2 97 Q1 96 Q4 96 Q3 96 Q2 96 Q1
----------- ----------- ----------- ----------- ----------- ----------- --------- -----------
<S> <C>
Sales 200,734 194,243 174,270 244,116 197,575 203,521 186,489 238,493
Net Earnings 2,681 183 130 109 (8,026) (1,383) (601) 206
Per Share 0.42 0.03 0.02 0.02 (1.26) (0.22) (0.09) 0.03
Fully Diluted 0.40 0.03 0.02 0.02 (1.26) (0.22) (0.09) 0.03
</TABLE>
(3) In fiscal 1992, the corporation paid a dividend of 5.5(cent) per share
during the first quarter and a dividend of 6(cent) per share per quarter
during the balance of the fiscal year. In fiscal 1993, the corporation
paid a dividend of 6(cent) per share for the first quarter and 7(cent) per
share per quarter for the balance of the fiscal year. In fiscal 1994, the
corporation paid a dividend of 7(cent) per share during the first quarter
and a dividend of 8(cent) per share during the balance of the fiscal year.
In fiscal 1995, the corporation paid a dividend of 8(cent) per share
during the first quarter and a dividend of 9(cent) per share during the
balance of the fiscal year. In fiscal 1996 and fiscal 1997, the
corporation paid a dividend of 9(cent) per share per quarter.
Item 5
Management's Discussion and Analysis
See pages 4-9 of the 1997 Annual Report incorporated herein by reference.
Item 6
Market for Securities
See page 21 of the 1997 Annual Report incorporated herein by reference.
Item 7
Directors and Officers
(1) Directors -- See page 21 of the 1997 Annual Report and pages 3 and 4 of
the Information Circular incorporated herein by reference.
Officers other than those included above and their respective principal
occupations within the five preceding years --
Paul E. Lang, Campbellville, Ontario, President Consumer Foods, J.M.
Schneider Inc. 1995-present; Group Vice President, J.M. Schneider Inc.
1989-1995.
John E. Lauer, Waterloo, Ontario, President Agribusiness, J.M. Schneider
Inc. 1995-present; Group Vice President, J.M. Schneider Inc. 1993-1995;
Vice President Operations, J.M. Schneider Inc. 1986-1993.
Teresa H. Fortney, Guelph, Ontario, Treasurer 1995-present; Manager of
Treasury Services, J.M. Schneider Inc. 1993-1995; Divisional Controller,
Philips Cables Limited 1991-1993.
Sharon L. Huber, Kitchener, Ontario, Assistant Corporate Secretary
1997-present; Senior Executive Secretary 1992-1997; Senior Executive
Secretary, Uniroyal Goodrich Inc. 1984-1992.
(2) See pages 3 and 4 of the Information Circular incorporated herein by
reference.
(3) The percentage of securities of each class of voting securities of the
corporation beneficially owned, directly or indirectly, or over which
control or direction is exercised by all directors and senior officers
of the corporation as
C-28
<PAGE>
a group is, with respect to common shares, 7.1% and is, with respect to
Class A shares, 1.1%. As at October 25, 1997, options to purchase 547,900
Class A shares were outstanding at the market prices on the dates
granted. Details of outstanding options as at October 25, 1997 are as
follows:
<TABLE>
<CAPTION>
Number Price Expiry Date
- ----------- ----------- ------------------
<S> <C>
113,400 $ 14.75 October 15, 2002
65,000 12.75 September 8, 2004
65,000 13.50 October 20, 2004
107,500 13.75 October 25, 2005
197,000 10.50 October 23, 2006
</TABLE>
Of the 547,900 options outstanding at October 25, 1997, 446,600 were
granted to directors and senior officers of the corporation. No options were
granted to directors in their capacities as directors.
(4) See page 21 of the 1997 Annual Report incorporated herein by
reference.
Item 8
Additional Information
Information regarding directors' and officers' remuneration and
indebtedness and the principal holders of the corporation's voting securities
is contained in the Information Circular.
Additional financial information is provided in the corporation's
comparative financial statements for fiscal 1997 contained in pages 11-19 of
the 1997 Annual Report. A copy of the Information Circular dated February 18,
1997, and 1997 Annual Report may be obtained upon written request from the
secretary of the corporation at the following address:
Schneider Corporation
321 Courtland Avenue East, P.O. Box 130
Kitchener, Ontario N2G 3X8
Attention: Corporate Secretary
C-29
<PAGE>
EXCERPTS FROM SCHNEIDER CORPORATION'S
1997 ANNUAL REPORT
THAT ARE INCORPORATED BY REFERENCE
IN THE ANNUAL INFORMATION FORM FOR THE YEAR ENDED OCTOBER 25, 1997
Management's Discussion & Analysis
Results of Operations
Schneider Corporation returned to profitability in fiscal 1997. Sales were
slightly lower than fiscal 1996 levels due to the closure of the Kitchener Pork
operations. Earnings in our Consumer Foods and Poultry businesses were
significantly improved, but were overshadowed by continuing losses in our Pork
sector.
Sales for the year were $813,363,000 compared to $826,078,000 in fiscal
1996, a decrease of 1.5%. Lower sales were a result of the discontinuance of
our uncompetitive Kitchener pork operations which were partially offset by
growth in our other businesses. The discontinuance of our Kitchener pork
operations also reduced our export sales to $85,135,000 from $103,069,000 in
fiscal 1996.
1997 was a year of continued success in implementing the Corporation's
strategies. The Corporation commissioned the Winnipeg pork facility and doubled
production space at our Fleetwood facility in Surrey, British Columbia. We also
increased bacon production capacity and expanded Italian specialty meats
production capacity. The Kitchener pork operations were closed and certain
other manufacturing processes were relocated to other corporate facilities. The
poultry operations made good progress in changing the mix of our business to
more value-added products and achieved excellent results in lowering product
costs. While these initiatives were taken during the year, only the bacon
expansion, Kitchener closure and poultry initiatives had any material impact on
the Corporation's earnings for the year and they were not enough to combat the
continued high hog costs experienced for most of the year.
While live hog costs did not quite reach the record levels of 1996, they
did on average exceed 1996 prices. This put continued pressure on gross margins
for the fresh pork operations and for products using pork as a main ingredient.
In spite of this, overall gross margins increased to 11.3% from 9.8% in 1996.
Earnings from operations were $12,651,000 compared to a loss from
operations of $7,143,000 in fiscal 1996. Included in the 1996 loss was a
provision against earnings of $12,000,000 to cover the cost of the Kitchener
pork operations closure and restructuring program.
The Consumer Foods group consists of processed meats and grocery products.
Consumer Foods sales were $540,733,000, a 3.4% increase from 1996. Sales
increases were achieved through our Prince bacon joint venture and in grocery
products with the addition of Michelina's frozen entrees. Earnings from
operations increased by 23.2% to $21,458,000. This was despite competitive
pressure which prevented us from increasing selling prices in response to high
raw material costs.
A major thrust for Consumer Foods in fiscal 1997 was to change the mix of
our business to generate more broadly based earnings. This was accomplished
through the investment in product development, new plant and equipment, and a
new joint venture with Luigino's, Inc.
We wanted grocery products to be a more significant source of earnings.
This was achieved by entering into an agreement with Luigino's, Inc. to
distribute, market and sell the Michelina's and Yu Sing lines of frozen entrees
which have a leading market position in Canada. The product line was also
expanded by adding Michelina's Lifestyle. These products conform to the
Lifestyle low fat criteria and provide us with a product offering in the
largest sector of the frozen entree market. Both the Lifestyle product line and
the Michelina's brand were supported with aggressive television advertising
during the year. Despite the entry of new competitors into the frozen entree
category, we were able to grow our market share and meet sales expectations.
From a strategic perspective we continued to redefine our export efforts
to the United States. We have placed more emphasis on establishing our baked
goods line, including our deep dish meat pie and pocket products. These
products are gaining acceptance in both the retail and private label markets.
During the year we completed the first phase restructuring of our
Kitchener manufacturing facility. Several production processes were moved to
other more cost efficient and competitive Schneider Corporation facilities,
achieving the savings we anticipated. These savings combined with our continued
emphasis on cost control and continuous improvement position us to provide high
quality products while being a low cost producer.
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<PAGE>
Earnings (Loss) from Operations
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1996 1995
- ------------------------ ---------- ------------ ----------
<S> <C>
Consumer Foods $ 21,458 $ 17,413 $ 27,030
Agribusiness (778) (5,956) (4,215)
Corporate/Unallocated (8,029) (6,600) (5,386)
Unusual Item -- (12,000) --
- ------------------------ -------- --------- --------
$ 12,651 $ (7,143) $ 17,429
-------- --------- --------
</TABLE>
The Agribusiness group consists of our poultry and fresh pork operations.
Agribusiness sales were $272,630,000 compared $302,877,000 in 1996, a decrease
of 10.0%. This decline reflects the discontinuance of our uncompetitive
Kitchener pork operations in February, 1997. Losses from operations were
$778,000 compared to losses of $5,956,000 in 1996.
Pork losses were significant as the hog industry in North America went
through an extremely difficult and volatile time. Slaughter capacity in both
Canada and the United States exceeded hog supply resulting in high hog costs
for most of 1997. The high cost hog cycle persisted for an unprecedented
twenty-nine months and only began to diminish in the Corporation's fourth
quarter of fiscal 1997.
Sales to Japan did not meet expectations. Japanese importers stockpiled
pork product anticipating a supply shortage and higher prices when Taiwan was
forced to terminate pork exports due to a hog hoof-and mouth disease outbreak
in that country.
Our world class Winnipeg pork processing plant began operations in June of
1997, and in the fourth quarter we began achieving the throughput, productivity
and yield improvements anticipated. With this facility we have doubled our hog
processing in Manitoba with our target of 25,000 weekly hog throughput being
met by fiscal 1997 year end. In an environment of high demand for hogs, the
Corporation has been successful in growing its supply base with producers in
Manitoba. This has been accomplished through contractual arrangements and our
"Quality Pays" program which rewards producers for quality performance with a
view to establishing long term partnerships.
The poultry markets improved this year as the industry was able to
maintain balance between supply and demand. This was achieved through a better
working agreement between all parties implemented in fiscal 1996 which resulted
in better communications and a decline in market volatility. To further reduce
our exposures to market volatility, we have focused on changing the mix of our
business to more value-added poultry products and to lowering the costs of
producing them.
Our poultry thrust in 1997 was to improve margins on our product's lines.
This was primarily driven by productivity improvements in operations through
the use of continuous improvement principles and research in genetics and bird
nutrition. Both of these initiatives were successfully implemented and exceeded
our expectations.
Selling, marketing and administrative expenses were $65,097,000, a 6%
increase over fiscal 1996. This increase reflects increased selling and
marketing costs to support our expanded grocery product line, additional
systems technology costs to support business processes, and employee incentive
payments. Depreciation and amortization of $14,157,000 is lower than 1996 by
$507,000 due to the Kitchener pork operations closure at the beginning of the
year. Depreciation on new facilities and operations began in the latter part of
the year with the commencement of normal commercial operations. Interest
expense of $7,432,000 is lower than 1996 by $321,000 reflecting favourable
short-term interest rates experienced in 1997. During the year, the Corporation
sold non-essential property and facilities related to its poultry operations
for a net gain of $1,132,000.
Net earnings for the year were $3,103,000 or $0.49 ($0.47 fully diluted)
per share compared to a net loss of $9,804,000 or $1.54 per share in fiscal
1996. The effect of the special charge for restructuring in 1996 was $1.17 per
share.
Inflation
In our competitive industry, selling prices are dependent on the
availability of raw material supply. Therefore, the effects of general
inflation have a relatively minor impact on selling prices. Many of the
Corporation's fixed costs are affected by inflation.
Financial Position
The Corporation has undertaken an aggressive capital expansion program
over the past two years, with expenditures for the 1996 and 1997 fiscal years
totaling $49,422,000. Cash provided by operations was less than forecast as a
result of losses in the Pork business sector, making it necessary to increase
borrowing. As of October 25, 1997, our current ratio was
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<PAGE>
1.21:1 compared to 1.24:1 as at the end of fiscal 1996, and the total debt to
equity ratio was 1.15:1 compared to 1.12:1 at the previous year end. Total debt
increased from $99,074,000 to $110,202,000.
Cash of $8,188,000 was provided from operations. This reflects earnings
for the year adjusted for depreciation and amortization and other non-cash
items. Cash payments related to the 1996 special charge for restructuring
amounted to $3,903,000. Pension payments in excess of expense for the year were
required to fund defined benefit pension plans in the amount of $6,095,000
compared to $3,954,000 in 1996. The excess contributions and the continued
strong investment performance of the plans resulted in pension plan assets at
market value exceeding the estimated present value of plan obligations by
$49,710,000 year-end compared to $23,284,000 at the prior year-end. Pension
payments are expected to decline to expense levels in fiscal 1999.
There was a reduction of $5,672,000 in cash required to fund working
capital balances relating to operations. This was achieved by improved cash
flow management and an improvement in inventory turnover.
Proceeds from divestitures relating to nonessential poultry property and
facilities sold during the year were received in the amount of $1,132,000.
Proceeds from loans exceeded repayments of debentures and loans by $14,095,000
as the Corporation elected to fix interest rates and fund capital expenditures
through long term debt.
During the year, 500,000 Class A shares were issued and acquired by the
Corporation's pension fund for cash consideration of $6,525,000.
The Corporation uses derivative financial instruments to manage its
exposure to interest rate and currency fluctuations. Specific instruments
include swaps, options and forward contracts. The Corporation uses these
instruments for hedging purposes only and does not participate in any
speculative trading. Interest rate swap agreements totalling $50,672,000 have
been used to effectively fix an interest rate of 7.06%. The underlying
borrowing vehicle for these swaps are bankers acceptances provided by the
Corporation's banks.
The Corporation's banking services are provided by Canadian chartered
banks. Unsecured bank lines of credit of $127,000,000 are available to fund
working capital and capital expenditure programs. Use of these lines of credit
are governed by performance covenants contained in the banking agreements. The
Corporation is in compliance with all covenants.
Interest coverage (cash generated from operations divided by total
interest) was 1.1 compared to 1.3 in 1996.
Capital Expenditures
Expenditures on property, plant and equipment totaled $26,582,000 compared
to $22,840,000 in 1996. Expenditures for the year were focused on completing
planned facility expansions to support our thrusts of growth through geographic
expansion.
Capital expenditures in Consumer Foods totaled $11,316,000. The expansions
of our smokehouse capacity for bacon at Prince and the Fleetwood expansion in
Surrey constituted the largest projects undertaken in Consumer Foods. The
balance of our capital activity was focused on the introduction of innovative
products including a new generation of Lunchmate products and on upgrading
technology to support our ability to be a low cost producer.
Capital expenditures in Agribusiness totaled $15,232,000. The key
initiative for the year was the completion of the new pork processing plant in
Winnipeg. The total cost for this project was $24,120,000 over the past two
years.
The Board of Directors has approved a capital expenditure program of
$5,000,000 for fiscal 1998. Following two years of aggressive expansion through
our capital program, we have positioned the Corporation to cultivate these
investments to achieve their full potential in 1998, and have therefore limited
our capital program for 1998 to maintenance requirements in our plants and cost
improvement in our wiener and ham operations.
Strategies and Risks
The thrust of the 1998 business plan is to build on the major strategic
initiatives executed in fiscal 1997. We see little change in the competitive
environment in all areas of our business. While we do not foresee growth or
buoyancy in sales or margins in domestic markets for our traditional core
product categories, we will aggressively pursue opportunities in selected
market niches. We will also continue to improve our cost structure in order to
improve our profitability. The core strategies of the Corporation are
consistent with the previous year with an additional focus on consumer
awareness and materials supply management:
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<PAGE>
o to grow through geographic expansion - offering specifically chosen
products to targeted customers in the United States, internationally and
throughout Canada;
o to grow through the introduction of new retail, foodservice and private
label value-added products;
o to improve our customer focus, by providing what they want, when they
want it;
o to enhance consumer awareness and brand equity;
o to manage the supply of raw materials;
o to maximize the contribution our employees can make to our success;
o to continue to work towards a position as our industry's lowest cost
producer within defined quality specifications.
Year 2000
The Corporation is aware of the pervasive and complex "Year 2000" issues
related to information systems. Initial analysis has been undertaken, and we
are in the process of developing a comprehensive identification, evaluation and
mitigation plan for business systems and manufacturing controls. The plan will
be completed by September, 1998, and any required replacement, repair and
testing will be completed by June, 1999.
Schneider's core systems use a Julian Dating approach, which does not
calculate with a two digit "year" format. This substantially reduces the
Corporation's risks of information processing interruption. EDI and other
formalized 3rd party relationships are under review. PCs and network components
are being replaced with certified equipment as leases roll over. Production
control equipment, PLCs, scaling systems, etc. are being evaluated. While
substantial internal resources are allocated to the exercise, the costs of
addressing the "Year 2000" issue will not be material to the Corporation's
operations. Costs are being charged to expense as they are incurred.
Consumer Foods
The continued development of the initiatives started in 1997 will be the
primary focus for Consumer Foods in 1998. The capacity expansions during 1997
at Prince, Fleetwood and Cappola position us well in terms of both overall
growth and geographic expansion.
Consumer Foods continues to pursue growth through geographic expansion.
Through our joint venture with the Prince Group, the Corporation completed a
major expansion of its Drummondville facility in Quebec, doubling its bacon
production capacity. The Prince Group is currently one of the largest and most
efficient bacon producers in North America. New capacity will be focused on
opportunities in the United States.
The Corporation also doubled its production capacity at its Fleetwood
operations in Surrey, British Columbia with the new output targeted for the
West Coast of the United States. By transferring the distribution functions
from the Fleetwood operation to a newly constructed modern distribution centre
in Coquitlam, British Columbia, the Corporation was able to double production
space at Fleetwood which had been operating at capacity for the past two years.
The benefits of both the bacon and Fleetwood projects in terms of earnings
commenced in the Corporation's fourth quarter of fiscal 1997.
Through its joint venture with Cappola Food the Corporation doubled the
capacity of Cappola's existing product lines and acquired and outfitted a new
facility in North York, Ontario to expand Italian specialty meats offerings to
include a full line of premium products. During the year, shipments of the new
product line under the Cappola label began in both Canada and the United
States. From an earnings perspective, the full benefits of this project will
commence in fiscal 1998.
In 1997, the Corporation was successful in obtaining Canadian government
approval to use the designation of "Fat Free" for our Lifestyle processed meats
product line, the first such approval in Canada. The delay of the government's
approval delayed the launch of our reformulated Lifestyle product line with the
benefits now expected in 1998.
Our manufacturing strategies will continue to emphasize cost control and
continuous improvement to ensure a competitive position in the marketplace.
With the first phase of restructuring at the Kitchener facility in place, we
will concentrate on planning redesign strategies for the remaining processes at
this facility to reduce costs to competitive levels over the long term.
Significant sales increases are expected in our grocery segment during
1998 as we realize a full year of frozen entree sales and the market for this
segment continues to grow. The market for frozen main meal entrees has
increased in 1997 by
C-33
<PAGE>
30%, and growth is expected to continue at approximately 20% through 1998.
Competitive activity will continue as competitors launch new products into the
marketplace. Consumer Foods recently launched a line of "lite" entrees
co-branded under the Lifestyle and Michelina's names, capitalizing on these two
well established brands.
Our strategy in 1998 for our baked goods business is to broaden the United
States private label customer base primarily in the pockets and deep dish pie
product line to fully utilize our existing manufacturing capacity.
The changing retail marketplace with its concentration of purchasing
power, expansion of private label products and rationalization of product lines
through the implementation of category management principles was addressed by
the Corporation by launching a major initiative designed to improve customer
focus. The process looked at customer needs, our ability to service those needs
and the policy and technical issues which needed to be addressed in the
development of a long term information technology and data collection system.
In 1998 we will continue our work in redesigning our corporate financial and
management reporting systems to improve the order fulfillment process.
Agribusiness
We expect a return to profitability in our pork operations in fiscal 1998.
Sales will grow reflecting higher throughput in our new Winnipeg facility as
hog costs continue to decline. Manitoba hog expansion is forecasted to increase
by 15% to 20% as hog operators lower their feed costs through better feed
conversions and lower labour costs on a per unit basis. New managerial
practices and improved genetics are two other major factors influencing
production gains. The Western Canada hog industry remains optimistic with
significant capital investment occurring in breeding and growing farms.
Increased hog processing capacity will be introduced throughout the year
with expansion occurring in Alberta and Manitoba. Hog expansion in the West is
expected to satisfy the needs of this new capacity. Procurement premiums may
have to be paid, however, to commit producers to longer term supply contracts.
Japanese sales are expected to return to normal demand. The tariff which
was terminated last July is not expected to be triggered in the first half of
the fiscal year therefore providing improved opportunity for the export of
higher valued product and a more consistent flow of orders. The continuing
Taiwanese ban on export will provide additional Canadian export opportunity
especially with chilled pork products. Chilled pork technology has been
installed in our new cut plant. This will enhance our ability to expand sales
to Japan at returns greater than those achieved from sales of frozen product.
Korea has reduced its import tariff on pork products and will provide good
potential for sales increase. We expect continued growth in other international
markets especially Mexico, Russia and the United States.
The new hog processing facility in Winnipeg, Manitoba has been designed to
be competitive on a global basis. With our capacity and the new advanced
technologies implemented in the plant, we are well positioned to benefit with
the growth in international markets. We remain confident that the Pork strategy
will bring strong financial returns to the Corporation.
Our Poultry thrust in 1998 is less dependent on cost reductions than it
was over the past two years. Rather, it is more strategically driven through
market opportunity. We will continue to penetrate the Ontario retail market
with Schneider branded boxed meats and pursue private label business with new
products. This will further increase our value added sales and reduce our
dependency on the fresh commodity markets. There will be an aggressive new
product development thrust with emphasis on the use of dark meat. We will
continue to build on the continuous improvement principles which yielded
significant cost reductions in 1997 and we will continue broiler genetic
evaluation to define best alternatives to improve broiler meat yield in the
manufacturing plants.
We are optimistic that the working arrangement among all parties of the
poultry industry in Ontario will remain market responsive to ensure that
broiler production does not exceed market demand.
Environment, Health and Safety
The Corporation's environmental management system is directed towards
prevention, compliance with legislative and corporate standards, planning and
training. Included in the system are:
o internal and external audits;
o integration of the "4R" principles -- reduce, reuse, recycle and recover
-- into our business planning process and day-to-day operations;
o participation in government and industry environmental initiatives that
are relevant to our business;
o regular reports to the Board of Directors.
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<PAGE>
The Corporation's health and safety management system targets accident
prevention, with the provision of prompt and effective support systems,
including rehabilitation programs, for those employees injured on the job. Our
safety performance exceeds industry norms.
The Corporation's policies and procedures in areas of environment, health
and safety are regularly reviewed and updated. The Corporation supports its
commitment in these areas with capital spending and other resources as
necessary.
Expenditures related to environment, health and safety requirements are
not expected to have a material effect on the Corporation's financial position,
earnings or competitive position.
Shareholders' Position
Shareholders' equity as at October 25, 1997 totaled $95,513,000 compared
to $88,155,000 the previous year end. The increase represents the earnings for
the year, less dividends distributed at nine cents a quarter, and the issuance
of Class A shares for cash consideration of $6,525,000.
The Corporation maintains a Stock Option Plan for officers and senior
managers. At the end of the current year, 547,900 Class A shares were reserved
for issuance under the terms of the plan at exercise prices ranging from $10.50
to $14.75. During the year, 7,000 options were cancelled. No new options were
granted during the year.
The Corporation purchased and cancelled 6,200 Class A shares through a
Normal Course Issuer Bid. The cost of the shares purchased was $81,000.
Outlook
For the past two years our results have been severely impacted by an
adverse economic environment in the North American hog industry. Despite the
influence this issue has had on our profitability, we have continued to
maintain strategic focus in changing the mix of the Corporation's business and
where that business is done.
Our Consumer Foods and Poultry businesses both delivered sound
performances in 1997. We are making progress in geographically expanding our
business, and we are broadening our earnings streams to lessen our reliance on
processed meats. At the close of 1997 we have seen moderation in hog prices and
the cost of our raw material, and we anticipate the progress made this year
will accelerate through fiscal 1998. We anticipate growth in all businesses led
by a full year of production and sales at our new Winnipeg pork operation.
Sales increases will be realized in Consumer Foods through strategies that
have been implemented in 1997. These include the introduction of the innovative
"Fat Free" and Lunchmate product lines by Schneiders, realization of sales due
to capacity expansions during 1997 at Prince and Fleetwood, and increased sales
of the new Italian line of meats produced at Cappola Food. We will achieve
geographic expansion by introducing Schneider products manufactured at
Fleetwood into the California market, and an expanded line of Cappola products
through its broker and distribution network throughout the United States.
In 1998 we will continue to maintain our core product category strengths
and concentrate on competitiveness of manufacturing capabilities, and realize
earnings from strategies introduced in 1997. We will broaden our United States
private label customer base primarily in the pockets and deep dish pie
products. Our manufacturing strategies will continue to emphasize cost control
and continuous improvement strategies so as to ensure a competitive position in
the marketplace.
We will also be expanding our grocery initiatives as we continue to build
our Michelina's and Yu Sing business supported by a national advertising
campaign, and secure new baked goods customers in the United States.
The most significant impact on future earnings will be our new pork
facility in Winnipeg. This plant will double its production from 1997 and
expand our international business. Fiscal 1997 proved to be a very difficult
year with high hog prices. We forecast a return to more normal markets in 1998,
and we continue to be optimistic on the potential of global market
opportunities.
The Poultry results have improved significantly in the past two years, as
the market participants have achieved a better balance between supply and
demand and we have been able to significantly reduce our cost structure. In
1998 our Poultry business will be more strategically driven by market
opportunities. We will build on the success of our Schneider branded boxed meat
program and execute an aggressive new product thrust with emphasis on the use
of dark meat. These initiatives are designed to further reduce our dependency
on commodity markets.
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<PAGE>
Fiscal 1998 will be a year in which, rather than starting many new
initiatives, the organization will concentrate on improving the return on the
strategic initiatives which were begun in fiscal 1996 and 1997. We see market
growth opportunities in all of our businesses and we will increase our
financial strength.
On November 5, 1997, one of our major competitors, Maple Leaf Foods Inc.
announced an unsolicited takeover bid for the Corporation. A number of other
proposals were presented to the Corporation by interested parties which led to
the decision of the Schneider Family to sell its controlling interest to
Smithfield Foods, Inc. of Norfolk, Virginia. A class action was commenced in
Ontario on January 14, 1998, against the Corporation, its directors and others
alleging that actions taken by them were oppressive, unfairly prejudicial to
and unfairly disregarded the interests of shareholders and that the conversion
rights contained in the coat-tail provisions of the Corporation's articles had
been triggered. Maple Leaf Foods Inc. commenced litigation on February 10, 1998
making similar allegations. On February 23, 1998, certain Class A shareholders
commenced litigation making similar allegations. The Corporation and its
directors are defending against such allegations. While this activity creates
some uncertainty for the Corporation, management is working diligently not to
be diverted from executing its strategies.
Management's Report
Management of Schneider is responsible for the preparation, integrity and
fair presentation of the financial statements. The financial statements have
been prepared in accordance with generally accepted accounting principles, and
are based on management's best information and judgments.
In fulfilling its responsibilities, management has developed internal
control systems and procedures designed to provide reasonable assurance that
the Corporation's assets are safeguarded, that transactions are executed in
accordance with appropriate authorization and that accounting records may be
relied upon to properly reflect the Corporation's business transactions. To
augment the internal control systems, the Corporation maintains an internal
audit department which evaluates the Corporation's operations, provides control
self-assessment training to employees, and formally reports on the adequacy and
effectiveness of the controls and procedures to the Audit Committee of the
Board of Directors.
The Corporation communicates throughout the organization the
responsibility for employees to maintain high ethical standards in their
conduct of the Corporation's affairs. This responsibility is characterized in
the Code of Conduct signed by each management employee which provides for
compliance with laws of each jurisdiction in which the Corporation operates and
for observance of rules of ethical business conduct.
The Audit Committee of the Board of Directors is comprised of directors
who are not employees. The Audit Committee meets periodically with and
independently from management, the internal auditors and the Corporation's
independent external auditors to discuss significant accounting, reporting and
internal control matters. The Audit Committee reviews the consolidated
financial statements of the Corporation and recommends them to the Board of
Directors for approval. Both the internal auditors and the independent external
auditors have unrestricted access to the Audit Committee.
The Board of Directors oversees management's performance of its financial
reporting responsibilities. The Board of Directors reviews the recommendations
of the Audit Committee and the discussion and analysis of management. It
approves the financial statements and the selection of the Corporation's
external auditors who are appointed by the Shareholders at the annual meeting.
<TABLE>
<S> <C>
DOUGLAS W. DODDS GERALD A. HOOPER
Chairman and Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
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<PAGE>
Corporate Profile
Schneider Corporation of Kitchener, Ontario is one of Canada's largest
producers of premium quality food products. The business was founded in 1890 by
John Metz Schneider who began making pork sausage in his home. Today, Schneider
Corporation is publicly owned and has 4,000 employees manufacturing and selling
its branded and private label products in the retail and foodservice markets.
These products are sold throughout Canada and to the United States, Japan and
other foreign markets.
The Corporation managed its various subsidiaries and joint ventures
through two operating groups -- Consumer Foods and Agribusiness.
The Consumer Foods group, which comprises Schneiders' processed meat and
grocery operations, focuses on identifying and meeting the needs of retail and
foodservice customers and consumers. The Corporation produces more than 1,000
products such as ham, sausage, wieners, bacon, luncheon meats, specialty meats
and savoury bakery products for sale through traditional grocery stores,
delicatessens and foodservice establishments. The Corporation has consumer
foods operations in Kitchener and Port Perry, Ontario; Winnipeg, Manitoba;
Surrey, British Columbia; and St.-Anselme, Quebec. In addition, it participates
in the consumer foods sector through joint ventures with the Prince Group of
Princeville, Quebec; Cappola Food of Toronto, Ontario; National Meats of
Toronto; Johnsonville Sausage of Kohler, Wisconsin and Luigino's of Duluth,
Minnesota.
The Agribusiness group, which comprises Schneiders' fresh pork and poultry
operations, focuses on identifying and meeting the needs of retail, foodservice
and export customers. The Corporation's plants in Winnipeg produce fresh pork
products for sale in Canada, the United States, Japan and other international
markets.
The Corporation participates in the poultry sector through major
facilities in Hanover, St. Marys and Ayr, Ontario. Fresh and value-added
products in this growing market sector are marketed under the Schneider brand
and private labels for retail and foodservice customers.
In 1997, Schneider Corporation had sales of $813.4 million and assets of
$278 million. The Corporation's most valuable asset is its reputation for
providing consumers with the finest quality food products available in the
market. The Corporation's branded and private label products are renowned for
quality and value.
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<PAGE>
Schedule of Financial Highlights
Years ended October 25, 1997, October 26, 1996 and October 28, 1995
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C>
Operating Results:
Sales ........................................... $ 813,363 $826,078 $ 827,521
Net Earnings (loss) ............................. 3,103 (9,804) 7,502
Financial position:
Working capital ................................ 20,126 20,977 39,345
Total assets ................................... 278,013 250,994 246,832
Long-term debt ................................. 82,562 67,718 63,827
Shareholders' equity ........................... 95,513 88,155 101,103
Per share (dollars):
Net earnings (loss):
First quarter ................................ 0.02 0.03 0.38
Second quarter ............................... 0.02 (0.09) 0.09
Third quarter ................................ 0.03 (0.22) 0.29
Fourth quarter ............................... 0.42 (1.26) 0.46
--------- -------- ----------
0.49 (1.54) 1.22
Dividends paid .................................. 0.36 0.36 0.35
Shareholders' equity, end of year ............... 13.96 13.88 15.92
Key ratios:
Return on sales ................................ 0.38% (1.19)% 0.91%
Return on opening shareholders' equity ......... 3.52% (9.70)% 8.07%
Current ratio .................................. 1.21:1 1.24:1 1.52:1
Debt to equity ratio* .......................... 1.15:1 1.12:1 0.80:1
Long-term debt to equity ratio ................. 0.86:1 0.77:1 0.63:1
</TABLE>
* Debt is defined as current and long-term debentures and loans and bank
advances.
Letter to Shareholders
In fiscal 1997 Schneider Corporation reported a return to profitability in
spite of the continuation of the high hog cost cycle until well into the fourth
quarter. Though sales were down by 1.5% to $813.4 million, due primarily to the
discontinuance of our uncompetitive Kitchener pork operations, net earnings
rebounded strongly to $3.1 million as compared to a net loss of $9.8 million in
fiscal 1996.
We believe this turnaround performance is a reflection of the quality of
the Corporation's people, its products and its partnerships, and is an
indication that we are successfully transforming ourselves into a competitive,
low cost producer with a more diversified value-added product line while
maintaining the Schneider commitment to quality.
The success of the turnaround and the obvious potential for continued
strong growth, attracted the attention of our competitors. Following the end of
the fiscal year, the Corporation was the target of an unsolicited takeover bid
which has caused some uncertainty for shareholders, employees, suppliers and
customers. In one sense, however, the unprecedented interest being expressed is
an indication that the industry believes that our strategic plan to transform
the Corporation is working and will work in the future.
Of particular significance to us was the commissioning in June of 1997 of
the $25 million hog processing plant in Winnipeg, Manitoba. This facility, part
of the Corporation's $50 million two year capital expenditure program, is a
world class plant that will enable us to increase sales of fresh pork in
international markets. We are pleased to report that by the end of the fourth
quarter the plant had achieved the productivity and yield improvements
anticipated when this venture was undertaken.
The restructuring of our pork operations, combined with an improvement in
margins on poultry products, helped reduce losses from operations of the
Agribusiness group from $6 million in 1996 to $778,000 in 1997.
As part of our strategic plan we also wanted to change our business mix to
generate more broadly based earnings. To that end, we pursued several
initiatives in our Consumer Foods group.
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<PAGE>
We entered into an agreement with Luigino's, Inc. to distribute, market
and sell the Michelina's and Yu Sing lines of frozen entrees, reaffirmed our
leadership position in the lunch kit category by launching the innovative next
generation of Lunchmate products and launched our reformulated Lifestyle line
of processed meats. In so doing, we became the only processed meat manufacturer
approved by the Canadian government to use the designation of "Fat Free".
Our ability to manufacture and market value-added processed meat products
was enhanced by the doubling of our bacon production capacity at Prince, the
expansion of our Italian specialty meat production capacity at Cappola and the
commissioning of a new distribution centre in Coquitlam, British Columbia which
allowed us to expand our production capacity at the Fleetwood plant.
The result of all these initiatives was that in fiscal 1997, in a very
competitive market, our Consumer Foods group recorded a 3.4% year-over-year
increase in sales to $540.7 million and earnings from operations grew by 23.2%
to $21.5 million.
While the improvement in the Corporation's profitability and operating
position in fiscal 1997 is gratifying, we believe that the positive impact of
many of the initiatives on our earnings will only begin to be fully realized in
1998.
We anticipate that the Winnipeg plant, which will double its production
relative to 1996 levels, will help our pork operations return to profitability
in 1998. Earnings growth should also benefit from new opportunities to sell
bacon in the United States, sales to the western United States from the
increased output of our Fleetwood plant and the expansion of our Italian deli
line.
We are also excited about our growth potential in the frozen entree
market. This market is expected to grow by 20% in 1998 and we anticipate
additional growth through the recently launched line of "Light" entrees
co-branded under the Lifestyle and Michelina's names to capitalize on these two
well established brands.
Fiscal 1997 then was a time of great changes and solid gains for the
Corporation -- new investments, new products, new partnerships and new plants.
On behalf of the Board of Directors we wish to thank all of our stakeholders:
our shareholders for their support over the years particularly during difficult
economic cycles; the communities in which we work and live for providing an
environment in which our employees can grow; our suppliers, customers and
individuals whose commitment through the years and shared concern for quality
have directly contributed to the Corporation's success; and finally, the
generations of dedicated employees who have helped make this company and these
products symbols of quality for millions of Canadians.
In November 1997 the Corporation was made the target of an unsolicited
takeover bid by one of its major competitors, Maple Leaf Foods. The conduct of
the Corporation and its directors in response to the takeover bid is the
subject of litigation in the province of Ontario. The Corporation and its
directors are defending against the allegations made against them.
This development stands as simply another chapter in the long history of
growth and prosperity of the Corporation. Central to success, however, has been
the legacy of our founder, J.M. Schneider. His continued insistence upon
product quality, customer service and innovation in response to a changing
industry is just as important today as when J.M. started his business over one
hundred years ago. It is these principles which ensure the continuing
pre-eminence of the Schneider name and the Schneider brand in the market -- now
and in the 21st century.
(signed) DOUGLAS W. DODDS
Chairman and
Chief Executive Officer
C-39
<PAGE>
----------------------------------------
Schneider Corporation
----------------------------------------
March, 1998
Kitchener, Ontario
TO OUR SHAREHOLDERS:
The Corporation's strong operating performance which began in the fourth
quarter of 1997 accelerated in the first quarter of 1998. Sales for the first
sixteen weeks of fiscal 1998 were $271,696,000, an 11.3% increase over a year
ago. Earnings from operations were $9,705,000 for the quarter compared to
$2,421,000 in the same quarter last year. Net earnings of $3,639,000, or $0.53
per share, compares to $109,000, or $0.02 per share in 1997. The first quarter
results provide the Corporation with a good foundation to achieve the
$12,325,000 net earnings forecast we provided to shareholders in November,
1997.
Consumer Foods
Sales increased 12.5% in the Consumer Foods group, and earnings from
operations nearly doubled compared to the first quarter of last year.
New product initiatives and additional capacity from investment in new
plant and equipment contributed to the growth in sales and earnings in Consumer
Foods. Our new "Fat Free" line of sliced meats and wieners which have been
nominated "Best New Product of the Year" by the Canadian Council of Grocery
Distributors, and the new "Lite" entrees co-branded under the Lifestyle and
Michelina's brands were major contributors to earnings improvement in the
quarter. Our new joint-venture bacon facility in Drummondville, Quebec,
completed in the fourth quarter of 1997, doubles our bacon production capacity
and contributed to our first quarter growth in sales and earnings. This new
facility, one of the largest and most efficient in North America, is focusing
on opportunities in the United States. New plant and equipment at Fleetwood
Sausage in Surrey, British Columbia, and Cappola in North York, Ontario, is
performing satisfactorily, but will not contribute significantly to earnings
until the third and fourth quarters.
Agribusiness
Sales increased 8.0% in the Agribusiness group compared to the same
quarter last year despite a substantial reduction in the selling price of fresh
pork. Earnings from operations improved significantly with our new Winnipeg
pork processing plant achieving productivity and yield expectations.
In the quarter, sales to the Pacific Rim were suppressed by economic and
currency problems in Asia; however, we expect continuing increased demand for
pork in international markets, and in particular, for chilled pork products now
being produced at our new Winnipeg facility. We have offset the temporary
decline in Pacific Rim orders by increasing sales in Russia, Eastern Europe and
Australia. Significant capital investment is occurring to expand hog production
in Western Canada. As a premium value-added processor of fresh pork products,
we are well positioned to benefit from this expansion as we sell our products
in international markets.
Poultry earnings from operations continue to improve as we develop more
value-added new products for retail and foodservice customers, and continue to
emphasize plant productivity and efficiency through our continuous improvement
programs. Poultry is now contributing consistent earnings each quarter.
We are concentrating on capitalizing on the strategic initiatives which
were begun in 1996 and 1997. Our Consumer Foods and Poultry businesses are
delivering sound results. We anticipate continued improvement in our Pork
business as the year progresses. We see market growth opportunities in all of
our businesses, and we expect to achieve record earnings in fiscal 1998.
Douglas W. Dodds Gerald A. Hooper
Chairman and Vice President and
Chief Executive Officer Chief Financial Officer
C-40
<PAGE>
SCHNEIDER CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
February 14 February 15
1998 1997
------------- ------------
(in thousands)
<S> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable ............................... $ 60,880 $ 49,979
Inventories ....................................... 49,260 47,642
Other current assets .............................. 4,978 5,503
--------- ---------
115,118 103,124
PROPERTY, PLANT AND EQUIPMENT ...................... 125,298 120,017
Deferred pension ................................... 21,078 17,216
Other assets ....................................... 16,186 13,975
--------- ---------
162,562 151,208
TOTAL ASSETS ....................................... $ 277,680 $ 254,332
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank advances ..................................... $ 25,744 $ 32,631
Accounts payable and accrued liabilities .......... 58,038 56,647
Other current liabilities ......................... 4,836 3,114
--------- ---------
88,618 92,392
Debentures and loans ............................... 82,178 67,926
Other liabilities .................................. 8,338 6,322
--------- ---------
90,516 74,248
SHAREHOLDERS' EQUITY:
Capital stock ..................................... 29,045 22,425
Retained earnings ................................. 69,501 65,267
--------- ---------
98,546 87,692
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 277,680 $ 254,332
========= =========
</TABLE>
C-41
<PAGE>
SCHNEIDER CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
------------------------------
February 14 February 15
1998 1997
------------- --------------
(in thousands)
<S> <C>
Sales .......................................... $ 271,696 $ 244,116
Expenses:
Cost of products sold ......................... 237,151 219,105
Selling, marketing and administrative ......... 19,983 18,244
Depreciation and amortization ................. 4,857 4,346
---------- ----------
261,991 241,695
Earnings from operations ....................... 9,705 2,421
Interest expense ............................... 2,651 2,233
Unusual item ................................... 555 --
---------- ----------
Earnings before income taxes ................... 6,499 188
Income taxes ................................... 2,860 79
---------- ----------
Net earnings ................................... $ 3,639 $ 109
========== ==========
Earnings per share ............................. $ 0.53 $ 0.02
========== ==========
Fully diluted earnings per share ............... $ 0.50 $ 0.02
========== ==========
</TABLE>
SCHNEIDER CORPORATION
CONSOLIDATED FINANCIAL INFORMATION
Unusual Item
In November, 1997, the Corporation was made the target of an unsolicited
takeover bid by one of its major competitors, Maple Leaf Foods Inc. In
responding to this bid and a number of other proposals from interested parties,
the Corporation has incurred costs of professional advisors which are reflected
as an unusual item. This matter is ongoing and total costs are not determinable
at this time.
Contingent Liability
A number of legal actions have been commenced by Maple Leaf Foods Inc. and
certain shareholders of the Corporation alleging that the Corporation and its
directors took actions that were oppressive and unfairly prejudicial to the
interests of shareholders in responding to the Maple Leaf takeover bid. The
actions seek damages and/or the right to convert Class A shares to Common
shares. The Corporation and its directors are defending against such
allegations.
Other Information
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted in the current year.
C-42
<PAGE>
SCHNEIDER CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(unaudited)
<TABLE>
<CAPTION>
Sixteen weeks ended
----------------------------
February 14 February 15
1998 1997
------------- ------------
(in thousands)
<S> <C>
Operating activities:
Cash from operations .................................................. $ 7,020 $ 1,583
Net change in non-cash working capital balances relating to operations (7,423) 3,915
-------- --------
Cash provided by (used in) operating activities ....................... (403) 5,498
Investing activities:
Additions to property, plant and equipment ............................ (2,183) (9,188)
Decrease (increase) in loans receivable ............................... 501 (1,396)
Proceeds on sale of property, plant and equipment ..................... 136 1,062
-------- --------
Cash used in investing activities ..................................... (1,546) (9,522)
Financing activities:
Decrease in debentures and loans ...................................... (785) (2,737)
Dividends ............................................................. (572) (616)
Proceeds from loans ................................................... 264 337
Shares issued ......................................................... 27 --
Purchase of shares .................................................... (18) --
-------- --------
Cash used in financing activities ..................................... (1,128) (2,972)
Increase in bank advances .............................................. 3,077 6,996
Bank advances, beginning of period ..................................... 22,667 25,635
-------- --------
Bank advances, end of period ........................................... $ 25,744 $ 32,631
======== ========
Cash from operations is derived as follows:
Net earnings .......................................................... $ 3,639 $ 109
Adjustment for non-cash items:
Depreciation and amortization ....................................... 4,857 4,346
Deferred pension .................................................... (2,479) (2,535)
Other ............................................................... 1,003 (337)
-------- --------
$ 7,020 $ 1,583
======== ========
</TABLE>
C-43
<PAGE>
ANNEX D
FORM OF VOTING, SUPPORT AND EXCHANGE TRUST AGREEMENT
D-1
<PAGE>
VOTING, SUPPORT AND EXCHANGE TRUST AGREEMENT
AGREEMENT made as of the o day of o, 1998
BETWEEN:
SMITHFIELD FOODS, INC., a corporation existing under the laws of the
Commonwealth of Virginia (the "Parent"),
- and -
SMITHFIELD CANADA LIMITED, a corporation existing under the laws of the
Province of Ontario (the "Corporation"),
- and -
CIBC MELLON TRUST COMPANY, a trust company existing under the laws of
Canada (the "Trustee").
WHEREAS the Corporation has offered, by way of a public take-over bid, to
acquire any and all of the outstanding Common Shares, Class A Shares and
options to purchase Class A Shares of Schneider Corporation in consideration
for Exchangeable Shares of the Corporation;
AND WHEREAS holders of Exchangeable Shares will be entitled to redeem such
Shares and upon such redemption each Exchangeable Share shall be exchanged by
the Corporation for one share of Parent Common Stock (as hereinafter defined);
AND WHEREAS the Parent intends to grant to and in favour of Non-Affiliated
Holders (as hereinafter defined) from time to time of Exchangeable Shares the
right, in the circumstances set forth herein, to require the Parent or, at the
option of the Parent, Smithfield Sub (as hereinafter defined) to purchase from
each Non-Affiliated Holder all or any part of the Exchangeable Shares held by
the Non-Affiliated Holder;
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby voting rights in the Parent shall be exercisable
by Non-Affiliated Holders from time to time of Exchangeable Shares by and
through the Trustee, which will hold legal title to the Voting Share (as
hereinafter defined) to which voting rights attach for the benefit of
Non-Affiliated Holders and whereby the rights to require the Parent or, at the
option of the Parent, Smithfield Sub to purchase Exchangeable Shares from the
Non-Affiliated Holders shall be exercisable by Non-Affiliated Holders from time
to time of Exchangeable Shares by and through the Trustee, which will hold
legal title to such rights for the benefit of Non-Affiliated Holders;
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby the Parent will take certain actions and make
certain payments and deliveries necessary to ensure that the Corporation and
Smithfield Sub will be able to make certain payments and to deliver or cause to
be delivered shares of Parent Common Stock in satisfaction of the obligations
of the Corporation and/or Smithfield Sub under the Exchangeable Share
Provisions (as hereinafter defined) and this trust agreement;
AND WHEREAS these recitals and any statements of fact in this trust
agreement are made by the Parent and the Corporation and not by the Trustee;
NOW THEREFORE, in consideration of the respective covenants and agreements
provided in this trust agreement and for other good and valuable consideration
(the receipt and sufficiency of which are hereby acknowledged), the parties
agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 Definitions. In this trust agreement, unless something in the subject
matter or context is inconsistent therewith:
"Automatic Exchange Rights" means the automatic exchange of shares of
Parent Common Stock for Exchangeable Shares pursuant to Section 5.3 of the
Exchangeable Share Provisions.
"Board of Directors" means the board of directors of the Corporation.
"Business Day" means a day other than a Saturday, a Sunday or a day when
banks are not open for business in either or both of Norfolk, Virginia and
Toronto, Ontario.
D-2
<PAGE>
"Canadian Dollar Equivalent" means in respect of an amount expressed in a
foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the official
noon spot exchange rate on such date for such foreign currency as reported by
the Bank of Canada or, in the event such spot exchange rate is not available,
such exchange rate on such date for such foreign currency as may be deemed by
the Board of Directors to be appropriate for such purpose.
"Company Redemption Date" has the meaning set out in Section 1.1 of the
Exchangeable Share Provisions.
"Current Market Price" means, in respect of a share of Parent Common Stock
on any date, the Canadian Dollar Equivalent of the average closing sales price
of shares of Parent Common Stock during a period of 20 consecutive trading days
ending not more than five trading days before such date on Nasdaq or, if the
shares of Parent Common Stock are not then listed on Nasdaq, on such other
stock exchange or automated quotation system on which the shares of Parent
Common Stock are listed or quoted, as the case may be, as may be selected by
the Board of Directors for such purpose; provided, however, that if in the
opinion of the Board of Directors the public distribution or trading activity
of Parent Common Stock during such period is inadequate to create a market that
reflects the fair market value of the Parent Common Stock, then the Current
Market Price of a share of the Parent Common Stock shall be determined by the
Board of Directors based upon the advice of such qualified independent
financial advisors as the Board of Directors may deem to be appropriate, and
provided further that any such selection, opinion or determination by the Board
of Directors shall be conclusive and binding.
"Dividend Amount" has the meaning set out in Section 1.1 of the
Exchangeable Share Provisions.
"Effective Date" means the date on which the Corporation first takes up
shares of Schneider Corporation under the Offer.
"Exchange Right" has the meaning set out in section 5.1 hereof.
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares.
"Exchangeable Shares" means the exchangeable shares to be issued by the
Corporation pursuant to the Offer.
"Insolvency Event" means the institution by the Corporation of any
proceeding to be adjudicated a bankrupt or insolvent or to be dissolved or
wound up, or the consent of the Corporation to the institution of bankruptcy,
insolvency, dissolution or winding-up proceedings against it, or the filing by
the Corporation of a petition, answer or consent seeking dissolution or winding
up under any bankruptcy, insolvency or analogous laws, including without
limitation the Companies Creditors' Arrangement Act (Canada) and the Bankruptcy
and Insolvency Act (Canada), and the failure by the Corporation to contest in
good faith any such proceedings commenced by a third party in respect of the
Corporation within 15 days of becoming aware thereof, or the consent by the
Corporation to the filing of any such petition or to the appointment of a
receiver, or the making by the Corporation of a general assignment for the
benefit of creditors, or the admission in writing by the Corporation of its
inability to pay its debts generally as they become due, or the Corporation not
being permitted, pursuant to solvency requirements or other provisions of
applicable law, to redeem any Retracted Shares pursuant to Section 6.1(4) of
the Exchangeable Share Provisions.
"Liquidation Amount" has the meaning set out in Section 5.1(1) of the
Exchangeable Share Provisions.
"Liquidation Call Right" has the meaning set out in Section 5.2(1) of the
Exchangeable Share Provisions.
"List" has the meaning set out in section 4.6 hereof.
"Nasdaq" means the Nasdaq National Market segment of The Nasdaq Stock
Market, an electronic securities market operated by The Nasdaq National Market
Stock Market, Inc., a wholly-owned subsidiary of the National Association of
Securities Dealers, Inc.
"Non-Affiliated Holder Votes" has the meaning set out in section 4.2
hereof.
"Non-Affiliated Holders" means the registered holders of Exchangeable
Shares other than the Parent and its Subsidiaries.
"Offer" means the offer, by way of a public take-over bid, by the
Corporation to acquire any and all of the outstanding Common Shares, Class A
Shares and options to purchase Class A Shares of Schneider Corporation.
D-3
<PAGE>
"Officer's Certificate" means, with respect to the Parent or the
Corporation, as the case may be, a certificate signed by any one of the
Chairman of the Board, the President, any Vice-President or any other executive
officer of the Parent or the Corporation, as the case may be.
"Parent Board of Directors" means the board of directors of the Parent.
"Parent Common Stock" means the shares of Common Stock of the Parent, par
value US$0.50 per share, having voting rights of one vote per share, and any
other securities into which such shares may be changed or for which such shares
may be exchanged (whether or not the Parent shall be the issuer of such other
securities) or any other consideration which may be received by the holders of
such shares, pursuant to a recapitalization, reconstruction, reorganization or
reclassification of, or amalgamation, merger, liquidation or similar
transaction, affecting such shares.
"Parent Consent" has the meaning set out in section 4.2 hereof.
"Parent Meeting" has the meaning set out in section 4.2 hereof.
"Parent Successor" has the meaning set out in section 11.1 hereof.
"Redemption Call Right" has the meaning set out in Section 7.2(1) of the
Exchangeable Share Provisions.
"Redemption Price" has the meaning set out in Section 7.1(1) of the
Exchangeable Share Provisions.
"Retracted Shares" has the meaning set out in section 5.7 hereof.
"Retraction Call Right" has the meaning set out in Section 6.2(1) of the
Exchangeable Share Provisions.
"Retraction Price" has the meaning set out in Section 6.1(1) of the
Exchangeable Share Provisions.
"Smithfield Sub" means Smithfield Sub Limited, a wholly-owned Subsidiary
of the Parent existing under the laws of the Province of Ontario.
"Subsidiary" of the Parent means any corporation more than 50% of the
outstanding stock of which is owned, directly or indirectly, by the Parent, by
one or more other Subsidiaries of the Parent or by the Parent and one or more
other Subsidiaries of the Parent.
"Tender Offer" has the meaning set out in section 6.8 hereof.
"Transfer Agent" has the meaning set out in Section 1.1 of the
Exchangeable Share Provisions.
"Trust" means the trust created by this trust agreement.
"Trust Estate" means the Voting Share, any other securities, the Exchange
Right and any money or other rights or assets that may be held by the Trustee
from time to time pursuant to this trust agreement.
"Trustee" means CIBC Mellon Trust Company and, subject to the provisions
of Article 10 hereof, includes any successor trustee or permitted assigns.
"Voting Rights" means the voting rights attached to the Voting Share.
"Voting Share" means the one share of Series B Special Voting Preferred
Shares par value US$1.00, issued by the Parent to and deposited with the
Trustee, which entitles the holder of record to a number of votes at meetings
of holders of Parent Common Stock equal to the number of Exchangeable Shares
outstanding from time to time that are held by Non-Affiliated Holders.
1.2 Interpretation Not Affected by Headings, etc. The division of this
trust agreement into articles and sections and the insertion of headings are
for reference purposes only and shall not affect the interpretation of this
trust agreement. Unless otherwise indicated, any reference in this trust
agreement to an article or section refers to the specified article or section
of this trust agreement.
1.3 Number, Gender and Persons. In this trust agreement, unless the
context otherwise requires, words importing the singular number include the
plural and vice versa, words importing any gender include all genders and words
importing persons include individuals, corporations, partnerships, companies,
associations, trusts, unincorporated organizations, governmental bodies and
other legal or business entities of any kind.
1.4 Date for Any Action. If any date on which any action is required to be
taken under this trust agreement is not a Business Day, such action shall be
required to be taken on the next succeeding Business Day.
D-4
<PAGE>
1.5 Payments. All payments to be made hereunder will be made without
interest and less any tax required by Canadian law to be deducted and withheld.
1.6 Currency. In this trust agreement, unless stated otherwise, all dollar
amounts are in Canadian dollars.
ARTICLE 2
TRUST
2.1 Establishment of Trust. One of the purposes of this trust agreement is
to create the Trust for the benefit of the Non-Affiliated Holders, as herein
provided. The Trustee will hold the Voting Share in order to enable the Trustee
to exercise the Voting Rights and will hold the Exchange Right in order to
enable the Trustee to exercise such right and will hold the other rights
granted in or resulting from the Trustee being a party to this trust agreement
in order to enable the Trustee to exercise or enforce such rights, in each case
as trustee for and on behalf of the Non-Affiliated Holders as provided in this
trust agreement.
ARTICLE 3
VOTING SHARE
3.1 Issue and Ownership of the Voting Share. Simultaneously with the
execution and delivery of this trust agreement, the Parent will issue to and
deposit with the Trustee the Voting Share to be hereafter held of record by the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Non-Affiliated Holders, in accordance with the provisions of this trust
agreement. The Parent hereby acknowledges receipt from the Trustee as trustee
for and on behalf of the Non-Affiliated Holders of good and valuable
consideration (and the adequacy thereof) for the issuance of the Voting Share
by the Parent to the Trustee. During the term of the Trust and subject to the
terms and conditions of this trust agreement, the Trustee shall possess and be
vested with full legal ownership of the Voting Share and shall be entitled to
exercise all of the rights and powers of an owner with respect to the Voting
Share, provided that the Trustee shall:
(a) hold the Voting Share and the legal title thereto as trustee solely
for the use and benefit of the Non-Affiliated Holders in accordance with
the provisions of this trust agreement; and
(b) except as specifically authorized by this trust agreement, have no
power or authority to sell, transfer, vote or otherwise deal in or with
the Voting Share and the Voting Share shall not be used or disposed of by
the Trustee for any purpose other than the purposes for which the Trust is
created pursuant to this trust agreement.
3.2 Legended Share Certificates. The Corporation will cause each
certificate representing Exchangeable Shares to bear an appropriate legend
notifying the Non-Affiliated Holders of their right to instruct the Trustee
with respect to the exercise of the Voting Rights with respect to the
Exchangeable Shares held by a Non-Affiliated Holder.
3.3 Safekeeping of Certificate. The certificate representing the Voting
Share shall at all times be held in safe keeping by the Trustee or its agent.
ARTICLE 4
EXERCISE OF VOTING RIGHTS
4.1 Voting Rights. The Trustee, as the holder of record of the Voting
Share, shall be entitled to all of the Voting Rights, including the right to
consent to or to vote in person or by proxy the Voting Share, on any matter,
question or proposition whatsoever that may come before the shareholders of the
Parent at a Parent Meeting or in connection with a Parent Consent. The Voting
Rights shall be and remain vested in and exercised by the Trustee. Subject to
section 7.15 hereof, the Trustee shall exercise the Voting Rights only on the
basis of instructions received pursuant to this Article 4 from Non-Affiliated
Holders entitled to instruct the Trustee as to the voting thereof at the time
at which the Parent Consent is sought or the Parent Meeting is held. To the
extent that no instructions are received from a Non-Affiliated Holder with
respect to the Voting Rights to which such Non-Affiliated Holder is entitled,
the Trustee shall not exercise or permit the exercise of the Voting Rights
relating to such Non-Affiliated Holder's Exchangeable Shares.
4.2 Number of Votes. With respect to all meetings of shareholders of the
Parent at which holders of shares of Parent Common Stock are entitled to vote
(a "Parent Meeting") and with respect to all written consents sought from the
holders of shares of Parent Common Stock (a "Parent Consent"), each
Non-Affiliated Holder shall be entitled to instruct the Trustee
D-5
<PAGE>
to cast and exercise, in the manner instructed, one vote for each Exchangeable
Share owned of record by such Non-Affiliated Holder on the record date
established by the Parent or by applicable law for such Parent Meeting or
Parent Consent, as the case may be (the "Non-Affiliated Holder Votes") in
respect of each matter, question or proposition to be voted on at such Parent
Meeting or to be consented to in connection with such Parent Consent.
4.3 Mailings to Shareholders. With respect to each Parent Meeting and
Parent Consent, the Trustee will use its reasonable best efforts to mail or
cause to be mailed (or otherwise communicate in the same manner that the Parent
utilizes in communications to holders of Parent Common Stock, subject to the
Trustee being advised in writing of such method and its ability to provide this
method of communication) to each of the Non-Affiliated Holders named in the
List on the same day as the initial mailing or notice (or other communication)
with respect thereto is given by the Parent to its shareholders:
(a) a copy of such notice, together with any proxy or information
statement and related materials to be provided to shareholders of the
Parent;
(b) a statement that such Non-Affiliated Holder is entitled, subject to
the provisions of section 4.7 hereof, to instruct the Trustee as to the
exercise of the Non-Affiliated Holder Votes with respect to such Parent
Meeting or Parent Consent, as the case may be, or, pursuant and subject to
section 4.7 hereof, to attend such Parent Meeting and to exercise
personally the Non-Affiliated Holder Votes thereat;
(c) a statement as to the manner in which such instructions may be given
to the Trustee, including, in the case of a Parent Meeting, an express
indication that instructions may be given to the Trustee to give:
(i) a proxy to such Non-Affiliated Holder or its duly appointed
designee to exercise personally such holder's Non-Affiliated Holder
Votes; or
(ii) a proxy to a duly appointed designated agent or other
representative of the management of the Parent to exercise such
Non-Affiliated Holder Votes;
(d) a statement that if no such instructions are received from the
Non-Affiliated Holder, the Non-Affiliated Holder Votes to which such
Non-Affiliated Holder is entitled will not be exercised;
(e) a form of direction whereby the Non-Affiliated Holder may so direct
and instruct the Trustee as contemplated herein; and
(f) a statement of (i) the time and date by which such instructions must
be received by the Trustee in order to be binding upon it, which in the
case of a Parent Meeting shall not be earlier than the close of business
on the second Business Day prior to such meeting, and (ii) the method for
revoking or amending such instructions.
The materials referred to above are to be provided by the Parent to the
Trustee, but shall be subject to review and comment by the Trustee. For the
purpose of determining Non-Affiliated Holder Votes to which a Non-Affiliated
Holder is entitled in respect of any such Parent Meeting or Parent Consent, the
number of Exchangeable Shares owned of record by the Non-Affiliated Holder
shall be determined at the close of business on the record date established by
the Parent or by applicable law for purposes of determining shareholders
entitled to vote at such Parent Meeting or to give written consent in
connection with such Parent Consent. The Parent will notify the Trustee in
writing of any decision of the board of directors of the Parent with respect to
the calling of any such Parent Meeting or the seeking of any such Parent
Consent and shall provide all necessary information and materials to the
Trustee in each case promptly and in any event in sufficient time to enable the
Trustee to perform its obligations contemplated by this section 4.3.
4.4 Copies of Shareholder Information. The Parent will deliver to the
Trustee copies of all proxy materials (including notices of Parent Meetings but
excluding proxies to vote shares of Parent Common Stock), information
statements, reports (including without limitation all interim and annual
financial statements) and other written communications that are to be
distributed from time to time to holders of Parent Common Stock in sufficient
quantities and in sufficient time so as to enable the Trustee to send those
materials to each Non-Affiliated Holder at the same time as such materials are
first sent to holders of Parent Common Stock. The Trustee will mail or
otherwise send to each Non-Affiliated Holder, at the expense of Parent, copies
of all such materials (and all materials specifically directed to the
Non-Affiliated Holders or to the Trustee for the benefit of the Non-Affiliated
Holders by the Parent) received by the Trustee from the Parent at the same time
as such materials are first sent to holders of Parent Common Stock. The Trustee
will make copies of all such materials available for inspection by any
Non-Affiliated Holder at the Trustee's principal office in Toronto.
D-6
<PAGE>
4.5 Other Materials. Immediately after receipt by the Parent or any
shareholder of the Parent of any material sent or given generally to the
holders of Parent Common Stock by or on behalf of a third party, including
without limitation dissident proxy and information circulars (and related
information and material) and tender and exchange offer circulars (and related
information and material), the Parent shall use reasonable efforts to obtain
and deliver to the Trustee copies thereof in sufficient quantities so as to
enable the Trustee to forward such material (unless the same has been provided
directly to Non-Affiliated Holders by such third party) to each Non-Affiliated
Holder as soon as practicable thereafter. As soon as practicable after receipt
thereof, the Trustee will mail or otherwise send to each Non-Affiliated Holder,
at the expense of the Parent, copies of all such materials received by the
Trustee from the Parent. The Trustee will also make copies of all such
materials available for inspection by any Non-Affiliated Holder at the
Trustee's principal office in Toronto.
4.6 List of Persons Entitled to Vote. The Corporation shall, (a) prior to
each annual, general and special Parent Meeting or the seeking of any Parent
Consent and (b) forthwith upon each request made at any time by the Trustee in
writing, prepare or cause to be prepared a list (a "List") of the names and
addresses of the Non-Affiliated Holders arranged in alphabetical order and
showing the number of Exchangeable Shares held of record by each such
Non-Affiliated Holder, in each case at the close of business on the date
specified by the Trustee in such request or, in the case of a List prepared in
connection with a Parent Meeting or a Parent Consent, at the close of business
on the record date established by the Parent or pursuant to applicable law for
determining the holders of Parent Common Stock entitled to receive notice of
and/or to vote at such Parent Meeting or to give consent in connection with
such Parent Consent. Each such List shall be delivered to the Trustee promptly
after receipt by the Corporation of such request or the record date for such
meeting or seeking of consent, as the case may be, and, in any event, within
sufficient time as to enable the Trustee to perform its obligations under this
trust agreement. The Parent agrees to give the Corporation written notice (with
a copy to the Trustee) of the calling of any Parent Meeting or the seeking of
any Parent Consent, together with the record dates therefor, sufficiently prior
to the date of the calling of such meeting or seeking of such consent so as to
enable the Corporation to perform its obligations under this section 4.6.
4.7 Entitlement to Direct Votes. Any Non-Affiliated Holder named in a List
prepared in connection with any Parent Meeting or any Parent Consent will be
entitled (a) to instruct the Trustee in the manner described in section 4.3
hereof with respect to the exercise of the Non-Affiliated Holder Votes to which
such Non-Affiliated Holder is entitled or (b) to attend such meeting and
personally to exercise thereat (or to exercise with respect to any written
consent), as the proxy of the Trustee, the Non-Affiliated Holder Votes to which
such Non-Affiliated Holder is entitled or (c) to appoint a third party as the
proxy of the Trustee to attend such meeting and exercise thereat the
Non-Affiliated Holder's voting rights to which such Non-Affiliated Holder is
entitled except, in each case, to the extent that such Non-Affiliated Holder
has transferred the ownership of any Exchangeable Shares in respect of which
such Non-Affiliated Holder is entitled to Non-Affiliated Holder Votes after the
close of business on the record date for such meeting or seeking of consent and
the transferee establishes ownership of the Exchangeable Shares and demands,
not later than ten days before the Parent Meeting, that the transferee be
entitled to the Non-Affiliated Votes attaching to such Exchangeable Shares at
the Parent Meeting.
4.8 Voting by Trustee, and Attendance of Trustee Representative, at
Meeting.
(1) In connection with each Parent Meeting and Parent Consent, the Trustee
shall exercise, either in person or by proxy, in accordance with the
instructions received from a Non-Affiliated Holder pursuant to section 4.3
hereof, the Non-Affiliated Holder Votes as to which such Non-Affiliated Holder
is entitled to direct the vote (or any lesser number thereof as may be set
forth in the instructions); provided, however, that such written instructions
are received by the Trustee from the Non-Affiliated Holder prior to the time
and date fixed by it for receipt of such instructions in the notice given by
the Trustee to the Non-Affiliated Holder pursuant to section 4.3 hereof.
(2) The Trustee shall cause such representatives as are empowered by it to
sign and deliver, on behalf of the Trustee, proxies for Voting Rights enabling
a Non-Affiliated Holder to attend each Parent Meeting. Upon submission by a
Non-Affiliated Holder (or its duly appointed designee) of identification
satisfactory to the Trustee's representatives, and at the Non-Affiliated
Holder's request, such representatives shall sign and deliver to such
Non-Affiliated Holder (or its duly appointed designee) a proxy to exercise
personally the Non-Affiliated Holder Votes as to which such Non-Affiliated
Holder is otherwise entitled hereunder to direct the vote, if such
Non-Affiliated Holder either (i) has not previously given the Trustee
instructions pursuant to section 4.3 hereof in respect of such meeting, or (ii)
submits to the Trustee's representatives written revocation of any such
previous instructions in accordance with the requirements specified by the
Trustee in the materials provided to the Non-Affiliated Holder pursuant to
section 4.3(f)(ii) hereof. At such meeting, the Non-Affiliated Holder
exercising such Non-Affiliated Holder Votes shall have the same rights as the
Trustee to speak at the meeting in respect of any matter, question or
proposition, to vote by way of ballot at the meeting in respect of any matter,
question or proposition and to vote at such meeting by way of a show of hands
in respect of any matter, question or proposition.
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4.9 Distribution of Written Materials. Any written materials to be
distributed by the Trustee to the Non-Affiliated Holders pursuant to this trust
agreement shall be delivered or sent by mail (or otherwise communicated in the
same manner as the Parent utilizes in communications to holders of Parent
Common Stock, subject to the Trustee being advised in writing of such method of
communication and its ability to provide same) to each Non-Affiliated Holder at
its address as shown on the books of the Corporation. The Corporation shall
provide or cause to be provided to the Trustee for this purpose, on a timely
basis and without charge or other expense:
(a) current lists of the Non-Affiliated Holders; and
(b) upon the request of the Trustee, mailing labels to enable the Trustee
to carry out its duties under this trust agreement.
The materials referred to above are to be provided by the Parent to the
Trustee, but shall be subject to review and comment by the Trustee.
4.10 Termination of Voting Rights. All the rights of a Non-Affiliated
Holder with respect to the Non-Affiliated Holder Votes exercisable in respect
of the Exchangeable Shares held by such Non-Affiliated Holder, including the
right to instruct the Trustee as to the voting of or to vote personally such
Non-Affiliated Holder Votes, shall be deemed to be surrendered by the
Non-Affiliated Holder to the Parent and such Non-Affiliated Holder Votes and
the Voting Rights represented thereby shall cease immediately upon the delivery
by such Non-Affiliated Holder to the Trustee of the certificates representing
such Exchangeable Shares in connection with the exercise by the Non-Affiliated
Holder of the Exchange Right or the occurrence of the automatic exchange of
Exchangeable Shares for shares of Parent Common Stock, as specified in Article
5 hereof, or upon the redemption of Exchangeable Shares pursuant to Article 6
or Article 7 of the Exchangeable Share Provisions, or upon the effective date
of the liquidation, dissolution or winding-up of the Corporation or any other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding up its affairs pursuant to Article 5 of the Exchangeable
Share Provisions, or upon the purchase of Exchangeable Shares from the holder
thereof by the Parent or Smithfield Sub pursuant to the exercise by the Parent
or Smithfield Sub of the Retraction Call Right, the Redemption Call Right or
the Liquidation Call Right (unless in any case the Corporation, the Parent or
Smithfield Sub shall not have delivered the requisite shares of Parent Common
Stock and cheque, if any, deliverable in exchange therefor to the Transfer
Agent or the Trustee for delivery to the Non-Affiliated Holders).
ARTICLE 5
EXCHANGE RIGHT AND PARENT SUPPORT
5.1 Grant and Ownership of the Exchange Right. The Parent hereby grants to
the Trustee as trustee for and on behalf of, and for the use and benefit of,
the Non-Affiliated Holders the right (the "Exchange Right"), upon the
occurrence and during the continuance of an Insolvency Event, to require the
Parent to purchase or to cause Smithfield Sub to purchase from each or any
Non-Affiliated Holder all or any part of the Exchangeable Shares held by the
Non-Affiliated Holder, all in accordance with the provisions of this trust
agreement. The Parent hereby acknowledges receipt from the Trustee, as trustee
for and on behalf of the Non-Affiliated Holders, of good and valuable
consideration (and the adequacy thereof) for the grant of the Exchange Right by
the Parent to the Trustee. During the term of the Trust and subject to the
terms and conditions of this trust agreement, the Trustee shall possess and be
vested with full legal ownership of the Exchange Right and shall be entitled to
exercise all of the rights and powers of an owner with respect to the Exchange
Right, provided that the Trustee shall:
(a) hold the Exchange Right and the legal title thereto as trustee solely
for the use and benefit of the Non-Affiliated Holders in accordance with
the provisions of this trust agreement; and
(b) except as specifically authorized by this trust agreement, have no
power or authority to exercise or otherwise deal in or with the Exchange
Right, and the Trustee shall not exercise such right for any purpose other
than the purposes for which this Trust is created pursuant to this trust
agreement.
5.2 Legended Share Certificates. The Corporation will cause each
certificate representing Exchangeable Shares to bear an appropriate legend
notifying the Non-Affiliated Holders of their right to instruct the Trustee
with respect to the exercise of the Exchange Right in respect of the
Exchangeable Shares held by a Non-Affiliated Holder.
5.3 General Exercise of Exchange Right. The Exchange Right shall be and
remain vested in and exercisable by the Trustee. Subject to section 7.15
hereof, the Trustee shall exercise the Exchange Right only on the basis of
instructions received pursuant to this Article 5 from Non-Affiliated Holders
entitled to instruct the Trustee as to the exercise thereof. To
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the extent that no instructions are received from a Non-Affiliated Holder with
respect to the Exchange Right, the Trustee shall not exercise or permit the
exercise of the Exchange Right.
5.4 Purchase Price. The purchase price payable by the Parent or Smithfield
Sub for each Exchangeable Share to be purchased by the Parent or Smithfield Sub
under the Exchange Right shall be an amount per share equal to (a) the Current
Market Price of a share of Parent Common Stock on the last Business Day prior
to the day of closing of the purchase and sale of such Exchangeable Share under
the Exchange Right, which shall be satisfied in full by causing to be delivered
to such holder one share of Parent Common Stock, plus (b) the Dividend Amount,
if any. The purchase price for each such Exchangeable Share so purchased may be
satisfied only by the Parent or Smithfield Sub delivering or causing to be
delivered to the Trustee, on behalf of the relevant Non-Affiliated Holder, one
share of Parent Common Stock and a cheque for the balance, if any, of the
purchase price, without interest.
5.5 Exercise Instructions. Subject to the terms and conditions herein set
forth, a Non-Affiliated Holder shall be entitled, upon the occurrence and
during the continuance of an Insolvency Event, to instruct the Trustee to
exercise the Exchange Right with respect to all or any part of the Exchangeable
Shares registered in the name of such Non-Affiliated Holder on the books of the
Corporation. To cause the exercise of the Exchange Right by the Trustee, the
Non-Affiliated Holder shall deliver to the Trustee, in person or by certified
or registered mail, at its principal office in Toronto, Ontario or at such
other places in Canada as the Trustee may from time to time designate by
written notice to the Non-Affiliated Holders, the certificates representing the
Exchangeable Shares which such Non-Affiliated Holder desires the Parent to
purchase, duly endorsed in blank, and accompanied by such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares
under the Business Corporations Act (Ontario) and such additional documents and
instruments as the Trustee, the Parent or the Corporation may reasonably
require together with (a) a duly completed form of notice of exercise of the
Exchange Right, contained on the reverse of or attached to the Exchangeable
Share certificates, stating (i) that the Non-Affiliated Holder thereby
instructs the Trustee to exercise the Exchange Right so as to require the
Parent or Smithfield Sub to purchase from the Non-Affiliated Holder the number
of Exchangeable Shares specified therein, (ii) that such Non-Affiliated Holder
has good title to and owns all such Exchangeable Shares to be acquired by the
Parent or Smithfield Sub free and clear of all liens, claims and encumbrances,
(iii) the names in which the certificates representing Parent Common Stock
issuable in connection with the exercise of the Exchange Right are to be issued
and (iv) the names and addresses of the persons to whom such new certificates
should be delivered and (b) payment (or evidence satisfactory to the Trustee,
the Corporation and the Parent of payment) of the taxes (if any) payable as
contemplated by section 5.8 of this trust agreement. If only a portion of the
Exchangeable Shares represented by any certificate delivered to the Trustee are
to be purchased by the Parent or Smithfield Sub under the Exchange Right, a new
certificate for the balance of such Exchangeable Shares shall be issued to the
holder at the expense of the Corporation.
5.6 Delivery of Parent Common Stock; Effect of Exercise. Promptly after
receipt of the certificates representing the Exchangeable Shares that a
Non-Affiliated Holder desires the Parent or Smithfield Sub to purchase under
the Exchange Right (together with such documents and instruments of transfer
and a duly completed form of notice of exercise of the Exchange Right) duly
endorsed for transfer to the Parent or Smithfield Sub, the Trustee shall notify
the Parent and the Corporation of its receipt of the same, which notice to the
Parent and the Corporation shall constitute exercise of the Exchange Right by
the Trustee on behalf of the holder of such Exchangeable Shares, and the Parent
shall immediately thereafter deliver or cause Smithfield Sub to deliver to the
Trustee, for delivery to the Non-Affiliated Holder of such Exchangeable Shares
(or to such other persons, if any, properly designated by such Non-Affiliated
Holder), a certificate for the number of shares of Parent Common Stock
deliverable in connection with such exercise of the Exchange Right (which
shares shall be duly issued as fully paid and non-assessable and shall be free
and clear of any lien, claim or encumbrance, security interest or adverse
claim) and a cheque for the balance, if any, of the purchase price therefor,
without interest; provided, however, that no such delivery shall be made unless
and until the Non-Affiliated Holder requesting the same shall have paid (or
provided evidence satisfactory to the Trustee, the Corporation and the Parent
of the payment of) the taxes (if any) payable as contemplated by section 5.8 of
this trust agreement. Immediately upon the giving of notice by the Trustee to
the Parent and the Corporation of the exercise of the Exchange Right, as
provided in this section 5.6, the closing of the transaction of purchase and
sale contemplated by the Exchange Right shall be deemed to have occurred, and
the Non-Affiliated Holder of such Exchangeable Shares shall be deemed to have
transferred to the Parent (or, at the Parent's option, to Smithfield Sub) all
of its right, title and interest in and to such Exchangeable Shares and the
related interest in the Trust Estate and shall not be entitled to exercise any
of the rights of a holder in respect thereof, other than the right to receive
its proportionate part of the total purchase price therefor, unless the
requisite number of shares of Parent Common Stock (together with a cheque for
the balance, if any, of the total purchase price therefor, without interest) is
not delivered by the Parent or Smithfield Sub to the Trustee, for delivery to
such Non-Affiliated Holder (or to such other persons, if any, properly
designated by such Non-Affiliated Holder), within five Business Days of the
date of the giving of such notice by the Trustee, in which case the
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rights of the Non-Affiliated Holder shall remain unaffected until such shares
of Parent Common Stock are so delivered and any such cheque is so delivered and
paid. Concurrently with the closing of the transaction of purchase and sale
contemplated by the Exchange Right, such Non-Affiliated Holder shall be
considered and deemed for all purposes to be the holder of the shares of Parent
Common Stock delivered to it pursuant to the Exchange Right.
5.7 Exercise of Exchange Right Subsequent to Retraction. In the event that
a Non-Affiliated Holder has exercised its right under Article 6 of the
Exchangeable Share Provisions to require the Corporation to redeem any or all
of the Exchangeable Shares held by the Non-Affiliated Holder (the "Retracted
Shares") and is notified by the Corporation pursuant to Section 6.1(4) of the
Exchangeable Share Provisions that the Corporation will not be permitted as a
result of solvency requirements of applicable law to redeem all such Retracted
Shares, subject to receipt by the Trustee of written notice to that effect from
the Corporation and provided that neither the Parent nor Smithfield Sub shall
have exercised its Retraction Call Right with respect to the Retracted Shares
and that the Non-Affiliated Holder shall not have revoked the retraction
request delivered by the Non-Affiliated Holder to the Corporation pursuant to
Section 6.1(5) of the Exchangeable Share Provisions, the retraction request
will constitute and will be deemed to constitute notice from the Non-Affiliated
Holder to the Trustee instructing the Trustee to exercise the Exchange Right
with respect to those Retracted Shares that the Corporation is unable to
redeem. In any such event, the Corporation hereby agrees with the Trustee and
in favour of the Non-Affiliated Holder immediately to notify the Trustee of
such prohibition against the Corporation redeeming all of the Retracted Shares
and immediately to forward or cause to be forwarded to the Trustee all relevant
materials delivered by the Non-Affiliated Holder to the Corporation or to the
Transfer Agent (including without limitation a copy of the retraction request
delivered pursuant to Section 6.1(1) of the Exchangeable Share Provisions) in
connection with such proposed redemption of the Retracted Shares and the
Trustee will thereupon exercise the Exchange Right with respect to the
Retracted Shares that the Corporation is not permitted to redeem and will
require the Parent or, at the Parent's option, Smithfield Sub, to purchase such
shares in accordance with the provisions of this Article 5.
5.8 Stamp or Other Transfer Taxes. Upon any sale of Exchangeable Shares to
the Parent or Smithfield Sub pursuant to the Exchange Right, the share
certificate or certificates representing the Parent Common Stock to be
delivered in connection with the payment of the total purchase price therefor
shall be issued in the name of the Non-Affiliated Holder of the Exchangeable
Shares so sold or in such names as such Non-Affiliated Holder may otherwise
direct in writing without charge to the holder of the Exchangeable Shares so
sold, provided, however, that such Non-Affiliated Holder (a) shall pay (and
none of the Parent, Smithfield Sub, the Corporation or the Trustee shall be
required to pay) any documentary, stamp, transfer or other similar taxes that
may be payable in respect of any transfer involved in the issuance or delivery
of such shares to a person other than such Non-Affiliated Holder or (b) shall
have established to the satisfaction of the Trustee, the Parent and the
Corporation that such taxes, if any, have been paid.
5.9 Notice of Insolvency Event. Immediately upon the occurrence of an
Insolvency Event or any event that with the giving of notice or the passage of
time or both would be an Insolvency Event, the Corporation and the Parent shall
give written notice thereof to the Trustee. As soon as practicable after
receiving notice from the Corporation or the Parent or from any other person of
the occurrence of an Insolvency Event, the Trustee will mail to each
Non-Affiliated Holder, at the expense of the Parent (such expenses to be
prepaid to the Trustee by the Corporation or the Parent), a notice of such
Insolvency Event in the form provided by the Parent, which notice shall contain
a brief statement of the right of the Non-Affiliated Holders with respect to
the Exchange Right.
5.10 Parent Support of Smithfield Sub. Notwithstanding any of the other
provisions of this trust agreement, so long as any Exchangeable Shares are
outstanding at least 50% of the common shares of Smithfield Sub shall be owned,
directly or indirectly, by the Parent and the Parent will take all actions and
do all such things as are necessary or desirable to enable and permit
Smithfield Sub, in accordance with applicable law, to perform its obligations
and exercise its rights with respect to the satisfaction of the Liquidation
Call Right, the Redemption Call Right and the Retraction Call Right, including
without limitation, all such actions and all such things as are necessary or
desirable to enable and permit Smithfield Sub to cause to be delivered Parent
Common Stock to the holders of Exchangeable Shares in accordance with the
Exchangeable Share Provisions. In furtherance of the foregoing obligations,
upon notice of any event which requires Smithfield Sub to cause to be delivered
shares of Parent Common Stock to any holder of Exchangeable Shares, the Parent
shall, in any manner deemed appropriate by it, provide such shares or cause
such shares to be provided to Smithfield Sub, which shall forthwith deliver the
requisite shares of Parent Common Stock to or to the order of the former holder
of the surrendered Exchangeable Shares. All such shares of Parent Common Stock
shall be duly issued as fully paid, non-assessable, free of pre-emptive rights
and shall be free and clear of any lien, claim, encumbrance, security interest
or adverse claim.
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5.11 Call Rights. The Liquidation Call Right, the Redemption Call Right,
the Retraction Call Right and the Automatic Exchange Right are hereby agreed,
acknowledged and confirmed, and it is agreed and acknowledged that such rights
are granted as part of the consideration for the obligations of the Parent
under this trust agreement.
5.12 Grant and Ownership of Automatic Exchange Rights
The Parent hereby grants the Automatic Exchange Rights to the Trustee as
trustee for and on behalf of, and for the use and benefit of, the
Non-Affiliated Holders. The Parent hereby acknowledges receipt from the
Trustee, as trustee for and on behalf of the Non-Affiliated Holders, of good
and valuable consideration (and the adequacy thereof) for the grant of the
Automatic Exchange Rights by the Parent to the Trustee. During the term of the
Trust and subject to the terms and conditions of this trust agreement and the
Exchangeable Share Provisions, the Trustee shall possess and be vested with
full legal ownership of the Automatic Exchange Rights and shall be entitled to
exercise all of the rights and powers of an owner with respect to the Automatic
Exchange Rights, provided that the Trustee shall:
(a) hold the Automatic Exchange Rights and the legal title thereto as
trustee solely for the use and benefit of the Non-Affiliated Holders in
accordance with the provisions of this trust agreement; and
(b) except as specifically authorized by this trust agreement, have no
power or authority to exercise or otherwise deal in or with the Automatic
Exchange Rights, and the Trustee shall not exercise such rights for any
purpose other than the purposes for which this Trust is created pursuant to
this trust agreement.
ARTICLE 6
COVENANTS, REPRESENTATIONS AND WARRANTIES
6.1 Covenants of Parent Regarding Exchangeable Shares. So long as any
Exchangeable Shares are outstanding, the Parent will:
(a) not declare or pay any dividend on the Parent Common Stock unless (i)
the Corporation will have sufficient money or other assets or authorized
but unissued securities available to enable the due declaration and the
due and punctual payment in accordance with applicable law, of an
equivalent dividend on the Exchangeable Shares and (ii) the Corporation
shall simultaneously declare or pay, as the case may be, an equivalent
dividend on the Exchangeable Shares; (b) advise the Corporation
sufficiently in advance of the declaration by the Parent of any dividend
on the Parent Common Stock and take all such other actions as are
necessary, in cooperation with the Corporation, to ensure that the
respective declaration date, record date and payment date for a dividend
on the Exchangeable Shares shall be the same as the declaration date,
record date and payment date for the corresponding dividend on the Parent
Common Stock and that such dividend on the Exchangeable Shares shall
correspond with any requirements of the stock exchange on which the
Exchangeable Shares are listed;
(c) ensure that the record date for determining shareholders entitled to
receive any dividend declared on the Parent Common Stock is not less than
10 Business Days after the declaration date for such dividend or such
shorter period within which applicable law may be complied with;
(d) take all such actions and do all such things as are necessary or
desirable to enable and permit the Corporation, in accordance with
applicable law, to pay and otherwise perform its obligations with respect
to the satisfaction of the Liquidation Amount in respect of each issued
and outstanding Exchangeable Share upon the liquidation, dissolution or
winding up of the Corporation or any other distribution of the assets of
the Corporation among its shareholders for the purpose of winding up its
affairs, including without limitation all such actions and all such things
as are necessary or desirable to enable and permit the Corporation to
cause to be delivered shares of Parent Common Stock to the holders of
Exchangeable Shares in accordance with the provisions of Article 5 of the
Exchangeable Share Provisions;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit the Corporation, in accordance with
applicable law, to pay and otherwise perform its obligations with respect
to the satisfaction of the Retraction Price and the Redemption Price,
including without limitation all such actions and all such things as are
necessary or desirable to enable and permit the Corporation to cause to be
delivered shares of Parent Common Stock to the holders of Exchangeable
Shares, upon the redemption of the Exchangeable Shares in accordance with
the provisions of Article 6 or Article 7 of the Exchangeable Share
Provisions, as the case may be;
(f) use its best efforts to enable the Corporation to maintain the
listing of the Exchangeable Shares on The Toronto Stock Exchange or
another stock exchange in Canada prescribed under the Income Tax Act
(Canada); and
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(g) not exercise its vote as a shareholder to initiate the voluntary
liquidation, dissolution or winding up of the Corporation or any other
distribution of the assets of the Corporation among its shareholders for
the purpose of winding up its affairs nor take any action or omit to take
any action that is designed to result in the liquidation, dissolution or
winding up of the Corporation or any other distribution of the assets of
the Corporation among its shareholders for the purpose of winding up its
affairs.
6.2 Segregation of Funds. The Parent will cause the Corporation to deposit
a sufficient amount of funds in a separate account and segregate a sufficient
amount of such other assets as is necessary to enable the Corporation to pay or
otherwise satisfy the applicable dividends, Liquidation Amount, Retraction
Price or Redemption Price, once such amounts become payable under the terms of
this trust agreement or the Exchangeable Share Provisions, in each case for the
benefit of Non-Affiliated Holders from time to time of the Exchangeable Shares,
and to use such funds and other assets so segregated exclusively for the
payment of dividends and the payment or other satisfaction of the Liquidation
Amount, the Retraction Price or the Redemption Price, as applicable.
6.3 Certain Representations. The Parent hereby represents, warrants and
covenants that:
(a) it has irrevocably reserved for issuance and will at all times keep
available, free from pre-emptive and other rights, out of its authorized
and unissued capital stock such number of shares of Parent Common Stock
(or other shares or securities into which the Parent Common Stock may be
reclassified or changed as contemplated by section 6.7 hereof) (i) as is
equal to the sum of (x) the number of Exchangeable Shares issued and
outstanding from time to time and (y) the number of Exchangeable Shares
issuable upon the exercise of all rights to acquire Exchangeable Shares
outstanding from time to time and (ii) as is now and may hereafter be
required to enable and permit each of the Corporation, the Parent and
Smithfield Sub to meet its obligations hereunder, under the Exchangeable
Share Provisions and under any other security or commitment pursuant to
which the Corporation, the Parent or Smithfield Sub may now or hereafter
be required to issue and/or deliver shares of Parent Common Stock; and
(b) it is not as of the Effective Date, and has not been at any time
within the last year prior to the Effective Date, a "United States real
property holding corporation" within the meaning of Section 897 of the
Internal Revenue Code of 1987, as amended.
6.4 Notification of Certain Events. In order to assist the Parent to
comply with its obligations hereunder, the Corporation will give the Parent
notice of each of the following events at the time set forth below:
(a) in the event of any determination by the Board of Directors to
institute voluntary liquidation, dissolution or winding-up proceedings
with respect to the Corporation or to effect any other distribution of the
assets of the Corporation among its shareholders for the purpose of
winding up its affairs, at least 60 days prior to the proposed effective
date of such liquidation, dissolution, winding up or other distribution;
(b) immediately, upon the earlier of (i) receipt by the Corporation of
notice of, and (ii) the Corporation otherwise becoming aware of, any
threatened or instituted claim, suit, petition or other proceeding with
respect to the involuntary liquidation, dissolution or winding up of the
Corporation or to effect any other distribution of the assets of the
Corporation among its shareholders for the purpose of winding up its
affairs;
(c) immediately, upon receipt by the Corporation of a Retraction Request
(as defined in the Exchangeable Share Provisions);
(d) at least 130 days prior to any Company Redemption Date determined by
the Board of Directors in accordance with the Exchangeable Share
Provisions; and
(e) as soon as practicable upon the issuance by the Corporation of any
Exchangeable Shares or rights to acquire Exchangeable Shares.
6.5 Delivery of Shares of Parent Common Stock. Upon notice of any event
that requires the Corporation to cause to be delivered shares of Parent Common
Stock to any holder of Exchangeable Shares, the Parent shall, in any manner
deemed appropriate by it, provide such shares or cause such shares to be
provided to the Corporation, which shall forthwith deliver the requisite shares
of Parent Common Stock to or to the order of the former holder of the
surrendered Exchangeable Shares, as the Corporation shall direct. All such
shares of Parent Common Stock shall be duly issued as fully paid,
non-assessable, free of pre-emptive rights and shall be free and clear of any
lien, claim, encumbrance, security interest or adverse claim.
6.6 Qualification of Shares of Parent Common Stock. The Parent covenants
that it will make such filings and seek such regulatory consents and approvals
as are necessary so that the shares of Parent Common Stock to be issued on the
exchange
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of Exchangeable Shares will be issued in compliance with the applicable
securities laws in Canada and the United States and may be freely traded (other
than by holders who are Affiliates of the Parent within the meaning of U.S.
securities laws) on Nasdaq or on such other United States exchange as such
shares may be listed, quoted or posted for trading from time to time. The
Parent will also take such steps as are commercially reasonable to cause the
Exchangeable Shares to be listed and posted for trading on a stock exchange in
Canada prescribed under the Income Tax Act (Canada).
6.7 Economic Equivalence.
(1) The Parent will not without the prior approval of the Corporation and
the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 9.2 of the Exchangeable Share Provisions:
(a) issue or distribute shares of Parent Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire shares
of Parent Common Stock) to the holders of all or substantially all of the
then outstanding Parent Common Stock by way of stock dividend or other
distribution, other than an issue of shares of Parent Common Stock (or
securities exchangeable for or convertible into or carrying rights to
acquire shares of Parent Common Stock) to holders of shares of Parent
Common Stock who exercise an option to receive dividends in Parent Common
Stock (or securities exchangeable for or convertible into or carrying
rights to acquire shares of Parent Common Stock) in lieu of receiving cash
dividends;
(b) issue or distribute rights (excluding rights issuable under the
Rights Agreement dated as of September 1, 1997 between the Parent and
First Union National Bank, as the same may be amended or replaced from
time to time (the "Shareholder Rights Plan"), options or warrants to the
holders of all or substantially all of the then outstanding shares of
Parent Common Stock entitling them to subscribe for or to purchase shares
of Parent Common Stock (or securities exchangeable for or convertible into
or carrying rights to acquire shares of Parent Common Stock); or
(c) issue or distribute to the holders of all or substantially all of the
then outstanding shares of Parent Common Stock (i) shares or securities of
the Parent of any class other than Parent Common Stock (other than shares
convertible into or exchangeable for or carrying rights to acquire shares
of Parent Common Stock), (ii) rights (excluding any rights issuable under
the Shareholder Rights Plan), options or warrants other than those
referred to in section 6.7(1) (b) above, (iii) evidences of indebtedness
of the Parent or (iv) assets of the Parent;
unless (x) the Corporation is permitted under applicable law to issue or
distribute the economic equivalent on a per share basis of such rights,
options, securities, shares, evidences of indebtedness or other assets to
holders of the Exchangeable Shares and (y) the Corporation shall issue or
distribute such rights, options, securities, shares, evidences of indebtedness
or other assets simultaneously to holders of the Exchangeable Shares.
(2) The Parent will not without the prior approval of the Corporation and
the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 9.2 of the Exchangeable Share Provisions:
(a) subdivide, redivide or change the then outstanding shares of Parent
Common Stock into a greater number of shares of Parent Common Stock; or
(b) reduce, combine or consolidate or change the then outstanding shares
of Parent Common Stock into a lesser number of shares of Parent Common
Stock; or
(c) reclassify or otherwise change the shares of Parent Common Stock or
effect an amalgamation, merger, reorganization or other transaction
affecting the shares of Parent Common Stock;
unless (x) the Corporation is permitted under applicable law to simultaneously
make the same or an economically equivalent change to, or in the rights of
holders of, the Exchangeable Shares and (y) the same or an economically
equivalent change is made to, or in the rights of the holders of, the
Exchangeable Shares.
(3) The Parent will ensure that the record date for any event referred to
in section 6.7(1) or 6.7(2) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 20 Business Days
after the date on which such event is declared or announced by the Parent (with
simultaneous notice thereof to be given by the Parent to the Corporation).
(4) The Board of Directors shall determine, in good faith and in its sole
discretion (with the assistance of such reputable and qualified independent
financial advisors and/or other experts as the board may require), economic
equivalence for the purposes of any event referred to in section 6.7(1) or
6.7(2) and each such determination shall be conclusive and binding on the
Parent. In making each such determination, the following factors shall, without
excluding other factors determined by the board to be relevant, be considered
by the Board of Directors:
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(a) in the case of any stock dividend or other distribution payable in
shares of Parent Common Stock, the number of such shares issued in
proportion to the number of shares of Parent Common Stock previously
outstanding;
(b) in the case of the issuance or distribution of any rights (excluding
any rights issuable under the Shareholder Rights Plan), options or
warrants to subscribe for or purchase shares of Parent Common Stock (or
securities exchangeable for or convertible into or carrying rights to
acquire shares of Parent Common Stock), the relationship between the
exercise price of each such right, option or warrant and the current
market value (as determined by the Board of Directors in the manner above
contemplated) of a share of Parent Common Stock;
(c) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of the
Parent of any class other than Parent Common Stock, any rights, options or
warrants other than those referred to in section 6.7(4)(b) above, any
evidences of indebtedness of the Parent or any assets of the Parent), the
relationship between the fair market value (as determined by the Board of
Directors in the manner above contemplated) of such property to be issued
or distributed with respect to each outstanding share of Parent Common
Stock and the current market value (as determined by the Board of
Directors in the manner above contemplated) of a share of Parent Common
Stock;
(d) in the case of any subdivision, redivision or change of the then
outstanding shares of Parent Common Stock into a greater number of shares
of Parent Common Stock or the reduction, combination or consolidation or
change of the then outstanding shares of Parent Common Stock into a lesser
number of shares of Parent Common Stock or any amalgamation, merger,
reorganization or other transaction affecting the Parent Common Stock, the
effect thereof upon the then outstanding shares of Parent Common Stock;
and
(e) in all such cases, the general taxation consequences of the relevant
event to holders of Exchangeable Shares to the extent that such
consequences may differ from the taxation consequences to holders of
shares of Parent Common Stock as a result of differences between taxation
laws of Canada and the United States (except for any differing
consequences arising as a result of differing marginal taxation rates and
without regard to the individual circumstances of holders of Exchangeable
Shares).
For purposes of the foregoing determinations, the current market value of
any security listed and traded or quoted on a securities exchange shall be the
weighted average of the daily trading prices of such security during a period
of not less than 20 consecutive trading days ending not more than five trading
days before the date of determination on the principal securities exchange on
which such securities are listed and traded or quoted; provided, however, that
if in the opinion of the Board of Directors the public distribution or trading
activity of such securities during such period does not create a market that
reflects the fair market value of such securities, then the current market
value thereof shall be determined by the Board of Directors, in good faith and
in its sole discretion (with the assistance of such reputable and qualified
independent financial advisors and/or other experts as the board may require),
and provided further that any such determination by the Board of Directors
shall be conclusive and binding on the Parent.
6.8 Tender Offers, etc. In the event that a cash offer, share exchange
offer, issuer bid, take-over bid or similar transaction with respect to Parent
Common Stock (each, a "Tender Offer") is proposed by the Parent or is proposed
to the Parent or its shareholders and is recommended by the board of directors
of the Parent, or is otherwise effected or to be effected with the consent or
approval of the board of directors of the Parent, the Parent will use
reasonable efforts (to the extent, in the case of a Tender Offer by a third
party, within its control) expeditiously and in good faith to take all such
actions and do all such things as are necessary or desirable to enable and
permit holders of Exchangeable Shares to participate in such Tender Offer to
the same extent and on an economically equivalent basis as the holders of
shares of Parent Common Stock, without discrimination. Without limiting the
generality of the foregoing, the Parent will use reasonable efforts
expeditiously and in good faith to ensure that holders of Exchangeable Shares
may participate in all such Tender Offers without being required to retract
Exchangeable Shares as against the Corporation (or, if so required, to ensure
that any such retraction shall be effective only upon, and shall be conditional
upon, the closing of the Tender Offer and only to the extent necessary to
tender or deposit to the Tender Offer).
6.9 Parent Not to Vote Exchangeable Shares. The Parent covenants and
agrees that it will appoint and cause to be appointed proxyholders with respect
to all Exchangeable Shares held by the Parent and its Subsidiaries for the sole
purpose of attending each meeting of holders of Exchangeable Shares in order to
be counted as part of the quorum for each such meeting. The Parent further
covenants and agrees that it will not, and will cause its Subsidiaries not to,
exercise any voting rights that may be exercisable by holders of Exchangeable
Shares from time to time pursuant to the Exchangeable Share Provisions or
pursuant to the provisions of the Business Corporations Act (Ontario) (or any
successor or other corporate
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statute by which the Corporation may in the future be governed) with respect to
any Exchangeable Shares held by it or by its direct or indirect Subsidiaries in
respect of any matter considered at any meeting of holders of Exchangeable
Shares.
6.10 Due Performance. On and after the Effective Date, the Parent shall,
and shall cause Smithfield Sub to, duly and timely perform all of its
obligations provided for herein and that may arise under the Exchangeable Share
Provisions, and Parent shall be responsible for the due performance of all of
such obligations hereunder and under the Exchangeable Share Provisions.
6.11 Issue of Additional Shares. During the term of this trust agreement,
the Parent will not issue any shares of Parent Series B Special Voting
Preferred Shares, par value US$1.00 (the "Special Voting Share") in addition to
the one Special Voting Share to be issued to the Trustee.
ARTICLE 7
CONCERNING THE TRUSTEE
7.1 Powers and Duties of the Trustee. The rights, powers and authorities
of the Trustee under this trust agreement, in its capacity as trustee of the
trust, shall include:
(a) receipt and deposit of the Voting Share from the Parent as trustee
for and on behalf of the Non-Affiliated Holders in accordance with the
provisions of this trust agreement;
(b) granting proxies and distributing materials to Non-Affiliated Holders
as provided in this trust agreement;
(c) voting the Non-Affiliated Holder Votes in accordance with the
provisions of this trust agreement;
(d) receiving the grant of the Exchange Right and the Automatic Exchange
Rights from the Parent as trustee for and on behalf of the Non-Affiliated
Holders in accordance with the provisions of this trust agreement;
(e) exercising the Exchange Right in accordance with the provisions of
this trust agreement, and in connection therewith receiving from
Non-Affiliated Holders Exchangeable Shares and other requisite documents
and distributing to such Non-Affiliated Holders the shares of Parent
Common Stock and cheques, if any, to which such Non-Affiliated Holders are
entitled upon the exercise of the Exchange Right;
(f) holding title to the Trust Estate;
(g) investing any money forming, from time to time, a part of the Trust
Estate as provided in this trust agreement;
(h) taking action at the direction of a Non-Affiliated Holder to enforce
the obligations of the Corporation and/or the Parent under this trust
agreement and under the Exchangeable Share Provisions; and
(i) taking such other actions and doing such other things as are
specifically provided in this trust agreement.
In the exercise of such rights, powers and authorities the Trustee shall have
(and is granted) such incidental and additional rights, powers and authority
not in conflict with any of the provisions of this trust agreement as the
Trustee, acting in good faith and in the reasonable exercise of its discretion,
may deem necessary, appropriate or desirable to effect the purpose of the
Trust. Any exercise of such discretionary rights, powers and authorities by the
Trustee shall be final, conclusive and binding upon all persons. For greater
certainty, the Trustee shall have only those duties as are set out specifically
in this trust agreement. The Trustee in exercising its rights, powers, duties
and authorities hereunder shall act honestly and in good faith with a view to
the best interests of the Non-Affiliated Holders and shall exercise the care,
diligence and skill that a reasonably prudent trustee would exercise in
comparable circumstances. The Trustee shall not be bound to give any notice or
do or take any act, action or proceeding by virtue of the powers conferred on
it hereby unless and until it shall be specifically required to do so under the
terms hereof; nor shall the Trustee be required to take any notice of, or to do
or to take any act, action or proceeding as a result of any default or breach
of any provision hereunder, unless and until notified in writing of such
default or breach, which notice shall distinctly specify the default or breach
desired to be brought to the attention of the Trustee and in the absence of
such notice the Trustee may for all purposes of this trust agreement
conclusively assume that no default or breach has been made in the observance
or performance of any of the representations, warranties, covenants, agreements
or conditions contained herein.
7.2 No Conflict of Interest. The Trustee represents to the Corporation and
the Parent that at the date of execution and delivery of this trust agreement
there exists no material conflict of interest in the role of the Trustee as a
fiduciary hereunder and the role of the Trustee in any other capacity. The
Trustee shall, within 90 days after it becomes aware that such a
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material conflict of interest exists, either eliminate such material conflict
of interest or resign in the manner and with the effect specified in Article 10
hereof. If, notwithstanding the foregoing provisions of this section 7.2, the
Trustee has such a material conflict of interest, the validity and
enforceability of this trust agreement shall not be affected in any manner
whatsoever by reason only of the existence of such material conflict of
interest. If the Trustee contravenes the foregoing provisions of this section
7.2, any interested party may apply to the Ontario Court of Justice (General
Division) for an order that the Trustee be replaced as trustee hereunder.
7.3 Dealings with Transfer Agents, Registrars, etc. The Corporation and
the Parent irrevocably authorize the Trustee, from time to time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar or
transfer agent, of the Exchangeable Shares and the Parent Common Stock;
and
(b) requisition, from time to time, from any such registrar or transfer
agent any information readily available from the records maintained by it
which the Trustee may reasonably require for the discharge of its duties
and responsibilities under this trust agreement. The Parent covenants that
it will supply, and will cause Smithfield Sub to supply, the Trustee, or
the Transfer Agent, as the case may be, in a timely manner with duly
executed share certificates for the purpose of completing the exercise
from time to time of all rights to acquire Parent Common Stock hereunder,
under the Exchangeable Share Provisions and under any other security or
commitment given to the Non-Affiliated Holders pursuant thereto, in each
case pursuant to the provisions hereof or of the Exchangeable Share
Provisions or otherwise.
7.4 Books and Records. The Trustee shall keep available for inspection by
the Parent and the Corporation, at the Trustee's principal office in Toronto,
Ontario, correct and complete books and records of account relating to the
Trustee's actions under this trust agreement, including without limitation all
information relating to mailings and instructions to and from Non-Affiliated
Holders and all transactions pursuant to the Voting Rights and the Exchange
Right for the term of this Agreement. On or before June 30, 1998, and on or
before June 30 in every year thereafter, so long as the Voting Share is on
deposit with the Trustee, the Trustee shall transmit to the Parent and the
Corporation a brief report, dated as of the last Saturday of the preceding
April, with respect to: (a) the property and funds comprising the Trust Estate
as of that date; (b) the number of exercises of the Exchange Right, if any, and
the aggregate number of Exchangeable Shares received by the Trustee on behalf
of Non-Affiliated Holders in consideration of the issue and delivery by the
Parent or Smithfield Sub of shares of Parent Common Stock in connection with
the Exchange Right, during the calendar year ended on such date; and (c) all
other actions taken by the Trustee in the performance of its duties under this
trust agreement which it had not previously reported.
7.5 Income Tax Returns and Reports. The Trustee shall, to the extent
necessary, prepare and file on behalf of the Trust appropriate Canadian and
United States income tax returns and any other returns or reports as may be
required by applicable law or pursuant to the rules and regulations of any
securities exchange or other trading system through which the Exchangeable
Shares are traded and, in connection therewith, may obtain the advice and
assistance of such experts as the Trustee may consider necessary or advisable.
The Parent shall retain such experts as may be required for the purposes of
providing such advice and assistance.
7.6 Indemnification Prior to Certain Actions by Trustee. The Trustee shall
exercise any or all of the rights, duties, powers or authorities vested in it
by this trust agreement at the request, order or direction of any
Non-Affiliated Holder upon such Non-Affiliated Holder furnishing to the Trustee
reasonable funding, security and indemnity against the costs, expenses and
liabilities that may be incurred by the Trustee therein or thereby, provided
that no Non-Affiliated Holder shall be obligated to furnish to the Trustee any
such funding, security or indemnity in connection with the exercise by the
Trustee of any of its rights, duties, powers and authorities with respect to
the Voting Share pursuant to Article 4 hereof and with respect to the Exchange
Right pursuant to Article 5 hereof, subject to the provisions of section 7.15
hereof. None of the provisions contained in this trust agreement shall require
the Trustee to expend or risk its own funds or otherwise incur financial
liability in the exercise of any of its rights, powers, duties or authorities
unless given funds, security and indemnified as aforesaid.
7.7 Actions by Non-Affiliated Holders. No Non-Affiliated Holder shall have
the right to institute any action, suit or proceeding or to exercise any other
remedy authorized by this trust agreement for the purpose of enforcing any of
its rights or for the execution of any trust or power hereunder unless the
Non-Affiliated Holder has requested the Trustee to take or institute such
action, suit or proceeding and furnished the Trustee with the funding, security
and indemnity referred to in section 7.6 hereof and the Trustee shall have
failed to act within a reasonable time thereafter. In such case, but not
otherwise, the Non-Affiliated Holder shall be entitled to take proceedings in
any court of competent jurisdiction such as the Trustee might have taken; it
being understood and intended that no one or more Non-Affiliated Holders shall
have any right in any manner whatsoever to affect, disturb or prejudice the
rights hereby created by any such action, or to enforce any right
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hereunder, including without limitiation, under the Voting Rights or the
Exchange Right, except subject to the conditions and in the manner herein
provided, and that all powers and trusts hereunder shall be exercised and all
proceedings at law shall be instituted, had and maintained by the Trustee,
except only as herein provided, and in any event for the equal benefit of all
Non-Affiliated Holders.
7.8 Reliance upon Declarations. The Trustee shall not be considered to be
in contravention of any of its rights, powers, duties and authorities hereunder
if, when required, it acts and relies in good faith upon lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other
papers or documents furnished pursuant to the provisions hereof or required by
the Trustee to be furnished to it in the exercise of its rights, powers, duties
and authorities hereunder and such lists, mailing labels, notices, statutory
declarations, certificates, opinions, reports or other papers or documents
comply with the provisions of section 7.9 hereof, if applicable, and with any
other applicable provisions of this trust agreement.
7.9 Evidence and Authority to Trustee. The Corporation and/or the Parent
shall furnish to the Trustee evidence of compliance with the conditions
provided for in this trust agreement relating to any action or step required or
permitted to be taken by the Corporation, the Parent, Smithfield Sub or the
Trustee under this trust agreement or as a result of any obligation imposed
under this trust agreement, including, without limitation, in respect of the
Voting Rights or the Exchange Right and the taking of any other action to be
taken by the Trustee at the request of or on the application of the Corporation
and/or the Parent forthwith if and when:
(a) such evidence is required by any other section of this trust
agreement to be furnished to the Trustee in accordance with the terms of
this section 7.9; or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this trust agreement, gives the Corporation and/or the
Parent written notice requiring it to furnish such evidence in relation to
any particular action or obligation specified in such notice.
Such evidence shall consist of an Officer's Certificate of the Corporation
and/or the Parent or a statutory declaration or a certificate made by persons
entitled to sign an Officer's Certificate stating that any such condition has
been complied with in accordance with the terms of this trust agreement.
Whenever such evidence relates to a matter other than the Voting Rights or the
Exchange Right and except as otherwise specifically provided herein, such
evidence may consist of a report or opinion of any solicitor, auditor,
accountant, appraiser, valuer, engineer or other expert or any other person
whose qualifications give authority to a statement made by such person,
provided that if such report or opinion is furnished by a director, officer or
employee of the Corporation and/or the Parent it shall be in the form of an
Officer's Certificate or a statutory declaration. Each statutory declaration,
certificate, opinion or report furnished to the Trustee as evidence of
compliance with a condition provided for in this trust agreement shall include
a statement by the person giving the evidence:
(a) declaring that such person has read and understands the provisions of
this trust agreement relating to the condition in question;
(b) describing the nature and scope of the examination or investigation
upon which such person based the statutory declaration, certificate,
statement or opinion; and
(c) declaring that such person has made such examination or investigation
as such person believes is necessary to enable such person to make the
statements or give the opinions contained or expressed therein.
7.10 Experts, Advisers and Agents. The Trustee may:
(a) in relation to these presents act and rely on the opinion or advice
of or information obtained from or prepared by any solicitor, auditor,
accountant, appraiser, valuer, engineer or other expert, whether retained
by the Trustee or by the Corporation and/or the Parent or otherwise, and
may employ such assistants as may be necessary to the proper determination
and discharge of its powers and duties and determination of its rights
hereunder and may pay proper and reasonable compensation for all such
legal and other advice or assistance as aforesaid; and
(b) employ such agents and other assistants as it may reasonably require
for the proper determination and discharge of its powers and duties
hereunder, and may pay reasonable remuneration for all services performed
for it (and shall be entitled to receive reasonable remuneration for all
services performed by it) in the discharge of the trusts hereof and
compensation for all disbursements, costs and expenses made or incurred by
it in the determination and discharge of its duties hereunder and in the
management of the Trust.
7.11 Investment of Money Held by Trustee. Unless otherwise provided in
this trust agreement, any money held by or on behalf of the Trustee which under
the terms of this trust agreement may or ought to be invested or which may be
on
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deposit with the Trustee or which may be in the hands of the Trustee may be
invested and reinvested in the name or under the control of the Trustee in
securities in which, under the laws of the Province of Ontario, trustees are
authorized to invest trust money, provided that such securities are stated to
mature within two years after their purchase by the Trustee, and the Trustee
shall so invest such money on the written direction of the Corporation. Pending
the investment of any money as herein before provided, such money may be
deposited in the name of the Trustee in any chartered bank in Canada or, with
the consent of the Corporation, in the deposit department of the Trustee or any
other loan or trust company authorized to accept deposits under the laws of
Canada or any province thereof at the rate of interest then current on similar
deposits.
7.12 Trustee Not Required to Give Security. The Trustee shall not be
required to give any bond or security in respect of the execution of the
trusts, rights, duties, powers and authorities of this trust agreement or
otherwise in respect of the premises.
7.13 Trustee Not Bound to Act on Corporation's Request. Except as in this
trust agreement otherwise specifically provided, the Trustee shall not be bound
to act in accordance with any direction or request of the Corporation and/or
the Parent or of the directors thereof until a duly authenticated copy of the
instrument or resolution containing such direction or request shall have been
delivered to the Trustee, and the Trustee shall be empowered to act and rely
upon any such copy purporting to be authenticated and believed by the Trustee
to be genuine.
7.14 Authority to Carry on Business. The Trustee represents to the
Corporation and the Parent that at the date of execution and delivery by it of
this trust agreement it is authorized to carry on the business of a trust
company in the Province of Ontario but if, notwithstanding the provisions of
this section 7.14, it ceases to be so authorized to carry on business, the
validity and enforceability of this trust agreement and the Voting Rights, the
Exchange Right and the other rights granted in or resulting from the Trustee
being a party to this trust agreement shall not be affected in any manner
whatsoever by reason only of such event but the Trustee shall, within 90 days
after ceasing to be authorized to carry on the business of a trust company in
the Province of Ontario, either become so authorized or resign in the manner
and with the effect specified in Article 10 hereof.
7.15 Conflicting Claims. If conflicting claims or demands are made or
asserted with respect to any interest of any Non-Affiliated Holder in any
Exchangeable Shares, including any disagreement between the heirs,
representatives, successors or assigns succeeding to all or any part of the
interest of any Non-Affiliated Holder in any Exchangeable Shares resulting in
conflicting claims or demands being made in connection with such interest, then
the Trustee shall be entitled, at its sole discretion, to refuse to recognize
or to comply with any such claim or demand. In so refusing, the Trustee may
elect not to exercise any Voting Rights, the Exchange Right or other rights
subject to such conflicting claims or demands and, in so doing, the Trustee
shall not be or become liable to any person on account of such election or its
failure or refusal to comply with any such conflicting claims or demands. The
Trustee shall be entitled to continue to refrain from acting and to refuse to
act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Right or other rights subject to such conflicting claims
or demands have been adjudicated by a final judgment of a court of
competent jurisdiction and all rights of appeal have expired; or
(b) all differences with respect to the Voting Rights, Exchange Right or
other rights subject to such conflicting claims or demands have been
conclusively settled by a valid written agreement binding on all such
adverse claimants, and the Trustee shall have been furnished with an
executed copy of such agreement.
If the Trustee elects to recognize any claim or comply with any demand
made by any such adverse claimant, it may in its discretion require such
claimant to furnish such surety bond or other security satisfactory to the
Trustee as it shall deem appropriate fully to indemnify it as between all
conflicting claims or demands.
7.16 Acceptance of Trust. The Trustee hereby accepts the Trust created and
provided for by and in this trust agreement and agrees to perform the same upon
the terms and conditions herein set forth and to hold all rights, privileges
and benefits conferred hereby and by law in trust for the various persons who
shall from time to time be Non-Affiliated Holders, subject to all the terms and
conditions herein set forth.
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ARTICLE 8
COMPENSATION
8.1 Fees and Expenses of the Trustee. The Trustee will invoice the Parent
for its fees and expenses under this trust agreement. The Parent and the
Corporation jointly and severally agree to pay to the Trustee reasonable
compensation for all of the services rendered by it under this trust agreement
and will reimburse the Trustee for all reasonable expenses (including but not
limited to taxes, compensation paid to experts, agents and advisors and travel
expenses) and disbursements, including the cost and expense of any suit or
litigation of any character and any proceedings before any governmental agency
reasonably incurred by the Trustee in connection with its rights and duties
under this trust agreement; provided that the Parent and the Corporation shall
have no obligation to reimburse the Trustee for any expenses or disbursements
paid, incurred or suffered by the Trustee in any suit or litigation in which
the Trustee is determined to have acted in bad faith or with negligence or
wilful misconduct.
ARTICLE 9
INDEMNIFICATION AND LIMITATION OF LIABILITY
9.1 Indemnification of the Trustee. The Parent and the Corporation jointly
and severally agree to indemnify and hold harmless the Trustee and each of its
directors, officers, employees and agents appointed and acting in accordance
with this trust agreement (collectively, the "Indemnified Parties") against all
claims, losses, damages, costs, penalties, fines and reasonable expenses
(including reasonable expenses of the Trustee's legal counsel) which, without
fraud, negligence, wilful misconduct or bad faith on the part of such
Indemnified Party, may be paid, incurred or suffered by the Indemnified Party
by reason of or as a result of the Trustee's acceptance or administration of
the Trust, its compliance with its duties set forth in this trust agreement, or
any written or oral instructions (when confirmed in writing) delivered to the
Trustee by the Parent or the Corporation pursuant hereto. In no case shall the
Parent or the Corporation be liable under this indemnity for any claim against
any of the Indemnified Parties if such claim is incurred or suffered by reason
of or as a result of the fraud, negligence, wilful misconduct or bad faith of
an Indemnified Party and unless the Parent and the Corporation shall be
notified by the Trustee of the written assertion of a claim or of any action
commenced against the Indemnified Parties, promptly after any of the
Indemnified Parties shall have received any such written assertion of a claim
or shall have been served with a summons or other first legal process giving
information as to the nature and basis of the claim. Subject to (ii), below,
the Parent and the Corporation shall be entitled to participate at their own
expense in the defence and, if the Parent or the Corporation so elect at any
time after receipt of such notice, any of them may assume the defence of any
suit brought to enforce any such claim. The Trustee shall have the right to
employ separate counsel in any such suit and participate in the defence thereof
but the fees and expenses of such counsel shall be at the expense of the
Trustee unless: (i) the employment of such counsel has been authorized by the
Parent or the Corporation, such authorization not to be unreasonably withheld;
or (ii) the named parties to any such suit include both the Trustee and the
Parent or the Corporation and the Trustee shall have been advised by counsel
acceptable to the Parent or the Corporation that there may be one or more legal
defences available to the Trustee that are different from or in addition to
those available to the Parent or the Corporation and that an actual or
potential conflict of interest exists (in which case the Parent and the
Corporation shall not have the right to assume the defence of such suit on
behalf of the Trustee but shall be liable to pay the reasonable fees and
expenses of counsel for the Trustee). Such indemnification shall survive the
resignation or removal of the Trustee and the termination of this trust
agreement.
9.2 Limitation of Liability. The Trustee shall not be held liable for any
loss which may occur by reason of depreciation of the value of any part of the
Trust Estate or any loss incurred on any investment of funds pursuant to this
trust agreement, except to the extent that such loss is attributable to the
fraud, negligence, wilful misconduct or bad faith on the part of the Trustee.
ARTICLE 10
CHANGE OF TRUSTEE
10.1 Resignation. The Trustee, or any trustee hereafter appointed, may at
any time resign by giving written notice of such resignation to the Parent and
the Corporation specifying the date on which it desires to resign, provided
that such notice shall never be given less than 60 days before such desired
resignation date unless the Parent and the Corporation otherwise agree and
provided further that such resignation shall not take effect until the date of
the appointment of a successor trustee and the acceptance of such appointment
by the successor trustee. Upon receiving such notice of resignation, the Parent
and the Corporation shall promptly appoint a successor trustee by written
instrument in duplicate, one copy of which shall be
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delivered to the resigning trustee and one copy to the successor trustee.
Failing acceptance by a successor trustee, a successor trustee may be appointed
by an order of the Ontario Court of Justice (General Division) upon application
of one or more of the parties hereto. If the retiring Trustee applies to the
Ontario Court (General Division) for the appointment of a successor trustee,
the retiring Trustee's costs of such application shall be at the joint and
several expense of the Parent and the Corporation.
10.2 Removal. The Trustee, or any trustee hereafter appointed, may be
removed with or without cause, at any time on 60 days' prior notice by written
instrument executed by the Parent and the Corporation, in duplicate, one copy
of which shall be delivered to the trustee so removed and one copy to the
successor trustee, provided that such removal shall not take effect until the
date of appointment of a successor trustee and the acceptance of such
appointment by the successor trustee.
10.3 Successor Trustee. Any successor trustee appointed as provided under
this trust agreement shall execute, acknowledge and deliver to the Parent and
the Corporation and to its predecessor trustee an instrument accepting such
appointment. Thereupon the resignation or removal of the predecessor trustee
shall become effective and such successor trustee, without any further act,
deed or conveyance, shall become vested with all the rights, powers, duties and
obligations of its predecessor under this trust agreement, with like effect as
if originally named as trustee in this trust agreement. However, on the written
request of the Parent and the Corporation or of the successor trustee, the
trustee ceasing to act shall, upon payment of any amounts then due it pursuant
to the provisions of this trust agreement, execute and deliver an instrument
transferring to such successor trustee all the rights and powers of the trustee
so ceasing to act. Upon the request of any such successor trustee, the Parent
and the Corporation and such predecessor trustee shall execute any and all
instruments in writing for more fully and certainly vesting in and confirming
to such successor trustee all such rights and powers.
10.4 Notice of Successor Trustee. Upon acceptance of appointment by a
successor trustee as provided herein, the Parent and the Corporation shall
cause to be mailed notice of the succession of such trustee hereunder to each
Non-Affiliated Holder specified in a List. If the Parent or the Corporation
shall fail to cause such notice to be mailed within 10 days after acceptance of
appointment by the successor trustee, the successor trustee shall cause such
notice to be mailed at the expense of the Parent and the Corporation.
ARTICLE 11
PARENT SUCCESSORS
11.1 Certain Requirements in Respect of Combination, etc. The Parent shall
not enter into any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other person or, in the case of a merger, of the
continuing corporation resulting therefrom unless, but may do so if:
(a) such other person or continuing corporation (the "Parent Successor"),
by operation of law, becomes, without more, bound by the terms and
provisions of this trust agreement or, if not so bound, executes, prior to
or contemporaneously with the consummation of such transaction a trust
agreement supplemental hereto and such other instruments (if any) as are,
in the opinion of legal counsel to the Trustee, necessary or advisable to
evidence the assumption by the Parent Successor of liability for all money
payable and property deliverable hereunder and the covenant of such Parent
Successor to pay and deliver or cause to be delivered the same and its
agreement to observe and perform all the covenants and obligations of the
Parent under this trust agreement; and
(b) such transaction shall, in the opinion of legal counsel to the
Trustee, be upon such terms as substantially to preserve and not to impair
in any material respect any of the rights, duties, powers and authorities
of the Trustee or of the Non-Affiliated Holders hereunder.
11.2 Vesting of Powers in Successor. Whenever the conditions of section
11.1 hereof have been duly observed and performed, if required by section 11.1
hereof, the Trustee, the Parent Successor and the Corporation shall execute and
deliver the supplemental trust agreement provided for in Article 12 hereof and
thereupon the Parent Successor shall possess and from time to time may exercise
each and every right and power of the Parent under this trust agreement in the
name of the Parent or otherwise and any act or proceeding by any provision of
this trust agreement required to be done or performed by the board of directors
of the Parent or any officers of the Parent may be done and performed with like
force and effect by the directors or officers of such Parent Successor.
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11.3 Wholly-Owned Subsidiaries. Except as provided in section 5.10,
nothing herein shall be construed as preventing the amalgamation or merger of
any wholly-owned Subsidiary of the Parent with or into the Parent or the
winding up, liquidation or dissolution of any wholly-owned Subsidiary of the
Parent provided that all of the assets of such Subsidiary are transferred to
the Parent or another wholly-owned Subsidiary of the Parent, and any such
transactions are expressly permitted by this Article 11.
ARTICLE 12
AMENDMENTS AND SUPPLEMENTAL TRUST AGREEMENTS
12.1 Amendments, Modifications, etc. This trust agreement may not be
amended or modified except by an agreement in writing executed by the
Corporation, the Parent and the Trustee and, unless the amendment or
modification is expressly authorized or permitted by this trust agreement,
approved by the Non-Affiliated Holders in accordance with Section 9.2 of the
Exchangeable Share Provisions.
12.2 Amendments with the Approval of Non-Affiliated Holders.
Notwithstanding the provisions of section 12.1 hereof, the parties to this
trust agreement may in writing, at any time and from time to time, without the
approval of the Non-Affiliated Holders, amend, modify or supplement this trust
agreement for the purposes of:
(a) adding to the covenants of any or all of the parties hereto for the
protection of the Non-Affiliated Holders hereunder;
(b) evidencing the succession of Parent Successors and the covenants of
and obligations assumed by each such Parent Sucessor in accordance with
the provisions of Article 11 and the succession of any successor trustee
in accordance with Article 10;
(c) making such amendments or modifications not inconsistent with this
trust agreement as may be necessary or desirable with respect to matters
or questions which, in the opinion of the Board of Directors and the board
of directors of the Parent, having in mind the best interests of the
Non-Affiliated Holders as a whole, it may be expedient to make, provided
that such boards of directors shall be of the opinion that such amendments
and modifications will not be prejudicial in any material respect to the
interests of the Non-Affiliated Holders as a whole; or
(d) making such changes or corrections which, on the advice of counsel to
the Corporation and the Parent, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error, provided that the Board of
Directors and the board of directors of the Parent shall be of the opinion
that such changes or corrections will not be prejudicial in any material
respect to the interests of the Non-Affiliated Holders as a whole.
12.3 Meeting to Consider Amendments. The Corporation, at the request of
the Parent, shall call a meeting or meetings of the Non-Affiliated Holders for
the purpose of considering any proposed amendment or modification requiring
approval pursuant hereto. Any such meeting or meetings shall be called and held
in accordance with the by-laws of the Corporation, the Exchangeable Share
Provisions and all applicable laws.
12.4 Changes in Capital of Parent and the Corporation. At all times after
the occurrence of any event effected pursuant to section 6.7 or section 6.8 of
this trust agreement, as a result of which either the Parent Common Stock or
the Exchangeable Shares or both are in any way changed, this trust agreement
shall forthwith be amended and modified as necessary in order that it shall
apply with full force and effect, mutatis mutandis, to all new securities into
which the Parent Common Stock or the Exchangeable Shares or both are so changed
and the parties hereto shall execute and deliver a supplemental trust agreement
giving effect to and evidencing such necessary amendments and modifications.
12.5 Execution of Supplemental Trust Agreements. No amendment to or
modification or waiver of any of the provisions of this trust agreement
otherwise permitted hereunder shall be effective unless made in writing and
signed by all of the parties hereto. From time to time the Corporation, the
Parent and the Trustee may, subject to the provisions of these presents, and
they shall, when so directed by these presents, execute and deliver by their
proper officers, trust agreements or other instruments supplemental hereto,
which thereafter shall form part hereof. In executing or accepting the
supplemental trusts created by any supplemental indenture permitted by this
Article 12, the Trustee will be entitled to receive and (subject to Article 7)
will be fully protected in relying upon an Officers' Certificate and opinions
of counsel stating that the execution of such supplemental indenture is
authorized or permitted in this trust agreement.
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<PAGE>
ARTICLE 13
TERMINATION
13.1 Term. The Trust created by this trust agreement shall continue until
the earliest to occur of the following events:
(a) no outstanding Exchangeable Shares are held by any Non-Affiliated
Holder;
(b) each of the Corporation and the Parent elects in writing to terminate
the Trust and such termination is approved by the Non-Affiliated Holders
of the Exchangeable Shares in accordance with Section 9.2 of the
Exchangeable Share Provisions; and
(c) 21 years after the death of the last survivor of the descendants of
His Majesty King George VI of the United Kingdom of Great Britain and
Northern Ireland living on the date of the creation of the Trust.
13.2 Survival of Agreement. This trust agreement shall survive any
termination of the Trust and shall continue until there are no Exchangeable
Shares outstanding held by any Non-Affiliated Holder; provided, however, that
the provisions of Articles 8 and 9 hereof and the representation contained in
section 6.3(b) hereof shall survive any such termination of this trust
agreement.
ARTICLE 14
GENERAL
14.1 Severability. If any provision of this trust agreement is held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of this trust agreement shall not in any way be affected or
impaired thereby and this trust agreement shall be carried out as nearly as
possible in accordance with its original terms and conditions.
14.2 Enurement. This trust agreement shall be binding upon and enure to
the benefit of the parties hereto and their respective successors and permitted
assigns and to the benefit of the Non-Affiliated Holders.
14.3 Notices to Parties. All notices and other communications between the
parties hereunder shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for such party as shall be specified in
like notice):
(a) if to the Parent at: Smithfield Foods, Inc.
200 Commerce Street
Smithfield, Virginia 23430
Attention: Corporate Secretary
Telecopy: (757) 365-3030
(b) if to the Corporation at: Smithfield Canada Limited
c/o McCarthy Tetrault
Suite 4700
Toronto Dominion Bank Tower
Toronto-Dominion Centre
Toronto, Ontario
M5K 1E6
Attention: Rene R. Sorell
Telecopy: (416) 868-0673
(c) if to the Trustee at: CIBC Mellon Trust Company
199 Bay Street
Commerce Court West
Toronto, Ontario M5L 1G9
Attention: Vice President, Client Services
Telecopy: (416) 813-4555
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of receipt thereof unless
such day is not a Business Day in which case it shall be deemed to have been
given and received upon the immediately following Business Day.
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14.4 Notice to Non-Affiliated Holders. Any notice, request or other
communication to be given to a Non-Affiliated Holder shall be in writing and
shall be valid and effective if given by mail (postage pre-paid or by delivery
to the address of the holder recorded in the securities register of the
Corporation or, in the event of the address of any such holder not being so
recorded, then at the last known address of such holder. Any such notice,
request or other communication, if given by mail, shall be deemed to have been
given and received on the fifth day following the date of mailing and, if given
by delivery, shall be deemed to have been given and received on the date of
delivery. Accidental failure or omission to give any notice, request or other
communication to one or more holders of Exchangeable Shares, or any defect in
such notice, shall not invalidate or otherwise alter or affect any action
proceeding to be taken pursuant thereto.
14.5 Risk of Payments by Post. Whenever payments are to be made or
certificates or documents are to be sent to any Non-Affiliated Holder by the
Trustee or by the Corporation, the Parent or by such Non-Affiliated Holder to
the Trustee or to the Parent or the Corporation, the making of such payment or
sending of such certificate or document sent through the post shall be at the
risk of the Corporation, in the case of payments made or documents sent by the
Trustee or the Corporation or the Parent and the Non-Affiliated Holder, in the
case of payments made or documents sent by the Non-Affiliated Holder.
14.6 Counterparts. This trust agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which taken together
shall constitute one and the same instrument.
14.7 Jurisdiction. This trust agreement shall be construed and enforced in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
14.8 Attornment. The Parent agrees that any action or proceeding arising
out of or relating to this trust agreement may be instituted in the courts of
Ontario, waives any objection which it may have now or hereafter to the venue
of any such action or proceeding, irrevocably submits to the jurisdiction of
the said courts in any such action or proceeding, agrees to be bound by any
judgment of the said courts and agrees not to seek, and hereby waives, any
review of the merits of any such judgment by the courts of any other
jurisdiction and hereby appoints the Corporation at its registered office in
the Province of Ontario as its attorney for service of process.
IN WITNESS WHEREOF, the parties hereto have caused this trust agreement to
be duly executed as of the date first above written.
SMITHFIELD FOODS, INC.
By:---------------------------------------
Name:
Title:
-----------------------------------------
Name:
Title:
SMITHFIELD CANADA LIMITED
By:---------------------------------------
Name:
Title:
-----------------------------------------
Name:
Title:
CIBC MELLON TRUST COMPANY
By:---------------------------------------
Name:
Title:
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<PAGE>
-----------------------------------------
Name:
Title:
EACH PRESENT OR FUTURE HOLDER OR
BENEFICIAL OWNER OF EXCHANGEABLE SHARES,
BY SMITHFIELD CANADA, AS ATTORNEY IN FACT
By:---------------------------------------
Name:
Title:
Name:
Title:
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<PAGE>
ANNEX E
FORM OF
SMITHFIELD CANADA SHARE PROVISIONS
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SMITHFIELD CANADA LIMITED
SHARE TERMS
Common Shares. The rights, privileges, restrictions and conditions attaching
to the Common Shares are as follows:
1.1 Dividends
Subject to the prior rights of the holders of the Exchangeable Shares and
any other shares ranking senior to the Common Shares with respect to priority
in the payment of dividends, the holders of Common Shares shall be entitled to
receive dividends and the Corporation shall pay dividends thereon, as and when
declared by the board of directors of the Corporation out of the assets of the
Corporation properly applicable to the payment of dividends, in such amount and
in such form as the board of directors may from time to time determine and all
dividends that the directors may declare on the Common Shares shall be declared
and paid in equal amounts per share on all Common Shares at the time
outstanding.
1.2 Dissolution
In the event of the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, subject to the prior rights of the holders of the Exchangeable
Shares and any other shares ranking senior to the Common Shares with respect to
priority in the distribution of assets upon such dissolution, liquidation or
winding up or other distribution, the holders of the Common Shares shall be
entitled to participate rateably in any distribution of the assets of the
Corporation for the purposes of winding up its affairs.
1.3 Voting Rights
The holders of the Common Shares shall be entitled to receive notice of
and to attend all meetings of the shareholders of the Corporation and shall
have one vote for each Common Share held at all meetings of the shareholders of
the Corporation, except for meetings at which only holders of another specified
class or series of shares of the Corporation are entitled to vote separately as
a class or series.
Exchangeable Shares. The rights, privileges, restrictions and conditions
attaching to the Exchangeable Shares are as follows:
ARTICLE 1
Interpretation
1.1 Definitions
In these Exchangeable Share Provisions, unless something in the subject
matter or context is inconsistent therewith:
"Automatic Exchange Right" has the meaning set out in Section 5.3(2).
"Board of Directors" means the board of directors of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or a day when
banks are not open for business in either or both of Norfolk, Virginia and
Toronto, Ontario.
"Canadian Dollar Equivalent" means in respect of an amount expressed in a
foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Account by (b) the official
noon spot exchange rate on such date for such foreign currency as reported by
the Bank of Canada or, in the event such spot exchange rate is not available,
such exchange rate on such date for such foreign currency as may be deemed by
the Board of Directors to be appropriate for such purpose.
"Common Shares" means the Common Shares of the Corporation.
"Company Redemption Date" means the earlier of: (i) April 30, 2008 ; and
(ii) the date established by the Board of Directors for the redemption of the
Exchangeable Shares on which there are less than 500,000 Exchangeable Shares
outstanding (other than Exchangeable Shares held by Smithfield and its
Subsidiaries and as such number of shares may be adjusted as deemed appropriate
by the Board of Directors to give effect to any subdivision, combination or
consolidation of
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<PAGE>
or stock dividend on the Exchangeable Shares, any issue or distribution of
rights to acquire Exchangeable Shares or securities exchangeable for or
convertible into Exchangeable Shares, any issue or distribution of other
securities or rights or evidences of indebtedness or assets, or any other
capital reorganization or other transaction affecting the Exchangeable Shares).
"Corporation" means Smithfield Canada Limited, a corporation existing
under the laws of the Province of Ontario.
"Current Market Price" means, in respect of a share of Smithfield Common
Stock on any date, the Canadian Dollar Equivalent of the average closing sales
price of a share of Smithfield Common Stock during a period of 20 consecutive
trading days ending not more than five trading days before such date on the
Nasdaq National Market or, if the shares of Smithfield Common Stock are not
then listed on the Nasdaq National Market, on such other stock exchange or
automated quotation system on which the shares of Smithfield Common Stock are
listed or quoted, as the case may be, as may be selected by the Board of
Directors for such purpose; provided, however, that if in the opinion of the
Board of Directors the public distribution or trading activity of shares of
Smithfield Common Stock during such period is inadequate to create a market
that reflects the fair market value of a share of Smithfield Common Stock, then
the Current Market Price of a share of Smithfield Common Stock shall be
determined by the Board of Directors based upon the advice of such qualified
independent financial advisors as the Board of Directors may deem to be
appropriate, and provided further that any such selection, opinion or
determination by the Board of Directors shall be conclusive and binding.
"Dividend Amount" means an amount equal to the full amount of all
dividends and distributions declared and unpaid on each Exchangeable Share and
all dividends and distributions declared on a share of Smithfield Common Stock
that have not been declared on each Exchangeable Share in accordance with
Section 3.1, in each case with a record date prior to the effective date of the
exchange of such Exchangeable Share for a share of Smithfield Common Stock
hereunder.
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions set out in this paragraph 4 of these articles of amendment.
"Exchangeable Shares" mean the Exchangeable Shares of the Corporation to
which are attached the Exchangeable Share Provisions.
"LCR Exercising Party" has the meaning set out in Section 5.2(1).
"Liquidation Amount" has the meaning set out in Section 5.1(1).
"Liquidation Call Purchase Price" has the meaning set out in Section
5.2(1).
"Liquidation Call Right" has the meaning set out in Section 5.2(1).
"Liquidation Date" has the meaning set out in Section 5.1(1).
"Nasdaq National Market" means the Nasdaq National Market segment of The
Nasdaq Stock Market, an electronic securities market operated by The Nasdaq
Stock Market, Inc., a wholly-owned subsidiary of the National Association of
Securities Dealers, Inc.
"OBCA" means the Business Corporations Act (Ontario), as amended.
"Officer's Certificate" means, with respect to Smithfield or the
Corporation, as the case may be, a certificate signed by any one of the
Chairman of the Board, the President, any Vice-President or any other senior
officer of Smithfield or the Corporation, as the case may be.
"Redemption Call Purchase Price" has the meaning set out in Section
7.2(1).
"Redemption Call Right" has the meaning set out in Section 7.2(1).
"Redemption Price" has the meaning set out in Section 7.1(1).
"Retracted Shares" has the meaning set out in Section 6.1(1).
"Retraction Call Purchase Price" has the meaning set out in Section
6.2(1).
"Retraction Call Right" has the meaning set out in Section 6.2(1).
"Retraction Date" has the meaning set out in Section 6.1(1).
"Retraction Price" has the meaning set out in Section 6.1(1).
"Retraction Request" has the meaning set out in Section 6.1(1).
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"RCR Exercising Party" has the meaning set out in Section 6.2(1).
"Smithfield" means Smithfield Foods, Inc., a corporation existing under
the laws of the Commonwealth of Virginia, and any successor corporation.
"Smithfield Call Notice" has the meaning set out in Section 6.2(2).
"Smithfield Common Stock" means the shares of Common Stock of Smithfield,
par value US$0.50 per share, having voting rights of one vote per share, and
any other securities into which such shares may be changed or for which such
shares may be exchanged (whether or not Smithfield shall be the issuer of such
other securities) or any other consideration which may be received by the
holders of such shares pursuant to a recapitalization, reconstruction,
reorganization or reclassification of, or amalgamation, merger, liquidation or
similar transaction affecting, such shares.
"Smithfield Dividend Declaration Date" means the date on which the board
of directors of Smithfield declares any dividend on the shares of Smithfield
Common Stock.
"Smithfield Liquidation Event" has the meaning set out in Section 5.3(1).
"Smithfield Liquidation Event Effective Date" has the meaning set out in
Section 5.3(3).
"Smithfield Sub" means Smithfield Sub Limited, a wholly-owned Subsidiary
of Smithfield existing under the laws of the Province of Ontario.
"Subsidiary" means, when used with reference to Smithfield, any
corporation more than 50% of the outstanding stock of which, by vote or by
value, is owned, directly or indirectly, by Smithfield, by one or more other
Subsidiaries of Smithfield, or by Smithfield and one or more other Subsidiaries
of Smithfield.
"Transfer Agent" means CIBC Mellon Trust Company, a corporation existing
under the laws of Canada, or such other person as may from time to time be the
registrar and transfer agent for the Exchangeable Shares.
"Trustee" means CIBC Mellon Trust Company, a corporation existing under
the laws of Canada, and any successor trustee appointed under the Voting,
Support and Exchange Trust Agreement.
"Trust Estate" has the meaning set out in Section 1.1 of the Voting,
Support and Exchange Trust Agreement.
"Voting, Support and Exchange Trust Agreement" means the Voting, Support
and Exchange Trust Agreement to be entered into by the Corporation, Smithfield
and the Trustee prior to the date on which the Corporation takes up and pays
for any common shares or Class A non-voting shares of Schneider Corporation
pursuant to a securities exchange take-over bid.
1.2 Sections and Headings
The division of these Exchangeable Share Provisions into articles and
sections and the insertion of headings are for reference purposes only and
shall not affect the interpretation of these Exchangeable Share Provisions.
Unless otherwise indicated, any reference in these Exchangeable Share
Provisions to an article or section refers to the specified article or section
of these Exchangeable Share Provisions.
1.3 Number Gender and Persons
In these Exchangeable Share Provisions, unless the context otherwise
requires, words importing the singular number include the plural and vice
versa, words importing any gender include all genders and words importing
persons include individuals, corporations, partnerships, companies,
associations, trusts, unincorporated organizations, governmental bodies and
other legal or business entities of any kind.
1.4 Payments
All payments to be made hereunder shall be made without interest and less
any tax required by Canadian law to be deducted and withheld.
1.5 Currency
In these Exchangeable Share Provisions, unless stated otherwise, all
dollar amounts are in Canadian dollars.
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ARTICLE 2.
Ranking of Exchangeable Shares
2.1 Ranking
The Exchangeable Shares shall be entitled to a preference over the Common
Shares and any other shares ranking junior to the Exchangeable Shares with
respect to the payment of dividends as and to the extent provided in Article 3
and with respect to the distribution of assets in the event of the liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
or any other distribution of the assets of the Corporation among its
shareholders for the purpose of winding up its affairs as and to the extent
provided in Article 5.
ARTICLE 3.
Dividends
3.1 Dividends
A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each Smithfield
Dividend Declaration Date, declare a dividend on each Exchangeable Share (a) in
the case of a cash dividend or distribution declared on the shares of
Smithfield Common Stock, in an amount in cash for each Exchangeable Share as is
equal to the Canadian Dollar Equivalent on the Smithfield Dividend Declaration
Date of the cash dividend or distribution declared on each share of Smithfield
Common Stock, (b) in the case of a stock dividend or distribution declared on
the shares of Smithfield Common Stock to be paid in shares of Smithfield Common
Stock, in such number of Exchangeable Shares for each Exchangeable Share as is
equal to the number of shares of Smithfield Common Stock to be paid on each
share of Smithfield Common Stock or (c) in the case of a dividend or
distribution declared on the shares of Smithfield Common Stock to be paid in
property other than cash or shares of Smithfield Common Stock, in such type and
amount of property for each Exchangeable Share as is the same as or
economically equivalent to (to be determined by the Board of Directors as
contemplated by section 6.7 of the Voting, Support and Exchange Trust
Agreement) the type and amount of property declared as a dividend or
distribution on each share of Smithfield Common Stock. Such dividends shall be
paid out of the assets of the Corporation properly applicable to the payment of
dividends, or out of authorized but unissued shares or other securities of the
Corporation.
3.2 Payment of Dividends
Cheques of the Corporation payable at par at any branch of the bankers of
the Corporation shall be issued in respect of any cash dividends or
distributions contemplated by Section 3.1(a) hereof and the sending of such a
cheque to each holder of an Exchangeable Share shall satisfy the cash dividend
represented thereby unless the cheque is not paid on presentation. Certificates
registered in the name of the registered holder of Exchangeable Shares shall be
issued or transferred in respect of any stock dividends or other distribution
of Exchangeable Shares contemplated by Section 3.1(b) hereof and the sending of
such a certificate to each holder of an Exchangeable Share shall satisfy the
stock dividend or other distribution of Exchangeable Shares represented
thereby. Such other type and amount of property in respect of any dividends or
distributions contemplated by Section 3.1(c) hereof shall be issued,
distributed or transferred by the Corporation in such manner as it shall
determine and the issuance, distribution or transfer thereof by the Corporation
to each holder of an Exchangeable Share shall satisfy the dividend or
distribution represented thereby. No holder of an Exchangeable Share shall be
entitled to recover by action or other legal process against the Corporation
any dividend that is represented by a cheque that has not been duly presented
to the Corporation's bankers for payment or that otherwise remains unclaimed
for a period of six years from the date on which such dividend or distribution
was payable.
3.3 Record and Payment Dates
The record date for the determination of the holders of Exchangeable
Shares entitled to receive payment of, and the payment date for, any dividend
or distribution declared on the Exchangeable Shares under Section 3.1 hereof
shall be the same as the record date and payment date, respectively, for the
corresponding dividend or distribution declared on the shares of Smithfield
Common Stock.
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3.4 Partial Payment
If on any payment date for any dividends or distributions declared on the
Exchangeable Shares under Section 3.1 hereof the dividends or distributions are
not paid in full on all of the Exchangeable Shares then outstanding, any such
dividends or distributions that remain unpaid shall be paid on a subsequent
date or dates determined by the Board of Directors on which the Corporation
shall have sufficient money or other assets properly applicable to the payment
of such dividends or distributions.
ARTICLE 4.
Certain Restrictions
4.1 Certain Restrictions
(1) Except as provided in Section 4.1(2), so long as any of the
Exchangeable Shares are outstanding, the Corporation shall not at any time
without, but may at any time with, the approval of the holders of the
Exchangeable Shares given as specified in Section 9.2 hereof:
(a) pay any dividends on the Common Shares or any other shares ranking
junior to the Exchangeable Shares, other than stock dividends payable in
Common Shares or any such other shares ranking junior to the Exchangeable
Shares, as the case may be;
(b) redeem or purchase or make any capital distribution in respect of
Common Shares or any other shares ranking junior to the Exchangeable
Shares;
(c) redeem or purchase any other shares of the Corporation ranking
equally with the Exchangeable Shares with respect to the payment of
dividends or on any liquidation distribution; or
(d) issue any shares other than (i) Exchangeable Shares, (ii) Common
Shares, and (iii) any other shares not ranking superior to the Exchangeable
Shares.
(2) The restrictions in Sections 4.1(1)(a), 4.1(1)(b) and 4.1(1)(c) shall
not apply if all dividends and distributions on the outstanding Exchangeable
Shares corresponding to dividends and distributions declared to date on the
Smithfield Common Stock shall have been declared on the Exchangeable Shares and
paid in full.
ARTICLE 5.
Liquidation
5.1 Participation Upon Liquidation, Dissolution or Winding Up of the
Corporation
(1) Subject to applicable law and the due exercise by Smithfield or
Smithfield Sub of a Liquidation Call Right, in the event of the liquidation,
dissolution or winding up of the Corporation or any other distribution of the
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, a holder of Exchangeable Shares shall be entitled to receive from
the assets of the Corporation in respect of each Exchangeable Share held by
such holder on the effective date of such liquidation, dissolution or winding
up or other distribution (the "Liquidation Date"), before any distribution of
any part of the assets of the Corporation among the holders of the Common
Shares or any other shares ranking junior to the Exchangeable Shares, an amount
per share equal to (a) the Current Market Price of a share of Smithfield Common
Stock on the last Business Day prior to the Liquidation Date, which shall be
satisfied in full by the Corporation causing to be delivered to such holder one
share of Smithfield Common Stock, plus (b) the Dividend Amount, if any
(collectively, the "Liquidation Amount").
(2) In the case of a distribution on Exchangeable Shares under this
Section 5.1, on or promptly after the Liquidation Date, the Corporation shall
cause to be delivered to the holders of the Exchangeable Shares the Liquidation
Amount for each such Exchangeable Share upon presentation and surrender of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the OBCA and such additional documents and
instruments as the Transfer Agent, the Trustee and the Corporation may
reasonably require, at the registered office of the Corporation or at any
office of the Transfer Agent as may be specified by the Corporation by notice
to the holders of the Exchangeable Shares. Payment of the aggregate Liquidation
Amount for such Exchangeable Shares shall be made by delivery to each holder,
at the address of the holder recorded in the securities register of the
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Corporation for the Exchangeable Shares or by holding for pick-up by the holder
at the registered office of the Corporation or at any office of the Transfer
Agent as may be specified by the Corporation by notice to the holders of
Exchangeable Shares, certificates representing the aggregate number of shares
of Smithfield Common Stock deliverable by the Corporation to such holder (which
shares shall be duly issued as fully paid and non-assessable and shall be free
and clear of any lien, claim, encumbrance, security interest or adverse claim)
and a cheque of the Corporation payable at par at any branch of the bankers of
the Corporation in payment of the remaining portion, if any, of the aggregate
Liquidation Amount payable to such hold, without interest. On or before the
Liquidation Date, the Corporation shall deposit or cause to be deposited the
total Liquidation Amount in respect of the Exchangeable Shares in a custodial
account with any chartered bank or trust company in Canada named in such
notice. Upon such deposit being made, the rights of the holders of Exchangeable
Shares as such shall be limited to receiving their proportionate part of the
total Liquidation Amount for such Exchangeable Shares so deposited, against
presentation and surrender of the said certificates held by them, respectively,
in accordance with the foregoing provisions and any interest allowed on such
deposit shall belong to the Corporation. Upon such payment or deposit of the
total Liquidation Amount, the holders of the Exchangeable Shares shall
thereafter be considered and deemed for all purposes to be the holders of the
shares of Smithfield Common Stock delivered to them.
(3) After the Corporation has satisfied its obligations to pay the holders
of the Exchangeable Shares the total Liquidation Amount pursuant to this
Section 5.1, such holders shall not be entitled to share in any further
distribution of the assets of the Corporation.
5.2 Liquidation Call Rights.
(1) Subject to the limitations set forth in Section 5.2(2), Smithfield and
Smithfield Sub shall each have the overriding right (a "Liquidation Call
Right"), in the event of and notwithstanding the proposed liquidation,
dissolution or winding up of the Corporation pursuant to Section 5.1 hereof, to
purchase from all but not less than all of the holders of Exchangeable Shares
on the Liquidation Date (other than Smithfield and Smithfield Sub) all but not
less than all of the Exchangeable Shares held by each such holder on payment by
whichever of Smithfield or Smithfield Sub is exercising such right (the "LCR
Exercising Party") of an amount per share equal to (a) the Current Market Price
of a share of Smithfield Common Stock on the last Business Day prior to the
Liquidation Date, which shall be satisfied in full by causing to be delivered
to such holder one share of Smithfield Common Stock, plus (b) the Dividend
Amount, if any (collectively, the "Liquidation Call Purchase Price"). In the
event of the exercise of a Liquidation Call Right, each holder of Exchangeable
Shares (other than Smithfield and Smithfield Sub) shall be obligated to sell
all the Exchangeable Shares held by such holder to the LCR Exercising Party on
the Liquidation Date on payment by the LCR Exercising Party to the holder of
the Liquidation Call Purchase Price for each such share.
(2) Smithfield Sub shall only be entitled to exercise its Liquidation Call
Right with respect to those holders of Exchangeable Shares, if any, in respect
of which Smithfield has not exercised its Liquidation Call Right. In order to
exercise its Liquidation Call Right, an LCR Exercising Party must notify in
writing the Transfer Agent, as agent for the holders of Exchangeable Shares,
the Trustee and the Corporation of its intention to exercise such right at
least 55 days before the Liquidation Date in the case of a voluntary
liquidation, dissolution or winding up of the Corporation and at least five
Business Days before the Liquidation Date in the case of an involuntary
liquidation, dissolution or winding up of the Corporation. The Transfer Agent
will notify the holders of Exchangeable Shares as to whether or not a
Liquidation Call Right has been exercised (such notice to specify the LCR
Exercising Party) forthwith after the expiry of the date by which the same may
be exercised, such form of notice to be provided by Smithfield to the Transfer
Agent. If a LCR Exercising Party duly exercises its Liquidation Call Right in
accordance with this Section 5.2, all obligations of the Corporation under
Section 5.1 shall terminate and on the Liquidation Date such LCR Exercising
Party will purchase and the holders of Exchangeable Shares (other than
Smithfield and Smithfield Sub) will sell all of their Exchangeable Shares then
outstanding for a price per share equal to the Liquidation Call Purchase Price.
(3) For the purposes of completing a purchase of the Exchangeable Shares
pursuant to the exercise of a Liquidation Call Right, the LCR Exercising Party
shall deposit with the Transfer Agent, on or before the Liquidation Date,
certificates representing the total number of shares of Smithfield Common Stock
deliverable by the LCR Exercising Party (which shares shall be duly issued as
fully paid and non-assessable and shall be free and clear of any lien, claim,
encumbrance, security interest or adverse claim) in payment of the total
Liquidation Call Purchase Price and a cheque in the amount of the remaining
portion, if any, of the total Liquidation Call Purchase Price and any interest
allowed on such deposit shall belong to the LCR Exercising Party. Provided that
the total Liquidation Call Purchase Price has been so deposited with the
Transfer Agent, on and after the Liquidation Date the rights of each holder of
Exchangeable Shares (other than Smithfield and Smithfield Sub) will be limited
to receiving such holder's proportionate part of the total Liquidation Call
Purchase Price payable by the
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LCR Exercising Party, upon presentation and surrender by the holder of
Exchangeable Shares of certificates representing the Exchangeable Shares held
by such holder in accordance with the following provisions and such holder
shall on and after the Liquidation Date be considered and deemed for all
purposes to be the holder of the shares of Smithfield Common Stock delivered to
such holder. Upon surrender to the Transfer Agent of a certificate representing
Exchangeable Shares, together with such other documents and instruments as may
be required to effect a transfer of Exchangeable Shares under the OBCA and such
additional documents and instruments as the Transfer Agent and the Corporation
may reasonably require, the holder of such surrendered certificate shall be
entitled to receive in exchange therefor, and the Transfer Agent on behalf of
the LCR Exercising Party shall deliver to such holder, a certificate
representing the shares of Smithfield Common Stock to which such holder is
entitled and a cheque in payment of the remaining portion, if any, of the
holder's proportionate part of the total Liquidation Call Purchase Price. If
neither Smithfield nor Smithfield Sub exercises its Liquidation Call Right in
the manner described above, on the Liquidation Date the holders of Exchangeable
Shares shall be entitled to receive in exchange therefor the Liquidation Amount
otherwise payable by the Corporation in connection with the liquidation,
dissolution or winding up of the Corporation pursuant to Section 5.1 hereof.
5.3 Automatic Exchange on Liquidation of Smithfield
(1) Smithfield shall give the Transfer Agent written notice of each of the
following events (each a "Smithfield Liquidation Event") at the time set forth
below:
(a) in the event of any determination by the board of directors of
Smithfield to institute voluntary liquidation, dissolution or winding up
proceedings with respect to Smithfield or to effect any other distribution
of assets of Smithfield among its stockholders for the purpose of winding
up its affairs, at least 60 days prior to the proposed effective date of
such liquidation, dissolution, winding up or other distribution; and
(b) immediately, upon the earlier of (i) receipt by Smithfield of notice
of and (ii) Smithfield otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceeding with respect to the
involuntary liquidation, dissolution or winding up of Smithfield or to
effect any other distribution of assets of Smithfield among its
stockholders for the purpose of winding up its affairs.
(2) Immediately following receipt by the Transfer Agent from Smithfield of
notice of any Smithfield Liquidation Event contemplated by Section 5.3(1)(a) or
5.3(1)(b), the Transfer Agent will give notice thereof to the holders of
Exchangeable Shares. Such notice shall be provided by Smithfield to the
Transfer Agent and shall include a brief description of the automatic exchange
of Exchangeable Shares for shares of Smithfield Common Stock provided for in
Section 5.3(4) below (the "Automatic Exchange Right").
(3) In order that the holders of Exchangeable Shares (other than
Smithfield and Smithfield Sub) will be able to participate on a pro rata basis
with the holders of Smithfield Common Stock in the distribution of assets of
Smithfield in connection with a Smithfield Liquidation Event, on the fifth
Business Day prior to the effective date (the "Smithfield Liquidation Event
Effective Date") of a Smithfield Liquidation Event all of the then outstanding
Exchangeable Shares (other than Exchangeable Shares held by Smithfield or
Smithfield Sub) shall be automatically exchanged for shares of Smithfield
Common Stock. To effect such automatic exchange, Smithfield shall purchase each
Exchangeable Share outstanding on the fifth Business Day prior to the
Smithfield Liquidation Event Effective Date and held by a holder of
Exchangeable Shares (other than Smithfield or Smithfield Sub), and each such
holder shall sell the Exchangeable Shares held by it at such time, for a
purchase price per share equal to (a) the Current Market Price of a share of
Smithfield Common Stock on the fifth Business Day prior to the Smithfield
Liquidation Event Effective Date, which shall be satisfied in full by
Smithfield delivering to such holder one share of Smithfield Common Stock, plus
(b) the Dividend Amount, if any.
(4) On the fifth Business Day prior to the Smithfield Liquidation Event
Effective Date, the closing of the transaction of purchase and sale
contemplated by the automatic exchange of Exchangeable Shares for Smithfield
Common Stock shall be deemed to have occurred, and each holder of Exchangeable
Shares (other than Smithfield and Smithfield Sub) shall be deemed to have
transferred to Smithfield all of such holder's right, title and interest in and
to such Exchangeable Shares and shall cease to be a holder of such Exchangeable
Shares and Smithfield shall deliver or cause to be delivered to the Transfer
Agent, for delivery to such holders, the certificates for the number of shares
of Smithfield Common Stock deliverable upon the automatic exchange of
Exchangeable Shares for Smithfield Common Stock (which shares shall be duly
issued as fully paid and non-assessable and shall be free and clear of any
lien, claim or encumbrance, security interest or adverse claim) and a cheque
for the balance, if any, of the total purchase price for such Exchangeable
Shares and any interest on such deposit shall belong to Smithfield.
Concurrently with each such holder ceasing to be a holder of Exchangeable
Shares, such holder shall be considered and deemed for all purposes to be the
holder of the shares of Smithfield Common Stock
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delivered to it, or to the Transfer Agent on its behalf, pursuant to the
automatic exchange of Exchangeable Shares for shares of Smithfield Common Stock
and the certificates held by such holder previously representing the
Exchangeable Shares exchanged by such holder with Smithfield pursuant to such
automatic exchange shall thereafter be deemed to represent the shares of
Smithfield Common Stock delivered to such holder by Smithfield pursuant to such
automatic exchange. Upon the request of any such former holder of Exchangeable
Shares and the surrender by such holder of Exchangeable Share certificates
deemed to represent shares of Smithfield Common Stock, duly endorsed in blank
and accompanied by such instruments of transfer as Smithfield may reasonably
require, the Transfer Agent shall deliver or cause to be delivered to such
holder certificates representing the shares of Smithfield Common Stock of which
such holder is the holder and a cheque in payment of the remaining portion, if
any, of the purchase price.
ARTICLE 6.
Retraction At Option Of Holder
6.1 Retraction at Option of Holder
(1) Subject to applicable law and the due exercise by either Smithfield or
Smithfield Sub of a Retraction Call Right, a holder of Exchangeable Shares
shall be entitled at any time to require the Corporation to redeem, on the
fifth Business Day after the date on which the Retraction Request is received
by the Corporation (the "Retraction Date"), any or all of the Exchangeable
Shares registered in the name of such holder for an amount per share equal to
(a) the Current Market Price of a share of Smithfield Common Stock on the last
Business Day prior to the Retraction Date, which shall be satisfied in full by
the Corporation causing to be delivered to such holder one share of Smithfield
Common Stock, plus (b) the Dividend Amount, if any (collectively, the
"Retraction Price"). The holder must give notice of a requirement to redeem by
presenting and surrendering at the registered office of the Corporation or at
any office of the Transfer Agent as may be specified by the Corporation by
notice to the holders of Exchangeable Shares the certificate representing the
Exchangeable Shares that the holder desires to have the Corporation redeem,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the OBCA and such additional documents
and instruments as the Transfer Agent and the Corporation may reasonably
require, together with a duly executed statement (the "Retraction Request") in
the form of Schedule A hereto or in such other form as may be acceptable to the
Corporation specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such certificate
(the "Retracted Shares") redeemed by the Corporation.
(2) In the case of a redemption of Exchangeable Shares under this Section
6.1, upon receipt by the Corporation or the Transfer Agent in the manner
specified in Section 6.1(1) hereof of a certificate representing the number of
Exchangeable Shares which the holder desires to have the Corporation redeem,
together with a Retraction Request, and provided that the Retraction Request is
not revoked by the holder in the manner specified in Section 6.1(5), the
Corporation shall redeem the Retracted Shares effective at the close of
business on the Retraction Date. On the Retraction Date, the Corporation shall
deliver or cause the Transfer Agent to deliver to the relevant holder, at the
address of the holder recorded in the securities register of the Corporation
for the Exchangeable Shares or at the address specified in the holder's
Retraction Request or by holding for pick-up by the holder at the registered
office of the Corporation or at any office of the Transfer Agent as may be
specified by the Corporation by notice to the holders of Exchangeable Shares, a
certificate representing the number of shares of Smithfield Common Stock to
which such holder is entitled (which shares shall be duly issued as fully paid
and non-assessable and shall be free and clear of any lien, claim, encumbrance,
security interest or adverse claim) registered in the name of the holder or in
such other name as the holder may request in payment of the Retraction Price
and a cheque of the Corporation payable at par at any branch of the bankers of
the Corporation in payment of the remaining portion, if any, of the aggregate
Retraction Price to which such holder is entitled and such delivery of such
certificate and cheque by or on behalf of the Corporation by the Transfer Agent
shall be deemed to be payment of and shall satisfy and discharge all liability
for the Retraction Price to the extent that the same is represented by such
share certificates and cheque, unless such cheque is not paid on due
presentation. If only a part of the Exchangeable Shares represented by any
certificate is redeemed, a new certificate for the balance of such Exchangeable
Shares shall be issued to the holder at the expense of the Corporation.
(3) On and after the close of business on the Retraction Date, the holder
of the Retracted Shares shall cease to be a holder of such Retracted Shares and
shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive its proportionate part of the total
Retraction Price, unless upon presentation and surrender of certificates in
accordance with the foregoing provisions, payment of the aggregate Retraction
Price payable to such holder shall not be made, in which case the rights of
such holder shall remain unaffected until such aggregate Retraction Price has
been
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paid in the manner hereinbefore provided. On and after the close of business on
the Retraction Date, provided that presentation and surrender of certificates
and payment of such aggregate Retraction Price has been made in accordance with
the foregoing provisions, the holder of the Retracted Shares so redeemed by the
Corporation shall thereafter be considered and deemed for all purposes to be a
holder of the shares of Smithfield Common Stock delivered to such holder.
(4) Notwithstanding any other provision of this Section 6.1, the
Corporation shall not be obligated to redeem Retracted Shares specified by a
holder in a Retraction Request to the extent that such redemption of Retracted
Shares would be contrary to solvency requirements or other provisions of
applicable law. If the Corporation believes that on any Retraction Date it
would not be permitted by any of such provisions to redeem the Retracted Shares
tendered for redemption on such date, and neither Smithfield nor Smithfield Sub
shall have exercised its Retraction Call Right with respect to the Retracted
Shares, the Corporation shall only be obligated to redeem Retracted Shares
specified by a holder in a Retraction Request to the extent of the maximum
number that may be so redeemed (rounded down to a whole number of shares) as
would not be contrary to such provisions and shall notify the holder at least
two Business Days prior to the Retraction Date as to the number of Retracted
Shares which will not be redeemed by the Corporation. In any case in which the
redemption by the Corporation of Retracted Shares would be contrary to solvency
requirements or other provisions of applicable law and more than one holder has
delivered a Retraction Request, the Corporation shall redeem Retracted Shares
in accordance with Section 6.1(2) on a pro rata basis and shall issue to each
such holder of Retracted Shares a new certificate, at the expense of the
Corporation, representing the Retracted Shares not redeemed by the Corporation
pursuant to Section 6.1(2) hereof. If the Retraction Request is not revoked by
the holder in the manner specified in Section 6.1(5) and neither Smithfield nor
Smithfield Sub shall have exercised its Retraction Call Right in respect of any
such Retracted Shares, an Insolvency Event (as defined in the Voting, Support
and Exchange Trust Agreement) shall, to the extent it has not theretofore
occurred, be deemed thereupon to have occurred and the holder of any such
Retracted Shares not redeemed by the Corporation pursuant to Section 6.1(2) as
a result of solvency requirements or other provisions of applicable law shall
be deemed by giving the Retraction Request to have exercised its Exchange Right
(as defined in the Voting, Support and Exchange Trust Agreement) so as to
require Smithfield or, at the Option of Smithfield, Smithfield Sub to purchase
the unredeemed Retracted Shares from such holder on the Retraction Date or as
soon as practicable thereafter on payment by Smithfield or, at the Option of
Smithfield, Smithfield Sub to such holder of the Retraction Price, all as more
specifically provided in the Voting, Support and Exchange Trust Agreement.
(5) A holder of Retracted Shares may, by notice in writing given by the
holder to the Corporation before the close of business on the Business Day
immediately preceding the Retraction Date, withdraw its Retraction Request in
which event such Retraction Request shall be null and void.
6.2 Retraction Call Rights
(1) In the event that a holder of Exchangeable Shares delivers a
Retraction Request pursuant to Section 6.1 and subject to the limitations set
forth in Section 6.2(2), Smithfield and Smithfield Sub shall each have the
overriding right (a "Retraction Call Right"), notwithstanding the proposed
redemption of the Exchangeable Shares by the Corporation pursuant to Section
6.1 hereof, to purchase from such holder on the Retraction Date all but not
less than all of the Retracted Shares held by such holder on payment by
whichever of Smithfield or Smithfield Sub is exercising such right (the "RCR
Exercising Party") of an amount per share equal to (a) the Current Market Price
of a share of Smithfield Common Stock on the last Business Day prior to the
Retraction Date, which shall be satisfied in full by the RCR Exercising Party
causing to be delivered to such holder one share of Smithfield Common Stock,
plus (b) the Dividend Amount, if any (the "Retraction Call Purchase Price"). In
the event of the exercise of a Retraction Call Right, a holder of Exchangeable
Shares who has delivered a Retraction Request shall be obligated to sell all
the Retracted Shares to the RCR Exercising Party on the Retraction Date on
payment by the RCR Exercising Party of an amount per share equal to the
Retraction Call Purchase Price for each such share.
(2) Upon receipt by the Corporation of a Retraction Request, the
Corporation shall immediately notify Smithfield and Smithfield Sub thereof. In
order to exercise its Retraction Call Right, the RCR Exercising Party must
notify the Corporation in writing of its determination to do so (a "Smithfield
Call Notice") within two Business Days of notification to such RCR Exercising
Party by the Corporation of the receipt by the Corporation of the Retraction
Request. If either Smithfield or Smithfield Sub so notifies the Corporation
within such two Business Day period, the Corporation shall notify the holder as
soon as possible thereafter as to the exercise of a Retraction Call Right (such
notice to specify the RCR Exercising Party). If either Smithfield or Smithfield
Sub delivers a Smithfield Call Notice within such two Business Day period and
duly exercises its Retraction Call Right in accordance with this Section 6.2,
the obligation of the Corporation to redeem the Retracted Shares shall
terminate and, provided that the Retraction Request is not revoked by the
holder in the manner specified in
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Section 6.1(5), the RCR Exercising Party shall purchase from such holder and
such holder shall sell to the RCR Exercising Party on the Retraction Date the
Retracted Shares for the Retraction Call Purchase Price. Provided that the
aggregate Retraction Call Purchase Price has been so deposited with the
Transfer Agent as provided in Section 6.2(3), the closing of the purchase and
sale of the Retracted Shares pursuant to the Retraction Call Right shall be
deemed to have occurred as at the close of business on the Retraction Date and,
for greater certainty, no redemption by the Corporation of such Retracted
Shares shall take place on the Retraction Date. In the event that neither
Smithfield nor Smithfield Sub delivers a Smithfield Call Notice within such two
Business Day period, and provided that the Retraction Request is not revoked by
the holder in the manner specified in Section 6.1(5), the Corporation shall
redeem the Retracted Shares on the Retraction Date and in the manner otherwise
contemplated in Section 6.1.
(3) For the purpose of completing a purchase of Exchangeable Shares
pursuant to the exercise of a Retraction Call Right, the RCR Exercising Party
shall deliver or cause the Transfer Agent to deliver to the relevant holder, at
the address of the holder recorded in the securities register of the
Corporation for the Exchangeable Shares or at the address specified in the
holder's Retraction Request or by holding for pick-up by the holder at the
registered office of the Corporation or at any office of the Transfer Agent as
may be specified by the Corporation by notice to the holders of Exchangeable
Shares, a certificate representing the number of shares of Smithfield Common
Stock to which such holder is entitled (which shares shall be duly issued as
fully paid and non-assessable and shall be free and clear of any lien, claim,
encumbrance, security interest or adverse claim) registered in the name of the
holder or in such other name as the holder may request in payment of the
Retraction Call Purchase Price and a cheque of the RCR Exercising Party payable
at par and in Canadian dollars at any branch of the bankers of Smithfield,
Smithfield Sub or of the Corporation in Canada in payment of the remaining
portion, if any, of such aggregate Retraction Call Purchase Price and such
delivery of such certificate and cheque on behalf of the RCR Exercising Party
by the Transfer Agent shall be deemed to be payment of and shall satisfy and
discharge all liability for the Retraction Call Purchase Price to the extent
that the same is represented by such share certificates and cheque, unless such
cheque is not paid on due presentation.
(4) On and after the close of business on the Retraction Date, the holder
of the Retracted Shares shall not be entitled to exercise any of the rights of
a holder in respect thereof, other than the right to receive its proportionate
part of the total Retraction Call Purchase Price unless upon presentation and
surrender of certificates in accordance with the foregoing provisions, payment
of the aggregate Retraction Call Purchase Price payable to such holder shall
not be made, in which case the rights of such holder shall remain unaffected
until such aggregate Retraction Call Purchase Price has been paid in the manner
hereinbefore provided. On and after the close of business on the Retraction
Date, provided that presentation and surrender of certificates and payment of
such aggregate Retraction Call Purchase Price has been made in accordance with
the foregoing provisions, the holder of the Retracted Shares so purchased by
the RCR Exercising Party shall thereafter be considered and deemed for all
purposes to be a holder of the shares of Smithfield Common Stock delivered to
such holder.
ARTICLE 7.
Redemption By The Corporation
7.1 Redemption by the Corporation
(1) Subject to applicable law and the due exercise by either Smithfield or
Smithfield Sub of a Redemption Call Right, the Corporation shall on the Company
Redemption Date redeem all of the then outstanding Exchangeable Shares for an
amount per share equal to (a) the Current Market Price of a share of Smithfield
Common Stock on the last Business Day prior to such Company Redemption Date,
which shall be satisfied in full by the Corporation causing to be delivered one
share of Smithfield Common Stock, plus (b) the Dividend Amount, if any
(collectively, the "Redemption Price"). If either Smithfield or Smithfield Sub
exercises a Redemption Call Right and all of the then outstanding Exchangeable
Shares (other than the Exchangeable Shares held by Smithfield or Smithfield
Sub) are purchased pursuant to Section 7.2, the remaining outstanding
Exchangeable Shares continue to be redeemable by the Corporation on the
subsequent Company Redemption Date pursuant to the provisions of this Section
7.1.
(2) In case of a redemption of Exchangeable Shares under this Section 7.1
that is to occur prior to April 30, 2008, the Corporation shall, at least 90
days before the Company Redemption Date, send or cause to be sent to each
holder of Exchangeable Shares a notice in writing of the redemption by the
Corporation or the purchase by Smithfield or Smithfield Sub under its
Redemption Call Right, as the case may be, of the Exchangeable Shares held by
such holder (other than
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Smithfield and Smithfield Sub in the case of a purchase by Smithfield or
Smithfield Sub). Such notice shall set out the formula for determining the
Redemption Price or the Redemption Call Purchase Price, as the case may be,
such Company Redemption Date and, if applicable, particulars of the Redemption
Call Right.
(3) On or after the Company Redemption Date and subject to the exercise by
Smithfield or Smithfield Sub of a Redemption Call Right, the Corporation shall
cause to be delivered to the holders of the Exchangeable Shares to be redeemed
the Redemption Price for each such Exchangeable Share upon presentation and
surrender at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation in such notice of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the OBCA and such additional documents and
instruments as the Transfer Agent and the Corporation may reasonably require.
Payment of the aggregate Redemption Price for Exchangeable Shares held by a
holder shall be made by delivery to such holder, at the address of such holder
recorded in the securities register of the Corporation or by holding for
pick-up by the holder at the registered office of the Corporation or at any
office of the Transfer Agent as may be specified by the Corporation in such
notice, of a certificate representing the aggregate number of shares of
Smithfield Common Stock deliverable by the Corporation to such holder (which
shares shall be duly issued as fully paid and non-assessable and shall be free
and clear of any lien, claim, encumbrance, security interest or adverse claim)
and a cheque of the Corporation payable at par at any branch of the bankers of
the Corporation in respect of the remaining portion, if any, of such aggregate
Redemption Price. On and after the Company Redemption Date, the holders of the
Exchangeable Shares called for redemption shall not be entitled to exercise any
of the rights of holders in respect thereof, other than the right to receive
their proportionate part of the total Redemption Price, unless payment of the
aggregate Redemption Price deliverable to a holder for Exchangeable Shares
shall not be made upon presentation and surrender of share certificates in
accordance with the foregoing provisions, in which case the rights of the
holder shall remain unaffected until the aggregate Redemption Price deliverable
to such holder has been paid in the manner hereinbefore provided.
(4) The Corporation shall have the right at any time after the sending of
notice of its intention to redeem the Exchangeable Shares as aforesaid to
deposit or cause to be deposited the total Redemption Price of the Exchangeable
Shares so called for redemption, or of such of the said Exchangeable Shares
represented by certificates that have not at the date of such deposit been
surrendered by the holders thereof in connection with such redemption, in a
custodial account with any chartered bank or trust company in Canada named in
such notice and any interest allowed on such deposit shall belong to the
Corporation. Provided that such total Redemption Price has been so deposited
prior to the Company Redemption Date, on and after the Company Redemption Date,
the Exchangeable Shares shall be redeemed and the rights of the holders thereof
after the Company Redemption date shall be limited to receiving their
proportionate part of the total Redemption Price for such Exchangeable Shares
so deposited, against presentation and surrender of the said certificates held
by them, respectively, in accordance with the foregoing provisions. Upon such
payment or deposit of the total Redemption Price, the holders of the
Exchangeable Shares shall thereafter be considered and deemed for all purposes
to be holders of the shares of Smithfield Common Stock delivered to them.
7.2 Redemption Call Rights
(1) Subject to the limitations set forth in Section 7.2(2), Smithfield and
Smithfield Sub shall each have the overriding right (a "Redemption Call
Right"), notwithstanding the proposed redemption of the Exchangeable Shares by
the Corporation pursuant to Section 7.1 hereof, to purchase from all but not
less than all of the holders of Exchangeable Shares (other than Smithfield and
Smithfield Sub) on the last Business Day prior to the Company Redemption Date
in respect of which the Redemption Call Right is exercised all but not less
than all of the Exchangeable Shares held by each such holder on payment by
whichever of Smithfield or Smithfield Sub is exercising such right (the "RCR
Exercising Party") of an amount per share equal to (a) the Current Market Price
of a share of Smithfield Common Stock on the last Business Day prior to such
Company Redemption date, which shall be satisfied in full by causing to be
delivered to such holder one share of Smithfield Common Stock plus (b) the
Dividend Amount, if any, without interest (collectively, the "Redemption Call
Purchase Price"). In the event of the exercise of a Redemption Call Right, each
holder of Exchangeable Shares (other than Smithfield and Smithfield Sub) shall
be obligated to sell all the Exchangeable Shares held by such holder to the RCR
Exercising Party on the last Business Day prior to such Company Redemption Date
on payment by the RCR Exercising Party to such holder of the Redemption Call
Purchase Price for each such share.
(2) Smithfield Sub shall only be entitled to exercise its Redemption Call
Right with respect to those holders of Exchangeable Shares, if any, in respect
of which Smithfield has not exercised its Redemption Call Right. In order to
exercise its Redemption Call Right, an RCR Exercising Party must notify in
writing the Transfer Agent, as agent for the holders of
E-12
<PAGE>
Exchangeable Shares and the Corporation of its intention to exercise such right
at least o days before the Company Redemption Date. The Transfer Agent will
notify the holders of Exchangeable Shares as to whether or not a Redemption
Call Right has been exercised (such notice to specify the RCR Exercising Party)
forthwith after the expiry of the date by which the same may be exercised, such
form of notice to be provided by Smithfield to the Transfer Agent. If an RCR
Exercising Party duly exercises its Redemption Call Right in accordance with
this Section 7.2, the right of the Corporation to redeem any Exchangeable
Shares pursuant to Section 7.1 on the Company Redemption Date shall terminate
at such time and on the last Business Day prior to such Company Redemption date
such RCR Exercising Party will purchase and the holders of Exchangeable Shares
(other than Smithfield and Smithfield Sub) will sell all of their Exchangeable
Shares then outstanding for a price per share equal to the Redemption Call
Purchase Price.
(3) For the purposes of completing a purchase of the Exchangeable Shares
pursuant to the exercise of a Redemption Call Right, the RCR Exercising Party
shall deposit with the Transfer Agent, on or before the last Business Day prior
to the Company Redemption Date, certificates representing the total number of
shares of Smithfield Common Stock deliverable by the RCR Exercising Party
(which shares shall be duly issued as fully paid and non-assessable and shall
be free and clear of any lien, claim, encumbrance, security interest or adverse
claim) in payment of the total Redemption Call Purchase Price and a cheque in
the amount of the remaining portion, if any, of the total Redemption Call
Purchase Price and any interest allowed on such deposit shall belong to the RCR
Exercising Party. Provided that the total Redemption Call Purchase Price has
been so deposited with the Transfer Agent, on and after the last Business Day
prior to the Company Redemption Date the rights of each holder of Exchangeable
Shares (other than Smithfield and Smithfield Sub) will be limited to receiving
such holder's proportionate part of the total Redemption Call Purchase Price
payable by the RCR Exercising Party upon presentation and surrender by such
holder of certificates representing the Exchangeable Shares held by such holder
in accordance with the following provisions and such holder shall on and after
the last Business Day prior to such Company Redemption date be considered and
deemed for all purposes to be the holder of the shares of Smithfield Common
Stock delivered to such holder. Upon surrender to the Transfer Agent of a
certificate representing Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the OBCA and such additional documents and
instruments as the Transfer Agent and the Corporation may reasonably require,
the holder of such surrendered certificate shall be entitled to receive in
exchange therefor, and the Transfer Agent on behalf of the RCR Exercising Party
shall deliver to such holder, a certificate representing the shares of
Smithfield Common Stock to which such holder is entitled and a cheque in
payment of the remaining portion, if any, of the holder's proportionate part of
the total Redemption Call Purchase Price. If neither Smithfield nor Smithfield
Sub exercises the Redemption Call Right in the manner described above, on the
Company Redemption date a holder of Exchangeable Shares shall be entitled to
receive in exchange therefor the redemption price otherwise payable by the
Corporation in connection with the redemption of the Exchangeable Shares
pursuant to Section 7.1 hereof.
ARTICLE 8.
Voting Rights
8.1 Except as required by applicable law and the provisions of Sections
9.1, 10.1 and 11.2, the holders of the Exchangeable Shares shall not be
entitled as such to receive notice of or to attend any meeting of the
shareholders of the Corporation or to vote at any such meeting. The holders of
the Exchangeable Shares shall, however, be entitled to notice of meetings of
the shareholders called for the purpose of authorizing the dissolution of the
Corporation or the sale, lease or exchange of all or substantially all the
property of the Corporation other than in the ordinary course of business of
the Corporation.
ARTICLE 9.
Amendment And Approval
9.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed only with the approval
of the holders of the Exchangeable Shares given as hereinafter specified.
9.2 Any approval given by the holders of the Exchangeable Shares to add
to, change or remove any right, privilege, restriction or condition attaching
to the Exchangeable Shares or any other matter requiring the approval or
consent of the holders of the Exchangeable Shares shall be deemed to have been
sufficiently given if it shall have been given in accordance with applicable
law subject to a minimum requirement that such approval be evidenced by
resolution passed by not less than two-thirds of the votes cast on such
resolution at a meeting of holders of Exchangeable Shares duly called and held
at which the holders of at least 50% of the outstanding Exchangeable Shares at
that time are present or represented by
E-13
<PAGE>
proxy; provided that such approval must be given also by the affirmative vote
of holders of more than two-thirds of the Exchangeable Shares represented in
person or by proxy at the meeting excluding Exchangeable Shares beneficially
owned by Smithfield or any of its Subsidiaries. If at any such meeting the
holders of at least 50% of the outstanding Exchangeable Shares at that time are
not present or represented by proxy within one-half hour after the time
appointed for such meeting then the meeting shall be adjourned to such date not
less than 10 days thereafter and to such time and place as may be designated by
the chairman of such meeting. At such adjourned meeting the holders of
Exchangeable Shares present or represented by proxy thereat may transact the
business for which the meeting was originally called and a resolution passed
thereat by the affirmative vote of not less than two-thirds of the votes cast
on such resolution at such meeting shall constitute the approval or consent of
the holders of the Exchangeable Shares.
ARTICLE 10.
Reciprocal Changes, Etc..
In Respect of Smithfield Common Stock
10.1(1) Each holder of an Exchangeable Share acknowledges that the Voting,
Support and Exchange Trust Agreement provides, in part, that Smithfield will
not, except as provided in the Voting, Support and Exchange Trust Agreement,
without the prior approval of the Corporation and the prior approval of the
holders of the Exchangeable Shares given in accordance with Section 9.2 hereof:
(a) issue or distribute shares of Smithfield Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire
Smithfield Common Stock) to the holders of all or substantially all of the
then outstanding shares of Smithfield Common Stock by way of stock dividend
or other distribution, other than an issue of shares of Smithfield Common
Stock (or securities exchangeable for or convertible into or carrying
rights to acquire Smithfield Common Stock) to holders of shares of
Smithfield Common Stock who exercise an option to receive dividends in
shares of Smithfield Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire shares of Smithfield Common
Stock) in lieu of receiving cash dividends;
(b) issue or distribute rights, options or warrants to the holders of all
or substantially all of the then outstanding shares of Smithfield Common
Stock entitling them to subscribe for or to purchase shares of Smithfield
Common Stock (or securities exchangeable for or convertible into or
carrying rights to acquire Smithfield Common Stock); or
(c) issue or distribute to the holders of all or substantially all of the
then outstanding shares of Smithfield Common Stock (i) shares or securities
of Smithfield of any class other than Smithfield Common Stock (other than
shares convertible into or exchangeable for or carrying rights to acquire
shares of Smithfield Common Stock), (ii) rights, options or warrants other
than those referred to in Section 10.1(1)(b) above, (iii) evidences of
indebtedness of Smithfield or (iv) assets of Smithfield;
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Exchangeable Shares.
(2) Each holder of an Exchangeable Share acknowledges that the Voting,
Support and Exchange Trust Agreement further provides, in part, that Smithfield
will not, except as provided in the Voting, Support and Exchange Trust
Agreement, without the prior approval of the Corporation and the prior approval
of the holders of the Exchangeable Shares given in accordance with Section 9.2
of these share provisions:
(a) subdivide, redivide or change the then outstanding shares of
Smithfield Common Stock into a greater number of shares of Smithfield
Common Stock; or
(b) reduce, combine or consolidate or change the then outstanding shares
of Smithfield Common Stock into a lesser number of shares of Smithfield
Common Stock; or
(c) reclassify or otherwise change the shares of Smithfield Common Stock
or effect an amalgamation, merger, reorganization or other transaction
affecting the Smithfield Common Stock; unless the same or an economically
equivalent change shall simultaneously be made to, or in the rights of the
holders of, the Exchangeable Shares.
The Voting, Support and Exchange Trust Agreement further provides, in
part, that the aforesaid provisions of the Voting, Support and Exchange Trust
Agreement shall not be changed without the approval of the holders of the
Exchangeable Shares given in accordance with Section 9.2 hereof.
E-14
<PAGE>
ARTICLE 11.
Actions by the Corporation Under the Voting,
Support and Exchange Trust Agreement
11.1 The Corporation shall take all such actions and do all such things as
shall be necessary or advisable to perform and comply with and to facilitate
performance and compliance by Smithfield with all provisions of the Voting,
Support and Exchange Trust Agreement applicable to the Corporation and
Smithfield, respectively, in accordance with the terms thereof including,
without limitation, taking all such actions and doing all such things as shall
be necessary or advisable to enforce to the fullest extent possible for the
direct benefit of the Corporation all rights and benefits in favour of the
Corporation under or pursuant to such agreement.
11.2 The Corporation shall not agree to or otherwise give effect to any
amendment to, or waiver or forgiveness of its rights or obligations under, the
Voting, Support and Exchange Trust Agreement without the approval of the
holders of the Exchangeable Shares given in accordance with Section 9.2 hereof
other than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:
(a) adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the holders of
Exchangeable Shares;
(b) making such provisions or modifications not inconsistent with such
agreement as may be necessary or desirable with respect to matters or
questions arising thereunder which, in the opinion of the Board of
Directors, it may be expedient to make, provided that the Board of
Directors shall be of the opinion, after consultation with counsel, that
such provisions and modifications will not be prejudicial to the interests
of the holders of the Exchangeable Shares; or
(c) making such changes in or corrections to such agreement which, on the
advice of counsel to the Corporation, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error contained therein, provided
that the Board of Directors shall be of the opinion, after consultation
with counsel, that such changes or corrections will not be prejudicial to
the interests of the holders of the Exchangeable Shares.
ARTICLE 12.
Legend
12.1 The certificates evidencing the Exchangeable Shares shall contain or
have affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the provisions of the Voting, Support and Exchange
Trust Agreement (including the provisions with respect to the call rights,
voting rights and exchange rights thereunder).
ARTICLE 13.
Notices
13.1 Subject to applicable law, any notice, request or other communication
to be given to the Corporation by a holder of Exchangeable Shares shall be in
writing and shall be valid and effective if given by mail (postage prepaid) or
by telecopy or by delivery to the registered office of the Corporation and
addressed to the attention of the President. Any such notice, request or other
communication, if given by mail, telecopy or delivery, shall only be deemed to
have been given and received upon actual receipt thereof by the Corporation.
13.2 Any presentation and surrender by a holder of Exchangeable Shares to
the Corporation or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding up of the
Corporation or the retraction or redemption of Exchangeable Shares shall be
made by registered mail (postage prepaid) or by delivery to the registered
office of the Corporation or to such office of the Transfer Agent as may be
specified by the Corporation, in each case addressed to the attention of the
President of the Corporation. Any such presentation and surrender of
certificates shall only be deemed to have been made and to be effective upon
actual receipt thereof by the Corporation or the Transfer Agent, as the case
may be. Any such presentation and surrender of certificates made by registered
mail shall be at the sole risk of the holder mailing the same.
E-15
<PAGE>
13.3 Subject to applicable law, any notice, request or other communication
to be given to a holder of Exchangeable Shares by or on behalf of the
Corporation shall be in writing and shall be valid and effective if given by
mail (postage prepaid) or by delivery to the address of the holder recorded in
the securities register of the Corporation or, in the event of the address of
any such holder not being so recorded, then at the last known address of such
holder. Any such notice, request or other communication, if given by mail,
shall be deemed to have been given and received on the fifth Business Day
following the date of mailing and, if given by delivery, shall be deemed to
have been given and received on the date of delivery. Accidental failure or
omission to give any notice, request or other communication to one or more
holders of Exchangeable Shares, or any defect in such notice, shall not
invalidate or otherwise alter or affect any action or proceeding to be taken by
the Corporation pursuant thereto.
SCHEDULE A
NOTICE OF RETRACTION
To Smithfield Canada Limited, Smithfield Foods, Inc. and Smithfield Sub
Limited, c/o CIBC Mellon Trust Company
This notice is given pursuant to Article 6 of the provisions (the "Share
Provisions") attaching to the share(s) represented by this certificate and all
capitalized words and expressions used in this notice that are defined in the
Share Provisions have the meanings ascribed to such words and expressions in
such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the
Retraction Call Right referred to below, the undersigned desires to have the
Corporation redeem on the Retraction Date (being the fifth Business Day after
the date upon which this notice is received by the Corporation) in accordance
with Article 6 of the Share Provisions:
all share(s) represented by this certificate; or
share(s) only.
The undersigned acknowledges the Retraction Call Right of Smithfield and
Smithfield Sub to purchase all but not less than all the Retracted Shares from
the undersigned and that this notice shall be deemed to be a revocable offer by
the undersigned to sell the Retracted Shares to Smithfield or Smithfield Sub,
as the case may be, in accordance with the Retraction Call Right on the
Retraction Date for the Retraction Call Purchase Price and on the other terms
and conditions set out in Section 6.2 of the Share Provisions. If neither
Smithfield nor Smithfield Sub determines to exercise its Retraction Call Right,
the Corporation will notify the undersigned of such fact as soon as possible.
This notice of retraction, and offer to sell the Retracted Shares to Smithfield
or Smithfield Sub, may be revoked and withdrawn by the undersigned by notice in
writing given to the Corporation at any time before the close of business on
the Business Day immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of solvency requirements
or other provisions of applicable law, the Corporation is unable to redeem all
Retracted Shares because of an Insolvency Event (as defined in the Voting,
Support and Exchange Trust Agreement) shall, to the extent it shall not
theretofore have occurred, be deemed thereupon to have occurred, and the
undersigned will be deemed to have exercised the Exchange Right (as defined in
the Voting, Support and Exchange Trust Agreement) so as to require Smithfield
or, at the option of Smithfield, Smithfield Sub to purchase the unredeemed
Retracted Shares.
The undersigned hereby represents and warrants to the Corporation,
Smithfield and Smithfield Sub that the undersigned has good title to, and owns,
the share(s) represented by this certificate to be acquired by the Corporation,
Smithfield or Smithfield Sub, as the case may be, free and clear of all liens,
claims, encumbrances, security interests and adverse claims.
- ------------------- ------------------------------------ ----------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
Please check box if the securities and any cheque(s) resulting from the
retraction or purchase of the Retracted Shares are to be held for pick-up by
the shareholder at the principal transfer office of the Transfer Agent in
Toronto, failing which the securities and any cheque will be mailed to the last
address of the shareholder as it appears on the register.
E-16
<PAGE>
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent and the Corporation may
require, must be deposited with the Transfer Agent at its principal
transfer office in Toronto. The securities and any cheque resulting from
the retraction or purchase of the Retracted Shares will be issued and
registered in, and made payable to, respectively, the name of the
shareholder as it appears on the register of the Corporation and the
securities and cheque resulting from such retraction or purchase will be
delivered to such shareholder as indicated above, unless the form
appearing immediately below is duly completed, all exigible transfer taxes
are paid and the signature of the registered holder is guaranteed by a
Canadian chartered bank or trust company, member of a recognized stock
exchange in Canada or a member of the Securities Transfer Association
Medallion (STAMP) Program.
Date----------------------
- -----------------------------------------
Name of Person in Whose Name Securities and
Cheque Are To Be Registered, Issued or
Delivered (please print)
- ---------------------------------------------------------------------------
Street Address or P.O. Box Signature of Registered Holder
- ---------------------------------------------------------------------------
City - Province Signature Guaranteed by
NOTE: If the notice of retraction is for less than all of the share(s)
represented by this certificate, a certificate representing the remaining
shares of the Corporation will be issued and registered in the name of the
shareholder as it appears on the register of the Corporation, unless the
Share Transfer Power on the share certificate is duly completed in respect
of such shares.
E-17
<PAGE>
U.S. Residents/Citizens must provide also complete the following:
SUBSTITUTE FORM W-9
To be completed by United States Holders only
<TABLE>
<CAPTION>
PAYER'S NAME:
<S> <C>
SUBSTITUTE FORM Part 1. PLEASE PROVIDE YOUR Security Number or
W-9 TIN IN THE BOX AT THE RIGHT Employer Identification
AND CERTIFY BY SIGNING AND Number
Department of the Treasury DATING BELOW. -------------------
Internal Revenue Service
----------------------------- ------------------------
Part 2. Certification -- Under penalties of perjury, I
certify that:
(1) The number shown on this form is my correct
Taxpayer Identification Number (or I am waiting
for a number to be issued to me) and
(2) I am not subject to backup withholding
because: (a) I am exemptfrom backup withholding,
or (b) I have not been notified by the Internal
Revenue Service (the "IRS") that I am subject to
backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS
has notified me that I am no longer subject to
backup withholding.
Payer's Request for
Taxpayer Identification
Number ("TIN") Certification Instructions -- You must cross out
item (2) above if you have been notified by the
IRS that you are currently subject to backup
withholding because of under-reporting interest or
dividends on your tax return. However, if after
being notified by the IRS that you were subject to
backup withholding you received another
notification from the IRS that you are no longer
subject to backup withholding, do not cross out
such Item (2).
-----------------------------
Part 3.
Signature: Awaiting TIN [ ]
Sign Here
Date:
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFERS.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3
OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (2) I intend to
mail or deliver an application in the near future. I understand that if I do
not provide a taxpayer identification number by the time of payment, 31% of all
reportable payments made to me will be withheld, but that such amounts will be
refunded to me if I then provide a Taxpayer Identification Number within sixty
(60) days.
Signature: -------------------------------------- Date: ------------ , 1998
E-18
<PAGE>
ANNEX F
FORM OF SPECIAL VOTING STOCK PROVISIONS
SMITHFIELD FOODS, INC.
ARTICLES OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
1. Name. The name of the Corporation is Smithfield Foods, Inc (the
Corporation").
2. The Amendment. Pursuant to Sections 13.1-638 and 13.1-639 of the
Virginia Stock Corporation Act, the Board of Directors of the Corporation
effective as of , 1998, duly adopted the following amendment to the
Articles of Incorporation, as amended, of the Corporation, adding thereto new
Section 4.4, which sets forth the designation and number of shares of a series
of Preferred Stock of the Corporation and certain preferences, limitations and
relative rights thereof:
4.4 Series B Special Voting Preferred Share
(a) Designation and Amount. Pursuant to a resolution adopted by the
Board of Directors of the Corporation on , 1998, one (1) preferred
share (of $1.00 par value) is hereby constituted as a series of preferred
shares of the Corporation which shall be designated as the "Series B
Special Voting Preferred Share" (the "Series B Preferred Share"), the
preferences and relative, optional and other special rights of which and
the qualifications, limitations or restrictions of which shall be as set
forth herein.
(b) Dividends and Distributions. The holder of the Series B Preferred
Share shall not be entitled to receive any portion of any dividend or
distribution at any time.
(c) Voting Rights. The holder of the Series B Preferred Share shall have
the following voting rights:
(i) The Series B Preferred Share shall entitle the holder thereof to
an aggregate number of votes equal to the number of Exchangeable
Shares ("Exchangeable Shares") of Smithfield Canada Limited, an
Ontario corporation ("Smithfield Canada"), outstanding from time
to time which are not owned by the Corporation or any of its
direct or indirect subsidiaries.
(ii) Except as otherwise provided herein or by law, the holder of the
Series B Preferred Share and the holders of Common Shares and of
Series A Preferred Shares shall vote together as one class on all
matters submitted to a vote of shareholders of the Corporation.
(iii) Except as set forth herein, the holder of the Series B Preferred
Share shall have no special voting rights, and its consent shall
not be required (except to the extent it is entitled to vote with
holders of Common Shares and of Series A Preferred Shares as set
forth herein) for taking any corporate action.
(d) Additional Provisions.
(i) The Holder of the Series B Preferred Share is entitled to
exercise the voting rights attendant thereto in such manner as
such holder desires.
(ii) At such time as (A) the Series B Preferred Share entitles its
holder to a number of votes equal to zero because there are no
Exchangeable Shares of Smithfield Canada outstanding which are not
owned by the Corporation or any of its direct or indirect
subsidiaries, and (B) there is no share of stock, debt, option or
other agreement, obligation or commitment of Smithfield Canada
which could by its terms require Smithfield Canada to issue any
Exchangeable Shares to any person other than the Corporation or
any of its direct or indirect subsidiaries, then the Series B
Preferred Share shall thereupon be retired and cancelled promptly
thereafter. Such share shall upon its cancellation, and upon the
taking of any action required by applicable law, become an
authorized but unissued preferred share and may be reissued as
part of a new series of preferred shares to be created by
resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
(e) Reacquired Share. If the Series B Preferred Share should be
purchased or otherwise acquired by the Corporation in any manner
whatsoever, then the Series B Preferred Share shall be retired and
canceled promptly after the acquisition thereof. Such share shall upon its
cancellation, and upon the taking of any action required by applicable
law, become an authorized but unissued preferred share and may be reissued
as part of a new series of preferred
F-1
<PAGE>
shares to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set
forth herein.
(f) Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, the holder of the Series B
Preferred Share shall not be entitled to any portion of any distribution.
(g) No Redemption or Conversion. The Series B Preferred Share shall not
be redeemable or convertible.
3. This amendment was duly adopted by the Board of Directors of the
Corporation without shareholder action, and shareholder action was not
required.
Dated: , 1998 SMITHFIELD FOODS, INC.
----------------------------------
By: Joseph W. Luter, III
Title: Chairman of the Board and Chief
Executive Officer
COMMONWEALTH OF VIRGINIA: OF ------------------- :
The undersigned Notary Public in and for the jurisdiction aforesaid hereby
certifies that Joseph W. Luter, III, Chairman of the Board and Chief Executive
Officer of Smithfield Foods, Inc., signed the foregoing Articles of Amendment,
dated as of , 1998, and acknowledged the same before me.
Given under my hand this-- day of------- , 1998.
My commission expires --------------- .
----------------------------------------
Notary Public
[NOTARY SEAL]
F-2
<PAGE>
ANNEX G
INFORMATION CONCERNING SMITHFIELD CANADA LIMITED
INDEX
<TABLE>
<S> <C>
Report of Independent Public Accountants ............................... G-2
Smithfield Canada Limited Balance Sheet as of February 1, 1998 ......... G-3
Smithfield Canada Limited Notes to Financial Statements ................ G-4
</TABLE>
G-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Smithfield Canada Limited:
We have audited the accompanying balance sheet of Smithfield Canada
Limited as of February 1, 1998. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Smithfield Canada Limited as
of February 1, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Richmond, Virginia
February 17, 1998
G-2
<PAGE>
SMITHFIELD CANADA LIMITED
BALANCE SHEET
As of February 1, 1998
<TABLE>
<CAPTION>
(in Canadian dollars)
<S> <C>
ASSETS
CURRENT ASSETS:
Receivable from stockholders ............................................................ $ 10.00
--------
Total Current Assets .................................................................. 10.00
--------
$ 10.00
========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES .............................................................................. $ --
--------
SHAREHOLDER'S EQUITY: ....................................................................
Common shares, no par value, authorized -- unlimited, issued and outstanding -- 10
shares 10.00
--------
Total Shareholder's Equity ............................................................ 10.00
--------
$ 10.00
========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
(signed) o ___________ (signed) o ___________
Director Director
G-3
<PAGE>
SMITHFIELD CANADA LIMITED
NOTES TO BALANCE SHEET
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business:
Smithfield Canada Limited was incorporated on January 19, 1998 for the
purpose of making offers to purchase the outstanding Common Shares, Class A
shares and outstanding Options to acquire Class A shares of Schneider
Corporation, whose primary activities are conducted in Canada.
Smithfield Canada Limited is a wholly-owned subsidiary of Smithfield
Foods, Inc. and has no material assets or liabilities and no operating history.
Basis of Reporting:
The balance sheet of Smithfield Canada Limited is prepared in accordance
with generally accepted accounting principles in the United States under the
accrual method of accounting.
The presentation of a statement of income, a statement of changes in
shareholder's equity and a statement of cash flows is not included as there was
no activity in the period presented, except for the sale of common shares to
Smithfield Foods, Inc.
G-4
<PAGE>
The Depositary for the Offers is
CIBC Mellon Trust Company
For Delivery by Mail and by Facsimile Transmission:
CIBC Mellon Trust Company
P.O. Box 1036
Adelaide Street Postal Station
Toronto, Ontanio
M5C 2K4
Attention: Special Projects
Telephone: (416) 643-5500
Toll Free: 1-800-387-0825
Fax: (416) 813-4646
For Delivery by Hand or Courier:
CIBC Mellon Trust Company
393 University Avenue
Lower Level
Toronto, Ontario
M5G 2M7
<TABLE>
<S> <C>
Montreal Calgary Vancouver
2001 University Street 600 The Dome Tower Mall Lavel
16th Floor 333 Seventh Avenue S.W. 1177 West Hastings Street
Montreal, PQ 6th Floor Vancouver, BC
H3A 2A6 Calgary, AB V6E 2K3
T2P 2Z1
Winnipeg Halifax Regina
330 St. Mary Avenue 1660 Hollis Street 1080 - 2002 Victoria Avenue
Suite 201 Centennial Building, Main Floor Regina, SK
Winnipeg, MB Halifax, NS S4P 0R7
R3C 3Z5 B3J 1V7
</TABLE>
The Dealer Manager of the Offers is
First Marathon Securities Limited
First Marathon Securities Limited
The Exchange Tower
2 First Canadian Place
Suite 3200, P.O. Box 21
Toronto, Ontario
M5X 1J9
Tel: (416) 869-3707
Fax: (416) o
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Smithfield
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.
Smithfield Canada
Under the OBCA, a corporation may indemnify a director or officer, a
former director or officer or a person who acts or acted at the corporation's
request as a director or officer of a body corporate of which the corporation
is or was a shareholder or creditor, and his or her heirs and legal
representatives (an "Indemnifiable Person"), against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is made a party by
reason of being or having been a director or officer of such corporation or
such body corporate, if: (a) he or she acted honestly and in good faith with a
view to the best interests of such corporation; and (b) in the case of a
criminal or administrative action or proceeding that is enforced by a monetary
penalty, he or she had reasonable grounds for believing that his or her conduct
was lawful. An Indemnifiable Person is entitled to such indemnity from the
corporation if he or she was substantially successful on the merits in his or
her defense of the action or proceeding and fulfilled the conditions set out in
(a) and (b), above. A corporation may, with the approval of a court, also
indemnify an Indemnifiable Person in respect of an action by or on behalf of
the corporation or body corporate to procure a judgement in its favor, to which
such person is made a party by reason of being or having been a director or an
officer of the corporation or body corporate, if he or she fulfills the
conditions set out in (a) and (b), above. The Smithfield Canada By-laws provide
for indemnification of directors and officers to the fullest extent authorized
by the OBCA.
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 the members of
the Schneider family set forth in Schedule B thereto. (a)
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 3.2 Articles of Incorporation of Smithfield Canada. (a)
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 3.4 Bylaws of Smithfield Canada, as amended to date. (a)
Exhibit 3.5 Form of Articles of Amendment to Articles of Incorporation of Smithfield regarding the terms of
Smithfield Special Voting Stock (incorporated by reference to Annex F of the Offer and Circular
forming a part of Smithfield's Registration Statement on Form S-4, Registration No. 333-46495).
Exhibit 3.6 Form of Smithfield Canada Share Terms (incorporated by reference to Annex E of the Offer and
Circular forming a part of Smithfield's Registration Statement on Form S-4, Registration No.
333-46495-01).
Exhibit 4.1 Articles of Incorporation of Smithfield, as amended to date (see Exhibit 3.1 above).
Exhibit 4.2 Articles of Incorporation of Smithfield Canada (see Exhibit 3.2 above).
Exhibit 4.3 Form of Articles of Amendment to Articles of Incorporation of Smithfield regarding the terms of
Smithfield Special Voting Stock (see Exhibit 3.5 above).
Exhibit 4.4 Form of Smithfield Canada Share Terms (see Exhibit 3.6 above).
Exhibit 4.5 Form of Certificate representing Smithfield Common Stock, par value $.50 per share (including
Rights legend)(incorporated by reference to Exhibit 6 to Smithfield's Current Report on Form
8-K filed with the Commission on September 5, 1997).
Exhibit 4.6 Form of Certificate representing Smithfield Canada Common Shares, without par value. (a)
Exhibit 4.7 Form of Certificate representing Smithfield Rights (incorporated by reference to Exhibit 5 to the
Smithfield's Current Report on Form 8-K filed with the Commission on September 5, 1997).
Exhibit 4.8 Form of Certificate representing the Smithfield Voting Share. (b)
Exhibit 4.9 Form of Certificate representing Smithfield Canada Exchangeable Shares. (b)
Exhibit 4.10 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 4.11 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 4.11(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 4.5a 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 4.11(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 4.5b 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>
Exhibit
Number Description
- ----------------- -------------------------------------------------------------------------------------------------
<S> <C>
Exhibit 4.12 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 4.12(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 4.12(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 4.13 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).
Exhibit 4.13(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 4.14 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 4.14(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 4.14(b) Registration Rights 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 4.15 Form of Voting, Support and Exchange Trust Agreement (incorporated by reference to Annex D
of the Offer and Circular forming a part of Smithfield's Registration Statement on Form S-4,
Registration No. 333-46495).
Exhibit 5.1 Opinion of McGuire, Woods, Battle & Boothe LLP. (a)
Exhibit 5.2 Opinion of McCarthy Tetrault. (b)
Exhibit 8.1 Tax Opinion of McGuire, Woods, Battle & Boothe LLP. (b)
Exhibit 8.2 Tax Opinion of McCarthy Tetrault contained in the opinion filed as Exhibit 5.2.
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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------- ------------------------------------------------------------------------------------------------
<S> <C>
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 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 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. (b)
Exhibit 23.2 Consent of Price Waterhouse LLP, independent public accountants. (b)
Exhibit 23.3 Consent of McGuire, Woods, Battle & Boothe LLP contained in the opinion filed as Exhibit 5.1
hereto.
Exhibit 23.4 Consent of McCarthy Tetrault contained in the opinion filed as Exhibit 5.2 hereto.
Exhibit 23.5 Form of consent of Arthur Andersen & Co. (b)(c)
Exhibit 24.1 Powers of Attorney (included in the signature pages of the Registration Statement).
Exhibit 99.1 Form of Share Purchase Agreement. (a)
Exhibit 99.2 Form of Indemnity Agreement. (a)
Exhibit 99.3 Form of Letter of Acceptance and Transmittal. (b)
Exhibit 99.4 Form of Assignment of Options. (a)
Exhibit 99.5 Form of Notice of Guaranteed Delivery. (a)
Exhibit 99.6 Schneider Corporation Directors' Circular, dated November 23, 1997. (a)
</TABLE>
- ---------
(a) Previously filed.
(b) Filed with this Amendment No. 2.
(c) Signed consent to be filed by amendment.
Item 22. Undertakings
Each of the undersigned registrants 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.
II-4
<PAGE>
Smithfield Canada undertakes to file a post-effective amendment to the
registration statement to include any financial statements required by Rule
3-19 of Regulation S-X at the start of any delayed offering or throughout a
continuous offering. Financial statements and information otherwise required by
Section 10(a)(3) of the Securities Act of 1933 need not be furnished, provided
that the registrant includes in the prospectus, by means of a post-effective
amendent, financial statements required pursuant to this paragraph (4) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or
ss.210.3-19 of this chapter if such financial statements and information are
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the Form F-3.
Smithfield hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement 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.
Each of the undersigned registrants hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes 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.
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.
Each of the undersigned registrants 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.
Each of the undersigned registrants 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-5
<PAGE>
SIGNATURES
Smithfield Foods, Inc.
Pursuant to the requirements of the Securities Act of 1933, Smithfield
Foods has duly caused this Amendment No. 2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Norfolk, Commonwealth of
Virginia, on May 15, 1998.
SMITHFIELD FOODS, INC.
By: /s/ AARON D. TRUB
--------------------------------------
Aaron D. Trub, Vice President,
Secretary and Treasurer, and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 has been signed by the following persons in the capacities indicated on
May 15, 1998.
<TABLE>
<CAPTION>
Name Title
- ----------------------------------------- ------------------------------------------
<S> <C>
/s/ JOSEPH W. LUTER, III* Chairman of the Board and Chief
- ---------------------------------------- Executive Officer, and Director
Joseph W. Luter, III (Principal Executive Officer)
/s/ LEWIS R. LITTLE* President and Chief Operating Officer,
- ---------------------------------------- and Director
Lewis R. Little
President and Chief Operating Officer of
- ---------------------------------------- Morrell, and Director
Joseph B. Sebring
/s/ ROGER R. KAPELLA* President and Chief Operating Officer of
- ---------------------------------------- Patrick Cudahy, and Director
Roger R. Kapella
/s/ AARON D. TRUB Vice President, Secretary, Treasurer, and
- ---------------------------------------- Director (Principal Financial Officer)
Aaron D. Trub
/s/ C. LARRY POPE* Vice President and Controller (Principal
- ---------------------------------------- Accounting Officer)
C. Larry Pope
/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.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Name Title
- ------------------------------------------ ---------
<S> <C>
/s/ RICHARD J. HOLLAND* Director
- ----------------------------------------
Richard J. Holland
/s/ H. GORDON MAXWELL, III* Director
- ----------------------------------------
H. Gordon Maxwell, III
/s/ WENDELL H. MURPHY* Director
- ----------------------------------------
Wendell H. Murphy
/s/ WILLIAM H. PRESTAGE* Director
- ----------------------------------------
William H. Prestage
*By: /s/ AARON D. TRUB
- ----------------------------------------
Aaron D. Trub
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
Smithfield Canada Limited
Pursuant to the requirements of the Securities Act of 1933, Smithfield
Canada has duly caused this Amendment No. 2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Norfolk, Commonwealth of
Virginia, on May 15, 1998.
SMITHFIELD CANADA LIMITED
By: /s/ AARON D. TRUB
--------------------------------------
Aaron D. Trub, Vice President,
Secretary and Treasurer, and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 has been signed by the following persons in the capacities indicated on
May 15, 1998.
<TABLE>
<CAPTION>
Name Title
- ------------------------------------------ -----------------------------------------
<S> <C>
/s/ JOSEPH W. LUTER, III* President and Director (Principal
- ---------------------------------------- Executive Officer)
Joseph W. Luter, III
/s/ AARON D. TRUB Vice President, Treasurer, Secretary and
- ---------------------------------------- Director (Principal Financial Officer,
Aaron D. Trub Principal Accounting Officer and
Smithfield Canada's Authorized
Representative in the United States)
/s/ RENE R. SORELL* Director
- ----------------------------------------
Rene R. Sorell
/s/ GRAHAM P.C. GOW* Director
- ----------------------------------------
Graham P.C. Gow
/s/ ROBERT J. RICHARDSON* Director
- ----------------------------------------
Robert J. Richardson
*By: /s/ AARON D. TRUB
- ----------------------------------------
Aaron D. Trub
Attorney-in-Fact
</TABLE>
II-8
<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 the members of
the Schneider family set forth in Schedule B thereto. (a)
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 3.2 Articles of Incorporation of Smithfield Canada. (a)
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 3.4 Bylaws of Smithfield Canada, as amended to date. (a)
Exhibit 3.5 Form of Articles of Amendment to Articles of Incorporation of Smithfield regarding the terms of
Smithfield Special Voting Stock (incorporated by reference to Annex F of the Offer and Circular
forming a part of Smithfield's Registration Statement on Form S-4, Registration No. 333-46495).
Exhibit 3.6 Form of Smithfield Canada Share Terms (incorporated by reference to Annex E of the Offer and
Circular forming a part of Smithfield's Registration Statement on Form S-4, Registration No.
333-46495-01).
Exhibit 4.1 Articles of Incorporation of Smithfield, as amended to date (see Exhibit 3.1 above).
Exhibit 4.2 Articles of Incorporation of Smithfield Canada (see Exhibit 3.2 above).
Exhibit 4.3 Form of Articles of Amendment to Articles of Incorporation of Smithfield regarding the terms of
Smithfield Special Voting Stock (see Exhibit 3.5 above).
Exhibit 4.4 Form of Smithfield Canada Terms (see Exhibit 3.6 above).
Exhibit 4.5 Form of Certificate representing Smithfield Common Stock, par value $.50 per share (including
Rights legend)(incorporated by reference to Exhibit 6 to Smithfield's Current Report on Form
8-K filed with the Commission on September 5, 1997).
Exhibit 4.6 Form of Certificate representing Smithfield Canada Common Shares, without par value. (a)
Exhibit 4.7 Form of Certificate representing Smithfield Rights (incorporated by reference to Exhibit 5 to the
Smithfield's Current Report on Form 8-K filed with the Commission on September 5, 1997).
Exhibit 4.8 Form of Certificate representing the Smithfield Voting Share. (b)
Exhibit 4.9 Form of Certificate representing Smithfield Canada Exchangeable Shares. (b)
Exhibit 4.10 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 4.11 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 4.11(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 4.5a 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 4.11(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 4.5b 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>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------------- -------------------------------------------------------------------------------------------------
<S> <C>
Exhibit 4.12 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 4.12(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 4.12(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 4.13 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).
Exhibit 4.13(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 4.14 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 4.14(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 4.14(b) Registration Rights 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 4.15 Form of Voting, Support and Exchange Trust Agreement (incorporated by reference to Annex D
of the Offer and Circular forming a part of Smithfield's Registration Statement on Form S-4,
Registration No. 333-46495).
Exhibit 5.1 Opinion of McGuire, Woods, Battle & Boothe LLP. (a)
Exhibit 5.2 Opinion of McCarthy Tetrault. (b)
Exhibit 8.1 Tax Opinion of McGuire, Woods, Battle & Boothe LLP. (b)
Exhibit 8.2 Tax Opinion of McCarthy Tetrault contained in the opinion filed as Exhibit 5.2.
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------- ------------------------------------------------------------------------------------------------
<S> <C>
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 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 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. (b)
Exhibit 23.2 Consent of Price Waterhouse LLP, independent public accountants. (b)
Exhibit 23.3 Consent of McGuire, Woods, Battle & Boothe LLP contained in the opinion filed as Exhibit 5.1
hereto.
Exhibit 23.4 Consent of McCarthy Tetrault contained in the opinion filed as Exhibit 5.2 hereto.
Exhibit 23.5 Form of consent of Arthur Andersen & Co. (b)(c)
Exhibit 24.1 Powers of Attorney (included in the signature pages of the Registration Statement).
Exhibit 99.1 Form of Share Purchase Agreement. (a)
Exhibit 99.2 Form of Indemnity Agreement. (a)
Exhibit 99.3 Form of Letter of Acceptance and Transmittal. (b)
Exhibit 99.4 Form of Assignment of Options. (a)
Exhibit 99.5 Form of Notice of Guaranteed Delivery. (a)
Exhibit 99.6 Schneider Corporation Directors' Circular, dated November 23, 1997. (a)
</TABLE>
- ---------
(a) Previously filed.
(b) Filed with this Amendment No. 2.
(c) Signed consent to be filed by amendment.
Exhibit 4.8
[FORM OF CERTIFICATE REPRESENTING SMITHFIELD SPECIAL VOTING SHARE]
FRONT OF CERTIFICATE
CERTIFICATE NO. 1 1 SHARE
SMITHFIELD FOODS, INC.
a corporation organized under the
Laws of the Commonwealth of Virginia
(the "Corporation")
THIS CERTIFIES THAT _________________________, is the registered holder of One
(1) fully paid and non-assessable Series B Special Voting Preferred Share of
Smithfield Foods, Inc. transferrable only on the books of the Corporation by the
holder hereof in person or by Attorney upon surrender of this Certificate
properly endorsed. This Certificate and the share represented hereby are issued
and shall be held subject to all of the provisions of the Articles of
Incorporation, as amended, of the Corporation (including without limitation all
of the provisions of the Articles of Amendment for the Series B Special Voting
Preferred Share), and to the Voting, Support and Exchange Trust Agreement among
the Corporation, Smithfield Canada Limited and CIBC Mellon Trust Company, dated
as of o, 1998 (as the same may be amended from time to time, the "Trust
Agreement"), to all of which the holder hereof by the acceptance of this
Certificate assents.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ____ day of ___________ A.D. 199__.
- ------------------------------------ -----------------------------------
Aaron D. Trub Lewis R. Little
Secretary and President and
Treasurer Chief Operating Officer
<PAGE>
BACK OF CERTIFICATE
SMITHFIELD FOODS, INC.
The Corporation will furnish to any shareholder upon request in writing and
without charge a full statement of the powers, designations, preferences and
relative participating, optional, or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights between the shares of each such class or series so far
as the same have been fixed and determined, and of the authority of the Board of
Directors to fix and determine the relative rights, preferences and limitations
of subsequent series (including without limitation a copy of the Trust
Agreement).
TRANSFER LIMITATIONS
The share represented by this certificate is subject to the limitations on
transfer imposed by the Trust Agreement, to which reference is hereby made.
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto
- ------------------------------------------------------------------------------
(Please print or type name and address of assignee)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
one share of the capital stock represented by the within Certificate, and does
hereby irrevocably constitute and appoint Smithfield Foods, Inc. Attorney to
transfer the said shares on the books of the within-named Corporation with full
power of substitution in the premises.
<TABLE>
<S> <C>
Dated _________________ Signature ________________________________________
NOTE: The above signature must correspond
exactly with the name on the face of
this Certificate in every particular.
</TABLE>
EXHIBIT 4.9
NUMBER - NUMERO SHARES -ACTIONS
E
SMITHFIELD CANADA LIMITED CUSIP 831917 109
INCORPORATED UNDER THE LAW OF THE PROVINCE OF ONTARIO
CONSTITUEE EN VERTU DE LA LOI DE LA PROVINCE DE L'ONTARIO
This certifies that
Ceci atteste que
SPECIMEN
is the registered holder of
est le detenteur inscrit de
<PAGE>
FULLY PAID AND NON-ASSESSABLE EXCHANGEABLE SHARES OF SMITHFIELD CANADA LIMITED
There are rights, privileges, restrictions or conditions attached to the said
shares and a copy of the full text thereof and of the rights, privileges,
restrictions or conditions attached to each other class and series of shares
authorized to be issued by the Corporation, including the authority of the board
to fix the rights, privileges, restrictions or conditions of subsequent series,
are obtainable on demand and without charge from the Corporation. This
certificate is not valid until countersigned by a Transfer Agent and Registrar
of the Corporation.
In Witness Whereof the Corporation has caused this certificate to be
signed by its duly authorized officers.
Dated .
Date le:
ACTIONS
ECHANGEABLES
ENTIEREMENT
LIBEREES DE
SMITHFIELD CANADA
LIMITED
Il y a des droits, privileges, restrictions ou conditions attaches aux dites
actions. On peut obtenir, sans frais et sur demande adresse a la Societe, une
copie du texte integral de ceux-ci et des droits, privileges, restrictions ou
conditions attaches a toutes les autres categories et series d'actions que la
Societe est autorisee a emettre, y compris le droit du conseil d'administration
de fixer les droits, privileges, restrictions ou conditions de series
ulterieures. Le present certificat n'est valide que s'il est contresigne par un
agent de transfert et d'enregistrement des actions de la Societe.
En Foi De Quoi, la Societe a fait signer le present certificat par ses
officiers dument autorises.
COUNTERSIGNED AND
REGISTERED -
CONTRESIGNE ET
ENREGISTRE
CIBC MELLON TRUST
COMPANY
COMPAGNIE CIBC
MELLON TRUST
TRANSFER AGENT AND
REGISTRAR - AGENT DE
TRANSFERT ET
D'ENREGISTREMENT
BY
PAR
AUTHORIZED
SIGNATURE - SIGNATURE
AUTORISE
THE SHARES
REPRESENTED BY THIS
CERTIFICATE ARE
INTERCHANGEABLY
TRANSFERABLE AT THE
PRINCIPAL OFFICES OF
CIBC MELLON TRUST
COMPANY IN TORONTO,
CANADA.
LES ACTIONS
REPRESENTEES PAR LE
PRESENT CERTIFICAT
SONT
INTERCHANGEABLES ET
TRANSFERABLES DANS
LES BUREAUX
PRINCIPAUX DE LA
COMPAGNIE CIBC
MELLON TRUST SITUES A
TORONTO, AU CANADA
PRESIDENT AND CHIEF
CORPORATE SECRETARY
EXECUTIVE OFFICER
SECRETAIRE
GENERAL
PRESIDENT ET CHEF
DE L'ADMINISTRATION
<PAGE>
- 1 -
Under the rights, privileges, restrictions or conditions attached to
the shares represented by this certificate pursuant to the articles of the
Corporation (the "Share Provisions"), the shares are subject to certain
overriding purchase rights of Smithfield Foods, Inc. ("Smithfield Foods") and
its subsidiary, Smithfield Sub Limited ("Smithfield Sub") upon the proposed
liquidation, dissolution or winding up of the Corporation and upon the proposed
retraction by the holder or redemption by the Corporation of the shares
represented hereby. Unless otherwise provided herein, all capitalized words used
in this certificate which are defined in the Share Provisions have the meanings
ascribed to such words in the Share Provisions.
The holder hereof also has certain rights and is entitled to certain
benefits pursuant to the Voting, Support and Exchange Trust Agreement dated as
of o , 1998 (the "Trust Agreement") between Smithfield Foods, the Corporation
and CIBC Mellon Trust Company (the "Trustee"), including the right to instruct
the Trustee with respect to the exercise of (i) voting rights in respect of a
share of special voting stock of Smithfield Foods and (ii) the right to exchange
the shares represented hereby for shares of Smithfield Common Stock, pursuant to
the terms and conditions of the Trust Agreement.
The terms of the Share Provisions and Trust Agreement are incorporated
herein by reference and a copy thereof will be mailed to any holder without
charge after receipt by the Corporation of a written request therefor.
SHARE TRANSFER POWER
Please insert social insurance number of
transferee, if applicable _____________
For value received, the undersigned hereby sells, assigns and transfers unto
_______________________________________________________________________________
(Please print or typewrite name and address of transferee)
shares represented by this certificate
- --------------- ---------------------------------- ------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
NOTICE OF RETRACTION
To Smithfield Canada Limited, Smithfield Foods, Inc. and Smithfield Sub Limited,
c/o CIBC Mellon Trust Company
This notice is given pursuant to Article 6 of the provisions (the
"Share Provisions") attaching to the share(s) represented by this certificate
and all capitalized words and expressions used in this notice that are defined
in the Share Provisions have the meanings ascribed to such words and expressions
in such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the
Retraction Call Right referred to below, the undersigned desires to have the
Corporation redeem on the Retraction Date (being the fifth Business Day after
the date upon which this notice is received by the Corporation) in accordance
with Article 6 of the Share Provisions:
|_| all share(s) represented by this certificate; or
|_| _________________ shares(s) only.
<PAGE>
- 2 -
The undersigned acknowledges the Retraction Call Right of Smithfield
and Smithfield Sub to purchase all but not less than all the Retracted Shares
from the undersigned and that this notice shall be deemed to be a revocable
offer by the undersigned to sell the Retracted Shares to Smithfield or
Smithfield Sub, as the case may be, in accordance with the Retraction Call Right
on the Retraction Date for the Retraction Call Purchase Price and on the other
terms and conditions set out in Section 6.2 of the Share Provisions. If neither
Smithfield nor Smithfield Sub determines to exercise its Retraction Call Right,
the Corporation will notify the undersigned of such fact as soon as possible.
This notice of retraction, and offer to sell the Retracted Shares to Smithfield
or Smithfield Sub, may be revoked and withdrawn by the undersigned by notice in
writing given to the Corporation at any time before the close of business on the
Business Day immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of solvency
requirements or other provisions of applicable law, the Corporation is unable to
redeem all Retracted Shares because of an Insolvency Event (as defined in the
Trust Agreement) shall, to the extent it shall not theretofore have occurred, be
deemed thereupon to have occurred, and the undersigned will be deemed to have
exercised the Exchange Right (as defined in the Trust Agreement) so as to
require Smithfield or, at the option of Smithfield, Smithfield Sub to purchase
the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to the Corporation,
Smithfield and Smithfield Sub that the undersigned has good title to, and owns,
the share(s) represented by this certificate to be acquired by the Corporation,
Smithfield or Smithfield Sub, as the case may be, free and clear of all liens,
claims, encumbrances, security interests and adverse claims.
__________ _________________________ ______________________
(Date) (Signature of Shareholder) (Guarantee of Signature)
Please check box if the securities and any cheque(s) resulting from the
retraction or purchase of the Retracted Shares are to be held for pick-up by the
shareholder at the principal transfer office of the Transfer Agent in Toronto,
failing which the securities and any cheque will be mailed to the last address
of the shareholder as it appears on the register.
NOTE:This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent and the Corporation may require,
must be deposited with the Transfer Agent at its principal transfer office
in Toronto. The securities and any cheque resulting from the retraction or
purchase of the Retracted Shares will be issued and registered in, and made
payable to, respectively, the name of the shareholder as it appears on the
register of the Corporation and the securities and cheque resulting from
such retraction or purchase will be delivered to such shareholder as
indicated above, unless the form appearing immediately below is duly
completed, all exigible transfer taxes are paid and the signature of the
registered holder is guaranteed by a Canadian chartered bank or trust
company, member of a recognized stock exchange in Canada or a member of the
Securities Transfer Association Medallion (STAMP) Program.
Date ____________________________________
<PAGE>
- 3 -
Name of Person in Whose Name Securities and
Cheque Are To Be Registered, Issued or
Delivered (please print)
___________________________________ ______________________________
Street Address or P.O. Box Signature of Registered Holder
___________________________ _______________________
City - Province Signature Guaranteed by
NOTE: If the notice of retraction is for less than all of the
share(s) represented by this certificate, a certificate
representing the remaining shares of the Corporation will be
issued and registered in the name of the shareholder as it
appears on the register of the Corporation, unless the Share
Transfer Power on the share certificate is duly completed in
respect of such shares.
U.S. Residents/Citizens must provide their Taxpayee
Indentification Number here ________________________
NOTICE OF EXERCISE OF OPTIONAL EXCHANGE RIGHT
UPON SMITHFIELD CANADA INSOLVENCY EVENT
To the Corporation, the Trustee and Smithfield Foods
In accordance with, and subject to, the Trust Agreement, the
undersigned hereby instructs the Trustee to exercise the Exchange Right (as
defined in the Trust Agreement) upon the occurrence and during continuance of an
Insolvency Event (as defined in the Trust Agreement) as to require Smithfield
Foods to purchase or cause Smithfield Sub to purchase from the undersigned:
|_| all shares represented by this certificate; or
|_| _____________________ shares only.
The undersigned hereby represents and warrants to the Corporation and
Smithfield Foods that the undersigned has full power and authority to give this
notice and that Smithfield Foods will acquire good title to the shares
represented by this certificate to be acquired, free and clear of all liens,
claims and encumbrances.
______________________
(Date) (Signature of Shareholder) (Guarantee of Signature)
|_| Please check box if the securities and any cheque resulting
from the exercise of the Exchange Right are to be held for
pick-up by the shareholder at the principal transfer office of
the Transfer Agent in Toronto, failing which the securities
and any cheque will be mailed to the last address of the
shareholder as it appears on the register.
NOTE:This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent and the Corporation may require,
must be deposited with the Transfer Agent at its principal transfer office
in Toronto. The securities and any cheque resulting from the exercise of
the Exchange Right will be issued and registered in, and made payable to,
respectively, the name of the shareholder as it appears on the register of
the Corporation and the securities and cheque resulting from such exchange
will be delivered to such shareholder as indicated above, unless the form
<PAGE>
- 4 -
appearing immediately below is duly completed and all exigible transfer
taxes are paid.
Name of Person in Whose Name Securities and Cheque Are To Be Registered, Issued
or Delivered (please print)
- -------------------------------------------------------------------------------
Street Address or P.O. Box
- -------------------------------------------------------------------------------
City - Province
- -------------------------------------------------------------------------------
Date: _________________________________
Signature of Shareholder ______________
Signature Guaranteed by _______________
NOTE: If the election to exchange is for less than all of the shares
represented by this certificate, a certificate representing
the remaining shares will be issued and registered in the name
of the shareholder as it appears on the register of the
Corporation, unless the Share Transfer Power hereon is duly
completed in respect of such shares.
<PAGE>
NOTICE OF RETRACTION
To Smithfield Canada Limited, Smithfield Foods, Inc. and Smithfield Sub
Limited c/o CIBC Mellon Trust Company
This notice is given pursuant to Article 6 of the provisions (the "Share
Provisions") attaching to the share(s) represented by this certificate and all
capitalized words and expressions used in this notice that are defined in the
Share Provisions have the meanings ascribed to such words and expressions in
such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the
Retraction Call Right referred to below, the undersigned desires to have the
Corporation redeem on the Retraction Date (being the fifth Business Day after
the date upon which this notice is received by the Corporation) in accordance
with Article 6 of the Share Provisions:
[ ] all shares represented by this certificate; or
[ ] shares only.
The undersigned acknowledges the Retraction Call Right of Smithfield and
Smithfield Sub to purchase all but not less than all the Retracted Shares from
the undersigned and that this notice shall be deemed to be a revocable offer by
the undersigned to sell the Retracted Shares to Smithfield or Smithfield Sub, as
the case may be, in accordance with the Retraction Call Right on the Retraction
Date for the Retraction Call Purchase Price and on the other terms and
conditions set out in Section 6.2 of the Share Provisions. If neither Smithfield
nor Smithfield Sub determines to exercise its Retraction Call Right, the
Corporation will notify the undersigned of such fact as soon as possible. This
notice of retraction, and offer to sell the Retracted Shares to Smithfield or
Smithfield Sub, may be revoked and withdrawn by the undersigned by notice in
writing given to the Corporation at any time before the close of business on the
Business Day immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of solvency
requirements or other provisions of applicable law, the Corporation is unable to
redeem all Retracted Shares because of an Insolvency Event (as defined in the
Trust Agreement) shall, to the extent it shall not theretofore have occurred, be
deemed thereupon to have occurred, and the undersigned will be deemed to have
exercised the Exchange Right (as defined in the Trust Agreement) so as to
require Smithfield or, at the option of Smithfield, Smithfield Sub to purchase
the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to the Corporation,
Smithfield and Smithfield Sub that the undersigned has good title to, and owns,
the share(s) represented by this certificate to be acquired by the Corporation,
Smithfield or Smithfield Sub, as the case may be, free and clear of all liens,
claims, encumbrances, security interests and adverse claims.
- --------------------- ------------------------------ -------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
[ ] Please check box if the securities and any cheque(s) resulting from the
retraction or purchase of the Retracted Shares are to be held for pick-up by
the shareholder at the principal transfer office of the Transfer Agent in
Toronto, failing which the securities and any cheque will be mailed to the
last address of the shareholder as it appears on the register.
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent and the Corporation may
require, must be deposited with the Transfer Agent at its principal
transfer office in Toronto. The securities and any cheque resulting from
the retraction or purchase of the Retracted Shares will be issued and
registered in, and made payable to, respectively, the name of the
shareholder as it appears on the register of the Corporation and the
securities and cheque resulting from such retraction or purchase will be
delivered to such shareholder as indicated above, unless the form
appearing immediately below is duly completed, all exigible transfer taxes
are paid and the signature of the registered holder is guaranteed by a
Canadian chartered bank or trust company, member of a recognized stock
exchange in Canada or a member of the Securities Transfer Association
Medallion (STAMP) Program.
Name of Person in Whose Name Securities and Cheque Are To Be Registered,
Issued or Delivered (please print) Date
- ----------------------------------------------------------------------------
Street Address or P.O. Box Signature of Shareholder
- ----------------------------------------------------------------------------
City - Province Signature Guaranteed by
- ----------------------------------------------------------------------------
NOTE: If the notice of retraction is for less than all of the shares represented
by this certificate, a certificate representing the remaining shares of
the Corporation will be issued and registered in the name of the
shareholder as it appears on the register of the Corporation, unless the
Share Transfer Power on the share certificate is duly completed in respect
of such shares.
U.S. Residents/Citizens must provide their Taxpayer Identification Number here:
- -------------------------------------------------------------------------------
<PAGE>
NOTICE OF EXERCISE OF OPTIONAL EXCHANGE RIGHT UPON SMITHFIELD CANADA INSOLVENCY
EVENT
To the Corporation, the Trustee and Smithfield Foods
In accordance with, and subject to, the Trust Agreement, the undersigned
hereby instructs the Trustee to exercise the Exchange Right (as defined in the
Trust Agreement) upon the occurrence and during continuance of an Insolvency
Event (as defined in the Trust Agreement) so as to require Smithfield Foods to
purchase or cause Smithfield Sub to purchase from the undersigned:
[ ] all shares represented by this certificate; or
[ ] shares only.
The undersigned hereby represents and warrants to the Corporation and
Smithfield Foods that the undersigned has full power and authority to give this
notice and that Smithfield Foods or Smithfield Sub, as the case may be, will
acquire good title to the shares represented by this certificate to be acquired,
free and clear of all liens, claims and encumbrances.
<TABLE>
<S> <C>
- --------------------------------------- --------------------------------- ----------------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
</TABLE>
[ ] Please check box if the securities and any cheque resulting from the
exercise of the Exchange Right are to be held for pick-up by the shareholder
at the principal transfer office of the Transfer Agent in Toronto, failing
which the securities and any cheque will be mailed to the last address of
the shareholder as it appears on the register.
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent and the Corporation may
require, must be deposited with the Transfer Agent at its principal
transfer office in Toronto. The securities and any cheque resulting from
the exercise of the Exchange Right will be issued and registered in, and
made payable to, respectively, the name of the shareholder as it appears
on the register of the Corporation and the securities and any cheque
resulting from such exchange will be delivered to such shareholder as
indicated above, unless the form appearing immediately below is duly
completed and all exigible transfer taxes are paid.
Name of Person in Whose Name Securities and Cheque Are To Be Registered,
Issued or Delivered (please print) Date
- -------------------------------------------------------------------------------
Street Address or P.O. Box Signature of Shareholder
- -------------------------------------------------------------------------------
City - Province Signature Guaranteed by
NOTE: If the election to exchange is for less than all of the shares represented
by this certificate, a certificate representing the remaining shares will
be issued and registered in the name of the shareholder as it appears on
the register of the Corporation, unless the Share Transfer Power hereon is
duly completed in respect of such shares.
<PAGE>
This certifies that
Ceci atteste que
is the registered holder of
est le detenteur inscrit de
FULLY PAID AND NON-ASSESSABLE EXCHANGEABLE SHARES OF
There are rights, privileges, restrictions or conditions attached to the
said shares and a copy of the full text thereof and of the rights, privileges,
restrictions or conditions attached to each other class and series of shares
authorized to be issued by the Corporation, including the authority of the board
to fix the rights, privileges, restrictions or conditions of subsequent series,
are obtainable on demand and without charge from the Corporation. This
certificate is not valid until countersigned by a Transfer Agent and Registrar
of the Corporation.
In Witness Whereof the Corporation has caused this certificate to be
signed by its duly authorized officers.
Dated - Date le:
Il y a des droits, privileges, restrictions ou conditions attaches aux
dites actions. On peut obtenir, sans frais et sur demande adresse a la Societe,
une copie du texte integral de ceux-ci et des droits, privileges, restrictions
ou conditions attaches a toutes les autres categories et series d actions que la
Societe est autorisee a emettre, y compris le droit du conseil d'administration
de fixer les droits, privileges, restrictions ou conditions de series
ulterieures. Le present certificat n'est valide que s'il est contresigne par un
agent de transfert et d'enregistrement des actions de la Societe.
En Foi De Quoi, la Societe a fait signer le present certificat par ses
officiers diment autorises.
[LETTERHEAD OF McCARTHY TETRAULT]
May 13, 1998
Smithfield Foods, Inc. and
Smithfield Canada Limited
200 Commerce Court Street
Smithfield, VA 23430
Dear Sirs and Mesdames:
We have acted as your Canadian counsel in connection with the Offers by
Smithfield Canada to acquire any and all of the outstanding Common Shares, Class
A Shares and Options of Schneider. The Offers will be made pursuant to a
securities exchange takeover bid circular (the "Offer and Circular") forming
part of a Registration Statement on Form S-4, as amended, to be filed with the
SEC in accordance with the U.S. Securities Act. In this letter, capitalized
undefined terms have the same meanings as in the Offer and Circular.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such public and corporate records, certificates,
instruments and other documents and have considered such questions of law as we
have deemed relevant and necessary as a basis for the opinions expressed in this
letter.
The opinions expressed below are limited to the laws of the Provinces
of Ontario and Quebec and the federal laws of Canada applicable therein.
Based upon the foregoing, we are of the opinion that:
1. Except for the filing of articles of amendment under the OBCA, all
necessary corporate action has been taken by Smithfield Canada to
authorize the creation, issue and sale by Smithfield Canada of the
Exchangeable Shares pursuant to the Offers.
2. Assuming the prior filing of articles of amendement to create the
Exchangeable Shares, upon Smithfield Canada taking up and paying for
any Common Shares, Class A Shares and Options tendered under the
Offers, the Exchangeable Shares issuable as consideration therefor will
be validly issued as fully paid and non-assessable shares of Smithfield
Canada.
<PAGE>
- 2 -
May 13, 1998
We also confirm that the statements set out in the Offer and Circular
under the headings "Canadian Federal Income Tax Considerations" and "Eligibility
for Investment in Canada", insofar as they refer to statements of Canadian law
or legal conclusions relating thereto, constitute our opinion as to the matters
discussed therein. In addition, we consent to being named in the Registration
Statement, to the inclusion of our opinions in the Registration Statement and to
the filing of this letter as an exhibit to the Registration Statement.
In giving this consent, we do not admit that we are in the category of
persons whose consent is required under section 7 of the U.S. Securities Act.
Yours very truly,
/s/"McCarthy Tetrault"
Exhibit 8.1
[TAX OPINION OF McGUIRE, WOODS, BATTLE & BOOTHE LLP]
[McGuire, Woods, Battle & Boothe LLP Letterhead]
April 30, 1998
Smithfield Foods, Inc.
200 Commerce Street
Smithfield, Virginia 23430
Smithfield Canada Limited
200 Commerce Street
Smithfield, Virginia 23430
Ladies and Gentlemen:
We have acted as your United States tax counsel in connection with the
Registration Statement on Form S-4, as amended (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act") relating to the offer and sale by
Smithfield Foods, Inc., a Virginia corporation ("Smithfield Foods") of up to
4,001,479 shares of its Common Stock, $.50 par value per share (the "Shares"),
Rights to Purchase Series A Junior Participating Preferred Stock, par value
$1.00 per share (the "Rights"), to be attached in equal number to the Shares as
described in the Registration Statement, and one Series B Special Voting
Preferred Share, par value $1.00 (the "Series B Preferred Share"). The
Registration Statement also relates to the offer and sale by Smithfield Canada
Limited, an Ontario corporation ("Smithfield Canada"), of up to 4,001,479 shares
of its Exchangeable Shares, without par value, as described in the Registration
Statement.
The statements set forth in the Offer and Circular under the caption
"United States Federal Income Tax Considerations", insofar as they are or refer
to statements of United States law or legal conclusions relating thereto,
constitute our opinion as to the matters discussed.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the statement made in reference to our firm under
the caption "United States Federal Income Tax Considerations" therein. We do not
admit by giving this consent that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ McGuire, Woods, Battle & Boothe LLP
Exhibit 23.1
[ARTHUR ANDERSEN LLP LETTERHEAD]
Consent of Independent Public Accountants
Dear Sirs:
As independent public accountants, we hereby consent to the use of our report in
and incorporation by reference in this registration statement of our report
dated June 6, 1997 to the stockholders on the consolidated balance sheets of
Smithfield Foods, Inc. 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 and to all references to
our Firm included in this registration statement.
We also consent to the inclusion in this registration statement of our report
dated February 17, 1998, to the stockholders on the balance sheet of Smithfield
Canada Limited.
Richmond, Virginia /s/ Arthur Andersen LLP
May 8, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 2 to
the Registration Statement of Smithfield Foods, Inc. and Smithfield Canada
Limited (Registration Nos. 333-46495 and 333-46495-01) on Form S-4 of our report
dated January 6, 1997 on 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, which appears in the Current Report on Form 8-K of
Smithfield Foods, Inc., 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
May 8, 1998
Exhibit 23.5
FORM OF
CONSENT OF ARTHUR ANDERSEN & CO.
We refer to the Registration Statement filed on Form S-4 (the "Registration
Statement") which includes the Offers to Purchase dated o, 1998 by Smithfield
Canada Limited to the holders of Common Shares, Class A Shares and Options of
Schneider Corporation.
We consent to the use in this Registration Statement of our compilation report
dated o, 1998 to the Directors of Smithfield Foods, Inc. and Smithfield Canada
Limited on the following financial statements:
o Pro forma consolidated condensed balance sheets as at February 1, 1998 which
have been prepared assuming both the pooling of interests methods of
accounting and the purchase method of accounting;
o Pro forma consolidated condensed statements of income for the forty weeks
ended February 1, 1998 and the fiscal years ended April 27, 1997, April 28,
1996 and April 30, 1995 which have been prepared assuming the pooling
method of accounting.
o Pro forma consolidated statements of income for the forty weeks ended
February 1, 1998 and the fiscal year ended April 27, 1997 which have been
prepared assuming the purchase method of accounting.
We report that we have read the Registration Statement referred to above and
have no reason to believe that there are any misrepresentations in the
information contained therein that is derived from the financial statements
upon which we have reported or that is within our knowledge as a result of our
audit of such financial statements.
This letter is provided to the securities regulatory authorities to which
it is addressed pursuant to the requirements of their securities regulations
and not for any other purpose.
Toronto, Ontario
o,1998
EXHIBIT 99.3
LETTER OF ACCEPTANCE AND TRANSMITTAL
to accompany certificates for
Class A non-voting shares or common shares
of
SCHNEIDER CORPORATION
to be deposited pursuant to the Offers to Purchase and
Offering Circular dated o, 1998 of
SMITHFIELD CANADA LIMITED
a wholly-owned subsidiary of
SMITHFIELD FOODS, INC.
EACH OF THE OFFERS WILL BE OPEN FOR ACCEPTANCE UNTIL 5:00 P.M. (LOCAL TIME AT
THE PLACE OF DEPOSIT) ON o, 1998 (the "Expiry Time") UNLESS EXTENDED OR
WITHDRAWN.
This Letter of Acceptance and Transmittal (this "Letter") is to be
completed by holders of Class A non-voting shares ("Class A Shares") or common
shares ("Common Shares" and, together with the Class A Shares, the "Schneider
Shares") of Schneider Corporation ("Schneider") who wish to deposit their
Schneider Shares under the offer to purchase Class A Shares (the "Class A
Offer") or the offer to purchase Common Shares (the "Common Share Offer" and,
together with the Class A Offer, the "Offers"), respectively, set out in the
Offers to Purchase and the accompanying Offering Circular (collectively,
together with the annexes to the Offering Circular, the "Offers and Circular")
of Smithfield Canada Limited ("Smithfield Canada") dated o, 1998.
To accept the Class A Offer or the Common Share Offer, certificate(s)
representing Schneider Shares to be deposited, together with a properly
completed and duly executed copy of this Letter (or a manually signed facsimile
thereof), and all other documents required by this Letter, must be received by
CIBC Mellon Trust Company (the "Depositary") at or before the Expiry Time at
its principal office in Toronto indicated below.
If a holder wishes to accept the relevant Offer and certificates
representing beneficial ownership of such holder's Schneider Shares are not
immediately available or time will not permit the certificates and all required
documents to reach the Depositary at or before the Expiry Time, such Schneider
Shares may nevertheless be deposited under the relevant Offer by compliance
with the guaranteed delivery procedure set forth in Section 6 of the Offers to
Purchase.
A holder of outstanding options issued by Schneider entitling the holders
thereof to acquire Class A Shares (the "Options") who wishes to accept the
Class A Offer must assign his or her Options by completing, signing and
delivering to the Depositary the Assignment of Options form which accompanies
the Offers to Purchase, according to the instructions set out in Section 3 of
the Offers to Purchase and in the Assignment of Options form.
The terms, conditions and definitions used in the Offers and Circular are
hereby incorporated into and form an integral part of this Letter.
Please read carefully the transmittal instructions set out below before
completing this Letter. The Depositary or your broker or other financial
advisor will assist you in completing this Letter.
1
<PAGE>
TO: Smithfield Canada Limited
AND TO: Schneider Corporation
AND TO: CIBC Mellon Trust Company
The undersigned:
(1) acknowledges receipt of the Offers and Circular dated o , 1998;
(2) subject only to the rights of withdrawal under the relevant Offer, unless
otherwise agreed, irrevocably accepts the Class A Offer or the Common
Share Offer, as the case may be, on and subject to its terms and
conditions, and deposits, sells, assigns and transfers to Smithfield
Canada all right, title and interest in and to the Schneider Shares
described below (the "Purchased Shares") and in and to any and all
dividends (other than the dividend declared on February 11, 1998 payable
on April 15, 1998 to holders of record on March 24, 1998), distributions,
payments, securities, rights, assets or other interests accrued, declared,
paid, issued, transferred, made or distributed on or in respect of the
Purchased Shares on and after the date of the relevant Offer
(collectively, "Other Securities"), effective from and after the date
Smithfield Canada takes up and pays for the Purchased Shares (the
"Effective Date"):
DESCRIPTION OF SCHNEIDER SHARES DEPOSITED
(Must be completed. If space is insufficient, please attach a signed list in
the form below.)
<TABLE>
<CAPTION>
Class and
Total Number of Number of
Name(s) and Address(es) Certificate Shares Evidenced Shares
of Registered Holder(s) No(s). by Certificate(s) Deposited*
<S> <C>
</TABLE>
* Unless otherwise indicated, the Depositary will assume that all
Schneider Shares evidenced by any certificate(s) submitted to the
Depositary are being deposited under the Offers. See Instruction 6.
(3) agrees and acknowledges that if, on or after the date of the Offers and
before Smithfield Canada takes up and pays for the Purchased Shares,
Schneider should declare or pay any cash or stock dividend (other than
normal quarterly dividends not exceeding $0.09 per Schneider Share) or
declare, make or pay any other payments or distributions on, or declare,
allot, reserve or issue any securities, rights, assets or other interests
with respect to, the Schneider Shares, payable or distributable to holders
of record on a date prior to the transfer into the name of Smithfield
Canada or its nominee or transferee on Schneider's securities transfer
records of Schneider Shares taken up pursuant to the Offers, the
undersigned will receive and hold such dividend, distribution or rights
for the account of Smithfield Canada and
(a) in the case of cash dividends, distributions or payments, the amount of
such cash dividends, distributions and payments shall be received by and
held by the undersigned for the account of Smithfield Canada until
Smithfield Canada pays for such Schneider Shares and the purchase price
per Share payable pursuant to the Offers will be reduced by the amount of
any such cash dividends, distributions or payments retained by the
undersigned; and
(b) in the case of non-cash dividends, distributions, payments, securities,
rights, assets or other interests, the whole of any such non-cash
dividends, distributions, payments, securities, rights, assets or other
interests shall be received and held by the undersigned for the account
of Smithfield Canada and must promptly be remitted and transferred by the
undersigned to the Depositary for the account of Smithfield Canada
accompanied by appropriate documentation of transfer and pending such
remittance, Smithfield Canada shall be entitled to all rights and
privileges as owner of any such non-cash dividends, distributions,
payments, securities, rights, assets or other interests and may withhold
the entire purchase price payable by Smithfield Canada to the undersigned
pursuant to the Offers or deduct from the purchase price payable by
Smithfield Canada pursuant to the Offers, the amount or value thereof as
determined by Smithfield Canada in its sole discretion;
2
<PAGE>
(4) represents and warrants that (a) the undersigned owns the Purchased Shares
and any Other Securities being deposited within the meaning of applicable
securities laws; (b) the undersigned has full power and authority to
deposit, sell, assign and transfer the Purchased Shares and Other
Securities to Smithfield Canada without restriction; (c) the deposit of
such Purchased Shares and Other Securities complies with applicable
securities laws; and (d) when such Purchased Shares and Other Securities
are taken up and paid for by Smithfield Canada, Smithfield Canada will
acquire good title thereto free and clear of all liens, restrictions,
charges, encumbrances, claims and equities;
(5) covenants that the undersigned will execute, upon request, any additional
documents necessary or desirable to complete the sale, assignment and
transfer of the Purchased Shares and Other Securities to Smithfield Canada
pursuant to the Offers;
(6) directs the Depositary (a) unless otherwise indicated under "Special
Payment Instructions" below, to issue the certificates representing
Exchangeable Shares of Smithfield Canada and the cheque (if any) for the
purchase price and/or any certificates representing the balance of any
Schneider Shares not deposited or purchased in their entirety in the
name(s) of the undersigned; (b) unless otherwise indicated under "Special
Delivery Instructions" below, to forward by first class mail, postage
prepaid, the certificates representing Exchangeable Shares of Smithfield
Canada and the cheque (if any) for the purchase price and/or any
certificates representing the balance of any Schneider Shares not
deposited or purchased in their entirety (and accompanying documents, as
appropriate) to the undersigned at the address appearing under
"Description of Schneider Shares Deposited" above or, if no name, address
or delivery instructions are indicated, to the address of the undersigned
as it appears on the applicable share register maintained by Schneider;
and (c) in the event that both the Special Delivery Instructions and the
Special Payment Instructions are completed, to issue the certificates
representing Exchangeable Shares of Smithfield Canada and the cheque (if
any) for the purchase price and/or any certificates representing the
balance of any Schneider Shares not deposited or purchased in their
entirety to or hold such certificates for the person or persons so
indicated;
(7) waives any right to receive notice of purchase of the Purchased Shares;
(8) agrees, from and after the Effective Date, (a) not to vote any of the
Purchased Shares or Other Securities at any meeting (whether annual,
special or otherwise) of holders of securities of Schneider; (b) not to
exercise any other rights or privileges attached to any of the Purchased
Shares or Other Securities; (c) to execute and deliver to Smithfield
Canada any and all instruments of proxy, authorizations or consents in
respect of any or all of the Purchased Shares or Other Securities; and (d)
to designate in any such instruments of proxy, the person or persons
specified by Smithfield Canada as the proxy or the proxy nominee or
nominees of the holder of the Purchased Shares or Other Securities;
(9) acknowledges that if, on or after the date of the Offers, Schneider should
split, combine or otherwise change any of the Schneider Shares or its
capitalization or disclose that it has taken or intends to take any such
action, then Smithfield Canada may, in its sole discretion, make such
adjustments as it deems appropriate to reflect such split, combination or
other change in the purchase price and other terms of the Offers
(including, without limitation, the type of securities offered to be
purchased and the amounts payable therefor);
(10) irrevocably appoints the Depositary and any officer of Smithfield Canada,
and each of them, and any other person designated by Smithfield Canada in
writing, as the true and lawful agent, attorney and attorney-in-fact and
proxy with respect to the Purchased Shares and any Other Securities,
effective from and after the Effective Date, with full power of
substitution, in the name and on behalf of the undersigned (such power of
attorney being deemed to be an irrevocable power coupled with an
interest), (a) to register or record, transfer and enter the transfer of
the Purchased Shares and Other Securities on the appropriate register of
holders of Schneider; and (b) to exercise any and all of the rights of the
undersigned in respect of the Purchased Shares and any Other Securities
including, without limitation, to vote and to execute and deliver any and
all instruments of proxy, authorizations or consents in respect of all or
any of the Purchased Shares and Other Securities, revoke any such
instrument, authorization or consent given prior to or after the Effective
Date, designate in any such instrument of proxy any person or persons as
the proxy or the proxy nominee or nominees of the undersigned in respect
of such Purchased Shares and such Other Securities for all purposes
including, without limiting the generality of the foregoing, in connection
with any meeting (whether annual, special or otherwise) of holders of
securities of Schneider (or any adjournment thereof), and execute, endorse
and negotiate, for and in the name of and on behalf of the undersigned,
any and all cheques or other instruments respecting any distribution
payable to or to the order of the undersigned;
(11) hereby revokes any and all authority, whether as agent, attorney-in-fact,
attorney, proxy or otherwise, hereinbefore conferred or agreed to be
conferred by the undersigned at any time with respect to any or all of the
Purchased Shares
3
<PAGE>
or Other Securities, and covenants that no subsequent authority, whether as
agent, attorney-in-fact, attorney, proxy or otherwise will be given with
respect thereto by the undersigned;
(12) acknowledges and agrees that all questions as to validity, form,
eligibility (including timely receipt) and acceptance of any Purchased
Shares or Other Securities, including the propriety and effect of the
execution of this Letter, will be determined by Smithfield Canada in its
sole discretion, and agrees that such determination shall be final and
binding;
(13) acknowledges that (a) Smithfield Canada reserves the absolute right to
reject any and all deposits which it determines not to be in proper form
or which, in the opinion of its counsel, may be unlawful to accept under
the laws of any jurisdiction, (b) Smithfield Canada reserves the absolute
right to waive any defect or irregularity in the deposit of any Purchased
Shares or Other Securities, and (c) there shall be no obligation on
Smithfield Canada, the Dealer Manager, the Depositary or any other person
to give notice of any defects or irregularities in any deposit and no
liability shall be incurred by any of them for failure to give any such
notice;
(14) hereby grants and is deemed to grant, on behalf of the undersigned and on
behalf of each present and future holder or beneficial owner (to the
extent permitted by law) of the Exchangeable Shares issuable in
consideration for the securities deposited hereby, an irrevocable power of
attorney (coupled with an interest) to each of Smithfield Canada and
Smithfield Foods, Inc. for the limited purpose of executing, on behalf of
the undersigned and each present or future registered holder or beneficial
owner of such Exchangeable Shares, the Voting, Support and Exchange Trust
Agreement made between Smithfield Foods, Smithfield Canada and CIBC Mellon
Trust Company, as trustee, in accordance with the Virginia Stock
Corporation Act, including section 670 thereof;
(15) understands that a deposit of any Purchased Shares or Other Securities
pursuant to any one of the procedures described in the Offers to Purchase
and the instructions set out in this Letter will constitute a binding
agreement between the undersigned and Smithfield Canada upon the terms and
subject to the conditions set out in the Offers to Purchase and subject to
the terms of this Letter; and
(16) acknowledges that all authority conferred or agreed to be conferred in or
by this Letter shall survive the death, incapacity, bankruptcy or
insolvency of the undersigned and all obligations of the undersigned in
this Letter shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
------------------------------------
By reason of the use by the undersigned of an English language form of
Letter of Acceptance and Transmittal, the undersigned and each of you shall be
deemed to have required that any contract evidenced by an Offer as accepted
through this Letter of Acceptance and Transmittal, as well as all documents
related thereto, be drawn exclusively in the English language. En raison de
l'usage d'une lettre d'acceptation et d'envoi en langue anglaise par le
soussigne, le soussigne et les destinataires sont presumes avoir requis que
tout contrat atteste par une offre acceptee par cette lettre d'acceptation et
d'envoi, ainsi que tous les documents qui s'y rapportent, soient rediges
exclusivement en langue anglaise.
4
<PAGE>
SPECIAL PAYMENT
INSTRUCTIONS
(See Instructions 4 and 6)
To be completed ONLY if certificates representing the balance of any
Schneider Shares not deposited or purchased in their entirety and/or
certificates representing Exchangeable Shares of Smithfield Canada and the
cheque (if any) to be issued in payment of the purchase price for the
Purchased Shares are to be issued in the name of someone other than the
undersigned. Issue to:
Name: -----------------------------
(Please Print)
Address: ----------------------------
----------------------------------
----------------------------------
(Include Postal Code)
Social Insurance No. --------------------
U.S. Residents/Citizens must provide their Tax Payer
Identification Number here:
----------------------------------
SPECIAL DELIVERY
INSTRUCTIONS
(See Instructions 4 and 6)
To be completed ONLY if the certificates representing the balance of any
Schneider Shares not deposited or purchased in their entirety and/or
certificates representing Exchangable Shares of Smithfield Canada and the
cheque (if any) to be issued in payment of the purchase price for the
Purchased Shares are to be sent to someone other than the undersigned or
to the undersigned at an address other than that appearing under
"Description of Schneider Shares Deposited" above, or are to be held by
the Depositary for pick-up by the undersigned or by any person designated
by the undersigned in writing.
Send to:
Name: -----------------------------
(Please Print)
Address: ----------------------------
----------------------------------
----------------------------------
(Include Postal Code)
[ ] Hold for pick-up at the office at which the Purchased Shares were
deposited, against counter receipt.
DEPOSIT PURSUANT TO NOTICE OF
GUARANTEED DELIVERY
(See Instruction 1)
[ ] Check here only if Schneider Shares are being delivered pursuant to a
Notice of Guaranteed Delivery previously sent to the Depositary and
complete the following:
Name(s) of Registered
Holder(s): ---------------------------------------------------
Date of Execution of Notice of Guaranteed
Delivery:--------------------------------------
Name of Eligible Institution which Guaranteed
Delivery: -----------------------------------
5
<PAGE>
TAX ELECTION FILING PACKAGE
(See Instruction 8)
To be completed ONLY by holders of Schneider Shares which are eligible to enter
into a joint election with Smithfield Canada and to avail themselves of the
rollover treatment described in the Offering Circular under "Canadian Federal
Income Tax Considerations -- Shareholders Resident in Canada".
[ ] Check here if you wish to receive a Tax Election filing Package.
( [ ] Check here if the holder is a partnership).
[ ] Check here if the holder is required to file in Quebec.
SIGN BELOW EXACTLY AS THE
SHAREHOLDER NAME
APPEARS ON THE SHARE CERTIFICATE
(See Instruction 1)
----------------------------------
----------------------------------
(Signature(s) of Holder(s))
----------------------------------
----------------------------------
(Social Insurance Number(s) of Holder(s))
Telephone: ( )
--------------------------
Date: ------------------------------
SIGNATURE(S) GUARANTEED BY
(See Instructions 2 and 3)
----------------------------------
(Authorized Signature)
----------------------------------
(Name of Eligible Institution)
----------------------------------
(Date)
SOLICITED DEPOSITS
(See Instruction 9)
If applicable, the depositing holder of Schneider Shares signing above
represents that the member of the soliciting dealer
who solicited and obtained this deposit is:
Name of
Firm: ------------------------------------------------------------------
Name of
Individual: ---------------------------------------------------------------
Address of
Firm: -----------------------------------------------------------------
[ ] Check here if registered holder represents more than one beneficial holder
and attach list of beneficial holders and shares held by each.
6
<PAGE>
TRANSMITTAL AND ACCEPTANCE INSTRUCTIONS
1. Delivery of Letter of Acceptance and Transmittal and Certificates. To accept
the Class A Offer or the Common Share Offer, certificate(s) representing
beneficial ownership of Schneider Shares, together with a properly
completed and duly executed copy of this Letter (or a manually signed
facsimile thereof) and all other documents required by this Letter, must be
received by the Depositary at its principal office in Toronto indicated
below at or before the Expiry Time, unless the procedures for guaranteed
delivery set out below are employed.
A holder of Schneider Shares whose certificate(s) for such shares are not
immediately available or who cannot deliver his or her certificates and all
other required documents to the Depositary at or before the Expiry Time, may
deposit his or her Schneider Shares by properly completing and executing a
Notice of Guaranteed Delivery pursuant to the procedure for guaranteed
delivery set forth in Section 6 of the accompanying Offers to Purchase.
Pursuant to such procedure, (i) such deposit must be made only at the
principal office of the Depositary in Toronto by or through an Eligible
Institution (as defined below); (ii) a properly completed and duly executed
Notice of Guaranteed Delivery, in the accompanying form (or a manually
signed facsimile thereof), must be received by the Depositary at its
principal office in Toronto at or before the Expiry Time; and (iii) the
certificates representing such deposited Schneider Shares in proper form for
transfer, together with a properly completed and duly executed copy of this
Letter (or a manually signed facsimile thereof) with any required signature
guarantees and any other documents required by this Letter, must be received
by the Depositary at its principal office in Toronto at or before 5:00 p.m.
Toronto time on the third business day after the Expiry Time. Delivery to
any offices of the Depositary other than its principal office in Toronto
does not constitute delivery for the purpose of satisfying a guaranteed
delivery. See Section 6 of the accompanying Offers to Purchase.
Holders whose Schneider Shares are registered in the name of a nominee should
contact their broker, dealer, bank, trust company or other nominee for
assistance in depositing such Schneider Shares.
The method of delivery of certificates, this Letter and all other required
documents is at the option and risk of the depositing shareholder and
delivery will be deemed effective only when such documents are actually
received. Smithfield Canada recommends that such documents be delivered by
hand to the Depositary and a receipt obtained or, if mailed, that registered
mail (return receipt requested) be used and proper insurance obtained.
2. Guarantee of Signatures. No signature guarantee is required on this Letter
(i) if this Letter is signed by the registered holder(s) of the Schneider
Shares (unless such holder has completed the box entitled "Special Payment
Instructions") or (ii) if such Schneider Shares are deposited for the
account of a Canadian chartered bank, a trust company in Canada, a
commercial bank or trust company having an office or correspondent in
Toronto, Ontario or a firm that is a member of a recognized stock exchange
in Canada, the Investment Dealers Association of Canada, a national
securities exchange in the United States of America or the National
Association of Securities Dealers, Inc. (each, an "Eligible Institution").
In all other cases, all signatures on this Letter must be guaranteed by an
Eligible Institution. See also Instruction 3.
3. Signatures on Letter of Acceptance and Transmittal, Powers and Endorsements.
If this Letter is signed by the registered holder(s) of Schneider Shares
represented by the deposited certificate(s), the signature(s) must
correspond with the name(s) as written on the face of such certificate(s)
without alteration, enlargement or any change whatsoever and such
certificate(s) need not be endorsed.
If this Letter is signed by a person other than the registered holder(s) of
the Schneider Shares represented by the deposited certificates, or if
certificates representing Schneider Shares for which the Class A Offer or
the Common Share Offer has not been accepted are to be issued to a person(s)
other than the registered holder(s), then the certificate(s) must be
endorsed or accompanied by share transfer powers duly and properly completed
by the registered holder(s), in either case signed exactly as the name(s) of
the registered holder(s) appear(s) on the certificate(s). The signature(s)
on such certificate(s) or powers must be guaranteed by an Eligible
Institution.
If the deposited Schneider Shares are held of record by two or more joint
owners, all such owners must sign this Letter. If any deposited Schneider
Shares are registered in different names on similar certificates, it will be
necessary to complete, sign and submit as many separate copies of this
Letter as there are different registrations of certificates.
If this Letter or any certificates or powers are signed by a trustee,
executor, administrator, guardian, attorney-in-fact, agent, officer of a
corporation or any other person acting in a fiduciary or representative
capacity, such person should so indicate when signing and proper evidence
satisfactory to Smithfield Canada of their authority to so act must be
submitted.
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4. Special Payment and Delivery Instructions. If the certificates representing
Exchangeable Shares of Smithfield Canada and the cheque (if any) to be
issued in payment of the purchase price for Schneider Shares purchased, or
if certificates representing the balance of any Schneider Shares not
deposited or purchased, are to be:
i. issued in the name of a person(s) other than the person(s) signing this
Letter;
ii. sent to someone other than the person(s) signing this Letter or to the
person(s) signing this Letter at an address other than that appearing in
the box entitled "Description of Schneider Shares Deposited"; or
iii. held by the Depositary for pick-up by the undersigned or any person
designated by the undersigned in writing;
the boxes entitled "Special Payment Instructions" and/or "Special Delivery
Instructions", as applicable, should be completed.
5. Inadequate Space. If the space provided herein for any information is
inadequate, the required information should be set out on a separate signed
list attached hereto.
6. Partial Deposits. If fewer than all the Schneider Shares evidenced by any
certificate(s) submitted are to be deposited, fill in the number of
Schneider Shares that are to be deposited in the box entitled "Number of
Shares Deposited". In such case, a new certificate(s) for Schneider Shares
not deposited will be issued and sent to the person(s) signing this Letter,
unless otherwise provided in the boxes entitled "Special Payment
Instructions" and/or "Special Delivery Instructions", as soon as
practicable after the expiration or termination of the Offers. All
Schneider Shares evidenced by a certificate(s) submitted to the Depositary
will be deemed to have been deposited unless otherwise indicated.
7. Stock Transfer Taxes. Smithfield Canada will pay any stock transfer taxes
with respect to the transfer and sale of Schneider Shares to it or its
order by the registered holder(s) pursuant to the Offers. If, however,
certificates for Schneider Shares not deposited or purchased are to be
registered in the name of any person(s) other than the registered
holder(s), or if certificates for Schneider Shares are registered in the
name of any person(s) other than the person(s) signing this Letter, the
amount of any stock transfer taxes (whether imposed on the registered
holder(s) or such other person(s)) payable on account of the transfer to
such person(s) will be payable by the seller(s) (which may include a
deduction from the purchase price) unless satisfactory evidence of the
payment of such taxes or exemption therefrom is submitted.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the certificate(s) for Schneider
Shares.
8. Tax Election Filing Package. Holders of Schneider Shares who are eligible to
enter into a joint election and who wish to enjoy rollover treatment must
submit a duly completed Tax Election Filing Package consisting of
prescribed Federal Election Form T-2057 or T-2058, Quebec Tax Election Form
TP-518V or TP-529V for holders of Schneider Shares required to file in
Quebec, and a letter authorizing the making of the joint election to the
Depositary at its principal office in Toronto indicated below on or before
March 31, 1999. See the Offering Circular under "Canadian Federal Income
Tax Considerations -- Shareholders Resident in Canada".
9. Solicitation. Identify the investment dealer or broker, if any, who has
solicited acceptance of the Offers by completing the box entitled
"Solicited Deposits" above and present a list of beneficial holders, if
applicable.
10. Request for Assistance or Additional Copies. Questions and requests for
assistance may be directed to the Depositary. Additional copies of the
Offers and Circular and this Letter may be obtained on request and without
charge from the Depositary at its principal office in Toronto indicated
below. Holders of Schneider Shares may also contact the Dealer Manager,
Smithfield Canada or their local broker, dealer, commercial bank or trust
company for assistance.
11. Lost Certificates. If a certificate representing Schneider Shares has been
lost or destroyed, this Letter should be completed as fully as possible
and forwarded to the Depositary together with a letter stating the loss.
The Depositary will contact you to advise of the replacement requirements.
12. Governing Law. The Offers and any agreement resulting from the acceptance
of the Offers will be construed in accordance with and governed by the
laws of the Province of Ontario and the laws of Canada applicable therein.
Manually signed facsimile copies of this Letter, properly completed and duly
executed in accordance with the instructions in this Letter, will be accepted.
This Letter, certificates for Schneider Shares and any other required documents
should be sent or delivered by each holder of Schneider Shares or such holder's
investment dealer, stockbroker, bank, trust company or other nominee to the
Depositary at the appropriate address set forth below.
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The Depositary for the Offers is:
CIBC MELLON TRUST COMPANY
For Delivery by Mail:
P. O. Box 1036
Adelaide Street Postal Station
Toronto, Ontario
M5C 2K4
Attention: Special Projects
For Delivery by Hand or Courier:
Up to and including
May 1, 1998:
393 University Avenue
Lower Level
Toronto, Ontario
M5G 2M7
On and after May 4, 1998:
199 Bay Street
Commerce Court West
Securities Level
Toronto, Ontario
M5L IG9
Attention: Courier Window
For Information:
In Toronto: (416) 643-5500
Toll Free: 1-800-387-0825
The Dealer Manager for the Offers is:
FIRST MARATHON SECURITIES LIMITED
The Exchange Tower
2 First Canadian Place
Suite 3200, P.O. Box 21
Toronto, Ontario
M5X 1J9
Telephone: (416) 869-3707
Facsimile: (416) 869-6411
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