SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 1, 1999 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from.................to............. COMMISSION FILE NUMBER 0-2258 SMITHFIELD FOODS, INC. 200 Commerce Street Smithfield, Virginia 23430 (757) 365-3000 Virginia 52-0845861 - ---------------------------- ------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Class Shares outstanding at September 10, 1999 - --------------------------------- ---------------------------------------- Common Stock, $.50 par value 45,339,805 1-17
SMITHFIELD FOODS, INC. CONTENTS <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION PAGE <S> <C> Item 1. Financial Statements Consolidated Condensed Balance Sheets - August 1, 1999 and May 2, 1999 3-4 Consolidated Condensed Statements of Operations - 13 Weeks Ended August 1, 1999 and 13 Weeks Ended August 2, 1998 5 Consolidated Condensed Statements of Cash Flows - 13 Weeks Ended August 1, 1999 and August 2, 1998 6 Notes to Consolidated Condensed Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 16 </TABLE> 2-17
PART I. FINANCIAL INFORMATION SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS <TABLE> <CAPTION> (In thousands) August 1, 1999 May 2, 1999 - ------------------------------------------------------------------------------------------------------------ ASSETS (Unaudited) <S> <C> Current assets: Cash and cash equivalents $ 27,305 $ 30,590 Accounts receivable, net 283,689 252,332 Inventories 496,513 348,856 Prepaid expenses and other current assets 20,370 50,302 ------------- ----------- Total current assets 827,877 682,080 ------------- ----------- Property, plant and equipment 1,325,537 1,083,416 Less accumulated depreciation (315,590) (292,640) ------------- ----------- Net property, plant and equipment 1,009,947 790,776 ------------- ----------- Other assets: Investments in partnerships 80,371 80,182 Goodwill 129,041 103,017 Other 183,314 115,559 ------------- ----------- Total other assets 392,726 298,758 ------------- ----------- $ 2,230,550 $1,771,614 ============= =========== </TABLE> See accompanying notes to consolidated condensed financial statements. 3-17
SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS <TABLE> <CAPTION> (In thousands) August 1, 1999 May 2, 1999 - ------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) <S> <C> Current liabilities: Notes payable $ 122,649 $ 63,900 Current portion of long-term debt and capital lease obligations 31,638 25,828 Accounts payable 215,385 207,703 Accrued expenses and other current liabilities 164,994 168,784 ------------ ------------ Total current liabilities 534,666 466,215 ------------ ------------ Long-term debt and capital lease obligations 785,605 594,241 Other noncurrent liabilities: Pension and postretirement benefits 69,743 62,276 Other 142,112 49,161 ------------ ------------ Total other noncurrent liabilities 211,855 111,437 ------------ ------------ Minority interests 40,017 57,475 ------------ ------------ Shareholders' equity: Preferred stock, $1.00 par value, 1,000,000 authorized shares Common stock, $.50 par value, 100,000,000 authorized shares; 46,150,959 and 41,847,359 issued 23,075 20,924 Additional paid-in capital 288,417 180,020 Retained earnings 347,084 340,154 Accumulated other comprehensive income (169) 1,148 ------------ ------------ Total shareholders' equity 658,407 542,246 ------------ ------------ $2,230,550 $1,771,614 ============ ============ </TABLE> See accompanying notes to consolidated condensed financial statements. 4-17
SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> 13 Weeks Ended 13 Weeks Ended (In thousands, except per share data) August 1, 1999 August 2, 1998 - ------------------------------------------------------------------------------------------ <S> <C> Sales $1,142,415 $865,823 Cost of sales 994,919 793,645 ---------- -------- Gross profit 147,496 72,178 Selling, general and administrative expenses 94,550 57,997 Depreciation expense 24,858 12,939 Interest expense 14,533 9,706 Minority interests 2,761 (599) ---------- -------- Income (loss) before income taxes 10,794 (7,865) Income tax expense (benefit) 3,864 (2,540) ---------- -------- Net income (loss) $ 6,930 $ (5,325) ========== ========= Net income (loss) per common share: Basic $ .15 $ (.14) ========== ======== Diluted $ .15 $ (.14) ========== ======== Average common shares outstanding: Basic 45,859 37,537 ========== ======== Diluted 47,088 37,537 ========== ======== </TABLE> See accompanying notes to consolidated condensed financial statements. 5-17
SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> 13 Weeks Ended 13 Weeks Ended August 1, 1999 August 2, 1998 - --------------------------------------------------------------------------------------------------------------------- <S> <C> Cash flows from operating activities: Net income (loss) $ 6,930 $ (5,325) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 25,968 13,939 Loss on sale of property, plant and equipment 603 588 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable (6,413) (18,109) Inventories (16,496) (21,577) Prepaid expenses and other current assets 32,562 (10,981) Other assets (10,475) 574 Accounts payable, accrued expenses and other liabilities (18,234) (11,504) -------- -------- Net cash provided by (used in) operating activities 14,445 (52,395) -------- -------- Cash flows from investing activities: Capital expenditures (28,877) (19,997) Business acquisitions, net of cash (4,849) (23,837) Proceeds from sale of property, plant and equipment 983 7 Investments in partnerships 2,372 (2,278) -------- -------- Net cash used in investing activities (30,371) (46,105) -------- -------- Cash flows from financing activities: Net repayments on notes payable (84,685) - Proceeds from issuance of long-term debt 11,006 - Net borrowings on long-term credit facility 94,000 77,000 Principal payments on long-term debt and capital lease obligations (9,969) (1,078) Exercise of common stock options 1,886 - -------- ------- Net cash provided by financing activities 12,238 75,922 -------- ------- Net decrease in cash and cash equivalents (3,688) (22,578) Effect of foreign exchange rate changes on cash 403 - Cash and cash equivalents at beginning of period 30,590 60,522 -------- ------- Cash and cash equivalents at end of period $ 27,305 $37,944 ======== ======= Supplemental disclosures of cash flow information: Cash payments during period: Interest (net of amount capitalized) $ 10,980 $ 6,049 ======== ======= Income taxes $ 10,886 $ 39 ======== ======= Noncash Investing and Financing Activities: As discussed in Note 7, effective May 3, 1999 the Company completed the acquisition of CFI and its affiliated companies and partnership interests in exchange for 4.2 million shares of the Company's common stock and the assumption of approximately $231.0 million in debt, plus other liabilities. </TABLE> See accompanying notes to consolidated condensed financial statements. 6-17
SMITHFIELD FOODS, INC. 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 May 2, 1999. (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 results of operations for the periods included in this report. (3) Inventories consist of the following: (In thousands) August 1, 1999 May 2, 1999 -------------- -------------- ----------- Fresh and processed meats $224,533 $219,647 Hogs on farms 197,732 83,352 Manufacturing supplies 45,007 30,201 Other 29,241 15,656 ------- ------- $496,513 $348,856 ========= ======= (4) Net income (loss) per basic share is computed based on the average common shares outstanding during the period. Net Income per diluted share is computed based on the average common shares outstanding during the period adjusted for the effect of potential common shares, such as stock options. The net loss reflected in fiscal 1999 resulted in the Company's stock options being antidilutive and, thus, excluded from the computation of income per diluted share. The computation for basic and diluted net income (loss) per share is as follows: 13 Weeks 13 Weeks Ended Ended (In thousands, except per share data) August 1, 1999 August 2, 1998 - ------------------------------------- -------------- -------------- Net income (loss) $6,930 $ (5,325) ------ -------- Average common shares outstanding: Basic 45,859 37,537 Dilutive stock options 1,229 - ------ ------ Diluted 47,088 37,537 ====== ====== Net income (loss) per common share: Basic $ .15 $ (.14) ====== ======= Diluted $ .15 $ (.14) ====== ======= 7-17
The summary below lists stock options outstanding at the end of each fiscal period which were not included in the computation of net income per diluted share because the options' exercise price were greater than the average market price of the common shares. August 1, 1999 August 2, 1998 -------------- -------------- Antidilutive stock option shares - 3,451,000 Average option price per share - $10.81 Stock option shares excluded 50,000 65,000 Average option price per share $32.38 $32.42 (5) The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," in fiscal 1999. The components of comprehensive income, net of related tax, consist of: 13 Weeks 13 Weeks Ended Ended (In thousands) August 1, 1999 August 2, 1998 - -------------- -------------- -------------- Net income (loss) $6,930 $(5,325) Other comprehensive income: Foreign currency translation adjustment (1,400) - Unrealized gain on securities 82 250 ------- ------- Comprehensive income $5,612 $(5,075) ======= ======= (6) The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information," in fiscal 1999. The segments identified include the Meat Processing Group ("MPG") and the Hog Production Group ("HPG"). The underlying factors used to identify the reportable segments include differences in products produced and sold. The following table presents information about the results of operation for each of the Company's reportable segments for the first quarters ended August 1, 1999 and August 2, 1998. In connection with the acquisition of CFI in the current quarter, total assets for the HPG increased by approximately $372.4 million to $715.4 million. <TABLE> <CAPTION> Meat Hog General (In thousands) Processing Production Corporate Total - -------------------- --------------------------------------------------------------------------------- <S> <C> 13 Weeks Ended August 1, 1999 - ----------- Sales $ 1,166,711 $ 120,371 $ -- $ 1,287,082 Intersegment sales (45,091) (99,576) -- (144,667) Operating profit 14,900 16,486 (20,592) 10,794 13 Weeks Ended August 2, 1998 - ----------- Sales $ 876,523 $ 42,799 $ -- $ 919,322 Intersegment sales (20,436) (33,063) -- (53,499) Operating profit 6,791 (748) (13,908) (7,865) </TABLE> 8-17
(7) Effective May 3, 1999, the Company completed the acquisition of Carrolls Foods Inc. ("CFI") and its affiliated companies and partnership interests for 4.2 million shares of the Company's common stock (subject to post closing adjustments) and the assumption of approximately $231.0 million in debt, plus other liabilities. The acquisition included 100% of the capital stock of CFI, CFI's 50% interest in Smithfield-Carroll's, CFI's 16% interest in Circle Four, CFI's 50% interest in Tar Heel Turkey Hatchery, 100% of CFI's turkey grow-out operations, CFI's 49% interest in Carolina Turkey's, and certain hog production interests in Brazil and Mexico. CFI was accounted for using the purchase method of accounting. Had the acquisition of CFI occurred at the beginning of fiscal 1999, it would not have had a material effect on sales, net income or net income per diluted share in the previous years first quarter. 8) In the third quarter of fiscal 1999, the Company acquired 100% of the voting common shares of Schneider Corporation ("Schneider") and approximately 59% of its Class A non-voting shares, which in the aggregate represents approximately 63% of the total equity of Schneider, in exchange for approximately 2.5 million Exchangeable Shares of Smithfield Canada Limited, a wholly-owned subsidiary of the Company. Each Exchangeable Share is exchangeable by the holder at any time for one common share of the Company. Schneider had sales in its fiscal year ended October 1998 of $548.1 million. In April 1999, the Company acquired, in a tender offer, 11.5 million shares of the capital stock of Animex S.A. ("Animex") which represented 67% of total equity and 51% of the voting control of Animex. During the 13-week period ended August 2, 1999, the Company acquired an additional 3.2 million shares of the capital stock of Animex increasing the Company's ownership to 80% of total equity. Animex had calendar year 1998 sales of approximately $400.0 million. In September 1998, the Company acquired all of the capital stock of Societe Bretonne de Salaisons ("SBS"). SBS had calendar year 1998 sales of $100.0 million. In October 1998, the Company acquired all of the assets and business of North Side Corp. ("North Side"). North Side had calendar year 1998 sales of $58.0 million. Each of these acquisitions was accounted for using the purchase method of accounting and, accordingly, the accompanying financial statements include the financial position and results of operations from the dates of acquisition. (9) On September 2, 1999, the Company announced an agreement in principle to acquire all of the capital stock of the corporate entities known as Murphy Farms, Inc. and Quarter M Farms, Inc. (collectively "Murphy Farms") for 10.0 million shares of Company stock and the assumption of approximately $170.0 million of debt, plus other liabilities. Murphy Farms is the second largest hog production company in the U.S. with 325.0 thousand sows and 5.5 million market hogs annually. The acquisition is expected to be effective in January 2000. Sales for Murphy Farms for its fiscal year ended October 1998 were approximately $500.0 million. A significant portion of those sales were to the Company's MPG group. 9-17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL - ------- Smithfield Foods, Inc. (the "Company") is comprised of a Meat Processing Group ("MPG") and a Hog Production Group ("HPG"). The MPG consists of six wholly-owned domestic pork processing subsidiaries, Gwaltney of Smithfield, Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc. ("Lykes"), North Side Foods Corp. ("North Side"), Patrick Cudahy Incorporated ("Patrick Cudahy"), and The Smithfield Packing Company, Incorporated ("Smithfield Packing"), and three international pork processing subsidiaries, Schneider Corporation ("Schneider"), a 63%-owned Canadian subsidiary of the Company, Animex S.A. ("Animex") an 80%-owned Polish Company and Societe Bretonne de Salaisons, ("SBS"), a wholly-owned French subsidiary. The HPG consists of Brown's of Carolina, Inc. ("Brown's"), an 86%-owned subsidiary of the Company; Carroll's Foods, Inc. ("CFI") a wholly-owned subsidiary of the Company, Carrolls Foods of Virginia (formerly Smithfield-Carroll's) a hog production operation based in Virginia and Circle Four, a hog production operation based in Utah. As a result of the acquisition of CFI effective May 3,1999, Carroll's Foods of Virginia (formerly Smithfield-Carroll's) and Circle Four are wholly-owned operations of the Company. Brown's, CFI and Carroll's Foods of Virginia produce hogs in North Carolina, Virginia and Colorado which are sold to the MPG. Circle Four produces hogs in Utah which are sold to an unrelated party. RESULTS OF OPERATIONS - --------------------- Several acquisitions affect the comparability of the results of operations of the 13 week periods ended August 1, 1999 and August 2, 1998, including the following: In May 1999, the Company completed the acquisition of CFI and its affiliated companies and partnership interests for 4.2 million shares of the Company's common stock (subject to post closing adjustments) and the assumption of approximately $231.0 million in debt, plus other liabilities. CFI had sales of $348.0 million in calendar year 1998. A significant portion of these sales were to the MPG. In the third quarter of fiscal 1999, the Company acquired 100% of the voting common shares of Schneider and approximately 59% of its Class A non-voting shares, which in the aggregate represents approximately 63% of the total equity of Schneider, in exchange for approximately 2.5 million Exchangeable Shares of Smithfield Canada Limited, a wholly-owned subsidiary of the Company. Each Exchangeable Share is exchangeable by the holder at any time for one common share of the Company. Schneider had sales in its fiscal year ended October 1998 of $548.1 million. In April 1999, the Company acquired, in a tender offer, 11.5 million shares of the capital stock of Animex which represented 67% of total equity and 51% of the voting control of Animex. During the 13-week period ended August 2, 1999, the Company acquired an additional 3.2 million shares of the capital stock of Animex increasing the Company's ownership to 80% of total equity. Animex had calendar year 1998 sales of approximately $400.0 million. In September 1998, the Company acquired all of the capital stock of SBS. SBS had calendar year 1998 sales of $100.0 million. In October 1998, the Company acquired all of the assets and business of North Side. North Side had calendar year 1998 sales of $58.0 million. Each of these acquisitions was accounted for using the purchase method of accounting and, accordingly, the accompanying financial statements include the results of operations from the dates of acquisition. 10-17
Consolidated 13 Weeks Ended August 1, 1999 - 13 Weeks Ended August 2, 1998 Sales in the first quarter of fiscal 2000 increased $276.6 million, or 31.9%, from the comparable period in fiscal 1999. The increase was primarily attributable to the incremental sales of the acquired businesses and higher processed meats volume in the base businesses in the MPG. See the following section for comments on sales changes by business segment. Gross profit in the current quarter increased $75.3 million, or 104.4%, from the comparable period in the prior year on the increased volumes and lower live hog costs in the MPG and lower feed costs and production efficiencies in the HPG. Gross profit in the HPG was also favorably impacted by commodity hedging gains recognized in the first quarter of the current year. In the prior period, the MPG recognized losses from its commodity positions. Selling, general and administrative expenses increased $36.6 million, or 63.0%, in the first quarter of fiscal 2000 from the comparable period in fiscal 1999. The increase was primarily due to the inclusion of expenses of acquired businesses, higher selling and marketing costs associated with efforts to market branded fresh pork and processed meats and expenses associated with the Year 2000. Depreciation expense increased $11.9 million, or 92.1%, in the first quarter of fiscal 2000 from the comparable period in fiscal 1999, primarily from the inclusion of acquired businesses. Interest expense increased $4.8 million, or 49.7%, in the first quarter of fiscal 2000 from the comparable period in fiscal 1999, reflecting the inclusion of the interest expense of the acquired businesses and the cost of borrowings to finance the acquisitions of Animex, SBS and North Side. The effective income tax rate for the first quarter of fiscal 2000 increased to 35.8% compared to 32.3% in the corresponding period of fiscal 1999 primarily on the inclusion of foreign earnings at higher marginal tax rates. Reflecting the factors previously discussed, net income increased to $6.9 million, or $ .15 per diluted share, in the first quarter of fiscal 2000, up from a net loss of $5.3 million, or $.14 per diluted share, in the first quarter of fiscal 1999. Meat Processing Group 13 Weeks Ended August 1, 1999 - 13 Weeks Ended August 2, 1998 Sales in the MPG segment increased $265.5 million or 31.0% on a sharp increase in processed meat volumes and higher fresh meat volumes partially offset by a slight decline in average unit selling prices. A 58.2% increase in processed meat volumes reflects the impact of acquired businesses as well as increased volumes in the base businesses. Fresh meat volumes were up 14.1% principally on the inclusion of fresh meat volumes of Schneider and Animex. The decline in unit selling prices reflects the impact of lower live hog costs being passed through to customers. Operating profit of the MPG increased to $14.9 million from $6.8 million in the prior year on higher volumes and margins in fresh and processed meats partially offset by increased selling and marketing expenses on efforts to expand distribution and in strengthening the Company's fresh and processed meat brands. Included in the current quarter were certain nonrecurring costs and production inefficiencies related to the implementation of food safety programs at Company facilities as well as increased spending on information systems related to Year 2000 projects. Acquired businesses contributed to improved operating results in the current quarter, however, these results were somewhat offset by operating losses in Animex. Included in last year's first quarter are certain commodity hedging program results that locked in raw material costs at higher than current market prices. 11-17
Hog Production Group 13 Weeks Ended August 1, 1999 - 13 Weeks Ended August 2, 1998 The majority of the sales of the HPG group are to the MPG and, therefore, are eliminated in the Company's consolidated statement of operations. Before intercompany eliminations, HPG sales increased sharply as a result of the inclusion of the sales of CFI which were partially offset by lower live hog prices which decreased 14.5% compared to the same period in the previous year. With the acquisition of CFI, hogs sold in the current quarter increased to 1.3 million compared to approximately 600.0 thousand for the first quarter of fiscal 1999. Operating profit of the HPG improved to $16.5 million compared to a loss of $750.0 thousand in the previous year as a result of lower feed costs and improved production efficiencies coupled with the impact of favorable commodity hedging contracts. In the current quarter, commodity hedging contracts for hog production were closed in connection with delivery of the hogs to the Company's hog slaughter plants. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash provided by operations totaled $14.4 million for the three months ended August 1, 1999 compared to cash used in operations of $52.4 million in the same period last year. In addition to the impact of additional earnings in the current quarter, non-cash charges increased to $26.0 from $13.9 million due primarily to the incremental depreciation and amortization of acquired businesses. In the prior year first quarter, the Company made a larger seasonal investment in inventories for the fall holiday season. In the current quarter, the Company's normal seasonal investment in working capital was partially offset by lower live hog prices and average unit selling prices. Cash used in investing activities declined to $30.4 million in the current year from $46.1 million from the same period in the prior year. Capital expenditures totaled $28.9 million in the first quarter of fiscal 2000. These capital expenditures included processed meat expansion and improvement projects, additional hog production facilities at Circle Four and replacement systems associated with the Year 2000. In addition, during the current quarter, the Company invested $8.2 million to acquire an additional 13% of the capital stock of Animex increasing the Company's ownership percentage to 80% of total equity. These capital expenditures and investments were funded with cash provided by operations and borrowings under the Company's long-term revolving credit facility. As of August 1, 1999, the Company had definitive commitments of $31.1 million for capital expenditures primarily to increase its value-added fresh pork capacity at several of its processing plants and for additional hog production facilities at Circle Four. These expenditures are expected to be funded with cash provided by operations. Financing activities provided $12.2 million in the current quarter as additional borrowings on revolving credit facilities were used primarily for the repayment of notes payable. During the second quarter of fiscal 2000 the Company intends to refinance a substantial portion of the debt assumed in connection with the CFI acquisition. This refinancing will include the placement of $225.0 million of 10 year senior secured notes with two institutional lenders and an increase in the Company's existing revolving credit facility from $300.0 million to $400.0 million. The financing is being structured to more closely align the debt with the underlying assets. RECENT DEVELOPMENTS - ------------------- On April 28, 1999 the board of directors authorized the repurchase of up to 2.0 million shares of the Company's common stock. As of September 10, 1999 the Company has repurchased 810.0 thousand shares under this authorization. On September 2, 1999, the Company announced an agreement in principle to acquire all of the capital stock of the corporate entities known as Murphy Farms, Inc. and Quarter M Farms, Inc. (collectively "Murphy Farms") for 10.0 million shares of Company stock and the assumption of approximately $170.0 million of debt and other liabilities. Murphy Farms is the second largest hog production company in the U.S. with 325.0 thousand 12-17
sows and markets approximately 5.5 million hogs annually. The acquisition is expected to be effective in January 2000. Sales for Murphy Farms for its fiscal year ended October 1998 were approximately $500 million. A significant portion of those sales were to the Company's MPG group. On August 12, 1999, the Company acquired the capital stock of Societe Financiere de Gestion et de Participation S.A. ("SFGP"), a private-label processed meats manufacturer in France. SFGP had sales of approximately $100.0 million in calendar 1998. YEAR 2000 - --------- The Year 2000 problem relates to computer systems that have date-sensitive programs that were designed to read years beginning with "19," but may not recognize the year 2000. Company information technology ("IT") systems (including non-IT systems) and third party information systems that fail due to the Year 2000 may have a material adverse effect on the Company. The Year 2000 issue has the potential to effect the Company's supply, production, distribution and financial chains. The Company began addressing the potential exposure associated with the Year 2000 during fiscal 1998. Management has approved the plan necessary to remediate, upgrade, and replace the affected systems to be Year 2000 compliant. A corrective five-point action plan had been developed including: 1) analysis and planning, 2) allocation of resources and commencing correction, 3) remediation, correction and replacement, 4) testing, and 5) development of contingency plans. The Company has identified and defined the critical IT and non-IT projects. These projects relate to systems that include any necessary technology used in manufacturing or administration with date-sensitive information that is critical to the day-to-day operations of the business. Of the critical IT projects identified, 96% have been completed, 3% are in correction and replacement and the remaining 1% are commencing the correction phase. The non-IT (plant) projects have identified system components that have a potential issue with rolling dates into the Year 2000. Of these components, 99% are fully compliant and the few that remain are in the final remediation testing stage. Following their acquisition in the fourth quarter of fiscal year 1999 and the first quarter of fiscal 2000, respectively, the Company completed its assessment and is well into the remediation phase for Animex and CFI. The overall compliance status of Animex subsidiaries is currently 81%. The preliminary review of CFI's Year 2000 readiness is complete, and approximately 77% of the critical systems are compliant. The remaining systems are targeted to be compliant by October 31, 1999. The forecasted cost of the Year 2000 solution, including hardware and software replacement, is expected to be approximately $34.9 million, of which $30.2 million has been expended to date. The Company has expensed a total of $11.0 million, including $2.6 million in the first quarter of fiscal 2000. The Company estimates $19.6 million of the total will be capitalized in accordance with generally accepted accounting principles. These expenditures are anticipated to be incurred through December 1999. Third party risk is being proactively assessed through inquiries and questionnaires. Significant vendors, electronic commerce customers and financial institutions have been sent inquiries about the status of their compliance for the Year 2000. Additionally, the Company will follow up the inquiries and questionnaires with interviews. This process is expected to be an ongoing evaluation and at this point management cannot determine the level of risk associated with third parties. The Company believes its planning efforts are adequate to address its Year 2000 concerns. The Company is developing a worse case scenario and a contingency plan which includes an evaluation of the criticality of each manufacturing process and the determination of possible manual alternatives, including the purchase of additional inventory and related storage for production supplies. As of August 1, 1999, contingency plans have been written and documented for 69% of the critical IT (plant) systems. While the Company believes it is taking the appropriate steps to address its readiness for the Year 2000, the costs of the project and expected completion dates are dependent upon the continued availability of certain resources and other factors. There can be no guarantee that these estimates will be achieved, and actual results 13-17
could differ materially from those anticipated. Specific factors that could influence the results may include, but are not limited to, the availability and cost of personnel trained in this area, and the ability to locate and correct all relevant computer codes and similar uncertainties. FORWARD-LOOKING STATEMENTS - -------------------------- This Form 10-Q may contain "forward-looking" information within the meaning of the federal securities laws. The forward-looking information may include, among other information, statements concerning the Company's outlook for the future. There may also be other statements of beliefs, future plans and strategies or anticipated events and similar expressions concerning matters that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or 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 live hogs and other raw materials, product pricing, 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, domestic and foreign governmental regulations, including without limitation, environmental and health regulations. 14-17
PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) Annual meeting of Shareholders held September 2, 1999. (b) Not applicable (c) There were 44,935 shares of Company's Common Stock and one Series B Special Voting Preferred Share outstanding as of July 9, 1999, the record date for the 1999 Annual Meeting of Shareholders. Each share of Common Stock entitled the holder thereof to one vote; the Series B Special Voting Preferred Share entitled the holder thereof to 1,174,219 votes; the total number of votes that shareholders could cast at the 1999 Annual Meeting of Shareholders was therefore 46,109,667. A total of 41,103,633 votes (or 89.1% of the total) were cast. All of management's nominees for directors of the corporation were elected with the following vote: <TABLE> <CAPTION> Votes Broker Director Nominee Votes For Withheld Non-Voters - ----------------------------- ------------- ------------------ ---------- <S> <C> Robert L. Burrus, Jr. 40,464,723 638,910 0 Douglas W. Dodds 39,915,616 1,188,017 0 F.J. Faison, Jr. 37,186,506 3,917,127 0 Ray A. Goldberg 39,543,797 1,559,836 0 George E. Hamilton, Jr. 40,462,393 641,240 0 Robert G. Hofmann, II 40,470,023 633,610 0 Richard J. Holland 40,632,054 471,579 0 Roger R. Kapella 40,471,297 632,336 0 Lewis R. Little 39,207,947 1,895,686 0 Joseph W. Luter, III 40,466,397 637,236 0 William H. Prestage 36,882,216 4,221,417 0 Joseph B. Sebring 39,936,157 1,167,476 0 Timothy A. Seely 40,636,994 466,639 0 </TABLE> A proposal to ratify the selection of Arthur Andersen LLP as independent public accountants of the Company for the fiscal year ending April 30, 2000 was approved by the shareholders with the following vote: Votes Broker Votes For Votes Against Withheld Non-Votes ------------ -------------- ----------- --------- 39,554,281 25,194 1,524,158 0 (d) Not applicable 15-17
Item 6. Exhibits and Reports on Form 8-K A. Exhibits Exhibit 3.2 - By-Laws of the Registrant, as amended to date. Exhibit 4.6(a) - Amended and Restated Multi-Year Credit Agreement dated as of September 8, 1999, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, relating to a $400,000,000 secured multi-year revolving credit facility. Exhibits 27 - Financial Data Schedule B. Reports on Form 8-K 1. A Current Report on Form 8-K for May 7, 1999, was filed with the Securities and Exchange Commission on May 12, 1999 to report, under Item 2, the acquisition of Carroll's Foods, Inc. and its affiliated companies. 2. A Current Report on Form 8-K for July 16, 1999, was filed with the Securities and Exchange Commission on July 19, 1999, to report, under Item 5, the audited consolidated financial statements and the notes thereto of Smithfield Foods, Inc. for the fiscal year ended May 2, 1999. 3. An Amended Current Report on Form 8-K/A for May 7, 1999, was filed with the Securities and Exchange Commission on July 21, 1999 to file certain historical and pro forma financial information relating to the acquisition of Carroll's Foods, Inc. and its affiliated companies. 16-17
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SMITHFIELD FOODS, INC. /s/ C. LARRY POPE - ----------------- C. Larry Pope Vice President and Chief Financial Officer /s/ DANIEL G. STEVENS - --------------------- Daniel G. Stevens Corporate Controller (Principal Accounting Officer) Date: September 14, 1999 17-17