UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended October 26, 2003
OR
For the transition period from to
COMMISSION FILE NUMBER 1-15321
SMITHFIELD FOODS, INC.
200 Commerce Street
Smithfield, Virginia 23430
(757) 365-3000
(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 ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Class
Shares outstanding at December 5, 2003
Common Stock, $.50 par value
CONTENTS
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income – 13 and 26 Weeks Ended October 26, 2003 and October 27, 2002
Consolidated Condensed Balance Sheets – October 26, 2003 and April 27, 2003
Consolidated Condensed Statements of Cash Flows – 26 Weeks Ended October 26, 2003 and October 27, 2002
Notes to Consolidated Condensed Financial Statements
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4.Controls and Procedures
PART II — OTHER INFORMATION
Item 1.Legal Proceedings
Item 4.Submission of Matters to a Vote of Security Holders
Item 6.Exhibits and Reports on Form 8-K
2-21
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share data)
October 26,
2003
October 27,
2002
Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Interest expense
Income (loss) from continuing operations before income taxes
Income taxes
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income
Income (loss) per common share:
Basic:
Continuing operations
Discontinued operations
Diluted:
Average common share outstanding:
Basic
Diluted
See Notes to Consolidated Condensed Financial Statements
3-21
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Assets of discontinued operations held for sale
Total current assets
Property, plant and equipment
Less accumulated depreciation
Net property, plant and equipment
Other assets:
Goodwill
Restricted cash and acquisition deposit
Investments in partnerships
Other
Total other assets
4-21
(In millions, except share data)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable
Bridge loan
Current portion of long-term debt and capital lease obligations
Accounts payable
Accrued expenses and other current liabilities
Liabilities of discontinued operations held for sale
Total current liabilities
Long-term debt and capital lease obligations
Other noncurrent liabilities:
Deferred income taxes
Pension and postretirement benefits
Total other noncurrent liabilities
Minority interests
Shareholders’ equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares
Common stock, $.50 par value, 200,000,000 authorized shares; 110,626,331 and 109,460,931 issued and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
5-21
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Income from continuing operations
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization
Changes in operating assets and liabilities, net of effect of acquisitions and discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Business acquisitions, net of cash
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from the issuance of long-term debt and bridge loan
Net (repayments) borrowings on revolving credit facility
Principal payments on long-term debt and capital lease obligations
Repurchase and retirement of common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Effect of foreign exchange rate changes on cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest (net of amount capitalized)
6-21
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Income statement amounts for Schneider reported as discontinued operations, for the 13 and 26 weeks ended October 26, 2003 and October 27, 2002, respectively, are as follows:
Net sales
Costs of sales
Selling, general and administrative
Income before taxes
Income from discontinued operations
7-21
The following table details the major classes of assets and liabilities of discontinued operations held for sale as of October 26, 2003 and April 27, 2003. These assets and liabilities are recorded in the captions “Assets of discontinued operations held for sale” and “Liabilities of discontinued operations held for sale,” respectively. As of October 26, 2003, all assets and liabilities of discontinued operations held for sale are recorded as current assets and current liabilities, respectively.
Assets
Current assets
Property, plant and equipment, net
Goodwill and other intangibles
Other assets
Liabilities
Current liabilities
Long-term pension and other liabilities
In October of fiscal 2004, the Company entered into a 364-day bridge loan and security agreement (the bridge loan), with Goldman Sachs Credit Partners L.P., for $300.0 million. The proceeds from the bridge loan, are restricted to finance the acquisition of Farmland Foods, Inc. (Farmland Foods) (See Note 12) and, accordingly, are classified as noncurrent assets, as of October 26, 2003, on the Company’s consolidated condensed balance sheet. As of October 26, 2003, the interest rate on the bridge loan was LIBOR plus 2.25 %. At the time of the funding of the Farmland Foods acquisition, the interest rate increases to LIBOR plus 5.0 %. Should the bridge loan remain outstanding 120 days after the effective date, the provisions of the bridge loan allow the interest rate to increase up to prime plus 5.0 %.The bridge loan is guaranteed by the Company’s Canadian operations.
Fresh and processed meats
Hogs on farms
Cattle
Manufacturing supplies
8-21
Average common shares outstanding:
Dilutive stock options
Net income per common share:
In fiscal 2003, the Company adopted the fair value method defined in Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” which is in compliance with the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosures, an amendment to SFAS No. 123,” issued December 2002, to account for the Company’s stock option plans. The Company records compensation expense for stock options granted subsequent to April 28, 2002 based on their fair value as determined using the Black-Scholes option pricing model and weighted average assumptions. For the 13 and 26 weeks ended October 26, 2003 and October 27, 2002, the impact of recording compensation expense for stock options granted was less than one cent per diluted share. Stock options granted prior to April 29, 2002 continue to be accounted for under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) until they are modified. Under APB 25, no compensation expense is recorded. Had the Company used the fair value method to determine compensation expense for its stock options granted prior to April 29, 2002, net income and net income per basic and diluted share would have been as follows:
Net income, as reported
Pro forma net income
Net income per share, as reported:
Pro forma net income per share:
9-21
Other comprehensive gain:
Unrealized loss on hedge accounting
Unrealized loss on securities
Foreign currency translation
Reclassification adjustments:
Hedge accounting
Securities
Comprehensive income
13 Weeks Ended
October 26, 2003
Intersegment sales
Operating profit (loss)
October 27, 2002
26 Weeks Ended
10-21
In September of fiscal 2004, the Company acquired the assets of Alliance Farms Cooperative Association (Alliance) for approximately $22.8 million. Alliance produces approximately 340,000 market hogs annually.
In November of fiscal 2003, the Company acquired Vall, Inc. (Vall) for $60.7 million in cash plus assumed liabilities. Vall produces approximately 350,000 market hogs annually.
In June of fiscal 2003, the Company acquired an 80% interest in Stefano Foods, Inc. (Stefano’s) for $34.6 million in cash plus assumed debt. The balance of the purchase price in excess of the fair value of the assets acquired and the liabilities assumed at the date of the acquisition was recorded as goodwill totaling $23.2 million.
Had the acquisitions of Cumberland Gap, Vall, Alliance and Stefano’s occurred at the beginning of the fiscal years in which they were acquired, sales, income from continuing operations and income from continuing operations per diluted share would have been $4.1 billion, $50.1 million and $.45, respectively, for the 26 weeks ended October 26, 2003, $1.8 billion, $(1.9) million and $(.02), respectively, for the 13 weeks ended October 27, 2002 and $3.6 billion, $3.3 million and $.03, respectively, for the 26 weeks ended October 27, 2002. There would have been no material effect to sales, income from continuing operations, and income from continuing operations per diluted share for the 13 weeks ended October 26, 2003.
These acquisitions were accounted for using the purchase method of accounting and, accordingly, the accompanying financial statements include the financial position and the results of operations from the dates of acquisition.
The net impact of ineffectiveness related to the Company’s hedges was not material for the 13 and 26 weeks ended October 26, 2003 and October 27, 2002. No hedges were discontinued for the 13 and 26 weeks ended October 26, 2003 and October 27, 2002 as a result of it becoming probable that the forecasted transaction will not occur.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 (SFAS 143), “Accounting for Asset Retirement Obligations.” SFAS 143 applies to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition,
11-21
construction, development or normal operation of long-lived assets, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and can be reasonably estimated. SFAS 143 was effective for the Company on April 28, 2003, the first day of fiscal 2004. The application of SFAS 143 has had no material impact on the Company’s consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 expands consolidated financial statements to include certain variable interest entities (VIEs). VIEs are to be consolidated by the company which is considered to be the primary beneficiary of that entity, even if the company does not have majority control. FIN 46 is immediately effective for VIEs created after January 31, 2003 and is effective for the Company in the third quarter of fiscal 2004 for VIEs created prior to February 1, 2003. The Company is evaluating unconsolidated entities in which the Company has significant contractural, ownership, or other pecuniary interests to determine if they are VIEs that the Company must consolidate. Based on the Company’s preliminary analysis, there are certain entities that the Company may be required to consolidate in the third quarter of fiscal 2004. Consolidation of these entities would have no impact on net income or shareholders’ equity of the Company. While the consolidation of these entities would affect certain components of the Company’s balance sheet and income statement, the Company does not expect the application of FIN 46 to have a material impact on the Company’s consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Smithfield Foods, Inc. and subsidiaries (the Company) is composed of three reportable segments: Pork, Beef, and the Hog Production Group (HPG). The Pork segment consists primarily of fresh pork and processed meats subsidiaries in the United States (U.S.). The Beef segment consists primarily of U.S. beef processing subsidiaries. The HPG consists primarily of hog production operations located in the U.S. and Poland. The Pork and HPG segments have certain joint ventures and other investments in addition to their primary operations.
The Pork segment includes the Company’s operations that process, package, market and distribute fresh pork and processed meats to retail, foodservice and export channels. Similarly, the Beef segment operations process, package, market and distribute beef products to the same channels. The HPG segment supplies raw materials (live hogs) primarily to the Pork segment, as well as to other outside operations.
Prior to the second quarter of fiscal 2004, the Company’s segments were Pork, Beef, International and HPG. The new reporting segments replace the International segment with an Other segment. The International segment is no longer a reportable segment due to Schneider Corporation (Schneider) now being reported as a discontinued operation. The remaining international meat processing operations are now included in Other, along with the Company’s turkey processing and production operations.
12-21
The Company reclassified depreciation expense for the 13 and 26 weeks ended October 27, 2002, which was previously stated as a separate line item on the consolidated statements of income, into either cost of sales or selling, general and administrative expense. The consolidated results of continuing operations discussion reflects this reclassification.
RESULTS OF CONTINUING OPERATIONS
13 weeks ended October 26, 2003 compared to 13 weeks ended October 27, 2002
Consolidated
Sales increased by $287.2 million, or 16%, primarily the result of significant increases in average unit selling prices in both the Beef and Pork segments partially offset by slight sales volume decreases in both segments. The unit selling price increases in both segments are primarily the result of the impact of higher livestock prices on fresh meat prices. See the following section for comments on sales changes by business segments.
Gross profit increased $53.9 million, or 36%, primarily the result of higher margins in the HPG on a 33% increase in U.S. live hog market prices partially offset by increased raising costs in the HPG. Beef segment margins also increased due to strong beef demand. The HPG and Beef increases were offset by gross margin decreases in the Pork segment due to the increase in U.S live hog market prices exceeding the increase in average unit selling prices. Gross profit was negatively impacted by $3.5 million of losses associated with Hurricane Isabel.
Selling, general and administrative expenses increased $1.2 million, or 1%. This increase was primarily due to an increase in pension costs and other variable operating expenses partially offset by lower advertising and promotion costs, and a $4.5 million gain on the sale of securities.
Interest expense increased $3.8 million, or 17%, due to incremental borrowing costs on long-term debt issued in May of fiscal 2004 and higher borrowing levels associated with acquired businesses (see Liquidity and Capital Resources of Continuing Operations).
The effective income tax rate for the current period is 34.0%. This estimated tax rate used in the current year is greater than the full fiscal 2003 rate of 33.0%. This increase is primarily due to an increase in earnings at higher marginal tax rates. The Company had a valuation allowance of $30.0 million related to income tax assets as of October 26, 2003 primarily related to losses in foreign jurisdictions for which no tax benefit is recognized.
Reflecting the foregoing factors, income from continuing operations increased to $31.9 million, or $.29 per diluted share, in the 13 weeks ended October 26, 2003, up from a loss from continuing operations of $0.2 million, or $.00 per diluted share, in the 13 weeks ended October 27, 2002.
13-21
SEGMENT RESULTS
Pork Segment Results
(in millions)
Operating profit
Sales in the Pork segment increased $110.3 million on a 13% increase in the average unit selling price of pork products. This increase in selling prices is primarily the result of the impact of sharply higher live hog prices on fresh pork prices and improved product mix as evidenced by a 7% increase in processed meats volumes and an 8% decrease in fresh pork volumes. Fresh pork sales were impacted during the quarter by higher shipments of fresh pork from Canada. This supply increase resulted from lower Canadian live cattle prices following the report of a single case of bovine spongiform encephalopathy (BSE) in that country in May 2003. The U.S. Department of Agriculture imposed a ban on the importation of ruminants and ruminant products from Canada, including beef, cattle and animal feed in response to the report. This sharply lower cattle market in Canada triggered a decline in Canadian demand for pork and an increase in Canadian fresh pork exports to the U.S., where prices were higher. The processed meats volume increases were due to the Company’s continued emphasis on growing the further processed and value-added portion of the business. The Company recorded double-digit volume increases in many of its pre-cooked products, such as bacon, sausage, entrees and ribs.
Pork segment operating profit decreased $9.0 million due primarily to a 33% increase in live hog market prices. Processed meats margins decreased due to the higher raw material costs that could not be fully passed through in product pricing. Processed meats margins decreases were partially offset by the Company’s continued emphasis on the value-added processed meats categories and by a slight increase in fresh pork margins. Losses attributed to Hurricane Isabel and higher pension costs also contributed to lower operating profit.
Beef Segment Results
Beef sales increased $134.0 million due primarily to a 29% increase in average unit selling price, partially offset by a 3% decrease in sales volume. The average unit selling price increased on a limited supply of beef related to the discovered case of BSE (See Pork Segment Results). Continued strong demand for beef resulted in favorable market conditions which improved pricing as well. Another positive factor in the beef operations was improved rendered by-product prices due to a strengthened export market.
Operating profit increased $20.1 million due to higher average unit selling prices on higher pricing for quality choice cuts and rendered by-products partially offset by an increase in live cattle prices.
14-21
Hog Production Group Segment Results
HPG sales increased $80.6 million primarily the result of a 33% increase in live hog market prices. HPG had intersegment sales of $223.2 million and $178.0 million for the 13 weeks ended October 26, 2003 and October 27, 2002, respectively, at current prices, primarily to the Pork segment, which were eliminated in the Company’s consolidated condensed statements of income.
Operating profit increased $41.6 million primarily due to the increase in live hog prices in the current year partially offset by an increase in raising costs from higher feed costs.
26 weeks ended October 26, 2003 compared to 26 weeks ended October 27, 2002
Sales increased by $466.5 million, or 13%, primarily the result of significant increases in average unit selling prices in both the Beef and Pork segments, partially offset by slight sales volume decreases in both segments. The unit selling price increases in both segments are primarily the result of the impact of higher livestock prices on fresh meat prices. See the following section for comments on sales changes by business segments.
Gross profit increased $69.1 million, or 22%, primarily the result of higher margins in the HPG on a 27% increase in U.S. live hog market prices partially offset by increased raising costs in the HPG. Beef segment margins also increased due to strong beef demand. The HPG and Beef segment increases were offset by gross margin decreases in the Pork segment due to the increase in U.S live hog market prices exceeding the increase in average unit selling prices. Gross profit was negatively impacted by $3.5 million of losses associated with Hurricane Isabel.
Selling, general and administrative expenses decreased $5.9 million, or 2%. This decrease was primarily due to lower advertising and promotion costs and a $4.5 million gain on the sale of securities partially offset by an increase in pension costs and other variable operating expenses.
Interest expense increased $8.0 million, or 18%, due to incremental borrowing costs on long-term debt issued in May of fiscal 2004 and higher borrowing levels associated with acquired businesses (see Liquidity and Capital Resources of Continuing Operations).
The effective income tax rate decreased to 34.0% as compared with 39.0%. This estimated tax rate used in the current year is greater than the full fiscal 2003 rate of 33.0%. This increase is primarily due to an increase in earnings at higher marginal tax rates. The Company had a valuation allowance of $30.0 million related to income tax assets as of October 26, 2003 primarily related to losses in foreign jurisdictions for which no tax benefit is recognized.
Reflecting the foregoing factors, income from continuing operations increased to $49.5 million, or $.44 per diluted share, in the 26 weeks ended October 26, 2003 up from $4.8 million, or $.04 per diluted share, in the 26 weeks ended October 27, 2002.
15-21
Sales in the Pork segment increased $213.6 million on a 12% increase in the average unit selling price of pork products. This increase in selling prices is primarily the result of the impact of sharply higher live hog prices on fresh pork prices and improved product mix as evidenced by a 6% increase in processed meats volumes and a 7% decrease in fresh pork volumes. Fresh pork sales were impacted by higher shipments of fresh pork from Canada (See Pork Segment Results for the 13 weeks ended October 26, 2003). The processed meats volume increases were due to the Company’s continued emphasis on growing the further processed and value-added portion of the business. The Company recorded double-digit volume increases in many of its pre-cooked products, such as bacon, sausage, entrees and ribs.
Pork segment operating profit decreased $28.0 million due primarily to a 27% increase in live hog market prices and a continued weak operating environment for fresh pork. Processed meats margins decreased due to the higher raw material costs that could not be fully passed through in product pricing. The decrease in processed meats margins was partially offset by the Company’s continued emphasis on the value-added processed meats categories. Fresh pork margins decreased on higher raw material costs, which were partially offset by the Company’s continued emphasis on branded and value-added fresh pork categories and by lower advertising and promotion costs. Losses attributed to Hurricane Isabel and higher pension costs also contributed to lower operating profit.
Beef sales increased $180.4 million due primarily to a 21% increase in average unit selling price, partially offset by a 3% decrease in sales volume. The average unit selling price increased on a limited supply of beef related to the discovered case of BSE (See Pork Segment Results). Continued strong demand for beef resulted in favorable market conditions which improved pricing as well. Another positive factor in the beef operations was improved rendered by-product values due to a strengthened export market.
Operating profit increased $30.1 million due to higher average unit selling prices on higher pricing for quality choice cuts and rendered by-products partially offset by an increase in live cattle prices.
16-21
HPG sales increased $142.5 million, primarily the result of a 27% increase in live hog market prices and a slight increase in head sold. HPG had intersegment sales of $468.9 million and $377.6 million for the 26 weeks ended October 26, 2003 and October 27, 2002, respectively, at current prices, primarily to the Pork segment, which were eliminated in the Company’s Consolidated Condensed Statements of Income.
Operating profit increased $80.8 million primarily due to the increase in live hog prices in the current year partially offset by an increase in raising costs from higher feed costs.
LIQUIDITY AND CAPITAL RESOURCES OF CONTINUING OPERATIONS
Cash provided by operations totaled $15.7 million for the 26 weeks ended October 26, 2003 compared to $20.3 million in the same period last year. This decrease is due primarily to increased working capital commitments partially offset by higher earnings as compared to the prior year.
Cash used in investing activities increased to $499.6 million for the 26 weeks ended October 26, 2003 compared to $129.1 million for the comparable prior period. The increase includes restricted cash of $295.5 million held for the acquisition of Farmland Foods, Inc. (Farmland Foods), a $35.0 million deposit related to the acquisition of Farmland Foods, and the acquisitions of Cumberland Gap Provision Company and Alliance Farms Cooperative Association. The increase was partially offset by a decrease in capital expenditures in the current quarter and the acquisition of Stefano Foods, Inc. in the prior year. Capital expenditures in the current period totaled $65.8 million primarily related to fresh pork and processed meats expansion projects and additional hog production facilities. As of October 26, 2003, the Company had definitive commitments of $87.1 million for capital expenditures primarily for processed meats expansion, foreign farm expansion and production efficiency projects.
Financing activities provided cash of $492.0 million in the current 26-week period compared to $92.5 million for the prior year. In the current period, the Company issued $350.0 million of 10-year, 7.75% senior unsecured notes. Net proceeds from the sale of these notes were used to repay indebtedness under the Company’s revolving credit facility. The Company used the availability under the revolving credit facility to fund investment activity in the 26 weeks ended October 26, 2003. The Company expects to continue to use availability under the revolving credit facility, together with internally generated funds, for capital expenditures and general corporate purposes, including expansion of its processed meats business and strategic acquisitions. As of October 26, 2003, the Company’s availability under the revolving credit facility was $378.5 million. During the current period the Company also entered into a $300.0 million 364-day bridge loan and security agreement (the bridge loan). The net proceeds from the bridge loan were restricted for the financing of the acquisition of Farmland Foods. In the prior period, the Company increased its borrowings on its revolving credit facility $159.0 million in the prior period to fund net investment activity and to repurchase 0.9 million shares of the Company’s common stock. The Company did not repurchase any of its own stock in the current 26-week period and as of December 5, 2003, 16.8 million shares of the Company’s common stock have been repurchased under an 18.0 million-share repurchase program.
Management believes that through internally generated funds and access to global capital markets, funds are available to adequately meet the Company’s current and future operating, capital and financing needs.
17-21
On October 28, 2003, the Company completed the acquisition of substantially all of the assets of Farmland Foods, the pork production and processing business of Farmland Industries, Inc., for approximately $367.4 million in cash, plus the assumption of certain Farmland Foods liabilities, subject to post-closing adjustments to reflect the net change in certain acquired working capital items. At closing, an estimate of the net change in working capital resulted in an additional cash payment of approximately $18.0 million. The assumed liabilities include the pension obligations and associated assets of both Farmland Foods and Farmland Industries, Inc. The Company is currently evaluating the amount of this liability which it estimates to be between $50.0 million and $70.0 million. Farmland Foods had sales of $1.6 billion for the 52 weeks ended August 31, 2003 (unaudited).
In October of fiscal 2004, the Company entered into the bridge loan, with Goldman Sachs Credit Partners L.P, for $300.0 million. The proceeds from the bridge loan were used to complete the acquisition of Farmland Foods. As of October 26, 2003, the interest rate on the bridge loan was LIBOR plus 2.25 %. At the time of the funding of the Farmland Foods acquisition, the interest rate increases to LIBOR plus 5.0%. Should the bridge loan remain outstanding 120 days after the effective date, the provisions of the bridge loan allow the interest rate to increase up to prime plus 5.0%.
In June of fiscal 2004, the Company filed a shelf registration statement with the Securities and Exchange Commission to register sales of up to $750.0 million of its debt, stock and other securities from time to time. Net proceeds to the Company from the possible sale of these securities would be used for general corporate purposes, including expansion of the Company’s processed meats business and strategic acquisitions.
In May of fiscal 2004, the Company notified Pennexx Foods, Inc. (Pennexx), a 41% owned case-ready meat provider, that it was in default under a $30.0 million line of credit agreement. At that time, the Company terminated its commitment to make further loans under the credit agreement and demanded repayment of $11.9 million, the amount outstanding. In June of fiscal 2004, the Company took possession of Pennexx’s assets due to Pennexx’s inability to pay amounts owed to the Company under the credit agreement. The Company also assumed $12.1 million of Pennexx equipment lease obligations. The Company is operating these assumed assets under the name Showcase Foods, Inc. as part of the Beef segment. The value of these assets assumed was approximately the amount of the outstanding receivable under the credit agreement.
DISCONTINUED OPERATIONS
In September of fiscal 2004, the Company entered into a definitive share purchase agreement with Maple Leaf Foods Inc. (Maple Leaf), under which the Company would sell all of the outstanding stock of Schneider to Maple Leaf for approximately $378.0 million, including the assumption of Schneider’s debt, subject to closing adjustments. The Company expects this sale to be completed in fiscal 2004. The company expects to use the net proceeds from this sale, as well as additional borrowings under the revolving credit facility, to repay the bridge loan.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking” statements within the meaning of the federal securities laws. The forward-looking information includes statements concerning our outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. Forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the statements. These risks and uncertainties include the availability and prices of live hogs and cattle, raw materials and supplies, food safety, livestock disease, live hog production costs, product pricing, the competitive environment and related market conditions, hedging risk, operating efficiencies, changes in interest rate and foreign currency exchange rates, access to capital, the cost of compliance with environmental and health standards, adverse results from on-going litigation, actions of domestic and foreign governments, the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations and other risks and uncertainties described in the Company’s Annual Report on Form 10-K for fiscal 2003. The Company undertakes no obligation to update any forward looking statements, whether as a result of new information, future events or otherwise.
18-21
Item 4. Controls and Procedures
The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings
The Company was a party to a credit agreement and related security documents with Pennexx Foods, Inc. (Pennexx). In June 2003, due to Pennexx’s failure to pay amounts due to the Company under the credit agreement, and pursuant to the terms of a Forbearance and Peaceful Possession Agreement between the Company and Pennexx as approved by the U.S. District Court for the Eastern District of Pennsylvania, the Company took possession of substantially all of Pennexx’s assets. (See Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources of Continuing Operations). On July 24, 2003, a putative class action complaint was filed on behalf of shareholders of Pennexx in the U. S. District Court for the Eastern District of Pennsylvania against Pennexx, its directors (including two of the Company’s officers that were former directors of Pennexx) and the Company. The complaint alleges violations of federal securities laws and state common law and seeks unspecified compensatory damages in connection with the Company’s foreclosure on Pennexx’s assets. On December 3, 2003, Pennexx filed a cross-claim in the securities action against the Company and the Company’s officers that formerly served as directors of Pennexx. The cross-claim alleges, among other things, fraud, breach of fiduciary duty and tortious interference with contractual relations, and seeks damages in excess of $226 million. The Company believes that the allegations in the securities action, including the cross-claim filed by Pennexx, are completely unfounded and have no basis in fact and intends to vigorously defend the lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
Information regarding the matters submitted to shareholders at the annual meeting on September 3, 2003 and related voting results was included in the Company’s Form 10-Q for the quarterly period ended July 27, 2003.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 2.1
Exhibit 2.2
Exhibit 3.1
Exhibit 3.2
Exhibit 4.1
Exhibit 4.2
Exhibit 4.3
Exhibit 4.4
Exhibit 4.5
Exhibit 10.1
19-21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
B. Reports on Form 8-K
The following reports on Form 8-K were filed with or furnished to the SEC by the Company since the beginning of the second quarter of fiscal 2004. The Forms 8-K listed below that were furnished to the SEC shall not be deemed filed for any purpose.
20-21
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.
/s/ DANIEL G. STEVENS
Daniel G. Stevens
Vice President and Chief Financial Officer
/s/ JEFFREY A. DEEL
Jeffrey A. Deel
Corporate Controller
Date: December 10, 2003
21-21