-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IyA6libuEY7uwnH2H9roXAsuFDaDpjDIrlDtXRlQpQpolqdjcrxvzclm3x9GmZ6E dy1S1m3BQAK2a5EH74BTYw== 0000760775-99-000052.txt : 19990512 0000760775-99-000052.hdr.sgml : 19990512 ACCESSION NUMBER: 0000760775-99-000052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990327 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WLR FOODS INC CENTRAL INDEX KEY: 0000760775 STANDARD INDUSTRIAL CLASSIFICATION: POULTRY SLAUGHTERING AND PROCESSING [2015] IRS NUMBER: 541295923 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17060 FILM NUMBER: 99616829 BUSINESS ADDRESS: STREET 1: P O BOX 7000 CITY: BROADWAY STATE: VA ZIP: 22815 BUSINESS PHONE: 5408967001 MAIL ADDRESS: STREET 1: 800 CO OP DRIVE CITY: TIMBERVILLE STATE: VA ZIP: 22853 FORMER COMPANY: FORMER CONFORMED NAME: WAMPLER LONGACRE ROCKINGHAM INC DATE OF NAME CHANGE: 19881114 FORMER COMPANY: FORMER CONFORMED NAME: WAMPLER LONGACRE INC DATE OF NAME CHANGE: 19880209 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 27, 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 0-17060 WLR FOODS, INC. (Exact name of Registrant as specified in its charter) Virginia 54-1295923 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) P.O. Box 7000 Broadway, Virginia 22815 (Address including Zip Code of Registrant's Principal Executive offices) (540) 896-7001 (Registrant's telephone number, including area code) Indicate by cross 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 () The number of shares outstanding of Registrant's Common Stock, no par value, at April 29, 1999 was 16,520,426 shares. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements WLR FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) Thirteen weeks ended In thousands, except per share data MARCH 27, MARCH 28, 1999 1998 Net sales $192,881 $212,487 Cost of sales 169,716 201,763 -------- -------- Gross profit 23,165 10,724 Selling, general and administrative expenses 22,406 22,082 -------- -------- Operating income (loss) 759 (11,358) Other expense: Interest expense 1,425 6,255 Gain on sale of Goldsboro division 55 - Other income (515) (242) -------- -------- Other expense, net 965 6,013 -------- -------- Loss before income taxes (206) (17,371) Income tax benefit (79) (6,254) -------- -------- Net loss from continuing operations ($127) ($11,117) Loss from discontinued operations, net of tax - (147) Gain on disposal of discontinued operations, net of tax 644 - -------- -------- Total income (loss) from discontinued operations 644 (147) -------- -------- Net income (loss) $517 ($11,264) ======== ======== Basic loss per common share, continuing operations ($0.01) ($0.68) Basic earnings (loss) per common share, discontinued operations 0.04 (0.01) -------- -------- Total basic earnings (loss) per common share $0.03 ($0.69) ======== ======== Diluted loss per common share, continuing operations ($0.01) ($0.68) Diluted earnings (loss) per common share, discontinued operations 0.04 (0.01) -------- -------- Total diluted earnings (loss) per common share $0.03 ($0.69) ======== ======== See accompanying Notes to Consolidated Financial Statements.
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WLR FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Thirty-nine weeks ended In thousands, except per share data MARCH 27, MARCH 28, 1999 1998 Net sales $660,097 $702,710 Cost of sales 557,845 659,835 -------- -------- Gross profit 102,252 42,875 Selling, general and administrative expenses 70,509 68,070 -------- -------- Operating income (loss) 31,743 (25,195) Other expense: Interest expense 9,314 15,489 Gain on sale of Goldsboro division (7,699) - Other income (212) (722) -------- -------- Other expense, net 1,403 14,767 -------- -------- Earnings (loss) before income taxes and minority interest 30,340 (39,962) Income tax expense (benefit) 11,529 (14,386) Minority interest in net earnings of consolidated subsidiary - 66 -------- -------- Net earnings (loss) from continuing operations $18,811 ($25,642) Income from discontinued operations, net of tax 664 2,044 3 Gain on disposal of discontinued operations, net of tax 16,143 - -------- -------- Total income from discontinued operations 16,807 2,044 Extraordinary charge on early extinguishment of debt, net of tax ($2,559) - -------- -------- Net income (loss) $33,059 ($23,598) ======== ======== Basic earnings (loss) per common share, continuing operations $1.12 ($1.57) Basic earnings per common share, discontinued operations 1.00 0.12 Basic loss per common share, extinguishment of debt (0.15) - -------- -------- Total basic earnings (loss) per common share $1.97 ($1.45) ======== ======== Diluted earnings (loss) per common share, continuing operations $1.11 ($1.57) Diluted earnings per common share, discontinued operations 0.99 0.12 Diluted loss per common share, extinguishment of debt (0.15) - -------- -------- Total diluted earnings (loss) per common share $1.95 ($1.45) ======== ======== See accompanying Notes to Consolidated Financial Statements.
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WLR FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands MARCH 27, June 27, 1999 1998 ASSETS (unaudited) Current Assets Cash and cash equivalents $148 $335 Accounts receivable, less allowance for doubtful accounts of $1,724 and $1,515. 55,935 72,457 Inventories (Note 2) 105,511 128,031 Income taxes receivable 1,002 1,002 Other current assets 2,372 1,870 -------- -------- Total current assets 164,968 203,695 Property, plant and equipment, net 114,236 153,702 Deferred income taxes 2,365 18,247 Other assets 6,773 6,098 -------- -------- TOTAL ASSETS $288,342 $381,742 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $4,793 $3,452 Excess checks over bank balances 16,055 9,925 Trade accounts payable 26,020 28,742 Accrued expenses 33,979 32,245 Deferred income taxes 8,810 10,636 5 Other current liabilities 1,529 - -------- -------- Total current liabilities 91,186 85,000 Long-term debt, excluding current maturities 55,387 189,225 Other liabilities and deferred credits 3,724 3,626 Shareholders' equity : Common stock, no par value. 68,946 67,851 Additional paid-in capital 2,974 2,974 Retained earnings 66,125 33,066 -------- -------- Total shareholders' equity 138,045 103,891 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $288,342 $381,742 ======== ======== See accompanying Notes to Consolidated Financial Statements.
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WLR FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Thirty-nine weeks ended Dollars in thousands MARCH 27, MARCH 28, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $33,059 ($23,598) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Extraordinary loss on early extinguishment of debt 2,559 - Depreciation and amortization 16,351 19,592 Gains on sale of property, plant and equipment (78) (52) Gain on sale of Goldsboro division (7,699) - Gain on sale of discontinued operation (26,038) - Deferred income taxes 14,056 (13,761) Valuation allowance on assets held for sale 1,354 - Other, net 51 (287) Change in operating assets and liabilities: Decrease in accounts receivable 11,251 11,878 Decrease in inventories 13,461 23,194 Decrease (Increase) in other current assets (593) 3,529 Decrease (Increase) in long-term assets (1,165) 630 Decrease in accounts payable (1,356) (7,391) Increase in accrued expenses and other 5,743 1,330 -------- -------- Net Cash Provided by Operating Activities 60,956 15,064 7 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (19,240) (16,193) Proceeds from sale of discontinued operation 54,968 - Proceeds from sale of Goldsboro division 37,582 - Proceeds from sale of property, plant and equipment 325 1,582 -------- -------- Net Cash Provided By (Used in) Investing Activities 73,635 (14,611) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of revolver and long-term debt 418,900 23,040 Payments on revolver and long-term debt (558,364) (10,454) Financing costs paid (1,966) (5,174) Increase (decrease) in checks drawn not presented 6,130 (4,125) Issuance of common stock 522 699 Repurchase of common stock - (4,438) -------- -------- Net Cash Used in Financing Activities (134,778) (452) -------- -------- (Decrease) Increase in Cash and Cash Equivalents (187) 1 Cash and Cash Equivalents at Beginning of Fiscal Year 335 283 -------- -------- Cash and Cash Equivalents at End of Period $148 $284 ======== ======== 8 Supplemental Cash Flow Information: Cash paid (refunded) for : Interest $11,713 $13,026 Income taxes 6,306 (3,149) The Company considers all highly liquid investments with maturities of 3 months or less at purchase to be cash equivalents. Non-cash financing activities: In fiscal 1998: The Company issued 102,296 shares as a stock dividend in the first quarter. The Company issued 889,898 stock warrants in the third quarter relating to the debt refinancing; of these 266,969 were immediately exercisable and were recorded at a value of $1,695,256. In fiscal 1999:, The Company recorded 142,384 stock warrants at a value of $904,136 which related to the February 1998 debt refinancing in the first quarter. The Company had 28,180 stock warrants expire at a value of $178,943 when a portion of the February 1998 debt was repaid in the first quarter. The Company incurred an extraordinary charge on early extinguishment of debt in the amount of $4.1 million in the second quarter. See accompanying Notes to Consolidated Financial Statements.
9 Notes to Consolidated Financial Statements WLR Foods, Inc. and Subsidiaries 1. Accounting Policies The consolidated financial statements presented herein, include the accounts of WLR Foods, Inc. and its wholly-owned subsidiaries. All material balances and transactions have been eliminated in consolidation. The consolidated balance sheet as of March 27, 1999, and the consolidated statements of operations for the thirteen and thirty-nine weeks ended March 27, 1999 and March 28, 1998, and the consolidated statements of cash flows for the thirty-nine weeks ended March 27, 1999 and March 28, 1998 are unaudited. In the opinion of management, all adjustments necessary for fair presentation of such consolidated financial statements have been included. Such adjustments consisted only of normal recurring accruals and the use of estimates. Interim results are not necessarily indicative of results for the entire fiscal year. The consolidated financial statements and notes are presented in conformity with the requirements for Form 10-Q and do not contain certain information included in the Company's annual consolidated financial statements and notes. The Company's unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Annual Report to Shareholders for the fiscal year ended June 27, 1998. In both, the accounting policies and principles used are consistent in all material respects. 2. Inventories A summary of inventories at March 27, 1999 and June 27, 1998 follows: (unaudited) Dollars in thousands MARCH 27, June 27, 1999 1998 Live poultry and breeder flocks $ 48,736 $ 58,947 Processed poultry and meat products 30,364 38,837 Packaging supplies, parts and other 13,665 15,879 Feed, grain and eggs 12,746 14,368 ------- ------- Total inventories $105,511 $128,031 ======= ======= 10 3. Earnings Per Share The following is a reconciliation between the calculation of basic and diluted net earnings (loss) per share: Third Quarter Third Quarter March 27, 1999 March 28, 1998 Basic EPS Computation Numerator - Net earnings (loss) $517 ($11,264) ======== ======== Denominator: Common shares outstanding 16,492 16,334 Effect of outstanding stock warrants 303 82 -------- -------- Basic weighted average common shares outstanding 16,795 16,416 ======== ======== Basic earnings (loss) per share $0.03 ($0.69) ======== ======== Diluted EPS Computation Numerator - Net earnings (loss) $517 ($11,264) ======== ======== Denominator: Common shares outstanding 16,492 16,334 Effect of outstanding options 0 0 Effect of outstanding stock warrants 303 82 -------- -------- Diluted weighted average common shares outstanding 16,795 16,416 ======== ======== Diluted earnings (loss) per share $0.03 ($0.69) ======== ======== Year To Date Year To Date March 27, 1999 March 28, 1998 Basic EPS Computation Numerator - Net earnings (loss) $33,059 ($23,598) ======== ======== Denominator: Common shares outstanding 16,462 16,291 Effect of outstanding stock warrants 299 28 -------- -------- 11 Basic weighted average common shares outstanding 16,761 16,319 ======== ======== Basic earnings (loss) per share $1.97 ($1.45) ======== ======== Diluted EPS Computation Numerator - Net earnings (loss) $33,059 ($23,598) ======== ======== Denominator: Common shares outstanding 16,462 16,291 Effect of outstanding options 13 0 Effect of outstanding stock warrants 445 28 -------- -------- Diluted weighted average common shares outstanding 16,920 16,319 ======== ======== Diluted earnings (loss) per share $1.95 ($1.45) ======== ======== 4. Sale of Assets The Company completed the sale of its Cassco Ice & Cold Storage subsidiary on July 31, 1998 for net proceeds of approximately $54 million, resulting in a gain of approximately $25 million ($15 million after tax). Income from operations in the current fiscal year was approximately $1 million ($0.7 million after tax). Both items relating to the sale have been segregated from continuing operations and reported as separate line items on the statement of operations. Based on a net asset value calculation at the date of sale, additional consideration was due to the Company. A portion of this additional consideration, $1.1 million, was received and recorded by the Company in February 1999. Additional proceeds, if any, will be recognized by the Company when agreed to and collected. In August 1998, the Company completed the sale of its Goldsboro, North Carolina chicken complex. Net proceeds of approximately $37 million resulted in a gain of approximately $8 million ($5 million after tax). Subsequent to the end of the third quarter, the Company completed the sale of its processing plant in Monroe, NC for net proceeds of $4.3 million, resulting in a loss of approximately $1.4 million, which had been previously reserved. During the second quarter of fiscal 1999, the Company had recorded a non-cash charge of $1.4 million to reduce the Monroe carrying value to approximate its net realizable value. 12 5. Debt Refinancing The Company refinanced its Secured Term Notes and Secured Revolving Credit Notes as of November 20, 1998. The new facility is a three-year financing agreement that provides a total borrowing capacity of $150 million. The Agreement includes a $50 million term loan and $100 million revolving credit facility. Both facilities have a maturity date of November 20, 2001 and are secured by virtually all of the Company's assets. At March 27, 1999, all $50 million of the term loan borrowings were based on a LIBOR rate of 5.00% plus the applicable margin of 140 basis points for a total rate of 6.40%. Revolving credit borrowings totaled $9.0 million as of March 27, 1999, at a LIBOR rate of 4.95% plus the 140 basis point applicable margin for a total rate of 6.35%. At the end of each quarter, the applicable margin is adjusted based upon Company performance. As of March 27, 1999 the applicable margin was at its lowest possible point. Principal payments of $1.0 to $1.5 million are required at the end of each fiscal quarter beginning with the fourth quarter of 1999 for the Term Loan portion of the credit facility. Additionally, principal payments are required on the proceeds of asset sales in excess of $1.0 million annually and for substantial new issuances of common stock. The Company recorded an extraordinary non-cash charge to write-off the remaining unamortized debt issue costs of the prior credit facility during the quarter ended December 26, 1998 of $1.5 million ($1.0 million after tax). The charge is shown as an extraordinary item for the early extinguishment of debt. During the first quarter ended on September 26, 1998, the Company recorded an extraordinary charge of $2.6 million ($1.6 million after tax) for the early extinguishment of debt resulting from the permanent reduction of its prior credit facility due to the sale of its Cassco Ice & Cold Storage, Inc. subsidiary and its Goldsboro, North Carolina chicken complex. Total year to date charges for the early extinguishment of debt are $4.1 million ($2.6 million after tax). The Company incurred approximately $2.0 million in costs to establish the new credit facility, which have been capitalized and are being amortized to interest expense over the life of the loan. In connection with the refinancing, an interest rate swap that was required under the prior credit facility was assigned from First Union National Bank to the Bank of Montreal. Accordingly, the swap has been marked to market as of November 20, 1998, with a non-cash charge of $0.6 million taken into interest expense. The variable to fixed interest rate swap agreement has a notional amount of $50.0 million, and fixes the Company's variable interest rate at 6.29% through 13 January 4, 2000. The related $0.6 million mark to market credit will be amortized as an offset to interest expense over the remaining life of the swap agreement. The Company was in compliance with all covenants required by its new credit facility as of March 27, 1999. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations WLR Foods, Inc. (the Company) is a fully integrated poultry production, processing and marketing business with operations in Virginia, West Virginia, Pennsylvania and North Carolina. Operating income for the third quarter of fiscal 1999 of $0.8 million was $12.1 million more than the same quarter last year. The improvement was primarily due to lower feed costs approximating $12 million. In total, prices declined approximately $4 million from the same quarter last year, with a $6 million decline in chicken pricing offset by a $2 million increase in the prices received for turkey products. Offsetting the decline in prices was improvements in operations and performance that totaled approximately $4 million. Results of Operations Net sales from continuing operations for the third quarter decreased $19.6 million or 9.2% to $192.9 million, compared to $212.5 million for the same quarter last year. Of this decrease, approximately $10 million is due to the closing of the distribution business in Franconia, Pennsylvania during the first quarter. Chicken revenues for the quarter increased 3%, the result of a 10% increase in volume, partially offset by a 7% decrease in pricing. Turkey revenues decreased 8%, with a 2% increase in price partially offsetting decreased volumes of 10%, which were planned cutbacks that primarily resulted from the conversion of the Marshville complex from turkey to chicken in the first quarter of this fiscal year. For the first nine months of fiscal 1999, net sales from continuing operations decreased $42.6 million or 6.1% to $660.1 million, compared to $702.7 million for the same period last year. Approximately $30 million of the decrease is the result of the closing of the Franconia distribution business. Chicken revenues increased 10%, the result of a 3% increase in pricing and a 7% increase in volume. Turkey revenues decreased 6%, with a 2% increase in price partially offsetting decreased volumes of 8%. For the third quarter of fiscal 1999, gross profits from continuing operations increased $12.4 million to $23.2 million and gross profit margins from continuing operations improved to 12.0% from 5.0% for the same quarter last year. Improving grain costs of approximately $12 million were the result of corn and soymeal average delivered prices decreasing 18% and 31%, respectively. Turkey prices for the quarter increased 2% resulting in additional revenues of $2 million, while 15 decreased chicken prices of 7% provided $6 million less in revenues. The Company also benefited from improved operating costs and performance of approximately $4 million. Gross profits from continuing operations increased $59.4 million to $102.3 million for the first nine months of fiscal 1999. Gross profit margins from continuing operations improved to 15.5% from 6.1% last year. The improvements in gross profits are primarily attributable to decreases in grain costs of approximately $46 million. In addition, chicken and turkey prices for the nine months increased 3% and 2%, respectively, compared to the same period last year, resulting in additional revenues of $8 million in chicken and $6 million in turkey. During the third quarter of fiscal 1999, selling, general and administrative expenses, which included accrued employee incentives of $0.1 million, increased $0.3 million when compared to the same quarter last year. For the first nine months of 1999, selling, general and administrative expenses, which included $1.6 million of accrued employee incentives, increased $2.4 million when compared to the same period last year. Interest expense decreased $4.8 million for the quarter and $6.2 million for the first nine months of the year, when compared to the same periods last year. These decreases are primarily the result of reduced borrowings. On August 14th, 1998 the Company sold its Goldsboro, North Carolina chicken complex for approximately $37 million in net proceeds resulting in a pre-tax gain of approximately $8 million The net proceeds were used to reduce long term debt. The Company had a net loss from continuing operations of $0.1 million, or $0.01 per diluted share for the third quarter of fiscal 1999, compared with a net loss of $11.1 million, or $0.68 per diluted share for the same quarter last year. For the first nine months of fiscal 1999, net earnings from continuing operations were $18.8 million, or $1.11 per diluted share, versus a net loss of $25.6 million, or $1.57 per diluted share in the same period last year. On July 31st, 1998 the Company sold its Cassco Ice and Cold Storage, Inc. subsidiary for approximately $54 million in net proceeds. The net proceeds from the sale of the subsidiary were used to reduce long-term debt. While there was no income from Cassco during the third quarter of this fiscal year, the year-to-date Cassco income from discontinued operations, net of tax, is $0.6 million and compares to $2.0 million in after-tax income for the nine months ended March 28, 1998. During the first fiscal quarter of 1999, the Company recorded a $15.5 million after-tax gain on the sale. Additional consideration was received during the third quarter of fiscal 1999 resulting in a $0.6 million 16 after-tax increase in the gain on sale of discontinued operations. Due to the permanent reduction of long term debt resulting from the sale of the Cassco subsidiary and the Goldsboro complex, the Company recorded an extraordinary after-tax charge of $1.6 million during the first quarter of fiscal 1999, representing the write-off of capitalized debt costs. In conjunction with the November 20, 1998 debt refinancing, the Company recorded an extraordinary after-tax charge of $1.0 million during the second quarter of fiscal 1999, representing the write-off of remaining capitalized debt costs pertaining to the refinanced credit facility. Net income for the fiscal 1999 third quarter was $0.5 million, or $0.03 per diluted share, and included an additional after-tax settlement totaling $0.6 million, or $0.04 per diluted share, on the sale of the Company s Cassco Ice & Cold Storage subsidiary, versus a net loss of $11.3 million, or $0.69 per diluted share, which included an after-tax loss of $0.2 million, or $0.01 per diluted share from the discontinued Cassco operation, for the same quarter last year. For the fiscal 1999 nine-month period, net income was $33.1 million, or $1.95 per diluted share, and included: after-tax income of $0.7 million, or $0.04 per diluted share from the Company's Cassco Ice & Cold Storage subsidiary; an after-tax gain of $16.1 million or $0.95 per diluted share on the sale of Cassco; and an after-tax, non-cash write-off totaling $2.6 million, or $0.15 per diluted share, on the early extinguishment of debt, versus a net loss of $23.6 million, or $1.45 per diluted share, which included after-tax income of $2.0 million, or $0.12 per diluted share from Cassco, for the same period last year. Financial Condition and Liquidity Accounts receivable and total inventory at the end of the first nine months of fiscal 1999 were $16.5 million and $22.5 million lower, respectively, when compared to the end of fiscal year 1998. Live and processed inventories decreased $10.2 million and $8.5 million, respectively. The decrease in live inventory was primarily due to the reduction in the number of turkeys grown and lower feed costs, while the processed inventories decreased primarily from the seasonal sale of turkey products and decreases in turkey production. Debt levels were reduced substantially during the first nine months of fiscal 1999, from $192.7 million at fiscal 1998 year-end to $60.2 million at the end of the first nine months of fiscal 1999. The decrease of $132.5 million is the result of approximately $93 million 17 from the sales of Cassco Ice and Cold Storage, Inc. and the Goldsboro complex, and from approximately $39.5 million in cash flow from operations. Capital Resources The Company's capital spending was $4.2 million and $19.2 million for the third quarter and the first nine months of fiscal 1999, respectively. The major capital project during this fiscal year was the conversion of the Marshville, North Carolina complex from turkey to chicken, which resulted in capital expenditures of $0.5 million for the third quarter and $9.9 million for the nine month period. The remaining capital expenditures were primarily for replacements of existing equipment and safety requirements. Depreciation expense was $4.8 million for the quarter and $14.5 million year-to-date. Projected capital spending for fiscal 1999 is expected to total $24 to $26 million. The Company remains in material compliance with all regulatory requirements at the present time. The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on March 28, 1998. The statement establishes standards for reporting comprehensive income and its components in a full set of general-purpose financial statements. The implementation of the standard did not have an impact on the financial reporting of the Company. The Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." The standard requires that companies report certain information about operating segments in a complete set of financial statements and in condensed financial statements of interim periods issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company does not believe the adoption of this statement will have a significant impact on the financial statements. Company performance expectations or "forward looking statements" expressed from time to time are always subject to the possible material impact of any risks of the business. These risks include weather conditions impacting grain production and harvesting and live growout of poultry; feed supplies and prices; supplies and selling prices of poultry and competing meats; consumer preferences; governmental and regulatory controls of the poultry industry; changes in the regulations governing production processes; and fluctuations in the general business climate. Year 2000 Update The Company began addressing the Year 2000 issues in 1995 and elected to replace its multiple financial and order management systems with 18 one set of integrated software from Oracle Corporation. An upgrade to a newer release of the Oracle software that supports the Year 2000 was completed in March of 1999. The Company has assessed all personal computers and communication networks and believes there are no significant Year 2000 problems in these areas. A review of operational systems, including processing plants, feed mills, warehouses and hatcheries has been performed. This review has resulted in a plan for minor upgrades or replacements of equipment. At the present time, management is not aware of any significant operational problems resulting from Year 2000 related equipment. To ensure that WLR's business with vendors and customers will continue without interruption in the new millennium, the Company began assessing vendor and customer Year 2000 readiness by written questionnaires in November of 1998. Questionnaires were sent to customers comprising a majority of sales revenue and to all significant vendors. To date, no problems have arisen with either vendors or customers, but all responses have not yet been obtained. The Company will continue to monitor and request Year 2000 readiness disclosures from its vendors and customers through out the remainder of the year. There can be no assurance that the systems of other parties upon which the Company relies will be converted on a timely basis. In evaluating contingency plans, the Company has identified its live production accounting as the area most likely to need a backup system in case of Year 2000 problems. The system is not deemed a critical system in terms of operating procedures and operates independently from the major Oracle operating systems. The Company estimates that the live production accounting system will be year 2000 compliant by no later than October of 1999. In the event of a system failure in the live accounting area, the Company believes that there is sufficient written documentation to prepare the needed accounting information on a manual basis. The Company has a committee that meets regularly to discuss progress and issues pertaining to the Year 2000. Progress is reported on a regular basis to the Board of Directors. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risks relating to the Company's operations result primarily from changes in interest rates and commodity prices. To address these risks, the Company enters into various hedging transactions as described below. The Company does not use financial instruments for trading purposes and is not party to any leveraged derivatives. Interest Rate Sensitivity The Company hedges exposures to changes in interest rates on certain of its financial instruments. Under the terms of various term and revolving credit loans, the Company enters into interest rate swap agreements to effectively lock in a fixed interest rate for a portion of these borrowings. In addition, the Company enters into interest rate cap agreements to effectively limit the Company's exposure to increases in interest rates. The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Expected Maturity Date Liabilities: Dollars in thousands 1999 2000 2001 2002 - -------------------- ---- ---- ---- ---- Liabilities: Long-term debt, including Current Portion Fixed Rate $18 $196 $202 $215 Average interest rate 6.00% 6.00% 6.00% 6.00% Variable Rate $1,027 $4,850 $5,850 $47,590 Average interest rate 6.39% 6.39% 6.39% 6.39% 20 Interest Rate Derivatives Dollars in thousands 1999 2000 2001 2002 - -------------------- ---- ---- ---- ---- Interest Rate Swaps Variable to Fixed $0 $50,000 $0 $0 Average pay rate 0.00 6.29% 0.00 0.00 Average receive rate - USD 1 month Libor Interest Rate Cap $0.00 $75,000 $0.00 $0.00 Average pay rate 0.00 6.50% 0.00 0.00 Average receive rate - USD 1 month Libor Liabilities: There- Fair Dollars in thousands 2003 after Total Value - -------------------- ---- ------ ----- ----- Liabilities: Long-term debt, including Current Portion Fixed Rate $89 $144 $864 $864 Average interest rate 6.00% 6.00% 6.00% Variable Rate $0 $0 $59,317 $59,317 Average interest rate 0.00% 0.00% 6.39% 21 Interest Rate Derivatives There- Fair Dollars in thousands 2003 after Total Value - -------------------- ---- ------ ----- ----- Interest Rate Swaps Variable to Fixed $0 $0 $50,000 ($535) Average pay rate 0.00 0.00 6.29% Average receive rate - USD 1 month Libor Interest Rate Cap $0.00 $0.00 $75,000 (1) Average pay rate 0.00 0.00 6.50% Average receive rate - USD 1 month Libor Commodity Price Sensitivity The Company is a purchaser of certain commodities, primarily corn and soybeans. The Company uses commodity futures and forward purchasing for hedging purposes to reduce the effect of changing commodity prices on a portion of its commodity purchases. The contracts that effectively meet risk reduction and correlation criteria are recorded using hedge accounting. Gains and losses on hedge transactions are recorded as a component of the underlying inventory purchase. The following table provides information about the Company's corn, soybean meal, other feed ingredient inventory, futures contracts and forward purchases that are sensitive to changes in commodity prices. For inventory, the table presents the carrying amount and fair value at March 27, 1999. For the futures contracts and forward purchases, the table presents the notional amounts in bushels, the weighted average contract prices, and the total dollar contract amount by expected maturity dates, the latest of which occurs in May 2000. Contract amounts are used to calculate the contractual payments and quantity of corn and soybean meal to be exchanged under the futures and forward contracts. 22 On Balance Sheet Commodity Position and Related Derivatives Carrying Fair Dollars in thousands Amount Value - -------------------- -------- ----- Corn, Soybean Meal and Other Feed Ingredient Inventory 8,519 8,519 Contractual Fair Related Derivatives Amount Value Corn Futures Contracts and Forward Purchasing Contract Volumes (100,000 bushels) 152 Weighted Average Price (per bushel) $2.30 $2.41 Contract Amount (dollars in thousands) 34,891 36,626 Soy Bean Meal Futures Contracts and Forward Purchasing Contract Volumes (100 tons) 946 Weighted Average Price (per ton) $141.82 $141.22 Contract Amount (dollars in thousands) 13,416 13,360 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings As previously reported on Form 8-K, filed with the Commission on March 1, 1999, on February 24, 1999, the Attorney General of the State of West Virginia filed suit against WLR Foods and its Wampler Foods, Inc. subsidiary in the Circuit Court of Hardy County, West Virginia under the West Virginia Consumer Credit and Protection Act, seeking unspecified damages. The suit alleged that Wampler provided substandard chicks and feed to broiler growers who raise chickens for Wampler. On April 6, 1999, the Company was served with an Amended Complaint, alleging that the Company violated the West Virginia Consumer Credit and Protection Act, the West Virginia Antitrust Act and the federal Packers and Stockyard Act in dealing with its broiler growers in West Virginia. In addition to seeking restitution to growers and damages of an unspecified amount, which would be trebled in the case of violations of the West Virginia Antitrust Act, the suit seeks a $100,000 civil penalty for alleged violations of the Antitrust Act and civil penalties of $5,000 for each alleged violation of the Consumer Credit and Protection Act. The State has also requested a preliminary injunction, enjoining Wampler Foods from paying any grower less than the current average base rate, and from terminating any existing grower's contract. The Company has filed a Notice of Removal in the U.S. District Court in Elkins, West Virginia, removing the case to federal court The lawsuit is not expected to have a material effect on the Company's financial statements. The Company continues to believe the suit is without merit, and intends to defend it vigorously. Item 5. Other Information. On April 27, 1999, Phillip C. Stone, President of Bridgewater College, Bridgewater, Virginia, was appointed to the Registrant s Board of Directors to serve as an additional Class A Director until the next annual meeting of the shareholders. Mr. Stone received his undergraduate education at Bridgewater College, attended the University of Chicago Graduate School of Economics, and received a law degree from the University of Virginia. After practicing law for 24 years, Mr. Stone became President of Bridgewater College in 1994. He has held leadership positions in the Virginia State Bar and the Virginia Bar Association, of which he served as President in 1997. He has also chaired the Virginia State Bar Committee on Ethics and its Disciplinary Board. 24 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See attached Exhibit Index (b) Form 8-K Reporting Date February 24, 1999. Item Reported - Item 5, Other Events. WLR Foods, Inc. reported that the Attorney General for the State of West Virginia had filed suit against the Company and its wholly-owned subsidiary, Wampler Foods, Inc., alleging violations of the West Virginia Consumer Credit and Protection Act, seeking unspecified damages. Reporting Date March 19, 1999. Item Reported - Item 5, Other Events. WLR Foods, Inc. reported the resignation of Ruth J. Mack, Executive Vice President of Sales and Marketing. 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed this 11th day of May, 1999, by the Registrant's principal financial officer who is also authorized by the Registrant to sign on its behalf. WLR FOODS, INC. __/s/ Dale S. Lam__ Dale S. Lam, Chief Financial Officer and duly authorized signator for Registrant 26 EXHIBIT INDEX Exhibit No. Description 27 Financial Data Schedule 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS JUL-03-1999 MAR-27-1999 148 0 55,935 1,724 105,511 164,968 304,300 190,064 288,342 91,186 55,387 0 0 68,946 69,099 288,342 192,881 192,881 169,716 169,716 22,406 67 1,425 (206) (79) (127) 644 0 0 517 .03 .03
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