-----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, FyPpni8LfCwLVHgInSXFH8s/GWuwb6tMhHrwfHYkCxyBGNvaJNJqVigqxl2TboU5 d+DSWEQk21j23ybv0m6oLA== 0000916641-98-000848.txt : 19980803 0000916641-98-000848.hdr.sgml : 19980803 ACCESSION NUMBER: 0000916641-98-000848 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980503 FILED AS OF DATE: 19980730 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITHFIELD FOODS INC CENTRAL INDEX KEY: 0000091388 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 520845861 STATE OF INCORPORATION: DE FISCAL YEAR END: 0427 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-02258 FILM NUMBER: 98674586 BUSINESS ADDRESS: STREET 1: 900 DOMINION TOWER STREET 2: 999 WATERSIDE DRIVE CITY: NORFOLK STATE: VA ZIP: 23510 BUSINESS PHONE: 8043653000 MAIL ADDRESS: STREET 1: 900 DOMINION TOWER STREET 2: 999 WATERSIDE DRIVE CITY: NORFOLK STATE: VA ZIP: 23510 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY EQUITIES CORP DATE OF NAME CHANGE: 19710221 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY REAL ESTATE TRUST DATE OF NAME CHANGE: 19661113 10-K 1 SMITHFIELD FOODS 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ FORM 10-K ------------------------------------ (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended May 3, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number: 0-2258 SMITHFIELD FOODS, INC. (Exact name of registrant as specified in its charter) Virginia 52-0845861 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Commerce Street Smithfield, Virginia 23430 (Address of principal executive offices) (Zip Code) (757) 365-3000 (Registrant's telephone number, including area code) ------------------------------------ Securities registered pursuant to Section 12(b) of the Act: None (Title of Class) Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.50 par value per share (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of Registrant's Common Stock held by non-affiliates as of July 10, 1998 was approximately $844,100,548. This figure was calculated by multiplying (i) the $29-5/16 last sales price of Registrant's Common Stock as reported on The Nasdaq National Market on July 10, 1998 by (ii) the number of shares of Registrant's Common Stock not held by any officer or director of the Registrant or any person known to the Registrant to own more than five percent of the outstanding Common Stock of the Registrant. Such calculation does not constitute an admission or determination that any such officer, director or holder of more than five percent of the outstanding shares of Common Stock of the Registrant is in fact an affiliate of the Registrant. At July 10, 1998, 37,537,362 shares of the Registrant's Common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the Registrant's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS ITEM NUMBER PAGE PART I 1. Business............................................................ 3 General........................................................... 3 Business Strategy................................................. 4 Revenue by Source..................................................5 Fresh Pork Products .............................................. 5 Processed Meat Products........................................... 5 Raw Materials .................................................... 6 Customers and Marketing .......................................... 6 Trademarks ........................................................7 Distribution...................................................... 7 Competition ...................................................... 7 Employees .........................................................8 Regulation ....................................................... 8 2. Properties ..........................................................10 3. Legal Proceedings .................................................. 11 4. Submission of Matters to a Vote of Security Holders ................................... 11 4A. Executive Officers of the Company ...................................12 PART II 5. Market for Company's Common Equity and Related Stockholder Matters ..................................14 6. Selected Financial Data .............................................15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................16 8. Financial Statements and Supplementary Data .........................20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........................20 PART III 10. Directors and Executive Officers of the Company .....................21 11. Executive Compensation ..............................................21 12. Security Ownership of Certain Beneficial Owners and Management ...................................................21 13. Certain Relationships and Related Transactions ......................21 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................................22 SIGNATURES ..............................................................S-1 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ..........F-1 - 2 - PART I ITEM 1. BUSINESS General Smithfield Foods, Inc. ("Smithfield Foods" or the "Company"), as a holding company, conducts its pork processing operations through five principal subsidiaries: Gwaltney of Smithfield, Ltd. ("Gwaltney") and The Smithfield Packing Company, Incorporated ("Smithfield Packing"), both based in Smithfield, Virginia; John Morrell & Co. ("John Morrell"), based in Cincinnati, Ohio; Patrick Cudahy Incorporated ("Patrick Cudahy"), based in Cudahy, Wisconsin; and Lykes Meat Group, Inc. ("Lykes"), based in Plant City, Florida. The Company also conducts hog production operations through its 86% owned subsidiary, Brown's of Carolina, Inc. ("Brown's") and through a 50% interest in Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production arrangement between the Company and Carroll's Foods of Virginia, Inc., an affiliate of Carroll's Foods, Inc., one of the largest hog producers in the United States. Both Brown's and Smithfield-Carroll's produce hogs for the Company's pork processing plants in Bladen County, North Carolina and Smithfield, Virginia. The Company is also a participant in the Circle Four joint hog production arrangement ("Circle Four") with certain of the principal hog suppliers for the Company's Eastern operations, which conducts hog production operations in Milford, Utah. The hogs produced by Circle Four are sold to an unrelated party. In this report, references to "Smithfield Foods" or the "Company" are to Smithfield Foods, Inc. together with all of its subsidiaries, unless the context otherwise indicates. The Company believes it is the largest combined pork slaughterer and further processor of pork in the United States. Smithfield Foods produces a wide variety of fresh pork and processed meat products which it markets domestically and internationally to over 25 foreign markets, including Japan, Russia and Mexico. Since 1975, when current management assumed control of the Company, Smithfield Foods has expanded its production capacity and markets through a combination of strong internal growth and selective acquisitions of regional and multi-regional companies with well-recognized brand identities. The Company's brands include Smithfield Premium, Smithfield Lean Generation Pork, Gwaltney, John Morrell, Patrick Cudahy and Lykes. To complement its hog slaughtering and further processing operations, the Company has vertically integrated into hog production through Brown's and Smithfield-Carroll's. These hog production operations collectively accounted for 10.8% of the hogs the Company slaughtered in fiscal 1998. In addition, the Company obtains a substantial part of its hogs under market-indexed, multi-year agreements with several of the nation's largest suppliers of high quality hogs, strategically located in proximity to the Company's hog slaughtering and further processing operations in North Carolina and Virginia. These suppliers accounted for 42.9% of the hogs the Company slaughtered in fiscal 1998. The Company's fresh pork and processed meats are available nationwide. In a number of markets, the Company's brands are among the leaders in selected product categories. In recent years, as consumers have become more health conscious, the Company has broadened its product line to include leaner fresh pork products as well as fat-free, lower fat and lower salt processed meats. Management believes that leaner pork products combined with the pork industry's efforts to heighten public awareness of pork as an attractive protein source have led to increased consumer demand for pork products. In order to capture the growing market for lower fat products, the Company has developed, and is marketing on a national basis, a line of extremely lean, premium fresh pork products under the Smithfield Lean Generation Pork brand to selected retail chains and institutional foodservice customers. Business Strategy Since 1975, when current management assumed control, Smithfield Foods has expanded both its production capacity and its markets through a combination of strong internal growth and the acquisition of regional and multi-regional -3- companies with well-recognized brand identities. In fiscal 1982, the Company acquired Gwaltney, then Smithfield Packing's principal Mid-Atlantic competitor. This acquisition doubled the Company's sales and slaughter capacity and added several popular lines of branded products along with a highly efficient hot dog and lunch meats production facility. The proximity of Gwaltney to Smithfield Packing allowed for synergies and cost savings in manufacturing, purchasing, engineering and transportation. This combination set the stage for a series of acquisitions of smaller regional processors with widely-recognized brands. In fiscal 1985, the Company acquired Patrick Cudahy, which added a prominent line of dry sausage products to the Company's existing line of processed meats. In fiscal 1986, the Company acquired Esskay, Inc., a firm with a broad line of deli products having substantial brand loyalty in the Baltimore-Washington, D.C. metropolitan area. In fiscal 1991, the Company acquired the Mash's brand name and a ham processing plant in Landover, Maryland. In fiscal 1993, the Company acquired the Valleydale brand name and a bacon processing plant in Salem, Virginia. In December 1995, the Company acquired John Morrell, a major Midwestern pork processor with primary markets in the Midwest, Northeast and Western United States. This acquisition changed the Company's character from a large multi-regional pork processor to one with national distribution. It also doubled the Company's sales and slaughter capacity, added several popular lines of branded processed meat products along with four efficient processing facilities and more than doubled the Company's international sales. The Company believes that John Morrell's strength in smoked sausage, hot dogs, lunch meats, bacon and smoked hams complements the strong smoked meats, hot dog and bacon business of the Company's Eastern operations. The acquisition of John Morrell also presented substantial opportunities for cost savings in the areas of processing, marketing, purchasing and distribution. In November 1996, the Company acquired the assets and businesses of Lykes. Lykes is a pork processor with primary markets in the South and Southeast. Lykes produces branded processed meats, including bacon, hot dogs, and breakfast and dinner sausages, under the Lykes and Sunnyland brands. The Company's business is based around four strategic initiatives: (i) vertical integration into hog production through Company-owned hog production operations and long-term partnerships and alliances with large and efficient hog producers; (ii) use of genetics which produce hogs that are among the leanest commercially available to enable the Company to market highly differentiated pork products; (iii) continued growth through strategic acquisitions; and (iv) a heightened emphasis on expansion into international markets. As a complement to the Company's hog processing operations, the Company has vertically integrated into highly efficient hog production through Brown's and Smithfield-Carroll's. In addition, the Company is supplementing the hogs it obtains from these hog production operations with market-indexed, multi-year agreements with several of the nation's largest suppliers of high quality hogs, strategically located in proximity to the Company's hog slaughtering and further processing operations in North Carolina and Virginia, including Carroll's Foods, Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc. In May 1991, Smithfield-Carroll's acquired from National Pig Development Company ("NPD"), a British firm, the exclusive United States franchise rights for genetic lines of specialized breeding stock. Smithfield-Carroll's has sub-licensed these franchise rights to certain of the Company's strategic partners. The hogs produced by these genetic lines are among the leanest hogs commercially available, and enable the Company to market highly differentiated pork products. Management believes that the leanness and increased meat yields of these hogs will, over time, improve the Company's profitability with respect to both fresh pork and processed meat. In fiscal 1998, the Company processed 2.5 million NPD hogs and expects to increase that number substantially in future years. Revenues by Source The Company's sales are in one industry segment, meat processing. The following table shows for the fiscal periods indicated the percentages of the Company's revenues derived from fresh pork, processed meats, and other products. -4- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Fresh Pork................. 56% 59% 59% 51% 48% Processed Meats............ 40% 37% 37% 45% 49% Other Products............. 4% 4% 4% 4% 3% --- --- ---- ---- ---- 100% 100% 100% 100% 100% === === === === === The increase in percentage of revenues derived from fresh pork since fiscal 1994 resulted principally from an increase in the number of hogs slaughtered at its Bladen County, North Carolina plant. The meat industry is generally characterized by narrow margins; however, profit margins on processed meats are greater than profit margins on fresh pork and on other products. Fresh Pork Products The Company is one of the largest fresh pork processors in the United States. The Company slaughters hogs at five of its plants (three in the Southeast and two in the Midwest),with a current aggregate slaughter capacity of 78,300 hogs per day. The Company owns a fourth plant in the Southeast not currently in operation, which has the capacity to slaughter an additional 6,500 hogs per day. A substantial portion of the Company's fresh pork is sold to retail customers as unprocessed, trimmed cuts such as loins (including roasts and chops), butts, picnics and ribs. The Company also sells hams, bellies and trimmings to other further processors. The Company is putting greater emphasis on the sale of value-added, higher margin fresh pork products, such as boneless loins, hams, butts and picnics. In addition, the Company provides its own processing operations with raw material of much higher quality and freshness than that generally available through open market purchases. The Company is marketing an extensive product line of NPD fresh pork cuts (including boneless loins, shoulder cuts, chops, ribs and processed and cubed pork) under the Smithfield Lean Generation Pork brand to selected retail chains and institutional foodservice customers. Smithfield Packing has also developed a case-ready pork program designed to supply supermarket chains with pre-packaged, weighed, labeled and priced fresh pork, ready for immediate sale to the consumer. Management believes that these initiatives, over time, will result in greater brand identification and higher margins for the Company's fresh pork products. Processed Meat Products The Company manufactures a wide variety of processed meats, including smoked and boiled hams, bacon, sausage, hot dogs (pork, beef and chicken), deli and lunch meats and specialty products such as pepperoni and dry salami. The Company markets its processed meat products under labels that include, among others, Smithfield, Smithfield Premium, Smithfield Lean Generation Pork, Gwaltney, Patrick Cudahy and John Morrell, as well as Dinner Bell, Esskay, Jamestown, Kretschmar, Luter's, Lykes, Peyton's, Tobin's First Prize and Valleydale. The Company also sells a substantial quantity of processed meats as private label products. The Company believes it is one of the largest producers of smoked hams and picnics in the United States. In response to growing consumer preference for more nutritious and healthy meats, the Company has for several years emphasized production of more closely-trimmed, leaner and lower-salt processed meats, such as 40 percent-lower-fat bacon. The Company markets a lower-fat line of value-priced lunch meats, smoked sausage and hot dogs, as well as fat-free hot dogs and fat-free deli hams. - 5 - Raw Materials The Company's primary raw material is live hogs. Historically, hog prices have been subject to substantial fluctuations. In addition, hog prices tend to rise seasonally as hog supplies decrease during the hot summer months and tend to decline as supplies increase during the fall. This is due to lower farrowing performance during the winter months and slower animal growth rates during the hot summer months. Hog supplies, and consequently prices, are also affected by factors such as corn and soybean prices, weather and interest rates. The Company produces its own hogs through Brown's and Smithfield-Carroll's and purchases hogs from several of the nation's largest hog producers strategically located in proximity to the Company's hog slaughtering and further processing operations in North Carolina and Virginia, such as Carroll's Foods, Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc., as well as from other independent hog producers and dealers located in the East, Southeast and Midwest. The Company obtained 10.8% of the hogs it processed in fiscal 1998 from Brown's and Smithfield-Carroll's. The Company's raw material costs fall when hog production at Brown's and Smithfield-Carroll's is profitable and conversely rise when such production is unprofitable. The profitability of hog production is directly related to the market price of live hogs and the cost of corn. Hog producers such as Brown's and Smithfield-Carroll's generate higher profits when hog prices are high and corn prices are low, and lower profits (or losses) when hog prices are low and corn prices are high. Management believes that hog production at Brown's and Smithfield-Carroll's furthers the Company's strategic initiative of vertical integration and reduces the Company's exposure to fluctuations in profitability historically experienced by the pork processing industry. The Company has also established multi-year agreements with Carroll's Foods, Inc., Maxwell Foods, Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc. which provide the Company with a stable supply of high-quality hogs at market-indexed prices. These producers supplied 42.9% of the hogs processed by the Company in fiscal 1998. The Company purchases its hogs on a daily basis at its Southeastern and Midwestern slaughter plants; at Company-owned buying stations in three Southeastern and five Midwestern states; from certain Canadian sources; and through certain exclusive dealer-operated buying stations in the Midwest. The Company also purchases fresh pork from other meat processors to supplement its processing requirements, and raw beef, poultry and other meat products to add to its sausage, hot dogs and lunch meats. Such meat products and other materials and supplies, including seasonings, smoking and curing agents, sausage casings and packaging materials are readily available from numerous sources at competitive prices. Customers and Marketing The Company has significant market presence nationwide, and strong market positions in the Mid-Atlantic, Southeast, South and Midwest. The Company's fundamental marketing strategy is to sell large quantities of value-priced processed meat products as well as fresh pork to national and regional supermarket chains, wholesale distributors and the foodservice industry (fast food, restaurant and hotel chains, hospitals and other institutional customers) and export markets. Management believes that this marketing approach reaches the largest number of value-conscious consumers without requiring large advertising and promotional campaigns. The Company uses both in-house salespersons as well as independent commission brokers to sell its products. In fiscal 1998, the Company sold its products to more than 3,500 customers, none of whom accounted for as much as 10% of the Company's revenues. The Company has no significant or seasonally variable backlog because most customers prefer to order products shortly before shipment, and therefore, do not enter into formal long-term contracts. Management believes that its registered trademarks have been important to the success of its branded processed meat products. The Company in recent years has placed major emphasis on growing and expanding its international sales. In fiscal 1998, international sales comprised approximately 6% of the Company's total dollar sales. The Company provides the Japanese market with a line of unique branded, as well as other chilled and frozen unbranded, fresh pork products. In connection with export sales to Japan, the Company maintains a distributorship arrangement with Sumitomo Corporation of America. To serve other international markets, the Company may also enter into similar distribution and sales arrangements, as well as make international acquisitions or establish strategic joint ventures not only for product sales - 6 - but also for hog production and pork processing. The Company also had export sales to Russia, Mexico and to more than two dozen other foreign countries in fiscal 1998. The Company expects continued growth in its international sales for the foreseeable future. International sales are subject to factors beyond the Company's control, such as tariffs, exchange rate fluctuations and changes in governmental policies. The Company conducts all of its export sales in U.S. dollars and therefore bears no currency translation risk. The Company's processed meats business is somewhat seasonal in that, traditionally, the heavier periods of sales for hams are the holiday seasons such as Thanksgiving, Christmas and Easter, and the heavier periods of sales of smoked sausage, hot dogs and lunch meats are the summer months. The Company typically builds substantial inventories of hams in anticipation of its seasonal holiday business. The Company uses recognized price risk management and hedging techniques to enhance sales and to reduce the effect of adverse price changes on the Company's profitability. The Company's price risk management and hedging activities currently are utilized in the areas of forward sales, hog production margin management, procurement of raw materials (ham and bacon) for seasonal demand peaks, inventory hedging, hog contracting and truck fleet fuel purchases. Trademarks The Company owns and uses numerous marks, which are registered trademarks of the Company or are otherwise subject to protection under applicable intellectual property laws. The Company considers these marks and the accompanying goodwill and customer recognition valuable and material to its business. Distribution The Company uses a private fleet of leased tractors and trailers, as well as independent common carriers, to distribute both fresh pork and processed meats to its customers, as well as to move raw material between plants for further processing. The Company coordinates deliveries and uses backhauling to reduce overall transportation costs. The Company distributes its products directly from certain of its plants and from leased distribution centers located in Connecticut, Indiana, Missouri, Kansas, Texas and California. In addition, during fiscal 1998, the Company completed a distribution center adjacent to its plant in Sioux Falls, South Dakota. Competition The protein industry generally, and the pork processing industry in particular, are highly competitive. The Company's products compete with a large number of other protein sources, including beef, chicken, turkey and seafood, but the Company's principal competition comes from other pork processors. Management believes that the principal competitive factors in the pork processing industry are price, quality, product distribution and brand loyalty. Some of the Company's competitors are larger, have correspondingly greater financial and other resources and enjoy wider recognition for their branded products. Some of these competitors are also more diverse than the Company. To the extent that their other operations generate profits, such companies may be able to subsidize their pork processing operations for a time. Employees As of May 3, 1998, the Company has approximately 19,500 employees, approximately 10,800 of whom are covered by collective bargaining agreements expiring between December 31, 1998 and May 5, 2002. The Company believes that its relationship with its employees is good. - 7 - Regulation Regulation Generally. Like other participants in the meat processing industry, the Company is subject to various laws and regulations administered by United States, state and other government entities, including the Environmental Protection Agency ("EPA") and corresponding state agencies such as the Virginia State Water Control Board ("VSWCB"), the Virginia Department of Environmental Quality ("VDEQ"), the North Carolina Department of Environment and Natural Resources ("DENR"), the Iowa Department of Natural Resources and the South Dakota Department of Environment Natural Resources, as well as the United States Department of Agriculture, the United States Food and Drug Administration and the United States Occupational Safety and Health Administration. Management believes that Smithfield Foods presently is in compliance with all such laws and regulations in all material respects, and that continued compliance with these standards will not have a material adverse effect on the Company's financial position or results of operations. Furthermore, with respect to the litigation and investigations discussed below, the Company believes that the ultimate resolution of these suits will not have a material adverse effect on the Company's financial position or annual results of operations. Permit Violations At Smithfield Packing And Gwaltney Plants; Administrative Consent Orders; Connection To HRSD System. The National Pollutant Discharge Elimination System permit (the "discharge permit") for the Smithfield Packing and Gwaltney plants in Smithfield, Virginia, as modified by the VSWCB in 1990, imposed more stringent effluent limitations on phosphorus and two species of nitrogen (ammonia and Total Kjeldahl Nitrogen) than the wastewater treatment facilities at those plants were designed to meet. To achieve compliance with these new limitations, the Company agreed to discontinue wastewater discharges into the Pagan River and connect its wastewater treatment facilities to the regional sewage collection and treatment system operated by the Hampton Roads Sanitation District ("HRSD"), when available. This agreement was embodied in an administrative consent order issued by the VSWCB in 1991 (the "1991 Order"). The VSWCB issued a second consent order (the "1994 Order") which concerned compliance with other discharge permit terms pending connection to the HRSD system. The Company connected its Gwaltney and Smithfield Packing wastewater treatment facilities to the HRSD system in June 1996 and July 1997, respectively, which were the earliest dates that the HRSD could serve those individual plants. To prepare for making these connections, the Company made more than $2.7 million in capital expenditures to upgrade its existing wastewater treatment facilities. The Company must continue to operate these facilities to produce a wastewater suitable for treatment in the HRSD system and, in addition, pay the HRSD approximately $1.8 million per year for wastewater treatment. The Company will account for these wastewater treatment costs as current period charges in the years in which such costs are incurred. These wastewater treatment facilities no longer make any discharges that are subject to regulation under the discharge permit. However, before being connected to the HRSD system, these facilities exceeded applicable discharge permit and consent orders limitations as discussed below. Record-Keeping Violations. Under its discharge permit, the Company regularly tested wastewater to determine compliance with applicable effluent limitations. Federal and state laws require that records of such tests be maintained for three years. Failure to maintain these records may result in the imposition of civil penalties, and criminal sanctions may be imposed in the event of false reporting or destruction of records. In July 1994, the Company learned that records of many tests conducted from 1991 through early 1994 could not be found. Despite a careful search, most of these records were never found and are believed to have been destroyed. The employee responsible for the supervision of the tests and the maintenance of the test records was replaced and subsequently terminated. In October 1996, that former employee entered a guilty plea and was convicted in the United States District Court for the Eastern District of Virginia of 23 violations of the United States Clean Water Act, including records destruction and making false reports. Eight of these violations related to his duties as the Company's employee, while 15 violations were committed during his outside consulting activities for public and private entities unrelated to Smithfield Foods. Beginning in January 1998, several Company employees responsible for wastewater treatment were subpoenaed and testified before a federal grand jury in Norfolk, Virginia. Subsequently, the grand jury issued subpoenas requiring production of various environmental materials relating to the Company's Smithfield, Virginia wastewater and further testimony by Company employees. Neither the Company nor any of its other present or former employees has been charged with any criminal violation arising from these matters, but there can be no assurance that charges will not be brought. - 8 - EPA Suit. On August 8, 1997, in United States of America v. Smithfield Foods, Inc. et al. (Civil Case No. 2:96:cv1204), a federal judge for the United States District Court for the Eastern District of Virginia imposed a $12.6 million civil penalty on the Company and its Smithfield Packing and Gwaltney subsidiaries. The Company recognized a nonrecurring charge of $12.6 million during the first quarter of fiscal 1998 with respect to this penalty. This suit was brought by the EPA for violations of the federal Clean Water Act before the Company's wastewater treatment facilities were connected to the HRSD system. The court found 6,982 days of violation. The Company asserted in its defense that approximately 5,500 of these violations were excused by the 1991 and 1994 Orders, which were issued by VSWCB in its role as primary enforcement authority under the federal-state Clean Water Act program. The Court held that the EPA was not bound by its awareness of, and failure to object to, those orders. The Company has appealed this and other aspects of the court's decision to the United States Court of Appeals for the Fourth Circuit in Richmond, Virginia. There can be no assurance as to the outcome of such appeal or any subsequent proceedings regarding this matter. Suit by Commonwealth Of Virginia. On August 30, 1996, VDEQ filed a civil suit under the laws of the Commonwealth of Virginia against Smithfield Foods in the Circuit Court of the County of Isle of Wight, Virginia. This suit alleged a total of 22,517 discharge permit violations at the Gwaltney and Smithfield Packing facilities during the period from 1986 until such facilities were connected to the HRSD system in 1996 and 1997, respectively. The difference in the number of total violations charged by the EPA and the Commonwealth of Virginia is mainly attributable to their different methods of counting violations. The same categories of violations were involved in both suits, except that the Commonwealth of Virginia did not charge the Company with any permit violation excused by the 1991 and 1994 Orders. The Commonwealth's total was larger in part because the Commonwealth counted every missing record as a separate violation, and the EPA counted the number of days records were missing. In addition, the Commonwealth's suit alleged a separate violation for each failure to test chlorine levels every hour, failure to make certain required reports, and failure on certain days to properly staff Smithfield's facilities. While each violation is subject to a maximum penalty of $25,000, the Commonwealth's civil penalties policy is designed to recapture any economic benefit which accrued to the violator as a result of the noncompliance, and to impose a surcharge penalty for having committed such violations. In addition, the policy would increase the amount of penalties based upon the extent of environmental damage caused by the violations. At the beginning of the July 1997 trial of its case, the Commonwealth contended that the Company should pay a total of $6 million for the violations alleged, which included an alleged economic benefit of $4 million. In the middle of the trial, however, the Commonwealth voluntarily dismissed its suit. One week later, the Commonwealth refiled the same suit in Isle of Wight County Circuit Court. On June 29, 1998, the Court overruled the Company's motions to dismiss this second suit on double jeopardy and res judicata grounds. If the Commonwealth's charges go to trial again, the Company will present evidence to show and argue that, among other things, no economic benefit accrued to Smithfield Foods as a result of, and that no environmental damage was caused by, the violations. There can be no assurance as to the outcome of any such proceeding. - 9 - ITEM 2. PROPERTIES The following table summarizes information concerning the principal plants and other materially important physical properties of the Company:
APPROXIMATE LAND AREA FLOOR SPACE LOCATION OPERATION (ACRES) (SQ. FT.) - -------------------------------------------------------------------------------------------------------------------------- Smithfield Packing Plant No. 1* Slaughtering and cutting hogs; 25.5 457,000 501 North Church Street manufacture of bacon products, Smithfield, Virginia smoked meats, and dry salt meats; production of hams and picnics Smithfield Packing Plant No. 2 Production of bone-in and boneless 20.0 218,000 2501 West Vernon Avenue cooked and smoked ham and other Kinston, North Carolina smoked meat products Smithfield Packing Plant No. 3 Production of bone-in smoked ham 7.8 136,000 5801 Columbia Park Drive and other smoked meat products Landover, Maryland Smithfield Packing Plant No. 4* Slaughtering and cutting hogs; 860.0 966,000 Carolina Food Processors production of boneless hams and loins Division (Bladen County) Route #87 Tarheel, North Carolina Gwaltney Plant No. 1* Slaughtering and cutting hogs; 56.4 556,000 601 North Church Street production of boneless loins, bacon, Smithfield, Virginia sausage, bone-in and boneless cooked and smoked hams and picnics Gwaltney Plant No. 2 Production of hot dogs, lunch meats 13.1 200,000 3515 Airline Boulevard and sausage products Portsmouth, Virginia Gwaltney Plant No. 3 Manufacture of bacon, smoked 11.0 152,000 1013 Iowa Street sausage and boneless cooked hams Salem, Virginia John Morrell Plant No. 1* Slaughtering and cutting hogs and 88.0 2,350,000 1400 N. Weber Avenue lambs; production of boneless loins, Sioux Falls, South Dakota bacon, bot dogs, lunch meats, smoked and canned hams, and packaged lard John Morrell Plant No. 2 Slaughtering and cutting hogs; 22.0 243,000 1200 Bluff Road production of boneless hams, loins, Sioux City, Iowa butts and picnics John Morrell Plant No. 3 Production of hot dogs, lunch meats, 21.0 177,000 801 East Kemper Road smoked sausage and smoked hams Springdale, Ohio
- 10 -
APPROXIMATE LAND AREA FLOOR SPACE LOCATION OPERATION (ACRES) (SQ. FT.) - ------------------------------------------------------------------------------------------------------------------------ John Morrell Plant No. 4 Production of bacon and smoked hams 60.0 150,000 South 281 Highway Great Bend, Kansas Lykes Meat Group Plant No. 1 Production of hot dogs, lunch meats 55.0 206,763 4811 Lykes Road and sausage products Plant City, Florida Lykes Meat Group Plant No. 2 Production of hot dogs, lunch meats, 78.0 312,466 603 Cassidy Road cured meats, bacon, boneless cooked Thomasville, Georgia and smoked ham and other smoked bone-in meat products Patrick Cudahy Plant Manufacture of bacon, dry sausage, 60.0 1,090,000 3500 E. Barnard Avenue boneless cooked hams and refinery Cudahy, Wisconsin products
- ------------------------ * Pledged as collateral under various loan agreements. The Company, through Brown's, owns and leases hog production facilities in North Carolina and South Carolina, and through Smithfield-Carroll's, owns hog production facilities in North Carolina and Virginia. The Company operates hog buying stations in North Carolina, South Carolina and Virginia which have facilities for purchasing and loading hogs for shipment to the Company's plants in Smithfield, Virginia and Bladen County, North Carolina, and hog buying stations in Iowa, Kansas, Minnesota, Nebraska and South Dakota, which have facilities for purchasing and loading hogs for shipment to the Company's plants in Sioux City, Iowa and Sioux Falls, South Dakota. ITEM 3. LEGAL PROCEEDINGS Smithfield Foods and its subsidiaries and affiliates are parties in various lawsuits arising in the ordinary course of business, excluding certain matters discussed under "Business -- Regulation" above. In the opinion of management, any ultimate liability with respect to these matters will not have a material adverse effect on the Company's financial position or results of operations. For a discussion of certain other regulatory and environmental matters, see "Item 1. Business -- Regulation" above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. - 11 - ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the name and age, position with the Company and business experience during the past five years of each of the executive officers of the Company. The Board of Directors elects executive officers to hold office until the next annual meeting of the Board or Directors or until their successors are elected, or until their resignation or removal.
POSITION BUSINESS EXPERIENCE NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------------------ Joseph W. Luter, III (59) Chairman of the Board and Mr. Luter has served as Chairman Chief Executive Officer of the of the Board and Chief Executive Company Officer since 1975. Prior to May 1995, he also served as President of the Company. Lewis R. Little (54) President and Chief Operating Mr. Little was elected President Officer of the Company, Lykes and Chief Operating Officer of the and Smithfield Packing Company and Smithfield Packing in November 1996 and President and Chief Operating Officer of Lykes in June 1998. From May 1993 until November 1996, he was President and Chief Operating Officer of Gwaltney. Prior to May 1993, Mr. Little served as Executive Vice President of Gwaltney. Timothy A. Seely (48) President and Chief Operating Mr. Seely was elected President Officer of Gwaltney and Chief Operating Officer of Gwaltney in November 1996. Prior to that time, he was Vice President, Sales and Marketing, Fresh Meats, of Gwaltney. Roger R. Kapella (56) President and Chief Operating Mr. Kapella has served as Officer of Patrick Cudahy President and Chief Operating Officer of Patrick Cudahy since 1986. Joseph B. Sebring (51) President and Chief Operating Mr. Sebring has served as Officer of John Morrell President and Chief Operating Officer of John Morrell since May 1994. Between 1992 and May 1994, he served as President and Chief Executive Officer of Indiana Packers Company. Prior to 1992, Mr. Sebring was Executive Vice President of Fresh Mark, Inc.
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POSITION BUSINESS EXPERIENCE NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------------------ C. Larry Pope (43) Vice President, Finance of the Mr. Pope was elected Vice Company President, Finance of the Company in July 1998. He joined the Company as Controller in 1980 and served as Vice President and Controller from August 1995 to July 1998. Aaron D. Trub (63) Vice President, Chief Financial Mr. Trub has served as Vice Officer and Secretary of the President and Secretary of the Company Company since 1978. Prior to July 1998, he also held the position of Treasurer. In July 1998, he was elected Chief Financial Officer of the Company. Richard J. M. Poulson (59) Vice President and Senior Advisor Mr. Poulson joined the Company to the Chairman as Vice President and Senior Advisor to the Chairman in July 1998. Between 1994 and 1998, he was a senior managing director of the Appian Group, a private merchant bank with offices in Washington, D.C. and Paris. Prior to 1994, Mr. Poulson was a senior corporate partner with the law firm of Hogan & Hartson, in Washington, D.C. and London.
- 13 - PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Common Stock of the Company is traded in the national over-the-counter market and is authorized for quotation on The Nasdaq National Market under the symbol "SFDS." The following table sets forth, for the fiscal periods indicated, the highest and lowest sales prices of the Common Stock on The Nasdaq National Market. Range of Sales Prices ------------------------- High Low ------------------------- Fiscal year ended April 27, 1997 First quarter ................................... $15.00 $11.31 Second quarter .................................. 16.25 11.62 Third quarter ................................... 19.31 14.25 Fourth quarter .................................. 24.75 16.19 Fiscal year ended May 3, 1998 First quarter.................................... 31.12 22.00 Second quarter................................... 33.87 22.75 Third quarter.................................... 35.62 24.37 Fourth quarter................................... 36.37 28.62 Holders As of July 10, 1998, there were 1,143 record holders of the Common Stock. Dividends The Company has never paid a cash dividend on its Common Stock and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the terms of certain of the Company's debt agreements prohibit the payment of cash dividends on the Common Stock. The payment of cash dividends, if any, will be made only from assets legally available for that purpose, and will depend on the Company's financial condition, results of operations, current and anticipated capital requirements, restrictions under then existing debt instruments and other factors deemed relevant by the board of directors. - 14 - ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below for the fiscal years indicated were derived from the Company's audited consolidated financial statements. The information should be read in conjunction with the Company's consolidated financial statements (including the notes thereto) and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in, or incorporated by reference into, this report.
FISCAL YEAR ENDED --------------------------------------------------------------------------- May 3, April 27, April 28, April 30, May 1, 1998 1997 1996 1995 1994 --------------------------------------------------------------------------- (In thousands, except per share data) INCOME STATEMENT DATA: Sales........................................ $ 3,867,442 $ 3,870,611 $ 2,383,893 $ 1,526,518 $ 1,403,485 Cost of sales ............................... 3,479,828 3,549,673 2,203,626 1,380,586 1,287,880 -------------------------------------------------------------------------- Gross profit ................................ 387,614 320,938 180,267 145,932 115,605 Selling, general and administrative expenses .................................. 219,861 191,225 103,095 61,723 50,738 Depreciation expense......................... 42,300 35,825 25,979 19,717 21,327 Interest expense............................. 31,891 26,211 20,942 14,054 11,605 Nonrecurring charge.......................... 12,600 - - - - --------------------------------------------------------------------------- Income from continuing operations before income taxes and change in accounting for income taxes.......................... 80,962 67,677 30,251 50,438 31,935 Income taxes................................. 27,562 22,740 10,465 18,523 12,616 --------------------------------------------------------------------------- Income from continuing operations before change in accounting for income taxes.............................. 53,400 44,937 19,786 31,915 19,319 Income (loss) from discontinued operations... - - (3,900) (4,075) 383 --------------------------------------------------------------------------- Net income................................ $ 53,400 $ 44,937 $ 15,886 $ 27,840 $ 19,702 =========================================================================== DILUTED INCOME (LOSS) PER SHARE: Continuing operations before cumulative effect of change in accounting for income taxes.............................. $ 1.34 $ 1.17 $ 53 $ 92 $ .55 Discontinued operations...................... - - (.11) (.12) .01 Cumulative effect of change in accounting for income taxes............... - - - - - ------------------------------------------------------------------------- Net income................................... $ 1.34 $ 1.17 $ .42 $ .80 $ .56 ========================================================================= Average diluted shares outstanding........... 39,732 38,558 35,000 33,923 33,697 BALANCE SHEET DATA: Working capital.............................. $ 259,188 $ 164,312 $ 88,026 $ 60,911 $ 81,529 Total assets................................. 1,083,645 995,254 857,619 550,225 452,279 Long term debt and capital lease obligations............................... 407,272 288,486 188,618 155,047 118,942 Shareholders' equity......................... 361,010 307,486 242,516 184,015 154,950 OPERATING DATA: Fresh pork sales (pounds).................... 2,539,221 2,320,477 1,635,300 955,290 820,203 Processed meats sales (pounds)............... 1,370,232 1,218,835 839,341 774,615 661,783 Total hogs purchased......................... 17,952 16,869 12,211 8,678 7,414
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - 15 - Management's discussion and analysis set forth below should be read in conjunction with the Company's consolidated financial statements (including the notes thereto) appearing elsewhere in this Form 10-K. Introduction The Company is comprised of a Meat Processing Group ("MPG") and a Hog Production Group ("HPG"). The MPG consists of five pork processing subsidiaries, Gwaltney, John Morrell, Lykes, Patrick Cudahy, and Smithfield Packing. The HPG consists of Brown's and the Company's interests in Smithfield-Carroll's and Circle Four. Acquisitions The Company has expanded through selective acquisitions of regional and multi-regional meat processing companies with well-recognized brand identities. The Company acquired John Morrell in December 1995 and Lykes in November 1996. The Company's fiscal 1998 operating results include those of John Morrell and Lykes for the full fiscal year. The Company's fiscal 1997 operating results include those of John Morrell for the full year and those of Lykes for 25 weeks. The Company's fiscal 1996 operating results include those of John Morrell for 18 weeks. In December 1997, the Company reached an irrevocable agreement with members of the Schneider family, the controlling shareholders, to purchase all of their shares in Schneider Corporation ("Schneider") as part of an offer by the Company to acquire all of the shares of Schneider. Schneider produces and markets fresh pork and a full line of processed meats in Canada and had revenues in its fiscal year ended October 1997 of US$512.7 million. A lawsuit contesting the acquisition was filed by a Canadian competitor and other Schneider shareholders. The court dismissed these claims, which have since been appealed. If the Company is successful in the appeals process, management anticipates that the acquisition will be completed in the second quarter of fiscal 1999. Price-Risk Management Substantially all of the Company's products are manufactured from commodity-based raw materials, primarily live hogs. The cost of live hogs is subject to wide fluctuations due to unpredictable factors such as the price of corn and soybean meal (the principal feed ingredients for a hog), weather conditions, economic conditions, government regulation and other unforeseen circumstances. The pricing of the Company's fresh pork and processed meats are monitored and adjusted upward and downward in reaction to changes in the cost of the underlying raw materials. The unpredictability of the raw material costs limit the Company's ability to forward price fresh pork and processed meat products without the use of commodity contracts through a program of price-risk management. The Company uses price-risk management to enhance its ability to engage in forward sales contracts, where prices for future deliveries are fixed, by purchasing (or selling) commodity contracts for future periods to reduce or eliminate the effect of fluctuations in future raw material costs on the profitability of the related sales. While this may tend to limit the Company's ability to participate in gains from favorable commodity price fluctuations, it also tends to reduce the risk of loss from adverse changes in raw material prices. In addition, the Company utilizes commodity contracts for live hogs and corn to manage hog production margins when management determines that conditions are appropriate for such hedges. The particular hedging methods employed and the time periods for the contracts depend on a number of factors, including the availability of adequate contracts for the respective periods for the hedges. The Company attempts to closely match the commodity contract expiration periods with the dates for product sale and delivery. As a result, gains and losses from hedging transactions are recognized when the related sales are made and the hedges are lifted. As of May 3, 1998 and April 27, 1997, the Company had deferred $1.9 million and $2.2 million, respectively, of unrealized hedging gains on outstanding futures contracts. As of May 3, 1998 and April 27, 1997, the Company had open futures contracts with fair values of $59.6 million and $44.3 million, respectively. As of May 3, 1998 and April 27, 1997, the Company had deposits with brokers for outstanding futures contracts of $10.9 million and $3.5 million, respectively, included in prepaid expenses and other current assets. For open futures contracts, the Company uses a sensitivity analysis technique to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments. As of May 3, 1998, the potential change in fair value of open futures contracts, assuming a 10% change in the underlying commodity price, was $2.1 million. - 16 - Operations Fiscal 1998 represented 53 weeks of operations compared to fiscal 1997 and 1996, each of which represented 52 weeks of operations. Accordingly, sales and all expense categories in fiscal 1998 reflect the impact of an additional week of operations compared to fiscal 1997. Fiscal 1998 Compared to Fiscal 1997. Sales in fiscal 1998 were flat compared to fiscal 1997. Sales reflected a 9.4% increase in sales tonnage offset by a 9.0% decrease in unit sales prices, reflecting the impact of lower live hog costs. The increase in sales tonnage reflected a 9.4% increase in fresh pork tonnage, a 12.4% increase in processed meats tonnage and a 4.5% increase in the tonnage of other products. The increase in fresh pork tonnage was primarily related to an increase in the number of hogs slaughtered at the Company's Sioux City, Iowa and Bladen County, North Carolina plants. The increase in processed meats tonnage was primarily related to Lykes. Cost of sales decreased $69.8 million, or 2.0%, in fiscal 1998, reflecting the increased sales tonnage offset by a 17.3% decrease in live hog costs. Gross profit increased $66.7 million, or 20.8%, in fiscal 1998 compared to fiscal 1997. The increase in gross profit reflected sharply improved margins on higher sales of both fresh pork (56.1% of dollar sales) and processed meats (40.2% of dollar sales). Selling, general and administrative expenses increased $28.6 million, or 15.0%, in fiscal 1998. This increase was primarily due to Lykes and to higher selling, marketing and product promotion costs associated with intensified efforts to market branded fresh pork and processed meats. Depreciation expense increased $6.5 million, or 18.1%, in fiscal 1998. The increase was primarily due to completed capital projects at several of the Company's processing plants and to Lykes. Interest expense increased $5.7 million, or 21.7%, in fiscal 1998, reflecting the higher cost of long-term debt placed during the past two fiscal years and higher average borrowing costs related to higher levels of inventory and accounts receivable in the first half of fiscal 1998. A nonrecurring charge of $12.6 million in fiscal 1998 reflected the imposition of civil penalties against the Company by the U.S. District Court for the Eastern District of Virginia in a civil action brought by the U.S. Environmental Protection Agency. The Company has appealed the Court's judgment to the U.S. Court of Appeals for the Fourth Circuit. Income before income taxes in fiscal 1998 was adversely affected by a loss of $1.2 million at the HPG compared to a $20.7 million profit in fiscal 1997. The effective income tax rate for fiscal 1998 increased to 34.0% from 33.6% in fiscal 1997, reflecting the impact of the $12.6 million nondeductible nonrecurring charge offset by a lower tax rate on increased foreign sales, benefits related to certain insurance contracts, and employment-related tax credits. Excluding the nonrecurring charge, the effective income tax for fiscal 1998 decreased to 29.5% from 33.6% in fiscal 1997. The Company had no valuation allowance related to income tax assets as of May 3, 1998, and there was no change in the valuation allowance during fiscal 1998. Excluding the nonrecurring charge, net income was $66.0 million, or $1.66 per diluted share, in fiscal 1998. Including the nonrecurring charge, net income increased to $53.4 million in fiscal 1998, or $1.34 per diluted share, from $44.9 million, or $1.17 per diluted share, in fiscal 1997. Fiscal 1997 Compared to Fiscal 1996. - 17 - Sales in fiscal 1997 increased $1.49 billion, or 62.4%, from fiscal 1996. This increase was due to the inclusion of the sales of John Morrell and Lykes, significant increases in unit sales prices for both fresh pork and processed meats, and increased sales of fresh pork related to an increase in the number of hogs slaughtered at the Company's Bladen County, North Carolina plant. The increase in unit sales prices reflected the pass-through of higher raw material costs due to an 18.8% increase in live hog costs. The increase in sales reflected a 41.9% increase in fresh pork tonnage and a 45.2% increase in processed meats tonnage, primarily related to John Morrell and Lykes. Cost of sales increased $1.35 billion, or 61.1%, in fiscal 1997, reflecting the increased sales tonnage and increased live hog costs. Gross profit increased $140.7 million, or 78.0%, in fiscal 1997 compared to fiscal 1996, reflecting the inclusion of the operations of John Morrell and Lykes and increased overall margins at the Company's other operating subsidiaries. The increase in gross profit reflected significantly improved margins on sales of processed meats (37.3% of dollar sales) that were somewhat offset by lower margins on sales of fresh pork (58.9% of dollar sales). Fresh pork margins were adversely impacted by relatively high hog costs due to a shortage of live hogs, excess industry slaughter capacity and strong competition at the retail level from comparatively lower-priced beef and chicken. Selling, general and administrative expenses increased $88.1 million, or 85.5%, in fiscal 1997. This increase was primarily due to John Morrell and Lykes. Depreciation expense increased $9.8 million, or 37.9%, in fiscal 1997. The increase was primarily due to John Morrell and Lykes. Interest expense increased $5.3 million, or 25.2%, in fiscal 1997, reflecting borrowings to finance the acquisition of Lykes, increased carrying costs on higher levels of inventories and accounts receivable related to higher live hog costs and the higher cost of long-term debt placed during the fiscal year. Income before income taxes was favorably affected by a $20.7 million profit at the HPG in fiscal 1997 compared to a $10.8 million profit in fiscal 1996. The effective income tax rate in fiscal 1997 decreased to 33.6% from 34.6% in fiscal 1996, reflecting a lower tax rate on increased foreign sales and a reduction in the effective rate of state income taxes. The Company had no valuation allowance related to income tax assets as of April 27, 1997, and there was no change in the valuation allowance during fiscal 1997. Income from continuing operations increased $25.1 million in fiscal 1997, reflecting the operating results of John Morrell for the full fiscal year, significantly improved margins on processed meats and substantially increased profitability of the HPG. Reflecting the factors discussed above, net income increased to $44.9 million, or $1.17 per diluted share, in fiscal 1997, up from $15.9 million, or $.42 per diluted share, in the prior fiscal year. Financial Condition The pork processing industry is characterized by high sales tonnage and rapid turnover of inventories and accounts receivable. Because of the rapid turnover rate, the Company considers its inventories and accounts receivable highly liquid and readily convertible into cash. Borrowings under the Company's credit facilities are used to finance increases in the levels of inventories and accounts receivable resulting from seasonal and other market-related fluctuations in raw material costs. The demand for seasonal borrowings usually peaks in early November when ham inventories are at their highest levels, and borrowings are repaid in January when accounts receivable generated by sales of the hams are collected. - 18 - In July 1997, the Company entered into loan agreements with a bank group providing for $350 million in revolving credit facilities, consisting of a five-year $300 million revolving credit facility and a 364-day $50 million revolving credit facility. In connection with this refinancing, the Company repaid all borrowings under its previous $300 million credit facilities, which were terminated. The 364-day $50 million revolving credit facility was terminated in February 1998. Average borrowings under the facilities were $149.7 million in fiscal 1998, $165.1 million in fiscal 1997 and $133.4 million in fiscal 1996 at average interest rates of approximately 7% for each year. Maximum borrowings were $247.0 million in fiscal 1998, $215.0 million in fiscal 1997 and $179.8 million in fiscal 1996. There were no borrowings under the facility as of May 3, 1998. The outstanding borrowings were $150.0 million as of April 27, 1997 at an average interest rate of 7%. In February 1998, the Company issued $200 million in aggregate principal amount of 10-year 7.625% senior subordinated notes. The net proceeds from the sales of the notes were used to repay indebtedness under the Company's $300 million revolving credit facility with the balance invested in short-term marketable debt securities. Capital expenditures totaled $92.9 million in fiscal 1998 and included renovation and expansion of certain of the Company's processing plants, as well as the acquisition of an idle slaughter plant in South Dakota and hog production facilities in North Carolina. In addition, during fiscal 1998, the Company acquired substantially all of the assets and business of Curly's Foods, Inc. and certain of the assets and business of Mohawk Packing Co. for an aggregate $15.9 million in cash plus $11.8 million of assumed liabilities. The capital expenditures and the business acquisitions were funded with internally generated funds. As of May 3, 1998, the Company had definitive commitments of $18.9 million for capital expenditures primarily to increase its processed meats and value-added fresh pork capacities at several of its processing plants and to replace and upgrade portions of its hardware and software in response to the Year 2000. The Company plans to make capital expenditures in fiscal 1999 to expand its hog production operations and to increase its processed meats business through strategic acquisitions and joint ventures, both in the United States and internationally. This will be funded by cash flows from operations and borrowings under the $300 million revolving credit facility. The Company's various debt agreements contain financial covenants that require the maintenance of certain levels and ratios for working capital, net worth, current ratio, fixed charges, capital expenditures and, among other restrictions, limit additional borrowings, the acquisition, disposition and leasing of assets, and payment of dividends to shareholders. Year 2000 Management has assessed and is in the process of modifying or replacing the Company's affected hardware and software and is evaluating whether external service providers, significant vendors and customers are taking the appropriate action to remedy problems associated with the Year 2000. Management expects to have substantially all of the systems and application changes completed by the end of fiscal 1999 (May 2, 1999) and believes that its level of preparedness is appropriate. Management is currently in the process of quantifying the costs associated with the Year 2000; however, the ultimate costs are still not determinable. Costs are being charged to expense as incurred with the exception of hardware and software costs that are capitalizable in accordance with generally accepted accounting principles. The costs of the project and the expected completion dates are based on management's best estimates, which were derived using assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results 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. Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 - 19 - This report 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 fiscal 1998, volume trends, industry conditions and expectations for capital expenditures. There may also be other statements of exceptions, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking information and statements in this report are subject to risks and uncertainties, including availability and prices of raw materials, product pricing, competitive environment and related market conditions, operating efficiencies, access to capital and actions of governments, that could cause actual results to differ materially from those expressed in or implied by the information or statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements listed in Item 14(a) hereof are incorporated herein by reference and are filed as a part of this report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. - 20 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (a) Information required by this Item regarding directors and all persons nominated or chosen to become directors is incorporated by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998. (b) Information required by this Item regarding the executive officers of the Company is included in Part I, Item 4A of this report. There is no family relationship between any of the persons named in response to Item 10. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is incorporated by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is incorporated by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is incorporated by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 27, 1998. - 21 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. and 2. Index to Financial Statements and Financial Statement Schedule An "Index to Financial Statements and Financial Statement Schedule" has been filed as a part of this Form 10-K Annual Report on page F-1 hereof. 3. Exhibits Exhibit 3.1 -- Articles of Incorporation of the Company, as amended to date (incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997). Exhibit 3.2 -- By-Laws of the Company, as amended to date (incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997). Exhibit 4.1 -- Articles of Incorporation of the Company, as amended to date (see Exhibit 3.1 above). Exhibit 4.2 -- Form of Certificate representing the Company's Common Stock, par value $.50 per share (including Rights legend) (incorporated by reference to Exhibit 6 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997) Exhibit 4.3 -- Form of Certificate representing Rights (incorporated by reference to Exhibit 5 to the Company's Current Report on Form 8-K filed with the Commission on September 5, 1997) Exhibit 4.4 -- Rights Agreement dated as of May 1, 1998, by and between the Company and Harris Trust and Savings Bank, Rights Agent. Exhibit 4.5 -- Five-Year Credit Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, relating to a $300,000,000 secured five-year revolving credit facility (incorporated by reference to Exhibit 4.5 of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); and Amendment Number One to the Five-Year Credit Agreement dated as of November 19, 1997 (incorporated by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). Exhibit 4.5(a) -- 364-Day Credit Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, relating to a $50,000,000 secured 364-day revolving credit facility (incorporated by reference to Exhibit 4.5(a) of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); and Amendment Number One to the 364-Day Credit Agreement dated as of November 19, 1997 (incorporated by reference to Exhibit 4.5(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). - 22 - Exhibit 4.5(b) -- Collateral Agency, Pledge and Security Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, The Chase Manhattan Bank, as Collateral Agent, relating to the Company's five-year revolving credit facility and its 364- day revolving credit facility (incorporated by reference to Exhibit 4.5(b) of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.6 -- Note Purchase Agreement dated as of July 15, 1996, among Smithfield Foods, Inc. and each of the Purchasers listed on Annex 1 thereto, relating to $140,000,000 in senior secured notes (incorporated by reference to Exhibit 4.7 to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended July 28, 1996); Amendment Number One to the Note Purchase Agreement dated as of July 15, 1997 (incorporated by reference to Exhibit 4.6 of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); Amendment Number Two to the Note Purchase Agreement dated as of December 1, 1997 (incorporated by reference to Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998); and Amendment Number Three to the Note Purchase Agreement dated as of January 30, 1998. Exhibit 4.6(a) -- Joint and Several Guaranty dated as of July 15, 1996, by Gwaltney of Smithfield, Ltd., John Morrell & Co., The Smithfield Packing Company, Incorporated, SFFC, Inc., Patrick Cudahy Incorporated, and Brown's of Carolina, Inc. (incorporated by reference to Exhibit 4.7(a) to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended July 28, 1996); and Amendment Number One to the Note Purchase Agreement dated as of July 15, 1997 (incorporated by reference to Exhibit 4.6(a) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.6(b) -- Joint and Several Guaranty dated as of July 15, 1997, by Lykes Meat Group, Inc., Sunnyland, Inc., Valleydale Foods, Inc., Hancock's Old Fashioned Country Hams, Inc., Copaz Packing Corporation, and Smithfield Packing - Landover, Inc. (incorporated by reference to Exhibit 4.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 4.7 -- Master Lease Agreement dated May 14, 1993 between General Electric Capital Corporation and Brown's of Carolina, Inc. (incorporated by reference to Exhibit 4.12 to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 4.7(a) -- Corporate Guaranty by Smithfield Foods, Inc. dated May 14, 1993 (incorporated by reference to Exhibit 4.12(a) to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 4.8 -- Indenture between the Company and SunTrust Bank, Atlanta (incorporated by reference to Exhibit 4.8 to the Company's Current Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). Exhibit 4.8(a) -- Purchase Agreement between the Company and Chase Securities, Inc. (incorporated by reference to Exhibit 4.8(a) to the Company's Current Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). Exhibit 4.8(b) -- Registration Rights Agreement between the Company and Chase Securities, Inc. (incorporated by reference to Exhibit 4.8(b) to the Company's Current Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998). - 23 - Exhibit 10.1 -- Subscription Agreement dated September 3, 1992 between Smithfield Foods, Inc. and Carroll's Foods, Inc., covering 1,000,000 shares of Smithfield Foods, Inc. Common Stock (incorporated by reference to Exhibit 10.1 of the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993); and Amendment No. 1 to Subscription Agreement dated January 31, 1995 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 1996 filed with the Commission on July 18, 1996). Exhibit 10.2 -- Smithfield Foods, Inc. 1984 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Form 10-K Annual Report for the fiscal year ended April 28, 1991). Exhibit 10.3 -- Smithfield Foods, Inc. 1992 Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 10-K Annual Report for the fiscal year ended May 2, 1993). Exhibit 10.4 -- Smithfield Foods, Inc. Incentive Bonus Plan applicable to the Company's Chairman of the Board and Chief Executive Officer (incorporated by reference to Exhibit 10.8 to the Company's Form 10-K Annual Report for the fiscal year ended April 30, 1995 filed with the Commission on July 28, 1995). Exhibit 10.5 -- Smithfield Foods, Inc. 1997 Incentive Bonus Plan applicable to the Company's President and Chief Operating Officer (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K Annual Report for the fiscal year ended April 28, 1996 filed with the Commission on July 18, 1996). Exhibit 10.6 -- Smithfield Foods, Inc. 1998 Incentive Bonus Plan applicable to the Company's Chief Operating Officer (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K Annual Report for the fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997). Exhibit 10.7 -- Smithfield Foods, Inc. 1998 Stock Incentive Plan. Exhibit 21 -- Subsidiaries of the Registrant. Exhibit 23 -- Consent of Independent Public Accountants. Exhibit 27 -- Financial Data Schedule. (b) Reports on Form 8-K 1. Current Report on Form 8-K for February 9, 1998, was filed with the Commission on February 10, 1998, to report, under Item 5, the closing of a private offering of $200,000,000 aggregate principal amount of 7-5/8% Senior Subordinated Notes due 2008. - 24 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SMITHFIELD FOODS, INC. Date: July 27, 1998 By: /s/ JOSEPH W. LUTER, III -------------------- Joseph W. Luter, III Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on July 27, 1998.
SIGNATURE TITLE Chairman of the Board and Chief Executive /s/ JOSEPH W. LUTER, III Officer, and Director - ------------------------------------------------ Joseph W. Luter, III President and Chief Operating Officer, /s/ LEWIS R. LITTLE and Director - ------------------------------------------------ Lewis R. Little Vice President, Chief Financial Officer /s/ AARON D. TRUB and Secretary, and Director - ----------------------------------------------- (Principal-Financial-Officer) Aaron D. Trub Vice President, Finance /s/ C. LARRY POPE (Principal Accounting Officer) - ----------------------------------------------- C. Larry Pope Director /s/ ROBERT L. BURRUS, JR. - ----------------------------------------------- Robert L. Burrus, Jr. Director /s/ F. J. FAISON, JR. - ----------------------------------------------- F. J. Faison, Jr. Director /s/ JOEL W. GREENBERG - ----------------------------------------------- Joel W. Greenberg Director /s/ GEORGE E. HAMILTON, JR. - ----------------------------------------------- George E. Hamilton, Jr. - S-1 - Director - ----------------------------------------------- Richard J. Holland Director /s/ ROGER R. KAPELLA - ----------------------------------------------- Roger R. Kapella Director /s/ WILLIAM H. PRESTAGE - ----------------------------------------------- William H. Prestage Director /s/ JOSEPH B. SEBRING - ----------------------------------------------- Joseph B. Sebring
- S-2 - SMITHFIELD FOODS, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE(S) ------------- FINANCIAL STATEMENTS Report of Independent Public Accountants ............................................ F-2 Consolidated Balance Sheets for the Fiscal Years Ended April 27, 1997, and May 3, 1998 .................................................................. F-3 Consolidated Statements of Income for the Fiscal Years 1998, 1997, and 1996 ......... F-4 Consolidated Statements of Cash Flows for the Fiscal Years 1998, 1997, and 1996 ..... F-5 Consolidated Statements of Shareholders' Equity for the Fiscal Years ended April 28, 1996, April 27, 1997, and May 3, 1998 ............................................ F-6 Notes to Consolidated Financial Statements .......................................... F-7 to F-22 FINANCIAL STATEMENT SCHEDULE Independent Public Accountants' Report on Financial Statement Schedule .............. F-23 Schedule I -- Condensed Financial Information of Registrant ......................... F-24 to F-28
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF SMITHFIELD FOODS, INC.: We have audited the accompanying consolidated balance sheets of Smithfield Foods, Inc. (a Virginia corporation) and subsidiaries as of May 3, 1998, and April 27, 1997, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended May 3, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Smithfield Foods, Inc. and subsidiaries as of May 3, 1998 and April 27, 1997, and the results of their operations and their cash flows for each of the three years in the period ended May 3, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Richmond, Virginia June 10, 1998 F-2 SMITHFIELD FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
FISCAL YEARS ENDED ------------------------------- MAY 3, APRIL 27, 1998 1997 --------------- ------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ..................................................... $ 60,522 $ 25,791 Accounts receivable less allowances of $1,541 and $1,499 ...................... 156,091 166,094 Inventories ................................................................... 249,511 253,276 Prepaid expenses and other current assets ..................................... 44,999 43,217 ----------- ---------- Total current assets ........................................................ 511,123 488,378 ----------- ---------- Property, plant and equipment: Land .......................................................................... 15,157 13,964 Buildings and improvements .................................................... 240,032 205,523 Machinery and equipment ....................................................... 418,810 344,328 Construction in progress ...................................................... 31,873 50,578 ----------- ---------- 705,872 614,393 Less accumulated depreciation ................................................. (233,652) (187,518) ----------- ---------- Net property, plant and equipment ........................................... 472,220 426,875 ----------- ---------- Other assets: Investments in partnerships ................................................... 49,940 44,582 Goodwill, net of accumulated amortization of $1,964 and $1,716 ................ 12,360 4,062 Other ......................................................................... 38,002 31,357 ----------- ---------- Total other assets .......................................................... 100,302 80,001 ----------- ---------- $ 1,083,645 $ 995,254 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable ................................................................. $ - $ 77,500 Current portion of long-term debt and captial lease obligations ............... 8,511 7,800 Accounts payable .............................................................. 118,909 132,268 Accrued expenses and other current liabilities ................................ 124,515 106,498 ----------- ---------- Total current liabilities ................................................... 251,935 324,066 ----------- ---------- Long-term debt and capital lease obligations ................................... 407,272 288,486 ----------- ---------- Other noncurrent liabilities: Pension and postretirement benefits ........................................... 38,486 55,320 Deferred income taxes ......................................................... 11,745 7,260 Other ......................................................................... 13,197 12,636 ----------- ---------- Total other noncurrent liabilities .......................................... 63,428 75,216 ----------- ---------- Commitments and contingencies Shareholders' equity: Preferred stock, $1.00 par value, 1,000,000 authorized shares ................. - - Common stock, $.50 par value, 100,000,000 and 25,000,000 shares authorized; 37,537,362 and 19,196,681 issued ............................................ 18,769 9,598 Additional paid-in capital .................................................... 96,971 113,661 Retained earnings ............................................................. 245,270 191,870 Treasury stock, at cost, 437,000 shares ....................................... - (7,643) ----------- ---------- Total shareholders' equity .................................................. 361,010 307,486 ----------- ---------- $ 1,083,645 $ 995,254 =========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 SMITHFIELD FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ---------------------------------------------------- 1998 1997 1996 ---------------- ---------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales ......................................................... $ 3,867,442 $ 3,870,611 $ 2,383,893 Cost of sales ................................................. 3,479,828 3,549,673 2,203,626 ------------ ------------ ----------- Gross profit ................................................. 387,614 320,938 180,267 Selling, general and administrative expenses .................. 219,861 191,225 103,095 Depreciation expense .......................................... 42,300 35,825 25,979 Interest expense .............................................. 31,891 26,211 20,942 ------------ ------------ ----------- Nonrecurring charge ........................................... 12,600 - - Income from continuing operations before income taxes ......... 80,962 67,677 30,251 Income taxes .................................................. 27,562 22,740 10,465 ------------ ------------ ----------- Income from continuing operations ............................. 53,400 44,937 19,786 Loss from discontinued operations, net of tax ................. - - (3,900) ------------ ------------ ----------- Net income .................................................... $ 53,400 $ 44,937 $ 15,886 ============ ============ =========== Net income available to common shareholders ................... $ 53,400 $ 43,699 $ 14,734 ============ ============ =========== Income (loss) per basic share: Continuing operations ........................................ $ 1.42 $ 1.21 $ .55 Discontinued operations ...................................... - - ( .11) ============ ============ =========== Net income ................................................... $ 1.42 $ 1.21 $ .44 ============ ============ =========== Income (loss) per diluted share: Continuing operations ........................................ $ 1.34 $ 1.17 $ .53 Discontinued operations ...................................... - - ( .11) ============ ============ =========== Net income ................................................... $ 1.34 $ 1.17 $ .42 ============ ============ ===========
The accompanying notes are an integral part of these consolidated statements. F-4 SMITHFIELD FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ------------------------------------------- 1998 1997 1996 ------------- ------------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net income .......................................................... $ 53,400 $ 44,937 $ 15,886 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ..................................... 45,872 39,057 28,299 Deferred income taxes ............................................. 14,752 7,810 (27,059) (Gain) loss on sale of property and equipment ..................... 216 (3,288) 2,168 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable .............................................. 15,115 (12,606) (9,251) Inventories ...................................................... 11,672 (30,008) (41,316) Prepaid expenses and other current assets ........................ (10,550) (1,605) 1,535 Other assets ..................................................... (7,746) (10,410) 22,682 Accounts payable, accrued expenses and other liabilities ......... (25,194) 9,377 19,166 ---------- ---------- --------- Net cash provided by operating activities ............................ 97,537 43,264 12,110 ---------- ---------- --------- Cash flows from investing activities: Capital expenditures ................................................ (92,913) (69,147) (74,888) Business acquisitions, net of cash acquired ......................... (7,810) (34,835) (14,079) Investments in partnerships ......................................... (5,357) (7,293) (2,486) Net advances to joint hog production arrangements ................... - (113) 6,464 Proceeds from sale of property and equipment ........................ 1,153 4,141 82 ---------- ---------- --------- Net cash used in investing activities ................................ (104,927) (107,247) (84,907) ---------- ---------- --------- Cash flows from financing activities: Net (repayments) borrowings on notes payable ........................ (75,000) (33,063) 33,592 Proceeds from issuance of long-term debt ............................ 450,050 171,250 50,000 Principal payments on long-term debt and capital lease obligations (333,053) (76,974) (16,672) Proceeds from issuance of preferred stock ........................... - - 20,000 Exercise of common stock options .................................... 124 1,270 768 Dividends on preferred stock ........................................ - (1,238) (1,152) ---------- ---------- --------- Net cash provided by financing activities ............................ 42,121 61,245 86,536 ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents ................. 34,731 (2,738) 13,739 Cash and cash equivalents at beginning of year ....................... 25,791 28,529 14,790 ---------- ---------- --------- Cash and cash equivalents at end of year ............................. $ 60,522 $ 25,791 $ 28,529 ========== ========== ========= Supplemental disclosures of cash flow information: Interest paid, net of amount capitalized ............................ $ 31,428 $ 25,751 $ 20,684 ---------- ---------- --------- Income taxes paid ................................................... $ 10,179 $ 15,043 $ 1,685 ---------- ---------- --------- Non-cash investing and financing activities: Refinancing of long-term debt ..................................... $ - $ 59,707 $ - ---------- ---------- --------- Conversion of preferred stock to common stock ..................... $ - $ 20,000 $ 10,000 ---------- ---------- --------- Common stock issued for acquisition ............................... $ - $ - $ 33,000 ---------- ---------- --------- Conversion of net advances to joint hog production arrangements to investments in partnerships ...................... $ - $ 7,691 $ - ========== ========== =========
The accompanying notes are an integral part of these consolidated statements. F-5 SMITHFIELD FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ------------------------ PAID-IN RETAINED TREASURY SHARES PAR VALUE CAPITAL EARNINGS STOCK ---------- ----------- ----------- ------------ ------------- (IN THOUSANDS) Balance, April 30, 1995 ..................... 16,834 $ 8,417 $ 49,804 $ 133,437 $ (7,643) Net income ................................. - - - 15,886 - Common stock issued for acquisition of John Morrell & Co. ....................... 1,094 547 32,453 - - Conversion of preferred stock .............. 465 233 9,767 - - Exercise of stock options .................. 60 30 738 - - Dividends on preferred stock ............... - - - (1,152) - ------ -------- -------- --------- --------- Balance, April 28, 1996 ..................... 18,453 9,227 92,762 148,171 (7,643) Net income ................................. - - - 44,937 - Conversion of preferred stock .............. 667 333 19,667 - - Exercise of stock options .................. 77 38 1,232 - - Dividends on preferred stock ............... - - - (1,238) - ------ -------- -------- --------- --------- Balance, April 27, 1997 ..................... 19,197 9,598 113,661 191,870 (7,643) Net income ................................. - - - 53,400 - Two-for-one stock split .................... 19,200 9,600 (9,600) - - Exercise of stock options .................. 14 8 116 - - Reclassification of treasury stock ......... (874) (437) (7,206) - 7,643 ------ -------- -------- --------- --------- Balance, May 3, 1998 ........................ 37,537 $ 18,769 $ 96,971 $ 245,270 $ - ====== ======== ======== ========= =========
The accompanying notes are an integral part of these consolidated statements. F-6 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Smithfield Foods, Inc. and subsidiaries (the "Company") operate as a producer, manufacturer, marketer, seller and distributor of fresh pork and processed meats. The Company's principal hog slaughtering and further processing operations are conducted through five wholly-owned subsidiaries: Gwaltney of Smithfield, Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc. ("Lykes"), Patrick Cudahy Incorporated ("Patrick Cudahy") and The Smithfield Packing Company, Incorporated ("Smithfield Packing"). The Company also conducts hog production operations, principally through its 86%-owned subsidiary, Brown's of Carolina, Inc. ("Brown's"). PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company after elimination of all material intercompany balances and transactions. Investments in partnerships are accounted for using the equity method of accounting. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in these financial statements. Actual results could differ from those estimates. FISCAL YEAR The Company's fiscal year is the 52- or 53-week period ending on the Sunday nearest April 30. The fiscal year ended May 3, 1998 includes 53 weeks while the fiscal years ended April 27, 1997 and April 28, 1996 each include 52 weeks. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying value of cash equivalents approximates market value. At May 3, 1998, cash and cash equivalents include $30,100,000 in short-term marketable debt securities. INVENTORIES The Company's inventories are valued at the lower of first-in, first-out cost or market. Cost includes direct materials, labor and applicable manufacturing and production overhead. Inventories consist of the following:
MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) Fresh and processed meats ......... $ 171,090 $ 183,480 Hogs on farms ..................... 49,263 44,563 Manufacturing supplies ............ 18,538 15,732 Other ............................. 10,620 9,501 --------- --------- $ 249,511 $ 253,276 ========= =========
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets. Buildings and improvements are depreciated over periods from 20 to 40 years. Machinery and equipment is depreciated over periods from 2 to 20 years. Repair and maintenance charges are expensed as incurred. Improvements that materially extend the life of the asset are capitalized. Gains and losses from dispositions or retirements of property, plant and equipment are recognized currently. Interest on capital projects is capitalized during the construction period. Total interest capitalized was $2,530,000 in fiscal 1998, $2,640,000 in fiscal 1997 and $2,021,000 in fiscal 1996. Repair and maintenance expenses totaled $106,481,000, $89,670,000 and $59,951,000 in fiscal 1998, 1997 and 1996, respectively. F-7 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued OTHER ASSETS Goodwill is being amortized over no more than 40 years. Organization costs are amortized over a five-year period. Deferred debt issuance costs are amortized over the terms of the related loan agreements. REVENUE RECOGNITION Revenues from product sales are recorded upon shipment to customers. PRICE-RISK MANAGEMENT Substantially all of the Company's products are manufactured from commodity-based raw materials, primarily live hogs. The cost of live hogs is subject to wide fluctuations due to unpredictable factors such as the price of corn and soybean meal (the principal feed ingredients for a hog), weather conditions, economic conditions, government regulation and other unforeseen circumstances. The pricing of the Company's fresh pork and processed meats are monitored and adjusted upward and downward in reaction to changes in the cost of the underlying raw materials. The unpredictability of the raw material costs limit the Company's ability to forward price fresh pork and processed meat products without the use of commodity contracts through a program of price-risk management. The Company uses price-risk management to enhance its ability to engage in forward sales contracts, where prices for future deliveries are fixed, by purchasing (or selling) commodity contracts for future periods to reduce or eliminate the effect of fluctuations in future raw material costs on the profitability of the related sales. While this may tend to limit the Company's ability to participate in gains from favorable commodity price fluctuations, it also tends to reduce the risk of loss from adverse changes in raw material prices. In addition, the Company utilizes commodity contracts for live hogs and corn to manage hog production margins when management determines that conditions are appropriate for such hedges. The particular hedging methods employed and the time periods for the contracts depend on a number of factors, including the availability of adequate contracts for the respective periods for the hedges. The Company attempts to closely match the commodity contract expiration periods with the dates for product sale and delivery. As a result, gains and losses from hedging transactions are recognized when the related sales are made and the hedges are lifted. As of May 3, 1998 and April 27, 1997, the Company had deferred $1,867,000 and $2,183,000, respectively, of unrealized hedging gains on outstanding futures contracts. As of May 3, 1998 and April 27, 1997, the Company had open futures contracts with fair values of $59,645,000 and $44,291,000, respectively. As of May 3, 1998 and April 27, 1997, the Company had deposits with brokers for outstanding futures contracts of $10,888,000 and $3,512,000 respectively, included in prepaid expenses and other current assets. For open futures contracts, the Company uses a sensitivity analysis technique to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments. As of May 3, 1998, the potential change in fair value of open futures contracts, assuming a 10% change in the underlying commodity price, was $2,124,000. ENVIRONMENTAL EXPENDITURES Environmental expenditures that relate to current or future operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and cleanups are probable and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the Company's commitment to a formal plan of action (see Note 12). SELF-INSURANCE PROGRAMS The Company is self-insured for certain levels of general and vehicle liability, workers' compensation and health care coverage. The cost of these self-insurance programs is accrued based upon estimated settlements for known and anticipated claims. Any resulting adjustments to previously recorded reserves are reflected in current operating results. F-8 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued INCOME PER SHARE The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS 128"), effective for fiscal 1998. SFAS 128 requires a dual computation and presentation of income per share (see Note 13). The basic computation is based on average common shares outstanding during the period. The diluted computation reflects the potentially dilutive effect of common stock equivalents such as options and convertible preferred stock during the period. All income per share amounts for all periods are presented to conform to the SFAS 128 requirements. On September 26, 1997, a two-for-one stock split of the Company's common stock was effected in the form of a stock dividend. Accordingly, all historical share and per share amounts have been restated to reflect the stock split. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. Adoption of SFAS 130 in fiscal 1999 will have no impact on the Company's net income or shareholders' equity. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for determining an entity's operating segments and for disclosure of financial information on such segments. Adoption of SFAS 131 in fiscal 1999 will have no impact on the Company's financial position or results of operations, but will require expanded disclosure for identified operating segments. In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits -- an amendment of FASB Statements No. 87, 88 and 106" ("SFAS 132"). In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 132 and SFAS 133 are not required to be adopted until fiscal 2000. The Company has not completed all of the analysis required to estimate the impact of these statements. NOTE 2 -- ACQUISITIONS In November 1996, the Company acquired substantially all of the assets and business of Lykes from Lykes Bros. Inc. for $34,835,000 in cash and the assumption of $10,616,000 of current liabilities. The following unaudited pro forma information combines the operating results of the Company and Lykes, assuming the acquisition had been made as of the beginning of each of the periods presented:
1997 1996 ---------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales ..................................... $ 3,948,091 $ 2,630,031 Income from continuing operations ......... 33,839 12,291 Net income ................................ 33,839 8,391 Income per basic share: Continuing operations ................... $ .90 $ .33 Net income .............................. .90 .21 Income per diluted share: Continuing operations ................... $ .88 $ .32 Net income .............................. .88 .21
The preceding pro forma amounts are not intended to be projections of future results or trends and do not purport to be indicative of what actual consolidated results of operations might have been if the acquisitions had been effective as of the beginning of the periods presented. The Company made several acquisitions in fiscal 1998 which, in the aggregate, would not have a material effect on pro forma results. F-9 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 2 -- ACQUISITIONS -- Continued The Company accounted for the Lykes and other acquisitions using the purchase method of accounting. The results of operations of these acquired businesses are included in the accompanying consolidated statements of income from the respective dates of acquisition. NOTE 3 -- JOINT HOG PRODUCTION ARRANGEMENTS SMITHFIELD-CARROLL'S The Company has an arrangement with certain affiliates of Carroll's Foods, Inc. ("CFI") to produce hogs for the Company's meat processing plants in North Carolina and Virginia. The arrangement ("Smithfield-Carroll's") involves: (1) Smithfield-Carroll's Farms, a partnership owned jointly by the Company and Carroll's Farms of Virginia, Inc. ("CFAV"), which owns the hog raising facilities, and (2) a long-term purchase contract between the Company and Carroll's Foods of Virginia, Inc. ("CFOV"), which leases and operates the facilities, obligating the Company to purchase all the hogs produced by CFOV at prices equivalent to market at the time of delivery. A director of the Company is the president and a director of CFI, CFAV and CFOV. In addition, the Company has a long-term agreement to purchase hogs from CFI at prices which, in the opinion of management, are equivalent to market. As of May 3, 1998 and April 27, 1997, the Company had investments of $29,357,000 and $27,943,000, respectively, in the Smithfield-Carroll's partnership. Profits and losses are shared equally under the arrangement. During fiscal 1997, the Company converted net advances to the arrangement of $7,691,000 to investments in the arrangement. Substantially all revenues of the partnership consist of lease payments from CFOV which cover debt service, depreciation charges and other operating expenses. For the fiscal years 1998, 1997 and 1996, revenues were $7,386,000, $8,227,000 and $8,912,000, respectively. Pursuant to the long-term purchase contract, the Company purchased $79,087,000, $93,049,000 and $70,540,000 of live hogs from CFOV in fiscal 1998, 1997 and 1996, respectively. The contract resulted in decreased raw material costs (as compared to market costs) of $359,000, $5,245,000 and $2,617,000 in fiscal 1998, 1997 and 1996, respectively. In fiscal 1997, the Company received $6,905,000 from CFOV in repayment of all outstanding demand loans. Pursuant to the agreement with CFI, the Company purchased $246,371,000, $269,499,000 and $201,878,000 of hogs in fiscal 1998, 1997 and 1996, respectively. CIRCLE FOUR The Company has an arrangement with certain of its principal hog suppliers to produce hogs in the state of Utah for sale to an unrelated party. The chief executive officers of two of the suppliers and the president of another served as directors of the Company during fiscal 1998. As of May 3, 1998, the Company had a 37% interest in the arrangement. As of May 3, 1998 and April 27, 1997, the Company had investments of $16,198,000 and $12,673,000, respectively, in the arrangement. B&G Brown's has an arrangement with a company owned by the daughter and son-in-law of the chairman and chief executive officer of the Company. The arrangement, B&G Farms LLC ("B&G"), involves the leasing of hog production facilities to Brown's and the production of hogs by Brown's on a contractual basis. In addition, the Company has a contract to purchase all of the hogs produced by B&G at prices which, in the opinion of management, are equivalent to market. Profits and losses are shared equally under the arrangement. As of May 3, 1998 and April 27, 1997, B&G had advanced $1,504,000 and $1,430,000, respectively, to Brown's for working capital. As of May 3, 1998 and April 27, 1997, the Company had investments of $1,147,000 and $1,291,000, respectively, in B&G. B&G's revenues consist of lease payments from Brown's, which cover debt service and depreciation charges, and the profits or losses on the sale of hogs. Pursuant to the contract, the Company purchased $7,944,000, $6,439,000 and $7,990,000 of hogs in fiscal 1998, 1997 and 1996, respectively. F-10 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 3 -- JOINT HOG PRODUCTION ARRANGEMENTS -- Continued The following summarized financial information represents an aggregation of the financial position of the unconsolidated hog production operations of Smithfield-Carroll's, Circle Four and B&G:
MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) Current assets ...................... $ 25,738 $ 17,116 Property and equipment, net ......... 147,171 134,937 Other assets ........................ 1,988 6,978 --------- --------- $ 174,897 $ 159,031 ========= ========= Current liabilities ................. $ 21,773 $ 15,721 Long-term debt ...................... 72,290 71,094 Equity .............................. 80,834 72,216 --------- --------- $ 174,897 $ 159,031 ========= =========
NOTE 4 -- DEBT Long-term debt consists of the following:
MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) 7.625% senior subordinated notes, due February 2008 ......... $ 200,000 $ - 8.52% senior notes, due August 2006 ......................... 100,000 100,000 8.34% senior notes, due August 2003 ......................... 40,000 40,000 8.41% senior notes, payable through August 2004 ............. 14,779 14,779 9.85% senior notes, payable through November 2006 ........... 11,333 13,000 8.41% senior notes, payable through August 2006 ............. 9,853 9,853 9.80% senior notes, payable through August 2003 ............. 7,500 8,437 10.75% senior notes, payable through August 2005 ............ 7,250 8,500 Long-term credit facility ................................... - 75,000 Other long-term debt ........................................ 6,126 4,036 --------- --------- 396,841 273,605 Less current portion ........................................ (7,020) (5,949) --------- --------- $ 389,821 $ 267,656 ========= =========
Scheduled maturities of long-term debt are as follows:
(IN THOUSANDS) --------------- Fiscal year 1999 ................... $ 7,020 2000 ................... 2,915 2001 ................... 3,170 2002 ................... 3,083 2003 ................... 10,473 Thereafter ............. 370,180 -------- $396,841 ========
In July 1997, the Company entered into loan agreements with a bank group for $350,000,000 in revolving credit facilities, consisting of a five-year $300,000,000 revolving credit facility and a 364-day $50,000,000 revolving credit facility. In connection with this refinancing, the Company repaid all borrowings under its previous $300,000,000 credit facilities, which F-11 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 4 -- DEBT -- Continued were terminated. The borrowings are prepayable and bear interest, at the Company's option, at various rates based on margins over the federal funds rate or Eurodollar rate. The Company pays a commitment fee on the unused portion. The 364-day $50,000,000 revolving credit facility was terminated in February 1998. In February 1998, the Company issued $200,000,000 in aggregate principal amount of 10-year 7.625% senior subordinated notes. The net proceeds from the sale of the notes were used to repay indebtedness under the Company's revolving credit facility with the balance invested in short-term marketable debt securities. In fiscal 1997, the Company privately placed $140,000,000 of senior secured notes with a group of institutional lenders. The placement consisted of $40,000,000 of seven-year 8.34% notes and $100,000,000 of 10-year 8.52% notes. The proceeds of the financing were used to repay $65,200,000 of long-term bank debt and to reduce short-term borrowings. In conjunction with the placement of the senior secured notes, the Company refinanced $59,707,000 of existing institutional long-term debt with the same institutional lenders. The refinancing resulted in revised maturity dates and repayment schedules for the refinanced debt; however, no additional proceeds resulted from this refinancing. Average borrowings under credit facilities were $149,723,000 in fiscal 1998, $165,071,000 in fiscal 1997 and $133,400,000 in fiscal 1996 at average interest rates of approximately 7% for each year. Maximum borrowings were $247,000,000 in fiscal 1998, $215,000,000 in fiscal 1997 and $179,800,000 in fiscal 1996. There were no borrowings under the facility as of May 3, 1998. The outstanding borrowings were $150,000,000 as of April 27, 1997, at an average interest rate of 7%. The senior subordinated notes are unsecured. The senior notes are secured by four of the Company's major processing plants and certain other property, plant and equipment. The credit facility is secured by substantially all of the Company's inventories and accounts receivable. The Company determines the fair value of long-term debt instruments for public debt using quoted market prices and values all other debt using discounted cash flow techniques at estimated market prices for similar issues. As of May 3, 1997, the fair value of long-term debt, based on the market value of debt with similar maturities and covenants, was approximately $407,511,000. The Company's various debt agreements contain financial covenants that require the maintenance of certain levels and ratios for working capital, net worth, current ratio, fixed charges, capital expenditures and, among other restrictions, limit additional borrowings, the acquisition, disposition and leasing of assets, and payments of dividends to shareholders. NOTE 5 -- INCOME TAXES Total income tax expense (benefit) was allocated as follows:
1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS) Income from continuing operations ......... $ 27,562 $ 22,740 $ 10,465 Discontinued operations ................... - - (2,600) -------- -------- -------- $ 27,562 $ 22,740 $ 7,865 ======== ======== ========
F-12 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 5 -- INCOME TAXES -- Continued Income tax expense attributable to income from continuing operations consists of the following:
1998 1997 1996 ----------- ----------- ------------ (IN THOUSANDS) Current tax expense: Federal ..................... $ 11,315 $ 12,765 $ 8,850 State ....................... 2,043 2,805 1,530 -------- -------- -------- 13,358 15,570 10,380 -------- -------- -------- Deferred tax expense (benefit): Federal ..................... 15,684 9,424 (129) State ....................... (1,480) (2,254) 214 14,204 7,170 85 -------- -------- -------- $ 27,562 $ 22,740 $ 10,465 ======== ======== ========
A reconciliation of taxes computed at the federal statutory rate to the provision for income taxes is as follows:
1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Federal income taxes at statutory rate ................. 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit ......... 1.0 1.7 3.9 Nondeductible settlements .............................. 4.5 1.6 - Foreign sales corporation benefit ...................... (2.0) (1.4) (2.4) Benefits of certain insurance contracts ................ (3.3) (3.6) (3.1) Other .................................................. (1.2) 0.3 1.2 ---- ---- ---- 34.0% 33.6% 34.6% ==== ==== ====
The tax effects of temporary differences consist of the following:
MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) Deferred tax assets: Employee benefits ........................................... $ 23,264 $ 28,986 Alternative minimum tax credit .............................. 5,781 12,278 Tax credits, carryforwards and net operating losses ......... 12,773 11,807 Inventories ................................................. 1,286 1,377 Accrued expenses ............................................ 12,867 12,519 -------- -------- $ 55,971 $ 66,967 ======== ======== Deferred tax liabilities: Property, plant and equipment ............................... $ 36,488 $ 35,072 Investments in subsidiaries ................................. 719 3,154 Other assets ................................................ 6,875 2,100 -------- -------- $ 44,082 $ 40,326 ======== ========
As of May 3, 1998 and April 27, 1997, the Company had $23,634,000 and $33,901,000, respectively, of net current deferred tax assets included in prepaid expenses and other current assets. The Company had no valuation allowance related to income tax assets as of May 3, 1998 and April 27, 1997, and there was no change in the valuation allowance during fiscal 1998 and 1997. The tax credits, carryforwards and net operating losses expire from fiscal 1998 to 2012. The alternative minimum tax credits do not expire. F-13 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 6 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following:
MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) Payroll and related benefits ................ $ 46,834 $ 43,723 Self-insurance reserves ..................... 24,794 18,112 Pension and postretirement benefits ......... 23,931 17,518 Other ....................................... 28,956 27,145 --------- --------- $ 124,515 $ 106,498 ========= =========
NOTE 7 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK REINCORPORATION AND TREASURY STOCK In August 1997, the Company's shareholders approved the reincorporation of the Company in Virginia from Delaware. The purpose of the reincorporation was to reduce annual franchise taxes and does not affect the Company's capitalization or the manner in which it operates. Since Virginia law does not recognize treasury stock, the shares previously classified as treasury stock reverted to unissued shares resulting in a reduction in common stock and additional paid-in capital for the cost basis of the shares. AUTHORIZED COMMON SHARES In August 1997, the Company's shareholders approved an increase in the number of authorized common shares from 25,000,000 to 100,000,000. STOCK SPLIT As discussed in Note 1, the Company effected a two-for-one split of its common stock in September 1997. Share amounts presented in the Consolidated Balance Sheets and the Consolidated Statements of Shareholders' Equity reflect the actual share amounts outstanding for each period presented. Stock option agreements provide for the issuance of additional shares for the stock split. All stock options outstanding and per share amounts for all periods have been restated to reflect the effect of this split. ISSUANCE OF COMMON STOCK In fiscal 1996, the Company issued 2,188,546 split-adjusted shares of its common stock to Chiquita Brands International, Inc. as part of the acquisition of John Morrell. PREFERRED STOCK The Company has 1,000,000 shares of $1.00 par value preferred stock authorized, none of which are issued. The board of directors is authorized to issue preferred stock in series and to fix, by resolution, the designation, dividend rate, redemption provisions, liquidation rights, sinking fund provisions, conversion rights and voting rights of each series of preferred stock. In fiscal 1996, the Company authorized and issued 2,000 shares of Series C 6.75% cumulative convertible redeemable preferred stock in a private transaction for $20,000,000. In fiscal 1997, all of these shares were converted into 1,333,332 split-adjusted shares of the Company's common stock at $15.00 per share. In fiscal 1996, all of the Series B 6.75% cumulative convertible redeemable preferred stock, totaling $10,000,000, was converted into 930,232 split-adjusted shares of the Company's common stock at $10.75 per share. F-14 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 7 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued STOCK OPTIONS Under the Company's 1984 Stock Option Plan (the "1984 Plan"), officers and certain key employees were granted incentive and nonstatutory stock options to purchase shares of the Company's common stock for periods not exceeding 10 years at prices that were not less than the fair market value of the common stock on the date of grant. Stock appreciation rights which are exercisable upon a change in control of the Company are attached to the options granted pursuant to the 1984 Plan. The 1984 Plan has expired with the exception of outstanding options. Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"), management and other key employees may be granted nonstatutory stock options to purchase shares of the Company's common stock exercisable five years after grant for periods not exceeding 10 years. The exercise price for options granted prior to August 31, 1994 was not less than 150% of the fair market value of the common stock on the date of grant. On August 31, 1994, the Company amended and restated the 1992 Plan, changing the exercise price of options granted on or after that date to not less than the fair market value of the common stock on the date of grant. The Company reserved 2,500,000 shares of common stock under the 1992 Plan. As of May 3, 1998, there were 394,000 options available for grant under the 1992 Plan. The following is a summary of transactions for the 1984 Plan and the 1992 Plan during fiscal 1998, 1997 and 1996:
STOCK OPTION AVERAGE PRICE SHARES PER SHARE -------------- -------------- Outstanding at April 30, 1995 ......... 3,132,200 $ 7.90 Granted ............................. 690,000 12.65 Exercised ........................... (119,200) 3.30 Cancelled ........................... (100,000) 11.53 --------- -------- Outstanding at April 28, 1996 ......... 3,603,000 8.86 Granted ............................. 160,000 15.67 Exercised ........................... (154,000) 3.11 Cancelled ........................... (540,000) 12.29 --------- -------- Outstanding at April 27, 1997 ......... 3,069,000 8.90 Granted ............................. 314,000 25.39 Exercised ........................... (17,000) 4.06 --------- -------- Outstanding at May 3, 1998 ............ 3,366,000 $ 10.47 ========= ========
As of May 3, 1998, April 27, 1997 and April 28, 1996, the number of option shares exercisable were 1,260,000, 1,278,000 and 1,432,000, respectively, at average per share exercise prices of $4.06, $4.06 and $3.96, respectively. The following table summarizes information about stock options outstanding as of May 3, 1998:
OPTION SHARES EXERCISE OUTSTANDING AVERAGE REMAINING AVERAGE PRICE RANGE MAY 3, 1998 CONTRACTUAL LIFE EXERCISE PRICE - ------------------ -------------- ------------------- --------------- $ 4.06 1,260,000 1.0 $ 4.06 10.72 to 11.75 1,291,000 5.6 11.52 13.62 to 15.31 450,000 7.7 13.70 16.47 to 17.84 100,000 8.6 16.88 25.53 to 27.72 200,000 9.1 26.51 31.63 to 32.75 65,000 9.6 32.42
Stock options with an exercise price of $4.06 per share are the only options exercisable as of May 3, 1998. The Company has adopted the supplemental disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, compensation costs are not recognized for the stock option plans. Had the Company determined compensation cost based on the fair value at the grant date for its stock options granted in fiscal 1998, 1997 and 1996 consistent with the provisions of SFAS 123, the Company's income F-15 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 7 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued from continuing operations and income per common share from continuing operations would have been reduced to the pro forma amounts as follows:
1998 1997 1996 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income from continuing operations, as reported ......... $ 53,400 $ 44,937 $ 19,786 Pro forma income from continuing operations ............ 52,571 44,553 19,715 Income per common share from continuing operations, as reported: Basic ................................................ $ 1.42 $ 1.21 $ .55 Diluted .............................................. 1.34 1.17 .53 Pro forma income per common share from continuing operations: Basic ................................................ $ 1.40 $ 1.20 $ .55 Diluted .............................................. 1.32 1.16 .53
The weighted-average fair values of option shares granted were $11.88, $7.62 and $6.01 for fiscal 1998, 1997 and 1996, respectively. The fair value of each stock option share granted beginning in fiscal 1995 is estimated at date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
1998 1997 1996 ------------- ------------- ------------- Expected option life ............... 6.0 years 6.0 years 6.0 years Expected annual volatility ......... 35.0% 35.0% 35.0% Risk-free interest rate ............ 6.3% 6.2% 5.8% Dividend yield ..................... 0.0% 0.0% 0.0%
PREFERRED SHARE PURCHASE RIGHTS As part of the reincorporation, the Company adopted a preferred share purchase rights plan (the "Rights Plan") and declared a dividend of one preferred share purchase right (a "Right") on each outstanding share of common stock. Under the terms of the Rights Plan, if the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder to purchase, at the Right's then current exercise price, a number of the acquiring company's common shares having a market value of twice such price. In addition, if a person or group acquires 20% (or other applicable percentage, as summarized in the Rights Plan) or more of the outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right's then current exercise price, a number of shares of common stock having a market value of twice such price. Each Right will entitle its holder to buy one one-thousandth of a Series A junior participating preferred share ("Preferred Share"), par value $1.00 per share, at an exercise price of $37.50 subject to adjustment. Each Preferred Share will entitle its holder to 1,000 votes and will have an aggregate dividend rate of 1,000 times the amount, if any, paid to holders of common stock. The Rights will expire on May 31, 2001 unless the date is extended or unless the Rights are earlier redeemed or exchanged at the option of the board of directors for $.0001 per Right. Generally, each share of common stock issued after May 31, 1991, will have one Right attached. NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS The Company sponsors several defined benefit pension and defined contribution plans covering substantially all employees. Pension plans covering salaried employees provide benefits based on years of service and average salary levels. Pension plans covering hourly employees provide benefits of stated amounts for each year of service. The Company's funding policy for pension plans is to contribute annually the minimum amount required under ERISA. The pension plan assets are invested primarily in equities, debt securities, insurance contracts and money market funds. F-16 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued The status of the Company's pension plans and the components of pension expense are as follows:
MAY 3, 1998 APRIL 27, 1997 ---------------------------- ----------------------------- OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED PLANS PLANS PLANS PLANS ------------ ------------- ------------ -------------- (IN THOUSANDS) Accumulated benefit obligation ............................. $ 42,938 $ 185,420 $ 30,974 $ 170,850 ========= ========== ========= ========== Vested benefit obligation .................................. $ 34,508 $ 181,563 $ 26,483 $ 168,222 ========= ========== ========= ========== Plan assets at fair value .................................. $ 63,447 $ 139,945 $ 47,179 $ 123,417 Projected benefit obligation ............................... (48,664) (193,890) (38,805) (177,114) --------- ---------- --------- ---------- Excess (deficiency) of plan assets over projected benefit obligation ................................................ 14,783 (53,945) 8,374 (53,697) Items not recorded on balance sheets: Unrecognized net transition gain .......................... - - (90) - Unrecognized net gain from experience differences ......... (11,121) (1,874) (6,799) (10,173) Unrecognized prior service cost ........................... 797 - 992 88 --------- ---------- --------- ---------- Prepaid (accrued) pension costs ........................... $ 4,459 $ (55,819) $ 2,477 $ (63,782) ========= ========== ========= ==========
1998 1997 1996 ------------ ------------ ---------- Net periodic pension cost included the following: Service costs for benefits earned ........................ $ 4,103 $ 4,054 $ 2,662 Interest accrued on projected benefit obligation ......... 16,730 16,299 7,532 Actual return on plan assets ............................. (35,052) (15,556) (6,691) Net amortization and deferral ............................ 18,606 878 (200) --------- --------- -------- Net periodic pension cost .............................. $ 4,387 $ 5,675 $ 3,303 ========= ========= ========
In determining the projected benefit obligation in fiscal 1998 and 1997, the average assumed discount rate was 7% and 8%, respectively, while the assumed rate of increase in future compensation was 4% in fiscal 1998 and 5% in fiscal 1997. The average expected long-term rate of return on plan assets was 9% in fiscal 1998 and 1997. The Company provides health care and life insurance benefits for certain retired employees. These plans are unfunded and generally pay covered costs reduced by retiree premium contributions, co-payments and deductibles. The Company retains the right to modify or eliminate these benefits. The status of the Company's postretirement plans are as follows:
MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees and dependents ..................................... $ 6,806 $ 8,226 Active plan participants .................................... 4,011 1,404 -------- -------- Total accumulated postretirement benefit obligation ......... 10,817 9,630 Unrecognized net gain (loss) ................................ (1,060) 651 -------- -------- Accrued postretirement benefit cost ........................... $ 9,757 $ 10,281 ======== ========
In determining the accumulated postretirement benefit obligation in fiscal 1998 and 1997, the average assumed discount rate was 7% and 8%, respectively. The assumed annual rate of increase in per capita cost of covered health care benefits is F-17 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 8 -- PENSION AND OTHER RETIREMENT PLANS -- Continued 7.5% for fiscal 1998, 6.5% for fiscal 1999 and 5.5% thereafter. An increase of 1% in the health care cost trend would increase the accumulated postretirement benefit obligation as of May 3, 1998 by $1,228,000 and the annual expense by $94,000. The total cost of postretirement benefits was $894,000, $1,072,000 and $673,000 in fiscal 1998, 1997 and 1996, respectively. NOTE 9 -- LEASE OBLIGATIONS AND COMMITMENTS The Company leases transportation equipment under operating leases ranging from one to 10 years with options to cancel at earlier dates. In addition, the Company has a long-term maintenance agreement related to this equipment. Maintenance fees are based upon fixed monthly charges for each vehicle, as well as the maintenance facility itself and contingent fees based upon transportation equipment usage. The amounts shown below as minimum rental commitments do not include contingent maintenance fees. The Company has agreements, expiring in fiscal 2004 and 2008, to use two cold storage warehouses owned by a partnership, 50% of which is owned by the Company. The Company has agreed to pay prevailing competitive rates for use of the facilities, subject to aggregate guaranteed minimum annual fees of $3,600,000. In fiscal 1998, 1997 and 1996, the Company paid $6,228,000, $5,372,000 and $4,641,000, respectively, in fees for use of the facilities. As of May 3, 1998 and April 27, 1997, the Company had investments of $1,411,000 and $1,137,000, respectively, in the partnership. In fiscal 1998, the Company entered into a 15-year agreement, expiring in 2013, to use a cold storage warehouse owned by a partnership, 50% of which is owned by the Company. The Company has agreed to lease the facility, beginning in fiscal 1999, for an amount which will cover debt service costs plus a minimum guaranteed annual fee totaling $2,174,000 in fiscal 1999. As of May 3, 1998, the Company had an investment of $1,826,000 in the partnership. Minimum rental commitments under all noncancelable operating leases and maintenance agreements are as follows:
(IN THOUSANDS) Fiscal year 1999 ............... $ 20,986 2000 ............... 18,774 2001 ............... 16,219 2002 ............... 21,535 2003 ............... 9,900 Thereafter ......... 34,651 --------- $ 122,065 =========
Rental expense was $24,839,000 in fiscal 1998, $24,270,000 in fiscal 1997 and $17,664,000 in fiscal 1996. Rental expense in fiscal 1998, 1997 and 1996 included $3,231,000, $3,593,000 and $3,389,000 of contingent maintenance fees, respectively. The Company has a sale and leaseback arrangement for certain hog production facilities at Brown's. The arrangement provides for an early termination at predetermined amounts in fiscal 2004. Property, plant and equipment under capital leases as of May 3, 1998 consists of land of $1,911,000, buildings and improvements of $5,647,000, and machinery and equipment of $6,550,000, less accumulated depreciation of $6,001,000. F-18 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 9 -- LEASE OBLIGATIONS AND COMMITMENTS -- Continued Future minimum lease payments for assets under capital leases and the present value of the net minimum lease payments are as follows:
(IN THOUSANDS) Fiscal year 1999 .................................... $ 3,016 2000 .................................... 3,070 2001 .................................... 3,184 2002 .................................... 3,190 2003 .................................... 3,190 Thereafter .............................. 9,602 -------- 25,252 Less amounts representing interest ...... (6,310) -------- Present value of net minimum obligations 18,942 Less current portion .................... (1,491) -------- Long-term capital lease obligations ..... $ 17,451 ========
As of May 3, 1998, the Company had definitive commitments of $18,871,000 for capital expenditures primarily to increase its processed meats and value-added fresh pork capacities at several of its processing plants and to replace and upgrade portions of its hardware and software in response to the Year 2000. NOTE 10 -- RELATED PARTY TRANSACTIONS A director of the Company is the chairman, president and chief executive officer and a director of Prestage Farms, Inc. ("PFI"). The Company has a long-term agreement to purchase hogs from PFI at prices which, in the opinion of management, are equivalent to market. Pursuant to this agreement with PFI, the Company purchased $168,829,000, $182,576,000 and $129,577,000 of hogs in fiscal 1998, 1997 and 1996, respectively. The chairman and chief executive officer and a director of Murphy Family Farms, Inc. ("MFF") was a director of the Company until May 1998. The Company has a long-term agreement to purchase hogs from MFF at prices which, in the opinion of management, are equivalent to market. Pursuant to this agreement with MFF, the Company purchased $366,397,000, $433,861,000 and $330,033,000 of hogs in fiscal 1998, 1997 and 1996, respectively. A director and the owner of 50% of the voting stock of Maxwell Foods, Inc. ("MFI") was a director of the Company until May 1998. The Company has a long-term agreement to purchase hogs from MFI at prices which, in the opinion of management, are equivalent to market. Pursuant to this agreement with MFI, the Company purchased $118,041,000, $109,470,000 and $76,448,000 of hogs in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, 1997 and 1996, the Company purchased raw materials totaling $18,524,000, $12,772,000 and $10,069,000, respectively, from a company which was 48%-owned by the chairman and chief executive officer's children. In the opinion of management, these purchases were made at prices that were equivalent to market. The Company is engaged in hog production arrangements with several related parties. See Note 3 for additional information regarding these arrangements. NOTE 11 -- DISCONTINUED OPERATIONS In fiscal 1996, the Company completed the disposition of the assets and business of Ed Kelly, Inc., its former retail electronics subsidiary, which is reported separately as discontinued operations in the consolidated statements of income. A loss from discontinued operations of $3,900,000 is reflected in fiscal 1996. F-19 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 12 -- REGULATION AND LITIGATION Like other participants in the meat processing industry, the Company is subject to various laws and regulations administered by federal, state and other government entities, including the U.S. Environmental Protection Agency ("EPA"), the U.S. Department of Agriculture, the U.S. Food and Drug Administration, the U.S. Occupational Safety and Health Administration and corresponding state agencies in states where the Company operates. Management believes that the Company presently is in compliance with all such laws and regulations in all material respects and that continued compliance will not have a material adverse effect on the Company's financial position or results of operations. The Company believes that the ultimate resolution of the litigation and investigations discussed below will not have a material adverse effect on its financial position or results of operations. Under the water pollution control laws of the United States and the Commonwealth of Virginia ("Virginia"), the Company is required to maintain certain test records for three years. Failure to do so may result in the imposition of civil penalties. Criminal sanctions may be imposed in the event of false reporting or destruction of records. In July 1994, the Company learned that records of many tests conducted at its Smithfield, Virginia packing plants from 1991 through early 1994 could not be found and may have been destroyed. In 1997, the employee responsible for such testing and record-keeping was convicted in the United States District Court for the Eastern District of Virginia on eight charges of records destruction and making false reports. Since January 1998, several of the Company's employees responsible for wastewater treatment operations have been called to testify under subpoena before a federal grand jury in Norfolk, Virginia. The grand jury also issued subpoenas requiring production of various environmental materials relating to the Company's wastewater treatment operations at these plants. Neither the Company nor any of its other present or former employees has been charged with any criminal violation arising from these matters, but there can be no assurance that such charges will not be brought. On August 8, 1997, in a civil suit filed by the EPA against the Company, the United States District Court for the Eastern District of Virginia imposed a $12,600,000 civil penalty on the Company for Clean Water Act violations at its Smithfield, Virginia packing plants. The Company recorded a nonrecurring charge of $12,600,000 during the first quarter of fiscal 1998 with respect to this penalty. The Company has appealed this decision to the United States Court of Appeals for the Fourth Circuit. There can be no assurance as to the outcome of such appeal or any subsequent proceedings regarding this matter. Prior to the filing of the EPA suit, the Commonwealth of Virginia filed a civil suit against the Company in the Circuit Court of the County of Isle of Wight, Virginia under Virginia's water pollution control laws. Virginia's action alleged 22,517 discharge permit violations at the Smithfield, Virginia packing plants during the period 1986 until 1997. Most of these alleged violations were also presented in the EPA suit. While each violation is subject to a maximum penalty of $25,000, Virginia follows a civil penalties policy designed to recapture from the violator any economic benefit which accrued as a result of the noncompliance, plus a surcharge penalty for having committed such violations. In addition, the policy may increase the amount of penalties based upon the extent of environmental damage caused by the violations. At the beginning of the July 1997 trial of its case, Virginia contended that the Company had received an economic benefit of $4,000,000 due to its noncompliance and should pay a total of $6,000,000 for the alleged violations. In the middle of the trial, however, Virginia voluntarily dismissed its suit. One week later, Virginia refiled the same suit in Isle of Wight County Circuit Court. On June 29, 1998, the Court overruled the Company's motions to dismiss this second suit on double jeopardy and res judicata grounds. If Virginia's charges go to trial again, the Company will present evidence to show and argue, among other things, that no economic benefit accrued to the Company as a result of, and that no environmental damage was caused by, the violations. There can be no assurance as to the outcome of any such proceeding. F-20 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 13 -- INCOME PER SHARE The computation for basic and diluted income per share is as follows:
INCOME SHARES PER SHARE ------------ -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Fiscal 1998 Net income per basic share ...................................... $ 53,400 37,532 $ 1.42 Effect of dilutive stock options ................................ - 2,200 - -------- ------ ------- Net income per diluted share ................................... $ 53,400 39,732 $ 1.34 ======== ====== ======= Fiscal 1997 Net income per basic share ...................................... $ 44,937 - - Less preferred stock dividends .................................. (1,238) - - -------- ------ ------- Net income available to common shareholders per basic share ..... 43,699 36,121 $ 1.21 Effect of dilutive stock options ................................ - 1,144 - Effect of dilutive convertible preferred stock .................. 1,238 1,293 - -------- ------ ------- Net income per diluted share ................................... $ 44,937 38,558 $ 1.17 ======== ====== ======= Fiscal 1996 Income from continuing operations ............................... $ 19,786 - - Less preferred stock dividends .................................. (1,152) - - -------- ------ ------- Income from continuing operations available to common shareholders per basic share ................................... 18,634 33,865 $ .55 Effect of dilutive stock options ................................ - 1,135 - -------- ------ ------- Income from continuing operations per diluted share ............ $ 18,634 35,000 $ .53 ======== ====== =======
The summary below lists stock options outstanding at the end of each fiscal year which were not included in the computation of income per diluted share because the average exercise price of the options was greater than the average market price of the common shares. These options, which have varying expiration dates, were still outstanding at May 3, 1998.
1998 1997 1996 ----------- ------------ ------------ (SHARES IN THOUSANDS) Stock option shares excluded ....... 65,000 100,000 440,000 Average option price per share ..... $ 32.42 $ 16.88 $ 13.70
F-21 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 14 -- QUARTERLY RESULTS OF OPERATIONS
FIRST SECOND THIRD FOURTH ------------- -------------- ---------------- -------------- (UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA) Fiscal 1998 Sales ...................... $ 914,963 $ 982,699 $ 1,095,999 $ 873,781 Gross profit .............. 75,184 93,970 116,663 101,797 Net income (loss) .......... (6,541) 15,548 23,719 20,674 Net income per common share: Basic .......................... $ (.17) $ .41 $ .63 $ .55 Diluted ........................ (.17) .39 .60 .52 Fiscal 1997 Sales ...................... $ 892,870 $ 969,226 $ 1,080,979 $ 927,536 Gross profit .............. 58,762 73,577 88,704 99,895 Net income ................. 746 9,017 15,734 19,440 Net income per common share: Basic .......................... $ .01 $ .24 $ .43 $ .53 Diluted ........................ .01 .23 .40 .50
F-22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE TO THE SHAREHOLDERS OF SMITHFIELD FOODS, INC. We have audited in accordance with generally accepted auditing standards the financial statements included in the Form 10-K Annual Report of Smithfield Foods, Inc. for the fiscal year ended May 3, 1998, and have issued our report thereon dated June 10, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed on the Index to Financial Statements and Financial Schedule filed as a part of the Company's Form 10-K Annual Report is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Richmond, Virginia June 10, 1998 - F-23 - SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC. PARENT COMPANY BALANCE SHEETS AS OF MAY 3, 1998 AND APRIL 27, 1997
FISCAL YEARS ENDED ------------------------------- MAY 3, 1998 APRIL 27, 1997 ------------- --------------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents .......................................................... $ 7,800 $ 38 Accounts receivable ................................................................ 324 3,675 Receivables from related parties ................................................... -- 1,414 Refundable income taxes ............................................................ 2,300 -- Deferred income taxes .............................................................. 23,634 33,901 Other .............................................................................. 15,921 5,137 --------- --------- TOTAL CURRENT ASSETS ............................................................. 49,979 44,165 --------- --------- Investments in and net advances to subsidiaries, at cost plus equity in undistributed earnings ........................................................................... 679,266 444,149 --------- --------- OTHER ASSETS: Investments in partnerships ........................................................ 46,966 41,753 Property, plant and equipment, net ................................................. 18,327 9,838 Other .............................................................................. 26,353 16,476 --------- --------- TOTAL OTHER ASSETS ............................................................... 91,646 68,067 --------- --------- $ 820,891 $ 556,381 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable ....................................................................... $ -- $ 2,500 Current portion of long-term debt .................................................. 6,248 4,263 Accounts payable ................................................................... 2,795 5,167 Accrued expenses ................................................................... 45,232 28,617 Income taxes payable ............................................................... -- 1,789 --------- --------- TOTAL CURRENT LIABILITIES ........................................................ 54,275 42,336 --------- --------- Long-term debt ...................................................................... 387,732 192,384 --------- --------- Deferred income taxes and other noncurrent liabilities .............................. 17,874 14,175 --------- --------- Shareholders' equity ................................................................ 361,010 307,486 --------- --------- $ 820,891 $ 556,381 ========= =========
The accompanying notes are an integral part of these balance sheets. F-24 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC. PARENT COMPANY STATEMENTS OF INCOME
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED MAY 3, 1998 APRIL 27, 1997 APRIL 28, 1996 ---------------- ---------------- --------------- (IN THOUSANDS) Sales ................................................... $ -- $ -- $ -- Cost of Sales ........................................... 9,589 1,820 (2,540) --------- --------- -------- Gross Profit ............................................ (9,589) (1,820) 2,540 General and administrative expenses, net of allocation to subsidiaries ........................................... 4,686 10,911 5,780 Depreciation expense .................................... 843 903 892 Interest expense ........................................ 24,578 16,434 2,556 Nonrecurring charge ..................................... 12,600 -- -- --------- --------- -------- Loss before income tax benefit and equity in earnings of subsidiaries ........................................... (52,296) (30,068) (6,688) Income tax benefit ...................................... (19,130) (12,562) (2,400) --------- --------- -------- Loss before equity in earnings of subsidiaries .......... (33,166) (17,506) (4,288) Equity in earnings of subsidiaries ...................... 86,566 62,443 20,174 --------- --------- -------- Net income .............................................. $ 53,400 $ 44,937 $ 15,886 ========= ========= ========
The accompanying notes are an integral part of these statements. F-25 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC. PARENT COMPANY STATEMENTS OF CASH FLOWS
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED MAY 3, 1998 APRIL 27, 1997 APRIL 28, 1996 ---------------- ---------------- --------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................... $ 53,400 $ 44,937 $ 15,886 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................... 1,461 1,040 1,162 Gain on sale of property and equipment ...................... -- (2,328) (1) Changes in operating assets and liabilities: Deferred income taxes and other noncurrent liabilities ..... 13,966 (37,308) 5,343 Accounts receivables ....................................... 3,351 (1,329) (2,171) Receivables from related parties ........................... 1,414 45 6,615 Other current assets ....................................... (10,784) (3,367) (1,318) Accounts payable and accrued expenses ...................... 14,243 15,696 260 Refundable income taxes .................................... (2,300) -- 3,458 Income taxes payable ....................................... (1,789) 1,560 229 Other assets ............................................... (10,495) (1,541) (4,778) ---------- --------- ---------- Net cash provided by operating activities ..................... 62,467 17,405 24,685 ---------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .......................................... (9,332) (3,226) (2,987) Proceeds from sale of property, plant and equipment ........... -- 3,424 38 Increase in investments in and advances to subsidiaries, net of common stock issued to acquire John Morrell & Co. ........ (235,117) (80,800) (36,649) Investment in partnerships .................................... (5,213) (5,660) (2,376) ---------- --------- ---------- Net cash used in investing activities ....................... (249,662) (86,262) (41,974) ---------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance (repayments) of short-term debt ........ -- (500) 500 Proceeds from issuance of long-term debt ...................... 447,150 140,000 -- Principal payments on long-term debt .......................... (252,317) (71,200) (2,420) Exercise of options ........................................... 124 1,270 767 Issuance of preferred stock ................................... -- -- 20,000 Preferred dividends ........................................... -- (1,238) (1,152) ---------- --------- ---------- Net cash provided by financing activities ................... 194,957 68,332 17,695 ---------- --------- ---------- NET INCREASE (DECREASE) in cash and cash equivalents ........... 7,762 (525) 406 CASH AND CASH EQUIVALENTS at beginning of year ................. 38 563 157 ---------- --------- ---------- CASH AND CASH EQUIVALENTS at end of year ....................... $ 7,800 $ 38 $ 563 ========== ========= ==========
The accompanying notes are an integral part of these statements. F-26 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT SMITHFIELD FOODS, INC. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS May 3, 1998 and April 27, 1997 1. The Notes to Parent Company Financial Statements should be read in conjunction with the Registrant's Notes to Consolidated Financial Statements included herein. 2. Restricted assets of Registrant: Existing loan covenants contain provisions which limit the amount of funds available for transfer from the subsidiaries to Smithfield Foods, Inc. without the consent of certain lenders. 3. Accrued expenses as of May 3, 1998 and April 27, 1997 are as follows: (In thousands) 1998 1997 -------------- --------- --------- Self-insurance reserves $21,834 $14,151 Other 23,398 14,466 -------- -------- $45,232 $28,617 ======= ======== 4. Long-Term Debt: In fiscal 1998, the Registrant entered into loan agreements with a bank group providing for $350,000,000 in revolving credit facilities, consisting of a five-year $300,000,000 revolving credit facility and a 364-day $50,000,000 revolving credit facility. In connection with this refinancing, the Registrant repaid all borrowings under its previous $300,000,000 credit facilities, which were terminated. The 364-day $50,000,000 revolving credit facility was later terminated. In fiscal 1998, the Registrant issued $200,000,000 in aggregate principal amount of 10-year 7.625% senior subordinated notes. The net proceeds from the sales of the notes were used to repay indebtedness under the Registrant's $300,000,000 revolving credit facility with the balance invested in short-term marketable debt securities. In fiscal 1997, the Registrant privately placed $140,000,000 of senior secured notes. The proceeds of the financing were used to repay $65,200,000 of long-term bank debt and for investments in and advances to subsidiaries. In conjunction with the placement of these notes, the Registrant refinanced $59,707,000 of existing long-term debt previously recorded by its subsidiaries. The result of the refinancing was to transfer debt to the parent and revise maturity dates and repayment schedules for the refinanced debt. No additional proceeds resulted from this refinancing. As of May 3, 1998, the Registrant is guaranteeing $18,942,000 of capital lease obligations of its subsidiaries and a $300,000,000 credit facility that had no outstanding balance. Scheduled maturities of the Registrant's long-term debt consists of the following (in thousands): Fiscal Year 1999 $6,248 2000 2,362 2001 3,134 2002 3,083 2003 10,473 Thereafter 368,680 ------- $393,980 ======== 5. The amount of dividends received from subsidiaries in fiscal 1998 and 1997 was $43,423,000 and $65,316,000, respectively. 6. In fiscal 1997, all of the Series C 6.75% cumulative convertible redeemable preferred stock, totaling $20,000,000, was converted into the Registrant's common stock. F-27 7. In fiscal 1998, the Registrant's shareholders approved the reincorporation of the Registrant in Virginia from Delaware. The purpose of the reincorporation was to reduce annual franchise taxes and does not affect the Registrant's capitalization or the manner in which it operates. 8. Supplemental disclosures of cash flow information (in thousands): Fiscal Year 1998 1997 1996 - ----------- ---- ---- ---- Interest paid, net of amount capitalized $20,901 $11,106 $ 1,807 ====== ====== ===== Income taxes paid $10,179 $15,043 $ 1,685 ====== ====== ===== Noncash investing and financing activities: Refinancing of long-term debt $ - $59,707 $ - ====== ====== ===== Conversion of preferred stock to common stock $ - $20,000 $10,000 ====== ====== ===== Common stock issued for acquisition $ - $ - $33,000 ====== ====== ====== Conversion of receivables from related parties to investments in partnership $ - $ 7,691 $ - ====== ====== ====== F-28 EX-4 2 EXHIBIT 4.4 AS EXECUTED SMITHFIELD FOODS, INC., A VIRGINIA CORPORATION AND HARRIS TRUST AND SAVINGS BANK RIGHTS AGENT RIGHTS AGREEMENT AS AMENDED DATED AS OF MAY 1, 1998 ------------------------------------------------------------ TABLE OF CONTENTS
SECTION PAGE 1. Certain Definitions......................................................................................1 2. Appointment of Rights Agent..............................................................................4 3. Issue of Right Certificates..............................................................................4 4. Form of Right Certificates...............................................................................6 5. Countersignature and Registration........................................................................6 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.......................6 7. Exercise of Rights; Purchase Price; Expiration Date of Rights............................................7 8. Cancellation and Destruction of Right Certificates.......................................................8 9. Availability of Preferred Shares.........................................................................8 10. Preferred Shares Record Date.............................................................................8 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.......................................9 12. Certificate of Adjusted Purchase Price or Number of Shares..............................................13 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power....................................13 14. Fractional Rights and Fractional Shares.................................................................14 15. Rights of Action........................................................................................15 16. Agreement of Right Holders..............................................................................15 17. Right Certificate Holder Not Deemed a Shareholder.......................................................16 18. Concerning the Rights Agent.............................................................................16 19. Merger or Consolidation or Change of Name of Rights Agent...............................................16 20. Duties of Rights Agent..................................................................................17 21. Change of Rights Agent..................................................................................18 22. Issuance of New Right Certificates......................................................................19 23. Redemption..............................................................................................19 24. Exchange................................................................................................20 25. Notice of Certain Events................................................................................21 26. Notices.................................................................................................22 27. Supplements and Amendments..............................................................................22 28. Successors..............................................................................................22 29. Benefits of this Agreement..............................................................................22 30. Severability............................................................................................22 31. Governing Law...........................................................................................22 32. Counterparts............................................................................................22 33. Descriptive Headings....................................................................................23
EXHIBITS Exhibit A - Form of Right Certificate Exhibit B - Summary of Rights to Purchase Preferred Shares Rights Agreement RIGHTS AGREEMENT This Rights Agreement, as amended (this "Agreement"), dated as of May 1, 1998, is entered into between Smithfield Foods, Inc., a Virginia corporation (the "Company"), and Harris Trust and Savings Bank, an Illinois corporation, as rights agent (the "Rights Agent"). The Board of Directors of the Company has authorized and declared a dividend of one preferred share purchase right (a "Right") for each Common Share of the Company outstanding on September 2, 1997, (the "Record Date"), each Right representing the right to purchase one one-thousandth of a Preferred Share, upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share that shall become outstanding (x) between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are defined in Sections 3 and 7 hereof) or (y) after the Distribution Date but before the earlier of the Redemption Date or the Final Expiration Date, if such Common Share became outstanding (A) upon the exercise of a stock option, (B) pursuant to any employee plan or arrangement, (C) upon the exchange pursuant to its terms of an Exchangeable Share, without par value (each an "Exchangeable Share"), of Smithfield Canada Limited, an Ontario corporation ("Smithfield Canada"), for such Common Share or (D) upon the exercise, conversion or exchange of any other security, which option, plan, arrangement, Exchangeable Share or other security was granted, established or issued, as the case may be, by the Company (or, with respect to any Exchangeable Share, issued by Smithfield Canada) before the Distribution Date. Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: SECTION 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 20% or more of the Common Shares of the Company then outstanding, but shall not include the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 20% or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 20% or more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person," as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an "Acquiring Person," as defined pursuant to the foregoing provisions of this paragraph (a), then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement. (b) "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement. (c) "Associate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement. Rights Agreement Page 1 (d) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than these Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(d)(ii)(B)) or disposing of any securities of the Company. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. (e) "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in Norfolk, Virginia or Chicago, Illinois are authorized or obligated by law or executive order to close. (f) "Close of Business" on any given date shall mean 5:00 P.M., Chicago, Illinois time, on such date; provided, however, that, if such date is not a Business Day, it shall mean 5:00 P.M.,Chicago, Illinois time, on the next succeeding Business Day. Rights Agreement Page 2 (g) "Common Shares" when used with reference to the Company shall mean the shares of Common Stock, par value $.50 per share, of the Company. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. (h) "Company" shall have the meaning set forth in the preamble hereof. (i) "current per share market price" shall have the meaning set forth in Section 11(d) hereof. (j) "Distribution Date" shall have the meaning set forth in Section 3 hereof. (k) "equivalent preferred shares" shall have the meaning set forth in Section 11(b) hereof. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (m) "Exchange Ratio" shall have the meaning set forth in Section 24(a) hereof. (n) "Exchangeable Share" shall have the meaning set forth in the second paragraph hereof. (o) "Final Expiration Date" shall have the meaning set forth in Section 7(a) hereof. (p) "NASDAQ" shall mean the National Association of Securities Dealers, Inc. Automated Quotations System. (q) "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. (r) "Preferred Shares" shall mean shares of Series A Junior Participating Preferred Stock, of $1.00 par value per share, of the Company having the rights and preferences set forth in the Articles of Amendment establishing such series of preferred stock. (s) "Purchase Price" shall have the meaning set forth in Section 7(b) hereof. (t) "Record Date" shall have the meaning set forth in the second paragraph hereof. (u) "Redemption Date" shall have the meaning set forth in Section 7(a) hereof. (v) "Redemption Price" shall have the meaning set forth in Section 23(a) hereof. (w) "Rights Agent" shall have the meaning set forth in the preamble hereof. (x) "Right" shall have the meaning set forth in the second paragraph hereof. (y) "Right Certificate" shall have the meaning set forth in Section 3(a) hereof. Rights Agreement Page 3 (z) "Security" shall have the meaning set forth in Section 11(d) hereof. (aa) "Shares Acquisition Date" shall mean the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such. (bb) "Smithfield Canada" shall have the meaning set forth in the second paragraph hereof. (cc) "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. (dd) "Summary of Rights" shall have the meaning set forth in Section 3(b) hereof. (ee) "Trading Day" shall have the meaning set forth in Section 11(d) hereof. SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall, prior to the Distribution Date, also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. SECTION 3. ISSUE OF RIGHT CERTIFICATES. (a) Until the earlier of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth business day (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) of, or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) to commence, a tender or exchange offer the consummation of which would result in any Person becoming the Beneficial Owner of Common Shares aggregating 20% or more of the then outstanding Common Shares (the earlier of such dates being herein referred to as the "Distribution Date"), (x) the Rights associated with Common Shares for which share certificates have been issued will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Right Certificates) and not by separate Right Certificates, (y) the Rights associated with uncertificated Common Shares will be evidenced (subject to the provisions of Section 3(b) hereof) by the registration of the Common Shares in the Company's share register in the names of the holders thereof (which registration shall also be deemed to be registration of ownership of the associated Right) and not by separate Right Certificates and (z) the right to receive Right Certificates will be transferable only in connection with the transfer of Common Shares. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send, at the expense of the Company) by first-class, insured, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit A hereto (a "Right Certificate"), evidencing one Right for each share of Common Shares so held. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates. Rights Agreement Page 4 (b) On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in substantially the form of Exhibit B hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the Close of Business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Summary of Rights attached thereto. With respect to uncertificated Common Shares outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by the registration of the Common Shares in the Company's share register in the names of the holders thereof. Until the Distribution Date (or the earlier of the Redemption Date or the Final Expiration Date), the transfer of any Common Shares outstanding on the Record Date, including in the case of Common Shares represented by certificates the surrender for transfer of any such certificate with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with such Common Shares. (c) Certificates for Common Shares which become outstanding, or initial transaction or subsequent periodic statements issued with respect to uncertificated Common Shares (whether upon issuance out of authorized but unissued Common Shares, issuance out of treasury, or issuance upon transfer or exchange of outstanding Common Shares) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them, in the case of share certificates, the following legend: This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement, as amended, between Smithfield Foods, Inc. and Harris Trust and Savings Bank, dated as of May 1, 1998 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Smithfield Foods, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Smithfield Foods, Inc. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement) will become null and void. and in the case of initial transaction or subsequent periodic statements with respect to uncertificated Common Shares, the following legend: The registration in the share register of Smithfield Foods, Inc. of the shares of common stock to which this initial transaction statement relates also evidences and entitles the registered holder of such shares to certain rights as set forth in a Rights Agreement, as amended, between Smithfield Foods, Inc. and Harris Trust and Savings Bank, dated as of May 1, 1998 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Smithfield Foods, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Smithfield Foods, Inc. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement) will become null and void. With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates Rights Agreement Page 5 alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. With respect to such initial transaction or subsequent periodic statements containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Shares with respect to which such statements are issued shall be evidenced solely by the registration of ownership of such Common Shares in the share register of the Company, and the registration of transfer of ownership in such share register shall also constitute the transfer of the Rights associated with the Common Shares whose ownership is so transferred. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. SECTION 4. FORM OF RIGHT CERTIFICATES. The Right Certificates (and the forms of election to purchase Preferred Shares and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit A hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or automated quotation system on which the Rights may from time to time be listed or quoted, or to conform to usage. Subject to the provisions of Section 22 hereof, the Right Certificates shall entitle the holders thereof to purchase such number of one one-thousandths of a Preferred Share as shall be set forth therein at the price per one one-thousandth of a Preferred Share set forth therein, but the number of such one one-thousandths of a Preferred Share and the Purchase Price shall be subject to adjustment as provided herein. SECTION 5. COUNTERSIGNATURE AND REGISTRATION. The Right Certificates shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President, any of its Vice Presidents, or its Treasurer, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the Person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any Person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate although at the date of the execution of this Rights Agreement any such Person was not such an officer. Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES. Subject to the provisions of Section 14 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 11(a)(ii) hereof or that have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates entitling the Rights Agreement Page 6 registered holder to purchase a like number of one one-thousandths of a Preferred Share as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the principal office of the Rights Agent. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Right Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall countersign and deliver to the Person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS. (a) The registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein), in whole or in part, at any time after the Distribution Date, upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the principal office of the Rights Agent, together with payment of the Purchase Price for each one one-thousandth of a Preferred Share as to which the Rights are exercised, at or prior to the earliest of (i) the Close of Business on May 31, 2001 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date") or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof. (b) The Purchase Price for each one one-thousandth of a Preferred Share purchasable pursuant to the exercise of a Right shall initially be $37.50, and shall be subject to adjustment from time to time as provided in Section 11 or 13 hereof (the "Purchase Price") and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the Purchase Price for the shares to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 9 hereof by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares certificates for the number of Preferred Shares to be purchased and the Company hereby irrevocably authorizes any such transfer agent to comply with all such requests, or (B) requisition from the depositary agent depositary receipts representing such number of one one-thousandths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent of the Preferred Shares with such depositary agent) and the Company hereby directs such depositary agent to comply with such request; (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in Rights Agreement Page 7 accordance with Section 14 hereof; (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder; and (iv) when appropriate, after receipt, deliver such cash to or upon the order of the registered holder of such Right Certificate. (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof. SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Right Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Right Certificates, and, in such case, shall deliver a certificate of destruction thereof to the Company. SECTION 9. AVAILABILITY OF PREFERRED SHARES. The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares or any Preferred Shares held in its treasury, the number of Preferred Shares that will be sufficient to permit the exercise in full of all outstanding Rights in accordance with Section 7. The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Preferred Shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any Preferred Shares upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a Person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Preferred Shares upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due. SECTION 10. PREFERRED SHARES RECORD DATE. Each Person in whose name any certificate for Preferred Shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Shares transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a holder of Preferred Shares for which the Rights shall be exercisable, including, without limitation, Rights Agreement Page 8 the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF RIGHTS. The Purchase Price, the number of Preferred Shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Company were open, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. (ii) Subject to Section 24 of this Agreement, in the event any Person becomes an Acquiring Person, each holder of a Right shall thereafter have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-thousandths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of the Company as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of one one-thousandths of a Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Company's Common Shares (determined pursuant to Section 11(d) hereof) on the date of the occurrence of such event. In the event that any Person shall become an Acquiring Person and the Rights shall then be outstanding, the Company shall not take any action which would eliminate or diminish the benefits intended to be afforded by the Rights. From and after the occurrence of such event, any Rights that are or were acquired or beneficially owned by any Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be void and any holder of such Rights shall thereafter have no right to exercise such Rights under any provision of this Agreement. No Right Certificate shall be issued pursuant to Section 3 that represents Rights beneficially owned by an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof; no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights would be void pursuant to the preceding sentence shall be cancelled. (iii) In the event that there shall not be sufficient Common Shares authorized but unissued to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii), the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exercise of the Rights. In the event the Company shall, after good faith effort, be unable to Rights Agreement Page 9 take all such action as may be necessary to authorize such additional Common Shares, the Company shall substitute, for each Common Share that would otherwise be issuable upon exercise of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share market price of one Common Share as of the date of issuance of such Preferred Shares or fraction thereof. (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares ("equivalent preferred shares")) or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the then current per share market price of the Preferred Shares on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. Preferred Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price of the Preferred Shares on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such current per share market price of the Preferred Shares; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. Rights Agreement Page 10 (d) (i) For the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days immediately prior to such date; provided, however, that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange or automated quotation system on which the Security is listed or admitted to trading or quoted is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange or quoted on any automated quotation system, a Business Day. (ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Shares shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Shares are not publicly traded, the "current per share market price" of the Preferred Shares shall be conclusively deemed to be the current per share market price of the Common Shares as determined pursuant to Section 11(d)(i) (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by one thousand. If neither the Common Shares nor the Preferred Shares are publicly held or so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one-millionth of a Preferred Share or one ten-thousandth of any other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If, as a result of an adjustment made pursuant to Section 11(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a) through (c), Rights Agreement Page 11 inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-thousandths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-thousandths of a Preferred Share (calculated to the nearest one one-millionth of a Preferred Share) obtained by (A) multiplying (x) the number of one one-thousandths of a share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (B) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights in substitution for any adjustment in the number of one one-thousandths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-thousandths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-thousandths of a Preferred Share issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of one one-thousandths of a Preferred Share which were expressed in the initial Right Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below one one-thousandth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price. Rights Agreement Page 12 (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it, in its sole discretion, shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any Preferred Shares at less than the current market price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or issuance of rights, options or warrants referred to hereinabove in Section 11(b), hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such shareholders. (n) In the event that at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on the Common Shares payable in Common Shares or (ii) effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then in any such case (A) the number of one one-thousandths of a Preferred Share purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of one one-thousandths of a Preferred Share so purchasable immediately prior to such event by a fraction, the numerator of which is the number of Common Shares outstanding immediately before such event and the denominator of which is the number of Common Shares outstanding immediately after such event, and (B) each Common Share outstanding immediately after such event shall have issued with respect to it that number of Rights which each Common Share outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this Section 11(n) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in Section 11 or 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Shares or the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained, and shall not be obligated or responsible for calculating any adjustment, nor shall it be deemed to have knowledge of such an adjustment unless and until it shall have received such certificate. SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. In the event, directly or indirectly, at any time after a Person has become an Acquiring Person, (a) the Company shall consolidate with, or merge with and into, any other Person, (b) any Person shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any other Person (or the Company) or cash or any other property, or (c) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the Rights Agreement Page 13 assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person other than the Company or one or more of its wholly-owned Subsidiaries, then, and in each such case, proper provision shall be made so that (i) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-thousandths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of such other Person (including the Company as successor thereto or as the surviving corporation) as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of one one-thousandths of a Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of such other Person (determined pursuant to Section 11(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9 hereof) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the Common Shares thereafter deliverable upon the exercise of the Rights. The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions which are integral multiples of one one-thousandth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral Rights Agreement Page 14 multiples of one one-thousandth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-thousandth of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu of fractional Preferred Shares that are not integral multiples of one one-thousandth of a Preferred Share, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share. For the purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). SECTION 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person subject to, this Agreement. SECTION 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer; and (c) the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Shares certificate, in the case of certificated Common Shares, or, in the case of uncertificated Common Shares, the associated Common Shares reflected on the Company's share register) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or, in the case of certificated Common Shares, the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary. Rights Agreement Page 15 SECTION 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. SECTION 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. The indemnity provided for herein shall survive the expiration of the Rights, the termination of this Agreement, and the resignation or removal of the Rights Agent. The reasonable costs and expenses of enforcing this right of indemnification shall also be paid by the Company. The Rights Agent may conclusively rely upon and shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Right Certificate or certificate for the Preferred Shares or Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust powers of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further fact on the part of any of the parties hereto; provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Rights Agreement Page 16 Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement, and no implied duties or obligations shall be read into this Agreement against the Rights Agent, upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound: (a) Before the Rights Agent acts or refrains from acting, the Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Agreement or any Right Certificate or as to whether any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. Rights Agreement Page 17 (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company shall be addressed and delivered in accordance with Section 26 of this Agreement and may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Rights Agreement and the date on or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than ten Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instruction in response to such application subject to the proposed action or omission and/or specifying the action to be taken or omitted. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) Except as may be otherwise specified in this Agreement, the Rights Agent shall not be required to take notice or be deemed to have notice of any fact, event or determination (including, without limitation, any dates or events defined in this Agreement or the designation of any Person as an Acquiring Person, Affiliate or Associate) under this Agreement unless and until the Rights Agent shall be specifically notified in writing by the Company of such fact, event or determination. SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and at the expense of the Company to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to Rights Agreement Page 18 make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the Commonwealth of Virginia, the State of North Carolina or the State of Illinois (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the Commonwealth of Virginia, the State of North Carolina or the State of Illinois), in good standing, having an office in the Commonwealth of Virginia, the State of North Carolina, the State of Illinois or the State of New York, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares or Preferred Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement or with respect to the exchange pursuant to their terms of any Exchangeable Shares (so long as such options, plan or arrangement were granted or established by the Company, or such Exchangeable Shares were issued by Smithfield Canada, as the case may be, prior to the Distribution Date), or upon the exercise, conversion or exchange of any other securities issued by the Company after the Record Date and prior to the Distribution Date, and (b) may, in any other case if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale. SECTION 23. REDEMPTION. (a) The Board of Directors of the Company may, at its option, at any time prior to such time as any Person becomes an Acquiring Person, redeem all but not less than all the then outstanding Rights at a redemption price of $.0001 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). The redemption of the Rights by the Board of Directors of the Company may be made effective at such time, on such basis and with such conditions as the Board of Directors of the Company, in its sole discretion, may establish. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to paragraph (a) of this Section 23, and without any further action and Rights Agreement Page 19 without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; provided, however, that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors of the Company ordering the redemption of the Rights, the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the Distribution Date. SECTION 24. EXCHANGE. (a) The Board of Directors of the Company may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 3(a) or Section 11(a)(ii) hereof) for Common Shares at an exchange ratio of one Common Share per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors of the Company shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 3(a) or Section 11(a)(ii) hereof) held by each holder of Rights. (c) In the event that there shall not be sufficient Common Shares authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exchange of the Rights. In the event the Company shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional Common Shares, the Company shall substitute, for each Common Share that would otherwise be issuable upon exchange of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share market price of one Common Share as of the date of issuance of such Preferred Shares or fraction thereof. Rights Agreement Page 20 (d) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional Common Shares would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this paragraph (d), the current market value of a whole Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24. SECTION 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Shares or to make any other distribution to the holders of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), (iv) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Company shall give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier. (b) In case the event set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof. SECTION 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Smithfield Foods, Inc. 200 Commerce Street Smithfield, Virginia 23430 Attention: Corporate Secretary Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be Rights Agreement Page 21 sent by Federal Express or another overnight courier service, registered or certified mail and shall be deemed given upon receipt and addressed (until another address is filed in writing with the Company) as follows: Harris Trust and Savings Bank 311 W. Monroe Street, 11th Floor Chicago, Illinois 60606 Attention: Tod Shafer Corporate Trust Administration Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. SECTION 27. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Right Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions with respect to the Rights which the Company may deem necessary or desirable, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; provided, however, that from and after such time as any Person becomes an Acquiring Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights. SECTION 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 29. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares). SECTION 30. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. SECTION 31. GOVERNING LAW. This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the Commonwealth of Virginia and for all purposes shall be governed by and construed in accordance with the laws of Commonwealth of Virginia applicable to contracts to be made and performed entirely within such Commonwealth. SECTION 32. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Rights Agreement Page 22 SECTION 33. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Rights Agreement Page 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. ATTEST: HARRIS TRUST AND SAVINGS BANK, as Rights Agent By: /s/Ginger L. Lawrence By: /s/ Tod C. Shafer - ------------------------------ ------------------------------- Name: Ginger L. Lawrence Name: Tod C. Shafer Title: Trust Officer Title: Vice President ATTEST: SMITHFIELD FOODS, INC. By: /s/ Michael H. Cole By: /s/ Aaron D. Trub - ------------------------------ -------------------------------- Name: Michael H. Cole Name: Aaron D. Trub Title: Assistant Secretary and Title: Vice President, Corporate Counsel Secretary and Treasurer Rights Agreement Page 24 Exhibit A Form of Right Certificate Certificate No. R- _______ Rights NOT EXERCISABLE AFTER MAY 31, 2001 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.0001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. Right Certificate SMITHFIELD FOODS, INC. This certifies that _________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, as amended, dated as of May 1, 1998 (the "Rights Agreement"), between Smithfield Foods, Inc., a Virginia corporation (the "Company"), and Harris Trust and Savings Bank, an Illinois corporation (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., Chicago, Illinois time, on May 31, 2001 at the principal office of the Rights Agent, or at the office of its successor as Rights Agent, one one-thousandth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock, $1.00 par value per share, of the Company, (the "Preferred Shares") at a purchase price of $37.50 (subject to adjustment as provided in the Rights Agreement) per one one-thousandth of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one-thousandths of a Preferred Share which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of September 2, 1997, based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of one one-thousandths of a Preferred Share which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the offices of the Rights Agent. This Right Certificate, with or without other Right Certificates, upon surrender at the principal office of the Rights Agent, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Preferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Right Certificate (i) may be redeemed by the Company at a redemption price of $.0001 per Right or (ii) may be exchanged in whole or in part for Preferred Shares or shares of the Company's Common Stock, par value $0.50 per share. Rights Agreement Exhibit A, Page 1 No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-thousandth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but, in lieu thereof, a cash payment will be made, as provided in the Rights Agreement. No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of ______, ____. HARRIS TRUST AND SAVINGS BANK By: ______________________________ Name: Title: ATTEST: SMITHFIELD FOODS, INC. By: ______________________________ By: _________________________________ Name: Name: Title: Title: Rights Agreement Exhibit A, Page 2 Form of Reverse Side of Right Certificate FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Right Certificate.) FOR VALUE RECEIVED,__________ hereby sells, assigns and transfers unto ________________________(Please print name and address of transferee) this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint_______________ Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution. Dated:____________,___________ Signature ___________________________________ Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). Signature ______________________________________ -------------------------------------------------------- Rights Agreement Exhibit A, Page 3 Form of Reverse Side of Right Certificate -- continued FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise Rights represented by the Right Certificate.) To: Smithfield Foods, Inc. The undersigned hereby irrevocably elects to exercise______Rights represented by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights and requests that certificates for such Preferred Shares be issued in the name of: Please insert social security or other identifying number (Please print name and address) If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) Dated:_________________,_____ Signature __________________________________ Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. -------------------------------------------------------- Rights Agreement Exhibit A, Page 4 Form of Reverse Side of Right Certificate -- continued The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). Signature ______________________________ -------------------------------------------------------- NOTICE The signature in the Form of Assignment or Form of Election to Purchase, as the case may be, must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment or Election to Purchase will not be honored. Rights Agreement Exhibit A, Page 5 Exhibit B SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES On August 28, 1997, the Board of Directors of Smithfield Foods, Inc., a Virginia corporation (the "Company"), declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, par value $0.50 per share, of the Company (the "Common Shares"). The dividend was payable on September 2, 1997 (the "Record Date") to the shareholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a Series A Junior Participating Preferred Share of the Company, $1.00 par value per share (the "Preferred Shares") at a price of $37.50 (subject to adjustment as provided in the Rights Agreement) per one one-thousandth of a Preferred Share (the "Purchase Price"), subject to adjustment. The Purchase Price of $37.50 took into account the one-for-one Common Shares dividend which the Board of Directors had declared on August 28, 1997, payable on or about September 26, 1997, to holders of record of the Common Shares on September 12, 1997. The description and terms of the Rights are set forth in a Rights Agreement, as amended (the "Rights Agreement"), between the Company and Harris Trust and Savings Bank, an Illinois corporation, as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 20% or more of the outstanding Common Shares or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of the outstanding Common Shares (the earlier of such dates being the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Shares outstanding as of the Record Date, by such Common Share certificate with a copy of this Summary of Rights attached thereto, in the case of Common Shares for which certificates have been issued, and, in the case of uncertificated Common Shares, by the registration of ownership of Common Shares in the Company's share register. The Rights Agreement provides that, until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights), upon transfer or new issuance of Common Shares, new Common Share certificates issued after the Record Date, in the case of certificated Common shares, and, in the case of uncertificated Common Shares, the initial transaction statement issued with respect to such Common Shares, will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the transfer of any Common Shares outstanding as of the Record Date, including in the case of certificated Common Shares surrender for transfer of any certificates therefor even without such notation or a copy of this Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with such Common Shares. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Company's Common Shares as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on May 31, 2001 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below. Rights Agreement Exhibit B, Page 1 The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares; (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then-current market price of the Preferred Shares; or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Preferred Shares) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of one one-thousandths of a Preferred Share issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Common Shares or a stock dividend on the Common Shares payable in Common Shares or subdivisions, consolidations or combinations of the Common Shares occurring, in any such case, prior to the Distribution Date (other than the already-declared stock dividend referred to in the first paragraph above). Preferred Shares purchasable upon exercise of the Rights will be nonredeemable. Each Preferred Share will have a minimum preferential quarterly dividend rate of $1.00 per share, but will be entitled to an aggregate dividend of 1,000 times the dividend declared on the Common Shares. In the event of liquidation, the holders of the Preferred Shares will receive a preferential liquidation payment equal to the greater of $37,500 or 1,000 times the payment made per Common Share. Each Preferred Share will have 1,000 votes, voting together with the Common Shares. Finally, in the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 1,000 times the amount received per Common Share. These rights are protected by customary antidilution provisions. Because of the nature of the Preferred Shares' dividend, liquidation and voting rights, the value of a one one-thousandth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one Common Share, or one one-thousandth of a Preferred Share (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Preferred Shares will Rights Agreement Exhibit B, Page 2 be issued (other than fractions which are integral multiples of one one-thousandth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts) and, in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Shares on the last trading day prior to the date of exercise. At any time prior to the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 20% or more of the outstanding Common Shares, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.0001 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time on such basis with such conditions as the Board of Directors in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that from and after such time as any person or group of affiliated or associated persons becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a [Current Report on Form 8-K dated __________, 1998. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference. * * * * * * Rights Agreement Exhibit B, Page 3 EX-4 3 EXHIBIT 4.6 -------------- SMITHFIELD FOODS, INC. -------------- AMENDMENT NUMBER THREE TO NOTE PURCHASE AGREEMENT DATED AS OF JULY 15, 1996 Amendment Dated as of January 30, 1998 SMITHFIELD FOODS, INC. AMENDMENT NUMBER THREE AMENDMENT NUMBER THREE AMENDMENT NUMBER THREE (this "Agreement"), dated as of January 30, 1998, to the separate Note Purchase Agreements, each dated as of July 15, 1996, between SMITHFIELD FOODS, INC., a Delaware corporation (the "Company"), formerly known as Smithfield Foods Virginia, Inc. and each of the Persons listed on Annex 1 thereto (collectively, the "Purchasers"). RECITALS: A. The Company entered into those certain separate Note Purchase Agreements, each dated as of July 15, 1996, (as amended by Amendment Number One dated as of July 15, 1997 and Amendment Number Two dated as of December 1, 1997 and as in effect immediately prior to the effectiveness of this Agreement, the "Existing Note Purchase Agreement," and, as amended by this Agreement, the "Amended Note Purchase Agreement"), with the Purchasers, pursuant to which the Company authorized, issued and sold, and certain of the Purchasers purchased (as set forth on Annex 1 thereto): (a) $2,825,000 in aggregate principal amount of its six and twenty-four one-hundredths percent (6.24%) Series A Senior Secured Notes Due November 1, 1998 (as amended, restated or otherwise modified from time to time, the "Series A Notes"), (b) $9,852,942 in aggregate principal amount of its eight and forty-one one-hundredths percent (8.41%) Series B Senior Secured Notes Due August 1, 2006 (as amended, restated or otherwise modified from time to time, the "Series B Notes"), (c) $40,000,000 in aggregate principal amount of its eight and thirty-four one-hundredths percent (8.34%) Series C Senior Secured Notes Due August 1, 2003 (as amended, restated or otherwise modified from time to time, the "Series C Notes"), (d) $9,000,000 in aggregate principal amount of its nine and eighty one-hundredths percent (9.80%) Series D Senior Secured Notes Due August 1, 2003 (as amended, restated or otherwise modified from time to time, the "Series D Notes"), (e) $9,250,000 in aggregate principal amount of its ten and seventy five one-hundredths percent (10.75%) Series E Senior Secured Notes Due August 1, 2005 (as amended, restated or otherwise modified from time to time, the "Series E Notes"), (f) $100,000,000 in aggregate principal amount of its eight and fifty-two one-hundredths percent (8.52%) Series F Senior Secured Notes Due August 1, 2006 (as amended, restated or otherwise modified from time to time, the "Series F Notes"), (g) $14,000,000 in aggregate principal amount of its nine and eighty-five one-hundredths percent (9.85%) Series G Senior Secured Notes Due November 1, 2006 (as amended, restated or otherwise modified from time to time, the "Series G Notes"), and (h) $14,779,412 in aggregate principal amount of its eight and forty-one-hundredths percent (8.41%) Series H Senior Secured Notes Due August 1, 2004 (as amended, restated or otherwise modified from time to time, the "Series H Notes"). The Series A Notes, the Series B Notes, the Series C Notes, the Series D Notes, the Series E Notes, the Series F Notes, the Series G Notes and the Series H Notes are herein referred to, individually, as a "Note," and collectively, as the "Notes." B. As of the Effective Date (defined below), the Purchasers are the holders of all of the outstanding Notes; the holders of the Notes on the Effective Date are herein referred to as the "Holders." C. Gwaltney of Smithfield, Ltd., John Morrell & Co., The Smithfield Packing Company, Incorporated, SFFC, Inc., Patrick Cudahy Incorporated, Brown's of Carolina, Inc., Lykes Meat Group, Inc., Hancock's Old Fashioned Country Hams, Inc. and Sunnyland, Inc. (collectively, the "Guarantors"), each a Wholly-Owned Subsidiary, are guarantors of the obligations of the Company in respect of, among other things, the Notes, pursuant to that certain Joint and Several Guaranty dated as of July 15, 1996. D. The Company has requested that the Holders agree (a) to amend certain provisions of the Existing Note Purchase Agreement and (b) direct the Security Trustee to take certain actions with respect to the Collateral. E. Subject to the terms and conditions set forth in this Agreement, (a) the Company and the Holders are willing to amend the Existing Note Purchase Agreement in the manner specified on certain Exhibits hereto and as more particularly set forth herein and (b) the Holders are willing to direct the Security Trustee to release and subordinate its interest with respect to certain portions of the Collateral. AGREEMENT: NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Holders agree as follows: SECTION 1. WARRANTIES AND REPRESENTATIONS. To induce the Holders to enter into this Agreement, the Company and each of the Guarantors represent and warrant to each of the Holders that as of the Effective Date (as hereinafter defined): 1.1 Corporate Organization and Authority. The Company and each Subsidiary: (a) is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation; (b) has all legal and corporate power and authority to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted; (c) has all necessary licenses, certificates and permits to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, except where the failure to have such licenses, certificates and permits, in the aggregate, could not reasonably be expected to have a Material Adverse Effect; and 2 (d) has duly qualified or has been duly licensed, and is authorized to do business and is in good standing, as a foreign corporation, in each state in the United States of America and in each other jurisdiction where the failure to be so qualified or licensed and authorized and in good standing, in the aggregate for all such failures, could reasonably be expected to have a Material Adverse Effect. 1.2 Authorization, etc. (a) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and each of the Guarantors. Each of this Agreement, the Amended Note Purchase Agreement and each other Financing Document (as defined in the Amended Note Purchase Agreement, the "Financing Documents") constitutes a legal, valid and binding obligation of the Company or the Guarantors, as applicable, enforceable, in each case, against the Company or such Guarantor, as applicable, in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (b) The Holders are the record owners of all of the outstanding Notes. (c) The Guarantors are the only Persons which have an outstanding Guaranty of the Notes. 1.3 Litigation. There are no proceedings pending, or, to the knowledge of the Company or the Guarantors, threatened, against or affecting the Company, any Guarantor or any other Subsidiary, or any of their respective Properties in any court or before any governmental authority or arbitration board or tribunal that, either individually or in the aggregate, conflict with or interfere with the ability of the Company or any of the Guarantors to execute and deliver this Agreement and to perform their respective obligations hereunder, under the Amended Note Purchase Agreement and under each of the other Financing Documents. 1.4 No Conflicts, etc. The execution and delivery by the Company and the Guarantors of this Agreement and the performance by the Company and the Guarantors of their respective obligations under each of this Agreement, the Amended Note Purchase Agreement and the other Financing Documents to which they are a party do not conflict with, result in any breach in any of the provisions of, constitute a default under, violate or result in the creation of any Lien upon any Property of the Company or any Subsidiary under the provisions of: (a) any charter document, agreement with shareholders or bylaws of the Company or any Subsidiary; 3 (b) any agreement, instrument or conveyance by which the Company or any Subsidiary or any of their respective Properties may be bound or affected; or (c) any statute, rule or regulation or any order, judgment or award of any court, tribunal or arbitrator by which the Company or any Subsidiary or any of their respective Properties may be bound or affected. 1.5 Governmental Consent. The execution and delivery by the Company and the Guarantors of this Agreement and the performance by the Company and the Guarantors of their respective obligations hereunder, under the Amended Note Purchase Agreement and the other Financing Documents to which they are a party do not require any consents, approvals or authorizations of, or filings, registrations or qualifications with, any governmental authority on the part of the Company or any Subsidiary under the circumstances and conditions contemplated by this Agreement, the Amended Note Purchase Agreement or the other Financing Documents. 1.6 Compliance with Law. Neither the Company nor any Subsidiary: (a) is in violation of any law, ordinance, governmental rule or regulation to which it is subject; or (b) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of its Property or to the conduct of its business; which violation or failure to obtain might, either individually or in the aggregate, have a material adverse effect on the business, prospects, profits, Properties or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or the ability of the Company or the Guarantors to perform any of their respective obligations set forth in this Agreement, the Amended Note Purchase Agreement or the other Financing Documents. 1.7 Existence of Defaults. Immediately prior to, and after giving effect to, the Note Purchase Agreement Amendment (as such term is defined in Section 2 hereof), no condition exists that would constitute a Default or an Event of Default under the Note Purchase Agreement or the Amended Note Purchase Agreement, as the case may be. 1.8 Disclosure. Neither this Agreement nor any written statement furnished by the Company or any Guarantor to any Holder in connection herewith contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein or herein not misleading. There is no fact that the Company has not disclosed to the Holders in writing that has had or, so far as the Company can now reasonably foresee, could reasonably be expected to have a material adverse effect on the business, prospects, profits, Properties or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or the ability of the Company or any Guarantor to perform any of their respective obligations set forth in this Agreement, the Amended Note Purchase Agreement or the other Financing Documents. 4 1.9 True and Correct Copies. The Company has delivered to the Holders or their special counsel true and correct copies of (a) the Note Purchase Agreement dated as of March 1, 1998 between Distribution Development, L.L.C. and certain purchasers of Notes thereunder and the Lease Guaranty by the Company executed in connection therewith and (b) the Bladen County Option Documents. SECTION 2. AMENDMENT, DIRECTION; AFFIRMATIONS. 2.1 Amendment to Existing Documents. The Company and the Guarantors, and, subject to the satisfaction of the conditions set forth in Section 3 hereof, the Holders, each hereby consents and agrees that the Existing Note Purchase Agreement is hereby amended in the manner and as specified in Exhibit A to this Agreement (such amendment provided for in Exhibit A is herein collectively referred to as the "Note Purchase Agreement Amendment"). 2.2 Direction to Security Trustee. Subject to the satisfaction of the conditions set forth in Section 3 hereof, the Holders hereby agree to execute and deliver to the Security Trustee the direction letter in the form attached hereto as Exhibit B. 2.3 Affirmation of Obligations under Amended Note Purchase Agreement and Notes. The Company hereby acknowledges and affirms all of its obligations under the terms of the Amended Note Purchase Agreement, the Notes and each of the other Financing Documents to which it is a party. 2.4 Affirmation of Obligations under Joint and Several Guaranty and Financing Documents. Each of the Guarantors hereby acknowledges and affirms all of its obligations under the terms of the Joint and Several Guaranty and each other Financing Document to which it is a party. 2.5 Confirmation of Security Interest. The Smithfield Packaging Company, Incorporated ("Packing") hereby confirms to the Holders that the security interest granted to the Security Trustee pursuant to the terms of the Security Agreement, includes, without limitation, a first perfected security interest in Packing's option rights as set forth in the Bladen County Option Documents. SECTION 3. CONDITIONS TO EFFECTIVENESS OF NOTE PURCHASE AGREEMENT AMENDMENT. 5 The Note Purchase Agreement Amendment and the direction to the Security Trustee to release and subordinate its interest with respect to certain portions of the Collateral as set forth on Exhibit B hereto shall not become effective unless all of the following conditions precedent shall have been satisfied in full (the date of such satisfaction being herein referred to as the "Effective Date"): 3.1 Execution and Delivery of this Agreement. The Company and each of the Guarantors shall have executed and delivered to each of the Holders an original counterpart of this Agreement. 3.2 No Defaults; Warranties and Representations True. No Default or Event of Default shall exist, and the warranties and representations set forth in Section 1 hereof shall be true and correct on the Effective Date. 3.3 Authorization of Transactions. The Company and each of the Guarantors shall have authorized, by all necessary corporate action, the execution and delivery of this Agreement and the performance of all obligations of, and the satisfaction of all conditions pursuant to this Section 3 by, and the consummation of all transactions contemplated by the Amended Note Purchase Agreement and the other Financing Documents by, the Company and each of the Guarantors. 3.4 Legal Opinions. The Holders shall have received legal opinions as to such matters as the Holders and their special counsel shall request in connection with the transactions contemplated by this Agreement. 3.5 Expenses. The Company shall have paid all costs and expenses of the Holders relating to this Agreement in accordance with Section 4.5 hereof. 4. SECTION MISCELLANEOUS. 4.1 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, INTERNAL VIRGINIA LAW, EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE. 6 4.2 Duplicate Originals. Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall be effective when at least one counterpart shall have been executed by each party hereto, and each set of counterparts that, collectively, show execution by each party hereto shall constitute one duplicate original. 4.3 Waivers and Amendments. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 4.4 Section Headings. The titles of the Sections hereof appear as a matter of convenience only, do not constitute a part of this Agreement and shall not affect the construction hereof. 4.5 Costs and Expenses. The Company shall pay all costs and expenses of the Holders relating to this Agreement, including, but not limited to, the statement for reasonable fees and disbursements of the Holders' special counsel presented to the Company on the Effective Date. The Company will also pay, upon receipt thereof, each additional statement for reasonable fees and disbursements of the Holders' special counsel rendered after the Effective Date in connection with this Agreement or the Financing Documents. 4.6 Survival. All warranties, representations, certifications and covenants made by the Company or any of the Guarantors in this Agreement shall be considered to have been relied upon by the Holders and shall survive the execution and delivery of this Agreement, regardless of any investigation made by or on behalf of the Holders. 4.7 Time of Essence. Time is and shall be of the essence in the satisfaction of all the conditions set forth in Section 3 of this Agreement. 4.8 Defined Terms. Capitalized terms used herein and not defined herein shall have the meanings assigned to them in the Amended Note Purchase Agreement. [Remainder of page intentionally left blank; next page is signature page.] 7 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on its behalf by a duly authorized officer or agent thereof. SMITHFIELD FOODS, INC. /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Vice President GWALTNEY OF SMITHFIELD, LTD. /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Secretary JOHN MORRELL & CO. /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Secretary THE SMITHFIELD PACKING COMPANY, INCORPORATED /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Secretary SFFC, INC. /s/ DAVID W. DUPERT --------------- Name: David W. Dupert Title: President PATRICK CUDAHY INCORPORATED /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Secretary BROWN'S OF CAROLINA, INC. /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Secretary LYKES MEAT GROUP, INC. /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Secretary HANCOCK'S OLD FASHIONED COUNTRY HAMS, INC. /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Secretary SUNNYLAND, INC. /s/ AARON D. TRUB ------------- Name: Aaron D. Trub Title: Secretary Accepted and Agreed: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: /s/ DAVID E. JOHNSON ---------------- Name: David E. Johnson Title: Investment Officer JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: /s/ DAVID E. JOHNSON ---------------- Name: David E. Johnson Title: Investment Officer MELLON BANK, N.A., solely in its capacity as Trustee for the Bell Atlantic Master Trust, (as directed by John Hancock Mutual Life Insurance Company), and not in its individual capacity By: /s/ BERNADETTE RIST --------------- Name: Bernadette Rist Title: Authorized Signatory MELLON BANK, N.A., solely in its capacity as Trustee for The Long-Term Investment Trust, (as directed by John Hancock Mutual Life Insurance Company), and not in its individual capacity By: /s/ BERNADETTE RIST --------------- Name: Bernadette Rist Title: Authorized Signatory THE MARITIME LIFE ASSURANCE COMPANY By: /s/ GARY MARTIN ----------- Name: Gary Martin Title: Director, Bonds and Corporate Finance By: /s/ PETER A. STUART --------------- Name: Peter A. Stuart Title: Senior Vice President Chief Investment Officer THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: /s/ J. THOMAS CHRISTOPHERSON ------------------------ Name: J. Thomas Christopherson Title: Authorized Representative THE VARIABLE ANNUITY LIFE INSURANCE COMPANY AND INDEPENDENT LIFE AND ACCIDENT INSURANCE COMPANY By: /s/ JULIA S. TUCKER --------------- Name: Julia S. Tucker Title: Investment Officer ACADEMY LIFE INSURANCE COMPANY By: /s/ MICHAEL S. SMITH ---------------- Name: Michael S. Smith Title: Second Vice President - Investments PEOPLES SECURITY LIFE INSURANCE COMPANY By: /s/ MICHAEL S. SMITH ---------------- Name: Michael S. Smith Title: Second Vice President - Investments UNITED OF OMAHA LIFE INSURANCE COMPANY By: /s/ EDWIN S. GARRISON, JR. ---------------------- Name: Edwin S. Garrison, Jr. Title: First Vice President COMPANION LIFE INSURANCE COMPANY By: /s/ EDWIN S. GARRISON, JR. ---------------------- Name: Edwin S. Garrison, Jr. Title: Assistant Treasurer By: /s/ JEFFRY F. SAILER ---------------- Name: Jeffry F. Sailer Title: Assistant Treasurer MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ KATHLEEN LYNCH -------------- Name: Kathleen Lynch Title: Managing Director : CM LIFE INSURANCE COMPANY By: /s/ KATHLEEN LYNCH -------------- Name: Kathleen Lynch Title: Investment Officer EXHIBIT A AMENDMENT TO EXISTING NOTE PURCHASE AGREEMENT (Section)1. Section 9.1 of the Existing Note Purchase Agreement is amended to amend and restate the definition of "Senior Subordinated Debt" and to add the definitions of "Acquisition", "Bladen County Cogeneration Property" and "Bladen County Option Documents" in the appropriate alphabetical order in such section: Acquisition -- Section 6.10. Bladen County Cogeneration Property -- means that certain piece or parcel of land located in Hollow Township, Bladen County, North Carolina, together with a certain twenty-five (25) foot right of way easement, which property is more particularly described in that certain Deed made and entered into on or around July 16, 1997, by and between The Smithfield Packing Company, Incorporated, as grantor and party of the first part, and United Supply of America, as grantee and party of the second part, together with any and all buildings, structures, improvements, fixtures, equipment, machinery and other property now or hereafter affixed to, located on, within or beneath, or used in connection with said property. Bladen County Option Documents -- means that certain Steam Purchase and Sales Agreement dated July 16, 1997, between United Supply of America, as supplier, and The Smithfield Packing Company, Incorporated, as purchaser, together with that certain Memorandum of Option to Purchase made and executed by United Supply of America in connection therewith or any other instruments and agreements pursuant to which The Smithfield Packing Company, Incorporated, or its successors and assigns, may acquire all or any portion of the Bladen County Cogeneration Property. Senior Subordinated Debt - means at any time the aggregate amount of Debt of the Company outstanding at such time which has the terms and conditions described in the Company's Preliminary Offering Memorandum (draft dated January 15, 1998) prepared by Chase Securities, Inc. for its issue of Senior Subordinated Notes due 2008 and is in a principal amount not exceeding $200,000,000. (Section)2. Section 6.10 of the Existing Note Purchase Agreement is hereby amended and restated to read in full as follows: 6.10 Consolidated Tangible Net Worth. The Company shall not at any time permit Consolidated Tangible Net Worth, determined at such time, to be less than the sum of (a) two hundred million dollars ($200,000,000), plus (b) the sum of the Company Fiscal Year Net Worth Increase Amounts calculated for all fiscal years of the Company ended on or after the Closing Date, plus (c) fifty percent (50%) of the aggregate amount of increases in Consolidated Tangible Net Worth after December 1, 1997 resulting from the issuance by the Company of capital stock as consideration in Acquisitions made by the Company and its Subsidiaries. EXHIBIT A-1 "Acquisition" means, any transaction, or any series of related transactions, by which the Company and/or any of its Subsidiaries (a) acquires any going business or all or substantially all of the assets of any Person, whether through purchase of assets, merger or otherwise, (b) directly or indirectly acquires control of at least a majority, in number of votes, of the securities of a corporation that have ordinary voting power for the election of directors or (c) directly or indirectly acquires control of at least a majority of the partner, member or other ownership interests of any Person that is not a corporation. "Company Fiscal Year Net Worth Increase Amount" means, for any fiscal year of the Company, the greater of (i) fifty percent (50%) of Consolidated Net Income for such fiscal year and (ii) zero dollars ($0). (Section)3. A New Section 6.24 to the Existing Note Purchase Agreement is hereby added and will read in full as follows: 6.24 Covenants Regarding the Bladen County Cogeneration Property. The Company covenants and agrees that, in the event the Company or any Affiliate shall acquire all or any portion of the Bladen County Cogeneration Property pursuant to the Bladen County Option Documents or otherwise, the Company shall, simultaneously with such acquisition, cause the Bladen County Cogeneration Property (or the portion thereof) so acquired to be pledged as additional collateral security for the indebtedness evidenced by the Notes pursuant to documentation and in a manner that is in all respects satisfactory to the Required Holders. The Company shall pay any and all fees, costs and expenses including, without limitation, legal fees and expenses and title insurance charges and premiums, incurred by the holders of the Notes, the Security Trustee and the other parties to such transaction. The Company further covenants and agrees that it shall not, directly or indirectly, terminate, modify or amend any of the Bladen County Option Documents, without the prior written consent of the Required Holders. EXHIBIT A-2 EXHIBIT B DIRECTION TO SECURITY TRUSTEE To: First Union National Bank, a national banking association (successor by merger to First Union Bank of Connecticut, a Connecticut banking corporation), as trustee under a Trust Agreement dated as of July 15, 1996 with Smithfield Foods, Inc. (the "Company") and certain other parties Date: January 30, 1998 Re: Amendment Number Three, dated as of January 30, 1998, to the separate Note Purchase Agreements each dated as of July 15, 1996 (the "Amendment Agreement"), among the Company, certain of its subsidiaries and other Persons party thereto (such other Persons herein collectively referred to as the "Holders") Ladies and Gentlemen: The undersigned are all of the Holders referred to above. In accordance with Section 2.2 of the Amendment Agreement, the undersigned hereby directs you to execute and deliver to Smithfield Foods, Inc. each of the documents attached hereto as Annex 1, Annex 2, Annex 3 and Annex 4. [Holders] By__________ EXHIBIT B-1 EX-10.6 4 1998 INCENTIVE STOCK PLAN SMITHFIELD FOODS, INC. 1998 STOCK INCENTIVE PLAN 1. PURPOSE. The purpose of this Smithfield Foods, Inc. 1998 Stock Incentive Plan (the "Plan"), is to further the long term stability and financial success of Smithfield Foods, Inc. (the "Company"), by attracting and retaining key employees through the use of stock incentives. It is believed that ownership of Company Stock will stimulate the efforts of those employees upon whose judgment and interests the Company is and will be largely dependent for the successful conduct of its business. It is also believed that Incentive Awards granted to such employees under this Plan will strengthen their desire to remain employed with the Company and will further the identification of those employees' interests with those of the Smithfield Foods, Inc. shareholders. The Plan is intended to operate in compliance with the provisions of Securities and Exchange Commission Rule 16b-3. 2. DEFINITIONS. As used in the Plan, the following terms have the meanings indicated: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Applicable Withholding Taxes" means the aggregate amount of federal, state and local income and payroll taxes that an Company is required to withhold in connection with any Performance Award or any exercise of a Nonstatutory Stock Option. (c) "Board" means the Board of Directors of Smithfield Foods, Inc. (d) "Change of Control" means the occurrence of any of the following events: (i) The acquisition, other than from the Company, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 20% or more of either the then outstanding shares of Common Stock of the Company or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors, but excluding for this purpose, any such acquisition by the Company or any of its subsidiaries, or any employee benefit plan (or related trust) of the Company or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 50% of, respectively, the then outstanding shares of Common Stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners, respectively, of the Common Stock and voting securities of the Company immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the then outstanding shares of Common Stock of the Company or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors, as the case may be; or (ii) Individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any A-1 individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934); or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, with respect to which the individuals and entities who were the respective beneficial owners of the Common Stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of Common Stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or a complete liquidation or dissolution of the Company or of its sale or other disposition of all or substantially all of the assets of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Company" means Smithfield Foods, Inc., a Virginia corporation. (g) "Company Stock" means common stock of the Company. In the event of a change in the capital structure of the Company (as provided in Section 14), the shares resulting from such a change shall be deemed to be Company Stock within the meaning of the Plan. (h) "Committee" means the Compensation Committee of the Board or a subcommittee of the Compensation Committee, consisting of not less than two directors of the Company, unless the Board shall appoint another committee (or subcommittee) to administer the Plan. If and to the extent required by Rule 16b-3, all members of the Committee shall be non-employee directors as defined in Rule 16b-3. If any member of the Committee fails to qualify as a non-employee director (to the extent required by Rule 16b-3), such person shall not take part in future Committee deliberations with respect to the Plan. (i) "Date of Grant" means the effective date on which an Incentive Award is granted by the Committee. (j) "Disability" or "Disabled" means, as to an Incentive Stock Option, a Disability within the meaning of Code section 22(e)(3). As to all other Incentive Awards, the Committee shall determine whether a Disability exists and such determination shall be conclusive. (k) "Fair Market Value" means, as of the day of the Date of Grant (or, if there were no trades on the Date of Grant, the last preceding day on which Company Stock was traded) (i) if the Company Stock is traded on an exchange, the average of the highest and lowest registered sales prices of the Company Stock at which it is traded on such date on the exchange on which it generally has the greatest trading volume or (ii) if the Company Stock is traded in the over-the-counter market, the last sale price on such date as reported by The Nasdaq National Market. (l) "Incentive Award" means, collectively, a Performance Award, or an Option under the Plan. A-2 (m) "Incentive Stock Option" means an Option intended to meet the requirements of, and qualify for favorable federal income tax treatment under, Code section 422. (n) "Mature Shares" means shares of Company Stock for which the holder thereof has good title, free and clear of all liens and encumbrances and which such holder either (i) has held for at least six months or (ii) has purchased on the open market. (o) "Nonstatutory Stock Option" means an Option that does not meet the requirements of Code section 422, or, even if meeting the requirements of Code section 422, is not intended to be an Incentive Stock Option and is so designated. (p) "Option" means a right to purchase Company Stock granted under the Plan, at a price determined in accordance with the Plan. (q) "Parent" means a parent corporation of the Company within the meaning Code section 425(e). (r) "Participant" means any employee of the Company who receives an Incentive Award under the Plan. (s) "Performance Award" means an Incentive Award made pursuant to Section 6. (t) "Performance Criteria" means any of the following areas of performance of the Company or a Subsidiary of the Company: asset growth; pre-tax earnings; pre-tax profits; debt to equity ratio; earnings per share; revenues; operating income; operating cash flow; net income, before or after taxes; net income before income taxes, incentive payments and accounting for minority interest; return on total capital, equity, revenue or assets; or market value of Company Stock. All Performance Criteria shall be calculated in accordance with generally accepted accounting principles consistently applied by the Company. (u) "Rule 16b-3" means Rule 16b-3 of the Securities and Exchange Commission promulgated under the Act. A reference in the Plan to Rule 16b-3 shall include a reference to any corresponding rule (or number redesignation) of any amendments to Rule 16b-3 enacted after the effective date of the Plan's adoption. (v) "Subsidiary" means a subsidiary of the Company within the meaning of Code section 425(d). (w) "Taxable Year" means the fiscal period used by the Company for reporting taxes on income under the Code. 3. GENERAL. The following types of Incentive Awards may be granted under the Plan: Options, or Performance Awards. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options. 4. STOCK. Subject to Section 14 of the Plan, there shall be reserved for issuance under the Plan an aggregate of one million five hundred thousand (1,500,000) shares of Company Stock, which shall be authorized, but unissued shares. Shares that have not been issued under the Smithfield Foods, Inc. 1992 Stock Incentive Plan (the "1992 Plan"), or shares allocable to Options or portions thereof granted under the Company's 1992 Plan or this Plan that expire or otherwise terminate unexercised may again be subjected to an Incentive Award under the Plan. A-3 The Committee is expressly authorized to make an Incentive Award to a Participant conditioned upon the surrender for cancellation of an option granted under an existing Incentive Award, provided, however, that the Committee is expressly prohibited from making such an Incentive Award if such Award reduces the Option exercise price of Company Stock covered by the existing Award or Option being surrendered. No more than three hundred thousand (300,000) shares may be allocated to the Incentive Awards, including the maximum amounts payable under a Performance Award, that are granted to any Participant during any single Taxable Year. 5. ELIGIBILITY. (a) All present and future employees of the Company (or Parent or Subsidiary of the Company) whom the Committee determines to have contributed or who can be expected to contribute significantly to the Company or Parent or Subsidiary shall be eligible to receive Incentive Awards under the Plan. The Committee shall have the power and complete discretion, as provided in Section 15, to select eligible employees to receive Incentive Awards and to determine for each employee the nature of the award and the terms and conditions of each Incentive Award. (b) The grant of an Incentive Award shall not obligate the Company or any Parent or Subsidiary to pay an employee any particular amount of remuneration, to continue the employment of the employee after the grant or to make further grants to the employee at any time thereafter. 6. PERFORMANCE AWARDS. (a) Each Performance Award shall be evidenced by an agreement (an Award Agreement) setting forth the Performance Goals for the award, including the Performance Criteria, the target and maximum amounts payable and such other terms and conditions as are applicable to the Performance Award. The amount payable under a Performance Award to any Participant for a Taxable Year may not exceed the greater of $2,000,000 or 3% of the Company's net income before income taxes, incentive payments and accounting for minority interests for the year for which the Performance Award is made. Each Performance Award shall be awarded and administered to comply with the requirements of Code section 162(m). In the event of any conflict between a Award Agreement and the Plan, the terms of the Plan shall govern. (b) The Committee shall establish the Performance Goals for Performance Awards to Participants. The Committee shall determine the extent to which any Performance Criteria shall be used and weighted in determining Performance Awards. The Committee may vary the Performance Criteria, Performance Goals and weightings from Participant to Participant, Performance Award to Performance Award and Plan Year to Plan Year. The Committee may increase, but not decrease, any Performance Goal during a Plan Year. (c) The Committee shall establish for each Performance Award the amount of cash payable at specified levels of performance, based on the Performance Goal for each Performance Criteria. Any Performance Award shall be granted not later than 90 days after the start of the period for which the Performance Award relates and shall be granted prior to the completion of 25% of such period. The Committee will make all determinations regarding the achievement of any Performance Goals. The Committee may not increase during a Plan Year the amount that would otherwise be payable upon achievement of the Performance Goal or Goals but may reduce or eliminate the payments as provided in a Performance Award. (d) The actual payments to a Participant under a Performance Award will be calculated by applying the achievement of a Performance Criteria to the Performance Goal as established in the Award Agreement. The A-4 Committee will make or review all calculations of actual payments and the Committee shall certify in writing the extent, if any, to which the Performance Goals have been met. (e) Performance Awards will be paid in cash, at such time or times as are provided in the Award Agreement. Performance Awards will be subject to Applicable Withholding Taxes. The Committee may provide in the Award Agreement that the Participant may make a prior election to defer the payment under a Performance Award subject to such terms and conditions as the Committee may determine. (f) Nothing contained in the Plan will be deemed in any way to limit or restrict the Company or the Committee from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. (g) A Participant's interest in a Performance Award may not be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered. 7. STOCK OPTIONS. (a) The Committee may make grants of Options to Participants. Whenever the Committee deems it appropriate to grant Options, notice shall be given to the Participant stating the number of shares for which Options are granted, the Option price per share, whether the Options are Incentive Stock Options or Nonstatutory Stock Options, and the conditions to which the grant and exercise of the Options are subject. This notice, when duly accepted in writing by the Participant, shall become a stock option agreement. (b) The exercise price of shares of Company Stock covered by an Option shall be not less than 100% of the Fair Market Value of such shares on the Date of Grant. (c) Options may be exercised in whole or in part at such times as may be specified by the Committee in the Participant's stock option agreement; provided that, the exercise provisions for Incentive Stock Options shall in all events not be more liberal than the following provisions: (i) No Incentive Stock Option may be exercised after the first to occur of (x) 10 years from the Date of Grant, (y) three months following the date of the Participant's retirement or termination of employment with the Company for reasons other than Disability or death, or (z) one year following the date of the Participant's termination of employment on account of Disability or death. (ii) An Incentive Stock Option by its terms, shall be exercisable in any calendar year only to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of the Company Stock with respect to which Incentive Stock Options are exercisable for the first time during the calendar year does not exceed $100,000 (the "Limitation Amount"). Incentive Stock Options granted under the Plan and all other plans of any Company shall be aggregated for purposes of determining whether the Limitation Amount has been exceeded. The Committee granting the Option may impose such conditions as it deems appropriate on an Incentive Stock Option to ensure that the foregoing requirement is met. If Incentive Stock Options that first become exercisable in a calendar year exceed the Limitation Amount, the excess Options will be treated as Nonstatutory Stock Options to the extent permitted by law. (d) Unless otherwise provided in an Incentive Award, Options shall become fully exercisable (i) upon a Change of Control or (ii) on the day immediately preceding the Distribution Date under the Rights Agreement A-5 dated as of September 1, 1997, as amended by Amendment No. 1 dated as of May 1, 1998, between the Company and Harris Trust and Savings Bank, as the same may be further amended from time to time, and any successor or replacement rights agreement. Unless otherwise provided in an Incentive Award, no option shall be exercisable sooner than five years from the Date of Grant. 8. METHOD OF EXERCISE OF OPTIONS. (a) Options may be exercised by the Participant giving written notice of the exercise to the Company, stating the number of shares the Participant has elected to purchase under the Option. The notice shall be effective if accompanied by the exercise price in full in cash. In addition, in the terms of an Option or by other action, the Committee may permit the Participant to (i) deliver Mature Shares (valued at their Fair Market Value on the date of exercise) in satisfaction of all or any part of the exercise price, or (ii) deliver a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company, from the sale or loan proceeds with respect to the sale of Company Stock or a loan secured by Company Stock, the amount necessary to pay the exercise price. In lieu of physical delivery of Mature Shares of Company Stock that are intended to be delivered, the Participant may either (a) if the Company Stock is held by a registered securities broker for Participant, provide a notarized statement attesting to the number of shares owned, or (b) if the Company Stock is actually held by Participant, provide a statement with certificate numbers of the shares owned. (b) The Company may place on any certificate representing Company Stock issued upon the exercise of an Option any legend deemed desirable by the Company's counsel to comply with federal or state securities laws, and the Company may require a customary written indication of the Participant's investment intent. Until the Participant has made any required payment, including any Applicable Withholding Taxes, and has had issued a certificate for the shares of Company Stock acquired, he or she shall possess no shareholder rights with respect to the shares. (c) Each Participant shall agree as a condition of the exercise of an Option to pay to the Company, or make arrangements satisfactory to the Company regarding the payment to the Company of, Applicable Withholding Taxes. Until such amount has been paid or arrangements satisfactory to the Company have been made, no stock certificate shall be issued upon the exercise of an Option. As an alternative to making a cash payment to the Company to satisfy Applicable Withholding Taxes, in addition, in the terms of an Option or by other action, the Committee may permit the Participant to elect to (i) deliver Mature Shares or (ii) have the Company retain that number of shares of Company Stock that would satisfy all or a specified portion of the Applicable Withholding Taxes. 9. ELECTION TO DEFER RECEIPT OF STOCK. (a) To the extent determined by the Committee, a Participant may elect to defer receipt of Shares that the Participant would otherwise receive upon exercise of a Nonstatutory Stock Option by completing a deferral election (a "Deferral Election"). A Deferral Election must be in writing and must be delivered to the Secretary of the Company at least six months before the Option will be exercised. A Deferral Election shall be irrevocable in respect to the number of shares under the Options to which it pertains. A Deferral Election must specify the applicable number or percentage of the Shares on which the Participant wishes to defer receipt. This Section 9 shall also apply to allow Deferral Elections on the exercise of a Nonstatutory Stock Option issued under the 1992 Plan. A-6 (b) The following provisions apply with respect to all Options for which a Deferral Election is made. The optionee must pay the exercise price of the Options by delivery to the Company of Shares (the "Exercise Shares") in the amount of the full Option exercise price for the Shares being acquired. Delivery of the Exercise Shares may be made as provided in Section 8. Upon delivery of the Exercise Shares, the Company shall issue Shares equal to the sum of (1) the number of Shares on which the Option was exercised reduced by the number of Exercise Shares (the "Deferred Shares"), and (2) if the Participant surrendered the Exercise Shares, Shares equal to the number of the Exercise Shares. The Deferred Shares shall be credited to the optionee's account (the "Deferred Shares Account") established under a trust (the "Deferred Shares Trust"). Any additional Shares shall be delivered to the Participant. (c) The Deferred Shares Trust shall secure the Company's obligation to transfer the Deferred Shares to the Participant. The Deferred Shares Trust and its assets shall remain subject to the claims of the Company's creditors and any interest the Participant may be deemed to have in the Deferred Shares Trust may not be sold, hypothecated or transferred (including, without limitation, transfer by gift), except by will or the laws of descent and distribution. The certificates for shares issued to the Deferred Shares Trust shall be issued in the name of the trustee. For accounting purposes, the trustee shall maintain records of the Deferred Shares Account for each Participant. All dividends and other distributions paid or made with respect to the Common Stock in the Deferred Shares Trust shall be held in the Deferred Shares Trust account. All cash dividends or other distributions shall be invested in additional shares of Common Stock. The Participant shall have the right to direct the trustee as to the voting of shares of Common Stock in the Deferred Shares Account. (d) A Deferral Election shall provide for payment of the Deferred Shares Account at a future date or dates elected by the Participant. A Deferral Election shall also provide the form of payment of the Deferred Shares Account. The Committee may establish the permissible forms of payment and dates for payment to be offered under a Deferral Election. In addition, the Participant may elect to receive the Deferred Shares Account in a single lump sum payment upon the occurrence of a Change of Control in lieu of any other form that would otherwise be payable pursuant to a prior election. The single lump sum payment shall be paid as soon as practicable after the Change of Control occurs. Except for an election made within 30 days of the effective date of this Plan which shall be immediately effective, any election or revocation of an election by the Participant as to the date of payment or payment upon a Change of Control shall be effective six months after it is made. (e) The Committee may establish such procedures as are necessary or appropriate to implement the provisions of this Section 9 and may delegate the administration to one or more employees of the Company. 10. TRANSFERABILITY OF OPTIONS AND OTHER AWARDS. Nonstatutory Stock Options may be transferable by a Participant and exercisable by a person other than the Participant, but only to the extent specifically provided in the Incentive Award or in other action of the Committee. Incentive Stock Options, by their terms, and other Incentive Awards shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable, during the Participant's lifetime, only by the Participant. 11. EFFECTIVE DATE OF THE PLAN. The effective date of the Plan is July 1, 1998. The Plan shall be submitted to the shareholders of the Company for approval. Until the Plan has been approved by the Company's shareholders, no Performance Award shall be awarded that is not contingent on these events and no Option granted shall be exercisable. A-7 12. TERMINATION, MODIFICATION, CHANGE. If not sooner terminated by the Board, this Plan shall terminate at the close of business on June 30, 2008. No Incentive Awards shall be made under the Plan after its termination. The Board may amend or terminate the Plan in such respects as it shall deem advisable; provided that, if and to the extent required by the Code, no change shall be made that increases the total number of shares of Company Stock reserved for issuance pursuant to Incentive Awards granted under the Plan (except pursuant to Section 14), materially modifies the requirements as to eligibility for participation in the Plan, or materially increases the benefits accruing to Participants under the Plan, unless such change is authorized by the shareholders of the Company. Notwithstanding the foregoing, the Board may unilaterally amend the Plan and Incentive Awards with respect to Participants as it deems appropriate to ensure compliance with Rule 16b-3 and to cause Incentive Stock Options to meet the requirements of the Code and regulations thereunder. Except as provided in the preceding two sentences, a termination or amendment of the Plan shall not, without the consent of the Participant, adversely affect a Participant's rights under an Incentive Award previously granted to him or her. 13. OTHER LIMITATIONS. To the extent provided in an Incentive Award, all or part of the rights with respect to the Incentive Award may be subject to the conditions that the Participant not engage or have engaged (i) in fraud, dishonesty, conduct in violation of Company policy, or any similar act at any time while an Employee; or (ii) in activity directly or indirectly in competition with any business of the Company or a Subsidiary, or in other conduct inimical to the best interests of the Company or a Subsidiary, during or following the Participant's employment with the Company or a Subsidiary. If it is determined by the Committee or the Committee's designee, either before or after termination of employment of a Participant, that there has been a failure of any such condition in an Incentive Award, all Incentive Awards and all rights with respect to all Incentive Awards granted to such Participant may be immediately terminated and any Company Stock issued pursuant to the Awards shall be forfeited. 14. CHANGE IN CAPITAL STRUCTURE. (a) In the event of a stock dividend, stock split or combination of shares, the number of shares of stock or securities of the Company to be subject to the Plan and to Incentive Awards then outstanding or to be granted thereunder, the maximum number of shares or securities which may be delivered under the Plan, and the exercise price of outstanding Options shall be automatically adjusted to account for the event. In the event of a recapitalization or merger in which the Company is the surviving corporation or other change in the Company's capital stock (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common stock or preferred stock of the Company), the number and kind of shares of stock or securities of the Company to be subject to the Plan and to Incentive Awards then outstanding or to be granted thereunder, the maximum number of shares or securities which may be delivered under the Plan, the exercise price and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. If the adjustment would produce fractional shares with respect to any unexercised Option, the Committee may adjust appropriately the number of shares covered by the Option so as to eliminate the fractional shares. (b) If the Company is a party to a consolidation or a merger in which the Company is not the surviving corporation, a transaction that results in the acquisition of substantially all of the Company's outstanding stock A-8 by a single person or entity, or a sale or transfer of substantially all of the Company's assets, the Committee may take such actions with respect to outstanding Incentive Awards as the Committee deems appropriate. (c) Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing actions without the consent of any Participant, and the Committee's determination shall be conclusive and binding on all persons for all purposes. (d) If a Change of Control occurs, the Committee may take such actions with respect to outstanding Options or Awards as the Committee deems appropriate. These actions may include, but shall not be limited to, accelerating the expiration date of any or all outstanding Options and Awards and the dates on which any part of the Options and Awards may be exercised. The effectiveness of such acceleration, and any exercise of Options and Awards pursuant thereto with respect to shares in excess of the number of shares which could have been exercised in the absence of such acceleration, may be conditioned upon the consummation of the applicable Change of Control. 15. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall have general authority to impose any limitation or condition upon an Incentive Award the Committee deems appropriate to achieve the objectives of the Incentive Award and the Plan and, without limitation and in addition to powers set forth elsewhere in the Plan, shall have the following specific authority: (a) The Committee shall have the power and complete discretion to determine (i) which eligible employees shall receive Incentive Awards and the nature of each Incentive Award, (ii) the terms and conditions of any Performance Award, (iii) the number of shares of Company Stock to be covered by each Incentive Award, (iv) whether Options shall be Incentive Stock Options or Nonstatutory Stock Options, (v) the time or times when an Incentive Award shall be granted, (vi) whether an Incentive Award shall become vested over a period of time and when it shall be fully vested, (vii) when Options may be exercised, (viii) whether a Disability exists, (ix) the manner in which payment will be made upon the exercise of Options, (x) conditions relating to the length of time before disposition of Company Stock received upon the exercise of Options is permitted, (xi) whether to authorize a Participant (A) to use Mature Shares to satisfy Applicable Withholding Taxes or (B) to have the Company withhold from the shares to be issued under an Incentive Award the number of shares necessary to satisfy Applicable Withholding Taxes, (xii) notice provisions relating to the sale of Company Stock acquired under the Plan, and (xiii) any additional requirements relating to Incentive Awards that the Committee deems appropriate. The Committee shall have the power to amend the terms of previously granted Incentive Awards that were granted by the Committee so long as the terms as amended are consistent with the terms of the Plan and provided that the consent of the Participant is obtained with respect to any amendment that would be detrimental to him or her, except that such consent will not be required if such amendment is for the purpose of complying with Rule 16b-3 or any requirement of the Code applicable to the Incentive Award. (b) The Committee may adopt rules and regulations for carrying out the Plan with respect to Participants. The interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive as to any Participant. The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel. A-9 (c) A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members, and any action so taken shall be fully effective as if it had been taken at a meeting. 16. NOTICE. All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (a) if to the Company - at the principal business address of the Company to the attention of the Secretary; or (b) if to any Participant - at the last address of the Participant known to the sender at the time the notice or other communication is sent. 17. INTERPRETATION. The terms of this Plan are subject to all present and future regulations and rulings of the Secretary of the Treasury or his or her delegate relating to the qualification of Incentive Stock Options under the Code. If any provision of the Plan conflicts with any such regulation or ruling, then that provision of the Plan shall be void and of no effect. The terms of this Plan shall be governed by the laws of the Commonwealth of Virginia. A-10 EX-21 5 SMITHFIELD FOODS EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Set forth below is a list of each of the subsidiaries of Smithfield Foods, Inc. (other than subsidiaries whose names have been omitted in accordance with Regulation S-K Item 601(21)(ii)) and their respective jurisdictions of organization. JURISDICTION NAME OF SUBSIDIARY OF ORGANIZATION ------------------ --------------- Brown's of Carolina, Inc. North Carolina Gwaltney of Smithfield, Ltd. Delaware John Morrell & Co. Delaware Lykes Meat Group, Inc. Delaware Patrick Cudahy Incorporated Delaware The Smithfield Packing Company, Incorporated Virginia EX-23 6 SMITHFIELD FOODS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent auditors, we hereby consent to the incorporation by reference in and inclusion of our reports dated June 10, 1998, included in this Form 10-K Annual Report, into the Company's previously filed Registration Statements: Registration Form: Number: Relating to: ----- ------- ------------ S-8 33-53024 Smithfield Foods, Inc. 401(k) Plan for Salaried Employees S-8 33-14219 1984 Stock Option Plan S-8 333-34553 1992 Stock Incentive Plan ARTHUR ANDERSEN LLP Richmond, Virginia July 29, 1998 EX-27 7 SMITHFIELD FOODS FDS
5 12-MOS MAY-03-1998 MAY-03-1998 60,522 0 157,632 1,541 249,511 511,123 705,872 233,652 1,083,645 251,935 407,272 0 0 18,769 342,241 1,083,645 3,867,442 3,867,442 3,479,828 3,479,828 12,600 0 31,891 80,962 27,562 53,400 0 0 0 53,400 1.42 1.34
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