As filed with the Securities and Exchange Commission on June 13, 1997
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________________
PILGRIM'S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 2015 75-1285071
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
LONNIE "BO" PILGRIM
110 SOUTH TEXAS STREET 110 SOUTH TEXAS STREET
PITTSBURG, TEXAS 75686 PITTSBURG, TEXAS 75686
(903) 855-1000 (903) 855-1000
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area code, and telephone number, including area
of registrant's principal executive offices) code, of agent for service)
COPIES TO:
ALAN G. HARVEY THOMAS A. ROBERTS
BAKER & MCKENZIE WEIL, GOTSHAL & MANGES LLP
2001 ROSS AVENUE, SUITE 4500 100 CRESCENT COURT, SUITE 1300
DALLAS, TEXAS 75201 DALLAS, TX 75201
(214) 978-3000 (214) 746-7700
_____________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
_____________
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
==================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED/(1)(2)/ UNIT/(3)/ PRICE/(3)/ FEE
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Common Stock, $0.01 par value 2,200,589 $11.625 $25,581,848 $7,753
==================================================================================================================
/(1)/ Includes 939,207 shares that may be purchased by the Underwriters from
the Company to cover over-allotments, if any.
/(2)/ Pursuant to Rule 429 of the Securities Act of 1933, as amended, the
Prospectus constituting part of this Registration Statement also
constitutes part of the Registrant's Registration Statement, Registration
No. 33-61160 (which became effective July 9, 1993, and which covers
5,000,000 shares of the Registrant's Common Stock, $.01 par value).
Filing fees in the amount of $13,867.19 were paid with respect to such
unsold securities and such unsold securities are being carried forward
for offer and sale under this Registration Statement.
/(3)/ Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based upon the average of the high and low sale
prices of such Common Stock as reported by the New York Stock Exchange on
June 10, 1997.
_____________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS INCLUDED
IN THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS RELATING ALSO TO
REGISTRATION STATEMENT NO. 33-61160 PREVIOUSLY FILED BY THE REGISTRANT ON FORM
S-1 AND DECLARED EFFECTIVE ON JULY 9, 1993. THIS REGISTRATION STATEMENT, WHICH
IS A NEW REGISTRATION STATEMENT, ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT NO. 1
TO REGISTRATION STATEMENT NO. 33-61160, AND SUCH POST-EFFECTIVE AMENDMENT NO. 1
SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY WITH THE EFFECTIVENESS OF THIS
REGISTRATION STATEMENT AND IN ACCORDANCE WITH SECTION 8(C) OF THE SECURITIES ACT
OF 1933.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 13, 1997
PROSPECTUS
, 1997
6,261,382 SHARES
[LOGO OF PILGRIM'S PRIDE APPEARS HERE]
COMMON STOCK
All of the shares of common stock, par value $0.01 per share ("Common Stock"),
offered hereby (the "Offering") are being sold by certain stockholders (the
"Selling Stockholders") of Pilgrim's Pride Corporation (the "Company"). The
Company will not receive any part of the proceeds from the sale of the shares by
the Selling Stockholders. See "Principal and Selling Stockholders."
The Common Stock is traded on the New York Stock Exchange under the symbol
"CHX." The last reported sale price of the Common Stock on the New York Stock
Exchange on June 11, 1997 was $11 3/4 per share. See "Price Range of Common
Stock and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------------------------------------------------------------------------------
Underwriting Proceeds to the
Price to the Discounts and Selling
Public Commissions(1) Stockholders(2)
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Per Share........................ $ $ $
Total(3)......................... $ $ $
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(1) See "Underwriting" for indemnification arrangements with the
Underwriters.
(2) Before deducting expenses estimated at $_____ payable by the Selling
Stockholders.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 939,207 additional shares of Common Stock, on the same terms as set
forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public and Underwriting
Discounts and Commissions will be $ and $ ,
respectively, and the proceeds to the Company therefrom will be $
. See "Underwriting."
The shares of Common Stock are being offered in the Offering by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including their right to reject orders in
whole or in part. It is expected that delivery of the shares will be made in
New York, New York on or about , 1997.
DONALDSON, LUFKIN & JENRETTE A.G. EDWARDS & SONS, INC.
SECURITIES CORPORATION
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), of which this Prospectus is a part,
with respect to the Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement for further information with respect to the Company
and the Common Stock offered hereby. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents and when any
such document is an exhibit to the Registration Statement, each such statement
is qualified in its entirety by reference to the copy of such document filed
with the Commission. Copies of the Registration Statement may be obtained upon
payment of the prescribed fees or examined without charge at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies can also
be obtained at prescribed rates from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
In addition, such materials filed electronically by the Company with the
Commission are available at the Commission's World Wide Web Site at
http:\\www.sec.gov.
The Common Stock is listed on the New York Stock Exchange. Reports, proxy
statements and other information concerning the Company can be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
REFERENCE DATA
Industry, market and market share information contained herein is based on
information appearing in publicly available reports. The Company has not
independently verified such information.
FORWARD-LOOKING INFORMATION
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such forward-
looking statements. Actual results, performance or achievements could differ
materially from the results expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors."
______________________
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES,
AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and Consolidated Financial
Statements and notes thereto included in this Prospectus. Investors should
carefully consider the information set forth under "Risk Factors." Unless
otherwise indicated herein, the information contained in this Prospectus assumes
that the Underwriters' over-allotment option will not be exercised. The term the
"Company" or "Pilgrim's Pride" refers to Pilgrim's Pride Corporation and its
subsidiaries, unless the context otherwise requires.
THE COMPANY
Pilgrim's Pride is one of the largest producers of prepared and fresh chicken
products in North America and has one of the best known brand names in the
chicken industry. The Company is the fourth largest producer of chicken in the
United States and one of the two largest in Mexico. Through vertical
integration, the Company controls the breeding, hatching and growing of chickens
and the processing, preparation, packaging and sale of its product lines. In
fiscal 1996, approximately 80% of the Company's net sales were from its U.S.
operations, including U.S. produced chicken products sold for export to Canada,
Eastern Europe, the Far East and other world markets.
The U.S. chicken industry has grown from 9.0 billion pounds produced in 1976
to 26.1 billion pounds in 1996, a compounded annual growth rate of 5.5%. This
growth was in response to both domestic and international demand. In the U.S.,
annual per capita consumption of chicken grew from 42.5 pounds in 1976 to 71.6
pounds in 1996 while per capita consumption of beef and pork declined. Per
capita consumption of chicken in the U.S. surpassed that of pork in 1982 and
beef in 1992. Exports of U.S. produced chicken have also increased from 3.2% of
production in 1976 to 16.9% in 1996. Management believes these trends will
continue in the foreseeable future.
In the U.S., the Company is the second largest full-line supplier of chicken
products to the foodservice market, which is principally comprised of chain
restaurant operations, frozen entree producers, institutions and distributors.
The majority of the Company's sales to this market consists of prepared food
products, which include portion-controlled breast fillets, tenderloins and
strips, formed nuggets and patties and bone-in chicken parts. These products
are sold frozen and may be either fully cooked or uncooked. Primarily as a
result of growth in the Company's sales of prepared food products to this
market, Company sales to the foodservice market from fiscal 1992 through fiscal
1996 grew at a compounded annual growth rate of 10.2%. Based on industry data,
the Company estimates that total industry dollar sales to the foodservice market
during this same period grew at a compounded annual growth rate of 7.5%. The
Company also sells fresh chicken products to the foodservice market and the
retail market, the latter consisting primarily of grocery store chains and
retail distributors.
In Mexico, the Company has made significant capital investments to modernize
its production technology, completed strategic acquisitions and transferred
experienced management personnel in order to be a low-cost producer of chicken.
Management believes that this low-cost producer strategy has resulted in
increased market share and higher profit margins relative to most other Mexican
chicken producers and has positioned the Company to participate in the
anticipated growth in Mexican chicken demand. According to an industry source,
annual per capita consumption of chicken in Mexico increased from approximately
24 pounds in 1982 to approximately 34 pounds in 1996. Mexican chicken
consumption is expected to continue to grow as the economy continues to
strengthen.
The Company's objectives are to increase sales, profit margins and earnings
and outpace the growth of the chicken industry (i) by focusing on growth in
prepared food products and Mexico markets and (ii) through greater utilization
of the Company's existing assets. Key elements of the Company's strategy to
achieve these objectives are to:
. FOCUS U.S. GROWTH ON PREPARED FOODS. In recent years the Company has focused
on increasing its sales of prepared foods to the foodservice market,
particularly to chain restaurants and frozen entree producers. The market for
prepared food products has experienced greater growth and higher margins than
fresh chicken products, and the Company's sales of prepared food products to
the foodservice market have grown from $178.2 million in fiscal 1992 to $303.9
million in fiscal 1996, a compounded annual growth rate of 14.3%.
Additionally, the production and sale of prepared foods reduces the impact of
feed grain costs on the Company's profitability. As further processing is
performed, feed grain costs become a decreasing percentage of a product's
total production cost. The Company is now the largest supplier of chicken to
Wendy's and Jack-in-the-Box chain restaurants and to Stouffer's frozen entree
operations. Other major prepared foods customers include KFC and Taco Bell.
Prepared foods constituted 44.9% of the Company's U.S. chicken sales in fiscal
1996.
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3
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. FOCUS ON CUSTOMER DRIVEN RESEARCH & DEVELOPMENT AND TECHNOLOGY. Much of the
Company's growth in prepared foods has been the result of customer-driven
research & development focused on designing new products to meet customers'
changing needs. The Company's research & development personnel often work
directly with customers in developing proprietary products. Approximately
$111.9 million of the Company's sales to foodservice customers in fiscal 1996
consisted of new products which were not sold by the Company in fiscal 1992.
Also, the Company is a leader in utilizing advanced processing technology,
which enables the Company to better meet its customers' needs for product
innovation, consistent quality and cost efficiency.
. ENHANCE THE U.S. FRESH CHICKEN PRODUCT MIX THROUGH VALUE-ADDED, BRANDED
PRODUCTS. The Company's fresh chicken business is an important component of
its sales and has grown from sales of $232.1 million in fiscal 1992 to $286.2
million in fiscal 1996. In addition to maintaining its sales of mature,
traditional fresh chicken products, the Company's strategy is to shift the mix
of its U.S. fresh chicken products by continuing to increase sales of higher
margin, faster growing products, such as marinated chicken and chicken parts.
As a result of this strategy, the Company's compounded annual growth rate of
fresh chicken sales from fiscal 1992 to fiscal 1996 exceeded 5.3% while total
U.S. industry sales of fresh chicken increased only 1.7%.
. MAINTAIN OPERATING EFFICIENCIES AND INCREASE CAPACITY ON A COST- EFFECTIVE
BASIS. As production and sales have grown, the Company has maintained
operating efficiencies by investing in state-of-the-art technology, processes
and training and by making cost-effective acquisitions both in the U.S. and
Mexico. As a result, according to industry data, since 1993 the Company has
consistently been one of the lowest cost producers of chicken and, in two
recent studies of 16 large chicken producers, was either the first or second
lowest cost producer of deboned meat, which is the major cost component of
prepared foods. Continuing this strategy, the Company acquired additional
chicken producing assets in the U.S. in April 1997, to replace chicken
purchased from third parties, at a cost that management believes is
significantly less than the cost required to construct a new chicken
production complex with similar capacity.
. CAPITALIZE ON INTERNATIONAL DEMAND FOR U.S. CHICKEN. Due to U.S. consumers'
preference for chicken breast meat, the Company has targeted international
markets to generate sales of leg quarters. The Company has also begun selling
prepared food products for export to the international divisions of its U.S.
chain restaurant customers. As a result of these efforts, sales for these
markets have grown from less than 1% of the Company's total U.S. chicken sales
in fiscal 1992 to more than 6% in fiscal 1996. Management believes that (i)
U.S. chicken exports will continue to grow as worldwide demand for high grade,
low cost protein sources increases and (ii) worldwide demand for higher margin
prepared food products will increase over the next five years; and
accordingly, the Company is well positioned to capitalize on such growth.
. CAPITALIZE ON INVESTMENTS AND EXPERTISE IN MEXICO. The Company's strategy in
Mexico is focused on (i) being one of the most cost-efficient producers and
processors of chicken in Mexico by applying technology and expertise utilized
in the U.S. and (ii) increasing distribution of its higher margin, value added
products to national retail stores and restaurants. This strategy has resulted
in the Company obtaining a market leadership position, with its estimated
market share in Mexico increasing from 10.5% in 1992 to 18.8% in 1996.
THE OFFERING
Common Stock offered by the
Selling Stockholders:
Archer-Daniels-Midland Company................. 5,514,900 shares
Other non-management stockholders.............. 746,482 shares
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Total.................................... 6,261,382 shares
Common Stock to be outstanding
after the Offering................................. 27,589,250 shares
Use of Proceeds....................................... The Company will not receive any of the proceeds of the
Offering other than the proceeds, if any, received as a result of
the exercise of the Underwriters' over-allotment option. Any
proceeds received as a result of the exercise of the over-
allotment option will be used to reduce borrowings under the
Company's revolving credit facility.
New York Stock Exchange symbol........................ CHX
Dividend Policy....................................... $0.015 per share per quarter. See "Price Range of Common
Stock and Dividends."
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4
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SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------------------------------------- ---------------------------
SEPTEMBER 26, OCTOBER 2, OCTOBER 1, SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
1992 1993/(A)/ 1994 1995/(B)/ 1996 1996 1997
INCOME STATEMENT DATA:
Net sales................... $ 817,361 $ 887,843 $ 922,609 $ 931,806 $1,139,310 $539,479 $601,207
Gross profit................ 32,802 106,036 110,827 74,144 70,640 37,019 53,352
Operating income (loss)..... (12,739) 56,345 59,698 24,930/(c)/ 21,504/(c)/ 12,509/ 25,974
Foreign exchange (gain)
loss...................... 736 243 (257) 5,605/(c)/ 1,275/(c)/ 1,222/(c)/ 536
Income (loss) before income
taxes and extraordinary
charge.................... (33,712) 32,838 42,448 2,091 47 1,533 17,611/(d)/
Income tax expense
(benefit)/(e)/............. (4,048) 10,543 11,390 10,058 4,551 2,792 2,552
Income (loss) before
charge..................... (29,664) 22,295 31,058 (7,967) (4,504) (1,259) 15,059/(d)/
Net income (loss)............. (29,664) 21,009 31,058 (7,967) (7,284) (4,039) 15,059/(d)/
Income (loss) per common
share before extraordinary
charge..................... $ (1.24) $ 0.81 $ 1.13 $ (0.29) $ (0.16) $ (0.05) $ 0.55/(d)/
Net income (loss) per
common share............... $ (1.24) $ 0.76 $ 1.13 $ (0.29) $ (0.26) $ (0.15) $ 0.55/(d)/
Dividends per common share.... $ 0.06 $ 0.03 $ 0.06 $ 0.06 $ 0.06 $ 0.03 $0.03
Weighted average shares
outstanding (thousands).... 23,880 27,589 27,589 27,589 27,589 27,589 27,589
OPERATING DATA:
EBITDA/(f)/................... $ 10,955 $ 79,465 $ 83,658 $ 49,811 $ 47,767 $ 25,679 $ 39,735
Capital expenditures.......... 14,813 11,511 23,572 71,589 32,534 22,262 12,090
AT
MARCH 29,
1997
BALANCE SHEET DATA:
Working capital.................................................................................................... $ 98,526
Total assets....................................................................................................... 531,579
Notes payable and current.......................................................................................... 33,645
maturities of long-term deb
Long-term debt, less current....................................................................................... 193,546
maturities
Total stockholders' equity......................................................................................... 157,366
_____________________
(a) Fiscal 1993 had 53 weeks.
(b) On July 5, 1995, the Company acquired certain assets of a group of five
Chicken companies located near Queretaro, Mexico for approximately $35.3
million. The acquisition has been accounted for as a purchase, and the
results of operations for this acquisition have been included in the
Company's consolidated results of operations since the acquisition date.
(c) In addition to foreign exchange losses, the peso decline and the related
economic recession in Mexico contributed significantly to the operating
losses experienced by the Company's Mexican operations of $17.0 million,
$8.2 million and $3.2 million for fiscal years 1995 and 1996 and the six
months ended March 30, 1996, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(d) Reflects $2.2 million (or $1.3 million or $0.05 per share net of tax
effect) of income arising from the final settlement of claims resulting
from a January 1992 fire at the Company's prepared foods plant.
(e) The Company does not include income or losses from its Mexican operations
in its determination of taxable income for U.S. income tax purposes based
upon its determination that such earnings will be indefinitely reinvested
in Mexico. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note D of the Consolidated Financial
Statements of the Company.
(f) "EBITDA" is defined as the sum of operating income (loss) and depreciation
and amortization (excluding amortization of capitalized financing costs).
EBITDA should not be considered as an alternative to, or more meaningful
than, net income as a measure of the Company's operating performance or
cash flows as a measure of the Company's liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EBITDA is presented here not as an alternative measure of operating results
or liquidity, but rather to provide additional information related to the
Company's debt service ability. Certain restrictive covenants contained in
agreements relating to the Company's indebtedness are based on the
Company's EBITDA, subject to certain adjustments.
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5
RISK FACTORS
INDUSTRY CYCLICALITY
Profitability in the chicken industry can be materially affected by the
commodity prices of feed grains and the commodity prices of chicken and chicken
parts, each of which are determined largely by balances in supply and demand. As
a result, the chicken industry as a whole has been characterized by cyclical
earnings.
High feed grain prices have had a material adverse effect on the Company's
operating results in recent periods. The Company periodically seeks, to the
extent available, to enter into advance purchase commitments and/or financial
hedging contracts for the purchase of feed grains in an effort to manage its
feed grain costs. There can be no assurance that the use of such instruments by
the Company will be successful. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "The Chicken Industry."
SUBSTANTIAL INDEBTEDNESS
The Company currently has a significant amount of outstanding indebtedness.
The degree to which the Company is leveraged could have important consequences
to the Company, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired; (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of the principal of and interest on its existing
indebtedness; (iii) the Company is more leveraged than certain of its
competitors, which may place the Company at a competitive disadvantage; (iv)
certain of the Company's borrowings are at variable rates of interest, which
cause the Company to be vulnerable to increases in interest rates; (v) the terms
of certain of the Company's indebtedness permit its creditors to accelerate
payments or require redemption upon certain events which constitute a change in
control of the Company; and (vi) the Company's high degree of leverage may make
it more vulnerable to economic downturns and may limit its ability to withstand
competitive pressures and adverse changes in government regulation, consummate
acquisitions and capitalize on significant business opportunities.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The terms and conditions of documents evidencing the Company's indebtedness
impose restrictions that affect, among other things, the Company's ability to
(i) incur additional indebtedness (including indebtedness incurred by means of
guarantees); (ii) create liens on assets; (iii) sell assets; (iv) engage in
mergers or consolidations; (v) make investments, acquisitions and capital
expenditures; (vi) pay dividends; and (vii) engage in certain transactions with
affiliates and subsidiaries. The Company is also required to comply with
certain specified financial ratios and tests. The Company's ability to comply
with such provisions may be affected by events beyond its control. The
Company's failure to comply with any of these covenants and restrictions could
result in defaults which in turn could cause such indebtedness (and by reason of
cross-acceleration provisions, certain other of its indebtedness) to be declared
immediately due and payable.
FOREIGN OPERATIONS
The Company has substantial operations and assets located in Mexico. Foreign
operations are subject to a number of special risks, including currency exchange
rate fluctuations, trade barriers, exchange controls, expropriation, changes in
laws and policies, including those governing foreign-owned operations, and other
risks. Currency exchange rate fluctuations have adversely affected the Company
in the past and there can be no assurance that currency exchange rate
fluctuations or one or more of such other risks will not have a material adverse
effect on the Company in the future.
The Company's operations in Mexico are conducted through subsidiaries of the
Company organized under the laws of Mexico. The Company may rely in part on
intercompany loans and distributions from such subsidiaries to meet its
obligations. Claims of creditors of the Company's subsidiaries, including trade
creditors, will generally have priority as to the assets of such subsidiaries
over the claims of the Company. Additionally, the ability of the Company's
Mexican subsidiaries to make payments and distributions to the Company will be
subject to, among other things, Mexican law. Although such laws have not had,
and the Company does not anticipate such laws having, a material adverse effect
on the ability of the Company's Mexican subsidiaries to make such payments and
distributions, no assurances can be given that such laws will not have such a
material adverse effect.
6
REGULATION
The chicken industry is subject to federal, state and local governmental
regulation, including in the health and environmental areas by the Centers for
Disease Control, the United States Department of Agriculture ("USDA"), the Food
and Drug Administration ("FDA") and the Environmental Protection Agency (the
"EPA") in the United States and by similar governmental agencies in Mexico. The
Company anticipates increased regulation by the USDA concerning food safety, by
the FDA concerning the use of medications in feed and by the Texas Natural
Resources and Conservation Commission (the "TNRCC"), the Arkansas State
Veterinarian Office (the "ASVO") and the EPA concerning the disposal of chicken
by-products and wastewater discharges. Although the Company does not anticipate
any such regulation having a material adverse effect upon the Company, there can
be no assurance that currently unknown matters, new laws and regulations, or
stricter interpretations of existing laws or regulations will not materially
affect the Company's business or operations in the future. See "Business--
Regulation."
VOTING CONTROL BY PRINCIPAL STOCKHOLDER
Lonnie "Bo" Pilgrim has voting control of 60.8% of the Company's outstanding
Common Stock and is therefore in a position to control the outcome of all
actions requiring stockholder approval, including the election of Directors,
thereby insuring his ability to control the future direction and management of
the Company. If Mr. Pilgrim and certain members of his family cease to own at
least a majority of the outstanding Common Stock of the Company, it will
constitute an event of default under certain agreements relating to the
Company's indebtedness and will entitle certain other holders of indebtedness to
the prepayment of such indebtedness. See "--Potential Payment of Deferred
Taxes" and "Principal and Selling Stockholders."
POTENTIAL PAYMENT OF DEFERRED TAXES
During taxable periods ending on or before July 2, 1988, the Company used the
cash method of accounting for income tax purposes. Pursuant to certain
provisions enacted by the Revenue Act of 1987, the Company was required to
change its method of accounting for federal income tax purposes from the cash
method to the accrual method. As a consequence of such change in accounting
method, the Company was permitted to create a "suspense account" in the amount
of approximately $89.7 million, which represents deferred income arising from
the Company's prior use of the cash method of accounting. If certain events
occur, which events are not necessarily within the control of the Company, then
the Company will be required to include all or a portion of the amount in the
suspense account in its taxable income.
The suspense account is includable in the taxable income of the Company in
either of two circumstances. First, the full amount of the suspense account
would be included in the Company's taxable income if the Company ceases to
qualify as a "family farm corporation" during any taxable period. The Company
ceases to qualify as a family farm corporation if less than 50% of the total
combined voting power of all classes of stock entitled to vote, or less than 50%
of all other classes of stock of the Company, are owned by members of the Lonnie
"Bo" Pilgrim family. Lonnie "Bo" Pilgrim and his family currently own in excess
of 60% of the outstanding Common Stock. Second, a portion of the Company's
suspense account must be reported as taxable income if the Company's gross
receipts from the Company's chicken operations for any taxable year ("Current
Year Receipts") are less than the Company's gross receipts from such operations
for the taxable year ending July 2, 1988 (or the gross receipts of any
subsequent year in which a portion of the suspense account must be reported as
income) ("Base Year Receipts"). The amount of the suspense account includable
in income would be the product of (i) the amount in the suspense account times
(ii) the ratio of (A) the excess of Base Year Receipts over Current Year
Receipts to (B) Base Year Receipts.
While currently there exists no plan or intention on the part of Lonnie "Bo"
Pilgrim to transfer sufficient stock of the Company so that the Company ceases
to qualify as a family farm corporation, and while management believes that in
all likelihood gross receipts from its chicken operations in future years will
exceed gross receipts from such operations for the fiscal year ending July 2,
1988, there can be no assurance that this will be the case and that the suspense
account will not be required to be included in whole or in part in the taxable
income of the Company.
A number of proposals have been made in recent years, including the most
recent Republican budget proposal and the President's most recent budget
proposal, that, if enacted, would require the Company to include the suspense
account in its taxable income, typically over time periods ranging from 10 to 20
years. There can be no assurance that such a
7
proposal will not require the entire suspense account to be included in taxable
income in less than 10 years.
COMPETITION
The chicken industry is highly competitive and certain of the Company's
competitors have greater financial and marketing resources than the Company. In
both the United States and Mexico, the Company competes principally with other
vertically integrated chicken companies.
In general, the competitive factors in the U.S. chicken industry include
price, product quality, brand identification, breadth of product line and
customer service. Competitive factors vary by major market. In the foodservice
market, competition is based on consistent quality, product development, service
and price. In the U.S. retail market, management believes that product quality,
brand awareness and customer service are the primary bases of competition.
There is some competition with non-vertically integrated further processors in
the U.S. prepared food business.
In Mexico, where product differentiation is limited, product quality and price
are the most critical competitive factors. Additionally, the North American Free
Trade Agreement ("NAFTA"), which went into effect on January 1, 1994, requires
annual reductions in tariffs for chicken and chicken products in order to
eliminate such tariffs by January 1, 2003. As such tariffs are reduced, there
can be no assurance that increased competition from chicken imported into Mexico
from the U.S. will not have a material adverse effect on the Mexican chicken
industry in general, or the Company's Mexican operations in particular.
There can be no assurance that the results of any such competition will not
have a material adverse effect on the Company's business or operations.
8
THE COMPANY
The Company, which was incorporated in Texas in 1968 and reincorporated in
Delaware in 1986, is the successor to a partnership founded in 1946 as a retail
feed store. Over the years, the Company grew through both internal growth and
various acquisitions of farming operations and chicken processors. In addition
to domestic growth, the Company initially expanded into Mexico through the
acquisition of several smaller chicken producers in 1988.
The Company's principal executive offices are located at 110 South Texas
Street, Pittsburg, Texas 75686 and its telephone number at such address is (903)
855-1000.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the Common
Stock by the Selling Stockholders. The Company will only receive proceeds from
the sale of the Common Stock offered hereby if the over-allotment option is
exercised. If the over-allotment option is exercised in full, the Company will
receive net proceeds of approximately $ million. The Company will use
the proceeds, if any, received as a result of the exercise of the over-allotment
option to reduce the borrowings under its revolving credit facility, which
currently bears interest at a rate equal to LIBOR plus 1 3/8% and expires in May
1999. The borrowings under the Company's revolving credit facility were used
for general corporate purposes.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is listed on the New York Stock Exchange under the trading
symbol "CHX." The following table sets forth the high and low sale prices for
the Common Stock as reported by the New York Stock Exchange and the dividends
declared during the quarters indicated.
PRICE RANGE DIVIDENDS
OF COMMON STOCK PER SHARE
----------------- ---------
FISCAL YEAR ENDED SEPTEMBER 30, 1995: HIGH LOW
1st Quarter.......................... $10 3/8 $9 3/8 $0.015
2nd Quarter.......................... 9 3/4 7 3/4 0.015
3rd Quarter.......................... 8 3/8 7 1/2 0.015
4th Quarter.......................... 8 3/4 7 5/8 0.015
FISCAL YEAR ENDED SEPTEMBER 28, 1996:
1st Quarter.......................... $ 8 3/8 $6 5/8 $0.015
2nd Quarter.......................... 7 5/8 6 3/4 0.015
3rd Quarter.......................... 9 6 3/4 0.015
4th Quarter.......................... 9 7 1/2 0.015
FISCAL YEAR ENDED SEPTEMBER 27, 1997:
1st Quarter.......................... $ 9 $7 3/4 $0.015
2nd Quarter.......................... 12 1/8 8 5/8 0.015
3rd Quarter (through June 11)........ 12 3/4 9 3/8 0.015
On June 11, 1997, the reported last sale price of the Common Stock was $11 3/4
per share. The Company believes that as of June 11, 1997 there were
approximately 12,500 holders of Common Stock of record or through nominee or
street name accounts with brokers.
With the exception of two quarters in fiscal 1993, the Company's Board of
Directors has declared cash dividends of $0.015 per share of Common Stock every
fiscal quarter since the Company's initial public offering in 1986. Payment of
future dividends will depend upon the Company's financial condition, results of
operations and other factors deemed
9
relevant by the Company's Board of Directors, as well as any limitations imposed
by lenders under the Company's credit facilities. The Company's revolving credit
facility currently limits dividends to a maximum of $1.7 million per year. See
Note C to the Consolidated Financial Statements of the Company.
10
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents summary historical financial data of the Company
as of and for the fiscal years ended 1992, 1993, 1994, 1995 and 1996 and as of
and for the six months ended March 30, 1996, and March 29, 1997. The income
statement and balance sheet data are derived from the Consolidated Financial
Statements of the Company which (except for the six months ended March 30, 1996,
and March 29, 1997) have been audited by Ernst & Young LLP, independent
auditors. The Consolidated Financial Statements as of September 30, 1995, and
September 28, 1996, and for each of the fiscal years in the three-year period
ended September 28, 1996, and the report of Ernst & Young LLP thereon, are
included elsewhere in this Prospectus. The Consolidated Financial Statements as
of and for the six months ended March 30, 1996, and March 29, 1997, are
unaudited, but, in the opinion of management, have been prepared on the same
basis as the audited Consolidated Financial Statements and include all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of such data. The results for the six months ended March 29,
1997, are not necessarily indicative of the results that may be expected for the
full fiscal year. The information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
FISCAL YEAR ENDED SIX MONTHS ENDED
----------------------------------------------------------------------- ----------------------
SEPTEMBER 26, OCTOBER 2, OCTOBER 1, SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
1992 1993/(A)/ 1994 1995/(B)/ 1996 1996 1997
INCOME STATEMENT DATA:
Net sales................. $817,361 $887,843 $922,609 $931,806 $1,139,310 $539,479 $601,207
Cost of sales............. 784,940 781,807 811,782 857,662 1,068,670 502,460 547,855
Gross profit.............. 32,802 106,036 110,827 74,144 70,640 37,019 53,352
Selling, general and
administrative expense.. 45,541 49,691 51,129 49,214 49,136 24,510 27,378
Operating income (loss)... (12,739) 56,345 59,698 24,930/(c)/ 21,504/(c)/ 12,509 25,974/(c)/
Interest expense, net..... 22,502 25,719 19,173 17,483 21,539 10,331 10,733
Foreign exchange (gain)
loss..................... 736 243 (257) 5,605/(c)/ 1,275/(c)/ 1,222 536/(c)/
Income (loss) before
income taxes and
extraordinary charge..... (33,712) 32,838 42,448 2,091 47 1,533 17,611/(d)/
Income tax expense
(benefit)/(e)/........... (4,048) 10,543 11,390 10,058 4,551 2,792 2,552
Income (loss) before...... (29,664) 22,295 31,058 (7,967) (4,504) (1,259) 15,059/(d)/
extraordinary charge
Extraordinary charge-early
repayment of debt, net of
tax...................... -- (1,286) -- -- (2,780) (2,780) --
Net income (loss)......... (29,664) 21,009 31,058 (7,967) (7,284) (4,039) 15,059/(d)/
Income (loss) per common
share before extraordinary
charge................... $(1.24) $0.81 $1.13 $ (0.29) $(0.16) $(0.05) $ 0.55/(d)/
Net income (loss) per common
share................... $(1.24) $0.76 $1.13 $ (0.29) $(0.26) $(0.15) $ 0.55/(d)/
Dividends per common
share.................... $0.06 $0.03 $0.06 $ 0.06 $0.06 $0.03 $ 0.03
Weighted average shares
outstanding (thousands).. 23,880 27,589 27,589 27,589 27,589 27,589 27,589
OPERATING DATA:
EBITDA/(f)/............... $ 10,955 $ 79,465 $ 83,658 $ 49,811 $ 47,767 $ 25,679 $ 39,735
Capital expenditures...... 14,813 11,511 23,572 71,589 32,534 22,262 12,090
BALANCE SHEET DATA (END OF PERIOD):
Working capital............. $ 11,277 $ 72,688 $ 99,724 $ 88,395 $ 88,455 $ 90,816 $ 98,526
Total assets................. 434,566 422,846 438,683 497,604 536,722 526,703 531,579
Notes payable and current
maturities of long-term
debt........................ 86,424 25,643 4,493 18,187 35,850 33,121 33,645
Long-term debt, less
current maturities.......... 131,534 159,554 152,631 182,988 198,334 202,128 193,546
Total stockholders' equity... 112,112 132,293 161,696 152,074 143,135 147,206 157,366
_______________________________
(a) Fiscal 1993 had 53 weeks.
11
(b) On July 5, 1995, the Company acquired certain assets of a group of five
chicken companies located near Queretaro, Mexico for approximately $35.3
million. The acquisition has been accounted for as a purchase, and the
results of operations for this acquisition have been included in the
Company's consolidated results of operations since the acquisition date.
(c) In addition to foreign exchange losses, the peso decline and the related
economic recession in Mexico contributed significantly to the operating
losses experienced by the Company's Mexican operations of $17.0 million,
$8.2 million and $3.2 million for fiscal years 1995 and 1996 and the six
months ended March 30, 1996, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(d) Reflects $2.2 million (or $1.3 million or $0.05 per share net of tax effect)
of income arising from the final settlement of claims resulting from a
January 1992 fire at the Company's prepared food plant.
(e) The Company does not include income or losses from its Mexican operations in
its determination of taxable income for U.S. income tax purposes based upon
its determination that such earnings will be indefinitely reinvested in
Mexico. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note D of the Consolidated Financial
Statements of the Company.
(f) "EBITDA" is defined as the sum of operating income (loss) and depreciation
and amortization (excluding amortization of capitalized financing costs).
EBITDA should not be considered as an alternative to, or more meaningful
than, net income as a measure of the Company's operating performance or cash
flows as a measure of the Company's liquidity. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." EBITDA is
presented here not as an alternative measure of operating results or
liquidity, but rather to provide additional information related to the
Company's debt service ability. Certain restrictive covenants contained in
agreements relating to the Company's indebtedness are based on the Company's
EBITDA, subject to certain adjustments.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Profitability in the chicken industry can be materially affected by the
commodity prices of feed grains and the commodity prices of chicken and chicken
parts, each of which are determined largely by supply and demand. As a result,
the chicken industry as a whole has been characterized by cyclical earnings.
Cyclical fluctuations in earnings of individual chicken companies can be
mitigated somewhat by (i) business strategy; (ii) product mix; (iii) sales and
marketing plans; and (iv) operating efficiencies. See "The Chicken Industry."
In an effort to reduce price volatility and to generate higher, more consistent
profit margins, the Company has concentrated on the production and marketing of
prepared food products, which generally have higher margins than the Company's
other products. Additionally, the production and sale in the U.S. of prepared
food products reduces the impact of feed grain costs on the Company's
profitability. As further processing is performed, feed grain costs become a
decreasing percentage of a product's total production costs.
In December 1994, the Mexican government changed its policy of defending the
peso against the U.S. dollar and allowed it to float freely on the currency
markets. These events resulted in the Mexican peso exchange rate declining from
3.39 to 1 U.S. dollar at October 3, 1994 to a low of 8.16 to 1 U.S. dollar at
November 14, 1995. The decline in the Mexican peso exchange rate affected the
Company's operations directly and indirectly as a result of the related economic
recession in Mexico in fiscal 1995. Similarly, the Company's fiscal 1996
results of operations were adversely affected by the continuation of the
economic recession in Mexico, as well as a significant increase in feed grain
costs in fiscal 1996, which included record high corn prices, and the first
quarter of fiscal 1997 when compared with fiscal 1995 and the first quarter of
fiscal 1996, respectively.
Since July 1996, feed ingredient prices have decreased significantly from the
fiscal 1996 high and the Mexican economy has shown improvement. See "The
Chicken Industry." Accordingly, the Company's operating results have improved
significantly during the first six months of fiscal 1997 as compared with the
first six months of fiscal 1996.
The following table presents certain information regarding the Company's U.S.
and Mexican operations.
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------ ----------------------
OCTOBER 1, SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
1994 1995 1996 1996 1997
(IN THOUSANDS)
SALES TO UNAFFILIATED CUSTOMERS:
United States.............................. $733,865 $772,315 $911,181 $430,952 $473,761
Mexico..................................... 188,744 159,491 228,129 108,527 127,446
OPERATING INCOME (LOSS):
United States.............................. 46,421 41,923 29,705 15,709 14,401
Mexico..................................... 13,277 (16,993) (8,201) (3,200) 11,573
13
The following table presents certain items as a percentage of net sales for the
periods indicated.
PERCENTAGE OF NET SALES
------------------------------------------------------------------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------------- ----------------------------------
OCTOBER 1, SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
1994 1995 1996 1996 1997
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 88.0 92.0 93.8 93.1 91.1
Gross profit................................... 12.0 8.0 6.2 6.9 8.9
Selling, general and administrative expense.... 5.5 5.3 4.3 4.5 4.6
Operating income............................... 6.5 2.7 1.9 2.3 4.3
Interest expense............................... 2.1 1.9 1.9 1.9 1.8
Income before income taxes and
extraordinary charge......................... 4.6 2.2 0.0 0.3 2.9
Net income (loss).............................. 3.4 (8.6) (0.6) (0.7) 2.5
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 29, 1997 COMPARED TO SIX MONTHS ENDED MARCH 30, 1996
Net Sales. Consolidated net sales were $601.2 million for the first six
months of fiscal 1997, an increase of $61.7 million, or 11.4%, over the first
six months of fiscal 1996. The increase in consolidated net sales resulted from
a $35.1 million increase in U.S. chicken sales to $397.3 million, an $18.9
million increase in Mexican chicken sales to $127.4 million and a $7.7 million
increase of sales of other domestic products to $76.5 million. The increase in
U.S. chicken sales was primarily due to a 7.5% increase in dressed pounds
produced and a 2.1% increase in total revenue per dressed pound produced. The
increase in Mexican chicken sales was primarily due to a 28.3% increase in total
revenue per dressed pound, offset slightly by an 8.5% decrease in dressed pounds
produced resulting from management's decision in fiscal 1996 to reduce
production due to the recession in Mexico. The increase in sales of other U.S.
products was primarily the result of increased sales of the Company's chicken
by-products group and higher average prices for commercial eggs for the period.
Increased revenues per dressed pound produced both in the United States and in
Mexico were primarily the result of higher sales prices as well as generally
improved economic conditions in Mexico compared to the prior year period.
Cost of Sales. Consolidated cost of sales was $547.9 million in the first six
months of fiscal 1997, an increase of $45.4 million, or 9.0%, over the first six
months of fiscal 1996. The increase primarily resulted from a $41.5 million
increase in cost of sales of U.S. operations, and a $3.9 million increase in the
cost of sales in Mexican operations. The cost of sales increase in U.S.
operations of $41.5 million was due to a 7.5% increase in dressed pounds
produced, increased production of higher cost and margin products in prepared
foods, and increased feed ingredient costs experienced primarily during the
first three months of such period. The $3.9 million cost of sales increase in
Mexican operations was primarily due to a 13.3% increase in average costs of
sales per pound offset partially by an 8.5% decrease in dressed pounds produced.
The increase in average costs of sales per pound was primarily the result of
increased production of higher value and cost products.
Gross Profit. Gross profit as a percentage of sales increased to 8.9% in the
first six months of fiscal 1997 from 6.9% in the first six months of fiscal
1996. The increased gross profit as a percentage of sales resulted mainly from
higher sales prices as mentioned above and significantly higher margins in
Mexico.
Selling, General and Administrative Expenses. Consolidated selling, general
and administrative expenses were $27.4 million in the first six months of fiscal
1997 and $24.5 million in the first six months of fiscal 1996. Consolidated
selling, general and administrative expenses as a percentage of sales increased
slightly in the first six months of fiscal 1997 to 4.6% compared to 4.5% in the
first six months of fiscal 1996.
Operating Income. Consolidated operating income was $26.0 million for the
first six months of fiscal 1997, an increase of $13.5 million, or 107.6%, when
compared to the first six months of fiscal 1996, resulting primarily from higher
margins experienced in the Mexican operations.
Interest Expense. Consolidated net interest expense was $10.7 million in the
first six months of fiscal 1997, an increase of $0.4 million, or 3.9%, when
compared to the first six months of fiscal 1996. This increase was due to
slightly
14
higher interest rates and higher average outstanding debt amounts when compared
to the first six months of fiscal 1996.
Miscellaneous Expense. Consolidated miscellaneous, net, a component of Other
Expense (Income), was $2.9 million in the first six months of fiscal 1997 and
includes a $2.2 million final settlement of claims resulting from the January
8, 1992 fire at the Company's prepared foods plant in Mt. Pleasant, Texas.
Income Tax Expense. Consolidated income tax expense in the first six months
of fiscal 1997 decreased to $2.5 million compared to an expense of $2.8 million
in the first six months of fiscal 1996. The lower consolidated income tax
expense in contrast to higher consolidated income resulted from increased
Mexican earnings that are not currently subject to income taxes. See Note D of
the Consolidated Financial Statements of the Company.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Consolidated net sales were $1.14 billion for fiscal 1996, an
increase of $207.5 million, or 22.3%, over fiscal 1995. The increase in
consolidated net sales resulted from a $102.6 million increase in U.S chicken
sales to $773.7 million, a $68.6 million increase in Mexican chicken sales to
$228.1 million and a $36.3 million increase in sales of other domestic products
to $137.5 million. The increase in U.S. chicken sales was primarily due to a
7.7% increase in total revenue per dressed pound produced and a 7.0% increase in
dressed pounds produced. The increase in Mexican chicken sales was primarily
due to a 35.6% increase in Mexican dressed pounds produced and a 5.5% increase
in total revenue per dressed pound. The increase in Mexican dressed pounds
produced resulted primarily from the July 5, 1995 acquisition of five chicken
companies located near Queretaro, Mexico. The increase in sales of other
domestic products was primarily the result of increased sales of the Company's
chicken by-products group and higher sales prices for table eggs. Increased
revenues per dressed pound produced both in the U.S. and in Mexico were
primarily the result of higher sales prices caused by the chicken markets
adjusting to higher feed ingredient cost.
Cost of Sales. Consolidated cost of sales was $1.07 billion in fiscal 1996,
an increase of $211.0 million, or 24.6%, over fiscal 1995. The increase
primarily resulted from a $150.8 million increase in cost of sales of U.S.
operations, and a $60.2 million increase in the cost of sales in Mexican
operations. The cost of sales increase in U.S. operations of $150.8 million was
due to a 41.5% increase in feed ingredient costs, a 7.0% increase in dressed
pounds produced and increased production of higher cost and margin products in
prepared foods. Since the fiscal 1995 year end, feed ingredient costs increased
substantially due to lower crop yields in the 1995 harvest season. Beginning in
July 1996, feed ingredient prices declined significantly due to a favorable crop
harvest. The $60.2 million cost of sales increase in Mexican operations was
primarily due to a 35.6% increase in dressed pounds produced and a 7.0% increase
in average costs of sales per pound. The increase in average costs of sales per
pound was primarily the result of a 37.2% increase in feed ingredient costs
resulting from the reasons discussed above.
Gross Profit. Gross profit as a percentage of sales decreased to 6.2% in
fiscal 1996 from 8.0% in fiscal 1995. The decreased gross profit as a
percentage of sales resulted mainly from increased costs of sales due to higher
feed ingredient prices experienced in fiscal 1996.
Selling, General and Administrative Expenses. Consolidated selling, general
and administrative expenses were $49.1 million in fiscal 1996 and $49.2 million
in fiscal 1995. Consolidated selling, general and administrative expenses as a
percentage of sales decreased in fiscal 1996 to 4.3% compared to 5.3% in fiscal
1995.
Operating Income. Consolidated operating income was $21.5 million for fiscal
1996, a decrease of $3.4 million when compared to fiscal 1995, resulting
primarily from higher feed ingredient cost.
Interest Expense. Consolidated net interest expense was $21.5 million in
fiscal 1996, an increase of $4.1 million, or 23.2%, when compared to fiscal
1995. This increase was due to higher outstanding debt levels resulting
primarily from expansions in the U.S. and the prior year acquisitions in Mexico,
offset slightly by lower interest rates when compared to fiscal 1995.
Income Tax Expense. Consolidated income tax expense in fiscal 1996 was $4.6
million compared to a consolidated income tax expense of $10.1 million in fiscal
1995. Consolidated income tax expense is significantly in excess of the amount
computed at the statutory U.S. income tax rate due to the non-deductibility of
Mexican losses in the U.S. in both
15
fiscal 1996 and fiscal 1995. The decrease in consolidated income tax expense in
fiscal 1996 compared to fiscal 1995 primarily resulted from the $13.6 million
decrease in income before income taxes and extraordinary charges for domestic
operations in fiscal 1996 compared to fiscal 1995.
Extraordinary Charge. The extraordinary charge-early repayment of debt in the
amount of $2.8 million, net of tax, was incurred while refinancing certain debt
at a lower interest rate, which will result in long-term interest expense
reductions. See Note C to the Consolidated Financial Statements of the Company.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Consolidated net sales were $931.8 million for fiscal 1995, an
increase of $9.2 million, or 1.0%, over fiscal 1994. The increase in
consolidated net sales resulted from a $36.0 million increase in U.S. chicken
sales to $671.1 million and a $2.5 million increase in sales of other domestic
products to $101.2 million offset partially by a $29.3 million decrease in
Mexican chicken sales to $159.5 million. The increase in U.S. chicken sales was
due primarily to a 3.6% increase in dressed pounds produced and a 2.0% increase
in the total revenue per dressed pound produced. The decrease in Mexican
chicken sales resulted from a 21.9% decrease in the total revenue per dressed
pound produced caused primarily by the devaluation of the Mexican peso and the
resulting recession, offset by an 8.1% increase in dressed pounds produced. See
"--Impact of Mexican Peso Devaluation."
Cost of Sales. Consolidated cost of sales was $857.7 million in fiscal 1995,
an increase of $45.9 million, or 5.7%, over fiscal 1994. The increase primarily
resulted from a $39.2 million increase in cost of sales of U.S. operations and a
$6.7 million increase in the cost of sales from Mexican operations. The cost of
sales increase in U.S. operations of $39.2 million was due primarily to a 3.6%
increase in dressed pounds produced and increased production of higher cost and
margin products in prepared foods, offset partially by a 6.1% decrease in feed
ingredient cost. The $6.7 million cost of sales increase in Mexican operations
was due primarily to an 8.1% increase in dressed pounds produced offset
partially by a 3.6% decrease in average cost of sales per dressed pound
resulting from the devaluation of the Mexican peso. See "--Impact of Mexican
Peso Devaluation."
Gross Profit. Gross profit as a percentage of sales decreased to 8.0% in
fiscal 1995 from 12.0% in fiscal 1994. The decreased gross profit resulted
mainly from the Company's Mexican operations and was primarily the result of the
Mexican peso devaluation having a greater effect on selling prices than on cost
of sales, due primarily to the dollar based characteristics of grain prices,
which is a major component of cost of goods sold.
Selling, General and Administrative Expenses. Consolidated selling, general
and administrative expenses were $49.2 million for fiscal 1995, a decrease of
$1.9 million, or 3.7%, when compared to fiscal 1994. Consolidated selling,
general and administrative expenses as a percentage of sales decreased in fiscal
1995 to 5.3% from 5.5% in fiscal 1994.
Operating Income. Consolidated operating income for fiscal 1995 was $24.9
million compared to $59.7 million in fiscal 1994. The decrease was due
primarily to lower margins in Mexican chicken operations which resulted
primarily from the effects of the Mexican peso devaluation as described above.
Interest Expense. Consolidated net interest expense was $17.5 million in
fiscal 1995, a decrease of $1.7 million, or 8.8%, when compared to fiscal 1994.
This decrease was due to lower average amounts of outstanding debt when compared
to fiscal 1994.
Income Tax Expense. Consolidated income tax expense decreased to $10.1
million in fiscal 1995 compared to $11.4 million in fiscal 1994. The high
effective tax rate is due to the Company having positive taxable income in the
United States offset by losses in Mexico, which results in no current tax
benefit under current Mexican tax laws.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1997, the Company's working capital was $98.5 million and its
current ratio was 1.79 to 1 compared with working capital of $88.5 million and a
current ratio of 1.63 to 1 at September 28, 1996, and working capital of $88.4
million and a current ratio of 1.84 to 1 at September 30, 1995. The increase in
working capital from September 28, 1996 to December 28, 1996 was due primarily
to income from operations.
16
Trade accounts and other receivables were $69.3 million at March 29, 1997,
compared to $65.9 million at September 28, 1996, and $60.0 million at September
30, 1995. The $3.4 million or 5.1% increase from September 28, 1996 to March
29, 1997 was due primarily to increased sales volume. The $5.9 million or 9.8%
increase from September 30, 1995 to September 28, 1996 was primarily due to
increased average selling prices and volumes. Allowances for doubtful
accounts, as a percentage of trade accounts and notes receivable, were 4.6% at
March 29, 1997 compared to 5.7% at September 28, 1996 and 6.7% at September 30,
1995. The decrease is due to increased net sales resulting in a corresponding
increase in trade accounts and other receivables with the dollar amount of
allowances for doubtful accounts remaining relatively stable.
Inventories were $137.9 million at March 29, 1997, compared to $136.9 million
at September 28, 1996, and $110.4 million at September 30, 1995. The $1.0
million increase between September 28, 1996 and March 29, 1997 was due primarily
to higher finished poultry products inventories offset partially by the
reduction of feed costs in inventories. The $26.5 million increase between
September 30, 1995 and September 28, 1996 was due primarily to the higher feed
ingredient costs affecting the carrying value of feed on hand and feed cost in
the live chickens and finished products.
Accounts payable were $57.8 million at March 29, 1997 compared to $71.4
million at September 28, 1996, and $55.7 million at September 30, 1995. The
$13.6 million or 19.0% decrease from September 28, 1996 to March 29, 1997 was
due primarily to the reduction in feed ingredient costs. The $15.7 million or
28.2% increase from September 30, 1995 to September 28, 1996 was due primarily
to higher production levels and feed ingredient costs.
Capital expenditures were $12.2 million and $34.3 million for the six months
ended March 29, 1997 and fiscal 1996, respectively, and were incurred primarily
to expand production capacities in the U.S., improve efficiencies, reduce costs
and for the routine replacement of equipment. The Company anticipates that it
will spend a total of approximately $55 million for capital expenditures,
including the purchase of certain assets of Green Acre Foods, Inc., in fiscal
1997 for these same purposes. The Company expects to finance such expenditures
with available operating cash flows and long-term financing. On April 15, 1997,
the Company completed its acquisition of certain chicken producing assets of
Green Acre Foods, Inc., an integrated chicken producer located in the Center and
Nacogdoches area of East Texas. These assets are capable of producing 650,000
chickens per week.
Cash flows provided by (used in) operating activities were $9.7 million,
$(10.7 million), $11.4 million, $32.7 million and $60.7 million in the six month
periods ended March 29, 1997 and March 30, 1996 and the fiscal years 1996, 1995
and 1994, respectively. The significant increase in cash flows provided from
operating activities for the six months ended March 29, 1997 compared to the six
months ended March 30 ,1996 was due primarily to net income for the six months
ended March 29, 1997 compared to net losses incurred for the six months ended
March 30, 1996. The decrease in cash flows provided by operating activities
between fiscal 1996 and fiscal 1995 was primarily caused by increased
inventories resulting from higher feed costs in fiscal 1996. The decrease in
cash flows provided by operating activities between fiscal 1995 and fiscal 1994
was primarily caused by changes in net income.
Cash provided by (used in) financing activities was $(7.9 million), $29.3
million, $27.3 million, $40.2 million and $(30.3 million) in the six months
ended March 29, 1997 and March 30, 1996 and in the fiscal years 1996, 1995 and
1994, respectively. The cash provided by (used in) financing activities
primarily reflects the net proceeds from notes payable and long-term financings
and debt retirements.
Total debt to capitalization decreased to 59.1% at March 29, 1997 compared to
62.1% at September 28, 1996. The Company maintains $110 million in revolving
credit facilities with available unused lines of credit of $77 million at June
11, 1997. The facilities expire in or after May 1999. On April 15, 1997, the
Company secured an additional $35 million in secured term borrowing capacity
from an existing lender at rates of 2.0% over LIBOR, with monthly principal and
interest payments, maturing on February 28, 2006. As of June 11, 1997, $20
million had been borrowed under such facility, and the Company may borrow the
remaining $15 million at any time on or before April 1, 1999. Additionally, on
June 9, 1997, the Company secured an additional $10 million in secured term
borrowing capacity from a group of existing lenders at rates currently equal to
LIBOR plus 1%, with interest only payments monthly, maturing on June 9, 1999.
As of June 11, 1997, nothing had been borrowed under this facility.
The Company's deferred income taxes have resulted primarily from the Company's
change from the cash method of accounting to the accrual method of accounting
for taxable periods beginning after July 2, 1988. The Company's deferred
17
income taxes arising from such change in method of accounting will continue to
be deferred as long as (i) at least 50% of the voting stock and at least 50% of
all other classes of stock of the Company continue to be owned by the Lonnie
"Bo" Pilgrim family and (ii) the Company's net sales from its agricultural
operation in a taxable year equal or exceed the Company's net sales from such
operations in its taxable year ending July 2, 1988. Failure of the first
requirement will cause all of the deferred taxes attributable to the change in
accounting method to be due. Failure of the second requirement will cause a
portion of such deferred taxes to be due based upon the amount of the relative
decline in net sales from the agricultural operations. The family of Lonnie "Bo"
Pilgrim currently owns in excess of 60% of the stock of the Company. Management
believes that likelihood of the (i) Pilgrim family ownership falling below 50%,
or (ii) gross receipts from agricultural activities falling below the 1988
level, is remote. See "Risk Factors--Potential Payment of Deferred Taxes."
IMPACT OF MEXICAN PESO DEVALUATION
In December 1994, the Mexican government changed its policy of defending the
peso against the U.S. dollar and allowed it to float freely on the currency
markets. These events resulted in the Mexican peso exchange rate declining from
3.39 to 1 U.S. dollar at October 3, 1994 to a low of 8.16 to 1 U.S. dollar at
November 14, 1995. On June 11, 1997 the Mexican peso closed at 7.97 to 1 U.S.
dollar. No assurance can be given as to the future valuation of the Mexican
peso and further movement in the Mexican peso could affect future earnings
positively or negatively. See "--General."
OTHER
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-
LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets to be
held and used and for long-lived assets to be disposed of. The Company adopted
SFAS No. 121 effective September 29, 1996. The adoption of SFAS No. 121 did not
have a material effect on the Company's consolidated financial statement.
IMPACT OF INFLATION
Due to moderate inflation and the Company's rapid inventory turnover rate, the
results of operations have not been adversely affected by inflation during the
past three-year period.
18
THE CHICKEN INDUSTRY
The Company produces chicken in both the United States and Mexico.
Substantially all of the Company's U.S. production is sold in the United States
and all of the Company's Mexican production is sold in Mexico. In fiscal 1996,
approximately 80% of the Company's net sales were attributable to its U.S.
operations. The Company expects these levels of relative contribution to
continue in the foreseeable future.
UNITED STATES
GENERAL
Prior to 1960, the U.S. chicken industry was highly fragmented with
numerous small, independent breeders, growers and processors. The industry has
consolidated during the last 35 years resulting in a relatively small number of
larger, more vertically integrated companies. In general, vertical integration
of the U.S. chicken industry has led to lower profit margins at each independent
production stage. Such lower profit margins have had a disproportionately
adverse effect on less vertically integrated chicken producers which are unable
to realize the synergies benefiting their more integrated competitors.
The following table sets forth the annualized average pounds of chicken
produced by, and the market share of, the ten largest U.S. producers of chicken.
This table reflects annualized respective volumes derived from average weekly
data reported by Broiler Industry in December 1996, with the Company's volume
adjusted to include 135.2 million additional pounds of production capacity
acquired from Green Acre Foods, Inc. in April 1997.
ESTIMATED
ANNUAL
PRODUCTION
(IN MILLIONS OF MARKET
POUNDS) SHARE
Tyson Foods, Inc.................... 6,474.0 21.7%
Gold Kist, Inc...................... 2,568.8 8.6
Perdue Farms, Inc................... 2,441.9 8.2
PILGRIM'S PRIDE CORPORATION......... 1,695.2 5.7
Con-Agra, Inc....................... 1,648.4 5.5
Hudson Foods, Inc................... 1,573.5 5.3
Wayne Poultry Division.............. 1,185.1 4.0
Cagle's, Inc........................ 833.6 2.8
Seaboard Farms, Inc................. 738.4 2.5
Foster Farms........................ 700.4 2.3
-------- -----
Ten Largest Producers............. 19,859.3 66.6
All Others.......................... 9,965.8 33.4
-------- -----
Total............................... 29,825.1 100.0%
======== =====
_________________________
Source: Broiler Industry, December 1996. Broiler Industry compiled the
information from its 1996 survey of the largest 48 integrated U.S.
chicken companies in 1996, which, according to Broiler Industry,
represent approximately 99% of the production of the U.S. chicken
industry.
CHICKEN CONSUMPTION
In the U.S., annual per capita consumption of chicken grew from 42.5 pounds
in 1976 to 71.6 pounds in 1996 while per capita consumption of beef and pork
declined. The following chart illustrates, for the periods indicated, per capita
consumption of chicken in the United States relative to beef and pork.
19
PER CAPITA
PER CAPITA
Chicken Pork Beef
1976 42.5 45.5 94.2
43.4 47 91.4
45.6 47 87.2
48.9 53.7 78
48.8 57.3 76.4
1981 50.2 54.7 77.1
50.5 49.1 76.8
50.8 51.6 78.2
52.2 51.3 78.1
54 51.7 78.8
1986 55.5 48.8 78.3
58.4 49 73.3
58.9 52.2 72.3
60.3 52 69.3
63 49.8 67.8
1991 65.3 50.4 66.8
68.2 53.1 66.5
70.3 52.4 65.1
71.6 53.1 67
71.3 52.5 67.5
1996 71.6 49.1 67.7
____________________________________
Source: USDA data, as reported by the National Broiler Council
Consumer awareness of the health and nutritional characteristics of chicken
is a major factor influencing this growth in consumption. Such health and
nutritional characteristics include lower levels of fat, cholesterol and
calories per pound relative to beef and pork.
Growth in chicken consumption has also been enhanced by new products and
packaging which increase convenience and product versatility. These products
include breast fillets, tenderloins and strips, formed nuggets and patties and
bone-in chicken parts, which are sold fresh, frozen and in various stages of
preparation, including blanched, breaded and fully-cooked. Most of these
products are targeted at the foodservice market, which is comprised of chain
restaurant operations, frozen entree producers, institutions and distributors.
According to the National Broiler Council, an industry trade association, U.S.
production of these further processed products has increased from 3.0 billion
ready to cook pounds in 1986 to 9.7 billion ready to cook pounds in 1996,
establishing this product group as the fastest growing product group in the U.S.
chicken industry. Additionally, the National Broiler Council reported that the
market share of this product group has increased from 20.9% of U.S. chicken
production in 1986 to 37.0% of such production in 1996.
A third factor influencing the growth of chicken consumption is the
significant price advantage of chicken compared with other meats, which has
increased over time. The price advantage of chicken relative to choice grade
beef in the United States has increased from $0.86 to $1.83 per pound during the
period from 1976 to 1996. The following chart illustrates, for the periods
indicated, the average retail price of chicken in the U.S. compared to choice
grade beef and pork.
Prices
Retail Prices
Chicken Pork Beef
1976 59.7 134 145.7
60.1 125.4 145.8
66.5 143.6 178.8
67.7 144.1 222.4
70.9 139.4 233.6
1981 73.2 152.4 234.7
71.4 175.4 238.4
72.5 169.8 234.1
81 162 235.5
76.3 162 228.6
1986 83.5 178.4 226.8
78.5 188.4 238.4
85.4 183.4 250.3
92.7 182.8 265.7
89.9 212.6 281
1991 88 211.9 288.3
86.9 198 284.6
89 197.6 293.4
90.1 198 282.9
91.7 194.8 284.4
1996 97.3 220.9 280.2
_____________________________________
Source: USDA data, as reported by the National Broiler Council.
Since chickens require approximately two pounds of dry feed to produce one
pound of live weight, compared to cattle and hogs, which require approximately
six and four pounds, respectively, the chicken industry enjoys a cost advantage
that yields a price advantage relative to other competing meats. To help sustain
this price advantage, the chicken industry has implemented improved genetic,
nutritional and processing technologies in an effort to minimize production
costs. Despite the dramatic growth in U.S. chicken consumption over the last 20
years, the USDA reports that for every $1.00 spent on chicken in 1996, consumers
spent approximately $1.78 on beef and $1.01 on pork.
INDUSTRY PROFITABILITY
Profitability in the chicken industry can be materially affected by the
commodity prices of feed grains and the commodity prices of chicken and chicken
parts, each of which are determined largely by balances in supply and demand. As
a result, the chicken industry as a whole has been characterized by cyclical
earnings. Cyclical fluctuations in earnings
20
of individual chicken companies can be mitigated somewhat by (i) business
strategy; (ii) product mix; (iii) sales and marketing plans; and (iv) operating
efficiencies.
For example, industry profitability is heavily influenced by feed costs and
feed costs are dependent on a number of factors unrelated to the chicken
industry. According to an industry source, feed costs have averaged
approximately 45% of total production costs of whole chickens and have
fluctuated substantially with the price of corn, milo and soybean meal. Assuming
finished product prices and other factors remain constant, very small movements
in feed costs may result in large changes in industry profits from basic chicken
products. By comparison, according to the same industry source, feed costs
typically average approximately 25% of total production costs of further
processed and prepared chicken products and, as a result, increased emphasis on
sales of such products by chicken producers reduces the sensitivity of earnings
to feed cost movements.
MEXICO
GENERAL
As compared to the United States, the Mexican chicken industry is more
fragmented with significantly more chicken producers. The Company believes that
the Mexican chicken industry is in the process of consolidating, which is
expected to result in a relatively smaller number of larger, more vertically
integrated producers. In general, the effects of vertical integration in the
Mexican chicken industry should be similar to those experienced in the past by
the U.S. chicken industry, including increased price competition and reduced
costs of production on a per unit basis. The Mexican chicken industry has
undergone consolidation in recent years with the largest producers gaining
market share through internal growth and acquisitions. The following table sets
forth for 1992 and 1996 the estimated number of chickens placed by, and the
estimated market share of, the eight largest Mexican producers, as reported by
Seccion Nacional de Productores de Pollo Mixto de Engorda de la Union Nacional
de Avicultores ("SENAPOME"), an industry association in Mexico.
ESTIMATED ESTIMATED
NUMBER NUMBER
OF CHICKENS OF CHICKENS
PLACED IN 1992 ESTIMATED PLACED IN 1996 ESTIMATED
(IN MILLIONS) MARKET SHARE (IN MILLIONS) MARKET SHARE
Bachoco............................................ 90.6 13.2% 160.4 18.8%
AVICOLA PILGRIM'S PRIDE DE
MEXICO........................................... 71.8 10.5 160.2 18.8
Trasgo............................................. 42.0 6.1 75.5 8.9
Univasa............................................ 48.0 7.0 53.8 6.3
Pasta /(1)/........................................ -- -- 30.2 3.5
San Antonio /(1)/.................................. -- -- 23.9 2.8
Gigantes /(1)/..................................... -- -- 20.5 2.4
Nochistongo /(1)/.................................. -- -- 19.7 2.3
San Fandila /(2)/.................................. 27.5 4.0 -- --
Oscar Hidalgo /(2)/................................ 27.1 4.0 -- --
Queretaro Group /(3)/.............................. 25.1 3.7 -- --
Cocula /(2)/....................................... 18.4 2.7
-------------- ------------- ------------- -------------
Eight Largest Producers......................... 350.5 51.2 544.2 63.8
All Others......................................... 333.3 48.8 309.2 36.2%
-------------- ------------- ------------- -------------
Total........................................... 683.8 100.0% 853.4 100.0%
_____________________________
(1) Pasta, San Antonio, Gigantes and Nochistongo were not among the eight
largest Mexican producers in 1992.
(2) San Fandila, Oscar Hidalgo and Cocula were not among the eight largest
Mexican producers in 1996.
(3) The Company acquired the Queretaro Group in July 1995. See Note I of the
Consolidated Financial Statements of the Company.
21
CHICKEN CONSUMPTION
According to an industry study, on a per capita basis, the annual
consumption of chicken in Mexico has increased from approximately 24 pounds in
1982 to approximately 34 pounds in 1996, versus 1996 consumption of
approximately 71.6 pounds in the U.S. According to industry sources, on an
absolute basis, production of chicken in Mexico has increased at a compounded
annual rate of over 8.7% since 1988 to approximately 3.2 billion pounds in 1996.
The Company believes chicken consumption increased in Mexico due to rapid
population growth, increased disposable income (prior to the recession that
resulted from the peso decline commencing in December 1994) and the price
advantage of chicken relative to other meats.
The close relationship between the growth in chicken consumption and the
strength of the Mexican economy caused per capita chicken consumption in Mexico
to fall in 1995 for the first time since 1986. This decrease was largely caused
by the deterioration of the Mexican economy resulting from the peso decline that
began in December 1994. See "--Recent Events in the Mexican Economy." The
following chart illustrates, for the periods indicated, per capita consumption
of chicken in Mexico.
MEXICAN PER CAPITA
1982 23.8
1983 24.0
1984 24.3
1985 25.8
1986 20.7
1987 22.5
1988 22.5
1989 23.8
1990 26.5
1991 31.3
1992 37.0
1993 34.4
1994 32.6
1995 34.6
1996 34.8
INDUSTRY PROFITABILITY
As in the U.S. chicken industry, profitability in the Mexican chicken
industry is heavily influenced by the price of chicken and the cost of feed
grains, each of which are determined largely by balances in supply and demand.
The Company's experience has been that the industry's profitability is cyclical
with each cycle generally having a shorter duration and exhibiting greater price
fluctuations than the cycles typically experienced by the U.S. chicken industry.
The Company's experience in Mexico indicates that, in contrast to the U.S.
chicken industry, the Mexican chicken industry's peak chicken prices occur
during the winter holiday season.
RECENT EVENTS IN THE MEXICAN ECONOMY
In December 1994, the Mexican government changed its policy of defending
the peso against the U.S. dollar and allowed it to float freely on the currency
markets. These events resulted in the Mexican peso exchange rate declining from
3.39 to 1 U.S. dollar at October 3, 1994 to a low of 8.16 to 1 U.S. dollar at
November 14, 1995. On June 11, 1997, the Mexican peso closed at 7.97 to 1 U.S.
dollar.
As a result of this decline, the Mexican economy deteriorated significantly
in 1995. The Mexican gross domestic product ("GDP") decreased 6.9% in 1995 after
growing 3.5% in 1994, and inflation, as measured by the Mexican consumer price
index, averaged 52% in 1995 versus 7.9% in 1994. The Mexican economy improved in
1996, with GDP growing 5.1% and inflation, as measured by the Mexican consumer
price index, declining to 27.7%. Mexican governmental forecasts estimate GDP
growth in 1997 of 4.5% and inflation, as measured by the Mexican consumer price
index, of 17.8%.
22
BUSINESS
GENERAL
Pilgrim's Pride is one of the largest producers of prepared and fresh chicken
products in North America and has one of the best known brand names in the
chicken industry. The Company is the fourth largest producer of chicken in the
United States and one of the two largest in Mexico. Through vertical
integration, the Company controls the breeding, hatching and growing of chickens
and the processing, preparation, packaging and sale of its product lines. In
fiscal 1996, approximately 80% of the Company's net sales were from its U.S.
operations, including U.S. produced chicken products sold for export to Canada,
Eastern Europe, the Far East and other world markets.
The Company's objectives are to increase sales, profit margins and earnings
and outpace the growth of the chicken industry (i) by focusing on growth in
prepared food products and Mexico markets and (ii) through greater utilization
of the Company's existing assets. Key elements of the Company's strategy to
achieve these objectives are to:
. FOCUS U.S. GROWTH ON PREPARED FOODS. In recent years the Company has focused
on increasing its sales of prepared foods to the foodservice market,
particularly to chain restaurants and frozen entree producers. The market for
prepared food products has experienced greater growth and higher margins than
fresh chicken products, and the Company's sales of prepared food products to
the foodservice market have grown from $178.2 million in fiscal 1992 to $303.9
million in fiscal 1996, a compounded annual growth rate of 14.3%.
Additionally, the production and sale of prepared foods reduces the impact of
feed grain costs on the Company's profitability. As further processing is
performed, feed grain costs become a decreasing percentage of a product's
total production cost. The Company is now the largest supplier of chicken to
Wendy's and Jack-in-the-Box chain restaurants and to Stouffer's frozen entree
operations. Other major prepared foods customers include KFC and Taco Bell.
Prepared foods constituted 44.9% of the Company's U.S. chicken sales in fiscal
1996.
. FOCUS ON CUSTOMER DRIVEN RESEARCH & DEVELOPMENT AND TECHNOLOGY. Much of the
Company's growth in prepared foods has been the result of customer-driven
research & development focused on designing new products to meet customers'
changing needs. The Company's research & development personnel often work
directly with customers in developing proprietary products. Approximately
$111.9 million of the Company's sales to foodservice customers in fiscal 1996
consisted of new products which were not sold by the Company in fiscal 1992.
Also, the Company is a leader in utilizing advanced processing technology,
which enables the Company to better meet its customers' needs for product
innovation, consistent quality and cost efficiency.
. ENHANCE THE U.S. FRESH CHICKEN PRODUCT MIX THROUGH VALUE-ADDED, BRANDED
PRODUCTS. The Company's fresh chicken business is an important component of
its sales and has grown from sales of $232.1 million in fiscal 1992 to $286.2
million in fiscal 1996. In addition to maintaining its sales of mature,
traditional fresh chicken products, the Company's strategy is to shift the mix
of its U.S. fresh chicken products by continuing to increase sales of higher
margin, faster growing products, such as marinated chicken and chicken parts.
As a result of this strategy, the Company's compounded annual growth rate of
fresh chicken sales from fiscal 1992 to fiscal 1996 exceeded 5.3% while total
U.S. industry sales of fresh chicken increased only 1.7%.
. MAINTAIN OPERATING EFFICIENCIES AND INCREASE CAPACITY ON A COST-EFFECTIVE
BASIS. As production and sales have grown, the Company has maintained
operating efficiencies by investing in state-of-the-art technology, processes
and training and by making cost-effective acquisitions both in the U.S. and
Mexico. As a result, according to industry data, since 1993 the Company has
consistently been one of the lowest cost producers of chicken and, and in two
recent studies of 16 large chicken producers, was either the first or second
lowest cost producer of deboned meat, which is the major cost component of
prepared foods. Continuing this strategy, the Company acquired additional
chicken producing assets in the U.S. in April 1997, to replace chicken
purchased from third parties, at a cost that management believes is
significantly less than the cost required to construct a new chicken
production complex with similar capacity.
. CAPITALIZE ON INTERNATIONAL DEMAND FOR U.S. CHICKEN. Due to U.S. consumers'
preference for chicken breast meat, the Company has targeted international
markets to generate sales of leg quarters. The Company has also begun selling
prepared food products for export, to the international divisions of its U.S.
chain restaurant customers. As a result of these efforts, sales for these
markets have grown from less than 1% of the Company's total U.S. chicken sales
in fiscal 1992 to more than 6% in fiscal 1996. Management believes that (i)
U.S. chicken exports will continue to grow as worldwide demand for high grade,
low cost protein sources increases and (ii) worldwide demand for higher margin
prepared food products will increase over the next five years; and
accordingly, the Company is well positioned to capitalize on such growth.
23
. CAPITALIZE ON INVESTMENTS AND EXPERTISE IN MEXICO. The Company's strategy in
Mexico is focused on (i) being one of the most cost-efficient producers and
processors of chicken in Mexico by applying technology and expertise utilized
in the U.S. and (ii) increasing distribution of its higher margin, value added
products to national retail stores and restaurants. This strategy has
resulted in the Company obtaining a market leadership position, with its
estimated market share in Mexico increasing from 10.5% in 1992 to 18.8% in
1996.
The Company's chicken products consist primarily of (i) prepared foods, which
include portion-controlled breast fillets, tenderloins and strips, formed
nuggets and patties and bone-in chicken parts, which are sold frozen and may be
either fully cooked or raw; (ii) fresh chicken, which includes refrigerated
(non-frozen), whole or cut-up chicken sold to the foodservice industry either
pre-marinated or non-marinated and prepackaged chicken, which includes various
combinations of freshly refrigerated, whole chickens and chicken parts in trays,
bags or other consumer packs labeled and priced ready for the retail grocer's
fresh meat counter; and (iii) export and other, which includes parts and whole
chicken, either refrigerated or frozen for U.S. export or domestic use. The
Company's Mexican products consist of live, uneviserated and eviserated chicken.
The following table sets forth, for the periods since fiscal 1992, net sales
attributable to each of the Company's primary product lines and markets served
with such products. The table is based on the Company's internal sales reports
and its classification of product types and customers.
FISCAL YEAR ENDED SIX MONTHS ENDED
---------------------------------------------------------- -----------------------
SEPT 26, OCT 2, OCT 1, SEPT 30, SEPT 28, MARCH 30, MARCH 29,
1992 1993 1994 1995 1996 1996 1997
(52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
(IN THOUSANDS)
U.S. CHICKEN SALES:
Prepared Foods:
Foodservice............................. $178,185 $183,165 $205,224 $240,456 $ 303,939 $140,390 $162,129
Retail.................................. 85,700 89,822 61,068 38,683 42,946 20,896 19,476
-------- -------- -------- -------- ---------- -------- --------
Total Prepared Foods................. 263,885 272,987 266,292 279,139 346,885 161,286 181,605
-------- -------- -------- -------- ---------- -------- --------
Fresh Chicken:
Foodservice............................. 126,472 149,197 155,294 140,201 145,052 65,937 69,568
Retail.................................. 105,636 100,063 125,133 138,368 141,135 65,568 75,601
-------- -------- -------- -------- ---------- -------- --------
Total Fresh Chicken................... 232,108 249,260 280,427 278,569 286,187 131,505 145,169
-------- -------- -------- -------- ---------- -------- --------
Export and Other.......................... 72,724 77,709 88,437 113,414 140,614 69,351 70,501
-------- -------- -------- -------- ---------- -------- --------
Total U.S. Chicken................. 568,717 599,956 635,156 671,122 773,686 362,142 397.275
-------- -------- -------- -------- ---------- -------- --------
MEXICO.................................... 160,620 188,754 188,744 159,491 228,129 108,527 127,466
-------- -------- -------- -------- ---------- -------- --------
Total Chicken Sales.................. 729,337 788,710 823,900 830,613 1,001,815 470,669 524,741
-------- -------- -------- -------- ---------- -------- --------
SALES OF OTHER U.S. PRODUCTS.............. 88,024 99,133 98,709 101,193 137,495 68,810 76,466
-------- -------- -------- -------- ---------- -------- --------
Total Net Sales...................... $817,361 $887,843 $922,609 $931,806 $1,139,310 $539,479 $601,207
======== ======== ======== ======== ========== ======== ========
UNITED STATES
The following table sets forth, since fiscal 1992, the percentage of net
U.S. chicken sales attributable to each of the Company's primary products lines
and markets serviced with such products. The table and related discussion are
based on the Company's internal sales reports and its classification of product
types and customers.
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------------ -----------------------
SEPT 26, OCT 2, OCT 1, SEPT 30, SEPT 28, MARCH 30, MARCH 29,
1992 1993 1994 1995 1996 1996 1997
U.S. CHICKEN SALES:
Prepared Foods:
Foodservice................................... 31.3% 30.5% 32.3% 35.8% 39.3% 38.8% 40.8%
Retail........................................ 15.1 15.0 9.6 5.8 5.6 5.8 4.9
----- ----- ----- ----- ----- ----- -----
Total Prepared Foods........................ 46.4 45.5 41.9 41.6 44.9 44.6 45.7
----- ----- ----- ----- ----- ----- -----
Fresh Chicken:
Foodservice................................... 22.2 24.9 24.5 20.9 18.7 18.2 17.5
Retail........................................ 18.6 16.7 19.7 20.6 18.2 18.1 19.0
----- ----- ----- ----- ----- ----- -----
Total Fresh Chicken......................... 40.8 41.6 44.2 41.5 36.9 36.3 36.5
----- ----- ----- ----- ----- ----- -----
Export and Other..................................... 12.8 12.9 13.9 16.9 18.2 19.1 17.8
----- ----- ----- ----- ----- ----- -----
Total U.S. Chicken Sales Mix......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== =====
24
PRODUCT TYPES
U.S. Prepared Foods Overview. During fiscal 1996, $346.9 million of the
Company's net U.S. chicken sales were in prepared food products to foodservice
and retail customers, as compared to $263.9 million in fiscal 1992, which
reflects the strategic focus for growth of the Company. The market for prepared
food products has experienced, and management believes that this market will
continue to experience, greater growth and higher margins than fresh chicken
products. Additionally, the production and sale of prepared foods reduces the
impact of feed grain costs on the Company's profitability. As further
processing is performed, feed grain costs becomes a decreasing percentage of a
product's total production cost.
The Company establishes prices for its prepared food products based primarily
upon perceived value to the customer, production costs and prices of competing
products. The majority of these products are sold pursuant to agreements with
varying terms that either set a fixed price for the products or set a price
according to formulas based on an underlying commodity market, subject in many
cases to minimum and maximum prices.
U.S. Fresh Chicken Overview. The Company's fresh chicken business is an
important component of its sales and has grown from sales of $232.1 million in
fiscal 1992 to $286.2 million in fiscal 1996. In addition to maintaining its
sales of mature, traditional fresh chicken products, the Company's strategy is
to shift the mix of its U.S. fresh chicken products by continuing to increase
sales of higher margin, faster growing products, such as marinated chicken and
chicken parts. As a result of this strategy, the Company's compounded annual
growth rate of fresh chicken sales from fiscal 1992 to fiscal 1996 exceeded 5.3%
while total U.S. industry sales of fresh chicken increased only 1.7%.
Most fresh chicken products are sold to established customers based upon
certain weekly or monthly market prices reported by the USDA and other public
price reporting services, plus a markup, which is dependent upon the customer's
location, volume, product specifications and other factors. The Company
believes its practices with respect to sales of its fresh chicken are generally
consistent with those of its competitors. Prices of these products are
negotiated daily or weekly and are generally related to market prices quoted by
the USDA or other public price reporting services.
Export and Other Overview. The Company's export and other products consist of
whole chickens and chicken parts sold primarily in bulk, non-branded form either
refrigerated to distributors in the U.S. or frozen for distribution to export
markets. Sales growth in the "Export and Other" category between fiscal 1992
and fiscal 1996 primarily reflects increased exports of chicken products. In
fiscal 1996, approximately $47 million of the Company's sales were attributable
to exports of U.S. chicken. These export and other products have historically
been characterized by lower prices and greater price volatility than the
Company's more value-added product lines.
MARKETS
U.S. Foodservice. The majority of the Company's U.S. chicken sales are
derived from products sold to the foodservice market which principally consists
of chain restaurants, frozen entree producers, institutions and distributors,
located throughout the continental United States. The Company supplies chicken
products ranging from portion-controlled refrigerated chicken parts to fully
cooked and frozen, breaded or non-breaded chicken parts or formed products.
As the second largest full-line supplier of chicken to the foodservice market,
the Company believes it is well-positioned to be the primary or secondary
supplier to many national and international chain restaurants who require
multiple suppliers of chicken products. Additionally, the Company is well
suited to be the sole supplier for many regional chain restaurants that offer
better margin opportunities and a growing base of business. Due to its
comparatively large size in this market, management believes the Company has
significant competitive advantages in terms of product capability, production
capacity, research & development expertise, and distribution and marketing
experience relative to smaller and to non-vertically integrated producers. As a
result of these competitive advantages, the Company's sales to the foodservice
market from fiscal 1992 through fiscal 1996 grew at a compounded annual growth
rate of approximately 10.2%. Based on industry data, the Company estimates
that total industry dollar sales to the foodservice market during this same
period grew at a compounded annual growth rate of approximately 7.5%. The
Company markets both prepared food and fresh chicken products to the foodservice
industry.
25
Foodservice - Prepared Foods. The majority of the Company's sales to the
foodservice market consists of prepared food products. Prepared food sales to
the foodservice market were $303.9 million in fiscal 1996 compared to $178.2
million in fiscal 1992, a compounded annual growth rate of approximately 14.3%.
The Company's prepared food products include portion-controlled breast fillets,
tenderloins and strips, formed nuggets and patties and bone-in chicken parts,
which are sold frozen and in various stages of preparation, including blanched,
battered, breaded and either partially or fully-cooked. The Company attributes
this growth in sales of prepared foods to the foodservice market to a number of
factors:
First, there has been significant growth in the number of foodservice
operators offering chicken on their menus and the number of chicken items
offered.
Second, foodservice operators are increasingly purchasing prepared chicken
products which allow them to reduce labor costs while providing greater product
consistency, quality and variety across all restaurant locations.
Third, there is a strong need among larger foodservice companies for an
alternative or additional supplier to the Company's principal competitor in the
prepared foods market. A viable alternative supplier must be able to ensure
supply, demonstrate innovation and new product development, and provide
competitive pricing. The Company has been successful in its objective of
becoming the alternative supplier of choice by being the primary or secondary
prepared chicken supplier to many large foodservice companies because (i) it is
vertically integrated, giving the Company control over its supply of chicken and
chicken parts; (ii) its further processing facilities are particularly well
suited to the high volume production runs necessary to meet the capacity and
quality requirements of the U.S. foodservice market; and (iii) it has
established a reputation for dependable quality, highly responsive service and
excellent technical support.
Fourth, as a result of the experience and reputation developed with larger
customers, the Company has increasingly become the principal supplier to
midsized foodservice organizations.
Fifth, the Company's in-house product development group follows a customer-
driven research & development focus designed to develop new products to meet
customers' changing needs. The Company's research & development personnel often
work directly with customers in developing proprietary products. Approximately
$111.9 million of the Company's sales to foodservice customers in fiscal 1996
consisted of new products which were not sold by the Company in fiscal 1992.
Sixth, the Company is a leader in utilizing advanced processing technology,
which enables the Company to better meet its customers' needs for product
innovation, consistent quality and cost efficiency.
Foodservice - Fresh Chicken. The Company produces and markets fresh,
refrigerated chicken for sale to U.S. quick-service restaurant chains,
delicatessens and other customers. These chickens have the giblets removed, are
usually of specific weight ranges, are usually pre-cut to customer
specifications and are often marinated to enhance value and product
differentiation. By growing and processing to customers' specifications, the
Company is able to assist quick-service restaurant chains in controlling costs
and maintaining quality and size consistency of chicken pieces sold to the
consumer.
U.S. Retail. The U.S. retail market consists primarily of grocery store
chains and retail distributors. The Company concentrates its efforts in this
market on sales of branded, prepackaged cut-up and whole chicken to grocery
chains and retail distributors in the midwestern, southwestern and western
regions of the United States. This regional marketing focus enables the Company
to develop consumer brand franchises and capitalize on proximity to the trade
customer in terms of lower transportation costs; more timely, responsive
service; and enhanced product freshness. For a number of years, the Company has
invested in both trade and retail marketing designed to establish high levels of
brand name awareness and consumer preferences within these markets.
The Company utilizes numerous marketing techniques, including advertising, to
develop and strengthen trade and consumer awareness and increase brand loyalty
for consumer products marketed under the Pilgrim's Pride brand. The Company's
founder, Lonnie "Bo" Pilgrim, is the featured spokesman in the Company's
television, radio and print advertising, and a trademark cameo of a person in a
Pilgrim's hat serves as the logo on all of the Company's primary branded
products. As a result of this marketing strategy, the Company has established a
well-known brand name in certain southwestern markets, including the Dallas/Fort
Worth area. Management believes its efforts to achieve and maintain
26
brand awareness and loyalty help to provide more secure distribution for its
products and generate greater price premiums than would otherwise be the case in
certain southwestern markets. The Company also maintains an active program to
identify consumer preferences primarily by testing new product ideas, packaging
designs and methods through taste panels and focus groups located in key
geographic markets.
Retail - Prepared Foods. The Company sells retail oriented prepared foods
primarily to grocery store chains located in the midwestern, southwestern and
western regions of the U.S. where it also markets prepackaged fresh chicken.
Being a major, national competitor in retail, branded frozen foods is not a part
of the Company's current business strategy. The Company previously was a
national supplier of retail prepared chicken to the wholesale club industry,
which is now dominated by two large national operators. Due to the highly
concentrated nature of the club store business, the Company no longer serves
this market and has redirected this prepared foods capacity to a more
diversified customer base.
Retail - Fresh Chicken. The Company's prepackaged retail products include
various combinations of freshly refrigerated whole chickens and chicken parts in
trays, bags or other consumer packs, labeled and priced ready for the grocer's
fresh meat counter. Management believes the retail, prepackaged fresh chicken
business will continue to be a large and relatively stable market, providing
opportunities for product differentiation and regional brand loyalty.
The Company concentrates its sales and marketing efforts for the above product
types to grocery chains and retail distributors in the midwestern, southwestern
and western regions of the United States. This regional marketing focus enables
the Company to develop consumer brand franchises and capitalize on proximity to
the trade customer in terms of lower transportation costs; more timely,
responsive service; and enhanced product freshness.
Export and Other. The Company's export and other products consist of whole
chickens and chicken parts sold primarily in bulk, non-branded form either
refrigerated to distributors in the U.S. or frozen for distribution to export
markets. In recent years, the Company has de-emphasized its marketing of bulk-
packaged chicken in the U.S. in favor of more value-added products and export
opportunities. In the U.S., prices of these products are negotiated daily or
weekly and are generally related to market prices quoted by the USDA or other
public price reporting services. The Company also sells U.S. produced chicken
products for export to Canada, Eastern Europe, the Far East and other world
markets. Due to U.S. consumers' preference for chicken breast meat, the Company
has targeted international markets to generate sales of leg quarters. The
Company has also begun selling prepared food products for export to the
international divisions of its U.S. chain restaurant customers. As a result of
these efforts, the Company's sales for export have grown from less than 1% of
its total U.S. chicken sales in fiscal 1992 to more than 6% in fiscal 1996.
Management believes that (i) U.S. chicken exports will continue to grow as
worldwide demand for high grade, low cost protein sources increases; and (ii)
worldwide demand for higher margin prepared food products will increase over the
next five years; and accordingly, the Company is well positioned to capitalize
on such growth.
Other U.S. Products. The Company markets fresh eggs under the Pilgrim's Pride
brand name as well as private labels in various sizes of cartons and flats to
U.S. retail grocery and institutional foodservice customers located primarily in
Texas. The Company has a housing capacity for approximately 2.3 million
commercial egg laying hens which can produce approximately 41 million dozen eggs
annually. U.S. egg prices are determined weekly based upon reported market
prices. The U.S. egg industry has been consolidating over the last few years
with the 20 largest producers accounting for more than 68% of the total number
of egg laying hens in service during 1996. The Company competes with other U.S.
egg producers, primarily on the basis of product quality, reliability, price and
customer service. According to an industry publication, the Company is the
twenty-fifth largest producer of eggs in the United States.
The Company also converts chicken by-products into protein products primarily
for sale to manufacturers of pet foods. In addition, the Company produces and
sells livestock feeds at its feed mill and farm supply store in Pittsburg,
Texas, to dairy farmers and livestock producers in northeastern Texas.
MEXICO
BACKGROUND
The Mexican market represented approximately 20% of the Company's net sales in
fiscal 1996. The Company entered the Mexican market in 1979 when it began
seasonally selling eggs to the Mexican government. Recognizing favorable
27
long-term demographic trends and improving economic conditions in Mexico, the
Company began exploring opportunities to produce and market chicken in Mexico.
In fiscal 1988, the Company acquired four vertically integrated chicken
production operations in Mexico for approximately $15.1 million. From fiscal
1988 through fiscal 1996, the Company made acquisitions and capital expenditures
in Mexico totaling $151.6 million to expand and improve such operations,
including a fiscal 1995 investment of $35.3 million for the acquisition of Union
de Queretaro, et al, a group of five chicken companies located near Queretaro,
Mexico. As a result of these expenditures, the Company has increased weekly
production in its Mexico operations by over 350% since its original investment
in fiscal 1988. The Company is now one of the two largest producers of chicken
in Mexico. The Company believes its facilities are among the most
technologically advanced in Mexico and that it is one of the lowest cost
producers of chicken in Mexico.
PRODUCTS
While the market for chicken products in Mexico is less developed than in the
United States, with sales attributed to fewer, more basic products, the market
for value added products is increasing. The Company's strategy is to lead this
trend. The products currently sold by the Company in Mexico consist primarily
of basic products such as New York dressed (whole chickens with only feathers
and blood removed), live birds and value added products such as eviscerated
chicken and chicken parts. The Company has increased its sales of value added
products, particularly through national retail chains and restaurants, and plans
to continue to do so. The Company remains opportunistic, however, utilizing its
low cost production to enter markets where profitable opportunities exist. For
example, the Company has significantly increased its sales of live birds since
1994 as many smaller producers exited this segment of the business as a result
of the recession in Mexico.
MARKETS
The Company sells its Mexican chicken products primarily to large wholesalers
and retailers. The Company's customer base in Mexico covers a broad geographic
area from Mexico City, the capital of Mexico with a population estimated to be
over 20 million, to Saltillo, the capital of the State of Coahuila, about 500
miles north of Mexico City, and from Tampico on the Gulf of Mexico to Acapulco
on the Pacific, which region includes the cities of San Luis Potosi and
Queretaro, capitals of the states of the same name.
COMPETITION
The chicken industry is highly competitive and certain of the Company's
competitors have greater financial and marketing resources than the Company. In
both the United States and Mexico, the Company competes principally with other
vertically integrated chicken companies.
In general, the competitive factors in the U.S. chicken industry include
price, product quality, brand identification, breadth of product line and
customer service. Competitive factors vary by major market. In the foodservice
market, competition is based on consistent quality, product development, service
and price. In the U.S. retail market, management believes that product quality,
brand awareness and customer service are the primary bases of competition.
There is some competition with non-vertically integrated further processors in
the U.S. prepared food business. The Company believes it has significant, long
term cost and quality advantages over non-vertically integrated further
processors.
In Mexico, where product differentiation is limited, product quality and price
are the most critical competitive factors. Additionally, NAFTA, which went into
effect on January 1, 1994, requires annual reductions in tariffs for chicken and
chicken products in order to eliminate such tariffs by January 1, 2003. As such
tariffs are reduced, there can be no assurance that increased competition from
chicken imported into Mexico from the U.S. will not have a material adverse
effect on the Mexican chicken industry in general, or the Company's Mexican
operations in particular.
OTHER ACTIVITIES
The Company has regional distribution centers located in Arlington, El Paso,
Mt. Pleasant and San Antonio, Texas; Phoenix and Tucson, Arizona; and Oklahoma
City, Oklahoma that distribute the Company's own poultry products along with
certain poultry and non-poultry products purchased from third parties to
independent grocers and quick service restaurants. The Company's non-poultry
distribution business is conducted as an accommodation to its customers and to
28
achieve greater economies of scale in distribution logistics. The store-door
delivery capabilities for the Company's own poultry products provide a strategic
service advantage in selling to quick-service, national chain restaurants.
REGULATION
The chicken industry is subject to government regulation, particularly in the
health and environmental areas. The Company's chicken processing facilities in
the U.S. are subject to on-site examination, inspection and regulation by the
USDA. The FDA inspects the production of the Company's feed mills in the U.S.
The Company's Mexican food processing facilities and feed mills are subject to
on-site examination, inspection and regulation by a Mexican governmental agency
which performs functions similar to those performed by the USDA and FDA. Since
commencement of operations by the Company's predecessor in 1946, compliance with
applicable regulations has not had a material adverse effect upon the Company's
earnings or competitive position and such compliance is not anticipated to have
a material adverse effect in the future. Management believes that the Company
is in substantial compliance with all applicable laws and regulations relating
to the operations of its facilities.
The Company anticipates increased regulation by the USDA concerning food
safety, by the FDA concerning the use of medications in feed and by the TNRCC,
the ASVO and the EPA concerning the disposal of chicken by-products and
wastewater discharges. Although the Company does not anticipate any such
regulation having a material adverse effect upon the Company, no assurances can
be given to that effect.
EMPLOYEES AND LABOR RELATIONS
As of June 11, 1997 the Company employed approximately 9,500 persons in the
U.S. and 3,200 persons in Mexico. Approximately 2,000 employees at the Company's
Lufkin and Nacogdoches, Texas facilities are members of collective bargaining
units represented by the United Food and Commercial Workers Union (the "UFCW").
None of the Company's other U.S. employees have union representation. The
Company's collective bargaining agreements with the UFCW expire on August 10,
1998 with respect to the Company's Lufkin employees and on October 5, 1998 with
respect to the Company's Nacogdoches employees. The Company believes that the
terms of each of these agreements are no more favorable than those provided to
its non-union U.S. employees. In Mexico, most of the Company's hourly employees
are covered by collective bargaining agreements as most employees are in Mexico.
The Company has not experienced any work stoppage since a two day work stoppage
at the Lufkin facility in May 1993, and management believes that relations with
the Company's employees are satisfactory.
PROPERTIES
Breeding and Hatching. The Company supplies all of its chicks in the U.S. by
producing its own hatching eggs from domestic breeder flocks in the U.S. owned
by the Company, approximately 33% of which are maintained on 43 Company-operated
breeder farms. In the U.S., the Company currently owns or contracts for
approximately 8.5 million square feet of breeder housing on approximately 239
breeder farms. In Mexico, all of the Company's breeder flocks are maintained on
Company-owned farms.
The Company owns six hatcheries in the United States, located in Nacogdoches
and Pittsburg, Texas, and DeQueen and Nashville, Arkansas, where eggs are
incubated and hatched in a process requiring 21 days. Once hatched, the day-old
chicks are inspected and vaccinated against common poultry diseases and
transported by Company vehicles to grow-out farms. The Company's seven
hatcheries in the U.S. have an aggregate production capacity of approximately
8.2 million chicks per week. In Mexico, the Company owns seven hatcheries,
which have an aggregate production capacity of approximately 3.3 million chicks
per week.
Grow-out. The Company places its U.S. grown chicks on approximately 1,102
grow-out farms located in Texas and Arkansas. These farms provide the Company
with approximately 53.5 million square feet of growing facilities. The Company
operates 33 grow-out farms in the U.S. that account for approximately 7% of its
total annual U.S. chicken capacity. The Company also places chicks with farms
owned by affiliates of the Company under grow-out contracts. See "Compensation
Committee Interlocks and Insider Participation" and "Certain Relationships and
Transactions." The remaining chicks are placed with independent farms under
grow-out contracts. Under such grow-out contracts, the farmers provide the
facilities, utilities and labor. The Company supplies the chicks, the feed and
all veterinary and technical
29
services. Contract grow-out farmers are paid based on live weight under an
incentive arrangement. In Mexico, the Company owns approximately 38% of its
grow-out farms and contracts with independent farmers for the balance of its
production. Arrangements with independent farmers in Mexico are similar to the
Company's arrangements with contractors in the United States.
Feed Mills. An important factor in the production of chicken is the rate at
which feed is converted into body weight. The Company purchases feed ingredients
on the open market. The primary feed ingredients include corn, milo and soybean
meal, which historically have been the largest component of the Company's total
production cost. The quality and composition of the feed is critical to the
conversion rate, and accordingly, the Company formulates and produces its own
feed. In the U.S., the Company operates six feed mills located in Nacogdoches,
Pittsburg and Center, Texas and Nashville and Hope, Arkansas. The Company
currently has annual feed requirements in the U.S. of approximately 2.2 million
tons and the capacity to produce approximately 2.3 million tons. The Company
owns four feed mills in Mexico which produce all of the requirements of its
Mexican operations. Mexican annual feed requirements are approximately 0.7
million tons with a capacity to produce approximately 0.9 million tons. In
fiscal 1996, approximately 55% of the grain used by the Company in Mexico was
imported from the United States. However, this percentage fluctuates based on
the availability and cost of local grain supplies.
Feed grains are commodities subject to volatile price changes caused by
weather, size of harvest, transportation and storage costs and the agricultural
policies of foreign governments. Although the Company can and sometimes does
purchase grain in forward markets, it cannot eliminate the potential adverse
effect of grain price changes.
Processing. Once the chickens reach processing weight, they are transported
by the Company's trucks to the Company's processing plants. These plants
utilize modern, highly automated equipment to process and package the chickens.
The Company periodically reviews possible application of new processing
technologies in order to enhance productivity and reduce costs. The Company's
six U.S. processing plants, two of which are located in Mt. Pleasant, Texas, and
the remainder of which are located in Dallas, Nacogdoches and Lufkin, Texas, and
DeQueen, Arkansas, have the capacity, under present USDA inspection procedures,
to produce approximately 1.3 billion pounds of dressed chicken annually. The
Company's three processing plants located in Mexico, which perform fewer
processing functions than the Company's U.S. facilities, have the capacity to
process approximately 470 million pounds of dressed chicken annually.
Prepared Foods Plant. The Company's prepared foods plant in Mt. Pleasant,
Texas, was constructed in 1986 and has been expanded significantly since such
time. This facility has deboning lines, marination systems, batter/breading
systems, fryers, ovens, both mechanical and cryogenic freezers, a variety of
packaging systems and cold storage. This plant is currently operating at the
equivalent of two shifts a day for six days a week. If necessary, the Company
could add additional shifts during the seventh day of the week.
Egg Production. The Company produces eggs at three farms near Pittsburg,
Texas. One farm is owned by the Company, while two farms are operated under
contract by an entity owned by a major stockholder of the Company. See
"Compensation Committee Interlocks and Insider Participation." The eggs are
cleaned, sized, graded and packaged for shipment at processing facilities
located on the egg farms. The farms have a housing capacity for approximately
2.3 million producing hens and are currently housing approximately 2.0 million
hens.
Other Facilities and Information. The Company operates a rendering plant
located in Mt. Pleasant, Texas, that currently processes by-products from
approximately 8.2 million chickens weekly into protein products, which are used
in the manufacture of chicken and livestock feed and pet foods. The Company
operates a feed supply store in Pittsburg, Texas, from which it sells various
bulk and sacked livestock feed products. The Company owns an office building in
Pittsburg, Texas, which houses its executive offices, and an office building in
Mexico City, which houses the Company's Mexican marketing offices. The Company
also owns approximately 15,068 acres of farmland previously used in the
Company's non- poultry farming operations. The Company is currently in the
process of disposing of such land and related assets.
Substantially all of the Company's U.S. property, plant and equipment in the
U.S. is pledged as collateral on its secured debt.
30
LEGAL PROCEEDINGS
From time to time the Company is named as a defendant or co-defendant in
lawsuits arising in the course of its business. The Company does not believe
that such pending lawsuits will have a material adverse impact on the Company.
31
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information relating to the current directors and
executive officers of the Company:
NAME AGE Position
--------
Lonnie "Bo" Pilgrim/(1)/ 69 Chairman of the Board and Chief Executive Officer
Clifford E. Butler 55 Vice Chairman of the Board and Executive President
Lindy M. "Buddy" Pilgrim 42 President, Chief Operating Officer and Director
David Van Hoose 54 President, Mexican Operations
Richard A. Cogdill 37 Executive Vice President, Chief Financial Officer, Secretary and Treasurer
Robert L. Hendrix 61 Executive Vice President, Operations and Director
Terry Berkenbile 46 Senior Vice President, Sales & Marketing, Retail and Fresh Products
Ray Gameson 48 Senior Vice President, Human Resources
O.B. Goolsby, Jr. 49 Senior Vice President, Prepared Foods Operations
Michael D. Martin 42 Senior Vice President, DeQueen, Arkansas Complex
James J. Miner, Ph.D. 69 Senior Vice President, Technical Services and Director
Michael J. Murray 38 Senior Vice President, Sales & Marketing, Prepared Foods
Robert N. Palm 52 Senior Vice President, Lufkin, Texas Complex
Lonnie Ken Pilgrim/(1)/ 38 Vice President, Director of Transportation and Director
Charles L. Black /(1)/ 67 Director
Robert E. Hilgenfeld /(1)(2)/ 72 Director
Vance C. Miller, Sr./(1)(2)/ 63 Director
James G. Vetter, Jr./(1)(2)/ 63 Director
Donald L. Wass, Ph.D /(1)/ 64 Director
____________________________________
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Lonnie "Bo" Pilgrim has served as Chairman of the Board and Chief
Executive Officer since the organization of the Company in 1968. Prior to the
incorporation of the Company, Mr. Pilgrim was a partner in the Company's
predecessor partnership business founded in 1946.
Clifford E. Butler serves as Vice Chairman of the Board and Executive
President. He joined the Company as Controller and Director in 1969, was named
Senior Vice President of Finance in 1973, became Chief Financial Officer and
Vice Chairman of the Board in July 1983 and effective January 1, 1997 he became
Executive President and continues to serve as Vice Chairman of the Board.
Lindy M. "Buddy" Pilgrim serves as President and Chief Operating Officer of
the Company. He was elected as Director in March 1993 and began employment
in April 1993 under the title of President of U.S. Operations and Sales and
Marketing. From April 1993 to March 1994, the President and Chief Operating
Officer reported to him. After that time, the Chief Operating Officer
title and responsibilities were incorporated into his own. Up to October
1990, Mr. Pilgrim was employed by the Company for 12 years in marketing and 9
years in operations. From October 1990 to April 1993, he was President of
Integrity Management Services, Inc., a consulting firm to the food industry. He
is a nephew of Lonnie "Bo" Pilgrim.
David Van Hoose has been President of Mexican Operations since April 1993. He
was previously Senior Vice President, Director General, Mexican Operations from
August 1990 to April 1993. Mr. Van Hoose was employed by the Company in
September 1988 as Senior Vice President, Texas Processing. Prior to that, Mr.
Van Hoose was employed by Cargill, Inc., as General Manager of one of its
chicken operations.
Richard A. Cogdill has served as Executive Vice President, Chief Financial
Officer, Secretary and Treasurer since January 1, 1997. Previously he served as
Senior Vice President, Corporate Controller, from August 1992 through
32
December 1996 and as Vice President, Corporate Controller from October 1991
through August 1992. Prior to October 1991 he was as Senior Manager with Ernst &
Young LLP. He is a Certified Public Accountant.
Robert L. Hendrix has served as Executive Vice President, Operations, of the
Company since March 1994 and as a Director of the Company since March 1994.
Prior to that he served as Senior Vice President, NETEX Processing from August
1992 to March 1994 and as President and Chief of Complex Operations from
September 1988 to March 1992. He was on leave from the Company from March 1992
to August 1992. He was President and Chief Operating Officer of the Company
from July 1983 to September 1988. He joined the Company as Senior Vice
President in September 1981 when the Company acquired Mountaire Corporation
of DeQueen, Arkansas, and, prior thereto, he was Vice President of Mountaire
Corporation.
Terry Berkenbile was named Senior Vice President, Sales & Marketing, for
Retail and Fresh Products in July 1994. Prior to that he was Vice President,
Sales & Marketing, for Retail and Fresh Products from May 1993 to July 1994.
From February 1991 to April 1993, Mr. Berkenbile was Director Retail Sales &
Marketing at Hudson Foods. From February 1988 to February 1991, Mr. Berkenbile
was Director Plant Sales at the Company; prior thereto, he worked in the
processed red meat industry.
Ray Gameson has been Senior Vice President of Human Resources since October
1994. He previously served as Vice President of Human Resources from August
1993 to October 1994. From December 1991 to July 1993, he was employed at
Townsends, Inc. and served as Complex Human Resource, Manager. Prior to that he
was employed by the Company as Complex Human Resource, Manager, at its Mt.
Pleasant, Texas location.
O.B. Goolsby, Jr. has been Senior Vice President, Prepared Foods Operations
since August 1992. He was previously Vice President, Prepared Foods Operations
from April 1986 to August 1992 and was previously employed by the Company in
sales and processing from November 1969 to January 1981.
Michael D. Martin has been Senior Vice President, DeQueen, Arkansas Complex
Manager, of the Company since April 1993. He previously served as Plant Manager
at the Company's Lufkin, Texas operations and Vice President, Processing, at the
Company's Mt. Pleasant, Texas, operations up to April 1993. He has served in
various other operating management positions in the Arkansas Complex since
September 1981. Prior to that he was employed by Mountaire Corporation of
DeQueen, Arkansas, until it was acquired by the Company in September 1981.
James J. Miner, Ph.D. has been Senior Vice President, Technical Services,
since April 1994. He has been employed by the Company and its predecessor
partnership since 1966 and served as Senior Vice President responsible for live
production and feed nutrition from 1968 to April 1994. He has been a Director
since the incorporation of the Company in 1968.
Michael J. Murray has been Senior Vice President, Sales & Marketing, for
Prepared Foods since October 1994. He previously served as Vice President of
Sales and Marketing, Food Service from August 1993 to October 1994. From 1990
to July 1993, he was employed by Cargill, Inc. Prior to that, from 1987 to
1990, he was employed by the Company as a Vice President for sales and marketing
and prior thereto, he was employed by Tyson Foods, Inc.
Robert N. Palm has been Senior Vice President, Lufkin, Texas, Complex Manager
of the Company, since June 1985 and was previously employed in various operating
management positions by Plus-Tex Poultry, Inc., a Lufkin, Texas based company
acquired by Pilgrim's Pride in June 1985.
Lonnie Ken Pilgrim has been employed by the Company since 1977 and has served
the Company as its Vice President, Director of Transportation and as a member
of the Board of Directors since March 1985. He is a son of Lonnie "Bo"
Pilgrim.
Charles L. Black was Senior Vice President, Branch President of NationsBank,
Mt. Pleasant, Texas, from December 1981 to his retirement in February 1995. He
previously was a Director of the Company from 1968 to August 1992 and has served
as a director since his re-election in February 1995.
33
Robert E. Hilgenfeld was elected a Director in September 1986. Mr.
Hilgenfeld was Senior Vice President--Marketing/Processing for the Company from
1969 to 1972 and for seventeen years prior to that worked in various sales and
management positions for the Quaker Oats Company. From 1972 until April 1986,
he was employed by Church's Fried Chicken Company ("Church's") as Vice
President--Purchasing Group, Vice President and Senior Vice President. He was
elected a Director of Church's in 1985 and retired from Church's in April 1986.
Since retirement he has served as a consultant to various companies including
the Company.
Vance C. Miller, Sr. was elected a Director in September 1986. Mr. Miller
has been Chairman of Vance C. Miller Interests, a real estate development
company formed in 1977 and has served as the Chairman of the Board and Chief
Executive Officer of Henry S. Miller Cos., a Dallas, Texas real estate services
firm since 1991. Mr. Miller also serves as a director of Resurgence Properties,
Inc.
James G. Vetter, Jr. has practiced law in Dallas, Texas, since 1966. He is a
member of the Dallas law firm of Godwin & Carlton, P.C., and has served as
general counsel and a Director since 1981. Mr. Vetter is a Board Certified-Tax
Law Specialist and serves as a lecturer and author in tax matters.
Donald L. Wass, Ph.D. was elected a Director of the Company in May 1987. He
has been President of the William Oncken Company of Texas, a time management
consulting company, since 1970.
COMMITTEES OF THE BOARD OF DIRECTORS
To assist in carrying out its duties, the Board of Directors has delegated
certain authority to the Audit and Compensation Committees. The Board of
Directors does not maintain a Nominating Committee. The members of the Audit
Committee are Robert E. Hilgenfeld, Vance C. Miller, Sr. and James G. Vetter,
Jr. The members of the Compensation Committee are Lonnie "Bo" Pilgrim, Robert
E. Hilgenfeld, Vance C. Miller, Sr., Lonnie Ken Pilgrim, James G. Vetter, Jr.,
Donald L. Wass and Charles L. Black. Each Committee meets to examine various
facets of the Company's operations and take appropriate action or make
recommendations to the Board of Directors. The Audit Committee's
responsibilities include making recommendations to the Board of Directors
regarding the selection of independent public accountants and reviewing the plan
and results of the audit performed by the public accountants of the Company and
the adequacy of the Company's systems of internal accounting controls, and
monitoring compliance with the Company's conflicts of interest and business
ethics policies. The Compensation Committee reviews the Company's remuneration
policies and practices and establishes the salaries of the Company's officers.
COMPENSATION OF DIRECTORS
The Company pays its Directors who are not employees of the Company $4,000 per
meeting attended, plus expenses.
34
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued by the Company to or on behalf of the
Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company during fiscal 1996.
SUMMARY COMPENSATION TABLE
ANNUAL
----------------------------------
NAME AND FISCAL OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION/(1)/
Lonnie "Bo" Pilgrim 1996 $475,065 $123,443 $26,518 $10,763
Chairman of the Board and Chief 1995 463,016 277,530 17,591 10,359
Executive Officer 1994 452,077 477,943 --- 19,525
Clifford E. Butler 1996 253,368 65,836 7,505 6,204
Vice Chairman of the Board and Executive 1995 246,942 148,016 7,160 9,965
President 1994 241,107 254,902 7,214 5,164
Lindy M. "Buddy" Pilgrim 1996 329,378 270,622 9,275 6,871
President and Chief Operating Officer 1995 321,022 192,419 9,145 10,273
1994 313,440 331,374 9,173 3,974
David Van Hoose 1996 248,400 65,545 6,000 7,634
President, Mexican Operations 1995 242,100 145,114 6,000 10,988
1994 162,375 171,665 3,894 3,058
Robert L. Hendrix 1996 248,400 64,545 10,200 7,777
Executive Vice President, Operations 1995 242,100 145,114 8,948 11,486
1994 192,231 203,230 8,175 3,873
____________________________
(1) Includes the following items of compensation:
(i) Company's contribution to the named individual under its 401(k)
Salary Deferral Plan in the following amounts: Lonnie "Bo"
Pilgrim, $52 (1996, 1995, 1994); Clifford E. Butler $5,033
(1996), $8,543 (1995), $3,936 (1994); Lindy M. "Buddy" Pilgrim,
$5,028 (1996), $8,453 (1995), $3,974 (1994); David Van Hoose,
$4,913 (1996), $8,315 (1995), $2,585 (1994); and Robert L.
Hendrix, $5,028 (1996), $8,543 (1995), $2,677 (1994).
(ii) Section 79 income to the named individual due to group term
life insurance in excess of $50,000 in the following amounts:
Lonnie "Bo" Pilgrim, $10,711 (1996), $10,307 (1995), $19,473
(1994); Clifford E. Butler, $1,171 (1996), $1,122 (1995),
$1,228 (1994); Lindy M. "Buddy" Pilgrim, $1,843 (1996), $1,820
(1995); David Van Hoose, $2,721 (1996), $2,673 (1995), $473
(1994); and Robert L. Hendrix, $2,749 (1996), $2,943 (1995),
$1,196 (1994).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, the members of the Company's Compensation Committee were:
Lonnie "Bo" Pilgrim, Robert E. Hilgenfeld, Vance C. Miller, Sr., James G.
Vetter, Jr., Donald L. Wass and Charles L. Black. Lonnie Ken Pilgrim was
elected to the Compensation Committee in fiscal 1997.
The Company has been and continues to be a party to certain transactions with
Lonnie "Bo" Pilgrim and a law firm affiliated with James G. Vetter, Jr. These
transactions, along with all other transactions between the Company and
affiliated persons, require the prior approval of the Audit Committee of the
Board of Directors.
The Company's transactions with Lonnie "Bo" Pilgrim have allowed the Company
to obtain the use of required production facilities and equipment on terms that
management believes are no less favorable to the Company than could
35
have been arranged with unaffiliated persons. Since 1985, Mr. Pilgrim has
engaged in chicken grow-out operations with the Company that involve the
purchase of chicks, feed and veterinary and technical services from the Company
and the grow-out of chickens to maturity at which time they are purchased by the
Company. Chicks, feed and services are purchased from the Company for their fair
market value, and the Company purchases the mature chickens from Mr. Pilgrim at
market-quoted prices at the time of purchase. Management of the Company believes
that this operation is conducted on terms no less favorable than those which
could be arranged with unaffiliated persons. During fiscal years 1996, 1995 and
1994, the Company paid Mr. Pilgrim, doing business as Pilgrim Poultry G.P.
("PPGP"), $18,112,000, $12,721,000 and $9,346,000, respectively, for chickens
produced in his grow-out operations, and PPGP paid the Company $18,057,000,
$12,478,000 and $9,373,000, respectively, for chicks, feed and services. Mr.
Pilgrim is the sole proprietor of PPGP.
PPGP also produces eggs for the Company. In addition to the chicken grow-out
operations described above, PPGP contracts with the Company to house and care
for Company flocks used for egg production and is paid an egg grower fee based
on actual production. The egg grower contract between PPGP and the Company
renews automatically as each expended flock of laying hens is replaced by a new
flock. The contract is cancelable by either party at any time prior to the time
when the then current producing flock is 48 weeks old. Flocks are normally
replaced every 14 months. Management of the Company believes that these
relationships are on terms no less favorable to the Company than those which
could be arranged with unaffiliated persons. During fiscal years 1996, 1995 and
1994, the Company paid PPGP contract egg grower's fees of $4,697,000, $4,760,000
and $5,137,000, respectively.
Since 1985, the Company has leased an airplane from Mr. Pilgrim under a lease
agreement which provides for monthly lease payments of $33,000 plus operating
expenses, which terms management of the Company believes to be substantially
similar to those obtainable from unaffiliated parties. During fiscal years
1996, 1995 and 1994, the Company had lease expenses of $396,000 per year and
operating expenses associated with the use of this airplane of $88,000, $149,000
and $213,000, respectively.
Historically, much of the Company's debt has been guaranteed by the major
stockholders of the Company. In consideration of such guarantees, the Company
has paid such stockholders a quarterly fee equal to 0.25% of the average
aggregate outstanding balance of such guaranteed debt. During fiscal years
1996, 1995 and 1994, the Company respectively incurred $1,027,000, $623,000, and
$526,000 for such guarantees and respectively paid $807,000, $451,000 and
$1,262,000 to Lonnie "Bo" Pilgrim and $47,500, $27,000 and $74,000 to each of
his three children (including Lonnie Ken Pilgrim, a Director of the Company, and
Patrick Wayne Pilgrim and Greta Pilgrim Owens, each of whom is a Selling
Stockholder). See "Principal and Selling Stockholders."
Godwin & Carlton, P.C., has represented and currently represents the Company
in connection with a variety of legal matters. James G. Vetter, Jr., is a
Director of the Company and is an Executive Vice President of Godwin & Carlton,
P.C. During fiscal years 1996, 1995 and 1994, the Company paid Godwin & Carlton,
P.C., legal fees of $363,385, $304,629 and $235,572, respectively, in connection
with such matters.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company has entered into chicken grower contracts involving farms owned by
certain of its officers, providing the placement of Company-owned flocks on
their farms during the grow-out phase of production. The contracts are on terms
substantially the same as contracts entered into by the Company with
unaffiliated parties and can be terminated by either party upon completion of
the grow-out of each flock. The aggregate amounts paid by the Company to its
officers and Directors under grower contracts during the fiscal years 1996, 1995
and 1994 were as follows: Clifford E. Butler--$177,908, $184,228 and $183,922,
respectively, and James J. Miner--$246,671, $161,968 and $190,348, respectively.
See "Compensation Committee Interlocks and Insider Participation" for a
discussion of the Company's transactions with Lonnie "Bo" Pilgrim, Lonnie Ken
Pilgrim, James G. Vetter, Jr., Patrick Wayne Pilgrim and Greta Pilgrim Owens.
Archer-Daniels-Midland Company ("ADM") is one of several vendors selling feed
ingredients to the Company in the ordinary course of business. During fiscal
years 1996, 1995 and 1994, the Company purchased $23.2 million, $44.3 million
and $56.5 million of feed ingredients from ADM, respectively. The Company
purchases such feed at prices based on the quoted market prices at the time of
purchase. See "Principal and Selling Stockholders."
36
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1997 by: (i) each person known by
the Company to own beneficially five percent or more of the outstanding Common
Stock; (ii) each of the Company's directors; (iii) each of the persons named in
the Summary Compensation Table; (iv) all directors and executive officers of the
Company as a group; and (v) each Selling Stockholder.
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP
PRIOR TO OFFERING SHARES AFTER OFFERING
--------------------- ---------------------
NUMBER OF BEING NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT
Lonnie "Bo" Pilgrim (a) (b) 16,773,490 60.8% -- 16,773,490 60.8%
110 South Texas Street
Pittsburg, Texas 75686
Archer-Daniels-Midland Company (c) 5,514,900 20.0 5,514,900 0 (d)
P.O. Box 1470
Decatur, Illinois
Lonnie Ken Pilgrim (b) (e) 28,970 1.9 -- 528,970 1.9
Clifford E. Butler (b) 28,823 (d) -- 28,823 (d)
Lindy M. "Buddy" Pilgrim (b) 21,436 (d) -- 21,436 (d)
Robert L. Hendrix (b) 22,584 (d) -- 22,584 (d)
David Van Hoose (b) 10,719 (d) -- 10,719 (d)
James J. Miner (b) 13,034 (d) -- 13,034 (d)
James G. Vetter, Jr. 1,550 (d) -- 1,550 (d)
Donald L. Wass 300 (d) -- 300 (d)
All executive officers and directors as a 17,310,420 62.7 17,310,420 62.7
group (18) persons
Patrick Wayne Pilgrim (f) 391,687 1.44 370,982 20,705 (d)
Greta Pilgrim Owens (g) 422,829 1.53 375,500 47,329 (d)
________________________
(a) Includes 60,387 shares of Common Stock held of record by Pilgrim Family
Trust I, an irrevocable trust dated June 16, 1987, for the benefit of
Lonnie "Bo" Pilgrim's surviving spouse and children, of which Lonnie Ken
Pilgrim and Patty R. Pilgrim, Lonnie "Bo" Pilgrim's wife, are co-trustees,
and 60,386 shares of Common Stock held of record by Pilgrim Family Trust
II, an irrevocable trust dated December 23, 1987, for the benefit of
Lonnie "Bo" Pilgrim and his children, of which Lonnie "Bo" Pilgrim and
Lonnie Ken Pilgrim are co-trustees. Lonnie "Bo" Pilgrim disclaims any
beneficial interest in the shares held by his children.
(b) Includes shares held in trust by the Company's 401(k) Salary Deferral
Plan.
(c) As reported in its Statement of Changes in Beneficial Ownership on Form 4
dated December 1, 1993. See "Certain Relationships and Transactions."
(d) Less than 1%.
(e) Includes 6,465 shares held by his wife, and 60,387 shares and 60,386
shares held by Pilgrim Family Trust I and Pilgrim Family Trust II,
respectively, for both of which Lonnie Ken Pilgrim serves as a co-trustee.
Also, includes 25,350 shares held in two irrevocable trusts dated December
15, 1994 and October 31, 1989 of which Lonnie Ken Pilgrim is a co-trustee
for the benefit of his children. Lonnie Ken Pilgrim disclaims any
beneficial interest in the foregoing shares.
(f) Includes 20,705 shares held in an irrevocable trust of which Patrick Wayne
Pilgrim is the co-trustee for the benefit of his child. Patrick Wayne
Pilgrim disclaims any beneficial interest in the foregoing shares. See
"Compensation Committee Interlocks and Insider Participation."
(g) Includes 8,779 shares held by her husband. Also, includes 38,550 shares
held in two irrevocable trusts dated December 15, 1989 and December 21,
1990 of which Greta Pilgrim Owens is a co-trustee for the benefit of her
children. Greta Pilgrim Owens disclaims any beneficial interest in the
foregoing shares. See "Compensation Committee Interlocks and Insider
Participation."
All of the individuals listed in the preceding table are officers or
directors of the Company other than Patrick Wayne Pilgrim and Greta Pilgrim
Owens.
37
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), of the Company authorizes the issuance of 45 million shares of
Common Stock, and 5 million shares of preferred stock, par value $0.01 per share
("Preferred Stock").
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share on each matter
submitted to a vote of stockholders. All outstanding shares of Common Stock are
fully paid, validly issued and nonassessable and the holders of Common Stock do
not have cumulative voting rights or preemptive rights to subscribe for or to
purchase any additional securities issued by the Company. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in the distribution of assets remaining after payment
of debts and expenses and the amounts payable upon liquidation for any Preferred
Stock then outstanding. There are no conversion, sinking fund or redemption
provisions, or any restrictions on alienability with respect to the Common
Stock.
Subject to the rights of the holders of Preferred Stock, if any, the holders
of Common Stock are entitled to receive dividends, when and if declared by the
Board of Directors of the Company, out of funds legally available therefor. The
Company's existing or future credit agreements may impose contractual
limitations on the payment of dividends on the Common Stock. See "Price Range
of Common Stock and Dividends." The declaration and payment of dividends are at
the discretion of the Board of Directors.
PREFERRED STOCK
The authorized Preferred Stock is issuable from time to time, in one or more
series, at the discretion of the Board of Directors of the Company. The Board
of Directors has authority, without further stockholder approval, to provide for
the issuance of Preferred Stock in one or more series, and to determine the
designations, rights, preferences and limitations of such series, including the
relative ranking with other series, the voting rights, if any, the dividend
rate, the redemption and liquidation rights, the conversion rights, if any, and
any other rights, preferences, qualifications, limitations or restrictions.
Although the Board of Directors has no present intention to issue Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase Preferred Stock, may have the effect of delaying, deferring, or
preventing a change in control of the Company or may increase or decrease the
number of shares constituting each series.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1997 (the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), who are represented by Donaldson, Lufkin & Jenrette Securities
Corporation and A.G. Edwards & Sons, Inc. (the "Representatives"), have
severally agreed to purchase from the Selling Stockholders the respective number
of shares of Common Stock set forth opposite their names below.
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
Donaldson, Lufkin & Jenrette Securities Corporation..............
A.G. Edwards & Sons, Inc. .......................................
Total.......................................................... 6,261,382
38
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option exercisable within 30
days after the date of this Prospectus to purchase, from time to time, in whole
or in part, up to an aggregate of 939,207 additional shares of Common Stock at
the initial public offering price less underwriting discounts and commissions.
The Underwriters may exercise such option solely to cover overallotments, if
any, made in connection with the Offering. To the extent that the Underwriters
exercise such option, each Underwriter will become obligated, subject to certain
conditions, to purchase their pro rata portion of such additional shares based
on such Underwriter's percentage underwriting commitment as indicated in the
preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholders) has agreed,
subject to certain exceptions, (i) not to offer, pledge, sell, contract to sell,
sell any options or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise) for a period of days after the date of this Prospectus
without the prior written consent of the Representatives. In addition, during
such period, the Company has also agreed not to file any registration statement
with respect to, and each of its executive officers, directors and certain
stockholders of the Company (including the Selling Stockholders) has agreed not
to make any demand for, or exercise any right with respect to, the registration
of any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock without the prior written consent of the
Representatives.
The Common Stock is traded on the New York Stock Exchange under the symbol
"CHX".
Other than in the United States, no action has been taken by the Company, the
Selling Stockholders or the Underwriters that would permit a public offering of
the shares of Common Stock offered hereby in any jurisdiction where action for
that purpose is required. The shares of Common Stock offered hereby may not be
offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the Offering and the distribution of this Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of Common Stock offered hereby in any jurisdiction in
which such an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the Offering, creating a syndicate
short position. In addition, the Underwriters may bid for and purchase shares
of Common Stock in the open market to cover syndicate short positions or to
stabilize the price of the Common Stock. These activities may stabilize or
maintain the market price of the Common Stock above independent market levels.
The Underwriters are not required to engage in these activities and may end
these activities at any time.
39
LEGAL MATTERS
The validity of the Common Stock to be offered hereby will be passed upon for
the Company by Baker & McKenzie, Dallas, Texas. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by Weil,
Gotshal and Manges LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements of the Company as of September 28, 1996
and September 30, 1995, and for each of the three years in the period ended
September 28, 1996, appearing in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets at September 30, 1995, September 28, 1996
and March 29, 1997 (unaudited)........................................... F-3
Consolidated Statements of Income (Loss) for the years ended October 1,
1994, September 30, 1995 and September 28, 1996 and the six months ended
March 30, 1996 (unaudited) and March 29, 1997 (unaudited)................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
October 1,1994, September 30, 1995 and September 28, 1996 and the
six months ended March 30, 1996 (unaudited) and
March 29, 1997 (unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended October 1, 1994,
September 30, 1995 and September 28, 1996 and the six months ended
March 30, 1996 (unaudited) and March 29, 1997 (unaudited)................ F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Pilgrim's Pride Corporation
We have audited the accompanying consolidated balance sheets of Pilgrim's Pride
Corporation and subsidiaries at September 30, 1995 and September 28, 1996 and
the related consolidated statements of income (loss), stockholders' equity, and
cash flows for each of the three years in the period ended September 28, 1996.
Our audits also included Schedule II--Valuation and Qualifying Accounts. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pilgrim's Pride
Corporation and subsidiaries at September 30, 1995 and September 28, 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 28, 1996 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
November 5, 1996
F-2
CONSOLIDATED BALANCE SHEETS
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 1995 September 28, 1996 March 29, 1997
------------------ ------------------ --------------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,892 $ 18,040 $ 7,717
Trade accounts and other receivables,
less allowance for doubtful accounts 60,031 65,887 69,256
Inventories 110,404 136,866 137,926
Deferred income taxes 9,564 6,801 7,001
Prepaid expenses 526 907 744
Other current assets 953 757 211
------------------ ------------------ --------------
Total Current Assets 193,370 229,258 222,855
OTHER ASSETS 20,918 18,827 21,801
PROPERTY, PLANT AND EQUIPMENT
Land 17,637 19,818 19,970
Buildings, machinery and equipment 383,076 409,191 411,005
Autos and trucks 32,227 32,503 32,146
Construction-in-progress 9,841 5,160 11,578
------------------ ------------------ --------------
442,781 466,672 474,699
Less accumulated depreciation 159,465 178,035 187,776
------------------ ------------------ --------------
283,316 288,637 286,923
------------------ ------------------ --------------
$ 497,604 $ 536,722 $ 531,579
================== ================== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 13,000 $ 27,000 $ 24,000
Accounts payable 55,658 71,354 57,789
Accrued expenses 31,130 33,599 32,895
Current maturities of long-term debt 5,187 8,850 9,645
------------------ ------------------ --------------
Total Current Liabilities 104,975 140,803 124,329
LONG-TERM DEBT, LESS CURRENT MATURITIES 182,988 198,334 193,546
DEFERRED INCOME TAXES 56,725 53,608 55,496
MINORITY INTEREST IN SUBSIDIARY 842 842 842
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 5,000,000
shares; none issued - - -
Common stock, $.01 par value, authorized 45,000,000
shares; 27,589,250 issued and outstanding in 1995, 1996
and 1997 276 276 276
Additional paid-in capital 79,763 79,763 79,763
Retained earnings 72,035 63,096 77,327
------------------ ------------------ --------------
Total Stockholders' Equity 152,074 143,135 157,366
------------------ ------------------ --------------
Commitments and Contingencies - - -
------------------ ------------------ --------------
$ 497,604 $ 536,722 $ 531,579
================== ================== ==============
See Notes to Consolidated Financial Statements
F-3
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
(Unaudited)
Years Ended Six Months Ended
------------------------------------------------ -----------------------------
October 1, September 30, September 28, March 30, March 29,
1994 1995 1996 1996 1997
---------- ------------- ------------- --------- ---------
(in thousands, except per share data)
NET SALES $ 922,609 $ 931,806 $ 1,139,310 $ 539,479 $ 601,207
COSTS AND EXPENSES:
Cost of sales 811,782 857,662 1,068,670 502,460 547,855
Selling, general and 51,129 49,214 49,136 24,510 27,378
administrative
---------- ------------- -------------- --------- ---------
862,911 906,876 1,117,806 526,970 575,233
---------- ------------- -------------- --------- ---------
Operating Income 59,698 24,930 21,504 12,509 25,974
OTHER EXPENSES (INCOME):
Interest expense, net 19,173 17,483 21,539 10,331 10,733
Foreign exchange (gain) (257) 5,605 1,275 1,222 536
loss
Miscellaneous, net (1,666) (249) (1,357) (577) (2,906)
---------- ------------- -------------- --------- ---------
17,250 22,839 21,457 10,976 8,363
---------- ------------- -------------- --------- ---------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY CHARGE 42,448 2,091 47 1,533 17,611
Income tax expense 11,390 10,058 4,551 2,792 2,552
---------- ------------- -------------- --------- ---------
Net income (loss) before 31,058 (7,967) (4,504) (1,259) 15,059
extraordinary charge
Extraordinary charge-early - - (2,780) (2,780) -
repayment of debt, net
of tax
---------- ------------- -------------- --------- ---------
NET INCOME (LOSS) $ 31,058 $ (7,967) $ (7,284) $ (4,039) $ 15,059
========== ============= ============== ========= =========
Net income (loss) per
common share before
extraordinary charge $ 1.13 $ (0.29) $ (0.16) $ (.05) $ 0.55
Extraordinary charge per - - (0.10) (0.10) -
common share
---------- ------------- -------------- --------- ---------
NET INCOME (LOSS) PER $ 1.13 $ (0.29) $ (0.26) $ (.15) $ 0.55
COMMON SHARE
========== ============= ============== ========= =========
See Notes to Consolidated Financial Statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
Number Additional
of Common Paid-in Retained
Shares Stock Capital Earnings Total
---------- ------ ---------- --------- ---------
(dollars in thousands, except per share data)
Balance at October 2, 1993 27,589,250 $ 276 $ 79,763 $ 52,254 $ 132,293
Net income for year 31,058 31,058
Cash dividends declared ($0.06 per share) (1,655) (1,655)
---------- ------- ---------- --------- ---------
Balance at October 1, 1994 27,589,250 276 79,763 81,657 161,696
Net loss for year (7,967) (7,967)
Cash dividends declared ($.06 per share) (1,655) (1,655)
---------- ------- ---------- --------- ---------
Balance at September 30, 1995 27,589,250 276 79,763 72,035 152,074
Net loss for year (7,284) (7,284)
Cash dividends declared ($.06 per share) (1,655) (1,655)
---------- ------- ---------- --------- ---------
Balance at September 28, 1996 27,589,250 276 79,763 63,096 143,135
Net income for six months
ended March 29, 1997 (unaudited) 15,059 15,059
Cash dividends declared ($.03 per share)
(unaudited) (828) (828)
---------- ------- ---------- --------- ---------
Balance at March 29, 1997 (unaudited) 27,589,250 $ 276 $ 79,763 $ 77,327 $ 157,366
========== ======= ========== ========= =========
See Notes to Consolidated Financial Statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
(Unaudited)
Years Ended Six Months Ended
------------------------------------------------ -----------------------------
October 1, September 30, September 28, March 30, March 29,
1994 1995 1996 1996 1997
---------- ------------- ------------- --------- ---------
(in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 31,058 $ (7,967) $ (7,284) $ (4,039) $ 15,059
Adjustments to reconcile net
income (loss) to cash provided
by operating activities:
Depreciation and amortization 25,177 26,127 28,024 14,639 14,229
Gain on property disposals (608) (263) (211) (221) 46
Provision for doubtful accounts 2,666 1,133 1,003 206 (779)
Deferred income taxes 6,720 3,785 (354) (3,214) 1,689
Extraordinary charge - - 4,587 4,587 -
Changes in operating assets and
liabilities:
Accounts and other receivables 3,412 (3,370) (6,858) (5,242) (5,783)
Inventories (8,955) (4,336) (24,830) (18,845) (1,061)
Prepaid expenses (459) 1,066 (674) (1,828) 703
Accounts payable and accrued 1,742 15,249 18,165 3,475 (14,269)
expenses
Other (89) 1,288 (177) (186) (162)
---------- ------------- ------------- --------- ---------
Net Cash Flows Provided by (Used 60,664 32,712 11,391 (10,668) 9,672
In) Operating Activities
INVESTING ACTIVITIES:
Acquisitions of property, plant
and equipment (25,547) (35,194) (34,314) (23,937) (12,162)
Business acquisitions
- property, plant and equipment
- other net assets - (6,659) - -
Proceeds from property disposal 2,103 541 1,468 1,314 330
Other, net (128) (758) 312 361 (258)
---------- ------------- ------------- --------- ---------
Net Cash Used in Investing (23,572) (71,589) (32,534) (22,262) (12,090)
Activities
FINANCING ACTIVITIES:
Proceeds from notes payable to 7,000 15,000 91,000 56,500 31,500
banks
Repayments on notes payable to (19,000) (2,000) (77,000) (43,500) (34,500)
banks
Proceeds from long-term debt 31 45,030 51,028 50,028 -
Payments on long-term debt (16,253) (16,202) (32,140) (29,001) (4,068)
Extraordinary charge, cash items - - (3,920) (3,920) -
Cash dividends paid (2,069) (1,655) (1,655) (828) (828)
---------- ------------- ------------- --------- ---------
Cash Provided by (Used in) (30,291) 40,173 27,313 29,279 (7,896)
Financing Activities
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
Increase (decrease) in cash and
cash equivalents 6,718 648 6,148 (3,664) (10,323)
Cash and cash equivalents at
beginning of period 4,526 11,244 11,892 11,892 18,040
---------- ------------- ------------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,244 $ 11,892 $ 18,040 $ 8,228 $ 7,717
========== ============= ============= ========= =========
Supplemental disclosure
information:
Cash paid during the
period for:
Interest (net of amount
capitalized) $ 19,572 $ 16,764 $ 20,310 $ 9,530 $ 10,961
Income taxes $ 7,108 $ 5,128 $ 4,829 $ 4,014 $ 1,807
See Notes to Consolidated Financial Statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pilgrim's Pride Corporation is a vertically integrated producer of chicken
products, controlling the breeding, hatching and growing of chickens and the
processing, preparation and packaging of its product lines. The Company is the
fifth largest producer of chicken in the United States, with production and
distribution facilities located in Texas, Arkansas, Oklahoma and Arizona, and
one of the two largest producers of chicken in Mexico, with production and
distribution facilities located in Mexico City and the states of Coahuila, San
Louis Potosi, Queretaro and Hidalgo. The Company's chicken products consist
primarily of prepared foods, which include portion-controlled breast fillets,
tenderloins and strips, formed nuggets and patties and bone-in chicken parts,
fresh foodservice chicken, prepackaged chicken, and bulk packaged chicken.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Pilgrim's Pride Corporation and its wholly and majority owned
subsidiaries (the "Company"). Significant intercompany accounts and
transactions have been eliminated.
The financial statements of the Company's Mexican subsidiaries are remeasured as
if the U.S. dollar were the functional currency. Accordingly, assets and
liabilities of the Mexican subsidiaries are translated at end-of-period exchange
rates, except for non-monetary assets which are translated at equivalent dollar
costs at dates of acquisition using historical rates. Operations are translated
at average exchange rates in effect during the period. Foreign exchange (gains)
losses are separately stated as components of "Other expenses (income)" in the
Consolidated Statement of Income (Loss). In recent years the Company has
experienced losses in Mexico primarily as a result of currency devaluations and
other economic factors. As of September 28, 1996, the Company has net Mexican
assets of $139.9 million.
CASH EQUIVALENTS: The Company considers highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE: The Company does not believe it has significant
concentrations of credit risk in its accounts receivable, which are generally
unsecured. Credit evaluations are performed on all significant customers and
updated as circumstances dictate. Allowances for doubtful accounts were $4.3
million and $4.0 million in 1995 and 1996, respectively.
INVENTORIES: Live chicken inventories are stated at the lower of cost or market
and hens at the lower of cost, less accumulated amortization, or market. The
costs associated with hens are accumulated up to the production stage and
amortized over the productive lives using the straight-line method. Finished
chicken products, feed, eggs and other inventories are stated at the lower of
cost (first-in, first-out method) or market. Occasionally, the Company hedges a
portion of its purchases of major feed ingredients using futures contracts to
minimize the risk of adverse price fluctuations. Gains and losses on the hedge
transactions are deferred and recognized as a component of cost of sales when
products are sold.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost.
For financial reporting purposes, depreciation is computed using the straight-
line method over the estimated useful lives of these assets. Depreciation
expense was $23.7 million, $24.8 million and $26.8 million in 1994, 1995 and
1996, respectively.
NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per share is based on the
weighted average shares of common stock outstanding during the year. The
weighted average number of shares outstanding was 27,589,250 in all periods.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION: The unaudited consolidated financial
statements at March 29, 1997 and for the six months ended March 30, 1996 and
March 29, 1997 are unaudited; however, in the opinion of management such
financial statements include all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the Company's
financial position at March 29, 1997 and results of operations and cash flows
for the six months ended March 30, 1996 and March 29, 1997. Operating results
for the six months ended March 29, 1997 are not necessarily indicative of the
results that may be expected for the year ending September 27, 1997.
F-7
On April 15, 1997, the Company secured an additional $35 million in secured term
borrowing capacity from an existing lender at rates of 2.0% over LIBOR, with
monthly principal and interest payments maturing in February 2006. On June 9,
1997, the Company secured an additional $10 million in secured term borrowing
capacity from a group of existing lenders at rates equal to those under its
existing $100 million revolving credit facility and maturing in June 1999. As
of June 11, 1997, $20 million had been borrowed under such facilities.
NOTE B - INVENTORIES
Inventories consist of the following:
(Unaudited)
September 30, September 28, March 29,
1995 1996 1997
----------- ------------- -----------
(in thousands)
Live chickens and hens $ 55,353 $ 66,248 $ 64,632
Feed, eggs and other 32,087 39,804 38,208
Finished chicken products 22,964 30,814 35,086
------------- ------------- ----------
$110,404 $136,866 $137,926
============= ============= ==========
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
The Company maintains a $100 million domestic credit facility with various banks
providing short-term lines of credit at interest rates of approximately one and
three-quarters percent above LIBOR. Domestic inventories and trade accounts
receivable of the Company are pledged as collateral on this facility. The
Company also maintains a $10 million credit facility for its Mexican operations
with a bank providing short-term lines of credit at interest rates of
approximately two and three-quarters percent above LIBOR. The Company has a
negative pledge of Mexican inventories and accounts receivable related to this
facility. At September 28, 1996, availability under these lines totaled $73.8
million. The weighted average interest rate on the Company's short-term
borrowings as of September 28, 1996, was 7.2%. The fair value of the Company's
long-term debt was estimated using quoted market prices, where available. For
long-term debt not actively traded, fair values were estimated using discounted
cash flow analysis using current market rates for similar types of borrowings.
The table below sets forth maturities on long-term debt during the next five
years.
(In thousands)
Year Amount
---- ------
1997 8,850
1998 9,741
1999 9,864
2000 24,692
2001 5,930
During 1996, the Company retired certain debt prior to its scheduled maturity.
These repayments resulted in an extraordinary charge of $2.8 million, net of
$1.8 million tax benefit.
The Company is required, by certain provisions of its debt agreements, to
maintain minimum levels of working capital and net worth, to limit dividends to
a maximum of $1.7 million per year, to maintain various fixed charge, leverage,
current and debt-to-equity ratios, and to limit annual capital expenditures.
Total interest during 1994, 1995 and 1996 was $20.1 million, $19.1 million and
$23.4 million, respectively. Interest related to new construction capitalized
in 1994, 1995 and 1996 was $.5 million, $.6 million and $1.3 million,
respectively.
F-8
Long-term debt and the related fair values consist of the following:
September 30, 1995 September 28, 1996
------------------------ --------------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------------------------ --------------------------
(in thousands)
Senior subordinated notes due August 1, 2003,
interest at 10 7/8% (effective rate of 11 1/8 %)
payable in semi-annual installments, less
discount of $1,181,000 and $1,032,000 in
1995 and 1996, respectively $ 98,819 $ 96,219 $ 98,968 $100,219
Notes payable to an insurance company at 7.21%,
payable in monthly installments of $455,305
including interest, plus one final balloon payment at
maturity on February 28, 2006 - - 48,896 46,063
Notes payable to bank, interest at LIBOR plus
1.8% in 1995 and 2.0% in 1996, respectively, with
principal payments of $167,000 and $950,500 in
quarterly installments, interest paid monthly, in fiscal
year 1996 and thereafter, respectively, plus one final
balloon payment at maturity on June 30, 2000 30,233 30,233 29,732 29,732
Notes payable to an agricultural lender at a rate
approximating LIBOR plus 1.65%, payable in
equal monthly installments including interest
through April 1, 2003 29,119 29,119 27,080 27,080
Senior secured debt payable to an insurance
company at 10.49%, payable in equal annual
installments beginning October 5, 1996 through
September 21, 2002 22,000 23,930 - -
Senior secured debt payable to an insurance
company, interest at 9.55%, payable in equal annual
installments through October 1, 1998 4,440 4,712 - -
Other notes payable 3,564 3,745 2,508 2,547
-------- -------- -------- --------
188,175 $187,958 207,184 $205,641
Less current maturities 5,187 8,850
-------- --------
$182,988 $198,334
======== ========
Substantially all of the Company's domestic property, plant and equipment is
pledged as collateral on its long-term debt, however, Mexico's property, plant
and equipment is unencumbered.
F-9
NOTE D - INCOME TAXES
Income (loss) before income taxes and extraordinary charge after allocation of
certain expenses to foreign operations for 1994, 1995 and 1996 was $33.9
million, $29.9 million and $16.3 million, respectively, for domestic
operations, and $8.6 million, $(27.8) million and $(16.3) million,
respectively, for foreign operations. The provisions for income taxes are based
on pretax financial statement income.
The components of income tax expense (benefit) are set forth below:
Years Ended
----------------------------
Oct. 1, Sept. 30, Sept. 28,
1994 1995 1996
------- --------- ---------
(in thousands)
Current:
Federal $ 4,573 $ 5,215 $3,005
Foreign 423 638 817
Other (326) 420 1,083
------- ------- ------
4,670 6,273 4,905
Deferred:
Reinstatement of deferred taxes through
utilization of tax credits and net
operating losses 6,589 3,542 397
Accelerated tax depreciation 1,002 215 (195)
Expenses deductible in a different year for
tax and financial reporting purposes (580) 411 238
Other, net (291) (383) (794)
------- ------- ------
6,720 3,785 (354)
------- ------- ------
$11,390 $10,058 $4,551
======= ======= ======
The following is a reconciliation between the statutory U.S. federal income tax
rate and the Company's effective income tax rate.
Years Ended
---------------------------------------------------------
October 1, 1994 September 30, 1995 September 28, 1996
--------------- ------------------ ------------------
Federal income tax rate 35.0% 35.0% 35.0%
State tax rate, net 2.3 40.1 1,674.1
Effect of Mexican loss being non-deductible in - 411.1 6,252.3
U.S.
Difference in U.S. statutory tax rate and Mexican
effective tax rate (10.7) - -
Effect of Mexican asset based minimum tax - - 1,649.3
Other, net 0.2 (5.2) 0.2
----- ----- -------
26.8% 481.0% 9,610.9%
===== ===== =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-10
Significant components of the Company's deferred tax liabilities and assets are
as follows:
Years Ended
-----------------------------------------
September 30,1995 September 28, 1996
------------------ ------------------
(in thousands)
Deferred tax liabilities:
Tax over book depreciation $ 24,221 $ 24,027
Prior use of cash accounting 33,572 33,418
Other 965 930
------------------ ------------------
Total deferred tax liabilities 58,758 58,375
------------------ ------------------
Deferred tax assets:
AMT credit carryforward 2,972 4,034
General business credit carryforward 1,459 1,459
Expenses deductible in different years 7,166 7,534
------------------ ------------------
Total deferred tax asset 11,597 11,568
------------------ ------------------
Net deferred tax liabilities $ 47,161 $ 46,807
================== ==================
On January 1, 1994, the Company completed a series of restructuring of
activities in Mexico which allowed previously nonagricultural Mexican operations
to be combined with existing agricultural operations and, as such, qualify for
taxability as agricultural operations, which are currently not subject to taxes
in Mexico. The current provision for foreign income taxes in 1995 and 1996 is
the result of an asset based minimum tax. The Company has not provided any U.S.
deferred federal income taxes on the undistributed earnings of its Mexican
subsidiaries based upon its determination that such earnings will be
indefinitely reinvested. As of September 28, 1996, the cumulative undistributed
earnings of these subsidiaries were approximately $19.1 million. If such
earnings were not considered indefinitely reinvested, deferred federal and
foreign income taxes would have been provided, after consideration of estimated
foreign tax credits. (Included in this amount would be foreign taxes resulting
from earnings of the Mexican agricultural subsidiaries which would be due upon
distribution of such earnings to the U.S.) However, determination of the amount
of deferred federal and foreign income taxes is not practicable.
As of September 28, 1996, approximately $4.0 million of alternative minimum tax
credits were available to offset future taxable income. All credits have been
reflected in the financial statements as a reduction of deferred taxes. As
these credits are utilized for tax purposes, deferred taxes will be reinstated.
NOTE E - SAVINGS PLAN
The Company maintains a Section 401(k) Salary Deferral Plan (the "Plan"). Under
the Plan, eligible domestic employees may voluntarily contribute a percentage of
their compensation. The Plan provides for a contribution of up to four percent
of compensation subject to an overall Company contribution limit of five percent
of income before taxes.
Under the plan outlined above, the Company's expenses were $2.6 million, $1.9
million and $1.8 million in 1994, 1995 and 1996, respectively.
F-11
NOTE F - RELATED PARTY TRANSACTIONS
The major stockholder of the Company owns an egg laying and a chicken growing
operation. Transactions with related entities are summarized as follows:
Years Ended
-------------------------------------------------------
October 1, 1994 September 30, 1995 September 28, 1996
--------------- ------------------ ------------------
(in thousands)
Contract egg grower fees to major $ 5,137 $ 4,760 $ 4,697
stockholder
Chick, feed and other sales to major 9,373 12,478 18,057
stockholder
Live chicken purchases from major 9,346 12,721 18,112
stockholder
Purchases of feed ingredients from Archer
Daniels Midland Company 56,499 44,250 23,226
The Company leases an airplane from its major stockholder under an operating
lease agreement. The terms of the lease agreement require monthly payments of
$33,000 plus operating expenses. Lease expense was $396,000 for each of the
years 1994, 1995 and 1996. Operating expenses were $213,000, $149,000 and
$88,000 in 1994, 1995 and 1996, respectively.
Expenses incurred for the guarantee of certain debt by stockholders were
$526,000, $623,000 and $1,027,000 in 1994, 1995 and 1996, respectively.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Consolidated Statements of Income (Loss) included rental expense for
operating leases of approximately $10.1 million, $9.8 million and $10.1 million
in 1994, 1995 and 1996, respectively. The Company's future minimum lease
commitments under noncancelable operating leases are as follows:
Year Amount
---- ------
(in thousands)
1997 $ 8,787
1998 $ 8,084
1999 $ 7,323
2000 $ 6,643
2001 $ 5,837
Thereafter $11,336
At September 28, 1996, the Company had $9.2 million letters of credit
outstanding relating to normal business transactions.
The Company is subject to various legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position or results of operations of the Company.
F-12
NOTE H - BUSINESS SEGMENTS
The Company operates in a single business segment as a producer of agricultural
products and conducts separate operations in the United States and Mexico.
Interarea sales, which are not material, are accounted for at prices comparable
to normal trade customer sales. Identifiable assets by geographic area are
those assets which are used in the Company's operation in each area.
Information about the Company's operations in these geographic areas is as
follows:
Years Ended
--------------------------------------------------------
October 1, 1994 September 30, 1995 September 28, 1996
--------------- ------------------ ------------------
(in thousands)
Sales to unaffiliated customers:
United States $ 733,865 $ 772,315 $ 911,181
Mexico 188,744 159,491 228,129
--------------- ------------------ ------------------
$ 922,609 $ 931,806 $ 1,139,310
Operating income (loss):
United States $ 46,421 $ 41,923 $ 29,705
Mexico 13,277 (16,993) (8,201)
--------------- ------------------ ------------------
$ 59,698 $ 24,930 $ 21,504
Identifiable assets:
United States $ 302,911 $ 328,489 $ 363,543
Mexico 135,772 169,115 173,179
--------------- ------------------ ------------------
$ 438,683 $ 497,604 $ 536,722
NOTE I - ACQUISITIONS AND INVESTMENTS
On July 5, 1995, the Company acquired certain assets of Union de Queretaro, et
al, a group of five chicken companies located near Queretaro, Mexico for
approximately $35.3 million. These assets were integrated with the Company's
existing Mexican operation, headquartered in Queretaro, Mexico, which is one of
the two largest chicken operations in Mexico. The acquisition has been
accounted for as a purchase, and the results of operations for this acquisition
have been included in the Company's consolidated results of operations since the
acquisition date. Pro forma operating results are not presented as they would
not differ materially from actual results reported in 1994 and 1995.
F-13
NOTE J - QUARTERLY RESULTS - (UNAUDITED)
Year Ended September 30, 1995
-------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------- -------------- ------------- -------------- -----------
(in thousands, except per share data)
Net sales $ 227,000 $ 216,830 $ 230,297 $ 257,679 $ 931,806
Gross profit 20,765 7,577 23,826 21,976 74,144
Operating income (loss) 8,742 (4,662) 11,843 9,007 24,930
Net income (loss) 556 (16,304) 6,143 1,638 (7,967)
Per share:
Net income (loss) 0.02 (0.59) 0.22 0.06 (0.29)
Cash dividends 0.015 0.015 0.015 0.015 0.06
Market price:
High 10 3/8 9 3/4 8 3/8 8 3/4 10 3/8
Low 9 3/8 7 3/4 7 1/2 7 5/8 7 1/2
Year Ended September 28, 1996
-------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------- -------------- ------------- -------------- -----------
(in thousands, except per share data)
Net sales $ 267,475 $ 272,004 $ 294,339 $ 305,492 $ 1,139,310
Gross profit 20,972 16,047 17,384 16,237 70,640
Operating income (loss) 8,825 3,684 5,454 3,541 21,504
Extraordinary charge (a) - (2,780) - - (2,780)
Net income (loss) (704) (3,335) 1,007 (4,252) (7,284)
Per share:
Net income (loss)
before extraordinary charge (0.03) (0.02) 0.04 (0.15) (0.16)
Extraordinary charge - (0.10) - - (0.10)
Net income (loss) (0.03) (0.12) 0.04 (0.15) (0.26)
Cash dividends 0.015 0.015 0.015 0.015 0.06
Market price:
High 8 3/8 7 5/8 9 9 9
Low 6 5/8 6 3/4 6 3/4 7 1/2 6 5/8
Year Ended September 27, 1997
------------------------------------
First Quarter Second Quarter
------------- ---------------
(in thousands, except per share data)
Net sales $ 297,806 $ 303,401
Gross profit 30,267 23,085
Operating income (loss) 16,314 9,660
Net income (loss) 10,105 4,954
Per share:
Net income (loss) 0.37 0.18
Cash dividends 0.015 0.015
Market price:
High 9 12 1/8
Low 7 3/4 8 5/8
(a) The extraordinary charge of $2.8 million, net of tax, is the result of the
early repayment of 10.49% and 9.55% senior secured debt payable to an
insurance company. (See Note C).
F-14
================================================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE UNDERWRITERS, OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON STOCK TO WHICH IT RELATES OR
AN OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
______________
TABLE OF CONTENTS
______________
Page
----
Available Information........................................... 2
Reference Data.................................................. 2
Forward-Looking Information..................................... 2
Prospectus Summary.............................................. 3
Risk Factors.................................................... 6
The Company..................................................... 9
Use of Proceeds................................................. 9
Price Range of Common Stock and Dividends....................... 9
Selected Consolidated Financial Data............................ 11
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 13
The Chicken Industry............................................ 19
Business........................................................ 23
Management...................................................... 32
Compensation Committee Interlocks and Insider Participation..... 35
Certain Relationships and Transactions.......................... 36
Principal and Selling Stockholders.............................. 37
Description of Capital Stock.................................... 38
Underwriting.................................................... 38
Legal Matters................................................... 40
Experts......................................................... 40
Index to Financial Statements................................... F-1
6,261,382 Shares
[LOGO OF PILGRIM'S PRIDE]
Common Stock
________
PROSPECTUS
________
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
A.G. EDWARDS & SONS, INC.
, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The table below sets forth the expenses to be incurred in connection with the
issuance and distribution of the Common Stock to be registered and offered
hereby. Such expenses will be paid by the Selling Stockholders.
SEC Registration Fee........................... $7,753
NASD Filing Fee................................ 8,871
New York Stock Exchange Listing Fee............ *
Accounting Fees and Expenses................... *
Transfer Agent and Registrar Fees.............. *
Printing, Distribution and Engraving Expenses.. *
Legal Fees and Expenses (other than Blue Sky).. *
Blue Sky (including legal fees and expenses)... *
Miscellaneous.................................. *
-----------
Total....................................... $ *
===========
________________________
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company provide that the Company shall indemnify and hold
harmless any present or former officer or director or any officer or director
who is or was serving at the request of the Company as a director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another corporation, partnership, trust, employee benefit plan or other
enterprise, from and against expenses actually incurred by such person in
connection with any suit to which they are made, or are threatened to be made, a
party, or to which they are a witness without being named a party, if it is
determined that he acted in good faith and reasonably believed (i) in the case
of conduct in his official capacity on behalf of the Company, that his conduct
was in the Company's best interests, (ii) in all other cases, that his conduct
was not opposed to the best interests of the Company, and (iii) with respect to
any criminal action, that he had no reasonable cause to believe his conduct was
unlawful; provided, however, that in the event a determination is made that such
person is liable to the Company or is found liable on the basis that a personal
benefit was improperly received by such person, the indemnification is limited
to reasonable expenses actually incurred by such person in connection with the
suit and shall not be made in respect of any suit in which such person shall
have been found liable for willful or intentional misconduct in the performance
of his duty to the Company.
Pursuant to Section 145 of the General Corporation Law of the State of
Delaware ("Delaware Code"), the Company generally has the power to indemnify its
present and former directors, officers, employees and agents against expenses
incurred by them in connection with any suit to which they are, or are
threatened to be made, a party be reason of their serving in such positions so
long as they acted in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interests of the Company, and with respect to
any criminal action, they had no reasonable cause to believe their conduct was
unlawful. The statute also expressly provides that the power to indemnify
authorized thereby is not exclusive of any rights granted under any bylaw,
agreement, vote of stockholders or disinterested directors, or otherwise.
According to the Bylaws of the Company and Section 145 of the Delaware Code,
the Company has the power to purchase and maintain insurance for such persons.
The above discussion of the Company's Bylaws and of Section 145 of the
Delaware Code is not intended to be exhaustive and is qualified in its entirety
by such Bylaws and the Delaware Code.
In addition, the Company and certain other persons may be entitled, pursuant
to the Underwriting Agreement, to indemnification by the Underwriters and the
Selling Stockholders against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"), or to
contribution with respect to payments which the Company or such persons may be
required to make in respect thereof.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
II-1
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.1 Form of Underwriting Agreement. **
3.1 Certificate of Incorporation of the Company (incorporated by reference
from Exhibit 3.1 of the Company's Registration Statement on Form S-1
(No. 33-8805) effective November 14, 1986).
3.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation,
a Delaware Corporation, effective December 4, 1996 (incorporated by
reference from Exhibit 3.3 of the Company's Quarterly Report on Form
10-Q for the three months ended March 29, 1997).
4.1 Certificate of Incorporation of the Company (incorporated by reference
from Exhibit 3.1 of the Company's Registration Statement on Form S-1
(No. 33-8805) effective November 14, 1986).
4.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation,
a Delaware Corporation, effective December 4, 1996 (incorporated by
reference from Exhibit 3.3 of the Company's Quarterly Report on Form
10-Q for the three months ended March 29, 1997).
4.3 Specimen Certificate for shares of Common Stock, par value $.01 per
share, of the Company (incorporated by reference from Exhibit 4.6 of
the Company's Form 8 filed on July 1, 1992).
4.4 Form of Indenture between the Company and Ameritrust Texas National
Association relating to the Company's 10 7/8% Senior Subordinated
Notes Due 2003 (incorporated by reference from Exhibit 4.6 of the
Company's Registration Statement on Form S-1 (No. 33-59626) filed on
March 16, 1993).
4.5 Form of 10 7/8% Senior Subordinated Note Due 2003 (incorporated by
reference from Exhibit 4.8 of the Company's Registration Statement on
Form S-1 (No. 33-61160) filed on June 16, 1993).
5.1 Opinion and Consent of Baker & McKenzie. **
10.1 Pilgrim Industries, Inc., Profit Sharing Retirement Plan, restated as
of July 1, 1987 (incorporated by reference from Exhibit 10.1 of the
Company's Form 8 filed on July 1, 1992).
10.2 Bonus Plan of the Company (incorporated by reference from Exhibit 10.2
to the Company's Registration Statement on Form S-1 (No. 33- 8805)
effective November 14, 1986).
10.3 Stock Purchase Agreement dated May 12, 1992, between the Company and
Archer Daniels Midland Company (incorporated by reference from Exhibit
10.45 of the Company's Form 10-K for the year ended September 26,
1992).
10.4 Employee Stock Investment Plan of the Company (incorporated by
reference from Exhibit 10.28 of the Company's Registration Statement
on Form S-1 (No. 33-21057) effective May 2, 1988).
10.5 Promissory Note dated September 20, 1990, by and between the Company
and Hibernia National Bank of Texas (incorporated by reference from
Exhibit 10.42 of the Company's Form 8 filed on July 1, 1992).
10.6 Loan Agreement dated October 16, 1990, by and among the Company,
Lonnie "Bo" Pilgrim and North Texas Production Credit Association,
with related Variable Rate Term Promissory Note and Deed of Trust
(incorporated by reference from Exhibit 10.43 of the Company's Form 8
filed on July 1, 1992).
10.7 Secured Credit Agreement dated May 27, 1993, by and among the Company
and Harris Trust and Savings Bank, and FBS AG Credit, Inc.,
Internationale Nederlanden Bank, N.V., Boatmen's First National Bank
of Kansas City, and First Interstate Bank of Texas, N.A. (incorporated
by reference from Exhibit 10.31 of the Company's Registration
Statement on Form S-1 (No. 33-61160) filed on June 16, 1993).
10.8 First Amendment to Secured Credit Agreement dated June 30, 1994 to the
Secured Credit Agreement dated May 27, 1993, by and among the Company
and Harris Trust and Savings Bank, and FBS AG Credit, Inc.,
Internationale Nederlanden Bank N.V., Boatman's First National Bank of
Kansas City and First Interstate Bank
II-2
of Texas, N.A. (incorporated by reference from Exhibit 10.33 of the
Company's annual report on Form 10-K for the fiscal year ended
September 28, 1996).
10.9 Second Amendment to Secured Credit Agreement dated December 6, 1994 to
the Secured Credit Agreement dated May 27, 1993, by and among the
Company and Harris Trust and Savings Bank, and FBS AG Credit, Inc.,
Internationale Nederlanden Bank N.V., Boatman's First National Bank of
Kansas City and First Interstate Bank of Texas, N.A. (incorporated by
reference from Exhibit 10.36 of the Company's annual report on Form
10-K for the fiscal year ended September 28, 1996).
10.10 Third Amendment to Secured Credit Agreement dated June 30, 1995 to the
Secured Credit Agreement dated May 27, 1993, by and among the Company
and Harris Trust and Savings Bank, and FBS AG Credit, Inc.,
Internationale Nederlanden Bank N.V., Boatman's First National Bank of
Kansas City and First Interstate Bank of Texas, N.A. (incorporated by
reference from Exhibit 10.37 of the Company's annual report on Form
10-K for the fiscal year ended September 28, 1996).
10.11 Second Amended and Restated Loan and Security Agreement dated July 31,
1995, by and among the Company, the banks party thereto and
Creditanstalt-Bankverein, as agent (incorporated by reference from
Exhibit 10.38 of the Company's annual report on Form 10-K for the
fiscal year ended September 28, 1996).
10.12 Revolving Credit Loan Agreement dated March 27, 1995 by and among the
Company and Agricultural Production Credit Association (incorporated
by reference from Exhibit 10.39 of the Company's annual report on Form
10-K for the fiscal year ended September 28, 1996).
10.13 First Supplement to Revolving Credit Loan Agreement dated July 6, 1995
by and among the Company and Agricultural Production Credit
Association (incorporated by reference from Exhibit 10.40 of the
Company's annual report on Form 10-K for the fiscal year ended
September 28, 1996).
10.14 Credit Agreement dated as of January 31, 1996 is entered into among
Pilgrim's Pride, S.A. de C.V., and Internationale Nederlanden (U.S.)
Capital Corporation, Pilgrim's Pride Corporation, Avicola Pilgrim's
Pride de Mexico, S.A. de C.V., Compania Incubadora Avicola Pilgrim's
Pride, S.A. de C.V., Productora Y Distribuidora de Alimentos, S.A. de
C.V., Immobiliaria Avicola Pilgrim's Pride, S. De R.L. de C.V. and
CIA. Incubadora Hidalgo, S.A. de C.V. (incorporated by reference from
Exhibit 10.42 of the Company's annual report on Form 10-K for the
fiscal year ended September 28, 1996).
10.15 Fourth Amendment to Secured Credit Agreement dated June 6, 1996 to the
Secured Credit Agreement dated May 27, 1993, by and among the Company
and Harris Trust and Savings Bank, and FBS AG Credit, Inc.,
Internationale Nederlanden Bank N.V., Boatman's First National Bank of
Kansas City and Wells Fargo Bank Texas, N.A., successor to First
Interstate Bank of Texas, N.A. (incorporated by reference from Exhibit
10.43 of the Company's annual report on Form 10-K for the fiscal year
ended September 28, 1996).
10.16 Second Supplement to Revolving Credit Loan Agreement dated June 28,
1996 by and among the Company and Agricultural Production Credit
Association (incorporated by reference from Exhibit 10.44 of the
Company's annual report on Form 10-K for the fiscal year ended
September 28, 1996).
10.17 Third Supplement to Revolving Credit Loan Agreement dated August 22,
1996 by and among the Company and Agricultural Production Credit
Association (incorporated by reference from Exhibit 10.45 of the
Company's annual report on Form 10-K for the fiscal year ended
September 28, 1996).
10.18 Note Purchase Agreement dated April 14, 1997 by and between John
Hancock Mutual Life Insurance Company and Signature 1A (Cayman), Ltd.
and the Company (incorporated by reference from Exhibit 10.46 of the
Company's Quarterly Report on Form 10-Q for the three months ended
March 29, 1997).
10.19 Agreement between Pilgrim's Pride Corporation and Certain Shareholders
dated November 28, 1996 (incorporated by reference from Exhibit 10.47
of the Company's Quarterly Report on Form 10-Q for the three months
ended March 29, 1997).
10.20 Aircraft Lease Extension Agreement between B.P. Leasing Co., (L. A.
Pilgrim, Individually) and Pilgrim's Pride Corporation, (formerly
Pilgrim Industries, Inc.) effective November 15, 1992 (incorporated by
reference from Exhibit 10.48 of the Company's Quarterly Report on Form
10-Q for the three months ended March 29, 1997).
II-3
10.21 Broiler Grower Contract dated May 6, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farm 30) (incorporated by
reference from Exhibit 10.49 of the Company's Quarterly Report on Form
10-Q for the three months ended March 29, 1997).
10.22 Commercial Egg Grower Contract dated May 7, 1997 between Pilgrim's
Pride Corporation and Pilgrim Poultry, G. P. (incorporated by
reference from Exhibit 10.50 of the Company's Quarterly Report on Form
10-Q for the three months ended March 29, 1997).
10.23 Agreement dated October 15, 1996 between Pilgrim's Pride Corporation
and Pilgrim Poultry, G.P. (Incorporated by reference from Exhibit
10.51 of the Company's Quarterly Report on Form 10-Q for the three
months ended March 29, 1997).
10.24 Heavy Breeder Contract dated May 7, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farms 44, 45 & 46) (Incorporated
by reference from Exhibit 10.51 of the Company's Quarterly Report on
Form 10-Q for the three months ended March 29, 1997).
22.1 Subsidiaries of Registrant.*
23.1 Consent of Ernst & Young LLP.*
23.2 Consent of Baker & McKenzie (included in the opinion filed as Exhibit
5.1 to this Registration Statement).
24.1 Power of Attorney (included on the signature page of this Registration
Statement).
* Filed herewith
** To be filed by amendment
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K promulgated by the
Securities and Exchange Commission, the Company has not filed as exhibits
certain other instruments defining the rights of holders of long-term debt of
the Company which instruments do not pertain to indebtedness in excess of 10% of
the total assets of the Company. The Company hereby agrees to furnish copies of
such instruments to the Securities and Exchange Commission upon request.
FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the requested
information is in the financial statements or the Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that (i) for purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective, and (ii) for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburg, State of
Texas, on June 13, 1997.
PILGRIM'S PRIDE CORPORATION
By: /S/ CLIFFORD E. BUTLER
---------------------------------
Clifford E. Butler
Vice Chairman of the Board of
Directors and Executive
President
Each individual whose signature appears below hereby designates and appoints
Lonnie A. Pilgrim and Clifford E. Butler, and each of them, any one of whom may
act without the joinder of the other, as such person's true and lawful
attorneys-in-fact and agents (the "Attorneys-in-Fact") with full power of
substitution and resubstitution, for such person and in such person's name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, which
amendments may make such changes in this Registration Statement as either
Attorney-in-Fact deems appropriate, and any registration statement relating to
the same offering filed pursuant to Rule 462(b) under the Securities Act of 1933
and requests to accelerate the effectiveness of such registration statements,
and to file each such amendment with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such Attorneys-in-Fact and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as such person might or
could do in person, hereby ratifying and confirming all that such Attorneys-in-
Fact or either of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ----------------------------- ---------------------------------------------- -------------
/S/ LONNIE A. PILGRIM Chairman of the Board of Directors and Chief June 13, 1997
- -----------------------------
Lonnie A. Pilgrim Executive Officer (Principal Executive
Officer)
/S/ CLIFFORD E. BUTLER Vice Chairman of the Board of Directors and June 13, 1997
- -----------------------------
Clifford E. Butler Executive President
/S/ LINDY M. PILGRIM President, Chief Operating Officer and June 13, 1997
- -----------------------------
Lindy M. Pilgrim Director
/S/ RICHARD A. COGDILL Executive Vice President, Chief Financial June 13, 1997
- -----------------------------
Richard A. Cogdill Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer)
/S/ ROBERT L. HENDRIX Executive Vice President, Operations and June 13, 1997
- -----------------------------
Robert L. Hendrix Director
/S/ JAMES J. MINER Senior Vice President, Technical Services and June 13, 1997
- -----------------------------
James J. Miner Director
/S/ LONNIE KEN PILGRIM Vice President, Director of Transportation June 13, 1997
- -----------------------------
Lonnie Ken Pilgrim and Director
/S/ CHARLES L. BLACK Director June 13, 1997
- -----------------------------
Charles L. Black
/S/ ROBERT E. HILGENFELD Director June 13, 1997
- -----------------------------
Robert E. Hilgenfeld
/S/ VANCE C. MILLER Director June 13, 1997
- -----------------------------
Vance C. Miller
/S/ JAMES G. VETTER, JR. Director June 13, 1997
- -----------------------------
James G. Vetter, Jr.
/S/ DONALD L. WASS Director June 13, 1997
- -----------------------------
Donald L. Wass
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E
ADDITIONS
Balance at
DESCRIPTION Beginning of Charged to Costs Changes to Other Deductions- Balance at End
Period and Expenses Accounts-Describe Describe of Period
Year ended September 28, 1996:
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts $4,280,000 $1,003,000 $ -- $1,298,000 (1) $3,985,000
Year ended September 30, 1995:
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts $5,906,000 $1,333,000 $ -- $2,759,000 (1) $4,280,000
Year ended October 1, 1994:
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts $3,238,000 $2,666,000 $ -- $ (2,000)(2) $5,906,000
(1) The decrease in the 1996 and 1995 reserve account is primarily due to the
devaluation of the peso.
(2) Uncollectible accounts written off, net of receivables.
EXHIBIT INDEX
22.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
EXHIBIT 22.1
SUBSIDIARIES OF REGISTRANT
1. AVICOLA PILGRIM'S PRIDE DE MEXICO, S.A. DE C.V.
2. COMPANIA INCUBADORA AVICOLA PILGRIM'S PIRDE, S.A. DE C.V.
3. CIA. INCUBADORA HIDALGO, S.A. DE C.V.
4. INMOBILIARIA AVICOLA PILGRIM'S PRIDE, S. DE R.L. DE C.V.
5. PILGRIM'S PRIDE, S.A. DE C.V.
6. PRODUCTORA Y DISTRIBUIDORA DE ALIMENTOS, S.A. DE C.V.
7. GALLINA PESADA S.A. DE C.V.
8. PPC MARKETING, LTD.
9. PPC DELAWARE BUSINESS TRUST
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated
November 5, 1996, in the Registration Statement (Form S-1) and related
Prospectus of Pilgrim's Pride Corporation for the registration of 7,200,589
shares of its common stock.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
June 10, 1997