SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended JUNE 29, 2002
Commission file number 1-9273
PILGRIM'S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1285071
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 SOUTH TEXAS, PITTSBURG, TX 75686-0093
(Address of principal executive offices) (Zip code)
(903) 855-1000
(Telephone number of principal executive offices)
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
27,589,250 shares of the Registrant's Class B Common Stock, $.01 par value,
were outstanding as of July 26, 2002.
13,523,429 shares of the Registrant's Class A Common Stock, $.01 par value,
were outstanding as of July 26, 2002.
INDEX
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets
June 29, 2002 and September 29, 2001
Consolidated statements of income
Three month and nine month periods ended June 29, 2002 and June
30, 2001
Consolidated statements of cash flows
Nine months ended June 29, 2002 and June 30, 2001
Notes to consolidated financial statements--June 29, 2002
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 29, 2002 SEPTEMBER 29, 2001
ASSETS (in thousands, except share and per share data)
Current Assets:
Cash and cash equivalents $ 7,813 $ 20,916
Trade accounts and other receivables,
less allowance for doubtful accounts 91,705 95,022
Inventories 331,092 314,400
Other current assets 9,683 12,934
Total Current Assets 440,293 443,272
Other Assets 21,803 20,067
Property, Plant and Equipment:
Land 37,356 36,350
Buildings, machinery and equipment 985,311 929,922
Autos and trucks 55,453 53,264
Construction in progress 62,083 71,427
1,140,203 1,090,963
Less accumulated depreciation 383,934 338,607
756,269 752,356
$1,218,365 $ 1,215,695
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 58,000 $ --
Accounts payable 136,516 151,265
Accrued expenses 82,590 83,558
Current maturities of long-term debt 5,207 5,099
Total Current Liabilities 282,313 239,922
Long-Term Debt, less current maturities 418,064 467,242
Deferred Income Taxes 118,068 126,710
Minority Interest in Subsidiary 2,010 889
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred stock, $.01 par value,
authorized 5,000,000 shares;
none issued -- --
Common stock - Class A, $.01 par value,
authorized 100,000,000 shares;
13,794,529 issued and outstanding
at June 29, 2002 and September 29,
2001, respectively 138 138
Common stock - Class B, $.01 par value,
authorized 60,000,000 shares;
27,589,250 issued and outstanding
at June 29, 2002 and September 29, 2001,
respectively 276 276
Additional paid-in capital 79,625 79,625
Retained earnings 318,413 302,758
Accumulated and Other Comprehensive
Income 1,026 (297)
Less treasury stock, 271,100 shares (1,568) (1,568)
Total Stockholders' Equity 397,910 380,932
$ 1,218,365 $ 1,215,695
See notes to consolidated financial statements.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
(in thousands, except share and per share data)
Net Sales $637,116 $645,836 $1,893,899 $1,573,461
Costs and Expenses:
Cost of sales 590,116 570,211 1,760,404 1,421,454
Selling, general and
administrative 32,954 30,139 100,491 88,581
623,070 600,350 1,860,895 1,510,035
Operating income 14,046 45,486 33,004 63,426
Other Expense (Income):
Interest expense, net 9,031 10,014 24,866 21,239
Foreign exchange loss/
(gain) 2,269 (602) 1,374 (439)
Miscellaneous, net (3,778) 1,751 (3,292) 1,348
7,522 11,163 22,948 22,148
Income before income
taxes 6,524 34,323 10,056 41,278
Income tax expense
(benefit) 3,258 9,056 (7,453) 13,075
Net income $ 3,266 $ 25,267 $ 17,509 $ 28,203
Net income per common share
- basic and diluted $ 0.08 $ 0.62 $ 0.43 $ 0.69
Dividends per common
share $ 0.015 $ 0.015 $ 0.045 $ 0.045
Weighted average shares
outstanding 41,112,679 41,112,679 41,112,679 41,112,679
See notes to financial statements.
PILGRIM'S PRIDE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 29, 2002 June 30, 2001
(in thousands)
Cash Flows From Operating Activities:
Net income $17,509 $28,203
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 52,859 39,428
Loss on property disposals 227 76
Deferred income taxes (8,642) 4,486
Changes in operating assets and liabilities:
Accounts and other receivables 3,317 (24,748)
Inventories (16,692) (18,167)
Prepaid expenses and other
current assets 3,251 (2,326)
Accounts payable and accrued expenses (15,717) (9,181)
Other 2,655 (519)
Cash Provided by Operating
Activities 38,767 17,252
Investing Activities:
Acquisitions of property, plant and equipment(56,430) (87,640)
Business acquisitions -- (239,539)
Proceeds from property disposals 790 1,622
Other, net (2,923) 3,040
Net Cash Used In Investing Activities (58,563) (322,517)
Financing Activities:
Borrowing for acquisition -- 285,070
Repayments on WLR Foods, Inc. debt -- (45,531)
Proceeds from notes payable to banks 141,500 136,000
Repayments of notes payable to banks (83,500) (82,000)
Proceeds from long-term debt 63,101 102,631
Payments on long-term debt (112,171) (108,491)
Cash dividends paid (1,854) (1,854)
Cash Provided By Financing Activities 7,076 285,825
Effect of exchange rate changes on cash and
cash equivalents (383) 147
Decrease in cash and cash equivalents (13,103) (19,293)
Cash and cash equivalents at beginning of year 20,916 28,060
Cash and cash equivalents at end
of period $ 7,813 $ 8,767
Supplemental disclosure information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 22,833 $ 16,262
Income taxes 1,451 6,845
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pilgrim's
Pride Corporation ("Pilgrim's" or the "Company") have been prepared in
accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the period ended June 29, 2002 are not necessarily indicative
of the results that may be expected for the year ended September 28, 2002.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Pilgrim's annual report on Form 10-K for the
year ended September 29, 2001.
The consolidated financial statements include the accounts of Pilgrim's and
its wholly and majority owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated.
Total comprehensive income for the three months ending and the nine months
ending June 29, 2002 and June 30, 2001 was $4.9 million, $18.8 million and
$25.3 million, $27.8 million, respectively.
On January 27, 2001, we acquired WLR Foods, Inc. (formerly Nasdaq:WLRF) for
approximately $239.5 million and the assumption of approximately $45.5
million of indebtedness. WLR Foods' operations have been included since
the acquisition on January 27, 2001. The acquisition was accounted for
under the purchase method of accounting and the purchase price has been
allocated based on the estimated fair value of assets and liabilities.
Pro Forma Financial Information: The following unaudited pro forma
financial information has been presented as if the acquisition of WLR Foods
had occurred as of the beginning of the nine months ended June 30, 2001.
In addition, certain reclassifications have been made to the WLR Foods
historical financial statements to conform to the presentation used by
Pilgrim's Pride Corporation.
Nine Months Ended
Historical ProForma
June 29, 2002 June 30, 2001
(in thousands)
Net Sales $1,893,899 $1,837,891
Operating Income 33,004 51,681
Depreciation and Amortization 52,859 48,561
Interest Expense, Net 24,866 30,253
Income Before Tax 10,056 20,384
Net Income $ 17,509 $ 15,457
Net Income Per Common Share
- Basic and Diluted $ 0.43 $ 0.37
NOTE B--ACCOUNTS RECEIVABLE
In 1998 the Company entered into an Asset Sale Agreement to sell up to $60
million of accounts receivable. In connection with the Asset Sale
Agreement, the Company sells, on a revolving basis, certain of its trade
receivables (the "Pooled Receivables") to a special purpose corporation
wholly owned by the Company, which in turn sells a percentage ownership
interest to third parties. At June 29, 2002 and September 29, 2001, an
interest in these Pooled Receivables of $60.0 million and $58.5 million,
respectively, had been sold to third parties and is reflected as a
reduction to accounts receivable. The increase in pooled receivable sales
from September 29, 2001 is included in cash flows from operating activities
in the Consolidated Statements of Cash Flows. Losses on sales were
immaterial.
NOTE C--INVENTORIES
Inventories consist of the following:
June 29, 2002 September 29, 2001
(in thousands)
Chicken:
Live chicken and hens $ 101,645 $ 97,073
Feed, eggs and other 69,085 77,970
Finished chicken products 68,914 70,493
239,644 245,536
Turkey:
Live turkey and hens 24,975 30,694
Feed, eggs and other 13,979 3,906
Finished turkey products 52,494 34,264
91,448 68,864
Total Inventories $331,092 $314,400
NOTE D--LONG TERM DEBT
At June 29, 2002, the Company maintained $130.0 million in revolving credit
facilities and $400.0 million in a secured revolving/term borrowing
facility. The $400.0 million revolving/term borrowing facility provides
for $285.0 million and $115.0 million of 10-year and 7-year commitments,
respectively. Borrowings under these facilities are split pro rata between
the 10-year and 7-year maturities as they occur. The credit facilities
provide for interest at rates ranging from LIBOR plus five-eighths percent
to LIBOR plus two and three-quarters percent depending upon the Company's
total debt to capitalization ratio. Interest rates on debt outstanding
under these facilities at June 29, 2002 ranged from LIBOR plus one and one-
quarter percent to LIBOR plus two percent. These facilities are secured by
inventory and fixed assets or are unsecured. At June 29, 2002,
approximately $28.4 million was available under the revolving credit
facilities, borrowing under these facilities, are intended to be paid
within one year and are classified as current liabilities and $270.2
million was available under the revolving/term borrowing facility. Annual
maturities of long-term debt for the remainder of fiscal 2002 and for the
five years subsequent to June 29, 2002 are: 2002 -- $1.3 million; 2003 --
$6.9 million; 2004 -- $14.5 million; 2005 -- $13.9 million; and 2006 --
$52.5 million.
NOTE E -- INCOME TAXES
Effective January 1, 2002, the Mexican Congress passed the Mexican tax
reform (the "Reform") legislation, which eliminated the previous tax
exemption under Simplified Regime for the Company's Mexico subsidiaries.
The Reform requires the Company's Mexico subsidiaries to calculate and pay
taxes under a new simplified regime pursuant to Mexico's income tax laws
beginning January 1, 2002, subject to certain transitional provisions. The
primary transitional provision was an exit calculation, which generated a
net operating loss carryforward for Mexican income tax purposes.
As a result of the Reform, the Company recognized a tax benefit of
approximately $9.7 million as of January 1, 2002, primarily to reflect the
benefit of the net operating loss carryforward for Mexican tax purposes.
The additional deferred tax assets and liabilities resulting from the
enactment of the Reform effective January 1, 2002 are summarized as follows
(in thousands):
Deferred tax liabilities:
Tax over book depreciation $ 17,468
Inventory valuation 6,905
Other 5,559
Total deferred tax liabilities 29,932
Deferred tax assets:
Mexico net operating losses (47,732)
Other (524)
Total deferred tax asset (48,256)
Less:
Valuation allowance 8,613
Net deferred tax (assets) ($ 9,711)
The valuation allowance reflects the portion of the net operating losses
attributable to certain of the Company's Mexico subsidiaries that currently
do not have significant operations and, accordingly, such losses are
expected to expire unutilized.
The Mexican tax operating loss carryforwards expire in the years ranging
from 2008 through 2012.
NOTE F--RELATED PARTY TRANSACTIONS
The major stockholder of the Company owns a chicken growing and an egg
laying operation.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
JUNE 29, 2002
Transactions with related parties are summarized as follows:
Three Months Ended Nine Months Ended
June 29, June 30, June 29, June 30, 2002 2001 2002 2001
(in thousands)
Contract egg grower fees
to major stockholder $ -- $ 48 $ 8 $ 1,468
Lease payments on commercial
egg property 187 188 563 376
Chick, feed and other sales
to major stockholder 425 344 44,485 38,459
Live chicken purchases
from major stockholder 126 288 44,299 39,341
Loan guaranty fees 579 811 2,227 1,245
Lease payments on airplane 145 164 469 465
On December 29, 2000 the Company entered into an agreement to lease a
commercial egg property and assume all of the ongoing costs of the
operation from the Company's major stockholder. The Company had previously
purchased the eggs produced from this operation pursuant to a contract
grower agreement. The lease term runs for ten years with a monthly lease
payment of $62,500. The Company has an option to extend the lease for an
additional five years, with an option at the end of the lease to purchase
the property at fair market value as determined by an independent
appraisal.
The Company had accounts receivable of approximately $0.1 million at June
29, 2002 from its major stockholder and related parties. Additionally, the
Company had $0.1 million at June 29, 2002 in notes receivable from other
officers of the Company.
NOTE G--CONTINGENCIES
In January of 1998, seventeen of our current and/or former employees filed
the case of "Octavius Anderson, et al. v. Pilgrim's Pride Corporation" in
the United States District Court for the Eastern District of Texas, Lufkin
Division claiming Pilgrim's Pride violated requirements of the Fair Labor
Standards Act. The suit alleged Pilgrim's Pride failed to pay employees
for all hours worked. The suit generally alleged that (1) employees should
be paid for time spent to put on, take off, and clean certain personal gear
at the beginning and end of their shifts and breaks and (2) the use of a
master time card or production "line" time fails to pay employees for all
time actually worked. Plaintiffs sought to recover unpaid wages plus
liquidated damages and legal fees. Approximately 1,700 consents to join as
plaintiffs were filed with the court by current and/or former employees.
During the week of March 5, 2001, the case was tried in the Federal Court
of the Eastern District of Texas, Lufkin, Texas. The Company prevailed at
the trial with a judgment issued by the judge, which found no evidence
presented to support the plaintiffs' allegations. The plaintiffs filed an
appeal in the Fifth Circuit Court of Appeals to reverse the judge's
decision. The plaintiff's brief was submitted to the court on November 5,
2001. Pilgrim's Pride's response to the plaintiff's brief to the Fifth
Circuit Court of Appeals was submitted on December 5, 2001. The Fifth
Circuit heard oral arguments in this matter on June 4, 2002. On June 6,
2002 the Fifth Circuit Court of Appeals entered a per curiam opinion
affirming the opinion of the trial court. Appellants did not file any
motion for a rehearing and the time for filing of such a motion has passed.
In August of 2000, four of our current and/or former employees filed the
case of "Betty Kennell, et al. v. Wampler Foods, Inc." in the United
States District Court for the Northern District of West Virginia, claiming
we violated requirements of the Fair Labor Standards Act. The suit
generally makes the same allegations as Anderson v. Pilgrim's Pride
discussed above. Plaintiffs seek to recover unpaid wages plus liquidated
damages and legal fees. Approximately 150 consents to join as plaintiffs
were filed with the court by current and/or former employees. No trial
date has been set. To date, only limited discovery has been performed.
Neither the likelihood of an unfavorable outcome nor the amount of ultimate
liability, if any, with respect to this case can be determined at this
time. We do not expect this matter, individually or collectively, to have
a material impact on our financial position, operations or liquidity.
On August 20, 1999, the former WLR Foods brought legal action as a
plaintiff in an antitrust lawsuit filed in the U.S. District Court in
Washington D.C. alleging a world-wide conspiracy by approximately 34 named
defendants to control production capacity and raise prices of common
vitamins such as A, B-4, C, and E. The Company, as successor to WLR Foods
in this suit, received $8.5 million in the third quarter of fiscal 2002 in
partial settlement of its claims, $3.3 million of which was recorded by the
Company as a component of "Other Expense (Income): Miscellaneous, Net" in
the third quarter of fiscal 2002 as the recovery amount received during the
period exceeded the $5.2 million recovery amount recorded at the time of
the acquisition of WLR Foods. The initial estimate of the amount that
would be recovered under the WLR Foods claims was based on the ratio of
recoveries to vitamin purchases, that was inherent in similar claims
settled by the Company in fiscal 2001 on substantially similar claims. To
date, claims related to approximately one-third of the WLR Foods affected
vitamin purchases have been settled by or on behalf of the former WLR Foods
netting the approximately $10.0 million to the former WLR Foods and/or the
Company. No assurances can be made regarding the likelihood or timing of
future settlements or whether or not future recoveries, if any, will be
proportionally less than, equal to or greater than these previous recovery
amounts.
AS DESCRIBED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", THE COMPANY HAS INCURRED AND EXPECTS
TO INCUR SIGNIFICANT LOSSES ASSOCIATED WITH THE OUTBREAK OF LOW-PATHOGENIC
AVIAN INFLUENZA, A DISEASE CONTAGIOUS TO TURKEY, CHICKEN AND OTHER BIRDS,
WAS DISCOVERED IN VIRGINIA DURING THE SECOND AND THIRD QUARTERS OF FISCAL
2002.
ON JUNE 19, 2002, U.S. SECRETARY OF AGRICULTURE ANN VENEMAN PROPOSED TO THE
OFFICE OF MANAGEMENT AND BUDGET THAT THE U.S. DEPARTMENT OF AGRICULTURE
COVER ONE-HALF, OR AN ESTIMATED $69.2 MILLION, OF THE TOTAL ESTIMATED
ECONOMIC LOSS SUFFERED BY THE POULTRY INDUSTRY AND INDEPENDENT GROWERS IN
VIRGINIA DUE TO THE AVIAN INFLUENZA OUTBREAK. SECRETARY VENEMAN ALSO
RECOMMENDED THAT THE GOVERNMENT OF VIRGINIA COVER THE REMAINING PORTION.
IT IS OUR UNDERSTANDING THAT, AS PART OF HER PROPOSAL SECRETARY VENEMAN IS
SUGGESTING THAT INDEPENDENT CHICKEN AND TURKEY GROWERS WILL BE FULLY
COMPENSATED FOR THEIR LOSSES FIRST AND THAT THE REMAINDER IS TO BE
ALLOCATED TO OTHER POULTRY PRODUCERS (INCLUDING THE COMPANY) WHOSE FLOCKS
WERE DESTROYED BY THE VIRUS. THE COMPANY ESTIMATES THAT APPROXIMATELY 5-
7% OF THE TOTAL ECONOMIC LOSS SUFFERED BY THE INDUSTRY WAS BORNE BY
INDEPENDENT CHICKEN AND TURKEY GROWERS. NO ASSURANCE CAN BE GIVEN THAT ANY
OF THE UNITED STATES FEDERAL OR STATE AGENCIES WILL IN FACT PROVIDE
ECONOMIC ASSISTANCE TO THE POULTRY GROWERS AND PRODUCERS AFFECTED BY THE
AVIAN INFLUENZA OUTBREAK IN THE COMMONWEALTH OF VIRGINIA, NOR CAN WE
ESTIMATE WHEN, IF EVER, SUCH ECONOMIC ASSISTANCE WILL BE DISTRIBUTED TO THE
AFFECTED PARTIES. NO ANTICIPATED RECOVERIES HAVE BEEN RECORDED BY THE
COMPANY. IN THE EVENT THAT FEDERAL AND/OR STATE AGENCIES DO DECIDE TO
GRANT ECONOMIC ASSISTANCE TO THE AFFECTED POULTRY GROWERS AND PRODUCERS, IT
IS IMPOSSIBLE AT THIS TIME TO ESTIMATE HOW THE FEDERAL AND/OR STATE
AGENCIES WILL ALLOCATE ANY SUCH ASSISTANCE BETWEEN AFFECTED POULTRY GROWERS
AND PRODUCERS WHOSE FLOCKS WERE DESTROYED BY THE VIRUS.
NOTE H--BUSINESS SEGMENTS
Since the acquisition of WLR Foods on January 27, 2001, the Company
operates in two reportable business segments as (1) a producer of chicken
and other products and (2) a producer of turkey products.
The Company's chicken and other products segment primarily includes sales
of chicken products the Company produces and purchases for resale in the
United States and Mexico, and also includes table eggs and feed. The
Company's chicken and other products segment conducts separate operations
in the United States and Mexico and is reported as two separate
geographical areas. The Company's turkey segment includes sales of turkey
products produced in our turkey operation recently acquired from WLR Foods,
whose operations are exclusively in the United States.
Inter-area sales and inter-segment sales, which are not material, are
accounted for at prices comparable to normal trade customer sales.
Corporate assets and expenses are included with chicken and other products.
The following table presents certain information regarding the Company's
segments:
Three Months Ended Nine Months Ended
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001* 2002 2001
(in thousands)
Net Sales to Customers:
Chicken and Other Products:
United States $ 476,232 $ 468,704 $1,373,859 $1,179,165
Mexico 84,805 89,752 256,097 244,076
Sub-total 561,037 558,456 1,629,956 1,423,241
Turkey 76,079 87,380 263,943 150,220
Total $ 637,116 $ 645,836 $1,893,899 $1,573,461
Operating Income(Loss):
Chicken and Other Products:
United States $ 13,829 $ 27,971 $ 28,156 $ 50,398
Mexico 5,831 13,766 13,788 11,145
Sub-total 19,660 41,737 41,944 61,543
Turkey (5,614) 3,749 (8,940) 1,883
Total $ 14,046 $ 45,486 $ 33,004 $ 63,426
Depreciation and Amortization:
Chicken and Other Products:
Unite States $ 11,896 $ 13,275 $ 35,240 $ 26,790
Mexico 3,395 3,123 10,189 8,864
Sub-total 15,291 16,398 45,429 35,654
Turkey 2,523 2,210 7,430 3,774
Total $ 17,814 $ 18,608 $ 52,859 $ 39,428
* In 2001, the Company identified certain products produced by the former
WLR Foods that were included in United States Chicken and Other Products
net sales but were more properly classified as Turkey Net Sales. As a
result, $8.6 million has been reclassified from United States Chicken and
Other Products net sales to Turkey Net Sales for the three months ended
June 30, 2001. Additionally, $2.1 million has been reclassified from
United States Chicken and Other Products operating income to Turkey
operating income to properly reflect operating income after the
reclassification of the net sales for the three months ended June 30, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Profitability in the poultry industry is materially affected by the
commodity prices of feed ingredients, chicken and turkey, which are
determined by supply and demand factors. As a result, the chicken and
turkey industries are subject to cyclical earnings fluctuations. Cyclical
earnings fluctuations can be mitigated somewhat by:
* Business strategy;
* Product mix;
* Sales and marketing plans; and
* Operating efficiencies.
In an effort to reduce price volatility and to generate higher, more
consistent profit margins, we have concentrated on the production and
marketing of prepared foods products. Prepared foods products generally
have higher profit margins than our other products. Also, the production
and sale in the U.S. of prepared foods products reduce the impact of the
costs of feed ingredients on our profitability. Feed ingredient purchases
are the single largest component of our cost of goods sold, representing
approximately 29.9% of our consolidated cost of goods sold in fiscal 2001.
The production of feed ingredients is positively or negatively affected
primarily by weather patterns throughout the world, the global level of
supply inventories and demand for feed ingredients, and the agricultural
policies of the United States and foreign governments. As further
processing is performed, feed ingredient costs become a decreasing
percentage of a product's total production cost, thereby reducing their
impact on our profitability. Products sold in this form enable us to charge
a premium, reduce the impact of feed ingredient costs on our profitability
and improve and stabilize our profit margins.
The following table presents certain information regarding our segments:
Three Months Ended Nine Months Ended
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001* 2002 2001
(in thousands)
Net Sales to Customers:
Chicken and Other Products:
United States $ 476,232 $ 468,704 $1,373,859 $1,179,165
Mexico 84,805 89,752 256,097 244,076
Sub-total 561,037 558,456 1,629,956 1,423,241
Turkey 76,079 87,380 263,943 150,220
Total $ 637,116 $ 645,836 $1,893,899 $1,573,461
Operating Income(Loss):
Chicken and Other Products:
United States $ 13,829 $ 27,971 $ 28,156 $ 50,398
Mexico 5,831 13,766 13,788 11,145
Sub-total 19,660 41,737 41,944 61,543
Turkey (5,614) 3,749 (8,940) 1,883
Total $ 14,046 $ 45,486 $ 33,004 $ 63,426
Depreciation and Amortization:
Chicken and Other Products:
Unite States $ 11,896 $ 13,275 $ 35,240 $ 26,790
Mexico 3,395 3,123 10,189 8,864
Sub-total 15,291 16,398 45,429 35,654
Turkey 2,523 2,210 7,430 3,774
Total $ 17,814 $ 18,608 $ 52,859 $ 39,428
* In 2001, the Company identified certain products produced by the former
WLR Foods that were included in United States Chicken and Other Products
net sales but were more properly classified as Turkey Net Sales. As a
result, $8.6 million has been reclassified from United States Chicken and
Other Products net sales to Turkey Net Sales for the three months ended
June 30, 2001. Additionally, $2.1 million has been reclassified from
United States Chicken and Other Products operating income to Turkey
operating income to properly reflect operating income after the
reclassification of the net sales for the three months ended June 30, 2001.
The following table presents certain items as a percentage of net sales for
the periods indicated.
Percentage of Net Sales
Three Months Ended Nine Months Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Costs and Expenses:
Cost of sales 92.6 88.3 93.0 90.3
Gross profit 7.4 11.7 7.0 9.7
Selling, general and
administrative 5.2 4.7 5.3 5.6
Operating Income 2.2 7.0 1.7 4.0
Interest Expense 1.4 1.6 1.3 1.3
Income before Income
Taxes 1.0 5.3 0.5 2.6
Net Income 0.5 3.9 0.9 1.8
RESULTS OF OPERATIONS
On January 27, 2001, we completed the acquisition of WLR Foods, a
vertically integrated producer of chicken and turkey products located in
the eastern United States. Accordingly, the results of the former WLR
Foods' operations are included in our third quarter ended and first nine
months ended June 29, 2002. In the prior fiscal year, WLR Foods' results
are included in our third quarter ended June 29, 2002 from and after
January 27, 2001 are included in our first nine months ended June 29, 2001.
ON MARCH 12, 2002 AN OUTBREAK OF LOW-PATHOGENIC AVIAN INFLUENZA, A DISEASE
CONTAGIOUS TO TURKEY, CHICKEN AND OTHER BIRDS, WAS DISCOVERED IN
VIRGINIA. DURING THE SECOND AND THIRD QUARTERS OF FISCAL 2002, WE ESTIMATE
THAT OUR OPERATING INCOME HAS BEEN NEGATIVELY IMPACTED BY APPROXIMATELY
$5.5 MILLION AND $14.9 MILLION, RESPECTIVELY, DUE TO THE NEGATIVE IMPACT OF
THE AVIAN INFLUENZA. AS OF JUNE 29, 2002, POULTRY GROWERS AND PRODUCERS
HAVE DESTROYED APPROXIMATELY 4.7 MILLION HEAD OF POULTRY AFFECTED AS A
RESULT OF THE VIRUS. TURKEYS REPRESENT APPROXIMATELY 70.0% OF THE
DESTROYED POULTRY, WITH CHICKENS REPRESENTED BY APPROXIMATELY 30.0%.
APPROXIMATELY ONE-HALF OF THE TURKEYS AND APPROXIMATELY THREE-QUARTERS OF
THE CHICKENS DESTROYED BY THE POULTRY INDUSTRY IN VIRGINIA BELONGED TO THE
COMPANY. NO NEW FLOCKS HAVE TESTED POSITIVE FOR THE PRESENCE OF AVIAN
INFLUENZA IN VIRGINIA SINCE JULY 2, 2002. ASSUMING THE OUTBREAK OF AVIAN
INFLUENZA HAS BEEN CONTAINED, WE CURRENTLY ESTIMATE THAT PRODUCTION IN OUR
TURKEY OPERATION WILL BE SIGNIFICANTLY REDUCED OVER THE NEXT NINE MONTHS
DUE TO THE VIRUS. AS A RESULT OF THE LOWER PRODUCTION IN OUR TURKEY
OPERATION, WE ANTICIPATE THAT OPERATING INCOME FROM OUR TURKEY OPERATION
WILL DECREASE BY AN ESTIMATED $6.0 TO $8.0 MILLION, IN THE FOURTH QUARTER
OF FISCAL 2002, WHEN COMPARED TO THE SAME PERIOD IN FISCAL 2001.
FURTHERMORE, WE ANTICIPATE THAT OPERATING INCOME FROM OUR TURKEY OPERATION
FOR THE FIRST SIX MONTHS OF FISCAL 2003 WILL DECREASE BY APPROXIMATELY $8.0
TO $14.0 MILLION, WHEN COMPARED TO THE FIRST SIX MONTHS OF FISCAL 2002. ON
JUNE 19, 2002, U.S. SECRETARY OF AGRICULTURE ANN VENEMAN PROPOSED TO THE
OFFICE OF MANAGEMENT AND BUDGET THAT THE U.S. DEPARTMENT OF AGRICULTURE
COVER ONE-HALF, OR AN ESTIMATED $69.2 MILLION OF THE TOTAL ESTIMATED
ECONOMIC LOSS SUFFERED BY THE POULTRY INDUSTRY AND INDEPENDENT GROWERS IN
VIRGINIA DUE TO THE AVIAN INFLUENZA OUTBREAK. SECRETARY VENEMAN ALSO
RECOMMENDED THAT THE GOVERNMENT OF VIRGINIA COVER THE REMAINING PORTION. IT
IS OUR UNDERSTANDING THAT, AS PART OF HER PROPOSAL SECRETARY VENEMAN IS
SUGGESTING THAT INDEPENDENT CHICKEN AND TURKEY GROWERS WILL BE FULLY
COMPENSATED FOR THEIR LOSSES FIRST AND THAT THE REMAINDER IS TO BE
ALLOCATED TO OTHER POULTRY PRODUCERS (INCLUDING THE COMPANY) WHOSE FLOCKS
WERE DESTROYED BY THE VIRUS. THE COMPANY ESTIMATES THAT APPROXIMATELY 5-
7% OF THE TOTAL ECONOMIC LOSS SUFFERED BY THE INDUSTRY WERE BORNE BY THESE
INDEPENDENT CHICKEN AND TURKEY GROWERS. NO ASSURANCE CAN BE GIVEN THAT ANY
OF THE UNITED STATES FEDERAL OR STATE AGENCIES WILL IN FACT PROVIDE
ECONOMIC ASSISTANCE TO THE POULTRY GROWERS AND PRODUCERS AFFECTED BY THE
AVIAN INFLUENZA OUTBREAK IN THE COMMONWEALTH OF VIRGINIA, NOR CAN WE
ESTIMATE WHEN, IF EVER, SUCH ECONOMIC ASSISTANCE WILL BE DISTRIBUTED TO THE
AFFECTED PARTIES. NO ANTICIPATED RECOVERIES HAVE BEEN RECORDED BY THE
COMPANY. IN THE EVENT THAT FEDERAL AND/OR STATE AGENCIES DO DECIDE TO
GRANT ECONOMIC ASSISTANCE TO THE AFFECTED POULTRY GROWERS AND PRODUCERS, IT
IS IMPOSSIBLE AT THIS TIME TO ESTIMATE HOW THE FEDERAL AND/OR STATE
AGENCIES WILL ALLOCATE ANY SUCH ASSISTANCE BETWEEN AFFECTED POULTRY GROWERS
AND PRODUCERS WHOSE FLOCKS WERE DESTROYED BY THE VIRUS.
Consolidated net income before tax is affected by foreign exchange rate
fluctuations between the U.S. dollar and the Mexican peso. In the third
quarter of fiscal 2002 the devaluation of the Mexican peso in relation to
the U.S. dollar had a negative impact on our consolidated income before tax
of approximately $5.5 million, which includes a $2.1 million reduction in
operating income, a $2.3 million in a translation cost and a $1.1 million
devaluation of inventories. Additionally, assuming the peso exchange rate
does not change from the rate at the end of the fourth quarter of fiscal
2002, approximately $1.9 million of future devaluation will result as
remaining inventory is sold. On March 29, 2002, the Mexican peso closed at
9.02 to 1 U.S. dollar, compared to 9.97 to 1 U.S. dollar on June 28, 2002,
and at 9.68 to 1 U.S. dollar on July 25, 2002. No assurances can be given
as to how future movements in the peso could affect our future earnings.
FISCAL THIRD QUARTER 2002 COMPARED TO FISCAL THIRD QUARTER 2001
CONSOLIDATED NET SALES. Consolidated net sales were $637.1 million for the
third quarter of fiscal 2002, a decrease of $8.7 million, or 1.4%, from the
third quarter of fiscal 2001. The decrease in consolidated net sales
resulted from an $11.3 million decrease in turkey sales to $76.1 million
and a $4.9 million decrease in Mexico chicken sales to $84.8 million
partially offset by a $4.9 million increase in sales of other U.S. products
to $50.6 million and by a $2.6 million increase in U.S. chicken sales to
$425.6 million.
The decrease in turkey sales was primarily due to an 8.0% decrease in total
revenue per dressed pound produced and a 5.4% decrease in dressed pounds
produced, both of which were affected by the avian influenza outbreak late
in the second quarter of fiscal 2002, discussed above. The decrease in
Mexico sales was primarily due to a 4.7% decrease in total revenue per
dressed pound produced and a 0.9% decrease in dressed pounds produced.
U.S. chicken net sales were also negatively affected by lower dark meat
sales prices in the U.S. caused in part by import restrictions of products
typically sold to Russia and Japan.
COST OF SALES. Consolidated cost of sales was $590.1 million in the third
quarter of fiscal 2002, an increase of $19.9 million, or 3.5%, compared to
the third quarter of fiscal 2001. The U.S. operations accounted for $17.1
million of the increase in the cost of sales and $2.8 million of the
increase resulted from our Mexico operations.
The $17.1 million cost of sales increase in our U.S. operations was due to
a 5.4% increase in dressed pounds produced and to a 4.5% increase in
average cost of sales per dressed pound primarily resulting from increased
sales of higher cost prepared foods products and by a $1.1 million write
down in live-chicken inventory infected by avian influenza. The increases
were partially offset by a $7.3 million decrease in our turkey cost of
sales primarily resulting from lower turkey sales volumes and increased
production and storage of turkey inventories for the Thanksgiving holiday
season attributed to product mix changes in response to the avian influenza
outbreak, offset by a $9.7 million increase in turkey cost of sales related
to inventory write downs of infected flocks and higher costs related to the
management of the virus.
The $2.8 million increase in cost of sales in our Mexico operations was
primarily due to a 5.0% increase in average cost of sales per dressed pound
offset by a slight decrease in dressed pounds produced.
GROSS PROFIT. Gross profit was $47.0 million for the third quarter of
fiscal 2002, a decrease of $28.6 million, or 37.8%, over the same period
last year. Gross profit as a percentage of sales decreased to 7.4% in the
third quarter of fiscal 2002, from 11.7% in the third quarter of fiscal
2001 due primarily to the negative effects of the avian influenza outbreak
in our Eastern Division and to lower dark meat sales prices in the U.S.
caused in part by import restrictions on products typically sold to Russia
and Japan.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $33.0 million in the third quarter
of fiscal 2002 and $30.1 million in the third quarter of fiscal 2001.
Consolidated selling, general and administrative expenses as a percentage
of sales increased in the third quarter of fiscal 2002 to 5.2%, compared to
4.7% in the third quarter of fiscal 2001, due primarily to an increase in
selling and administrative expense resulting from higher sales volume.
OPERATING INCOME. Consolidated operating income was $14.0 million for the
third quarter of fiscal 2002, decreasing by approximately $31.4 million,
when compared to the third quarter of fiscal 2001 due primarily to the
negative effects of the avian influenza outbreak in our Eastern Division
and to lower dark meat sales prices in the U.S. caused in part by import
restrictions on products typically sold to Russia and Japan.
INTEREST EXPENSE. Consolidated net interest expense decreased 9.8% to $9.0
million in the third quarter of fiscal 2002, when compared to $10.0 million
for the third quarter of fiscal 2001, due primarily to lower average
outstanding debt balances experienced in the quarter.
INCOME TAX EXPENSE. Consolidated income tax expense in the third quarter
of fiscal 2002 decreased to $3.3 million, compared to $9.1 million in the
third quarter of fiscal 2001. This decrease in income tax expense resulted
primarily from lower earnings in the U.S. and Mexico.
The effective tax rate for the third quarter ended June 29, 2002 was 49.9%,
which resulted primarily from the nondeductible foreign currency exchange
losses realized during the quarter.
FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO FIRST NINE MONTHS OF FISCAL
2001
CONSOLIDATED NET SALES. Consolidated net sales were $1.9 billion for the
first nine months of fiscal 2002, an increase of $320.4 million, or 20.4%,
from the first nine months of fiscal 2001. The increase in consolidated net
sales resulted from a $178.8 million increase in U.S. chicken sales to $1.2
billion, a $113.7 million increase in turkey sales to $263.9 million, a
$12.0 million increase in Mexico chicken sales to $256.1 million and a
$15.9 million increase in sales of other U.S. products to $149.9 million.
The increase in U.S. chicken sales was primarily due to a 21.6% increase in
dressed pounds produced, which resulted primarily from the acquisition of
WLR Foods on January 27, 2001 (resulting in only five months of these
operations being included in the Company's same period last year,) offset
partially by a 3.7% decrease in total revenue per dressed pound produced.
The increase in turkey sales was due to the inclusion of nine months of
results in fiscal 2002 as opposed to five months results for the same
period last year as a result of the acquisition of WLR Foods. The $12.0
million increase in Mexico chicken sales was primarily due to a 4.9%
increase in average revenue per dressed pound produced offset partially by
a 0.4% decrease in dressed pounds produced. The $15.9 million increase in
sales of other U.S. products was primarily due to poultry by-products sales
price increases, an increase in sales by the Company's wholesale feed
division and the acquisition of WLR Foods.
COST OF SALES. Consolidated cost of sales was $1.8 billion in the first
nine months of fiscal 2002, an increase of $339.0 million, or 23.8% when
compared to the first nine months of fiscal 2001. The U.S. operations
accounted for $332.8 million of the increase in the cost of sales and our
Mexico operations accounted for $6.2 million of the increase.
The cost of sales increase in our U.S. operations of $332.8 million was due
primarily to the acquisition of WLR Foods, $113.6 million of which is
related to the turkey operations. The increase was partially offset by a
decrease in our turkey cost of sales resulting from lower sales volumes due
to the impact of avian influenza on our turkey operations as previously
discussed and increased production and storage of turkey inventories for
the Thanksgiving holiday season attributed to product mix changes in
response to the avian influenza outbreak, offset by a $15.2 million
increase in turkey cost of sales related to inventory write downs of
infected flocks and higher costs related to the management of the virus.
The increase in cost of sales of chicken products also resulted from
increased sales of higher cost prepared foods products.
The $6.2 million cost of sales increase in our Mexico operations was
primarily due to a 2.9% increase in average cost of sales per pound
produced.
GROSS PROFIT. Gross profit was $133.5 million for the first nine months of
fiscal 2002, a decrease of $18.5 million, or 12.2%, over the same period
last year, due primarily to the negative effects of the avian influenza
outbreak in our Eastern Division.
Gross profit as a percentage of sales decreased to 7.0% in the first nine
months of fiscal 2002, from 9.7% in the first nine months of fiscal 2001,
primarily due to increased operating expenses incurred in connection with
the avian influenza outbreak in our Eastern Division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $100.5 million in the first nine
months of fiscal 2002 and $88.6 million in the first nine months of fiscal
2001. The $11.9 million increase was due primarily to the acquisition of
WLR Foods which was completed on January 27, 2001. Consolidated selling,
general and administrative expenses as a percentage of sales decreased in
the first nine months of fiscal 2002 to 5.3%, compared to 5.6% in the first
nine months of fiscal 2001, due primarily to synergies resulting from the
WLR Foods acquisition.
OPERATING INCOME. Consolidated operating income was $33.0 million for the
first nine months of fiscal 2002, decreasing by approximately $30.4
million, when compared to the first nine months of fiscal 2001 primarily
due to the effects of the avian influenza outbreak in the company's Eastern
Division.
INTEREST EXPENSE. Consolidated net interest expense increased 17.1% to
$24.9 million in the first nine months of fiscal 2002, when compared to
$21.2 million for the first nine months of fiscal 2001, due to higher
average outstanding balances resulting primarily from the acquisition of
WLR Foods, Inc. on January 27, 2001, offset partially by lower average
interest rates.
INCOME TAX EXPENSE. Consolidated income tax benefit in the first nine
months of fiscal 2002 was $7.5 million compared to an income tax expense of
$13.1 million in the first nine months of fiscal 2001. This decrease was a
result of a $9.7 million income tax benefit resulting from changes in the
Mexico tax laws and from lower pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
WE MAINTAIN $130.0 MILLION IN REVOLVING CREDIT FACILITIES AND $400.0
MILLION IN A SECURED REVOLVING/TERM BORROWING FACILITY. THE $400.0 MILLION
REVOLVING/TERM BORROWING FACILITY PROVIDES FOR $285.0 MILLION AND $115.0
MILLION OF 10-YEAR AND 7-YEAR COMMITMENTS, RESPECTIVELY. BORROWINGS UNDER
THIS FACILITY ARE SPLIT PRO RATA BETWEEN THE 10-YEAR AND 7-YEAR MATURITIES
AS THEY OCCUR. THE CREDIT FACILITIES PROVIDE FOR INTEREST AT RATES RANGING
FROM LIBOR PLUS FIVE-EIGHTHS PERCENT TO LIBOR PLUS TWO AND THREE-QUARTERS
PERCENT, DEPENDING UPON OUR TOTAL DEBT TO CAPITALIZATION RATIO. INTEREST
RATES ON DEBT OUTSTANDING UNDER THESE FACILITIES AS OF JUNE 29, 2002 RANGED
FROM LIBOR PLUS ONE AND ONE-QUARTER PERCENT TO LIBOR PLUS TWO PERCENT.
THESE FACILITIES ARE SECURED BY INVENTORY AND FIXED ASSETS.
AT JUNE 29, 2002, $28.4 MILLION WAS AVAILABLE UNDER THE REVOLVING CREDIT
FACILITIES AND $270.2 MILLION WAS AVAILABLE UNDER THE REVOLVING/TERM
BORROWING FACILITY.
IN 1998, WE ENTERED INTO AN ASSET SALE AGREEMENT TO SELL UP TO $60 MILLION
OF ACCOUNTS RECEIVABLE, WHICH AGREEMENT EXPIRES IN JUNE 2003. IN
CONNECTION WITH THE ASSET SALE AGREEMENT, WE SELL, ON A REVOLVING BASIS,
CERTAIN OF OUR TRADE RECEIVABLES (THE "POOLED RECEIVABLES") TO A SPECIAL
PURPOSE CORPORATION WHOLLY OWNED BY US, WHICH IN TURN SELLS A PERCENTAGE
OWNERSHIP INTEREST TO THIRD PARTIES. AT JUNE 29, 2002 AND SEPTEMBER 29,
2001, AN INTEREST IN THESE POOLED RECEIVABLES OF $60.0 MILLION AND $58.5
MILLION, RESPECTIVELY, HAD BEEN SOLD TO THIRD PARTIES AND IS REFLECTED AS A
REDUCTION IN ACCOUNTS RECEIVABLE. THESE TRANSACTIONS HAVE BEEN RECORDED AS
SALES IN ACCORDANCE WITH FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO.
140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. THE INCREASE IN POOLED RECEIVABLE SALES
FROM SEPTEMBER 29, 2001 IS INCLUDED IN CASH FLOWS FROM OPERATING ACTIVITIES
IN OUR CONSOLIDATED STATEMENTS OF CASH FLOWS. LOSSES ON THESE SALES WERE
IMMATERIAL.
ON JUNE 29, 1999, THE CAMP COUNTY INDUSTRIAL DEVELOPMENT CORPORATION ISSUED
$25.0 MILLION OF VARIABLE-RATE ENVIRONMENTAL FACILITIES REVENUE BONDS
SUPPORTED BY LETTERS OF CREDIT OBTAINED BY PILGRIM'S PRIDE. WE MAY DRAW
FROM THESE PROCEEDS OVER THE CONSTRUCTION PERIOD FOR NEW SEWAGE AND SOLID
WASTE DISPOSAL FACILITIES AT A POULTRY BY-PRODUCTS PLANT TO BE BUILT IN
CAMP COUNTY, TEXAS. WE ARE NOT REQUIRED TO BORROW THE FULL AMOUNT OF THE
PROCEEDS FROM THE BONDS. ALL AMOUNTS BORROWED FROM THESE FUNDS WILL BE DUE
IN 2029. THE AMOUNTS THAT WE BORROW WILL BE REFLECTED AS DEBT WHEN RECEIVED
FROM THE CAMP COUNTY INDUSTRIAL DEVELOPMENT CORPORATION. THE INTEREST RATES
ON AMOUNTS BORROWED WILL CLOSELY FOLLOW THE TAX-EXEMPT COMMERCIAL PAPER
RATES. PRESENTLY, THERE ARE NO BORROWINGS OUTSTANDING UNDER THE BONDS.
AT JUNE 29, 2002, OUR WORKING CAPITAL DECREASED TO $158.0 MILLION AND OUR
CURRENT RATIO DECREASED TO 1.56 TO 1, COMPARED WITH WORKING CAPITAL OF
$203.4 MILLION AND A CURRENT RATIO OF 1.85 TO 1 AT SEPTEMBER 29, 2001,
PRIMARILY DUE TO INCREASED SHORT TERM BORROWINGS.
TRADE ACCOUNTS AND OTHER RECEIVABLES WERE $91.7 MILLION AT JUNE 29, 2002,
COMPARED TO $95.0 MILLION AT SEPTEMBER 29, 2001. THE 3.5% DECREASE IN TRADE
ACCOUNTS AND OTHER RECEIVABLES WAS PRIMARILY DUE TO NORMAL SEASONAL
VARIATIONS. EXCLUDING THE SALE OF RECEIVABLES, TRADE ACCOUNTS AND OTHER
RECEIVABLES WOULD HAVE DECREASED $1.8 MILLION TO $151.7 MILLION AT THE END
OF THE THIRD QUARTER OF FISCAL 2002 FROM $153.5 MILLION AT THE END OF
FISCAL 2001.
INVENTORIES WERE $331.1 MILLION AT JUNE 29, 2002, COMPARED TO $314.4
MILLION AT SEPTEMBER 29, 2001. THE $16.7 MILLION, OR 5.3%, INCREASE IN
INVENTORIES WAS PRIMARILY DUE TO INCREASES IN FINISHED TURKEY PRODUCTS
INVENTORIES RELATING TO EXPECTED INCREASES IN SALES OF TURKEY PRODUCTS
DURING THE HOLIDAY SEASON.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES DECREASED $15.7 MILLION TO $219.1
MILLION AT JUNE 29, 2002, COMPARED TO $234.8 MILLION AT SEPTEMBER 29, 2001
DUE TO SEASONAL VARIATIONS.
CAPITAL EXPENDITURES OF $56.4 MILLION AND $87.6 MILLION, FOR THE NINE
MONTHS ENDED JUNE 29, 2002 AND JUNE 30, 2001, RESPECTIVELY, WERE INCURRED
PRIMARILY TO ACQUIRE AND EXPAND CERTAIN FACILITIES, IMPROVE EFFICIENCIES,
REDUCE COSTS AND FOR THE ROUTINE REPLACEMENT OF EQUIPMENT. WE ANTICIPATE
SPENDING APPROXIMATELY $75.0 MILLION IN FISCAL 2002 TO IMPROVE EFFICIENCIES
AND FOR THE ROUTINE REPLACEMENT OF EQUIPMENT. WE EXPECT TO FINANCE SUCH
EXPENDITURES WITH AVAILABLE OPERATING CASH FLOWS AND EXISTING CREDIT
FACILITIES.
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES WERE $38.8 MILLION AND $17.3
MILLION FOR THE NINE MONTHS ENDED JUNE 29, 2002 AND JUNE 30, 2001,
RESPECTIVELY. THE INCREASE IN CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
IN THE FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO THE FIRST NINE MONTHS
OF FISCAL 2001 WAS PRIMARILY DUE TO INCREASED DEPRECIATION FROM THE WLR
FOODS ACQUISITION AND DECREASED TRADE ACCOUNTS AND OTHER RECEIVABLES FROM
OUR IMPROVED COLLECTIONS OF THE WLR FOODS ACCOUNTS RECEIVABLE.
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES WERE $7.1 MILLION AND $285.8
MILLION FOR THE NINE MONTH PERIODS ENDED JUNE 29, 2002 AND JUNE 30, 2001,
RESPECTIVELY. THE CASH PROVIDED BY FINANCING ACTIVITIES PRIMARILY REFLECTS
NET OF BORROWINGS. DURING THE NINE MONTHS ENDED MARCH 31, 2001 THE COMPANY
PURCHASED WLR FOODS. USING $239.9 MILLION IN BORROWINGS TO COMPLETE THE
ACQUISITION.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
Our earnings are affected by foreign exchange rate fluctuations related to
the Mexican peso net monetary position of our Mexico subsidiaries. We
manage this exposure primarily by attempting to minimize our Mexican peso
net monetary position, but from time to time we have also considered
executing hedges to help minimize this exposure. Such instruments, however,
have historically not been economically feasible. We are also exposed to
the effect of potential exchange rate fluctuations to the extent that
amounts are repatriated from Mexico to the United States. However, we
currently anticipate that the cash flows of our Mexico subsidiaries will
continue to be reinvested in our Mexico operations. In addition, the
Mexican peso exchange rate can directly and indirectly impact our results
of operations and financial position in several ways, including potential
economic recession in Mexico resulting from a devalued peso. See "Item 1.
Management's Discussion and Analysis of Financial Condition of Operations -
Results of Operations". The impact on our financial position and results
of operations resulting from a hypothetical change in the exchange rate
between the U.S. dollar and the Mexican peso cannot be reasonably
estimated. Foreign currency exchange gains and losses, representing the
change in the U.S. dollar value of the net monetary assets of our Mexico
subsidiaries denominated in Mexican pesos, was a loss of $1.4 million in
the first nine months of fiscal 2002 compared to a gain of $0.4 million for
the first nine months of fiscal 2001. On July 25, 2002, the Mexican peso
closed at 9.68 to 1 U.S. dollar, compared to 9.54 at September 29, 2001. No
assurance can be given as to how future movements in the peso could affect
our future earnings.
There have been no material changes from the information provided in Item
7A of the Company's Annual Report on Form 10-K for the year ended September
29, 2001, other than foreign currency.
FORWARD LOOKING STATEMENTS
Statements of our intentions, beliefs, expectations or predictions for the
future, denoted by the words "anticipate", "believe", "estimate", "expect",
"project", "imply", "intend", "foresee" and similar expressions, are
forward-looking statements that reflect our current views about future
events and are subject to risks, uncertainties and assumptions. Such
risks, uncertainties and assumptions include the following:
* Matters affecting the poultry industry generally, including fluctuations
in the commodity prices of feed ingredients, chicken and turkey;
* Disease outbreaks affecting the production performance and/or
marketability of the Company's poultry products;
* Management of our cash resources, particularly in light of our
substantial leverage;
* Restrictions imposed by, and as a result of, our substantial leverage;
* Currency exchange rate fluctuations, trade barriers, exchange controls,
expropriation and other risks associated with foreign operations;
* Changes in laws or regulations affecting our operations, as well as
competitive factors and pricing pressures;
* Inability to effectively integrate WLR Foods or realize the associated
cost savings and operating synergies currently anticipated; and
* The impact of uncertainties of litigation as well as other risks
described in our filings with the Securities and Exchange Commission.
Actual results could differ materially from those projected in these
forward-looking statements as a result of these factors, among others, many
of which are beyond our control.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January of 1998, seventeen of our current and/or former employees filed
the case of "Octavius Anderson, et al. v. Pilgrim's Pride Corporation" in
the United States District Court for the Eastern District of Texas, Lufkin
Division claiming Pilgrim's Pride violated requirements of the Fair Labor
Standards Act. The suit alleged Pilgrim's Pride failed to pay employees
for all hours worked. The suit generally alleged that (1) employees should
be paid for time spent to put on, take off, and clean certain personal gear
at the beginning and end of their shifts and breaks and (2) the use of a
master time card or production "line" time fails to pay employees for all
time actually worked. Plaintiffs sought to recover unpaid wages plus
liquidated damages and legal fees. Approximately 1,700 consents to join as
plaintiffs were filed with the court by current and/or former employees.
During the week of March 5, 2001, the case was tried in the Federal Court
of the Eastern District of Texas, Lufkin, Texas. The Company prevailed at
the trial with a judgment issued by the judge, which found no evidence
presented to support the plaintiffs' allegations. The plaintiffs filed an
appeal in the Fifth Circuit Court of Appeals to reverse the judge's
decision. The plaintiff's brief was submitted to the court on November 5,
2001. Pilgrim's Pride's response to the plaintiff's brief to the Fifth
Circuit Court of Appeals was submitted on December 5, 2001. The Fifth
Circuit Court of Appeals heard oral arguments in this matter on June 4,
2002. On June 6, 2002 the Fifth Circuit entered a per curiam opinion
affirming the opinion of the trial court. Appellants did not file any
motion for a rehearing and the time for filing of such a motion has passed.
In August of 2000, four of our current and/or former employees filed the
case of "Betty Kennell, et al. v. Wampler Foods, Inc." in the United
States District Court for the Northern District of West Virginia, claiming
we violated requirements of the Fair Labor Standards Act. The suit
generally makes the same allegations as Anderson v. Pilgrim's Pride
discussed above. Plaintiffs seek to recover unpaid wages plus liquidated
damages and legal fees. Approximately 150 consents to join as plaintiffs
were filed with the court by current and/or former employees. No trial
date has been set. To date, only limited discovery has been performed.
Neither the likelihood of an unfavorable outcome nor the amount of ultimate
liability, if any, with respect to this case can be determined at this
time. We do not expect this matter, individually or collectively, to have
a material impact on our financial position, operations or liquidity.
On August 20, 1999, the former WLR Foods brought legal action as a
plaintiff in an antitrust lawsuit filed in the U.S. District Court in
Washington D.C. alleging a world-wide conspiracy by approximately 34 named
defendants to control production capacity and raise prices of common
vitamins such as A, B-4, C, and E. The Company, as successor to WLR Foods
in this suit, received $8.5 million in the third quarter of fiscal 2002 in
partial settlement of its claims, $3.3 million of which was recorded by the
Company as a component of "Other Expense (Income): Miscellaneous, Net" in
the third quarter of fiscal 2002 as the recovery amount received during the
period exceeded the $5.2 million recovery amount recorded at the time of
the acquisition of WLR Foods. The initial estimate of the amount that
would be recovered under the WLR Foods claims was based on the ratio of
recoveries to vitamin purchases, that was inherent in similar claims
settled by the Company in 2001 on substantially similar claims. To date,
claims related to approximately one-third of the affected vitamin purchases
have been settled by or on behalf of the former WLR Foods netting
approximately $10.0 million to the former WLR Foods and/or the Company. No
assurances can be made regarding the likelihood or timing of future
settlements or whether or not future recoveries, if any, will be
proportionally less than, equal to or greater than these previous recovery
amounts..
The Company is subject to various other 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, results of operations or
cash flows of the Company.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
JUNE 29, 2002
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
EXHIBIT NUMBER
10.36 First Amendment to Amended and Restated Credit Agreement made as
of December 14, 2001 by and among the Company, CoBank, ACB,
individually and as agent for the benefit of the present and
future lenders, Farm Credit Services of America, FLCA,
individually and as a co-arranger, and the lenders parties thereto
individually.
10.37 Second Amendment to Amended and Restated Credit Agreement made as
of June 17, 2002 by and among the Company, CoBank, ACB,
individually and as agent for the benefit of the present and
future lenders, Farm Credit Services of America, FLCA,
individually and as co-arranger, and the lenders parties thereto
individually.
b. The Company filed a current report on Form 8-K on April 25, 2002 and a
current report on Form 8-K/A on April 26, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PILGRIM'S PRIDE CORPORATION
/s/ Richard A. Cogdill
Date JULY 26, 2002 Richard A. Cogdill
Executive Vice President and
Chief Financial Officer and
Secretary and Treasurer
in his respective capacity as such
EXHIBIT 10.36
-------------
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT ("FIRST
AMENDMENT") is made as of December 14, 2001 ("Execution Date"), by and
between COBANK, ACB ("COBANK") as the Administrative, Documentation and
Collateral Agent for the benefit of the present and future Syndication
Parties (in its capacity as Administrative Agent and Collateral Agent, the
"ADMINISTRATIVE AGENT"), Lead Arranger and Book Manager, and as a
Syndication Party, FARM CREDIT SERVICES OF AMERICA, FLCA, as Co-Arranger
and as a Syndication Party, the Syndication Parties identified in SCHEDULE
1 hereto, and PILGRIM'S PRIDE CORPORATION, a Delaware corporation, whose
address is 110 South Texas Street, Pittsburg, Texas 75686, ("BORROWER").
R E C I T A L S
A. CoBank, in its capacity as Administrative and Documentation Agent
for the benefit of the present and future Syndication Parties, Lead
Arranger and Book Manager, and as a Syndication Party, Farm Credit Services
of America, FLCA as Co-Arranger and as a Syndication Party and certain
other Syndication Parties, and Borrower, entered into that certain Amended
and Restated Credit Agreement dated as of November 16, 2000 (as amended,
modified, supplemented, restated or replaced from time to time, the "CREDIT
AGREEMENT") pursuant to which the Syndication Parties agreed to make to
Borrower (a) a 7 Year Loan in the amount of $115,000,000 and (b) a 10 Year
Loan in the amount of $285,000,000 upon the terms and conditions set forth
in the Credit Agreement.
B. Borrower now desires to amend the Credit Agreement to extend
certain Appraisal deadlines, which the Syndication Parties are willing to
do under the terms and conditions as set forth in this First Amendment.
A G R E E M E N T S
Now, therefore, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Borrower, Administrative Agent
and the Syndication Parties hereby agree as follows:
1. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is hereby
amended as of the Effective Date as follows:
a. Subsection 10.2.12(a)(i) of the Credit Agreement shall be
amended in its entirety to read as follows:
(i) on December 14, 2002 and on each two year anniversary
thereof, provided that if the Leverage Ratio for the Fiscal Quarter
immediately preceding (or ending on) such date is less than fifty percent
(50%), this requirement will be deferred on a Fiscal Quarter basis so long
as such ratio is maintained, provided further that, unless otherwise agreed
by the Required Lenders, any such deferrals shall be for no more than 24
months, so that in any event an Appraisal will be required no later than
four years after the date the last previous Appraisal was required; and.
2. CONDITIONS TO EFFECTIVENESS OF THIS FIRST AMENDMENT. The
effectiveness of this First Amendment is subject to satisfaction, in the
Administrative Agent's sole discretion, of each of the following conditions
precedent (such date being the "Effective Date"):
a. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Borrower shall be true and correct in all material respects
on and as of the Effective Date as though made on and as of such date.
b. NO EVENT OF DEFAULT. No Event of Default shall have occurred
and be continuing under the Credit Agreement as of the Effective Date of
this First Amendment.
3. GENERAL PROVISIONS.
a. NO OTHER MODIFICATIONS. The Credit Agreement shall remain in
full force and effect except as specifically amended by this First
Amendment
b. DEFINITIONS. Capitalized terms shall have the meanings set
forth herein, if defined herein. Capitalized terms used, but not defined,
herein shall have the meanings given to such terms in the Credit Agreement
if defined therein.
c. SEVERABILITY. Should any provision of this First Amendment be
deemed unlawful or unenforceable, said provision shall be deemed several
and apart from all other provisions of this First Amendment and all
remaining provisions of this First Amendment shall be fully enforceable.
d. GOVERNING LAW. This First Amendment shall be governed by,
interpreted and enforced in accordance with the laws of the State of
Colorado.
e. HEADINGS. The captions or headings in this First Amendment are
for convenience only and in no way define, limit or describe the scope or
intent of any provision of this First Amendment.
f. COUNTERPARTS. This First Amendment may be executed by the
parties hereto in separate counterparts, each of which, when so executed
and delivered, shall be an original, but all such counterparts shall
together constitute one and the same instrument. Each counterpart may
consist of a number of copies hereof, each signed by less than all, but
together signed by all, of the parties hereto. Telefax copies of documents
or signature pages bearing original signatures, and executed documents or
signature pages delivered by telefax, shall, in each such instance, be
deemed to be, and shall constitute and be treated as, an original signed
document or counterpart, as applicable.
This First Amendment is executed as of the Execution Date.
BORROWER:
PILGRIM'S PRIDE CORPORATION
By: /S/ RICHARD A. COGDILL
Name: RICHARD A. COGDILL
Title: EXECUTIVE VICE PRESIDENT, CFO
ADMINISTRATIVE AGENT:
COBANK, ACB
By: /S/ KENNETH L. WARLICK
Name: KENNETH L. WARLICK
Title: VICE PRESIDENT
CO-ARRANGER:
FARM CREDIT SERVICES OF AMERICA, FLCA
By: /S/ NATHAN F. BURNHAM
Name: NATHAN F. BURNHAM
Title: VICE PRESIDENT
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
SYNDICATION PARTIES:
COBANK, ACB
By: /S/ KENNETH L. WARLICK
Name: Kenneth L. Warlick
Title: Vice President
FARM CREDIT SERVICES OF AMERICA, FLCA
By: /S/ NATHAN F. BURNHAM
Name: Nathan F. Burnham
Title: Vice President
CREDIT AGRICOLE INDOSUEZ
By: /S/ BRADLEY C. PETERSON / THEODORE D.
TICE
Name: Bradley C. Peterson / Theodore D. Tice
Title: First Vice President / Vice
President,
Senior Relationship
Manager
HARRIS TRUST AND SAVINGS BANK
By: /S/ CURTIS FLAMMINI
Name: Curtis Flammini
Title: Vice President
SUNTRUST BANK
By: /S/ HUGH E. BROWN
Name: Hugh E. Brown
Title: Vice President
DEERE CREDIT, INC.
By: /S/ RAYMOND L. MURPHEY
Name: Raymond L. Murphey
Title: Senior Account Credit Manager
U.S. BANK, National Association (INDIVIDUALLY
AND AS SUCCESSOR BY MERGER TO FIRSTAR BANK,
N.A.)
By: /S/ ALAN V. SCHULER
Name: Alan V. Schuler
Title: Vice President
BANK OF TEXAS
By: /S/ DAVID BROUSSARD, JR.
Name: David Broussard, Jr.
Title: Sr. Vice President
Exhibit 10.37
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
("SECOND AMENDMENT") is made as of June 17, 2002 ("EXECUTION DATE"), by and
between COBANK, ACB ("COBANK") as the Administrative, Documentation and
Collateral Agent for the benefit of the present and future Syndication
Parties (in its capacity as Administrative Agent and Collateral Agent, the
"ADMINISTRATIVE AGENT"), Lead Arranger and Book Manager, and as a
Syndication Party, FARM CREDIT SERVICES OF AMERICA, FLCA, as Co-Arranger
and as a Syndication Party, the Syndication Parties whose signatures appear
below, and PILGRIM'S PRIDE CORPORATION, a Delaware corporation, whose
address is 110 South Texas Street, Pittsburg, Texas 75686, ("BORROWER").
R E C I T A L S
A. CoBank, in its capacity as Administrative and Documentation Agent
for the benefit of the present and future Syndication Parties, Lead
Arranger and Book Manager, and as a Syndication Party, Farm Credit Services
of America, FLCA as Co-Arranger and as a Syndication Party and certain
other Syndication Parties, and Borrower, entered into that certain Amended
and Restated Credit Agreement dated as of November 16, 2000, and that
certain First Amendment to Amended and Restated Credit Agreement dated as
of December 14, 2001 ("FIRST AMENDMENT") (as amended by the First Amendment
and as amended, modified, supplemented, restated or replaced from time to
time in the future, the "CREDIT AGREEMENT") pursuant to which the
Syndication Parties agreed to make to Borrower (a) a 7 Year Loan in the
amount of $115,000,000 and (b) a 10 Year Loan in the amount of $285,000,000
upon the terms and conditions set forth in the Credit Agreement.
B. Borrower now desires to amend the Credit Agreement, which the
Syndication Parties are willing to do under the terms and conditions as set
forth in this Second Amendment.
A G R E E M E N T S
Now, therefore, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Borrower, Administrative Agent
and the Syndication Parties hereby agree as follows:
1. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is hereby
amended as of the Effective Date as follows:
1.1 "WLR Turkey Assets" is deleted from the list of definitions
following Section 1.115, and a new Section 1.116 is added reading as
follows:
1.116 WLR TURKEY ASSETS: means all of Borrower's and its
Subsidiaries' assets relating to or used in connection with its turkey
line of business including, without limitation, all inventory and
receivables and all real property interest, furniture, fixtures and
equipment located at, or used in connection with, the turkey hatching,
raising, slaughtering, processing, packaging, and shipping operations
and facilities identified on Part B of EXHIBIT 7.3 hereto.
1.2 Section 1.15 is amended in its entirety to read as follows:
1.15 AVAILABLE AMOUNT: the lesser of (a) $400,000,000.00 and
(b) seventy-five percent (75%) of the Appraised Value (as shown on the
latest Available Amount Report pursuant to the latest Appraisal as
provided pursuant to the 1999 Credit Agreement or this Credit
Agreement, whichever is later) of the Collateral in which the
Syndication Parties have a perfected first priority lien (without
considering the lien which secures, but after deducting from the
Appraised Value the amount owing under, any Pari Passu Loan).
1.3 Section 5.4 is amended in its entirety to read as follows:
5.4 MANDATORY PREPAYMENTS: Borrower shall be required to make
prepayments ("MANDATORY PREPAYMENTS") in each of the following events
(a) in the event any of the Collateral (including, after the Merger
Consummation Date, whether or not the Administrative Agent has, for
the benefit of the Syndication Parties, been granted a lien thereon,
the Acquisition Stock, the Wampler Securities Collateral, and the WLR
Chicken Assets) is the subject of a Casualty Event, a Mandatory
Prepayment equal to the amount of the Casualty Proceeds received by
Borrower, Survivor, or Subsidiary Merger Survivor on account thereof
(provided that no such Mandatory Prepayment shall be required to the
extent that Borrower, Survivor, or Subsidiary Merger Survivor, as
applicable, use such Casualty Proceeds for repair or replacement for
any Casualty Event if the amount of Casualty Proceeds does not exceed
$25,000,000.00, or such higher amount as may be approved by the
Required Lenders at their discretion, and so long as (i) a contract
for such repair or replacement is entered into within 180 days of such
Casualty Event for such repairs and/or the acquisition of such
replacements, (ii) such repair or replacement is effected within 360
days of such Casualty Event, and (iii) any such replacements are
covered by the lien in favor of the Administrative Agent on the
Collateral); (b) upon the issuance of any equity securities in a
capital raising transaction resulting in net proceeds to Borrower of
an amount in excess of $10,000,000.00, a Mandatory Prepayment equal to
fifty percent (50%) of net proceeds of such offering of equity
securities to the extent they are not used, under the conditions set
forth below, for acquisitions and/or capital investment within 360
days of receipt; (c) upon sale or other disposition of any non-current
assets (except for sales in the ordinary course of business) (i) which
are not a part of the Collateral (other than the WLR Turkey Assets), a
Mandatory Prepayment equal to one hundred percent (100%) of the net
proceeds in excess of $5,000,000 received by Borrower, Survivor, or
Subsidiary Merger Survivor to the extent that they are not used, under
the conditions set forth below, for acquisitions and/or capital
investment within 360 days of receipt by Borrower, Survivor, or
Subsidiary Merger Survivor, as applicable, or (ii) which are a part of
the Collateral (including, after the Merger Consummation Date, whether
or not the Administrative Agent has, for the benefit of the
Syndication Parties, been granted a lien thereon, the Acquisition
Stock, the Wampler Securities Collateral, and the WLR Chicken Assets),
a Mandatory Prepayment equal to one hundred percent (100%) of the net
proceeds in excess of $5,000,000 received by Borrower, Survivor, or
Subsidiary Merger Survivor to the extent that they are not used, under
the conditions set forth below, for acquisitions and/or capital
investment within 360 days of receipt by Borrower, Survivor, or
Subsidiary Merger Survivor, as applicable, which are covered by a lien
in favor of the Administrative Agent; and (d) at any time that the
aggregate outstanding principal balance owing (i) under the 7 Year
Revolving Loan and the 10 Year Revolving Loan (including the Converted
Loans) exceeds the Available Amount or (ii) under either the 7 Year
Revolving Loan or the 10 Year Revolving Loan (including the 7 Year
Converted Loans or the 10 Year Converted Loans, as applicable) exceeds
the Aggregate 7 Year Commitment or the Aggregate 10 Year Commitment,
respectively, as either of them may be reduced from time to time, a
Mandatory Prepayment equal to the amount of such excess. In each case
of proceeds from any offering of equity securities and from any sale
or other disposition of assets other than the WLR Turkey Assets, to
avoid Mandatory Prepayment based thereon, Borrower, Survivor, or
Subsidiary Merger Survivor, as applicable, must, within 180 days of
receipt of such proceeds, have used such proceeds for acquisitions
and/or capital investments or executed a binding definitive contract
for such acquisitions and/or capital investments. Mandatory
Prepayments made (x) pursuant to clause (d) of this Section and
applied to Converted Loans or (z) pursuant to clauses (a), (b), and
(c) of this Section, will, in either case, result in a permanent
reduction of the Aggregate 7 Year Commitment and the Aggregate 10 Year
Commitment to the extent of the Mandatory Payments applied to each
such Facility. Mandatory Prepayments under clauses (a), (b), or
(c) shall be due no later than 10 Banking Days after the expiration of
the applicable acquisition or capital investment period set forth
above, and Mandatory Prepayments under (d) shall be due the next
Banking Day following such occurrence. In determining the amount of
Mandatory Prepayment required under clauses (a) or (c)(ii), Borrower
shall be permitted to make any prepayment required on account of such
Casualty Event or sale under any Pari Passu Loan (in a maximum amount
no greater than the pro rata portion based on total outstanding
principal balances of such loan and the Facilities), and in
determining the amount of Mandatory Prepayment required under clauses
(b) and (c)(i), Borrower shall, without duplication regarding payments
made on account of any Pari Passu Loan, be permitted to make any
prepayment required on account of such sale under any secured or
unsecured credit facility which is not expressly subordinate to the
Facilities in a maximum amount, with respect only to such unsecured
facilities, of no greater than the pro rata portion based on the total
outstanding principal balances owing under such unsecured facility to
the sum of the total outstanding principal balances owing under all
such unsecured facilities and under the Facilities.
1.4 Section 7.1 is amended in its entirety to read as follows:
7.1 BORROWER'S COLLATERAL: As security for the payment and
performance of all obligations of Borrower to the Administrative
Agent, to FCSA (with respect to the obligations of Borrower under
Article 6 hereof), and to all present and future Syndication Parties,
including but not limited to principal and interest under the Notes,
purchases of Bank Equity Interests, fees, Funding Losses,
reimbursements, and all other Bank Debt or obligations under any of
the Loan Documents, Borrower shall grant to, and maintain for, the
Administrative Agent, for the benefit of FCSA (to the extent of
Borrower's obligations with respect to Bank Equity Interests), and for
the benefit of all present and future Syndication Parties, a first
lien and security interest, pursuant to the Security Documents,
subject only to (i) purchase money security interests which would
qualify as Permitted Encumbrances, and (ii) Permitted Encumbrances
described in Section 11.3(a) hereof, in the following ("BORROWER
COLLATERAL") in accordance with the timing set forth in Section 10.3
hereof: (a) all of Borrower's real property interest, furniture,
fixtures and equipment located at, or used in connection with, the
poultry hatching, raising, slaughtering, processing, packaging, and
shipping operations and facilities identified on EXHIBIT 7.1 hereto;
(b) all of Borrower's issued and outstanding common and preferred
stock in (i) Acquisition Corp ("ACQUISITION STOCK"), and (ii)
following the consummation of the Merger, in Survivor, and (iii)
following the consummation of the Subsidiary Merger, in Subsidiary
Merger Survivor (the stock referred to in clauses (ii) and/or (iii)
the "SURVIVOR STOCK"); and (c) all proceeds with respect to the assets
described in clauses (a) and (b) above and all insurance policies in
connection with the assets described in clauses (a), (b) and
(c) hereof and the proceeds thereof, in each case whether now owned or
hereafter acquired; provided that only FCSA shall have a lien on the
Bank Equity Interests and none of the Syndication Parties shall have a
lien thereon. Borrower shall execute and deliver to the
Administrative Agent, for the benefit of the Syndication Parties, the
Security Documents to evidence the security interest of the
Administrative Agent, for the benefit of the Syndication Parties, in
the Borrower Collateral, together with such financing statements or
other documents as the Administrative Agent shall reasonably request.
Borrower shall also execute such further security agreements,
mortgages, deeds of trust, financing statements, assignments or other
documents as the Administrative Agent shall reasonably request from
time to time, in form and substance as the Administrative Agent shall
specify, to establish, confirm, perfect or provide notice of the
Administrative Agent's security interest (for the benefit of the
Administrative Agent and all Syndication Parties) in the Borrower
Collateral.
1.5 Section 7.3 is amended in its entirety to read as follows:
7.3 GUARANTOR'S COLLATERAL: As security for the payment and
performance of all obligations of Acquisition Corp. to the
Administrative Agent and to all present and future Syndication Parties
under the Acquisition Guaranty, Survivor and the Subsidiary Merger
Survivor, as applicable, shall grant to, and maintain for, the
Administrative Agent, for the benefit of all present and future
Syndication Parties, a first lien and security interest, pursuant to
the Security Documents in the following ("WAMPLER COLLATERAL") in
accordance with the timing set forth in Section 10.3 hereof: (a) all
of Survivor's stock in Wampler, and all rights, including the rights
to distributions, thereunder ("WAMPLER SECURITIES COLLATERAL"); (b)
all of Survivor's and Subsidiary Merger Survivor's real property
interest, furniture, fixtures and equipment located at, or used in
connection with, the poultry hatching, raising, slaughtering,
processing, packaging, and shipping operations and facilities
identified on Part A of EXHIBIT 7.3 hereto ("WLR CHICKEN ASSETS"); and
(c) all proceeds with respect to the assets described in clauses
(a) and (b) above and all insurance policies in connection with the
assets described in clauses (a), (b), and (c) hereof and the proceeds
thereof, in each case whether now owned or hereafter acquired.
Survivor and Subsidiary Merger Survivor, as applicable shall execute
and deliver to the Administrative Agent, for the benefit of the
Syndication Parties, the Wampler Security Documents to evidence the
security interest of the Administrative Agent, for the benefit of the
Syndication Parties, in the Wampler Collateral, together with such
financing statements or other documents as the Administrative Agent
shall reasonably request. Survivor and Subsidiary Merger Survivor, as
applicable, shall also execute such further security agreements,
mortgages, deeds of trust, financing statements, assignments or other
documents as the Administrative Agent shall reasonably request from
time to time, in form and substance as the Administrative Agent shall
specify, to establish, confirm, perfect or provide notice of the
Administrative Agent's security interest (for the benefit of the
Administrative Agent and all Syndication Parties) in the Wampler
Collateral.
1.6 Subsection 10.2.11 is amended in its entirety to read as
follows:
10.2.11 AVAILABLE AMOUNT REPORTS: If any Advance is made during
any Fiscal Quarter, then, no later than forty-five (45) days after the
end of such Fiscal Quarter, unless the outstanding principal balance
owing under the Facilities on any Advance Date (including the Advance
requested for such date in a Borrowing Notice) exceeds ninety percent
(90%) of the Aggregate Commitment, in which case an Available Amount
Report effective as of the date of such Borrowing Notice must
accompany the Borrowing Notice (the appropriate date in either case
being the "AVAILABLE AMOUNT REPORT DEADLINE"), a report in the form of
EXHIBIT 10.2.11 attached hereto ("AVAILABLE AMOUNT REPORT") effective
as of the last day of such Fiscal Quarter or the date of such
Borrowing Notice, as applicable. Any time that, in connection with a
Pari Passu Loan, Borrower requests the Administrative Agent to execute
an Intercreditor Agreement, Borrower shall provide to the
Administrative Agent an endorsement to the Title Policy increasing the
amount of insurance provided thereby (or a new Title Policy in the
full amount, including any such increase) if the following two
conditions have occurred: (a) the maximum amount available under such
Pari Passu Loan, together with the maximum amounts available under all
Pari Passu Loans entered into since the most recent increase in the
amount of the Title Policy, is equal to or greater than
$25,000,000.00, and (b) Borrower has since the most recent increase in
the amount of the Title Policy, provided to the Administrative Agent
one or more Available Amount Reports which, in the aggregate, reflect
an increase in the Appraised Value of the real estate (including any
structures or other improvements thereon, other than
equipment) included in the Collateral in an amount equal to or greater
than $25,000,000.00; provided that Borrower shall not be required to
provide such endorsement or new Title Policy on account of Available
Amount Reports which increase the Available Amount based solely on the
WLR Chicken Assets so long as (i) no part of the WLR Chicken Assets
are used in calculating whether a Pari Passu Loan is permitted under
this Subsection and (ii) none of the WLR Chicken Assets are used as
security for any such Pari Passu Loan. In the event an increase in
the amount of insurance available under the Title Policy is required
pursuant to the preceding sentence, the amount of such increase shall
be the amount of the aggregate increase in Appraised Value determined
as provided in clause (b) thereof; provided that in no event shall
Borrower be required to increase the amount of insurance provided
under the Title Policy to the extent it would result in the amount
thereof being an amount in excess of (x) during the Availability
Period, the Aggregate Commitment, or (y) at any time after the end of
the Availability Period, the amount of Bank Debt owing. In the event
the parcel or parcels of real estate with respect to which there has
been an increase in Appraised Value are insured by separate Title
Policies, the increase in insured amount required above need only be
provided with respect to those Title Policies.
1.7 Subsection 10.2.12 is amended in its entirety to read as
follows:
10.2.12 APPRAISALS: Borrower shall provide the Administrative
Agent with Appraisals covering all interests required to be included
within the Collateral: (a) on December 14, 2002 and on each two year
anniversary thereof, provided that if the Leverage Ratio for the
Fiscal Quarter immediately preceding (or ending on) such date is less
than fifty percent (50%), this requirement will be deferred on a
Fiscal Quarter basis so long as such ratio is maintained, provided
further that, unless otherwise agreed by the Required Lenders, any
such deferrals shall be for no more than 24 months, so that in any
event an Appraisal will be required no later than four years after the
date the last previous Appraisal was required; and (b) as may be
required in connection with Pari Passu Loans as provided herein.
1.8 Section 10.3 is amended in its entirety to read as follows:
10.3 GRANT OF LIENS ON WLR RELATED ASSETS: Borrower shall cause
Acquisition Corp. and/or Survivor, and/or Subsidiary Merger Survivor
to, grant to the Administrative Agent, for the benefit of the
Syndication Parties, a first priority lien on the Wampler Securities
Collateral and the WLR Chicken Assets, and with respect to such assets
take the actions in accordance with the following time table:
1.9 Clause (e) of Subsection 10.3.3 is amended in its entirety
to read as follows:
(e) The Administrative Agent shall have received in form and
substance satisfactory to the Administrative Agent: (i) documents,
certified to be true and correct by the Secretary or Assistant
Secretary of Borrower, evidencing all corporate action taken by
Survivor and Subsidiary Merger Survivor to authorize (including the
specific names and titles of the persons authorized to so act the
execution, delivery and performance of the Wampler Security Documents
to which it is a party and which relate to WLR Chicken Assets, and a
certificate of the Secretary or Assistant Secretary of Borrower, dated
the Closing Date, certifying the names and true signatures of the
Authorized Officers; (ii) documents, certified to be true and correct
by the Secretary or Assistant Secretary of Survivor and Subsidiary
Merger Survivor, evidencing all corporate action taken by such Person
to authorize (including the specific names and titles of the persons
authorized to so act) the execution, delivery and performance of such
Wampler Security Documents, and (iii) evidence satisfactory to it that
all consents and approvals of governmental authorities and third
parties which are with respect to Survivor and/or Subsidiary Merger
Survivor necessary for, or required as a condition of the validity and
enforceability of such Wampler Security Documents to which it is a
party.
1.10 Subsection 10.3.4 is deleted in its entirety.
1.11 Section 10.15 is amended in its entirety to read as follows:
1.12 10.15 APPRAISED PROPERTY: No Available Amount Report will
be based in any part on the Appraised Value of any real property, or
improvements, fixtures, machinery or equipment located on any real
property, not, in either case, described in the deeds of trust executed, on
or prior to the date of such Available Amount Report, by Borrower in
connection with this Credit Agreement.
1.13 Clause (f) of Section 11.1 is amended in its entirety to
read as follows:
(f) secured Debt (other than Bank Debt and the Pari Passu
Loans) in an aggregate amount at any time outstanding of up to the sum
of (i) eighty-five percent (85%) of the book value of the outstanding
accounts receivable of Borrower and its Subsidiaries (as such account
receivable would be shown on a consolidated balance sheet of Borrower
and its Subsidiaries prepared in accordance with GAAP), less allowance
for doubtful accounts, PLUS (ii) seventy-five percent (75%) of the
higher of book value or fair market value, determined in accordance
with GAAP, of the assets of Borrower and its Subsidiaries, but
excluding from such calculation under this clause (ii), the assets
covered by clause (i), the Collateral (including, after the Merger
Consummation Date, whether or not the Administrative Agent has, for
the benefit of the Syndication Parties, been granted a lien thereon,
the WLR Chicken Assets), and good will, MINUS (iii) amounts owing
under the Harris Loan and under the Hancock Loan;
1.14 Clauses (g), (h), and (i) of Section 11.3 are amended in
their entirety to read as follows:
(g) Liens, other than on the Collateral (including, after the
Merger Consummation Date, whether or not the Administrative Agent has,
for the benefit of the Syndication Parties, been granted a lien
thereon, the Acquisition Stock, the Wampler Securities Collateral, and
the WLR Chicken Assets), securing its reimbursement obligations under
any letter of credit issued in connection with the acquisition of an
asset; provided that (i) the lien attaches only to such asset, and
(ii) the lien is released upon satisfaction of such reimbursement
obligation;
(h) Liens on the Collateral (including, after the Merger
Consummation Date, whether or not the Administrative Agent has, for
the benefit of the Syndication Parties, been granted a lien thereon,
the Acquisition Stock, the Wampler Securities Collateral, and the WLR
Chicken Assets) in connection with the Bank Debt or any permitted Pari
Passu Loan;
(i) Liens on assets of Borrower or its Subsidiaries, other than
on the Collateral (including, after the Merger Consummation Date,
whether or not the Administrative Agent has, for the benefit of the
Syndication Parties, been granted a lien thereon, the Acquisition
Stock, the Wampler Securities Collateral, and the WLR Chicken Assets),
to secure indebtedness permitted under Sections 11.1(f) and 11.1(i);
and
1.15 Section 11.4 is amended in its entirety to read as follows:
11.4 SALE OF ASSETS: Borrower shall not (nor shall it permit any
of its Subsidiaries to) sell, convey, assign, lease or otherwise
transfer or dispose of, voluntarily, by operation of law or otherwise,
any of the Collateral (including, after the Merger Consummation Date,
whether or not the Administrative Agent has, for the benefit of the
Syndication Parties, been granted a lien thereon, the Acquisition
Stock, the Wampler Securities Collateral, and the WLR Chicken
Assets) except the sale of assets disposed of in the ordinary course
of business, and which are either replaced or are no longer necessary
or useful for the business conducted at the facilities which are
included within the Collateral (including, whether or not the
Administrative Agent has, for the benefit of the Syndication Parties,
been granted a lien thereon, the Acquisition Stock, the Wampler
Securities Collateral, and the WLR Chicken Assets).
2. CONDITIONS TO EFFECTIVENESS OF THIS SECOND AMENDMENT. The
effectiveness of this Second Amendment is subject to satisfaction, in the
Administrative Agent's sole discretion, of each of the following conditions
precedent:
2.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Borrower shall be true and correct in all material respects
on and as of the Effective Date as though made on and as of such date.
2.2 NO EVENT OF DEFAULT. No Event of Default shall have
occurred and be continuing under the Credit Agreement as of the Execution
Date.
2.3 EXECUTION AND DELIVERY. Receipt by the Administrative Agent
of a copy of this Second Amendment, duly executed by all requisite parties.
2.4 SCHEDULE OF APPRAISED VALUES. Receipt by the Administrative
Agent of a report, certified to by Borrower's Chief Financial Officer,
showing, for each of the facilities included within the Borrower Collateral
and the Wampler Collateral and upon which the Available Amount is based:
(a) the address, physical description, and function; (b) the Appraised
Value (separated as to (i) machinery and equipment, (ii) building
improvements, and (iii) land); and (c) the date of the Appraisal from which
the Appraised Value has been determined.
2.5 AMENDMENT FEE. Borrower's payment to the Administrative
Agent, by wire transfer, of a fee in the amount of $100,000.00 ("AMENDMENT
FEE") to be distributed to the Syndication Parties in the manner determined
by the Administrative Agent and disclosed to the Syndication Parties.
3. GENERAL PROVISIONS.
3.1 NO OTHER MODIFICATIONS. The Credit Agreement shall remain
in full force and effect except as specifically amended by this Second
Amendment
3.2DEFINITIONS. Capitalized terms shall have the meanings set
forth herein, if defined herein. Capitalized terms used, but not defined,
herein shall have the meanings given to such terms in the Credit Agreement
if defined therein.
3.3PRIOR ACTIONS. Nothing in this Second Amendment shall affect
any previous actions, waivers, or lien releases.
3.4 SEVERABILITY. Should any provision of this Second Amendment
be deemed unlawful or unenforceable, said provision shall be deemed several
and apart from all other provisions of this Second Amendment and all
remaining provisions of this Second Amendment shall be fully enforceable.
3.5 GOVERNING LAW. This Second Amendment shall be governed by,
interpreted and enforced in accordance with the laws of the State of
Colorado.
3.6 HEADINGS. The captions or headings in this Second Amendment
are for convenience only and in no way define, limit or describe the scope
or intent of any provision of this Second Amendment.
3.7 COUNTERPARTS. This Second Amendment may be executed by the
parties hereto in separate counterparts, each of which, when so executed
and delivered, shall be an original, but all such counterparts shall
together constitute one and the same instrument. Each counterpart may
consist of a number of copies hereof, each signed by less than all, but
together signed by all, of the parties hereto. Telefax copies of documents
or signature pages bearing original signatures, and executed documents or
signature pages delivered by telefax, shall, in each such instance, be
deemed to be, and shall constitute and be treated as, an original signed
document or counterpart, as applicable.
This Second Amendment is executed as of the Execution Date.
BORROWER:
PILGRIM'S PRIDE CORPORATION
By: /S/ RICHARD A. COGDILL
Name: Richard A. Cogdill
Title: Executive Vice President,
Chief Financial Officer,
Secretary & Treasurer
ADMINISTRATIVE AGENT:
COBANK, ACB
By: /S/ BRIAN J. KLATT
Name: Brian J. Klatt
Title: Vice President
CO-ARRANGER:
FARM CREDIT SERVICES OF AMERICA, FLCA
By: /S/ NATHAN F. BURNHAM
Name: Nathan F. Burnham
Title: Vice President
[SIGNATURES CONTINUE ON FOLLOWING PAGES]
SYNDICATION PARTIES:
COBANK, ACB
By: /S/ KEN WARLICK
Name: Ken Warlick
Title:
FARM CREDIT SERVICES OF AMERICA, FLCA
By: /S/ NATHAN F. BURNHAM
Name: Nathan F. Burnham
Title: Vice President
CREDIT AGRICOLE INDOSUEZ
By:
Name:
Title:
HARRIS TRUST AND SAVINGS BANK
By:
Name:
Title:
SUNTRUST BANK
By:
Name:
Title:
DEERE CREDIT, INC.
By:
Name:
Title:
U.S. BANK, National Association (INDIVIDUALLY
AND AS SUCCESSOR BY MERGER TO FIRSTAR BANK,
N.A.)
By:
Name:
Title:
BANK OF TEXAS
By:
Name:
Title:
GREENSTONE FARM CREDIT SERVICES, FLCA
By: /S/ ALFRED S. COMPTON, JR.
Name: Alfred S. Compton, Jr.
Title: Vice President/Senior Loan Officer
