SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 27, 1997 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) Registrant's telephone number, including area code: (903) 855-1000 Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange on TITLE OF EACH CLASS WHICH REGISTERED Common Stock, Par Value $0.01 New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock, $0.01 par value, held by non- affiliates of the Registrant as of December 12, 1997, was $155,424,806. For purposes of the foregoing calculation only, all directors, executive officers, and 5% beneficial owners have been deemed affiliates. 27,589,250 shares of the Registrant's common stock, $.01 par value, were outstanding as of December 12, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for the annual meeting of stockholders to be held February 4, 1998 are incorporated by reference into Part III.
PILGRIM'S PRIDE CORPORATION FORM 10-K TABLE OF CONTENTS PART I PAGE Item 1. Business 4 Item 2. Properties 18 Item 3. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders. 21 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 22 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 24 Item 8. Financial Statements and Supplementary Data (see Index to Financial Statements and Schedules below). 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 30 PART III Item 10. Directors and Executive Officers of Registrant 30 Item 11. Executive Compensation 30 Item 12. Security Ownership of Certain Beneficial Owners and Management 30 Item 13. Certain Relationships and Related Transactions 30 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 30 Signatures 36 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Report of Ernst & Young LLP--Independent Auditors 38 Consolidated Balance Sheets as of September 27, 1997 and September 28, 1996 39 Consolidated Statements of Income (Loss) for the years ended September 27, 1997, September 28, 1996 and September 30, 1995 40 Consolidated Statements of Stockholders' Equity for the years ended September 27, 1997, September 28, 1996 and September 30, 1995 41 Consolidated Statements of Cash Flows for the years ended September 27, 1997, September 28, 1996 and September 30,1995 42 Notes to Consolidated Financial Statements 43
PART I ITEM 1. BUSINESS GENERAL Pilgrim's Pride Corporation (the "Company"), which was incorporated in Texas in 1968 and reincorporated in Delaware in 1986, is the successor to a partnership founded in 1946 as a retail feed store. Over the years, the Company grew through both internal growth and various acquisitions of farming operations and chicken processors. In addition to domestic growth, the Company initially expanded into Mexico through the acquisition of several smaller chicken producers in 1988. Pilgrim's Pride Corporation is one of the largest producers of prepared and fresh chicken products in North America and has one of the best known brand names in the chicken industry. The Company is the fourth largest producer of chicken in the United States and one of the two largest in Mexico. Through vertical integration, the Company controls the breeding, hatching and growing of chickens and the processing, preparation, packaging and sale of its product lines. In fiscal 1997, approximately 78% of the Company's net sales were from its U.S. operations, including U.S. produced chicken products sold for export to Canada, Eastern Europe, the Far East and other world markets, with the remaining approximately 22% arising from the Company's Mexico operations. The Company's objectives are to increase sales, profit margins and earnings and outpace the growth of the chicken industry: (i) by focusing on growth in the prepared food products market, (ii) by focusing on growth in the Mexico market, and (iii) through greater utilization of the Company's existing assets. Key elements of the Company's strategy to achieve these objectives are to: FOCUS U.S. GROWTH ON PREPARED FOODS. In recent years the Company has focused its sales of prepared foods to the foodservice market, particularly to chain restaurants and frozen entree producers. The market for prepared foods has experienced greater growth and higher margins than fresh chicken products, and the Company's sales of prepared foods products to the foodservice market have grown from $183.2 million in fiscal 1993 to $347.8 million in fiscal 1997, a compounded annual growth rate of 17.4%. Additionally, the production and sale of prepared foods reduces the impact of feed grain costs on the Company's profitability. As further processing is performed, feed grain costs become a decreasing percentage of a product's total production cost. The Company is now the largest supplier of chicken to Wendy's and Jack-in-the-Box chain restaurants and to Stouffer's frozen entree operation. Other major prepared foods customers include KFC and Taco Bell. Prepared foods constituted 45.4% of the Company's U.S. chicken sales in fiscal 1997. FOCUS ON CUSTOMER DRIVEN RESEARCH AND TECHNOLOGY. Much of the Company's growth in prepared foods has been the result of customer- driven research & development focused on designing new products to meet customer's changing needs. The Company's research & development personnel often work directly with institutional customers in developing proprietary products. Approximately $118 million of the Company's sales to foodservice customers in fiscal 1997 consisted of new products, which were not sold by the Company in fiscal 1993. The Company is also a leader in utilizing advanced processing technology, which enables the Company to better meet its customers' needs for product innovation, consistent quality and cost efficiency. ENHANCE THE U.S. FRESH CHICKEN PRODUCT MIX THROUGH VALUE-ADDED, BRANDED PRODUCTS. The Company's fresh chicken business is an important component of its sales and has grown from sales of $249.3 million in fiscal 1993 to $326.5 million in fiscal 1997. In addition to maintaining its sales of mature, traditional fresh chicken products, the Company's strategy is to shift the mix of its U.S. fresh chicken products by continuing to increase sales of higher margin, faster growing products, such as marinated chicken and chicken parts. As a result of this strategy, the Company's compounded annual growth rate of fresh chicken sales from fiscal 1993 to fiscal 1997 exceeded 6.9% while total U.S. industry sales of fresh chicken increased approximately 1%. MAINTAIN OPERATING EFFICIENCIES AND INCREASE CAPACITY ON A COST- EFFECTIVE BASIS. As production and sales have grown, the Company has maintained operating efficiencies by investing in state of-the-art technology, processes and training and by making cost-effective acquisitions both in the U.S. and Mexico. As a result, according to industry data, since 1993 the Company has consistently been one of the lowest cost producers of chicken. Continuing this strategy, the Company acquired additional chicken producing assets in the U.S. in April 1997, to replace chicken purchased from third parties, at a cost that management believes is significantly less than the cost required to construct a new chicken production complex with similar capacity. CAPITALIZE ON INTERNATIONAL DEMAND FOR U.S. CHICKEN. Due to U.S. consumers' preference for chicken breast meat, the Company has targeted international markets to generate sales of leg quarters. The Company has also begun selling prepared food products for export, to the international divisions of its U.S. chain restaurant customers. As a result of these efforts, sales for these markets have grown from less than 1% of the Company's total U.S. chicken sales in fiscal 1993 to more than 5% in fiscal 1997. Management believes that: (i) U.S. chicken exports will continue to grow as worldwide demand for high grade, low costs protein sources increases, and (ii) worldwide demand for higher margin prepared food products will increase over the next five years; and accordingly, the Company is well positioned to capitalize on such growth. CAPITALIZE ON INVESTMENTS AND EXPERTISE IN MEXICO. The Company's strategy in Mexico is focused on: (i) being one of the most cost- efficient producers and processors of chicken in Mexico by applying technology and expertise utilized in the U.S. and (ii) increasing distribution of its higher margin, value added products to national retail stores and restaurants. This strategy has resulted in the Company obtaining a market leadership position, with its estimated market share in Mexico increasing from 10.9% in 1993 to 17.7% in 1997. The Company's chicken products consist primarily of: (i) prepared foods, which include portion-controlled breast fillets, tenderloins and strips, formed nuggets and patties and bone-in chicken parts, which are sold frozen and may be either fully cooked or raw, (ii) fresh chicken, which includes refrigerated (non-frozen), whole or cut-up chicken sold to the foodservice industry either pre-marinated or non-marinated and prepackaged chicken, which includes various combinations of freshly refrigerated, whole chickens and chicken parts in trays, bags or other consumer packs labeled and priced ready for the retail grocers' fresh meat counter, and (iii) export and other, which includes parts and whole chicken, either refrigerated or frozen for U.S. export or domestic use. The Company's Mexican products consist of live, uneviscerated and eviscerated chicken. The following table sets forth, for the periods since fiscal 1993, net sales attributable to each of the Company's primary product lines and markets served with such products. The table is based on the Company's internal sales reports and its classification of product types and customers. <TABLE> <CAPTION> FISCAL YEAR ENDED <S> <C> <C> <C> <C> <C> Sept. Sept. Sept. Oct. Oct. 27, 1997 28, 1996 30, 1995 1, 1994 2, 1993 (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (In thousands) U.S. Chicken Sales: Prepared Foods Food Service $347,831 $303,939 $240,456 $205,224 $183,165 Retail 41,804 42,946 38,683 61,068 89,822 Total Prepared Foods 389,635 346,885 279,139 266,292 272,987 Fresh Chicken: Food Service 173,743 145,052 140,201 155,294 149,197 Retail 152,738 141,135 138,368 125,133 100,063 Total Fresh Chicken 326,481 286,187 278,569 280,427 249,260 Export and Other 142,030 140,614 113,414 88,437 77,709 Total U.S. Chicken 858,146 773,686 671,122 635,156 599,956 Mexico 274,997 228,129 159,491 188,744 188,754 Total Chicken Sales 1,133,143 1,001,815 830,613 823,900 788,710 Sales of Other U.S. Products 144,506 137,495 101,193 98,709 99,133 Total Net Sales $1,277,649 $1,139,310 $931,806 $922,609 $887,843 </TABLE> UNITED STATES The following table sets forth, since fiscal 1993, the percentage of net U.S. chicken sales attributable to each of the Company's primary product lines and markets serviced with such products. The table and related discussion are based on the Company's internal sales reports and its classification of product types and customers. <TABLE> <CAPTION> FISCAL YEAR ENDED <S> <C> <C> <C> <C> <C> Sept.27, Sept. 28, Sept. 30, Oct. 1, Oct. 2, 1997 1996 1995 1994 1993 (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) U.S. Chicken Sales: Prepared Foods: Foodservice 40.5 % 39.3% 35.8% 32.3% 30.5% Retail 4.9 5.6 5.8 9.6 15.0 Total Prepared Foods 45.4 44.9 41.6 41.9 45.5 Fresh Chicken: Foodservice 20.2 18.7 20.9 24.5 24.9 Retail 17.8 18.2 20.6 19.7 16.7 Total Fresh 38.0 36.9 41.5 44.2 41.6 Chicken Export and Other 16.6 18.2 16.9 13.9 12.9 TOTAL U.S. CHICKEN Sales Mix 100.0% 100.0% 100.0% 100.0% 100.0% </TABLE> PRODUCT TYPES U.S. PREPARED FOODS OVERVIEW. During fiscal 1997, $389.6 million of the Company's net U.S. chicken sales were in prepared foods products to foodservice and retail, as compared to $273.0 million in fiscal 1993, which reflects the strategic focus for growth of the Company. The market for prepared food products has experienced, and management believes that this market will continue to experience, greater growth and higher margins than fresh chicken products. Additionally, the production and sale of prepared foods reduces the impact of feed grain costs on the Company's profitability. As further processing is performed, feed grain costs becomes a decreasing percentage of a product's total production costs. The Company establishes prices for its prepared food products based primarily upon perceived value to the customer, production costs and prices of competing products. The majority of these products are sold pursuant to agreements with varying terms that either set a fixed price for the products or set a price according to formulas based on an underlying commodity market, subject in many cases to minimum and maximum prices. U.S. Fresh Chicken Overview. The Company's fresh chicken business is an important component of its sales and has grown from sales of $249.3 million in fiscal 1993 to $326.5 million in fiscal 1997. In addition to maintaining its sales of mature, traditional fresh chicken products, the Company's strategy is to shift the mix of its U.S. fresh chicken products by continuing to increase sales of higher margin, faster growing products, such as marinated chicken and chicken parts. As a result of this strategy, the Company's compounded annual growth rate of fresh chicken sales from fiscal 1993 to fiscal 1997 exceeded 6.9% while total U.S. industry sales of fresh chicken increased approximately 1%. Most fresh chicken products are sold to established customers based upon certain weekly or monthly market prices reported by the USDA and other public price reporting services, plus a markup, which is dependent upon the customer's location, volume, product specifications and other factors. The Company believes its practices with respect to sales of its fresh chicken are generally consistent with those of its competitors. Prices of these products are negotiated daily or weekly and are generally related to market prices quoted by the USDA or other public reporting services. EXPORT AND OTHER OVERVIEW. The Company's export and other products consist of whole chickens and chicken parts sold primarily in bulk, non- branded form either refrigerated to distributors in the U.S. or frozen for distribution to export markets. Sales growth in the "Export and Other" category between fiscal 1993 and fiscal 1997 primarily reflects increased exports of chicken products. In fiscal 1997, approximately $44 million of the Company's sales were attributable to exports of U.S. chicken. These exports and other products have historically been characterized by lower prices and greater price volatility than the Company's more value-added product lines. MARKETS U.S. FOODSERVICE. The majority of the Company's U.S. chicken sales are derived from products sold to the foodservice market which principally consists of chain restaurants, frozen entree producers, institutions and distributors, located throughout the continental United States. The Company supplies chicken products ranging from portion-controlled refrigerated chicken parts to fully cooked and frozen, breaded or non-breaded chicken parts or formed products. As the second largest full-line supplier of chicken to the foodservice market, the Company believes it is well-positioned to be the primary or secondary supplier to many national and international chain restaurants who require multiple suppliers of chicken products. Additionally, the Company is well suited to be the sole supplier for many regional chain restaurants that offer better margin opportunities and a growing base of business. Due to its comparatively large size in this market, management believes the Company has significant competitive advantages in terms of product capability, production capacity, research and development expertise, and distribution and marketing experience relative to smaller and to non- vertically integrated producers. As a result of these competitive advantages, the Company's sales to the foodservice market from fiscal 1993 through fiscal 1997 grew at a compound annual growth rate of approximately 11.9%. Based on industry data, the Company estimates that total industry dollar sales to the foodservice market during this same period grew at a compounded annual growth rate of approximately 7.9%. The Company markets both prepared food and fresh chicken products to the foodservice industry. FOODSERVICE - PREPARED FOODS: The majority of the Company's sales to the foodservice market consists of prepared food products. Prepared food sales to the foodservice market were $347.8 million in fiscal 1997 compared to $183.2 million in fiscal 1993, a compounded growth rate of approximately 17.4%. The Company's prepared food products include portion-controlled breast fillets, tenderloins and strips, formed nuggets and patties and bone-in chicken parts, which are sold frozen and in various states of preparation, including blanched, battered, breaded and either partially or fully-cooked. The Company attributes this growth in sales of prepared foods to the foodservice market to a number of factors: FIRST, there has been significant growth in the number of foodservice operators offering chicken on their menus and the number of chicken items offered. SECOND, foodservice operators are increasingly purchasing prepared chicken products, which allow them to reduce labor cost while providing greater product consistency, quality and variety across all restaurant locations. THIRD, there is a strong need among larger foodservice companies for an alternative or additional supplier to the Company's principal competitor in the prepared foods market. A viable alternative supplier must be able to ensure supply, demonstrate innovation and new product development, and provide competitive pricing. The Company has been successful in its objective of becoming the alternative supplier of choice by being the primary or secondary prepared chicken supplier to many large foodservice companies because:(i) it is vertically integrated, giving the Company control over its supply of chicken and chicken parts, (ii) its further processing facilities are particularly well suited to the high volume production runs necessary to meet the capacity and quality requirements of the U.S. foodservice market, and (iii) it has established a reputation for dependable quality, highly responsive service and excellent technical support. FOURTH, as a result of the experience and reputation developed with larger customers, the Company has increasingly become the principal supplier to mid-sized foodservice organizations. FIFTH, the Company's in-house product development group follows a customer-driven research & development focus designed to develop new products to meet customers' changing needs. The Company's research & development personnel often work directly with institutional customers in developing proprietary products. Approximately $118.4 million of the Company's sales to foodservice customers in fiscal 1997 consisted of new products, which were not sold by the Company in fiscal 1993. SIXTH, the Company is a leader in utilizing advanced processing technology, which enables the Company to better meet its customers' needs for product innovation, consistent quality and cost efficiency. FOODSERVICE - FRESH CHICKEN: The Company produces and markets fresh, refrigerated chicken for sale to U.S. quick-service restaurant chains, delicatessens and other customers. These chickens have the giblets removed, are usually of specific weight ranges, are usually pre-cut to customer specifications and are often marinated to enhance value and product differentiation. By growing and processing to customers' specifications, the Company is able to assist quick-service restaurant chains in controlling costs and maintaining quality and size consistency of chicken pieces sold to the consumer. U.S. RETAIL. The U.S. retail market consists primarily of grocery store chains and retail distributors. The Company concentrates its efforts in this market on sales of branded, prepackaged cut-up and whole chicken to grocery chains and retail distributors in the mid-western, southwestern and western regions ofthe United States. This regional marketing focus enables the Company to develop consumer brand franchises and capitalize on proximity to the trade customer in terms of lower transportation costs; more timely, responsive service; and enhanced product freshness. For a number of years, the Company has invested in both trade and retail marketing designed to establish high levels of brand name awareness and consumer preferences within these markets. The Company utilizes numerous marketing techniques, including advertising, to develop and strengthen trade and consumer awareness and increase brand loyalty for consumer products marketed under the "Pilgrim's Pride" brand. The Company's founder, Lonnie "Bo" Pilgrim, is the featured spokesman in the Company's television, radio and print advertising, and a trademark cameo of a person in a Pilgrim's hat serves as the logo on all of the Company's primary branded products. As a result of this marketing strategy, the Company has established a well-known brand name in certain southwestern markets, including the Dallas/Fort Worth area. Management believes its efforts to achieve and maintain brand awareness and loyalty help to provide more secure distribution for its products and generate greater price premiums that would otherwise be the case in certain southwestern markets. The Company also maintains an active program to identify consumer preferences primarily by testing new product ideas, packaging designs and methods through taste panels and focus groups located in key geographic markets. RETAIL - PREPARED FOODS. The Company sells retail oriented prepared foods primarily to grocery store chains located in the mid-western, southwestern and western region of the U.S. where it also markets prepackaged fresh chicken. Being a major, national competitor in retail, branded frozen foods is not a part of the Company's current business strategy. The Company no longer serves the wholesale club industry, which is now dominated by two large national operators, and has redirected this prepared foods capacity to a more diversified customer base. RETAIL - FRESH CHICKEN. The Company's prepackaged retail products include various combinations of freshly refrigerated whole chickens and chicken parts in trays, bags or other consumer packs, labeled and priced ready for the grocer's fresh meat counter. Management believes the retail, prepackaged fresh chicken business will continue to be a large and relatively stable market, providing opportunities for product differentiation and regional brand loyalty. The Company concentrates its sales and marketing efforts for the above product types to grocery chains and retail distributors in the mid-western, southwestern and western regions of the United States. This regional marketing focus enables the Company to develop consumer brand franchises and capitalize on proximity to the trade customer, in terms of lower transportation costs; more timely, responsive service; and enhanced product freshness. EXPORT AND OTHER CHICKEN. The Company's export and other products consist of whole chickens and chicken parts sold primarily in bulk, non-branded form either refrigerated to distributors in the U.S. or frozen for distribution to export markets. In recent years, the Company has de-emphasized its marketing of bulk-packaged chicken in the U.S. in favor of more value-added products and export opportunities. In the U.S., prices of these products are negotiated daily or weekly and are generally related to market prices quoted by the USDA or other public price reporting services. The Company also sells U.S. produced chicken products for export to Canada, Eastern Europe, the Far East and other world markets. Due to U.S. consumers' preference for chicken breast meat, the Company has targeted international markets to generate sales of leg quarters. The Company has also begun selling prepared food products for export to the international divisions of its U.S. chain restaurant customers. As a result of these efforts, the Company's sales for export have grown from less than 1% of its total U.S. chicken sales in fiscal 1993 to more than 5% in fiscal 1997. Management believes that: (i) U.S. chicken exports will continue to grow as worldwide demand for high grade low cost protein sources increases, (ii) worldwide demand for higher margin prepared food products will increase over the next five years, and accordingly, (iii) the Company is well positioned to capitalize on such growth. OTHER U.S. PRODUCTS. The Company markets fresh eggs under the Pilgrim's Pride brand name as well as private labels in various sizes of cartons and flats to U.S. retail grocery and institutional foodservice customers located primarily in Texas. The Company has a housing capacity for approximately 2.3 million commercial egg laying hens which can produce approximately 41 million dozen eggs annually. U.S. egg prices are determined weekly based upon reported market prices. The U.S. egg industry has been consolidating over the last few years with the 20 largest producers accounting for more than 68% of the total number of egg laying hens in service during 1997. The Company competes with other U.S. egg producers primarily on the basis of product quality, reliability, price and customer service. According to an industry publication, the Company is the twenty-fifth largest producer of eggs in the United States. The Company also converts chicken by-products into protein products primarily for sale to manufacturers of pet foods. In addition, the Company produces and sells livestock feeds at its feed mills in Pittsburg and Mt. Pleasant, Texas and at its farm supply store in Pittsburg, Texas, to dairy farmers and livestock producers in northeastern Texas. MEXICO BACKGROUND. The Mexican market represented approximately 21.5% of the Company's net sales in fiscal 1997. The Company entered the Mexican market in 1979 when it began seasonally selling eggs to the Mexican government. Recognizing favorable long-term demographic trends and improving economic conditions in Mexico, the Company began exploring opportunities to produce and market chicken in Mexico. In fiscal 1988, the Company acquired four vertically integrated chicken production operations in Mexico for approximately $15.1 million. From fiscal 1988 through fiscal 1997, the Company made acquisitions and capital expenditures in Mexico totaling $158.9 million to expand and improve such operations, including a fiscal 1995 investment of $35.3 million for the acquisition of Union de Queretaro, et al, a group of five chicken companies located near Queretaro, Mexico. As a result of these expenditures, the Company has increased weekly production in its Mexico operations by over 350% since its original investment in fiscal 1988. The Company is now one of the two largest producers of chicken in Mexico. The Company believes its facilities are among the most technologically advanced in Mexico and that it is one of the lowest cost producers of chicken in Mexico. PRODUCT TYPES. While the market for chicken products in Mexico is less developed than in the United States, with sales attributed to fewer, more basic products, the market for value added products is increasing. The Company's strategy is to lead this trend. The products currently sold by the Company in Mexico consist primarily of basic products such as New York dressed (whole chickens with only feathers and blood removed), live birds and value added products such as eviscerated chicken and chicken parts. The Company has increased its sales of value added products, particularly through national retail chains and restaurants, and plans to continue to do so. The Company remains opportunistic, however, utilizing its low cost production to enter markets where profitable opportunities exist. For example, the Company has significantly increased its sales of live birds since 1994 as many smaller producers exited this segment of the business as a result of the recession in Mexico. MARKETS. The Company sells its Mexican chicken products primarily to large wholesalers and retailers. The Company's customer base in Mexico covers a broad geographic area from Mexico City, the capital of Mexico with a population estimated to be over 20 million, to Saltillo, the capital of the State of Coahuila, about 500 miles north of Mexico City, and from Tampico on the Gulf of Mexico to Acapulco on the Pacific, which region includes the cities of San Luis Potosi and Queretaro, capitals of the states of the same name. COMPETITION The chicken industry is highly competitive and certain of the Company's competitors have greater financial and marketing resources than the Company. In the United States and Mexico, the Company competes principally with other vertically integrated chicken companies. In general, the competitive factors in the U.S. chicken industry include price, product quality, brand identification, breadth of product line and customer service. Competitive factors vary by major market. In the foodservice market, competition is based on consistent quality, product development, service and price. In the U.S. retail market, management believes that product quality, brand awareness and customer service are the primary bases of competition. There is some competition with non-vertically integrated further processors in the U.S. prepared food business. The Company believes it has significant, long term cost and quality advantages over non-vertically integrated further processors. In Mexico, where product differentiation is limited, product quality and price are the most critical competitive factors. NAFTA, which went into effect on January 1, 1994, requires annual reductions in tariffs for chicken and chicken products in order to eliminate such tariffs by January 1, 2003. As such tariffs are reduced, there can be no assurance that increased competition from chicken imported into Mexico from the U.S. will not have a material adverse effect on the Mexican chicken industry in general, or the Company's Mexican operations in particular. OTHER ACTIVITIES The Company has regional distribution centers located in Arlington, El Paso, Mt. Pleasant and San Antonio, Texas; Phoenix and Tucson, Arizona; and Oklahoma City, Oklahoma that distribute the Company's own poultry products along with certain poultry and non-poultry products purchased from third parties to independent grocers and quick service restaurants. The Company's non-poultry distribution business is conducted as an accommodation to their customers and to achieve greater economies of scale in distribution logistics. The store-door delivery capabilities for the Company's own poultry products provide a strategic service advantage in selling to quick service, national chain restaurants. REGULATION The chicken industry is subject to government regulation, particularly in the health and environmental areas. The Company's chicken processing facilities in the U.S. are subject to on-site examination, inspection and regulation by the USDA. The FDA inspects the production of the Company's feed mills in the U.S. The Company's Mexican food processing facilities and feed mills are subject to on-site examination, inspection and regulation by a Mexican governmental agency, which performs functions similar to those performed by the USDA and FDA. Since commencement of operations by the Company's predecessor in 1946, compliance with applicable regulations has not had a material adverse effect upon the Company's earnings or competitive position and such compliance is not anticipated to have a materially adverse effect in the future. Management believes that the Company is in substantial compliance with all applicable laws and regulations relating to the operations of its facilities. The Company anticipates increased regulation by the USDA concerning food safety, by the FDA concerning the use of medications in feed and by the TNRCC, the ASVO and the EPA concerning the disposal of chicken by-products and wastewater discharges. Although the Company does not anticipate any such regulation having a material adverse effect upon the Company, no assurances can be given to that effect. EMPLOYEES AND LABOR RELATIONS As of Decmber 14, 1997 the Company employed approximately 9,700 persons in the U.S. and 3,300 persons in Mexico. Approximately 2,000 employees at the Company's Lufkin and Nacogdoches, Texas facility are members of collective bargaining units represented by the United Food and Commercial Workers Union (the "UFCW"). None of the Company's other U.S. employees have union representation. The Company's collective bargaining agreements with the UFCW expire on August 10, 1998 with respect to the Company's Lufkin employees and on October 5, 1998 with respect to the Company's Nacogdoches employees. The Company believes that the terms of each of these agreements are no more favorable than those provided to its non-union U.S. employees. In Mexico, most of the Company's hourly employees are covered by collective bargaining agreements as most employees are in Mexico. The Company has not experienced any work stoppage since a two day work stoppage at the Lufkin facility in May 1993, and management believes that relations with the Company's employees are satisfactory. DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information relating to the Current directors and executive officers of the Company: EXECUTIVE OFFICERS OF THE COMPANY AGE POSITIONS Lonnie "Bo" Pilgrim (1) 69 Chairman of the Board and Chief Executive Officer Clifford E. Butler 55 Vice Chairman of the Board and Executive President Lindy M. "Buddy" Pilgrim 42 President and Chief Operating Officer and Director David Van Hoose 55 President, Mexican Operations Richard A. Cogdill 37 Executive Vice President, Chief Financial Officer, Secretary and Treasurer Robert L. Hendrix 61 Executive Vice President Operations and Director Terry Berkenbile 47 Senior Vice President Sales & Marketing, Retail and Fresh Products Ray Gameson 48 Senior Vice President Human Resources O.B. Goolsby, Jr. 50 Senior Vice President Prepared Foods Operations Michael D. Martin 43 Senior Vice President DeQueen, Arkansas Complex James J. Miner, Ph.D. 69 Senior Vice President Technical Services and Director Michael J. Murray 39 Senior Vice President Sales & Marketing, Prepared Foods Robert N. Palm 54 Senior Vice President, Lufkin, Texas Complex Lonnie Ken Pilgrim (1) 39 Senior Vice President, Director of Transportation and Director Charles L. Black (1) 67 Director Robert E. Hilgenfeld (1) (2) 72 Director Vance C. Miller, Sr. (1) (2) 63 Director James G. Vetter, Jr. (1) (2) 63 Director Donald L. Wass, Ph.D. (1) 65 Director _________ (1) Member of the Compensation Committee (2) Member of the Audit Committee LONNIE "BO" PILGRIM has served as Chairman of the Board and Chief Executive Officer since the organization of the Company in 1968. Prior to the incorporation of the Company, Mr. Pilgrim was a partner in the Company's predecessor partnership business founded in 1946. CLIFFORD E. BUTLER serves as Vice Chairman of the Board and Executive President. He joined the Company as Controller and Director in 1969, was named Senior Vice President of Finance in 1973, became Chief Financial Officer and Vice Chairman of the board in July 1983 and effective January 1, 1997 he became Executive President and continues to serve as Vice Chairman of the Board. LINDY M. "BUDDY" PILGRIM serves as President and Chief Operating Officer of the Company. He was elected as Director in March 1993 and began employment in April 1993 under the title of President of U.S. Operations and Sales & Marketing. From April 1993 to March 1994, the President and Chief Operating Officer reported to him.After that time, the Chief Operating Officer title and responsibilities were incorporated into his own. Up to October 1990, Mr. Pilgrim was employed by the Company for 12 years in marketing and 9 years in operations. From October 1990 to April 1993, he was President of Integrity Management Services, Inc., a consulting firm to the food industry. He is a nephew of Lonnie "Bo" Pilgrim. DAVID VAN HOOSE has been President of Mexican Operations since April 1993. He was previously Senior Vice President, Director General, Mexican Operations since August 1990 to April 1993. Mr. Van Hoose was employed by the Company in September 1988 as Senior Vice President, Texas Processing. Prior to that, Mr. Van Hoose was employed by Cargill, Inc., as General Manager of one of its chicken operations. RICHARD A. COGDILL has served as Executive Vice President, Chief Financial Officer, Secretary and Treasurer since January 1, 1997. Previously he served as Senior Vice President, Corporate Controller, from August 1992 through December 1996 and as Vice President, Corporate Controller from October 1991 through August 1992. Prior to October 1991 he was a Senior Manager with Ernst & Young LLP. He is a Certified Public Accountant. ROBERT L. HENDRIX has been Executive Vice President, Operations, of the Company since March 1994 and as a Director of the Company since March 1994. Prior to that he served as Senior Vice President, NETEX Processing from August 1992 to March 1994 and as President and Chief of Complex Operations from September 1988 to March 1992. He was on leave from the Company from March 1992 to August 1992. From July 1983 to March 1992 he served as a Director of the Company. He was President and Chief Operating Officer of the Company from July 1983 to September 1988. He joined the Company as Senior Vice President in September 1981 when the Company acquired Mountaire Corporation of DeQueen, Arkansas, and, prior thereto, he was Vice President of Mountaire Corporation. TERRY BERKENBILE was named Senior Vice President, Sales & Marketing, for Retail and Fresh Products in July 1994. Prior to that he was Vice President, Sales & Marketing, for Retail and Fresh Products since May 1993 to July 1994. From February 1991 to April 1993, Mr. Berkenbile was Director Retail Sales & Marketing at Hudson Foods. From February 1988 to February 1991, Mr. Berkenbile was Director Plant Sales at the Company; prior thereto, he worked in the processed red meat industry. RAY GAMESON has been Senior Vice President of Human Resources since October 1994. He previously served as Vice President of Human Resources since August 1993. From December 1991 to July 1993, he was employed by Townsends, Inc. and served as Complex Human Resource, Manager. Prior to that, he was employed by the Company as Complex Human Resource, Manager, at its Mt. Pleasant, Texas location. O.B. GOOLSBY, JR. has been Senior Vice President, Prepared Foods Operations since August 1992. He was previously Vice President, Prepared Foods Operations since April 1986 to August 1992 and was previously employed by the Company from November 1969 to January 1981. MICHAEL D. MARTIN has been Senior Vice President, DeQueen, Arkansas Complex Manager, of the Company since April 1993. He previously served as Plant Manager at the Company's Lufkin, Texas operations and Vice President, Processing, at the Company's Mt. Pleasant, Texas, operations up to April 1993. He has served in various other operating management positions in the Arkansas Complex since September 1981. Prior to that, he was employed by Mountaire Corporation of DeQueen, Arkansas, until it was acquired by the Company in September 1981. JAMES J. MINER, PH.D., has been Senior Vice President, Technical Services, since April 1994. He has been employed by the Company and its predecessor partnership since 1966 and served as Senior Vice President responsible for live production and feed nutrition from 1968 to April 1994. He has been a Director since the incorporation of the Company in 1968. MICHAEL J. MURRAY has been Senior Vice President, Sales & Marketing, for Prepared Foods since October 1994. He previously served as Vice President of Sales and Marketing, Food Service from August 1993 to October 1994. From 1990 to July 1993, he was employed by Cargill, Inc. Prior to that, from March 1987 to 1990 he was employed by the Company as a Vice President for sales and marketing and prior thereto, he was employed by Tyson Foods, Inc. ROBERT N. PALM has been Senior Vice President, Lufkin, Texas, Complex Manager of the Company, since June 1985 and was previously employed in various operating management positions by Plus-Tex Poultry, Inc., a Lufkin, Texas based company acquired by Pilgrim's Pride in June 1985. LONNIE KEN PILGRIM has been employed by the Company since 1977 and has been Senior Vice President, Transportation since August 1997. Prior to that he served the Company as its Vice President, Director of Transportation. He has been a member of the Board of Directors since March 1985. He is a son of Lonnie "Bo" Pilgrim. CHARLES L. BLACK was Senior Vice President, Branch President of NationsBank, Mt. Pleasant, Texas, from December 1981 to his retirement in February 1995. He previously was a Director of the Company from 1968 to August 1992 and has served as a director since his re-election in February 1995. ROBERT E. HILGENFELD was elected a Director in September 1986. Mr. Hilgenfeld was a Senior Vice President-Marketing/Processing for the Company from 1969 to 1972 and for seventeen years prior to that worked in various sales and management positions for the Quaker Oat Company. From 1972 until April 1986, he was employed by Church's Fried Chicken Company ("Church's") as Vice President-Purchasing Group, Vice President and Senior Vice President. He was elected a Director of Church's in 1985 and retired from Church's in April 1986. Since retirement he has served as a consultant to various companies including the Company. VANCE C. MILLER, SR. was elected a Director in September 1986. Mr. Miller has been Chairman of Vance C. Miller Interests, a real estate development company formed in 1977 and has served as the Chairman of the Board and Chief Executive Officer of Henry S. Miller Cos., a Dallas, Texas real estate services firm since 1991. Mr. Miller also serves as a director of Resurgence Properties, Inc. JAMES G. VETTER, JR. has practiced law in Dallas, Texas since 1966. He is a member of the Dallas law firm of Godwin & Carlton, P.C., and has served as general counsel and a Director since 1981. Mr. Vetter is a Board Certified-Tax Law Specialist and serves as a lecturer and author in tax matters. DONALD L. WASS, Ph.D. was elected a Director of the Company in May 1987. He has been President of the William Oncken Company of Texas, a time management consulting company, since 1970. ITEM 2. PROPERTIES PRODUCTION AND FACILITIES BREEDING AND HATCHING The Company supplies all of its chicks in the U.S. by producing its own hatching eggs from domestic breeder flocks in the U.S. owned by the Company, approximately 34% of which are maintained on 43 Company-operated breeder farms. In the U.S., the Company currently owns or contracts for approximately 8.4 million square feet of breeder housing on approximately 233 breeder farms. In Mexico, all of the Company's breeder flocks are maintained on Company- owned farms. The Company owns seven hatcheries in the United States, located in Nacogdoches, Center and Pittsburg, Texas, and DeQueen and Nashville, Arkansas, where eggs are incubated and hatched in a process requiring 21 days. Once hatched, the day-old chicks are inspected and vaccinated against common poultry diseases and transported by Company vehicles to grow-out farms. The Company's seven hatcheries in the U.S. have an aggregate production capacity of approximately 8.2 million chicks per week. In Mexico, the Company owns seven hatcheries, which have an aggregate production capacity of approximately 3.3 million chicks per week. GROW-OUT The Company places its U.S. grown chicks on approximately 1,100 grow-out farms located in Texas and Arkansas. These farms provide the Company with approximately 54.9 million square feet of growing facilities. The Company operates 33 grow-out farms in the U.S. which account for approximately 8.1% of its total annual U.S. chicken capacity. The Company also places chicks with farms owned by affiliates of the Company under grow-out contracts. The remaining chicks are placed with independent farms under grow-out contracts. Under such grow-out contracts, the farmers provide the facilities, utilities and labor. The Company supplies the chicks, the feed and all veterinary and technical services. Contract grow-out farmers are paid based on live weight under an incentive arrangement. In Mexico, the Company owns approximately 38% of its grow-out farms and contracts with independent farmers for the balance of its production. Arrangements with independent farmers in Mexico are similar to the Company's arrangements with contractors in the United States. FEED MILLS An important factor in the production of chicken is the rate at which feed is converted into body weight.The Company purchases feed ingredients on the open market. The primary feed ingredients include corn, milo and soybean meal, which historically have been the largest component of the Company's total production cost. The quality and composition of the feed is critical to the conversion rate, and accordingly, the Company formulates and produces its own feed. In the U.S., the Company operates seven feed mills located in Nacogdoches, Mt. Pleasant, Center and Pittsburg, Texas and Nashville and Hope, Arkansas. The Company currently has annual feed requirements of approximately 2.2 million tons and the capacity to produce approximately 2.6 million tons. The Company owns four feed mills in Mexico, which produce all of the requirements of its Mexican operations. Mexican annual feed requirements are approximately 0.7 million tons with a capacity to produce approximately 0.9 million tons. In fiscal 1997, approximately 14% of the grain used was imported from the United States. However, this percentage fluctuates based on the availability and cost of local grain supplies and in recent years has been as high as 55%. Feed grains are commodities subject to volatile price changes caused by weather, size of harvest, transportation and storage costs and the agricultural policies of the United States and foreign governments. Although the Company can and sometimes does purchase grain in forward markets, it cannot eliminate the potential adverse effect of grain price changes. PROCESSING Once the chickens reach processing weight, they are transported in the Company's trucks to the Company's processing plants. These plants utilize modern, highly automated equipment to process and package the chickens. The Company periodically reviews possible application of new processing technologies in order to enhance productivity and reduce costs. The Company's six U.S. processing plants, two of which are located in Mt. Pleasant, Texas, and the remainder of which are located in Dallas, Nacogdoches and Lufkin, Texas, and DeQueen, Arkansas, have the capacity, under present U.S.D.A. inspection procedures, to produce approximately 1.3 billion pounds of dressed chicken annually. The Company's three processing plants located in Mexico, which perform fewer processing functions than the Company's U.S. facilities, have the capacity to process approximately 470 million pounds of dressed chicken annually. PREPARED FOODS PLANT The Company's prepared foods plant in Mt. Pleasant, Texas, was constructed in 1986 and has expanded significantly since that time. This facility has deboning lines, marination systems, batter/breading systems, fryers, ovens, both mechanical and cryogenic freezers, a variety of packaging systems and cold storage. This plant is currently operating at the equivalent of two shifts a day for six days a week. If necessary, the Company could add additional shifts during the seventh day of the week. The Company is currently completing construction of a new prepared foods facility at its Dallas, Texas location, which is scheduled to begin production late in fiscal first quarter 1998. EGG PRODUCTION The Company produces eggs at three farms near Pittsburg, Texas. One farm is owned by the Company, while two farms are operated under contract by an entity owned by a major stockholder of the Company. The eggs are cleaned, sized, graded and packaged for shipment at processing facilities located on the egg farms. The farms have a housing capacity for approximately 2.3 million producing hens and are currently housing approximately 2.0 million hens. OTHER FACILITIES AND INFORMATION The Company operates a rendering plant located in Mt. Pleasant, Texas, that currently processes by-products from approximately 8.2 million chickens weekly into protein products, which are used in the manufacture of chicken and livestock feed and pet foods. The Company operates a feed supply store in Pittsburg, Texas, from which it sells various bulk and sacked livestock feed products. The Company owns an office building in Pittsburg, Texas, which houses its executive offices, and an office building in Mexico City, which houses the Company's Mexican marketing offices. The Company also owns approximately 9,618 acres of farmland previously used in the Company's non-poultry farming operations. The Company is in the process of disposing of the farmland and currently has contracts of sale scheduled to close in early January, 1998 which will complete the disposal of such land and related assets. Substantially all of the Company's U.S. property, plant and equipment is pledged as collateral on its secured debt. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is named as a defendant or co-defendant in lawsuits arising in the course of its business. The Company does not believe that such pending lawsuits will have a material adverse impact on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NOT APPLICABLE
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS <TABLE> <CAPTION> QUARTERLY STOCK PRICES AND DIVIDENDS High and low sales prices and dividends were: <S> <C> <C> <C> <C> <C> <C> Prices Prices 1997 1996 Dividends QUARTER HIGH LOW HIGH LOW 1997 1996 First $ 9 $7 3/4 $8 3/8 $6 5/8 $.015 $.015 Second 12 1/8 8 5/8 7 5/8 6 3/4 .015 .015 Third 12 3/4 9 1/2 9 6 3/4 .015 .015 Fourth 15 3/8 10 5/16 9 7 1/2 .015 .015 The Company's stock is traded on the New York Stock Exchange (ticker symbol "CHX"). The Company estimates there were approximately 13,700 holders (including individual participants in security position listings) of the Company's common stock as of December 19, 1997. ITEM 6. SELECTED FINANCIAL DATA S E L E C T E D F I N A N C I A L D A T A PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES </TABLE> <TABLE> <CAPTION> FISCAL YEARS ENDED <S> <C> <C> <C> <C> <C> 1997 1996 1995 1994 1993(A) (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales $1,277,649 $1,139,310 $931,806 $922,609 $887,843 Gross margin 114,497 70,640 74,144 110,827 106,036 Operating income (loss) 63,894 21,504(b) 24,930(b) 59,698 56,345 Income (loss)before income taxes and extraordinary charge 43,824 47 2,091 42,448 32,838 Income tax expense (benefit) (c) 2,788 4,551 10,058 11,390 10,543 Income (loss) before extraordinary charge 41,036 (4,504) (7,967) 31,058 22,295 Extraordinary charge early repayment of debt, net of tax - (2,780) - - (1,286) Net income (loss) 41,036 (7,284) (7,967) 31,058 21,009 PER COMMOM SHARE DATA: Income (loss) before extraordinary charge $1.49 $(0.16) $(0.29) $1.13 $.81 Extraordinary charge - early repayment of debt - (0.10) - - (0.05) Net income (loss) 1.49 (0.26) (0.29) 1.13 (0.05) Cash dividends 0.06 0.06 0.06 0.06 0.03 Book value (d) 6.62 5.19 5.51 5.86 4.80 BALANCE SHEET SUMMARY: Working capital $133,542 $88,455 $88,395 $99,724 $72,688 Total assets 579,124 536,722 497,604 438,683 422,846 Notes payable and current maturities of long-term debt 11,596 35,850 18,187 4,493 25,643 Long-term debt, less current maturities 224,743 198,334 182,988 152,631 159,554 Total stockholders' equity 182,516 143,135 152,074 161,696 132,293 KEY INDICATORS (as a percentage ofsales): Gross margin 9.0% 6.2% 8.0% 2.0% 11.9% Selling, general and administrative expenses 4.0% 4.3% 5.3% 5.5% 5.6% Operating income (loss) 5.0% 1.9% 2.7% 6.5% 5.7% Interest expense, net 1.7% 1.9% 1.9% 2.1% 2.9% Net income (loss) 3.2% (0.6)% (0.9)% 3.4% 2.4% </TABLE> <TABLE> <CAPTION> Fiscal Years Ended <S> <C> <C> <C> <C> 1992 1991 1990 1989 INCOME STATEMENT DATA: Net Sales $817,361 $786,651 $720,555 $661,077 Gross Margin 32,802 75,567 74,190 83,356 Operating income (loss) (12,739) 31,039 33,379 47,014 Income (loss) before income taxes and extraordinary charge (33,712) 12,235 20,463 31,027 Income tax expense (benefit) (c) (4,048) (59) 4,826 10,745 Income (loss) before extraordinary charge (29,664) 12,294 15,637 20,282 Extraordinary charge - early repayment of debt, net of tax - - - - Net income (loss) (29,664) 12,294 15,637 20,282 PER COMMON SHARE DATA: Income (loss) before extraordinary charge $(1.24) $0.54 $0.69 $0.90 Extraordinary charge - early repayment of debt - - - - Net income (loss) (1.24) 0.54 0.69 0.90 Cash dividends 0.06 0.06 0.06 0.06 Book value (d) 4.06 4.97 4.49 3.86 BALANCE SHEET SUMMARY: Working Capital $11,227 $44,882 $54,161 $60,313 Total assets 434,566 428,090 379,694 291,102 Notes payable and current maturities of long-term debt 86,424 44,756 30,351 9,528 Long-term debt, less current maturities 131,534 175,776 154,277 109,412 Total stockholders' equity 112,112 112,353 101,414 87,132 KEY INDICATORS (as a percentage of sales) Gross Margin 4.0% 9.6% 10.3% 12.6% Selling, general and administrative expenses 5.7% 5.7% 5.7% 5.5% Operating income (loss) (1.6)% 3.9% 4.6% 7.1% </TABLE> (a) Fiscal 1993 had 53 weeks (b) The peso decline and the related economic recession in Mexico contributed significantly to the operating losses experienced by the Company's Mexican operations of $8.2million and $17.0 million for fiscal years 1996 and 1995, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (c) The Company does not include income or losses from its Mexican operations in its determination of taxable income for U.S. income tax purposes based upon its determination that such earnings will be indefinitely reinvested in Mexico. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note D of the Consolidated Financial Statements of the Company. (d) Amounts are based on end-of-period shares of common stock outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Profitability in the chicken industry can be materially affected by the commodity prices of feed grains and the commodity prices of chicken and chicken parts, each of which are determined largely by supply and demand. As a result, the chicken industry as a whole has been characterized by cyclical earnings. Cyclical fluctuations in earnings of individual chicken companies can be mitigated somewhat by: (i) business strategy, (ii) product mix, (iii) sales and marketing plans, and (iv) operating efficiencies. In an effort to reduce price volatility and to generate higher, more consistent profit margins, the Company has concentrated on the production and marketing of prepared food products, which generally have higher margins than the Company's other products. Additionally, the production and sale in the U.S. of prepared foods products reduces the impact of feed grain costs on the Company's profitability. As further processing is performed, feed grain costs become a decreasing percentage of a product's total production costs. In December 1994, the Mexican government changed its policy of defending the peso against the U.S. dollar and allowed it to float freely on the currency markets. These events resulted in the Mexican peso exchange rate declining from 3.39 to 1 U.S. dollar at October 3, 1994 to a low of 8.50 to 1 U.S. dollar at October 28, 1997. The decline in the Mexican peso exchange rate affected the Company's operations directly and indirectly as a result of the related economic recession in Mexico in fiscal 1995. Similarly, the Company's results of operations were adversely affected by: (i) the continuation of the economic recession in Mexico in fiscal 1996, as well as, (ii) significantly higher feed grain costs in fiscal 1996 (which included record high corn prices). In fiscal 1997, however, the Company benefited substantially from: (i) a rebounding economy in Mexico when compared to fiscal 1996 and 1995, and, (ii) the adjustment of supply of poultry products in Mexico to the levels of demand existing after the economic recession.
The following table presents certain information regarding the Company's U.S. and Mexican operations. <TABLE> <CAPTION> Percentage of Net Sales YEARS ENDED <S> <C> <C> <C> <C> <C> <C> SEPTEMBER SEPTEMBER SEPTEMBER 27, 1997 28, 1996 30, 1995 Net sales 100.0% 100.0% 100.0% Cost of sales 91.0 93.8 92.0 Gross profit 9.0 6.2 8.0 Selling, general and administrative expense 4.0 4.3 5.3 Operating income 5.0 1.9 2.7 Interest expense 1.7 1.9 1.9 Income before income taxes and extraordinary charge 3.4 0.0 0.2 Net income (loss) 3.2 (0.6) (0.9) </TABLE> RESULTS OF OPERATIONS FISCAL 1997 COMPARED TO FISCAL 1996: NET SALES. Consolidated net sales were $1.3 billion for fiscal 1997, an increase of $138.3 million, or 12.1%, over fiscal 1996. The increase in consolidated net sales resulted from an $84.5 million increase in U.S. chicken sales to $858.1 million, a $46.9 million increase in Mexican chicken sales to $275.0 million and from a $7.0 million increase of sales of other U.S. products to $144.5 million. The increase in U.S. chicken sales was primarily due to a 14.0% increase in dressed pounds produced primarily as a result of the Company's expansion of existing facilities and the purchase of poultry producing assets capable of producing 650,000 chickens per week from Green Acre Foods, Inc. on April 15, 1997, offset partially by a 2.7% decrease in total revenue per dressed pound produced. The increase in Mexican chicken sales was primarily due to a 25.5% increase in total revenue per dressed pound partially offset by a 3.9% decrease in dressed pounds produced resulting from management's decision in fiscal 1996 to reduce production due to the recession in Mexico. Increased revenue per dressed pound produced in Mexico was primarily the result of higher sales prices as well as generally improved economic conditions in Mexico compared to the prior year. The increase in sales of other domestic products was primarily the result of increased sales of the company's chicken by-products group. COST OF SALES. Consolidated cost of sales was $1.2 billion in fiscal 1997, an increase of $94.5 million, or 8.8%, over fiscal 1996. The increase primarily resulted from a $91.7 million increase in cost of sales of U.S. operations, and a $2.8 million increase in the cost of sales in Mexican operations. The cost of sales increase in U.S. operations of $91.7 million was due to a 14.0% increase in dressed pounds produced and increased production of higher cost and margin products in prepared foods, partially offset by a decrease in feed ingredient cost when compared to fiscal 1996. The $2.8 million cost of sales increase in Mexican operations was primarily due to a 5.4% increase in average costs of sales per pound partially offset by a 3.9% decrease in dressed pounds produced. The increase in average costs of sales per pound was primarily the result of cost adjusting upward due to generally improved economic conditions in Mexico compared to the prior year offset partially by lower feed ingredient cost experienced in the period. GROSS PROFIT. Gross profit as a percentage of sales increased to 9.0% in fiscal 1997 from 6.2% in fiscal 1996. The increased gross profit resulted mainly from significantly higher margins in Mexico. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general and administrative expenses were $50.6 million in fiscal 1997, and $49.1 million in fiscal 1996. Consolidated selling, general and administrative expenses as a percentage of sales decreased in fiscal 1997 to 4.0% compared to 4.3% in fiscal 1996. The decrease in selling, general and administrative expenses as a percent of sales was primarily due to increased sales, while selling, general and administrative expenses remained relatively constant. OPERATING INCOME. Consolidated operating income was $63.9 million for fiscal 1997, an increase of $42.4 million, or 197.13% when compared to fiscal 1996, resulting from higher margins experienced in the Mexican operations. INTEREST EXPENSE. Consolidated net interest expense increased slightly to $22.1 million, or 2.5% in fiscal 1997, when compared to $21.5 million in fiscal 1996, due to slightly higher levels of outstanding indebtedness in 1997. As a percentage of sales, however, interest expense decreased to 1.7% in fiscal 1997 compared to 1.9% in fiscal 1996. MISCELLANEOUS EXPENSE. Consolidated miscellaneous, net, a component of "Other Expense (Income)", was ($2.4) million in fiscal 1997 and includes a $2.2 million final settlement of claims resulting from the January 8, 1992 fire at the Company's prepared foods plant in Mt. Pleasant, Texas. INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 1997 decreased to $2.8 million compared to an expense of $4.6 million in fiscal 1996. The lower consolidated income tax expense in contrast to higher consolidated income resulted from increased Mexican earnings that are not currently subject to income taxes. FISCAL 1996 COMPARED TO FISCAL 1995: NET SALES. Consolidated net sales were $1.14 billion for fiscal 1996, an increase of $207.5 million, or 22.3%, over fiscal 1995. The increase in consolidated net sales resulted from a $102.6 million increase in U.S. chicken sales to $773.7 million, a $68.6 million increase in Mexican chicken sales to $228.1 million and a $36.3 million increase in sales of other domestic products to $137.5 million. The increase in U.S. chicken sales was primarily due to a 7.7% increase in total revenue per dressed pound produced and a 7.0% increase in dressed pounds produced. The increase in Mexican chicken sales was primarily due to a 35.6% increase in Mexican dressed pounds produced and a 5.5% increase in total revenue per dressed pound. The increase in Mexican dressed pounds produced resulted primarily from the July 5, 1995 acquisition of five chicken companies located near Queretaro, Mexico. The increase in sales of other domestic products was primarily the result of increased sales of the Company's chicken by-products group and higher sales prices for table eggs. Increased revenues per dressed pound produced both in the U.S. and in Mexico were primarily the result of higher sales prices caused by the chicken markets adjusting to higher feed ingredient cost. COST OF SALES. Consolidated cost of sales was $1.07 billion in fiscal 1996, an increase of $211.0 million, or 24.6%, over fiscal 1995. The increase primarily resulted from a $150.8 million increase in cost of sales of U.S. operations, and a $60.2 million increase in the cost of sales in Mexican operations. The cost of sales increase in U.S. operations of $150.8 million was due to a 41.5% increase in feed ingredient costs, a 7.0% increase in dressed pounds produced and increased production of higher cost and margin products in prepared foods. Since the fiscal 1995 year end, feed ingredient costs increased substantially due to lower crop yields in the 1995 harvest season. Beginning in July 1996, feed ingredient prices declined significantly due to a favorable crop harvest. The $60.2 million cost of sales increase in Mexican operations was primarily due to a 35.6% increase in dressed pounds produced and a 7.0% increase in average costs of sales per pound. The increase in average costs of sales per pound was primarily the result of a 37.2% increase in feed ingredient costs resulting from the reasons discussed above. GROSS PROFIT. Gross profit as a percentage of sales decreased to 6.2% in fiscal 1996 from 8.0% in fiscal 1995. The decreased gross profit as a percentage of sales resulted mainly from increased costs of sales due to higher feed ingredient prices experienced in fiscal 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general and administrative expenses were $49.1 million in fiscal 1996 and $49.2 million in fiscal 1995. Consolidated selling, general and administrative expenses as a percentage of sales decreased in fiscal 1996 to 4.3% compared to 5.3% in fiscal 1995. OPERATING INCOME. Consolidated operating income was $21.5 million for fiscal 1996, a decrease of $3.4 million, when compared to fiscal 1995, resulting primarily from higher feed ingredient cost. INTEREST EXPENSE. Consolidated net interest expense was $21.5 million in fiscal 1996, an increase of $4.1 million, or 23.2%, when compared to fiscal 1995. This increase was due to higher outstanding debt levels resulting primarily from expansions in the U.S. and the prior year acquisitions in Mexico, offset slightly by lower interest rates when compared to fiscal 1995. INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 1996 was $4.6 million compared to a consolidated income tax expense of $10.1 million in fiscal 1995. Consolidated income tax expense is significantly in excess of the amount computed at the statutory U.S. income tax rate due to the non-deductibility of Mexican losses in the U.S. in both fiscal 1996 and fiscal 1995. The decrease in consolidated income tax expense in fiscal 1996 compared to fiscal 1995 primarily resulted from the $13.6 million decrease in income before income taxes and extraordinary charges for domestic operations in fiscal 1996 compared to fiscal 1995. EXTRAORDINARY CHARGE. The extraordinary charge-early repayment of debt in the amount of $2.8 million, net of tax, was incurred while refinancing certain debt at a lower interest rate, which will result in long-term interest expense reductions. LIQUIDITY AND CAPITAL RESOURCES: At September 27, 1997, the Company's working capital was $133.5 million and a current ratio was 2.14 to 1 compared with working capital of $88.5 million and a current ratio of 1.63 to 1 at September 28, 1996. The increases in working capital and current ratio from September 28, 1996 to September 27, 1997 were due primarily to income from operations. Trade accounts and other receivables were $78.0 million at September 27, 1997, a $12.1 million increase from September 28, 1996. The 18.3% increase was due primarily to increased sales volumes. Inventories were $146.2 million at September 27, 1997 compared to $136.9 million at September 28, 1996. The $9.3 million increase between September 28, 1996 to September 27, 1997 was due primarily to larger inventories from the inclusion of recently acquired production capabilities from Green Acre Foods, Inc., offset partially by the reduction of feed costs in inventories. Capital expenditures for fiscal 1997 were $50.2 million and were incurred primarily to acquire or expand production capacities in the U.S., improve efficiencies, reduce costs and for the routine replacement of equipment. The Company anticipates that it will spend approximately $55.0 million for capital expenditures in fiscal year 1998 and expects to finance such expenditures with available operating cash flows and long-term financing. Capital expenditures include the Company's April 15, 1997, acquisition of certain chicken producing assets of Green Acre Foods, Inc., an integrated poultry producer located in the Center and Nacogdoches area of East Texas. These assets are capable of producing 650,000 chickens per week. Cash flows provided by operating activities were $49.6 million, $11.4 million and $32.7 million in fiscal 1997, 1996 and 1995, respectively. The significant increase in cash flows provided by operating activities for fiscal 1997 when compared to fiscal 1996 was due primarily to net income for fiscal 1997 compared to a net loss in fiscal 1996. The decrease in cash flows provided by operating activities between fiscal 1996 and fiscal 1995 was primarily caused by increased inventories resulting from higher feed costs in fiscal 1996. Cash flows provided by financing activities were $348,000, $27.3 million and $40.2 million in fiscal 1997, 1996 and 1995, respectively. The cash provided by financing activities primarily reflects the net proceeds from notes payable and long-term financing and debt retirements. At September 27, 1997, the Company's stockholder's equity increased to $182.5 million from $143.1 million at September 28, 1996. Total debt to capitalization decreased to 56.4% at September 27, 1997 compared to 62.1% at September 28, 1996. The Company maintains $110 million in revolving credit facilities and $45 million in secured term borrowing facilities. The credit facilities provide for interest at rates ranging from LIBOR plus one and three-quarters percent to LIBOR plus two percent and are secured by inventory, trade accounts receivable and fixed assets. At September 27, 1997, $102 million was available under the revolving credit facilities and $25 million was available under the term borrowing facilities. The Company's deferred income taxes have resulted primarily from the Company's use of the cash method of accounting for periods before July 2, 1988. The "Omnibus Budget Reconciliation Act of 1987" required certain family-owned farming businesses to switch to the accrual method of accounting and provided that such corporations establish a suspense account in lieu of taking the adjustment into taxable income currently. "The Taxpayer Relief Act of 1997" requires that this suspense account be taken into income ratably over 20 years beginning in fiscal 1997, however, any remaining balance in the suspense account will be accelerated if the Company ceases to be family-owned corporation. A "family-owned" corporation is one in which at least 50 percent of the total combined voting power of all classes of stock of the corporation are owned by members of the same family. The Company believes that it will remain a family owned corporation for the foreseeable future. IMPACT OF MEXICAN PESO DEVALUATION: In December 1994, the Mexican government changed its policy of defending the peso against the U.S. dollar and allowed it to float freely on the currency markets. These events resulted in the Mexican peso exchange rate declining from 3.39 to 1 U.S. dollar at October 1, 1994 to a low of 8.50 at October 28, 1997. The decline in the Mexican peso exchange rate affected the Company's operations directly and indirectly as a result of the related economic recession in Mexico in fiscal 1995. Similarly, the Company's results of operations were adversely affected by the continuation of the economic recession in Mexico in fiscal 1996. On December 3, 1997 the Mexican peso closed at 8.13 to 1 U.S. dollar. No assurance can be given as to the future valuation of the Mexican peso and further movement in the Mexican peso could affect future earnings positively or negatively. IMPACT OF INFLATION: Due to moderate inflation and the Company's rapid inventory turnover rate, the results of operations have not been adversely affected by inflation during the past three-year period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements together with the report of independent auditors, and financial statement schedules are included on pages 36 through 49 of this document. Financial statement schedules other than those included herein have been omitted because the required information is contained in the consolidated financial statements or related notes, or such information is not applicable. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NOT APPLICABLE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Reference is made to "Election of Directors" on pages 3 through 5 of Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders, which section is incorporated herein by reference. Reference is made to "Compliance with Section 16(a) of the Exchange Act" on page 9 of Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders, which section is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information responsive to Items 11, 12 and 13 is incorporated by reference from sections entitled "Security Ownership", "Election of Directors", "Executive Compensation", and "Certain Transactions" of the Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The financial statements listed in the accompanying index to financial statements and schedules are filed as part of this report. (2) No schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are required under the related instructions or are applicable and therefore have been omitted. (3) Exhibits Exhibit NUMBER 2.1 Agreement and Plan of Reorganization dated September 15, 1986, by and among Pilgrim's Pride Corporation, a Texas corporation; Pilgrim's Pride Corporation, a Delaware corporation; and Doris Pilgrim Julian, Aubrey Hal Pilgrim, Paulette Pilgrim Rolston, Evanne Pilgrim, Lonnie "Bo" Pilgrim, Lonnie Ken Pilgrim, Greta Pilgrim Owens and Patrick Wayne Pilgrim (incorporated by reference from Exhibit 2.1 to the Company's Registration Statement on Form S-1 (No. 33-8805) effective November 14, 1986). 3.1 Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3.1 of the Company's Registration Statement on Form S-1 (No.33-8805) effective November 14, 1986). 3.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation, a Delaware Corporation, effective December 4, 1996 (incorporated by reference from Exhibit 3.3 of the Company's Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 4.1 Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3.1 of the Company's Registration Statement on Form S-1 (No. 33-8805) effective November 14, 1986). 4.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation, a Delaware Corporation, effective December 4, 1996 (incorporated by reference from Exhibit 3.3 of the Company's Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 4.3 Specimen Certificate for shares of Common Stock, par value $.01 per share, of the Company (incorporated by reference from Exhibit 4.6 of the Company's Form 8 filed on July 1, 1992). 4.4 Form of Indenture between the Company and Ameritrust Texas National Association relating to the Company's 10 7/8% Senior Subordinated Notes Due 2003 (incorporated by reference from Exhibit 4.6 of the Company's Registration Statement on Form S-1 (No.33-59626) filed on March 16, 1993). 4.5 Form of 10 7/8% Senior Subordinated Note Due 2003 (incorporated by reference from Exhibit 4.8 of the Company's Registration Statement on Form S-1 (No. 33-61160) filed on June 16, 1993). 10.1 Pilgrim's Industries, Inc. Profit Sharing Retirement Plan, restated as of July 1, 1987 (incorporated by reference from Exhibit 10.1 of the Company's Form 8 filed on July 1, 1992). 10.2 Bonus Plan of the Company (incorporated by reference from Exhibit 10.2 to the Company's Registration Statement on Form S-1 (No.33-8805) effective November 14, 1986). 10.3 Stock Purchase Agreement dated May 12, 1992, between the Company and Archer Daniels Midland Company (incorporated by reference from Exhibit 10.45 of the Company's Form 10-K for the year ended September 26, 1992). 10.4 Employee Stock Investment Plan of the Company (incorporated by reference from Exhibit 10.28 of the Company's Registration Statement on Form S-1 (No. 33-21057) effective May 2, 1988). 10.5 Promissory Note dated September 20, 1990, by and between the Company and Hibernia National Bank of Texas (incorporated by reference from Exhibit 10.42 of the Company's Form 8 filed on July 1, 1992). 10.6 Loan Agreement dated October 16, 1990, by and among the Company, Lonnie "Bo" Pilgrim and North Texas Production Credit Association, with related Variable Rate Term Promissory Note and Deed of Trust (incorporated by reference from Exhibit 10.43 of the Company's Form 8 filed on July 1, 1992). 10.7 Secured Credit Agreement dated May 27, 1993, by and among the Company and Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale Nederlanden Bank, N.V., Boatmen's First National Bank of Kansas City, and First Interstate Bank of Texas, N.A. (incorporated by reference from Exhibit 10.31 of the Company's Registration Statement on Form S-1 (No. 33-61160) filed on June 16, 1993). 10.8 First Amendment to Secured Credit Agreement dated June 30, 1994 to the Secured Credit Agreement dated May 27, 1993, by and among the Company and Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale Nederlanden Bank N.V., Boatmen's First National Bank of Kansas City and First Interstate Bank of Texas, N.A. (incorporated by reference from Exhibit 10.33 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.9 Second Amendment to Secured Credit Agreement dated December 6, 1994 to the Secured Credit Agreement dated May 27, 1993, by and among the Company and Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale Nederlanden Bank N.V., Boatmen's First National Bank of Kansas City and First Interstate Bank of Texas, N.A. (incorporated by reference from Exhibit 10.36 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.10 Third Amendment to Secured Credit Agreement dated June 30, 1995 to the Secured Credit Agreement dated May 27, 1993, by and among the Company and Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale Nederlanden Bank N.V., (incorporated by reference from Exhibit 10.37 of the Company's annual report of Form 10-K for the fiscal year ended September 28, 1996). 10.11 Second Amended and Restated Loan and Security Agreement dated July 31, 1995, by and among the Company, the banks party thereto and Creditanstalt- Bankverein, as agent (incorporated by reference from Exhibit 10.38 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.12 Revolving Credit Loan Agreement dated March 27, 1995 by and among the Company and Agricultural Production Credit Association (incorporated by reference from Exhibit 10.39 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.13 First Supplement to Revolving Credit Loan Agreement dated July 6, 1995 by and among the Company and Agricultural Production Credit Association (incorporated by reference from Exhibit 10.40 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.14 Credit Agreement dated as of January 31, 1996 is entered into among Pilgrim's Pride, S.A. de C.V., and Internationale Nederlanden (U.S.) Capital Corporation, Pilgrim's Pride Corporation, Avicola Pilgrim's Pride de Mexico, S.A. de C.V., Compania Incubadora Avicola Pilgrim's Pride, S.A. de C.V., Productora Y Distribuidora de Alimentos, S.A. de C.V., Immobiliaria Avicola Pilgrim's Pride, S. De R.L. de C.V. and C.I.A. Incubadora Hidalgo, S.A. de C.V. (incorporated by reference from Exhibit 10.42 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.15 Fourth Amendment to Secured Credit Agreement dated June 6, 1996 to the Secured Credit Agreement dated May 27, 1993, by and among the Company and Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale Nederlanden Bank N.V., successor to First Interstate Bank of Texas., N.A. (incorporated by reference from Exhibit 10.43 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.16 Second Supplement to Revolving Credit Loan Agreement dated June 28, 1996 by and among the Company and Agricultural Production Credit Association (incorporated by reference from Exhibit 10.44 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.17 Third Supplement to Revolving Credit Loan Agreement dated August 22, 1996 by and among the Company and Agricultural Production Credit Association (incorporated by reference from Exhibit 10.45 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 1996). 10.18 Note Purchase Agreement dated April 14, 1997 by and between John Hancock Mutual Life Insurance Company and Signature 1A (Cayman), Ltd. and the Company (incorporated by reference from Exhibit 10.46 of the Company's Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.19 Guaranty Fee Agreement between Pilgrim's Pride Corporation and Certain Shareholders dated November 28, 1996 (incorporated by reference from Exhibit 10.47 of the Company's Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.20 Aircraft Lease Extension Agreement between B.P. Leasing Co., (L.A. Pilgrim, Individually) and Pilgrim's Pride Corporation, (formerly Pilgrim's Industries, Inc.) effective November 15, 1992 (incorporated by reference from Exhibit 10.48 of the Company's Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.21 Broiler Grower Contract dated May 6, 1997 between Pilgrim's Pride Corporation and Lonnie "Bo" Pilgrim (Farm 30) (incorporated by reference from Exhibit 10.49 of the Company's Quarterly Report on Form 10- for the three months ended March 29, 1997). 10.22 Commercial Egg Grower Contract dated May 7, 1997 between Pilgrim's Pride Corporation and Pilgrim Poultry G.P. (incorporated by reference from Exhibit 10.50 of the Company's Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.23 Agreement dated October 15, 1996 between Pilgrim's Pride Corporation and Pilgrim Poultry G.P. (incorporated by reference from Exhibit 10.51 of the Company's Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.24 Heavy Breeder Contract dated May 7, 1997 between Pilgrim's Pride Corporation and Lonnie "Bo" Pilgrim (Farms 44, 45 & 46) (incorporated by reference from Exhibit 10.51 of the Company's Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.25 Broiler Grower Contract dated January 9, 1997 by and between Pilgrim's Pride and O.B. Goolsby, Jr. (incorporated by reference from Exhibit 10.25 of the Company's Registration Statement on Form S-1 (No. 333-29163) effective June 27, 1997). 10.26 Broiler Grower Contract dated January 15, 1997 by and between Pilgrim's Pride Corporation and B.J.M. Farms. (incorporated by reference from Exhibit 10.26 of the Company's Registration Statement on Form S-1 (No. 333-29163) effective June 27, 1997). 10.27 Broiler Grower Agreement dated January 29, 1997 by and between Pilgrim's Pride Corporation and Clifford E. Butler (incorporated by reference from Exhibit 10.27 of the Company's Registration Statement on Form S-1 (No. 333-29163) effective June 27, 1997). 10.28 Secured Term Credit Agreement dated June 5, 1997 by and among Pilgrim's Pride Corporation and Harris Trust and Savings Bank, and FBS AG Credit, Inc., CoBank, ACB, ING (U.S.) Capital Corporation, Wells Fargo Bank(Texas) and N.A., Caisse National de Credit Agricole, Chicago Branch.* 10.29 Amended and Restated Secured Credit Agreement dated August 11, 1997 to the Secured Credit Agreement dated May 27, 1993 by and among the Company and Harris Trust and Savings Bank, and FBS AG Credit, Inc., CoBank, ACB, ING (U.S.) Capital Corporation, Wells Fargo Bank (Texas) and N.A., Caisse National de Credit Agricole, Chicago Branch.* 10.30 Second Amendment to Second Amended and Restated Loan and Security Agreement dated September 18, 1997 by and among the Company, the banks party thereto and Creditanstalt-Bankverein, as agent.* 10.31 Guaranty Fee Agreement between Pilgrim's Pride Corporation and Certain Shareholders dated July 23, 1997.* 21.1 Subsidiaries of Registrant.* 23.1 Consent of Ernst & Young LLP.* * Filed herewith SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 12th day of December 1997. PILGRIM'S PRIDE CORPORATION By: \s\ Richard A. Cogdill Richard A. Cogdill Chief Financial Officer Secretary and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE \s\ Lonnie "Bo Pilgrim ________________________ Chairman of the Board 12/12/97 Lonnie "Bo" Pilgrim of Directors and Chief Executive Officer (Principal Executive Officer) \s\ Clifford E. Butler _______________________ Vice Chairman of the 12/12/97 Clifford E. Butler Board of Directors, Executive President \s\ Lindy M. "Buddy" Pilgrim ________________________ President and 12/12/97 Lindy M. "Buddy" Pilgrim Chief Operating Officer and Director \s\ Robert L. Hendrix _______________________ Executive Vice President 12/12/97 Robert L. Hendrix Operations and Director \s\ James J. Miner _______________________ Senior Vice President 12/12/97 James J. Miner Technical Services and Director \s\ Lonnie Ken Pilgrim _______________________ Senior Vice President and 12/12/97 Lonnie Ken Pilgrim Director \s\ Charles L. Black _______________________ Director 12/12/97 Charles L. Black _______________________ Director 12/12/97 Robert E. Hilgenfeld _______________________ Director 12/12/97 Vance C. Miller ______________________ Director 12/12/97 James J. Vetter, Jr. _______________________ Director 12/12/97 Donald L. Wass
REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Pilgrim's Pride Corporation We have audited the accompanying consolidated balance sheets of Pilgrim's Pride Corporation and subsidiaries at September 27, 1997 and September 28, 1996 and the related consolidated statements of income (loss), stockholders' equity and cash flows for each of the three years in the period ended September 27, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pilgrim's Pride Corporation and subsidiaries at September 27, 1997 and September 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 27, 1997 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP \s\ Ernst & Young LLP Dallas, Texas November 5, 1997
C O N S O L I D A T E D B A L A N C E S H E E T S PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> SEPTEMBER SEPTEMBER 27, 1997 28, 1996 ASSETS (IN THOUSANDS) Current Assets Cash and cash equivalents $ 20,338 $ 18,040 Trade accounts and other receivables, less allowance for doubtful accounts 77,967 65,887 Inventories 146,180 136,866 Deferred income taxes 3,998 6,801 Prepaid expenses 2,353 907 Other current assets 311 757 Total Current Assets 251,147 229,258 OTHER ASSETS 18,094 18,827 PROPERTY, PLANT AND EQUIPMENT Land 25,737 19,818 Buildings, machinery and equipment 436,783 409,191 Autos and trucks 33,278 32,503 Construction-in-progress 14,863 5,160 510,661 466,672 Less accumulated depreciation 200,778 178,035 309,883 288,637 $579,124 $536,722 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks $ - $ 27,000 Accounts payable 71,225 71,354 Accrued expenses 34,784 33,599 Current maturities of long-term debt 11,596 8,850 Total Current Liabilities 117,605 140,803 LONG-TERM DEBT, less current maturities 224,743 198,334 DEFERRED INCOME TAX 53,418 53,608 MINORITY INTEREST IN SUBSIDIARY 842 842 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, authorized 5,000,000 shares; none issued - - Common stock, $.01 par value, authorized 45,000,000 shares; 27,589,250 issued and outstanding in 1997 and 1996 276 276 Additional paid-in capital 79,763 79,763 Retained earnings 102,477 63,096 Total Stockholders' Equity 182,516 143,135 $579,124 $536,722 See Notes to Consolidated Financial Statements </TABLE> C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E ( L O S S ) PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> <C> <C> SEPTEMBER SEPTEMBER SEPTEMBER 27, 1997 28, 1996 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) NET SALES $1,277,649 $1,139,310 $931,806 COSTS AND EXPENSES: Cost of sales 1,163,152 1,068,670 857,662 Selling, general and administrative 50,603 49,136 49,214 1,213,755 1,117,806 906,876 Operating Income 63,894 21,504 24,930 OTHER EXPENSES (INCOME): Interest expense, net 22,075 21,539 17,483 Foreign exchange loss 434 1,275 5,605 Miscellaneous, net (2,439) (1,357) (249) 20,070 21,457 22,839 INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE 43,824 47 2,091 Income tax expense 2,788 4,551 10,058 Net income (loss) before extraordinary charge 41,036 (4,504) (7,967) EXTRAORDINARY CHARGE-EARLY REPAYMENT OF DEBT, NET OF TAX - (2,780) - NET INCOME (LOSS) $41,036 $(7,284) $(7,967) Net income (loss) per common share before extraordinary charge $1.49 $(0.16) $(0.29) Extraordinary charge per common share - (0.10) - NET INCOME (LOSS) PER COMMON SHARE $1.49 $(0.26) $(0.29) See Notes to Consolidated Financial Statements. </TABLE> C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S ' E Q U I T Y PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES <TABLE> <CAPTION> NUMBER ADDITIONAL OF COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Balance at October 1, 1994 27,589,250 $276 $79,763 $81,657 $161,696 Net loss for year (7,967) (7,967) Cash dividends declared ($.06 per share) (1,655) (1,655) Balance at September 30, 1995 27,589,250 276 79,763 72,035 152,074 Net loss for year (7,284) (7,284) Cash dividends declared ($.06 per share) (1,655) (1,655) Balance at September 28, 1996 27,589,250 276 79,763 63,096 143,135 Net income for year 41,036 41,036 Cash dividends declared ($.06 per share) (1,655) (1,655) Balance at September 27, 1997 27,589,250 $276 $79,763 $102,477 $182,516 See Notes to Consolidated Financial Statements </TABLE> C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> <C> <C> SEPTEMBER SEPTEMBER SEPTEMBER 27, 1997 28, 1996 30, 1995 (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 41,036 $ (7,284) $ (7,967) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 29,796 28,024 26,127 (Gain) loss on property disposals 874 (211) (263) Provision for doubtful accounts (60) 1,003 1,133 Deferred income taxes 2,613 (354) 3,785 Extraordinary charge - 4,587 - Changes in operating assets and liabilities: Accounts and other receivables (15,213) (6,858) (3,370) Inventories (9,314) (24,830) (4,336) Prepaid expenses (999) (674) 1,066 Accounts payable and accrued expenses 1,056 18,165 15,249 Other (174) (177) 1,288 Net Cash Flows Provided by Operating Activitie 49,615 11,391 32,712 INVESTING ACTIVITIES: Acquisitions of property, plant and equipment (50,231) (34,314) (35,194) Business acquisitions - - (36,178) Proceeds from property disposal 3,853 1,468 541 Other, net (1,291) 312 (758) Net Cash Used in Investing Activities (47,669) (32,534) (71,589) FINANCING ACTIVITIES: Proceeds from notes payable to banks 68,500 91,000 15,000 Repayments on notes payable to banks (95,500) (77,000) (2,000) Proceeds from long-term debt 39,030 51,028 45,030 Payments on long-term debt (10,027) (32,140) (16,202) Cash dividends paid (1,655) (1,655) (1,655) Extraordinary charge, cash items - (3,920) - Net Cash Provided by Financing Activities 348 27,313 40,173 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS: 4 (22) (648) Increase in cash and cash equivalents 2,298 6,148 648 Cash and cash equivalents at beginning of year 18,040 11,892 11,244 CASH AND CASH EQUIVALENTS AT END OF YEAR: $20,338 $18,040 $11,892 SUPPLEMENTAL DISCLOSURE INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) $22,026 $20,310 $16,764 Income taxes $ 2,021 $4,829 $5,128 See Notes to Consolidated Financial Statements. </TABLE> N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Pilgrim's Pride Corporation and Subsidiaries NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Pilgrim's Pride Corporation ("the Company") is a vertically integrated producer of chicken products, controlling the breeding, hatching and growing of chickens and the processing, preparation and packaging of its product lines. The Company is the fourth largest producer of chicken in the United States, with production and distribution facilities located in Texas, Arkansas, Oklahoma and Arizona, and one of the two largest producers of chicken in Mexico, with production and distribution facilities located in Mexico City and the states of Coahuila, San Louis Potosi, Queretaro and Hidalgo. The Company's chicken products consist primarily of prepared foods, which include portion- controlled breast fillets, tenderloins and strips, formed nuggets and patties and bone-in chicken parts, fresh foodservice chicken, prepackaged chicken, and bulk packaged chicken. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Pilgrim's Pride Corporation and its wholly and majority owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. The financial statements of the Company's Mexican subsidiaries are remeasured as if the U.S. dollar were the functional currency. Accordingly, assets and liabilities of the Mexican subsidiaries are translated at end-of- period exchange rates, except for non-monetary assets which are translated at equivalent dollar costs at dates of acquisition using historical rates. Operations are translated at average exchange rates in effect during the period. Foreign exchange (gains) losses are separately stated as components of "Other expenses (income)" in the Consolidated Statement of Income (Loss). CASH EQUIVALENTS: The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. ACCOUNTS RECEIVABLE: The Company does not believe it has significant concentrations of credit risk in its accounts receivable, which are generally unsecured. Credit evaluations are performed on all significant customers and updated as circumstances dictate. Allowances for doubtful accounts were $3.8 million and $4.0 million at September 27, 1997 and September 28, 1996, respectively. INVENTORIES: Live chicken inventories are stated at the lower of cost or market and breeder hens at the lower of cost, less accumulated amortization, or market. The costs associated with breeder hens are accumulated up to the production stage and amortized over the productive lives using the straight-line method. Finished chicken products, feed, eggs and other inventories are stated at the lower of cost (first-in, first-out method) or market. Occasionally, the Company hedges a portion of its purchases of major feed ingredients using futures contracts to minimize the risk of adverse price fluctuations. Gains and losses on the hedge transactions are deferred and recognized as a component of cost of sales when products are sold. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost. For financial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of these assets. Depreciation expense was $28.7 million, $26.8 million and $24.8 million in 1997, 1996 and 1995, respectively. NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per share is based on the weighted average shares of common stock outstanding during the year. The weighted average number of shares outstanding was 27,589,250 in all periods. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS 128), which the Company will be required to initially adopt in the first quarter of 1998. The adoption of SFAS 128 will have no impact on its reporting of earnings per share. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> SEPTEMBER 27, SEPTEMBER 28, 1997 1996 (IN THOUSANDS) Live chickens and hens $68,034 $66,248 Feed, eggs and other 43,878 39,804 Finished chicken products 34,268 30,814 $146,180 $136,866 </TABLE> NOTE C - NOTES PAYABLE AND LONG-TERM DEBT The Company maintains a $110 million in revolving credit facilities and $45 million in secured term borrowing facilities. These credit facilities provide for interest at rates ranging from LIBOR plus one and three-quarters percent to LIBOR plus two percent and are secured by inventory, trade accounts receivable and fixed assets. At September 27, 1997, $102 million was available under the revolving credit facilities and $25 million was available under the term borrowing facilities. The table below sets forth maturities on long-term debt during the next five years. <TABLE> <CAPTION> YEAR AMOUNT <S> <C><C> <C> <C> (in thousands) 1998 $11,596 1999 11,630 2000 11,799 2001 11,942 2002 12,201 </TABLE> During 1996, the Company retired certain debt prior to its scheduled maturity. These repayments resulted in an extraordinary charge of $2.8 million, net of $1.8 million tax benefit. The Company is required, by certain provisions of its debt agreements, to maintain minimum levels of working capital and net worth, to limit dividends to a maximum of $1.7 million per year, to maintain various fixed charge, leverage, current and debt-to-equity ratios, and to limit annual capital expenditures. Substantially all of the Company's domestic property, plant an equipment is pledged as collateral on its long-term debt. Total interest was $23.4 million in 1997 and 1996, and $19.1 million in 1995. Interest related to new construction capitalized in 1997, 1996 and 1995 was $.5 million, $1.3 million and $.6 million, respectively. The weighted average interest rate on short term borrowings outstanding as of September 28, 1996 was 7.2% The fair value of the Company's long-term debt was estimated using quoted market prices, where available. For long-term debt not actively traded, fair values were estimated using discounted cash flow analysis using current market rates for similar types of borrowings. <TABLE> <CAPTION> Long-term debt and the related fair values consist of the following: <S> <C> <C> <C> <C> <C> <C> <C> <C> YEARS ENDED SEPTEMBER 27, 1997 SEPTEMBER 28, 1996 CARRYING FAIR CARRYING FAIR AMOUNTS VALUE AMOUNTS VALUE (IN THOUSANDS) Senior subordinated notes due August 1, 2003, interest at 10 7/8% (effective rate of 11/8%) payable in semi-annual installments, less discount of $882,105 and $1,032,000 in 1997 and 1996, respectively. $ 99,118 $106,000 $ 98,968 $100,219 Notes payable to an insurance company at 7.21%, payable in monthly installments of $455,305 including interest, plus one final balloon payment at maturity on February 28, 2006. 47,065 45,463 48,896 46,063 Notes payable to bank, interest paid monthly at LIBOR plus 1.8% currently and 2.0% in both 1997 and 1996, with quarterly principal payments of $950,000 in 1997 and 1996 and $1,000,000 in 1998 and thereafter, plus one final balloon payment at 40,000 40,000 29,732 29,732 maturity on June 30, 2003. Notes payable to an agricultural lender at a rate approximating LIBOR plus 1.65%, payable in equal monthly installments including interest through April 1, 2003. 28,871 28,871 27,080 27,080 Notes payable to an insurance company, interest paid monthly at LIBOR plus 2.0%, with monthly principal payments of $70,899 plus one fixed balloon payment at maturity on February 28, 2006. 12,478 12,478 - - Other notes payable 8,807 8,589 2,508 2,547 236,339 241,401 207,184 205,641 Less current maturities 11,596 8,850 $224,743 $198,334 </TABLE> NOTE D - INCOME TAXES Income (loss) before income taxes and extraordinary charge after allocation of certain expenses to foreign operations for 1997, 1996 and 1995 was $15.8 million, $16.3 million and $29.9 million, respectively, for U.S. operations, and $28 million, $(16.3) million and $(27.8) million, respectively, for foreign operations. The provisions for income taxes are based on pretax financial statement income. The components of income tax expense (benefit) are set forth below: <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> <C> <C> SEPTEMBER SEPTEMBER SEPTEMBER 27, 1997 28, 1996 30, 1995 (IN THOUSANDS) Current: Federal $1 ,113 $3,005 $5,215 Foreign 245 817 638 State and other (1,183) 1,083 420 175 4,905 6,273 Deferred: Reinstatement of deferred taxes through utilization of tax credits and net operating losses 516 397 3,542 Accelerated tax depreciation 558 (195) 215 Expenses deductible in a different year for tax and financial reporting purposes 841 238 411 Other, net 698 (794) (383) 2,613 (354) 3,785 $ 2,788 $4,551 $10,058 </TABLE> The following is a reconciliation between the statutory U.S. federal income tax rate and the Company's effective income tax rate. <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> <C> <C> SEPTEMBER SEPTEMBER SEPTEMBER 27, 1997 28, 1996 30, 1995 Federal income tax rate 35.0% 35.0% 35.0% State tax rate, net (0.8) 1,674.1 40.1 Effect of Mexican loss being non- deductible in U.S. - 6,252.3 411.1 Difference in U.S. statutory tax rate and Mexican effective tax rate (27.8) 1,649.3 - Other, net - 0.2 (5.2) 6.4% 9,610.9% 481.0% </TABLE> Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows: <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> SEPTEMBER 27, SEPTEMBER 28, 1997 1996 Deferred tax liabilities: (IN THOUSANDS) Tax over book depreciation $ 24,584 $24,027 Prior use of cash accounting 34,223 33,418 Other 823 930 Total deferred tax liabilities 59,630 58,375 Deferred tax assets: AMT credit carryforward 3,518 4,034 Expenses deductible in different years 6,692 7,534 Total deferred tax asset 10,210 11,568 Net deferred tax liabilities $49,420 $46,807 </TABLE> The Company has not provided any U.S. deferred income taxes on the undistributed earnings of its Mexican subsidiaries based upon its determination that such earnings will be indefinitely reinvested. As of September 27, 1997, the cumulative undistributed earnings of these subsidiaries were approximately $54.9 million. If such earnings were not considered indefinitely reinvested, deferred U.S. and foreign income taxes would have been provided, after consideration of estimated foreign tax credits. However, determination of the amount of deferred federal and foreign income taxes is not practical. As of September 27, 1997, approximately $3.5 million of alternative minimum tax credits were available to offset future income taxes. All credits have been reflected in the financial statements as a reduction of deferred taxes. As these credits are utilized for tax purposes, deferred taxes will be reinstated. NOTE E - SAVINGS PLAN The Company maintains a Section 401(k) Salary Deferral Plan ("the Plan"). Under the Plan, eligible domestic employees may voluntarily contribute a percentage of their compensation. The Plan provides for a contribution of up to four percent of compensation subject to an overall Company contribution limit of five percent of the U.S. operation income before taxes. Under this plan, the Company's expenses were $2.1 million, $1.8 million and $1.9 million in 1997, 1996 and 1995, respectively. NOTE F - RELATED PARTY TRANSACTIONS The major stockholder of the Company owns an egg laying and a chicken growing operation. Transactions with related entities are summarized as follows: <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> <C> <C> SEPTEMBER SEPTEMBER SEPTEMBER 27, 1997 28, 1996 30, 1995 (IN THOUSANDS) Contract egg grower fees to major stockholder $ 4,926 $ 4,697 $ 4,760 Chick, feed and other sales to major stockholder 20,116 18,057 12,478 Live chicken purchases from major stockholder 20,442 18,112 12,721 </TABLE> The Company leases an airplane from its major stockholder under an operating lease agreement. The terms of the lease agreement require monthly payments of $33,000 plus operating expenses. Lease expense was $396,000 for each of the years 1997, 1996 and 1995. Operating expenses were $107,000, $88,000 and $149,000 in 1997, 1996 and 1995, respectively. Expenses incurred for the guarantee of certain debt by stockholders were $1,137,000, $1,027,000 and $623,000 in 1997, 1996 and 1995, respectively. NOTE G - COMMITMENTS AND CONTINGENCIES The Consolidated Statements of Income (Loss) included rental expense for operating leases of approximately $11.3 million, $10.1 million and $9.8 million in 1997, 1996 and 1995, respectively. The Company's future minimum lease commitments under noncancelable operating leases are as follows: <TABLE> <CAPTION> YEAR AMOUNT <S> <C> 1998 $10,238 1999 9,259 2000 8,148 2001 10,288 2002 8,301 Thereafter 9,567 </TABLE> At September 27, 1997, the Company had $8.0 million letters of credit outstanding relating to normal business transactions. The Company is subject to various legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company. NOTE H - BUSINESS SEGMENTS The Company operates in a single business segment as a producer of agricultural products and conducts separate operations in the United States and Mexico. Inter-area sales, which are not material, are accounted for at prices comparable to normal trade customer sales. Identifiable assets by geographic area are those assets, which are used in the Company's operation in each area. Information about the Company's operations in these geographic areas is as follows: <TABLE> <CAPTION> YEARS ENDED <S> <C> <C> <C> <C> <C> <C> SEPTEMBER SEPTEMBER SEPTEMBER 27, 1997 28, 1996 30, 1995 (IN THOUSANDS) Sales to unaffiliated customers: United States $1,002,652 $ 911,181 $772,315 Mexico 274,997 228,129 159,491 $1,277,649 $1,139,310 $931,806 Operating income(loss): United States $ 29,321 $ 29,705 $ 41,923 Mexico 34,573 (8,201) (16,993) $ 63,894 $ 21,504 $ 24,930 Identifiable assets: United States $ 404,213 $ 363,543 $328,489 Mexico 174,911 173,179 169,115 $ 579,124 $ 536,722 $497,604 </TABLE> The operating losses in Mexico in 1996 and 1995 were primarily the result of currency devaluation and other economic factors. As of September 27, 1997 the Company had net assets in Mexico of $154 million. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS 131), effective for years beginning after December 15, 1997. SFAS No. 131 supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE, and requires that a public company report annual and interim financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Because this statement addresses how supplemental financial information is disclosed in annual and interim reports, the adoption will have no impact on the Company's financial statements, but may affect the disclosure of segment information. NOTE I - ACQUISITIONS AND INVESTMENTS On July 5, 1995, the Company acquired certain assets of Union de Queretaro, et al, a group of five chicken companies located near Queretaro, Mexico for approximately $35.3 million. These assets were integrated with the Company's existing Mexican operation, headquartered in Queretaro, Mexico, which is one of the two largest chicken operations in Mexico. The acquisition has been accounted for as a purchase, and the results of operations for this acquisition have been included in the Company's consolidated results of operations since the acquisition date. Pro forma operating results are not presented as they would not differ materially from actual results reported in 1995.
NOTE J - QUARTERLY RESULTS - (UNAUDITED) <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 27, 1997 FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net sales $297,806 $303,401 $335,168 $341,274 $1,277,649 Gross profit 30,267 23,085 27,285 33,860 114,497 Operating income 16,314 9,660 12,627 25,293 63,894 Net income 10,105(a) 4,954 7,286 18,691 41,036(a) Per Share: Net income 0.37(a) 0.18 0.26 0.68 1.49 (a) Cash dividends 0.015 0.015 0.015 0.015 0.06 Market price: High 9 12 1/8 12 3/4 15 3/8 15 3/8 Low 7 3/4 8 5/8 9 1/2 10 5/16 7 3/4 </TABLE> <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 28, 1996 FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net sales $267,475 $272,004 $294,339 $305,492 $1,139,310 Gross profit 20,972 16,047 17,384 16,237 70,640 Operating income 8,825 3,684 5,454 3,541 21,504 Extraordinary charge (b) - (2,780) - - (2,780) Net income (loss) (704) (3,335) 1,007 (4,252) (7,284) Per share: Net income (loss) before extraordinary charge (0.03) (0.02) 0.04 (0.15) (0.16) Extraordinary charge - (0.10) - - (0.10) Net income (loss) (0.03) (0.12) 0.04 (0.15) (0.26) Cash dividends 0.015 0.015 0.015 0.015 0.06 Market price: High 8 3/8 7 5/8 9 9 9 Low 6 5/8 6 3/4 6 3/4 7 1/2 6 5/8 </TABLE> (a) Includes $2.2 million ($1.3 million net of taxes) of other income arising from the final settlement of claims arising from a January 1992 fire at the Company's prepared foods plant. (b) The extraordinary charge of $2.8 million, net of tax, is the result of the early repayment of 10.49% and 9.55% senior secured debt payable to an insurance company. (See Note C).
EXHIBIT 22 - SUBSIDIARIES OF REGISTRANT 1. AVICOLA PILGRIM'S PRIDE DE MEXICO, S.A. DE C.V. 2. COMPANIA INCUBADORA AVICOLA PILGRIM'S PRIDE, S.A. DE C.V. 3. CIA. INCUBADORA HIDALGO, S.A. DE C.V. 4. INMOBILIARIA AVICOLA PILGRIM'S PRIDE, S. DE R.L. DE C.V. 5. PILGRIM'S PRIDE, S.A. DE C.V. 6. PRODUCTORA Y DISTRIBUIDORA DE ALIMENTOS, S.A. DE C.V. 7. GALLINA PESADA S.A. DE C.V.
EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 3-12043) of Pilgrim's Pride Corporation of our report dated November 5, 1997, with respect to the consolidated financial statements of Pilgrim's Pride Corporation included in this Annual Report (Form 10-K) for the year ended September 7, 1997. Ernst & Young LLP \s\ Ernst & Young LLP Dallas, Texas December 15, 1997