-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LisaCl/FPTSxM3xUxbPRf3IADzL4ONW8FmVRFtHlOrlm7k6O/GTEnBYSP8Wwnqyu U0MifO4gEw5RWsw3dFOANg== 0000052477-97-000007.txt : 19970717 0000052477-97-000007.hdr.sgml : 19970717 ACCESSION NUMBER: 0000052477-97-000007 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970505 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970716 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBP INC CENTRAL INDEX KEY: 0000052477 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 420838666 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06085 FILM NUMBER: 97641642 BUSINESS ADDRESS: STREET 1: IBP AVE STREET 2: P O BOX 515 CITY: DAKOTA CITY STATE: NE ZIP: 68731 BUSINESS PHONE: 4024942061 MAIL ADDRESS: STREET 1: IBP AVE STREET 2: P O BOX 515 CITY: DAKOTA CITY STATE: NE ZIP: 68731 FORMER COMPANY: FORMER CONFORMED NAME: IOWA BEEF PROCESSORS INC /PRED/ DATE OF NAME CHANGE: 19821109 FORMER COMPANY: FORMER CONFORMED NAME: IOWA BEEF PACKERS INC DATE OF NAME CHANGE: 19701130 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 May 5, 1997 Date of Report (Date of earliest event reported) IBP, inc. A Delaware Corporation Commission File IRS Employer Number 1-6085 Identification Number 42-0838666 IBP Avenue Post Office Box 515 Dakota City, Nebraska 68731 Telephone 402-494-2061 ITEM 2 Acquisition or Disposition of Assets In connection with the acquisition of Foodbrands America, Inc. ("Foodbrands"), a Delaware corporation, by IBP Foodservice, L.L.C, a Delaware limited liability company whose sole members are the Registrant, Prepared Foods, Inc., a Texas corporation and a wholly-owned subsidiary of the Registrant, and IBP Caribbean Inc., a Cayman Islands company and a wholly- owned subsidiary of the Registrant (all of which is disclosed more fully in the Registrant's quarterly report on Form 10-Q for the 13 weeks ended March 29, 1997), the Registrant is filing herewith the appropriate historical and pro forma financial statements relating to such acquisition. ITEM 7 Financial Statements and Exhibits Listed below are the financial statements and pro forma financial information related to the acquisition mentioned above in item 2. (a) Financial statements of Foodbrands are referenced below in subpart (c). (b) Pro forma financial information: Pro Forma Condensed Consolidated Balance Sheet (Unaudited) as of March 29, 1997. Pro Forma Condensed Consolidated Statement of Earnings (Unaudited) for the 52 weeks ended December 28, 1996. Pro Forma Condensed Consolidated Statement of Earnings (Unaudited) for the 13 weeks ended March 29, 1997. Notes to Pro Forma Condensed Consolidated Financial Statements. (c) Financial statements of Foodbrands are attached hereto as exhibits and are incorporated herein by reference: Exhibit No. (Referenced to Item 601 of Regulation S-K Description of Exhibit - -------------- 99.1 Consolidated Balance Sheets as of December 28, 1996 and December 30, 1995. 99.2 Consolidated Statements of Operations for the years ended December 28, 1996, December 30, 1995, and December 31, 1994. 99.3 Consolidated Statements of Stockholders' of Stockholders' Equity for the years ended December 28, 1996, December 30, 1995, and December 31, 1994. 99.4 Consolidated Statements of Cash Flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994. 99.5 Independent Accountants' Report of Coopers & Lybrand L.L.P. 99.6 Consolidated Balance Sheet as of March 29, 1997 (Unaudited). 99.7 Consolidated Statements of Operations for the quarters ended March 29, 1997 and March 30, 1996 (Unaudited). 99.8 Consolidated Statements of Cash Flows for the quarters ended March 29, 1997 and March 30, 1996 (Unaudited). The pro forma balance sheet of the Company has been prepared as if the acquisition had been consummated on March 29, 1997. The pro forma statements of earnings assume the acquisition took place on December 31, 1995. The acquisition will be accounted for under the purchase method of accounting. The pro forma results of operations are not necessarily indicative of actual results of operations that would have resulted had the acquisition occurred on the first day of fiscal 1996, nor are they necessarily indicative of future results.
IBP, inc. Pro Forma Condensed Consolidated Balance Sheet (Unaudited) As of March 29, 1997 (In thousands) Pro Forma Pro Forma Historical Adjustments Combined Company Foodbrands ASSETS CURRENT ASSETS: Cash and cash equivalents $44,892 $7,178 (38,669) (d) $13,401 Marketable securities 57,322 0 57,322 Accounts receivable, less allowance for doubtful accounts 510,127 47,245 (1,918) (a) 555,454 Inventories 311,240 70,675 381,915 Deferred income tax benefits and 0 other current assets 47,174 29,985 77,159 --------- ------- ------- --------- TOTAL CURRENT ASSETS 970,755 155,083 (40,587) 1,085,251 NET PROPERTY, PLANT, AND EQUIPMENT 827,456 155,406 (1,412) (f) 981,450 OTHER ASSETS: Intangible assets, net of accumulated amortization 204,487 193,344 281,589 (b) 679,420 (2,952) (g) Other 49,426 53,808 (40,802) (c) 59,480 --------- ------- ------- --------- 253,913 247,152 237,835 738,900 --------- ------- ------- --------- $2,052,124 $557,641 $195,836 $2,805,601 ========= ======= ======= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt $ 0 $ 0 $325,000 (d) $ 325,000 Current maturities of long-term debt 0 34,839 (33,183) (d) 1,656 Accounts payable and accrued 0 liabilities 517,723 92,945 (1,918) (a) 608,750 -------- ------- ------- --------- TOTAL CURRENT LIABILITIES 517,723 127,784 289,899 935,406 LONG-TERM OBLIGATIONS 259,688 306,120 565,808 DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes and other 4,550 (h) liabilities 103,798 65,926 (40,802) (c) 133,472 --------- ------- ------- --------- 103,798 65,926 (36,252) 133,472 STOCKHOLDERS' EQUITY: 1,170,915 57,811 (57,811) (e) 1,170,915 --------- ------- ------- --------- $2,052,124 $557,641 $195,836 $2,805,601 0 ========= ======= ======= ========= See accompanying notes to the Pro Forma Condensed Consolidated Balance Sheet.
IBP ,inc. Pro Forma Condensed Consolidated Statement of Earnings (Unaudited) 52 Weeks Ended December 28, 1996 (In thousands, except per share data) Pro Forma Pro Forma Historical Adjustments Combined Company Foodbrands Net sales $12,538,753 $835,175 ($68,524) (i) $13,305,404 Cost of sales 12,095,550 673,449 (68,524) (i) 12,700,475 ---------- ------- ------- ---------- Gross profit 443,203 161,726 604,929 Selling, general and administrative 120,295 113,230 7,040 (j) 240,565 ------- ------- ------- ------- Earnings from operations 322,908 48,496 364,364 Interest, net (3,373) (32,270) 12,518 (k) (48,161) ------- ------ ------- ------- Earnings before income taxes and extraordinary items 319,535 16,226 316,203 Income tax expense 120,800 308 (7,432) (l) 113,676 ------- ------ ------- ------- Net earnings $198,735 $15,918 ($12,126) $202,527 ======= ====== ======= ======= Earnings per share $2.06 $2.10 (m) ==== ==== See accompanying notes to the Pro Forma Condensed Consolidated Statement of Earnings.
IBP ,inc. Pro Forma Condensed Consolidated Statement of Earnings (Unaudited) 13 Weeks Ended March 29, 1997 (In thousands, except per share data) Pro Forma Pro Forma Historical Adjustments Combined Company Foodbrands Net sales $3,134,590 $210,768 ($17,919) (n) $3,327,439 Cost of sales 3,051,478 171,010 (17,919) (n) 3,204,569 --------- ------- ------ --------- Gross profit 83,112 39,758 122,870 Selling, general and administrative 31,252 28,001 1,760 (o) 61,013 ------ ------ ------ ------ Earnings from operations 51,860 11,757 61,857 Interest expense, net and other income (expense) (550) (8,005) 3,216 (p) (11,771) ------ ----- ------ ------ Earnings before income taxes 51,310 3,752 50,086 Income tax expense 19,000 1,613 (1,891) (q) 18,722 ------ ----- ------ ------ Net earnings $32,310 $2,139 $(3,085) $31,364 ====== ===== ====== ====== Earnings per share $0.34 $0.33 (r) ==== ==== See accompanying notes to the Pro Forma Consolidated Statement of Earnings. Note 1 Pro Forma Adjustments Condensed Consolidated Balance Sheet for 13 Weeks Ended March 29, 1997 (a) To eliminate intercompany accounts receivable/payable. (b) To record goodwill related to the Foodbrands acquisition. (c) To reclassify noncurrent deferred tax assets. (d) To record the use of cash and borrowings under the Company's revolving credit facility to replace Foodbrands' bank debt and pay for the cash portion of the purchase price and liabilities funded at closing. (e) To eliminate the equity of Foodbrands. (f) To adjust the carrying value of plant, property and equipment to fair value. (g) To eliminate bank debt issue deferred charges. (h) To adjust the reserve for postretirement benefit obligations to fair value. Condensed Consolidated Statement of Earnings for 52 Weeks Ended December 28, 1996 (i) To eliminate intercompany sales. (j) To record net change in amortization expense related to Foodbrands acquisition based on the amortization of the goodwill over a period of 40 years. (k) To record additional interest expense attributable to the increase in debt to finance the Foodbrands acquisition. (l) To record the tax effect of the pro forma adjustments at the marginal tax rate of 38%. (m) Pro forma earnings per share based on 96,632,000 average common and common equivalent shares. Condensed Consolidated Statement of Earnings for 13 Weeks Ended March 29, 1997 (n) To eliminate intercompany sales. (o) To record net change in amortization expense related to Foodbrands acquisition based on the amortization of the goodwill over a period of 40 years. (p) To record additional interest expense attributable to the increase in debt to finance the Foodbrands acquisition. (q) To record the tax effect of the pro forma adjustments at the marginal tax rate of 38%. (r) Pro forma earnings per share based on 95,731,000 average common and common equivalent shares. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IBP, inc. ----------------- (Registrant) July 16, 1997 /s/ Craig J. Hart -------------------- --------------------- Date Craig J. Hart Vice President and Controller EXHIBIT INDEX Exhibit No. (Referenced to Item 601 of Regulation S-K Description of Exhibit 99.1 Consolidated Balance Sheets as of December 28, 1996 and December 30, 1995. 99.2 Consolidated Statements of Operations for the years ended December 28, 1996, December 30, 1995, and December 31, 1994. 99.3 Consolidated Statements of Stockholders' Equity for the years ended December 28, 1996, December 30, 1995, and December 31, 1994. 99.4 Consolidated Statements of Cash Flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994. 99.5 Independent Accountants' Report of Coopers & Lybrand L.L.P. 99.6 Consolidated Balance Sheet as of March 29, 1997 (Unaudited). 99.7 Consolidated Statements of Operations for the quarters ended March 29, 1997 and March 30, 1996 (Unaudited). 99.8 Consolidated Statements of Cash Flows for the quarters ended March 29, 1997 and March 30, 1996 (Unaudited). EXHIBIT 99.1 FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands, except par value) December 28, December 30, 1996 1995 ASSETS Current assets: Cash and cash equivalents $ 10,442 $ 18,207 Receivables 46,582 46,166 Inventories 62,960 58,523 Other current assets 26,342 10,378 ------- ------- Total current assets 146,326 133,274 Property, plant and equipment - net of accumulated depreciation and amortization of $56,434 in 1996 and $38,188 in 1995 152,778 139,926 Intangible assets, net of accumulated amortization of $10,623 in 1996 and $5,375 in 1995 193,390 195,025 Deferred charges and other assets 56,032 39,036 Reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization of $9,641 in 1995 - 25,311 ------- ------- $548,526 $532,572 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 28,368 $ 18,341 Accounts payable 33,298 36,961 Accrued liabilities 47,542 50,294 ------- ------- Total current liabilities 109,208 105,596 Long-term debt 310,307 305,407 Other long-term liabilities 73,393 78,340 Commitments and contingencies (Note 14) Stockholders' equity: Preferred stock, 4,000,0000 shares authorized, none issued and outstanding - - Common stock, $.01 par value, 20,000,000 shares authorized, 12,464,080 and 12,467,738 shares issued and outstanding, respectively 125 125 Capital in excess of par value 151,364 151,248 Retained earnings (deficit) (94,336) (105,203) Minimum pension liability adjustment (1,535) (2,941) ------- ------- Total stockholders' equity 55,618 43,229 ------- ------- $548,526 $532,572 ======= ======= The accompanying notes are an integral part of the consolidated financial statements. EXHIBIT 99.2 FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) Fiscal Year Ended Dec. 28, Dec. 30, Dec. 31, 1996 1995 1994 Net sales $835,175 $634,700 $512,352 Cost of sales 673,449 499,985 410,118 ------- ------- ------- Gross profit 161,726 134,715 102,234 Operating expenses: Selling 77,832 69,483 52,165 General and administrative 29,143 25,634 24,151 Amortization of intangible assets 6,028 4,495 4,123 Provision for restructuring and integration, net (Note 4) 227 - 10,586 ------- ------- ------- Total 113,230 99,612 91,025 ------- ------- ------- Operating income 48,496 35,103 11,209 Other income (expense): Interest and financing costs (31,374) (17,268) (15,102) Other, net (896) (1,193) (702) ------- ------- ------- Total (32,270) (18,461) (15,804) Income (loss) from continuing operations ------- ------- ------- before income taxes 16,226 16,642 (4,595) Income tax provision 308 7,041 600 ------- ------- ------- Income (loss) from continuing operations 15,918 9,601 (5,195) Discontinued operations (Notes 3 and 10): Loss from operations of the Retail Meat Division, net of income tax - (4,121) (8,522) Loss on disposal of the Retail Meat Division (plus applicable income tax expense of $10,300) - (38,526) - Extraordinary loss on early extinguishment of debt (less income tax benefit) (Note 8) (5,051) (1,049) (2,481) ------- ------- ------- Net income (loss) $ 10,867 $(34,095) $(16,198) ======= ======= ======= (continued) FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) Fiscal Year Ended Dec. 28, Dec. 30, Dec. 31, 1996 1995 1994 Earnings (loss) per share - primary and fully diluted: Income (loss) from continuing operations $ 1.28 $ 0.77 $(0.59) Loss from discontinued operations - (0.33) (0.98) Loss on disposal of discontinued operations - (3.09) - Extraordinary loss on early extinguishment of debt (0.41) (0.08) (0.28) ------ ------ ----- Net income (loss) $ 0.87 $ (2.73) $(1.85) ====== ====== ===== Weighted average number of common and common equivalent shares outstanding - primary and fully diluted 12,471 12,453 8,727 The accompanying notes are an integral part of the consolidated financial statements.
EXHIBIT 99.3 FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands) Minimum Capital in Retained Pension Unearned Common Stock Excess of Earnings Liability Compen- Shares Amount Par Value (Deficit) Adjustment sation Balance, January 1, 1994 7,918 $ 79 $112,315 $ (54,910) $(1,575) $ (340) Net Loss - - - (16,198) - - Issuance of new shares 4,512 45 38,581 - - - Net activity under Stock Incentive Plan 18 - 150 - - 340 Balance, ------ --- ------- ------- ----- ----- Dec. 31, 1994 12,448 124 151,046 (71,108) (1,575) - Net Loss - - - (34,095) - - Issuance of new shares 20 1 202 - - - Minimum pension liability adjustment, net of deferred tax - - - - (1,366) - Balance, ------ --- ------- ------ ----- ---- Dec. 30, 1995 12,468 125 151,248 (105,203) (2,941) - Net Income - - - 10,867 - - Issuance of new shares 9 - 116 - - - Cancellation of stock (13) - - - - - Minimum pension liability adjustment, net of deferred tax - - - - 1,406 - Balance, ------ --- ------- -------- ------ ---- Dec. 28, 1996 12,464 $125 $151,364 $ (94,336) $(1,535) $ - ====== === ======= ======== ====== ====
The accompanying notes are an integral part of the consolidated financial statements. EXHIBIT 99.4 FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Dollar amounts in thousands) Fiscal Year Ended Dec. 28, Dec. 30, Dec. 31, 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations $ 15,918 $ 9,601 $ (5,195) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by continuing operating activities: Depreciation and amortization 18,346 11,509 10,508 Amortization of intangible assets 6,028 4,495 4,123 Amortization included in interest expense 1,833 1,195 1,279 Deferred income taxes (306) 6,138 - Provision for restructuring and integration, net 227 - 10,586 Deferred compensation 778 460 - Payments for restructuring/ integration (1,649) (3,240) (1,020) Changes in: Receivables (817) (8,413) 430 Inventories (4,997) (2,844) 1,713 Other current assets (1,077) (587) (354) Deferred charges and other assets 1,084 (219) 357 Accounts payable and accrued liabilities (12,569) 7,135 9,776 Other long-term liabilities (1,144) (41) 242 Other 113 (51) 22 Net cash provided by continuing ------- ------- ------- operations 21,768 25,138 32,467 Net cash provided (used) by discontinued operations including changes in working capital (1,636) (12,294) 627 Net cash provided (used) by operating ------- ------- ------- activities 20,132 12,844 33,094 ------- ------- ------- (Continued) FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Dollar amounts in thousands) Fiscal Year Ended Dec. 28, Dec. 30, Dec. 31, 1996 1995 1994 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment $(26,094) $(24,255) $(10,063) Acquisition of KPR Holdings, L.P. (575) (51,935) - Acquisition of TNT Crust, Inc. (91) (56,379) - Acquisition of International Multifoods Foodservice Corp. - - (137,684) Payments received on notes receivable 641 358 672 Proceeds from sale of property, plant and equipment 1,540 130 436 Increase in notes receivable (450) - - Proceeds from sale of Retail Meat Division - 65,786 - Net investing activities of discontinued operations - (838) (4,557) ------- ------- ------- Net cash used by investing activities (25,029) (67,133) (151,196) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt obligations, net of issuance costs 164,850 147,636 141,154 Borrowings under revolving working capital facility 222,500 30,000 195,500 Payments on revolving working capital facility (216,000) (21,000) (203,500) Payment on promissory note incurred in conjunction with the acquisition of KPR Holdings, L.P. (50,000) - - Payments on capital lease and debt obligations (117,992) (112,629) (36,720) Payment on early extinguishment of debt (6,325) - (1,088) Issuance of common stock 99 195 38,626 Net financing activities of discontinued operations - (549) 1,016 Net cash provided (used) by ------- ------- ------- financing activities (2,868) 43,653 134,988 Increase (decrease) in cash ------- ------- ------- and cash equivalents (7,765) (10,636) 16,886 Cash and cash equivalents at beginning of period 18,207 28,843 11,957 Cash and cash equivalents at end of ------- ------- ------- period $ 10,442 $ 18,207 $ 28,843 ======= ======= ======= (Continued) FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Dollar amounts in thousands) Fiscal Year Ended Dec. 28, Dec. 30, Dec. 31, 1996 1995 1994 Supplemental disclosure of noncash operating activities: Loss on early extinguishment of debt $ (2,374) $ (1,722) $ (1,393) Supplemental disclosure of noncash investing and financing activities: Promissory note issued upon acquisition $ - $ 50,000 $ - Capital lease obligations- Continuing operations 6,595 22 550 Discontinued operations - - 2,853 Contingent purchase price expected to be settled in common stock 7,201 - - Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 32,673 $ 19,944 $ 19,441 Income taxes 263 727 442 The accompanying notes are an integral part of the consolidated financial statements. Note 1 Description of Business and Summary of Significant Accounting Policies a. Description of Business: The Company produces, markets and distributes frozen and refrigerated products targeted to growth segments of the foodservice industry, which encompasses all aspects of away-from-home food preparation. The Company's products include pepperoni, beef and pork toppings, as well as partially baked pizza crusts, marketed to the pizza industry, appetizers, Mexican and Italian foods, sauces, soups and side dishes and branded and processed meat products. Customers include large multi-unit restaurant chains, major food- service distributors, warehouse clubs and grocery store delicatessens, prin- cipally in the United States. In Fiscal 1996, 10.3% of the Company's sales were made to a single customer. The Company's annual reporting period ends on the Saturday nearest December 31. Accordingly, the annual reporting periods ended December 28, 1996, December 30, 1995 and December 31, 1994 each contained 52 weeks. b. Principles of Consolidation: The consolidated financial statements include the accounts of Foodbrands America, Inc. ("Foodbrands America") and all of its subsidiaries (collectively referred to herein as the "Company"). c. Use of Estimates in the Preparation of Financial Statements: 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. Significant estimates made by the Company include accrued pension costs, including a minimum pension liability adjustment, accrued postretirement medical benefits and recoverability of deferred tax assets. Accrued pension costs and postretirement benefits involve the use of actuarial assumptions, including selection of discount rates (See Notes 11 and 12). Recoverability of deferred tax assets considers estimates of projected taxable income (See Note 10). d. Cash and Cash Equivalents: The Company considers cash equivalents to include all investments with a maturity at date of purchase of 90 days or less. There were no cash equivalents at December 28, 1996. Cash equivalents of $10.1 million at December 30, 1995, represent investments primarily in Commercial Paper and U.S. Government Securities, carried at cost, which approximates market. The Company nets its cash balances within the same bank and presents positive cash balances as cash and negative balances as accounts payable. e. Concentrations of Credit Risk: The concentrations of credit risk with respect to trade receivables are, in management's opinion, considered minimal due to the Company's diverse customer base. Credit evaluations of customers' financial conditions are performed periodically, and the Company generally does not require collateral from its customers. As of December 28, 1996, the Company had concentrations of cash in bank balances totaling approximately $6.5 million located at 6 banks which exposes the Company to concentrations of credit risk. As of December 30, 1995, the Company had concentrations of cash in bank balances totaling approximately $4.2 million located in 6 banks. f. Inventories: Inventories are valued at the lower of cost (first-in, first-out) or market. The Company periodically enters into futures contracts as deemed appropriate to reduce the risk of future price increases. These futures contracts are accounted for as hedges. Accordingly, resulting gains or losses are deferred and recognized as part of the product cost and included in cash flows from operating activities in the Consolidated Statement of Cash Flows. g. Property, Plant and Equipment: Property, plant and equipment are stated at cost. When assets are sold or retired, the costs of the assets and the related accumulated depreciation are removed from the accounts and the resulting gains or losses are recognized. Depreciation and amortization are provided using the straight-line method over either the estimated useful lives of the related assets (3 to 40 years) or, for capital leases, the terms of the related leases. h. Intangible Assets and Reorganization Value: The excess of the aggregate purchase price over fair value of net assets acquired ("Goodwill") is being amortized over 40 years. Trademarks and tradenames are amortized on the straight-line method over 20 to 25 years. "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets" ("Reorganization Value") was being amortized using the straight-line method over 20 years. The Reorganization Value was written off in 1996 as a result of the elimination of the valuation allowance associated with the deferred tax assets (see Note 10). The Company continually reevaluates the carrying amount of the intangibles as well as the amortization period to determine whether current events and circumstances warrant adjustments to the carrying value and/or revised estimates of useful lives. The specific methodology of future pre-interest cash flows (with assets grouped by division which is the lowest level for which there are identifiable cash flows) is used for this evaluation. At this time, the Company believes that no impairment of the intangibles has occurred and that no reduction of the estimated useful lives is warranted. i. Deferred Charges and Other Assets: Included in deferred charges and other assets are net deferred tax assets of $42.4 million and $25.5 million at December 28, 1996 and December 30, 1995, respectively. Deferred loan costs associated with various debt instruments are being amortized over the terms of the related debt using the interest method. At December 28, 1996 and December 30, 1995, $7.3 million and $6.1 million, respectively, remained to be amortized over future periods. Amortization expense for these loans included in interest expense for Fiscal 1996, 1995 and 1994 was approximately $1.8 million, $1.1 million and $1.2 million, respectively. Deferred loan costs of $2.1 million and $1.7 million were written off in Fiscal 1996 and 1995, respectively, due to the early extinguishment of debt. j. Income Taxes: The Company utilizes the asset and liability approach for financial accounting and reporting for income taxes. Deferred income taxes are recorded to reflect the expected tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts and net operating loss carryforwards ("NOLs") and tax credit carry- forwards at each year-end. k. Earnings (Loss) Per Common Share: Primary and fully diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding during each period. Options and warrants which have a dilutive effect are considered in the per share computations. l. Recently Issued Accounting Pronouncements: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share and Statement No. 129, Disclosure of Information About Capital Structure. Statement No. 128 specifies the computation, presentation, and disclosure requirements for earnings per share. Statement No. 129 consolidates existing requirements to disclose certain information about an entity's capital structure. Both statements are effective for financial statements issued for periods ending after December 15, 1997. Based on the Company's present capital structure and common stock equivalents (stock options), the Company does not believe that the implementation of these new standards will have a material impact on its financial statements. m. Reclassifications: Certain reclassifications have been made to the prior years' financial statements to conform with current presentation. Note 2 Acquisitions On December 11, 1995, the Company purchased KPR Holdings, L.P. ("KPR") which produces and markets custom prepared foods and prepared meat items for multi- unit restaurant chains. The purchase price the Company paid was approximately $102.1 million, including transaction related costs of the acquisition. In addition, the Company agreed to certain contingent payments payable in Common Stock of the Company (at a price of $13.125 per share) or cash, at the option of the sellers, aggregating up to approximately $14.3 million, over the three year period following the acquisition based on the attainment of specified earnings levels. In 1996, KPR achieved the required earnings levels and a payment will be made in either Common Stock of the Company or cash no later than April 1, 1997, in the amount of $4.3 million, which is net of $0.4 million paid during 1996 in connection with the settle- ment of certain litigation. The accrual of the first payment was recorded at December 28, 1996, as an increase in goodwill, and any subsequent payments will also increase goodwill. The acquisition was accounted for by the purchase method of accounting. The excess of the total purchase price over fair value of net assets acquired of $66.0 million and the realized con- tingent payments of $4.7 million has been recognized as goodwill and the balance remaining at December 28, 1996, is being amortized over the remaining life of 39 years. On December 18, 1995, the Company purchased all the outstanding stock of TNT Crust, Inc. ("TNT") which produces and markets partially baked and frozen self-rising crusts for use by pizza chains, restaurants and frozen pizza manufacturers and operates as a part of the Food Service Division. The purchase price the Company paid was approximately $56.5 million, including transaction related costs of the acquisition. In addition, the Company agreed to a contingent earnout payment payable in Common Stock of the Company (at a price of $11.54 per share) or cash, at the option of the sellers, not to exceed $6.5 million, based on sales growth to certain customers. As a result of the sales growth achieved in 1996, $2.9 million of the contingent earnout payment was earned and recorded as a liability in 1996. This accrual increased goodwill and any additional amounts will also increase goodwill. The acquisition was accounted for by the purchase method of accounting. The excess of the total purchase price over fair value of net assets acquired of $47.5 million and the realized contingent earnout payment of $2.9 million has been recognized as goodwill and the balance remaining at December 28, 1996, is being amortized over the remaining life of 39 years. Both the KPR & TNT contingent earnout payments are included in other long- term liabilities as an obligation expected to be settled in Common Stock of the Company. On June 1, 1994, the Company purchased all of the outstanding stock of International Multifoods Foodservice Corp., a division of International Multifoods Corporation, for approximately $137.7 million, including transaction related costs of the acquisition. The business, which has been renamed Specialty Brands, Inc., manufactures frozen food products, including ethnic foods in the Mexican and Italian categories, as well as appetizers, entrees and portioned meats. The acquisition was accounted for by the purch- ase method of accounting. The excess of the aggregate purchase price over fair value of net assets acquired of approximately $68.3 million and trade- marks at a fair value of $9.7 million were recognized as intangible assets and are being amortized over 40 and 25 years, respectively. The operating results of the acquisitions are included in the Company's consolidated results of operations from the dates of acquisition. The following unaudited pro forma consolidated financial information assumes the acquisitions of KPR, TNT and Specialty Brands occurred at the beginning of 1994. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the periods presented, or of the results which may occur in the future. Year Ended Dec. 30, Dec. 31, 1995 1994 (in thousands, except per share) Net sales $751,008 $689,577 Operating income 50,418 28,457 Income (loss) from continuing operations 10,385 (5,349) Net income (loss) (33,311) (16,352) Earnings (loss) per share - primary and fully diluted: Income (loss) from continuing operations $ 0.83 $(0.61) Net income (loss) (2.67) (1.87) Note 3 Discontinued Operations On May 30, 1995, the Company sold the assets of its Retail Meat Division (a separate industry segment) to Thorn Apple Valley, Inc. The sales price approximated $65.8 million in cash payments plus the assumption of long-term debt of approximately $6.0 million and certain current liabilities related to the division of approximately $4.5 million. In connection with this sale the Company wrote off approximately $64.3 million of post-bankruptcy intangible assets and recorded a net loss on disposition of approximately $38.5 million. The agreement also includes potential consideration of an additional $10 million based upon an increase in the market value to the purchaser's common stock. Proceeds of the sale were used to reduce the Company's debt under its term loan by $58 million and to pay expenses related to the sale. The results of operations and cash flows attributable to the Retail Meat Division were reported as discontinued operations. Corporate interest expense was allocated to the Retail Meat Division based on its net assets in proportion to the Company's consolidated net assets. The results of discontinued operations are (in thousands): Fiscal Year Ended Dec. 30, Dec. 31, 1995 1994 Net sales $72,357 $238,308 Income (loss) before taxes $(7,020) $ (8,522) Tax expense (benefit) (2,899) - Net income (loss) $(4,121) $ (8,522) Included in accounts payable and accrued liabilities at December 30, 1995, were certain amounts, totalling $2.1 million, related to the sale of the Retail Meat Division. Payments associated with these accruals have been reflected in the 1996 consolidated statement of cash flows as net cash flows used by discontinued operations. The assets included in the sale of the Retail Meat Division had significantly different financial and tax basis. Therefore, for income tax purposes this transaction generated taxable income of approximately $28.6 million requiring the utilization of net operating loss carryforwards. The tax affect of this utilization was approximately $10.9 million. Note 4 Restructuring and Integration In December 1994, the Company announced a restructuring program that resulted in a $10.6 million charge against operating income in 1994. The restructuring program identified specific manufacturing facilities and operations that related to excess capacity, as well as duplication of activities after the acquisition of the Specialty Brands Division. The charge also included costs incurred prior to year-end associated with the corporate legal restructuring to preserve the Company's income tax NOLs and to change the Company's name to Foodbrands America, Inc. During 1995, the Company completed most of the program including the consolidation of production operations and the closing of certain production and distribution facilities. During Fiscal 1996, the Company paid $0.2 million that was charged against the restructuring reserve and applied $1.0 million of the restructuring reserve to write down the net book value of certain assets. After extensive review of several alternative plans, the Company determined that it would not close one of its manufacturing facilities that had been contemplated under the 1994 restructuring program and the estimated cost to complete another project under the program was reduced. As a result, the Company recorded a $2.1 million credit to the restructuring and integration provision during 1996. During Fiscal 1996, the Company established a new restructuring program consisting of two components. The first involved the realignment of the Company's ham production by moving an existing product line into a new production facility with a charge of $0.6 million. The second component involved the restructuring of the sales, marketing and administrative activities of the Specialty Brands Division including shifting the marketing program to an Everyday Low Pricing concept. The charge related to the Specialty Brands Division totalled $1.7 million and included severance costs of $0.7 million for approximately 26 employees, and the writedown of certain assets used in the business. The total charge for the new restructuring program of $2.3 million was netted with the $2.1 million credit from the 1994 restructuring program. Both of the restructuring programs are substantially completed as of December 28, 1996. Note 5 Inventories Inventories at December 28, 1996 and December 30, 1995 are summarized as follows (in thousands): 1996 1995 Raw materials and supplies $19,234 $20,147 Work in process 8,499 7,365 Finished goods 35,227 31,011 $62,960 $58,523 Note 6 Property, Plant and Equipment Property, plant and equipment at December 28, 1996 and December 30, 1995 is summarized as follows (in thousands): 1996 1995 Land $ 3,673 $ 3,053 Buildings and improvements 79,948 68,461 Machinery and equipment 117,960 97,705 Construction in progress 7,631 5,621 ------- ------- 209,212 174,840 Less accumulated depreciation and amortization 56,434 38,188 ------- ------- 152,778 136,652 Assets to be disposed of, net - 3,274 ------- ------- $152,778 $139,926 ======= ======= Note 7 Accrued Liabilities Accrued liabilities at December 28, 1996 and December 30, 1995 are summarized as follows (in thousands): 1996 1995 Interest $ 3,579 $ 5,883 Salaries, wages and payroll taxes 8,994 9,285 Employee medical benefits 9,418 11,361 Workers' compensation benefits 2,146 2,404 Pension and retirement benefits 5,106 2,098 Marketing expenses 7,334 5,360 Provisions for facility restructuring and integration 504 1,240 Provisions for discontinued operations, closed and sold facilities 480 2,968 Other 9,981 9,695 ------ ------ $47,542 $50,294 ====== ====== Note 8 Long-term Debt Long-term debt, more fully described below, at December 28, 1996 and December 30, 1995 consisted of the following (in thousands): 1996 1995 Notes payable to banks $210,380 $160,500 Promissory note - 50,000 10 % Senior Subordinated Notes due 2006 120,000 - 9 % Senior Subordinated Redeemable Notes due 2000, net of discount - 109,741 Capital lease obligations 8,295 3,507 ------- ------- 338,675 323,748 Less current maturities 28,368 18,341 ------- ------- $310,307 $305,407 ======= ======= Based on the borrowing rates currently available to the Company for bank borrowings with similar terms and average maturities, the Company believes that the carrying amount of these borrowings at December 28, 1996, approximates face value. The fair value of the $120.0 million of 10 % Senior Subordinated Notes due 2006 (the "10 % Senior Subordinated Notes"), based on the quoted market price at December 28, 1996, is $127.2 million. The aggregate amounts of long-term obligations, excluding obligations under capitalized leases, which become due during each of the next five fiscal years are as follows (in millions): $26.6 in 1997, $36.1 in 1998, $38.0 in 1999, $28.2 in 2000, $28.6 in 2001 and $172.9 thereafter. Notes Payable to Banks On December 11, 1995, the Company consummated a credit agreement and at December 28, 1996, it consists of (i) a Term loan A for $45.0 million, (ii) a Term loan B for $100.0 million, (iii) an acquisition term loan for $56.1 million and (iv) a working capital revolving facility not to exceed $75.0 million ("the Credit Agreement"). The proceeds received on December 11, 1995, were net of $3.9 million of debt issuance costs and were used to repay the existing bank debt outstanding under the previous bank term loan totaling $53.0 million and to fund the acquisition of KPR. The acquisition revolving facility was subsequently drawn down to finance the acquisition of TNT. The Credit Agreement includes a subfacility for standby and commercial letters of credit not to exceed $7.0 million. On December 28, 1996, there was $3.1 million of standby letters of credit outstanding under this subfacility. The Credit Agreement ranks senior to all existing indebtedness and is collateral- ized by essentially all the assets of the Company including accounts receivable, inventory, general intangibles and mortgaged properties. Borrowings under the Credit Agreement bear interest at an annual rate equal to, at the Company's option, either the Eurodollar Rate, as defined by the agreement, plus 2.75% for the Term loan B and plus 2.50% for all other loans (subject to adjustment based on the Company's Total Debt Ratio, as defined) or an Alternate Base Rate, as defined in the agreement, which is based on The Chase Manhattan Bank's prime rate, plus 1.75% for the Term loan B and plus 1.50% for all other loans (subject to adjustment based on the Company's Total Debt Ratio, as defined). On December 28, 1996, the weighted average interest rate on the borrowings was 8.17%. Interest on the borrowings is payable quarterly in arrears. The Term loan A requires quarterly payments which began in May 1996 while the Term loan B and the acquisition term loan require quarterly payments beginning in May 1997. To the extent not previously paid, all borrowings under the Credit Agreement are due and payable February 28, 2003. At December 28, 1996, borrowings under the working capital revolving facility were $15.5 million and $50.0 million was available for borrowing at that date based on accounts receivable and inventory balances. In connection with the extinguishment of debt discussed above, the Company incurred an extraordinary loss in 1995 of $1.0 million, net of $0.7 million income tax benefit. In connection with the early extinguishment of debt in 1994 and termination of a related interest rate swap agreement, the Company incurred an extra- ordinary loss in the amount of $2.5 million. The Credit Agreement and the 10 3/4% Senior Subordinated Notes described below contain certain restrictive covenants and conditions among which are limitations on further indebtedness, restrictions on dispositions and acquisitions of assets, limitations on dividends and compliance with certain financial covenants, including but not limited to a maximum total debt ratio and minimum interest expense coverage. Promissory Note Upon the acquisition of KPR, the Company executed a promissory note to the sellers for $50.0 million. The note was paid on January 15, 1996, and bore interest at the rate of 6%. The note was retired using funds previously not drawn down under the term loan facility of the Credit Agreement. 10 3/4% Senior Subordinated Notes On May 15, 1996, Foodbrands America completed an offering of $120 million 10 3/4% Senior Subordinated Notes. The net proceeds from the offering were used to consummate a tender offer to repurchase the outstanding 9 3/4% Senior Subordinated Redeemable Notes due 2000 (the "9 3/4% Notes"). Interest on the 10 3/4% Senior Subordinated Notes is payable on May 15 and November 15 of each year beginning with November 15, 1996. The 10 3/4% Senior Subordinated Notes are unsecured and subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Credit Agreement. Terms of the 10 3/4% Senior Subordinated Notes include a guarantee by substantially all of Foodbrands America's direct and indirect subsidiaries, all of which are wholly-owned. The guarantees are joint and several, full, complete and unconditional. There are no restrictions on the ability of any subsidiaries to transfer funds to Foodbrands America in the form of cash dividends, loans or advances. Foodbrands America is a holding company with no assets, liabilities, or operations other than its investments in its subsidiaries. The nonguarantors are inconsequential, individually and in the aggregate to the consolidated financial statements, and separate financial statements of the guarantors are not presented because management has determined that they would not be material to investors. In connection with the early extinguishment of the 9 3/4% Notes, the Company incurred an extraordinary loss in 1996 of $5.1 million, net of $3.6 million income tax benefit. The loss was comprised of premium fees paid to redeem the 9 3/4% Notes and the remaining unamortized deferred loan costs and debt discount associated with these notes. Leases The Company leases one facility and various equipment and vehicles under agreements which are classified as capital leases. The building lease had an original term of 25 years and the lease is in the first of four renewal option periods for fifteen years each. Most equipment leases have purchase options at the end of the original lease term. Leased capital assets included in property, plant and equipment at December 28, 1996 and December 30, 1995 are as follows (in thousands): 1996 1995 Buildings $ 2,666 $ 2,666 Machinery and equipment 12,674 6,079 ------ ------ 15,340 8,745 Accumulated amortization 6,478 4,207 ------ ------ $ 8,862 $ 4,538 ====== ====== Future minimum payments, by year and in the aggregate, under noncancellable capital leases and operating leases with initial or remaining terms of one year or more consist of the following at December 28, 1996 (in thousands): Capital Operating Leases Leases 1997 $ 2,345 $ 5,202 1998 1,759 4,774 1999 1,613 4,300 2000 1,505 4,030 2001 2,411 976 Future years 531 3,378 ------ ------ Total minimum lease payments 10,164 $22,660 Amounts representing interest 1,869 ====== Present value of net minimum ------ payments 8,295 Current portion 1,755 ------ $ 6,540 ====== The Company's rental expense for operating leases was (in millions) $6.4, $5.3 and $4.5 for the fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994. In connection with the KPR acquisition, the Company entered into a ten year operating lease for a production facility. The base rent is $0.8 million per year and is payable to a corporation related to the former owners and current management of KPR. Rent expense for 1996 was $0.8 million and for 1995 was less than $0.1 million. Note 9 Stockholders' Equity Effective November 1, 1996, the remaining balance of approximately 13,000 shares of Common Stock reserved for issuance to pre-bankruptcy equity holders was cancelled pursuant to the terms on which such reserve was previously established. In October 1994, the Company completed a stock rights offering. The rights offering provided stockholders the ability to purchase 0.68 shares for each share owned. As a result of the offering, 4,511,867 rights were exercised at $9.00 per share for gross proceeds of $40.6 million. Net proceeds, after expenses, were $38.6 million. The Company used $35.0 million of the proceeds to reduce bank debt. At December 28, 1996, the Company has warrants outstanding to purchase 290,342 shares. The warrant agreement provides the holders an irrevocable put option, which obligates the Company to repurchase the warrants at a price per warrant equal to the excess of (i) the then- current market price per share of Common Stock, over (ii) $17.53, which may be exercised by each of the holders of the warrants only upon a Change of Control, as defined in the current warrant agreement. The warrants may be exercised through December 31, 1998. Note 10 Income Taxes Deferred tax assets primarily result from net operating loss carryforwards and certain accrued liabilities not currently deductible, and deferred tax liabilities result from the recognition of depreciation and amortization in different periods for financial reporting and income tax purposes. Income tax expense results from the income tax payable for the year and the change during the year in deferred tax assets and liabilities including the realization of prereorganization net operating losses. The provision (benefit) for income taxes in continuing operations consisted of the following components (in thousands): Fiscal Year Ended Dec. 28, Dec. 30, Dec. 31, 1996 1995 1994 Current: Federal $ 409 $ 103 $ - State 205 800 600 ----- ----- ------ 614 903 600 Deferred: ----- ----- ------ Federal 5,408 5,168 - State 987 970 - ----- ----- ------ 6,395 6,138 - ----- ----- ------ Change in valuation allowance (6,701) - - ----- ----- ------ Total $ 308 $7,041 $ 600 ===== ===== ====== The income tax provision (benefit) applicable to the net losses from discontinued operations associated with the Retail Meat Division were (in thousands): Fiscal Year Ended Dec. 30, Dec. 31, 1995 1994 Operations of the Retail Meat Division Deferred expense (benefit) $(2,899) $ - ====== ===== Disposal of the Retail Meat Division: Current expense: Federal $ 278 $ - State 469 - Deferred expense 9,553 - ------ ----- $10,300 $ - ====== ===== The effective tax rate on income from continuing operations differs from the statutory rate as follows: Fiscal Year Ended Dec. 28, Dec. 30, Dec. 31, 1996 1995 1994 (Liability Method) Statutory rate 35.0% 35.0% (34.0)% Tax effect of: Amortization of intangible assets 4.2 4.0 18.4 State taxes, net of federal benefit 4.4 3.1 8.6 Limitation on recognition of tax benefit - - 20.1 Other (0.4) 0.2 - ---- ---- ---- 43.2 42.3 13.1 Change in valuation allowance (41.3) - - ---- ---- ---- 1.9% 42.3% 13.1% ==== ==== ==== At December 28, 1996 and December 30, 1995, the deferred tax assets and deferred tax liabilities were as follows (in thousands): 1996 1995 Deferred tax assets: Retiree medical benefit plan accruals $25,909 $26,962 Pension plan accruals 2,794 5,487 Plant closing accruals 318 2,036 Employee compensation and benefits accruals 5,771 5,531 Other accrued expenses 3,265 978 Net operating loss carryforwards 33,389 43,385 AMT credits 885 - ------ ------ Total deferred tax assets 72,331 84,379 Deferred tax liabilities: ------ ------ Capitalized leases (568) (420) Accumulated depreciation (1,630) (3,046) Intangible assets (5,342) (4,787) Other (489) (72) ------ ------ Total deferred tax liabilities (8,029) (8,325) ------ ------ Net deferred tax assets 64,302 76,054 Valuation allowance - (43,314) ------ ------ Net deferred tax assets 64,302 32,740 Current portion 21,870 7,248 ------ ------ Noncurrent portion $42,432 $25,492 ====== ====== In the second quarter of 1996, the Company eliminated its valuation allowance resulting in a net deferred tax asset at that time of $68.5 million. Two factors contributed to the elimination of the valuation allowance. The first factor was the acquisitions of KPR and TNT in December 1995. The results of operations from these two acquisitions through the end of the second quarter of 1996 exceeded expectations and enhanced the Company's projections of taxable income. The other factor was the debt refinancing which occurred in May 1996 which increased the Company's financial flexibility. As a result of these two factors, the Company's projected taxable income indicates that it is more likely than not that the net deferred tax benefits will be realized in the future. A majority of the deferred tax assets were attributable to pre- reorganization temporary differences and NOLs, and the tax benefit from utilizing the pre-reorganization temporary differences and NOLs was recorded as a reduction of Reorganization Value and other intangible assets arising from bankruptcy. Therefore, the adjustment in 1996 resulted in the elimination of the remaining Reorganization Value of $23.0 million and a reduction in intangible assets of $4.2 million. In addition, a tax benefit of $6.7 million was recorded resulting from the elimination of the valuation allowance associated with post-reorganization temporary differences and NOLs. In 1995, the Company reduced the Reorganization Value by $12.1 million as a result of utilizing pre-reorganization net operating loss carryforwards. At December 28, 1996, after considering utilization restrictions, the Company's tax loss carryforwards approximated $97.3 million. The net operating loss carryforwards which are subject to utilization limitations due to ownership changes may be utilized to offset future taxable income as follows: $78.4 million in 1997, $13.3 million in 1998, $5.0 million in 1999, and $0.6 million in 2000. Loss carryforwards not utilized in the first year that they are available may be carried over and utilized in subsequent years, subject to their expiration provisions. These carryforwards expire as follows: $21.3 million in 1998, $6.0 million in 1999, $0.9 million in 2000, $4.2 million in 2001 and $64.9 million during the years 2002 through 2009. Note 11 Pension Plans Foodbrands America and certain subsidiaries maintain employee benefit plans covering most employees. All full-time employees of the Company who have obtained the age of 21, have completed one year of employment and are not subject to a collective bargaining agreement or one of the other plans described below are permitted to contribute up to 15% of their salary, not to exceed the limit set by the Internal Revenue Service, to a 401(k) plan. The Company makes contributions on behalf of each participant of a matching amount not to exceed the employee's contribution or 3% of such employee's salary. Hourly employees at the Jefferson, Wisconsin facility who have obtained the age of 18 and have completed one year of employment are permitted to contribute up to 15% of their annual gross earnings, not to exceed the limit set by the Internal Revenue Service, to a 401(k) plan. The Company contributes $0.10 for every hour worked by participants enrolled in the plan. In addition, approximately 14% of the Company's employees are covered under two other profit sharing plans. Substantially all of the hourly employees at the Cherokee, Iowa, Jefferson, Wisconsin and Riverside, California facilities participate in defined benefit pension plans. Information presented below also includes benefits and Company obligations associated with participants of closed and sold operations. The funded status of the defined benefit plans at December 28, 1996 and December 30, 1995 is as follows (in thousands): 1996 1995 Actuarial present value of benefit obligations: Vested benefit obligation $64,368 $65,972 Accumulated benefit obligation $66,368 $68,229 Projected benefit obligation $66,368 $68,229 Plan assets at fair value 59,528 55,170 Projected benefit obligation ------ ------ in excess of plan assets 6,840 13,059 Unrecognized net actuarial loss - difference in assumptions and actual experience (2,517) (5,010) Adjustment required to recognize additional minimum liability 2,475 4,743 ------ ------ Accrued pension cost $ 6,798 $12,792 ====== ====== Plan assets are comprised of cash and cash equivalents and mutual funds investing primarily in interest bearing and equity securities. The funding policy for the plan at the Cherokee facility is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA), and the plans at the Jefferson and Riverside facilities are funded based upon a recommendation from the Company's actuary. Such contributions for the plans at the Jefferson and Riverside facilities have, in prior years, exceeded the minimum funding requirements. Pension costs of the defined benefit plans for fiscal 1996, 1995 and 1994 are composed of the following, based on expected long-term rates of return of 9.0%, 9.0% and 8.5% and discount rates of 7.75%, 7.5% and 8.75% for the plan at the Jefferson facility, expected long-term rates of return of 8.5%, 8.5% and 8.5% and discount rates of 7.75%, 7.5% and 8.75% for the plan at the Cherokee facility and expected long-term rates of return of 9.0% and 9.0% and discount rates of 7.75% and 7.5% for fiscal 1996 and 1995, respectively for the plan at the Riverside facility which became effective in 1995 (in thousands): December 28, December 30, December 31, 1996 1995 1994 Service cost for benefits earned during the year $ 555 $ 465 $ 370 Interest cost on projected benefit obligation 4,933 5,121 4,991 Return on plan assets (4,635) (4,094) (4,330) Amortization of transition obligation and unrecognized prior service cost 23 11 - ----- ----- ----- Total pension cost $ 876 $1,503 $1,031 ===== ===== ===== Expenses for all of the Company's retirement plans for fiscal years 1996, 1995 and 1994 were (in millions) $2.9, $2.6 and $2.1, respectively. In connection with a new labor agreement which was approved in January 1997 at the Company's Riverside facility, the defined benefit plan at that facility has been frozen and no future benefits will accrue under the plan. A new defined contribution plan has been established at the Riverside facility in February 1997 which allows employees to contribute up to 15% of their compensation. Terms of the agreement require the Company to match the employees' contributions at a 50% level up to 3% and to make a seed contribution of 1/2% of the employees' compensation. Note 12 Postretirement Medical Benefits The Company provides life insurance and medical benefits ("Postretirement Medical Benefits") for substantially all retired hourly and salaried employees of one of its subsidiaries under various defined benefit plans. Contributions are made by certain retired participants toward their Postretirement Medical Benefits. The components of net periodic postretirement benefit cost for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 were as follows (in thousands): 1996 1995 1994 Service cost $ 290 $ 231 $ 241 Interest on accumulated benefit obligation 5,277 5,399 5,372 Other (33) (61) (21) Net periodic postretirement ----- ----- ----- benefit cost $5,534 $5,569 $5,592 ===== ===== ===== The actuarial and recorded liabilities for these Postretirement Medical Benefits at December 28, 1996 and December 30, 1995 were as follows (in thousands): 1996 1995 Accumulated postretirement benefit obligation: Retirees and dependents $62,481 $68,095 Actives not fully eligible 6,627 6,203 Actives fully eligible 214 226 ------ ------ 69,322 74,524 Assets at fair value (271) (1,056) Accumulated postretirement benefit obligation ------ ------ in excess of plan assets 69,051 73,468 Unrecognized net gain (loss) (4,917) (6,443) Unrecognized prior service cost 367 379 ------ ------ Liability recognized on the balance sheet 64,501 67,404 Less current portion 6,365 7,854 Noncurrent liability for postretirement ------ ------ medical benefits $58,136 $59,550 ====== ====== For measuring the accumulated postretirement medical benefit obligation, a 9.86% annual rate of increase in the per capita claims cost was assumed for 1997. This rate was assumed to decrease gradually to 8.9% by 2000, 7.7% by 2005, and 6.5% by 2010 and remain at that level thereafter. The weighted average discount rates used in determining the accumulated obligation was 7.75%, 7.5% and 8.75% for fiscal 1996, 1995 and 1994, respectively. The expected long-term rate of return on plan assets was 6.0% for fiscal years 1996, 1995 and 1994. If the health care cost trend rate were increased 1.0%, the accumulated benefit obligation as of December 28, 1996 would have increased by $1.5 million. The effect of this change on the aggregate of service and interest cost for the year ended December 28, 1996 would be an increase of $0.1 million. Note 13 Stock Incentive Plans At December 28, 1996, the Company had three stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 ("Opinion 25") and related Interpretations in accounting for its plans. FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Adoption of SFAS 123 is optional; however, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 in 1995 are presented below. The 1992 Stock Incentive Plan, as amended, (the "Plan") authorizes the Company to grant stock options and/or Common Stock aggregating 1,900,000 shares to directors, officers and other key employees. In February 1992, the Company granted 105,000 restricted shares of Common Stock, of which 11,666 shares lapsed prior to vesting. The Company also granted 105,000 performance shares of Common Stock, of which 51,670 shares were issued and vested. The Company has also granted under the Plan Common Stock options at option prices ranging from $9.00 to $15.25 per share, which vest over a three to five year period and expire after ten years. A summary of the status of the Company's stock options as of December 28, 1996, December 30, 1995 and December 31, 1994 and changes during the year ended on those dates is presented below: 1996 1995 1994 Wtd. Avg. Wtd. Avg. Wgtd. Avg. Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at begin- ning of year 1,406,861 $10.71 1,121,194 $10.00 241,666 $14.07 Granted 14,500 13.02 475,128 12.44 913,528 9.08 Exercised (8,000) 12.38 (19,686) 9.89 - - Forfeited (15,500) 13.29 (169,775) 10.75 (34,000) 14.26 Outstanding at end --------- --------- --------- of year 1,397,861 $10.70 1,406,861 $10.71 1,121,194 $10.00 ========= ===== ========= ===== ========= ===== Options exercisable at year end 645,401 $10.84 457,753 $10.57 212,105 $12.18 ========= ===== ========= ===== ========= ===== As of December 28, 1996, the stock options outstanding under the Plan have a weighted-average remaining contractual life of 7.7 years and 329,443 Common Stock options are available for future issuance. The weighted average fair value of options granted during 1996 and 1995, respectively, was $8.14 and $7.68. The compensation cost that was charged against income for this Plan for all outstanding options for Fiscal 1996 and 1995, respectively, was $0.8 million and $0.5 million. The fair value of each option granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996 and 1995, respectively: (1) dividend yield of 0% for both years; (2) expected volatility of 48% and 49%; (3) risk-free interest rates ranging from 6.4% to 6.8% for 1996 and 5.7% to 7.6% for 1995; and (4) expected life of 8 years for the options granted in both years. Director Option Agreement - The Company issued 25,000 Common Stock options during 1995 to members of the Board of Directors under an option plan covering nonemployee directors. The options vested upon granting at an exercise price of $7.875, expire after ten years, and all options remain outstanding at December 28, 1996. In accordance with Opinion 25, no compensation costs were recorded in 1996 or 1995 for these options. The fair value of these options granted during 1995 was estimated at $5.08 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected life of 8 years; expected volatility of 49%; and risk-free interest rate of 7.1%. Employee Stock Purchase Plan - The Company implemented an Associate Stock Purchase Plan ("Stock Purchase Plan") in 1996 which authorized the issuance of up to 100,000 shares of Common Stock to its eligible employees. Under the terms of the Stock Purchase Plan, employees can choose each year to have up to three percent of their annual base earnings withheld to purchase the Company's Common Stock. The purchase price of the stock is 90 percent of the lower of its fair market value at the beginning of the plan year or the end of the plan year. It is estimated that the Company will sell approximately 27,000 shares to employees in 1997 under this Stock Purchase Plan. In accordance with Opinion 25, no compensation cost has been recognized in connection with the Stock Purchase Plan. However, as required by SFAS 123, the following pro forma disclosures include the fair value of the employees' purchase rights which was estimated using the Black-Scholes model with the following assumptions for 1996: dividend yield of 0%; an expected life of 1 year; expected volatility of 48%; and risk-free interest rate of 5.9%. Had compensation cost for the Company's three stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data): As Reported Pro Forma As Reported Pro Forma 1996 1996 1995 1995 Net income (loss) $10,867 $10,505 $(34,095) $(34,371) Earnings (loss) per share - primary and fully diluted $0.87 $0.84 $(2.73 ) $(2.76) The effects of applying SFAS 123 in this pro forma disclosure are not necessarily indicative of future amounts as SFAS 123 does not apply to awards prior to 1995. Note 14 Commitments and Contingencies The Company has committed to minimum purchases of raw materials, supplies and equipment for delivery at various times in 1997. The total of such commitments at December 28, 1996, is approximately $15.6 million. In the opinion of management, the Company's exposure to loss, if any, under various claims and legal actions that have arisen in the normal course of business, that are not covered by insurance, will not be material. In September 1992, United Refrigerated Services, Inc. ("URS") filed suit against Continental Deli Foods, Inc. (formerly known as Wilson Foods Corporation), a wholly-owned subsidiary of Foodbrands America ("Continental Deli") the Company (formerly known as Doskocil Companies Incorporated) and unaffiliated parties Lopez Foods, Incorporated (formerly known as Normac Foods, Inc.) ("Lopez") and Thompson Builders of Marshall, Inc. ("Thompson") in the Circuit Court of Saline County, Missouri. The URS lawsuit involves claims for property damage, as a result of a fire in a warehouse owned by URS in Marshall, Missouri, in which Continental Deli was leasing space. ConAgra, Inc. ("ConAgra") also filed suit against Continental Deli, the Company, Lopez and Thompson seeking to recover damages for frozen food that was stored in another part of the Marshall warehouse at the time of the fire and allegedly damaged. The fire occurred in a part of the URS warehouse being leased by Continental Deli in which Continental Deli had produced sausage patties under contract for Lopez until the contract terminated in September 1991. Lopez's contractor, Thompson, was removing Lopez's equipment with a torch when fire broke out and destroyed a large section of the URS warehouse and its contents. On March 19, 1997, all parties to the consolidated suits reached settlement agreements in principle for all claims, including cross claims, counter claims and third party claims. As a result of the settlement, the Company will not incur any charge to its financial statements. Note 15 Subsequent Event On March 25, 1997, Foodbrands America entered into an Agreement and Plan of Merger (the "Merger Agreement") dated as of March 25, 1997, with IBP, inc. ("IBP") and IBP Sub, Inc., a wholly owned subsidiary of IBP (the "Purchaser"), providing for the acquisition of the Company by IBP. Pursuant to the Merger Agreement, and subject to the terms and conditions therein, the Purchaser will commence a tender offer (the "Tender Offer") for any and all outstanding shares of common stock, par value $.01 per share, of the Company (the "Common Stock") at a price of $23.40 per share net to the seller in cash. Upon consummation of the Tender Offer, the Merger Agreement contemplates that the Purchaser will be merged with and into the Company (the "Merger"), with the Company being the surviving corporation and becoming a wholly owned subsidiary of IBP. At the effective time of the Merger, each outstanding share of Common Stock (other than shares held by IBP, the Company or their respective subsidiaries and other than shares the holders of which have validly perfected their dissenters rights under Delaware law) shall be cancelled and converted into the right to receive $23.40 per share in cash. Concurrently with the execution and delivery of the Merger Agreement, Joseph Littlejohn & Levy, L.P., a Delaware limited partnership, and Joseph Littlejohn & Levy Fund II, L.P., a Delaware limited partnership (together, "JLL"), entered into a Tender Agreement dated as of March 25, 1997 (the "JLL Tender Agreement") among JLL, IBP and the Purchaser whereby JLL has agreed to tender all of their shares of Common Stock in the Tender Offer. Concurrently with the execution and delivery of the Merger Agreement, The Airlie Group, L.P., a Delaware limited partnership ("Airlie"), entered into a Tender Agreement dated as of March 25, 1997 (the "Airlie Tender Agreement") among Airlie, IBP and the Purchaser whereby Airlie has agreed to tender a number of shares which when taken together with the number of shares of Common Stock (i) beneficially owned by IBP or its subsidiaries and (ii) which IBP or its affiliates have the right to acquire from JLL pursuant to the JLL Tender Agreement, would cause IBP or its affiliates to beneficially own 49.9% of the aggregate voting power represented by the issued and outstanding capital stock of the Company. In addition, each of JLL and Airlie has agreed with IBP to vote in favor of the Merger Agreement, the Merger and the transactions contemplated therein and to oppose any other acquisition proposal and to vote against any such acquisition proposal. Following the Merger of the Company, the contingent payments payable as a result of the 1995 acquisitions of KPR Holdings, L.P. ("KPR") and TNT Crust, Inc. ("TNT") described in Note 2 will be amended. The KPR payment due on April 1, 1997 will be made in cash and an additional payment of approximately $3.8 million would also be made following the completion of the Merger. The contingent payments which can be earned in 1997 and 1998 could be elected to be taken in cash or common stock of IBP (at a price of $22.50 per share), at the option of the sellers. With regards to the TNT contingent payments, following the consummation of the Merger the previous contingent earnout provisions would be deleted and the sellers of TNT would receive a cash payment of $9.5 million. EXHIBIT 99.5 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Foodbrands America, Inc. We have audited the consolidated balance sheets of Foodbrands America, Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994. 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 Foodbrands America, Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the consolidated results of their operations and their cash flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Oklahoma City, Oklahoma February 18, 1997, except as to the information presented in the last paragraph of Note 14, and the information presented in Note 15, for which the date is March 26, 1997. FOODBRANDS AMERICA, INC. AND SUBSIDIARIES QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 28, 1996 and December 30, 1995. (Amounts are in thousands except per share data.) Quarter Year ended December 28, 1996 First Second(1) Third Fourth Net sales $185,997 $200,710 $218,656 $229,812 Gross profit 39,309 40,050 40,307 42,060 Income from continuing operations 2,122 8,707 1,910 3,179 Net income 2,122 3,656 1,910 3,179 Earnings per share, primary and fully diluted: Income from continuing operations $0.17 $0.70 $0.15 $0.26 Net income 0.17 0.29 0.15 0.26 Quarter Year ended December 30, 1995 First(2) Second(3) Third Fourth(4) Net sales $139,412 $146,582 $169,223 $179,483 Gross profit 31,165 32,587 34,463 36,500 Income from continuing operations 1,792 1,932 2,503 3,374 Net income (loss) (563) (38,360) 2,503 2,325 Earnings (loss) per share, primary and fully diluted: Income from continuing operations $ 0.14 $0.16 $0.20 $0.27 Net income (loss) (0.05) (3.07) 0.20 0.19 _______________________ (1) Net income includes extraordinary loss on early extinguishment of debt of $5.1 million, net of income tax benefit of $3.6 million and a tax benefit of $6.7 million from the elimination of the deferred tax asset valuation allowance. (2) Net income includes net loss from operating activities of the discontinued Retail Meat Division of $2.3 million. (3) Net income includes net loss from operating activities of the discontinued Retail Meat Division of $1.8 million and loss on disposal of the division of $38.5 million. (4) Net income includes extraordinary loss on early extinguishment of debt of $1.0 million, net of income tax benefit of $0.7 million. EXHIBIT 99.6 FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands, except par value) March 29, December 28, ASSETS 1997 1996 Current assets: (Unaudited) Cash and cash equivalents $ 7,178 $ 10,442 Receivables 47,245 46,582 Inventories 70,675 62,960 Other current assets 29,985 26,342 ------- ------- Total current assets 155,083 146,326 ------- ------- Property, plant and equipment, net of accumulated depreciation and amortization of $58,768 and $56,434 155,406 152,778 Intangible assets, net of accumulated amortization of $11,949 and $10,623 193,344 193,390 Deferred charges and other assets 53,808 56,032 ------- ------- $557,641 $548,526 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 34,839 $ 28,368 Accounts payable 36,421 33,298 Accrued liabilities 56,524 47,542 ------- ------- Total current liabilities 127,784 109,208 Long-term debt 306,120 310,307 Other long-term liabilities 65,926 73,393 Stockholders' equity: Preferred stock, 4,000,000 shares authorized, none issued and outstanding - - Common stock, $.01 par value, 20,000,000 shares authorized, 12,467,015 shares issued and outstanding (12,464,080 shares at December 28, 1996) 125 125 Capital in excess of par value 151,418 151,364 Retained earnings (deficit) (92,197) (94,336) Minimum pension liability adjustment (1,535) (1,535) Total stockholders' equity 57,811 55,618 ------- ------- $557,641 $548,526 ======= ======= The accompanying notes are an integral part of the condensed consolidated financial statements. EXHIBIT 99.7 FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED (Dollar amounts in thousands, except per share figures) Three Months Ended March 29, March 30, 1997 1996 Net sales $210,768 $185,783 Cost of sales 171,010 146,688 ------- ------- Gross profit 39,758 39,095 Operating expenses: Selling 17,577 18,280 General and administrative 9,098 7,924 Amortization of intangible assets 1,326 1,747 ------- ------- Total 28,001 27,951 ------- ------- Operating income 11,757 11,144 Other income (expense): Interest and financing costs (8,054) (7,419) Other, net 49 32 ------- ------- Total (8,005) (7,387) ------- ------- Income before income taxes 3,752 3,757 Income tax provision 1,613 1,635 ------- ------- Net income $ 2,139 $ 2,122 ======= ======= Primary and fully diluted earnings per share: Net income $0.17 $0.17 Weighted average number of common and common equivalent shares outstanding used for: Primary calculation 12,686 12,468 Fully diluted calculation 12,888 12,620 The accompanying notes are an integral part of the condensed consolidated financial statements. EXHIBIT 99.8 FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED Increase (Decrease) in Cash and Cash Equivalents (Dollar amounts in thousands) Three Months Ended March 29, March 30, 1997 1996 Cash flows from operating activities: Net income $ 2,139 $ 2,122 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 4,952 4,350 Amortization of intangible assets 1,326 1,747 Amortization included in interest expense 384 492 Deferred income taxes 1,452 1,535 Payments for restructuring/integration - (245) Deferred compensation 723 378 Changes in: Receivables (659) 6,237 Inventories (7,715) (5,785) Other current assets (3,465) (3,281) Deferred charges and other assets 166 24 Accounts payable and accrued liabilities 2,715 (11,965) Other long-term liabilities (82) 103 Other (4) (4) Net cash provided (used) by operating ------ ------ activities 1,932 (4,292) Cash flows from investing activities: ------ ------ Purchase of property, plant and equipment (7,285) (4,974) Acquisition of KPR Holdings, L.P. - (165) Acquisition of TNT Crust, Inc. - (82) Payments received on notes receivable 42 43 Proceeds from sale of property, plant and equipment 186 22 Increase in notes receivable - (450) Net cash provided (used) by investing ------ ------ activities (7,057) (5,606) Cash flows from financing activities: ------ ------ Proceeds from debt obligations, net of issuance costs - 49,614 Borrowings under revolving working capital facility 44,500 50,500 Payments on revolving working capital facility (40,500) (49,500) Payment on promissory note - (50,000) Payments on capital lease and debt obligations (2,193) (590) Issuance of common stock 54 5 Net cash provided (used) by financing ------ ------ activities 1,861 29 ------ ------ Continued FOODBRANDS AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED (continued) Increase (Decrease) in Cash and Cash Equivalents (Dollar amounts in thousands) Three Months Ended March 29, March 30, 1997 1996 Increase (decrease) in cash and cash equivalents $ (3,264) $ (9,869) Cash and cash equivalents at beginning of period 10,442 18,207 ------- ------- Cash and cash equivalents at end of period $ 7,178 $ 8,338 ======= ======= Supplemental disclosure of noncash investing activities: Capital lease obligations $ 477 $ - The accompanying notes are an integral part of the condensed consolidated financial statements. NOTE 1 GENERAL The accompanying condensed consolidated financial statements include the accounts of Foodbrands America, Inc. and all majority- owned subsidiaries (collectively, the "Company") and have been prepared without audit. The Balance Sheet at December 28, 1996, has been derived from financial statements which have been audited by Coopers & Lybrand L.L.P., independent accountants. Certain reclassifications have been made to prior year balances to conform to the current year presentation. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (adjustments are of a normal, recurring nature) necessary for a fair presentation of the financial position as of March 29, 1997 and December 28, 1996, and the results of operations for the three months ended March 29, 1997 and March 30, 1996 and cash flows for the three months ended March 29, 1997 and March 30, 1996. Results for the three months ended March 29, 1997 are not necessarily indicative of the results which will be realized for the year ending January 3, 1998. The financial statements should be read in conjunction with the Company's Annual Report on Form 10-K, as amended, for the year ended December 28, 1996. NOTE 2 INVENTORIES Inventories at March 29, 1997 and December 28, 1996 are summarized as follows (in thousands): March 29, December 28, 1997 1996 Raw materials and supplies $24,933 $19,234 Work in process 7,926 8,499 Finished goods 37,816 35,227 $70,675 $62,960 NOTE 3 INCOME TAXES The provision for income taxes consists of the following components (in thousands): Three Months Ended March 29, 1997 March 30, 1996 Current: Federal $ 81 $ 50 State 80 50 161 100 Deferred: Federal 1,228 1,263 State 224 272 1,452 1,535 Total $1,613 $1,635 The effective tax rate differs from the statutory rate due primarily to amortization of certain intangible assets which are not deductible for tax purposes. The effective tax rate was calculated based on the projected taxable income for the full fiscal year and the anticipated changes in the deferred tax assets and the deferred tax liabilities. NOTE 4 MERGER AGREEMENT On March 25, 1997, Foodbrands America entered into an Agreement and Plan of Merger (the "Merger Agreement") dated as of March 25, 1997, with IBP, inc. ("IBP") and IBP Sub, Inc., a wholly owned subsidiary of IBP (the "Purchaser"), providing for the acquisition of the Company by IBP. Pursuant to the Merger Agreement, and subject to the terms and conditions therein, the Purchaser commenced a tender offer (the "Tender Offer") for any and all outstanding shares of common stock, par value $.01 per share, of the Company (the "Common Stock") at a price of $23.40 per share net to the seller in cash. The Tender Offer was completed on April 29, 1997 resulting in a change of control of Foodbrands America. IBP, through the Purchaser, acquired approximately 93.0% of the Company's Common Stock (representing 11,577,000 shares of Common Stock). The source of the funds used to acquire control of Foodbrands America was from IBP's available cash and borrowings under IBP's existing credit facility with a syndicate of banks including Bank of America National Trust and Savings Association as co-agent and First Bank National Association as administrative agent. The credit facility is a revolving facility which provides for borrowings up to an aggregate principal amount of $500 million with a maturity date of December 20, 2000 which may be extended for one year increments annually during the revolving period with the consent of the banks involved. The applicable rate of interest as of December 28, 1996, was 5.5%. Pursuant to the Merger Agreement, the Purchaser has the right to require each of the members of the board of directors of Foodbrands America to resign and to nominate and elect new directors to fill the subsequent vacancies. Pursuant to the Merger Agreement the Purchaser will be merged with and into the Company on or about May 7, 1997 (the "Merger"), with the Company being the surviving corporation and becoming a wholly owned subsidiary of IBP. At the effective time of the Merger, each outstanding share of Common Stock (other than shares held by IBP, the Company or their respective subsidiaries and other than shares the holders of which have validly perfected their dissenters rights under Delaware law) shall be canceled and converted into the right to receive $23.40 per share in cash. Concurrently with the execution and delivery of the Merger Agreement, Joseph Littlejohn & Levy, L.P., a Delaware limited partnership, and Joseph Littlejohn & Levy Fund II, L.P., a Delaware limited partnership (together, "JLL"), entered into a Tender Agreement dated as of March 25, 1997 (the "JLL Tender Agreement") among JLL, IBP and the Purchaser pursuant to which JLL tendered all of their shares of Common Stock in the Tender Offer. Concurrently with the execution and delivery of the Merger Agreement, The Airlie Group, L.P., a Delaware limited partnership ("Airlie"), entered into a Tender Agreement dated as of March 25, 1997 (the "Airlie Tender Agreement") among Airlie, IBP and the Purchaser pursuant to which Airlie tendered a number of shares which when taken together with the number of shares of Common Stock (i) beneficially owned by IBP or its subsidiaries and (ii) which IBP or its affiliates have the right to acquire from JLL pursuant to the JLL Tender Agreement, caused IBP or its affiliates to beneficially own 49.9% of the aggregate voting power represented by the issued and outstanding capital stock of the Company. Upon consummation of the Tender Offer, the contingent payment payable as a result of the 1995 acquisition of KPR Holdings, L.P. ("KPR") was amended. The KPR payment due on April 1, 1997 was made in cash and an additional payment of approximately $3.8 million was paid as a result of the Tender Offer. The contingent payments which can be earned in 1997 and 1998 can now be elected to be taken in cash or common stock of IBP (at a price of $22.50 per share), at the option of the sellers. Following the Merger of the Company, the contingent payment payable as a result of the 1995 acquisition of TNT Crust, Inc. ("TNT"), will be deleted and the sellers of TNT will receive a cash payment of $9.5 million. In connection with the Merger, the Company will be required to make other cash payments totaling approximately $37.0 million. These payments include fees and expenses associated with the Merger, payments to the holders of the Company's outstanding stock options, stock warrants and other stock plans as the holders become fully vested upon a change of control and payments under certain employment agreements which become due upon a change of control. The funding for these payments, and the payments to KPR and TNT, will be provided by operations, the Company's working capital revolving facility and by IBP. As a result of the change of control which will occur pursuant to the Tender Offer, the Company is required under the Indenture for the Company's 10-3/4% Senior Subordinated Notes due 2006 (the "Notes") to make an offer not more than 60 nor less than 30 days following the occurrence of the change of control to repurchase the outstanding Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest. Also as a result of the Merger, the Company's annual utilization of its net operating loss carryforwards will be limited. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Foodbrands America, Inc. We have reviewed the condensed consolidated balance sheet of Foodbrands America, Inc. and subsidiaries as of March 29, 1997, and the related condensed consolidated statements of operations and cash flows for the three month periods ended March 29, 1997, and March 30, 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 28, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the period ended December 28, 1996 (not presented herein), and in our report dated February 18, 1997, except as to the information presented in the last paragraph of Note 14, and the information presented in Note 15, for which the date is March 26, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 28, 1996, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. COOPERS & LYBRAND L.L.P. Oklahoma City, Oklahoma May 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----