-----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, CSHWSJ29JLlLN+gzAM5DHyqRZnQsZGVYW10gY58DvW7DembbF01j8iY/73SyWJK7 VUCaqtsaftisR1sO3rgWxw== 0000052477-99-000003.txt : 19990326 0000052477-99-000003.hdr.sgml : 19990326 ACCESSION NUMBER: 0000052477-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981226 FILED AS OF DATE: 19990325 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: 10-K SEC ACT: SEC FILE NUMBER: 001-06085 FILM NUMBER: 99572093 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 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 26, 1998 ______________________________ IBP, inc. DELAWARE CORPORATION 42-0838666 (State of Incorporation) (Employer Identification Number) 800 STEVENS PORT DRIVE SUITE 836 DAKOTA DUNES, SD 57049 (Address) (Zip Code) Telephone Number: (605) 235-2061 ________________________________________________ Securities registered pursuant to section 12(b) of Act: Common Stock Registered with the New York Stock Exchange and the Pacific Stock Exchange. Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Security Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained in definitive Proxy Statement incorporated by reference in Part III of this Form 10-K. The aggregate market value of the registrant's common stock held by non-affiliates (91,642,114 shares) based on the New York Stock Exchange average bid and ask price on March 22, 1999, was approximately $1.82 billion. As of March 22, 1999, the registrant had outstanding 92,288,986 shares of its common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1998 Annual Report to Stockholders (the "Annual Report") are incorporated by reference in Parts I, II and IV of this Report. Portions of the registrant's definitive Proxy Statement dated March 17, 1999, (the "Proxy Statement") are incorporated by reference in Part III of this Report. Other documents incorporated by reference in this Report are listed in the Exhibit Index on pages 16 through 18. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES General IBP, inc., ("IBP") a Delaware corporation, has two business segments, Fresh Meats and Enterprises. Fresh Meats produces fresh beef and processed beef and pork products. Fresh Meats' primary products include boxed beef and fresh pork which are marketed mainly in the United States to grocery chains, meat distributors, wholesalers, retailers, restaurant and hotel chains, and processors who produce cured and smoked products, such as bacon, ham, luncheon meats and sausage items. Fresh Meats also produces inedible allied products, such as hides and other items used to manufacture products such as leather, animal feed and pharmaceuticals, and edible allied products, which include variety meat items. Enterprises produces frozen and refrigerated food products for the foodservice industry. IBP is currently moving into its new World Headquarters, and the mailing address of IBP's corporate headquarters is 800 Stevens Port Drive, Dakota Dunes, South Dakota 57049; its telephone number is (605) 235-2061. All references to "IBP" include IBP, inc. and its subsidiaries. Fresh Meats IBP operates an extensive sales network to service its customers with regional sales/service centers in the United States (including an independently-owned contractor in Los Angeles that is licensed to use IBP trademarks) as well as sales/service centers in foreign countries. IBP operates 10 fed beef carcass production facilities in seven cattle-producing states and one in Canada, which reduce live cattle to dressed carcass form. Eight of these locations include processing facilities which conduct fabricating operations to produce boxed beef. Fed beef consists primarily of young steers and heifers specifically raised for beef consumption. IBP operates three cow boning facilities in Iowa, Nebraska and Texas, which reduce cows and bulls to dressed carcass form and boneless meat product. Cows and bulls processed by IBP are primarily breeding or dairy stock which have been culled for various reasons. IBP also operates one ground beef facility in Nebraska. IBP operates six pork carcass facilities in Indiana, Iowa and Nebraska which reduce live hogs to dressed carcass form. IBP operates seven processing facilities which conduct fabricating operations to produce boxed pork. The production process for pork is similar to that employed in its beef operation. Enterprises Enterprises primarily consists of IBP's wholly-owned subsidiaries Foodbrands America, Inc. ("Foodbrands") and The Bruss Company ("Bruss"). Foodbrands and Bruss each are extensions of IBP's Fresh Meats business, offering a wide range of value-added food products to IBP's customers. Foodbrands manufactures and markets frozen and refrigerated food products such as pepperoni, beef and pork toppings, pizza crusts, appetizers, hors d'oeuvres, desserts, prepared meals, Mexican and Italian foods, soups, sauces, side dishes, and branded and processed meats. Bruss manufactures and markets high quality, portion-controlled steaks, pork chops and other products. In 1998, IBP completed the acquisition of the assets of the appetizer division of Diversified Foods Group, L.L.C. which assets are operated under the name DFG Foods, Inc. ("DFG"). DFG operates as a subsidiary of Foodbrands with production plants in Chicago, Illinois and Newark, New Jersey. DFG markets a variety of premium quality hors d'oeuvres, appetizers, desserts and prepared meals. FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS The company's businesses are classified into two business segments: Fresh Meats and Enterprises. The contributions of each business segment to net sales and operating earnings, and the identifiable assets attributable to each business segment set forth in Note M. "Business Segments" on page 43 of the Annual Report incorporated herein by reference. The Annual Report is an Exhibit to this Form 10-K. History of IBP's Business IBP was first incorporated in 1960. It began operations in 1961 with a single fed beef carcass production facility located near Denison, Iowa, in what was then the nation's major cattle- producing region. IBP grew in the Northern and Central Plains states over the following nine years and added beef plants in Dakota City, Nebraska; Emporia, Kansas; Luverne, Minnesota; and West Point, Nebraska. IBP expanded into the Southern Plains in 1975, when it built its Amarillo, Texas facility near the large commercial feedlot operations of that region. In 1976, it moved into the Pacific Northwest through the acquisition and expansion of plants in Pasco, Washington and Boise, Idaho. Company expansion continued in 1980 with construction of a facility in Finney County, Kansas and, in 1983, with the purchase and expansion of a plant in Joslin, Illinois. In 1990, IBP opened its Lexington, Nebraska fed beef plant and, in 1994, IBP purchased Lakeside Farm Industries, Ltd. ("Lakeside"), an agribusiness company with a fed beef plant in Brooks, Alberta, Canada. Lakeside was IBP's first plant outside of the United States. In March of 1998, IBP discontinued operations at its Luverne, Minnesota facility. IBP began its cow boning operations in 1995 by acquiring facilities in Tama, Iowa; Gibbon, Nebraska; and Sealy, Texas. In 1996, IBP acquired its fourth cow boning facility in Palestine, Texas. These plants supplemented IBP's expansion into hamburger patty production. IBP increased its hamburger patty production capabilities in 1997 with the acquisition of the Columbus, Nebraska, ground beef facility. In August of 1998, IBP discontinued operations at its Sealy, Texas facility and, in April of 1999, IBP plans to discontinue its operations at the Palestine, Texas facility. IBP began pork operations in 1982 when it purchased, expanded and commenced operation of a pork facility in Storm Lake, Iowa. Additional pork facilities were added in 1986 in Louisa County and Council Bluffs, Iowa; in 1987 in Madison, Nebraska; in 1989 in Perry, Iowa; in 1990 in Waterloo, Iowa; and in 1993 in Logansport, Indiana. In 1994, IBP constructed ham processing facilities at its Council Bluffs, Iowa and Madison, Nebraska, locations. IBP no longer produces carcasses at the Council Bluffs, Iowa facility; however, the facility is still used for processing operations. In 1998, IBP entered into an agreement with Plumrose USA, Inc. ("Plumrose") wherein Plumrose agreed to lease from IBP the Council Bluffs, Iowa ham processing facility. In 1990, IBP added its first value-added operation when a cooked meats facility was added to the Waterloo, Iowa pork facility. This operation processed fresh meat into value-added, consumer-ready items such as pork and beef pizza toppings. In 1994, IBP purchased Prepared Foods, Inc. from International Multifoods, Inc. that included a plant in Santa Teresa, New Mexico. In 1995, IBP purchased and renovated a facility in Columbia, South Carolina. The Santa Teresa and Columbia facilities process fresh meat into value-added, consumer-ready items. In 1997, IBP increased its presence in the value-added marketplace with the Foodbrands and Bruss acquisitions. In addition to the Waterloo, Santa Teresa, and Columbia value-added facilities listed above which have been put under Foodbrands' management, Foodbrands operates facilities in Rialto, California; Riverside, California; Cherokee, Iowa; Edwardsville, Kansas; South Hutchinson, Kansas; Hutchinson, Kansas; Carthage, Missouri; Concordia, Missouri; Piedmont, Missouri; Albuquerque, New Mexico; New Rochelle, New York; Oklahoma City, Oklahoma; Dallas, Texas; Fort Worth, Texas; Jefferson, Wisconsin; and Green Bay, Wisconsin. In 1998, IBP acquired the assets of Diversified Food Group, L.L.C. with plants in Chicago, Illinois (leased facility) and Newark, New Jersey. These plants are also operated by Foodbrands. The Bruss Company operates one processing facility in Chicago, Illinois. Prior to August 1981, when it was acquired by Occidental Petroleum Corporation ("Occidental"), IBP was a publicly-held corporation listed on the New York Stock Exchange (the "NYSE"). From August 1981 to October 1987, IBP was a wholly-owned subsidiary of Occidental. In October 1987, IBP sold 49.5% of its common stock and was again listed on the NYSE. On September 4, 1991, Occidental offered all of its shares of IBP Common Stock to Occidental's stockholders and certain standby underwriters in an underwritten rights offering. As a result of this transaction, Occidental sold its IBP Common Stock. Operations Cattle and Hog Supplies IBP does not currently have facilities of its own to raise cattle or hogs in the United States. However, IBP does have various risk-sharing and procurement arrangements with producers that help secure a supply of livestock for daily start-up operations at its facilities. IBP's Canadian subsidiary, Lakeside, has cattle feeding facilities, other agricultural divisions and a beef carcass production and boxed beef processing facility. In 1998, Lakeside's feedlots provided approximately 19% of that facility's live cattle needs. IBP's main supply of live cattle and hogs is purchased by IBP buyers who are trained to select high quality animals that are candidates for higher yields. IBP's buyers purchase cattle and hogs on a daily basis, generally a few days before the animals are required for processing. Live animals are generally held in IBP's holding pens for only a few hours. Production Process - Fresh Meats IBP's fed beef carcass production facilities reduce live fed cattle to dressed carcass form and process allied products. IBP's beef processing facilities conduct fabricating operations to produce boxed beef. IBP's fed carcass and beef processing facilities operated in 1998 at approximately 86% and 83%, respectively, of their production capacities. IBP's cow boning facilities produce beef trimmings and boneless cuts of beef that are further processed by IBP and sold to customers who produce hamburger, sausage and deli meats. IBP's cow boning facilities operated in 1998 at approximately 56% of their production capacity. Due to variances in product mix that may be processed at a ground beef facility, it is difficult to estimate a facility's capacity. However, in 1998, IBP estimates its Columbus, Nebraska ground beef facility operated at approximately 41% of its production capacity. IBP's pork facilities produce fresh boxed pork for shipment to customers, as well as pork bellies, hams and boneless picnic meat for shipment to customers who further process the pork into bacon, cooked hams, luncheon meats and sausage items. In 1998, IBP's pork facilities operated at approximately 85% of their production capacity. Throughout production, edible beef, cow boning and pork allied products, such as variety meat items, are segregated and prepared for shipment or further refinement. Inedible beef, cow boning and pork products derived from processing operations are used in the manufacture of leather, animal feed, gelatin, pharmaceuticals and cosmetics. Eight of IBP's fed beef and cow boning plants include hide treatment facilities. The majority of the hides from IBP's other fed beef and cow boning plants are transported to these facilities, which include brine curing operations and, in four locations, chrome hide tanneries. The chrome tanning process produces a semifinished product that is shipped to leather good manufacturers worldwide. Brine-cured hides are sold to other tanneries. IBP is the largest chrome tanner of cattle hides in the United States. Production Process - Enterprises IBP Enterprises production facilities process fresh beef, fresh pork, and other raw materials into pizza toppings, portion- controlled steaks and pork chops, branded and processed meats, appetizers, hors d'oeuvres, desserts, ethnic foods, soups, sauces, side dishes and pizza crusts. Due to variances in product mix that may be processed at a value-added facility, it is difficult to estimate a facility's capacity. However, in 1998, IBP estimates the Enterprises facilities operated at approximately 85% of their production capacity. Facilities The corporate headquarters of IBP were located during 1998 primarily in Dakota City, Nebraska. In April of 1999, IBP anticipates materially completing its move into a new corporate headquarters in Dakota Dunes, South Dakota. IBP believes that its plants are among the most modern in the world and strives to maintain and enhance its facilities. Generally, plants and additions are designed and constructed by IBP's personnel. IBP generally considers its existing plants and equipment to be in excellent condition. IBP's capital spending for 1999 is expected to be in the range of $175 million, which includes expenditures for environmental compliance activities. Its principal plants as of December 26, 1998, are described below. Fresh Meats - Beef IBP's ten U.S. fed beef carcass production facilities are located in the states of Idaho, Illinois, Iowa, Kansas, Nebraska, Texas and Washington. IBP's eleventh fed beef carcass production facility is in Alberta, Canada. At these locations, eight have processing facilities, eight have hide treatment or tanning operations, six have cold storage freezer operations and one has a tallow refining plant. IBP's three cow boning facilities are located in Iowa, Nebraska and Texas. IBP also has a ground beef processing facility in Nebraska. Fresh Meats - Pork IBP's six pork carcass production and seven processing facilities are located in the states of Indiana, Iowa and Nebraska. At these locations, four have cold storage freezer operations and two have skinning operations. Enterprises IBP's twenty-three facilities under the Enterprises business are located in California, Illinois, Iowa, Kansas, Missouri, Nebraska, New Jersey, New Mexico, New York, Oklahoma, South Carolina, Texas, and Wisconsin. Sales IBP's customers for beef, pork and value-added products include domestic and international grocery chains, meat distributors, wholesalers, retailers, warehouse clubs, foodservice distributors, restaurant and hotel chains, and meat processors who produce cured and smoked products, such as bacon, ham, luncheon meat and sausage items. Most sales are made pursuant to daily orders as opposed to long-term supply contracts. In each of the past three years for Fresh Meats, IBP's largest beef customer accounted for less than 4% of its annual beef net sales, and its largest pork customer accounted for less than 7% of its pork net sales. In each of the past three years, Enterprises' largest customer accounted for less than 15% of its annual net sales. For the same periods, IBP's largest customer for all products combined accounted for less than 4% of its annual net sales. IBP sells to international customers through foreign and domestic sales offices. In fiscal 1998, export sales accounted for approximately 12% of IBP's net sales, which compares to approximately 13% in fiscal 1997 and 13% in fiscal 1996. Some allied products are sold as commodities in bulk, while other items are trimmed, boxed and frozen by IBP. Cattle hides are sold for both domestic and international use. Uncured and brine- cured hides are sold to tanneries for further processing. Chrome- tanned hides are sold to tanneries and directly to further processors of leather. Distribution Fresh Meats Most products are shipped by trucks, generally from plants located closest to the purchaser, although other plants may supplement such deliveries, depending upon prevailing supplies and product demand. Enterprises Enterprises' products are transported by independent carriers from its distribution/customer service centers in Edwardsville, Kansas and Rialto, California, or are shipped directly from the production facility with a view toward achieving an efficient, cost-effective method of distribution. Customer requirements vary from the need for large quantities of a limited number of products to small quantities of a number of items, each requiring a different distribution method. From the distribution centers, orders for customers of the different divisions can be filled and delivered in a single shipment regardless of the variety of products ordered or the location of the manufacturing facility at which they are produced. The company also can combine for shipment the orders of many smaller customers in the same geographic region. Management believes this flexible distribution system allows the company to provide superior service to its customers by reducing the time between the placement of customer orders and delivery of the company's products. This also lowers the customer's shipping costs through the elimination of higher- cost, fragmented deliveries. Competition Fresh Meats The primary industry in which IBP operates is highly competitive and characterized by very small margins. IBP considers its principal competition to come from domestic producers of fresh beef and pork products, although IBP also competes with other suppliers of protein, including other red meats, poultry, seafood, grain, dairy products, eggs, soya and other protein products. Competition exists both in the purchase of live cattle and hogs, as well as in the sale of beef and pork products. The principal competitive element in both buying and selling is price. Failure to accurately assess the quality of cattle and hogs can result in (i) the payment of an excessive price if the livestock yields less than expected or (ii) the failure to bid a price sufficiently high to purchase high quality livestock. To effectively compete in the purchase of cattle, a cattle buyer must be able to accurately judge the yield and quality of the cattle to establish price. As part of IBP's cattle buying process, each cattle buyer prepares an estimate by lot of the yield and quality of the cattle purchased. IBP's information systems prepare a report on each lot that compares the actual yield and quality to the buyer's initial estimate. This enables IBP to monitor the quality of various cattle producers and to measure the skill of its cattle buyers, both of which are critical factors in determining IBP's success and competitiveness. IBP's hog buyers generally purchase hogs based upon an average daily bid price. The average daily bid price is adjusted for each producer by tracking the producer's yield and quality results. From the results of the producer's prior sales, IBP is able to generate a discount or a premium which adjusts the average daily bid for that individual producer. In addition, IBP has recently introduced an animal ultrasound system to its pork facilities to measure the quality and other factors regarding the profitability of a hog. IBP believes this purchasing system is one of the most advanced and accurate methods for establishing carcass values in the industry. Product quality, product mix, location and service, in addition to price, are important competitive elements in the sale of fresh beef and pork products. IBP is the largest producer of fresh beef and one of the largest producers of pork products in the United States. IBP believes that its two largest beef competitors in 1998 were Monfort, a subsidiary of ConAgra, Inc. ("ConAgra") and Excel Corporation, a subsidiary of Cargill, Incorporated. IBP believes that its largest pork competitors in 1998 were Smithfield Foods, Inc.; ConAgra; and Hormel Foods Corp. Enterprises Enterprises' products are sold in highly competitive markets competing with a significant number of companies of various sizes. The principal competitive factors in these markets are price, service, innovative products, and quality. Employees As of December 26, 1998, IBP had approximately 40,000 employees. Whenever possible, production employees are recruited locally and trained by IBP for specific tasks. IBP considers its relations with its employees at its plants to be good. Approximately 16,600 hourly employees at 16 of IBP's 45 production facilities are represented by labor organizations. The labor contracts applicable to these plants expire as follows: Contract Expiration Plant Union Date - ----------------------- -------------- ------------------- Amarillo, Texas Teamsters (1) November 2002 Chicago, Illinois (3) Teamsters (1) April 2001 Pasco, Washington Teamsters (1) May 1999 Rialto, California Teamsters (1) September 2001 Tama, Iowa Teamsters (1) December 2000 Albuquerque, New Mexico UFCW (2) November 2000 Cherokee, Iowa UFCW (2) March 2004 Chicago, Illinois UFCW (2) July 1999 Concordia, Missouri UFCW (2) June 2001 Dakota City, Nebraska UFCW (2) August 1999 Jefferson, Wisconsin UFCW (2) June 2002 Joslin, Illinois UFCW (2) December 2000 Logansport, Indiana UFCW (2) October 2003 Newark, New Jersey UFCW (2) September 1999 Perry, Iowa UFCW (2) May 2003 Riverside, California UFCW (2) May 2001 Rialto, California (4) UFCW (2) May 2001 Waterloo, Iowa UFCW (2) June 2002 _________________ (1) Teamsters local unions affiliated with The International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America. (2) United Food and Commercial Workers, International Union, AFL-CIO. (3) The Teamsters contract at the Chicago, Illinois facility covers only those employees working in distribution. (4) The UFCW labor contract at the Rialto, California facility covers only those employees working in distribution. Regulatory Matters IBP's operations are subject to the constant inspection and regulation of the United States Department of Agriculture (the "USDA"), including (i) regulations of the USDA's Grain Inspection, Packers and Stockyards Administration, (ii) continuous in-plant inspection of IBP's production facilities (along with each live animal, each carcass and all edible products) by USDA employees to ensure compliance with USDA standards and (iii) grading of beef carcasses by USDA employees. IBP is subject to federal, state and local laws and regulations governing environmental protection. In 1998, IBP incurred expenses of $19 million to maintain compliance with such regulations. IBP believes that it is in substantial compliance with such applicable laws and regulations. IBP is not aware of any violations of, or pending changes in, such laws and regulations that are likely to result in material penalties or material increases in compliance costs. IBP incurred $4 million in capital expenditures for environmental control facilities in fiscal 1998 and anticipates capital expenditures of approximately $25 million in fiscal 1999 for environmental related projects. EXECUTIVE OFFICERS OF THE REGISTRANT Age at Positions With IBP and January 27, Five-Year Employment Name 1999 History - -------------------------- ----------- --------------------------- Richard L. Bond 51 President and Chief Operating Officer since 1997; Director since 1995; 1995-1997 President, Fresh Meats; 1994-1995 Executive Vice President, Beef; 1989- 1994 Group Vice President, Beef Sales and Marketing; 1982-1989 Vice President, Boxed Beef Sales and Marketing Kenneth W. Browning, Jr. 49 Executive Vice President since 1996; 1989-1996 Senior Vice President, Hide Division; 1982-1989 Vice President, Hides R. Randolph Devening 56 Chief Executive Officer and President, Foodbrands America, Inc. since 1994; Chairman of the Board, Foodbrands America, Inc. 1994 to 1997 Craig J. Hart 43 Vice President and Controller since 1995; 1993-1995 Assistant Vice President and Controller; 1990-1993 Controller David C. Layhee 54 President, Value-Added Ground Meats since 1997; 1995-1997 President, Consumer Products; 1994- 1995 Executive Vice President, Design Products; 1989-1994 Group Vice President, Design Products; 1983-1989 Group Vice President, Sales & Marketing Eugene D. Leman 56 President, Fresh Meats since 1997; Director since 1989; 1995-1997 President, Allied Group; 1986-1995 Executive Vice President, Pork Division; 1981-1986 Group Vice President, Pork Division James V. Lochner 46 Executive Vice President, since 1995; 1993-1995 Senior Vice President, Technical Services; 1989- 1993 Vice President, Technical Services; 1986- 1989 Assistant Vice President Quality Control, Beef; 1984-1986 Director, Quality Control Charles F. Mostek 51 Executive Vice President since 1995; 1989-1995 Vice President, Beef Sales; 1985-1989 Vice President, Slaughter Division Sales; 1981-1985 Assistant Vice President, Carcass Grading and Administration Robert L. Peterson 66 Chairman of the Board of Directors since 1981; Chief Executive Officer since 1980; Director since 1976; 1979-1995 President Kenneth L. Rose 54 Executive Vice President since 1995; 1989-1995 Senior Vice President, Logistics Services; 1982- 1989 Vice President, Transportation Jerry S. Scott 53 Executive Vice President since 1995; 1986-1995 Vice President, Pork Operations Larry Shipley 43 President, IBP Enterprises since 1997; 1995-1997 Executive Vice President, Corporate Development; 1995 Senior Vice President, Corporate Development; 1994-1995 Assistant to the Chairman; 1989-1994 Assistant to the President. ITEM 3. LEGAL PROCEEDINGS Incorporated by reference from the Annual Report, page 44, section entitled "Notes to Consolidated Financial Statements," at note "O. Contingencies." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of IBP's security holders during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Annual Report, page 37, section entitled "Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income"; and from page 44, section entitled "Notes to Consolidated Financial Statements," at note "P. Quarterly Financial Data (Unaudited)". IBP's Common Shares were held by approximately 7,000 stockholders of record at year-end 1998. The Common Stock is listed on the New York and Pacific Stock Exchanges. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data (in thousands, except net sales and per share data) Fiscal Year Ended -------------------------------------------------------- Dec. 26, Dec. 27, Dec. 28, Dec. 30, Dec. 31, 1998 1997 1996 1995 1994(1) --------- --------- --------- --------- --------- OPERATIONS: Net sales (in millions) $ 12,849 $ 13,259 $ 12,539 $ 12,668 $ 12,075 Gross profit 662,208 442,892 443,582 604,068 460,109 Selling, general and administrative expense 288,473 216,176 120,674 123,972 112,772 Earnings from operations 373,735 226,716 322,908 480,096 347,337 Interest expense, net 43,213 38,002 3,373 20,784 38,448 Income taxes 125,700 71,700 120,800 179,200 126,600 Extraordinary loss (2) (14,815) - - (22,189) - Net earnings 190,007 117,014 198,735 257,923 182,289 PER SHARE DATA: Earnings per share: Earnings before extraordinary item $2.21 $1.26 $2.10 $2.96 $1.92 Extraordinary loss (2) (.16) - - (.24) - Net earnings 2.05 1.26 2.10 2.72 1.92 Earnings per share - assuming dilution: Earnings before extraordinary item $2.19 $1.25 $2.07 $2.92 $1.90 Extraordinary loss (2) (.16) - - (.23) - Net earnings 2.03 1.25 2.07 2.69 1.90 Dividends per share .10 .10 .10 .10 .10 FINANCIAL CONDITION: Working capital $ 231,003 $ 207,109 $ 540,903 $ 427,241 $359,238 Total assets 3,008,096 2,838,941 2,174,495 2,027,601 1,865,463 Long-term obligations 575,522 568,281 260,008 260,752 361,760 Stockholders' equity 1,400,914 1,237,069 1,203,655 1,022,939 780,494 (1) 53-week year. (2) Extraordinary loss on early extinguishment of debt, net of applicable income taxes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the Annual Report, pages 45-46, section entitled "Management's Discussion and Analysis." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated by reference from the Annual Report page 46, section entitled "Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from the Annual Report, pages 32-46, sections entitled "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Report of Independent Accountants." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Incorporated by reference from the Proxy Statement, page 12, section entitled "INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS." PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from the Proxy Statement, pages 2-4, section entitled "ELECTION OF DIRECTORS" and reference is also made to the information regarding executive officers set forth in "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Proxy Statement, pages 8-11, section entitled "SUMMARY COMPENSATION TABLE"; "OPTION GRANTS TABLE," "AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE," "PERFORMANCE GRAPH," and from page 5, section entitled "ELECTION OF DIRECTORS," subsection "Information Regarding Directors' Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the Proxy Statement, page 2 and page 6, sections entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF MANAGEMENT." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Proxy Statement, pages 2-5, sections entitled "ELECTION OF DIRECTORS," subsection "Information Regarding the Board of Directors and its Committees" and from page 8, section entitled "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. The following financial information is incorporated by reference from the Annual Report, as identified below, or is found in this report. 1. Consolidated Financial Location Statements Report of Independent Accountants Annual Report, page 32 and page 19 of this report Consolidated Statements of Earnings Annual Report, page 33 Consolidated Balance Sheets Annual Report, pages 34-35 Consolidated Statements of Cash Flows Annual Report, page 36 Consolidated Statements of Changes in Annual Report, page 37 Stockholders' Equity and Comprehensive Income Notes to Consolidated Financial Annual Report, pages Statements 38-44 2. Financial Statement Schedule Reports of Independent Accountants on Financial Statement Schedules Schedule II Valuation and Qualifying Accounts and Reserves All other schedules are omitted because they are not applicable or not required. 3. Exhibits 3.1* Restated Certificate of Incorporation of IBP (filed as Exhibit No. 3.1. to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1996, File No. 1-6085). 3.2 Restated By-laws of IBP (filed as Exhibit No. 3.2 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1996, File No. 1- 6085). 10.5* IBP's 1987 Stock Option Plan (Compensatory Plan)(filed as Exhibit No. 28(a) to IBP's Registration Statement on Form S-8, dated January 5, 1988, File No. 33-19441). 10.5.1* Form of Stock Option Agreement (10/1/87) (Compensatory Plan) (filed as Exhibit No. 28(b) to IBP's Registration Statement on Form S-8, dated January 5, 1988, File No. 33-19441). 10.5.2* Form of Stock Option Agreement (12/31/87) (Compensatory Plan) (filed as Exhibit No. 28(c) to IBP's Registration Statement on Form S-8, dated January 5, 1988, File No. 33-19441). 10.5.3* IBP Officer Long-Term Stock Plan (Compensatory Plan) (filed as Exhibit No. 10.5.3 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 25, 1993, File No. 1-6085). 10.5.4* IBP Directors Stock Option Plan (Compensatory Plan) (filed as Exhibit No. 10.5.4 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 25, 1993, File No. 1-6085). 10.5.5* IBP 1993 Stock Option Plan (Compensatory Plan) (filed as Exhibit No. 10.5.5 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 25, 1993, File No. 1-6085). 10.5.6* 1996 Officer Long-Term Stock Plan (Compensatory Plan) (filed as Exhibit No. 10.5.6 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1996, File No. 1-6085). 10.5.7* 1996 Stock Option Plan (Compensatory Plan) (filed as Exhibit 10.5.7 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1996. File No. 1-6085). 10.8* Form of IBP's Indemnification Agreement with officers and directors (Management Contract) (filed as Exhibit No. 10.8 to IBP's Registration Statement on Form S-1, dated August 19, 1987, File No. 1- 6085). 10.21* Credit Agreement (Revolving/Term Credit Facility) dated as of December 21, 1995, between IBP, inc. and various lenders with First Bank National Association as Administrative Agent and Bank of America National Trust and Savings Association as Co-Agent. (filed as Exhibit No. 10.21 to the Annual Report on Form 10-K of IBP, for the fiscal year ended December 30, 1995, File No. 1-6085). 10.23* Inter-company Agreement, dated as of September 4, 1991, between IBP and Occidental Petroleum Corporation (filed as Exhibit No. 10.23 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1991, File No. 1-6085). 10.24* Employment Agreement, effective as of August 18, 1997, between IBP and Larry Shipley (Management Contract) (filed as Exhibit No. 10.24 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 27, 1997, File No. 1-6085). 10.25* Employment Agreement, effective as of March 1, 1997, between IBP and Richard L. Bond (Management Contract)(filed as Exhibit No. 10.25 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 27, 1997, File No. 1-6085). 10.26* Employment Agreement, effective as of March 1, 1997, between IBP and Eugene D. Leman (Management Contract)(filed as Exhibit No. 10.26 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 27, 1997, File No. 1-6085). 10.27 Employment Agreement, effective as of December 22, 1995 between IBP and Craig Hart (Management Contract). 10.28* Text of Retirement Income Plan of IBP, inc. (As Amended and Restated Effective as of January 1, 1992), as amended. (Compensatory Plan) (filed as Exhibit No. 10.28 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 26, 1992, File No. 1-6085). 10.29* Employment Agreement, effective January 1, 1993, between IBP and Dale Tinstman (filed as Exhibit No. 10.29 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 25, 1993, File No. 1-6085). 13. 1998 Annual Report to Stockholders. 21. Subsidiaries of IBP, inc. as of December 26, 1998. 22.* Matters submitted to vote of security holders (filed as Item 4 to the Quarterly Report on Form 10-Q for the 26 weeks ended June 27, 1998, File No. 1-6085). 23.1 Consent of Independent Public Accountants (PricewaterhouseCoopers LLP). 27. Financial Data Schedule. __________________ * Incorporated herein by reference (b) Reports on Form 8-K Not Applicable (c) Other Matters With the exception of the information expressly referenced and thereby incorporated in ITEMS 3, 5, 6, 7 and 8, the Annual Report is not to be deemed "filed" with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities and Exchange Act of 1934. For the purpose of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, IBP hereby undertakes as follows, which undertaking shall be incorporated by reference into IBP's Registration Statement on Form S-8 No. 33-19441 (filed January 5, 1988): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of IBP pursuant to the foregoing provisions, or otherwise, IBP has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by IBP of expenses incurred or paid by a director, officer or controlling person of IBP in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, IBP will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IBP, inc. Our audits of the consolidated financial statements referred to in our report dated January 22, 1999, which has been incorporated by reference in this Form 10-K from page 32 of the 1998 Annual Report to Stockholders of IBP, inc., also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP - ---------------------------------- Omaha, Nebraska January 22, 1999 IBP, inc. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Fiscal Years 1996, 1997, and 1998 (In thousands) Allowance for Doubtful Accounts ------------ Balance, December 30, 1995 $ 9,494 Amounts charged to costs and expenses 379 Recoveries of amounts previously written off 115 Write-off of uncollectible accounts (112) Other (3) ------- Balance, December 28, 1996 9,873 Amounts charged to costs and expenses 514 Recoveries of amounts previously written off 39 Write-off of uncollectible accounts (829) Other 466 ------- Balance, December 27, 1997 10,063 Amounts charged to costs and expenses 1,890 Recoveries of amounts previously written off 231 Write-off of uncollectible accounts (101) Other 28 ------- Balance, December 26, 1998 $ 12,111 ======= SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. IBP, inc. By: /s/ Robert L. Peterson ------------------------- Robert L. Peterson Chairman of the Board and Chief Executive Officer Date: 3/25/99 ---------- 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/ Robert L. Peterson Chairman of the Board 3/25/99 - ------------------------ -------- Robert L. Peterson and Chief Executive Officer (principal executive officer) /s/ Larry Shipley President, IBP 3/25/99 - ------------------------ -------- Larry Shipley Enterprises and Chief Financial Officer (principal financial officer) /s/ Craig J. Hart Vice President and 3/25/99 - ------------------------- -------- Craig J. Hart Controller /s/ Richard L. Bond Director 3/25/99 - ------------------------- -------- Richard L. Bond - ------------------------- Director -------- John S. Chalsty /s/ Wendy L. Gramm Director 3/23/99 - ------------------------- -------- Wendy L. Gramm /s/ John J. Jacobson, Jr. Director 3/22/99 - ------------------------- -------- John J. Jacobson, Jr. /s/ Eugene D. Leman Director 3/25/99 - ------------------------- -------- Eugene D. Leman - ------------------------- Director -------- Michael L. Sanem /s/ Martin A. Massengale Director 3/23/99 - ------------------------- -------- Martin A. Massengale /s/ JoAnn R. Smith Director 3/23/99 - ------------------------- -------- JoAnn R. Smith /s/ Dale C. Tinstman Director 3/22/99 - ------------------------- -------- Dale C. Tinstman EX-10 2 EMPLOYMENT AGREEMENT This Agreement, effective the 22nd day of December, 1995 (the "Effective Date"), by and between IBP, inc., a Delaware corporation (hereinafter referred to as "Employer"), and Craig J. Hart (hereinafter referred to as "Employee"). WITNESSETH: Employer hereby agrees to employ, or agrees to continue to employ Employee, and Employee agrees to be employed upon the following terms and conditions. 1. Duties. Employee shall perform the duties of Vice President & Controller or shall serve in such other capacity and with such other duties for Employer as Employer shall hereafter from time to time prescribe. 2. Term of Employment. The term of employment shall be for a period of five (5) years, commencing on the Effective Date of this Agreement, unless terminated prior thereto in accordance with the provisions of this Agreement. 3. Compensation. For the services to be performed hereunder, Employee shall be compensated by Employer at the rate of not less than Eighty-Five Thousand Dollars ($85,000.00) per year payable monthly, and in addition may receive awards under Employer's Cash Bonus Plan subject to the discretion of the senior management of Employer. Such compensation will be subject to review from time to time when salaries of other officers and managers of Employer are reviewed for consideration of increases therein. 4. Participation in Benefit Programs. Employee shall be entitled to participate in any benefit programs generally applicable to officers of Employer adopted by Employer from time to time. 5. Limitation on Outside Activities. Employee shall devote full employment energies, interest, abilities and time (except for personal investments) to the performance of obligations hereunder and shall not, without the written consent of the Chief Executive Officer of the Company, render to others any service of any kind or engage in any activity which conflicts or interferes with the performance of duties hereunder. 6. Ownership of Employee's Inventions. All ideas, inventions, and other developments or improvements conceived by Employee, alone or with others, during the term of his employment, whether or not during working hours, that are within the scope of Employer's business operations or that relate to any of the Employer's work or projects, are the exclusive property of Employer. Employee agrees to assist Employer, at its expense, to obtain patents on any such patentable ideas, inventions, and other developments, and agrees to execute all documents necessary to obtain such patents in the name of the Employer. 7. Termination. (a) Voluntary Termination. Employee may terminate this Agreement at any time by not less than one year's prior written notice to Employer. Employee shall not be entitled to any compensation from Employer for any period beyond Employee's actual date of termination. (b) Resignation. In the event Employee shall resign from employment at the request of Employer, Employer shall compensate Employee at the rate and in the manner provided in Paragraph 3 above for a period after termination equivalent to the lesser of (i) one year, or (ii) the remainder of the term of this Agreement. During the time Employee is being compensated in lieu of continued employment, the Employer shall have the right to require the Employee to perform consulting services from time to time on behalf of the Employer. Any out-of-pocket expenses associated with any such assignment shall be, upon proper documentation, reimbursed by Employer to Employee. In the event Employer compensates Employee in lieu of continued employment, all remuneration or wages earned by Employee during such period, either as an employee, independent contractor or consultant to any person, firm, or corporation other than Employer, shall be a set-off to Employer's duty of compensation to Employee. (c) Company Termination. In the event Employer shall conclude, in its sole discretion, that it is no longer in the interest of the Company to continue the employment of Employee, the Employer may terminate this Agreement, and Employer shall have no further obligation to pay compensation to Employee after the effective date of termination. (d) Incapacity. If Employee is materially incapacitated from fully performing his or her duties pursuant to this Agreement by reason of illness or other incapacity or by reason of any statute, law, ordinance, regulation, order, judgement or decree, Employer may terminate this Agreement by 30 days written notice to Employee, but only in the event that such incapacity shall aggregate not less than one hundred twenty (120) days during any one year. 8. Confidential Information, Trade Secrets, Limitations on Solicitation and Non-Compete Clause. (a) Employee shall receive, in addition to all regular compensation for services as described in Section 3 of this Employment Agreement, as additional consideration for signing this Employment Agreement and for agreeing to abide and be bound by the terms, provisions and restrictions of this Section 8, the following: (i) an award of such number of shares of Common Stock of Employer under the terms and conditions of the Employer's new IBP Officer Long-Term Stock Plan as shall be equal to an aggregate value of $150,000 less amounts due to restrictions on promotional grants (see Employee Award; Letter) (ii) a grant of options to purchase an aggregate of Three Thousand Two Hundred (3,200) shares of Common Stock of Employer under the terms and conditions of the Employer's new IBP 1993 Stock Option Plan and each year on the annual grant date for stock options an Annual Option Grant of options to purchase shares of Common Stock of the Employer which is equal to three times (3x) the Annual Option Level of the Employee's officer-position band option level, provided that the Employee has been on the payroll, whether as an officer or otherwise, at least six months prior to the annual grant date; and (iii) the right to receive Bonus Option Grants, under the terms and conditions of the new IBP 1993 Stock Option Agreement with Bonus Options shall be executed by the Employer and the Employee pursuant to the new IBP 1993 Stock Option Plan, upon the Employee's exercise of any options granted to the Employee which qualify as Incentive Stock Options (ISOs) under the Internal Revenue Code of 1990, as amended or superseded. (b) Employee recognizes that, as a result of his employment hereunder (and his employment, if any, with Employer for periods prior to the Effective Date), he has had and will continue to have access to confidential information, trade secrets, proprietary information, intellectual property, and other documents, data, and information concerning methods, processes, controls, techniques, formulaes, production, distribution, purchasing, financial analysis, returns and reports which is the property of and integral to the operations and success of Employer, and therefore agrees to be bound by the provisions of this Section 8, which Employee agrees and acknowledges to be reasonable and to be necessary to protect legitimate and important business interests and concerns of Employer. (c) Employee agrees that he will not divulge to any person, nor use to the detriment of Employer or any of its subsidiaries, nor use in any business or process of manufacture competitive with or similar to any business or process of manufacture of Employer or any of its subsidiaries, at any time during the term of this Agreement or thereafter, any of the Employer's trade secrets, without first obtaining the express written permission of Employer. A trade secret shall include any formula, pattern, device or compilation of information used by Employer in its business. For purposes of this Section 8, the compilation of information shall include, without limitation, the identity of customers and suppliers and information reflecting their interests, preferences, credit-worthiness, likely receptivity to solicitation for participation in various transactions and related information obtained during the course of his employment with Employer. (d) Employee agrees that at the time of leaving the employ of Employer he will deliver to Employer, and not keep or deliver to anyone else, any and all notebooks, memoranda, documents and, in general, any and all materials relating to Employer's business, or constituting Employer's property. Employee further agrees that he will not, directly or indirectly, request or advise any customers or suppliers of employer or any of its subsidiaries to withdraw, curtail or cancel its business with Employer or any of its subsidiaries. (e) During the term of Employee's employment with the Employer and for a period of one (1) year from the termination of Employee's employment for any reason whatsoever Employee (i) will not directly or indirectly, in the United States, own, manage, operate, control, or participate in as a partner, director, holder of more than 5% of the outstanding voting shares, principal, or officer, any business in direct competition with the business of the Employer and (ii) will not accept employment or be employed by any such firm or corporation in any position where he would perform services materially similar to those which he has provided for Employer during the term hereof. (f) Employee recognizes that he posses confidential information and trade secrets about other employees of Employer and its subsidiaries relating to their education, experience, skills, abilities, salary and benefits, and interpersonal relationships with customers and suppliers of Employer and its subsidiaries. Employee recognizes that the information he possesses about these other employees is not generally known, is of substantial value to Employer in securing and retaining customers and suppliers, and was acquired by Employee because of his business position with Employer. Employee agrees that during his employment hereunder, and for a period of three (3) years thereafter, Employee shall not, directly or indirectly, solicit or contact any employee or agent of Employer or any of its subsidiaries, with a view to inducing or encouraging such employee or agent to leave the employ of Employer or any of its subsidiaries, for the purpose of being hired by Employee, and employer affiliated with Employee, or any competitor of Employer or any of its subsidiaries. Employee agrees that he will not convey any such confidential information or trade secrets about other employees to anyone affiliated with Employee or to any competitor of Employer or any of its subsidiaries. (g) Employee acknowledges that the restrictions contained in this Section 8 are reasonable and necessary to protect Employer's interest in this agreement and that any breach thereof will result in an irreparable injury to Employer for which Employer has no adequate remedy at law. Employee therefore agrees that , in the event that Employee breaches any of the provisions contained in this Section 8, Employer shall be authorized and entitled to seek from any court of competent jurisdiction (i) a temporary restraining order, (ii) preliminary and permanent injunctive relief, (iii) an equitable accounting of all profits or benefits arising out of such breach, and (iv) direct, incidental and consequential damages arising from such breach. (h) Employer and Employee have attempted to specify a reasonable period of time, a reasonable area and reasonable restrictions to which this Section 8 shall apply. Employer and Employee agree that if a court or administrative body should subsequently determine that the terms of this Section 8 are greater than reasonable necessary to protect Employer's interest, Employer agrees to waive those terms which are found by a court or administrative body to be greater than reasonably necessary to protect Employer's interest and to request that the court or administrative body reform this Agreement specifying a reasonable period of time and such other reasonable restrictions as the court or administrative body deems necessary. (i) Employee further agrees that this Section 8 is an integral part of this agreement, and that should a court fail or refuse to enforce the restrictions contained herein in such a manner as to effectively enjoin competitive activity, the Employer shall recover from Employee, and the court shall award as damages to the Employer, the consideration provided to and elected by Employee under the terms of Section 8(a) above (or the monetary equivalent thereof), its cost and its reasonable attorney's fees. 9. Modification. This Agreement contains all the terms and conditions agreed upon by the parties hereto, and no other agreements, oral or otherwise, regarding the subject matter of this Agreement shall be deemed to exist or bind either of the parties hereto, except for a confidentiality agreement between the parties dated December 26, 1978. This Agreement cannot be modified except by a writing signed by both parties. 10. Assignment. This Agreement shall be binding upon Employee, his heirs, executors and assigns and upon Employer, its successors and assigns. 11. Applicable Law. This Agreement is made and entered into in the State of South Dakota. The validity, interpretation, performance and enforcement of this agreement shall be governed by the internal laws of said State of South Dakota, without giving effect to the conflict of laws provisions thereof. IN WITNESS WHEREOF , the parties hereto have executed this Agreement effective as of the day and year first above written. IBP, inc. By /s/ Robert L. Peterson --------------------------- /s/ Craig J. Hart 1/20/96 ------------------ --------- (Employee) EX-13 3 IBP, inc. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 26, December 27, 1998 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 27,254 $ 69,022 Marketable securities 1,400 3,120 Accounts receivable, less allowance for doubtful accounts of $12,111 and $10,063 599,999 564,125 Inventories (Note B) 405,418 389,753 Deferred income tax benefits (Note E) 51,761 48,602 Prepaid expenses 10,983 9,305 --------- --------- TOTAL CURRENT ASSETS 1,096,815 1,083,927 --------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land and land improvements 106,492 108,055 Buildings and stockyards 544,711 501,166 Equipment 1,096,571 1,053,983 --------- --------- 1,747,774 1,663,204 Accumulated depreciation and amortization (843,937) (774,694) --------- --------- 903,837 888,510 Construction in progress 168,256 128,572 --------- --------- 1,072,093 1,017,082 OTHER ASSETS: --------- --------- Goodwill, net of accumulated amortization of $158,808 and $137,996 724,089 671,557 Other 115,099 66,375 --------- --------- 839,188 737,932 --------- --------- $3,008,096 $2,838,941 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses (Note D) $ 565,517 $ 569,641 Notes payable to banks (Note C) 140,967 192,010 Federal and state income taxes 152,122 106,375 Deferred income taxes (Note E) 1,818 4,266 Other 5,388 4,526 ----------- --------- TOTAL CURRENT LIABILITIES 865,812 876,818 LONG-TERM OBLIGATIONS (Notes C and F) 575,522 568,281 DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes (Note E) 17,037 15,446 Other 148,811 141,327 --------- --------- 165,848 156,773 --------- --------- COMMITMENTS AND CONTINGENCIES (Notes N and O) STOCKHOLDERS' EQUITY (Note G): Preferred stock, 25,000,000 shares authorized; none issued Common stock, $.05 par value per share; authorized 200,000,000 shares; issued 95,000,000 shares 4,750 4,750 Additional paid-in capital 405,278 406,952 Retained earnings 1,067,725 886,964 Accumulated other comprehensive income (16,456) (6,114) Treasury stock, at cost, 2,686,188 and 2,414,349 shares (60,383) (55,483) --------- --------- TOTAL STOCKHOLDERS' EQUITY 1,400,914 1,237,069 --------- --------- $3,008,096 $2,838,941 ========= ========= See notes to consolidated financial statements. IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) 52 Weeks Ended ------------------------------------------- December 26, December 27, December 28, 1998 1997 1996 ------------ ------------ ------------ Net sales (Note A) $12,848,635 $13,258,784 $12,538,753 Cost of products sold 12,186,427 12,815,892 12,095,171 ---------- ---------- ---------- Gross profit 662,208 442,892 443,582 Selling, general and administrative expense 288,473 216,176 120,674 ---------- ---------- ---------- Earnings from operations 373,735 226,716 322,908 Interest: Incurred (55,653) (50,001) (19,536) Capitalized 7,976 6,933 6,813 Income 4,464 5,066 9,350 ---------- ---------- ---------- (43,213) (38,002) (3,373) ---------- ---------- ---------- Earnings before income taxes and extraordinary item 330,522 188,714 319,535 Income taxes (Note E) 125,700 71,700 120,800 ---------- ---------- ---------- Earnings before extraordinary item 204,822 117,014 198,735 Extraordinary loss on early extinguishment of debt, less applicable taxes (Note F) (14,815) - - ---------- ---------- ---------- Net earnings $ 190,007 $ 117,014 $ 198,735 ========== ========== ========== Earnings per share (Note K): Earnings before extraordinary item $2.21 $1.26 $2.10 Extraordinary item (.16) - - ---- ---- ---- Net earnings $2.05 $1.26 $2.10 ==== ==== ==== Earnings per share - assuming dilution: Earnings before extraordinary item $2.19 $1.25 $2.07 Extraordinary item (.16) - - ---- ---- ---- Net earnings $2.03 $1.25 $2.07 ==== ==== ==== See notes to consolidated financial statements. IBP,inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (in thousands, except per share data) Accumulated Additional Other Common Paid-in Retained Comprehensive Treasury Total Stock Capital Earnings Income Stock ---------- ------ ---------- --------- ------------- -------- Balances, December 30, 1995 $1,022,939 $4,750 $432,726 $ 589,936 $ 116 $(4,589) Comprehensive income: --------- Net earnings 198,735 198,735 Other comprehensive income: Foreign currency translation adjustments (148) (148) --------- Comprehensive income 198,587 --------- Dividends declared on common stock, $.10 per share (9,472) (9,472) Treasury shares purchased (15,405) (15,405) Treasury share delivered under employee stock plans 7,006 (5,270) 12,276 --------- ----- ------- ------- ------ ------ Balances, December 28, 1996 1,203,655 4,750 427,456 779,199 (32) (7,718) --------- Comprehensive income: Net earnings 117,014 117,014 Other comprehensive income: Foreign currency translation adjustments (6,082) (6,082) --------- Comprehensive income 110,932 --------- Dividends declared on common stock, $.10 per share (9,249) (9,249) Treasury shares purchased (73,915) (73,915) Treasury share delivered under employee stock plans 5,646 (20,504) 26,150 --------- ----- ------- ------- ----- ------- Balances, December 27, 1997 1,237,069 4,750 406,952 886,964 (6,114) (55,483) --------- Comprehensive income: Net earnings 190,007 190,007 Other comprehensive income: Foreign currency translation adjustments (10,342) (10,342) --------- Comprehensive income 179,665 --------- Dividends declared on common stock, $.10 per share (9,246) (9,246) Treasury shares purchased (12,370) (12,370) Treasury share delivered under employee stock plans 5,796 (1,674) 7,470 --------- ----- ------- --------- -------- ------- Balances, December 26, 1998 $1,400,914 $4,750 $405,278 $1,067,725 $ (16,456) $(60,383) ========= ===== ======= ========= ======== ======= See notes to consolidated financial statements. IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 52 Weeks Ended -------------------------------- Dec. 26, Dec. 27, Dec. 28, 1998 1997 1996 -------- -------- --------- Inflows (outflows) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $190,007 $ 117,014 $ 198,735 ------- -------- -------- Adjustments to reconcile net earnings to cash flows from operations: Depreciation and amortization 100,821 92,292 73,910 Amortization of intangible asts 25,405 17,638 8,780 Deferred income tax (benefit)rovision (5,300) 1,175 7,500 Extraordinary loss on extinguishment of debt 14,815 - - Working capital changes, net of effects of acquisitions: Accounts payable and accrued liabilities 71,936 (21,901) (57,976) Accounts receivable (32,070) (16,069) 28,950 Inventories (13,773) (11,761) 3,912 Other adjustments, net 8,989 9,529 4,167 ------- -------- -------- 170,823 70,903 69,243 Net cash flows provided by operating activities 360,830 187,917 267,978 ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposals of marketable securities 257,721 403,723 922,051 Purchases of marketable securities (250,954) (237,243) (1,043,180) Capital expenditures (245,692) (133,925) (170,664) Investment in life insurance contracts (38,000) (4,000) - Payments for stock of new subsidiaries, net of cash acquired - (324,891) - Other investing activities, net (2,051) 9,855 1,944 ------- ------- -------- Net cash flows used in investing activities (278,976) (286,481) (289,849) ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations (114,371) (212,054) (615) Proceeds from issuance of long-term debt 49,773 132,187 197,878 Net change in checks in process of clearance (29,464) (7,715) 22,520 Premiums paid on early retirement of debt (20,636) - - Increase (decrease) in short-term debt 11,000 238,500 (200,000) Dividends paid (9,252) (9,300) (9,473) Purchases of treasury stock (12,370) (73,915) (3,129) Other financing activities, net 3,246 6,465 (7,497) ------- ------- ------- Net cash flows (used in) provided by financing activities (122,074) 74,168 (316) ------- ------- ------- Effect of exchange rate on cash and cash equivalents (1,548) (746) 74 ------- ------- ------ Net change in cash and cash equivalents (41,768) (25,142) (22,113) Cash and cash equivalents at beginning of year 69,022 94,164 116,277 ------- ------- -------- Cash and cash equivalents at end of year $ 27,254 $ 69,022 $ 94,164 ======= ======== ======== See notes to consolidated financial statements. IBP, inc. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED DECEMBER 26, 1998, DECEMBER 27, 1997 AND DECEMBER 28, 1996 (Columnar amounts in thousands, except per share amounts) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION - All subsidiaries are wholly-owned and are consolidated in the accompanying financial statements. All material intercompany balances, transactions and profits have been eliminated. MANAGEMENT'S 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. FISCAL YEAR - IBP's fiscal year ends on the last Saturday of the calendar year. Fiscal years 1998, 1997 and 1996 all consisted of 52 weeks. EXPORT SALES - In 1998, 1997 and 1996, net export sales, principally to customers in Asia and also to destinations in the Americas and Europe, amounted to $1.6 billion, $1.7 billion and $1.7 billion, respectively. STATEMENT OF CASH FLOWS - For purposes of the statement of cash flows, management considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Such investments are carried at cost, which approximates fair value. DERIVATIVE INSTRUMENTS - To manage interest rate and currency exposures, the company uses interest rate swaps and currency forward contracts. IBP specifically designates interest rate swaps as hedges of debt instruments and recognizes interest differentials as adjustments to interest expense in the period they occur. Gains and losses related to foreign currency hedges of firmly committed transactions are deferred and are recognized in income when the hedged transaction occurs. To manage its commodity exposures, the company uses commodity futures, options and forward contracts. These instruments are used primarily in forward purchases of livestock and, to a lesser extent, forward sales of products. The company accounts for these instruments as hedges of specific lots of livestock or sales and any gain or loss is not recognized until the hedged transaction occurs. Livestock hedging gains or losses are included in cost of products sold while forward sales hedging transactions are recorded in net sales. Cash flows related to derivative financial instruments are classified in the statement of cash flows in a manner consistent with those of transactions being hedged. MARKETABLE SECURITIES - Marketable securities are classified as available for sale, are highly liquid and are purchased and sold on a short-term basis as part of IBP's management of working capital. Such securities consist of auction market preferred stock, which management does not intend to hold more than one year, and tax-exempt securities and commercial paper with maturities of less than one year. Marketable securities are carried at cost, which approximates fair value. INVENTORIES - Inventories are valued on the basis of the lower of first-in, first-out cost or market. PROPERTY, PLANT AND EQUIPMENT - Depreciation is provided for property, plant and equipment on the straight-line method over the estimated useful lives of the respective classes of assets as follows: Land improvements..................8 to 20 years Buildings and stockyards..........10 to 40 years Equipment..........................3 to 12 years Leasehold improvements, included in the equipment class, are amortized over the life of the lease or the life of the asset, whichever is shorter. GOODWILL - Goodwill is amortized on a straight-line basis over periods ranging from 15 years to 40 years. Management reviews goodwill as well as other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. FOREIGN CURRENCY TRANSLATION - The translation of foreign currency into U.S. dollars is performed for balance sheet accounts using the current exchange rate in effect at the balance sheet date and for revenue and expense accounts using the average exchange rate during the period. The gains or losses resulting from translation are included in stockholders' equity. Exchange adjustments resulting from foreign currency transactions, which were not material in any of the years presented, are generally recognized in net earnings. ACCOUNTING CHANGES - In 1998, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" (see "Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income" and below), SFAS No. 131, "Disclosures About Segments of an Enterprise" (see Note M) and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (see Note J). These standards expand or modify disclosures and have no effect on the company's consolidated financial position, results of operations or cash flows. Information for prior years has been restated to conform to the requirements of these standards. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued, and is effective no later than the first quarter of fiscal 2000. Based upon the company's current level of derivatives activity, management expects that this standard will not materially affect the company's financial position or results of operations. COMPREHENSIVE INCOME - Comprehensive income consists of net earnings and foreign currency translation adjustments. Management considers its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars. There are no reclassification adjustments to be reported in the periods presented. RECLASSIFICATIONS - Certain reclassifications have been made to prior financial statements to conform to the current year presentation. B. INVENTORIES: Inventories are comprised of the following: December 26, December 27, 1998 1997 ------------ ------------ Product inventories: Raw materials $ 22,552 $ 22,952 Work in process 69,790 82,679 Finished goods 148,542 165,970 ------- ------- 240,884 271,601 Livestock 89,321 45,908 Supplies 75,213 72,244 ------- ------- $405,418 $389,753 ======= ======= C. CREDIT ARRANGEMENTS: At December 26, 1998, IBP had in place two committed revolving credit facilities totaling $600 million in potential borrowings. These facilities include a $500 million multi-year credit facility (the "Multi- Year Facility") and a $100 million revolving promissory note (the "Promissory Note"). From time to time, IBP also may use uncommitted lines of credit for some or all of its short-term borrowing needs. The Multi-Year Facility is a revolving facility with a maturity date of December 20, 2000, which may be extended for one-year increments annually during the revolving period with consent of the banks involved. Facility fees can vary from .085 to .200 of 1% on the total amount of the facility. The Promissory Note with Bank of America was extended on May 1, 1998 and matures on April 30, 1999. There were total borrowings of $225 million outstanding under the revolving facilities at December 26, 1998, $50 million of which was classified as current liabilities. IBP also had $91 million of short- term borrowings outstanding at year-end 1998 under uncommitted credit lines. The remaining $175 million under revolving facilities, which IBP does not intend to repay within one year, was classified as non-current in the consolidated balance sheet. The interest rate at December 26, 1998 on the non-current portion was 5.4%. During fiscal 1998, the maximum amount of borrowings under all of IBP's credit arrangements, including any amounts considered non-current, was $529 million. Average borrowings under IBP's credit arrangements and the weighted average interest rate during fiscal 1998 were $423 million and 5.8%. The comparable 1997 figures were average borrowings of $281 million and an average interest rate of 5.9%. IBP's credit facility agreements contain certain restrictive covenants which, among other things, (1) require the maintenance of a minimum debt service coverage ratio; and (2) provide for a maximum funded debt ratio. D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses are comprised of the following: December 26, December 27, 1998 1997 ------------ ------------ Accounts payable, principally trade creditors $220,972 $219,449 ------- ------- Checks in process of clearance 94,888 126,279 ------- ------- Accrued expenses: Employee compensation 74,728 73,724 Employee benefits 34,771 34,733 Property and other taxes 24,809 25,886 Marketing costs 14,352 13,808 Other 100,997 75,762 ------- ------- 249,657 223,913 ------- ------- $565,517 $569,641 ======= ======= E. INCOME TAXES: Income tax expense consists of the following: 1998 1997 1996 ------ ------- ------- Current: Federal $118,260 $ 72,000 $100,775 State 13,380 3,825 8,275 Foreign (640) (5,300) 4,250 ------- ------ ------- 131,000 70,525 113,300 ------- ------- ------- Deferred: Federal (5,630) 3,100 6,575 State 480 300 550 Foreign (150) (2,225) 375 ------- ------- ------- (5,300) 1,175 7,500 ------- ------- ------- $125,700 $ 71,700 $120,800 ======= ======= ======= Total income tax expense varies from the amount which would be provided by applying the U.S. federal income tax rate to earnings before income taxes. The major reasons for this difference (expressed as a percentage of pre-tax earnings) are as follows: 1998 1997 1996 ---- ---- ---- Federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.9 1.7 1.7 Goodwill amortization 1.8 2.5 0.8 Foreign Sales Corporation benefits (0.4) (0.8) (0.5) Other, net (1.3) (0.4) .8 ---- ---- ---- 38.0% 38.0% 37.8% ==== ==== ==== The Internal Revenue Service (IRS) has proposed certain income tax adjustments which are being contested by the company involving the years 1989 through 1991. The IRS is currently examining the years 1992 through 1996. In management's opinion, adequate provisions for income taxes have been made for all years. Deferred income tax liabilities and assets were comprised of the following: December 26, December 27, 1998 1997 ----------- ------------ Deferred tax assets: Nondeductible accrued liabilities $ 95,085 $ 90,281 State tax credit carryforwards 8,543 9,996 Bad debt and claims reserves 4,372 3,598 Federal and state operating loss carryforwards 20,874 27,404 Other 2,987 2,829 ------- ------- Gross deferred tax assets 131,861 134,108 Valuation allowance (8,543) (9,996) ------- ------- Net deferred tax assets 123,318 124,112 ------- ------- Deferred tax liabilities: Fixed assets (75,107) (82,746) Intangible assets (11,445) (8,210) Other (3,860) (4,266) ------- ------- (90,412) (95,222) ------- ------- $ 32,906 $ 28,890 ======= ======= The net $1.5 million decrease in the valuation allowance for deferred tax assets was the result of net utilization of state tax credit carryforwards. No benefit has been recognized for these state tax credit carryforwards, most of which expire in the years 2004 through 2008. At December 26, 1998, after considering utilization restrictions, the company's acquired tax loss carryforwards approximated $65.9 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: $16.0 million in 1999 and 2000, $16.1 million in 2001 and 2002 and $1.7 million in 2003. 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: $0.3 million in 2000, $4.2 million in 2001, $17.2 million in 2002, and $44.2 million during the years 2004 through 2009. F. LONG-TERM OBLIGATIONS: Long-term obligations are summarized as follows: December 26, December 27, 1998 1997 ------------ ------------ Revolving credit facilities $175,000 $112,950 7.45% Senior Notes due 2007 125,000 125,000 10.75% Senior Subordinated Notes due 2006 - 112,050 6.125% Senior Notes due 2006 100,000 100,000 7.125% Senior Notes due 2026 100,000 100,000 6.0% Securities due 2011 50,000 - Present value of minimum capital lease obligations 27,526 19,093 Other 1,076 1,400 ------- ------- 578,602 570,493 Less amounts due within one year 3,080 2,212 ------- ------- $575,522 $568,281 ======= ======= In June 1997, the company completed its public offering of $125 million principal amount of 7.45% Senior Notes due 2007. Net proceeds from the offering were ultimately used to reduce borrowings under IBP's revolving credit facilities. On January 15, 1998, the company settled and closed its public offering of $50 million aggregate principal amount of 6.0% Remarketable or Redeemable Securities, due January 15, 2011 (the "6.0% Securities"). The net proceeds from the 6.0% Securities were added to the company's working capital. The 6.0% Securities were the first series of notes issued under the company's $300 million aggregate principal amount, Medium-Term Notes program which commenced on December 12, 1997. During the first quarter 1998, the company completed its purchase of all of the $112 million outstanding 10.75% Senior Subordinated Notes of its wholly-owned subsidiary, Foodbrands America, Inc. Net prepayment premiums, accelerated amortization of unamortized deferred financing costs, and transaction expenses totaled $24 million, before applicable income tax benefit of $9 million, and was accounted for as an extraordinary loss. The purchase of these obligations by IBP was funded with available credit facilities and will likely be refinanced at a later date under the company's $300 million registered Medium-Term Notes program. The portion of borrowings under IBP's revolving credit facilities considered long- term increased to $175 million at December 26, 1998 from $113 million at December 27, 1997. Substantially all of the leased assets under capital leases can be purchased by IBP at the end of the respective lease terms. Leased assets, which are included with owned property in the consolidated balance sheets, at cost totaled $31 million; accumulated amortization on these assets totaled $9 million. Aggregate maturities of long-term obligations for each of the five fiscal years subsequent to 1998 are (in millions) $3.1; $177.7; $3.8; $2.1 and $51.1. G. STOCK PLANS: Officer Long-Term Stock Plans: IBP has officer long-term stock plans which provide for awards to key officers of IBP which, subject to certain restrictions, will vest generally after five years resulting in the delivery of shares of common stock over the one-year period following such vesting. At December 26, 1998, there were approximately 720,000 shares available for future awards under the plans. For approximately 125,000 shares (average grant price of $18.86) granted under the plans, the company is obligated to pay the mandatory federal withholding and Medicare taxes upon delivery of the shares. The company recognized compensation expense for these plans totaling $2.3 million, $3.3 million and $3.0 million, respectively, in 1998, 1997 and 1996. The status of shares under the officer long-term stock plans is summarized as follows: Number of Weighted Average Shares Price per Share --------- ----------------- Balance, December 30, 1995 1,274.8 $10.57 Granted 55.6 25.10 Delivered (9.5) 8.28 Forfeited - - ------------------------- Balance, December 28, 1996 1,320.9 11.07 Granted 260.1 21.14 Delivered (1,020.0) 8.41 Forfeited (10.2) 18.36 ------------------------- Balance, December 27, 1997 550.8 20.48 Granted 48.7 23.94 Delivered - - Forfeited (9.3) 21.48 ------------------------- Balance, December 26, 1998 590.2 $20.54 ======= ===== Stock Option Plans: IBP has stock option plans under which incentive and non-qualified stock options may be granted to key employees and directors of IBP and its subsidiaries. As of December 26, 1998, the plans provided for the delivery of up to 7.4 million shares of common stock upon exercise of options granted at no less than the market value of the shares on the effective date of grant. An additional 0.4 million options granted in 1998 were non-qualified ("non-qualifying options") based upon differences in market price on the effective date and issuance date. The 1998 expense recorded for the non-qualifying options was not material. All options may be granted for terms up to but not exceeding ten years and are generally fully vested after five years from the date granted. At December 26, 1998 and December 27, 1997, there were 3.2 million and 3.6 million options, respectively, reserved for future grants. The company follows the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been recognized for the stock option plans under that standard. Had compensation cost for IBP's stock option plans been determined based on the fair value at the grant date for awards in 1998, 1997, and 1996 consistent with the provisions of SFAS No. 123, IBP's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below : 1998 1997 1996 ------- ------- ------- Net earnings - as reported $190,007 $117,014 $198,735 Net earnings - pro forma 187,088 114,236 196,518 Earnings per share - as reported 2.05 1.26 2.10 Earnings per share - pro forma 2.02 1.23 2.08 Diluted earnings per share - as reported 2.03 1.25 2.07 Diluted earnings per share - pro forma 2.00 1.22 2.05 The weighted average fair values at date of grant for options granted at market value during 1998, 1997 and 1996 were $7.29, $7.91 and $9.89 per option respectively. The weighted-average fair value for the non-qualifying options granted in 1998 was $13.15 per option. The fair value of each option was estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted-average assumptions for options granted in 1998, 1997 and 1996: 1998 1997 1996 ------- ------- ------- Expected option life 6 years 6 years 6 years Expected annual volatility 26% 26% 30% Risk-free interest rate 4.7% 5.8% 6.5% Dividend yield 0.4% 0.4% 0.4% The status of stock options under the plans is summarized as follows: Number of Weighted Average Options Shares Price Per Share Exercisable --------- ---------------- ----------- Balance at December 30, 1995 4,583.6 $14.93 1,256.4 Granted 675.4 24.25 Exercised (464.4) 10.04 Canceled (244.7) 19.88 - ----------------------------------------------------------------- Balance at December 28, 1996 4,549.9 16.09 1,721.0 Granted 658.2 21.63 Exercised (738.5) 8.78 Canceled (344.4) 21.25 - ----------------------------------------------------------------- Balance at December 27, 1997 4,125.2 17.85 1,846.3 Granted at market value 208.7 21.37 Granted at a price below market value 434.2 16.56 Exercised (320.1) 11.44 Canceled (199.4) 21.64 - ----------------------------------------------------------------- Balance at December 26, 1998 4,248.6 $18.20 2,230.9 The following table summarizes information about stock options outstanding at December 26, 1998: Number Weighted Average Range of Outstanding Remaining Weighted Average Exercisable prices At 12/26/98 Contractual Life Exercise Price - ------------------ ----------- ---------------- ---------------- $ 6.75 to 15.99 1,211.9 4.0 Years $10.53 16.00 to 25.99 2,933.1 7.7 Years 21.16 26.00 to 33.00 103.6 8.1 Years 28.10 - --------------------------------------------------------------- $ 6.75 to 33.00 4,248.6 6.6 Years $18.20 Number Range of Exercisable Weighted Average Exercisable prices At 12/26/98 Exercise Price ------------------ ----------- ---------------- $ 6.75 to 15.99 1,174.7 $10.27 16.00 to 25.99 1,020.3 21.69 26.00 to 33.00 35.9 28.34 ----------------------------------------------- $ 6.75 to 33.00 2,230.9 $15.78 Share Delivery Restrictions: Shares of common stock to be delivered for approximately 0.8 million options under the stock option plans must come from previously issued shares. All other shares of stock to be delivered pursuant to the stock option plans and the officer long-term stock plans may alternatively come from previously authorized but unissued common stock. H. SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental information on cash payments is presented as follows: 1998 1997 1996 -------- -------- ------- Interest, net of amounts capitalized $47,775 $ 37,670 $ 2,045 Income taxes 74,343 39,017 108,625 I. FINANCIAL INSTRUMENTS: Interest and Currency Rate Derivatives: The company's policy is to manage interest cost using a mix of fixed and variable rate debt. To manage this mix in a cost-effective manner, the company may enter into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. These interest rate swaps effectively convert a portion of the company's fixed-rate debt to variable-rate debt, or vice versa. The notional amounts of these swap agreements were $50 million at year-end 1998 and $75 million at year-end 1997. The notional amounts of these and other derivative instruments do not represent assets or liabilities of the company but, rather, are the basis for the settlements under the contract terms. The company's Canadian subsidiary enters into currency futures contracts to hedge its exposures on live cattle and purchase commitments in foreign currencies. At December 26, 1998, the company had outstanding contracts to buy Canadian dollars totaling CDN$130 million at various dates through 1999. Comparable outstanding contracts at year-end 1997 totaled CDN$34 million. There were no material realized or unrealized gains or losses for any derivative financial instruments in any of the fiscal years presented. The company monitors the risk of default by its financial instrument counterparties, all of which are major financial institutions, and does not anticipate nonperformance. Fair Value of Financial Instruments: The following methods and assumptions are used in estimating the fair value of each class of the company's financial instruments at December 26, 1998: For cash equivalents, marketable securities, accounts receivable, notes payable and accounts payable, the carrying amount is a reasonable estimate of fair value because of the short-term nature of these instruments. For securities included in other assets, fair value is based upon quoted market prices for these or similar securities. The carrying amount approximates fair value for these securities. For long-term debt, fair value was determined using valuation techniques that considered cash flows discounted at current market rates and management's best estimate for instruments without quoted market prices. At year-end 1998, the fair value exceeded the carrying value by $6 million. At year-end 1997, the fair value exceeded the carrying value by $22 million. The company's long-term debt is generally not callable until maturity, except for the 7.125% Senior Notes due 2026. For derivatives, the fair value was estimated using termination cash values. The fair values of IBP's derivatives at year-ends 1998 and 1997 were not material. J. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS: IBP's subsidiary, Foodbrands America, Inc. ("Foodbrands"), has defined benefit pension plans at three of its facilities. Foodbrands also provides life insurance and medical benefits for substantially all retired hourly and salaried employees of one of its subsidiaries under various defined benefit plans. Pension Benefits Other Benefits ---------------- --------------- 1998 1997 1998 1997 ----- ---- ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $68,933 $66,368 $ 69,410 $ 69,322 Service cost 473 411 229 197 Interest cost 4,787 4,956 4,799 5,018 Actuarial loss 3,117 3,599 666 902 Benefits paid (6,389) (6,401) (6,253) (6,029) ------ ------ ------ ------ Benefit obligation at end of year 70,921 68,933 68,851 69,410 ------ ------ ------ ------ Change in plan assets: Fair value of plan assets at beginning of year 65,110 59,529 9 264 Actual return on plan assets 5,165 7,477 - 1 Employer contribution 2,851 4,505 6,249 5,773 Benefits paid (6,389) (6,401) (6,253) (6,029) ------ ------ ------ ------ Fair value of plan assets at end of year 66,737 65,110 5 9 ------ ------ ------ ----- Funded status (4,184) (3,823) (68,846) (69,401) Unrecognized net actuarial loss 3,812 317 1,587 904 ------ ------ ------- ------- Net amount recognized $ (372) $(3,506) $(67,259) $(68,497) ====== ====== ======= ======= Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 1,046 $ 846 $ - $ - Accrued benefit liability (1,418) (4,352) (67,259) (68,497) ------ ------ ------- ------- Net amount recognized $ (372) $(3,506) $(67,259) $(68,497) ====== ====== ======= ======= Weighted-average assumptions as of year end: Discount rate 6.75% 7.25% 6.75% 7.25% Expected return on plan assets 8.50% 8.50% n/a n/a For measurement purposes, a 9.9% annual rate of increase in the per capita claims cost of covered health care benefits was assumed for 1998. The 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. Components of net periodic benefit cost: Service cost $ 473 $ 411 $ 229 $ 197 Interest cost 4,787 4,956 4,799 5,018 Expected return on plan assets (5,501) (4,993) (1) (2) ------ ------ ----- ----- Net periodic benefit cost $ (241) $ 374 $ 5,027 $ 5,213 ====== ====== ====== ====== Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects: 1-percentage- 1-percentage- Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components for 1998 $ 82 $ (79) Effect on year-end postretirement benefit obligation $1,099 $(1,066) K. EARNINGS PER SHARE: For the Year Ended December 26, 1998 --------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ----------- Basic EPS Earnings before extraordinary item $204,822 92,485 $2.21 ==== Effect of Dilutive Securities Employee stock plans - 910 ------- ------ Diluted EPS $204,822 93,395 $2.19 ======= ====== ==== For the Year Ended December 27, 1997 ------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount ---------- ------------- ---------- Basic EPS Net earnings $117,014 92,651 $1.26 Effect of Dilutive Securities Employee stock plans - 1,141 ------- ------ ---- Diluted EPS $117,014 93,792 $1.25 ======= ====== ==== For the Year Ended December 28, 1996 -------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ----------- Basic EPS Earnings before extraordinary item $198,735 94,688 $2.10 ==== Effect of Dilutive Securities Employee stock plans - 1,402 ------- ------ Diluted EPS $198,735 96,090 $2.07 ======= ====== ==== The summary below lists stock options outstanding at the end of the fiscal years which were not included in the computations of diluted EPS because the options' exercise price was greater than the average market price of the common shares. These options had varying expiration dates. 1998 1997 1996 ------ ------ ------ Stock options excluded from Diluted EPS computation 120 1,406 978 Average option price per share $27.28 $24.95 $25.70 L. ACQUISITION: On May 7, 1997, the company, through a subsidiary, completed a merger with Foodbrands America, Inc. ("Foodbrands") for approximately $287 million, excluding transaction costs, and assumed liabilities of approximately $528 million. Foodbrands is a leading U.S. producer, marketer and distributor of frozen and refrigerated products to the "away from home" food preparation market. The acquisition was accounted for by the purchase method of accounting. The excess of the aggregate purchase price over fair value of identifiable assets and liabilities acquired of approximately $463 million was recognized as goodwill and is being amortized over 40 years. Foodbrands' historical goodwill of approximately $182 million was eliminated. The operating results of Foodbrands are included in IBP's consolidated results of operations from the date of acquisition. The following pro forma financial information assumes the acquisition occurred at the beginning of 1996. 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 1996, or of the results which may occur in the future (in thousands except per share data). 52 Weeks Ended --------------------------- Dec. 27, Dec. 28, 1997 1996 ----------- ----------- Net sales $13,508,370 $13,283,587 Earnings from operations 240,080 364,379 Earnings before extraordinary item 116,035 202,756 Net earnings 116,035 197,705 Earning per share: Earnings before extraordinary item $1.25 $2.14 Net earnings 1.25 2.09 Earnings per share - assuming dilution: 1.24 2.11 Earnings before extraordinary item 1.24 2.06 Net earnings The company made other acquisitions in 1997 and 1998 for which pro forma results were not included above because the impact was not material. M. BUSINESS SEGMENTS: The company is managed and operated as two divisions, Fresh Meats and Enterprises, and, accordingly, has two business segments. IBP's Fresh Meats operation relates principally to the meat processing industry and primarily involves cattle and hog slaughter, beef and pork fabrication and related allied product processing activities. This segment markets its products to food retailers, distributors, wholesalers, restaurant and hotel chains, other food processors and leather makers, as well as manufacturers of pharmaceuticals and animal feeds. The Enterprises segment consists of IBP subsidiaries Foodbrands and The Bruss Company, as well as three former IBP cooked meats plants transferred to Foodbrands in 1997. The Enterprises group produces, markets and distributes a variety of frozen and refrigerated products to the "away from home" food preparation market, including pizza toppings and crusts, value-added pork-based products, ethnic specialty foods, appetizers, soups, sauces and side dishes as well as deli meats and processed beef, pork and poultry products. Enterprises also produces portion-controlled premium beef and pork products for sale to restaurants and foodservice customers in domestic and international markets. The company operates principally in the United States. Intersegment sales have been recorded at amounts approximating market. Earnings from operations are comprised of net sales less all identifiable operating expenses, allocated corporate selling, general and administrative expenses, and goodwill amortization. Net interest expense and income taxes have been excluded from segment operations. NET SALES 1998 1997 1996 ---------- ----------- ---------- Sales to unaffiliated customers: Fresh Meats $11,696,190 $12,421,902 $12,412,071 Enterprises 1,152,445 836,882 126,682 ---------- ---------- ---------- $12,848,635 $13,258,784 $12,538,753 ========== ========== ========== Intersegment sales: Fresh Meats $ 185,459 $ 148,224 $ 48,084 Intersegment elimination (185,459) (148,224) (48,084) ---------- ---------- ---------- $ - $ - $ - ========== ========== ========== Net sales: Fresh Meats $11,881,649 $12,570,126 $12,460,155 Enterprises 1,152,445 836,882 126,682 Intersegment elimination (185,459) (148,224) (48,084) ---------- ---------- ---------- $12,848,635 $13,258,784 $12,538,753 ========== ========== ========== EARNINGS FROM OPERATIONS Fresh Meats $291,211 $195,493 $324,934 Enterprises 82,524 31,223 (2,026) --------- ---------- --------- Total earnings from operations 373,735 226,716 322,908 Net interest expense (43,213) (38,002) (3,373) --------- ---------- --------- Pre-tax earnings $330,522 $188,714 $319,535 ========= ======== ========= TOTAL ASSETS Fresh Meats $1,989,674 $1,923,517 $2,122,176 Enterprises 1,018,422 915,424 52,319 --------- --------- --------- $3,008,096 $2,838,941 $2,174,495 ========= ========= ========= ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT,INCLUDING ACQUISITIONS Fresh Meats $123,179 $107,503 $148,082 Enterprises 122,513 351,313 22,582 ------- ------- ------- $245,692 $458,816 $170,664 ======= ======= ======= DEPRECIATION AND AMORTIZATION Of fixed assets: Fresh Meats $ 74,034 $ 74,282 $ 71,711 Enterprises 26,787 18,010 2,199 ------- ------- ------- $100,821 $ 92,292 $ 73,910 ======= ======= ======= Of intangible assets: Fresh Meats $ 12,295 $ 8,944 $ 8,780 Enterprises 13,110 8,694 - ------- ------- ------- $ 25,405 $ 17,638 $ 8,780 ======= ======= ======= NET SALES BY GEOGRAPHIC LOCATION OF CUSTOMERS 1998 1997 1996 ---------- ---------- ---------- United States $10,952,780 $11,167,708 $10,416,883 Japan 784,624 909,855 1,058,630 Korea 134,271 224,272 190,164 Canada 421,701 508,568 505,012 Mexico 173,074 125,533 75,492 Other foreign countries 382,185 322,848 292,572 ---------- ---------- ---------- $12,848,635 13,258,784 $12,538,753 ========== ========== ========== N. COMMITMENTS: The company leases various facilities and equipment under noncancelable operating lease arrangements which expire at various dates through the year 2012. Future minimum payments under noncancelable operating leases with lease terms in excess of one year at December 26, 1998 totaled approximately $63 million. Aggregate maturities for each of the five fiscal years subsequent to 1998 are (in millions) $15.2; $14.5; $8.0; $5.1; and $3.5. The company's rental expense for all operating leases was (in millions) $21.9; $15.9; and $11.0 for fiscal years 1998, 1997 and 1996. The company had livestock and other purchase commitments, letters of credit, and other commitments and guarantees at December 26, 1998 aggregating approximately $260 million. Livestock purchase commitments were at a market or market-derived price at the time of delivery or were fully hedged if the price was determined at an earlier date. In addition to the livestock purchase commitments above, the company is committed to purchase approximately 12 million market hogs between 1999 and 2009 at market-derived prices under Cash Flow Assistance ("CFA") contracts with producers. Commitments for the next five years average approximately 1.8 million hogs annually, which represents less than 10% of IBP's current annual production capacity. O. CONTINGENCIES: IBP is involved in numerous disputes incident to the ordinary course of its business. In the opinion of management, any liability for which provision has not been made relative to the various lawsuits, claims and administrative proceedings pending against IBP, including that described below, will not have a material adverse effect on its future consolidated results of operations, financial position or liquidity. In July 1996, a lawsuit was filed against IBP by certain cattle producers in the U.S. District Court, Middle District of Alabama, seeking certification of a class of all cattle producers. The complaint alleges, inter alia, that IBP has used its market power and alleged "captive supply" agreements to reduce the prices paid to producers for cattle. Plaintiffs initially disclosed that, in addition to declaratory relief and punitive damages, they sought disgorgement of all profits earned in 1994, 1995 and 1996 in excess of what they deem a "fair" return. On September 15, 1998, the District Court rendered a decision denying class certification. Plaintiffs have filed a motion requesting reconsideration of this decision, attempting to limit the class in a manner necessary to avoid conflicts between class members, and attempting to present a damage analysis which the District Court will accept. Based upon IBP's review of this information, management still believes that class certification is unlikely. As previously stated, IBP believes it has acted properly and lawfully in its dealings with cattle producers. P. QUARTERLY FINANCIAL DATA (UNAUDITED): Quarterly results are summarized as follows: First Second Third Fourth 1998 Quarter Quarter Quarter Quarter Annual ---- ------- ------- ------- ------- ------ Net sales $3,224,944 $3,334,340 $3,210,689 $3,078,662 $12,848,635 Gross profit 103,829 126,141 193,251 238,987 662,208 Earnings before extraordinary item 13,599 33,853 65,581 91,789 204,822 Net earnings (loss) (1,216) 33,853 65,581 91,789 190,007 Earnings per share: Earnings before extraordinary item .15 .37 .71 .99 2.21 Net earnings (loss) (.01) .37 .71 .99 2.05 Earnings per share - assuming dilution: Earnings before extraordinary item .15 .36 .70 .98 2.19 Net earnings (loss) (.01) .36 .70 .98 2.03 Dividends per share .025 .025 .025 .025 .10 Market price: High 24 1/2 23 1/8 21 1/8 29 7/16 Low 19 15/16 18 3/8 16 9/16 20 1997 ----- Net sales $3,134,591 $3,448,337 $3,416,706 $3,259,150 $13,258,784 Gross profit 82,856 119,959 125,441 114,636 442,892 Net earnings 32,310 33,864 29,121 21,719 117,014 Earnings per share .34 .37 .32 .23 1.26 Earnings per share - assuming dilution .34 .36 .31 .23 1.25 Dividends per share .025 .025 .025 .025 .10 Market price: High 26 25 1/2 24 1/4 25 1/2 Low 22 3/4 22 3/8 22 1/8 20 3/8 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IBP, inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, changes in stockholders' equity and comprehensive income, and of cash flows present fairly, in all material respects, the consolidated financial position of IBP, inc. and subsidiaries at December 26, 1998 and December 27, 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 26, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - -------------------------------- PricewaterhouseCoopers LLP Omaha, Nebraska January 22, 1999 REPORT ON FINANCIAL STATEMENT INTEGRITY BY MANAGEMENT To our Stockholders: IBP's consolidated financial statements have been prepared by management and we are responsible for their integrity and objectivity. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). We believe these statements present fairly the company's financial position and results of operations. Our independent auditors, PricewaterhouseCoopers LLP, have audited these consolidated financial statements. Their audit was conducted using generally accepted auditing standards, which included consideration of our internal controls in order to form an independent opinion on the financial statements.We have made available to PricewaterhouseCoopers LLP, all the company's financial records, as well as the minutes of meetings of stockholders and directors. IBP relies on a system of internal accounting controls to provide assurance that assets are safeguarded and transactions are properly authorized and recorded. We continually monitor these controls, modifying and improving themas business operations change. IBP maintains a strong internal auditing departmnt that independently reviews and evaluates these controls as well. The Audit Committee of the Board of Directors provides oversight to ensure the integrity and objectivity of the company's financial reporting process and the independence of our internal and external auditors. Both internal audit and PricewaterhouseCoopers LLP, have complete access to the Board's Audit Committee with or without the presence of management personnel. Our management team is responsible for proactively fostering a strong climate of ethical conduct so that the company's affairs are carried out according to the highest standards of personal and corporate behavior. This responsibility is specifically demonstrated in IBP's conflict of interest policy which requires annual written acknowledgment by each and every officer and those management personnel so designated. We are pleased to present this annual report and the accompanying consolidated financial statements for your review and consideration. Most sincerely, /s/ Robert L. Peterson /s/ Larry Shipley ____________________________________ ______________________________ Robert L. Peterson Larry Shipley Chairman and Chief Executive Officer President, IBP Enterprises and IBP, inc. Chief Financial Officer IBP, inc. MANAGEMENT'S DISCUSSION AND ANALYSIS The matters discussed herein contain forward-looking statements. Specifically, these forward-looking statements include risks and uncertainties. Thus, actual results may differ materially from those expressed or implied in those statements. Those risks and uncertainties include, without limitation, risks of changing market conditions with regard to livestock supplies and demand for the company's products, domestic and international legal and regulatory risks, the costs of environmental compliance, the impact of governmental regulations, operating efficiencies, as well as competitive and other risks over which IBP has little or no control. Moreover, past financial performance should not be considered a reliable indicator of future performance. The company makes no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement. RESULTS OF OPERATIONS This section presents analysis of IBP's consolidated operating results displayed in the Consolidated Statements of Earnings and should be read together with the business segments information in Note M to the consolidated financial statements. STRATEGIC GROWTH Acquisitions of Foodbrands America, Inc. ("Foodbrands") and the Bruss Company ("Bruss") were completed in the second quarter of 1997. The Foodbrands purchase, effective as of May 7, 1997, extended the company's product base into value-added, branded food products. Foodbrands is a leading U.S. producer, marketer, and distributor of frozen and refrigerated products to the "away from home" food preparation market, which is a fast- growing segment of the food industry. An industry leader in pizza topping sales, Foodbrands is also a major provider of value-added, pork-based products to the food service industry. Foodbrands produces over 1,600 branded and custom products, including pizza toppings and crusts, ethnic specialty foods, breaded appetizers, soups, sauces, and side dishes as well as deli meats and processed beef, pork, and poultry products. The Bruss purchase, effective as of May 30, 1997, brought to IBP a processor of individual cuts of premium quality beef and pork for sale to restaurants and foodservice providers both domestically and internationally. IBP purchased a bacon topping manufacturer, Winchester Food Processing, Inc., ("Winchester") in Hutchinson, Kansas, in the third quarter of 1997. Winchester produces bacon toppings and bacon bits for the foodservice industry and has expanded its operations in 1998 to include additional cooked meat products. IBP also purchased one of the nation's leading producers of high quality appetizers in the fourth quarter of 1998. The company purchased the appetizer division of Diversified Foods Group ("DFG") which has plants in Chicago, Illinois, and Newark, New Jersey. DFG produces and markets a variety of hors d'oeuvres, appetizers, desserts and prepared meals for foodservice companies, club stores and retail grocery chains. Winchester and DFG will both be part of IBP's Foodbrands subsidiary. COMPARISON OF 1998 TO 1997 Operating earnings in 1998 measured 2.9% of net sales versus 1.7% in 1997. The Fresh Meats 1998 operating margin measured 2.5% of net sales compared to 1.6% in 1997. The higher 1998 figure reflected much-improved pork margins offset by lower beef margins caused by competing domestic meat supplies and weaker export demand resulting from economic problems in the Far East. Meanwhile, Enterprises' operations performed above expectations as product demand increased and raw material prices decreased. Net Sales 1998 1997 % Change ----------- ----------- -------- Fresh Meats $11,696,190 $12,421,902 -5.8% Enterprises 1,152,445 836,882 37.7% ---------- ---------- ---- Total $12,848,635 $13,258,784 -3.1% ========== ========== ==== Earnings from Operations Fresh Meats $ 291,211 $ 195,493 49.0% Enterprises 82,524 31,223 164.3% ---------- ---------- ----- Total $ 373,735 $ 226,716 64.8% ========== ========== ===== SALES The 6% decrease in Fresh Meats' net sales was due to lower average prices of beef and pork products sold. Average 1998 pork prices in particular fell 26% from 1997. These lower average prices were partially offset by increases in pounds of beef and pork products sold. Enterprises' net sales in 1997 included 35 weeks for Foodbrands and 31 weeks for Bruss. Meanwhile, Enterprises' comparable period sales also decreased in 1998 from 1997 due to lower selling prices resulting from lower raw material costs passed through to customers, which offset an increase in pounds sold. Net export sales in 1998 decreased 6% from 1997. Export tonnage in 1998 increased 21% over 1997 but was offset by overall lower prices and a sales mix with a higher percentage of lower valued products. Exports accounted for approximately 12.3% of consolidated net sales in 1998 versus 12.7% in 1997. The Asian region accounted for 67% of total net export sales in 1998 compared to 73% in 1997. The decline was due to much-publicized economic difficulties. The Far East shortfall was partially offset by increased exports to Mexico and South America destinations. The USDA has predicted that 1999 U.S. red meat exports will increase slightly over 1998. They foresee relatively weak world economic growth but some improvement in sales to the Pacific Rim, especially Japan. The company's 1998 net export sales to Japan, IBP's most significant export market, were 14% lower than in 1997, although sales volume in 1998 increased 7% over 1997. COST OF PRODUCTS SOLD The cost of products sold in 1998 decreased 5% from the same 1997 period. Fresh Meats experienced a 7% decrease in 1998 costs versus the prior year. This decrease was primarily due to reduced average prices paid for live hogs and cattle, which overrode the effect of increases in pounds of pork and beef products sold. Fresh Meats' plant costs increased due primarily to higher labor costs and increased pork volume. Enterprises also experienced lower comparable cost of products sold due primarily to the lower pork raw material prices. Industry experts predict that fed cattle supplies will remain strong into the first half of 1999 before tightening somewhat. Meanwhile, favorable hog supplies are expected throughout 1999 despite the recent price decline due to an increase in hog production facilities in recent years and relatively low feed grain prices. This factor bodes well for Enterprises as well as Fresh Meats due to the significance of pork as a raw material in Enterprises' product base. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 1998 expense was 33% higher than in 1997. Excluding the effect of new subsidiaries, 1998 expense was 10% higher than in 1997. Generally, higher incentive compensation and amortization of intangibles was partially offset by accrual of refunds of U.S. harbor maintenance taxes paid in prior years, based upon a U.S. Supreme Court decision which ruled their collection unconstitutional, as well as cessation of current year harbor tax expense. Enterprises' selling expense is much higher as a percentage of net sales compared to Fresh Meats due to the value-added nature of their respective product lines which require increased levels of customer contact, brand name development and promotional costs. The company expects that selling expense will continue to be significantly higher than in periods prior to the Foodbrands and Bruss acquisitions. INTEREST EXPENSE The 14% higher net interest expense in 1998 versus 1997 was primarily attributable to 29% higher average borrowings brought about by the purchases of Foodbrands and Bruss in the second quarter 1997. IBP's effective interest rate in 1998 was lower by 53 basis points from the average in 1997, which somewhat offset the higher average borrowings. The lower effective interest rate was attributable in part to lower short-term market rates in 1998, the retirement of Foodbrands' 10.75% Senior Subordinated Notes in the first quarter 1998, and a favorable market position with IBP's interest rate swap contract. COMPARISON OF 1997 TO 1996 Earnings from operations, measured as a percentage of net sales, decreased to 1.7% in 1997 from 2.6% in 1996. Excluding results of new acquisitions Foodbrands and Bruss, operating earnings fell to 1.5% in 1997. Fresh Meats margins were squeezed by increasing supplies of competing meats and new plant start up losses at the company's beef processing facility in Canada and pork complex in Logansport, Indiana. In addition, export demand in important Asian markets was slowed in the latter part of 1997 by food safety scares and a stronger U.S. dollar versus Asian currencies. Net Sales 1997 1996 % Change ----------- ----------- -------- Fresh Meats $12,421,902 $12,412,071 0.1% Enterprises 836,882 126,682 560.6% ---------- ---------- ----- Total $13,258,784 $12,538,753 5.7% ========== ========== ===== Earnings from Operations Fresh Meats $ 195,493 $ 324,934 -39.8% Enterprises 31,223 (2,026) n/a ---------- ---------- ----- Total $ 226,716 $ 322,908 -29.8% ========== ========== ===== SALES Net sales in 1997 rose 6% compared to 1996, with Enterprises accounting for most of the increase. In IBP's comparative Fresh Meats operations, 1997 net sales were up slightly from 1996 due primarily to increased pounds of beef products sold. Net export sales in 1997 were also slightly higher in comparison to 1996. Except for Japan, the company achieved positive year-over-year comparisons in all significant export markets. Exports to Japan improved throughout most of 1997 from the second half of 1996. A food safety scare had sharply curtailed U.S. red meat sales into Japan in 1996. The Asian financial crisis began to adversely impact exports late in 1997 as the strengthening U.S. dollar made American products more expensive for Japanese customers. Total net exports accounted for 12.7% of consolidated net sales in 1997 versus 13.4% in 1996. COST OF PRODUCTS SOLD The 6% increase in cost of products sold from 1996 to 1997 was due largely to the impact of Enterprises. Excluding the impact of these entities, IBP's Fresh Meats operations in 1997 compared to 1996 increased modestly due primarily to the new plant start ups in Alberta, Canada, and Logansport, Indiana. A higher average price paid for live cattle also contributed to higher cost of products sold. Plant costs in 1997 for comparable operations increased over 1996 primarily as a result of higher labor costs. Additionally, 1996 cost of products sold was reduced $13 million (after bonus impact) by reduction of a workers' compensation lawsuit reserve. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense in 1997 was 79% higher than in 1996 due primarily to expenses incurred by Enterprises. Enterprises' selling expense is much higher as a percentage of net sales compared to Fresh Meats due to the incrementally higher value-added nature of its product lines. Fresh Meats 1997 expenses were slightly higher than in the prior year due in part to higher personnel-related costs, outside contract services and international selling expense. These higher costs were partially offset by reduced incentive compensation resulting from lower operating earnings. INTEREST EXPENSE Net interest expense rose significantly in 1997 versus 1996 due mainly to the Foodbrands and Bruss acquisitions. Incremental borrowings were necessary to acquire these companies and Foodbrands had existing debt of $341 million at the purchase date. Total consolidated outstanding borrowings averaged $654 million in 1997 compared to $265 million in 1996. The company's effective average interest rate increased also, due primarily to the addition of Foodbrands' $112 million of 10.75% Senior Subordinated Notes. LIQUIDITY AND CAPITAL RESOURCES The meat processing industry is characterized by significant working capital requirements. This is due largely to statutory provisions that generally provide for immediate payment for livestock, while it takes IBP on average about eight days to turn its product inventories and sixteen days to convert its trade receivables to cash. These factors, combined with fluctuations in production levels, selling prices and prices paid for livestock, can impact cash requirements substantially on a day-to-day basis. To provide cash for its working capital requirements, the company's credit facilities (more fully described in Note C to the consolidated financial statements) provide IBP with same-day access to an aggregate of $600 million in potential committed borrowings. The unused portion of the committed credit lines was $375 million at December 26, 1998. Although IBP has significant working capital requirements, its accounts receivable and inventories are highly liquid, characterized by rapid turnover. The following are key indicators relating to IBP's working capital, asset-based liquidity, and leverage ratios: December 26, December 27, 1998 1997 ----------- ----------- Working capital (in millions) $231 $207 Current ratio 1.3:1 1.2:1 Quick ratio 0.7:1 0.7:1 Number of days' sales in accounts receivable 15.8 15.3 Inventory turnover 30.0 35.2 Earnings to fixed charges 6.1 4.3 Positive 1998 operating cash flows contributed to improvement in the company's working capital and associated ratios. However, differences in the nature of the Enterprises businesses (e.g., more numerous product lines, distribution channels, customers and credit terms) caused slower consolidated receivables and inventory turnover rates. Meanwhile, receivables and inventory turnover rates for comparable Fresh Meats operations in 1998 were similar to those in 1997. Total consolidated outstanding borrowings averaged $843 million in 1998 compared to $654 million in 1997. Borrowings outstanding at December 26, 1998 under committed facilities totaled $225 million, and available unused credit capacity under committed facilities was $375 million. The purchase of the Foodbrands 10.75% Notes in the first quarter 1998 by IBP, inc. was funded with available credit facilities and will likely be refinanced at a later date under the company's $300 million Medium-Term Notes program registered with the Securities and Exchange Commission. The portion of borrowings under IBP's revolving credit facilities considered long-term increased to $175 million at December 26, 1998 from $113 million at year-end 1997. In January 1998, the company settled and closed its public offering of $50 million aggregate principal amount of 6.0% Remarketable or Redeemable Securities, due January 15, 2011 (the "6.0% Securities"). The net proceeds from the 6.0% Securities were added to the company's working capital. The 6.0% Securities were a series of notes issued under the company's Medium-Term Notes program. The company invested $38 million in 1998 and $4 million during the fourth quarter 1997 in life insurance contracts for key employees. Among other advantages, expected changes in the cash value of these contracts are intended to effectively act as a hedge against changes in the company's deferred compensation liabilities. Capital expenditures in 1998 totaled $246 million compared to $134 million in 1997. Current year spending included purchases of the appetizer division of Diversified Food Group, with plants in Chicago, Illinois, and Newark, New Jersey, and a closed beef manufacturing facility in Norfolk, Nebraska. The appetizer business will operate as a separate division within Enterprises while the beef manufacturing facility is part of Fresh Meats. Additional 1998 spending went toward pork and foodservice plant expansions, construction of the company's new world headquarters, and ongoing replacements and modifications to existing facilities. The company used positive operating cash flows and available debt facilities to fund its 1998 capital expenditures. Management's estimate of 1999 capital spending is in the range of $175 million, the majority of which has been designated for revenue enhancement and capacity expansion. The company intends to fund these expenditures with operating cash flows and available debt facilities. MARKET RISK Interest Rates - The company manages interest cost using a mix of fixed and variable rate debt. To manage this mix in a cost-effective manner, the company may enter into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. These interest rate swaps effectively convert a portion of the company's fixed-rate debt to variable-rate debt or vice versa. A sensitivity analysis indicates that with respect to interest rate derivative instruments in place at December 26, 1998, a 100-basis point increase in market interest rates would not have a material impact on the company's financial position, results of operations or cash flows. Foreign Operations - Transactions denominated in a currency other than the entity's functional currency are generally hedged using currency forward contracts to reduce this market risk. These transactions primarily involve the company's Canadian subsidiary, which enters into currency futures contracts to hedge its exposures on live cattle and purchase commitments in foreign currencies. A sensitivity analysis indicates that a 10% change in currency exchange rates would not have a material impact on the company's financial position, results of operations or cash flows. Commodities - The company uses commodity futures contracts to hedge its forward livestock purchases which, in 1998, accounted for approximately 2% of its livestock purchases. The contract lives ranged from one to twelve months. Any change in the value of the futures contracts is generally balanced by an offsetting change in the cash market price of the delivered livestock. Additionally, a sensitivity analysis indicates that a 10% change in livestock market prices would not have a material impact on the company's financial position, results of operations or cash flows. YEAR 2000 The "Year 2000" problem relates to computer systems that have time and date-sensitive programs that were designed to read years beginning with "19," but may not properly recognize the year 2000. If a computer system or other equipment with embedded chips or processors (collectively, "Business Systems") used by the company or a third party dealing with the company fails because of the inability of the system or application to properly read the year "2000," the results could conceivably have a material adverse effect on the company. This Year 2000 issue can arise at any point in the company's supply, manufacturing, processing, distribution, and financial chains. The company has an internal team responsible for assessing the impact of Year 2000 and leading and monitoring the company's state of readiness with respect to this issue. The assessment and planning phase is 95% complete, the implementation phase is approximately 90% complete, and the testing phase is approximately 60% complete. All phases are expected to be completed during 1999. A significant portion of the company's Business Systems is internally developed and has been or is in the process of being remediated. The Business Systems considered most critical to continuing operations are being given the highest priority. None of the company's other information technology projects have been delayed due to the implementation of the Year 2000 readiness program. As part of the Year 2000 readiness program, significant service providers, vendors, suppliers, customers, and governmental entities ("Key Business Partners") that are considered critical to business operations around January 1, 2000, have been identified and steps are being undertaken in an attempt to reasonably ascertain their stage of Year 2000 readiness as it relates directly or indirectly to the company. The possible consequences of the company or its Key Business Partners not being fully Year 2000 compliant by January 1, 2000 include, among other things, temporary plant closings, delays in the delivery of products and/or receipt of supplies, invoice and collection errors and inventory and supply obsolescence. However, the company believes that its Year 2000 readiness program, including the contingency planning discussed below, should significantly reduce the adverse effect any such disruptions may have. The company currently has no formal contingency plan in place. However, the progress of the Year 2000 readiness program is being closely monitored and additional measures will be taken as risks arise. These measures may include stockpiling critical supplies and packaging materials, securing alternate sources of supplies or services, and other appropriate measures. It is currently estimated that the aggregate cost of the company's Year 2000 efforts will be approximately $14 million, of which $7 million has been spent. The budgeted $14 million includes approximately $8 million, of which $3 million has been spent, for computer hardware, substantially all of which will be capitalized. The remaining $6 million is primarily for computer software modifications, all of which will be expensed as incurred and funded with operating cash flows. Approximately $4 million has been expensed to date. The company's Year 2000 readiness program is an ongoing process and the estimates of costs and completion dates for various components of the Year 2000 readiness program described above are subject to change.
EX-21 4 EXHIBIT 21 SUBSIDIARIES OF IBP, inc. December 26, 1998 Foodbrands America, Inc., Delaware IBP Foodservice, L.L.C., Delaware* ---------------------------- * Owns 100% interest in Foodbrands America, Inc. EX-23 5 Consent of Independent Accountants We consent to the incorporation by reference in the registration statement of IBP, inc. on Form S-3 (File No. 33-64459) and on Form S-8 (File No. 33- 19441) of our report dated January 22, 1999, on our audits of the consolidated financial statements and financial statement schedule of IBP, inc. as of December 26, 1998 and December 27, 1997 and for each of the three years ended December 26, 1998, which report is incorporated by reference in the Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - ----------------------------------- PricewaterhouseCoopers LLP Omaha, Nebraska March 25, 1999 EX-27 6
5 1,000 YEAR DEC-26-1998 DEC-26-1998 27,254 1,400 612,110 12,111 405,418 1,096,815 1,916,030 843,937 3,008,096 865,812 575,522 0 0 4,750 1,396,164 3,008,096 12,848,635 12,848,635 12,186,427 12,186,427 288,473 0 43,213 330,522 125,700 204,822 0 (14,815) 0 190,007 2.05 2.03
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