8-K/A 3 edgar8k.txt 8-K DATED MARCH 12, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K/A CURRENT REPORT ____________________________ PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-6085 March 12, 2001 Date of Report (Date of earliest event reported) ____________________________ IBP, inc. a Delaware Corporation I.R.S. Employer Identification No. 42-0838666 800 Stevens Port Drive Dakota Dunes, South Dakota 57049 Telephone 605-235-2061 ____________________________ page 1 of 58 pages -1- ITEM 5. OTHER EVENTS As previously reported in the registrant's Form 10-K for the year ended December 25, 1999, on February 7, 2000, the company acquired Corporate Brand Foods America, Inc. ("CBFA"), a privately held processor and marketer of meat and poultry products for the retail and foodservice markets. In the transaction, which was accounted for as a pooling of interests, IBP issued 14.4 million common shares for all of the outstanding stock of CBFA. The company is filing certain financial information, including the restated audited consolidated balance sheets of the Company as of December 25, 1999 and December 26, 1998 and the restated audited consolidated statements of earnings, changes in redeemable stock, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 25, 1999, together with the related Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company, which give retroactive effect to the merger of CBFA. The financial statements and notes thereto incorporated by reference in the company's Form 10-K, originally filed with Securities and Exchange Commission ("SEC") on March 23, 2000, have been restated to reflect the following matters, which were included in the registrant's amended Form 10-K/A as filed with the SEC on March 12, 2001. The financial statements and notes thereto include in this amended Form 8-K/A similarly relect the following matters: The accompanying financial statements have been restated to reflect adjustments for irregularities and misstatements at one of the company's subsidiaries, the application of variable plan accounting for certain stock options, and expanded disclosures related to segment information, acquisitions, long-term debt and capital lease obligations, contingencies, redeemable stock and capital stock. See Notes M and R for more detail relating to the effects of these restatements. The statements of cash flows have also been restated for the above adjustments to provide more detail of certain cash transactions that were previously reported on a combined basis and to reclassify the change in the company's checks in process of clearance to cash flows from operations as a change in accounts payable, consistent with the balance sheet classification. The change in this balance previously was included in financing activities. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS a) Supplemental Consolidated Selected Financial Data, Supplemental Consolidated Financial Statements and noted thereto, Supplemental Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations, and Supplemental Financial Statement Schedules (restated to give effect to merger accounted for as pooling of interests). Supplemental Selected Financial Data Supplemental Financial Statements Consolidated Balance Sheets - December 25, 1999 and December 26, 1998 -2- Consolidated Statements of Earnings - Years ended December 25, 1999, December 26, 1998, and December 28, 1997 Consolidated Statements of Changes in Redeemable Stock, Stockholders' Equity and Comprehensive Income - Years ended December 25, 1999, December 26, 1998, and December 28, 1997 Consolidated Statements of Cash Flows - Years ended December 25, 1999, December 26, 1998, and December 28, 1997 Notes to Consolidated Financial Statements The supplementary data regarding quarterly results of operations set forth in Note P. "Quarterly Results (Unaudited)" Supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations Independent Auditors' Report Schedule II - Supplemental Valuation and Qualifying Accounts b) Exhibits Consent of PricewaterhouseCoopers LLP Exhibit 27.1 - Restated Financial Data Schedule Exhibit 27.2 - Restated Financial Data Schedule Exhibit 27.3 - Restated Financial Data Schedule IBP, INC. March 12, 2001 By: /s/ Larry Shipley _______________________ Chief Financial Officer -3- Selected Financial Data ----------------------- (in thousands, except net sales and per share data) 52 Weeks Ended ------------------------------------------------------ Restated Restated Restated Restated Restated Dec. 25, Dec. 26, Dec. 27, Dec. 28, Dec. 30, 1999 1998 1997 1996 1995 ------------------------------------------------------ OPERATIONS: Net sales (in millions)$ 14,635 $ 13,277 $ 13,446 $ 12,539 $ 12,668 Gross profit 995,070 737,534 471,427 443,582 604,068 Selling, general and administrative expenses 440,474 355,564 231,669 121,848 131,417 Earnings from operations 554,596 381,970 239,758 321,734 472,651 Interest expense, net 67,816 57,571 44,173 3,373 20,784 Income taxes 168,913 126,432 73,837 120,719 178,821 Extraordinary loss (1) - (14,815) - - (22,189) Net earnings 317,867 183,152 121,748 197,642 250,857 PER SHARE DATA: Earnings per diluted share - Earnings before extraordinary item $2.96 $1.86 $1.20 $2.06 $2.85 Extraordinary loss (1) - (.14) - - (.23) Net earnings 2.96 1.72 1.20 2.06 2.62 Dividends per common share .10 .10 .10 .10 .10 FINANCIAL CONDITION: Working capital $ 148,011 $ 251,254 $ 218,400 $ 540,903 $ 427,241 Total assets 4,143,557 3,313,019 2,971,512 2,174,495 2,027,601 Long-term obligations 789,861 761,182 635,006 260,008 260,752 Stockholders' equity 1,700,483 1,390,797 1,235,848 1,193,882 1,014,259
(1) Extraordinary loss on early extinguishment of debt, net of applicable income taxes. -4- IBP, inc. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) Restated Restated December 25, December 26, 1999 1998 ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 32,865 $ 28,829 Marketable securities - 1,400 Accounts receivable, less allowance for doubtful accounts of $21,352 and $13,110 849,679 635,215 Inventories (Note B) 615,192 454,897 Deferred income tax benefits (Note E) 63,426 55,110 Prepaid expenses 19,566 14,513 --------- --------- TOTAL CURRENT ASSETS 1,580,728 1,189,964 --------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land and land improvements 124,053 109,600 Buildings and stockyards 694,212 581,129 Equipment 1,373,054 1,156,793 --------- --------- 2,191,319 1,847,522 Accumulated depreciation and amortization (960,391) (857,606) --------- --------- 1,230,928 989,916 Construction in progress 131,837 168,256 --------- --------- 1,362,765 1,158,172 --------- --------- OTHER ASSETS: Goodwill, net of accumulated amortization of $189,395 and $160,908 1,054,839 826,866 Other 145,225 138,017 --------- --------- 1,200,064 964,883 --------- --------- $4,143,557 $3,313,019 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses (Note D) $ 736,242 $ 629,836 Notes payable to banks (Note C) 542,060 140,967 Federal and state income taxes 135,620 152,122 Deferred income taxes (Note E) 3,361 1,818 Other 15,434 13,967 --------- --------- TOTAL CURRENT LIABILITIES 1,432,717 938,710 LONG-TERM OBLIGATIONS (Notes C and F) 789,861 761,182 DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes (Note E) 8,366 23,494 Other 167,566 168,944 --------- --------- 175,932 192,438 --------- --------- -5- REDEEMABLE STOCK: Series A Preferred Stock, $0.001 par value, 25,000 shares authorized, 5,053 and 4,488 shares outstanding, redemption amount: $5.1 million and $4.5 million 4,820 4,247 Series B Preferred Stock, $0.001 par value, 25,000 shares authorized, 18,243 and 9,237 shares outstanding, redemption amount: $18.5 million and $9.4 million 16,964 8,848 Series C Preferred Stock, $0.001 par value, 25,000 shares authorized,4,891 and 4,261 shares outstanding, redemption amount: $5.0 million and $4.3 million 4,161 3,491 Class B Common Stock, $0.001 par value, 12.2 million shares authorized, 6.5 million and 5.3 million shares outstanding 12,542 7,862 Class B Common Stock Warrants, 3.3 million and 3.2 million warrants outstanding 6,077 5,444 --------- --------- TOTAL REDEEMABLE STOCK 44,564 29,892 --------- --------- STOCKHOLDERS' EQUITY: Common stock 4,964 4,964 Additional paid-in capital 404,463 409,564 Retained earnings 1,358,971 1,053,108 Accumulated other comprehensive income (8,600) (16,456) Treasury stock, at cost (59,315) (60,383) --------- --------- TOTAL STOCKHOLDERS' EQUITY 1,700,483 1,390,797 --------- --------- $4,143,557 $3,313,019 ========= ========= See notes to consolidated financial statements. -6- IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) 52 Weeks Ended -------------------------------------------- Restated Restated Restated December 25, December 26, December 27, 1999 1998 1997 ------------ ------------ ------------ Net sales (Note A) $14,635,036 $13,276,708 $13,446,498 Cost of products sold 13,639,966 12,539,174 12,975,071 ---------- ---------- ---------- Gross profit 995,070 737,534 471,427 Selling, general and administrative expenses 440,474 355,564 231,669 ---------- ---------- ---------- Earnings from operations 554,596 381,970 239,758 Interest: Incurred (81,989) (70,011) (56,172) Capitalized 8,589 7,976 6,933 Income 5,584 4,464 5,066 ---------- ---------- ---------- (67,816) (57,571) (44,173) ---------- ---------- ---------- Earnings before income taxes and extraordinary item 486,780 324,399 195,585 Income taxes (Note E) 168,913 126,432 73,837 ---------- ---------- ---------- Earnings before extraordinary item 317,867 197,967 121,748 Extraordinary loss on early extinguishment of debt, less applicable taxes (Note F) - (14,815) - ---------- ---------- ---------- Net earnings $ 317,867 $ 183,152 $ 121,748 ========== ========== ========== Earnings per share (Note K): --------------------------- Earnings before extraordinary item $3.26 $2.02 $1.26 Extraordinary item - (.15) - ---- ---- ---- Net earnings $3.26 $1.87 $1.26 ==== ==== ==== Earnings per share - assuming dilution: -------------------------------------- Earnings before extraordinary item $2.96 $1.86 $1.20 Extraordinary item - (.14) - ---- ---- ---- Net earnings $2.96 $1.72 $1.20 ==== ==== ==== See notes to consolidated financial statements. -7- IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (in thousands, except per share data) Accumulated Common Additional Other Total Shares Common Paid-in Retained Comprehensive Treasury Stockholders' Outstanding Stock Capital Earnings Income Stock Equity ------------------------------------------------------------------------------- Restated balances, December 28, 1996 94,627 $4,750 $427,456 $769,426 $ (32) $ (7,718) $1,193,882 Comprehensive income: Net earnings - restated 121,748 121,748 Other comprehensive income: Foreign currency translation adjustments (6,082) (6,082) --------- Comprehensive income - restated 115,666 --------- Dividends declared on common stock, $.10 per share (9,249) (9,249) Shares issued by pooled company 4,280 214 4,286 4,500 Dividends on preferred stock (652) (652) Accretion of preferred stock (30) (30) Treasury shares purchased (3,800) (73,915) (73,915) Treasury shares delivered under employee stock plans 1,759 (20,504) 26,150 5,646 ------------------------------------------------------------------------------- Restated balances, 96,866 $4,964 $411,238 $881,243 $(6,114) $(55,483) $1,235,848 December 27, 1997 Comprehensive income: Net earnings - restated 183,152 183,152 Other comprehensive income: Foreign currency translation adjustments (10,342) (10,342) --------- Comprehensive income - restated 172,810 Dividends declared on common stock, $.10 per share (9,246) (9,246) Dividends on preferred stock (1,719) (1,719) Accretion of redeemable stock (322) (322) Treasury shares purchased (592) (12,370) (12,370) Treasury shares delivered under employee stock plans 320 (1,674) 7,470 5,796 ------------------------------------------------------------------------------- Restated balances, -8-
Accumulated Common Additional Other Total Shares Common Paid-in Retained Comprehensive Treasury Stockholders' Outstanding Stock Capital Earnings Income Stock Equity ------------------------------------------------------------------------------- December 26, 1998 96,594 $4,964 $409,564 $1,053,108 $ (16,456) $(60,383) $1,390,797 --------- Comprehensive income: Net earnings - restated 317,867 317,867 Other comprehensive income: Foreign currency translation adjustments 7,856 7,856 Comprehensive income - restated 325,723 --------- Dividends declared on common stock, $.10 per share (9,230) (9,230) Accretion of redeemable stock (356) (356) Dividends on preferred stock (2,418) (2,418) Treasury shares purchased (326) (6,170) (6,170) Treasury shares delivered under employee stock plans 378 (5,101) 7,238 2,137 ------------------------------------------------------------------------------- Restated balances, 96,646 $4,964 $404,463 $1,358,971 $ (8,600) $(59,315) $1,700,483 December 25,1999 ===============================================================================
See notes to consolidated financial statements. -9- IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 52 Weeks Ended ---------------------------------------- Restated Restated Restated December 25, December 26, December 27, 1999 1998 1997 ------------ ------------ ------------ Inflows (outflows) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 317,867 $ 183,152 $ 121,748 --------- --------- --------- Adjustments to reconcile net earnings to cash flows from operations: Depreciation and amortization 125,515 110,249 97,890 Amortization of intangible assets 31,163 28,924 18,562 Non-cash restricted and variable stock compensation (9,675) 11,668 (1,622) Fixed assets impairment write-downs 29,351 - - Deferred income tax (benefit) provision (3,936) (6,314) 824 Change in customer advances 12,000 (14,100) - Extraordinary loss on extinguishment of debt - 14,815 - Provision for bad debts 15,907 2,161 618 Net loss on disposal of fixed assets 1,710 16,996 1,587 Net loss on disposal of financings - - 210 Other operating cash inflows 15,072 15,609 18,885 Other operating cash outflows (6,359) (8,299) (6,171) Working capital changes, net of effects of acquisitions: Accounts receivable (177,301) (30,560) (22,404) Inventories (107,050) (22,967) (9,358) Accounts payable and accrued liabilities 53,099 70,099 (14,018) Change in checks in process of clearance 20,576 (29,464) (7,715) --------- --------- --------- 72 158,817 77,288 --------- --------- --------- Net cash flows provided by operating activities 317,939 341,969 199,036 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired (504,420) (186,639) (384,569) Capital expenditures (208,781) (183,040) (137,539) Proceeds from disposals of marketable 20,800 257,721 403,723 Purchases of marketable securities (19,400) (250,954) (237,243) Investment in life insurance contracts (7,759) (38,000) (4,000) Proceeds from sale of PP&E 4,523 3,687 5,737 Insurance proceeds 3,010 190 65 Investment in notes receivable (8,000) - (3,544) Other investing cash inflows 319 - 3,772 --------- --------- --------- Net cash flows used in investing activities (719,708) (397,035) (353,598) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term debt 317,964 121,210 279,955 Purchase of treasury stock (6,170) (12,370) (73,915) Dividends paid on common stock (9,229) (9,252) (9,300) Exercise of stock options 2,137 3,238 6,505 Principal payments on long-term obligations (10,977) (118,360) (216,894) Proceeds from issuance of long-term debt100,800 49,773 132,187 Proceeds from sale of stock and warrants 9,582 7,944 15,195 Premiums paid on early retirement of debt - (20,636) - Payment of loan acquisition costs - (6,824) (1,713) Other financing cash outflows - (156) - --------- --------- --------- Net cash flows provided by (used in) financing activities 404,107 14,567 132,020 --------- --------- --------- Effect of exchange rate on cash and cash equivalents 1,698 (1,548) (746) --------- --------- --------- Net change in cash and cash equivalents 4,036 (42,047) (23,288) Cash and cash equivalents at beginning of year 28,829 70,876 94,164 --------- --------- --------- Cash and cash equivalents at end of year $ 32,865 $ 28,829 $ 70,876 ========= ========= ========= See notes to consolidated financial statements. -10- IBP, inc. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 ------------------------------------------------------- AND DECEMBER 27, 1997 --------------------- Columnar amounts in thousands, except share and per share amounts A. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------------------ RESTATEMENTS - The accompanying financial statements have been restated to reflect adjustments for irregularities and misstatements at one of the company's subsidiaries, the application of variable plan accounting for certain stock options, and expanded disclosures related to segment information, acquisitions, long-term debt and capital lease obligations, contingencies, redeemable stock and capital stock. See Notes M and R for more detail relating to the effects of these restatements. The statements of cash flows have also been restated to provide more detail of certain cash transactions that were previously reported on a combined basis and to reclassify the change in the company's checks in process of clearing to cash flows from operations as a change in accounts payable, consistent with the balance sheet classification. The change in this balance previously was included in financing activities. 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. On February 7, 2000, the company acquired Corporate Brand Foods America, Inc. ("CBFA") through an exchange of shares. The business combination was accounted for as a pooling of interests. These historical financial statements of the company have been restated to give effect to the above acquisition as though the companies had operated together from the beginning of the earliest period presented. 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 1999, 1998 and 1997 all consisted of 52 weeks. REVENUE RECOGNITION - Revenues from product sales are recorded upon shipment to customers. EXPORT SALES - In 1999, 1998 and 1997, net export sales, principally to customers in Asia and also to destinations in the Americas and Europe, amounted to $1.7 billion, $1.6 billion and $1.7 billion, respectively. -11- 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 generally over 40 years. IMPAIRMENT OF LONG-LIVED ASSETS - The company reviews the carrying value of its long-lived assets (including goodwill) for impairment whenever events or changes in circumstances indicate -12- that the carrying amount may not be recoverable. Assessment of impairment is based on estimated future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values. During 1999, the company wrote down $30 million of impaired long-lived assets, including $15 million in the fourth quarter 1999. These write-downs, which were classified in cost of products sold, were primarily attributable to the company's decision to exit its cow boning business. 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 June 1999, Statement of Financial Accounting Standard ("SFAS") No. 137 was issued, which deferred the effective date for SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is effective no later than the first quarter of fiscal 2001. 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. Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements", was issued in December 1999 and includes staff interpretations of the application of generally accepted accounting principles to revenue recognition. The company expects to adopt the provisions of SAB 101 in the first quarter of 2000 by recording a cumulative effect of accounting change related to revenue recognition of approximately $2,429, net of $1,489 tax. As a result of the guidance in SAB 101, the company will recognize revenue upon delivery of product to customers. The Company had historically recognized revenue upon shipment, based on its interpretation of Statement of Financial Accounting Concepts No. 5, Revenue and Recognition in Measurement in Financial Statements of Business Enterprises. 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 were 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. -13- B. INVENTORIES: ----------- Inventories are comprised of the following: Restated December 25, December 26, 1999 1998 ------------ ------------ Product inventories: Raw materials $ 57,385 $ 40,754 Work in process 84,505 70,643 Finished goods 238,710 171,878 ------- ------- 380,600 283,275 Livestock 137,300 89,321 Supplies 97,292 82,301 ------- ------- $615,192 $454,897 ======= ======= C. CREDIT ARRANGEMENTS: ------------------- At December 25, 1999, IBP had in place four committed revolving credit facilities totaling $659 million in potential borrowings. The primary facilities were a $500 million multi-year credit facility (the "Multi-Year Facility") and a $100 million revolving promissory note (the "Promissory Note"). Two revolvers in place at CBFA at December 25, 1999 with $59 million in borrowing capacity were terminated on February 7, 2000. From time to time, IBP also used 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. Facility fees can vary from .085 to .200 of 1% on the total amount of the facility. The Promissory Note was extended on May 1, 1999 and matures on April 30, 2000. In January 2000, the company increased its revolving credit capacity by $300 million via a one-year facility with two major financial institutions. Credit terms were similar to those in existing credit facilities. There were total borrowings of $538 million outstanding under the revolving facilities at December 25, 1999, $320 million of which was classified as current liabilities. IBP also had $133 million of short-term borrowings outstanding at year-end 1999 under uncommitted credit lines. The remaining $218 million under revolving facilities was classified as non-current in the consolidated balance sheet. The interest rate at December 25, 1999 on the non-current portion was 6.9%. During fiscal 1999, the maximum amount of borrowings under all of IBP's credit arrangements, including any amounts considered non-current, was $786 million. Average borrowings under IBP's credit arrangements and the weighted average interest rate during fiscal 1999 were $606 million and 5.5%. The comparable 1998 figures were average borrowings of $437 million and an average interest rate of 5.8%. -14- IBP's credit facility agreements contain certain restrictive covenants that, 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: Restated December 25, December 26, 1999 1998 ------------ ------------ Accounts payable, principally trade creditors $302,101 $247,605 ------- ------- Checks in process of 122,754 101,888 clearance ------- ------- Accrued expenses: Employee compensation 98,999 87,725 Employee benefits 47,274 37,139 Property and other taxes 25,587 24,809 Marketing costs 25,273 18,663 Other 114,254 112,007 ------- ------- 311,387 280,343 ------- ------- $736,242 $629,836 ======= ======= E. INCOME TAXES: ------------ Income tax expense consists of the following: Restated Restated Restated 1999 1998 1997 -------- -------- -------- Current: Federal $148,955 $119,831 $ 74,364 State 20,794 13,555 3,949 Foreign 3,100 (640) (5,300) ------- ------- ------ 172,849 132,746 73,013 ------- ------- ------ Deferred: Federal (6,148) (6,695) 2,798 State (413) 531 251 Foreign 2,625 (150) (2,225) ------- ------- ------ (3,936) (6,314) 824 ------- ------- ------ $168,913 $126,432 $ 73,837 ======= ======= ====== -15- Total income tax expense varies from the amount that 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: Restated Restated Restated 1999 1998 1997 -------- -------- -------- Federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.8 3.0 2.9 Settlement of federal audit issues (2.8) - - Foreign tax items (1.6) (1.3) (1.9) Goodwill amortization 1.4 1.9 2.5 Stock options expense (0.6) 0.8 (0.3) Other, net 0.5 (0.4) (0.4) ---- ---- ---- 34.7% 39.0% 37.8% ==== ==== ==== Management reached a settlement with the U.S. Internal Revenue Service ("IRS") on audit issues related to fiscal years 1989, 1990 and 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: Restated Restated December 25, December 26, 1999 1998 ------------ ------------ Deferred tax assets: Nondeductible accrued $ 106,589 $ 99,233 liabilities State tax credit carryforwards 9,140 8,543 Bad debt and claims reserves 7,259 4,579 Federal and state operating loss carryforwards 31,969 20,874 Other 4,213 3,813 ------- ------- Gross deferred tax assets 159,170 137,042 Valuation allowance (9,140) (8,543) ------- ------- Net deferred tax assets 150,030 128,499 ------- ------- Deferred tax liabilities: Fixed assets (76,280) (81,229) Intangible assets (17,901) (13,339) Other (4,150) (4,133) (98,331) (98,701) ------ ------ $ 51,699 $ 29,798 ====== ====== The net $0.6 million increase in the valuation allowance for deferred tax assets was the result of net state tax credits earned. No benefit has been recognized for these state tax credit carryforwards, most of which expire in the years 2004 through 2008. -16- At December 25, 1999, after considering utilization restrictions, the company's acquired tax loss carryforwards approximated $94 million, including $48 million acquired in the purchase of H&M Food Systems Company, Inc. (see note L). 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: approximately $21 million each in 2000, 2001, 2002 and 2003 and $11 million in 2004. 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 during the years 2005 through 2019. -16- F. LONG-TERM OBLIGATIONS: --------------------- Long-term obligations are summarized as follows: Restated December 25, December 26, 1999 1998 ------------ ------------ Revolving credit facilities $ 218,327 $ 196,764 CBFA Term Loans 138,125 143,650 7.45% Senior Notes due 2007 125,000 125,000 6.125% Senior Notes due 2006 100,000 100,000 7.125% Senior Notes due 2026 100,000 100,000 6.0% Securities due 2001 50,000 50,000 CBFA Subordinated Notes 33,464 31,000 Discount on Subordinated Notes (2,655) (3,174) Present value of capital lease obligations 26,878 27,676 Other 13,847 1,141 ------- ------- 802,986 772,057 Less amounts due within one year 13,125 10,875 ------- ------- $ 789,861 $ 761,182 ======= ======= CBFA had three term loans in original principal amounts of $65 million ("Term Loan A"), $70 million ("Term Loan B"), and $12 million ("Term Loan C"). Term Loans A and B were repayable in graduated quarterly installments through 2004 and 2006, respectively. Term Loan C was due in 2006. The Term Loans were at variable interest rates based upon two options. At year-end 1999, the weighted average interest rate on borrowings under Term Loans A, B and C was 9.6%. These Term Loans were paid off upon IBP's acquisition of CBFA on February 7, 2000, using available IBP debt facilities. CBFA had senior subordinated promissory notes (the "Subordinated Notes") with a financial institution, which was also a CBFA stockholder. The principal amount of the Subordinated Notes was due June 30, 2007 and interest accrues at a blended rate of 12.2%. The Subordinated Notes contained detachable warrants to purchase a total of 2.2 million shares of Class B Common Stock. The allocation of fair values of these debt and equity instruments resulted in debt discounts, which were being amortized to interest expense over the term of the Subordinated Notes. These Subordinated Notes were paid off upon -17- IBP's acquisition of CBFA on February 7, 2000, using available IBP debt facilities. On January 31, 2000, the company issued $300 million of 7.95% 10-year notes under its $550 million Debt Securities program originally registered with the Securities and Exchange Commission ("SEC") in 1996. This Debt Securities program was subsequently amended and filed with the SEC on January 27, 2000. The net proceeds, issued at a slight discount to par, were used to repay existing borrowings under revolving credit facilities. Interest is payable semiannually. 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. ("Foodbrands"). 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 the Foodbrands obligations by IBP was funded with available credit facilities. The portion of borrowings under IBP's revolving credit facilities considered long-term was $218 million at December 25, 1999 and $197 million at December 26, 1998. Substantially all of the leased assets under capital leases can be purchased by IBP at the end of the respective lease terms. Leased assets at December 25, 1999 are comprised of $19.4 million in buildings and $12.1 million in equipment in the consolidated balance sheets, with accumulated amortization of approximately $12 million. Minimum lease payments under capital lease obligations for each of the five fiscal years subsequent to 1999 are (in millions); $4.4; $5.3; $3.2; $2.2; and $2.2. Amounts representing interest in the above payments total $5.7. Aggregate maturities of long-term obligations, excluding capital leases, for each of the five fiscal years subsequent to 1999 are (in millions): $185.3; $62.7; $14.7; $16.2 and $70.1. 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 25, 1999, there were approximately 607,000 shares available for future awards under the plans. The company recognized compensation expense for these plans totaling $3.1 million, $2.3 million and $3.3 million, respectively, in 1999, 1998 and 1997. -18- 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 28, 1996 1,342.2 $11.13 Granted 290.6 21.11 Delivered (1,020.0) 8.41 Forfeited (10.2) 18.36 --------------------- Balance, December 27, 1997 602.6 20.48 Granted 48.8 23.94 Delivered - - Forfeited (9.3) 21.48 --------------------- Balance, December 26, 1998 642.1 20.54 Granted 61.7 22.49 Delivered (86.9) 15.12 Forfeited (6.9) 25.38 --------------------- Balance, December 25, 1999 610.0 $21.84 --------------------- 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 25, 1999, the plans provided for the delivery of up to 7.1 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 expense recorded for the non-qualifying options is recognized over the vesting period. The company's stock option plan grants officers additional bonus options if the original options are exercised. The original officer options are generally issued at market price at the date of the grant, vest over a five-year period and have a ten-year term. The bonus options are issued at market price at the date the bonus options are granted and are exercisable after two years, provided the shares acquired with the original options are still owned by the officer. As a result of the bonus options feature, variable plan accounting is appropriate for the options granted under these provisions. Compensation expense for the original options is recorded over the vesting period based on the difference between the market value and the exercise price at the end of each period. Compensation expense related to the bonus options is recorded based on the market value and the exercise prices over the vesting period from the date vesting becomes probable, to the date the bonus options are vested and exercisable. Compensation charges (credits) related to these options under variable plan accounting was $(11,991), 10,968 and (1,872) in 1999, 1998 and 1997 respectively. 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 25, 1999 and December 26, 1998, there -19- were 2.7 million and 3.2 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, compensation cost for stock option, if any, is recorded as described above for variable plans and for fixed plans is recorded based on the excess of the market price of the stock over the exercise price at the date of grant. The expense is recognized over the vesting period. Had compensation cost for IBP's stock option plans been determined based on the fair value at the grant date for awards in 1999, 1998, and 1997 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: Restated Restated Restated 1999 1998 1997 -------- -------- -------- Net earnings - as reported $317,867 $183,152 $121,748 Net earnings - pro forma 303,725 190,056 117,196 Earnings per share - as 3.26 1.87 1.26 reported Earnings per share - pro 3.12 1.94 1.22 forma Earnings per diluted share - as reported 2.96 1.72 1.20 Earnings per diluted share - pro forma 2.82 1.78 1.16 The weighted average fair values at date of grant for options granted at market value during 1999, 1998 and 1997 were $7.53, $7.29 and $7.91 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 1999, 1998 and 1997: 1999 1998 1997 -------- -------- -------- Expected option life 6 years 6 years 6 years Expected annual volatility 26% 26% 26% Risk-free interest rate 5.8% 4.7% 5.8% 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 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 -20- Value 208.7 21.37 Granted at a price below market 434.2 16.56 value Exercised (320.1) 11.44 Canceled (199.4) 21.64 -------------------------------------------------------------- Balance at December 26, 1998 4,248.6 18.20 2,230.9 Granted 651.0 20.63 Exercised (290.9) 10.64 Canceled (179.0) 21.65 -------------------------------------------------------------- Balance at December 25, 1999 4,429.7 $18.92 2,543.7 The following table summarizes information about stock options outstanding at December 25, 1999: Number Weighted Average Range of Outstanding Remaining Weighted Average Exercisable Prices At 12/25/99 Contractual Life Exercise Price ------------------ ----------- ---------------- ---------------- $ 6.75 to 15.99 994.2 2.9 years $10.84 16.00 to 25.99 3,335.7 6.9 years 21.06 26.00 to 33.00 99.8 7.0 years 28.11 --------------------------------------------------------------------- $ 6.75 to 33.00 4,429.7 6.3 years $18.92 Number Range of Exercisable Weighted Average Exercisable Prices At 12/25/99 Exercise Price ------------------ ----------- ---------------- $ 6.75 to 15.99 971.1 $10.73 16.00 to 25.99 1,529.2 21.77 26.00 to 33.00 43.4 28.33 -------------------------------------------------------- $ 6.75 to 33.00 2,543.7 $17.65 Shares of common stock to be delivered for approximately 0.6 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. The company, by virtue of its acquisition of CBFA, has a restricted stock plan for which, upon termination of employment with the company, grantees have the right to require the company to purchase the vested portion of shares issued under the plan at fair market value. As a result of this mandatory redemption feature (the "Put Features"), shares issued under the plan are classified as redeemable stock in the accompanying consolidated balance sheet, and the plan is accounted for as a "variable plan" in accordance with APB Opinion #25. Since the inception of the plan, no grantees have exercised their Put Features, and management considers the likelihood of significant Put Features being exercised in the future to be remote. The company recorded compensation expense of $2.3 million, $0.7 million and $0.3 million related to these grants in fiscal 1999, 1998 and 1997, respectively. Approximately 1.2 million shares were granted in fiscal 1997 and another 0.8 million shares were granted in fiscal -21- 1999. At December 25, 1999, there were approximately 2.0 million shares outstanding under the restricted stock plan. Approximately 1.3 million shares outstanding under the restricted stock plan were vested at the merger date (February 7, 2000) and delivered. The remaining 0.7 million shares outstanding at that date will vest no later than 8 years following the grant date, based on a combination of performance-based and time-based criteria, and authorized, unissued common shares will then be delivered to the grantees. H. SUPPLEMENTAL CASH FLOW INFORMATION: ---------------------------------- Supplemental information on cash payments is presented as follows: 1999 1998 1997 -------- -------- -------- Interest, net of amounts capitalized $ 65,137 $ 62,598 $ 42,885 Income taxes 197,235 76,364 41,345 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 1999 and $99 million at year-end 1998. 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 receivables, live cattle and purchase commitments in foreign currencies. At December 25, 1999, the company had outstanding contracts to buy Canadian dollars totaling CDN$96 million at various dates through 2000. Comparable outstanding contracts at year-end 1998 totaled CDN$130 million. The company also had outstanding contracts at year-end 1999 to sell $20 million U.S. dollars at various dates. There were no such contracts outstanding at year-end 1998. 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. -22- 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 25, 1999: 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. Life insurance contracts are carried at fair value. 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 1999, the carrying value exceeded the fair value by $14 million. At year-end 1998, the fair value exceeded the carrying value by $6 million. The company's long-term debt is generally not callable until maturity, except for the 7.125% Senior Notes due 2026 and all of CBFA's debt obligations, subject to prepayment premiums. For derivatives, the fair value was estimated using termination cash values. The fair values of IBP's derivatives at year-ends 1999 and 1998 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 1999 1998 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year $ 70,921 $ 68,933 $ 68,851 $ 69,410 Service cost 568 473 221 229 Interest cost 4,690 4,787 4,452 4,799 Actuarial (gain) loss (3,979) 3,117 (4,634) 666 Benefits paid (6,284) (6,389) (5,938) (6,253) ------ ------ ------ ------ Benefit obligation at end of 65,916 70,921 62,952 68,851 year ------ ------ ------ ------ Change in plan assets: Fair value of plan assets at beginning of year 66,737 65,110 5 9 Actual return on plan assets 9,378 5,165 1 - Employer contribution 188 2,851 5,954 6,249 Benefits paid (6,284) (6,389) (5,938) (6,253) ------ ------ ------ ------ -23- Fair value of plan assets at end of year 70,019 66,737 22 5 ------ ------ ----- ----- Funded status 4,103 (4,184) (62,930) (68,846) Unrecognized net actuarial (gain) Loss (3,967) 3,812 (3,064) 1,587 ----- ----- ----- ----- Net amount recognized $ 136 $ (372) $(65,994) $(67,259) ======= ======= ======= ======= Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 1,040 $ 1,046 $ - $ - Accrued benefit liability (904) (1,418) (65,994) (67,259) ----- ----- ------ ------ Net amount recognized $ 136 $ (372) $(65,994) $(67,259) ======= ======= ======= ======= Weighted-average assumptions as of year end: Discount rate 7.75% 6.75% 7.75% 6.75% Expected return on plan assets 8.50% 8.50% n/a n/a For measurement purposes, a 9.2% annual rate of increase in the per capita claims cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 8.7% by 2001, 7.5% by 2006, and 6.5% by 2011 and remain at that level thereafter. Components of net periodic benefit cost: Pension benefits 1999 1998 1997 Service cost $ 568 $ 473 $ 411 Interest cost 4,690 4,787 4,956 Expected return on plan assets (5,578) (5,501) (4,993) ----- ----- ----- Net periodic (benefit) cost $ (320) $ (241) $ 374 ======= ======= ======= Other benefits 1999 1998 1997 Service cost $ 221 $ 229 $ 197 Interest cost 4,452 4,799 5,018 Expected return on plan assets - (1) (2) ----- ----- ----- Net periodic cost $ 4,673 $ 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 Point Increase Decrease Effect on total of service and interest cost components for $ 117 $ (45) 1999 Effect on year-end postretirement benefit obligation $ 923 $ (898) -24- K. EARNINGS PER SHARE: Fiscal Year Restated Restated Restated 1999 1998 1997 Numerator: Earnings before extraordinary item $317,867 $197,967 $121,748 Preferred stock dividends and (2,774) (2,041) (682) accretion ------- ------- ------- Earnings available for common shares $315,093 $195,926 $121,066 ======= ======= ======= Denominator: Weighted average common shares Outstanding 96,586 96,774 95,811 Dilutive effect of employee stock 10,015 8,518 5,015 plans ------- ------- ------- Diluted average common shares 106,601 105,292 100,826 ======= ======= ======= Basic earnings before extraordinary item per common share $3.26 $2.02 $1.26 ==== ==== ==== Diluted earnings before extraordinary item per common share $2.96 $1.86 $1.20 ==== ==== ==== 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. Restated Restated Restated 1999 1998 1997 Stock options excluded from Diluted EPS computation 1,552 120 1,406 Average option price per $24.72 $27.28 $24.95 share L. ACQUISITIONS: On January 28, 1997 the company acquired certain assets and assumed certain liabilities of Iowa Ham Processors, Inc. and the stock of Iowa Ham Canning, Inc. (together, "IHC"). The purchase price totaled $34.4 million, including liabilities assumed of $4.3 million. The excess of the purchase price over the fair value of net assets acquired of $9.1 million was recognized as goodwill. On May 7, 1997, the company, through a wholly owned subsidiary, completed a merger with Foodbrands America, Inc. ("Foodbrands") for approximately $869 million, including liabilities assumed 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 excess of the aggregate purchase price over fair value of identifiable assets and liabilities acquired of approximately $463 million was recognized as goodwill. On June 4, 1997, the company acquired The Bruss Company, a meat purveyor serving the domestic and international restaurant industry. -25- The purchase price of $24.1 million included liabilities assumed of $5.8 million. The excess of the purchase price over the fair value of the net assets acquired of $4.9 million was recorded as goodwill. On June 23, 1997, the company acquired certain assets and assumed certain liabilities of International Trading Company, Ltd. ("ITC"). The purchase price totaled $53.6 million, including liabilities assumed of $19.2 million. The excess of the purchase price over the fair value of acquired assets and liabilities of $17.1 million was recognized as goodwill. The company acquired Winchester Food Processing on September 24, 1997, for $17.5 million, which included liabilities assumed of $2.1 million. Winchester Foods, located in Hutchinson, Kansas, is a major producer of precooked bacon toppings marketed to national pizza chains and other foodservice customers. Pursuant to the purchase agreement, the purchase price is subject to adjustment of up to $5 million for contingent consideration payments, however, as of December 25, 1999, no contingent payments had been earned or paid. The excess of the purchase price over the estimated fair values of net assets acquired resulted in goodwill of approximately $13.9 million. On May 8, 1998, the company acquired substantially all of the operating assets of Jac Pac Foods, Ltd ("Jac Pac"). Jac Pac, with facilities in New Hampshire and Nebraska, produces and sells high quality, value-added beef products to a broad base of food service companies, restaurants and supermarkets. The purchase price consisted of $58.6 million, including liabilities assumed of $23.8 million. The excess of the purchase price over the fair value of net assets acquired resulted in goodwill of $16.8 million. On July 17, 1998, the company acquired the stock of Jordan's Meats. Jordan's Meats manufactures and sells a complete line of processed meat products to leading retailers and food service distributors primarily in New England but also throughout the United States. The purchase price totaled $84.6 million, including $11.1 million of liabilities assumed. The excess of the purchase price over the fair value of net assets acquired resulted in goodwill of $63.7 million. The company, through a special acquisition subsidiary, purchased the assets of the appetizer division of Diversified Foods Group, L.L.C. ("DFG"), on October 18, 1998. The Chicago, Illinois-based division, which includes a production plant in Chicago and another in Newark, New Jersey, was acquired for a purchase price of $91.6 million, which included liabilities assumed of $15.2 million. Goodwill recorded for the excess of the purchase price over the value of net assets acquired totaled $65.5 million. Additional consideration of up to $40 million is provided under the amended DFG purchase agreement contingent on meeting specified earnings targets through 2001. As of December 25, 1999, no contingent payments had been made. -26- On April 12, 1999, the company acquired the outstanding stock of H&M Food Systems Company, Inc. ("H&M"), a producer of custom- formulated pre-cooked meat products and prepared foods with two plants in Texas. The purchase price was $134.5 million, including assumed liabilities of $12.6 million. The excess of the purchase price over the fair value of the net assets acquired resulted in goodwill of $75.7 million. The company acquired Zemco Industries, Inc., the owner of Russer Foods on April 8, 1999. Russer Foods, based in Buffalo, New York, produces and markets a variety of premium deli meats. The purchase price totaled $170.5 million, including assumed liabilities of $19.2 million. The allocation of the purchase price over the fair value of assets acquired resulted in goodwill of $110.3 million. On June 28, 1999, the company purchased Wilton Foods, Inc. (Wilton) for $19.1 million, including assumed liabilities of $5.2 million. Wilton, a leading producer of hors d'oeuvres, appetizer, premium kosher meals and prepared foods, is operated under DFG. The excess of the aggregate purchase price over fair value of identifiable assets and liabilities acquired of approximately $13.1 million was recognized as goodwill. The DFG purchase agreement was amended upon the acquisition of Wilton to include Wilton's results in the contingent consideration calculation provided by the DFG purchase agreement, as described above. On August 23, 1999, IBP, through its IBP Foods, Inc. subsidiary, purchased substantially all of the operating assets of Thorn Apple Valley, Inc. ("TAVI"), a further processor of pork and poultry products, which had been involved in bankruptcy proceedings. The purchase price for the TAVI net assets totaled $109.9 million, which included liabilities assumed of $2.3 million. There were no intangible assets or goodwill recorded in connection with this acquisition. On December 1, 1999, the Company acquired substantially all of the operating assets of Wright Brand Foods, Inc. ("WBF"), a Vernon, Texas based processor of high quality bacon products, for $116.5 million, which included liabilities assumed of $8.7 million. The excess of the purchase price over the fair value of the net assets acquired of $59.9 million was recognized as goodwill. All of the consideration for the above acquisitions was in cash and all were accounted for by the purchase method of accounting. Accordingly, the accompanying consolidated statements of operations include the results from the respective dates of each acquisition. Goodwill under these acquisitions is being amortized on a straight-line basis over forty years. In addition, the company identified and recorded $35 million in other intangible assets, primarily registered trademarks, associated with the acquisitions. These other intangible assets are being amortized over their useful lives, generally ten to twenty years. The following unaudited pro forma financial information assumes the above businesses were acquired at the beginning of the year preceding the acquisition. These results have been prepared -27- for comparative purposes only and do not purport to be indicative of what would have occurred had the assets been acquired at the beginning of the year preceding the acquisition, or of the results which may occur in the future. The pro forma results do not include TAVI's discontinued fresh pork operation that IBP did not purchase. However, the pro forma results do include significant TAVI nonrecurring charges related to goodwill and asset impairments, Russian credit losses, product recalls and bankruptcy- related legal and financing expenses. Fiscal Year Ended Restated Restated Dec. 25, Dec. 26, 1999 1998 (unaudited) Net sales $15,078,944 $14,178,208 Earnings from operations 525,922 424,671 Earnings before extraordinary item 261,663 211,915 Net earnings 261,663 197,100 Earnings per diluted share: Earnings before extraordinary item $2.43 $1.99 Net earnings 2.43 1.85 Corporate Brand Foods America On February 7, 2000, the company acquired Corporate Brand Foods America, Inc. ("CBFA"), a privately held processor and marketer of meat and poultry products for the retail and foodservice markets. In the transaction, accounted for as a pooling of interests, IBP issued 14.4 million common shares for all of the outstanding stock of CBFA. The company also assumed $316 million of CBFA's debt and $28 million preferred stock obligations. IBP had product sales to CBFA in IBP's fiscal years ended December 25, 1999 and December 26, 1998, totaling $65 million and $53 million, respectively. The effects of conforming CBFA's accounting policies to those of IBP were not material. Prior to the merger, CBFA's fiscal year ended on the Sunday closest to the last day of February. The following information presents certain statement of earnings data of CBFA for the periods preceding the merger, based on fiscal year periods that coincide with the company's fiscal years: Restated Period from Restated Restated Inception Twelve Months Twelve Months (Jan. 28, 1997) Ended Ended Through December 25, December 26, December 27, 1999 1998 1997 (unaudited) (unaudited) (unaudited) Net sales $624,632 $480,855 $236,712 EBITDA(1) 46,275 32,150 17,692 Net earnings 3,403 2,968 2,960 -28- (1)Earnings before interest, taxes, depreciation and amortization The following information presents certain statement of earnings data for the separate companies corresponding to IBP's fiscal years 1999, 1998, and 1997: Fiscal Year Restated Restated Restated 1999 1998 1997 Net sales: IBP, as previously reported $14,075,208 $12,848,635 $13,258,784 Intercompany sales to CBFA (64,804) (52,782) (48,998) ---------- ---------- ---------- Net IBP sales 14,010,404 12,795,853 13,209,786 CBFA 624,632 480,855 236,712 ---------- ---------- ---------- $14,635,036 $13,276,708 $13,446,498 ========== ========== ========== Net earnings: IBP $ 314,464 $ 180,184 $ 118,788 CBFA 3,403 2,968 2,960 --------- --------- ---------- $ 317,867 $ 183,152 $ 121,748 ========= ========= ========== M. BUSINESS SEGMENTS: Segment information has been prepared in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." Performance of the segments is evaluated on earnings from operations. The Beef Carcass segment is involved in the slaughter of live fed cattle, reducing them to dressed carcasses and allied products for sales to further processors. Over 90% of Beef Carcass sales are to other IBP segments, chiefly to Beef Processing. The Beef Carcass segment also markets its allied products to manufacturers of pharmaceuticals and animal feeds. The Beef Processing segment is primarily involved in fabrication of dressed beef carcasses into primals and sub-primal meat cuts. The Pork segment is involved in hog slaughter and fabrication and related allied product processing activities. The Beef Processing and Pork segments market their products to food retailers, distributors, wholesalers, restaurants and hotel chains and other food processors in domestic and international markets. The Pork segment also sells allied products to pharmaceutical and animal feeds manufacturers. The Foodbrands America segment consists of several IBP subsidiaries, principally Foodbrands America, Inc., The Bruss Company, and IBP Foods, Inc. The Foodbrands America group produces, markets and distributes a variety of frozen and refrigerated products to the "away from home" food preparation -29- 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. The Foodbrands America segment also produces portion-controlled premium beef and pork products for sale to restaurants and foodservice customers in domestic and international markets. The All Other segment includes several businesses that do not constitute reportable business segments. These businesses primarily include the company's logistics operations, its Lakeside Farm Industries, Ltd. subsidiary (Canadian beef slaughter and fabrication operation and cattle feedlot), its cow boning operations and its hide curing and tanning operations. Corporate and other includes various unallocated corporate items not attributable to the company's operating segments. The principal items in this caption are unallocated goodwill amortization and variable stock options expense (credits). 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. Allocable corporate costs are allocated generally based on sales. Net interest expense and income taxes have been excluded from segment operations. Restated Restated Restated NET SALES 1999 1998 1997 Sales to unaffiliated customers: Beef Carcass $ 941,226 $ 956,893 $ 996,674 Beef Processing 7,411,823 6,904,335 7,138,126 Pork 2,080,153 2,113,829 2,431,971 Foodbrands America 2,443,987 1,710,256 1,094,655 All Other 1,757,847 1,591,395 1,785,072 ---------- ---------- ---------- $ 14,635,036 $ 13,276,708 $ 13,446,498 ========== ========== ========== Intersegment sales: Beef Carcass $ 7,293,431 $ 6,942,784 $ 7,337,055 Beef Processing 266,348 249,635 244,073 Pork 360,030 248,884 291,279 All Other 472,961 474,270 495,448 Intersegment elimination (8,392,770) (7,915,573) (8,367,855) ---------- ---------- ---------- $ - $ - $ - ========== ========== ========== Net sales: Beef Carcass $ 8,234,657 $ 7,899,677 $ 8,333,729 Beef Processing 7,678,171 7,153,970 7,382,199 Pork 2,440,183 2,362,713 2,723,250 Foodbrands America 2,443,987 1,710,256 1,094,655 All Other 2,230,808 2,065,665 2,280,520 Intersegment elimination (8,392,770) (7,915,573) (8,367,855) ---------- ---------- ---------- $ 14,635,036 $ 13,276,708 $ 13,446,498 ========== ========== ========== -30- EARNINGS FROM OPERATIONS Beef Carcass $ 91,513 $ 124,322 $ 127,309 Beef Processing 163,656 1,651 34,369 Pork 151,689 119,838 (18,738) Foodbrands America 102,370 98,708 40,302 All Other 46,730 72,536 60,968 ------- ------- ------- Earnings from segments 555,958 417,055 244,210 Corporate (1,362) (35,085) (4,452) ------- ------- ------- Total earnings from 554,596 381,970 239,758 operations Net interest expense (67,816) (57,571) (44,173) ------- ------- ------- Earnings before income taxes and extraordinary item $ 486,780 $ 324,399 $ 195,585 ======= ======= ======= ACCOUNTS RECEIVABLE Beef Carcass $ 53,958 $ 44,554 $ 53,080 Beef Processing 267,216 224,409 214,617 Pork 178,640 115,150 133,998 Foodbrands America 203,089 120,150 89,387 All Other 101,272 103,373 76,090 ------- ------- ------- Accounts receivable from 804,175 607,636 567,172 segments Corporate 45,504 27,579 18,865 ------- ------- ------- $ 849,679 $ 635,215 $ 586,037 ======= ======= ======= GEOGRAPHIC LOCATION OF PROPERTY, PLANT AND LONG-LIVED EQUIPMENT, NET United States $ 1,280,386 $ 1,081,234 $ 991,810 Canada 82,379 76,938 82,102 --------- --------- --------- $ 1,362,765 $ 1,158,172 $ 1,073,912 ========= ========= ========= -31- ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT, INCLUDING ACQUISITIONS 1999 1998 1997 Beef Carcass $ 28,110 $ 18,290 $ 14,581 Beef Processing 18,254 6,990 6,030 Pork 16,199 30,676 17,833 Foodbrands America 604,270 248,351 425,533 All Other 46,368 65,372 58,131 ------- ------- ------- Total $ 713,201 $ 369,679 $ 522,108 ======= ======= ======= DEPRECIATION AND AMORTIZATION Of fixed assets: Beef Carcass $ 17,157 $ 16,846 $ 17,519 Beef Processing 14,399 14,084 12,239 Pork 19,551 18,779 18,949 Foodbrands America 51,291 37,544 24,523 All Other 21,831 21,706 23,259 ------- ------- ------ Total of segments 124,229 108,959 96,489 Corporate 1,286 1,290 1,401 Total $ 125,515 $ 110,249 $ 97,890 ======= ======= ====== Of intangible assets: Foodbrands America $ 22,606 $ 16,629 $ 9,618 All Other 997 3,362 1,338 ------ ------ ------ Total of segments 23,603 19,991 10,956 Corporate 7,560 8,933 7,606 ------ ------ ------ Total $ 31,163 $ 28,924 $ 18,562 ====== ====== ====== NET SALES BY GEOGRAPHIC LOCATION OF CUSTOMERS 1999 1998 1997 United States $12,472,491 $11,376,453 $11,355,422 Japan 845,150 784,624 909,855 Canada 510,801 421,701 508,568 Korea 224,131 134,271 224,272 Mexico 194,627 177,474 125,533 Other foreign countries 387,836 382,185 322,848 ---------- ---------- --------- $14,635,036 $13,276,708 $13,446,498 ========== ========== ========== N. COMMITMENTS: The company leases various facilities and equipment under noncancelable operating lease arrangements that 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 25, 1999 totaled approximately $73 million. Aggregate maturities for each of the five fiscal years subsequent to 1999 are (in millions) $18.8; $10.9; $7.7; $5.6; and $4.6. The company's rental expense for all operating leases was (in millions) $27.0; $23.9; and $16.4 for fiscal years 1999, 1998 and 1997. The company had livestock and other purchase commitments, letters of credit, and other commitments and guarantees at December 25, 1999 aggregating approximately $302 million. -32- 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 24 million market hogs between 2000 and 2009 at market-derived prices under various contracts with producers. Contractual commitments for the next five years average approximately 4.6 million hogs annually, which represents approximately 21% 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 those 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 that IBP has used its market power and alleged "captive supply" agreements to reduce the prices paid to producers for cattle. Plaintiffs have disclosed that, in addition to declaratory relief, they seek actual and punitive damages, although plaintiffs have not specified the amounts they seek. The original motion for class certification was denied by the District Court; plaintiffs then amended their motion, defining a narrower class consisting of only those cattle producers who sold cattle directly to IBP from 1994 through the date of certification. While the District Court approved this narrower class in April 1999, the Court noted that it could decertify the class as discovery proceeds. The 11th Circuit granted IBP's request for a review of the class certification decision, and is expected to issue an opinion in early 2000. Management continues to believe that the company has acted properly and lawfully in its dealings with cattle producers. On January 12, 2000, The United States Department of Justice ("DOJ"), on behalf of the Environmental Protection Agency ("EPA"), filed a lawsuit against IBP in U.S. District Court for the District of Nebraska, alleging violations of various environmental laws at IBP's Dakota City facility. This action alleges, among other things, violations of: (1) the Clean Air Act; (2) the Clean Water Act; (3) the Resource, Conservation and Recovery Act; (4) the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"); and (5) the Emergency Planning and Community Right to Know Act ("EPCRA"). This action seeks injunctive relief to remedy alleged violations and damages of $25,000 per violation per day for alleged violations which occurred prior to January 30, 1997, and $27,500 per violation per day for alleged violations after that date. The Complaint alleges that some violations began to occur as early as 1989, although the great majority of the violations are alleged to have occurred much later, and continue into the present. The company determined to reserve $3.5 million for the claims raised in this lawsuit based upon the evaluation of a confidential settlement demand received -33- from the DOJ, and review and evaluation of the resolution of comparable claims, in light of the company's assessment of the facts as known to the company in light of the legal theories advanced by the DOJ. On the same basis, the company believes the range of exposure is between $3.5 million and $15.9 million, though is unable to predict with accuracy the ultimate resolution in this matter due to risks and uncertainties that make such an evaluation difficult at this time. The company believes it has meritorious defenses on each of these allegations and intends to aggressively defend these claims. The EPA has also sent IBP an information request under the Clean Air Act and CERCLA seeking additional information regarding hydrogen sulfide emissions from the company's Dakota City facility. The EPA claims it seeks information to determine whether the emissions pose an imminent and substantial endangerment to human health or the environment. If the EPA makes this finding, it could trigger further action including an administrative order for compliance concerning the facility. IBP disputes and would vigorously contest any claim that the emissions pose any such threat. P. RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED): Restated quarterly results are summarized as follows: Restated Restated Restated Restated First Second Third Fourth Restated 1999 Quarter Quarter Quarter Quarter Annual ---- ---------- ---------- ---------- ---------- ----------- Net sales $3,211,174 $3,616,112 $3,798,687 $4,009,063 $14,635,036 Gross profit 205,018 230,137 290,029 269,886 995,070 Net earnings 66,021 65,241 110,017 76,588 317,867 Earnings per share .68 .67 1.13 .79 3.26 Earnings per diluted share .62 .61 1.03 .71 2.96 Dividends per share .025 .025 .025 .025 .10 Market price: High 29 3/16 23 1/8 25 3/4 25 Low 19 3/8 16 3/4 22 17 3/4 The above quarterly data has been restated to reflect adjustments described in Note R. The following quantifies the adjustments made to increase (decrease) the amounts originally reported to those presented above. DFG Gross profit - - - $ (8,658) $ (8,658) Net earnings - - - (9,621) (9,621) Earnings per share - - - (.10) (.10) Earnings per diluted share - - - (.09) (.09) -34- STOCK OPTIONS Net earnings $ 9,419 $ (2,532) $ (377) $ 4,316 $ 10,824 Earnings per share .10 (.03) (0.01) .04 .11 Earnings per diluted Share .09 (.02) 0.00 .04 .11 1998 Net sales $3,300,443 $3,426,023 $3,343,292 $3,206,950 $13,276,708 Gross profit 115,695 141,323 215,473 265,043 737,534 Earnings before extraordinary item 12,485 37,613 64,811 83,058 197,967 Net earnings (loss) (2,330) 37,613 64,811 83,058 183,152 Earnings per share: Earnings before extraordinary item .13 .38 .67 .86 2.02 Net earnings (loss) (.03) .38 .67 .86 1.87 Earnings per diluted share: Earnings before extraordinary item .12 .35 .61 .78 1.86 Net earnings (loss) (.03) .35 .61 .78 1.72 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 19 9/16 20 The above quarterly data has been restated to reflect adjustments described in Note R. The following quantifies the adjustments made to increase (decrease) the amounts originally reported to those presented above. STOCK OPTIONS Net earnings $ (1,802) $ 2,918 $ (1,613)$ (9,325) $ (9,823) Earnings per share (.02) .03 (.01) (.09) (.11) Earnings per diluted share (.02) .03 (.01) (.09) (.10) Q. CAPITAL STOCK: REDEEMABLE STOCK: Preferred Stock. The three series of preferred stock were designated as Series A Cumulative Mandatorily Redeemable Pay-In- Kind Preferred Stock (the "Series A Preferred Stock"), Series B Participating Preferred Stock (the "Series B Preferred Stock") and Series C Cumulative Mandatorily Redeemable Stock (the "Series C Preferred Stock"). The holders of Series A and Series B Preferred Stock were entitled to receive annual dividends of 12% payable quarterly in arrears in additional shares of the applicable series -35- of preferred stock. Such dividends were cumulative and accrued whether or not declared or earned. The holders of Series C Preferred Stock were entitled to receive annual dividends of 14% payable quarterly in arrears in additional shares of Series C Preferred Stock. Such dividends were cumulative and accrued whether or not declared or earned. There were no dividends in arrears for Series A, B or C preferred stock at year-end 1999. All three series of redeemable preferred stock were fully redeemed upon IBP's acquisition of CBFA on February 7, 2000, for $28.5 million. Class B Common Stock and Warrants. From time to time, the company issued Class B Common Stock and warrants to purchase shares of Class B Common Stock at $0.01 per share (the "Warrants"). In instances in which Warrants were issued in connection with other securities, proceeds from the issuance were allocated based on the respective fair values of the Warrants and the related securities. Warrants generally expired ten years from the date of grant. Upon a change of control (as defined in the Subordinated Note Agreements) or at any time on or after June 30, 2005, the holder of the Subordinated Notes has the right to require the Company to mandatorily redeem its Class B Common Stock and Warrants at an appraised value. Finally, upon termination of employment with the Company, holders of Class B Common Stock under the Company's 1997 Restricted Stock Plan (the "Restricted Stock Plan")(see additional discussion in Note G) have the right to require the Company to purchase such holders' Class B Common Stock at an appraised value. As a result of these mandatory redemption features (the "Put Features"), the Class B Common Stock and Warrants are classified in the accompanying consolidated balance sheets as redeemable stock. Redeemable Stock ---------- Balances, December 28, 1996 $ - Shares issued 16,695 Restricted stock expense 250 Dividends on preferred stock 652 Accretion of preferred stock 30 ---------- Balances, December 27, 1997 $ 17,627 Dividends on preferred stock 1,719 Restricted stock expense 700 Accretion of redeemable stock 322 Redeemable shares issued 9,524 ---------- Balances, December 26, 1998 $ 29,892 Accretion of redeemable stock 356 Restricted stock expense 2,316 Dividends on preferred stock 2,418 Redeemable stock issued 10,000 Redeemable stock repurchased (418) ---------- Balances, December 25, 1999 $ 44,564 ========== -36- PREFERRED STOCK The Board of Directors is authorized to issue up to 25,000,000 shares of preferred stock at such time or times, in such series, with such designations, preferences, or other special rights, as it may determine. R. RESTATEMENTS: DFG RESTATEMENTS: Following the third quarter 2000, the company identified $9.6 million in adjustments that were necessary related to inaccuracies at its DFG subsidiary, which were reflected in the company's reported results in its Quarterly Report on Form 10-Q for the period ended September 23, 2000. As a result of these inaccuracies, which were identified during the fourth quarter 2000, the company initiated a comprehensive internal review of operations, systems, processes and controls related to its DFG subsidiary. These reviews and other issues raised during the fourth quarter 2000 resulted in recording certain charges and adjustments, as discussed below, which resulted from irregularities and misstatements and impacted previously reported results for the year ended December 25, 1999. The accompanying financial statements have been restated to reflect $15.5 million of pre-tax adjustments, related principally to overstated prepaid expenses; inventory valued above net realizable value; uncollectible accounts receivable due to customer short payments, unauthorized deductions and subsequent allowances; and underaccrual of liabilities for inventory purchases, temporary labor costs, marketing, rebates and commissions at December 25, 1999. These adjustments resulted in an $8.7 million increase in previously reported cost of products sold and a $6.8 million increase in selling, general and administrative expenses. The related tax impact of these adjustments of $5.9 million has also been reflected. The impact of these adjustments reduced net earnings by $9.6 million and related basic and diluted earnings per share by $0.10 and $0.09, respectively, from amounts previously reported for fiscal 1999. STOCK OPTIONS: The company's stock option plan grants officers additional bonus options if the original options are exercised. The original officer options are generally issued at market price at the date of the grant, vest over a five-year period and have a ten-year term. The bonus options are issued at market price at the date the bonus options are granted and are exercisable after two years, provided the shares acquired with the original options are still owned by the officer. As a result of the bonus options feature, variable plan accounting is appropriate for the options granted under these provisions. Compensation expense for the original options has been revised and is now recorded over the vesting period based on the difference between the market value -37- and the exercise price at the end of each period. Compensation expense related to the bonus options is recorded based on the market value and the exercise prices over the vesting period from the date vesting becomes probable, to the date the bonus options are vested and exercisable. Prior to the restatement, the company followed fixed accounting for these options, treating the original grants and the bonus option grants as two separate grants. The restatement records the period and cumulative accrued compensation and related deferred tax impact, which increased (decreased) compensation expense by ($11,991), $10,968 and ($1,872) in 1999, 1998 and 1997, respectively, and adjusted income tax expense for the tax benefit associated with the expense. The change increased (decreased) net earnings by $10,824, ($9,823) and $1,774 and earnings per diluted share by $0.11, ($0.10) and $0.02 in 1999, 1998 and 1997, respectively. SEGMENTS: Note M has been restated for all periods presented to reflect a change in the segments from those previously reported. The company previously reported two segments, Fresh Meats and Foodbrands America. As a result of reconsidering the requirements of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, the company has expanded the number of segments disclosed. CASH FLOW STATEMENTS: The statements of cash flows have also been restated to reflect the impact of the DFG misstatements and to reclassify the change in the company's checks in process of clearance to cash flows from operations rather than from financing activities. The restated cash flows also provide more detail of certain cash transactions that were previously reported on a combined basis. The following tables present the impact of the above restatements related to the balance sheets, statements of earnings, and statements of cash flows: CONSOLIDATED BALANCE SHEET (In thousands, except share and per share data) As December 25, 1999 Previously Stock As Reported DFG Options Restated ASSETS ----------- ------- ----------- --------- CURRENT ASSETS: Cash and cash equivalents $ 33,294 $ (429) $ 32,865 Accounts receivable 853,234 (3,555) 849,679 Inventories 619,977 (4,785) 615,192 Deferred income tax benefits 60,820 2,606 63,426 Prepaid expenses 21,138 (1,572) 19,566 -38- TOTAL CURRENT ASSETS 1,588,463 (7,735) 1,580,728 TOTAL ASSETS 4,151,292 (7,735) 4,143,557 LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 731,066 5,176 $ 736,242 Federal and state income taxes 138,910 (3,290) 135,620 TOTAL CURRENT LIABILITIES 1,430,831 1,886 1,432,717 Deferred income taxes 8,762 (396) 8,366 Other 160,172 7,394 167,566 168,934 6,998 175,932 STOCKHOLDERS' EQUITY: Retained earnings 1,375,590 (9,621) (6,998) 1,358,971 TOTAL LIABILITIES, REDEEMABLE STOCK and STOCKHOLDERS' EQUITY $4,151,292 $(7,735) $ - $4,143,557 ========= ====== ====== ========= CONSOLIDATED BALANCE SHEET December 26, 1998 Deferred Credits and Other Liabilities: Deferred income taxes 25,057 (1,563) 23,494 Other 149,559 19,385 168,944 Retained earnings 1,070,930 (17,822) 1,053,108 Stockholders' equity 1,408,619 - (17,822) 1,390,797 ========= ======= ======= ========= CONSOLIDATED STATEMENT OF EARNINGS 52 Weeks Ended December 25, 1999 Cost of products sold 13,631,308 8,658 13,639,966 Selling, general and administrative expenses 445,606 6,859 (11,991) 440,474 Earnings from operations 558,122 (15,517) 11,991 554,596 Income taxes 173,642 (5,896) 1,167 168,913 Net earnings 316,664 (9,621) 10,824 317,867 Earnings per share - Basic 3.25 (0.10) 0.11 3.26 Earnings per share - Diluted 2.94 (0.09) 0.11 2.96 -39- CONSOLIDATED STATEMENT OF EARNINGS 52 Weeks Ended December 26, 1998 Selling, general and administrative expenses 344,596 10,968 355,564 Earnings from operations 392,938 (10,968) 381,970 Income taxes 127,577 (1,145) 126,432 Net earnings 192,975 (9,823) 183,152 PER SHARE DATA: Earnings per share: Earnings before extraordinary item 2.13 (0.11) 2.02 Extraordinary loss (0.16) 0.01 (0.15) Net earnings 1.97 (0.10) 1.87 Earnings per share - assuming dilution: Earnings before extraordinary item 1.95 (0.09) 1.86 Extraordinary loss (0.14) - (0.14) Net earnings 1.81 (0.09) 1.72 CONSOLIDATED STATEMENT OF EARNINGS 52 Weeks Ended December 27, 1997 Selling, general and administrative expenses 233,541 (1,872) 231,669 Earnings from operations 237,886 1,872 239,758 Income taxes 73,739 98 73,837 Net earnings 119,974 1,774 121,748 PER SHARE DATA: Earnings per share: Earnings before extraordinary item 1.25 0.01 1.26 Extraordinary loss - - - Net earnings 1.25 0.01 1.26 Earnings per share - assuming dilution: Earnings before extraordinary item 1.18 0.02 1.20 Extraordinary loss - - Net earnings 1.18 0.02 1.20 -40- CONSOLIDATED STATEMENT OF CASH FLOWS Reclass (In thousands) As Checks in December 25, 1999 Previously Process of As Reported DFG Impact Clearance Restated ------------------------------------------------- Inflows (outflows) Net cash flows provided by operating activities $297,792 $(429) $ 20,576 $317,939 Net cash flows provided by (used in) financing activities 424,683 (20,576) 404,107 Net change in cash and cash equivalents 4,465 (429) 4,036 Cash at end of year 33,294 (429) 32,865 ============================================== 52 Weeks Ended December 26, 1998 Net cash flows provided by operating activities 371,433 (29,464) 341,969 Net cash flows (used in) provided by financing activities (14,897) 29,464 14,567 ============================================== 52 Weeks Ended December 27, 1997 Net cash flows provided by operating activities 206,751 (7,715) 199,036 Net cash flows provided by financing activities 124,305 7,715 132,020 ============================================= -41- 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. RESTATEMENTS Management's discussion and analysis has been restated and expanded to reflect the following items, as described in Note R to the financial statements: DFG RESTATEMENTS: Following the third quarter 2000, the company identified $9.6 million in adjustments that were necessary related to inac- curacies at its DFG subsidiary, which were reflected in the company's reported results in its Quarterly Report on Form 10-Q for the period ended September 23, 2000. As a result of these inaccuracies, which were identified during the fourth quarter 2000, the company initiated a comprehensive internal review of operations, systems, processes and controls related to its DFG subsidiary. These reviews and other issues raised during the fourth quarter 2000 resulted in recording certain charges and adjustments, as discussed below, which impacted previously reported results for the year ended December 25, 1999 and unaudited results for quarterly periods in 2000. The accompanying discussion and analysis has been revised to reflect $15.5 million of pre-tax adjustments, related principally to overstated prepaid expenses; inventory valued above net realizable value; uncollectible accounts receivable due to customer short pay- ments, unauthorized deductions and subsequent allowances; and under- accrual of liabilities for inventory purchases, temporary labor costs, marketing, rebates and commissions at December 25, 1999. These adjustments resulted in an $8.7 million increase in previously reported cost of goods sold and a $6.8 million increase in selling, general and administrative expenses. The related tax impact of these adjustments of $5.9 million has also been reflected. The impact of these adjustments reduced net earnings by $9.6 million and related basic and diluted earnings per share by $0.10 and $0.09, respectively, from amounts previously reported for fiscal 1999. -42- STOCK OPTIONS: The company's stock option plan grants officers additional bonus options if the original options are exercised. The original officer options are generally issued at market price at the date of the grant, vest over a five-year period and have a ten-year term. The bonus options are issued at market price at the date the bonus options are granted and are exercisable after two years, provided the shares acquired with the original options are still owned by the officer. As a result of the bonus options features, variable plan accounting is appropriate for the options granted under these provisions. Compensation expense for the original options has been revised and is now recorded over the vesting period based on the difference between the market value and the exercise price at the end of each period. Compensation expense related to the bonus options is recorded based on the market value and the exercise prices over the vesting period from the date vesting becomes probable, to the date the bonus options are vested and exercisable. Prior to the restatement, the company followed fixed accounting for these options, treating the original grants and the bonus option grants as two separate grants. The restatement increased (decreased) compensation expense by ($11,991), $10,968 and ($1,872) in 1999, 1998 and 1997, respectively, and adjusted income tax expenses for the tax benefit associated with the expense. The change increased (decreased) net earnings by $10,824, ($9,823) and $1,774 and earnings per diluted share by $0.11, ($0.10) and $0.02 in 1999, 1998 and 1997, respectively. SEGMENTS: The company previously reported two segments, Fresh Meats and Foodbrands America. As a result of reconsidering the requirements of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, the company has expanded the number of segments disclosed. ACQUISITIONS On January 28, 1997 the company acquired certain assets and assumed certain liabilities of Iowa Ham Processors, Inc. and the stock of Iowa Ham Canning, Inc. (together, "IHC"). The purchase price totaled $34.4 million, including liabilities assumed of $4.3 million. The excess of the purchase price over the fair value of net assets acquired of $9.1 million was recognized as goodwill. On May 7, 1997, the company, through a wholly owned subsidiary, completed a merger with Foodbrands America, Inc. ("Foodbrands") for approximately $869 million, including liabilities assumed 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 excess of the aggregate purchase price over fair value of identifiable assets and liabilities acquired of approximately $463 million was recognized as goodwill. -43- On June 4, 1997, the company acquired The Bruss Company, a meat purveyor serving the domestic and international restaurant industry. The purchase price of $24.1 million included liabilities assumed of $5.8 million. The excess of the purchase price over the fair value of the net assets acquired of $4.9 million was recorded as goodwill. On June 23, 1997, the company acquired certain assets and assumed certain liabilities of International Trading Company, Ltd. ("ITC"). The purchase price totaled $53.6 million, including liabilities assumed of $19.2 million. The excess of the purchase price over the fair value of acquired assets and liabilities of $17.1 million was recognized as goodwill. The company acquired Winchester Food Processing on September 24, 1997, for $17.5 million, which included liabilities assumed of $2.1 million. Winchester Foods, located in Hutchinson, Kansas, is a major producer of precooked bacon toppings marketed to national pizza chains and other foodservice customers. Pursuant to the purchase agreement, the purchase price is subject to adjustment of up to $5 million for contingent consideration payments, however, as of December 25, 1999, no contingent payments had been earned or paid. The excess of the purchase price over the estimated fair values of net assets acquired resulted in goodwill of approximately $13.9 million. On May 8, 1998, the company acquired substantially all of the operating assets of Jac Pac Foods, Ltd ("Jac Pac"). Jac Pac, with facilities in New Hampshire and Nebraska, produces and sells high quality, value-added beef products to a broad base of food service companies, restaurants and supermarkets. The purchase price consisted of $58.6 million, including liabilities assumed of $23.8 million. The excess of the purchase price over the fair value of net assets acquired resulted in goodwill of $16.8 million. On July 17, 1998, the company acquired the stock of Jordan's Meats. Jordan's Meats manufactures and sells a complete line of processed meat products to leading retailers and food service distributors primarily in New England but also throughout the United States. The purchase price totaled $84.6 million, including $11.1 million of liabilities assumed. The excess of the purchase price over the fair value of net assets acquired resulted in goodwill of $63.7 million. The company, through a special acquisition subsidiary, purchased the assets of the appetizer division of Diversified Foods Group, L.L.C. ("DFG"), on October 18, 1998. The Chicago, Illinois-based division, which includes a production plant in Chicago and another in Newark, New Jersey, was acquired for a purchase price of $91.6 million, which included liabilities assumed of $15.2 million. Goodwill recorded for the excess of the purchase price over the value of net assets acquired totaled $65.5 million. Additional consideration of up to $40 million is provided under the amended DFG purchase agreement contingent on meeting -44- specified earnings targets through 2001. As of December 25, 1999, no contingent payments had been made. On April 12, 1999, the company acquired the outstanding stock of H&M Food Systems Company, Inc. ("H&M"), a producer of custom- formulated pre-cooked meat products and prepared foods with two plants in Texas. The purchase price was $134.5 million, including assumed liabilities of $12.6 million. The excess of the purchase price over the fair value of the net assets acquired resulted in goodwill of $75.7 million. The company acquired Zemco Industries, Inc., the owner of Russer Foods on April 8, 1999. Russer Foods, based in Buffalo, New York, produces and markets a variety of premium deli meats. The purchase price totaled $170.5 million, including assumed liabilities of $19.2 million. The allocation of the purchase price over the fair value of assets acquired resulted in goodwill of $110.3 million. On June 28, 1999, the company purchased Wilton Foods, Inc. (Wilton) for $19.1 million, including assumed liabilities of $5.2 million. Wilton, a leading producer of hors d'oeuvres, appetizer, premium kosher meals and prepared foods, is operated under DFG. The excess of the aggregate purchase price over fair value of identifiable assets and liabilities acquired of approximately $13.1 million was recognized as goodwill. The DFG purchase agreement was amended upon the acquisition of Wilton to include Wilton's results in the contingent consideration calculation provided by the DFG purchase agreement, as described above. On August 23, 1999, IBP, through its IBP Foods, Inc. subsidiary, purchased substantially all of the operating assets of Thorn Apple Valley, Inc. ("TAVI"), a further processor of pork and poultry products, which had been involved in bankruptcy proceedings. The purchase price for the TAVI net assets totaled $109.9 million, which included liabilities assumed of $2.3 million. There were no intangible assets or goodwill recorded in connection with this acquisition. On December 1, 1999, the Company acquired substantially all of the operating assets of Wright Brand Foods, Inc. ("WBF"), a Vernon, Texas, based processor of high quality bacon products, for $116.5 million, which included liabilities assumed of $8.7 million. The excess of the purchase price over the fair value of the net assets acquired of $59.9 million was recognized as goodwill. All of the consideration for the above acquisitions was in cash and all were accounted for by the purchase method of accounting. Accordingly, the accompanying consolidated statements of operations include the results from the respective dates of each acquisition. Goodwill under these acquisitions is being amortized on a straight-line basis over forty years. In addition, the company identified and recorded $35 million in other intangible assets, primarily registered trademarks, associated -45- with the acquisitions. These other intangible assets are being amortized over their useful lives, generally ten to twenty years. 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. On February 7, 2000, the company acquired Corporate Brand Foods America ("CBFA"), a privately held processor and marketer of meat and poultry products for the retail and foodservice markets. In the transaction, which was accounted for as a pooling of interests, IBP issued 14.4 million common shares for all of the outstanding stock of CBFA. The company also assumed $344 million of CBFA's debt and preferred stock obligations. At the acquisition date, all of the debt obligations were refinanced and the preferred stock was redeemed. Financial information for all periods included herein were restated to include the results of CBFA. CBFA's financial information is included in the Foodbrands America segment. COMPARISON OF 1999 TO 1998 The Beef Carcass 1999 operating margin as a percentage of net sales was 1.1% compared to 1.6% in the prior year. The Beef Carcass segment's performance was below prior year levels due to slightly higher live cattle costs, partially offset by effective levels of plant capacity utilization. The Beef Processing 1999 operating margin as a percentage of net sales was 2.1% compared to 0.0% in the prior year. Beef Processing operations performed above prior year levels due to effective levels of plant utilization coupled with improved domestic and export demand. The Pork segment 1999 operating margin as a percentage of net sales was 6.2% compared to 5.1% in the prior year. Pork operations performed above prior year levels due to relatively stable livestock prices, effective levels of plant capacity utilization, and improved domestic and export demand. Foodbrands America's 1999 operating earnings decreased to 4.2% of net sales compared to 5.8% in 1998. Excluding the negative impact of IBP Foods, the 1999 operating margin measured 5.1%. Higher 1999 raw material and selling costs were the primary factors that reduced margins at existing operations. In the fourth quarter 1999, the company recorded pre-tax adjustments principally to inventories, accounts receivables, and accrued liabilities totaling $15.5 million at DFG Foods, a -46- Foodbrands America subsidiary that produces a variety of appetizers and kosher items. These adjustments, which included an $8.7 million increase in cost of products sold and a $6.8 million increase in selling, general and administrative expenses, resulted from accounting irregularities and misstatements. The All Other segment 1999 operating margin as a percentage of net sales was 2.1% compared to 3.5% in the prior year. Other operations performed below prior year levels mainly due to the aforementioned impairment write-downs for cow plants (discussed below) partially offset by increased capacity utilization and improved product demand at the company's Canadian beef complex. During 1999, the company incurred $35 million of non- cash, pre-tax nonrecurring charges, including $18 million in the fourth quarter 1999. These nonrecurring charges, which were classified in cost of products sold, were primarily fixed asset impairment write-downs attributable to the company's decision, based upon poor earnings forecasts, to exit its cow boning business. Consequently, the cow plant assets were written down to their estimated net realizable value. The company's cow boning operations, included in the All Other segment, were not material to the company's total operations either in terms of assets (less than 1%) or net sales (less than 2%). The lower 1999 Corporate expenses included in earnings from operations were primarily attributable to a $23 million decrease in variable stock option expense and reduced litigation expense. Industry experts predict that fed cattle supplies will remain strong into the first half of 2000 before tightening somewhat, with full year beef production down about 5%. Meanwhile, hog supplies in 2000 are expected to be down 3%-4% from 1999. COMPARATIVE SEGMENT RESULTS Restated Restated Net Sales: 1999 1998 % Change ----------- ----------- ----------- Beef Carcass $ 8,234,657 $ 7,899,677 4% Beef Processing 7,678,171 7,153,970 7% Pork 2,440,183 2,362,713 3% Foodbrands America 2,443,987 1,710,256 43% All Other 2,230,808 2,065,665 8% Intersegment elimination (8,392,770) (7,915,573) 6% ----------- ----------- ----------- Total $14,635,036 $13,276,708 10% =========== =========== =========== Earnings from Operations: Beef Carcass $ 91,513 $ 124,322 -26% Beef Processing 163,656 1,651 9,813% Pork 151,689 119,838 27% Foodbrands America 102,370 98,708 4% All Other 46,730 72,536 -36% ----------- ----------- ----------- Earnings from segments 555,958 417,055 33% Corporate (1,362) (35,085) 96% ----------- ----------- ----------- Total Earnings $ 554,596 $ 381,970 45% =========== =========== =========== -47- SALES Beef Carcass segment net sales in 1999 increased 4% over 1998. The increase was attributable to 3% higher average selling prices and a 1% increase in pounds of beef carcasses sold. Approximately 90% of Beef Carcass sales are intersegment sales, principally to the Beef Processing segment operations. Beef Processing segment net sales in 1999 increased 7% over 1998. The increase was almost equally the result of higher average selling prices and increased pounds of processed beef products sold. The 3% increase in Pork segment 1999 net sales from 1998 was attributable to higher average selling prices, as the volume of pork products sold was virtually flat between 1999 and 1998. Meanwhile, Foodbrands America's 1999 net sales increased 43% over 1998. Excluding acquisitions, Foodbrands America's net sales increased 9% due primarily to sales volume increases. Export sales and pounds sold increased 9% and 6% in 1999 compared to 1998. The improvement was attributable to a 25% increase in export sales in the second half of 1999, including 40% higher sales of chilled and frozen beef and pork. Net export sales accounted for 12% of 1999 and 1998 net sales. Japan continues to be IBP's most significant export destination, and 1999 export dollars were up 8% over 1998 due to a strong second half of 1999. Although volumes were 8% below the prior year, the sales mix has shifted to products of higher value, showing signs of a stronger economy in the Far East. Additionally, sales to Korea and Taiwan were up significantly over 1998. Closer to home, export sales to Mexico were up 10% in 1999 versus 1998. The U.S. Meat Export Federation predicts that U.S. red meat exports in 2000 will increase 8% over 1999, primarily to markets in the Far East. COST OF PRODUCTS SOLD The Beef Carcass segment cost of products sold in 1999 increased 5% over 1998. Higher live cattle prices and increased volume of beef carcasses sold were the most significant factors. The Beef Processing segment cost of products sold in 1999 increased 5% over 1998. Higher raw material prices passed through from the Beef Carcass segment operations, as well as increased volume of beef products sold were the most significant factors. Pork segment cost of products sold in 1999 increased 2% over 1998. Higher live hog prices were the most significant factor. Foodbrands America's cost of products sold in 1999 versus 1998 increased 46% from 1998. The higher costs were primarily -48- due to acquisitions, although higher sales volume-related increases in existing businesses and the aforementioned DFG issues were also contributing factors. Costs in the All Other segment in 1999 increased 9% over 1998. Increased volume at the company's Canadian beef complex was the primary contributing factor. The increase was also due in part to the $35 million of nonrecurring cow plant asset impairment write-downs mentioned earlier. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1999 expenses increased 24% over 1998. The increases were chiefly a result of acquisitions, higher sales volume- related selling costs, corporate salaries, the aforementioned DFG issues and consulting expense. The increases were partially offset by a $7 million second quarter 1998 credit for export-related harbor maintenance tax refunds and a $12 million credit to stock options expense in 1999 compared to an $11 million charge to stock options expense in 1998. INTEREST EXPENSE The 18% increase in 1999 net interest expense versus 1998 was due primarily to 24% higher average borrowings in 1999 offset somewhat by a lower average effective interest rate. Average borrowings and net interest expense will continue at higher levels in the foreseeable future because of additional borrowings required for the recent acquisitions and increased capital expenditures. INCOME TAXES IBP's effective income tax rate in 1999 decreased to 34.7% compared to 39.0% in 1998. The 1999 rate reduction resulted primarily from an IBP, inc. settlement with the Internal Revenue Service on all audit issues related to fiscal years 1989, 1990 and 1991. The settlement decreased 1999 income tax expense by $14 million or $0.13 per diluted share. COMPARISON OF 1998 TO 1997 The Beef Carcass segment 1998 operating margin measured 1.6% of net sales compared to 1.5% in 1997. The higher Beef Carcass segment margins were mainly due to a decrease in average live cattle prices. For the Beef Processing segment, the 1998 operating margin measured 0.0% of net sales compared to 0.5% in 1997. The lower Beef Processing margins were caused by significant supplies of competing proteins and weaker export demand resulting from economic problems in the Far East. The Pork segment 1998 operating margin measured 5.1% of net sales compared to an operating deficit of (0.7)% in 1997. The higher Pork margin resulted from increased pounds of pork products sold as well as a significant decrease in live pork prices. Foodbrands America's operations performed above -49- the prior year with an operating margin of 5.8% in 1998 compared to 3.7% in 1997 as product demand increased and raw material prices decreased. The All Other segment 1998 operating margin measured 3.5% of net sales compared to 2.7% in 1997. Other operations performed above prior year levels mainly due to increased capacity utilization and improved product demand at the company's Canadian beef complex offset by decreased capacity by decreased capacity utilization and product demand for the company's cow operations. The higher 1998 Corporate expenses included in earnings from operations compared to 1997 were primarily attributable to a $13 million increase in variable stock option expense, increased litigation expense and a $7 million credit accrual for the harbor maintenance tax refunds discussed above. COMPARATIVE SEGMENT RESULTS --------------------------- Restated Restated Net Sales: 1998 1997 % Change -------- -------- -------- Beef Carcass $ 7,899,677 $ 8,333,729 -5% Beef Processing 7,153,970 7,382,199 -3% Pork 2,362,713 2,723,250 -13% Foodbrands America 1,710,256 1,094,655 56% All Other 2,065,665 2,280,520 -9% Intersegment elimination (7,915,573) (8,367,855) -5% ---------- ---------- ----- Total $13,276,708 $13,446,498 -1% ========== ========== ===== Earnings from Operations: Beef Carcass $ 124,322 $ 127,309 -2% Beef Processing 1,651 34,369 -95% Pork 119,838 (18,738) 740% Foodbrands America 98,708 40,302 145% All Other 72,536 60,968 19% ---------- ---------- ----- Earnings from segments 417,055 244,210 71% Corporate (35,085) (4,452) -688% ---------- ---------- ----- Earnings from Operations$ 381,970 $ 239,758 59% SALES The 5% decrease in Beef Carcass net sales was due primarily to an 8% decrease in the average selling price offset by a 3% increase in total pounds sold. The 3% decrease in Beef Processing sales was due primarily to lower average selling prices as the volume of pounds of beef products sold was relatively flat. The 13% decrease in Pork segment net sales was due primarily to 16% lower average prices of pork products sold, partially offset by a 3% increase in pounds of pork products sold. Foodbrands America's net sales in 1997 included 35 weeks for Foodbrands America, Inc., 31 weeks for The Bruss Company and 27 weeks for ITC. Meanwhile, Foodbrands America's 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. -50- Net sales in the All Other segment decreased 9% from 1998 to 1997 due mainly to a decrease in the average selling price of beef hides sold and to a decrease in average selling prices of beef products sold from the company's Canadian beef complex. 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% of consolidated net sales in 1998 versus 13% in 1997. The Asian region accounted for 67% of total export dollars 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. COST OF PRODUCTS SOLD The Beef Carcass segment experienced a 5% decrease in 1998 cost versus the prior year. This decrease was primarily due to reduced average prices paid for live cattle. Beef Processing experienced a 3% decrease in 1998 cost versus the prior year. This decrease was primarily due to reduced average prices paid for raw material from the Beef Carcass segment operations, which overrode the effect of increases in the pounds of beef products sold. Pork experienced an 18% decrease in 1998 cost versus the prior year. This decrease was primarily due to reduced average prices paid for live hogs, which overrode the effect of increases in the pounds of pork products produced. Beef Carcass and Beef Processing plant costs increased due to higher labor costs. Pork plant costs increased due to higher labor costs and increased pork volume. Foodbrands America also experienced lower costs, on a comparable basis, due primarily to the lower pork raw material prices. Costs in the All Other segment in 1998 decreased 14% over 1997. The decrease was primarily due to decreased costs of raw materials, passed through from the Beef Carcass segment, in the hides division and a lower volume of hogs bought and sold by the company's hog marketing subsidiary included in this segment. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1998 expenses were 53% higher than in 1997. Excluding the effect of new subsidiaries, 1998 expenses were 17% higher than in 1997. Generally, higher incentive compensation, amortization of intangibles and $13 million higher non-cash variable stock option expense, which fluctuates with changes in the company's stock price, caused the increase. The higher expenses were 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. -51- Foodbrands America's 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. Management expects that selling expense will continue to be significantly higher than in periods prior to the Foodbrands America acquisitions. INTEREST EXPENSE The 30% higher net interest expense in 1998 versus 1997 was primarily attributable to higher average borrowings brought about by several acquisitions in 1997 and 1998. IBP's effective interest rate in 1998 was lower than 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. RECENT ACCOUNTING CHANGES ------------------------- In June 1999, Statement of Financial Accounting Standard ("SFAS") No. 137 was issued, which deferred the effective date for SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is effective no later than the first quarter of fiscal 2001. 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. Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", was issued in December 1999 and includes staff interpretations of the application of generally accepted accounting principles related to revenue recognition. The company expects to adopt the provisions of SAB 101 in the first quarter of 2000 by recording a cumulative effect of accounting change related to revenue recognition of approximately $2.5 million, net of tax. The change will result in the company recognizing revenue upon delivery of product to customers. The Company had historically recognized revenue upon shipment, based on its interpretation of Statement of Financial Accounting Concepts No. 5, Revenue and Recognition in Measurement in Financial Statements of Business Enterprises. 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 eighteen 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. -52- To provide cash for its working capital requirements, the company's credit facilities (more fully described in Notes C and D to the consolidated financial statements) provide IBP with same- day access to an aggregate of $659 million in potential committed borrowings. The unused portion of the committed credit lines was $121 million at December 25, 1999. 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: Restated Restated December 25, December 26, 1999 1998 ------------ ------------ Working capital (in millions $148 $251 Current ratio 1.1:1 1.3:1 Quick ratio 0.6:1 0.7:1 Number of days' sales in accounts receivable 18.0 16.2 Inventory turnover 24.3 28.2 Earnings to fixed charges 6.3 5.1 Working capital and associated liquidity ratios at year-end 1999 slipped relative to the prior year primarily because of increased short-term borrowings needed to fund acquisitions. Those ratios improved in the first quarter 2000 upon issuance of the $300 million of 7.95% 10-year notes discussed below, which reduced short-term debt by $125 million. Beef Carcass, Beef Processing and Pork segments accounts receivable and inventories were higher at year-end 1999 than at year-end 1998 due primarily to higher selling prices and livestock prices, especially on the pork side. These higher balances, along with the effect of customarily slower rates in the company's expanding foodservice business, contributed to slower consolidated receivables and inventory turnover rates. Total consolidated outstanding borrowings averaged $1,200 million in 1999 compared to $968 million in 1998. Borrowings outstanding at December 25, 1999 under committed facilities totaled $540 million. On January 31, 2000, the company issued $300 million of 7.95% 10-year notes under its $500 million Debt Securities program registered with the Securities and Exchange Commission in 1996. As discussed above, the net proceeds were used to repay existing borrowings under credit facilities. In the acquisition of CBFA on February 7, 2000, IBP issued 14.4 million common shares for all of the outstanding stock of CBFA. The company also assumed $344 million of CBFA's debt and preferred stock obligations. CBFA's debt was refinanced and the preferred stock was liquidated immediately upon completion of the transaction, utilizing existing IBP debt facilities. -53- The purchase of the Foodbrands America, Inc. 10.75% Notes in the first quarter 1998 by IBP, inc. was funded with available credit facilities. The portion of borrowings under IBP's revolving credit facilities considered long-term was $175 million at year-ends 1999 and 1998. The company invested $8 million in 1999 and $38 million in 1998 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 1999 totaled $209 million compared to $182 million in 1998. Significant projects with 1999 spending included various beef plant food safety projects, several plant expansions, and completion of the company's world headquarters complex. Over half of the 1999 spending was for revenue enhancement or cost-saving projects, while the remainder generally went toward upgrades and replacements of existing equipment and facilities. Management's estimate of capital spending in 2000 is in the range of $400 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 25, 1999 and December 26, 1998, a 100-basis point increase in the applicable market interest rate would not have had a material impact on the company's financial position, results of operations, or liquidity. 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 forward and futures contracts to hedge its exposures on receivables, live cattle, and purchase commitments in foreign currencies. A sensitivity analysis indicates that, with respect to currency-based derivatives in place at December 25, 1999 and December 26, 1998, a 10% change in currency exchange rates would not have had a material impact on the company's financial position, results of operations, or liquidity. -54- Commodities - The company uses commodity futures contracts to hedge its forward livestock purchases which, in 1999, accounted for approximately 7% of its livestock purchases. The contract lives ranged from one to twelve months. A sensitivity analysis indicates that, for futures contracts open at December 25, 1999, a 10% increase in futures contract prices would increase hedging losses by $15 million. The comparable prior year figure was $13 million. Any change in the value of the futures contracts is generally balanced by an offsetting position in the cash market price of the delivered livestock. Neither the company's financial position nor its liquidity would have been materially impacted by the above increase in futures contract prices. YEAR 2000 --------- 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. All planning, implementation and testing was successfully completed before the end of 1999. The team has continued to monitor the company's systems. As part of the Year 2000 readiness program, significant service providers, vendors, suppliers, customers, and governmental entities ("Key Business Partners") that were considered critical to business operations around January 1, 2000, were identified. Steps were initiated to reasonably ascertain their stage of Year 2000 readiness as it related 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 included, 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, with some very minor exceptions, the company has not suffered any financial losses or operational inefficiencies resulting from the calendar advancing past January 1, 2000. The company also had in place a formal contingency plan to address risks considered critical to operations. This contingency plan will remain in place to ensure that any unforeseen Year 2000 or other critical issues can be addressed appropriately. The aggregate cost of the company's Year 2000 efforts was approximately $14 million, virtually all of which has been spent or committed. The spending included approximately $9 million for computer hardware, most of which was capitalized. The remaining $5 million was primarily for changes in computer software, all of which was expensed as incurred and funded with operating cash flows. The company's Year 2000 readiness program has been a very successful effort and, although continued monitoring of Business Systems is an ongoing process, the effort is essentially complete. The company does not anticipate any material adverse impact resulting from unforeseen Year 2000 issues. -55- 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, of changes in stockholders' equity and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of IBP, inc. and its subsidiaries at December 25, 1999 and December 26, 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 25, 1999, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. The consolidated financial statements give retroactive effect to the merger of Corporate Brand Foods America, Inc. ("CBFA") on February 7, 2000 in a transaction accounted for as a pooling of interests, as described in Note L to the consolidated financial statements. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. As indicated in Note R, the company has restated its 1999 financial statements with respect to certain matters involving its subsidiary, DFG, to apply variable plan accounting to certain stock options and to provide expanded segment disclosures. PricewaterhouseCoopers LLP Omaha, Nebraska February 7, 2000 except as to Notes M and R for which the date is March 2, 2001, and as to the pooling described in Notes A and L, for which the date is March 20, 2000, 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 accounting principles generally accepted in the United States. -56- 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 auditing standards generally accepted in the United States, 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 all meetings of stockholders, directors and committees of 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 them as business operations change. IBP maintains a strong internal auditing department 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 Chief Financial Officer IBP, inc. IBP, inc. -57- IBP, inc. AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Fiscal Years 1997, 1998, and Restated 1999 (In thousands) Allowance for Doubtful Accounts ---------------- Balance, December 28, 1996 $ 9,873 Amounts charged to costs and expenses 618 Recoveries of amounts previously written off 39 Write-off of uncollectible accounts (850) Acquired in business combinations 787 Foreign currency translation (45) ------ Balance, December 27, 1997 10,422 Amounts charged to costs and expense 2,161 Recoveries of amounts previously written off 231 Write-off of uncollectible accounts (290) Acquired in business combinations 678 Foreign currency translation (92) ------ Balance, December 26, 1998 13,110 Amounts charged to costs and expenses 15,907 Recoveries of amounts previously written off 100 Write-off of uncollectible accounts (8,344) Acquired in business combinations 512 Foreign currency translation 67 ------ Balance, December 25, 1999 $21,352 ====== -58-