-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wha6h5ls1hVJMj7/tYUP22vbavF8Num5uUi9aY5MeIyLZgLkUePxBT0v2lysGmAp NxVBhUzwcL8AbUq1hwulLA== 0000052477-01-500024.txt : 20010315 0000052477-01-500024.hdr.sgml : 20010315 ACCESSION NUMBER: 0000052477-01-500024 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991225 FILED AS OF DATE: 20010314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBP INC CENTRAL INDEX KEY: 0000052477 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 420838666 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-06085 FILM NUMBER: 1567838 BUSINESS ADDRESS: STREET 1: 800 STEVENS PORT DR CITY: DAKOTA DUNES STATE: SD ZIP: 57049 BUSINESS PHONE: 4024942061 MAIL ADDRESS: STREET 1: IBP AVE STREET 2: P O BOX 515 CITY: DAKOTA CITY STATE: NE ZIP: 68731 FORMER COMPANY: FORMER CONFORMED NAME: IOWA BEEF PROCESSORS INC /PRED/ DATE OF NAME CHANGE: 19821109 FORMER COMPANY: FORMER CONFORMED NAME: IOWA BEEF PACKERS INC DATE OF NAME CHANGE: 19701130 10-K/A 1 fye199910ktextwithindex.txt RESTATED 1999 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 25, 1999 ______________________________ IBP, inc. DELAWARE CORPORATION 42-0838666 (State of Incorporation) (Employer Identification Number) 800 STEVENS PORT DRIVE DAKOTA DUNES, SD 57049 (Address) (Zip Code) Telephone Number: (605) 235-2061 ________________________________________________ Securities registered pursuant to section 12(b) of Act: Common Stock Registered with the New York Stock Exchange and the Pacific Stock Exchange. Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained in definitive Proxy Statement incorporated by reference in Part III of this Form 10-K. The aggregate market value of the registrant's common stock held by non-affiliates (104,898,300 shares) based on the New York Stock Exchange average bid and ask price on March 22, 2000, was approximately $1.57 billion. As of March 22, 2000, the registrant had outstanding 106,057,995 shares of its common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement dated March 20, 2000, (the "Proxy Statement") are incorporated by reference in Part III of this Report. Other documents incorporated by reference in this Report are listed in the Exhibit Index on pages 15 through 18. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES General IBP, inc. hereby amends Items 1, 3, 6, 7, 8 and 14 of its Forms 10-K for the fiscal year ended December 25, 1999 for purposes described in Note A in the Notes to the Consolidated Financial Statements of IBP's 1999 Annual Report, as amended. IBP, inc., ("IBP") a Delaware corporation, has five business segments, Beef Carcass, Beef Processing, Pork, Foodbrands America and All Other. The Beef Carcass segment reduces live fed cattle to dressed carcasses and other allied products, over 90% of which are sold to other IBP segments. The Beef Processing segment produces fresh beef and processed beef products that are typically marketed in the form of boxed beef. The Pork segment reduces live hogs to fresh and processed pork products that are typically sold in the form of boxed pork. Boxed beef and pork from the Beef Processing and Pork segments are marketed mainly in the United States to grocery chains, meat distributors, wholesalers, retailers, restaurant and hotel chains, and processors who produce cured and smoked products, such as bacon, ham, luncheon meats and sausage items. The Foodbrands America segment produces frozen and refrigerated food products for the foodservice industry. IBP's All Other segment includes the Company's trucking and warehousing operations, its Canadian beef operations, cow boning operations and hide curing and tanning operations. The Beef Carcass, Beef Processing, Pork and All Other segments are all operated under IBP's Fresh Meats division, and may be referred to as Fresh Meats Operations. IBP operates an extensive sales network to service its customers with regional sales/service centers in the United States (including an independently-owned contractor in Los Angeles that is licensed to use IBP trademarks) as well as sales/service centers in foreign countries. The mailing address of IBP's corporate headquarters is 800 Stevens Port Drive, Dakota Dunes, South Dakota 57049; its telephone number is (605) 235-2061. All references to "IBP" include IBP, inc. and its subsidiaries. Beef Carcass IBP operates ten fed beef carcass production facilities in Idaho, Illinois, Iowa, Kansas, Nebraska, Texas and Washington, which reduce live cattle to dressed carcass form. Fed beef consists primarily of young steers and heifers specifically raised for beef consumption. Beef Processing IBP operates beef processing facilities at eight U.S. locations, seven of which are adjacent to U.S. beef carcass production facilities in Illinois, Kansas, Nebraska, Texas and Washington; and the eight is located in Norfolk, Nebraska. These facilities conduct fabricating operations to produce boxed beef. Pork IBP operates six pork carcass facilities in Indiana, Iowa -2- and Nebraska which reduce live hogs to dressed carcass form. IBP operates seven processing facilities which conduct fabricating operations to produce boxed pork. The production process for pork is similar to that employed in IBP's Beef Processing segment. Foodbrands America The Foodbrands America business segment is headed by IBP's wholly owned subsidiary Foodbrands America, Inc. ("FAI"). The Foodbrands America business segment is an extension of IBP's Fresh Meats operations, offering a wide range of value-added food products to IBP's customers. Foodbrands America manufactures and markets frozen and refrigerated food products such as pepperoni, beef and pork toppings, pizza crusts, appetizers, hors d'oeuvres, desserts, prepared meals, Mexican and Italian foods, soups, sauces, side dishes, branded and processed meats, ground beef and high quality, portion-controlled steaks and pork chops. Early in the second quarter of 1999, the company acquired the outstanding stock of two companies, H&M Food Systems Company, Inc. ("H&M") and Zemco Industries, Inc., the owner of Russer Foods. H&M is a producer of custom-formulated pre-cooked meat products and prepared foods with two plants in Texas. Russer Foods, based in Buffalo, New York, produces and markets a variety of premium deli meats. Both operations are subsidiaries of FAI, and will operate as part of IBP's Foodbrands America business segment. In the third quarter of 1999, FAI acquired Wilton Foods, Inc. ("Wilton") a leading producer of premium kosher meals and prepared foods for airlines and institutions. Wilton also produces premium kosher hors d'oeuvres and appetizers. Wilton is based in Goshen, New York. In the third quarter of 1999, IBP (through its IBP Foods, Inc. subsidiary) purchased a substantial portion of the operating assets of Thorn Apple Valley, Inc. ("TAVI"), a further processor of pork and poultry products. The purchase of the TAVI assets included five processing plants, most of its current assets and a number of product brand names. The five processing plants acquired from TAVI will be under the Foodbrands America business segment. On February 7, 2000, the company acquired all of the stock of Corporate Brand Foods America, Inc. ("CBFA"), a privately held processor for the retail and foodservice markets. In the transaction, which will be accounted for as a pooling of interests, IBP issued approximately 14.4 million IBP common shares for all of the outstanding stock of CBFA. The company also assumed $344 million of CBFA's debt and preferred stock obligations. The CBFA operations will be part of the Foodbrands America business segment. All Other IBP's All Other segment includes eleven warehouse and freezer facilities located in Illinois, Iowa, Kansas, Nebraska and Texas. The All Other segment includes IBP's eight hide treatment facilities and four tanning facilities located in Illinois, Kansas, Nebraska and Texas. IBP's Lakeside Farm Industries, Ltd. subsidiary in Alberta, Canada, which has cattle feeding and beef processing operations, is also included in the All Other Segment. As of December 25, 1999, IBP had one cow boning facility that was operating in Nebraska. -3- FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS The company's businesses are classified into five business segments: Beef Carcass, Beef Processing, Pork, Foodbrands America and All Other. The contributions of each business segment to net sales and operating earnings, and the identifiable assets attributable to each business segment are set forth in Note M, "Business Segments" of the Consolidated Financial Statements included herein at pages F-1 through F-34. History of IBP's Business IBP was first incorporated in 1960. It began operations in 1961 with a single fed beef carcass production facility located near Denison, Iowa, in what was then the nation's major cattle-producing region. IBP grew in the Northern and Central Plains states over the following nine years and added beef plants in Dakota City, Nebraska; Emporia, Kansas; and West Point, Nebraska. IBP expanded into the Southern Plains in 1975, when it built its Amarillo, Texas facility near the large commercial feedlot operations of that region. In 1976, it moved into the Pacific Northwest through the acquisition and expansion of plants in Pasco, Washington and Boise, Idaho. Company expansion continued in 1980 with construction of a facility in Finney County, Kansas, and in 1983 with the purchase and expansion of a plant in Joslin, Illinois. In 1990, IBP opened its Lexington, Nebraska fed beef plant. These operations comprise IBP's Beef Carcass and Beef Processing operations. IBP began pork operations in 1982 when it purchased, expanded and commenced operation of a pork facility in Storm Lake, Iowa. Additional pork facilities were added in 1986 in Louisa County and Council Bluffs, Iowa; in 1987 in Madison, Nebraska; in 1989 in Perry, Iowa; in 1990 in Waterloo, Iowa; and in 1993 in Logansport, Indiana. In 1994, IBP constructed ham processing facilities at its Council Bluffs, Iowa and Madison, Nebraska, locations. IBP no longer produces carcasses at the Council Bluffs, Iowa facility, however the facility is still used for processing operations. In 1998, IBP entered into an agreement with Plumrose USA, Inc. ("Plumrose") wherein Plumrose agreed to lease from IBP the Council Bluffs, Iowa ham processing facility. These operations comprise IBP's Pork business segment. In 1990, IBP added its first value-added operation when a cooked meats operation was added to the Waterloo, Iowa pork facility. This operation processed fresh meat into value-added, consumer-ready items such as pork and beef pizza toppings. In 1994, IBP purchased Prepared Foods, Inc. from International Multifoods, Inc. that included a plant in Santa Teresa, New Mexico. In 1995, IBP purchased and renovated a facility in Columbia, South Carolina. The Santa Teresa and Columbia facilities process fresh meat into value-added, consumer-ready items. IBP increased its hamburger patty production capabilities in 1997 with the acquisition of a Columbus, Nebraska, ground beef facility. In 1997, IBP increased its presence in the value-added marketplace with the FAI and Bruss acquisitions. All of the value-added facilities listed above have been incorporated into the Foodbrands America business segment and are under FAI's management. FAI operates facilities in Rialto, California; Riverside, California; Chicago, Illinois; Cherokee, Iowa; Edwardsville, Kansas; South Hutchinson, Kansas; Hutchinson, Kansas; Carthage, Missouri; Concordia, Missouri; Piedmont, Missouri; Newark, New Jersey; Albuquerque, New Mexico; New Rochelle, New York; Oklahoma City, Oklahoma; Dallas, Texas; Fort Worth, Texas; Jefferson, Wisconsin; and Green Bay, Wisconsin. In -4- 1999, IBP acquired the stock of H&M with plants in Lampasas, Texas and North Richland Hills, Texas; and acquired the stock of Zemco Industries, Inc. with a plant in Buffalo, New York. In 1999 IBP acquired certain assets of TAVI including plants in Forest City, Arkansas (currently idle); Detroit, Michigan; Grand Rapids, Michigan; Holly Ridge, North Carolina; and Ponca City, Oklahoma. In 1999, FAI acquired the stock of Wilton Foods, Inc. with a plant in Goshen, NY. In February of 2000, IBP completed the acquisition of the stock of CBFA, which has facilities in Independence, Iowa; Oelwien, Iowa; Augusta, Maine; Bangor, Maine; Portland, Maine; York, Nebraska; Manchester, New Hampshire; Houston, Texas; and Vernon, Texas. In 1994 IBP purchased Lakeside Farm Industries, Ltd. ("Lakeside"), an agribusiness company with a fed beef plant in Brooks, Alberta, Canada. Lakeside was IBP's first plant outside of the United States. IBP began its cow boning operations in 1995 by acquiring facilities in Tama, Iowa; Gibbon, Nebraska; and Sealy, Texas. In 1996 IBP acquired its fourth cow boning facility in Palestine, Texas. In 1998, IBP discontinued operations at its Sealy, Texas facility; in 1999, IBP discontinued operations at the Palestine, Texas and Tama, Iowa cow boning operations; and on March 17, 2000, IBP discontinued operations at its final cow boning operation in Gibbon, Nebraska. These operations, along with the warehouse, cold storage and hides production operations are all operated under the All Other segment. Prior to August 1981, when it was acquired by Occidental Petroleum Corporation ("Occidental"), IBP was a publicly held corporation listed on the New York Stock Exchange (the "NYSE"). From August 1981 to October 1987, IBP was a wholly owned subsidiary of Occidental. In October 1987, IBP sold 49.5% of its common stock and was again listed on the NYSE. On September 4, 1991, Occidental offered all of its shares of IBP Common Stock to Occidental's stockholders and certain standby underwriters in an underwritten rights offering. As a result of this transaction, Occidental sold its remaining IBP Common Stock. Operations Cattle and Hog Supplies IBP does not currently have facilities of its own to raise cattle or hogs in the United States, the primary source of raw material for its Fresh Meats Operations. However, IBP has entered into various risk-sharing and procurement arrangements with producers that help secure a supply of livestock for daily start-up operations at its facilities. IBP's Canadian subsidiary, Lakeside, has cattle feeding facilities, other agricultural divisions and a beef carcass production and boxed beef processing facility. In 1999, Lakeside's feedlots provided approximately 23% of that facility's fed cattle needs. IBP's main supply of live cattle and hogs is purchased by IBP buyers who are trained to select high quality animals. IBP's buyers purchase cattle and hogs on a daily basis, generally a few days before the animals are required for processing. Live animals are generally held in IBP's holding pens for only a few hours. Production Process - Beef Carcass IBP's fed beef carcass production facilities reduce live fed cattle to dressed carcass form and process allied products. IBP's fed carcass facilities operated in 1999 at approximately 86% of their production capacities. -5- Throughout production, edible beef and allied products, such as variety meat items, are segregated and prepared for shipment or further refinement. Inedible beef derived from processing operations are used in the manufacture of animal feed, gelatin, pharmaceuticals and cosmetics. Production Process - Beef Processing IBP's beef processing facilities conduct fabricating operations to produce boxed beef. IBP's beef processing facilities operated in 1999 at approximately 86% of their production capacities. Throughout production, edible beef and allied products, such as variety meat items, are segregated and prepared for shipment or further refinement. Inedible beef derived from processing operations are used in the manufacture of animal feed, gelatin, pharmaceuticals and cosmetics. Production Process - Pork IBP's pork facilities produce fresh boxed pork for shipment to customers, as well as pork bellies, hams and boneless picnic meat for shipment to customers who further process the pork into bacon, cooked hams, luncheon meats and sausage items. In 1999, IBP's pork facilities operated at approximately 84% of their production capacity. Throughout production, edible pork and allied products, such as variety meat items, are segregated and prepared for shipment or further refinement. Inedible pork products derived from processing operations are used in the manufacture of animal feed, gelatin, pharmaceuticals and cosmetics. Production Process - Foodbrands America IBP's Foodbrands America production facilities process fresh beef, fresh pork, and other raw materials into pizza toppings, portion-controlled steaks and pork chops, branded and processed meats, appetizers, hors d'oeuvres, desserts, ethnic foods, soups, sauces, side dishes and pizza crusts. Foodbrands America's raw materials are typically commodity based raw materials, including fresh beef and pork, that can be purchased from various suppliers and manufacturers of these raw materials. Due to variances in product mix that may be processed at a value- added facility, it is difficult to estimate a facility's capacity. However, in 1999, IBP estimates the Foodbrands America facilities operated at approximately 85% of their production capacity. Foodbrands America also produces ground beef at the Norfolk, Nebraska, ground beef operation, due to variances in product mix that may be processed at a ground beef facility, it is difficult to estimate a facility's capacity. However, in 1999, IBP estimates its Columbus, Nebraska, ground beef facility operated at approximately 50% of its production capacity. Production Process - All Other IBP's Lakeside Farm Industries, Ltd. subsidiary includes cattle feeding, beef carcass production and beef processing operations; and in 1999 these operations operated at approximately 98%, 80% and 71% of their production capabilities. -6- IBP's cow boning facilities operating in 1999 produced beef trimmings and boneless cuts of beef that were further processed by IBP and sold to customers who produce hamburger, sausage and deli meats. IBP's cow boning facilities operated in 1999 at approximately 63% of their production capacity. Eight of IBP's fed beef and cow boning plants include hide treatment facilities. The majority of the hides from IBP's other fed beef plants are transported to these facilities, which include brine curing operations and, in four locations, chrome hide tanneries. The chrome tanning process produces a semifinished product that is shipped to leather good manufacturers worldwide. Brine-cured hides are sold to other tanneries. IBP is the largest chrome tanner of cattle hides in the United States. Facilities The corporate headquarters of IBP are located in Dakota Dunes, South Dakota. IBP believes that its plants are among the most modern in the world and strives to maintain and enhance its facilities. Generally, plants and additions are designed by IBP's personnel. IBP generally considers its existing plants and equipment to be in excellent condition. IBP's capital spending for 2000 is expected to be in the range of $400 million, which includes expenditures for environmental compliance activities. Its principal plants as of December 25, 1999, are described below. Beef Carcass IBP's ten U.S. fed beef carcass production facilities are located in the states of Idaho, Illinois, Iowa, Kansas, Nebraska, Texas and Washington. Beef Processing At seven of IBP's ten fed beef carcass production facilities the company has beef processing facilities that reduce beef carcasses to primal and sub-primal form. These facilities are located in Illinois, Kansas, Nebraska, Texas and Washington. Pork IBP's six pork carcass production and seven processing facilities are located in the states of Indiana, Iowa and Nebraska. Foodbrands IBP's forty-three facilities under the Foodbrands business segment are located in Arkansas, California, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oklahoma, South Carolina, Texas and Wisconsin. All Other -7- IBP's Canadian cattle feeding operation, fed beef carcass production and processing facility are located in Alberta, Canada. At IBP's beef carcass facilities, eight have hide treatment or tanning operations, six have cold storage freezer operations and one has a tallow refining plant. At IBP's pork locations, four have cold storage freezer operations and two have skinning operations. IBP's one cow boning facility as of December 25, 1999 was located in Nebraska. Sales IBP's customers for beef, pork and value-added products include domestic and international grocery chains, meat distributors, wholesalers, retailers, warehouse clubs, foodservice distributors, restaurant and hotel chains, and meat processors who produce cured and smoked products, such as bacon, ham, luncheon meat and sausage items. Most sales are made pursuant to daily orders as opposed to long-term supply contracts. In each of the past three years, the largest customer of the Beef Carcass segment was IBP's other business segments which purchased over 90% of the annual beef carcasses produced; and for Beef Processing, IBP's largest processed beef customer accounted for less than 6% of its annual processed beef net sales. For the past three years, IBP's largest customer of the Pork segment accounted for less than 6% of its pork net sales. In each of the past three years, Foodbrands America's largest customer accounted for less than 15% of its annual net sales; and in each of the past three years, All Other largest customer accounted for less than 5% of its annual net sales. For the same periods, IBP's largest customer for all products combined accounted for less than 4% of its annual net sales. IBP sells to international customers through foreign and domestic sales offices. In fiscal 1999, export sales accounted for approximately 12% of IBP's net sales, which compares to approximately 12% in fiscal 1998 and 13% in fiscal 1997. International sales, which include all consolidated company sales to customers outside the United States, totaled 15% of consolidated net sales in 1999, 15% in 1998 and 16% in 1997. Some allied products are sold as commodities in bulk, while other items are trimmed, boxed and frozen by IBP. Cattle hides are sold for both domestic and international use. Uncured and brine-cured hides are sold to tanneries for further processing. Chrome-tanned hides are sold to tanneries and directly to further processors of leather. Distribution Beef Carcasses Most beef carcasses produced by IBP are used by IBP's Beef Processing segment. The carcasses are usually transferred within the facility, or shipped by truck from slaughter plants that do not have processing operations. Carcasses sold to third parties are usually shipped by truck. Beef Processing, Pork and All Other Most products from these segments are shipped by trucks, generally from plants located closest to the purchaser, although -8- other plants may supplement such deliveries, depending upon prevailing supplies and product demand. Foodbrands Foodbrands' products are transported by independent carriers from its distribution/customer service centers in Detroit, Michigan; Edwardsville, Kansas; and Rialto, California, or are shipped directly from the production facility with a view toward achieving an efficient, cost-effective method of distribution. Customer requirements vary from the need for large quantities of a limited number of products to small quantities of a number of items, each requiring a different distribution method. From the distribution centers, orders for customers of the different divisions can be filled and delivered in a single shipment regardless of the variety of products ordered or the location of the manufacturing facility at which they are produced. The company also can combine for shipment the orders of many smaller customers in the same geographic region. Management believes this flexible distribution system allows the company to provide superior service to its customers by reducing the time between the placement of customer orders and delivery of the company's products. This also lowers the customer's shipping costs through the elimination of higher-cost, fragmented deliveries. Competition Fresh Meats - Beef Carcass, Beef Processing, and Pork The primary industry in which IBP operates is highly competitive and characterized by very small margins. IBP considers its principal competition to come from domestic producers of fresh beef and pork products, although IBP also competes with other suppliers of protein, including other red meats, poultry, seafood, grain, dairy products, eggs, soya and other protein products. Competition exists both in the purchase of live cattle and hogs, as well as in the sale of beef and pork products. The principal competitive element in both buying and selling is price. Failure to accurately assess the quality of cattle and hogs can result in (i) the payment of an excessive price if the livestock yields less than expected or (ii) the failure to bid a price sufficiently high to purchase high quality livestock. To effectively compete in the purchase of cattle, a cattle buyer must be able to accurately judge the yield and quality of the cattle to establish price. As part of IBP's cattle buying process, each cattle buyer prepares an estimate by lot of the yield and quality of the cattle purchased. IBP prepares a report on each lot that compares the actual yield and quality to the buyer's initial estimate. This enables IBP to monitor the quality of various cattle producers and to measure the skill of its cattle buyers, both of which are critical factors in determining IBP's success and competitiveness. IBP's hog buyers generally purchase hogs based upon an average daily bid price. The average daily bid price is adjusted for each producer by tracking the producer's yield and quality results. From the results of the producer's prior sales, IBP is able to generate a discount or a premium which adjusts the average daily bid for that individual producer. In addition, IBP has recently introduced an animal ultrasound system to its pork facilities to measure the quality and other factors regarding the profitability of a hog. IBP believes this purchasing system is one of the most advanced and accurate methods for establishing carcass values in the industry. -9- Product quality, product mix, location and service, in addition to price, are important competitive elements in the sale of fresh beef and pork products. IBP is the largest producer of beef carcasses and fresh beef in the United States. IBP believes that its two largest beef competitors in 1999 were Monfort, a subsidiary of ConAgra, Inc. ("ConAgra") and Excel Corporation, a subsidiary of Cargill, Incorporated. IBP is one of the largest pork processors in the United States. IBP believes that its largest pork competitors in 1999 were Smithfield Foods, Inc.; ConAgra; and Hormel Foods Corp. Foodbrands America Foodbrands America's products are sold in highly competitive markets competing with a significant number of companies of various sizes. The principal competitive factors in these markets are price, service, innovative products, and quality. All Other The All Other segment combines a mix of various business that do not individually comprise a reportable business segment. Based on this mix of businesses, it is difficult to identify this segment's principal competitors. However, this segment does contain operations that compete with similar operations of other beef and pork processors, and a number of the competitors listed for those segments would be similar competitors for the All Other segment. Employees As of December 25, 1999, IBP had approximately 45,000 employees. Whenever possible, production employees are recruited locally and trained by IBP for specific tasks. IBP considers its relations with its employees at its plants to be good. Approximately 14,600 hourly employees at 23 of IBP's 59 production facilities are represented by labor organizations. The labor contracts applicable to these plants expire as follows (IBP has included the plants acquired from CBFA in this table even though such plants were not part of IBP's operations on December 25, 1999): Contract Expiration Plant Union Date Amarillo, Texas Teamsters (1) November 2002 Chicago, Illinois (3) Teamsters (1) April 2001 Detroit, Michigan (3) Teamsters (1) August 2004 -10- Grand Rapids, Teamsters (1) January 2001 Michigan (3) Manchester, Teamsters (1) December 2000 New Hampshire (3) Pasco, Washington Teamsters (1) May 2004 Rialto, California (3) Teamsters (1) September 2001 Albuquerque, New Mexico UFCW (2) November 2000 Augusta, Maine UFCW (2) December 2004 Cherokee, Iowa UFCW (2) March 2004 Chicago, Illinois UFCW (2) July 2003 Concordia, Missouri UFCW (2) June 2001 Dakota City, Nebraska UFCW (2) August 2004 Detroit, Michigan UFCW (2) August 2004 Grand Rapids, Michigan UFCW (2) August 2003 Holly Ridge, UFCW (2) April 2004 North Carolina Holly Ridge, UFCW (2) August 2000 North Carolina (3) Jefferson, Wisconsin UFCW (2) June 2002 Joslin, Illinois UFCW (2) December 2000 Logansport, Indiana UFCW (2) October 2003 Manchester, UFCW (2) December 2000 New Hampshire Newark, New Jersey UFCW (2) December 2003 North Richland Hills, UFCW (2) August 2001 Texas Perry, Iowa UFCW (2) May 2003 Ponca City, Oklahoma UFCW (2) March 2004 Riverside, California UFCW (2) May 2001 Rialto, California UFCW (2) May 2001 Waterloo, Iowa UFCW (2) June 2002 Buffalo, New York IUOE (4) June 2002 -11- _________________ (1) Teamsters local unions affiliated with The International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America. (2) United Food and Commercial Workers, International Union, AFL-CIO. (3) These contracts at the Chicago, Illinois; Detroit, Michigan; Grand Rapids, Michigan; Holly Ridge, North Carolina; Manchester, New Hampshire; and Rialto, California facility cover those employees working in distribution. (4) International Union of Electrical Workers. Regulatory Matters IBP's operations are subject to the constant inspection and regulation of the United States Department of Agriculture (the "USDA"), including (i) regulations of the USDA's Grain Inspection, Packers and Stockyards Administration, (ii) continuous in-plant inspection of IBP's production facilities (along with each live animal, each carcass and all edible products) by USDA employees to ensure compliance with USDA standards and (iii) grading of beef carcasses by USDA employees. IBP is subject to federal, state and local laws and regulations governing environmental protection. In 1999, IBP incurred expenses of approximately $20 million to maintain compliance with such regulations. These expenditures relate principally to the normal operation and maintenance of wastewater treatment facilities ("Wastewater Treatment Facilities"), where IBP biologically treats these wastes, and the associated land application of wastes generated at these treatment facilities. Wastes are generated as a by-product of the animal slaughtering and processing operations. Except as disclosed in Item 3, IBP believes that it is in substantial compliance with such applicable laws and regulations and IBP is not aware of any violations of, or pending changes in, such laws and regulations that are likely to result in material penalties or material increases in compliance costs. IBP incurred $12 million in capital expenditures, primarily related to its Wastewater Treatment Facilities, in fiscal 1999 and anticipates capital expenditures of approximately $54 million in fiscal 2000 for environmental projects primarily related to the Wastewater Treatment Facilities. EXECUTIVE OFFICERS OF THE REGISTRANT Age at Positions With IBP and February 18,Five-Year Employment Name 2000 History Richard L. Bond 52 President and Chief Operating Officer since 1997; Director since 1995; 1995-1997 President, Fresh Meats; 1994-1995 Executive Vice President, Beef; 1989- 1994 Group Vice President, Beef Sales and Marketing; 1982-1989 Vice President, Boxed Beef Sales and Marketing -12- R. Randolph Devening 57 Chief Executive Officer of Foodbrands America, Inc. since 2000; 1994-2000 Chief Executive Officer and President, Foodbrands America, Inc.; Chairman of the Board, Foodbrands America, Inc. 1994 to 1997 Craig J. Hart 44 Vice President and Controller since 1995; 1993- 1995 Assistant Vice President and Controller; 1990-1993 Controller Eugene D. Leman 57 Chief Executive Officer, Fresh Meats since 2000; Director Since 1989; 1995-2000 President, Fresh Meats; 1995-1997 President, Allied Group; 1986-1995 Executive Vice President, Pork Division; 1981-1986 Group Vice President, Pork Division Robert L. Peterson 67 Chairman of the Board of Directors since 1981; Chief Executive Officer since 1980; Director since 1976; 1979-1995 President Larry Shipley 44 Chief Financial Officer since 2000; 1997-2000 President, IBP Enterprises and Chief Financial Officer; 1995-1997 Executive Vice President, Corporate Development; 1995 Senior Vice President, Corporate Development; 1994- 1995 Assistant to the Chairman; 1989-1994 Assistant to the President. ITEM 3. LEGAL PROCEEDINGS Information required by this item is set forth in Note O "Contingencies" of the Consolidated Financial Statements included herein at pages F-1 through F-34. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -13- No matters were submitted to a vote of IBP's security holders during the fourth quarter of 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item is included in the Consolidated Financial Statements included herein at pages F-1 through F-34 including the "Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income," "Notes to Consolidated Financial Statements," and "Note P - Quarterly Financial Data (Unaudited)". IBP's Common Stock was held by approximately 5,500 stockholders of record at year-end 1999. The Common Stock is listed on the New York and Pacific Stock Exchanges. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data (in thousands, except net sales and per share data) The financial information below has been restated to reflect adjustments for irregularities and misstatements at one of the company's subsidiaries and for the application of variable plan accounting for certain stock options. See Notes G and Q for more detail relating to the effects of these restatements for 1999, 1998 and 1997. Fiscal years 1995 and 1996 were restated for the application of variable plan accounting for stock options mentioned above. The impact of variable plan accounting increased selling, general and administrative expense in fiscal years 1995 and 1996 by $7.4 million and $1.2 million. Net earnings were reduced by $7.1 million and $1.1 million and earnings per diluted share by $0.07 and $0.01, respectively, in fiscal years 1995 and 1996. 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 $ 14,075 $ 12,849 $ 13,259 $ 12,539 $ 12,668 millions) Gross profit 893,589 662,208 442,892 443,582 604,068 Selling, general and administrative expense 368,642 299,441 214,304 121,848 131,417 Earnings from operations 524,947 362,767 228,588 321,734 472,651 Interest expense, 45,412 43,213 38,002 3,373 20,784 net Income taxes 165,071 124,555 71,798 120,719 178,821 Extraordinary loss - (14,815) - - (22,189) (1) Net earnings 314,464 180,184 118,788 197,642 250,857 -14- PER SHARE DATA: Earnings per share: Earnings before extraordinary item $3.41 $2.11 $1.28 $2.09 $2.88 Extraordinary loss (1) - (.16) - - (.24) Net earnings 3.41 1.95 1.28 2.09 2.65 Earnings per share - assuming dilution: Earnings before extraordinary item $3.37 $2.09 $1.27 $2.06 $2.85 Extraordinary loss - (.16) - - (.23) (1) Net earnings 3.37 1.93 1.27 2.06 2.62 Dividends per share .10 .10 .10 .10 .10 FINANCIAL CONDITION: Working capital $ 196,680 $ 231,003 $ 207,109 $ 540,903 $ 427,241 Total assets 3,705,869 3,008,096 2,838,941 2,174,495 2,027,601 Long-term 586,528 575,522 568,281 260,008 260,752 obligations Stockholders' equity 1,692,149 1,383,092 1,229,070 1,193,882 1,014,259 (1) Extraordinary loss on early extinguishment of debt, net of applicable income taxes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 -15- Management's discussion and analysis has been revised and expanded to reflect the following items, as described in Note Q to the financial statements: 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 impacted previously reported results for the year ended December 25, 1999 and unaudited results for quarterly periods in 2000. 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 earnings per diluted share by $0.10 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 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 -16- 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. 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. ACQUISITIONS 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. 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. 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. 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. 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 -17- 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. 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 $11 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. A corporate realignment announced in early 2000 has brought all former Enterprises operations, including the acquisitions described above, under the Foodbrands America, Inc. umbrella. Consequently, the Enterprises segment will be referred to in this report and subsequently as the Foodbrands America segment. 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 will be 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 of preferred stock obligations. 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 -18- 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 4.0% of net sales compared to 6.5% in 1998. Excluding the negative impact of IBP Foods, the 1999 operating margin measured 5.7%. Higher 1999 raw material, selling costs, and the DFG issues (discussed below) 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 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 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. 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. 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 were not material to the company's total operations either in terms of assets (less than 1%) or net sales (less than 2%). 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. 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 1,819,355 1,229,401 48% -19- All Other 2,230,808 2,065,665 8% Intersegment elimination (8,327,966) (7,862,791) 6% Total $ 14,075,208 $ 12,848,635 10% Earnings from Operations Carcass $ 91,513 $ 124,322 -26% Processing 163,656 1,651 9,813% Pork 151,689 119,838 27% Foodbrands America 72,721 79,505 -9% All Other 46,730 72,536 -36% Total from segments 526,309 397,852 32% Corporate (1,362) (35,085) 96% Total Earnings $ 524,947 $ 362,767 45% 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 48% over 1998. Excluding acquisitions, Foodbrands America's net sales increased 12% due to sales volume increases at other existing Foodbrands America divisions. 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 12.3% 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 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 -20- through from the Beef Carcass segment, 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 53% from 1998. The higher costs were primarily 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 EXPENSE 1999 expense increased 23% over 1998. The increase was 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, which fluctuates with changes in the company's stock price. INTEREST EXPENSE The 5% increase in 1999 net interest expense versus 1998 was due primarily to 18% higher average borrowings in 1999 offset somewhat by a lower average effective interest rate (38 basis points). 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 34.4% compared to 39.0% in 1998. The 1999 rate reduction resulted primarily from a settlement with the Internal Revenue Service on audit issues related to fiscal years 1989, 1990 and 1991. The settlement decreased 1999 income tax expense by $14 million or $0.15 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. In 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. -21- Foodbrands America's operations performed above the prior year with an operating margin of 6.5% in 1998 compared to 3.4% 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, partially offset by decreased capacity utilization and product demand in the company's cow boning 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. 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 1,229,401 857,943 43% All Other 2,065,665 2,280,520 -9% Intersegment Elimination (7,862,791) (8,318,857) -5% Total $ 12,848,635 $ 13,258,784 -3% 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 79,505 29,132 173% All Other 72,536 60,968 -19% Total from segments 397,852 233,040 71% Corporate (35,085) (4,452) -688% Total Earnings $ 362,767 $ 228,588 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. and 31 weeks for The Bruss Company. Meanwhile, Foodbrands America's comparable period sales decreased in 1998 from 1997 due to lower selling prices resulting from lower raw material costs passed through to customers, which offset an increase in pounds sold. Net 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. -22- Net export sales in 1998 decreased 6% from 1997. Export tonnage in 1998 increased 21% over 1997 but was offset by overall lower prices and a sales mix with a higher percentage of lower valued products. Exports accounted for approximately 12.3% of consolidated net sales in 1998 versus 12.7% in 1997. The Asian region accounted for 67% of total net export sales in 1998 compared to 73% in 1997. The decline was due to much- publicized economic difficulties. The Far East shortfall was partially offset by increased exports to Mexico and South America destinations. 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 the reduced average prices paid for raw material from the carcass segment operations, which overrode the effect of increases in the pounds of beef products sold. Pork experienced a 19% 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 EXPENSE 1998 expense was 40% higher than in 1997. Excluding the effect of new subsidiaries, 1998 expense was 17% higher than in 1997. Generally, the increases were due to 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. The increases 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 that ruled their collection unconstitutional, as well as cessation of current year harbor tax expense. 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. The company expects that selling expense will continue to be significantly higher than in periods prior to the Foodbrands and Bruss acquisitions. INTEREST EXPENSE The 14% higher net interest expense in 1998 versus 1997 was primarily attributable to 29% higher average borrowings brought about by the purchases of Foodbrands America, Inc. and The Bruss -23- Company in the second quarter 1997. IBP's effective interest rate in 1998 was lower by 53 basis points from the average in 1997, which somewhat offset the higher average borrowings. The lower effective interest rate was attributable in part to lower short-term market rates in 1998, the retirement of Foodbrands' 10.75% Senior Subordinated Notes in the first quarter 1998, and a favorable market position with IBP's interest rate swap contract. 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 $2,429, 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. 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. 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 $600 million in potential committed borrowings. The unused portion of the committed credit lines was $110 million at December 25, 1999. 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. 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 December 25, 1999 26, 1998 -24- Working capital (in Millions) $197 $231 Current ratio 1.2:1 1.3:1 Quick ratio 0.7:1 0.7:1 Number of days' sales in Accounts receivable 17.6 15.8 Inventory turnover 26.0 30.0 Earnings to fixed 6.2 5.0 charges 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 contributed to slower consolidated receivables and inventory turnover rates. In addition, the increasing presence of value-added businesses, with their more numerous product lines and distribution channels, and longer credit terms, has caused slower receivables and inventory turnover rates. Total consolidated outstanding borrowings averaged $997 million in 1999 compared to $843 million in 1998. Borrowings outstanding at December 25, 1999 under committed facilities totaled $490 million. On January 31, 2000, the company issued $300 million of 7.95% 10-year notes. The net proceeds were used to repay existing borrowings under credit facilities. On February 7, 2000, the company acquired Corporate Brand Foods America, Inc. ("CBFA") in an exchange of common shares. 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 of 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. 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 $195 million compared to $172 million in 1998. Significant projects with 1999 spending included beef facility 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. -25- 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. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 -26- 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. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is set forth in the Consolidated Financial Statements included herein at pages F-1 through F-34. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Incorporated by reference from the Proxy Statement, page 14, section entitled "INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS." PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from the Proxy Statement, pages 2-4, section entitled "ELECTION OF DIRECTORS" and reference is also made to the information regarding executive officers set forth in "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION -27- Incorporated by reference from the Proxy Statement, pages 9-12, section entitled "SUMMARY COMPENSATION TABLE"; "OPTION GRANTS TABLE," "AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE," "PERFORMANCE GRAPH," and from page 5, section entitled "ELECTION OF DIRECTORS," subsection "Information Regarding Directors' Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the Proxy Statement, page 2 and page 6, sections entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF MANAGEMENT." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Proxy Statement, pages 4-5, sections entitled "ELECTION OF DIRECTORS," subsection "Information Regarding the Board of Directors and its Committees" and from page 8, section entitled "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. The following financial information is incorporated by reference from the Annual Report, as identified below, or is found in this report. 1. Consolidated Financial Location Statements Report of Independent Accountants Page F-35 of this report Consolidated Statements of Earnings Page F-3 of this report Consolidated Balance Sheets Page F-2 of this report Consolidated Statements of Cash Flows Page F-5 and F-6 of this report Consolidated Statements of Changes in Page F-4 of this report Stockholders' Equity and Comprehensive Income Notes to Consolidated Financial Pages F-7 through F-34 Statements of this report -28- 2. Financial Statement Schedule Schedule II Valuation and Qualifying Page S-1 of this report Accounts and Reserves All other schedules are omitted because they are not applicable or not required. 3. Exhibits 3.1* Restated Certificate of Incorporation of IBP (filed as Exhibit No. 3.1. to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1996, File No. 1-6085). 3.2 Restated By-laws of IBP. 10.1 Registration Rights Agreement between IBP and the holders of restricted shares of IBP Common Stock (the holders received such restricted shares in exchange for common shares of CBFA in the CBFA acquisition). 10.5* IBP's 1987 Stock Option Plan (Compensatory Plan)(filed as Exhibit No. 28(a) to IBP's Registration Statement on Form S-8, dated January 5, 1988, File No. 33-19441). 10.5.1* Form of Stock Option Agreement (10/1/87) (Compensatory Plan) (filed as Exhibit No. 28(b) to IBP's Registration Statement on Form S-8, dated January 5, 1988, File No. 33-19441). 10.5.2* Form of Stock Option Agreement (12/31/87) (Compensatory Plan) (filed as Exhibit No. 28(c) to IBP's Registration Statement on Form S-8, dated January 5, 1988, File No. 33-19441). 10.5.3* IBP Officer Long-Term Stock Plan (Compensatory Plan) (filed as Exhibit No. 10.5.3 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 25, 1993, File No. 1-6085). 10.5.4* IBP Directors Stock Option Plan (Compensatory Plan) (filed as Exhibit No. 10.5.4 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 25, 1993, File No. 1-6085). 10.5.5* IBP 1993 Stock Option Plan (Compensatory Plan) (filed as Exhibit No. 10.5.5 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 25, 1993, File No. 1-6085). 10.5.6* 1996 Officer Long-Term Stock Plan (Compensatory Plan) (filed as Exhibit No. 10.5.6 to the Annual -29- Report on Form 10-K of IBP for the fiscal year ended December 28, 1996, File No. 1-6085). 10.5.7* 1996 Stock Option Plan (Compensatory Plan) (filed as Exhibit 10.5.7 to the Annual Report on Form 10- K of IBP for the fiscal year ended December 28, 1996. File No. 1-6085). 10.8* Form of IBP's Indemnification Agreement with officers and directors (Management Contract) (filed as Exhibit No. 10.8 to IBP's Registration Statement on Form S-1, dated August 19, 1987, File No. 1-6085). 10.21* Credit Agreement (Revolving/Term Credit Facility) dated as of December 21, 1995, between IBP, inc. and various lenders with First Bank National Association as Administrative Agent and Bank of America National Trust and Savings Association as Co-Agent. (filed as Exhibit No. 10.21 to the Annual Report on Form 10-K of IBP, for the fiscal year ended December 30, 1995, File No. 1-6085). 10.24* Employment Agreement, effective as of August 18, 1997, between IBP and Larry Shipley (Management Contract) (filed as Exhibit No. 10.24 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 27, 1997, File No. 1-6085). 10.25* Employment Agreement, effective as of March 1, 1997, between IBP and Richard L. Bond (Management Contract)(filed as Exhibit No. 10.25 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 27, 1997, File No. 1-6085). 10.26* Employment Agreement, effective as of March 1, 1997, between IBP and Eugene D. Leman (Management Contract)(filed as Exhibit No. 10.26 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 27, 1997, File No. 1-6085). 10.27* Employment Agreement, effective as of December 22, 1995 between IBP and Craig Hart (Management Contract)(filed as Exhibit 10.27 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 26, 1998, File No. 1-6085). 10.28* Text of Retirement Income Plan of IBP, inc. (As Amended and Restated Effective as of January 1, 1992), as amended. (Compensatory Plan) (filed as Exhibit No. 10.28 to the Annual Report on Form 10- K of IBP for the fiscal year ended December 26, 1992, File No. 1-6085). 21. Subsidiaries of IBP, inc. as of December 25, 1999. 22.* Matters submitted to vote of security holders (filed as Item 4 to the Quarterly Report on Form 10-Q for the 26 weeks ended June 26, 1999, File No. 1-6085). -30- 23.1 Consent of Independent Public Accountants (PricewaterhouseCoopers LLP). 27. Financial Data Schedule. __________________ * Incorporated herein by reference (b) Reports on Form 8-K Not Applicable (c) Other Matters For the purpose of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, IBP hereby undertakes as follows, which undertaking shall be incorporated by reference into IBP's Registration Statement on Form S-8 No. 33-19441 (filed January 5, 1988): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of IBP pursuant to the foregoing provisions, or otherwise, IBP has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by IBP of expenses incurred or paid by a director, officer or controlling person of IBP in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, IBP will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -31- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. IBP, inc. By: /s/ Robert L. Peterson ---------------------- Robert L. Peterson Chairman of the Board and Chief Executive Officer Date: 3/12/01 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date /s/ Robert L. Peterson Chairman of the Board 3/12/01 - ---------------------- and Chief Executive Robert L. Peterson Officer (principal executive officer) /s/ Larry Shipley Chief Financial 3/12/01 - ---------------------- Officer (principal Larry Shipley financial officer) /s/ Craig J. Hart Vice President and 3/12/01 - ---------------------- Controller Craig J. Hart /s/ Richard L. Bond Director 3/12/01 - ---------------------- Richard L. Bond /s/ John S. Chalsty Director 3/12/01 - ---------------------- John S. Chalsty /s/ Wendy L. Gramm Director 3/12/01 - ---------------------- Wendy L. Gramm -32- Signature Title Date /s/ John J. Jacobson, Jr. Director 3/12/01 - ----------------------- John J. Jacobson, Jr. /s/ Eugene D. Leman Director 3/12/01 - ---------------------- Eugene D. Leman /s/ Michael L. Sanem Director 3/12/01 - ---------------------- Michael L. Sanem /s/ Martin A. Massengale Director 3/12/01 - ---------------------- Martin A. Massengale /s/ JoAnn R. Smith Director 3/12/01 - ---------------------- JoAnn R. Smith -33- IBP, inc. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE IBP, Inc. and Subsidiaries: Consolidated Balance Sheets as of December 25,1999 F-2 and December 26, 1998 Consolidated Statement of Earnings for the Years F-3 ended 1999, 1998 and 1997 Consolidated Statements Of Changes In Stockholders' F-4 Equity And Comprehensive Income for the Years ended 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years F-5 to F-6 ended 1999, 1998, and 1997 Notes to Consolidated Financial Statements F-7 to F-34 Independent Auditors' Reports and Managements' F-35 to F-36 Report on Financial Statement Integrity Schedule II - Valuation and Qualifying Accounts S-1 and Reserves F-1 IBP, inc. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) Restated Restated December December 25, 26, 1999 1998 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 31,735 $ 27,254 Marketable securities - 1,400 Accounts receivable, less allowance for doubtful accounts of $20,050 and $12,111 794,996 599,999 Inventories (Note B) 554,840 405,418 Deferred income tax benefits (Note E) 60,902 51,761 Prepaid expenses 16,721 10,983 --------- --------- TOTAL CURRENT ASSETS 1,459,194 1,096,815 --------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land and land improvements 120,658 106,492 Buildings and stockyards 646,907 544,711 Equipment 1,287,358 1,096,571 --------- --------- 2,054,923 1,747,774 Accumulated depreciation and amortization (937,283) (843,937) --------- --------- 1,117,640 903,837 Construction in progress 127,264 168,256 --------- --------- 1,244,904 1,072,093 --------- --------- OTHER ASSETS: Goodwill, net of accumulated amortization of $184,088 and $158,808 893,064 724,089 Other 108,707 115,099 --------- --------- $3,705,869 $3,008,096 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses (Note D) $ 669,150 $ 565,517 Notes payable to banks (Note C) 447,960 140,967 Federal and state income taxes 135,809 152,122 Deferred income taxes (Note E) 3,361 1,818 Other 6,234 5,388 --------- --------- TOTAL CURRENT LIABILITIES 1,262,514 865,812 LONG-TERM OBLIGATIONS (Notes C and F) 586,528 575,522 DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes (Note E) - 15,474 Other 164,678 168,196 --------- --------- 164,678 183,670 --------- --------- COMMITMENTS AND CONTINGENCIES (Notes N and O) STOCKHOLDERS' EQUITY (Note G): Preferred stock, authorized 25,000,000 shares; none issued Common stock, $.05 par value per share; authorized 200,000,000 shares; issued 95,000,000 shares 4,750 4,750 Additional paid-in capital 400,177 405,278 Retained earnings 1,355,137 1,049,903 Accumulated other comprehensive income (8,600) (16,456) Treasury stock, at cost, 2,634,268 and 2,686,188 shares (59,315) (60,383) --------- --------- TOTAL STOCKHOLDERS' EQUITY 1,692,149 1,383,092 --------- --------- $3,705,869 $3,008,096 ========= ========= See notes to consolidated financial statements. F-2 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) $14,075,208 $12,848,635 $13,258,784 Cost of products sold 13,181,619 12,186,427 12,815,892 ---------- ---------- ---------- Gross profit 893,589 662,208 442,892 Selling, general and administrative expense 368,642 299,441 214,304 ---------- ---------- ---------- Earnings from operations 524,947 362,767 228,588 Interest: Incurred (59,585) (55,653) (50,001) Capitalized 8,589 7,976 6,933 Income 5,584 4,464 5,066 ---------- ---------- ---------- (45,412) (43,213) (38,002) ---------- ---------- ---------- Earnings before income taxes and extraordinary item 479,535 319,554 190,586 Income taxes (Note E) 165,071 124,555 71,798 ---------- ---------- ---------- Earnings before extraordinary item 314,464 194,999 118,788 ========== ========== ========== Extraordinary loss on early extinguishment of debt, less applicable taxes (Note F) - (14,815) - ---------- ---------- ---------- Net earnings $ 314,464 $ 180,184 $ 118,788 ========== ========== ========== Earnings per share (Note K): Earnings before extraordinary item $3.41 $2.11 $1.28 Extraordinary item - (.16) - ---- ---- ---- Net earnings $3.41 $1.95 $1.28 ==== ==== ==== Earnings per share- assuming dilution: Earnings before extraordinary item $3.37 $2.09 $1.27 Extraordinary item - (.16) - ---- ---- ---- Net earnings $3.37 $1.93 $1.27 ==== ==== ==== See notes to consolidated financial statements. F-3 IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (in thousands, except per share data) Accumulated Common Additional Other Shares Common Paid-in Retained Comprehensive Treasury Outstanding Stock Capital Earnings Income Stock Total -------------------------------------------------------------------------------- Restated balances, December 28, 1996 94,627 $ 4,750 $ 427,456 $ 769,426 $ (32) $ (7,718) $1,193,882 Comprehensive income: Net earnings - restated 118,788 118,788 Other comprehensive income: Foreign currency translation adjustments (6,082) (6,082) --------- Comprehensive income - restated 112,706 Dividends declared on common stock, $.10 per share (9,249) (9,249) Treasury shares purchased (3,800) (73,915) (73,915) Treasury shares delivered under employee stock plans 1759 (20,504) 26,150 5,646 ------ ----- -------- ------- ----- ------ --------- Restated balances, December 27, 1997 92,586 4,750 406,952 878,965 (6,114) (55,483) 1,229,070 --------- Comprehensive income: Net earnings - restated 180,184 180,184 Other comprehensive income: Foreign currency translation adjustments (10,342) (10,342) --------- Comprehensive income - restated 169,842 --------- Dividends declared on common stock, $.10 per share (9,246) (9,246) Treasury shares purchased (592) (12,370) (12,370) Treasury shares delivered under employee stock plans 320 (1,674) 7,470 5,796 ------ ----- -------- --------- ------ ------ --------- Restated balances, December 26, 1998 92,314 4,750 405,278 1,049,903 (16,456) (60,383) 1,383,092 --------- Comprehensive income: Net earnings - restated 314,464 314,464 Other comprehensive income: Foreign currency translation adjustments 7,856 7,856 --------- Comprehensive income - restated 322,320 --------- Dividends declared on common stock, $.10 per share (9,230) (9,230) Treasury shares purchased (326) (6,170) (6,170) Treasury shares delivered under employee stock plans 378 (5,101) 7,238 2,137 ------ ----- -------- --------- ------ ------ --------- Restated balances, December 25, 1999 92,366 $ 4,750 $ 400,177 $ 1,355,137 $ (8,600) $ (59,315) $1,692,149 ====== ===== ======= ========= ===== ====== ========= See Notes to consolidated financial statements. F-4
IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 52 Weeks Ended ----------------------------------- Restated Restated Restated December December December 25, 26, 27, 1999 1998 1997 ---------- ---------- --------- Inflows (outflows) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 314,464 $ 180,184 $ 118,788 Adjustments to reconcile net earnings to cash flows from operations: Depreciation and amortization 113,508 100,821 92,292 Amortization of intangible assets 26,544 25,405 17,638 Noncash variable stock compensation (11,991) 10,968 (1,872) Fixed assets impairment write-downs 29,351 - - Deferred income tax (benefit) provision (3,889) (6,445) 1,273 Extraordinary loss on extinguishment of debt - 14,815 - Provision for bad debts 15,507 1,890 514 Net gain/loss on disposal of fixed Assets 1,710 16,996 1,587 Net gain/loss on disposal of financings - - 210 Change in customer advances 12,000 (14,100) - Other operating cash inflows 14,897 14,392 10,471 Other operating cash outflows (4,603) (8,299) (2,739) Working capital changes, net of Effects of acquisitions: Accounts receivable (169,501) (33,960) (16,583) Inventories (96,283) (13,773) (11,761) Accounts payable and accrued liabilities 45,512 71,936 (21,901) Checks in process of clearance 20,576 (29,464) (7,715) -------- -------- -------- (6,662) 151,182 61,414 -------- -------- -------- Net cash flows provided by operating activities 307,802 331,366 180,202 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired (396,612) (78,332) (320,091) Capital expenditures (194,853) (172,112) (133,925) Proceeds from disposals of marketable securities 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 disposals of fixed assets 4,523 2,511 4,762 Insurance proceeds 3,329 190 65 Investment in notes receivable (8,000) - (3,544) Other investing cash inflows - - 3,772 Net cash flows used in investing ------- -------- ------- activities (597,972) (278,976) (286,481) F-5 52 Weeks Ended ----------------------------------- Restated Restated Restated December December December 25, 26, 27, 1999 1998 1997 ---------- ---------- --------- Inflows (outflows) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term debt 307,000 11,000 238,460 Purchase of treasury stock (6,170) (12,370) (73,915) Dividends paid (9,229) (9,252) (9,300) Exercise of stock options 2,137 3,238 6,505 Principal payments on long-term obligations (3,777) (114,371) (212,054) Proceeds from issuance of long-term debt 2,992 49,781 132,187 Premiums paid on early retirement of debt - (20,636) - -------- ------- ------- Net cash flows provided by (used in) financing activities 292,953 (92,610) 81,883 Effect of exchange rate on cash and cash equivalents 1,698 (1,548) (746) ------- ------ ------ Net change in cash and cash equivalents 4,481 (41,768) (25,142) Cash and cash equivalents at beginning of year 27,254 69,022 94,164 --------- -------- ------ Cash and cash equivalents at end of year $ 31,735 $ 27,254 $69,022 ========= ======== ====== See notes to consolidated financial statements. F-6 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 G, M and Q 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. 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. STATEMENT OF CASH FLOWS - For purposes of the statement of cash flows, management considers all highly liquid debt instruments purchased with original F-7 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 F-8 changes in circumstances indicate 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 are no reclassification adjustments to be reported in the periods presented. RECLASSIFICATIONS - Certain reclassifications have been made to prior financial statements to conform to the current year presentation. F-9 B. INVENTORIES: Inventories are comprised of the following: Restated December 25, December 26, 1999 1998 Product inventories: Raw materials $ 37,846 $ 22,552 Work in process 83,638 69,790 Finished goods 209,487 148,542 ------- ------- 330,971 240,884 Livestock 137,300 89,321 Supplies 86,569 75,213 ------- ------- $554,840 $405,418 ======= ======= C. CREDIT ARRANGEMENTS: At December 25, 1999, IBP had in place two committed revolving credit facilities totaling $600 million in potential borrowings. These facilities include a $500 million multi-year credit facility (the "Multi-Year Facility") and a $100 million revolving promissory note (the "Promissory Note"). From time to time, IBP also may use uncommitted lines of credit for some or all of its short-term borrowing needs. The Multi-Year Facility is a revolving facility with a maturity date of December 20, 2000. 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 are similar to those in existing credit facilities. There were total borrowings of $490 million outstanding under the revolving facilities at December 25, 1999, $315 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 $175 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 6.3%. During fiscal 1999, the maximum amount of borrowings under all of IBP's credit arrangements, including any amounts considered non-current, was $764 million. Average borrowings under IBP's credit arrangements and the weighted average interest rate during fiscal 1999 were $584 million and 5.4%. The comparable 1998 figures were average borrowings of $423 million and an average interest rate of 5.8%. IBP's credit facility agreements contain certain restrictive covenants that, among other things, (1) require the maintenance of a minimum debt service F-10 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 $275,183 $220,972 ------- ------- Checks in process of clearance 115,768 94,888 Accrued expenses: ------- ------- Employee compensation 86,504 74,728 Employee benefits 44,997 34,771 Property and other taxes 25,364 24,809 Marketing costs 20,962 14,352 Other 100,372 100,997 ------- ------- 278,199 249,657 ------- ------- $669,150 $565,517 ======= ======= E. INCOME TAXES: Income tax expense consists of the following: Restated Restated Restated 1999 1998 1997 -------- -------- -------- Current: Federal $145,260 $118,260 $ 72,000 State 20,600 13,380 3,825 Foreign 3,100 (640) (5,300) ------- ------- ------- 168,960 131,000 70,525 Deferred: ------- ------- ------- Federal (6,108) (6,774) 3,198 State (406) 480 300 Foreign 2,625 (150) (2,225) ------- ------- ------- (3,889) (6,444) 1,273 ------- ------- ------- $165,071 $124,556 $ 71,798 ======= ======= ======= F-11 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 2.7 3.0 1.7 Settlement of federal audit issues (2.7) - - Foreign tax items (1.6) (1.3) (1.9) Goodwill amortization 1.4 1.9 2.5 Officer stock options (0.6) 0.8 (0.3) Other, net 0.2 (0.4) 0.7 ---- ---- ---- 34.4% 39.0% 37.7% ==== ==== ==== 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 December 25, 26, 1999 1998 ---------- ---------- Deferred tax assets: Nondeductible accrued $ 104,026 $ 96,648 liabilities State tax credit carryforwards 9,140 8,543 Bad debt and claims reserves 7,050 4,372 Federal and state operating loss carryforwards 31,969 20,874 Other 3,989 2,987 --------- -------- Gross deferred tax assets 156,174 133,424 Valuation allowance (9,140) (8,543) --------- -------- Net deferred tax assets 147,034 124,881 --------- -------- Deferred tax liabilities: Fixed assets (69,737) (75,107) Intangible assets (15,544) (11,445) Other (3,847) (3,860) -------- ------- (89,128) (90,412) -------- ------- $ 57,906 $ 34,469 ======== ======= 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. F-12 At December 25, 1999, after considering utilization restrictions, the company's acquired tax loss carryforwards approximated $93.8 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: $20.6 million each in 2000, 2001, 2002 and 2003 and $11.4 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. F. LONG-TERM OBLIGATIONS: Long-term obligations are summarized as follows: December December 25, 26, 1999 1998 ---------- ---------- Revolving credit facilities $ 175,000 $ 175,000 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 Present value of minimum capital lease obligations 26,728 27,526 Other 13,725 1,076 --------- --------- 590,453 578,602 Less amounts due within one year 3,925 3,080 --------- --------- $ 586,528 $ 575,522 ========= ========= 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 $175 million at December 25, 1999 and December 26, 1998. Substantially all of the leased assets under capital leases can be purchased by IBP at the end of F-13 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): $176.0; $51.0; $1.0; $1.0 and $2.5. G. CAPITAL STOCK AND STOCK PLANS: 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. 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. 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 F-14 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 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 is recorded as described above for variable plan accounting and for fixed plan accounting is recorded based on the excess of the market price over the exercise price. 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 $314,464 $180,184 $118,788 Net earnings - pro forma 300,322 186,895 114,236 Earnings per share - as 3.41 1.95 1.28 reported Earnings per share - pro 3.25 2.02 1.23 forma Earnings per diluted share - as reported 3.37 1.93 1.27 Earnings per diluted share - pro forma 3.22 2.00 1.22 The weighted average fair values at date of grant for options granted at market value during 1999, 1998 F-15 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 ---------------------------------------- Number of Weighted Average Options Shares Price Per Share Exercisable Balance at --------- ---------------- ----------- December 27, 1997 4,125.2 17.85 1,846.3 Granted at market Value 208.7 21.37 Granted at a price below market value 434.2 16.56 Exercised (320.1) 11.44 Canceled (199.4) 21.64 ---------------------------------------- Balance at December 26, 1998 4,248.6 18.20 2,230.9 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: Range of Number Weighted Average Exercisable Outstanding Remaining Weighted Average 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 F-16 Range of Number Exercisable Exercisable Weighted Average 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 Share Delivery Restrictions: 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. H. SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental information on cash payments is presented as follows: 1999 1998 1997 -------- -------- -------- Interest, net of amounts Capitalized $ 47,906 $ 47,775 $ 37,670 Income taxes 193,721 74,343 39,017 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-ends 1999 and 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. F-17 There were no material realized or unrealized gains or losses for any derivative financial instruments in any of the fiscal years presented. The company monitors the risk of default by its financial instrument counterparties, all of which are major financial institutions, and does not anticipate nonperformance. Fair Value of Financial Instruments: The following methods and assumptions are used in estimating the fair value of each class of the company's financial instruments at December 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 $25 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. 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 $ 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 year 65,916 70,921 62,952 68,851 ------- ------ ------ ------ F-18 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) ------- ------ ------ ------ 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 F-19 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) K. EARNINGS PER SHARE: Restated For the Year Ended December 25, 1999 ------------------------------------ Earnings Shares Per Share (Numerator) (Denominator) Amount --------- ----------- --------- Basic EPS Net earnings $ 314,464 92,298 $3.41 Effect of Dilutive Securities ===== Employee stock plans - 991 -------- ------ Diluted EPS $ 314,464 93,289 $3.37 ======== ====== ===== Restated For the Year Ended December 26, 1998 Earnings Shares Per Share (Numerator) (Denominator) Amount Basic EPS Earning before extraordinary item $ 194,999 92,485 $2.11 Effect of Dilutive Securities ===== Employee stock plans - 874 -------- ------ Diluted EPS $ 194,999 93,359 $1.95 ======== ====== ===== Restated For the Year Ended December 27, 1997 Earnings Shares Per Share (Numerator) (Denominator) Amount Basic EPS Net earnings $118,788 92,651 $1.28 Effect of Dilutive Securities ===== Employee stock plans - 1,142 -------- ------ Diluted EPS $118,788 93,793 $1.27 ======== ====== ===== 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. F-20 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 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. 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. 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. 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. 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 F-21 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. 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 $11 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 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. F-22 Fiscal Year Ended -------------------- Restated Restated Dec. 25, Dec. 26, 1999 1998 (unaudited) (unaudited) Net sales $14,396,046 $13,618,468 Earnings from operations 470,654 391,190 Earnings before extraordinary item 242,118 199,678 Net earnings 242,118 184,863 Earnings per diluted share: Earnings before extraordinary item $2.60 $2.14 Net earnings 2.60 1.98 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, which will be 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 are not expected to be 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 year: 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) Net sales $624,632 $480,855 $236,712 EBITDA(1) 46,275 32,150 17,692 Net earnings 3,403 2,968 2,960 (1)Earnings before interest, taxes, depreciation and amortization M. BUSINESS SEGMENTS: Segment information has been prepared in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments F-23 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 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. F-24 Restated Restated Restated NET SALES 1999 1998 1997 ----------- ----------- ----------- Sales to unaffiliated customers: Beef Carcass $ 941,226 $ 956,893 $ 996,674 Beef Processing 7,424,784 6,914,891 7,147,926 Pork 2,131,996 2,156,055 2,471,169 Foodbrands America 1,819,355 1,229,401 857,943 All Other 1,757,847 1,591,395 1,785,072 ----------- ----------- ----------- $ 14,075,208 $ 12,848,635 $ 13,258,784 =========== =========== =========== Intersegment sales: Beef Carcass $ 7,293,431 $ 6,942,784 $ 7,337,055 Beef Processing 253,387 239,079 234,273 Pork 308,187 206,658 252,081 All Other 472,961 474,270 495,448 Intersegment elimination (8,327,966) (7,862,791) (8,318,857) ----------- ----------- ----------- $ - $ - $ - =========== =========== =========== 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 1,819,355 1,229,401 857,943 All Other 2,230,808 2,065,665 2,280,520 Intersegment elimination (8,327,966) (7,862,791) (8,318,857) ----------- ----------- ----------- $ 14,075,208 $ 12,848,635 $ 13,258,784 =========== =========== =========== 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 72,721 79,505 29,132 All Other 46,730 72,536 60,968 ----------- ----------- ----------- Total from segments 526,309 397,852 233,040 Corporate (1,362) (35,085) (4,452) ----------- ----------- ----------- Total earnings from operations 524,947 362,767 228,588 Net interest expense (45,412) (43,213) (38,002) ----------- ----------- ----------- Pre-tax earnings $ 479,535 $ 319,554 $ 190,586 =========== =========== =========== F-25 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 148,406 84,934 67,475 All Other 101,272 103,373 76,090 ----------- ----------- ----------- Total from segments 749,492 572,420 545,260 Corporate 45,504 27,579 18,865 ----------- ----------- ----------- $ 794,996 $ 599,999 $ 564,125 =========== =========== =========== Geographic location of property, plant and equipment, net United States $ 1,162,525 $ 995,155 $ 934,980 Canada 82,379 76,938 82,102 ----------- ----------- ----------- $ 1,244,904 $ 1,072,093 $ 1,017,082 =========== =========== =========== ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT, INCLUDING ACQUISITIONS 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 482,534 129,116 357,441 All Other 46,368 65,372 58,131 ----------- ----------- ----------- Total $ 591,465 $ 250,444 $ 454,016 =========== =========== =========== 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 39,284 28,116 18,925 All Other 21,831 21,706 23,259 ----------- ----------- ----------- Total from segments 112,222 99,531 90,891 Corporate 1,286 1,290 1,401 ----------- ----------- ----------- Total $ 113,508 $ 100,821 $ 92,292 =========== =========== =========== Of intangible assets: Foodbrands America $ 17,987 $ 13,110 $ 8,694 All Other 997 3,362 1,338 ----------- ----------- ----------- Total from segments 18,984 16,472 10,032 Corporate 7,560 8,933 7,606 ----------- ----------- ----------- Total $ 26,544 $ 25,405 $ 17,638 =========== =========== =========== F-26 NET SALES BY GEOGRAPHIC LOCATION OF CUSTOMERS 1999 1998 1997 ----------- ----------- ----------- United States $11,916,663 $10,952,780 $11,167,708 Japan 845,150 784,624 909,855 Canada 510,801 421,701 508,568 Korea 224,131 134,271 224,272 Mexico 190,627 173,074 125,533 Other foreign countries 387,836 382,185 322,848 ----------- ----------- ----------- $14,075,208 $12,848,635 $13,258,784 =========== =========== =========== 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 $68 million. Aggregate maturities for each of the five fiscal years subsequent to 1999 are (in millions) $17.5; $10.1; $7.1; $5.2; and $4.4. The company's rental expense for all operating leases was (in millions) $25.2; $21.9; and $15.9 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. 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 F-27 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 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. F-28 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 $3,097,652 $3,478,467 $3,648,390 $3,850,699 $14,075,208 Gross profit 179,148 208,034 263,631 242,776 893,589 Net earnings 66,317 63,711 108,228 76,208 314,464 Earnings per share .72 .69 1.17 .83 3.41 Earnings per diluted share .71 .68 1.16 .82 3.37 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 Q. The following quantifies the adjustments made to increase (decrease) the amounts originally reported to those presented above. Restated Restated Restated Restated First Second Third Fourth Restated Quarter Quarter Quarter Quarter Annual ---------- ---------- ---------- ---------- ----------- DFG Gross profit - - - $ (8,658) $(8,658) Net earnings - - - (9,621) (9,621) Earnings per share - - - (.10) (.10) Earnings per diluted share - - - (.09) (.10) STOCK OPTIONS Net earnings $ 9,419 $ (2,532) $ (377) $ 4,316 $ 10,824 Earnings per share .10 (.03) (.01) .05 .12 Earnings per diluted share .10 (.03) 0.00 .04 .11 F-29 Restated Restated Restated Restated First Second Third Fourth Restated 1998 Quarter Quarter Quarter Quarter Annual ---------- ---------- ---------- ---------- ----------- Net sales $3,224,944 $3,334,340 $3,210,689 $3,078,662 $12,848,635 Gross profit 103,829 126,141 193,251 238,987 662,208 Earnings before extraordinary item 11,797 36,771 63,968 82,463 194,999 Net earnings (loss) (3,018) 36,771 63,968 82,463 180,184 Earnings per share: Earnings before extraordinary item .13 .40 .69 .89 2.11 Net earnings (loss) (.03) .40 .69 .89 1.95 Earnings per diluted share: Earnings before extraordinary item .13 .39 .69 .88 2.09 Net earnings (loss) (.03) .39 .69 .88 1.93 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 Q. 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) (.10) (.10) Earnings per diluted share (.02) .03 (.01) (.10) (.10) Q. 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 F-30 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 earnings per diluted share by $0.10 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 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. F-31 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 SHEETS December 25, 1999 As Previously Stock As Reported DFG Options Restated ---------- ---------- ---------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 32,164 $ (429)$ - $ 31,735 Accounts receivable 798,551 (3,555) - 794,996 Inventories 559,625 (4,785) - 554,840 Deferred income tax benefits 58,296 2,606 - 60,902 Prepaid expenses 18,293 (1,572) - 16,721 TOTAL CURRENT ASSETS 1,466,929 (7,735) - 1,459,194 Other assets 108,342 - 365 108,707 TOTAL ASSETS 3,713,239 (7,735) 365 3,705,869 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses 663,974 5,176 - 669,150 Federal and state income taxes 139,099 (3,290) - 135,809 TOTAL CURRENT LIABILITIES 1,260,628 1,886 - 1,262,514 Deferred income taxes 31 - (31) - Other 157,284 - 7,394 164,678 STOCKHOLDERS' EQUITY: Retained earnings 1,371,756 (9,621) (6,998) 1,355,137 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 3,713,239 (7,735) 365 3,705,869
F-32 CONSOLIDATED BALANCE SHEETS December 26, 1998 Deferred Credits and Other Liabilities: Deferred income taxes 17,037 - (1,563) 15,474 Other 148,811 - 19,385 168,196 Retained earnings 1,067,725 - (17,822) 1,049,903 Stockholders' equity 1,400,914 - (17,822) 1,383,092 CONSOLIDATED STATEMENTS OF EARNINGS 52 Weeks Ended December 25, 1999 As Previously Stock As Reported DFG Options Restated ---------- ---------- ---------- ---------- Cost of products sold $13,172,961 $ 8,658 $ - $13,181,619 Selling, general and administrative expenses 373,774 6,859 (11,991) 368,642 Earnings from operations 528,473 (15,517) 11,991 524,947 Income taxes 169,800 (5,896) 1,167 165,071 Net earnings 313,261 (9,621) 10,824 314,464 Earnings per share - Basic $3.39 $(0.10) $0.12 $3.41 Earnings per share - Diluted $3.36 $(0.10) $0.11 $3.37 CONSOLIDATED STATEMENT OF EARNINGS 52 Weeks Ended December 26, 1998 As Previously Stock As Reported DFG Options Restated ---------- ---------- ---------- ---------- Selling, general and administrative expenses $ 288,473 $ - $ 10,968 $ 299,441 Earnings from operations 373,735 - (10,968) 362,767 Income taxes 125,700 - (1,145) 124,555 Net earnings 190,007 - (9,823) 180,184 PER SHARE DATA: Earnings per share: Earnings before $2.21 $ - $(0.10) $2.09 extraordinary item Extraordinary loss (0.16) - - (0.16) Net earnings $2.05 $ - $(0.10) $1.95 Earnings per share - assuming dilution: Earnings before $2.19 $ - $(0.10) $2.09 extraordinary item Extraordinary loss (0.16) - - (0.16) Net earnings 2.03 $ - $(0.10) $1.93
F-33 CONSOLIDATED STATEMENT OF EARNINGS 52 Weeks Ended December 27, 1997 As Previously Stock As Reported DFG Options Restated ---------- ---------- ---------- ---------- Selling, general and administrative expenses $ 216,176 $ - (1,872) 214,304 Earnings from operations 226,716 - 1,872 228,588 Income taxes 71,700 - 98 71,798 Net earnings 117,014 $ - 1,774 118,788 PER SHARE DATA: Earnings per share: Earnings before extraordinary item $1.26 $ - $0.02 $1.28 Extraordinary loss - - - - Net earnings $1.26 $ - $0.02 $1.28 Earnings per share - assuming dilution: Earnings before extraordinary item $1.25 $ - $0.02 $1.27 Extraordinary loss - - - - Net earnings $1.25 $ - $0.02 $1.27
CONSOLIDATED STATEMENT OF CASH FLOWS 52 Weeks Ended December 25, 1999 Reclass As Checks in Previously Process of As Reported DFG Impact Clearance Restated --------- --------- --------- --------- Net cash flows provided by operating activities $ 287,655 $ (429) $ 20,576 $ 307,802 Net cash flows provided by financing activities 313,529 - (20,576) 292,953 Net change in cash and cash equivalents 4,910 (429) - 4,481 Cash at end of year 32,164 (429) - 31,735 52 Weeks Ended December 26, 1998 Net cash flows provided by operating activities $ 360,830 $ - $ (29,464) $ 331,366 Net cash flows used in financing activities $(122,074) $ - $ 29,464 $ (92,610) 52 Weeks Ended December 27, 1997 Net cash flows provided by operating activities $ 187,917 $ - $ (7,715) $ 180,202 Net cash flows provided by financing activities 74,168 - 7,715 81,883
F-34 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 consolidated financial position of IBP, inc. and subsidiaries at December 25, 1999 and December 26, 1998, and the consolidated 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. 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 Q, 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 Q and M for which the date is March 2, 2001 F-35 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. 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 that 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 Financial Chief Executive Officer Officer IBP, inc. IBP, inc. F-36 IBP, inc. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Fiscal Years 1997, 1998, and 1999 (In thousands) Allowance for Doubtful Accounts ------------ Balance, December 28, 1996 $ 9,873 Amounts charged to costs and expenses 514 Recoveries of amounts previously written off 39 Write-off of uncollectible accounts (829) Acquired in business combinations 511 Foreign currency translation (45) ------ Balance, December 27, 1997 10,063 Amounts charged to costs and expenses 1,890 Recoveries of amounts previously written off 231 Write-off of uncollectible accounts (101) Acquired in business combinations 120 Foreign currency translation (92) ------ Balance, December 26, 1998 12,111 Amounts charged to cost and expenses 15,507 Recoveries of amounts previously written off 100 Write-off of uncollectible accounts (8,147) Acquired in business combinations 412 Foreign currency translation 67 ------- Balance, December 25, 1999 $ 20,050 ======= S-1 EX-23 2 pwcconsent.txt INDEPENDENT ACCOUNTANTS' CONSENT Consent of Independent Accountants We consent to the incorporation by reference in the registration statement of IBP, inc. on Form S-3 (File No. 33-64459) and on Form S-8 (File No. 33-19441) of our report dated February 7, 2000, and March 2, 2001, on our audits of the consolidated financial statements and financial statement schedule of IBP, inc. as of December 25, 1999 and December 26, 1998, and for each of the three years in the period ended December 25, 1999, which report is included in this Form 10-K. /s/ PricewaterhouseCoopers LLC - ------------------------------ Omaha, Nebraska March 12, 2001 EX-27 3 r9799fds10k.xfd RESTATED FDS 1997, 1998, 1999
5 Restated for adjustments for irregularities and misstatements at one of the company's subsidiaries (1999 only) and the application of variable plan accounting for certain stock options (all years). 1,000,000 YEAR YEAR YEAR Dec-25-1999 Dec-26-1998 Dec-27-1997 Dec-25-1999 Dec-26-1998 Dec-27-1997 32 27 69 0 1 3 815 612 574 20 12 10 555 405 390 1,459 1,097 1,084 2,182 1,916 1,792 937 844 775 3,706 3,008 2,838 1,263 866 877 587 576 568 0 0 0 0 0 0 5 5 5 1,688 1,378 1,232 3,706 3,008 2,839 14,075 12,849 13,259 14,075 12,849 13,259 13,182 12,186 12,816 13,182 12,186 12,816 369 299 214 0 0 0 45 43 38 480 320 191 165 125 72 314 180 119 0 0 0 0 (15) 0 0 0 0 314 195 119 3.41 2.11 1.28 3.37 2.09 1.27 Earnings before extraordinary item Earnings before extraordinary item 12-26-98 12-26-98
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