-----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, QSoAA4s9w0VBRSE1b8DXAv+1AL3tlfbHz3mRS6FycWKZJMclRDLj1GAVQz00Wq7/ xGRD91O2teqIl3F213kFOQ== 0000052477-98-000009.txt : 19980507 0000052477-98-000009.hdr.sgml : 19980507 ACCESSION NUMBER: 0000052477-98-000009 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980506 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBP INC CENTRAL INDEX KEY: 0000052477 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 420838666 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-06085 FILM NUMBER: 98610968 BUSINESS ADDRESS: STREET 1: IBP AVE STREET 2: P O BOX 515 CITY: DAKOTA CITY STATE: NE ZIP: 68731 BUSINESS PHONE: 4024942061 MAIL ADDRESS: STREET 1: IBP AVE STREET 2: P O BOX 515 CITY: DAKOTA CITY STATE: NE ZIP: 68731 FORMER COMPANY: FORMER CONFORMED NAME: IOWA BEEF PROCESSORS INC /PRED/ DATE OF NAME CHANGE: 19821109 FORMER COMPANY: FORMER CONFORMED NAME: IOWA BEEF PACKERS INC DATE OF NAME CHANGE: 19701130 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 27, 1997 ______________________________ IBP, inc. DELAWARE CORPORATION 42-0838666 (State of Incorporation) (Employer Identification Number) IBP AVENUE POST OFFICE BOX 515 DAKOTA CITY, NE 68731 (Address) (Zip Code) Telephone Number: (402) 494-2061 _________________________________________________ Securities registered pursuant to section 12(b) of Act: Common Stock Registered with the New York Stock Exchange and the Pacific Stock Exchange. Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Security Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained in definitive Proxy Statement incorporated by reference in Part III of this Form 10-K. The aggregate market value of the registrant's common stock held by non-affiliates (91,974,553 shares) based on the New York Stock Exchange average bid and ask price on March 24, 1998, was approximately $2.14 billion. As of March 24, 1998, the registrant had outstanding 92,565,108 shares of its common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1997 Annual Report to Stockholders (the "Annual Report") are incorporated by reference in Parts I, II and IV of this Report. Portions of the registrant's definitive Proxy Statement dated March 18, 1998, (the "Proxy Statement") are incorporated by reference in Part III of this Report. Other documents incorporated by reference in this Report are listed in the Exhibit Index on pages 16 and 17. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES General IBP, inc., ("IBP") a Delaware corporation, principally produces fresh and processed beef and pork products. IBP's primary products include boxed beef and fresh pork which are marketed mainly in the United States to grocery chains, meat distributors, wholesalers, retailers, restaurant and hotel chains, and processors who produce cured and smoked products, such as bacon, ham, luncheon meats and sausage items. In addition, IBP produces frozen and refrigerated food products for the foodservice industry. IBP also produces inedible allied products, such as hides and other items used to manufacture products such as leather, animal feed and pharmaceuticals, and edible allied products, which include variety meat items. 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 IBP Avenue, Post Office Box 515, Dakota City, Nebraska 68731-0515; its telephone number is (402) 494-2061. All references to "IBP" include IBP, inc. and its subsidiaries. IBP operates 10 fed beef carcass production facilities in seven cattle-producing states and one in Canada, which reduce live cattle to dressed carcass form. Eight of these locations include processing facilities which conduct fabricating operations to produce boxed beef. IBP operates four cow boning facilities in Iowa, Nebraska and Texas, which reduce cows and bulls to dressed carcass form and boneless meat product. IBP also operates one ground beef facility in Nebraska. Fed beef consists primarily of young steers and heifers specifically raised for beef consumption. Cows and bulls processed by IBP are primarily breeding or dairy stock which have been culled for various reasons. IBP operates six pork carcass facilities in Indiana, Iowa and Nebraska which reduce live hogs to dressed carcass form. IBP operates seven processing facilities which conduct fabricating operations to produce boxed pork. The production process for pork is similar to that employed in the beef operation. In 1997, IBP completed the acquisitions of Foodbrands America, Inc. ("Foodbrands") and The Bruss Company ("Bruss") which are now held as subsidiaries of IBP. Foodbrands and Bruss each are extensions of IBP's fresh beef and pork business, offering a wide range of value-added food products to IBP's customers. Foodbrands manufactures and markets frozen and refrigerated food products such as pepperoni, beef and pork toppings, pizza crusts, appetizers, Mexican and Italian foods, soups, sauces, side dishes, and branded and processed meats. Bruss manufactures and markets high quality, portion-controlled steaks, pork chops and other products. The following table reflects the approximate percentages of revenues during the last three fiscal years from IBP's principal product categories, all of which are within one industry segment: 1997 1996 1995 ---- ---- ---- Processed Beef Products 61% 62% 64% Beef Carcasses (1) 4 4 5 Processed Pork Products 21 20 17 Beef And Pork Allied Products 14 14 14 --- --- --- 100% 100% 100% === === === (1) Represents beef carcasses sold to third parties that are not further processed by IBP. History of IBP's Business IBP was first incorporated in 1960. It began operations in 1961 with a single fed beef carcass production facility located near Denison, Iowa, in what was then the nation's major cattle-producing region. IBP grew in the Northern and Central Plains states over the following nine years and added beef plants in Dakota City, Nebraska; Emporia, Kansas; Luverne, Minnesota; and West Point, Nebraska. IBP expanded into the Southern Plains in 1975, when it built its Amarillo, Texas, facility near the large commercial feedlot operations of that region. In 1976, it moved into the Pacific Northwest through the acquisition and expansion of plants in Pasco, Washington, and Boise, Idaho. Company expansion continued in 1980 with construction of a facility in Finney County, Kansas, and in 1983 with the purchase and expansion of a plant in Joslin, Illinois. In 1990, IBP opened its Lexington, Nebraska, fed beef plant and in 1994 IBP purchased Lakeside Farm Industries, Ltd. ("Lakeside"), an agribusiness company with a fed beef plant in Brooks, Alberta, Canada. Lakeside is IBP's first plant outside of the United States. In March of 1998, IBP discontinued operations at its Luverne, Minnesota, facility. IBP began its cow boning operations in 1995 by acquiring facilities in Tama, Iowa; Gibbon, Nebraska; and Sealy, Texas. In 1996, IBP acquired its fourth cow boning facility in Palestine, Texas. These plants supplement IBP's expansion into hamburger patty production. IBP increased its hamburger patty production capabilities in 1997 with the acquisition of the Columbus, Nebraska, ground beef facility from Hudson Foods, Inc. 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. In 1997, IBP discontinued operations at the carcass production facility and the ham processing facility in Council Bluffs, Iowa. In 1990, IBP added its first value-added operation when a cooked meats facility was added to the Waterloo, Iowa pork facility. This operation processed fresh meat into value-added, consumer-ready items such as pork and beef pizza toppings. In 1994, IBP purchased Prepared Foods, Inc. from International Multifoods, Inc. with a plant in Santa Teresa, New Mexico. In 1995, IBP purchased and renovated a facility in Columbia, South Carolina. The Santa Teresa and Columbia facilities process fresh meat into value-added, consumer-ready items. In 1997, IBP increased its presence in the value-added marketplace with the Foodbrands and Bruss acquisitions. In addition to the three IBP value-added facilities listed above which have been put under Foodbrands' management, Foodbrands operates facilities in Rialto, California; Riverside, California; Cherokee, Iowa; Edwardsville, Kansas; South Hutchinson, Kansas; Hutchinson, Kansas; Carthage, Missouri; Concordia, Missouri; Piedmont, Missouri; Albuquerque, New Mexico; New Rochelle, New York; Oklahoma City, Oklahoma; Dallas, Texas; Fort Worth, Texas; Jefferson, Wisconsin; and Green Bay, Wisconsin. The Bruss Company operates one processing facility in Chicago, Illinois. Prior to August 1981, when it was acquired by Occidental Petroleum Corporation ("Occidental"), IBP was a publicly-held corporation that was 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 no longer owns any shares of IBP Common Stock. Operations Cattle and Hog Supplies IBP does not currently have facilities of its own to raise cattle or hogs in the United States. However, in 1997, in order to provide a secure supply of cattle to its Washington and Idaho facilities, IBP entered into a risk-sharing arrangement with a cattle producer in the Northwest for the production of cattle. IBP's Canadian subsidiary, Lakeside, has cattle feeding facilities, other agricultural divisions and a beef carcass production and boxed beef processing facility. In 1997, Lakeside's feedlots provided approximately 18% of that facility's live cattle needs. IBP's main supply of live cattle and hogs is purchased by IBP buyers who are trained to select high quality animals that are candidates for higher yields. IBP's buyers purchase cattle and hogs on a daily basis, generally a few days before the animals are required for processing. Live animals are generally held in IBP's holding pens for only a few hours. Production Process-Beef and Pork IBP's fed beef carcass production facilities reduce live fed cattle to dressed carcass form and process allied products. IBP's beef processing facilities conduct fabricating operations to produce boxed beef. IBP's fed carcass and beef processing facilities operated in 1997 at approximately 85% and 83%, respectively, of their production capacities. IBP's cow boning facilities produce beef trimmings and boneless cuts of beef that are further processed by IBP and which are sold to customers who produce hamburger, sausage and deli meats. IBP's cow boning facilities operated in 1997 at approximately 57% of their production capacity. IBP's Columbus, Nebraska ground beef facility was acquired in the fall of 1997 and is still in its start-up phase. 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 1997, IBP's pork facilities operated at approximately 71% of their production capacities. Throughout production, edible beef, cow boning and pork allied products, such as variety meat items, are segregated and prepared for shipment or further refinement. Inedible beef, cow boning and pork products derived from processing operations are used in the manufacture of leather, animal feed, gelatin, pharmaceuticals and cosmetics. Eight of IBP's fed beef and cow boning plants include hide treatment facilities. The majority of the hides from IBP's other fed beef and cow boning plants are transported to these facilities, which include brine curing operations and, in four locations, chrome hide tanneries. The chrome tanning process produces a semifinished product that is shipped to leather good manufacturers worldwide. Brine-cured hides are sold to other tanneries. IBP is the largest chrome tanner of cattle hides in the United States. Production Process-Value-Added Products IBP's value-added 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, ethnic foods, soups, sauces, side dishes and pizza crusts. Due to variances in product mix that may be processed at a value-added facility, it is difficult to estimate a facility's capacity. However, in 1997, IBP estimates the value-added facilities operated at approximately 70% to 75% of their production capacity. Facilities The corporate headquarters of IBP are located primarily in Dakota City, Nebraska. IBP is constructing a new corporate headquarters in Dakota Dunes, South Dakota, that is expected to be completed in the summer of 1998. IBP believes that its plants are among the most modern in the world and strives to maintain and enhance its facilities. Generally, plants and additions are designed and constructed by IBP's personnel. IBP generally considers its existing plants and equipment to be in excellent condition. IBP's capital spending for 1998 is expected to be in the range of $175 million, which includes expenditures for environmental compliance activities. Its principal plants as of December 27, 1997, are described below. Beef IBP's eleven fed beef carcass production facilities are located in the states of Idaho, Illinois, Iowa, Kansas, Minnesota, Nebraska, Texas and Washington. IBP's twelfth fed beef carcass production facility is in Alberta, Canada. At these locations, eight have processing facilities, eight have hide treatment or tanning operations, five have cold storage freezer operations and one has a tallow refining plant. IBP's four cow boning facilities are located in Iowa, Nebraska and Texas. IBP also has a ground beef processing facility in Nebraska. Pork IBP's six pork carcass production and seven processing facilities are located in the states of Indiana, Iowa and Nebraska. At these locations, four have cold storage freezer operations and two have skinning operations. Value-Added IBP's twenty-one value-added facilities are located in California, Iowa, Kansas, Missouri, Nebraska, New Mexico, New York, Oklahoma, South Carolina, Texas, and Wisconsin. Sales IBP's customers for beef, pork and value-added products include domestic and international grocery chains, meat distributors, wholesalers, retailers, warehouse clubs, foodservice distributors, restaurant and hotel chains, and meat processors who produce cured and smoked products, such as bacon, ham, luncheon meat and sausage items. Most sales are made pursuant to daily orders as opposed to long-term supply contracts. In each of the past three years, IBP's largest beef customer accounted for less than 4% of its annual beef net sales, and its largest pork customer accounted for less than 7% of its net pork gross 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 1997, export sales accounted for approximately 13% of IBP's net sales, which compares to approximately 13% in fiscal 1996 and 14% in fiscal 1995. 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 and Pork Most IBP beef and pork products are shipped by trucks, generally from plants located closest to the purchaser, although other plants may supplement such deliveries, depending upon prevailing supplies and product demand. Value-Added IBP's value-added products are transported by independent carriers from its distribution/customer service centers in Edwardsville, Kansas and Rialto, California, or are shipped directly from the production facility with a view toward achieving an efficient, cost-effective method of distribution. Customer requirements vary from the need for large quantities of a limited number of products to small quantities of a number of items, each requiring a different distribution method. From the distribution centers, orders for customers of the different divisions can be filled and delivered in a single shipment regardless of the variety of products ordered or the location of the manufacturing facility at which they are produced. The company also can combine for shipment the orders of many smaller customers in the same geographic region. Management believes this flexible distribution system allows the company to provide superior service to its customers by reducing the time between the placement of customer orders and delivery of the company's products. This also lowers the customer's shipping costs through the elimination of higher-cost, fragmented deliveries. Competition Beef 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's information systems prepare a report on each lot that compares the actual yield and quality to the buyer's initial estimate. This enables IBP to monitor the quality of various cattle producers and to measure the skill of its cattle buyers, both of which are critical factors in determining IBP's success and competitiveness. IBP's hog buyers generally purchase hogs based upon an average daily bid price. The average daily bid price is adjusted for each producer by tracking the producer's yield and quality results. From the results of the producer's prior sales, IBP is able to generate a discount or a premium which adjusts the average daily bid for that individual producer. IBP believes this purchasing system is one of the most advanced and accurate methods for establishing fair prices in the industry. In addition to price, product quality, product mix, location and service are important competitive elements in the sale of fresh beef and pork products. IBP is the largest producer of fresh beef and one of the largest producers of pork products in the United States. IBP believes that its two largest beef competitors in 1997 were Monfort, a subsidiary of ConAgra, Inc. ("ConAgra") and Excel Corporation, a subsidiary of Cargill, Incorporated. It believes that its largest pork competitors in 1997 were Smithfield Foods Inc.; ConAgra; and Hormel Foods Corp. Value-Added IBP's value-added products are sold in highly competitive markets competing with a significant number of companies of various sizes. The principal competitive factors in these markets are price, service, innovative products, and quality. Employees As of December 27, 1997, IBP had approximately 38,000 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 14,700 hourly employees at fourteen of IBP's 44 production facilities are represented by labor organizations. The labor contracts applicable to these plants expire as follows: Contract Expiration Plant Union Date - ------------------------- ------------------------------ ------------------ Amarillo, Texas Teamsters (1) November 2002 Chicago, Illinois (3) Teamsters (1) April 1998 Pasco, Washington Teamsters (1) May 1999 Rialto, California Teamsters (1) September 1998 Tama, Iowa Teamsters (1) January 2001 Albuquerque, New Mexico UFCW (2) November 2000 Cherokee, Iowa UFCW (2) March 1999 Chicago, Illinois UFCW (2) July 1999 Concordia, Missouri UFCW (2) June 2001 Dakota City, Nebraska UFCW (2) August 1999 Jefferson, Wisconsin UFCW (2) June 1998 Joslin, Illinois UFCW (2) December 2000 Perry, Iowa UFCW (2) April 1999 Riverside, California UFCW (2) May 2001 Rialto, California (4) UFCW (2) May 2001 Waterloo, Iowa UFCW (2) September 1998 _________________ (1) Teamsters local unions affiliated with The International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America. (2) United Food and Commercial Workers, International Union, AFL-CIO. (3) The Teamsters contract at the Chicago, Illinois, facility covers only those employees working in distribution. (4) The UFCW labor contract at the Rialto, California, facility covers only those employees working in distribution. Regulatory Matters IBP's operations are subject to the constant inspection and regulation of the United States Department of Agriculture (the "USDA"), including (i) regulations of the USDA's 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 1997, expenditures to maintain compliance with such regulations cost the company approximately $15 million. IBP believes that it is in substantial compliance with such applicable laws and regulations. IBP is not aware of any violations of, or pending changes in, such laws and regulations that are likely to result in material penalties or material increases in compliance costs. IBP incurred $8 million in capital expenditures for environmental control facilities in fiscal 1997 and anticipates capital expenditures of approximately $23 million in fiscal 1998. EXECUTIVE OFFICERS OF THE REGISTRANT Age at Positions With IBP and January 27, Five-Year Employment Name 1998 History - ------------------ ---------- ----------------------------- Richard L. Bond 50 President and Chief Operating Officer since 1997; Director since 1995; 1995 - 1997 President, Fresh Meats; 1994-1995 Executive Vice President, Beef; 1989-1994 Group Vice President, Beef Sales and Marketing; 1982-1989 Vice President, Boxed Beef Sales and Marketing Kenneth W. Browning, Jr. 48 Executive Vice President since 1996; 1989-1996 Senior Vice President, Hide Division; 1982-1989 Vice President, Hides R. Randolph Devening 55 Chief Executive Officer and President, Foodbrands America, Inc. since 1994; Chairman of the Board, Foodbrands America, Inc. 1994 to 1997. Craig J. Hart 42 Vice President and Controller since 1995; 1993-1995 Assistant Vice President and Controller; 1990-1993 Controller David C. Layhee 53 President, Value-Added Ground Meats since 1997; 1995 - 1997 President, Consumer Products; 1994- 1995 Executive Vice President, Design Products; 1989-1994 Group Vice President, Design Products; 1983-1989 Group Vice President, Sales & Marketing Eugene D. Leman 55 President, Fresh Meats since 1997; Director since 1989; 1995 - 1997 President, Allied Group; 1986-1995 Executive Vice President, Pork Division; 1981-1986 Group Vice President, Pork Division James V. Lochner 45 Executive Vice President since 1995; 1993-1995 Senior Vice President, Technical Services; 1989- 1993 Vice President, Technical Services; 1986- 1989 Assistant Vice President Quality Control, Beef; 1984-1986 Director, Quality Control Charles F. Mostek 50 Executive Vice President since 1995; 1989-1995 Vice President, Beef Sales; 1985-1989 Vice President, Slaughter Division Sales; 1981-1985 Assistant Vice President, Carcass Grading and Administration Robert L. Peterson 65 Chairman of the Board of Directors since 1981; Chief Executive Officer since 1980; Director since 1976; 1979-1995 President Kenneth L. Rose 53 Executive Vice President since 1995; 1989-1995 Senior Vice President, Logistics Services; 1982- 1989 Vice President, Transportation Jerry S. Scott 52 Executive Vice President since 1995; 1986-1995 Vice President, Pork Operations Larry Shipley 42 President, IBP Enterprises since 1997; 1995 - 1997 Executive Vice President, Corporate Development; 1995 Senior Vice President, Corporate Development; 1994-1995 Assistant to the Chairman; 1989-1994 Assistant to the President. ITEM 3. LEGAL PROCEEDINGS Incorporated by reference from the Annual Report, page 41, section entitled "Notes to Consolidated Financial Statements," at note "N. Commitments and Contingencies." The Annual Report is an exhibit to this Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of IBP's security holders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Annual Report, page 35, section entitled "Consolidated Statements of Changes in Stockholders' Equity"; and from page 42, section entitled "Notes to Consolidated Financial Statements," at note "O. Quarterly Financial Data (Unaudited)". IBP's Common Shares were held by approximately 6,600 stockholders of record at year-end 1997. The Common Stock is listed on the New York and Pacific Stock Exchanges. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data (in thousands, except net sales and per share data) Fiscal Year Ended ----------------------------------------------------- Dec. 27, Dec. 28, Dec. 30, Dec. 31, Dec. 25, 1997 1996 1995 1994 (1) 1993 --------- ---------- --------- --------- --------- OPERATIONS: Net sales (in millions) $13,258.8 $12,538.8 $12,667.6 $12,075.4 $11,671.4 Gross profit 442,892 443,582 604,068 460,109 258,666 Selling, general and administrative expense 216,176 120,674 123,972 112,772 84,197 Earnings from operations 226,716 322,908 480,096 347,337 174,469 Interest expense, net (38,002) (3,373) (20,784) (38,448) (43,212) Income taxes 71,700 120,800 179,200 126,600 53,800 Extraordinary loss (2) - - (22,189) - - Accounting change (3) - - - - 12,626 Net earnings 117,014 198,735 257,923 182,289 90,083 PER SHARE DATA: Earnings per share: Earnings before extra. item, accounting change $1.26 $2.10 $2.96 $1.92 $ .82 Extraordinary loss (2) - - (.23) - - Accounting change (3) - - - - .13 Net earnings 1.26 2.10 2.73 1.92 .95 Earnings per share - assuming dilution: Earnings before extra. item, accounting change $1.25 $2.07 $2.92 $1.90 $ .81 Extraordinary loss (2) - - (.23) - - Accounting change (3) - - - - .13 Net earnings 1.25 2.07 2.69 1.90 .94 Dividends per share .10 .10 .10 .10 .10 FINANCIAL CONDITION: Working capital $207,109 $540,903 $427,241 $359,238 $336,668 Total assets 2,838,941 2,174,495 2,027,601 1,865,463 1,538,907 Long-term obligations 568,281 260,008 260,752 361,760 460,723 Stockholders' equity 1,237,069 1,203,655 1,022,939 780,494 612,796 (1) 53-week year. (2) Extraordinary loss on early extinguishment of debt. (3) Cumulative effect of change in accounting for income taxes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the Annual Report, pages 43- 44, section entitled "Management's Discussion and Analysis." In the first quarter 1998, IBP, inc. purchased substantially all of the $112 million of 10.75% Senior Subordinated Notes due 2006, which were obligations of its wholly-owned subsidiary, Foodbrands America, Inc. The purchase of these obligations by IBP, inc. was funded with available credit facilities and will likely be refinanced later in 1998 under the company's $300 million Medium-Term Notes program registered with the Securities and Exchange Commission. Net prepayment premiums, accelerated amortization of unamortized deferred financing costs, and transaction expenses, totaled $23.6 million, before applicable income tax benefit of $9.0 million, and will be accounted for as an extraordinary loss in the first quarter 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from the Annual Report, pages 30- 45, sections entitled "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Report of Independent Accountants." See reference to purchase of Foodbrands America, Inc. bonds in Item 7. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Incorporated by reference from the Proxy Statement, page 11, section entitled "INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS." PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from the Proxy Statement, pages 2- 4, section entitled "ELECTION OF DIRECTORS" and reference is also made to the information regarding executive officers set forth in "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Proxy Statement, pages 7- 10, 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 pages 5-6, 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 7, section entitled "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. The following financial information is incorporated by reference from the Annual Report, as identified below, or is found in this report. 1. Consolidated Financial Location Statements -------------------------- Report of Independent Accountants Annual Report, page 30 and page 19 of this report Consolidated Statements of Earnings Annual Report, page 31 Consolidated Balance Sheets Annual Report, pages 32-33 Consolidated Statements of Cash Flows Annual Report, page 34 Consolidated Statements of Changes Annual Report, page 35 in Stockholders' Equity Notes to Consolidated Financial Annual Report, pages Statements 36-42 2. Financial Statement Schedule Reports of Independent Accountants on Financial Statement Schedules Schedule II Valuation and Qualifying Accounts and Reserves All other schedules are omitted because they are not applicable or not required. 3. Exhibits 3.1* Restated Certificate of Incorporation of IBP (filed as Exhibit No. 3.1. to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1996, File No. 1-6085). 3.2* Restated By-laws of IBP (filed as Exhibit No. 3.2 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1996, File No. 1- 6085). 10.5* IBP's 1987 Stock Option Plan (filed as Exhibit No. 28(a) to IBP's Registration Statement on Form S-8, dated January 5, 1988, File No. 33-19441) (Executive Compensation Plan). 10.5.1* Form of Stock Option Agreement (10/1/87) (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) (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 (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 (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 (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 (filed as Exhibit No. 10.5.6 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1996, File No. 1-6085). 10.5.7* 1996 Stock Option Plan (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). 10.14* Form of IBP's Indemnification Agreement with officers and directors (filed as Exhibit No. 10.18 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. 10.23* Intercompany Agreement, dated as of September 4, 1991, between IBP and Occidental Petroleum Corporation (filed as Exhibit No. 10.23 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 28, 1991, File No. 1-6085). 10.24 Employment Agreement, effective as of August 18, 1997, between IBP and Larry Shipley. 10.25 Employment Agreement, effective as of March 1, 1997, between IBP and Richard L. Bond. 10.26 Employment Agreement, effective as of March 1, 1997, between IBP and Eugene D. Leman. 10.28* Text of Retirement Income Plan of IBP, inc. (As Amended and Restated Effective as of January 1, 1992), as amended. (Executive Compensation Plan) (filed as Exhibit No. 10.28 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 26, 1992, File No. 1-6085). 10.29* Employment Agreement, effective January 1, 1993, between IBP and Dale Tinstman (filed as Exhibit No. 10.29 to the Annual Report on Form 10-K of IBP for the fiscal year ended December 25, 1993, File No. 1-6085). 13. 1997 Annual Report to Stockholders. 21. Subsidiaries of IBP, inc. as of December 26, 1997. 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 28, 1997, File No. 1-6085). 23.1 Consent of Independent Public Accountants (Coopers & Lybrand L.L.P.). 27. Financial Data Schedule. __________________ * Incorporated herein by reference (b) Reports on Form 8-K The company filed a report on Form 8-K, dated November 25, 1997, with the Securities and Exchange Commission, File No. 1- 6085. The 8-K reported Items 2 and 7, and historical and pro forma financial statements relating to the Foodbrands acquisition were filed with the 8-K. (c) Other Matters With the exception of the information expressly referenced and thereby incorporated in ITEMS 3, 5, 6, 7 and 8, the Annual Report is not to be deemed "filed" with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities and Exchange Act of 1934. For the purpose of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, IBP hereby undertakes as follows, which undertaking shall be incorporated by reference into IBP's Registration Statement on Form S-8 No. 33-19441 (filed January 5, 1988): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of IBP pursuant to the foregoing provisions, or otherwise, IBP has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by IBP of expenses incurred or paid by a director, officer or controlling person of IBP in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, IBP will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IBP, inc. Our report on the consolidated financial statements of IBP, inc. has been incorporated by reference in this Form 10-K from page 30 of the 1997 Annual Report to Stockholders of IBP, inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule as of December 27, 1997, December 28, 1996 and December 30, 1995 and for the years then ended listed in Item 14(a) 2 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Omaha, Nebraska January 23, 1998 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Fiscal Years 1995, 1996, and 1997 (In thousands) Allowance for Doubtful Accounts ------------ Balance, December 31, 1994 $ 9,397 Amounts charged to costs and expenses 478 Recoveries of amounts previously written off 106 Write-off of uncollectible accounts (508) Other 21 ------ Balance, December 30, 1995 9,494 Amounts charged to costs and expenses 379 Recoveries of amounts previously written off 115 Write-off of uncollectible accounts (112) Other (3) ------ Balance, December 28, 1996 9,873 Amounts charged to costs and expenses 514 Recoveries of amounts previously written off 39 Write-off of uncollectible accounts (829) Other 466 ------ Balance, December 27, 1997 $10,063 ====== 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: 3/24/98 ----------- 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 3/24/98 - -------------------------- Robert L. Peterson and Chief Executive Officer (principal executive officer) /s/ Larry Shipley - -------------------------- President, IBP 3/24/98 Larry Shipley Enterprises (principal financial officer) /s/ Craig J. Hart - -------------------------- Vice President and 3/24/98 Craig J. Hart Controller /s/ Richard L. Bond - --------------------------- Director 3/24/98 Richard L. Bond /s/ John S. Chalsty - --------------------------- Director 3/24/98 John S. Chalsty /s/ Wendy L. Gramm - --------------------------- Director 3/23/98 Wendy L. Gramm /s/ John J. Jacobson Jr. - --------------------------- Director 3/20/98 John J. Jacobson, Jr. /s/ Eugene D. Leman - --------------------------- Director 3/24/98 Eugene D. Leman /s/ Martin A. Massengale - --------------------------- Director 3/24/98 Martin A. Massengale /s/ Michael L. Sanem - --------------------------- Director 3/21/98 Michael L. Sanem /s/ JoAnn R. Smith - --------------------------- Director 3/23/98 JoAnn R. Smith - --------------------------- Director Dale C. Tinstman EX-10 2 Exhibit 10.24 EMPLOYMENT AGREEMENT This Agreement, effective the 18th day of August, 1998 (the "Effective Date"), by and between IBP, inc., a Delaware corporation (hereinafter referred to as "Employer"), and Larry Shipley (hereinafter referred to as "Employee"). WITNESSETH: WHEREAS, Employer is engaged in a very competitive business, where the development and retention of extensive trade secrets and proprietary information is critical to future business success; and WHEREAS, Employee, by virtue of its employment with Employer, is involved in the development of, and has access to, this critical business information which information, if it were to get into the hands of competitors of Employer, could do substantial business harm to Employer; and WHEREAS, Employer has advised Employee that agreement to the terms of this Agreement, and specifically the non-compete and non-solicitation paragraphs, is an integral part of this Agreement, and Employee acknowledges the importance of the non-compete and non-solicitation paragraphs, and having reviewed the agreement as a whole, is willing to commit to the restrictions as set forth herein; NOW, THEREFORE, Employer and Employee, in consideration of the above and the terms and conditions contained herein, hereby mutually agree upon the following terms and conditions. 1. Duties. Employee shall perform the duties of President, IBP Enterprises or shall serve in such other capacity and with such other duties for Employer as Employer shall hereafter from time to time prescribe. Employee shall perform all such duties with diligence and thoroughness. Employee shall be subject to and comply with all rules, policies, procedures, supervision and direction of Employer in all matters related to the performance of Employee's duties. 2. Term of Employment. The term of employment shall be for a period of five (5) years, commencing on the Effective Date of this Agreement (the "Term"), unless terminated prior thereto in accordance with the provisions of this Agreement. The obligations of Employee under Paragraphs 8 b), c), d), e), f), g), h), and i) shall continue to apply after the expiration of the Term for the time periods specified in these sections. 3. Compensation. For the services to be performed hereunder, Employee shall be compensated by Employer at the rate of not less than two hundred and fifty thousand dollars ($250,000) per year payable monthly, and in addition may receive awards under Employer's Cash Bonus Plan subject to the discretion of the senior management of Employer. Such compensation will be subject to review from time to time when salaries of other officers and managers of Employer are reviewed for consideration of increases therein. 4. Participation in Benefit Programs. Employee shall be entitled to participate in any benefit programs generally applicable to officers of Employer adopted by Employer from time to time. 5. Limitation on Outside Activities. Employee shall devote full employment energies, interest, abilities and time (except for personal investments) to the performance of obligations hereunder and shall not, without the written consent of the Chief Executive Officer of the Company, render to others any service of any kind or engage in any activity which conflicts or interferes with the performance of duties hereunder. 6. Ownership of Employee's Inventions. All ideas, inventions, and other developments or improvements conceived by Employee, alone or with others, during the term of his employment, whether or not during working hours, that are within the scope of Employer's business operations or that relate to any of Employer's work or projects, are the exclusive property of Employer. Employee agrees to assist Employer, at its expense, to obtain patents on any such patentable ideas, inventions, and other developments, and agrees to execute all documents necessary to obtain such patents in the name of Employer. 7. Termination. (a) Voluntary Termination. Employee may terminate this Agreement at any time by not less than one year's prior written notice to Employer. Employee shall not be entitled to any compensation from Employer for any period beyond Employee's actual date of termination. (b) Employer Right to Voluntary Termination. Employer shall be entitled, at its election and with or without cause, to terminate Employee's employment upon written notice to Employee. Employer shall continue to pay Employee at the rate and in the manner provided in Paragraph 3 above for a period after such notice of termination equivalent to three (3) months. During the time Employee is being compensated in lieu of continued employment, the Employer shall have the right, at its election, to a) relieve the Employee's duties effective the date of notice of termination, or b) to require the Employee to perform services from time to time on behalf of the Employer during such three (3) month period. (c) Incapacity. If Employee is materially incapacitated from fully performing his duties pursuant to this Agreement by reason of illness or other incapacity or by reason of any statute, law, ordinance, regulation, order, judgment or decree, Employer may terminate this Agreement by 30 days written notice to Employee, but only in the event that such incapacity shall aggregate not less than one hundred twenty (120) days during any one year. 8. Confidential Information, Trade Secrets, Limitation on Solicitation and Non-Compete Clause. (a) Employee shall receive, in addition to all regular compensation for services as described in Section 3 of this Employment Agreement, as additional consideration for signing this Employment Agreement and for agreeing to abide and be bound by the terms, provisions and restrictions of this Section 8, the following: (i) an award of such number of shares of Common Stock of Employer under the terms and conditions of the Employer's IBP Officer Long-Term Stock Plan and/or 1996 Officer Long-Term Stock Plan as shall be equal to an aggregate value of $550,000, less $350,000 previously awarded; (ii) a grant of options to purchase an aggregate of ten thousand (10,000) shares of Common Stock of Employer under the terms and conditions of the Employer's IBP Stock Option Plans and each year on the annual grant date for stock options an annual option grant of options to purchase shares of Common Stock of the Employer under the terms and conditions of the Employer's Stock Option Plans which is equal to three times (3x) the annual option level of the Employee's officer-position band option level, provided that the Employee has been on the payroll, whether as an officer or otherwise, at least six months prior to the annual grant date; and (iii) the right to receive bonus option grants, pursuant to the terms and conditions made available by the Plans Administration Committee of Employer's Board of Directors, from the employer's stock option plans, upon the Employee's exercise of any options granted to the Employee. (b) Employee recognizes that, as a result of his employment hereunder (and his employment, if any, with Employer for periods prior to the Effective Date), he has had and will continue to have access to confidential information, trade secrets, proprietary information, intellectual property, and other documents, data, and information concerning methods, processes, controls, techniques, formula, production, distribution, purchasing, financial analysis, returns and reports (in addition if Employee is involved with marketing, sales or procurement he has had and will continue to have access to lists of customers, suppliers, livestock vendors, and accounts, other sensitive information and data regarding the Employers customers, suppliers, vendors, services, sales, pricing, and costs which are highly confidential and constitute trade secrets or confidential business information) which is the property of and integral to the operations and success of Employer, and therefore agrees to be bound by the provisions of this Section 8, which Employee agrees and acknowledges to be reasonable and to be necessary to protect legitimate and important business interests and concerns of Employer. (c) Employee agrees that he will not divulge to any person, nor use to the detriment of Employer or any of its subsidiaries, nor use in any business or process of manufacture competitive with or similar to any business or process of manufacture of Employer or any of its subsidiaries, at any time during the term of this Agreement or thereafter, any of the Employer's trade secrets, without first obtaining the express written permission of Employer. A trade secret shall include any formula, pattern, device or compilation of information used by Employer in its business. For purposes of this Section 8, the compilation of information shall include, without limitation, the identity of customers and suppliers and information reflecting their interests, preferences, credit-worthiness, likely receptivity to solicitation for participation in various transactions and related information obtained during the course of his employment with Employer. (d) Employee agrees that at the time of leaving the employ of Employer he will deliver to Employer, and not keep or deliver to anyone else, any and all notebooks, memoranda, documents and, in general, any and all materials relating to Employer's business, or constituting Employer's property. Employee further agrees that he will not, directly or indirectly, request or advise any customers or suppliers of Employer or any of its subsidiaries to withdraw, curtail or cancel its business with Employer or any of its subsidiaries. (e) During the term of Employee's employment with the Employer and for a period of one (1) year from the earlier of 1) the termination of Employee's employment for any reason whatsoever, or 2) the expiration of the Term (it is expressly acknowledged that this clause is intended to survive the expiration of the "Term"), Employee will not directly or indirectly, in the United States, participate in any Position, in any business in direct competition with the business of the Employer. The term "Position" as used in this section shall include, without limitation, a partner, director, holder of more than 5% of the outstanding voting shares, principal, executive, officer, manager or any employment or consulting position. It is acknowledged and agreed that the scope of the clause as set forth above is essential, because 1) a more restrictive definition of "Position" (e.g. limiting it to the "same" position within a competitor) will subject the Employer to serious, irreparable harm by allowing competitors to describe positions in ways to evade the operation of this clause, and substantially restrict the protection sought by Employer, and 2) by allowing the Employee to escape the application of this clause by accepting a position designated as a "lesser" or "different" position with a competitor, the Employer is unable to restrict the Employee from providing valuable information to such competing company to the harm of the Employer. (f) Employee recognizes that he possesses confidential information and trade secrets about other employees of Employer and its subsidiaries relating to their education, experience, skills, abilities, salary and benefits, and interpersonal relationships with customers and suppliers of Employer and its subsidiaries. Employee recognizes that the information he possesses about these other employees is not generally known, is of substantial value to Employer in securing and retaining customers and suppliers, and was acquired by Employee because of his business position with Employer. Employee agrees that during his employment hereunder, and for a period of three (3) years from the earlier of 1) the termination of Employee's employment for any reason whatsoever, or 2) the expiration of the Term, Employee shall not, directly or indirectly, solicit or contact any employee or agent of Employer or any of its subsidiaries, with a view to inducing or encouraging such employee or agent to leave the employ of Employer or any of its subsidiaries, for the purpose of being hired by Employee, an employer affiliated with Employee, or any competitor of Employer or any of its subsidiaries. Employee agrees that he will not convey any such confidential information or trade secrets about other employees to anyone affiliated with Employee or to any competitor of Employer or any of its subsidiaries. (g) Employee acknowledges that the restrictions contained in this Section 8 are reasonable and necessary to protect Employer's interest in this agreement and that any breach thereof will result in an irreparable injury to Employer for which Employer has no adequate remedy at law. Employee therefore agrees that, in the event that Employee breaches any of the provisions contained in this Section 8, Employer shall be authorized and entitled to seek from any court of competent jurisdiction (i) a temporary restraining order, (ii) preliminary and permanent injunctive relief, (iii) an equitable accounting of all profits or benefits arising out of such breach, and (iv) direct, incidental and consequential damages arising from such breach. Employee agrees to reimburse Employer for all reasonable legal fees, as well as costs of defense related to any actions taken by Employer to enforce Section 8. (h) Employer and Employee have attempted to specify a reasonable period of time, a reasonable area and reasonable restrictions to which this Section 8 shall apply. Employer and Employee agree that if a court or administrative body should subsequently determine that the terms of this Section 8 are greater than reasonably necessary to protect Employer's interest, Employer agrees to waive those terms which are found by a court or administrative body to be greater than reasonably necessary to protect Employer's interest and to request that the court or administrative body reform this Agreement specifying a reasonable period of time and such other reasonable restrictions as the court or administrative body deems necessary. (i) Employee further agrees that this Section 8 is an integral part of this agreement, and that should a court fail or refuse to enforce the restrictions contained herein in the manner expressly provided in Sections 8(a) through 8(g) above, the Employer shall recover from Employee, and the court shall award as damages to the Employer, the consideration (or a pro-rata portion thereof to the extent these provisions are enforced but the time frame is reduced beyond that specified above) provided to and elected by Employee under the terms of Section 8(a) above (or the monetary equivalent thereof), its costs and its reasonable attorney's fees. 9. Modification. This Agreement contains all the terms and conditions agreed upon by the parties hereto, and no other agreements, oral or otherwise, regarding the subject matter of this Agreement shall be deemed to exist or bind either of the parties hereto, except for a confidentiality agreement between the parties dated August 16, 1989. This Agreement cannot be modified except by a writing signed by both parties. 10. Assignment. This Agreement shall be binding upon Employee, his heirs, executors and assigns and upon Employer, its successors and assigns. 11. Applicable Law. This agreement is made and entered into in the State of South Dakota. The validity, interpretation, performance and enforcement of this agreement shall be governed by the internal laws of said State of South Dakota, without giving effect to the conflict of laws provisions thereof. 12. Jurisdiction and Venue of Disputes. The South Dakota First Judicial Circuit shall have jurisdiction and be the venue of all disputes between the Company and Employee, whether such disputes arise from this Agreement or otherwise. 13. Severability. If, for any reason, any one or more of the provisions contained in this Agreement are held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. IBP, inc. By /s/ Robert L. Peterson ------------------------- EMPLOYEE ACKNOWLEDGES THAT HE/SHE HAS READ THE ABOVE, AND HAS BEEN ADVISED TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING. EMPLOYEE AGREES TO THE TERMS AND CONDITIONS OF THIS EMPLOYEE AGREEMENT AS WRITTEN ABOVE. /s/ Larry Shipley ---------------------- (Employee) Exhibit 10.25 EMPLOYMENT AGREEMENT PRODUCTION AND ADMINISTRATIVE This Agreement, effective the 1st day of March, 1997(the "Effective Date"), by and between IBP, inc., a Delaware corporation (hereinafter referred to as "Employer"), and Richard L. Bond (hereinafter referred to as "Employee"). WITNESSETH: Employer hereby agrees to employ, or agrees to continue to employ Employee, and Employee agrees to be employed upon the following terms and conditions. 1. Duties. Employee shall perform the duties of President & COO or shall serve in such other capacity and with such other duties for Employer as Employer shall hereafter from time to time prescribe. 2. Term of Employment. The term of employment shall be for a period of five (5) years, commencing on the Effective Date of this Agreement, unless terminated prior thereto in accordance with the provisions of this Agreement. 3. Compensation. For the services to be performed hereunder, Employee shall be compensated by Employer at the rate of not less than Five Hundred Thousand Dollars ($500,000.00) per year payable monthly, and in addition may receive awards under Employer's Cash Bonus Plan subject to the discretion of the senior management of Employer. Such compensation will be subject to review from time to time when salaries of other officers and managers of Employer are reviewed for consideration of increases therein. 4. Participation in Benefit Programs. Employee shall be entitled to participate in any benefit programs generally applicable to officers of Employer adopted by Employer from time to time. 5. Limitation on Outside Activities. Employee shall devote full employment energies, interest, abilities and time (except for personal investments) to the performance of obligations hereunder and shall not, without the written consent of the Chief Executive Officer of the Company, render to others any service of any kind or engage in any activity which conflicts or interferes with the performance of duties hereunder. 6. Ownership of Employee's Inventions. All ideas, inventions, and other developments or improvements conceived by Employee, alone or with others, during the term of his employment, whether or not during working hours, that are within the scope of Employer's business operations or that relate to any of Employer's work or projects, are the exclusive property of Employer. Employee agrees to assist Employer, at its expense, to obtain patents on any such patentable ideas, inventions, and other developments, and agrees to execute all documents necessary to obtain such patents in the name of Employer. 7. Termination. (a) Voluntary Termination. Employee may terminate this Agreement at any time by not less than one year's prior written notice to Employer. Employee shall not be entitled to any compensation from Employer for any period beyond Employee's actual date of termination. (b) Resignation. In the event Employee shall resign from employment at the request of Employer, Employer shall compensate Employee at the rate and in the manner provided in Paragraph 3 above for a period after termination equivalent to the lesser of (i) one year, or (ii) the remainder of the term of this Agreement. During the time Employee is being compensated in lieu of continued employment, the Employer shall have the right to require the Employee to perform consulting services from time to time on behalf of the Employer. Any out-of-pocket expenses associated with any such assignment shall be, upon proper documentation, reimbursed by Employer to Employee. In the event Employer compensates Employee in lieu of continued employment, all remuneration or wages earned by Employee during such period, either as an employee, independent contractor or consultant to any person, firm, or corporation other than Employer, shall be a set-off to Employer's duty of compensation to Employee. (c) Company Termination. In the event Employer shall conclude, in its sole discretion, that it is no longer in the interest of the Company to continue the employment of Employee, the Employer may terminate this Agreement, and Employer shall have no further obligation to pay compensation to Employee after the effective date of termination. (d) Incapacity. If Employee is materially incapacitated from fully performing his or her duties pursuant to this Agreement by reason of illness or other incapacity or by reason of any statute, law, ordinance, regulation, order, judgment or decree, Employer may terminate this Agreement by 30 days written notice to Employee, but only in the event that such incapacity shall aggregate not less than one hundred twenty (120) days during any one year. 8. Confidential Information, Trade Secrets, Limitation on Solicitation and Non-Compete Clause. (a) Employee shall receive, in addition to all regular compensation for services as described in Section 3 of this Employment Agreement, as additional consideration for signing this Employment Agreement and for agreeing to abide and be bound by the terms, provisions and restrictions of this Section 8, the following: (i) an award of such number of shares of Common Stock of Employer under the terms and conditions of the Employer's IBP Officer Long-Term Stock Plan and/or 1996 Officer Long-Term Stock Plan as shall be equal to an aggregate value of $650,000 less amounts due to restrictions on promotional grants (see Employee Award Letter); (ii) a grant of options to purchase an aggregate of Fourteen Thousand Nine Hundred (14,900) shares of Common Stock of Employer under the terms and conditions of the Employer's IBP Stock Option Plans and each year on the annual grant date for stock options an annual option grant of options to purchase shares of Common Stock of the Employer which is equal to three times (3x) the annual option level of the Employee's officer-position band option level, provided that the Employee has been on the payroll, whether as an officer or otherwise, at least six months prior to the annual grant date; and (iii) the right to receive bonus option grants, pursuant to the terms and conditions made available by the Plans Administration Committee of Employer's Board of Directors, from the Employer's Stock Option Plans, upon the Employee's exercise of any options granted to the Employee. (b) Employee recognizes that, as a result of his employment hereunder (and his employment, if any, with Employer for periods prior to the Effective Date), he has had and will continue to have access to confidential information, trade secrets, proprietary information, intellectual property, and other documents, data, and information concerning methods, processes, controls, techniques, formulae, production, distribution, purchasing, financial analysis, returns and reports which is the property of and integral to the operations and success of Employer, and therefore agrees to be bound by the provisions of this Section 8, which Employee agrees and acknowledges to be reasonable and to be necessary to protect legitimate and important business interests and concerns of Employer. (c) Employee agrees that he will not divulge to any person, nor use to the detriment of Employer or any of its subsidiaries, nor use in any business or process of manufacture competitive with or similar to any business or process of manufacture of Employer or any of its subsidiaries, at any time during the term of this Agreement or thereafter, any of the Employer's trade secrets, without first obtaining the express written permission of Employer. A trade secret shall include any formula, pattern, device or compilation of information used by Employer in its business. For purposes of this Section 8, the compilation of information shall include, without limitation, the identity of customers and suppliers and information reflecting their interests, preferences, credit-worthiness, likely receptivity to solicitation for participation in various transactions and related information obtained during the course of his employment with Employer. (d) Employee agrees that at the time of leaving the employ of Employer he will deliver to Employer, and not keep or deliver to anyone else, any and all notebooks, memoranda, documents and, in general, any and all materials relating to Employer's business, or constituting Employer's property. Employee further agrees that he will not, directly or indirectly, request or advise any customers or suppliers of Employer or any of its subsidiaries to withdraw, curtail or cancel its business with Employer or any of its subsidiaries. (e) During the term of Employee's employment with the Employer and for a period of one (1) year from the termination of Employee's employment for any reason whatsoever, Employee (i) will not directly or indirectly, in the United States, own, manage, operate, control, or participate in as a partner, director, holder of more than 5% of the outstanding voting shares, principal or officer, any business in direct competition with the business of the Employer and (ii) will not accept employment or be employed by any such firm or corporation in any position where he would perform services materially similar to those which he has provided for Employer during the term hereof. (f) Employee recognizes that he possesses confidential information and trade secrets about other employees of Employer and its subsidiaries relating to their education, experience, skills, abilities, salary and benefits, and interpersonal relationships with customers and suppliers of Employer and its subsidiaries. Employee recognizes that the information he possesses about these other employees is not generally known, is of substantial value to Employer in securing and retaining customers and suppliers, and was acquired by Employee because of his business position with Employer. Employee agrees that during his employment hereunder, and for a period of three (3) years thereafter, Employee shall not, directly or indirectly, solicit or contact any employee or agent of Employer or any of its subsidiaries, with a view to inducing or encouraging such employee or agent to leave the employ of Employer or any of its subsidiaries, for the purpose of being hired by Employee, an employer affiliated with Employee, or any competitor of Employer or any of its subsidiaries. Employee agrees that he will not convey any such confidential information or trade secrets about other employees to anyone affiliated with Employee or to any competitor of Employer or any of its subsidiaries. (g) Employee acknowledges that the restrictions contained in this Section 8 are reasonable and necessary to protect Employer's interest in this agreement and that any breach thereof will result in an irreparable injury to Employer for which Employer has no adequate remedy at law. Employee therefore agrees that, in the event that Employee breaches any of the provisions contained in this Section 8, Employer shall be authorized and entitled to seek from any court of competent jurisdiction (i) a temporary restraining order, (ii) preliminary and permanent injunctive relief, (iii) an equitable accounting of all profits or benefits arising out of such breach, and (iv) direct, incidental and consequential damages arising from such breach. (h) Employer and Employee have attempted to specify a reasonable period of time, a reasonable area and reasonable restrictions to which this Section 8 shall apply. Employer and Employee agree that if a court or administrative body should subsequently determine that the terms of this Section 8 are greater than reasonably necessary to protect Employer's interest, Employer agrees to waive those terms which are found by a court or administrative body to be greater than reasonably necessary to protect Employer's interest and to request that the court or administrative body reform this Agreement specifying a reasonable period of time and such other reasonable restrictions as the court or administrative body deems necessary. (i) Employee further agrees that this Section 8 is an integral part of this agreement, and that should a court fail or refuse to enforce the restrictions contained herein in such a manner as to effectively enjoin competitive activity, the Employer shall recover from Employee, and the court shall award as damages to the Employer, the consideration provided to and elected by Employee under the terms of Section 8(a) above (or the monetary equivalent thereof), its costs and its reasonable attorney's fees. 9. Modification. This Agreement contains all the terms and conditions agreed upon by the parties hereto, and no other agreements, oral or otherwise, regarding the subject matter of this Agreement shall be deemed to exist or bind either of the parties hereto, except for a confidentiality agreement between the parties dated February 1, 1980. This Agreement cannot be modified except by a writing signed by both parties. 10. Assignment. This Agreement shall be binding upon Employee, his heirs, executors and assigns and upon Employer, its successors and assigns. 11. Applicable Law. This agreement is made and entered into in the State of South Dakota. The validity, interpretation, performance and enforcement of this agreement shall be governed by the internal laws of said State of South, without giving effect to the conflict of laws provisions thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. IBP, inc. By /s/ Robert L. Peterson ------------------------- /s/ Richard L. Bond ------------------------- (Employee) Exhibit 10.26 EMPLOYMENT AGREEMENT PRODUCTION AND ADMINISTRATIVE This Agreement, effective the 1st day of March, 1997(the "Effective Date"), by and between IBP, inc., a Delaware corporation (hereinafter referred to as "Employer"), and Eugene D. Leman (hereinafter referred to as "Employee"). WITNESSETH: Employer hereby agrees to employ, or agrees to continue to employ Employee, and Employee agrees to be employed upon the following terms and conditions. 1. Duties. Employee shall perform the duties of President - Fresh Meats or shall serve in such other capacity and with such other duties for Employer as Employer shall hereafter from time to time prescribe. 2. Term of Employment. The term of employment shall be for a period of five (5) years, commencing on the Effective Date of this Agreement, unless terminated prior thereto in accordance with the provisions of this Agreement. 3. Compensation. For the services to be performed hereunder, Employee shall be compensated by Employer at the rate of not less than Three Hundred Fifteen Thousand Dollars ($315,000.00) per year payable monthly, and in addition may receive awards under Employer's Cash Bonus Plan subject to the discretion of the senior management of Employer. Such compensation will be subject to review from time to time when salaries of other officers and managers of Employer are reviewed for consideration of increases therein. 4. Participation in Benefit Programs. Employee shall be entitled to participate in any benefit programs generally applicable to officers of Employer adopted by Employer from time to time. 5. Limitation on Outside Activities. Employee shall devote full employment energies, interest, abilities and time (except for personal investments) to the performance of obligations hereunder and shall not, without the written consent of the Chief Executive Officer of the Company, render to others any service of any kind or engage in any activity which conflicts or interferes with the performance of duties hereunder. 6. Ownership of Employee's Inventions. All ideas, inventions, and other developments or improvements conceived by Employee, alone or with others, during the term of his employment, whether or not during working hours, that are within the scope of Employer's business operations or that relate to any of Employer's work or projects, are the exclusive property of Employer. Employee agrees to assist Employer, at its expense, to obtain patents on any such patentable ideas, inventions, and other developments, and agrees to execute all documents necessary to obtain such patents in the name of Employer. 7. Termination. (a) Voluntary Termination. Employee may terminate this Agreement at any time by not less than one year's prior written notice to Employer. Employee shall not be entitled to any compensation from Employer for any period beyond Employee's actual date of termination. (b) Resignation. In the event Employee shall resign from employment at the request of Employer, Employer shall compensate Employee at the rate and in the manner provided in Paragraph 3 above for a period after termination equivalent to the lesser of (i) one year, or (ii) the remainder of the term of this Agreement. During the time Employee is being compensated in lieu of continued employment, the Employer shall have the right to require the Employee to perform consulting services from time to time on behalf of the Employer. Any out-of-pocket expenses associated with any such assignment shall be, upon proper documentation, reimbursed by Employer to Employee. In the event Employer compensates Employee in lieu of continued employment, all remuneration or wages earned by Employee during such period, either as an employee, independent contractor or consultant to any person, firm, or corporation other than Employer, shall be a set-off to Employer's duty of compensation to Employee. (c) Company Termination. In the event Employer shall conclude, in its sole discretion, that it is no longer in the interest of the Company to continue the employment of Employee, the Employer may terminate this Agreement, and Employer shall have no further obligation to pay compensation to Employee after the effective date of termination. (d) Incapacity. If Employee is materially incapacitated from fully performing his or her duties pursuant to this Agreement by reason of illness or other incapacity or by reason of any statute, law, ordinance, regulation, order, judgment or decree, Employer may terminate this Agreement by 30 days written notice to Employee, but only in the event that such incapacity shall aggregate not less than one hundred twenty (120) days during any one year. 8. Confidential Information, Trade Secrets, Limitation on Solicitation and Non-Compete Clause. (a) Employee shall receive, in addition to all regular compensation for services as described in Section 3 of this Employment Agreement, as additional consideration for signing this Employment Agreement and for agreeing to abide and be bound by the terms, provisions and restrictions of this Section 8, the following: (i) an award of such number of shares of Common Stock of Employer under the terms and conditions of the Employer's IBP Officer Long-Term Stock Plan and/or 1996 Officer Long-Term Stock Plan as shall be equal to an aggregate value of $550,000 less amounts due to restrictions on promotional grants (see Employee Award Letter); (ii) a grant of options to purchase an aggregate of Five Thousand (5,000) shares of Common Stock of Employer under the terms and conditions of the Employer's IBP Stock Option Plans and each year on the annual grant date for stock options an annual option grant of options to purchase shares of Common Stock of the Employer which is equal to three times (3x) the annual option level of the Employee's officer-position band option level, provided that the Employee has been on the payroll, whether as an officer or otherwise, at least six months prior to the annual grant date; and (iii) the right to receive bonus option grants, pursuant to the terms and conditions made available by the Plans Administration Committee of Employer's Board of Directors, from the Employer's Stock Option Plans, upon the Employee's exercise of any options granted to the Employee. (b) Employee recognizes that, as a result of his employment hereunder (and his employment, if any, with Employer for periods prior to the Effective Date), he has had and will continue to have access to confidential information, trade secrets, proprietary information, intellectual property, and other documents, data, and information concerning methods, processes, controls, techniques, formulae, production, distribution, purchasing, financial analysis, returns and reports which is the property of and integral to the operations and success of Employer, and therefore agrees to be bound by the provisions of this Section 8, which Employee agrees and acknowledges to be reasonable and to be necessary to protect legitimate and important business interests and concerns of Employer. (c) Employee agrees that he will not divulge to any person, nor use to the detriment of Employer or any of its subsidiaries, nor use in any business or process of manufacture competitive with or similar to any business or process of manufacture of Employer or any of its subsidiaries, at any time during the term of this Agreement or thereafter, any of the Employer's trade secrets, without first obtaining the express written permission of Employer. A trade secret shall include any formula, pattern, device or compilation of information used by Employer in its business. For purposes of this Section 8, the compilation of information shall include, without limitation, the identity of customers and suppliers and information reflecting their interests, preferences, credit-worthiness, likely receptivity to solicitation for participation in various transactions and related information obtained during the course of his employment with Employer. (d) Employee agrees that at the time of leaving the employ of Employer he will deliver to Employer, and not keep or deliver to anyone else, any and all notebooks, memoranda, documents and, in general, any and all materials relating to Employer's business, or constituting Employer's property. Employee further agrees that he will not, directly or indirectly, request or advise any customers or suppliers of Employer or any of its subsidiaries to withdraw, curtail or cancel its business with Employer or any of its subsidiaries. (e) During the term of Employee's employment with the Employer and for a period of one (1) year from the termination of Employee's employment for any reason whatsoever, Employee (i) will not directly or indirectly, in the United States, own, manage, operate, control, or participate in as a partner, director, holder of more than 5% of the outstanding voting shares, principal or officer, any business in direct competition with the business of the Employer and (ii) will not accept employment or be employed by any such firm or corporation in any position where he would perform services materially similar to those which he has provided for Employer during the term hereof. (f) Employee recognizes that he possesses confidential information and trade secrets about other employees of Employer and its subsidiaries relating to their education, experience, skills, abilities, salary and benefits, and interpersonal relationships with customers and suppliers of Employer and its subsidiaries. Employee recognizes that the information he possesses about these other employees is not generally known, is of substantial value to Employer in securing and retaining customers and suppliers, and was acquired by Employee because of his business position with Employer. Employee agrees that during his employment hereunder, and for a period of three (3) years thereafter, Employee shall not, directly or indirectly, solicit or contact any employee or agent of Employer or any of its subsidiaries, with a view to inducing or encouraging such employee or agent to leave the employ of Employer or any of its subsidiaries, for the purpose of being hired by Employee, an employer affiliated with Employee, or any competitor of Employer or any of its subsidiaries. Employee agrees that he will not convey any such confidential information or trade secrets about other employees to anyone affiliated with Employee or to any competitor of Employer or any of its subsidiaries. (g) Employee acknowledges that the restrictions contained in this Section 8 are reasonable and necessary to protect Employer's interest in this agreement and that any breach thereof will result in an irreparable injury to Employer for which Employer has no adequate remedy at law. Employee therefore agrees that, in the event that Employee breaches any of the provisions contained in this Section 8, Employer shall be authorized and entitled to seek from any court of competent jurisdiction (i) a temporary restraining order, (ii) preliminary and permanent injunctive relief, (iii) an equitable accounting of all profits or benefits arising out of such breach, and (iv) direct, incidental and consequential damages arising from such breach. (h) Employer and Employee have attempted to specify a reasonable period of time, a reasonable area and reasonable restrictions to which this Section 8 shall apply. Employer and Employee agree that if a court or administrative body should subsequently determine that the terms of this Section 8 are greater than reasonably necessary to protect Employer's interest, Employer agrees to waive those terms which are found by a court or administrative body to be greater than reasonably necessary to protect Employer's interest and to request that the court or administrative body reform this Agreement specifying a reasonable period of time and such other reasonable restrictions as the court or administrative body deems necessary. (i) Employee further agrees that this Section 8 is an integral part of this agreement, and that should a court fail or refuse to enforce the restrictions contained herein in such a manner as to effectively enjoin competitive activity, the Employer shall recover from Employee, and the court shall award as damages to the Employer, the consideration provided to and elected by Employee under the terms of Section 8(a) above (or the monetary equivalent thereof), its costs and its reasonable attorney's fees. 9. Modification. This Agreement contains all the terms and conditions agreed upon by the parties hereto, and no other agreements, oral or otherwise, regarding the subject matter of this Agreement shall be deemed to exist or bind either of the parties hereto, except for a confidentiality agreement between the parties dated October 29, 1981. This Agreement cannot be modified except by a writing signed by both parties. 10. Assignment. This Agreement shall be binding upon Employee, his heirs, executors and assigns and upon Employer, its successors and assigns. 11. Applicable Law. This agreement is made and entered into in the State of South Dakota. The validity, interpretation, performance and enforcement of this agreement shall be governed by the internal laws of said State of South, without giving effect to the conflict of laws provisions thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. IBP, inc. By /s/ Robert L. Peterson ------------------------- /s/ Eugene D. Leman ------------------------- (Employee) EX-13 3 IBP, inc. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data) December 27, December 28, 1997 1996 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 69,022 $ 94,164 Marketable securities 3,120 169,476 Accounts receivable, less allowance for doubtful accounts of $10,063 and $9,873 564,125 500,781 Inventories (Note B) 389,753 299,700 Deferred income tax benefits (Note E) 48,602 42,364 Prepaid expenses 9,305 4,100 --------- --------- TOTAL CURRENT ASSETS 1,083,927 1,110,585 PROPERTY, PLANT AND EQUIPMENT, at cost: Land and land improvements 108,055 99,765 Buildings and stockyards 501,166 385,328 Equipment 1,053,983 860,712 1,663,204 1,345,805 --------- --------- Accumulated depreciation and amortization (774,694) (697,510) 888,510 648,295 Construction in progress 128,572 167,911 --------- --------- 1,017,082 816,206 OTHER ASSETS: Goodwill, net of accumulated amortization of $137,996 and $121,644 671,557 206,587 Other 66,375 41,117 --------- --------- 737,932 247,704 --------- --------- $2,838,941 $2,174,495 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses (Note D) $ 569,641 $ 475,071 Notes payable to banks (Note C) 192,010 - Federal and state income taxes 106,375 83,484 Deferred income taxes (Note E) 4,266 8,115 Other 4,526 3,012 ------- ------- TOTAL CURRENT LIABILITIES 876,818 569,682 LONG-TERM OBLIGATIONS (Notes C and F) 568,281 260,008 DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes (Note E) 15,446 68,026 Other 141,327 73,124 ------- ------- 156,773 141,150 ------- ------- COMMITMENTS AND CONTINGENCIES (Note N) STOCKHOLDERS' EQUITY (Note G): Preferred stock, 25,000,000 shares authorized; none issued Common stock, $.05 par value per share; authorized 200,000,000 shares; issued 95,000,000 shares 4,750 4,750 Additional paid-in capital 406,952 427,456 Retained earnings 886,964 779,199 Other (6,114) (32) Treasury stock, at cost, 2,414,349 and 372,780 shares (55,483) (7,718) --------- --------- TOTAL STOCKHOLDERS' EQUITY 1,237,069 1,203,655 --------- --------- $2,838,941 $2,174,495 ========= ========= See notes to consolidated financial statements. - -1- IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except per share data) 52 Weeks Ended ------------------------------------------- December 27, December 28, December 30, 1997 1996 1995 ------------ ------------ ------------ Net sales (Note A) $13,258,784 $12,538,753 $12,667,562 Cost of products sold 12,815,892 12,095,171 12,063,494 ---------- ---------- ---------- Gross profit 442,892 443,582 604,068 Selling, general and administrative expense 216,176 120,674 123,972 ---------- ---------- ---------- Earnings from operations 226,716 322,908 480,096 Interest: Incurred (50,001) (19,536) (38,551) Capitalized 6,933 6,813 9,039 Income 5,066 9,350 8,728 ---------- ---------- ---------- (38,002) (3,373) (20,784) ---------- ---------- ---------- Earnings before income taxes and extraordinary item 188,714 319,535 459,312 Income taxes (Note E) 71,700 120,800 179,200 ---------- ---------- ---------- Earnings before extraordinary item 117,014 198,735 280,112 Extraordinary loss on early extinguishment of debt, less applicable taxes (Note F) - - (22,189) ---------- ---------- ---------- Net earnings $ 117,014 $ 198,735 $ 257,923 ========== ========== ========== Earnings per share (Notes A and M) Earnings before extraordinary item $1.26 $2.10 $2.96 Extraordinary item - - (.24) ---- ---- ---- Net earnings $1.26 $2.10 $2.72 ==== ==== ==== Earnings per share - assuming dilution: Earnings before extraordinary item $1.25 $2.07 $2.92 Extraordinary item - - (.23) ---- ---- ---- Net earnings $1.25 $2.07 $2.69 ==== ==== ==== See notes to consolidated financial statements. - -2- IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands except per share data) Common Stock Additional Par Paid-In Retained Treasury Shares Value Capital Earnings Other Stock Balances, December 31, 1994 47,500 $2,375 $439,567 $341,492 $(1,074) $ (1,866) Net earnings 257,923 Dividends declared, $.10 per share (9,479) Additional shares issued in two-for-one stock split effected in the form of a stock dividend 47,500 2,375 (2,375) Treasury shares purchased (13,441) Treasury shares delivered under employee stock plans (4,466) 10,718 Foreign currency translation adjustments 1,190 Balances, ------ ----- ------- ------- ----- ------ December 30, 1995 95,000 4,750 432,726 589,936 116 (4,589) Net earnings 198,735 Dividends declared, $.10 per share (9,472) Treasury shares purchased (15,405) Treasury shares delivered under employee stock plans (5,270) 12,276 Foreign currency translation adjustments (148) Balances, ------ ----- ------- ------- ---- ------ December 28, 1996 95,000 4,750 427,456 779,199 (32) (7,718) Net earnings 117,014 Dividends declared, $.10 per share (9,249) Treasury shares (73,915) purchased Treasury shares delivered under employee stock plans (20,504) 26,150 Foreign currency translation adjustments (5,752) Minimum pension liability adjustment (330) Balances, ------ ----- ------- ------- ------ ------- December 27, 1997 95,000 $4,750 $406,952 $886,964 $(6,114) $(55,483) ====== ===== ======= ======= ====== ======= See notes to consolidated financial statements. - -3- IBP, inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 52 Weeks Ended ---------------------------------------- December 27, December 28, December 30, 1997 1996 1995 ------------ ------------ ------------ Inflows (outflows) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $117,014 $ 198,735 $ 257,923 ------- -------- -------- Adjustments to reconcile net earnings to cash flows from operations: Depreciation and amortizaon 109,930 82,690 92,539 Deferred income tax provision (benefit) 1,175 7,500 (11,600) Extraordinary loss on extinguishment of debt - - 22,189 Working capital changes, net of effects of acquisitions: Accounts payable and accrued liabilities (21,901) (57,976) 60,943 Accounts receivable (16,069) 28,950 (14,336) Inventories (11,761) 3,912 (58,705) Other adjustments, net 5,529 4,167 2,127 ------- -------- -------- 66,903 69,243 93,157 ------- -------- -------- Net cash flows provided by operating activities 183,917 267,978 351,080 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposals of marketable securities 403,723 922,051 588,591 Payments for stock of new subsidiaries, net of cash acquired (324,891) - - Purchases of marketable securities (237,243) (1,043,180) (576,167) Capital expenditures (133,925) (170,664) (160,626) Other investing activities, net 9,855 1,944 2,188 -------- ---------- -------- Net cash flows used in investing activities (282,481) (289,849) (146,014) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term debt 238,500 (200,000) 250,000 Principal payments on long-term obligations (212,054) (615) (350,761) Proceeds from issuance of long-term debt 132,187 197,878 - Purchases of treasury stock (73,915) (3,129) (2,723) Dividends paid (9,300) (9,473) (9,484) Net change in checks in process of clearance (7,715) 22,520 (18,135) Premiums paid on early retirement of debt - - (35,420) Other financing activities, net 6,465 ( 7,497) (7,044) ------- --------- -------- Net cash flows provided by (used in) financing activities 74,168 (316) (173,567) ------- --------- -------- Effect of exchange rate on cash and cash equivalents (746) 74 549 ------- --------- -------- Net change in cash and cash equivalents (25,142) (22,113) 32,048 Cash and cash equivalents at beginning of year 94,164 116,277 84,229 ------- --------- -------- Cash and cash equivalents at end of year $ 69,022 $ 94,164 $ 116,277 ======= ========= ======== See notes to consolidated financial statements. - -4- IBP, inc. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 28, 1996 AND DECEMBER 30, 1995 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF OPERATIONS AND INDUSTRY SEGMENT INFORMATION - IBP's operations relate principally to the meat processing industry and primarily involve cattle and hog slaughter, beef and pork fabrication and related allied product processing activities. The company also produces precooked meats for the retail and food service industries. IBP's customers include food retailers, distributors, wholesalers, restaurant and hotel chains, other food processors and leather makers, as well as manufacturers of pharmaceuticals and animal feeds. Management considers its operations to comprise one industry segment. PRINCIPLES OF CONSOLIDATION - All subsidiaries are wholly-owned and are consolidated in the accompanying financial statements. All material inter- company 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 1997, 1996 and 1995 all consisted of 52 weeks. EXPORT SALES - In 1997, 1996 and 1995, net export sales, principally to customers in Asia and also to destinations in Canada, Mexico and Europe, amounted to $1.7 billion, $1.7 billion and $1.8 billion, respectively. STATEMENT OF CASH FLOWS - For purposes of the statement of cash flows, management considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Such investments are carried at cost, which approximates fair value. DERIVATIVE FINANCIAL 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. - -5- 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 Management adjusted its estimate of salvage value for most fixed assets during 1995 to better reflect actual experience. This adjustment increased 1995 cost of products sold by approximately $18 million. Leasehold improvements, included in the equipment class, are amortized over the life of the lease or the life of the asset, whichever is shorter. GOODWILL - Goodwill is amortized on a straight-line basis over periods ranging from 15 years to 40 years. Management reviews goodwill as well as other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. FOREIGN CURRENCY TRANSLATION - The translation of foreign currency into U.S. dollars is performed for balance sheet accounts using the current exchange rate in effect at the balance sheet date and for revenue and expense accounts using the average exchange rate during the period. The gains or losses resulting from translation are included in stockholders' equity. Exchange adjustments resulting from foreign currency transactions, which were not material in any of the years presented, are generally recognized in net earnings. - -6- EARNINGS PER SHARE - The company has adopted Statement of Financial Accounting Standards No. 128, Earnings per Share (the "Statement"), effective as of December 27, 1997. The Statement requires a basic calculation of earnings per share (EPS), based upon the weighted average number of common shares outstanding during the period. The Statement also requires a diluted EPS calculation that reflects the potential dilution from common stock equivalents such as stock options and other stock-based compensation. All current and prior years' EPS calculations included herein have been restated under the provisions of the Statement. RECLASSIFICATIONS - Certain reclassifications have been made to prior financial statements to conform to the current year presentation. B. INVENTORIES: Inventories are comprised of the following: December 27, December 28, 1997 1996 ------------ ------------ (In thousands) Product inventories: Raw materials $ 22,952 $ 15,285 Work in process 82,679 76,880 Finished goods 165,970 124,868 ------- ------- 271,601 217,033 Livestock 45,908 28,756 Supplies 72,244 53,911 ------- ------- $389,753 $299,700 ======= ======= C. CREDIT ARRANGEMENTS: At December 27, 1997, IBP had in place two committed revolving credit facilities totaling $600,000,000 in potential borrowings. These facilities include a $500,000,000 multi-year credit facility (the "Multi-Year Facility") and a $100,000,000 revolving promissory note (the "Promissory Note"). From time to time, IBP also may use uncommitted lines of credit for some or all of its short-term borrowing needs. The Multi-Year Facility is a revolving facility with a maturity date of December 20, 2000, which may be extended for one-year increments annually during the revolving period with consent of the banks involved. Facility fees can vary from .085 to .200 of 1% on the total amount of the facility. The Promissory Note was entered into with Bank of America on May 1, 1997 and matures on April 30, 1998. Total borrowings of $304,960,0000 under the revolving facilities at December 27, 1997 are classified as current liabilities with the exception of $112,950,000 which IBP does not intend to repay within one year. This amount is classified as non-current in the consolidated balance sheet. The interest rate at December 27, 1997 on these borrowings was 6.1%. During fiscal 1997, the maximum amount of borrowings under all of IBP's credit arrangements, including any amounts considered non-current, was $540,000,000. Average borrowings under IBP's credit arrangements and the weighted average interest rate during fiscal 1997 were $281,217,000 and 5.9%. The comparable 1996 figures were average borrowings of $68,288,000 and an average interest rate of 5.7%. -7- IBP's credit facility agreements contain certain restrictive covenants which, among other things, (1) require the maintenance of a minimum debt service coverage ratio; and (2) provide for a maximum funded debt ratio. D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses are comprised of the following: December 27, December 28, 1997 1996 ------------ ------------ (In thousands) Accounts payable, principally trade creditors $219,449 $181,161 ------- ------- Checks in process of clearance 126,279 118,624 ------- ------- Accrued expenses: Employee compensation 73,724 76,034 Employee benefits 34,733 21,060 Property and other taxes 25,886 20,267 Marketing costs 13,808 752 Other 75,762 57,173 ------- ------- 223,913 175,286 ------- ------- $569,641 $475,071 ======= ======= E. INCOME TAXES: Income tax expense consists of the following: 1997 1996 1995 --------- --------- ---------- (In thousands) Current: Federal $ 72,000 $100,775 $173,600 State 3,825 8,275 12,100 Foreign (5,300) 4,250 5,100 ------- ------- ------- 70,525 113,300 190,800 ------- ------- ------- Deferred: Federal 3,100 6,575 (10,375) State 300 550 (850) Foreign (2,225) 375 (375) ------- ------- ------- 1,175 7,500 (11,600) ------- ------- ------- $ 71,700 $120,800 $179,200 ======= ======= ======= Total income tax expense varies from the amount which would be provided by applying the U.S. federal income tax rate to earnings before income taxes. The major reasons for this difference (expressed as a percentage of pre-tax earnings) are as follows: 1997 1996 1995 ---- ---- ---- Federal income tax rate 35.0% 35.0% 35.0% Goodwill amortization 2.5 0.8 0.7 State income taxes, net of federal benefit 1.7 1.7 1.8 Foreign Sales Corporation benefits (0.8) (0.5) (0.4) Other, net (0.4) .8 1.9 ---- ---- ---- 38.0% 37.8% 39.0% ==== ==== ==== - -8- The Internal Revenue Service (IRS) has proposed certain income tax adjustments which are being contested by the company involving the years 1989, 1990, and 1991. The IRS is currently examining the years 1992 and 1993. In management's opinion, adequate provisions for income taxes have been made for all years. Deferred income tax liabilities and assets were comprised of the following: December 27, December 28, 1997 1996 ------------ ------------ (In thousands) Deferred tax assets: Nondeductible accrued liabilities $ 90,281 $ 50,796 State tax credit carryforwards 9,996 9,033 Bad debt and claims reserves 3,598 3,890 Acquired federal and state operating loss carryforwards 27,404 7 Other 2,829 1,080 ------- ------ Gross deferred tax assets 134,108 64,806 Valuation allowance (9,996) (9,040) ------- ------ Net deferred tax assets 124,112 55,766 ------- ------ Deferred tax liabilities: Fixed assets (82,746) (81,428) Intangible assets (8,210) - Farm accounting (4,266) (8,115) ------- ------- (95,222) (89,543) ------- ------- $ 28,890 $(33,777) ======= ======= The net $1.0 million increase in the valuation allowance for deferred tax assets is the result of a net increase in state tax credit carryforwards. No benefit has been recognized for these state tax credit carryforwards, which expire primarily in the years 2004 through 2008. At December 27, 1997, after considering utilization restrictions, the company's acquired tax loss carryforwards approximated $82.4 million. The net operating loss carryforwards, which are subject to utilization limitations due to ownership changes, may be utilized to offset future taxable income as follows: $16.9 million in 1998, $16.0 million in 1999 and 2000, $16.1 million in 2001 and 2002 and $1.3 million in 2003. Loss carryforwards not utilized in the first year that they are available may be carried over and utilized in subsequent years, subject to their expiration provisions. These carryforwards expire as follows: $11.5 million in 1998, $6.0 million in 1999, $0.9 million in 2000, $4.2 million in 2001, $17.3 million in 2002 and $42.5 million during the years 2003 through 2009. -9- F. LONG-TERM OBLIGATIONS: Long-term obligations are summarized as follows: December 27, December 28, 1997 1996 ------------ ------------ (In thousands) 7.45% Senior Notes due 2007 $125,000 $ - 10.75% Senior Subordinated Notes due 2006 112,050 - 6.125% Senior Notes due 2006 100,000 100,000 7.125% Senior Notes due 2026 100,000 100,000 Revolving credit facilities 112,950 50,000 Present value of minimum capital lease obligations 19,093 9,610 Other 1,400 1,044 ------- ------- 570,493 260,654 Less amounts due within one year 2,212 646 ------- ------- $568,281 $260,008 ======= ======= In the fourth quarter of 1995, IBP began a process of refinancing its long-term debt. On December 15, 1995, IBP prepaid its $275 million principal amount of 9.82% Senior Notes due 2000 and its $75 million principal amount of 10.39% Senior Subordinated Debentures due 2002. The prepayments were funded with available cash and $250 million borrowed under available credit facilities. Net prepayment premiums and the accelerated amortization of unamortized deferred financing costs totaled $36.4 million, before applicable income tax benefit of $14.2 million, which was accounted for as a net extraordinary loss of $22.2 million in 1995. In January 1996, IBP completed its public offerings of $100 million principal amount of 6 1/8% Senior Notes due 2006 and $100 million principal amount of 7 1/8% Senior Notes due 2026. These offerings were part of a $500,000,000 aggregate principal amount, debt securities program registered with the Securities and Exchange Commission (the "Shelf Registration"). Proceeds from the offerings were used to reduce borrowings under the Multi- Year Facility to $50 million, which was classified as long-term debt at December 28, 1996, due to IBP's ability and intent to refinance this amount on a long-term basis. In June 1997, the company completed its public offering of $125 million principal amount of 7.45% Senior Notes due 2007. Net proceeds from the offering were ultimately used to reduce borrowings under IBP's revolving credit facilities. On January 15, 1998, the company settled and closed its public offering of $50,000,000 aggregate principal amount of 6.00% Remarketable or Redeemable Securities, due January 15, 2011 (the "6.00% Securities"). The net proceeds from the 6.00% Securities were added to the company's working capital. The 6.00% Securities were a series of notes issued under the company's $300,000,000 aggregate principal amount, Medium-Term Notes program which commenced on December 12, 1997, and which in turn is part of the Shelf Registration described above, as amended. - -10- The 10.75% Senior Subordinated Notes are obligations of IBP's newly- acquired subsidiary, Foodbrands America, Inc. ("Foodbrands") (see Note J), which are guaranteed by all of Foodbrands' direct and indirect subsidiaries, all of which are wholly-owned. Substantially all of the leased assets under capital leases can be purchased by IBP at the end of the respective lease terms. Leased assets, which are included with owned property in the consolidated balance sheets, at cost totaled $21.1 million; accumulated amortization on these assets totaled $6.5 million. Aggregate maturities of long-term obligations for each of the five fiscal years subsequent to 1997 are (in millions) $2.2; $2.5; $115.0; $3.1 and $1.4. The company leases various facilities and equipment under noncancelable operating lease arrangements. Future minimum payments under noncancelable operating leases with lease terms in excess of one year at December 27, 1997 totaled $83 million. These operating leases expire at various dates through the year 2015. Aggregate maturities for each of the five fiscal years subsequent to 1997 are (in millions) $16.1; $13.9; $12.6; $7.8 and $5.5. The company's rental expense was (in millions) $15.9; $11.0 and $12.0 for fiscal years 1997, 1996 and 1995. G. STOCK PLANS Officer Long-Term Stock Plans: IBP has officer long-term stock plans which provide for awards to key officers of IBP which, subject to certain restrictions, will vest generally after five years resulting in the delivery of shares of common stock over the one-year period following such vesting. The plans allow for a maximum of approximately 1,310,000 shares of common stock to be delivered; at December 27, 1997, there were approximately 760,000 shares available for future awards. For approximately 125,000 shares (average grant price of $18.56) granted under the plans, the company is obligated to pay the mandatory federal withholding and Medicare taxes upon delivery of the shares. The company recognized compensation expense for these plans totaling $3.3 million, $3.0 million and $2.2 million, respectively, in 1997, 1996 and 1995. - -11- 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 31, 1994 1,119,159 $ 8.53 Granted 177,730 21.75 Delivered 0 - Forfeited (22,069) 8.55 ------------------------------ Balance, December 30, 1995 1,274,820 10.57 Granted 55,585 25.10 Delivered (9,504) 8.28 Forfeited 0 - ------------------------------ Balance, December 28, 1996 1,320,901 11.07 Granted 260,080 21.14 Delivered (1,019,999) 8.41 Forfeited (10,186) 18.36 ------------------------------ Balance, December 27, 1997 550,796 $20.48 ========== ===== 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 27, 1997, the plans provide for the delivery of up to 7,740,000 shares of common stock upon exercise of options granted at no less than the fair market value of the shares on the date of grant. The 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 27, 1997 and December 28, 1996, there were 3,615,000 and 3,926,000 options, respectively, reserved for future grants. The company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for IBP's stock option plans been determined based on the fair value at the grant date for awards in 1997, 1996, and 1995 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 (net earnings in thousands): 1997 1996 1995 ------- ------- ------- Net earnings - as reported $117,014 $198,735 $257,923 Net earnings - pro forma 114,236 196,518 256,407 Earnings per share - as reported 1.26 2.10 2.72 Earnings per share - pro forma 1.23 2.08 2.70 Diluted earnings per share - as reported 1.25 2.07 2.69 Diluted earnings per share - pro forma 1.22 2.05 2.67 -12- The weighted average fair values at date of grant for options granted during 1997, 1996 and 1995 were $7.91, $9.89 and $9.50, respectively. The fair value of each option is estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted-average assumptions for options granted in 1997, 1996 and 1995: 1997 1996 1995 --------- --------- --------- Expected option life 6.0 years 6.0 years 6.0 years Expected annual volatility 26.0% 29.7% 29.7% Risk-free interest rate 5.75% 6.51% 5.56% Dividend yield .44% .44% .44% 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 31, 1994 3,854,076 $11.47 1,489,924 Granted 1,526,097 24.55 Exercised (466,626) 8.49 Forfeited (329,952) 13.88 - --------------------------------------------------------------- Balance at December 30, 1995 4,583,595 14.93 1,256,358 Granted 675,388 24.25 Exercised (464,362) 10.04 Forfeited (244,693) 19.88 - --------------------------------------------------------------- Balance at December 28, 1996 4,549,928 16.09 1,721,044 Granted 658,249 21.63 Exercised (738,498) 8.78 Forfeited (344,451) 21.25 - --------------------------------------------------------------- Balance at December 27, 1997 4,125,228 $17.85 1,846,317 - --------------------------------------------------------------- The following table summarizes information about stock options outstanding at December 27, 1997: Number Weighted Average Range of Outstanding Remaining Weighted Average Exercisable prices At 12/27/97 Contractual Life Exercise Price - ------------------ ----------- ---------------- --------------- $ 6 to 15 1,510,871 5.8 Years $10.39 16 to 25 2,536,185 8.2 Years 21.98 26 to 35 78,172 7.8 Years 28.09 - --------------------------------------------------------------------- $ 6 to 35 4,125,228 7.0 Years $17.85 Number Range of Exercisable Weighted Average Exercisable prices At 12/27/97 Exercise Price - ------------------ ----------- ---------------- $ 6 to 15 1,196,151 $ 9.81 16 to 25 631,431 20.89 26 to 35 18,735 28.77 - --------------------------------------------------- $ 6 to 35 1,846,317 $13.79 - -13- Share Delivery Restrictions: Shares of common stock to be delivered for approximately 975,000 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 andthe 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: 1997 1996 1995 ---------- ----------- ----------- (In thousands) Interest, net of amounts capitalized $37,670 $ 2,045 $ 34,040 Income taxes 39,017 108,625 192,028 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 enters 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. The notional amounts of these swap agreements were $75 million at year-end 1997 and $100 million at year-end 1996. 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 exposure on live cattle purchase commitments in foreign currencies. At December 27, 1997, the company had outstanding contracts to buy Canadian dollars totaling CDN$34.0 million at various dates through December 1998. Comparable outstanding contracts at year-end 1996 totaled CDN$22.6 million. There were no material realized or unrealized gains or losses for any derivative financial instruments in any of the fiscal years presented. The company monitors the risk of default by its financial instrument counter- parties, 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 27, 1997: 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. - -14- 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 1997, the fair value exceeded the carrying value by $22.1 million. At year-end 1996, the carrying value exceeded the fair value by $9.3 million. The change in fair value from 1996 to 1997 was due largely to the addition of Foodbrands' 10.75% Senior Subordinated Notes. A general decline in market interest rates also impacted the change. For derivatives, the fair value was estimated using termination cash values. At year-end 1997, interest rate swap agreement values would represent an obligation of $0.1 million. The fair value of foreign currency derivatives at December 27, 1997 would represent an obligation of $0.4 million and at December 28, 1996 would represent an obligation of $0.2 million. J. ACQUISITION On May 7, 1997, the company, through a wholly-owned subsidiary, completed a merger with Foodbrands America, Inc. for approximately $287 million, excluding transaction costs, and assumed liabilities of approximately $528 million. Foodbrands is a leading U.S. producer, marketer and distributor of frozen and refrigerated products to the "away from home" food preparation market. The acquisition was accounted for by the purchase method of accounting. The excess of the aggregate purchase price over fair value of identifiable assets and liabilities acquired of approximately $463 million was recognized as goodwill and is being amortized over 40 years. Foodbrands' historical goodwill of approximately $182 million was eliminated. The operating results of Foodbrands are included in IBP's consolidated results of operations from the date of acquisition. The following pro forma financial information assumes the acquisition occurred at the beginning of 1996. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 1996, or of the results which may occur in the future (in thousands except per share data). 52 Weeks Ended --------------------------- Dec. 27, Dec. 28, 1997 1996 ----------- ----------- Net sales $13,508,370 $13,283,587 Earnings from operations 240,080 364,379 Earnings before extraordinary item 116,035 202,756 Net earnings 116,035 197,705 Earning per share: Earnings before extraordinary item $1.25 $2.14 Net earnings 1.25 2.09 Earnings per share - assuming dilution: Earnings before extraordinary item 1.24 2.11 Net earnings 1.24 2.06 The company made other acquisitions in 1997 for which pro forma results were not included above because the impact was not material. -15- K. PENSION PLANS: IBP's subsidiary, Foodbrands America, Inc., has defined benefit pension plans at three of its facilities. The funded status of these defined benefit plans at December 27, 1997 is as follows (in thousands): 1997 ------- Actuarial present value of benefit obligations: Vested benefit obligation $66,752 ====== Accumulated benefit obligation $68,933 ====== Projected benefit obligation $68,933 Plan assets at fair value 65,110 ------ Projected benefit obligation in excess of plan assets 3,823 Unrecognized net actuarial loss - difference in assumptions and actual experience (317) Adjustment required to recognize additional minimum liabilty 551 ------ Accrued pension cost $ 4,057 ====== Plan assets are comprised of cash and cash equivalents and mutual funds investing primarily in interest bearing and equity securities. The funding policy for the plan at one facility is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, and the plans at the other two facilities are funded based upon a recommendation from the company's actuary. Such contributions for the plans at these two facilities have, in prior years, exceeded the minimum funding requirements. Pension cost of the defined benefit plans for the full fiscal year 1997 was composed of the following (in thousands): 1997 ------ Service cost for benefits earned during the year $ 411 Interest cost on projected benefit obligation 4,956 Return on plan assets (4,993) ------ Total pension cost $ 374 ====== Actuarial assumptions used in determining the pension cost for fiscal 1997 included an expected long-term return on plan assets of 8.5% and a discount rate of 7.25%. - -16- L. POSTRETIREMENT MEDICAL BENEFITS IBP's subsidiary, Foodbrands America, Inc., provides life insurance and medical benefits ("Postretirement Medical Benefits") for substantially all retired hourly and salaried employees of one of its subsidiaries under various defined benefit plans. Contributions are made by certain retired participants toward their Postretirement Medical Benefits. The components of net periodic postretirement benefit cost for the full fiscal year ended December 27, 1997, were as follows (in thousands): 1997 ------ Service cost $ 197 Interest on accumulated benefit obligation 5,213 Other (2) ----- Net periodic postretirement benefit cost $5,213 ===== The actuarial and recorded liabilities for these Postretirement Medical Benefits at December 27, 1997, was as follows (in thousands): 1997 ------- Accumulated postretirement benefit obligation: Retirees and dependents $62,624 Actives mot fully eligible 5,070 Actives fully eligble 1,716 ------ 69,410 Assets at fair value 9 ------ Accumulated postretirement benefit obligation in excess of plan assets 69,401 Unrecognized net gain (loss) (1,259) Unrecognized prior service cost 355 ------ Liability recognized on the balance sheet 68,497 Less current portion 6,426 ------ Noncurrent liability for postretirement medical benefits $62,071 ====== For measuring the accumulated postretirement medical benefit obligation, a 9.9% annual rate of increase in the per capita claims cost was assumed for 1997. This rate was assumed to decrease gradually to 8.9% by 2000, 7.7% by 2005, and 6.5% by 2010 and remain at that level thereafter. The weighted average discount rate used in determining the accumlated obligation was 7.25% for fiscal 1997. The expected long-term rate of return on plan assets was 6.0% for fiscal 1997. If the health care cost trend rate were increased 1.0%, the accumulated benefit obligation as of December 27, 1997 would have increased by $2.4 million. The effect of this change on the aggregate of service and interest cost for the year ended December 27, 1997 would be an increase of $0.2 million. -17- M. EARNINGS PER SHARE For the Year Ended December 27, 1997 ------------------------------------- Earnings Shares Per Share (in thousands, except per share (Numerator) (Denominator) Amount amounts) ----------- ------------- ---------- Basic EPS Net earnings $117,014 92,651 $1.26 ==== Effect of Dilutive Securities Stock options 957 Officer long-term stock plans 184 ------- ------ Diluted EPS $117,014 93,792 $1.25 ======= ====== ==== For the Year Ended December 28, 1996 -------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ----------- Basic EPS Net earnings $198,735 94,688 $2.10 ==== Effect of Dilutive Securities Stock options 1,375 Officer long-term stock plans 27 ------- ------- Diluted EPS $198,735 96,090 $2.07 ======= ======= ==== For the Year Ended December 30, 1995 -------------------------------------- Earnings Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ----------- Basic EPS Earnings before extraordinary item $280,112 94,745 $2.96 ==== Effect of Dilutive Securities Stock options 1,323 ------- ----- Diluted EPS $280,112 96,068 $2.92 ======= ====== ==== 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 option's exercise price was greater than the average market price of the common shares. These options had varying expiration dates. 1997 1996 1995 ----- ----- ----- Stock options excluded from Diluted EPS computation 1,406 978 237 Average option price per share $24.95 $25.70 $25.89 N. COMMITMENTS AND 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 consolidated results of operations, financial position or liquidity. -18- In July 1996, a lawsuit was filed against IBP by certain cattle producers in the U.S. District Court, Middle District of Alabama, seeking certification of a class of all cattle producers. The complaint alleges, inter alia, that IBP has used its market power and alleged "captive supply" agreements to reduce the prices paid to producers for cattle. Plaintiffs recently disclosed that, in addition to declaratory relief and punitive damages, they seek disgorgement of all profits earned in 1994, 1995 and 1996 in excess of what they deem a "fair" return. Management believes that class certification is unlikely and that, in any event, it has acted properly and lawfully in its dealings with cattle producers. A former employee sued the company for slander and breach of fiduciary duty and was awarded $15,004,000, all of which was provided for in 1994. On appeal, the Iowa Supreme Court reduced the amount to $2,000,000. The company reduced its $15,000,000 reserve to $100,000 in the fourth quarter of 1996 and expects coverage for the remaining amount under its general liability insurance. O. QUARTERLY FINANCIAL DATA (UNAUDITED): Quarterly results are summarized as follows: (In thousands except per share data) First Second Third Fourth 1997 Quarter Quarter Quarter Quarter Annual - ---- ------- ------- ------- ------- ------ Net sales $3,134,591 $3,448,337 $3,416,706 $3,259,150 $13,258,784 Gross profit 83,319 119,496 125,441 114,636 442,892 Net earnings 32,310 33,864 29,121 21,719 117,014 Earnings per share .34 .37 .32 .23 1.26 Earnings per share - assuming dilution .34 .36 .31 .23 1.25 Dividends per share .025 .025 .025 .025 .10 Market price: High 25 1/2 25 1/2 24 1/4 25 Low 23 22 3/4 22 9/16 20 11/16 1996 - ---- Net sales $3,084,722 $3,260,268 $3,175,940 $3,017,823 $12,538,753 Gross profit 117,900 175,587 94,472 55,623 443,582 Net earnings 53,027 86,988 40,467 18,253 198,735 Earnings per share .56 .92 .43 .19 2.10 Earning per share - assuming dilution .55 .90 .42 .19 2.07 Dividends per share .025 .025 .025 .025 .10 Market price: High 27 1/8 28 7/8 27 5/8 26 1/2 Low 23 1/4 23 3/8 22 3/4 23 1/8 -19- MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Gross profit, measured as a percentage of net sales, decreased to 3.3% in 1997 from 3.5% in 1996. Excluding results of new acquisitions Foodbrands America, Inc. and The Bruss Company (see descriptions of acquisitions below), gross profit fell to 2.5% in 1997. IBP's fresh meats margins were reduced by increasing supplies of competing meats and new plant start up losses at the company's beef processing facility in Canada, pork complex in Logansport, Indiana, and cooked meats plant in Columbia, South Carolina. In addition, export demand in important Asian markets was slowed in the latter part of 1997 by food safety scares and a stronger U.S. dollar versus Asian currencies. Livestock Supplies IBP's fed beef carcass production and plant capacity utilization were virtually the same in 1997 as in 1996, although higher average live animal weights produced an increase in pounds of beef products sold. Meanwhile, cow division production decreased 13% versus 1996 and the company processed 2.5% fewer hogs in 1997 from the previous year. According to the U.S. Department of Agriculture ("USDA") and industry sources, fed cattle supplies for the first few months of 1998 will be above 1997 levels, followed by a period of declining supplies over the remainder of the year. Overall, 1998 cattle supplies are expected to be down 1% to 2% from the previous year. Cow slaughter is also expected to be lower in 1998 than in 1997. On the other hand, industry sources expect that live hog supplies will be approximately 6% higher in 1998 compared to a year earlier. Strategic Growth The company made several strategic moves in 1997 to expand its presence in higher growth and margin businesses and to realign its available fresh meats production base to capitalize on shifting concentrations of livestock supplies. These moves included business acquisitions and plant expansions and shutdowns. Acquisitions of Foodbrands America, Inc. ("Foodbrands") and the Bruss Company ("Bruss") were completed in the second quarter 1997. The Foodbrands purchase, effective as of May 7, 1997, has extended the company's product base into value-added, branded food products. Foodbrands is a leading U.S. producer, marketer and distributor of frozen and refrigerated products to the "away from home" food preparation market, which is a fast-growing segment of the food industry. An industry leader in pizza toppings sales, Foodbrands is also a major provider of value-added, pork-based products to the foodservice industry. Foodbrands produces over 1,600 branded and custom products, including pizza toppings and crusts, ethnic specialty foods, breaded appetizers, soups, sauces and side dishes as well as deli meats and processed beef, pork and poultry products. The Bruss purchase, effected as of May 30, 1997, has brought to IBP a processor of individual cuts of premium quality beef and pork for sale to restaurants both domestically and internationally. Both companies contributed positively to net earnings in 1997. - -20- IBP's fresh meats division introduced a new line of "Consumer Friendly" beef and pork cuts in 1997 that are packaged for immediate sale in the retail meat case. The product line offers advantages to the retailer in increased food safety, a longer product shelf life and reduced handling costs. For the consumer, the cuts are closely trimmed and include cooking instructions and/or seasonings for ease of use. Foodbrands purchased a bacon topping manufacturer, Winchester Food Processing, Inc., in Hutchinson, Kansas, in the third quarter 1997. This company, with projected net sales of approximately $25 million annually, produces bacon toppings and bacon bits for the foodservice industry. The company acquired a major ground beef manufacturing plant in Columbus, Nebraska, in August 1997. The plant is building its production and customer bases and will enhance IBP's presence in a growing segment of retail and foodservice markets. Production Realignment In the fresh meats division, boxed beef production at the company's Alberta, Canada, facility commenced in early 1997. In early 1998, management announced plans to permanently close its Luverne, Minnesota, carcass beef plant in March 1998. Available production capacity at other IBP beef plants is sufficient to offset lost production from the Luverne facility. Fresh pork production capacity was increased at some IBP plants and reduced or discontinued at others. The company's Logansport, Indiana, pork complex began a second production shift in 1997 while activities at the Louisa County, Iowa, facility were reduced to one shift from two shifts and carcass production ceased at the Council Bluffs, Iowa, complex. The company also transferred the management responsibility of three of its Consumer Products foodservice plants to Foodbrands. This move brings Foodbrands' production, marketing and distribution expertise to those facilities and gives Foodbrands added capacity and flexibility in growing its related businesses. The matters discussed herein contain forward-looking statements that involve risks and uncertainties including risk of changing market conditions with regard to livestock supplies and demand for the company's products, domestic and international regulatory risks, competitive and other risks over which IBP has little or no control. Consequently, future results may differ from management's expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. COMPARISON OF 1997 TO 1996 SALES Net sales in 1997 rose 6% compared to 1996, with Foodbrands and Bruss accounting for most of the increase. In IBP's comparative core operations, 1997 net sales were up slightly from 1996 due primarily to increased pounds of beef products sold. -21- Net export sales in 1997 were also slightly higher in comparison to 1996. Except for Japan, the company achieved positive year-over-year comparisons in all significant export markets. Exports to Japan improved throughout most of 1997 from the second half of 1996. A food safety scare had sharply curtailed U.S. red meat sales into Japan in 1996. The Asian financial crisis began to adversely impact exports late in 1997 as the strengthening U.S. dollar made American products more expensive for Japanese customers. Total net exports accounted for 12.7% of consolidated net sales in 1997 versus 13.4% in 1996. The USDA has predicted that U.S. red meat exports will decline in 1998. They foresee improved sales to Mexico and other Central and South American destinations being more than offset by lower sales to Pacific Rim countries. The stronger U.S. dollar in relation to Asian currencies as well as currencies of competing exporters to Asia (e.g., Australia) will make exports to the Pacific Rim more difficult for U.S. companies. COST OF PRODUCTS SOLD The 6% increase in cost of products sold from 1996 to 1997 was due largely to the impact of Foodbrands and Bruss. Excluding the impact of these entities, IBP's core fresh meats costs in 1997 compared to 1996 increased due primarily to the new plant start ups in Alberta, Canada, Logansport, Indiana, and Columbia, South Carolina. A higher average price paid for live cattle also contributed to higher cost of products sold. Plant costs in 1997 for comparable operations increased over 1996 primarily as a result of higher labor costs. Additionally, 1996 cost of products sold was reduced $13 million (after bonus impact) by reduction of a workers' compensation lawsuit reserve. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense in 1997 was 79% higher than in 1996 due primarily to expenses incurred at Foodbrands. Foodbrands' selling expense is much higher as a percentage of net sales compared to IBP's fresh meats operations due to the value-added nature of their respective product lines which require higher levels of customer contact, broker relationships, 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 acquisition. Excluding the impact of the Foodbrands and Bruss acquisitions, 1997 expenses were slightly higher than in the prior year due in part to higher personnel-related costs, outside contract services and international selling expense. These higher costs were partially offset by reduced incentive compensation resulting from lower operating earnings. INTEREST EXPENSE Net interest expense rose significantly in 1997 versus 1996 due mainly to the Foodbrands and Bruss acquisitions. Incremental borrowings were necessary to acquire these companies and Foodbrands had existing debt of $341 million at the purchase date. Total consolidated outstanding borrowings averaged $654 million in 1997 compared to $265 million in 1996. The company's effective average interest rate increased also, due primarily to the addition of Foodbrands' $112 million of 10.75% Senior Subordinated Notes. Management expects that net interest expense in the foreseeable future will continue to be significantly higher than in 1996. - -22- COMPARISON OF 1996 to 1995 SALES Net sales in 1996 were 1.0% below the record level achieved in 1995. A decrease in pounds of beef and pork products sold in IBP's core fresh meats operations in 1996 versus 1995 as well as a decrease in the average price of beef products sold were the primary factors in the lower 1996 net sales. These factors were partially offset by an increase in the average price of pork products sold and a full year of cow boning operations in 1996 (nine months in 1995 for the three plants purchased in 1995 and no prior year sales for the Palestine plant purchased in the second quarter 1996). IBP's net export sales in 1996 were 8% lower than in 1995. An outbreak of E. Coli, a bacterial illness, in Japan, the company's most significant export market, caused a food safety scare among Japanese consumers. This problem significantly reduced IBP exports to the Pacific Rim during the second half of 1996, even though the source of the illnesses appeared to be non-meat related. Exports accounted for 13.4% of consolidated net sales in 1996 compared to 14.4% in 1995. COST OF PRODUCTS SOLD A 1% increase in 1996 cost of products sold from 1995 was due primarily to a full year of operations in 1996 for three cow boning plants purchased in 1995 versus nine months in the prior year. Meanwhile, 1996 livestock costs in the company's core beef and pork operations decreased from 1995. A lower average price paid for live cattle and fewer pounds of beef products sold were partially offset by the effect of a higher average price paid for live hogs. Livestock costs comprised 88% of total cost of products sold in 1996 and 1995. The cost of products sold in 1996 was reduced $13 million (after bonus impact) by reduction of a workers' compensation lawsuit reserve due to favorable developments in the fourth quarter 1996. In addition, 1995 cost of products sold included $18 million (after bonus impact) for a second quarter adjustment to salvage value for most fixed assets to better reflect actual experience. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Reduced incentive compensation based upon lower 1996 operating earnings was the most significant factor in the 3% decrease in 1996 expense from 1995. Administrative costs were higher in 1996 as a result of higher personnel - -related costs to support the company's expanding operations. Selling expense also increased in 1996 over 1995 due principally to higher international selling costs as the company added foreign service centers in Korea and Taiwan. INTEREST EXPENSE Net interest expense in 1996 fell 84% from the year earlier. These reductions resulted in part from a lower effective interest rate due to the refinancing of substantially all of IBP's long-term obligations at lower rates early in 1996. Additionally, 1996 borrowings averaged almost $100 million less than in 1995 due to continued strong operating cash flows. - -23- 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 ten days to turn its product inventories and fifteen days to convert its trade receivables to cash. These factors, combined with fluctuations in production levels, selling prices and prices paid for livestock, can impact cash requirements substantially on a day-to-day basis. To provide cash for its working capital requirements, the company's credit facilities (more fully described in Note C to the consolidated financial statements) provide IBP with same-day access to an aggregate of $600 million in potential committed borrowings. The unused portion of the credit lines was $295 million at December 27, 1997 and was $300 million at the end of fiscal January 1998. Although IBP has significant working capital requirements, its accounts receivable and inventories are highly liquid, characterized by rapid turnover. The following are key indicators relating to IBP's working capital, asset-based liquidity, and leverage ratios: December 27, December 28, 1997 1996 ------------ ------------ Working capital (in millions) $207 $541 Current ratio 1.2:1 1.9:1 Quick ratio 0.7:1 1.3:1 Number of days' sales in accounts receivable 15.3 14.0 Inventory turnover 35.2 40.3 Earnings to fixed charges 4.3 14.5 The acquisitions of Foodbrands and Bruss necessitated an increase in short- term borrowings ($192 million as of December 27, 1997 versus $0 as of December 28, 1996), thus reducing the company's working capital and associated ratios. Also, the company liquidated most of its short-term investments which were classified as cash equivalents and marketable securities to help fund the acquisitions and other cash requirements. Additionally, the nature of the new subsidiaries' businesses (e.g., product lines, distribution channels, customers and credit terms) is closer to the final consumer than is IBP's fresh meats business. Correspondingly, receivables and inventory turnover rates are typically slower for such businesses with value-added products. For comparative IBP operations, receivables and inventory turnover rates for the company's fresh meats operations in 1997 were comparable with 1996 rates. Immediately after acquiring Foodbrands in early May 1997, IBP borrowed against its $500 million revolving credit facility to pay off Foodbrands' higher interest-rate bank debt totaling $211 million. As of December 27, 1997, Foodbrands had $115 million of 10.75% Senior Subordinated Notes still outstanding, $3 million of which was held by IBP. - -24- In May 1997, the company entered into a one-year, $100 million credit agreement with Bank of America. This credit agreement gives the company additional short-term borrowing capacity and flexibility given the increased borrowings against the existing $500 million revolving credit facility. In June 1997, the company completed its offering of $125 million principal amount of 7.45% Senior Notes due 2007. Proceeds from the offering were used ultimately to reduce borrowings under IBP's revolving credit facilities. In January 1998, the company settled and closed its public offering of $50 million aggregate principal amount of 6.00% Remarketable or Redeemable Securities, due January 15, 2011 (the "6.00% Securities"). The net proceeds from the 6.00% Securities were added to the company's working capital. The 6.00% Securities were a series of notes issued under the company's $300 million aggregate principal amount, Medium-Term Notes program which commenced in December 1997, and which in turn is part of the $500 million aggregate principal amount, Debt Securities program registered with the Securities and Exchange Commission. Capital expenditures in 1997 totaled $134 million compared to $171 million in 1996. Current year spending was primarily for equipment replacements and modifications to existing facilities as well as the addition of processing facilities at the company's Brooks, Alberta, Canada, beef plant. Management's estimate of 1998 capital spending is in the range of $175 million, which the company intends to fund from operating cash flows and available debt facilities. YEAR 2000 Management has assessed the capability of its computer-based systems to properly handle dates of January 1, 2000 and beyond. Necessary modifications to systems have been identified and have either been implemented or are in the process of being implemented. Management believes these issues are being addressed appropriately and expects that costs incurred to complete the modifications will not be material. - -25- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IBP, inc. We have audited the accompanying consolidated balance sheets of IBP, inc. and subsidiaries as of December 27, 1997 and December 28, 1996, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 27, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IBP, inc. and subsidiaries as of December 27, 1997 and December 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 27, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Omaha, Nebraska January 23, 1998 REPORT ON FINANCIAL STATEMENT INTEGRITY BY MANAGEMENT To our stockholders: IBP's consolidated financial statements have been prepared by management and we are responsible for their integrity and objectivity. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). We believe these statements present fairly the company's financial position and results of operations. Our independent auditors, Coopers & Lybrand L.L.P., have audited these consolidated financial statements. Their audit was conducted using generally accepted auditing standards, which included consideration of our internal controls in order to form an independent opinion on the financial statements. We have made available to Coopers & Lybrand L.L.P. all the company's financial records, as well as the minutes of meetings of stockholders and directors. IBP relies on a system of internal accounting controls to provide assurance that assets are safeguarded and transactions are properly authorized and recorded. We continually monitor these controls, modifying and improving them as business operations change. IBP maintains a strong internal auditing department that independently reviews and evaluates these controls as well. - -26- 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 Coopers & Lybrand L.L.P. have complete access to the Board's Audit Committee with or without the presence of management personnel. Our management team is responsible for proactively fostering a strong climate of ethical conduct so that the company's affairs are carried out according to the highest standards of personal and corporate behavior. This responsibility is specifically demonstrated in IBP's conflict of interest policy which requires annual written acknowledgment by each and every officer and those management personnel so designated. We are pleased to present this annual report and the accompanying consolidated financial statements for your review and consideration. Most sincerely, /s/ Robert L. Peterson /s/ Larry Shipley - ------------------------- -------------------- Robert L. Peterson Larry Shipley Chairman and Chief Executive Officer President, IBP Enterprises IBP, inc. & Chief Financial Officer IBP, inc. - -27- EX-21 4 EXHIBIT 21 SUBSIDIARIES OF IBP, inc. December 27, 1997 The Bruss Company Foodbrands America, Inc. (1) IBP Caribbean Inc. IBP Finance Company of Canada IBP Foodservice, LLC (2) IBP Foreign Sales Corporation IBP Hog Markets, Inc.(3) IBP International, Inc. IBP International, Inc. Asia(4) IBP International, Inc. Europe(4) IBP of Wisconsin, inc. IBP Service Center Corp. Lakeside Farm Industries Ltd. Lakeside Feeders Ltd.(5) PBX, inc. Prepared Foods, Inc. Rural Energy Systems, Inc. Supreme Processed Foods, Inc. Texas Transfer, Inc. (1) Stock is 100% owned by IBP Foodservice, LLC (2) Membership consists of IBP, inc.; IBP Caribbean, Inc.; and Prepared Foods, Inc. (3) Also doing business as Heinold Hog Market (4) Stock is 100% owned by IBP International, Inc. (5) Stock is 100% owned by Lakeside Farm Industries Ltd. EX-23 5 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the registration statements of IBP, inc. on Form S-3 (File No. 33-64459) and on Form S-8 (File No. 33-19441) of our report dated January 23, 1998, on our audits of the consolidated financial statements and financial statement schedule of IBP, inc. as of December 27, 1997 and December 28, 1996 and for each of the three years in the period ended December 27, 1997, which report is incorporated by reference in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Omaha, Nebraska March 25, 1998 EX-27 6
5 1,000 YEAR DEC-27-1997 DEC-27-1997 69,022 3,120 574,188 10,063 389,753 1,083,927 1,791,776 774,694 2,838,941 876,818 568,281 0 0 4,750 1,232,319 2,838,941 13,258,784 13,258,784 12,815,892 12,815,892 216,176 0 38,002 188,714 71,700 117,014 0 0 0 117,014 1.26 1.25
EX-27 7
5 1,000 YEAR DEC-28-1996 DEC-28-1996 94,164 169,476 510,654 9,873 299,700 1,110,585 1,513,716 697,510 2,174,195 569,682 260,008 0 0 4,750 1,198,905 2,174,195 12,538,753 12,538,753 12,095,171 12,095,171 120,674 0 3,373 319,535 120,800 198,735 0 0 0 198,735 2.10 2.07
EX-27 8
5 1,000 YEAR DEC-30-1995 DEC-30-1995 116,277 63,851 539,290 9,494 303,711 1,068,890 1,359,525 632,666 2,027,601 641,649 260,752 0 0 4,750 1,018,189 2,027,601 12,667,562 12,667,562 12,063,494 12,063,494 123,972 0 20,784 459,312 179,200 280,112 0 (22,189) 0 257,923 2.72 2.69
EX-27 9
5 1,000 9-MOS DEC-27-1997 SEP-27-1997 32,561 4,235 623,108 10,820 392,021 1,114,594 1,757,949 754,656 2,847,441 924,896 568,749 0 0 4,750 1,219,181 2,847,441 9,999,634 9,999,634 9,671,378 9,671,378 150,159 0 24,502 153,595 58,300 95,295 0 0 0 95,295 1.03 1.02
EX-27 10
5 1,000 6-MOS DEC-27-1997 JUN-28-1997 27,170 11,317 637,586 10,743 399,414 1,137,477 1,734,296 735,822 2,869,863 974,868 568,633 0 0 4,750 1,196,243 2,869,863 6,582,927 6,582,927 6,380,308 6,380,308 85,503 0 10,442 106,674 40,500 66,174 0 0 0 66,174 .71 .70
EX-27 11
5 1,000 3-MOS DEC-27-1997 MAR-29-1997 44,892 57,322 520,099 9,972 311,240 970,755 1,542,135 714,679 2,052,124 517,723 259,688 0 0 4,750 1,166,165 2,052,124 3,134,590 3,134,590 3,051,734 3,051,734 30,996 0 550 51,310 19,000 32,310 0 0 0 32,310 .34 .34
EX-27 12
5 1,000 9-MOS DEC-28-1996 SEP-28-1996 25,299 142,388 520,329 9,785 299,556 1,031,460 1,480,938 680,863 2,091,920 536,226 260,127 0 0 4,750 1,184,578 2,091,920 9,520,930 9,520,930 9,132,971 9,132,971 93,211 0 3,566 291,182 110,700 180,482 0 0 0 180,482 1.91 1.88
EX-27 13
5 1,000 6-MOS DEC-28-1996 JUN-29-1996 41,473 110,452 558,405 9,706 299,249 1,053,343 1,436,067 663,445 2,076,905 557,382 260,192 0 0 4,750 1,148,632 2,076,905 6,344,990 6,344,990 6,051,503 6,051,503 64,688 0 3,084 225,715 85,700 140,015 0 0 0 140,015 1.48 1.46
EX-27 14
5 1,000 3-MOS DEC-28-1996 MAR-30-1996 70,449 45,215 552,948 9,592 291,919 1,005,987 1,407,568 664,937 1,986,569 550,098 260,257 0 0 4,750 1,066,751 1,986,569 3,084,722 3,084,722 2,966,445 2,966,445 30,874 0 1,776 85,627 32,600 53,027 0 0 0 53,027 .56 .55
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