-----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, Lns7Bu1MDTHidHHQELQdkCbaJ/LYxj055yxavWc1P+wDtaagpSPZkiBebadQ7u9G zkZgFbXkKnXzMnZUrw6sWw== 0000088121-99-000005.txt : 19990326 0000088121-99-000005.hdr.sgml : 19990326 ACCESSION NUMBER: 0000088121-99-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEABOARD CORP /DE/ CENTRAL INDEX KEY: 0000088121 STANDARD INDUSTRIAL CLASSIFICATION: POULTRY SLAUGHTERING AND PROCESSING [2015] IRS NUMBER: 042260388 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03390 FILM NUMBER: 99572055 BUSINESS ADDRESS: STREET 1: 9000 W. 67TH STREET CITY: SHAWNEE MISSION STATE: KS ZIP: 66201 BUSINESS PHONE: 9136768800 MAIL ADDRESS: STREET 1: 9000 W. 67TH STREET CITY: SHAWNEE MISSION STATE: KS ZIP: 66202 FORMER COMPANY: FORMER CONFORMED NAME: SEABOARD ALLIED MILLING CORP DATE OF NAME CHANGE: 19820328 FORMER COMPANY: FORMER CONFORMED NAME: HATHAWAY BAKERIES INC DATE OF NAME CHANGE: 19710315 10-K405 1 SEABOARD CORP. 1998 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________________ to ____________________________ Commission file number 1-3390 Seaboard Corporation (Exact name of registrant as specified in its charter) Delaware 04-2260388 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9000 W. 67th Street, Shawnee Mission, Kansas 66202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (913)676-8800 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock American Stock Exchange $1.00 Par Value Securities registered pursuant of Section 12(g) of the Act: None (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X (Continued) State the aggregate market value of the voting stock held by non- affiliates of the Registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $122,179,750 (March 5, 1999). On such date, 349,085 shares were held by non-affiliates, and the closing price of the stock was $350.00 per share. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 1,487,519.75 shares of Common Stock as of March 5, 1999. DOCUMENTS INCORPORATED BY REFERENCE Part I, item 1(b), a part of item 1(c)(1) and the financial information required by item 1(d) and Part II, items 5, 6, 7, 7A and 8 are incorporated by reference to the Registrant's Annual Report to Stockholders furnished to the Commission pursuant to Rule 14a-3(b). Part III, a part of item 10 and items 11, 12 and 13 are incorporated by reference to the Registrant's definitive proxy statement filed pursuant to Regulation 14A for the 1999 annual meeting of stockholders (the "1999 Proxy Statement"). This Form 10-K and its Exhibits (Form 10-K) contain forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which may include statements concerning projection of revenues, income or loss, capital expenditures, capital structure or other financial items, statements regarding the plans and objectives of management for future operations, statements of future economic performance, statements of the assumptions underlying or relating to any of the foregoing statements and other statements which are other than statements of historical fact. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief or current expectations of the Company and its management with respect to (i) the cost and timing of the completion of new or expanded facilities, (ii) the Company's financing plans, (iii) the price of feed stocks and other materials used by the Company, (iv) the price for the Company's products and services, (v) the effect of Tabacal on the consolidated financial statements of the Company, (vi) the impact of Year 2000 issues, or (vii) other trends affecting the Company's financial condition or results of operations. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially as a result of various factors. The accompanying information contained in this Form 10-K, including without limitation, the information under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations", identifies important factors which could cause such differences. PART I Item 1. Business (a) General Development of Business Seaboard Corporation, a Delaware corporation, the successor corporation to a company first incorporated in 1928, and subsidiaries ("Registrant" or "Company"), is a diversified international agribusiness and transportation company which is primarily engaged in domestic poultry and pork production and processing, and cargo shipping. Overseas, the Company is primarily engaged in commodity merchandising, flour and feed milling, produce farming, sugar production, and electric power generation. See Item 1(c) (1) (ii) below for a discussion of developments in specific segments. (b) Financial Information about Industry Segments The information required by Item 1 relating to Industry Segments is hereby incorporated by reference to Note 12 of Registrant's Consolidated Financial Statements appearing on pages 41, 42 and 43 of the Registrant's Annual Report to Stockholders furnished to the Commission pursuant to Rule 14a-3(b) and attached as Exhibit 13 to this Report. (c) Narrative Description of Business (1) Business Done and Intended to be Done by the Registrant (i) Principal Products and Services Registrant produces and processes poultry in the United States and sells processed chicken and chicken parts, both directly and through commercial distributors, foodservice and institutional markets, to retail, primarily in the eastern half of the United States and foreign markets. Registrant produces hogs and processes pork in the United States and sells fresh pork to further processors, foodservice and retail, primarily in the western half of the United States and foreign markets. Hogs produced at Company owned or leased facilities are processed at the Company's processing plant. Registrant operates an ocean liner service for containerized cargo primarily between Florida and ports in the Caribbean Basin and Central and South America. Registrant sources and trades commodities, such as bulk grains and oilseeds, for its subsidiaries, affiliates and third parties primarily in Africa, the Caribbean, Central and South America, the Eastern Mediterranean and Europe. Registrant operates its own bulk carriers primarily in the Atlantic Basin to conduct a portion of its commodity trading activities. Registrant, by itself or through non-controlled subsidiaries, operates flour and feed mills in Africa, the Caribbean and South America. Registrant, by itself or through non-controlled affiliates, produces and processes produce and shrimp in Central and South America, primarily for export to the U.S. and Europe. Registrant also brokers fruits, vegetables and shrimp for independent growers. The majority of these products are transported using the Registrant's shipping line and distribution facility in Miami, Florida. Registrant also operates a power generating facility in the Dominican Republic, produces and refines sugarcane and produces and processes citrus in Argentina, and produces wine in Bulgaria. The Registrant, through non- controlled affiliates, produces salmon and processes seafood in Maine. The information required by Item 1 with respect to the amount or percentage of total revenue contributed by any class of similar products or services which account for 10% or more of consolidated revenue in any of the last three fiscal years is hereby incorporated by reference to Note 12 of Registrant's Consolidated Financial Statements appearing on pages 41, 42 and 43 of the Registrant's Annual Report to Stockholders furnished to the Commission pursuant to rule 14a-3(b) and attached as Exhibit 13 to this report. (ii) Status of Product or Segment Registrant continues to expand its poultry and pork segments by further investing in pork and poultry production and processing facilities. The Registrant plans to expand its Mayfield, Kentucky and Chattanooga, Tennessee poultry facilities. Phase one of the expansion is scheduled to begin in 1999 and includes a new hatchery and feed mill in Mayfield, and an expansion of the Mayfield poultry processing facility. In addition, Registrant plans to add new deboning lines to the Chattanooga processing facility. Phase two is scheduled to begin in 2000 and is tentatively planned to include additional expansion of the Chattanooga facilities. In 1998, the Registrant began construction of facilities to produce an additional one million market hogs per year. The Registrant plans to construct a second vertically integrated pork operation capable of processing over four million hogs annually although the timing has not been finalized. The Registrant's Argentine subsidiary continues to make improvements to existing facilities and expand the sugarcane fields. In December 1998, the Registrant sold its baking and flour mill operations in Puerto Rico. (iii) Sources and Availability of Raw Materials None of Registrant's businesses utilize material amounts of raw materials that are dependent on purchases from one supplier or a small group of dominant suppliers. (iv) Patents, Trademarks, Licenses, Franchises and Concessions Registrant currently uses one registered trademark: Easy Entrees, for retail sales of poultry products. Registrant uses three registered trademarks; Season Sweet, Chestnut Hill Farms and Cumars Best in marketing fresh fruits, vegetables and shrimp in the United States. Patents, trademarks, franchises, licenses and concessions are not material to any of Registrant's other segments. (v) Seasonal Business Profitability of the poultry operations is generally higher in the summer months. Profits from processed pork are generally higher in the fall months. Produce operations are seasonal, depending on the crop being grown. Generally, crops which are exported to the United States are only in production from November through May. The Registrant's other segments are not seasonally dependent to any material extent. (vi) Practices Relating to Working Capital Items There are no unusual industry practices or practices of Registrant relating to working capital items. (vii) Depending on a Single Customer or Few Customers Registrant does not have sales to any one customer equal to 10% or more of Registrant's consolidated revenues, nor sales to a few customers which, if lost, would have a material adverse effect on any such segment or on Registrant taken as a whole. (viii) Backlog Backlog is not material to Registrant's businesses. (ix) Government Contracts No material portion of Registrant's business involves government contracts. (x) Competitive Conditions Competition in Registrant's poultry and pork segments come from a variety of national and regional producers and is based primarily on product performance, customer service and price. In the January 1999 issue of Broiler Industry, an industry trade publication, the Registrant was ranked as one of the ten largest poultry processors in the United States based on number of birds processed. In the October 1998 issue of Successful Farming, an industry trade publication, the Registrant was ranked in the top ten pork producers in the United States based on sows in production. Registrant's ocean liner service for containerized cargoes faces competition based on price and customer service. A new U.S. shipping law, The Ocean Reform Act of 1998, will go into effect in May 1999 and will permit shipping companies to enter into unregulated confidential rate agreements with shippers. Management is not able to predict the impact of this new law on the Registrant. Registrant believes it is among the top five ranking ocean liner services for containerized cargoes in the Caribbean Basin based on cargo volume. (xi) Research and Development Activities Registrant does not engage in material research and development activities. (xii) Environmental Compliance Registrant believes that it is in substantial compliance with applicable Federal, state and local provisions relating to environmental protection, and no significant capital expenditures are contemplated in this area. (xiii) Number of Persons Employed by Registrant As of December 31, 1998, Registrant, excluding non- controlled, non-consolidated foreign subsidiaries, had 14,954 employees, of whom 9,336 were employed in the United States. (d) Financial Information about Foreign and Domestic Operations and Export Sales The financial information required by Item 1 relating to export sales is hereby incorporated by reference to Note 12 of Registrant's Consolidated Financial Statements appearing on pages 41, 42 and 43 of Registrant's Annual Report to Stockholders furnished to the Commission pursuant to Rule 14a-3(b) and attached as Exhibit 13 to this report. Registrant did not have a material amount of sales or transfers between geographic areas for the periods reported on herein. Registrant considers its relations with the governments of the countries in which its foreign subsidiaries are located to be satisfactory, but these foreign operations are subject to the normal risks of doing business abroad, including expropriation, confiscation, war, insurrection, civil strife and revolution, currency inconvertibility and devaluation, and currency exchange controls. To minimize these risks, Registrant has insured certain investments in and loans to its affiliate shrimp farm in Ecuador and its affiliate flour mills, in Democratic Republic of Congo, Ecuador, Haiti and Mozambique, to the extent deemed appropriate against certain of these risks with the Overseas Private Investment Corporation, an agency of the United States Government. In addition, the Company has purchased commercial insurance to cover certain forms of political risk if physical damage is done to its own and affiliate facilities abroad. Item 2. Properties (1) Poultry The principal poultry operations of the Registrant consist of five owned and one leased processing plants. These plants are devoted to various phases of slaughtering, dressing, cutting, packing, deboning or further-processing chickens. The total slaughter capacity is approximately 244 million birds per year. To support these facilities, the Registrant operates four feed mills, four hatcheries and a network of 680 contract growers that supply pullet, breeder and broiler farms. These facilities are located in Alabama, Georgia, Kentucky and Tennessee. (2) Pork The Registrant owns a hog processing plant in Oklahoma with a double shift capacity of approximately four million hogs per year. Hog production facilities currently consist of a combination of owned and leased farrowing, nursery and finishing units to support 125,500 sows. Registrant owns three feed mills which have a combined capacity to produce 850,000 tons of feed annually to support the hog production. These facilities are located in Oklahoma, Texas, Kansas and Colorado. (3) Marine Registrant leases a 135,000 square foot warehouse and more than 70 acres of port terminal land and facilities in Florida which are used in its containerized cargo operations. In addition, Registrant timecharters, under short-term agreements, between eighteen and twenty-two containerized ocean cargo vessels with deadweights ranging from 2,488 to 9,200 metric-tons. Registrant also bareboat charters, under long-term lease agreements, three containerized ocean cargo vessels with deadweights ranging from 12,169 to 12,648 metric tons. (4) Commodity Trading and Milling The Registrant owns in whole or in part nine flour mills with capacity to produce over 5,000 metric tons of flour per day. In addition, Registrant has feed mill capacity of 75 metric tons per hour to produce formula animal feed. The flour mills, located in Democratic Republic of Congo, Ecuador, Guyana, Haiti, Lesotho, Mozambique, Nigeria, Sierra Leone and Zambia, and the feed mills located in Ecuador, Lesotho, Nigeria and Zambia are owned; in Lesotho, Nigeria and Sierra Leone the land the mills are located on is leased under long-term agreements. The Registrant owns six 9,000 metric-ton deadweight dry bulk carriers. (5) Other Registrant leases 1,300 acres in Honduras and 1,000 acres in Arizona for growing produce. Registrant also leases 40,000 square feet of refrigerated space and 70,000 square feet of dry space in the Port of Miami for warehousing produce products. Registrant has a controlling interest in an Argentine company which owns approximately 37,000 acres of planted sugarcane and approximately 4,200 acres of planted citrus. In addition, this company owns a sugar mill with a capacity to process 155,000 metric tons of sugar per year. Registrant owns a floating power generating facility, capable of producing 40 megawatts of power, located in the Port of Rio Haino in Santo Domingo, Dominican Republic. During 1998, Registrant sold the assets of a second power generating facility capable of producing 17.5 megawatts of power also located in the Dominican Republic. Registrant owns a controlling interest in a Bulgarian winery with a capacity to produce 27 million liters of wine per year. Related facilities are located on approximately 330 acres of owned land. Registrant, by itself or through non-controlled affiliates, operates approximately 3,100 acres of shrimp ponds in Honduras and Ecuador. Approximately 1,400 acres are leased and the rest are owned. Registrant owns a non-controlling interest in a company in Maine capable of producing over 10 million pounds of salmon. Registrant owns a non-controlling interest in a company in Maine with a 20,000 square feet facility for processing seafood and related products. Management believes that the Registrant's present facilities are generally adequate and suitable for its current purposes. In general, facilities are fully utilized; however, seasonal fluctuations in inventories and production may occur as a reaction to market demands for certain products. Certain foreign flour mills may operate at less than full capacity due to unavailability of foreign exchange to pay for imported raw materials. Item 3. Legal Proceedings The Company is subject to legal proceedings related to the normal conduct of its business, including as a defendant in a maritime arbitration claim more fully described in Note 11 of the consolidated financial statements. In the opinion of management, none of these actions are expected to result in a final judgement having a materially adverse effect on the consolidated financial statements of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted during the last quarter of the fiscal year covered by this report to a vote of security holders. Executive Officers of Registrant The following table lists the executive officers and certain significant employees of Registrant. Generally, each executive officer is elected at the Annual Meeting of the Board of Directors following the Annual Meeting of Stockholders and holds his office until the next such annual meeting or until his successor is duly chosen and qualified. There are no arrangements or understandings pursuant to which any executive officer was elected. Name (Age) Positions and Offices with Registrant and Affiliates H. Harry Bresky (73) President of Registrant; President and Treasurer of Seaboard Flour Corporation (SFC) Joe E. Rodrigues (62) Executive Vice President and Treasurer Rick J. Hoffman (44) Vice President Steven J. Bresky (45) Vice President Robert L. Steer (39) Vice President - Chief Financial Officer Douglas W. Schult (42) Vice President - Human Resources James L. Gutsch (45) Vice President - Engineering David M. Becker (37) General Counsel and Assistant Secretary Mr. H. Harry Bresky has served as President of Registrant since 1967 and as President of SFC since 1987, and as Treasurer of SFC since 1973. Mr. Bresky is the father of Steven J. Bresky. Mr. Rodrigues has served as Executive Vice President and Treasurer of Registrant since December 1986. Mr. Hoffman has served as Vice President of Registrant since April 1989. Mr. Steven J. Bresky has served as Vice President of Registrant since April 1989. Mr. Steer has served as Vice President - Chief Financial Officer of Registrant since April 1998 and previously as Vice President - Finance of Registrant since April 1996. He has been employed with the Registrant since 1984. Mr. Schult has served as Vice President - Human Resources of Registrant since April 1996. He has been employed with the Registrant since February 1995, by M.G. Waldbaum from January 1993 to January 1995 and prior to that by IBP, Inc. Mr. Gutsch has served as Vice President - Engineering of Registrant since December 1998. He has been employed with the Registrant since 1984. Mr. Becker has served as General Cousel and Assistant Secretary of Registrant since April 1998 and previously Assistant Secretary of Registrant since May 1994. He has been employed with the Registrant since 1993 and prior to that was employed by the law firm Stinson Mag and Fizzell PC. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by Item 5 is hereby incorporated by reference to "Stock Listing" and "Quarterly Financial Data" appearing on pages 44 and 17, respectively, of Registrant's Annual Report to Stockholders furnished to the Commission pursuant to Rule 14a-3(b) and attached as Exhibit 13 to this Report. Item 6. Selected Financial Data The information required by Item 6 is hereby incorporated by reference to the "Summary of Selected Financial Data" appearing on page 16 of Registrant's Annual Report to Stockholders furnished to the Commission pursuant to Rule 14a-3(b) and attached as Exhibit 13 of this Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by Item 7 is hereby incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 18 through 24 of Registrant's Annual Report to Stockholders furnished to the Commission pursuant to Rule 14a-3(b) and attached as Exhibit 13 to this Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by Item 7A is hereby incorporated by reference to the material under the captions "Financial Instruments" and "Commodity Instruments" within Note 1 of the Registrant's Consolidated Financial Statements appearing on page 33, and to the material under the caption "Derivative Information" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 22 through 24 of the Registrant's Annual Report to Stockholders furnished to the Commission pursuant to Rule 14a-3(b) and attached as Exhibit 13 to this Report. Item 8. Financial Statements and Supplementary Data The information required by Item 8 is hereby incorporated by reference to Registrant's "Quarterly Financial Data," "Independent Auditors' Report," "Consolidated Statements of Earnings," "Consolidated Statements of Stockholders' Equity," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" appearing on pages 17 and 25 through 43 of Registrant's Annual Report to Stockholders furnished to the Commission pursuant to Rule 14a- 3(b) and attached as Exhibit 13 to this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of Registrant Refer to "Executive Officers of Registrant" in Part I. Information required by this item relating to directors of Registrant has been omitted since Registrant filed a definitive proxy statement within 120 days after December 31, 1998, the close of its fiscal year. The information required by this item relating to directors is incorporated by reference to "Item 1" appearing on pages 3 and 4 of the 1999 Proxy statement. The information required by this item relating to late filings of reports required under Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the last paragraph on page 2 of the Registrant's 1999 Proxy Statement. Item 11. Executive Compensation This item has been omitted since Registrant filed a definitive proxy statement within 120 days after December 31, 1998, the close of its fiscal year. The information required by this item is incorporated by reference to "Executive Compensation and Other Information," "Retirement Plans" and "Compensation Committee Interlocks and Insider Participation" appearing on pages 5 through 8 and 10 of the 1999 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management This item has been omitted since Registrant filed a definitive proxy statement within 120 days after December 31, 1998, the close of its fiscal year. The information required by this item is incorporated by reference to "Principal Stockholders" appearing on page 2 and "Election of Directors" on page 3 of the 1999 Proxy Statement. Item 13. Certain Relationships and Related Transactions This item has been omitted since Registrant filed a definitive proxy statement within 120 days after December 31, 1998, the close of its fiscal year. The information required by this item is incorporated by reference to "Compensation Committee Interlocks and Insider Participation" appearing on page 10 of the 1999 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Consolidated financial statements. See Index to Consolidated Financial Statements on page F-1. 2. Consolidated financial statement schedules. See Index to Consolidated Financial Statements on page F-2. 3. Exhibits. 2.1 - Stock and Asset Purchase Agreement by and between HDPR Acquisitions Corp., and CB Acquisitions Corp., as Buyers and Seaboard Corporation, as Seller, dated as of November 9, 1988. Incorporated by reference to Exhibit 2.1 of Registrant's Form 8-K, dated December 30, 1998. 2.2 - Asset Purchase Agreement by and between HDPR Acquisitions Corp., as Buyer, Harinas de Puerto Rico, Inc., as Seller and Seaboard Corporation, dated as of November 9, 1998. Incorporated by reference to Exhibit 2.2 of Registrant's Form 8-K, dated December 30, 1998. 3.1 - Registrant's Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 3.2 - Registrant's By-laws, as amended. Incorporated by reference to Exhibit 3.2 of Registrant's Annual Report or Form 10-K for the fiscal year ended December 31, 1997. 4.1 - Note Purchase Agreement dated December 1, 1993 between the Registrant and various purchasers as listed in the exhibit. The Annexes and Exhibits to the Note Purchase Agreement have been omitted from the filing, but will be provided supplementally upon request of the Commission. Incorporated by reference to Exhibit 4.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 4.2 Seaboard Corporation 6.49% Senior Note Due December 1, 2005 issued pursuant to the Note Purchase Agreement described above. Incorporated by reference to Exhibit 4.2 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 4.3 Note Purchase Agreement dated June 1, 1995 between the registrant and various purchasers as listed in the exhibit. The Annexes and Exhibits to the Note Purchase Agreement have been omitted from the filing, but will be provided supplementally upon request of the Commission. Incorporated by reference to Exhibit 4.3 of Registrant's Form 10-Q for the quarter ended September 9, 1995. 4.4 Seaboard Corporation 7.88% Senior Note Due June 1, 2007 issued pursuant to the Note Purchase Agreement described above. Incorporated by reference to Exhibit 4.4 of Registrant's Form 10-Q for the quarter ended September 9, 1995. 4.5 - Seaboard Corporation Note Agreement dated as of December 1, 1993 ($100,000,000 Senior Notes due December 1, 2005). First Amendment to Note Agreement. Incorporated by reference to Exhibit 4.7 of Registrant's Form 10-Q for the quarter ended March 23, 1996. 4.6 - Seaboard Corporation Note Agreement dates as of June 1, 1995 ($125,000,000 Senior Notes due June 1, 2007). First Amendment to Note Agreement. Incorporated by reference to Exhibit 4.8 of Registrant's Form 10-Q for the quarter ended March 23, 1996. * 10.1 Registrant's Executive Retirement Plan dated January 1, 1997. The addenda have been omitted from the filing, but will be provided supplementary upon request of the Commission. Incorporated by reference to Exhibit 10.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. * 10.2 Registrant's Amended and Restated Supplemental Executive Retirement Plan. * 10.3 Registrant's Supplemental Executive Retirement Plan for H. Harry Bresky dated March 21, 1995. Incorporated by reference to Exhibit 10.3 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. * 10.4 Employment Agreement for Joe E. Rodrigues dated July 9, 1986 and amended August 10, 1990. Incorporated by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 13 - Sections of Annual Report to security holders incorporated by reference herein. 21 - List of subsidiaries. 27 - Financial Data Schedule (included in electronic copy only). * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K On January 13, 1999 the Registrant filed a report on Form 8-K, dated December 30, 1998, disclosing the sale of its baking and flour milling businesses located in Puerto Rico. This sale is further described in Note 2 to the Consolidated Financial Statements. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEABOARD CORPORATION By /s/H. Harry Bresky By /s/Robert L. Steer H. Harry Bresky, President Robert L. Steer, Vice President - Chief (principal executive officer) Financial Officer (principal financial and accounting officer) Date: March 25, 1999 Date: March 25, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated. By /s/H. Harry Bresky By /s/J.E. Rodrigues H. Harry Bresky, Director J.E. Rodrigues, Director Date: March 25, 1999 Date: March 25, 1999 By /s/David A. Adamsen By /s/Thomas J. Shields David A. Adamsen, Director Thomas J. Shields, Director Date: March 25, 1999 Date: March 25, 1999 SEABOARD CORPORATION AND SUBSIDIARIES Consolidated Financial Statements and Schedule (Form 10-K) Securities and Exchange Commission For the year ended December 31, 1998 (With Independent Auditors' Report Thereon) SEABOARD CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule Financial Statements Stockholders' Annual Report Page Independent Auditors' Report 25 Consolidated Statements of Earnings for the years ended December 31, 1998, December 31, 1997 and December 31, 1996 26 Consolidated Statements of Changes in Equity for the years ended December 31, 1998, December 31, 1997 and December 31, 1996 27 Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997 28 Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1997 and December 31, 1996 30 Notes to Consolidated Financial Statements 31 The foregoing are incorporated by reference. The individual financial statements of the nonconsolidated foreign affiliates which would be required if each such foreign affiliate were a Registrant are omitted, because (a) the Registrant's and its other subsidiaries' investments in and advances to such foreign affiliates do not exceed 20% of the total assets as shown by the most recent consolidated balance sheet; (b) the Registrant's and its other subsidiaries' proportionate share of the total assets (after intercompany eliminations) of such foreign affiliates do not exceed 20% of the total assets as shown by the most recent consolidated balance sheet; and (c) the Registrant's and its other subsidiaries' equity in the earnings before income taxes and extraordinary items of the foreign affiliates does not exceed 20% of such income of the Registrant and consolidated subsidiaries compared to the average income for the last five fiscal years. Combined condensed financial information as to assets, liabilities and results of operations have been presented for nonconsolidated foreign affiliates in Note 5 of "Notes to the Consolidated Financial Statements." F-1 (Continued) SEABOARD CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule Schedule Page II - Valuation and Qualifying Accounts for the years ended December 31, 1998, 1997 and 1996 F-4 All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related consolidated notes. F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Seaboard Corporation: Under date of February 26, 1999, we reported on the consolidated balance sheets of Seaboard Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, changes in equity and cash flows for each of the years in the three-year period ended December 31, 1998, as contained in the December 31, 1998 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended December 31, 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for spare parts and supplies inventories in 1996. KPMG LLP Kansas City, Missouri February 26, 1999 F-3
Schedule II SEABOARD CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts (In Thousands) Balance at Write-offs net Aquisitions Balance beginning Provision net of and at end of year (1) recoveries Disposals of year Year ended December 31, 1998: Allowance for doubtful accounts $20,658 5,902 1,790 1,347 $26,117 Year ended December 31, 1997: Allowance for doubtful accounts $19,448 3,845 2,635 -- $20,658 Year ended December 31, 1996: Allowance for doubtful accounts $17,088 4,122 1,762 -- $19,448 (1) Charged to selling, general and administrative expenses.
F-4 EX-10.2 2 EXECUTIVE RETIREMENT PLAN AMENDED AND RESTATED EXHIBIT 10.2 THE AMENDED AND RESTATED SEABOARD CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN DATED JANUARY 1, 1998 Effective January 1, 1998, the Seaboard Corporation Supplemental Executive Retirement Plan is amended and restated to read as follows: QUALIFICATIONS FOR ENTRY In order to qualify for participation in the SEABOARD CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN a person must be a participant in the Seaboard Corporation Retirement Savings Plan with compensation in excess of the maximum compensation limit on which qualified plan benefits may be paid pursuant to Internal Revenue Code Section 401(a)(17), as may be amended from time to time. Further, it is required that participants be a part of a select group of management, who are deemed to make significant contributions to the success of the organization, or who have management and supervisory responsibilities for a key organizational function, as well as the authority to make autonomous decisions. Final approval of all participants will be granted by the President or Executive Vice President of Seaboard Corporation. BENEFIT AMOUNT All qualified plan participants are entitled to receive as additional compensation, an amount equal to the Seaboard Corporation's Retirement Savings Plan maximum employer match on an after tax basis of each participant's eligible compensation in excess of the maximum compensation limit on which qualified plan benefits may be paid pursuant to Internal Revenue Code Section 401(a)(17), as may be amended from time to time. For purposes of this Plan, the term "Eligible Compensation" shall be defined as in Section 1.10 of the Seaboard Corporation Retirement Savings Plan, except that deferrals under any Company-sponsored non-qualified deferred compensation arrangement shall be considered eligible compensation under this Supplemental Executive Retirement Plan. In addition, each such participant will receive from the Company a "gross up" payment to reimburse such participant for the estimated federal and state income taxes such participant will have to pay on account of receipt of this benefit, as determined by the Company, which determination shall be conclusive. By: /s/J.E. Rodrigues Date: February 11, 1999 EX-13 3 1998 ANNUAL REPORT Summary of Selected Financial Data Seaboard Corporation and Subsidiaries (Thousands of dollars except per share amounts) Years ended December 31, 1998 1997 1996 1995 1994 Net sales $1,779,869 $1,780,333 $1,464,362 $1,173,977 $983,804 Net earnings $ 52,355 $ 30,574 $ 5,846 $ 20,202 $ 35,201 Earnings per common share $ 35.20 $ 20.55 $ 3.93 $ 13.58 $ 23.67 Total assets $1,233,134 $1,124,385 $1,004,685 $ 878,132 $675,211 Long-term debt $ 329,469 $ 306,666 $ 297,719 $ 297,440 $177,666 Stockholders' equity $ 449,792 $ 399,015 $ 369,934 $ 365,810 $346,080 Dividends per common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 In December 1998, the Company sold its baking and flour mill operations in Puerto Rico, recognizing an after tax gain of $33,272,000 or $22.37 per common share. See Note 2 to the consolidated financial statements for further discussion. As described in Note 4 to the consolidated financial statements, the Company changed its method of accounting for spare parts and supplies inventories in 1996. The cumulative effect of this change at January 1, 1996, was to increase net earnings by $3,006,000 or $2.02 per common share. In addition, the net effect of this change in 1996, exclusive of the cumulative effect, was to increase net earnings by $788,000 or $.53 per common share. Management's Discussion and Analysis Liquidity and Capital Resources (Dollars in millions) 1998 1997 1996 Current ratio 1.65:1 1.47:1 1.71:1 Working capital $ 235.8 168.3 204.2 Cash from operating activities $ 100.8 121.1 (72.8) Capital expenditures $ 45.5 85.5 110.5 Long-term debt, exclusive of current maturities $ 329.5 306.7 297.7 Total capitalization* $ 852.0 763.5 715.5 * Total capitalization is defined as stockholders' equity and noncurrent liabilities. Cash provided by operating activities for 1998 decreased $20.3 million compared to 1997. The decrease in cash flows was primarily related to changes in certain components of working capital and a decrease in net earnings, excluding the gain on disposition of businesses. Changes in components of working capital are primarily related to decreases in inventory and the timing of normal transactions for voyage settlements, trade payables and receivables. Within the Commodity Trading and Milling segment there were fewer voyages in transit at December 31, 1998 compared to December 31, 1997 resulting in a decrease in deferred revenue balances and a partially offsetting decrease in related grain inventories. In the Poultry segment, the sell-off of a previous build-up of poultry leg quarter inventories also contributed to the inventory decrease. Cash provided by operating activities for 1997 increased $193.9 million compared to 1996 primarily as a result of a large increase in current liabilities, smaller increases in accounts receivable and inventories, and an increase in net earnings during 1997 compared to 1996. The increase in current liabilities consists primarily of deferred revenues on incomplete voyages and various increases in other accrued liabilities. The smaller increase in receivables during 1997 was primarily the result of smaller increases in pork and poultry receivables and improved collections in the Transportation and Power segments during 1997. The smaller increase in inventory was primarily a result of the Pork segment experiencing a larger build-up of hog inventories during 1996 than 1997. The Company invested $45.5 million in property, plant and equipment during 1998, of which $18.6 million was expended in the Poultry segment, $16.3 in the Pork segment, $5.2 million in the Marine segment and $5.4 million in other businesses of the Company. The Company invested $18.6 million in 1998 primarily for the completion of expansion projects at the Athens and Elberton, Georgia, poultry facilities. During 1999, the Company anticipates spending $55.0 million primarily to expand the Mayfield, Kentucky, and Chattanooga, Tennessee, poultry facilities and make general upgrades to other poultry facilities. Management anticipates these expenditures will be funded from internally generated cash. The Company invested $16.3 million in 1998 primarily for improvements to the pork processing plant. The Company plans to invest $15.0 million in 1999 for general upgrades to the pork processing plant and continued expansion of hog production facilities. The Company previously disclosed plans to construct a second vertically integrated pork operation and is currently making arrangements to increase annual production to three million hogs. Management anticipates that this increase in hog production will primarily be accomplished through a combination of operating lease arrangements and third party contract growers. The timing of the remaining expansion plans has not been finalized. Capital expenditures in the Marine segment during 1998 totaled $5.2 million for general replacement and upgrades of property and equipment. During 1999, the Company anticipates spending $11.9 million for the purchase of two vessels currently being chartered and for general replacement and upgrades of property and equipment. Capital expenditures in all other segments for 1998 totaled $5.4 million in general modernization and efficiency upgrades of plant and equipment. During 1997, the Company invested $85.5 million in property, plant and equipment. The Company invested $37.2 million in the Poultry segment primarily to expand and convert the Athens, Georgia, poultry facility from retail tray-pack production to foodservice production and to add an additional cooking line at the Elberton, Georgia, poultry facility. The Company invested $31.9 million in the Pork segment primarily for improvements to the pork processing plant. Capital expenditures in the Marine segment during 1997 totaled $9.0 million for general replacement and upgrades of property and equipment. Capital expenditures in all other segments for 1997 totaled $7.4 million in general modernization and efficiency upgrades of plant and equipment. During 1998, the Company made $45.8 million in advances to and non- voting investments in Ingenio y Refineria San Martin del Tabacal S.A. (Tabacal) for working capital requirements, reduction of debt, general modernization, efficiency upgrades of plant and equipment and expansion of sugarcane fields. During 1999, the Company plans to invest $15.0 million in Tabacal for capital expenditures to upgrade existing facilities and equipment and to expand sugarcane fields. Effective December 31, 1998, the Company obtained voting control over a majority of the capital stock of Tabacal. See Note 5 to the consolidated financial statements for further discussion. During the first half of 1999, management intends to increase the Company's ownership in Tabacal. The cost is not expected to be material. On December 30, 1998, the Company completed the sale of its baking and flour milling businesses in Puerto Rico. These businesses were sold for $81.4 million and the assumption of $11.8 million of liabilities resulting in a gain of $54.5 million ($33.3 million after taxes). The proceeds from the sale consisted of approximately $72.4 million in cash and $9.0 million in notes receivable. See Note 2 to the consolidated financial statements for further discussion. In November 1998, the Company purchased a milling business in Zambia by assuming liabilities of $10.2 million. In October 1998, the Company purchased a controlling interest in an existing Bulgarian winery by acquiring newly issued shares for $15.0 million. These acquisitions were accounted for using the purchase method and would not have significantly affected net earnings or earnings per share on a pro forma basis. In July 1998, the Company completed the acquisition of a 50% interest in a flour mill in Lesotho for approximately $5.0 million. In June 1998, the Company, in a joint venture with two other partners, completed its acquisition of an interest in a flour mill in Haiti. The Company made an investment of $3.0 million for a minority interest in the joint venture, which in turn owns 70% of a Haitian company which owns the flour mill. These investments are being accounted for using the equity method. In January 1998, the Company invested $2.5 million for a minority interest in a new limited liability company in Maine. The new company acquired the assets of an existing seafood company which processes and distributes smoked seafood and related products. The investment is being accounted for using the equity method. During 1998, the Company extended committed, one-year revolving credit facilities totaling $160 million for an additional year. As discussed in Note 5 to the consolidated financial statements, as of December 31, 1998, the Company consolidated Tabacal. This consolidation resulted in an increase of $20 million in the Company's uncommitted lines of credit. At December 31, 1998, the Company had $142.4 million outstanding under the one-year revolving credit facilities totaling $160 million and $16.6 million outstanding under the short-term uncommitted credit lines totaling $120 million. Subsequent to year-end, the Company's one-year revolving credit facilities totaling $145 million maturing in the first quarter of 1999 were increased to $153.3 million and extended for an additional year. In addition, the existing five-year revolving credit facility totaling $25 million was increased to $26.7 million. As a result of the acquisitions in Bulgaria and Zambia, and the consolidation of Tabacal, long-term debt of $42.1 million was added to the Company's balance sheet. This long-term debt consisted of $18.3 million in current maturities of which $6.0 million was extinguished in 1998. Management anticipates the remaining current maturities will be paid from internally generated cash. Management intends to continue seeking opportunities for expansion in the industries in which it operates and believes that the Company's liquidity, capital resources and borrowing capabilities are adequate for its current and intended operations. Results of Operations Net sales totaled $1,779.9 million for the year ended December 31, 1998, compared to sales of $1,780.3 million for the year ended December 31, 1997. Operating income of $68.4 million for 1998 decreased $8.7 million compared to 1997. Net sales totaled $1,780.3 million for the year ended December 31, 1997, an increase of $315.9 million compared to the year ended December 31, 1996. Operating income of $77.1 million for 1997 increased $57.4 million compared to 1996. As of December 31, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." Accordingly, certain 1997 and 1996 segment information below has been reclassified to conform with 1998 presentations. See Note 12 to the consolidated financial statements for further discussion of the adoption of SFAS 131. Poultry Segment (Dollars in millions) 1998 1997 1996 Net sales $ 514.5 476.6 501.7 Operating income $ 33.3 (7.0) 2.1 Net sales increased $37.9 million to $514.5 million in 1998 compared to 1997. This increase is the result of an increase in sales volume and higher poultry prices. Sales volume increased in 1998 as a result of the operation for a full year of the new further processing cooking line at the Elberton, Georgia, plant which commenced operation in the second half of 1997. Domestic poultry prices increased in the second half of 1998 but were somewhat offset by the effect of the Russian economic crisis on certain export products, especially leg quarters. Although management cannot predict poultry prices, it is anticipated that prices will remain favorable during 1999, with the exception of leg quarters. Operating income increased $40.3 million to $33.3 million in 1998 compared to 1997. This increase is primarily the result of significantly lower finished feed costs, improved sales prices and, to a lesser extent, uninterrupted operation of the Athens, Georgia, plant. During 1997, the Athens plant was shut down for one week to convert from retail tray-pack to foodservice production. This increase was somewhat offset by increases in further processing costs as a result of the change in sales mix. Although management cannot predict finished feed costs, it is anticipated that feed ingredient costs should continue to be favorable for most of 1999. Additional expansion activities at existing facilities during 1999 could have a short-term negative effect on financial results as construction may temporarily halt production. Net sales decreased $25.1 million to $476.6 million and operating income decreased $9.1 million to $(7.0) million in 1997 compared to 1996. These decreases were a result of downtime and start-up costs associated with converting the Company's largest plant located in Athens, Georgia, from retail tray-pack to foodservice production. In addition, there was a general decrease in poultry markets, especially leg quarter prices, during 1997 compared to 1996. The decrease in operating income was partially offset by lower finished feed costs, primarily corn, and a reduction in packaging costs, primarily as a result of product mix. Pork Segment (Dollars in millions) 1998 1997 1996 Net sales $ 500.4 531.6 234.3 Operating income $ (1.1) 38.4 (13.0) Net sales decreased $31.2 million to $500.4 million in 1998 compared to 1997. This decrease is the result of lower pork prices partially offset by an increase in sales volume. Lower sales prices for most pork products have resulted from an industry wide excess supply of live hogs and, to a lesser extent, pricing pressure from the Asian economic situation. The increase in sales volume is the result of the hog processing plant operating at double-shift production during all of 1998. The plant did not employ a second shift until part way through the second quarter of 1997. During the third quarter of 1998, the plant reached full capacity on a double-shift basis. Operating income decreased $39.5 million to $(1.1) million in 1998 compared to 1997. This decrease is primarily the result of lower prices for finished pork products without a comparable decrease in the cost of production. This decrease was partially offset by an increase in the percentage of cheaper third party hogs processed compared to company raised hogs. Although management cannot predict pork prices, it is anticipated that market conditions will be more favorable to the Company during 1999 compared to 1998. Net sales increased $297.3 million to $531.6 million in 1997 compared to 1996. This increase is primarily the result of increased sales of pork at the hog processing plant, which reached full single-shift capacity during the second half of 1996 and commenced double-shift operations during the second quarter of 1997. In addition, pork prices were higher for the majority of 1997 compared to 1996. Operating income increased $51.4 million to $38.4 million in 1997 compared to 1996. This increase is primarily the result of increased utilization of the pork processing plant along with increased production and weight per hog at the hog production facilities. Marine Segment (Dollars in millions) 1998 1997 1996 Net sales $ 310.9 309.3 265.7 Operating income $ 17.4 27.3 4.2 Net sales increased $1.6 million to $310.9 million in 1998 compared to 1997. During the first half of 1998, the Company experienced higher cargo volumes in certain markets the Company serves. During the last half of 1998, cargo volumes and applicable cargo rates decreased primarily as a result of weakening economic conditions in certain South American markets the Company serves and, to a lesser extent, from trade disruptions relating to Hurricane Mitch in Central America during the fourth quarter of 1998. Operating income decreased $9.9 million to $17.4 million in 1998 compared to 1997. This decrease is primarily a result of lower cargo volumes and rates during the last half of 1998, trade disruptions relating to Hurricane Mitch during the fourth quarter of 1998 and, to a lesser extent, an increase in various general and administrative costs. Management expects that these situations will continue to have a negative effect on financial results through at least the first half of 1999. A new U.S. shipping law, The Ocean Reform Act of 1998, will go into effect in May 1999 and will permit shipping companies to enter into unregulated confidential rate agreements with shippers. Management is not able to predict the impact of this new law on 1999 financial results. Net sales increased $43.6 million to $309.3 million and operating income increased $23.1 million to $27.3 million in 1997 compared to 1996. These increases are primarily the result of increased unit cargo volumes shipped in certain markets that the Company serves and, to a lesser extent, modestly higher container rates. During 1996, container rates were under significant competitive pressure but stabilized and began to improve during the fourth quarter of 1996. Commodity Trading and Milling Segment (Dollars in millions) 1998 1997 1996 Net sales $ 306.4 313.9 315.6 Operating income $ 10.5 9.5 17.7 Net sales decreased $7.5 million to $306.4 million in 1998 compared to 1997. This decrease is primarily the result of a decrease in commodity prices sold in foreign markets partially offset by an increase in tonnage sold. Operating income increased $1.0 million to $10.5 million in 1998 compared to 1997. This increase is primarily the result of increased income from operating certain mills in foreign countries. Net sales decreased $1.7 million to $313.9 million in 1997 compared to 1996. This decrease is primarily the result of a decrease in commodity prices, mainly wheat and corn, sold in foreign markets partially offset by an increase in tonnage sold. Operating income decreased $8.2 million to $9.5 million in 1997 compared to 1996, primarily as a result of lower millfeed prices in foreign markets and increased reserves on certain foreign receivables. Other Operations (Dollars in millions) 1998 1997 1996 Net sales $ 147.7 148.9 147.1 Operating income $ 10.6 9.8 8.8 Net sales from other operations were almost unchanged in 1998 compared to 1997. Operating income increased by $0.8 million in 1998 compared to 1997 primarily as a result of lower electric power generating costs and improved collections on foreign receivables partially offset by shrimp operation damages from Hurricane Mitch in Honduras. Net sales from other operations were almost unchanged in 1997 compared to 1996. Operating income increased by $1.0 million in 1997 compared to 1996 as a result of improved collections on foreign receivables. As discussed in Note 2 to the consolidated financial statements, in late 1998 the Company sold its Puerto Rican baking business and acquired a winery in Bulgaria. In addition, Tabacal's results of operations will be accounted for on a consolidated basis commencing in 1999. Although management cannot predict future sugar prices, it is anticipated that market conditions will continue to have a negative effect on Tabacal resulting in losses in 1999. Management expects the overall result of these changes will be a decrease in sales and a significant decrease in operating income for Other Operations in 1999. Selling, General and Administrative Expenses Selling, general and administrative expenses (SG&A) totaled $147.0 million, $142.0 million and $128.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. As a percent of revenues, SG&A increased to 8.3% in 1998 compared to 8.0% in 1997 as a result of various cost increases in the Marine segment. As a percent of revenues, SG&A decreased to 8.0% in 1997 compared to 8.8% in 1996 as a result of increased pork production and lower expenses in the Marine segment. Interest Income Interest income totaled $7.1 million, $6.1 million and $9.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in 1998 is primarily the result of an increase in average funds invested. The decrease in 1997 is primarily the result of a decrease in average invested funds. Interest Expense Interest expense totaled $32.1 million, $31.1 million and $26.9 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increase during 1997 compared to 1996 was primarily a result of increased short-term borrowings during the year. Loss from Foreign Affiliates Loss from foreign affiliates totaled $(17.1) million, $(8.7) million and $(3.0) million for the years ended December 31, 1998, 1997 and 1996, respectively. These losses are primarily attributable to the operations of Tabacal. During 1998, losses increased from Tabacal as a result of lower sugar prices and planned operating efficiencies and harvest production levels not being realized. During 1997, losses increased from Tabacal primarily as a result of the costs of upgrading and expanding operations. As discussed above, Tabacal's results of operations will be consolidated for 1999 and, accordingly, the loss from foreign affiliates should decrease significantly. Gain on Disposition of Businesses On December 30, 1998, the Company completed the sale of its baking and flour milling businesses in Puerto Rico resulting in a pre-tax gain of $54.5 million ($33.3 million after taxes). See Note 2 to the consolidated financial statements for further discussion. Miscellaneous Income Miscellaneous income totaled $4.4 million, $1.2 million and $1.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increase during 1998 is primarily the result of gains on the sale of fixed assets in the Marine segment as older, fully depreciated equipment was replaced in the normal course of business. Income Tax Expense In 1998, the effective tax rate increased to 39% compared to 31% in 1997. The increase is primarily attributable to an increase in loss from foreign affiliates for which no benefit is available. The effective tax rate for 1997 decreased compared to 1996. This decrease was a result of increased permanently deferred foreign tax earnings during 1997 and the effect of certain other permanent differences on the increased level of income for 1997 compared to 1996. Other Financial Information The Company is subject to various federal and state regulations regarding environmental protection and land use. Among other things, these regulations affect the disposal of livestock waste and corporate farming matters in general. Management believes it is in compliance with all such material regulations. Laws and regulations in the states where the Company currently conducts its pork operations are becoming more restrictive. Any future changes could delay the Company's expansion plans or increase related development costs. Future changes in environmental or corporate farming laws could affect the manner in which the Company operates its business and its cost structure. During the second quarter of 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and all hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities at their fair values. Accounting for changes in the fair value of a derivative depends on its designation and effectiveness. For derivatives that qualify as effective hedges, the change in fair value will have no net impact on earnings until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value will affect current period net earnings. The Company will adopt SFAS No. 133 during the first quarter of fiscal 2000. Depending on market interest rates and the types of financial hedging derivatives in place at the time of adoption, adoption of this statement could result in significant adjustments to the Company's balance sheet as financial derivatives are recorded as assets or liabilities at fair value with corresponding adjustments to Other Comprehensive Income. The Company does not believe adoption will have a material impact on the Company's net earnings or cash flows. In 1998, the Company expanded the scope of its original Year 2000 assessment and has completed the assessment of its primary mainframe computer systems, both hardware and software. Resolution of issues identified within the primary mainframe computer systems, including all necessary testing, is expected to be completed by mid-1999. The Company is in the advanced stages of assessing other computer and electronic information systems throughout its operations, with the objective of addressing any issues deemed critical to operations by mid-1999. Certain equipment with embedded chip technology cannot be tested or guaranteed by the manufacturer for Year 2000 compliance. Consequently, general contingency plans are being developed for certain locations including lists of spare parts to have on hand and work around options in case of failure. Although not deemed critical to consolidated operations, computer systems at certain international locations are being reviewed and upgrades are planned or in process. The failure to identify or resolve any significant Year 2000 issue in a timely manner could have a material adverse effect on the Company, including an interruption in, or a failure of, certain normal business activities or operations. The Company is also in the process of communicating with significant suppliers and customers to determine the extent to which the Company is vulnerable to failure of those third parties to resolve their own Year 2000 issues. The Company does not anticipate the cost of Year 2000 compliance by suppliers to be passed on to the Company and has not been informed of any material risks related to third party Year 2000 compliance. However, the failure of a significant third party supplier or customer to resolve its Year 2000 issues in a timely manner could have a material adverse effect on the Company, such as business disruptions resulting from noncompliance by a local utility (either electric, gas or water) or chartered vessel service. Based upon assessments completed to date, the Company believes that the total costs, including equipment replacements and internal costs consisting primarily of payroll related costs, to resolve Year 2000 issues will not be material to the Company's consolidated financial statements. Not all assessments are complete at this date and the discovery of a significant Year 2000 issue unknown at this time could materially alter this estimate. The Company does not believe its businesses have been materially adversely affected by general inflation. Derivative Information The Company is exposed to various types of market risks from its day- to-day operations. Primary market risk exposures result from changing interest rates and commodity prices. Changes in interest rates impact the cash required to service variable rate debt. Changes in commodity prices impact the cost of necessary raw materials as well as the selling prices of finished products. The Company uses interest rate swaps to manage risks of increasing interest rates. The Company uses corn, wheat, soybeans and soybean meal futures and options to manage risks of increasing prices of raw materials. The Company uses hog futures and options to manage risks of decreasing prices of pork products. The Company is also subject to foreign currency exchange rate risk on a short-term note payable denominated in foreign currency. This risk is managed through the use of a foreign currency forward exchange agreement. The table below provides information about the Company's non-trading financial instruments sensitive to changes in interest rates at December 31, 1998. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Long-term debt includes foreign subsidiary obligations of $21.5 million denominated in U.S. dollars and $14.6 million payable in Argentine pesos. The Argentine peso is currently pegged to the U.S. dollar and accordingly, management believes there is minimal exchange risk. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on rates in place at the reporting date. Short-term instruments including short-term investments, non- trade receivables and current notes payable have carrying values that approximate market and are not included in this table due to their short-term nature. The interest rate swaps listed below are used to manage interest rate risk on certain variable rate current notes payable, which management believes will be continuously outstanding throughout the term of the swap agreements, and long-term debt. Current notes payable totaled $159.0 million at December 31, 1998. The fair value of long-term debt at December 31, 1998 was $363.4 million. The Company would be required to pay an estimated $13.0 million to terminate the exchange rate agreements at December 31, 1998. (Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total Long-term debt: Fixed rate $10,663 5,003 24,851 24,317 48,361 152,498 $265,693 Average interest rate 7.08% 10.56% 7.23% 7.06% 7.58% 7.77% Variable rate $ 7,945 1,539 - 10,000 - 62,900 $ 82,384 Average interest rate 11.81% 5.00% - 6.07% - 4.51% Interest rate swaps: Variable to fixed - - - - - $200,000 $200,000 Average pay rate - - - - - 6.33% 6.33% Average receive rate - - - - - LIBOR LIBOR Inventories that are sensitive to changes in commodity prices, including carrying amounts and fair values at December 31, 1998, are presented in Note 4 to the consolidated financial statements. Projected raw material requirements, finished product sales, and firm sales commitments may also be sensitive to changes in commodity prices. The tables below provide information about the Company's derivative contracts that are sensitive to changes in commodity prices. Although used to manage overall market risks, certain contracts do not qualify as hedges for financial reporting purposes. As a result, they are classified as trading instruments and carried at fair market value. Contracts that qualify as hedges for financial reporting purposes are classified as non-trading instruments. Gains and losses on non-trading instruments are deferred and recognized as adjustments of the carrying amounts of the commodities when the hedged transaction occurs. The following tables present the notional quantity amounts, the weighted average contract prices, the contract maturities, and the fair value of the position of the Company's open trading and non-trading derivatives at December 31, 1998.
Trading: Contract Volumes Wtd.-avg. Fair Futures Quantity (000's)Units Price/Unit Maturity Value (000's) Contracts Corn purchases - long 1,525 bushels $ 2.47 1999 $(211) Corn sales - short 125 bushels 2.18 1999 6 Hog sales - short 600 pounds 0.38 1999 -- Contract Volumes Wtd.-avg. Exercise Fair Option Contracts Quantity (000's)Units Price/Unit Maturity Value (000's) Corn puts written - long 3,540 bushels $ 2.11 1999 $(255) Corn puts purchased - short 2,000 bushels 2.10 1999 53 Corn calls written - short 3,270 bushels 2.53 1999 (171) Corn calls purchased - long 9,770 bushels 2.84 1999 146 Wheat puts written - long 1,535 bushels 3.01 1999 (176) Wheat puts purchased - short 775 bushels 2.60 1999 22 Wheat calls written - short 400 bushels 2.93 1999 (75) Wheat calls purchased - long 1,000 bushels 3.00 1999 33 Soybean meal calls purchased - long 115 tons 166.30 1999 68 Hog calls written - short 800 pounds 0.48 1999 (11) Non-trading: Contract Volumes Wtd.-avg. Fair Futures Contracts Quantity (000's)Units Price/Unit Maturity Value (000's) Corn purchases - long 2,075 bushels $ 2.22 1999 $(170) Corn sales - short 1,485 bushels 2.24 1999 156 Wheat purchases - long 1,200 bushels 3.32 1999 (25) Wheat sales - short 1,000 bushels 3.33 1999 27 Soybean purchases - long 1,350 bushels 5.77 1999 (479) Soybean sales - short 1,025 bushels 5.79 1999 390 Soybean meal purchases - long 40 tons 146.84 1999 (262) Soybean meal sales - short 36 tons 148.78 1999 306
The table below provides information about the Company's financial instrument and related derivative financial instrument sensitive to foreign currency exchange rates, consisting of a Japanese Yen (Yen) denominated note obligation and a foreign currency forward exchange agreement. Information is presented in U.S. dollar equivalents. The table presents the notional amounts and weighted average exchange rate by contractual maturity date. The notional amount is generally used to calculate the contractual payments to be exchanged under the contract. Due to the short-term nature of these instruments, their carrying and contract values approximate market. (Dollars in thousands) 1999 Short-term notes payable: Variable rate (Yen) $16,560 Average interest rate 5.85% Related derivative: Forward exchange agreement, including projected interest due at maturity (receive Yen/pay $US) $16,616 Exchange rate 116.63 Quarterly Financial Data (Unaudited) Seaboard Corporation and Subsidiaries (Thousands of dollars 1st 2nd 3rd 4th Total for except per share amounts) Quarter Quarter Quarter Quarter the Year 1998 Net sales $446,532 454,645 438,909 439,783 $1,779,869 Operating income $ 12,261 19,256 21,507 15,340 $ 68,364 Net earnings $ 2,864 7,932 5,018 36,541 $ 52,355 Earnings per common share $ 1.93 5.33 3.37 24.57 $ 35.20 Dividends per common share $ .25 .25 .25 .25 $ 1.00 Market price range per common share: High $ 435 375 1/16 336 445 Low $ 365 265 1/2 261 256 1997 Net sales $400,180 449,366 429,610 501,177 $1,780,333 Operating income $ 16,120 24,209 23,234 13,512 $ 77,075 Net earnings $ 5,336 10,505 10,508 4,225 $ 30,574 Earnings per common share $ 3.59 7.06 7.06 2.84 $ 20.55 Dividends per common share $ .25 .25 .25 .25 $ 1.00 Market price range per common share: High $ 268 292 316 453 Low $ 230 1/4 247 1/2 264 309 In the fourth quarter of 1998, the Company sold its baking and flour milling operations in Puerto Rico, recognizing an after-tax gain of $33,272,000 or $22.37 per common share. See Note 2 to the consolidated financial statements for further discussion. Responsibility for Financial Statements The consolidated financial statements appearing in this annual report have been prepared by the Company in conformity with generally accepted accounting principles and necessarily include amounts based upon judgments with due consideration given to materiality. The Company relies on a system of internal accounting controls that is designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with Company policy and are properly recorded, and accounting records are adequate for preparation of financial statements and other information. The concept of reasonable assurance is based on recognition that the cost of a control system should not exceed the benefits expected to be derived and such evaluations require estimates and judgments. The design and effectiveness of the system are monitored by a professional staff of internal auditors. The consolidated financial statements have been audited by the independent accounting firm of KPMG LLP, whose responsibility is to examine records and transactions and to gain an understanding of the system of internal accounting controls to the extent required by generally accepted auditing standards and render an opinion as to the fair presentation of the consolidated financial statements. The board of directors pursues its review of auditing, internal controls and financial statements through its audit committee, consisting of a majority of directors who are not employed by the Company. In the exercise of its responsibilities, the audit committee meets annually with management, with the internal auditors and with the independent accountants to review the scope and results of examinations. Both the internal auditors and independent accountants have free access to the committee with or without the presence of management. Independent Auditors' Report We have audited the accompanying consolidated balance sheets of Seaboard Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, changes in equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seaboard Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for spare parts and supplies inventories in 1996. KPMG LLP Kansas City, Missouri February 26, 1999 Seaboard Corporation and Subsidiaries Consolidated Statements of Earnings (Thousands of dollars except per share amounts) Years ended December 31, 1998 1997 1996 Net sales $1,779,869 $1,780,333 $1,464,362 Cost of sales and operating expenses 1,564,536 1,561,265 1,315,782 Gross income 215,333 219,068 148,580 Selling, general and administrative expenses 146,969 141,993 128,835 Operating income 68,364 77,075 19,745 Other income (expense): Interest income 7,072 6,127 9,095 Interest expense (32,062) (31,108) (26,864) Loss from foreign affiliates (17,105) (8,733) (2,966) Gain on disposition of businesses 54,544 -- -- Miscellaneous 4,449 1,221 1,292 Total other income (expense), net 16,898 (32,493) (19,443) Earnings before income taxes and cumulative effect of a change in accounting principle 85,262 44,582 302 Income tax (expense) benefit (32,907) (14,008) 2,538 Earnings before cumulative effect of a change in accounting principle 52,355 30,574 2,840 Cumulative effect of changing the accounting for inventories, net of income tax expense of $1,922 -- -- 3,006 Net earnings $ 52,355 $ 30,574 $ 5,846 Earnings per common share: Earnings before cumulative effect of a change in accounting principle $ 35.20 $ 20.55 $ 1.91 Cumulative effect of changing the accounting for inventories -- -- 2.02 Earnings per common share $ 35.20 $ 20.55 $ 3.93 See accompanying notes to consolidated financial statements. Seaboard Corporation and Subsidiaries Consolidated Statements of Changes in Equity (Thousands of dollars except per share amounts) Years ended December 31, 1998, 1997 and 1996
Accumulated Other Common Treasury Additional Comprehensive Retained Comprehensive Stock Stock Capital Income Earnings Income Balances,January 1,1996 $ 1,790 $(302) $ 13,214 $ 251 $350,857 Net earnings -- -- -- -- 5,846 $ 5,846 Other comprehensive income, net of income tax benefit of $142 -- -- -- (235) -- (235) Comprehensive income -- -- -- -- -- 5,611 Dividends on common stock ($1.00 per share) -- -- -- -- (1,487) Balances, December 31, 1996 1,790 (302) 13,214 16 355,216 Net earnings -- -- -- -- 30,574 30,574 Other comprehensive income, net of income tax benefit of $3 -- -- -- (6) -- (6) Comprehensive income -- -- -- -- -- 30,568 Dividends on common stock ($1.00 per share) -- -- -- -- (1,487) Balances, December 31, 1997 1,790 (302) 13,214 10 384,303 Net earnings -- -- -- -- 52,355 52,355 Other comprehensive income, net of income tax benefit of $56 -- -- -- (91) -- (91) Comprehensive income -- -- -- -- -- $ 52,264 Dividends on common stock ($1.00 per share) -- -- -- -- (1,487) Balances, December 31, 1998 $ 1,790 $(302) $ 13,214 $ (81) $435,171 See accompanying notes to consolidated financial statements.
Seaboard Corporation and Subsidiaries Consolidated Balance Sheets (Thousands of dollars) December 31, Assets 1998 1997 Current assets: Cash and cash equivalents $ 20,716 $ 8,552 Short-term investments 155,763 108,744 Receivables: Trade 160,229 169,990 Due from foreign affiliates 25,319 16,041 Other 22,152 10,267 207,700 196,298 Allowance for doubtful receivables (26,117) (20,658) Net receivables 181,583 175,640 Inventories 214,846 211,024 Deferred income taxes 14,604 9,730 Prepaid expenses and deposits 13,757 15,545 Total current assets 601,269 529,235 Investments in and advances to foreign affiliates 28,416 93,668 Net property, plant and equipment 559,749 486,373 Other assets 33,700 15,109 Total Assets $1,223,134 $1,124,385 See accompanying notes to consolidated financial statements. Seaboard Corporation and Subsidiaries Consolidated Balance Sheets (Thousands of dollars) December 31, Liabilities and Stockholders' Equity 1998 1997 Current liabilities: Notes payable to banks $ 158,980 $ 157,445 Current maturities of long-term debt 18,608 6,843 Accounts payable 73,481 78,805 Accrued liabilities 77,868 55,520 Deferred revenues 15,384 42,958 Accrued payroll 21,143 19,331 Total current liabilities 365,464 360,902 Long-term debt, less current maturities 329,469 306,666 Deferred income taxes 44,147 27,943 Other liabilities 28,580 29,859 Total non-current and deferred liabilities 402,196 364,468 Minority interest 5,682 -- Commitments and contingent liabilities Stockholders' equity: Common stock of $1 par value. Authorized 4,000,000 shares; issued 1,789,599 shares including 302,079 shares of treasury stock 1,790 1,790 Shares held in treasury (302) (302) 1,488 1,488 Additional capital 13,214 13,214 Accumulated other comprehensive income (81) 10 Retained earnings 435,171 384,303 Total stockholders' equity 449,792 399,015 Total Liabilities and Stockholders' Equity $1,223,134 $1,124,385 See accompanying notes to consolidated financial statements. Seaboard Corporation and Subsidiaries Consolidated Statements of Cash Flows (Thousands of dollars) Years ended December 31, 1998 1997 1996 Cash flows from operating activities: Net earnings $ 52,355 $ 30,574 $ 5,846 Adjustments to reconcile net earnings to cash from operating activities: Depreciation and amortization 58,564 56,896 50,914 Loss from foreign affiliates 17,105 8,733 2,966 Deferred income taxes 10,884 2,719 9,301 Gain from sale of fixed assets (3,278) (1,334) (1,977) Gain from disposition of businesses (54,544) -- -- Changes in current assets and liabilities (net of businesses acquired and disposed): Receivables, net of allowance 9,982 (19,711) (66,575) Inventories 36,164 (25,323) (72,858) Prepaid expenses and deposits (770) (1,215) (79) Current liabilities exclusive of debt (24,855) 64,529 (1,825) Other, net (759) 5,242 1,525 Net cash from operating activities 100,848 121,110 (72,762) Cash flows from investing activities: Purchase of investments (446,868) (277,437) (327,020) Proceeds from the sale of investments 311,433 193,303 300,265 Proceeds from the maturity of investments 85,053 65,754 71,202 Capital expenditures (45,543) (85,482) (110,491) Investments in and advances to foreign affiliates (48,586) (41,834) (6,476) Proceeds from the sale of fixed assets 10,953 7,872 31,831 Notes receivable 496 163 719 Investment in domestic affiliate (2,500) -- -- Acquisition of businesses (net of cash acquired) (1,388) -- -- Proceeds from disposition of businesses 72,359 -- -- Net cash from investing activities (64,591) (137,661) 39,970) Cash flows from financing activities: Notes payable to banks, net (15,025) 7,288 116,342 Proceeds from issuance of long-term debt -- 10,213 10,000 Principal payments of long-term debt (7,581) (1,323) (12,394) Deferred grant revenue -- -- 350 Dividends paid (1,487) (1,487) (1,487) Bond construction fund -- (1,055) 5,859 Net cash from financing activities (24,093) 13,636 118,670 Net change in cash and cash equivalents 12,164 (2,915) 5,938 Cash and cash equivalents at beginning of year 8,552 11,467 5,529 Cash and cash equivalents at end of year $ 20,716 $ 8,552 $ 11,467 See accompanying notes to consolidated financial statements. Seaboard Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Note 1 Summary of Significant Accounting Policies Operations of Seaboard Corporation and its Subsidiaries Seaboard Corporation and its subsidiaries (the Company) is a diversified international agribusiness and transportation company primarily engaged in domestic poultry and pork production and processing, and cargo shipping. Overseas, the Company is primarily engaged in commodity merchandising, flour and feed milling, produce farming, sugar production, and electric power generation. Seaboard Flour Corporation is the owner of 75.3% of the Company's outstanding common stock. Principles of Consolidation and Investments in Affiliates The consolidated financial statements include the accounts of Seaboard Corporation and its domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's investments in non-controlled affiliates are accounted for by the equity method. Financial information from certain foreign subsidiaries and affiliates is reported on a one-to three-month lag depending on the specific entity. Short-term Investments Short-term investments are retained for future use in the business and include time deposits, commercial paper, tax-exempt bonds, corporate bonds and U.S. government obligations. All short-term investments held by the Company are categorized as available-for-sale and are reported at fair value with unrealized gains and losses reported, net of tax, as a component of accumulated other comprehensive income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Inventories The Company uses the lower of last-in, first-out (LIFO) or market for determining cost for poultry and baking product inventories. All other inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Property, Plant and Equipment Property, plant and equipment are carried at cost and are being depreciated generally on the straight-line method over useful lives ranging from 3 to 45 years. Property, plant and equipment leases which are deemed to be installment purchase obligations have been capitalized and included in the property, plant and equipment accounts. Maintenance, repairs and minor renewals are charged to operations while major renewals and improvements are capitalized. Deferred Grant Revenue Included in other liabilities at December 31, 1998 and 1997 is $11,127,000 and $11,550,000, respectively, of deferred grant revenue. Deferred grant revenue represents economic development funds contributed to the Company by government entities that were limited to construction of a hog processing facility in Guymon, Oklahoma. Deferred grants are being amortized to income over the life of the assets acquired with the funds. Income Taxes Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Comprehensive Income The Company retroactively adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," as of January 1, 1998. This statement establishes requirements for reporting and display of comprehensive income and its components. For the years ended December 31, 1998, 1997 and 1996, other comprehensive income adjustments were not material and consisted of unrealized gains on available-for-sale securities and foreign currency cumulative translation adjustments, net of tax. The adoption of this statement had no effect on the previously reported net earnings or stockholders' equity. Revenue Recognition The Company recognizes revenue on commercial exchanges at the time title to the goods transfers to the buyer. Revenue of the Company's containerized cargo service is recognized ratably over the transit time for each voyage. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Impairment of Long-lived Assets Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Earnings Per Common Share Earnings per common share are based upon the average shares outstanding during the period. Average shares outstanding were 1,487,520 for each of the three years ended December 31, 1998, 1997 and 1996, respectively. Basic and diluted earnings per share are the same for all periods presented. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all demand deposits and overnight investments as cash equivalents. Included in accounts payable are outstanding checks in excess of cash balances of $19,997,000 and $22,487,000 at December 31, 1998 and 1997, respectively. The amounts paid (received) for income taxes and interest are as follows: Years ended December 31, (Thousands of dollars) 1998 1997 1996 Interest (net of amounts capitalized) $ 32,135 30,284 27,120 Income taxes $ 10,308 (6,817) (10,362) Supplemental Noncash Transactions As more fully described in Notes 2 and 5, during 1998 the Company purchased two businesses, consolidated a previously non-controlled foreign affiliate and disposed of its Puerto Rican baking and flour milling operations. The following table summarizes the noncash transactions resulting from the acquisitions and consolidation of the foreign affiliate: Year ended December 31, (Thousands of dollars) 1998 Increase in other working capital $ 38,539 Decrease in investments in and advances to foreign affiliates (96,733) Increase in fixed assets 114,867 Increase in other net assets 9,198 Increase in notes payable and long-term debt (58,801) Minority interest (5,682) Cash paid, net of cash acquired and consolidated $ 1,388 The following table summarizes the noncash transactions resulting from the disposition of businesses: Year ended December 31, (Thousands of dollars) 1998 Decrease in short-term investments $ 3,429 Decrease in other working capital 1,303 Decrease in fixed assets 19,736 Decrease in other net assets 1,347 Long-term note receivable from sale (8,000) Gain on disposal 54,544 Proceeds from disposition of businesses $72,359 Foreign Currency The Company has operations in and transactions with customers in a number of foreign countries. The currencies of the countries fluctuate in relation to the U.S. dollar. Most of the Company's major contracts and transactions, however, are denominated in U.S. dollars. In addition, the value of the U.S. dollar fluctuates in relation to the currencies of countries where certain of the Company's foreign subsidiaries and affiliates primarily conduct business. These fluctuations result in exchange gains and losses. The activities of these foreign subsidiaries and affiliates are primarily conducted with U.S. subsidiaries or they operate in hyper- inflationary environments. As a result, the Company translates the financial statements of certain foreign subsidiaries and affiliates using the U.S. dollar as the functional currency. The exchange gains and losses reported in earnings were not material for the years ended December 31, 1998, 1997 and 1996. Foreign currency exchange restrictions imposed upon the Company's foreign subsidiaries and foreign affiliates do not have a significant effect on the consolidated financial position of the Company. Certain foreign subsidiaries use local currency as their functional currency. Assets and liabilities of these subsidiaries are translated to U.S. dollars at year-end exchange rates, and income and expense items are translated at average rates for the year. Resulting translation gains and losses were not material for the years ended December 31, 1998, 1997 and 1996. Translation gains and losses are recorded as components of accumulated other comprehensive income. Financial Instruments The Company enters into interest rate exchange agreements which involve the exchange of fixed-rate and variable-rate interest payments over the life of the agreements without the exchange of the underlying notional amounts to hedge the effects of fluctuations in interest rates. These agreements effectively convert specifically identified, variable-rate debt into fixed- rate debt. The Company also has a foreign currency exchange agreement to manage a foreign currency exchange risk on a short-term note which is payable in foreign currency. Differences to be paid or received are accrued as interest or exchange rates change and are recognized as an adjustment to interest expense. See Note 8 for a description of outstanding exchange rate agreements. Gains and losses on termination of interest rate exchange agreements are deferred and recognized over the term of the underlying debt instrument as an adjustment to interest expense. At December 31, 1998 and 1997, net deferred gains on terminated interest rate exchange agreements were not material. In cases where there is no remaining underlying debt instrument, gains and losses on termination are recognized currently in miscellaneous income (expense). Commodity Instruments The Company enters into forward purchase and sale contracts, futures and options to manage its exposure to price fluctuations in the commodity markets. These commodity instruments generally involve the anticipated purchase of feed grains and the sale of hogs. At December 31, 1998, the Company had net contracts to purchase 11.9 million bushels of grain and 119,000 tons of meal, and net contracts to sell 1.4 million pounds of hogs. Gains and losses on commodity instruments designated as hedges and for which there is high correlation between changes in the value of the instrument and changes in the value of the hedged commodity are deferred and ultimately recognized in operations as part of the cost of the commodity. Gains and losses on qualifying hedges of firm commitments or probable anticipated transactions are also deferred and recognized as adjustments of the carrying amounts of the commodities when the hedged transaction occurs. When a qualifying hedge is terminated or ceases to meet the specific criteria for use of hedge accounting, any deferred gains or losses through that date continue to be deferred. Commodity instruments not qualifying as hedges for financial reporting purposes are marked to market and included in cost of sales in the consolidated statements of earnings. For the years ended December 31, 1998, 1997 and 1996, losses on commodity contracts reported in operating income were $5,583,000, $1,557,000 and $12,881,000, respectively. At December 31, 1998, the net deferred gain on commodity instruments was $92,000, compared to a net deferred loss at December 31, 1997 of $689,000. These amounts are included in deferred revenues in the consolidated balance sheets. Cash flows from commodity instruments are classified in the same category as cash flows from the hedged commodities in the consolidated statements of cash flows. Note 2 Acquisitions and Dispositions of Businesses In October 1998, the Company purchased a controlling interest in an existing Bulgarian winery by acquiring newly issued shares for $15,000,000. In November 1998, the Company purchased a flour and feed milling operation in Zambia by assuming liabilities of approximately $10,232,000. These acquisitions were accounted for using the purchase method and would not have significantly affected sales, net earnings or earnings per share on a pro forma basis. On December 30, 1998, the Company completed the sale of its Puerto Rican baking and flour milling businesses, to a management group led by the President of the baking businesses. These assets were sold for $81,359,000 and the assumption of $11,770,000 in liabilities. The proceeds consisted of $72,359,000 in cash, an $8,000,000 interest bearing subordinated note receivable due in 2004, and a $1,000,000 interest bearing note receivable subsequently collected in the first quarter of 1999. The Company recognized a pre-tax gain of $54,544,000 ($33,272,000 after tax) in connection with this transaction. The following pro forma unaudited financial data reflects the pro forma impact on the Company's results of operations as if the sale was consummated at the beginning of each year presented, excluding the gain on the sale, with pro forma adjustments to give effect to reducing short-term borrowings, interest income earned on short-term investments and certain other adjustments, together with related income tax effects: Years ended December 31, (Thousands of dollars, except per share amounts) 1998 1997 Net sales $1,688,693 1,686,356 Net earnings $ 17,545 28,474 Earnings per share $ 11.79 19.14 The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the sale been consummated on the dates assumed, nor are they necessarily indicative of future operating results. Note 3 Short-term Investments Substantially all available-for-sale securities have contractual maturities within two years and are available to meet current operating needs. The amortized cost of these investments approximates fair value at December 31, 1998 and 1997. The gross realized gains and losses on sales of available-for-sale securities were not material for the years ended December 31, 1998, 1997 and 1996. The following is a summary of the estimated fair value of available-for-sale securities at December 31, 1998 and 1997: December 31, (Thousands of dollars) 1998 1997 U.S. Treasury securities and obligations of U.S. government agencies $ 39,265 $ 27,321 Obligations of states and political subdivisions 60,877 50,587 Other debt securities 55,621 30,836 Total debt securities $ 155,763 $ 108,744 Note 4 Inventories During the fourth quarter of 1996, the Company changed its method of accounting for spare parts and supplies used in its poultry and pork processing operations, retroactively effective as of January 1, 1996. Previously, these spare parts and supplies were expensed when purchased. Under the new method, such purchases are recorded as inventory and charged to operations when used. Due to the growth of these inventories, primarily as a result of completion of the new pork processing plant in Oklahoma, the Company believes the new method is preferable as it provides a better matching of revenues and expenses. The cumulative effect of this accounting change at January 1, 1996 was to increase net earnings by $3,006,000 or $2.02 per common share. The net effect of this accounting change was to increase earnings before cumulative effect of change in accounting principle by $788,000 or $.53 per common share for the year ended December 31, 1996. A summary of inventories at the end of each year is as follows: December 31, (Thousands of dollars) 1998 1997 At lower of LIFO cost or market: Live poultry $ 24,840 $ 27,116 Dressed poultry 22,961 32,496 Feed and baking ingredients, packaging supplies and other 5,813 6,970 53,614 66,582 LIFO allowance 2,811 (4,744) Total inventories at lower of LIFO cost or market 56,425 61,838 At lower of FIFO cost or market: Live hogs 75,887 76,484 Grain, flour and feed 8,196 37,575 Crops in production and related materials 17,133 11,166 Dressed pork 8,486 8,388 Processed sugar 20,125 - Other 28,594 15,573 Total inventories at lower of FIFO cost or market 158,421 149,186 Total inventories $ 214,846 $ 211,024 The use of the LIFO method increased net earnings in 1998, 1997 and 1996 by $4,609,000 ($3.10 per share), $766,000 ($.52 per share) and $589,000 ($.40 per share), respectively. Significant decreases in commodity prices during 1998 have eliminated the LIFO reserve as overall poultry feed costs have decreased below base year levels. The increases in net earnings during 1997 and 1996 were primarily the result of declining purchase prices. If the FIFO method had been used, inventories would have been $2,811,000 lower and $4,744,000 higher than those reported at December 31, 1998 and 1997, respectively. Note 5 Investments in and Advances to Foreign Affiliates The Company has made investments in and advances to non-controlled foreign affiliates primarily conducting business in flour milling, feed milling, and sugar production. The foreign affiliates are located in the Democratic Republic of Congo, Lesotho, Mozambique, Nigeria and Sierra Leone in Africa; Argentina and Ecuador in South America; and Haiti in the Caribbean. These investments are accounted for by the equity method. See further discussion below concerning consolidation of the sugar production operation as of December 31, 1998. The Company's investments in foreign affiliates are primarily carried at the Company's equity in the underlying net assets of each subsidiary. Certain of these foreign affiliates operate under restrictions imposed by local governments which limit the Company's ability to have significant influence on their operations. These restrictions have resulted in a loss in value of these investments and advances that is other than temporary. The Company suspended the use of the equity method for these investments and recognized the impairment in value by a charge to earnings in years prior to 1996. In July 1998, the Company acquired for $5,000,000 a non-controlling interest in a flour mill in Lesotho. In June 1998, the Company, in a joint venture with two other partners, acquired an interest in a flour mill in Haiti. The Company made an investment of $3,000,000 for a minority interest in the joint venture, which in turn owns 70% of a Haitian company which owns the flour mill. These investments are being accounted for using the equity method. In October 1996, the Company acquired for $4,600,000 a non-controlling interest in a flour mill located in Mozambique. The Company paid $1,000,000 at closing with the balance to be paid in installments over the next six years. The Company accounts for this investment using the equity method. In July 1996, the Company purchased for $8,800,000 a non-controlling interest in Ingenio y Refineria San Martin del Tabacal S.A. (Tabacal). Tabacal is an Argentine company primarily engaged in growing and refining sugarcane and, to a lesser extent, citrus production. Through December 31, 1998, the Company had made net advances to and non-voting investments in Tabacal of $113,399,000 for working capital, improvements to existing operations, expansion of sugarcane and citrus fields and reduction of debt. The Company accounted for this investment using the equity method from July 1996 through December 1998. Effective December 31, 1998, the Company obtained voting control over a majority of the capital stock of Tabacal. Accordingly, as of December 31, 1998, Tabacal is accounted for as a consolidated subsidiary resulting in the elimination of $96,733,000 in investments in and advances to foreign affiliates on the balance sheet. See Notes 1 and 8 for further discussion of the effects of the consolidation on the balance sheet. Sales of grain and supplies to non-consolidated foreign affiliates are included in consolidated net sales for the years ended December 31, 1998, 1997, and 1996, and amounted to $107,424,000, $79,946,000, and $83,007,000 respectively. Combined condensed financial information of the non-controlled, non- consolidated foreign affiliates for their fiscal periods ended within each of the Company's years ended, excluding Tabacal's balance sheet as of December 31, 1998, are as follows: December 31, (Thousands of dollars) 1998 1997 1996 Net sales $217,362 208,340 191,600 Net loss $(20,497) (13,831) (6,089) Total assets $137,381 240,511 215,512 Total liabilities $ 72,995 193,094 157,484 Total equity $ 64,386 47,417 58,028 Note 6 Property, Plant and Equipment A summary of property, plant and equipment at the end of each year is as follows: December 31, (Thousands of dollars) 1998 1997 Land and improvements $ 74,025 $ 49,031 Buildings and improvements 191,671 173,031 Machinery and equipment 511,171 411,037 Transportation equipment 80,573 84,614 Office furniture and fixtures 14,172 13,604 Construction in progress 6,078 39,971 877,690 771,288 Accumulated depreciation and amortization (317,941) (284,915) Net property, plant and equipment $ 559,749 $ 486,373 Approximately $252,000, $184,000 and $855,000 of interest costs were capitalized as part of property, plant and equipment in the years ended December 31, 1998, 1997 and 1996, respectively. Note 7 Income Taxes Total income taxes for the years ended December 31, 1998, 1997 and 1996 differ from the amounts computed by applying the statutory U.S. Federal income tax rate to earnings before income taxes and cumulative effect of a change in accounting principle for the following reasons: Years ended December 31, (Thousands of dollars) 1998 1997 1996 Computed tax expense on earnings before income taxes and cumulative effect of a change in accounting principle $ 29,842 $ 15,604 $ 105 Adjustments to tax expense attributable to: Foreign tax differences 7,680 705 (3,789) Tax-exempt investment income (730) (621) (603) State income taxes, net of Federal benefit 1,018 700 820 Other (4,903) (2,380) 929 $ 32,907 $ 14,008 $ (2,538) The components of total income taxes are as follows: Years Ended December 31, (Thousands of dollars) 1998 1997 1996 Current: Federal $ 1,620 $ 4,341 $ (17,853) Foreign (including Puerto Rico) 17,125 6,469 5,403 State and local 1,372 479 611 Deferred: Federal 12,368 3,036 8,680 Foreign (including Puerto Rico) 110 (730) (380) State and local 312 413 1,001 Income tax expense (benefit) 32,907 14,008 (2,538) Cumulative effect of changing the accounting for inventories -- -- 1,922 Unrealized changes in other comprehensive income (56) (3) (142) Total income taxes $ 32,851 $ 14,005 $ (758) Components of the net deferred income tax liability at the end of each year are as follows : December 31, (Thousands of dollars) 1998 1997 Deferred income tax liabilities: Cash basis farming adjustment $ 18,084 $ 19,036 Deferred earnings of foreign subsidiaries 4,819 1,688 Depreciation 52,853 39,840 Other 775 581 76,531 61,145 Deferred income tax assets: Reserves/accruals 40,001 29,492 Foreign losses 3,165 3,606 Other 5,972 11,984 49,138 45,082 Valuation allowance 2,150 2,150 Net deferred income tax liability $ 29,543 $ 18,213 The Company believes that its future taxable income will be sufficient for full realization of the deferred tax assets. The valuation allowance represents accumulated losses on certain foreign subsidiaries that will not be recognized without future liquidation or sale of these subsidiaries. At December 31, 1998 and 1997 current income taxes payable totaled $17,231,000 and $7,422,000, respectively. At December 31, 1998 and 1997, no provision has been made in the accounts for Federal income taxes which would be payable if the undistributed earnings of certain foreign subsidiaries were distributed to the Company since management has determined that the earnings are permanently invested in these foreign operations. Should such accumulated earnings be distributed, the resulting Federal income taxes would amount to approximately $33,500,000. Note 8 Notes Payable and Long-term Debt Notes payable amounting to $158,980,000 and $157,445,000 at December 31, 1998 and 1997, respectively, consisted of obligations due banks within one year. At December 31, 1998, these funds were outstanding under the Company's one-year revolving credit facilities totaling $160 million and short-term uncommitted credit lines from banks totaling $120 million, less outstanding letters of credit commitments totaling $7.0 million. Subsequent to year-end, the Company's one-year revolving credit facilities totaling $145 million maturing in the first quarter of 1999 were increased to $153.3 million and extended for an additional year. Weighted average interest rates on the notes payable were 6.18% and 6.63% at December 31, 1998 and 1997, respectively. As a result of an acquisition and the consolidation of a previously unconsolidated foreign affiliate, as discussed in Notes 2 and 5, respectively, long-term debt of $42,149,000 was added to the Company's balance sheet. This long-term debt consisted of $18,330,000 in current maturities of which $6,000,000 was extinguished as of December 31, 1998. In addition, as a result of the consolidation discussed in Note 5, the Company added to its balance sheet $16,560,000, payable in Japanese Yen (Yen), included in notes payable above and outstanding under a $20 million uncommitted line of credit. At December 31, 1998, the Company had foreign exchange contracts in place effectively fixing the exchange rate on this $16,560,000 note payable at 116.63 Yen to one U.S. dollar. Subsequent to year-end, the Company's existing five-year revolving credit facility totaling $25 million was increased to $26.7 million. Notes payable, the revolving credit facilities and uncommitted credit lines from banks are unsecured and do not require compensating balances. Facility fees on these agreements are not material. A summary of long-term debt at the end of each year is as follows: December 31, (Thousands of dollars) 1998 1997 Private placements: 6.49% senior notes, due 2001 through 2005 $ 100,000 $ 100,000 7.88% senior notes, due 2003 through 2007 125,000 125,000 Industrial Development Revenue Bonds (IDRBs), floating rates (4.35% - 4.65% at December 31, 1998) due through 2027 62,900 62,900 Revolving credit facility, floating rate (6.07% at December 31, 1998) due 2002 10,000 10,000 Foreign subsidiary obligations (9.00% - 14.50%) due 1999 through 2007 26,665 - Foreign subsidiary obligations, floating rates (5.00% - 15.50%) due 1999 through 2000 9,484 - Term loan, 3.00%, due 1999 5,415 5,700 Capital lease obligations and other 8,613 9,909 348,077 313,509 Current maturities of long-term debt (18,608) (6,843) Long-term debt, less current maturities $ 329,469 $ 306,666 Of the foreign subsidiary obligations, $21,532,000 are denominated in U.S. dollars and the remaining $14,617,000 is payable in Argentine pesos. At December 31, 1998, poultry processing facilities with a depreciated cost of $17,861,000, and Argentine land and sugar production facilities and equipment with a depreciated cost of $23,672,000, secure certain bond issues and foreign subsidiary debt. Included in other assets at December 31, 1998 and 1997 are $1,477,000 and $1,371,000, respectively, of unexpended bond proceeds held in trust that are invested in accordance with the bond issuance agreements. The terms of the note agreements pursuant to which the senior notes, IDRBs, term loan and revolving credit facilities were issued require, among other terms, the maintenance of certain ratios and minimum net worth, the most restrictive of which requires the ratio of consolidated funded debt to consolidated shareholders' equity, as defined, not to exceed .90 to 1, and the maintenance of consolidated tangible net worth, as defined, of not less than $250,000,000. The Company is in compliance with all restrictive debt covenants relating to these agreements as of December 31, 1998. At December 31, 1998 and 1997, the Company had interest rate exchange agreements in place effectively fixing the interest rate on $200 million of variable rate debt to a fixed, weighted-average rate of 6.33%. These contracts expire in 2007. The Company monitors the risk of default by the counterparty and does not anticipate nonperformance. For the year ended December 31, 1998, ownership of these agreements increased interest expense by $1,108,000. The effect on interest expense in 1997 was not material. Annual maturities of long-term debt at December 31, 1998 are as follows: $18,608,000 in 1999, $6,542,000 in 2000, $24,851,000 in 2001, $34,317,000 in 2002, $48,361,000 in 2003, and $215,398,000 thereafter. Note 9 Fair Value of Financial Instruments The fair value of the Company's short-term investments is based on quoted market prices at the reporting date for these or similar investments. At December 31, 1998 and 1997 the fair value of the Company's short-term investments was $155,763,000 and $108,744,000, respectively, with an amortized cost of $155,682,000 and $108,729,000 at December 31, 1998 and 1997, respectively. The fair value of long-term debt is determined by comparing interest rates for debt with similar terms and maturities. At December 31, 1998 and 1997 the fair value of the Company's long-term debt was $363,414,000 and $316,746,000, respectively, with a carrying value of $348,077,000 and $313,509,000 at December 31, 1998 and 1997, respectively. The fair values of interest rate exchange agreements are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreements. The Company would be required to pay an estimated $13,000,000 to terminate the exchange agreements at December 31, 1998. Other financial instruments consisting of cash and cash equivalents, net receivables, notes payable, and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Note 10 Employee Benefits The Company maintains defined benefit pension plans for its domestic salaried, clerical and poultry employees. The Company also sponsors non- qualified, unfunded supplemental executive plans. The plans generally provide for normal retirement at age 65 and eligibility for participation after one year's service upon attaining the age of 21. The Company bases pension contributions on funding standards established by the Employee Retirement Income Security Act of 1974. Benefits are generally based upon the number of years of service and a percentage of final average pay. Plan assets are invested in equity securities, fixed income bonds and short-term cash equivalents. The changes in the plans' benefit obligations and fair value of assets for the years ended December 31, 1998 and 1997, and a statement of the funded status as of December 31, 1998 and 1997 were as follows: December 31, (Thousands of dollars) 1998 1997 Reconciliation of benefit obligation: Benefit obligation at beginning of year $ 37,672 $ 32,143 Service cost 2,822 2,670 Interest cost 2,692 2,402 Actuarial losses 1,581 2,551 Benefits paid (2,187) (2,094) Divestitures (see Note 2) (10,351) - Benefit obligation at end of year $ 32,229 $ 37,672 Reconciliation of fair value of plan assets: Fair value of plan assets at beginning of year $ 32,391 $ 29,808 Actual return on plan assets 3,677 4,120 Employer contributions 1,091 534 Benefits paid (2,132) (2,071) Divestitures (see Note 2) (6,995) - Fair value of plan assets at end of year $ 28,032 $ 32,391 Funded status $ (4,197) $ (5,281) Unrecognized transition obligation 1,215 1,400 Unamortized prior service cost (2,188) (1,932) Unrecognized net actuarial gains (3,437) (3,091) Accrued benefit cost $ (8,607) $ (8,904) Assumptions used in determining pension information were: Years ended December 31, 1998 1997 1996 Weighted-average assumptions: Discount rate 7.25% 7.50% 7.75% Expected return on plan assets 8.75% 8.75% 8.50-9.00% Long-term rate of increase in compensation levels 4.50% 4.25-4.50% 4.25-4.50% The net periodic benefit cost of these plans was as follows: Years ended December 31, (Thousands of dollars) 1998 1997 1996 Components of net periodic benefit cost: Service cost $ 2,822 $ 2,670 $ 1,874 Interest cost 2,692 2,403 2,204 Expected return on plan assets (2,833) (2,523) (2,258) Amortization and other (80) (107) 51 Net periodic benefit cost $ 2,601 $ 2,443 $ 1,871 As of December 31, 1998, the projected benefit obligation and accumulated benefit obligation for unfunded pension plans were $2,561,000 and $2,143,000, respectively. As of December 31, 1997, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligation in excess of plan assets were $10,723,000, $9,106,000 and $5,878,000, respectively. During 1997, a new non-qualified, unfunded supplemental executive retirement plan was adopted amending and restating a previous plan. For disclosure purposes, the new plan is included in the 1998 and 1997 section of the defined benefit tables above while expenses related to the prior plan are included in the 1996 supplemental discussion below. The Company has certain individual, non-qualified, unfunded supplemental retirement agreements for certain executive employees. Pension expense for these plans was $514,000, $574,000, and $3,128,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Included in other liabilities at December 31, 1998 and 1997 is $8,207,000 and $8,903,000, respectively, representing the accrued benefit obligation for these plans. The Company maintains a defined contribution plan covering most of its domestic salaried and clerical employees. The Company contributes to the plan an amount equal to 100% of employee contributions up to a maximum of 3% of employee compensation. Employee vesting is based upon years of service with 20% vested after one year of service and an additional 20% vesting with each additional complete year of service. Contribution expense was $1,698,000, $1,466,000, and $1,294,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Note 11 Commitments and Contingencies The Company leases various ships, facilities and equipment under noncancelable operating lease agreements. In addition, the Company is a party to master lease programs with limited partnerships which own certain of the facilities used by the Company in connection with its hog production. These arrangements are accounted for as operating leases. Under these arrangements, the Company has certain rights to acquire any or all of the leased properties at the conclusion of their respective lease terms at a price based on estimated fair market value of the property. In the event the Company does not acquire any property which it has ceased to lease, the Company has a limited obligation to the lessors for any deficiency between the amortized cost of the property and the price for which it is sold up to a specific amount. Rental expense for operating leases amounted to $59,221,000, $50,436,000, and $45,591,000 in 1998, 1997 and 1996, respectively. Minimum lease commitments under noncancelable leases with initial terms greater than one year at December 31, 1998, were $30,519,000 for 1999, $19,131,000 for 2000, $12,911,000 for 2001, $9,713,000 for 2002, $8,107,000 for 2003, and $33,541,000 thereafter. It is expected that, in the ordinary course of business, leases will be renewed or replaced. The Company is a defendant in a pending arbitration proceeding and related litigation in Puerto Rico brought by the owner of a chartered barge and tug which were damaged by fire after delivery of the cargo. Damages of $47,600,000 are alleged. The Company is vigorously defending the action and believes that it has no responsibility for the loss. The Company also believes that it would have a claim for indemnity if it were held liable for any loss. The Company is subject to various other legal proceedings related to the normal conduct of its business. In the opinion of management, none of these actions is expected to result in a judgment having a materially adverse effect on the consolidated financial statements of the Company. Note 12 Segment Information The Company retroactively adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the year ended December 31, 1998. This statement requires companies to report certain information about operating segments in their financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Comparative information for prior years presented has been restated to conform to the requirements of SFAS 131. Seaboard Corporation has four reportable segments: Poultry, Pork, Marine, and Commodity Trading and Milling, each offering a specific product or service. The Poultry segment sells fresh, frozen, value-added, and further processed poultry products mainly to foodservice companies and restaurants both domestically and overseas. The Pork segment sells fresh and value-added pork products mainly to further processors and foodservice companies both domestically and overseas. The Marine segment, primarily based out of the Port of Miami, offers containerized cargo shipping services throughout Latin America and the Caribbean. The Commodity Trading and Milling segment sources bulk and bag commodities primarily overseas and operates foreign flour and feed mills. Revenues from all other segments are primarily derived from operations including produce farming, baking (sold in December 1998, see Note 2), wine production, and the generation of electricity. Each of the four main segments is separately managed and each was started or acquired independent of the other segments. The following tables set forth specific financial information about each segment as reviewed by the Company's management. Operating income for segment reporting is prepared on the same basis as that used for consolidated operating income. Operating income is used as the measure of evaluating segment performance because management does not consider interest and income tax expense on a segment basis.
(Thousands of dollars) 1998 Commodity Trading Segment Poultry Pork Marine and Milling All Other Totals Sales to external customers $ 514,503 500,357 310,903 306,406 147,700 $1,779,869 Operating income $ 33,281 (1,122) 17,379 10,505 10,624 $ 70,667 Total assets $ 188,558 387,699 99,609 129,071 291,562 $1,096,499 Depreciation and amortization $ 18,085 20,676 8,451 2,985 7,763 $ 57,960 Capital expenditures $ 18,630 16,304 5,151 1,162 3,279 $ 44,526 Reconciliations to consolidated totals: Segment Corporate Consolidating Consolidated Totals Items Adjustment Totals Sales to external customers $1,779,869 - - $1,779,869 Operating income $ 70,667 (2,303) - $ 68,364 Total assets $1,096,499 169,323 (42,688) $1,223,134 Depreciation and amortization $ 57,960 604 - $ 58,564 Capital expenditures $ 44,526 1,017 - $ 45,543 (Thousands of dollars) 1997 Commodity Trading Segment Poultry Pork Marine and Milling All Other Totals Sales to external customers $ 476,580 531,587 309,306 313,900 148,960 $1,780,333 Operating income $ (6,997) 38,378 27,297 9,542 9,788 $ 78,008 Total assets $ 194,287 403,739 104,622 154,966 147,174 $1,004,788 Depreciation and amortization $ 15,150 20,225 9,476 3,037 7,835 $ 55,723 Capital expenditures $ 37,158 31,850 9,020 1,464 5,762 $ 85,254 Reconciliations to consolidated totals: Segment Corporate Consolidating Consolidated Totals Items Adjustment Totals Sales to external customers $1,780,333 - - $1,780,333 Operating income $ 78,008 (933) - $ 77,075 Total assets $1,004,788 139,870 (20,273) $1,124,385 Depreciation and amortization $ 55,723 1,173 - $ 56,896 Capital expenditures $ 85,254 228 - $ 85,482 (Thousands of dollars) 1996 Commodity Trading Segment Poultry Pork Marine and Milling All Other Totals Sales to external customers $ 501,710 234,291 265,645 315,610 147,106 $1,464,362 Operating income $ 2,090 (13,004) 4,226 17,763 8,803 $ 19,878 Total assets $ 168,327 374,237 96,511 131,189 133,438 $ 903,702 Depreciation and amortization $ 13,885 12,700 11,806 3,196 8,264 $ 49,851 Capital expenditures $ 12,391 83,044 8,582 1,935 3,749 $ 109,701 Reconciliations to consolidated totals: Segment Corporate Consolidating Consolidated Totals Items Adjustment Totals Sales to external customers $1,464,362 - - $1,464,362 Operating income $ 19,878 (133) - $ 19,745 Total assets $ 903,702 113,397 (12,414) $1,004,685 Depreciation and amortization $ 49,851 1,063 - $ 50,914 Capital expenditures $ 109,701 790 - $ 110,491
Administrative services provided by the corporate office are primarily allocated to the individual segments based on revenues. Corporate assets include short-term investments, investments in subsidiaries (eliminated in consolidation), investments in and advances to foreign affiliates, fixed assets, deferred tax amounts and other miscellaneous items. Corporate operating losses represent certain operating costs not specifically allocated to individual segments. Geographic Information No individual foreign country accounts for 10% or more of sales to external customers. The following table provides a geographic summary of the Company's net sales based on the location of product delivery: Years ended December 31, (Thousands of dollars) 1998 1997 1996 United States $1,092,868 $1,074,209 $ 845,437 Caribbean, Central and South America 336,957 315,729 302,877 Africa 126,169 160,349 166,332 Pacific Basin and Far East 76,328 90,244 42,042 Canada/Mexico 72,017 48,682 30,877 Eastern Mediterranean 40,830 37,382 33,502 Europe 34,700 53,738 43,295 Total $1,779,869 $1,780,333 $1,464,362 The following table provides a geographic summary of the Company's long- lived assets according to their physical location and primary port for Company owned vessels: December 31, (Thousands of dollars) 1998 1997 1996 United States $420,351 $ 457,262 $434,162 Argentina 103,968 -- -- All other 35,430 29,111 31,999 Total $559,749 $ 486,373 $466,161 At December 31, 1998 and 1997, the Company had approximately $81,005,000 and $77,472,000, respectively, of foreign receivables, excluding receivables due from foreign affiliates, which represent more of a collection risk than the Company's domestic receivables. The Company believes that its allowance for doubtful receivables is adequate. EX-21 4 LIST OF SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES NAMES UNDER STATE OR OTHER OF THE WHICH SUBSIDIARIES JURISDICTION REGISTRANT DO BUSINESS OF INCORPORATION A & W Interlining American Interlining Maryland Services Corp. Company Western Coat Pad Company African Coffee ACC Democratic Republic Company, S.P.R.L. of Congo Agencia Maritima Same Costa Rica del Istmo, S.A. Agencias Generales Conaven Venezuela Conaven, C.A. Almacenadora Conaven, S.A. Same Venezuela Atlantic Salmon (Maine) Same Maine Limited LIability Company* Cape Fear Railways, Inc. Same North Carolina Cayman Freight Shipping Same Cayman Islands Services, Ltd.* Chestnut Hill Farms, Inc. Same Florida Chestnut Hill Farms Honduras, Same Honduras S.A. de C.V. Consorcio Naviero de Occidente, Conaven Venezuela C.A. Cultivos Marinos, S.A. de C.V. CUMAR Honduras Delta Packaging Company Ltd.* Same Nigeria Desarrollo Industrial DIBSA Ecuador Bioacuatico, S.A.* Ducktrap River Fish Farm, Same Maine L.L.C.* Empacadora Litoral, S.A. Same Honduras S.A. de C.V. Globe International Holdings, Same Nigeria S.A.* Guymon Housing Partners Same Oklahoma Limited Partnership* H&O Shipping Limited Same Liberia Haiti Agro Processors Holdings, Same Cayman Islands Ltd* Ingenio y Refineria San Martin Tabacal Argentina del Tabacal Les Moulins d'Haiti S.E.M. Same Haiti (LHM)* Lesotho Flour Mills Limited* Same Lesotho EXHIBIT 21 (continued) Life Flour Mill Ltd.* Same Nigeria Minoterie de Matadi, S.A.R.L.* Same Democratic Republic of Congo Mobeira, SARL* Same Mozambique Molinos Champion, S.A.* Mochasa Ecuador Molinos del Ecuador, C.A.* Molidor Ecuador National Milling Company of Same Guyana Guyana, Ltd. National Milling Company Limited Same Zambia Port of Miami Cold Storage, Inc. Same Florida Representaciones Maritimas y Remarsa Guatemala Aereas, S.A. Samovar International Finance, Same Puerto Rico Inc. SASCO Engineering Co./ Seaboard Sales Corporation Same Bermuda Sea Cargo, S.A. Same Panama Seaboard de Colombia, S.A. Same Colombia Seaboard de Honduras, S.A. Same Honduras S.A. de C.V. Seaboard del Peru, S.A. Same Peru Seaboard Farms of Athens, Seaboard Farms of Inc. Athens Inc. Jordan Hatchery Georgia Seaboard Farms of Chattanooga, Same Tennessee Inc. Seaboard Farms of Elberton, Seaboard Farms of Inc. Elberton, Inc. Seaboard Farms of Canton Georgia Seaboard Farms of Kentucky, Inc. Same Kentucky Seaboard Farms of Minnesota, Inc. Same Minnesota Seaboard Farms of Orlando, Inc. Same Florida Seaboard Farms, Inc. Same Oklahoma Seaboard Guyana, Ltd. Same Bermuda Seaboard Holdings Ltd. Same British Virgin Islands EXHIBIT 21 (continued) Seaboard Marine Bahamas, Ltd. Same Bahamas Seaboard Marine Ltd. Same Liberia Seaboard Marine of Florida, Inc. Same Florida Seaboard Overseas Limited Same Bahamas S.B.D., LLC Same Delaware Seaboard Ship Management Inc. Same Florida Seaboard Shipping Services (PTY) Ltd. Same South Africa Seaboard Trading and Shipping Ltd. Same Minnesota Seaboard Trading de Mexico, S.A. Same Mexico S.A. de C.V. Seaboard Transport Inc. Same Oklahoma Seaboard West Africa Limited* Same Sierra Leone Seadom, S.A.* Same Dominican Republic Secuador Limited Same Bermuda Shilton Limited Same Cayman Islands Top Feeds Limited* Same Nigeria Transcontinental Capital Corp. (Bermuda) Ltd. Same Bermuda Vinprom Rousse AD Same Bulgaria Zenith Investments, Ltd.* Same Nigeria *Represents a non-controlled, non-consolidated affiliate. EX-27 5 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FISCAL 1998 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 DEC-31-1998 20716 155763 207700 26117 214846 601269 877690 317941 1223134 365464 329469 0 0 1488 448304 1223134 1779869 1779869 1564536 1564536 146969 5902 32062 85262 32907 52355 0 0 0 52355 35.20 35.20
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