ELEVEN-YEAR FINANCIAL SUMMARY
TYSON FOODS,INC.
(In millions except per share data)
- ------------------------------------------------------------------------------------------
OPERATING RESULTS FOR FISCAL YEAR 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------
Sales $7,414.1 $6,355.7 $6,453.8 $5,511.2
Cost of Sales 6,260.1 5,318.0 5,505.7 4,423.1
Gross Profit 1,154.0 1,037.7 948.1 1,088.1
Operating Expenses 950.4 637.8 678.5 616.4
Interest Expense 139.1 110.4 132.9 114.9
Provision for Taxes 45.9 143.9 49.0 131.0
Net Income (Loss) 25.1 185.8 86.9 219.2
Diluted Earnings (Loss) Per Share 0.11 0.85 0.40 1.01
Basic Earnings (Loss) Per Share 0.11 0.86 0.40 1.01
Dividends Per Share:
Class A 0.100 0.095 0.080 0.053
Class B $ 0.090 $ 0.086 0.072 0.044
- --------------------------------------------------------------------------------------------
Capital Expenditures $ 310.4 $ 291.2 $ 214.0 $ 347.2
Depreciation and Amortization 276.4 230.4 239.3 204.9
Total Assets 5,242.5 4,411.0 4,544.1 4,444.3
Net Property, Plant and Equipment 2,256.5 1,924.8 1,869.2 2,013.5
Total Debt 2,128.9 1,690.1 1,975.1 1,984.7
Shareholders' Equity 1,970.4 1,621.5 1,541.7 1,467.7
Year-End Shares Outstanding 230.9 213.4 217.4 217.2
Diluted Average Shares Outstanding 227.9 218.2 218.0 217.7
Book Value Per Share 8.53 $ 7.60 $ 7.09 $ 6.76
Total Debt to Capitalization 51.9% 51.0% 56.2% 57.5%
- --------------------------------------------------------------------------------------------
Return on Sales 0.3% 2.9% 1.4% 4.0%
Annual Sales Growth (Decline) 16.7% (1.5)% 17.1% 7.9%
Five-Year Compounded Annual Sales Growth 9.5% 8.8% 10.5% 7.6%
Gross Margin 15.6% 16.3% 14.7% 19.7%
Return on Beginning Assets 0.6% 4.1% 2.0% 6.0%
Return on Beginning Shareholders' Equity 1.5% 12.1% 5.9% 17.0%
Five-Year Return on Beginning
Shareholders' Equity 7.1% 10.1% 10.9% 13.8%
Effective Tax Rate 64.7% 43.6% 37.0% 38.1%
Closing Stock Price High $ 24.44 $ 23.63 $ 18.58 $ 18.17
Closing Stock Price Low 16.50 17.75 13.83 13.83
49
1994 1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------
$5,110.3 $4,707.4 $4,168.8 $3,922.1 $3,825.3 $2,538.2 $1,936.0
4,149.1 3,796.5 3,390.3 3,147.5 3,081.7 2,056.1 1,627.6
961.2 910.9 778.5 774.6 743.6 482.1 308.4
766.0 535.4 446.8 441.4 423.4 271.5 184.0
86.1 72.8 76.9 95.5 128.6 45.0 19.5
120.7 129.3 100.5 97.0 80.1 62.9 23.0
(2.1) 180.3 160.5 145.5 120.0 100.6 81.4
(0.01) 0.81 0.77 0.70 0.60 0.52 0.42
(0.01) 0.82 0.78 0.71 0.61 0.52 0.43
0.047 0.027 0.027 0.020 0.013 0.013 0.013
$ 0.039 $ 0.022 $ 0.022 $ 0.017 $ 0.011 $ 0.011 $ 0.011
- ---------------------------------------------------------------------------------------
$ 232.1 $ 225.3 $ 108.0 $ 213.6 $ 163.8 $ 128.9 $ 86.3
188.3 176.6 148.9 135.8 123.4 84.8 70.3
3,668.0 3,253.5 2,617.7 2,645.8 2,501.1 2,586.1 889.1
1,610.0 1,435.3 1,142.2 1,162.0 1,071.1 1,020.8 430.0
1,455.1 1,024.3 825.6 984.0 1,020.5 1,374.4 211.3
1,289.4 1,360.7 980.2 822.5 663.0 447.7 341.4
217.8 220.9 206.2 206.1 204.9 194.0 191.4
221.7 222.5 207.6 207.1 199.3 194.6 192.0
$ 5.92 $ 6.16 $ 4.75 $ 3.99 $ 3.24 $ 2.31 $ 1.78
53.0% 42.9% 45.7% 54.5% 60.6% 75.4% 38.2%
- ---------------------------------------------------------------------------------------
0.0% 3.8% 3.9% 3.7% 3.1% 4.0% 4.2%
8.6% 12.9% 6.3% 2.5% 50.7% 31.1% 8.4%
15.0% 19.5% 18.5% 21.1% 27.5% 27.6% 26.3%
18.8% 19.4% 18.7% 19.8% 19.4% 19.0% 15.9%
(0.1)% 6.9% 6.1% 5.8% 4.6% 11.3% 10.1%
(0.2)% 18.4% 19.5% 22.0% 26.8% 29.5% 30.2%
14.1% 21.7% 23.9% 26.8% 29.7% 31.8% 32.4%
101.8% 41.8% 38.5% 40.0% 40.0% 38.5% 22.0%
$ 16.67 $ 18.08 $ 15.08 $ 15.58 $ 11.79 $ 8.63 $ 7.25
12.50 12.83 10.17 8.46 7.17 4.92 3.63
[FN]
1. Significant business combinations accounted for as purchases: Hudson
Foods, Inc., Arctic Alaska Fisheries Corporation and Holly Farms
Corporation on Jan. 9, 1998, Oct. 5, 1992 and July 19, 1989,
respectively. See Footnote 2 to the Consolidated Financial Statements
for acquisitions during the three-year period ended Oct. 3, 1998.
50
2. The results for 1998 include a $214.6 million pre-tax charge, or $0.68
per share, for asset impairment and other charges.
3. The results for 1997 include a $41 million pre-tax gain ($4 million after-
tax) from the sale of the beef division assets.
4. The results for 1994 include a $205 million after-tax charge, or $0.93
per share, due to the writedown of certain long-lived assets of Arctic Alaska
Fisheries Corporation.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS
TYSON FOODS, INC.
ACQUISITIONS
On Jan. 9, 1998, the Company completed the acquisition of Hudson Foods, Inc.
(Hudson) pursuant to which Hudson merged with and into a wholly-owned
subsidiary of the Company (the Hudson Acquisition). At the effective time of
merger, the Class A and Class B shareholders of Hudson received an aggregate
of approximately 18.4 million shares of the Company's Class A common stock
valued at approximately $363.5 million and approximately $257.4 million in
cash. The Company borrowed funds under its commercial paper program to
finance the $257.4 million cash portion of the Hudson Acquisition
and repay approximately $61 million under Hudson's revolving credit
facilities. The Hudson Acquisition has been accounted for as a purchase and
the excess of investment over net assets acquired is being amortized
straight-line over 40 years. The Company's consolidated results of
operations include the operations of Hudson since the acquisition date.
DISPOSITIONS
On June 9, 1998, the Company and Pierre Foods, LLC (Pierre), a wholly owned
subsidiary of Fresh Foods, Inc., completed an asset purchase agreement for
Pierre to acquire the Pierre Foods division from the Company. The Pierre
Foods division, based in Cincinnati, Ohio, is primarily engaged in producing
and distributing packaged, precooked food products to the foodservice
industry. On Aug. 28, 1998, the Company sold its Caryville, Tenn., meat
processing facility to Advance Food Company, Inc. of Enid, Okla. Both
facilities were acquired with the Hudson Acquisition. Under the terms of
both agreements, the Company received $128 million in cash. The Company
recognized no gain or loss on the sale of these assets. In addition, no pro
forma information is provided as the operations of these facilities were not
significant to the Company.
On Oct. 27, 1998, the Company and Rose Acre Farms, Inc. signed an asset
purchase agreement whereby Rose Acre Farms, Inc. will acquire the Company's
National Egg Products Company operations in Social Circle, Ga. This
operation, which is reflected in assets held for sale at Oct. 3, 1998, was
acquired with the Hudson Acquisition. This transaction is expected to be
finalized in the first quarter of fiscal 1999 at an amount which
approximates its carrying value.
51
The Company also intends to sell Willow Brook Foods, its integrated turkey
production and processing business, and its Albert Lea, Minn., processing
facility which primarily produces the Schweigert brand of sausages, lunch
and deli meats and other related products. These operations, which are
reflected in assets held for sale at Oct. 3, 1998, were acquired with the
Hudson Acquisition.
IMPAIRMENT AND OTHER CHARGES
The Company recorded charges totaling $214.6 million on a pre-tax basis
($0.68 per share) during the fourth quarter of 1998. These charges consist
of $142.2 million for asset impairment of property, plant and equipment,
writedown of related excess of investments over net assets acquired and
severance costs, $48.4 million for losses in the Company's export business
to Russia which has been adversely affected by the continuing economic
problems in Russia and $24.0 million for other charges related primarily to
workers compensation and employment practice liabilities. These charges have
been classified in the Consolidated Statements of Income as $142.2 million
asset impairment and other charges, $48.4 million included in selling
expenses, $20.5 million included in cost of sales and $3.5 million in other
expense. During the fourth quarter of 1998, the Russian Ruble devalued
resulting in the losses described above. The Company recognizes that
conducting business in or selling products into foreign countries, including
Russia, entails inherent risks. The Company, however, is continually
monitoring its international business practices and, whenever possible, will
attempt to minimize the Company's financial exposure to these risks.
As previously announced, the Company's Board of Directors approved
management's proposed restructure plan on Aug. 28, 1998. The restructuring,
which resulted in asset impairment and related charges, is in furtherance of
the Company's previously stated objective to focus on its core business,
chicken. The recent acquisition of Hudson and the assimilation of Hudson's
facilities and operations into the Company's business have permitted the
Company to review and rationalize the productive capabilities and cost
structure of its core business. Further, the Company intends to continue the
rationalization of its seafood assets. This rationalization may include
divestiture, redeployment, and other possible business transactions,
exploring all alternatives in an orderly fashion. The restructuring
includes, among other things, the closure of eight plants and feedmills
resulting in work force reductions, the writedown of excess of investments
over net assets acquired allocated to closed facilities, the
reconfiguration of various production facilities and the writedown of
certain seafood assets to estimated net realizable value. The anticipated
three-year net benefit, including anticipated proceeds from the sale of
certain assets identified for disposition is approximately $130 million.
The restructuring is expected to result in annual after-tax savings of $12-
$15 million through reduced depreciation, amortization and production costs.
The future cash outflows for severance and related costs is not expected to
be material.
RESULTS OF OPERATIONS
The Company's accounting cycle resulted in a 53-week year for 1998 compared
to a 52-week year for both 1997 and 1996.
52
1998 vs. 1997
Sales for 1998 increased 16.7% over sales for 1997. Consumer poultry sales,
excluding turkey, accounted for an increase of 12.3% of the total change in
sales for 1998 as compared to 1997. This increase was mainly due to a 21%
increase in tonnage offset slightly by a 5.1% decrease in average sales
prices. A significant portion of the increase in total sales and consumer
poultry sales for 1998 compared to 1997 is due to the Hudson Acquisition.
The operating results for 1998 were affected negatively by the excess
supply of poultry during the first six months of the fiscal year, excess
supply of other proteins for the entire fiscal year and the more commodity-
based Hudson sales mix. Additionally, the collapse of the Russian economy
and the devaluation of the Ruble weakened leg quarter prices and slowed
volume.
The prepared foods group sales, consisting of Mexican Original, Culinary
Foods and Mallard's, accounted for an increase of 0.8% of the change in
total sales for 1998 as compared to 1997. This increase primarily was due
to a 19.6% increase in average sales prices as well as a 2.1% increase in
tonnage, largely due to the acquisition of Mallard's in August 1997. Seafood
sales accounted for a decrease of 0.8% of the change in total sales for 1998
as compared to 1997. This decrease was due to a 25.9% decrease in tonnage
partially offset by a 8.6% increase in average sales prices. Decreased
seafood volume was mainly due to weakness in the surimi business caused in
large part by the Asian economic crisis. However, this is partially offset
by improvements in the analog business. The seafood operations continue to
be affected by the availability of some species of fish as well as
regulations that limit its source of supply. Other miscellaneous sales
accounted for an increase of 4.4% of the change in total sales for 1998 as
compared to last year.
Cost of goods sold increased 17.7% for 1998 as compared to 1997. This
increase is mainly the result of the Hudson Acquisition. As a percent of
sales, cost of sales was 84.4% for 1998 compared to 83.7% for 1997.
Operating expenses for 1998 increased 49% from 1997, mostly due to the asset
impairment and other charges. As a percent of sales, selling expense
increased to 8.7% in 1998 compared to 8.1% in 1997 mainly due to a $48.4
million charge for losses in the Company's export business to Russia.
Selling expense, as a percent of sales excluding the $48.4 million loss in
1998, was 8%. General and administrative expense, as a percent of sales,
increased to 1.8% in 1998 compared to 1.6% in 1997, partly due to penalties
and costs associated with the plea agreement by the Company with respect to
the investigation by the Office of Independent Counsel in connection with
former Secretary of Agriculture Michael Espy. Amortization expense, as a
percent of sales, was 0.4% in 1998 and 1997.
[GRAPH]
Expenses as a Percent of Sales
1996 1997 1998
Selling 8.5% 8.1% 8.0% *
General and Administrative 1.6% 1.6% 1.8%
* Excludes $48.4 million loss
53
Interest expense increased 26% in 1998 compared to 1997. As a percent of
sales, interest expense was 1.9% in 1998 compared to 1.7% in 1997. The
Company had a higher level of borrowing in 1998, which increased the
Company's average indebtedness by 18% over the same period last year mainly
due to the Hudson Acquisition. The Company's short-term interest rates were
slightly higher than the same period last year, and the net average
effective interest rate on total debt for 1998 was 6.6% compared to 6.2% for
1997.
The effective tax rate for 1998 was 64.7% compared to 43.6% for 1997. The
1998 effective tax rate was affected by certain costs related to asset
impairment and foreign losses not deductible for tax purposes.
Return on beginning assets for 1998 was 0.6% compared to 4.1% for 1997, with
a five-year average of 2.5%. Return on beginning assets for 1998, excluding
the $214.6 million for asset impairment and other charges, was 4.1%. Return
on beginning shareholders' equity for 1998 was 1.5% compared to 12.1% for
1997, with a five-year average of 7.1%. Return on beginning shareholders'
equity for 1998, excluding the $214.6 million for asset impairment and other
charges, was 11.1%.
[GRAPH]
Return on Beginning Assets
1996 2.0%
1997 4.1%
1998 4.1% *
* Excluding $214.6 million asset impairment and other charges.
1997 vs. 1996
Sales for 1997 decreased 1.5% from sales for 1996. This decrease is largely
attributable to the sale of the Company's beef division assets in the first
quarter of 1997. Excluding sales related to these operations, total sales
for 1997 increased 4.5% over comparable sales for 1996. Consumer poultry
sales accounted for an increase of 4.1% of the total change in sales for
1997 as compared to 1996. This increase was mainly due to a 0.8% increase in
average sales prices and a 4.2% increase in tonnage.
In 1997, the Company experienced intermittent sales disruptions and lower
than expected prices for leg quarters and related dark meat products in its
Russian markets. Such lower prices, together with tariffs, custom
regulations and other increased costs associated with these exports,
diminished net returns.
The prepared foods group sales, consisting of Mexican Original, Culinary
Foods and Mallards, accounted for a decrease of 0.1% of the total change in
sales for 1997 as compared to 1996. This decrease was primarily due to a
2.1% decrease in tonnage partially offset by a 0.8% increase in average
sales prices. Seafood sales accounted for a decrease of 0.5% of the change
in total sales for 1997 as compared to 1996. This decrease was due to an
11.7% decrease in average sales prices, partially offset by a 0.5% increase
in tonnage. The decrease in average sales prices is mainly due to a shift in
product mix. The seafood operations were affected by the availability of
54
some species of fish as well as reduced pricing on some products and
regulations that limit supply sources. Other miscellaneous sales accounted
for an increase of 1.0% of the change in total sales for 1997 as compared to
1996.
Cost of goods sold for 1997 decreased 3.4% compared to 1996, which is
largely attributable to the sale of the Company's beef division assets in
the first quarter of 1997. Excluding cost of sales related to these
operations, total cost of sales for 1997 increased 2.5% over last year's
comparable cost of sales. The cost of ingredients used in feed for poultry
and swine and the ingredients used in Mexican Original operations during
1997 decreased in comparison with 1996. However, these costs did not
moderate as much as management had anticipated. As a percent of sales, cost
of sales was 83.7% for 1997 compared to 85.3% in 1996.
Operating expenses for 1997 decreased 5.7% from 1996. This decrease is
mainly the result of the sale of the beef division assets in the first
quarter of fiscal 1997 and cost reductions. As a percent of sales, selling
expense decreased to 8.1% in 1997 compared to 8.5% in 1996; general and
administrative expense was 1.6% in 1997 and 1996; and amortization expense
was 0.4% in 1997 and 1996.
Interest expense decreased 16.9% in 1997 compared to 1996. As a percent of
sales, interest expense was 1.7% in 1997 compared to 2.1% in 1996. The
Company had a lower level of borrowing in 1997, which decreased the
Company's average indebtedness by 12.8% over the same period last year due
to paying down debt with funds generated from operations and proceeds from
the sale of the beef division assets. The Company's short-term interest
rates were slightly lower than the same period last year and the gross
average effective interest rate on total debt for 1997 was 6.8% compared to
6.9% for 1996.
Included in other income in 1997 is a $41.0 million pre-tax gain from the
sale of the beef division assets.
The effective tax rate for 1997 was 43.6% compared to 37% for 1996. The 1997
effective tax rate was affected by the taxes on the gain from the sale of
the beef division assets. Certain costs were allocated to the beef division
which are not deductible for tax purposes, resulting in a higher effective
tax rate.
LIQUIDITY AND CAPITAL RESOURCES
In 1998, net cash of $496.4 million was provided by operating activities,
a decrease of $44.6 million from 1997. The Company used cash from operations
to pay down debt, to fund additions to property, plant and equipment and for
acquisitions. The expenditures for property, plant and equipment were
related to acquiring new equipment, upgrading facilities to maintain
competitive standing and to position the Company for future opportunities.
Additionally, the Company makes a continuing effort to increase
efficiencies, reduce overall cost and meet or exceed environmental laws and
regulations, which requires investments.
55
[GRAPH]
Cash Provided by Operating Activities
Dollars in Millions
1996 $173.3
1997 $541.0
1998 $496.4
The Company's foreseeable cash needs for operations and capital expenditures
will continue to be met through cash flows from operations and borrowings
supported by existing credit facilities, as well as additional credit
facilities which the Company believes are available.
At 1998 year end, working capital was $934.1 million compared to $851.5
million at the end of 1997, an increase of $82.6 million. The current ratio
for 1998 was 2.12 to 1 compared to 2.18 to 1 for 1997. Working capital has
increased over 1997 primarily due to the Hudson Acquisition. Total assets
have increased by $2 billion or 61.1% over the past five years inclusive of
acquisitions.
Additions, net of dispositions, to total property, plant and equipment for
the last five years were $1.5 billion including acquisitions, an increase of
68.6% over the last five years. At 1998 year end, the Company had
construction projects in progress that will require approximately $193.2
million to complete. Funding for these expenditures will be provided by
cash from operations or additional borrowings.
Total debt at 1998 year end was $2.1 billion, an increase of $438.8 million
from the end of 1997. The Company has an unsecured revolving credit
agreement totaling $1 billion which supports the Company's commercial paper
program. This $1 billion facility expires in May 2002. At Oct. 3, 1998,
$506.9 million in commercial paper was outstanding under this $1 billion
facility. Additional outstanding long-term debt at Oct. 3, 1998, consisted
of $1,028.4 million of public debt, $169.1 million of institutional notes,
$170.5 million of leveraged equipment loans and $91.7 million of other
indebtedness. On Jan. 9, 1998, the Company borrowed funds under its
commercial paper program for the Hudson Acquisition. Subsequent to the
Hudson Acquisition, the Company refinanced $270 million in outstanding long-
term debt assumed pursuant to the Hudson Acquisition with commercial paper.
On Jan. 21, 1998 the Company issued, in two separate series, $150 million 6%
Notes due Jan. 15, 2003 and $150 million 7% Notes due Jan. 15, 2028. On Feb.
4, 1998, the Company issued $100 million 6.08% Mandatory Par Put Remarketed
SecuritiesSM (MOPPRSSM) due Feb. 1, 2010 and $50 million Floating Rate
MOPPRSSM due Feb. 1, 2010. On April 28, 1998, the Company issued debt
securities in the form of $240 million 7% Notes due May 1, 2018. The net
proceeds from these debt offerings were used by the Company to repay a
portion of the borrowings under its commercial paper program. The Company
may use funds borrowed under its revolving credit facility, commercial
paper program or through the issuance of additional debt securities from
time to time in the future to finance acquisitions as opportunities may
arise, to refinance other indebtedness or capital leases of the Company, and
for other general corporate purposes.
56
[GRAPH]
Total Capitalization
Dollars in Billions
1996 1997 1998
Equity 1.5 1.6 2.0
Debt 2.0 1.7 2.1
--- --- ---
Total 3.5 3.3 4.1
The revolving credit agreement and notes contain various covenants, the more
restrictive of which require maintenance of a minimum net worth, current
ratio, cash flow coverage of interest and a maximum total debt-to-
capitalization ratio. The Company is in compliance with most of these
covenants at year end and has obtained waivers for covenants in which the
Company is not in compliance.
The Company prefers to maintain a mix of fixed and floating debt.
Management believes that, over the long-term, variable-rate debt may provide
more cost-effective financing than fixed-rate debt; however, the Company
issues fixed-rate debt when advantageous market opportunities arise.
Shareholders' equity increased 21.5% during 1998 and has grown at a
compounded annual rate of 7.7% over the past five years, inclusive of $214.6
million in asset impairment and other charges in 1998, $363.5 million for
the purchase of Hudson in 1998, $20.8 million for the purchase of Mallard's
in 1997 and a $213.9 million writedown of assets in 1994.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
Because of the nature of the Year 2000 issue, older software is more likely
to have issues with Year 2000 readiness, while newer software is more likely
to be Year 2000 compliant. The Company has replaced its entire computer
software applications portfolio since 1990. Nonetheless, the Company has
been working on testing and ensuring application readiness since 1996. Many
of the applications that are used to support core business processes have
been taken to offsite computer testing facilities to ensure their Year 2000
readiness. This includes core application functionality as well as
interfaces to other applications and outside partners.
57
In addition to the testing that has been done, the Company has been in
contact with the providers of packaged software applications to ensure that
these packages are also Year 2000 ready. To this point, all suppliers of
software have provided some approach for the Company to ensure readiness,
either through upgrades or new products. Most of these solutions have
already been implemented. Those remaining will be completed by March 31,
1999.
In certain instances, software has been purchased to provide new
functionality for the Company replacing software that was not compliant.
These purchases were not predicated by the Year 2000 issue; however, the
result is that the new systems are compliant and non-compliant systems are
ultimately retired. An example of this is the implementation of new
accounting software from SAP that the Company installed at the beginning of
the 1999 fiscal year.
Because many of the systems were already compliant, did not require
significant modifications to make them compliant, or were replaced for other
business reasons, the costs incurred specifically to address Year 2000
readiness are not material to the company. Since 1996, the expenses that
resulted from Year 2000 readiness activities have been absorbed through the
annual Management Information Systems operational budget and funded from
internally generated funds. These costs can be primarily described as
personnel costs and have increased each year since 1996 because of increased
activity from testing. The costs incurred since 1996 are approximately $1.2
million and are anticipated to be less than $720,000 in 1999. No projects
under consideration by the Company have been deferred because of Year 2000
efforts.
Because of the rapid pace of change in technology, especially in the area of
hardware, the Company regularly upgrades and replaces hardware platforms
such as database and application servers. Consequently all of the servers
are Year 2000 ready. More than 90 percent of the personal computers have
been certified as being Year 2000 ready with the rest to be completed by
Dec. 31, 1998.
The telephone systems in use by the company have also been surveyed. There
are more than 170 of these systems currently in use. Three of these systems
currently have Year 2000 issues that need to be resolved. It is expected
that these systems will be addressed by March 31, 1999.
The embedded technology in the production environment, such as programmable
logic controllers, computer-controlled valves and other equipment, has been
inventoried and the Company has contacted the vendors who supplied this
technology with respect to their Year 2000 readiness. While not all of the
responses have been received, those that have responded have given a
positive response to their Year 2000 readiness. Based on current evidence,
the Company believes there to be no significant exposure with regard to
production equipment.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company's total Year 2000 project
cost, which is not expected to have a material effect on the Company's
results of operations, includes the estimated costs and time associated with
the impact of third party Year 2000 issues based upon presently available
58
information. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be converted timely or
would not have an adverse effect on the Company's systems.
To date, the Company has not established a contingency plan for possible
Year 2000 issues. The Company will establish contingency plans, if needed,
based on its actual testing experience with its supplier base and assessment
of outside risks.
MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in interest rates, foreign exchange rates and commodity prices, as
well as credit risk concentrations. To address these risks the Company
enters into various hedging transactions as described below. The Company
does not use financial instruments for trading purposes and is not a party
to any leveraged derivatives.
Commodities Risk
The Company is a purchaser of certain commodities, primarily corn and
soybeans. The Company periodically uses commodity futures and purchased
options for hedging purposes to reduce the effect of changing commodity
prices and as a mechanism to procure the grains. The contracts that
effectively meet risk reductions and correlation criteria are recorded using
hedge accounting. Gains and losses on closed hedge transactions are
recorded as a component of the underlying inventory purchase.
The following table provides information about the Company's corn, soybean
oil and other feed ingredient inventory and futures contracts that are
sensitive to changes in commodity prices. The table presents the carrying
amounts and fair values at Oct. 3, 1998. Additionally, for futures
contracts, the latest of which matures 15 months from the reporting date,
the table presents the notional amounts in units of purchase, the weighted
average contract prices and the total dollar contract amounts. Contract
amounts are used to calculate the contractual payments and quantity of corn
and soybean oil to be exchanged under the futures contracts.
DOLLARS AND VOLUME IN MILLIONS, EXCEPT PER UNIT AMOUNTS
- ------------------------------------------------------------------------------
Contract/ Weighted Weighted
Book Ave. Price Fair Ave.Price
Volume Value Per Unit Value Per Unit
- ----------------------------------------------------------------------------
Recorded Balance Sheet Commodity Position:
Commodity Inventory - $36.0 $ - $36.0 $ -
Corn Futures Contracts
(volume in bushels)
Long (Buy) Positions 7.5 17.4 2.33 17.0 2.27
Short (Sell) Positions 9.7 20.5 2.11 20.2 2.08
Soybean Oil Futures Contracts
(volume in cwt)
Long (Buy) Positions 0.1 2.1 24.24 2.1 24.05
Short (Sell) Positons 0.1 1.5 24.40 1.5 24.06
===========================================================================
59
Foreign Currency and Interest Rate Risks
The Company periodically enters into foreign exchange forward contracts and
option contracts to hedge some of its foreign currency exposure. The Company
uses such contracts to hedge exposure to changes in foreign currency
exchange rates, primarily Japanese Yen, associated with sales denominated in
foreign currency. Gains and losses on these contracts are recognized as an
adjustment of the subsequent transaction when it occurs. Forward and option
contracts generally have maturities not exceeding 12 months.
The Company also hedges exposure to changes in interest rates on certain of
its financial instruments. Under the terms of various leveraged equipment
loans, the Company enters into interest rate swap agreements to effectively
lock in a fixed interest rate for these borrowings. The maturity dates of
these leveraged equipment loans range from 2005 to 2008 with interest rates
ranging from 4.7% to 6%.
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. The table presents the Company's debt
obligations, principal cash flows, related weighted-average interest rates
by expected maturity dates and fair values. For interest rate swaps, the
table presents notional amounts, weighted-average interest rates or strike
rates by contractual maturity dates and fair values. Notional amounts are
used to calculate the contractual cash flows to be exchanged under the
contract.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest (Swap) Rate
____________________________________________________________________________
There- Fair
1999 2000 2001 2002 2003 after Total Value
(dollars in millions) 10/3/98
____________________________________________________________________________
Liabilities
Long-term Debt, including Current Portion
Fixed Rate $73.6 $226.7 $125.2 $31.4 $178.5 $823.3 $1,458.7 $1,533.7
Average Interest
Rate 9.37% 6.39% 8.25% 7.88% 6.20% 6.79% 6.93%
Variable Rate $4.0 $24.6 - $506.9 - $50.0 $ 585.5 $ 585.5
Average Interest
Rate 4.15% 7.67% - 5.57% - 3.73% 5.49%
Interest Rate Derivative Financial Instruments Related to Debt
Interest Rate Swaps
Pay Fixed $16.1 $17.2 $18.4 $19.6 $20.2 $50.2 $141.7 ($8.1)
Average Pay Rate 6.71% 6.71% 6.69% 6.73% 6.74% 6.59% 6.67%
Average Receive Rate- USD 6 Month Libor.
===========================================================================
60
The following table summarizes information on instruments and transactions
that are sensitive to foreign currency exchange rates. The table presents
the notional amounts, weighted-average exchange rates by expected
(contractual) maturity dates and fair values. These notional amounts
generally are used to calculate the contractual payments to be exchanged
under the contract.
Exposures Related to Derivative Contracts
with United States Dollar Functional Currency
Principal (Notional) Amount by Expected Maturity
Average Forward Foreign Currency Exchange Rate (USD/Foreign Currency)
(dollars in millions)
____________________________________________________________________________
1999 2000 - 2003 There- Total Fair
after Value
10/3/98
____________________________________________________________________________
Sold Option Contracts to Sell Foreign Currencies for US$
Japanese Yen
Notional Amount $6.5 - - $6.5 -
Weighted Average
Strike Price Y109.48
Purchased Option Contracts to Sell Foreign Currencies for US$
Japanese Yen
Notional Amount $5.6 - - $5.6 $0.4
Weighted Average
Strike Price Y126.69
============================================================================
61
CONSOLIDATED STATEMENTS OF INCOME
TYSON FOODS, INC.
THREE YEARS ENDED OCTOBER 3, 1998
(IN MILLIONS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Sales $7,414.1 $6,355.7 $6,453.8
Cost of Sales 6,260.1 5,318.0 5,505.7
- --------------------------------------------------------------------------------
1,154.0 1,037.7 948.1
- --------------------------------------------------------------------------------
Operating Expenses:
Selling 642.2 513.3 550.0
General and administrative 132.7 96.9 100.9
Amortization 33.3 27.6 27.6
Asset impairment and other charges 142.2
impairment
- --------------------------------------------------------------------------------
950.4 637.8 678.5
- --------------------------------------------------------------------------------
Operating Income 203.6 399.9 269.6
Other Expense (Income):
Interest 139.1 110.4 132.9
Foreign currency exchange 9.0
Other (6.5) (40.2) (4.9)
- --------------------------------------------------------------------------------
132.6 70.2 137.0
- --------------------------------------------------------------------------------
Income Before Taxes on Income and
Minority Interest 71.0 329.7 132.6
Provision for Income Taxes 45.9 143.9 49.0
Minority Interest in Net Loss of
Consolidated Subsidiary 3.3
- --------------------------------------------------------------------------------
Net Income $ 25.1 $ 185.8 $ 86.9
================================================================================
Basic Earnings Per Share $0.11 $0.86 $0.40
Diluted Earnings Per Share $0.11 $0.85 $0.40
================================================================================
SEE ACCOMPANYING NOTES.
62
CONSOLIDATED BALANCE SHEETS
TYSON FOODS, INC.
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (IN MILLIONS EXCEPT PER SHARE DATA)
ASSETS 1998 1997
Current Assets:
Cash and cash equivalents $ 46.5 $ 23.6
Accounts receivable 631.0 617.8
Inventories 984.1 886.1
Assets held for sale 65.2 6.2
Other current assets 38.3 38.8
Total Current Assets 1,765.1 1,572.5
Net Property, Plant and Equipment 2,256.5 1,924.8
Excess of Investments Over Net Assets Acquired 1,035.8 731.1
Investments and Other Assets 185.1 182.6
Total Assets $5,242.5 $4,411.0
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 84.7 $ 37.3
Current portion of long-term debt 77.6 94.6
Trade accounts payable 330.6 290.3
Accrued salaries and wages 98.4 80.9
Federal and state income taxes payable 0.9 27.2
Accrued interest payable 22.3 27.3
Other current liabilities 216.5 163.4
Total Current Liabilities $ 831.0 721.0
Long-Term Debt 1,966.6 1,558.2
Deferred Income Taxes 434.4 506.1
Other Liabilities 40.1 4.2
Shareholders' Equity:
Common stock ($.10 par value):
Class A-authorized 900 million shares:
Issued 137.9 million shares in 1998 13.8 11.9
and 119.5 million shares in 1997
Class B-authorized 900 million shares:
Issued 102.6 million shares in 1998 10.3 10.3
and 102.7 million shares in 1997
Capital in excess of par value 740.5 379.1
Retained earnings 1,394.2 1,390.8
Currency translation adjustment (1.0) (2.5)
2,157.8 1,789.6
Less treasury stock, at cost-
9.7 mi shares in 1998 and 8.8 mi shares in 1997 185.1 165.6
Less unamortized deferred compensation 2.3 2.5
Total Shareholders' Equity 1,970.4 1,621.5
Total Liabilities and Shareholders' Equity $5,242.5 $4,411.0
===========================================================================
SEE ACCOMPANYING NOTES.
63
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TYSON FOODS, INC.
THREE YEARS ENDED OCTOBER 3, 1998 (IN MILLIONS EXCEPT PER SHARE DATA)
1998 1997 1996
Shares Amount Shares Amount Shares Amount
CLASS A COMMON STOCK
Beginning Balance 119.5 $11.9 79.7 8.0 79.7 $8.0
Three-for-two stock split
Acquisition 18.4 1.9 39.8 3.9
-----------------------------------------------------------
Ending Balance 137.9 13.8 119.5 11.9 79.7 $8.0
CLASS B COMMON STOCK
Beginning Balance 102.7 10.3 68.5 6.8 68.5 6.8
Three-for-two stock split 34.2 3.5
-----------------------------------------------------------
Ending Balance 102.7 10.3 102.7 10.3 68.5 6.8
CAPITAL IN EXCESS OF PAR VALUE
Beginning Balance 379.1 375.4 377.9
Exercise of Options (0.2) (0.3) (2.5)
Acquisitions 361.6 4.0
-----------------------------------------------------------
Ending Balance 740.5 379.1 375.4
RETAINED EARNINGS
Beginning Balance 1,390.8 1,232.4 1,162.3
Net income 25.1 185.8 86.9
Three-for-two stock split (7.4)
Dividends: Class A per share (21.7) (20.0) (16.8)
(1998-$.10;1997-$.095;1996-$.09)
Class B per share (1998-$.09;
1997-$.086; 1996-$.072)
-----------------------------------------------------------
Ending Balance 1,394.2 1,390.8 1,232.4
CURRENCY TRANSLATION ADJUSTMENT
Beginning Balance (2.5) (2.8) (5.2)
Currency translation adjustment 1.5 0.3 2.4
-----------------------------------------------------------
Ending Balance (1.0) (2.5) (2.8)
TREASURY STOCK
Beginning Balance 8.8 (165.6) 3.2 (75.4) 3.4 (79.2)
Purchases 1.1 (22.3) 5.2 (109.6) 0.1 (1.3)
Exercise of options (0.2) 2.8 (0.2) 2.6 (0.3) 5.1
Acquisition (1.0) 16.8
Three-for-two stock split 1.6
-----------------------------------------------------------
Ending Balance 9.7 (185.1) 8.8 (165.6) 3.2 (75.4)
UNAMORTIZED DEFERRED COMPENSATION
Beginning Balance (2.5) (2.7) (2.9)
Amortization of deferred
compensation 0.2 0.2 0.2
-----------------------------------------------------------
Ending Balance (2.3) (2.5) (2.7)
-----------------------------------------------------------
Total Shareholders' Equity $1,970.4 $1,621.5 $1,541.7
===========================================================
SEE ACCOMPANYING NOTES.
64
CONSOLIDATED STATEMENTS OF CASH FLOWS
TYSON FOODS, INC.
THREE YEARS ENDED OCTOBER 3, 1998 (IN MILLIONS)
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25.1 $185.8 $86.9
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 243.1 202.8 211.7
Amortization 33.3 27.6 27.6
Restructuring and related asset impairment 214.6
Deferred income taxes (144.5) 10.5 15.9
Minority interest (3.3)
Foreign currency exchange loss 9.0
(Gain) Loss on dispositions of property, plant and (2.3) (34.8) 2.2
equipment
Decrease (increase) in accounts receivable 32.8 (68.4) (66.9)
Decrease (increase) in inventories 79.8 143.6 (126.7)
(Decrease) increase in trade accounts payable (6.6) 19.2 (4.7)
Net change in other current assets and liabilities 21.1 54.7 21.6
- ----------------------------------------------------------------------------------------------
Cash Provided by Operating Activities 496.4 541.0 173.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions (258.5) (4.3)
Additions to property, plant and equipment (310.4) (291.2) (214.0)
Proceeds from sale of assets 136.0 223.4 21.1
Net change in other assets and liabilities (13.3) (63.8) (29.5)
- ----------------------------------------------------------------------------------------------
Cash Used for Investing Activities (446.2) (135.9) (222.4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable (74.4) (2.2) (55.7)
Proceeds from long-term debt 1,027.1 131.4 475.6
Repayments of long-term debt (954.7) (420.8) (351.5)
Purchase of treasury shares (22.3) (109.6) (1.3)
Other (2.9) (17.2) (15.0)
- ----------------------------------------------------------------------------------------------
Cash Provided by (Used for) Financing Activities (27.2) (418.4) 52.1
Effect of Exchange Rate Change on Cash (0.1) 0.3 0.5
- ----------------------------------------------------------------------------------------------
(Decrease) Increase in Cash 22.9 (13.0) 3.5
Cash and Cash Equivalents at Beginning of Year 23.6 36.6 33.1
- ----------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 46.5 $23.6 $36.6
- ----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TYSON FOODS, INC.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Description of Business: The Company is a fully integrated producer,
processor and marketer of chicken, chicken-based food products and
convenience food items. The Company's food products are sold in the domestic
foodservice, retail and wholesale club markets as well as internationally.
Fiscal Year: The Company utilizes a 52- or 53- week accounting period which
ends on the Saturday closest to Sept. 30.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents consist of investments in short-
term, highly liquid securities having original maturities of three months or
less, which are made as part of the Company's cash management activity. The
carrying values of these assets approximate their fair market values. As a
result of the Company's cash management system, checks issued, but not
presented to the banks for payment, may create negative cash balances.
Checks outstanding in excess of related cash balances totaling approximately
$158.8 million at Oct. 3, 1998, and $147 million at Sept. 27, 1997, are
included in trade accounts payable, accrued salaries and wages and other
current liabilities.
Inventories: Live poultry consists of broilers and breeders. Broilers are
stated at the lower of cost (first-in, first-out) or market and breeders are
stated at cost less amortization. Breeders costs are accumulated up to the
production stage and amortized into broiler costs over the estimated
production lives based on historical egg production. Live hogs consist of
breeding stock and finishing hogs which are carried at lower of cost (first-
in, first-out) or market. The cost of live hogs is included in cost of
sales when the hogs are sold. Broilers, live hogs, dressed and further-
processed products, seafood-related products, hatchery eggs and feed and
supplies are valued at the lower of cost (first-in, first-out) or market.
(IN MILLIONS)
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
Dressed and further-processed products $ 410.4 $ 366.1
Live poultry and hogs 374.2 353.4
Seafood related products 49.2 39.5
Hatchery eggs and feed 71.5 57.8
Supplies 78.8 69.3
- ---------------------------------------------------------------------------
$ 984.1 $ 886.1
- ---------------------------------------------------------------------------
66
Property, Plant and Equipment and Depreciation: Depreciation is provided
primarily by the straight-line method using estimated lives for buildings
and leasehold improvements of 10 to 39 years; machinery and equipment of
three to 12 years; vessels of 16 to 30 years; and other of three to 20
years.
The Company capitalized interest costs of $1.8 million in 1998, $3.4 million
in 1997 and $3.8 million in 1996 as part of the cost of major asset
construction projects. Approximately $193.2 million will be required to
complete construction projects in progress at Oct. 3, 1998.
The major categories of property, plant and equipment and accumulated
depreciation, at cost, are as follows:
(IN MILLIONS)
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
Land $ 57.8 $ 47.7
Buildings and leasehold improvements 1,163.0 931.9
Machinery and equipment 2,004.6 1,838.9
Vessels 83.8 101.7
Land improvements and other 112.6 90.7
Buildings and equipment under construction 262.6 152.3
- ----------------------------------------------------------------------------
3,684.4 3,163.2
Less accumulated depreciation 1,427.9 1,238.4
- ----------------------------------------------------------------------------
$2,256.5 $1,924.8
- ----------------------------------------------------------------------------
Excess of Investments Over Net Assets Acquired: Costs in excess of net
assets of businesses purchased are amortized on a straight-line basis over
periods ranging from 15 to 40 years. The carrying value of excess of
investments over net assets acquired is reviewed at each balance sheet date
to determine if facts and circumstances suggest that it may be impaired. If
this review indicates that the excess of investments over net assets
acquired may not be recoverable, an estimate of the undiscounted cash flows
of the entity acquired is prepared and the Company's carrying value of
excess of investments over net assets acquired will be reduced by the
estimated shortfall of cash flows. At Oct. 3, 1998 and Sept. 27, 1997, the
accumulated amortization of excess of investments over net assets acquired
was $196.4 million and $165.8 million, respectively. See also Footnote 4
Impairment and Other Charges.
Capital Stock: Holders of Class B common stock (Class B stock) may convert
such stock into Class A common stock (Class A stock) on a share-for-share
basis. Holders of Class B stock are entitled to ten votes per share while
holders of Class A stock are entitled to one vote per share on matters
submitted to shareholders for approval. Cash dividends cannot be paid to
holders of Class B stock unless they are simultaneously paid to holders of
Class A stock, and the per share amount of the cash dividend paid to
holders of Class B stock cannot exceed 90% of the cash dividend
simultaneously paid to holders of Class A stock.
67
On Jan. 10, 1997, the Company's Board of Directors authorized a three-for-
two stock split in the form of a stock dividend, effective Feb. 15, 1997,
for shareholders of record on Feb. 1, 1997.
Stock-Based Compensation: The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and related interpretations in accounting for its employee stock
options. Under APB 25, because the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded. The Company has adopted the disclosure-
only provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123).
Financial Instruments: Periodically, the Company uses derivative financial
instruments to reduce its exposure to various risks. As a policy, the
Company does not engage in speculative transactions not does the Company
hold or issue financial instruments for trading purposes. Contracts that
effectively meet risk reduction and correlation criteria are recorded using
hedge accounting. Interest rate swaps are used to hedge exposure to changes
in interest rates under various leveraged equipment loans. Settlements of
interest rate swaps are accounted for as an adjustment to interest expense.
Gains and losses are recognized immediately if the underlying instrument is
settled. Commodity futures and options are used to hedge a portion of the
Company's purchases of certain commodities for future processing
requirements. Such contracts are accounted for as hedges, with gains and
losses recognized as part of cost of goods sold, and generally have terms of
less than 15 months. Foreign currency forwards and option contracts are
used to hedge sale transactions denominated in foreign currencies, primarily
Japanese Yen, to reduce the currency risk associated with fluctuating
exchange rates. Such contracts generally have terms of less than one year.
Unrealized gains and losses are deferred as part of the basis of the
underlying transaction.
Earnings Per Share: The Company adopted FASB statement No. 128, "Earnings
Per Share," effective for the year ending Oct. 3, 1998. All prior-period
earnings per share data have been restated. This Statement requires dual
presentation of basic and diluted earnings per share on the face of the
income statement. Stock options issued pursuant to Company compensation
plans are the only dilutive securities in all periods presented.
68
The following table sets forth the computation of basic and diluted earnings
per share:
(In millions)
1998 1997
---------- -------------
Numerator:
Net Income $ 25.1 $ 185.8
===== ======
Denominator:
Denominator for basic
earnings per share-
weighted average shares 226.7 216.3
Effect of dilutive securities:
Employee stock options 1.2 1.9
------- -------
Denominator for diluted
earnings per share-
adjusted weighted average
shares and assumed conversions 227.9 218.2
======= =======
Basic earnings per share $ 0.11 $ 0.86
======= =======
Diluted earnings per share $ 0.11 $ 0.85
======= =======
Income Taxes: The Company follows the liability method in accounting for
deferred income taxes. The liability method provides that deferred tax
liabilities are recorded at currently enacted tax rates based on the
difference between the tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes, referred to as temporary
differences.
Advertising and Promotion Expenses: Advertising and promotion expenses are
charged to operations in the period incurred. Advertising and promotion
expenses for 1998, 1997 and 1996 were $294.2 million, $233.2 million and
$228 million, respectively.
Comprehensive Income: In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). The provisions of SFAS No. 130 require companies to classify items of
comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from
retained earnings and capital in excess of par value in the consolidated
financial statements. The Company's comprehensive income items, primarily
foreign currency translation adjustments, are not material; accordingly, the
effect of adopting this statement will not be material when it becomes
effective for fiscal 1999.
Segment Reporting: In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS No. 131). Under the provisions of SFAS No.
131, public business enterprises must report financial and descriptive
69
information about its reportable segments. Management is finalizing its
study of SFAS No. 131 as well as the Company's operations to determine all
of the Company's reportable segments. Based upon this analysis, the Company
believes that one segment, consumer poultry, will account for at least 75%
of revenue and operating income. This statement will be effective for
fiscal 1999.
Derivative Instruments and Hedging Activities: In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). The
provisions of SFAS No. 133 requires all derivatives to be recorded on the
balance sheet at fair value. SFAS No. 133 establishes "special accounting"
for fair value hedges, cash flow hedges, and hedges of foreign currency
exposures of net investments in foreign operations. Derivatives that are
not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value of the
hedged item through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of
a derivative's change in fair value will be immediately recognized in
earnings. The Company has not yet determined what the effect of this
statement will be on the earnings and financial position of the Company when
it becomes effective for fiscal 2000.
Costs Associated with Computer Software: In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use (SOP 98-1). This statement provides guidance on the
capitalization of certain costs incurred in developing or acquiring internal-
use computer software. The Company believes the adoption of SOP 98-1 in
fiscal 2000 will not have a material impact on its financial position or
results of operations.
NOTE 2: ACQUISITIONS
On Jan. 9, 1998, the Company completed the acquisition of Hudson Foods, Inc.
(Hudson) pursuant to which Hudson merged with and into a wholly-owned
subsidiary of the Company (the Hudson Acquisition). At the effective time of
the acquisition, the Class A and Class B shareholders of Hudson received an
aggregate of approximately 18.4 million shares of the Company's Class A
common stock valued at approximately $363.5 million and approximately $257.4
million in cash. The Company borrowed funds under its commercial paper
program to finance the $257.4 million cash portion of the Hudson
Acquisition and repay approximately $61 million under Hudson's revolving
credit facilities. The Hudson Acquisition has been accounted for as a
purchase and the excess of investment over net assets acquired is being
amortized straight-line over 40 years. The Company's consolidated results of
operations include the operations of Hudson since the acquisition date. The
following unaudited pro forma information shows the results of operations as
though the purchase of Hudson had been made at the beginning of fiscal 1997.
70
(In millions, except per share data)
1998 1997
--------------------------
Net sales $7,831.0 $8,020.8
Net income 16.8 140.3
Basic Earnings Per Share 0.07 0.60
Diluted Earnings Per Share $ 0.07 $ 0.59
The unaudited pro forma results are not necessarily indicative of the actual
results of operations that would have occurred had the purchase actually
been made at the beginning of 1997, or the results that may occur in the
future.
On Aug. 1, 1997, the Company acquired Mallard's Food Products, Inc.
(Mallard's) for a combination of one million shares of the Company's Class A
stock valued at $20.8 million and cash of $4.0 million. Mallard's, with two
plants in Modesto, Calif., has annual sales of approximately $33 million.
This transaction has been accounted for as a purchase, and the results of
operations for this acquisition has been included in the Company's
consolidated results of operations since the acquisition date. No pro forma
information is provided as the results of operations for this acquisition
are not significant to the Company.
NOTE 3: DISPOSITIONS
On June 9, 1998, the Company and Pierre Foods, LLC (Pierre), a wholly owned
subsidiary of Fresh Foods, Inc. completed an asset purchase agreement for
Pierre to acquire the Pierre Foods division from the Company. The Pierre
Foods division, based in Cincinnati, Ohio, is primarily engaged in producing
and distributing packaged, precooked food products to the foodservice
industry. On Aug. 28, 1998, the Company sold its Caryville, Tenn. meat
processing facility to Advance Food Company, Inc. of Enid, Okla. Both of
these facilities were acquired with the Hudson Acquisition. Under the terms
of both agreements, the Company received $128 million in cash. The Company
recognized no gain or loss on the sale of these assets. In addition, no pro
forma information is provided as the operations of these facilities were not
significant to the Company.
NOTE 4: IMPAIRMENT AND OTHER CHARGES
The Company recorded charges totaling $214.6 million on a pre-tax basis
($0.68 per share) during the fourth quarter of 1998. These charges consist
of $142.2 million for asset impairment of property, plant and equipment,
writedown of related excess of investments over net assets acquired and
severance costs, $48.4 million for losses in the Company's export business
to Russia which has been adversely affected by the continuing economic
problems in Russia and $24 million for other charges related primarily to
workers compensation and employment practice liabilities. These charges have
been classified in the Consolidated Statements of Income as $142.2 million
in asset impairment and other charges, $48.4 million included in selling
expenses, $20.5 million included in cost of sales and $3.5 million included
in other expense. Additionally, the foreign losses have been netted with
accounts receivable on the Consolidated Balance Sheets.
71
As previously announced, the Company's Board of Directors approved
management's proposed restructure plan on Aug. 28, 1998. The restructuring,
which resulted in asset impairment and other charges, is in furtherance of
the Company's previously stated objective to focus on its core business,
chicken. The recent acquisition of Hudson Foods, Inc. and the assimilation
of Hudson's facilities and operations into the Company's business have
permitted the Company to review and rationalize the productive capabilities
and cost structure of its core business. Further, the Company intends to
continue the rationalization of its seafood assets. This rationalization
may include divestiture, redeployment, and other possible business
transactions, exploring all alternatives in an orderly fashion. The
restructuring includes, among other things, the closure of eight plants and
feedmills resulting in work force reductions, the writedown of excess of
investments over net assets acquired allocated to closed facilities, the
reconfiguration of various production facilities and the writedown of
certain seafood assets to estimated net realizable value.
The major components of the asset impairment and related charges consist of
the following:
(IN MILLIONS)
- --------------------------------------------------------------------
Impairment of property, plant and equipment $120.7
Writedown of related excess of investments
over net assets acquired 19.3
Severance and other related costs 2.2
- --------------------------------------------------------------------
$142.2
====================================================================
The impairment charge represents the excess of the carrying value of those
assets discussed above over their fair value less cost to sell. Impaired
assets which are expected to be disposed of within the next 12 months are
included in assets held for sale.
The writedown of excess of investments over net assets acquired is related
to plant closings and related book value impairments, which originated from
prior business acquisitions. Substantially, all of the severance and
related costs will be paid in fiscal 1999.
During the fourth quarter, the Russian Ruble was devalued from 6.3 to 16.0.
This event and other related economic factors in Russia resulted in the
Company recognizing losses of $48.4 million.
The majority of the $24.0 million charge noted above relates primarily to
revisions to the Company's estimated liabilities for workers compensation
and employment practice related matters. This charge is based upon two
separate actuarial studies completed during the fourth quarter.
NOTE 5: ASSETS HELD FOR SALE
On Oct. 27, 1998, the Company and Rose Acre Farms, Inc. signed an asset
purchase agreement whereby Rose Acre Farms, Inc. will acquire the Company's
National Egg Products Company operations in Social Circle, Ga. This
operation, which is reflected in assets held for sale at Oct. 3, 1998, was
acquired with the Hudson Acquisition. This transaction is expected to be
finalized in the first quarter of fiscal 1999 at an amount which
approximates its carrying value.
72
The Company also intends to sell Willow Brook Foods, its integrated turkey
production and processing business, and its Albert Lea, Minn., processing
facility which primarily produces the Schweigert brand of sausages, lunch
and deli meats and other related products. These operations, which are
reflected in assets held for sale at Oct. 3, 1998, were acquired with the
Hudson Acquisition.
During 1996, the Company announced its intention to sell its beef and pork
further-processing operations in its effort to return to its core business.
On Nov. 25, 1996, the Company sold its beef further-processing operations,
known as Gorges/Quik-to-Fix Foods, resulting in a pre-tax gain of $41
million which was recorded in other income for fiscal 1997 in the
Consolidated Statements of Income. The operating results of this facility
were not material to the Company in 1997. During 1997, the Company recorded
an impairment loss of $11.2 million for the pork further-processing assets,
which was classified as an operating charge in the Consolidated Statements
of Income. The Company has closed the pork further-processing facility and
recorded an additional $4 million writedown of this facility in fiscal 1998.
NOTE 6: FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
Interest Rate Instruments: Interest rate swaps with notional amounts of
$141.7 million and $147.7 million were in effect at Oct. 3, 1998, and Sept.
27, 1997, respectively. Fair values of these swaps were ($8.1) million and
($1.3) million at Oct. 3, 1998, and Sept. 27, 1997, respectively. Fair
values of interest rate instruments are estimated amounts the Company would
receive or pay to terminate the agreements at the reporting dates. These
swaps mature from 2005 to 2008.
Commodity and Foreign Currency Contracts: At Oct. 3, 1998, and Sept. 27,
1997, the Company held the following commodity and foreign currency
contracts:
(DOLLARS IN MILLIONS, EXCEPT PER UNIT CONTRACT/STRIKE PRICES)
Notional Weighted Average Fair Value
Amount Contract/Strike Price
1998 1997 1998 1997 1998 1997
Long position in corn $17.4 $ - $2.32 $ - $17.0 $ -
Short position in corn 20.5 10.1 2.11 2.65 20.2 9.9
Long positions in soybean oil 2.1 - 24.24 - 2.1 -
Short positions in soybean oil 1.5 - 24.40 - 1.5 -
Short positions in soybean meal - 7.1 - 215.00 - 6.5
Sold option contracts to sell
Japanese Yen for US$ 6.5 42.5 109.48 113.20 - (1.0)
Purchased option contracts to
Purchase Japanese Yen for US$ 5.6 38.0 126.69 126.75 0.4 0.5
Foreign forward exchange contracts - 0.5 - 102.45 - 0.4
Fair Value of On-Balance Sheet Financial Instruments: The Company's
significant financial instruments include cash and cash equivalents,
investments and debt. In evaluating the fair value of significant financial
instruments, the Company generally uses quoted market prices of the same or
similar instruments or calculates an estimated fair value on a discounted
cash flow basis using the rates available for instruments with the same
73
remaining maturities. As of Oct. 3, 1998, and Sept. 27, 1997, the fair
value of financial instruments held by the Company approximated the recorded
value except for long-term debt. Fair value of long-term debt was $2.1
billion and $1.7 billion at Oct. 3, 1998, and Sept. 27, 1997, respectively.
Concentrations of Credit Risk: The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash
equivalents and trade receivables. The Company's cash equivalents are in
high quality securities placed with major banks and financial institutions.
Concentrations of credit risk with respect to receivables are limited due to
the large number of customers and their dispersion across geograhic areas.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. No single group or
customer represents greater than 10% of total accounts receivable.
NOTE 7: CONTINGENCIES AND COMMITMENTS
The Company is involved in various lawsuits and claims made by third parties
on an ongoing basis as a result of its day-to-day operations. Although the
outcome of such items cannot be determined with certainty, the Company's
general counsel and management are of the opinion that the final outcome
should not have a material effect on the Company's results of operations or
financial position.
On Dec. 29, 1997, the Company entered into a plea agreement resolving the
Office of Independent Counsel's (OIC) investigation of the Company in
connection its investigation of former Secretary of Agriculture Michael
Espy. The Company entered a guilty plea to a single count of violating the
illegal gratuity statute, 18 U.S.C. 201(c)(1). The Company was sentenced
on Jan. 12, 1998 to pay a fine of $4 million, costs of prosecution of $2
million and was placed on probation for four years. At the time of its
plea, the Company also entered a Compliance Agreement with the OIC and the
U.S. Department of Agriculture requiring it to implement a compliance
program.
Following the entry of its guilty plea, the Company and others were named as
defendants in a putative class action suit brought on behalf of all
individuals who sold beef cattle to beef packers for processing between
certain dates in 1993 and 1998. This action, captioned Wayne Newton, et al.
v. Tyson Foods, Inc., et al., U.S. District Court, Northern District of
Iowa, Civil Action No. 98-30, asserts claims under the Racketeer Influenced
and Corrupt Organizations statute as well as a common-law claim for
intentional interference with prospective economic advantage. Plaintiffs
allege that the gratuities which were the subject of the Company's plea
resulted in a competitive advantage for poultry products vis-a-vis beef
products. Plaintiffs request trebled damages in excess of $3 billion, plus
attorney's fees and costs. While management is not able to determine the
outcome of this matter at this time, based upon information currently
available, management presently does not believe that this lawsuit has merit
and will not have a material adverse effect on the Company's financial
position or its results of operations.
On July 28, 1997, Hudson received notice from the U.S. Department of Justice
(DOJ) that it was prepared to bring an action against Hudson for the alleged
violation of the Clean Water Act at Hudson's Berlin, Md., poultry processing
facility. The DOJ alleged that over the past five years, Hudson had
74
repeatedly discharged pollutants in quantities in excess of its National
Pollutant Discharge Elimination System (NPDES) permit limits, violated
monitoring and sampling requirements of its NPDES permit and failed to
provide notice of NPDES violations. On Sept. 19, 1997, Hudson entered into
an agreement in principle with the DOJ for the settlement of these claims.
On May 8, 1998, a Consent Decree between the United States, Hudson and the
Company was filed with the U.S. District Court together with a Complaint
alleging these violations. On Oct. 6, 1998, the U.S. District Court approved
and entered the Consent Decree. The Consent Decree, while stating that
Hudson denies the violations alleged in the Complaint, provides for the
payment to the United States of $4 million and the expenditure of $2 million
in supplemental environmental projects (SEPs).
On or about July 23, 1998, the Maryland Department of the Environment (MDE)
filed a Complaint for Injunctive Relief and Civil Penalty (the Complaint)
against the Company in the Circuit Court of Worcester County, Md., for the
alleged violation of certain Maryland water pollution control laws with
respect to the Company's land application of sludge to Company owned
agricultural land near Berlin, Md. The MDE seeks, in addition to injunctive
and equitable relief, civil penalties of up to $10,000 per day for each day
the Company had allegedly operated in violation of the Maryland water
pollution control laws. The Company has only recently received the
Complaint, is reviewing and researching the factual matters asserted
therein, and intends to vigorously defend against the same. The Company
does not believe any penalties, if imposed, would have a material adverse
effect on the Company's results of operations or financial condition.
The Company leases certain farms and other properties and equipment for
which the total rentals thereon approximated $46.7 million in 1998, $34
million in 1997 and $35.7 million in 1996. Most farm leases have terms
ranging from one to 10 years with various renewal periods. The most
significant obligations assumed under the terms of the leases are the upkeep
of the facilities and payments of insurance and property taxes.
Minimum lease commitments under noncancelable leases at Oct. 3, 1998, total
$141.8 million composed of $46.8 million for 1999, $37.2 million for 2000,
$26.0 million for 2001, $16.2 million for 2002, $9.8 million for 2003 and
$5.8 million for later years. These future commitments are expected to be
offset by future minimum lease payments to be received under subleases of
approximately $16.7 million.
The Company assists certain of its swine and poultry growers in obtaining
financing for growout facilities by providing the growers with extended
growout contracts and conditional operation of the facilities should a
grower default under their growout or loan agreement. The Company also
guarantees debt of outside third parties of $60 million.
NOTE 8: LONG-TERM DEBT
The Company has an unsecured revolving credit agreement totaling $1 billion
which supports the Company's commercial paper program. This $1 billion
facility expires in May 2002. At Oct. 3, 1998, $506.9 million in commercial
paper was outstanding under this facility. The Company's $250 million
facility was terminated effective May 4, 1998.
75
At Oct. 3, 1998, the Company had outstanding letters of credit totaling
approximately $108.5 million issued primarily in support of
workers' compensation insurance programs, industrial revenue bonds and the
leveraged equipment loans.
Under the terms of the leveraged equipment loans, the Company had restricted
cash totaling approximately $44.7 million which is included in investments
and other assets at Oct. 3, 1998. Under these leveraged loan agreements, the
Company entered into interest rate swap agreements to effectively lock in a
fixed interest rate for these borrowings.
Annual maturities of long-term debt for the five years subsequent to Oct. 3,
1998 are: 1999-$77.6 million; 2000-$251.3 million; 2001-$125.2 million; 2002-
$538.3 million and 2003-$178.5 million.
The revolving credit agreement and notes contain various covenants, the more
restrictive of which require maintenance of a minimum net worth, current
ratio, cash flow coverage of interest and fixed charges and a maximum total
debt-to-capitalization ratio. The Company is in compliance with most of
these covenants at year end and has obtained waivers for covenants in which
the Company is not in compliance.
The weighted average interest rate on all outstanding short-term borrowing
was 5.6% at Oct. 3, 1998, and Sept. 27, 1997.
Long-term debt consists of the following:
(IN MILLIONS)
- -------------------------------------------------------------------------------
Maturity 1998 1997
- -------------------------------------------------------------------------------
Commercial paper
(5.6% effective rate at 10/3/98) 2002 $ 506.9 $ 638.7
Debt securities:
6.75% notes 2005 149.3 149.1
6.625% notes 2005 149.5 149.3
6.39-6.41% notes 2000 50.0 50.1
6% notes 2003 146.8 -
7% notes 2028 145.9 -
7% notes 2018 236.3 -
Institutional notes:
10.33% notes 1999 - 33.7
10.61% notes 1999-2001 106.3 125.0
10.84% notes 2002-2006 50.0 50.0
11.375% notes 1999-2002 12.8 17.1
Mandatory Par Put Remarketed
Securities (5.88% effective rate at 10/3/98) 2010 50.2 -
6.08% notes 2010 100.4 -
Revolving credit facility 2002 - 130.0
Leveraged equipment loans
(rates ranging from 4.7% to 6.0%) 2005-2008 170.5 166.5
Other various 91.7 48.7
- -------------------------------------------------------------------------------
$1,966.6 $1,558.2
===============================================================================
76
NOTE 9: INCOME TAXES
Detail of the provision for income taxes consists of:
(IN MILLIONS)
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Federal $ 50.1 $129.7 $49.9
State (4.2) 14.2 (0.9)
- ----------------------------------------------------------------------------
$ 45.9 $143.9 $49.0
============================================================================
Current $ 80.6 $133.4 $33.1
Deferred (34.7) 10.5 15.9
- ----------------------------------------------------------------------------
$ 45.9 $143.9 $49.0
============================================================================
The reasons for the difference between the effective income tax rate and the
statutory U.S. federal income tax rate are as follows:
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
U.S. federal income tax rate 35.0% 35.0% 35.0%
Amortization of excess of investments
Over net assets acquired 23.6 8.6 5.9
State income taxes (benefit) (3.8) 2.8 (0.4)
Foreign sales corp benefit (9.6) - -
Foreign Losses 20.5 - -
Other (1.0) (2.8) (3.5)
- ---------------------------------------------------------------------------
64.7% 43.6% 37.0%
===========================================================================
The Company follows the liability method in accounting for deferred income
taxes. The liability method provides that deferred tax liabilities are
recorded at current tax rates based on the difference between the tax basis
of assets and liabilities and their carrying amounts for financial reporting
purposes referred to as temporary differences. Significant components of the
Company's deferred tax liabilities as of Oct. 3, 1998, and Sept. 27, 1997,
are as follows:
(IN MILLIONS)
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
Basis difference in property, plant and equipment $289.9 $267.9
Suspended taxes from conversion to accrual method 135.1 142.7
Other 9.4 95.5
- ----------------------------------------------------------------------------
$434.4 $506.1
============================================================================
77
The Omnibus Budget Reconciliation Act of 1987 required family-owned farming
businesses to use the accrual method of accounting for tax purposes.
Internal Revenue Code Section 447(i) provides that if any family
corporation is required to change its method of accounting for any taxable
year, such corporation shall establish a suspense account in lieu of taking
the adjustments into taxable income. The suspense account, which represents
the initial catch-up adjustment to change from the cash to accrual method of
accounting, is not currently includable in the Company's taxable income and
any related income taxes are deferred. However, legislation was enacted in
1997 which now requires the Company to pay down the suspense account over 20
years.
NOTE 10: RESTRICTED STOCK AND STOCK OPTIONS
The Company has outstanding 189,000 restricted shares of Class A stock. The
restriction expires over periods ranging from 10 to 26 years. The
unamortized portion is classified on the Consolidated Balance Sheets as
deferred compensation in shareholders' equity.
The Company has a nonqualified stock option plan which provides for granting
options for shares of Class A stock at a price not less than the fair market
value at the date of grant. The options generally become exercisable ratably
over four to eight years from the date of grant and must be exercised within
10 years of the grant date.
A summary of the Company's stock option activity for the plan is as follows:
- -------------------------------------------------------------------------------
Shares Weighted Average
Under Exercise Price
Option Per Share
- -------------------------------------------------------------------------------
Outstanding, Sept. 30, 1995 4,118,171 $13.79
Exercised (320,535) 8.05
Canceled (459,150) 14.49
Granted 2,129,775 15.04
- -------------------------------------------------------------------------------
Outstanding, Sept. 28, 1996 5,468,261 14.55
Exercised (163,906) 13.83
Canceled (560,296) 15.06
Granted 3,598,275 17.92
- -------------------------------------------------------------------------------
Outstanding, Sept. 27, 1997 8,342,334 15.99
Exercised (178,467) 14.18
Canceled (313,019) 15.84
Granted 504,700 18.00
- -------------------------------------------------------------------------------
Outstanding, Oct. 3, 1998 8,355,548 $16.15
===============================================================================
The number of options exercisable was as follows: Oct. 3, 1998- 1,202,498,
Sept. 27, 1997- 806,837 and Sept. 28, 1996- 442,616. The remainder of the
options outstanding at Oct. 3, 1998, are exercisable ratably through
November 2007. The number of shares available for future grants was
6,459,402 and 6,651,083 at Oct. 3, 1998, and Sept. 27, 1997, respectively.
78
The following table summarizes information about stock options outstanding
at Oct. 3, 1998:
Options Outstanding Options Exercisable
Range of Shares Weighted Weighted Shares Weighted
Exercise Outstanding Average Average Exercisable Average
Prices Remaining Exercise Exercise
Contractual Price Price
Life(in years)
$ 4.82 - 6.58 27,389 4.3 $ 5.79 27,389 $ 5.79
14.33 - 14.50 2,619,609 5.9 14.40 1,174,359 14.40
14.58 - 15.17 1,815,825 8.0 15.02 750 15.17
17.92 - 18.00 3,892,725 8.1 17.93 - -
- -------------------------------------------------------------------------------------------
8,355,548 1,202,498
The weighted average fair value of options granted during 1998 and 1997 is
approximately $7.10 and $7.15, respectively. The fair value of each option
grant is established on the date of grant using the Black-Scholes option-
pricing model. Assumptions include an expected life of eight years, weighted
average risk-free interest rates ranging from 5.5% to 6.4%, expected
volatility of 0.2% and dividend yield of 0.5% in both 1998 and 1997.
As permitted by SFAS No. 123, the Company chose to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation expense
was recognized for its stock option compensation plans. Had the fair value
method of accounting been applied to the Company's stock option plans, the
tax-effected impact would be as follows:
____________________________________________________________________________
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
____________________________________________________________________________
Net Income
As reported $25.1 $185.8 $86.9
Pro forma 21.0 182.0 85.7
Earnings Per Share
As reported
Basic 0.11 0.86 0.40
Diluted 0.11 0.85 0.40
Pro forma
Basic 0.09 0.84 0.39
Diluted 0.09 0.83 0.39
____________________________________________________________________________
Pro forma net income reflects only options granted in 1998, 1997 and 1996.
79
NOTE 11: TRANSACTIONS WITH RELATED PARTIES
The Company has operating leases for farms, equipment and other facilities
with the Senior Chairman of the Board of Directors of the Company and
certain members of his family, as well as a trust controlled by him, for
rentals of $5.4 million in 1998, $5.6 million in 1997 and $7 million in
1996. Other facilities, including a cold storage distribution facility in
1996, have been leased from the Company's profit sharing plan and other
officers and directors for rentals totaling $3.4 million in 1998, $5.3
million in 1997 and $6.6 million in 1996. In 1997, the Company purchased
the cold storage distribution facility as well as other facilities from the
profit sharing plan.
Certain officers and directors are engaged in poultry and swine growout
operations with the Company whereby these individuals purchase animals,
feed, housing and other items to raise the animals to market weight. The
total value of these transactions amounted to $11.5 million in 1998, $12.3
million in 1997 and $11.7 million in 1996.
NOTE 12: BENEFIT PLANS
The Company has defined contribution retirement and incentive benefit
programs for various groups of Company personnel. Company discretionary
contributions, which are determined by the Board of Directors, totaled $31.8
million, $26.8 million and $24.0 million for 1998, 1997 and 1996,
respectively.
NOTE 13: SUPPLEMENTAL INFORMATION
(IN MILLIONS)
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $159.9 $123.4 $114.1
Income Taxes 196.9 124.1 40.5
- ----------------------------------------------------------------------------
SUPPLEMENTAL SALES INFORMATION: The Company sells certain of its products in
foreign markets, primarily Canada, China, Georgia, Guatemala, Japan, Puerto
Rico, Russia and Singapore as well as certain Middle Eastern countries and
countries in the Caribbean. The Company's export sales for 1998, 1997 and
1996 totaled $687 million, $762.5 million and $790.9 million, respectively.
Substantially all of the Company's export sales are transacted through
unaffiliated brokers, marketing associations and foreign sales staffs.
Foreign sales were less than 10% of total consolidated sales for 1998, 1997
and 1996, respectively.
80
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------
1998 First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------
Sales $1,520.8 $1,870.8 $1,953.6 $2,068.9
Gross Margin 260.7 268.8 308.4 316.1
Net Income (Loss) 44.9 23.3 46.6 (89.7)
Basic Earnings (Loss) Per Share 0.21 0.10 0.20 (0.39)
Diluted Earnings (Loss) Per Share 0.21 0.10 0.20 (0.39)
====================================================================================
1997
- ------------------------------------------------------------------------------------
Sales $1,527.9 $1,574.3 $1,591.2 $1,662.3
Gross Margin 248.4 262.2 268.0 259.1
Net Income 44.6 48.2 45.2 47.8
Basic Earnings Per Share 0.21 0.22 0.21 0.22
Diluted Earnings Per Share 0.20 0.22 0.21 0.22
====================================================================================
81
REPORT OF MANAGEMENT
TYSON FOODS, INC.
The management of Tyson Foods, Inc., (the Company) has the responsibility of
preparing the accompanying financial statements and is responsible for their
integrity and objectivity. The statements were prepared in conformity with
generally accepted accounting principles applied on a consistent basis. Such
financial statements are necessarily based, in part, on best estimates and
judgments.
The Company maintains a system of internal accounting controls, and a
program of internal auditing designed to provide reasonable assurance that
the Company's assets are protected and that transactions are executed in
accordance with proper authorization, and are properly recorded. This system
of internal accounting controls is continually reviewed and modified in
response to changing business conditions and operations and to
recommendations made by the independent auditors and the internal auditors.
During 1998, certain of these controls were reviewed and strengthened.
Additionally, the Company has adopted a code of conduct and has hired an
experienced full-time compliance officer. The management of the Company
believes that the accounting and control systems provide reasonable
assurance that assets are safeguarded and financial information is reliable.
The Audit Committee of the Board of Directors meets regularly with the
Company's financial management and counsel, with the Company's internal
auditors, and with the independent auditors engaged by the Company. These
meetings include discussions of internal accounting controls and the quality
of financial reporting. The independent auditors and the Internal Audit
Department have free and independent access to the Audit Committee to
discuss the results of their audits or any other matters relating to the
Company's financial affairs.
The accompanying consolidated financial statements have been audited by
Ernst & Young LLP, independent auditors.
November 20, 1998
/s/Wayne Britt /s/ Steven Hankins
----------------- --------------------
Wayne Britt Steven Hankins
Chief Executive Officer Executive Vice President and
Chief Financial Officer
82
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
Tyson Foods, Inc.
We have audited the accompanying consolidated balance sheets of Tyson Foods,
Inc., as of October 3, 1998, and September 27, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended October 3, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tyson
Foods, Inc., at October 3, 1998, and September 27, 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended October 3, 1998, in conformity with
generally accepted accounting principles.
Tulsa, Oklahoma /s/Ernst & Young LLP
November 20, 1998 --------------------
Ernst & Young LLP
83
BOARD OF DIRECTORS
TYSON FOODS, INC.
DON TYSON, 68, senior chairman of the board of directors, served as chairman
of the board until April 1995 when he was named senior chairman. Mr. Tyson
served as chief executive officer until March 1991 and has been a member of
the board since 1952. 1
JOE STARR, 65, a private investor, served as a vice president of Tyson until
1996. Mr. Starr has been a member of the board since 1969.
NEELY CASSADY, 70, is chairman of the board of Cassady Investments, Inc. and
served as a senator in the Arkansas General Assembly from 1983 to 1996. Mr.
Cassady has been a member of the board since 1974. 2,3,4
FRED VORSANGER, 70, is a private business consultant, manager of Bud Walton
Arena and vice president emeritus of finance and administration at the
University of Arkansas. He is a director of McIlroy Bank & Trust Co. of
Fayetteville, Ark. Mr. Vorsanger was a city director and mayor of
Fayetteville and was a vice president at the U of A from 1968 until 1988.
He has been a member of the board since 1977. 2,3,4
LELAND TOLLETT, 61, retired as chairman and chief executive officer Oct. 1,
1998. He had been chairman of the board since April 1995. He had served as
vice chairman, president and chief executive officer since March 1991 and as
president and chief operating officer from 1983 until 1991. Mr. Tollett has
been a member of the board since 1984. 1
JOHN TYSON, 45, was named chairman of the board of directors effective Oct.
1, 1998. He had served as vice chairman since 1997. Previously he was
president of the beef and pork division and director of governmental, media
and public relations. He also has served as vice president and director of
engineering/environmental/capital spending, as vice president of
marketing/corporate accounts and as special projects manager. Mr. Tyson has
been a member of the board since 1984. 1
SHELBY MASSEY, 65, is a farmer and a private investor. He served as senior
vice chairman of the board of directors from 1985 to 1988 and has been a
member of the board since 1985. 3,4
BARBARA TYSON, 49, is vice president of the company. Ms. Tyson has served in
related capacities for the past seven years and was previously a regional
sales manager in the foodservice division. Ms. Tyson has been a member of
the board since 1988.
LLOYD HACKLEY, 57, is president and chief executive officer of Lloyd V.
Hackley and Associates, Inc. He was president of the North Carolina
Community College System from 1995 to 1997 and was chancellor and a tenured
professor of political science at Fayetteville State University,
Fayetteville, N.C., from 1988 to 1995. Mr. Hackley has been a member of the
board since 1992. 2,4
DONALD WRAY, 61, is president and chief operating officer of Tyson Foods. He
has held his current titles since April 1995 after serving as chief
operating officer since 1991 and as senior vice president of the sales and
marketing division since 1985. Mr. Wray has been a member of the board
since 1994.
84
GERALD JOHNSTON, 55, a private investor, was executive vice president of
finance for Tyson from 1981 to 1996 when he stepped down and became a
consultant to the company. Mr. Johnston has been a member of the board
since 1996.
WAYNE BRITT, 49, was named chief executive officer and was elected to the
board of directors of Tyson effective Oct. 1, 1998. In his 26 years with
Tyson, Mr. Britt has served as executive vice president and chief financial
officer; senior vice president, international division; vice president,
wholesale club sales and marketing; secretary-treasurer; controller; cost
and budget manager; and complex controller.
1 Executive Committee
2 Audit Committee
3 Compensation Committee
4 Oversight Committee
85
CORPORATE AND OPERATIONAL OFFICERS
TYSON FOODS, INC.
Roy D. Brister Gerard A. Dowd William F. Kuckuck David S. Purtle
Director, Senior Vice President, Senior Vice President, Executive Vice President,
Research and Nutrition Foodservice Division International Division Operations, Transportation
and Warehousing
Wayne Britt James G. Ennis John S. Lea
Chief Executive Officer Vice President, Controller Senior Vice President, Archie Schaffer III
and Chief Accounting Officer Retail Sales and Marketing Director, Media, Public
Roy Brown and Governmental Affairs
President, Louis C. Gottsponer, Jr.
Seafood Division Assistant Secretary and Dennis Leatherby Dan Serrano
Director of Investor Relations Senior Vice President, Vice President,
Ellis Brunton Finance and Treasurer Human Resources Operations
Vice President, Steven Hankins
Research and Quality Assurance Executive Vice President Greg W. Lee Donnie Smith
and Chief Financial Officer Executive Vice President, Vice President, Purchasing
Wayne B. Butler Sales, Marketing and
President, R. Read Hudson Technical Services John H. Tyson
Prepared Foods Group Secretary Chairman of the
Bob E. Love Board of Directors
Jim Cate Greg Huett Vice President,
Senior Vice President, Senior Vice President, Research and Development David L. Van Bebber
Specialty Products Sales and Marketing- Vice President and
Wholesale Club Division Bill Lovette Director of Legal Services
Gary D. Cooper Senior Vice President,
Vice President, William P. Jaycox Poultry Operations William E. Whitfield III
Management Information Systems Senior Vice President, Vice President, Business
Human Resources Gene A. Lovette Development and Analysis
John D. Copeland Senior Vice President,
Director, Corporate Lance E. Jensen Poultry Operations Donald E. Wray
Ethics and Compliance Vice President, President and Chief
Strategic Project Development Tim McGovern Operating Officer
John H. Curran Vice President, Distribution
Senior Vice President, Carl G. Johnson Robert Zimmerman
Retail Fresh Division Vice President, Bill Moeller Vice President,
Asset and Risk Management President, The Pork Group Engineering
86
CORPORATE INFORMATION
TYSON FOODS, INC.
Closing Price of Company's Common Stock
_______________________________________________________________________________
Fiscal Year 1998 Fiscal Year 1997
_______________________________________________________________________________
High Low High Low
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First Quarter $23.88 $17.88 $22.42 $17.79
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Second Quarter 20.81 18.06 23.63 19.88
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Third Quarter 24.13 18.94 21.56 17.75
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Fourth Quarter 24.44 16.50 23.56 19.00
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As of Oct. 3, 1998, the Company had 33,683 Class A common shareholders of record
and 17 Class B common shareholders of record.
DIRECTSERVICE SHAREHOLDER INVESTMENT PROGRAM
Tyson has authorized First Chicago Trust Company to implement its program
for dividend reinvestment and direct purchase of shares for current as well
as new investors of Tyson Class A Common Stock. This program provides
alternatives to traditional retail brokerage methods of purchasing, holding
and selling Tyson stock. All inquiries concerning this program should be
directed to:
DirectSERVICE Program for Shareholders of Tyson Foods, Inc.
c/o First Chicago Trust Company
P.O. Box 2598
Jersey City, NJ 07303-2598
1-800-317-4445 (current shareholders)
1-800-822-7096 (non-shareholders)
CHANGE OF ADDRESS
If your Tyson stock is registered in your own name(s), send change of
address information to First Chicago Trust Company.
MULTIPLE DIVIDEND CHECKS AND DUPLICATE MAILINGS
If your Tyson stock is registered in similar but different names, e.g. Jane
A. Doe and J.A. Doe, we are required to create separate accounts and mail
dividend checks and proxy materials separately even if the mailing addresses
are the same. To consolidate accounts, contact First Chicago Trust Company.
LOST OR STOLEN STOCK CERTIFICATES OR LEGAL TRANSFERS
If your stock certificates are lost, stolen, or in some way destroyed, or if
you wish to transfer registration, notify First Chicago Trust Company in
writing. Include the exact name(s) and Social Security or tax identification
number(s) in which the stock is registered and, if possible, the numbers and
issue dates of the certificates.
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CORPORATE INFORMATION
TYSON FOODS, INC.
CORPORATE DATA INDEPENDENT AUDITORS
Tyson Foods, Inc., which employs Ernst & Young LLP
approximately 70,500 people, is the 3900 One Williams Center
world's largest fully inte- Tulsa, Oklahoma 74101
grated producer, processor and
marketer of chicken and chicken- TRANSFER AGENT
based food products. First Chicago Trust Company
of New York
STOCK EXCHANGE LISTINGS P.O. Box 2506
The Class A common stock of the Company Jersey City, NJ 07303-2506
is traded on the New York Stock Exchange 1-800-317-4445
under the symbol TSN.
Shareholders also may contact
CORPORATE HEADQUARTERS First Chicago Trust Company
2210 West Oaklawn Drive through the Internet at www.fctc.com
Springdale, Arkansas 72762-6999
Telephone (501) 290-4000 INVESTOR RELATIONS
Fax (501) 290-4000 Financial analysts and others
seeking investor-related
AVAILABILITY OF FORM 10-K information should contact:
A copy of the Company's Form 10-K Director of Investor Relations
Report, as filed with the Securities and Tyson Foods, Inc.
Exchange Commission for 1998, may be P.O. Box 2020
obtained by Tyson shareholders by Springdale, Arkansas 72765-2020
writing to: Telephone (501) 290-4826
Director of Investor Relations Fax (501) 290-4061
Tyson Foods, Inc.
P.O. Box 2020 NEWS RELEASES
Springdale, Arkansas 72765-2020 Press Releases and other
Telephone (501) 290-4826 can be faxed by calling PR Newswire
Fax (501) 290-4061 information concerning Tyson Foods
at (800)758-5804, ext. 113769.
ANNUAL MEETING
The Annual Meeting of Shareholders will TYSON ON THE INTERNET
be held at 10 a.m., January 8, 1999, at
the Walton Arts Center, Fayetteville, Information about Tyson Foods
Arkansas. Shareholders who cannot attend is available on the Internet at
the meeting are urged to exercise their www.tyson.com
right to vote by proxy.
LEGAL NOTICE
GENERAL COUNSEL The term "Tyson" and such terms as
James B. Blair, Esquire "the Company","our","we" and "us"
3422 North College, Suite 3 may refer to Tyson Foods, Inc., to
Fayetteville, Arkansas 72703 one or more of its consolidated
subsidiaries or to all of them
taken as a whole. These terms are
used for convenience only and are
not intended as a precise
description of any of the separate
companies, each of which manages
its own affairs.
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