EXHIBIT 99.2
IBP, inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 30,
2001 2000
----------- -------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 19,262 $ 29,970
Accounts receivable, less allowance for
doubtful accounts of $13,579 and $19,898 705,488 673,485
Inventories 982,954 873,544
Deferred income tax benefits and
prepaid expenses 93,834 88,595
--------- ---------
TOTAL CURRENT ASSETS 1,801,538 1,665,594
Property, plant and equipment
less accumulated depreciation
of $1,155,614 and $1,089,775 1,731,900 1,630,774
Goodwill, net of accumulated
amortization of $235,827 and $221,160 946,660 961,340
Deferred income tax benefits and
other assets 172,255 168,548
--------- ---------
$4,652,353 $4,426,256
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks 1,023,000 775,000
Accounts payable 432,079 516,030
Deferred income taxes and other
current liabilities 392,182 373,019
Current portion of long-term debt 5,780 55,351
--------- ---------
TOTAL CURRENT LIABILITIES 1,853,041 1,719,400
--------- ---------
Long-term debt and capital lease
obligations 687,652 658,719
--------- ---------
Deferred income taxes and other
liabilities 199,774 198,626
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock at par value 5,450 5,450
Additional paid-in capital 442,527 443,388
Retained earnings 1,537,265 1,481,004
Accumulated other comprehensive income (12,726) (11,261)
Treasury stock (60,630) (69,070)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,911,886 1,849,511
--------- ---------
$4,652,353 $4,426,256
========= =========
See accompanying notes to condensed consolidated financial statements.
1
IBP, inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
13 Weeks Ended 26 Weeks Ended
----------------------- -----------------------
Restated Restated
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales $ 4,359,304 $ 4,268,866 $ 8,485,941 $ 8,224,257
Cost of products sold 4,114,367 4,020,762 8,065,286 7,740,841
----------- ----------- ----------- -----------
Gross profit 244,937 248,104 420,655 483,416
Selling, general and
administrative expense 150,968 151,069 275,310 280,565
(Gain) on sale of production
facility -- -- (6,897) --
Nonrecurring merger-related
expense -- -- -- 31,299
----------- ----------- ----------- -----------
EARNINGS FROM OPERATIONS 93,969 97,035 152,242 171,552
Interest expense, net 24,020 21,635 50,026 42,950
Earnings before income taxes, -- -- -- --
accounting change and
extraordinary item 69,949 75,400 102,216 128,602
Income tax expense 27,630 28,958 39,900 48,424
----------- ----------- ----------- -----------
Earnings before accounting change
and extraordinary item 42,319 46,442 62,316 80,178
Cumulative effect of change in
accounting principle -- -- (115) (2,429)
Extraordinary loss on early
extinguishment of debt, less
applicable taxes -- -- (633) (15,037)
----------- ----------- ----------- -----------
NET EARNINGS $ 42,319 $ 46,442 $ 61,568 $ 62,712
=========== =========== =========== ===========
Earnings per common share:
Earnings before cumulative
effect of accounting change and
extraordinary item $ .40 $ .44 $ .59 $ .73
Cumulative effect of change in
accounting principle -- -- -- (.02)
Extraordinary item -- -- (.01) (.14)
----------- ----------- ----------- -----------
Net earnings $ .40 $ .44 $ .58 $ .57
=========== =========== =========== ===========
Earnings per common share -
assuming dilution:
Earnings before cumulative
effect of accounting change and
extraordinary item $ .40 $ .43 $ .58 $ .72
Cumulative effect of change in
accounting principle -- -- -- (.02)
Extraordinary item -- -- (.01) (.14)
----------- ----------- ----------- -----------
Net earnings $ .40 $ .43 $ .57 $ .56
=========== =========== =========== ===========
Dividends per share $ .025 $ .025 $ .05 $ .05
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
2
IBP, inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
26 Weeks Ended
------------------------
Restated
June 30, June 24,
2001 2000
---------- ------------
Inflows (outflows)
NET CASH FLOWS (USED) PROVIDED BY OPERATING
ACTIVITIES $ (21,984) $ 108,649
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (196,410) (181,501)
Proceeds from sale of PP&E 21,074 977
Investment in life insurance contracts (10,627) -
Investments in equity ventures (1,096) (10,268)
Purchases of marketable securities - (25,000)
Proceeds from disposals of marketable
securities - 15,000
Increase in noncurrent receivables - (7,763)
Other investing cash inflows 1,261 -
Other investing cash outflows (898) (58)
-------- ---------
Net cash flows used by
investing activities (186,696) (208,613)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt 248,000 333,796
Principal payments on long-term
obligations (52,263) (483,644)
Exercise of stock options 9,565 885
Dividends paid (5,291) (4,978)
Proceeds from issuance of long-term debt 2,000 295,482
Purchase of treasury stock (1,987) (13,580)
Redemption of preferred stock - (28,512)
Other financing cash outflows (1,986) -
-------- --------
Net cash flows provided by
financing activities 198,038 99,449
-------- --------
Effect of exchange rate on cash
and cash equivalents (66) 65
-------- --------
Net change in cash and cash equivalents (10,708) (450)
Cash and cash equivalents at beginning
of period 29,970 32,865
-------- --------
Cash and cash equivalents at end of
period $ 19,262 $ 32,415
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest, net of amounts capitalized $ 46,712 $ 36,653
Income taxes, net of refunds received 11,221 40,042
Depreciation and amortization expense 85,963 69,288
Amortization of intangible assets 16,046 17,421
See accompanying notes to condensed consolidated financial statements.
3
IBP, inc. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Columnar amounts in thousands, except per share amounts
A. GENERAL
The accompanying financial statements for the periods ended June 24,
2000 were restated to reflect adjustments for irregularities and
misstatements at one of the company's subsidiaries, for the cumulative and
current period effect on revenue recognition of adoption of Staff Accounting
Bulletin Rule 101, for the application of variable plan accounting for
certain stock options, for reclassifications in the statement of cash flows,
and for expanded disclosures related to segment information. The company's
reports on Form 10-Q/A for the twenty-six weeks ended June 24, 2000 and Form
10-K for the year ended December 30, 2000 provide detailed descriptions of
the restatements.
Freight charges previously netted against sales have been reclassified
to cost of goods sold in the prior year to conform to the current year
presentation.
The condensed consolidated balance sheet of IBP, inc. and subsidiaries
("IBP" or "the company") at December 30, 2000 has been taken from audited
financial statements at that date and condensed. All other condensed
consolidated financial statements contained herein have been prepared by IBP
and are unaudited. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in IBP's Annual Report on Form 10-K for the year ended
December 30, 2000.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position of IBP at June 30, 2001 and the results of its operations and its
cash flows for the periods presented herein.
B. TYSON MERGER AGREEMENT
In late June, the company executed a Stipulation with Tyson Foods,
Inc. ("Tyson") that requires Tyson to specifically perform the Merger
Agreement between IBP and Tyson (the "Merger Agreement") as modified by the
Stipulation. Pursuant to the Merger Agreement, as modified by the
Stipulation, Tyson agreed to proceed with a cash tender at $30 per share for
50.1% of the shares, followed by a merger in which IBP will merge into Lasso
Acquisition Corporation, a wholly owned subsidiary of Tyson. Each IBP
shareholder at the time of the merger shall receive a number of shares of
Tyson Class A common stock having a value of $30.00 if, during the fifteen
trading day period ending on the fifth trading day immediately preceding the
effective time of the merger, the average per share price of Tyson Class A
common stock is at least $12.60 and no more than $15.40. If the average per
4
share price of Tyson Class A common stock is less than $12.60, then each
IBP share outstanding immediately prior to the effective time of the merger
will be exchanged for 2.381 shares of Tyson Class A common stock. If the
average per share price of Tyson Class A common stock is more than $15.40,
then each IBP share outstanding immediately prior to the effective time of
the merger will be exchanged for 1.948 shares of Tyson Class A common
stock. Tyson closed the cash tender on August 3, 2001, with expected
completion by mid-August, and expects the merger to be consummated in early
October 2001.
Upon confirmation of payment for shares purchased by Tyson in the Cash
Tender, Martin A. Massengale, Wendy L. Gramm, John Jacobsen, Jr. and Eugene
D. Leman will resign, effective August 6, 2001 from the IBP Board, and
effective August 6, 2001, John Tyson, Tyson's Chairman, President and Chief
Executive Officer, Don Tyson, Tyson's Senior Chairman, Greg Lee, Les R.
Baledge and Steve Hankins will be appointed to and join the IBP Board.
If the merger is consummated but fails to be treated as a
"reorganization" for federal income tax purposes, the merger will be a
taxable transaction. The merger would fail to be treated as a
"reorganization" if, for example, the aggregate fair market value of the
Tyson Class A stock delivered as consideration for the IBP shares in the
merger failed to exceed a minimum percentage, approximately 40 percent under
one United States Supreme Court case, of the aggregate fair market value of
the cash and Tyson Class A common stock delivered as consideration for all
IBP shares in the tender offer and merger. In the event that the merger is
consummated but fails to be treated as a "reorganization," each holder of IBP
shares that exchanges IBP shares for Tyson Class A common stock in the merger
will generally recognize gain or loss measured by the difference between the
fair market value of Tyson Class A common stock received in the merger
(together with any cash received in lieu of fractional shares) and such
stockholder's adjusted tax basis in the IBP shares exchanged in the merger.
In addition, if the merger is consummated as currently described in the
merger agreement - as a merger of IBP into Purchaser with the Purchaser as
the surviving corporation - the merger may be taxable to IBP, as well as IBP
shareholders, resulting in a corporate level tax on IBP's gain, measured by
the difference between the fair market value of IBP's assets and IBP's basis
in such assets. Tyson and IBP may elect, however, pursuant to Section
12.03(c) of the merger agreement to amend the merger agreement and require
Purchaser to merge into IBP with IBP the surviving corporation in the merger.
If that election is made, the corporate level tax would not apply, but the
merger would be taxable to shareholders.
C. OTHER
IBP's interim operating results of its Beef Carcass, Beef Processing and
Pork segments may be subject to substantial fluctuations that do not
necessarily occur or recur on a seasonal
5
basis. Such fluctuations are normally caused by competitive and other
conditions in the cattle and hog markets over which IBP has little or no
control. Therefore, the results of operations for the interim periods
presented are not necessarily indicative of the results to be attained for
the full fiscal year.
D. INVENTORIES
Inventories, valued at the lower of first-in, first-out cost or market,
are comprised of the following:
June 30, December 30,
2001 2000
--------- ---------
Product inventories:
Raw materials $ 79,239 $ 78,004
Work in process 107,002 101,973
Finished goods 501,652 412,211
------- -------
687,893 592,188
Livestock 196,572 185,413
Supplies 98,489 95,943
------- -------
$982,954 $873,544
======= =======
E. EARNINGS PER SHARE
13 Weeks Ended
------------------------
Restated
June 30, June 24,
2001 2000
---------- ---------
Numerator:
Net earnings $ 42,319 $ 46,442
======= =======
Denominator:
Weighted average common shares
outstanding 106,047 106,019
Dilutive effect of employee stock
plans 640 1,159
Diluted average common shares ------- -------
outstanding 106,687 107,178
======= =======
Basic earnings per common share $ .40 $ .44
==== ====
Diluted earnings per common share $ .40 $ .43
==== ====
26 Weeks Ended
------------------------
Restated
June 30, June 24,
2001 2000
Numerator: -------- ----------
Earnings before accounting change
and extraordinary item $ 62,316 $ 80,178
Preferred stock dividends
and accretion - (2,566)
------- -------
Earnings available for common shares $ 62,316 $ 77,612
======= =======
Denominator:
Weighted average common shares
6
outstanding 106,001 106,030
Dilutive effect of employee stock 931 1,304
plans
Diluted average common shares ------- -------
outstanding 106,932 107,334
======= =======
Basic earnings before accounting
change and extraordinary item
per common share $ .59 $ .73
==== ====
Diluted earnings before accounting
change and extraordinary item per
common share $ .58 $ .72
==== ====
7
The summary below lists stock options outstanding at the end of the
fiscal quarters which were not included in the computations of diluted EPS
because the options' exercise price was greater than the average market price
of the common shares. These options had varying expiration dates.
2001 2000
------ ------
Stock options excluded from
diluted EPS computation 2,027 3,287
Average option price per share $22.95 $21.19
F. COMPREHENSIVE INCOME
Comprehensive income consists of net earnings and foreign currency
translation adjustments. Management considers its foreign investments to be
permanent in nature and does not provide for taxes on currency translation
adjustments arising from converting the investment in a foreign currency to
U.S. dollars. Comprehensive income for the 26 weeks ended June 30, 2001 and
June 24, 2000 was as follows:
26 Weeks Ended
------------------------
Restated
June 30, June 24,
2001 2000
-------- ---------
NET EARNINGS $61,568 $62,712
Other comprehensive income:
Foreign currency translation
adjustments (1,465) (1,056)
------ ------
COMPREHENSIVE INCOME $60,103 $61,656
====== ======
G. ACQUISITION AND DISPOSITION
On February 7, 2000, the company acquired the outstanding common stock
of Corporate Brand Foods America, Inc. ("CBFA"), a privately held processor
and marketer of meat and poultry products for the retail and foodservice
markets. In the transaction, which was accounted for as a pooling of
interests, IBP issued approximately 14.4 million common shares for all of the
outstanding common stock of CBFA. The company also assumed $344 million of
CBFA's debt and preferred stock obligations. At the acquisition
7
date, all of the debt obligations were refinanced (see Note H) and the
preferred stock was redeemed. The companies incurred $31 million of
nonrecurring merger-related expenses, related primarily to an increase in
the valuation of CBFA's restricted redeemable stock, a non-cash charge of
$21 million, and $10 million in professional fees and other expenses.
In January 2001, the company sold a 70% interest in its Platte County,
Nebraska, ground meats facility to Carneco Holdings, LLC, a wholly owned
subsidiary of Lopez Foods, Inc., a smaller meat processor headquartered in
Oklahoma City, Oklahoma. The company received cash proceeds of $20.5
million and recognized a gain of $7 million related to the percentage sold.
The Platte County facility had net sales of $146 million and earnings from
operations of $2 million in fiscal 2000. The gain on sale of the Platte
County facility and past operations were included in the Foodbrands America
segment although IBP's subsequent 30% equity in earnings of this facility is
in the All Other segment.
H. LONG-TERM OBLIGATIONS:
On January 16, 2001, the company repaid its $50 million of 6.0%
Securities due 2001. The company chose not to exercise an option to extend
the term of the securities and, in so doing, paid $2 million to terminate the
option. The $2 million payment plus unamortized deferred financing costs less
unamortized option premium totaled $1,017, before applicable income tax
benefit of $384, and was accounted for as an extraordinary loss in the
condensed consolidated statement of earnings.
In early January 2001, the company terminated interest rate swaps on
notional amounts of $350 million and received $31 million cash proceeds.
Under FAS 133, the offsetting adjustment previously recorded to the hedged
debt will be amortized as a credit to interest expense over the life of the
debt through 2010.
On February 7, 2000, the company completed its merger with CBFA and, at
the same time, refinanced all of CBFA's various existing debt obligations,
using available IBP credit facilities that were at more favorable terms.
Prepayment premiums, accelerated amortization of unamortized deferred
financing costs, and transaction expenses totaled $22 million, before
applicable income tax benefit of $7 million, and was accounted for as an
extraordinary loss in the condensed consolidated statement of earnings.
I. CONTINGENCIES:
IBP is involved in numerous disputes incident to the ordinary course of
its business. While the outcome of any litigation is not predictable with
certainty, or subject to the company's control, management believes that any
liability for which provision has not been made relative to the various
lawsuits,
8
claims and administrative proceedings pending against IBP, including those
described below, will not have a material adverse effect on its future
consolidated results, financial position or liquidity.
Cattle Producer Litigation. In July 1996, a lawsuit was filed against
IBP by certain cattle producers in the U.S. District Court, Middle District
of Alabama, seeking certification of a class of all cattle producers. The
complaint alleges that IBP has used its market power and alleged "captive
supply" agreements to reduce the prices paid to producers for cattle.
Plaintiffs have disclosed that, in addition to declaratory relief, they seek
actual and punitive damages. The original motion for class certification was
denied by the District Court; plaintiffs then amended their motion, defining
a narrower class consisting of only those cattle producers who sold cattle
directly to IBP from 1994 through the date of certification. The District
Court approved this narrower class in April 1999. The 11th Circuit Court of
Appeals reversed the District Court decision to certify a class, on the
basis that there were inherent conflicts amongst class members preventing
the named plaintiffs from providing adequate representation to the class.
The plaintiffs then filed pleadings seeking to certify an amended class.
The Court denied the plaintiffs' motion on October 17, 2000. Plaintiffs'
motion for reconsideration of the judge's decision was denied, and
plaintiffs now seek to certify a class of cattle producers who have sold
exclusively to IBP on a cash market basis. This motion, as well as the
company's motions for summary judgment on both liability and damages, is
now pending. Management continues to believe that the company has acted
properly and lawfully in its dealings with cattle producers.
Environmental Litigation. On January 15, 1997, the Illinois EPA brought
suit against IBP at its Joslin, Illinois facility alleging that IBP's
operations at its Joslin, Illinois facility are violating the "odor nuisance"
regulations enacted in the State of Illinois. IBP has already completed
additional improvements at its Joslin facility to further reduce odors from
this operation, but denies Illinois EPA's contention that its operations at
any time amounted to a "nuisance". IBP is in the midst of discussions aimed
at a complete resolution of these issues, and reports this issue solely
because of a recent determination that the penalties have the potential to
exceed $100,000.
On January 12, 2000, The United States Department of Justice ("DOJ"), on
behalf of the Environmental Protection Agency ("EPA"), filed a lawsuit
against IBP in U.S. District Court for the District of Nebraska, alleging
violations of various environmental laws at IBP's Dakota City facility. This
action alleges, among other things, violations of: (1) the Clean Air Act; (2)
the Clean Water Act; (3) the Resource, Conservation and Recovery Act; (4) the
Comprehensive Environmental Response Compensation and Liability Act
("CERCLA"); and (5) the Emergency Planning and Community Right to Know Act
("EPCRA"). This action seeks
9
injunctive relief to remedy alleged violations and damages of $25,000 per
violation per day for alleged violations which occurred prior to January
30, 1997, and $27,500 per violation per day for alleged violations after
that date. The Complaint alleges that some violations began to occur as
early as 1989, although the great majority of the violations are alleged to
have occurred much later, and continue into the present. The company
determined to reserve $3.5 million during 1999 for the claims raised in
this lawsuit based upon the evaluation of a confidential settlement demand
received from the DOJ, and review and evaluation of the resolution of
comparable claims, in light of the company's assessment of the facts as
known to the company and the legal theories advanced by the DOJ. On the
same basis, the company believes, based upon a confidential settlement
demand received from the DOJ and a review and assessment of the facts known
to the company and the legal theories advanced by the DOJ that the range of
exposure is between $4.4 million and $15.9 million, although the company is
unable to predict with accuracy the ultimate resolution in this matter due
to risks and uncertainties that make such an evaluation difficult at this
time. The company believes it has meritorious defenses on each of these
allegations and intends to aggressively defend these claims.
On May 19, 2000, IBP signed a Partial Consent Decree with the EPA which
makes environmental improvements that were already underway at IBP's Dakota
City, Nebraska facility federally enforceable. Although this Partial Consent
Decree does not purport to resolve all of the allegations in the Complaint,
if EPA were to prevail in court on certain of its claims, these improvements
may nonetheless satisfy part of the injunctive relief sought by EPA under the
Complaint, a fact that EPA has acknowledged.
Securities Litigation re: Environmental Liabilities. In February 2000,
several lawsuits were filed against IBP by certain shareholders in the United
States District Court for the District of Nebraska seeking to certify a class
of all persons who purchased IBP stock between March 25, 1999 and January 12,
2000. The complaints, seeking unspecified damages, allege that IBP violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule
10b-5 thereunder, and claims IBP issued materially false statements about the
company's compliance with environmental laws in order to inflate the
company's stock price. The lawsuits have been consolidated and the Court has
appointed three lead plaintiffs and has appointed lead and liaison counsel.
An amended consolidated complaint with respect to all the actions was filed,
and the company prepared and filed a motion to dismiss this complaint. On
February 14, 2001, lead plaintiffs filed a motion for leave to amend the
amended consolidated complaint to add additional claims on behalf of all
persons who purchased IBP stock between March 25, 1999 to January 25, 2001.
The proposed new claims are substantially similar to those alleged in the
South Dakota and New York actions described below under the heading
Securities Litigation re: Earnings Restatement, alleging that IBP
10
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and rule 10b-5 thereunder. On May 21, 2001, the Magistrate Judge issued two
opinions recommending 1) the denial of plaintiffs request to amend the
amended consolidated complaint, and 2) dismissal of the complaint in its
entirety for failure to state a claim. Plaintiffs have appealed to the
District Court judge, and a final decision is pending.
Litigation re: Rawhide and Tyson Transactions. Between October 2 and
November 1, 2000, fourteen class actions were filed in the Delaware Court of
Chancery against IBP and members of the Board of Directors of IBP (the
"Delaware Shareholder Litigation") relating to IBP's entry into the Rawhide
Merger Agreement on October 1, 2000 (the "Rawhide Merger Agreement"), and
IBP's termination of the Rawhide Merger Agreement in favor of the Tyson
Merger Agreement on January 1, 2001 (the "Tyson Merger Agreement").
On March 29, 2001, Tyson announced that it was "discontinuing" the
Tyson Merger Agreement, and Tyson filed a lawsuit against IBP in the Chancery
Court of Washington County, Arkansas alleging that IBP had fraudulently
induced it to enter into the Tyson Merger Agreement. Tyson later amended
its complaint to add claims for breach of representations and warranties
contained in the Tyson Merger Agreement.
On March 30, 2001, IBP filed a cross-claim against Tyson in the Delaware
Shareholder Litigation seeking to compel specific performance of the Tyson
Merger Agreement and to obtain a declaratory judgment that Tyson had no right
to rescind or terminate the Tyson Merger Agreement. Tyson counterclaimed in
the Delaware Shareholder Litigation claiming that the Tyson Merger Agreement
was voidable on grounds of fraudulent inducement, negligent misrepresentation
and mistake, that IBP had breached representations and warranties in the
Tyson Agreement, that Tyson was entitled to restitution of the $66.5 million
payment made by it to Rawhide on IBP's behalf, and that Tyson was entitled to
a declaratory judgment that it had validly terminated the Tyson Merger
Agreement.
Following an expedited trial, the Delaware Court of Chancery issued an
opinion on June 15, 2001 (revised on June 18, 2001) holding that 1) the Tyson
Merger Agreement was valid and enforceable against Tyson and not induced by
fraud, negligent misrepresentation, material misrepresentation or mistake; 2)
Tyson breached its obligations to IBP by terminating the Tyson Merger
Agreement; 3) Tyson did not breach any obligations to the plaintiff
shareholders by failing to consummate the cash tender offer; and 4) IBP was
entitled to specific performance of the Tyson Merger Agreement.
On June 27, 2001, the Delaware Court of Chancery issued an Order,
Judgment and Decree in accordance with its opinion. The Court also signed a
Stipulation and Order (the "IBP/Tyson
11
Stipulation") negotiated by IBP and Tyson, which required Tyson to
consummate the transactions contemplated by the Tyson Merger Agreement as
modified by the IBP/Tyson Stipulation.
On June 27, 2001, IBP, Tyson and the shareholders in the Delaware
Shareholder Litigation, entered into a Stipulation of Settlement pursuant to
which Tyson agreed to proceed with the performance of its obligations under
the Tyson Merger Agreement, as modified by the IBP/Tyson Stipulation. On
August 3, 2001, the Delaware Court of Chancery issued an Order and Final
Judgment approving the Stipulation of Settlement. The Order and Final
Judgment provides for the settlement and release of all claims that have been
or could have been asserted in the Delaware Court of Chancery, or any other
forum, by any member of the Class of all IBP shareholders from October 2,
2000 through the closing of the contemplated merger with Tyson, whether
directly, representatively or derivatively, that have arisen or could have
arisen from any of the acts that could have been asserted in the Delaware
Shareholder Litigation, or in any other court, including any claim for
violation of federal or state law, relating to the Tyson Merger Agreement or
the Rawhide Merger Agreement. The release carves out the claims described
below under the heading Securities Litigation re: Earnings Restatement. The
Order and Final Judgment awarded counsel for the shareholder plaintiffs fees
and expenses in the amount of $338,000.
Two separate suits, containing the same general allegations as those
contained in the Delaware Shareholder Litigation, were filed in the District
Court for South Dakota. The first action against IBP and its directors,
Teamsters Local Nos. 175 and 505 Pension Trust Fund v. IBP, inc., challenged
the Rawhide Merger Agreement. The plaintiff in this action voluntarily
dismissed its claim on April 5, 2001. In the second action, a shareholder
derivative action entitled Reier v. Bond, IBP's motion to dismiss or stay
remains pending. The South Dakota federal district court has scheduled an
oral argument on the motion for August 17th. IBP has advised the district
court and the plaintiff's counsel that the Order and Final Judgment entered
by the Delaware Court of Chancery bars plaintiff's claim.
Securities Litigation re: Earnings Restatement. Between January and
March 2001, a number of lawsuits were filed by certain shareholders in the
United States District Court for the District of South Dakota and one suit
filed in the United States District Court for the Southern District of New
York seeking to certify a class of all persons who purchased IBP stock
between February 7, 2000 and January 25, 2001. The plaintiff in the New York
action has voluntarily dismissed and refiled its complaint in South Dakota.
The complaints, seeking unspecified damages, allege that IBP and certain
members of management violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and Rule 10b-5 thereunder, and claims IBP issued
materially false statements about the company's financial results in order to
inflate the company's stock price. More specifically, these allegations
12
relate primarily to the charges that IBP has taken relating to operations at
its DFG Foods subsidiary, the restatement of earnings announced by IBP for
certain periods in 1999 and 2000, IBP's announced adoption of a different
method for accounting for certain components of its stock option plans, and
certain issues raised by the SEC that have since been resolved. The South
Dakota court has consolidated the actions and selected a lead plaintiff.
Plaintiffs are expected to file a consolidated amended complaint. IBP intends
to vigorously contest these claims.
Preference Litigation. In late July 2001, the company resolved a claim
from a trustee of a former customer now in bankruptcy of an alleged
preference, for a sum within the $0- $3 million range previously disclosed in
the company's Form 10-Q for the thirteen weeks ended March 31, 2001.
J. BUSINESS SEGMENTS
Segment information has been prepared in accordance with FASB Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Performance of the segments is
evaluated on earnings from operations.
The Beef Carcass segment is involved in the slaughter of live fed
cattle, reducing them to dressed carcasses and allied products for sales to
further processors. Over 87% of Beef Carcass sales are to other IBP
segments, chiefly to Beef Processing. The Beef Carcass segment also markets
its allied products to manufacturers of pharmaceuticals and poultry feeds.
The Beef Processing segment is primarily involved in fabrication of
dressed beef carcasses into primal and sub- primal meat cuts.
The Pork segment is involved in hog slaughter and fabrication and
related allied product processing activities.
The Beef Processing and Pork segments market their products to food
retailers, distributors, wholesalers, restaurants and hotel chains and other
food processors in domestic and international markets. The Pork segment also
sells allied products to pharmaceutical and poultry feeds manufacturers.
The Foodbrands America segment consists of several IBP subsidiaries,
principally Foodbrands America, Inc., IBP Branded Foods, Inc. (formerly
CBFA), The Bruss Company and The IBP Foods Co. The Foodbrands America group
produces, markets and distributes a variety of frozen and refrigerated
products to the "away from home" food preparation market, including pizza
toppings and crusts, value-added pork-based products, ethnic specialty foods,
appetizers, soups, sauces and side dishes as well as deli meats and processed
beef, pork and poultry products. The Foodbrands America segment also
produces portion-controlled premium beef and pork products for sale to
restaurants and foodservice customers in domestic and international
markets.
The All Other segment includes several businesses that do not constitute
reportable business segments. These businesses primarily include the
company's logistics operations, its Lakeside Farm Industries, Ltd. subsidiary
(Canadian beef slaughter and fabrication operation and cattle feedlot), its
fresh meat case ready operations and its hide curing and tanning operations.
Corporate includes various unallocated corporate items not attributable
to the company's operating segments. The principal items in this caption are
unallocated goodwill amortization and variable stock option expense
(credits).
Intersegment sales have been recorded at amounts approximating market.
Earnings from operations are comprised of net sales less all identifiable
operating expenses, allocated corporate selling, general and administrative
expenses, and goodwill amortization. Allocable corporate costs are allocated
generally based on sales. Net interest expense and income taxes have been
excluded from segment operations.
13
13 Weeks Ended 26 Weeks Ended
------------------- -------------------
Restated Restated
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
--------- --------- --------- ---------
NET SALES
Sales to unaffiliated
customers:
Beef Carcass $ 252,667 $ 274,776 $ 505,217 $ 556,864
Beef Processing 2,084,321 2,081,096 4,052,833 4,030,358
Pork 586,582 617,888 1,145,390 1,191,272
Foodbrands America 767,329 806,782 1,538,249 1,515,253
All Other 668,405 488,324 1,244,252 930,510
--------- --------- --------- ---------
$4,359,304 $4,268,866 $8,485,941 $8,224,257
========= ========= ========= =========
Intersegment sales:
Beef Carcass $2,133,812 $1,983,223 $4,119,495 $3,928,399
Beef Processing 140,647 81,365 241,066 155,083
Pork 143,242 87,115 268,491 168,933
Foodbrands America 299 - 299 -
All Other 61,345 19,367 106,376 77,200
Intersegment elimination (2,479,345) (2,171,070) (4,735,727) (4,329,615)
--------- --------- --------- ---------
- - - -
========= ========= ========= =========
Net sales:
Beef Carcass $2,386,479 $2,257,999 $4,624,712 $4,485,263
Beef Processing 2,224,968 2,162,461 4,293,899 4,185,441
Pork 729,824 705,003 1,413,881 1,360,205
Foodbrands America 767,628 806,782 1,538,548 1,515,253
All Other 729,750 507,691 1,350,628 1,007,710
Intersegment elimination (2,479,345) (2,171,070) (4,735,727) (4,329,615)
--------- --------- --------- ---------
$4,359,304 $4,268,866 $8,485,941 $8,224,257
========= ========= ========= =========
EARNINGS FROM OPERATIONS
Beef Carcass $ 59,164 $ 22,609 $ 72,742 $ 64,662
Beef Processing 4,962 45,080 (7,726) 58,399
Pork 20,722 3,674 43,757 29,872
Foodbrands America (4,992) 2,111 (2,971) (27,008)
All Other 28,723 26,946 52,025 49,455
--------- --------- --------- ---------
Earnings from Segments 108,579 100,420 157,827 175,380
Corporate (14,610) (3,385) (5,585) (3,828)
--------- --------- --------- ---------
Total Earnings from Operations 93,969 97,035 152,242 171,552
Net interest expense (24,020) (21,635) (50,026) (42,950)
--------- --------- --------- ---------
Pre-tax earnings $ 69,949 $ 75,400 $ 102,216 $ 128,602
========= ========= ========= =========
NET SALES BY LOCATION
OF CUSTOMERS
United States $3,700,200 $3,627,799 $7,216,185 $6,950,047
Japan 257,032 257,447 483,045 514,444
Canada 161,918 149,921 299,949 286,885
Mexico 69,329 63,003 139,135 120,483
Korea 56,529 72,157 110,860 151,901
Other foreign countries 114,296 98,539 236,767 200,497
--------- --------- --------- ---------
$4,359,304 $4,268,866 $8,485,941 $8,224,257
========= ========= ========= =========
14
K. ADOPTION OF FAS 133
The company adopted Statement of Financial Accounting Standards No. 133
(FAS 133), "Accounting for Derivative Instruments and Hedging Activities", on
December 31, 2000. In accordance with the transition provisions of FAS 133,
the company recorded a net-of-tax cumulative-effect-type adjustment of
$13,106 (gain) in earnings to recognize at fair value all derivatives that
are designated as fair-value hedging instruments. The company also recorded a
net-of-tax cumulative-effect-type adjustment of $13,143 (loss) in earnings to
recognize the difference (attributable to the hedged risks) between the
carrying values and fair values of related hedged assets and liabilities.
Additionally, the company recorded $78 net-of-tax loss in earnings to reflect
the fair value of derivatives that did not qualify as hedges under FAS 133.
All derivatives are recognized on the balance sheet at their fair value.
On the date the derivative contract is entered into, the company designates
the derivative as (1) a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment ("fair value" hedge) or (2) a
foreign-currency fair-value ("foreign currency" hedge). Changes in the fair
value of a derivative that is highly effective as - and that is designated
and qualifies as - a fair-value hedge, along with the loss or gain on the
hedged asset or liability that is attributable to the hedged risk (including
losses or gains on firm commitments), are recorded in current-period
earnings. Changes in the fair value of derivatives that are highly effective
as - and that are designated and qualify as - foreign-currency hedges are
recorded in current-period earnings.
The company occasionally purchases a financial instrument that contains
a derivative instrument that is "embedded" in the financial instrument. Upon
purchasing the instrument, the company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related to
the economic characteristics of the remaining component of the financial
instrument (i.e., the host contract) and whether a separate instrument with
the same terms as the embedded instrument would meet the definition of a
derivative instrument. If it is determined that (1) the embedded derivative
possesses economic characteristics that are not clearly and closely related
to the economic characteristics of the host contract, and (2) a separate
instrument with the same terms would qualify as a derivative instrument, the
embedded derivative would be separated from the host contract, carried at
fair value, and designated as a fair- value, cash-flow, or foreign-currency
hedge, or as a trading derivative instrument. However, in cases where (1) the
host contract is measured at fair value, with changes in fair value reported
in current earnings or (2) the company is unable to reliably identify and
measure an embedded derivative for separation from its host contract, the
entire contract is carried
15
on the balance sheet at fair value and is not designated as a hedging
instrument.
The company formally documents all relationships between hedging
instruments and hedged items, as well as its risk- management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value or foreign-
currency hedges to specific assets and liabilities on the balance sheet or to
specific firm commitments. The company also formally assesses, both at the
hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in
fair values of hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective
hedge, the company discontinues hedge accounting prospectively, as discussed
below.
The company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes
in the fair value or cash flows of a hedged item (including firm
commitments); (2) the derivative expires or is sold, terminated, or
exercised; (3) a hedged firm commitment no longer meets the definition of a
firm commitment; or (4) management determines that designation of the
derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the
derivative will continue to be carried on the balance sheet at its fair
value, and the hedged asset or liability will no longer be adjusted for
changes in fair value. When hedge accounting is discontinued because the
hedged item no longer meets the definition of a firm commitment, the
derivative will continue to be carried on the balance sheet at its fair
value, and any asset or liability that was recorded pursuant to recognition
of the firm commitment will be removed from the balance sheet and recognized
as a gain or loss in current-period earnings. In all other situations in
which hedge accounting is discontinued, the derivative will be carried at its
fair value on the balance sheet, with changes in its fair value recognized in
current-period earnings.
At June 30, 2001 and December 30, 2000, the company had the following
derivative activity, qualifying as fair value hedges:
Interest and Currency Rate Derivatives:
The company's policy is to manage interest cost using a
mix of fixed and variable rate debt. To manage this mix in a cost-effective
manner, the company may enter into interest rate swaps in which the company
agrees to exchange, at specified intervals, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal amount. These
16
interest rate swaps effectively convert a portion of the company's fixed-
rate debt to variable-rate debt, or vice versa.
The notional amounts of these swap agreements were $350 million at
year-end 2000. The notional amounts of these and other derivative instruments
do not represent assets or liabilities of the company but, rather, are the
basis for the settlements under the contract terms. The swaps were completely
liquidated in early January 2001 for cash proceeds of $31 million, which
has been included in cash flows from operating activities. The offsetting
loss related to the debt will be amortized as a credit to interest expense
over the debt lives through 2010.
The company's Canadian subsidiary enters into currency futures contracts
to hedge its exposures on receivables, live cattle and purchase commitments
in foreign currencies. At June 30, 2001, the company had outstanding
qualifying hedge contracts to buy Canadian dollars totaling CDN$50 million at
various dates through 2001. Comparable outstanding contracts at year-end 2000
totaled CDN$56 million. The company also had outstanding contracts at June
30, 2001 and December 30, 2000 to sell $27 million and 20 million U.S.
dollars, respectively at various dates, to hedge its receivables denominated
in U.S. dollars.
Commodity Derivatives:
The company uses commodity futures contracts to hedge its forward
livestock purchases. At June 30, 2001 and December 30, 2000, the company had
outstanding approximately -0- and 800 qualifying hedge contracts,
respectively to buy fed cattle and hogs and 8,300 and 6,500 contracts,
respectively to sell fed cattle and hogs.
There were no significant net gains or losses recognized in earnings
during the reporting period representing the amount of the hedges'
ineffectiveness.
17