-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PY63S9l7ElgORWz2oD1GzKGg8CQvFmXblQE/kFd2XmsjAPPY8Vkfn5W53QovsHBP WAfO9116ws3o86RJl7sEgA== 0000950152-99-007779.txt : 19990924 0000950152-99-007779.hdr.sgml : 19990924 ACCESSION NUMBER: 0000950152-99-007779 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANCASTER COLONY CORP CENTRAL INDEX KEY: 0000057515 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 131955943 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-04065 FILM NUMBER: 99715847 BUSINESS ADDRESS: STREET 1: 37 W BROAD ST CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142247141 10-K 1 LANCASTER COLONY CORPORATION 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the transition period from ...................... to ...................... COMMISSION FILE NUMBER 0-4065-1 LANCASTER COLONY CORPORATION (Exact name of registrant as specified in its charter) OHIO 13-1955943 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 37 WEST BROAD STREET, COLUMBUS, OHIO 43215 (Address of principal executive offices) (Zip Code) 614-224-7141 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- COMMON STOCK--NO PAR VALUE PER SHARE (INCLUDING SERIES A PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The aggregate market value of Common Stock held by non-affiliates on September 1, 1999 was approximately $1,030,987,000, based on the closing price of these shares on that day. As of September 1, 1999, there were approximately 40,307,000 shares of Common Stock, no par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference to this annual report: Registrant's 1999 Annual Report to Shareholders - Parts I, II and IV. Proxy Statement for the Annual Meeting of Shareholders to be held November 15, 1999; to be filed - Part III. The 1999 Annual Report to Shareholders and 1999 Proxy Statement shall be deemed to have been "filed" only to the extent portions thereof are expressly incorporated by reference. EXHIBIT INDEX ON PAGE 12. -1- 2 PART I Item 1. Business -------- General Development of Business - ------------------------------- Lancaster Colony Corporation was reincorporated in Ohio effective January 2, 1992. Prior to this date Lancaster Colony Corporation had been a Delaware Corporation organized in 1961. As used herein the term "registrant," unless the context otherwise requires, refers to Lancaster Colony Corporation and its subsidiaries. Description of and Financial Information About Business Segments - ---------------------------------------------------------------- The registrant operates in three business segments - "specialty foods," "glassware and candles" and "automotive" - which accounted for approximately 42%, 35% and 23%, respectively, of consolidated net sales for the fiscal year ended June 30, 1999. The financial information relating to business segments for each of the three years in the period ended June 30, 1999, appearing in Exhibit 13 in this Form 10-K Annual Report, is incorporated herein by reference. Further description of each business segment the registrant operates within is provided below: Specialty Foods --------------- The food products manufactured and sold by the registrant include salad dressings and sauces marketed under the brand names "Marzetti," "Cardini's," "Pfeiffer" and "Girard's"; fruit glazes, veggie dips and fruit dips marketed under the brand name "Marzetti"; frozen unbaked pies principally marketed under the brand name "Mountain Top"; hearth-baked frozen breads marketed under the brand name "New York Frozen Foods"; refrigerated chip dips and dairy desserts marketed under the brand names "Allen" and "Marzetti"; premium dry egg noodles marketed under the brand names "Inn Maid" and "Amish Kitchen"; frozen specialty noodles, pastas, and breaded specialty items marketed under the brand name "Reames"; croutons and related products marketed under the brand name "Chatham Village" and caviar marketed under the brand name "Romanoff." Nearly all of this segment's product lines are manufactured by the registrant in 11 plants located throughout the United States. Certain individual items are manufactured and packaged by third parties located in the United States under contractual agreements established by the registrant. The dressings, sauces, croutons, veggie dips and fruit dips are sold in various metropolitan areas in the United States with sales being made to retail and/or foodservice markets. The frozen unbaked pies are marketed principally in the Midwestern United States through salesmen and food brokers to institutional distributors and retail outlets. A portion of the frozen bread sales is directed to the foodservice market. The dry egg noodles and refrigerated chip dips and dairy desserts are sold through food brokers and distributors to retail markets principally in the Midwestern United States. The "Reames" line is sold through brokers and distributors in various metropolitan areas principally in the central and Midwestern United States. Due to distribution arrangements with several large foodservice customers, the sales to one foodservice distributor accounted for approximately 12% of this segment's total net sales in the current year. Although the Company is a leading producer in several of its product categories, all of the markets in which the registrant sells food products are highly competitive in the areas of price, quality and customer service. During fiscal year 1999, the registrant obtained adequate supplies of raw materials for this segment. The registrant's firm order backlog at June 30, 1999, in this business segment, was approximately $4,125,000 as compared to a backlog of approximately $4,195,000 as of the end of the preceding fiscal year. It is expected that all of these orders will be filled during the current fiscal year. The operations of this segment are not affected to any material extent by seasonal fluctuations. The registrant does not utilize any franchises or concessions in this business segment. The trade names under which it operates are significant to the overall success of this segment. However, the patents and licenses under which it operates are not essential to the overall success of this segment. -2- 3 Glassware and Candles --------------------- Candles and other home fragrance products of all sizes, forms and fragrance are primarily sold in the mass merchandise markets as well as to supermarkets, drug stores and specialty shops under the name "Candle-lite." A portion of the registrant's candle business is marketed under private label. Glass products include a broad range of machine pressed and machine blown consumer glassware and technical glass products such as cathode ray tubes, lighting components, lenses and silvered reflectors. Consumer glassware includes a diverse line of decorative and ornamental products such as tumblers, bowls, pitchers, jars and barware. These products are marketed under a variety of trademarks, the most important of which are "Indiana Glass," "Colony" and "Fostoria." The registrant also purchases domestic and imported blown glassware which is sold under the trade name "Colony." Glass vases and containers are sold both in the retail and wholesale florist markets under the trade names "Brody" and "Indiana Glass" as well as under private label. The registrant's glass products are sold to discount, department, variety and drug stores, as well as to jobbers and directly to retail customers. Commercial markets such as foodservice, hotels, hospitals and schools are also served by this segment's products. Although minor, rubber matting sales to commercial markets are also included in this segment. All the markets in which the registrant sells houseware products are highly competitive in the areas of design, price, quality and customer service. Sales of glassware and candles to one customer accounted for approximately 24% and 21% of this segment's total net sales during 1999 and 1998, respectively. No other customer accounted for more than 10% of this segment's total net sales. During fiscal year 1999, the registrant obtained adequate supplies of raw materials for this business segment. The registrant's firm order backlog at June 30, 1999, in this business segment, was approximately $38,981,000 as compared to approximately $33,327,000 as of the end of the preceding fiscal year. It is expected that all of these orders will be filled during the current fiscal year. Seasonal retail stocking patterns cause certain of this segment's products to experience increased sales in the first half of the fiscal year. The registrant does not use any franchises or concessions in this segment. The patents under which it operates are not essential to the overall success of this segment. However, certain trademarks and licenses are important to this segment's marketing efforts. Automotive ---------- The registrant manufactures and sells a complete line of rubber, vinyl and carpeted car mats both in the aftermarket and to original equipment manufacturers. Other products are pickup truck bed mats, running boards, bedliners, tool boxes and other accessories for pickup trucks, vans and sport utility vehicles, truck and trailer splash guards and quarter fenders, accessories such as cup holders, litter caddies and floor consoles. The automotive aftermarket products are marketed primarily through mass merchandisers and automotive outlets under the name "Rubber Queen" and the registrant sells bedliners under the "Protecta" trademark, running boards under the "Dee Zee" name, as well as under private labels. The aggregate sales of two customers accounted for approximately 29% of this segment's total net sales during 1999 and 1998. No other customer accounted for more than 10% of this segment's total net sales. Although the Company is a market leader in many of its product lines, all the markets in which the registrant sells automotive products are highly competitive in the areas of design, price, quality and customer service. During fiscal year 1999, the registrant obtained adequate supplies of raw materials for this segment. The registrant's firm order backlog at June 30, 1999, in this business segment, was approximately $6,486,000 as compared to a backlog of approximately $6,348,000 as of the end of the preceding fiscal year. Such backlogs do not reflect certain orders by original equipment manufacturers as, due to its nature, such information is not readily available. It is expected that all of these orders will be filled during the current fiscal year. The operations of this segment are not affected to any material extent by seasonal fluctuations. The registrant does not utilize any significant franchises or concessions in this segment. The patents, trademarks and licenses under which it operates are generally not essential to the overall success of this segment. -3- 4 Net Sales by Class of Products - ------------------------------ The following table sets forth business segment information with respect to the percentage of net sales contributed by each class of similar products which accounted for at least 10% of the Company's consolidated net sales in any fiscal year from 1997 through 1999:
1999 1998 1997 - -------------------------------------------------------------------------- Specialty Foods: Retail 23% 22% 21% Foodservice 19% 18% 17% Glassware and Candles: Consumer Table and Giftware 30% 31% 31% Automotive 23% 23% 26%
Combined net sales from each of the three segments to Wal-Mart Stores, Inc. totaled approximately 10% of consolidated fiscal 1999 net sales. General Business - ---------------- Research and Development ------------------------ The estimated amount spent during each of the last three fiscal years on research and development activities determined in accordance with generally accepted accounting principles is not considered material. Environmental Matters --------------------- Certain of the registrant's operations are subject to compliance with various air emission standards promulgated under Title V of the Federal Clean Air Act. Pursuant to this Act, with respect to certain of its facilities, the Company is required to submit compliance strategies to various regulatory authorities for review and approval. Based upon available information, compliance with the Federal Clean Air Act provisions, as well as other various Federal, state and local environmental protection laws and regulations, is not expected to have a material adverse effect upon the level of capital expenditures, earnings or the competitive position of the registrant for the remainder of the current and succeeding fiscal year. Employees --------- The registrant has approximately 6,700 employees. Foreign Operations and Export Sales ----------------------------------- Financial information relating to foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based on existing operations. -4- 5 Item 2. Properties ---------- The registrant uses approximately 5,800,000 square feet of space for its operations. Of this space, approximately 998,000 square feet are leased. The following table summarizes facilities exceeding 75,000 square feet of space and which are considered the principal manufacturing and warehousing operations of the registrant:
Approximate Location Business Segment(s) Square Feet - -------- ------------------- ----------- Columbus, OH Specialty Foods 198,000 Coshocton, OH Automotive 591,000 Des Moines, IA (1) Automotive 404,000 Dunkirk, IN Glassware and Candles 729,000 Elkhart, IN Automotive 96,000 Grove City, OH Specialty Foods 195,000 Jackson, OH Automotive and Glassware and Candles 223,000 LaGrange, GA Automotive 211,000 Lancaster, OH Glassware and Candles 465,000 Leesburg, OH (2) Glassware and Candles 875,000 Milpitas, CA (1) Specialty Foods 130,000 Muncie, IN Glassware and Candles 153,000 Sapulpa, OK (3) Glassware and Candles 686,000 Wapakoneta, OH (2) Automotive 196,000 Waycross, GA (1) Automotive 142,000 Wilson, NY Specialty Foods 80,000
(1) Part leased for term expiring 2000. (2) Part leased on a monthly basis. (3) Part leased for term expiring in 2004. Item 3. Legal Proceedings ----------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None -5- 6 EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held November 15, 1999. The following is a list of names and ages of all of the executive officers of the registrant indicating all positions and offices with the registrant held by such person and each person's principal occupation or employment during the past five years. No person other than those listed below has been chosen to become an executive officer of the registrant:
First Elected Age as of an August 31 Offices and Executive Name 1999 Positions Held Officer ---- --------- -------------- --------- John B. Gerlach, Jr. 45 Chairman, Chief Executive Officer and President 1982 John L. Boylan 44 Treasurer, Vice President, Assistant Secretary and Chief Financial Officer 1990 Larry G. Noble 63 Vice President 1985 Bruce L. Rosa 50 Vice President, Development - elected July 1, 1998; Senior Vice President of T. Marzetti Company (a subsidiary of Lancaster Colony Corporation) from 1993 to 1996; Executive Vice President of T. Marzetti Company from 1996 to 1998 1998
The above named officers were elected or re-elected to their present positions at the annual meeting of the Board of Directors on November 16, 1998. All such persons have been elected to serve until the next annual election of officers, which shall occur on November 15, 1999 and their successors are elected or until their earlier resignation or removal. -6- 7 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder ---------------------------------------------------------------- Matters ------- Reference is made to the "Selected Quarterly Financial Data," appearing in Exhibit 13 of this Form 10-K Annual Report, for information concerning market prices and related security holder matters on the registrant's common shares during 1999 and 1998. Such information is incorporated herein by reference. Item 6. Selected Financial Data ----------------------- The presentation of selected financial data as of and for the five years ended June 30, 1999 is included in the "Operations" and "Financial Position" sections of the "Five Year Financial Summary" appearing in Exhibit 13 of this Form 10-K Annual Report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Results of Operations and ----------------------------------------------------------------- Financial Condition ------------------- Reference is made to the "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing in Exhibit 13 of this Form 10-K Annual Report. Such information is incorporated herein by reference. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. All statements made by the Company, other than statements of historical fact, that address activities, events or developments that the Company or management intends, expects, projects, believes or anticipates will or may occur in the future, are forward-looking statements. Such statements are based upon certain assumptions and assessments made by management of the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. The forward-looking statements included in this Report are also subject to a number of risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, customers, products, services and prices. Specific influences relating to these forward-looking statements include fluctuations in material costs, the success of Year 2000 compliance efforts, the continued solvency of key customers, efficiencies in plant operations and innumerable other factors. Such forward-looking statements are not guarantees of future performance, and the actual results, developments and business decisions may differ from those contemplated by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Item 7A. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Not Applicable Item 8. Financial Statements and Supplementary Data ------------------------------------------- The financial statements and supplementary financial information are set forth in Exhibit 13 of this Form 10-K Annual Report and are incorporated herein by reference. Item 9. Changes In and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None PART III -------- Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- For information with respect to the executive officers of the registrant, see "Executive Officers of the Registrant" at the end of Part I of this report. For information with respect to the Directors of the registrant, see "Nomination and Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders to be held November 15, 1999, which is incorporated herein by reference. Item 11. Executive Compensation ---------------------- Information set forth under the caption "Executive Compensation" in the Proxy Statement for the Annual Meeting of Shareholders to be held November 15, 1999 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- Information set forth under the captions "Nomination and Election of Directors" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement for the Annual Meeting of Shareholders to be held November 15, 1999 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions ---------------------------------------------- Not Applicable -7- 8 PART IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ---------------------------------------------------------------- (a) 1. Financial Statements -------------------- The consolidated financial statements as of June 30, 1999 and 1998 and for each of the three years in the period ended June 30, 1999, together with the report thereon of Deloitte & Touche LLP dated August 25, 1999, appearing in Exhibit 13 of this Form 10-K Annual Report are incorporated herein by reference. Index to Financial Statements ----------------------------- Consolidated Statements of Income for the years ended June 30, 1999, 1998 and 1997 Consolidated Balance Sheets as of June 30, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Independent Auditors' Report (a) 2. Financial Statement Schedules Required by Items 8 and 14(d) ----------------------------------------------------------- Included in Part IV of this report is the following additional financial data which should be read in conjunction with the consolidated financial statements in the 1999 Annual Report to Shareholders: Independent Auditors' Report Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended June 30, 1999 Supplemental schedules not included with the additional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (a) 3. Exhibits Required by Item 601 of Regulation S-K and Item 14(c) -------------------------------------------------------------- See Index to Exhibits attached. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the fourth quarter of the year ended June 30, 1999. -8- 9 SIGNATURES ---------- Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 23rd day of September, 1999. LANCASTER COLONY CORPORATION (Registrant) By /S/ John B. Gerlach, Jr. ---------------------------- John B. Gerlach, Jr. Chairman, Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /S/ John B. Gerlach, Jr. Chairman, Chief September 22, 1999 - --------------------------- Executive Officer, ------------------ John B. Gerlach, Jr. President and Director /S/ John L. Boylan Treasurer, Vice September 22, 1999 - --------------------------- President, Assistant ------------------ John L. Boylan Secretary, Chief Financial Officer (Principal Financial and Accounting Officer) and Director /S/ Kerrii B. Anderson Director September 13, 1999 - --------------------------- ------------------ Kerrii B. Anderson /S/ Robert L. Fox Director September 13, 1999 - --------------------------- ------------------ Robert L. Fox /S/ Morris S. Halpern Director September 12, 1999 - --------------------------- ------------------ Morris S. Halpern /S/ Robert S. Hamilton Director September 20, 1999 - --------------------------- ------------------ Robert S. Hamilton /S/ Edward H. Jennings Director September 14, 1999 - --------------------------- ------------------ Edward H. Jennings /S/ Henry M. O'Neill, Jr. Director September 10, 1999 - --------------------------- ------------------ Henry M. O'Neill, Jr. /S/ Zuheir Sofia Director September 10, 1999 - --------------------------- ------------------ Zuheir Sofia
-9- 10 INDEPENDENT AUDITORS' REPORT To the Directors and Shareholders of Lancaster Colony Corporation: We have audited the consolidated financial statements of Lancaster Colony Corporation and its subsidiaries as of June 30, 1999 and 1998, and for each of the three years in the period ended June 30, 1999, and have issued our report thereon dated August 25, 1999; such financial statements and report are included in your 1999 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Lancaster Colony Corporation and its subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /S/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Columbus, Ohio August 25, 1999 -10- 11 SCHEDULE II LANCASTER COLONY CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR - ------------------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSET TO WHICH THEY APPLY - Allowance for doubtful accounts: Year ended June 30, 1997...................... $2,131,000 $1,813,000 $1,083,000(A) $2,861,000 ========================================================== Year ended June 30, 1998...................... $2,861,000 $1,834,000 $1,921,000(A) $2,774,000 ========================================================== Year ended June 30, 1999...................... $2,774,000 $1,789,000 $1,263,000(A) $3,300,000 ==========================================================
(A) Represents uncollectible accounts written off net of recoveries. -11- 12 LANCASTER COLONY CORPORATION ---------------------------- FORM 10-K JUNE 30, 1999 INDEX TO EXHIBITS
Exhibit Number Description Located at - ------ ----------- ---------- 3.1 Certificate of Incorporation of the registrant approved by the shareholders November 18, 1991. (k) .2 Certificate of Amendment to the Articles of Incorporation approved by the shareholders November 16, 1992. (k) .3 Certificate of Amendment to the Articles of Incorporation approved by the shareholders November 17, 1997. (k) .4 By-laws of the registrant as amended through November 18, 1991. (a) .5 Certificate of Designation, Rights and Preferences of the Series A Participating Preferred Stock of Lancaster Colony Corporation. (b) 4.1 Specimen Certificate of Common Stock. (j) .2 Rights Agreement dated as of April 20, 1990 between Lancaster Colony Corporation and The Huntington Trust Company, N.A. (c) 10.1 1981 Incentive Stock Option Plan. (d) .2 Resolution by the Board of Directors to amend registrant's 1981 Incentive Stock Option Plan, approved by the shareholders November 21, 1983. (e) .3 Resolution by the Board of Directors to amend registrant's 1981 Incentive Stock Option Plan approved by the shareholders November 18, 1985. (f) .4 Resolution by the Board of Directors to amend registrant's 1981 Incentive Stock Option Plan approved by the shareholders November 19, 1990. (g) .5 Key Employee Severance Agreement between Lancaster Colony Corporation and John L. Boylan. (g) .6 Consulting Agreement by and between Lancaster Colony Corporation and Morris S. Halpern. (h) .7 1995 Key Employee Stock Option Plan. (i) .8 Key Employee Severance Agreement between Lancaster Colony Corporation and Bruce L. Rosa. 1999 Form 10-K 13. Annual Report to Shareholders. 1999 Form 10-K
-12- 13 21. Significant Subsidiaries of Registrant. 1999 Form 10-K 23. The consent of Deloitte & Touche LLP to the incorporation by reference in Registration Statements No. 33-39102 and 333-01275 on Form S-8 of their reports dated August 25, 1999, appearing in and incorporated by reference in this Annual Report on Form 10-K of Lancaster Colony Corporation for the year ended June 30, 1999. 1999 Form 10-K 27. Financial Data Schedule 1999 Form 10-K (a) Indicates the exhibit is incorporated by reference from filing as an annex to the proxy statement of Lancaster Colony Corporation for the annual meeting of stockholders held November 18, 1991. (b) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 10-Q for the quarter ended March 31, 1990. (c) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 8-K filed April 20, 1990. (d) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 10-K for the year ended June 30, 1982. (e) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 10-K for the year ended June 30, 1984. (f) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 10-K for the year ended June 30, 1985. (g) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 10-K for the year ended June 30, 1991. (h) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 10-K for the year ended June 30, 1993. (i) Indicates the exhibit is incorporated by reference from the Lancaster Colony Corporation filing on Form S-8 of its 1995 Key Employee Stock Option Plan (Registration Statement No. 333-01275). (j) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 10-K for the year ended June 30, 1996. (k) Indicates the exhibit is incorporated by reference from filing as an exhibit to the Lancaster Colony Corporation report on Form 10-K for the year ended June 30, 1998. Note (1) The registrant and certain of its subsidiaries are parties to various long-term debt instruments. The amount of securities authorized under such debt instruments does not, in any case, exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees to furnish a copy of any such long-term debt instrument to the Commission upon request. Note (2) The registrant has included in Exhibit 13 only the specific Financial Statements and notes thereto of its 1999 Annual Report to Shareholders which are incorporated by reference in this Form 10-K Annual Report. The registrant agrees to furnish a complete copy of its 1999 Annual Report to Shareholders to the Commission upon request.
-13- EX-10.8 2 EXHIBIT 10.8 1 EXHIBIT 10.8 BRUCE L. ROSA ----------------------------------- Name of Key Employee May 3, 1990 ----------------------------------- Date of Agreement LANCASTER COLONY CORPORATION Key Employee Severance Agreement -------------------------------- This agreement is entered as of the date set forth above into between Lancaster Colony Corporation ("LCC") and the undersigned key employee of LCC named above (the "Key Employee"). 1. Severance Benefits. In the event the employment of the Key Employee is terminated within one year following a Change of Control (i) by LCC other than for Cause, or (ii) by the Key Employee for Good Reason, the Key Employee shall be entitled to and shall be paid the following severance benefits, which severance benefits shall be payable in cash by LCC to the Key Employee within thirty (30) days after such termination of employment: (a) The amount of any unpaid base salary of the Key Employee accruing through the date of termination of employment, determined at the base salary rate in effect for the Key Employee at such date. (b) An amount equal to the lesser of (i) the sum of (y) the Key Employee's highest annual salary paid within the three full fiscal years prior to the date of termination of employment, plus (z) the Key Employee's highest total annual bonus paid within the three full fiscal years prior to the date of termination of employment, and (ii) an amount equal to twice the Key Employee's annual compensation (salary plus bonus) paid for the full fiscal year immediately preceding the date of termination of employment. In addition to the foregoing cash payments, the Key Employee shall be entitled to continued coverage under such of LCC's health, disability and life insurance plans in which the Key Employee participated on the date of termination of employment, on the same basis as in effect on such date (including required employee contributions, if any), for a period of one year following the date of termination of employment. 2. Definitions. As used herein, the following terms shall have the meanings set forth below. "Cause" means the willful engaging by the Key Employee in malfeasance or felonious conduct which in any material respect impairs the reputation, good will or business position of LCC or involves misappropriation of LCC's funds or other assets. "Change of Control" means a change in control of LCC of a nature that would be required to be reported in response to Item 1(a) of LCC's Current Report on Form 8-K pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided that, without limitation, such a Change of Control shall be deemed to have occurred at such time as (i) any "person" within the meaning of Section 14(d) of the Exchange Act, other than LCC; a subsidiary of LCC; John 2 B. Gerlach, John B. Gerlach, Jr. or any of their "affiliates" or "associates" (as such terms are defined in Rule 12b-2 under the Exchange Act); or any employee benefit plan sponsored by LCC becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Common Stock of LCC or (ii) individuals who constitute the Board of Directors of LCC as of the date hereof (the "Incumbent Board") or who are successor members to such Incumbent Board members and whose appointment or nomination for election was approved by action of at least three-fourths of (y) of such Incumbent Board ("Approved Successors") or (z) by a board whose members can trace their status as such to appointment or nomination for election which was approved by at least three-fourths of Incumbent Board members or Approved Successors cease for any reason to constitute at least a majority thereof; but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board. "Good Reason" means (i) a reduction in base salary or fringe benefits (except for a reduction in fringe benefits which is required by law to maintain any tax benefits relating thereto or is applied universally to such fringe benefits of all employees of LCC) paid and provided by LCC to the Key Employee, (ii) a materially adverse change in the terms of the bonus program applicable to the Key Employee, (iii) a reduction in the authority of the Key Employee, (iv) a material change in the duties and responsibilities of the Key Employee, (v) the failure by LCC to provide and credit the Key Employee with the number of paid vacation days to which he is then entitled in accordance with LCC's normal vacation policy as in effect immediately prior to the Change of Control or (vi) LCC's requiring the Key Employee to be based more than 30 miles from where his office or the place of employment is located immediately prior to the Change of Control. 3. Disputes. If a dispute arises regarding a termination of the Key Employee's employment with LCC or the interpretation or enforcement of this agreement and the Key Employee obtains a final judgment in his favor from a court of competent jurisdiction or his claim is settled by LCC prior to the rendering of a judgment by such a court, all reasonable legal fees and expenses incurred by the Key Employee in contesting or disputing any such termination or seeking to obtain or enforce any right or benefit provided for in this agreement, or in otherwise pursuing his claim, shall be paid by LCC to the fullest extent permitted by law. 4. No Mitigation or Reduction of Benefits. The Key Employee is not required to mitigate the amount of any benefits to be paid by LCC pursuant to this agreement by seeking other employment or otherwise, nor shall the amount of any benefits provided for in this agreement be reduced by any compensation earned by the Key Employee as the result of employment by another employer after the termination of the Key Employee's employment with LCC. 5. No Employment Rights or Obligations Established. This agreement does not establish any rights on the part of the Key Employee to continued employment by LCC, nor does it establish any obligations on the part of the Key Employee to continue his employment with LCC, it being understood and agreed that this agreement relates solely to certain benefits to be provided to the Key Employee in the event of his termination of employment under certain circumstances as provided herein. 6. Amendments. This agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto. 2 3 7. Other Agreements. This agreement does not supersede or affect in any way, nor is it affected in any way by, any other existing agreement between LCC and the Key Employee. Further, no future agreement between LCC and the Key Employee shall supersede or affect this agreement, nor shall this agreement affect such future agreement, unless such future agreement specifically so provides and is executed by both LCC and the Key Employee. 8. Successors and Assigns. This agreement is personal to the Key Employee and may not be assigned by him otherwise than by will or the laws of descent and distribution. This agreement shall be binding upon, inure to the benefit of and be enforceable by and against the Company and its successors and assigns. 9. Governing Law. This agreement is made and is expected to be performed in Ohio, and the various terms, provisions, covenants and agreements, and the performance thereof, shall be construed, interpreted and enforced under and with reference to the laws of the State of Ohio. IN WITNESS WHEREOF, this agreement is executed by the parties effective the date first set forth above. LCC: Key Employee: - ---- ------------- LANCASTER COLONY CORPORATION By: /S/ John B. Gerlach, Jr. /S/ Bruce L. Rosa ------------------------------- ------------------------------- (Signature) (Signature) John B. Gerlach, Jr., Secretary BRUCE L. ROSA - ---------------------------------- ------------------------------- (Name and Title) (Name) 3 EX-13 3 EXHIBIT 13 1 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION REVIEW OF CONSOLIDATED OPERATIONS Consolidated net sales for the fiscal year ended June 30, 1999 totaled $1,045,702,000. This is a record level of sales and represents the eighth consecutive year that such a record has been achieved. The fiscal 1999 total represents a 4% increase over the $1,008,752,000 recorded in fiscal 1998. Expansion of both retail and foodservice sales within the Specialty Foods segment was the primary contributor to this growth. Net sales in fiscal 1998 increased $85,939,000, or 9%, over the fiscal 1997 total of $922,813,000. Similar to fiscal 1999, the increase in fiscal 1998 sales was led by growth in the Specialty Foods segment, which increased by $60,361,000. This segment benefited in fiscal 1998 from both internal volume growth and the July 1997 acquisition of the Chatham Village product lines. Sales increases driven by pricing increases have been nominal in recent years as a result of competitive market conditions. Net income of $95,129,000 for fiscal 1999 declined 1% from the record level of net income in 1998 of $96,130,000. In general, a marked decline in profitability of the Company's Automotive segment was somewhat offset by the improvement of the Specialty Foods segment. Additionally, operating income within the Glassware and Candles segment declined slightly. Further impacting comparability between these years were pretax gains of approximately $1,800,000 recognized in 1998 from the sales of long-idle manufacturing facilities. Net income in fiscal 1998 represented an 8% increase over the $88,706,000 recorded in fiscal 1997. This improvement was primarily the result of the increased sales volume discussed above. The relative proportion of sales and operating income contributed by each of the Company's business segments can impact a year-to-year comparison of the consolidated statements of income. The following table summarizes the sales mix and related operating income percentages achieved by the business segments over each of the last three years:
Segment Sales Mix:(1) 1999 1998 1997 - -------------------------------------------------------------------------------- Specialty Foods 42% 41% 38% Glassware and Candles 35% 36% 36% Automotive 23% 23% 26% Segment Operating Income %:(2) - -------------------------------------------------------------------------------- Specialty Foods 16% 15% 14% Glassware and Candles 22% 22% 24% Automotive 5% 8% 9%
(1) Expressed as a percentage of consolidated net sales (2) Expressed as a percentage of the related segment's net sales The Company's gross margin as a percentage of net sales was 30.8% in 1999 compared with 32.2% in 1998 and 31.5% in 1997. The decline in the most recent year's percentage is primarily attributable to higher food ingredient costs present in the first half of the fiscal year, and production inefficiencies incurred in the operation of certain glassware and automotive manufacturing facilities. Compared to fiscal 1997, fiscal 1998 benefited from a more favorable sales mix within the Specialty Foods segment, although lower production volumes adversely affected margins of the Automotive segment. The increasing proportion of sales contributed by specialty food and candle products over the last two years has positively influenced gross margin percentages during this period as such products typically carry higher average gross margins than many of the Company's other products. Selling, general and administrative expenses for 1999 totaled $166,228,000, a 1% decrease from the 1998 total of $168,526,000. This decrease was influenced by cost reductions attained within the Glassware and Candles segment. The consolidated total of such expenses for fiscal 1998 increased 15% over the 1997 total of $146,403,000. This increase generally resulted from the effects of higher sales volume on sales-related costs. In the aggregate, improved Specialty Foods results were largely offset by a decline in Automotive performance such that consolidated operating income for 1999 totaled $155,688,000, a slight decline from the 1998 total of $155,871,000. As most directly affected by the increased sales volume, 1998 consolidated operating income increased by 8% over the comparable 1997 total of $144,359,000. The effective tax rate in 1999 decreased slightly to 38.0% compared to 38.1% in 1998. The effective rate for 1997 was 37.7%. Net income per common share totaled $2.28 on a fully-diluted basis for fiscal 1999, an increase of 3% over the comparable 1998 total of $2.22 per share. The 1998 fully-diluted earnings per share had increased 10% over the $2.01 reported in 1997, after adjustment for the three-for-two stock split paid in January 1998. Earnings per share have been beneficially affected by the Company's share repurchases which have totaled in excess of $133 million over the three-year period ended June 30, 1999. SEGMENT REVIEW - SPECIALTY FOODS The Specialty Foods segment achieved another record level of sales during fiscal 1999. Totaling $441,470,000, these sales exceeded the prior year level of $411,373,000 by $30,097,000 or 7%. A 17% increase in sales also occurred in 1998 relative to the 1997 total of $351,012,000. In 1999 and 1998, retail sales comprised approximately 56% of total sales compared to 44% for foodservice. For fiscal 1997, the sales proportions were 55% and 45%, respectively. Retail sales growth during 1999 was provided by higher sales volumes of products such as vegetable and fruit dips placed in grocery produce departments as well as the recently introduced Texas Toast frozen bread products. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS Foodservice volumes also increased in 1999 with improved sales of both Marzetti-branded products to wholesale distributors and specialty items made for specific restaurant chains. The increase in retail sales during 1998 was influenced by the acquisition of the Chatham Village crouton business in July 1997. Similar to 1999, the 1998 sales increase also benefited from greater sales of fruit and vegetable dips and by the introductory success of the Texas Toast line. This segment's operating income of $68,550,000 in 1999 improved 10% over the 1998 total of $62,141,000 despite significant increases in raw material costs incurred during the first half of the fiscal year. The raw materials most significantly contributing to these increased costs were soybean oil and cream. Otherwise, the segment's overall improvement in both 1999 and 1998 was influenced by such factors as higher sales volumes, better capacity utilization and a more favorable sales mix. Relative to 1997 operating income of $47,393,000, 1998 income increased 31%. SEGMENT REVIEW - GLASSWARE AND CANDLES Fiscal 1999 net sales for this segment totaled $363,617,000, which was comparable with the $363,835,000 achieved in 1998. Adversely affecting sales in 1999 was a reduction in the sales of private-label wax-filled products, as well as the October 1998 closing of the segment's Tiara direct selling organization, which predominantly sold glassware. Compared to 1997 sales of $336,200,000, segment volume in 1998 grew as a result of internally-generated sales increases of candles and related products to mass merchants. Partially offsetting this growth was a decline in private-label wax-filled sales. This segment's operating income margin was relatively unchanged between years and decreased by 1% in 1999 to $79,235,000 compared to $80,350,000 achieved in 1998. Despite improved candle contribution margins in the second half of the fiscal year, significantly and adversely affecting this segment's fiscal 1999 margins were operating inefficiencies that were incurred at the Sapulpa, Oklahoma glass production facility. Lower production volumes at a second glass production facility also impaired overhead absorption. Among the factors adversely affecting 1998 margins were higher wax costs, certain operating inefficiencies at the consumer glassware plants, increased competitive pricing and promotional pressures and a less favorable sales mix. SEGMENT REVIEW - AUTOMOTIVE Net sales of the Automotive segment during fiscal 1999 of $240,615,000 increased 3% over the 1998 total of $233,544,000. Contributing to the volume increase was internal growth associated with the addition of several new floor mat and aluminum accessory programs placed with original equipment manufacturers ("OEMs"), as well as the acquisition of one significant new aftermarket customer account. Adversely affected by a decline in aftermarket sales, fiscal 1998 net sales of the Automotive segment declined 1% from the 1997 total of $235,601,000. Sales of light truck bedliners were adversely impacted by significant industry over-capacity and intense competitive pricing conditions. Sales to OEMs increased during 1998 with particular strength in aluminum accessories for light trucks and sport utility vehicles. Operating income of the Automotive segment during 1999 totaled $12,861,000, a 31% decline from the comparable 1998 total of $18,700,000. This decline was affected by operating inefficiencies (particularly in floor mat operations), the continuation of competitive market conditions and a less favorable sales mix with respect to certain aftermarket product lines. Efficiencies in the first half of fiscal 1999 were also adversely affected by the disruptive effects of unrelated work stoppages at both a major customer and at the Company's Wapakoneta, Ohio manufacturing facility. The operating income of this segment for 1998 declined 10% from the $20,819,000 recorded in 1997. This decline is attributable to lower sales volume, a less favorable sales mix and pricing pressures, particularly on sales to OEMs. This segment's sales to OEMs are made both directly to the OEMs and indirectly through third party, "Tier 1" suppliers. Such sales are sensitive to the overall rate of new vehicle sales, the availability of competitive alternatives and the Tier 1 supplier's ongoing ability to maintain its relationship with the OEMs. Additionally, the extent of pricing flexibility associated with these sales continues to be particularly limited with certain products subject to annual price reductions. During 1999, sales to OEMs comprised 50% of this segment's sales compared to 49% and 44% in 1998 and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's balance sheet as of June 30, 1999 reflects a position of financial strength. This posture has been accomplished through the benefit of strong cash flows with net cash provided by operating activities totaling $126,484,000, $120,045,000 and $113,461,000 for 1999, 1998 and 1997, respectively. The primary influences on these amounts has been the Company's favorable levels of net income and working capital. Cash flow generated from operations remains the primary source of financing the Company's internal growth. The principal use of cash flows used in investing activities over the last three years has been for investments in property, plant and equipment. The cumulative total of such investments during this time has been $116,267,000, including $33,804,000 in 1999. Although the Glassware and Candles segment has been the primary user of such funds over this 3 MANAGEMENT'S DISCUSSION AND ANALYSIS period, the Specialty Foods segment had the greatest expenditures during fiscal 1999. The largest project completed during fiscal 1999 related to a food distribution center in Grove City, Ohio. During 1998, the Glassware and Candles segment also completed a new distribution facility adjacent to the existing candle manufacturing facility located in Leesburg, Ohio. Additionally, during July 1997, the Company utilized cash flows to acquire the outstanding stock of Chatham Village Foods, Inc., a manufacturer and marketer of croutons and related products. The total of cash paid and debt assumed by the Company in consummating this acquisition exceeded $20,000,000. The largest financing activity conducted by the Company in each of the last three years involved the purchase of the Company's common stock. Cash utilized for these purchases totaled $66,792,000, $37,083,000 and $29,554,000 in 1999, 1998 and 1997, respectively. In February 1999, the Company's Board of Directors approved a share repurchase authorization of 2,000,000 shares of which 1,041,500 remained authorized for future purchase as of June 30, 1999. An additional significant financing activity conducted in each of the last three years has been the payment of dividends. Total dividend payments for 1999 were $24,573,000 which was more than 5% greater than the 1998 total of $23,326,000. This increase reflects the higher dividend payout rate of $.59 present during 1999 compared to $.54 during 1998. Fiscal 1999 marks the 36th consecutive year in which the Company's dividend rate was increased. The future levels of share purchases and declared dividends are subject to the periodic review of the Company's Board of Directors and are generally determined after an assessment is made of such factors as anticipated earnings levels, cash flow requirements and general business conditions. The Company's balance sheet reflects a relatively low level of leverage as the debt to total capital ratio remains low at 7% at both June 30, 1999 and 1998. Management believes this posture provides the Company with considerable flexibility to acquire businesses complementary in function to that of the Company's existing operations. It is anticipated that adequate funds will continue to be made available under discretionary bank lines of credit to meet any short-term cash requirements not otherwise met by cash generated from operations. The Company's ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various Federal, state and local agencies. With respect to environmental matters, costs are incurred pertaining to regulatory compliance and, upon occasion, remediation. These costs have not been, and are not anticipated to become, material. IMPACT OF INFLATION With the exception of certain food commodity costs, raw material costs during fiscal 1999 did not significantly vary from the levels encountered in fiscal 1998. Soybean oil and cream costs rose markedly during the first half of fiscal 1999 but returned to more comparable levels by June 30 and are actually trending lower as the Company enters its fiscal 2000. Generally, compared to 1997, fiscal 1998 encountered relatively moderate changes in raw material costs. The Company generally attempts to adjust its selling prices to offset the effects of increased raw material costs. However, these adjustments have historically been difficult to implement on a timely basis relative to the increase in costs incurred. Minimizing the exposure to such increased costs is the Company's diversity of operations and its ongoing efforts to achieve greater manufacturing and distribution efficiencies through the improvement of work processes. YEAR 2000 The "Year 2000" problem arises as a result of many automated calculations being written in computer code which do not properly recognize dates after 1999. Problems associated with this issue can occur not only on "mainframe" applications, but also with such devices as personal computers, telecommunication equipment and programmable logic controllers associated with certain manufacturing equipment. Without correction, it is possible that business and operational functions that rely on this improper code could fail and cause significant business disruption and loss. Lancaster Colony continues to address and prepare for the consequences that the Year 2000 may have on its ability to rely on data processing and other automated operational functions that are date-dependent. The Company's existing data processing structure is decentralized in nature. Management has created a Year 2000 team to oversee Year 2000 status at the various business units. Management believes the Company's business units have completed an adequate assessment of the internal Year 2000 dependencies relating to their critical data processing functions. However, there are no assurances that this process has identified all the existing Year 2000 exposures. Furthermore, such a failure could result in a materially adverse impact to the Company although the extent of this impact is not believed to be reasonably estimable. The Company is addressing Year 2000 compliance through a multiphased concurrent approach encompassing identification, implementation and testing phases utilizing a combination of internal and external resources. Depending on the business unit's particular circumstance, the manner of resolving 4 MANAGEMENT'S DISCUSSION AND ANALYSIS the identified Year 2000 shortcomings has included strategies such as implementing Year 2000 compliant versions of third party software, modifying portions of existing software and replacing non-compliant business systems with new third party software. The Company has substantially completed the identification, implementation and testing phases. However, additional testing of the various systems and programs may continue through the third and fourth quarter of calendar 1999. The most significant data processing expenditures are being made within the Company's Automotive segment. This segment is in the process of implementing comprehensive new third party software and hardware with Year 2000 compliance being regarded as one of several resulting benefits. The Company's aggregate costs to date are approximately $4.8 million, which include capitalized costs incurred by the Automotive segment of approximately $3.7 million. The Company estimates an additional $1.2 million of cost will be incurred, of which approximately $1.0 million will relate to the Automotive segment's data processing project. Expenditures associated with making changes to existing systems specifically for Year 2000 compliance are being expensed as incurred. Costs associated with the Company's efforts, both incurred and planned, are not believed to be material to the Company's consolidated results of operations, liquidity and financial condition. Due to the nature of the Company's efforts, actual costs could vary significantly from that currently anticipated and there are no guarantees regarding the timing or efficacy of completion. As noted above, the Year 2000 issue may also affect systems ("non-IT systems") not traditionally identified with information technology. For example, production machinery, which is dependent on reading the current date, could become inoperable if the machine's embedded code does not allow for proper interpretation of a year beyond 1999. The Company continues to address its Year 2000 exposure with respect to non-IT systems. Remediation of non-IT equipment will be substantially completed by the third quarter of calendar 1999 while testing of the various systems and programs may continue through the fourth quarter of calendar 1999. The Company is not currently aware of any significant deficiencies. There can be no assurances, however, that such deficiencies do not exist. The effect of not resolving these issues on a timely basis could have a materially adverse impact on the Company. Another risk presented by the Year 2000 issue is that significant customers and suppliers of the Company could fail to become fully Year 2000 compliant. This failure, in turn, could result in a significant adverse effect to the Company's operations. The Company continues to inquire and correspond with its significant suppliers as to the state of their Year 2000 readiness. It is believed that these inquiries will become increasingly more meaningful as the Year 2000 approaches. Regardless, there can be no assurance that the data processing and non-IT systems utilized by these other companies will become Year 2000 compliant on a timely basis. The impact of noncompliance is not currently estimable, but it is possible that significant failures could have a material adverse effect on the Company's operations. Management will continue to diligently monitor Year 2000 efforts both internally and externally and, as needed, will develop contingency plans to address exposures, if any, as they become better clarified. The costs and business implications which might be associated with the adoption of any such contingency plan is not estimable but could be significant. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: All statements made by the Company in both this annual report and in other contexts, other than statements of historical fact, that address activities, events or developments that the Company or management intends, expects, projects, believes or anticipates will or may occur in the future, are forward-looking statements. Such statements are based upon certain assumptions and assessments made by management of the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. The forward-looking statements included in this report are also subject to a number of risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, customers, products, services and prices. Specific influences relating to these forward-looking statements include fluctuations in material costs, the success of Year 2000 compliance efforts, the continued solvency of key customers, efficiencies in plant operations and innumerable other factors. Such forward-looking statements are not guarantees of future performance, and the actual results, developments and business decisions may differ from those contemplated by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 5 FIVE YEAR FINANCIAL SUMMARY Lancaster Colony Corporation and Subsidiaries
(Thousands Except Per Share Figures) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- OPERATIONS Net Sales $1,045,702 $1,008,752 $922,813 $855,912 $795,126 Gross Margin $ 321,916 $ 324,397 $290,762 $263,952 $247,942 Percent of Sales 30.8% 32.2% 31.5% 30.8% 31.2% Interest Expense $ 2,718 $ 2,626 $ 2,596 $ 2,875 $ 2,736 Percent of Sales 0.3% 0.3% 0.3% 0.3% 0.3% Income Before Income Taxes $ 153,462 $ 155,373 $142,459 $123,221 $114,808 Percent of Sales 14.7% 15.4% 15.4% 14.4% 14.4% Taxes Based on Income $ 58,333 $ 59,243 $ 53,753 $ 47,086 $ 44,284 Net Income $ 95,129 $ 96,130 $ 88,706 $ 76,135 $ 70,524 Percent of Sales 9.1% 9.5% 9.6% 8.9% 8.9% Per Common Share:(1) Net Income-Basic and Diluted $ 2.28 $ 2.22 $ 2.01 $ 1.71 $ 1.57 Cash Dividends $ 0.59 $ 0.54 $ 0.48 $ 0.44 $ 0.37 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Total Assets $ 550,014 $ 529,367 $484,394 $435,359 $379,904 Working Capital $ 212,162 $ 235,031 $235,079 $203,988 $189,255 Property, Plant and Equipment--Net $ 175,617 $ 170,766 $151,309 $139,095 $113,187 Long-Term Debt $ 3,575 $ 29,095 $ 30,685 $ 31,230 $ 31,840 Property Additions $ 33,804 $ 44,935 $ 37,528 $ 50,229 $ 31,745 Depreciation and Amortization $ 35,569 $ 32,571 $ 26,981 $ 24,399 $ 22,717 Shareholders' Equity $ 414,855 $ 410,563 $368,000 $323,563 $277,148 Per Common Share(1) $ 10.23 $ 9.60 $ 8.45 $ 7.29 $ 6.19 Weighted Average Common Shares Outstanding-Diluted(1) 41,799 43,364 44,108 44,624 45,057 - ----------------------------------------------------------------------------------------------------------------- STATISTICS Price-Earnings Ratio at Year End 15.1 17.1 16.0 14.6 15.2 Current Ratio 2.8 4.1 4.2 3.9 4.1 Long-Term Debt as a Percent of Shareholders' Equity 0.9% 7.1% 8.3% 9.7% 11.5% Dividends Paid as a Percent of Net Income 25.8% 24.3% 23.8% 25.7% 23.4% Return on Average Equity 23.0% 24.7% 25.7% 25.3% 27.4% - -----------------------------------------------------------------------------------------------------------------
(1) Adjusted for 3-for-2 stock split paid January 1998. 6 BUSINESS SEGMENTS Lancaster Colony Corporation and Subsidiaries For the Years Ended June 30, 1999, 1998 and 1997 IN 1999, THE COMPANY ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." MANAGEMENT HAS EVALUATED ITS OPERATIONS IN ACCORDANCE WITH SFAS NO. 131 AND HAS DETERMINED THAT THE BUSINESS IS SEPARATED INTO THREE DISTINCT OPERATING AND REPORTABLE PRODUCT CATEGORIES: "SPECIALTY FOODS," "GLASSWARE AND CANDLES" AND "AUTOMOTIVE." THE 1998 AND 1997 BUSINESS SEGMENT PRESENTATIONS HAVE BEEN RESTATED TO CONFORM WITH THE 1999 PRESENTATION. SPECIALTY FOODS-includes production and marketing of a family of pourable and refrigerated produce salad dressings, croutons, sauces, refrigerated produce vegetable and fruit dips, chip dips, dairy snacks and desserts, dry and frozen egg noodles, caviar, frozen ready-to-bake pies and frozen hearth-baked breads. The salad dressings, sauces and frozen bread products are sold to both retail and foodservice markets. The remaining products of this business segment are primarily directed to retail markets. GLASSWARE AND CANDLES-includes the production and marketing of table and giftware consisting of domestic glassware, both machine pressed and machine blown; imported glassware; candles in all popular sizes, shapes and scents; potpourri and related scented products; industrial glass and lighting components; and glass floral containers. This segment's products are sold primarily to retail markets such as mass merchandisers and department stores. AUTOMOTIVE-includes production and marketing of rubber, vinyl and carpet-on-rubber car mats for original equipment manufacturers, importers and for the auto aftermarket; truck and trailer splash guards; pickup truck bed mats and liners; aluminum running boards for pickup trucks and vans; and a broad line of auto accessories. Operating income represents net sales less operating expenses related to the business segments. Expenses of a general corporate nature have not been allocated to the business segments. All intercompany transactions have been eliminated, and intersegment revenues are not significant. Identifiable assets for each segment include those assets used in its operations and intangible assets allocated to purchased businesses. Corporate assets consist principally of cash, cash equivalents and deferred income taxes. The 1999 and 1998 capital expenditures of the segments include property relating to business acquisitions as follows:
Segments 1999 1998 - ------------------------------------------ Automotive $990,000 Specialty Foods $3,690,000 ==========================================
7 BUSINESS SEGMENTS Lancaster Colony Corporation and Subsidiaries For the Years Ended June 30, 1999, 1998 and 1997 The following sets forth certain financial information attributable to the Company's business segments for the three years ended June 30, 1999, 1998 and 1997:
(Dollars In Thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- NET SALES Specialty Foods $ 441,470 $ 411,373 $351,012 Glassware and Candles 363,617 363,835 336,200 Automotive 240,615 233,544 235,601 - -------------------------------------------------------------------------------- Total $1,045,702 $1,008,752 $922,813 ================================================================================ OPERATING INCOME Specialty Foods $ 68,550 $ 62,141 $ 47,393 Glassware and Candles 79,235 80,350 81,859 Automotive 12,861 18,700 20,819 Corporate expenses (4,958) (5,320) (5,712) - -------------------------------------------------------------------------------- Total $ 155,688 $ 155,871 $144,359 ================================================================================ IDENTIFIABLE ASSETS Specialty Foods $ 133,100 $ 121,659 $ 95,130 Glassware and Candles 260,359 264,569 235,154 Automotive 122,373 108,238 110,525 Corporate 34,182 34,901 43,585 - -------------------------------------------------------------------------------- Total $ 550,014 $ 529,367 $484,394 ================================================================================ CAPITAL EXPENDITURES Specialty Foods $ 13,721 $ 9,347 $ 4,625 Glassware and Candles 10,998 29,847 21,986 Automotive 9,804 9,372 10,817 Corporate 271 59 100 - -------------------------------------------------------------------------------- Total $ 34,794 $ 48,625 $ 37,528 ================================================================================ DEPRECIATION AND AMORTIZATION Specialty Foods $ 7,601 $ 7,425 $ 5,546 Glassware and Candles 18,601 16,367 12,520 Automotive 9,242 8,684 8,814 Corporate 125 95 101 - -------------------------------------------------------------------------------- Total $ 35,569 $ 32,571 $ 26,981 ================================================================================
Substantially all net sales and all long-lived assets are domestic. Combined net sales from each of the three segments to one customer totaled approximately $108,913,000 or 10% of consolidated fiscal 1999 net sales. 8 CONSOLIDATED STATEMENTS OF INCOME Lancaster Colony Corporation and Subsidiaries For the Years Ended June 30, 1999, 1998 and 1997
Years Ended June 30 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- NET SALES $1,045,702,000 $1,008,752,000 $922,813,000 COST OF SALES 723,786,000 684,355,000 632,051,000 - ------------------------------------------------------------------------------------------------------- GROSS MARGIN 321,916,000 324,397,000 290,762,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 166,228,000 168,526,000 146,403,000 - ------------------------------------------------------------------------------------------------------- OPERATING INCOME 155,688,000 155,871,000 144,359,000 OTHER INCOME (EXPENSE): Interest expense (2,718,000) (2,626,000) (2,596,000) Interest income and other--net 492,000 2,128,000 696,000 - ------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 153,462,000 155,373,000 142,459,000 TAXES BASED ON INCOME 58,333,000 59,243,000 53,753,000 - ------------------------------------------------------------------------------------------------------- NET INCOME $ 95,129,000 $ 96,130,000 $ 88,706,000 ======================================================================================================= NET INCOME PER COMMON SHARE: BASIC $ 2.28 $ 2.22 $ 2.01 DILUTED $ 2.28 $ 2.22 $ 2.01 ======================================================================================================= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 41,759,000 43,271,000 44,060,000 DILUTED 41,799,000 43,364,000 44,108,000 =======================================================================================================
See Notes to Consolidated Financial Statements 9 CONSOLIDATED BALANCE SHEETS Lancaster Colony Corporation and Subsidiaries as of June 30, 1999 and 1998
June 30 ASSETS 1999 1998 - ------------------------------------------------------------------------------------------ CURRENT ASSETS: Cash and equivalents $ 18,860,000 $ 23,224,000 Receivables (less allowance for doubtful accounts, 1999--$3,300,000; 1998--$2,774,000) 123,268,000 99,870,000 Inventories: Raw materials and supplies 41,741,000 44,915,000 Finished goods and work in process 127,680,000 130,282,000 - ------------------------------------------------------------------------------------------ Total inventories 169,421,000 175,197,000 Prepaid expenses and other current assets 16,830,000 13,257,000 - ------------------------------------------------------------------------------------------ Total current assets 328,379,000 311,548,000 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements 112,351,000 103,252,000 Machinery and equipment 281,710,000 270,781,000 - ------------------------------------------------------------------------------------------ Total cost 394,061,000 374,033,000 Less accumulated depreciation 218,444,000 203,267,000 - ------------------------------------------------------------------------------------------ Property, plant and equipment--net 175,617,000 170,766,000 OTHER ASSETS: Goodwill (net of accumulated amortization, 1999--$8,884,000; 1998--$6,872,000) 35,768,000 37,045,000 Other Assets 10,250,000 10,008,000 - ------------------------------------------------------------------------------------------ TOTAL $550,014,000 $529,367,000 ========================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ 25,520,000 $ 510,000 Accounts payable 45,742,000 41,804,000 Accrued liabilities 44,955,000 34,203,000 - ------------------------------------------------------------------------------------------ Total current liabilities 116,217,000 76,517,000 LONG-TERM DEBT--Less current portion 3,575,000 29,095,000 OTHER NONCURRENT LIABILITIES 7,081,000 7,325,000 DEFERRED INCOME TAXES 8,286,000 5,867,000 SHAREHOLDERS' EQUITY: Preferred stock--authorized 3,050,000 shares; Outstanding--none Common stock--authorized 75,000,000 shares; Shares outstanding, 1999--40,547,796; 1998--42,753,488 50,912,000 50,392,000 Retained earnings 548,143,000 477,587,000 Accumulated other comprehensive income 106,000 98,000 - ------------------------------------------------------------------------------------------ Total 599,161,000 528,077,000 Less common stock in treasury, at cost 184,306,000 117,514,000 - ------------------------------------------------------------------------------------------ Total shareholders' equity 414,855,000 410,563,000 - ------------------------------------------------------------------------------------------ TOTAL $550,014,000 $529,367,000 ==========================================================================================
See Notes to Consolidated Financial Statements 10 CONSOLIDATED STATEMENTS OF CASH FLOWS Lancaster Colony Corporation and Subsidiaries For the Years Ended June 30, 1999, 1998 and 1997
Years Ended June 30 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 95,129,000 $ 96,130,000 $ 88,706,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35,569,000 32,571,000 26,981,000 Provision for losses on accounts receivable 1,789,000 1,691,000 1,813,000 Deferred income taxes and other noncash charges (1,225,000) 887,000 (669,000) (Gain) loss on sale of property (229,000) (1,965,000) 530,000 Changes in operating assets and liabilities: Receivables (25,252,000) 2,661,000 1,133,000 Inventories 6,426,000 (12,635,000) (9,656,000) Prepaid expenses and other current assets (173,000) 81,000 208,000 Accounts payable and accrued liabilities 14,450,000 624,000 4,415,000 - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 126,484,000 120,045,000 113,461,000 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments on property additions (33,804,000) (44,935,000) (37,528,000) Acquisitions net of cash acquired (2,075,000) (19,749,000) Proceeds from sale of property 647,000 3,634,000 52,000 Other--net (4,269,000) (9,165,000) (3,629,000) - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (39,501,000) (70,215,000) (41,105,000) - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (24,573,000) (23,326,000) (21,114,000) Purchase of treasury stock (66,792,000) (37,083,000) (29,554,000) Payments on long-term debt, including acquisition debt payoff (510,000) (5,148,000) (610,000) Reduction of ESOP debt 1,279,000 Common stock issued, including stock issued upon exercise of stock options and related tax benefit 520,000 6,819,000 5,082,000 - -------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (91,355,000) (58,738,000) (44,917,000) - -------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 8,000 23,000 - -------------------------------------------------------------------------------------------------------------- Net change in cash and equivalents (4,364,000) (8,885,000) 27,439,000 Cash and equivalents at beginning of year 23,224,000 32,109,000 4,670,000 - -------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $ 18,860,000 $ 23,224,000 $ 32,109,000 ==============================================================================================================
See Notes to Consolidated Financial Statements 11 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Lancaster Colony Corporation and Subsidiaries For the Years Ended June 30, 1999, 1998 and 1997
Accumulated Other Amount Outstanding Common Retained Comprehensive Treasury due from Shares Stock Earnings Income Stock ESOP - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1996 29,563,401 $38,491,000 $337,153,000 $ 75,000 $ 50,877,000 $ 1,279,000 - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended June 30, 1997: Net income 88,706,000 Cash dividends-- common stock ($.48 per share) (21,114,000) Purchase of treasury shares (691,882) 29,554,000 Shares issued upon exercise of stock options including related tax benefits 145,317 5,082,000 Tax benefit of cash dividends paid on ESOP unallocated shares 38,000 Reduction of ESOP debt (1,279,000) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1997 29,016,836 43,573,000 404,783,000 75,000 80,431,000 - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended June 30, 1998: Net income 96,130,000 Cash dividends--common stock ($.54 per share) (23,326,000) Purchase of treasury shares (987,150) 37,083,000 Shares issued upon exercise of stock options including related tax benefits 215,659 6,819,000 Shares issued in connection with three-for-two stock split 14,508,143 Translation adjustment 23,000 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1998 42,753,488 50,392,000 477,587,000 98,000 117,514,000 - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended June 30, 1999: Net income 95,129,000 Cash dividends-- common stock ($.59 per share) (24,573,000) Purchase of treasury shares (2,226,800) 66,792,000 Shares issued upon exercise of stock options including related tax benefits 21,108 520,000 Translation adjustment 8,000 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1999 40,547,796 $50,912,000 $548,143,000 $106,000 $184,306,000 ====================================================================================================================================
See Notes to Consolidated Financial Statements 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lancaster Colony Corporation and Subsidiaries 1. SUMMARY OF Principles of Consolidation SIGNIFICANT ACCOUNTING The accompanying consolidated financial statements POLICIES include the accounts of Lancaster Colony Corporation and its wholly-owned subsidiaries, collectively referred to as the "Company." All significant intercompany transactions have been eliminated. Use of Estimates The preparation of the consolidated financial statements of the Company in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as their related disclosures. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain prior year amounts have been reclassed to conform to the current year presentation. Cash Equivalents The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Property, Plant and Equipment The Company uses the straight-line method of computing depreciation for financial reporting purposes based on the estimated useful lives of the corresponding assets. Estimated useful lives for buildings and improvements range from ten to forty years while machinery and equipment range from three to ten years. For tax purposes, the Company generally computes depreciation using accelerated methods. Goodwill For financial reporting purposes goodwill is being amortized on a straight-line basis over ten to forty years, with the exception of $2,243,000 which relates to a company acquired prior to November 1, 1970. Such amount is not being amortized as, in the opinion of management, there has been no diminution in value. Management periodically evaluates the future economic benefit of its recorded goodwill and other long-term assets when events or circumstances indicate potential recoverability concerns. This evaluation is based on consideration of expected future undiscounted cash flows and other operating factors. Carrying amounts are adjusted appropriately when determined to have been impaired. Revenue Recognition Net sales and related cost of sales are recognized upon shipment of products. Net sales are recorded net of estimated sales discounts and returns. Per Share Information Net income per common share is computed based on the weighted average number of shares of common stock and common stock equivalents (stock options) outstanding during each period. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the diluted weighted average number of common shares outstanding during the period, which includes the dilutive potential common shares associated with outstanding stock options. There are no adjustments to net income necessary in the calculation of basic and diluted earnings per share. On January 27, 1998, a three-for-two stock split was effected whereby one additional common share was issued for each two shares outstanding to shareholders of record on January 6, 1998. Accordingly, per share data and weighted average common shares outstanding for all periods presented in the accompanying consolidated financial statements have been retroactively adjusted for this split. Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and trade accounts receivable. The Company places its cash 13 equivalents with high-quality institutions and, by policy, limits the amount of credit exposure to any one institution. Concentration of credit risk with respect to trade accounts receivable is limited by the Company having a large and diverse customer base. Business Segments The business segments information for 1999, 1998 and 1997 included on pages 14 and 15 of this Annual Report is an integral part of these financial statements. Comprehensive Income The only component of other comprehensive income for the Company is foreign currency translation adjustments for which there is no related income tax effect. The difference from net income is immaterial in relation to the Company's financial statements for the fiscal years ended June 30, 1999, 1998 and 1997. Derivative Instruments, Computer Software Costs and Start-up Costs In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which revised the accounting for derivative financial instruments. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities-- Deferral of the Effective Date of FASB Statement No. 133," which deferred the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000 (i.e., the first quarter of the Company's fiscal 2001). Management has not yet completed its analysis of this Statement as to its impact on the Company's financial statements and disclosures. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which revises the accounting for software development costs. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires costs of start-up activities to be expensed as incurred. These SOPs will be effective for the Company the first quarter of fiscal 2000. Management does not expect the adoption of these SOPs to have a significant impact on the Company's financial statements. 2. ACQUISITIONS During October 1998, the Company acquired certain assets of Southeast Mat Company, an automobile floor mat manufacturer, for cash of approximately $2,075,000. During July 1997, the Company acquired all of the common stock of Chatham Village Foods, Inc., an upscale salad crouton business, for cash of approximately $19,749,000. This amount was financed through the use of internally generated funds. The related liabilities assumed totaled approximately $5,747,000. These acquisitions were accounted for under the purchase method of accounting and the non-cash aspects have been excluded from the accompanying Consolidated Statements of Cash Flows. The results of operations of these entities have been included in the consolidated financial statements from the dates of acquisition and are immaterial in relation to the consolidated totals. 3. INVENTORIES Inventories are valued at the lower of cost or market. Inventories which comprise approximately 22% of total inventories at June 30, 1999 and 1998, are costed on a last-in, first-out (LIFO) basis. Inventories which are costed by various other methods approximate actual cost on a first-in, first-out (FIFO) basis. If the FIFO method (which approximates current cost) of inventory accounting had been used for inventories costed on a LIFO basis, these inventories would have been $16,744,000 and $14,531,000 higher than reported at June 30, 1999 and 1998, respectively. It is not practicable to segregate work in process from finished goods inventories. Management estimates, however, that work in process inventories amount to less than 10% of the combined total of finished goods and work in process inventories at June 30, 1999 and 1998. 4. SHORT-TERM BORROWINGS As of June 30, 1999, 1998 and 1997, the Company had unused lines of credit for short-term borrowings from various banks of $95,000,000, $85,000,000 and $174,000,000, respectively. The lines of credit are granted at the discretion of the lending banks and are generally subject to periodic review. As of June 30, 1999 and 1998, the Company had no short-term borrowings under its line of credit arrangements. 14 5. ACCRUED LIABILITIES Accrued liabilities at June 30, 1999 and 1998 are composed of:
(Dollars In Thousands) 1999 1998 -------------------------------------------------------------------- Income and other taxes $ 4,131 $(4,603) Accrued compensation and employee benefits 29,911 27,088 Accrued marketing and distribution 5,808 4,959 Other 5,105 6,759 -------------------------------------------------------------------- Total accrued liabilities $44,955 $34,203 ====================================================================
6. LONG-TERM DEBT Long-term debt (including current portion) at June 30, 1999 and 1998 consists of:
(Dollars In Thousands) 1999 1998 -------------------------------------------------------------------------- Notes payable (8.9%, due in February 2000) $25,000 $25,000 Obligations with various industrial development authorities-collateralized by real estate and equipment-floating rate due in installments to 2005 4,095 4,605 -------------------------------------------------------------------------- Total 29,095 29,605 Less current portion 25,520 510 -------------------------------------------------------------------------- Long-term debt $ 3,575 $29,095 ==========================================================================
No material debt was assumed for the purchase of property additions in 1999, 1998 and 1997. Cash payments for interest were $2,722,000, $2,646,000 and $2,603,000 for 1999, 1998 and 1997, respectively. Various debt agreements require the maintenance of certain financial statement amounts and ratios, including a requirement to maintain a specified minimum net worth, as defined. At June 30, 1999, the Company exceeded this net worth requirement by approximately $45,623,000.
Long-term debt matures as follows: (Dollars In Thousands) ------------------------------------------------------------- Year ending June 30: 2000 $25,520 2001 535 2002 545 2003 555 2004 565 After 2004 1,375 ------------------------------------------------------------- Total $29,095 =============================================================
Based on the borrowing rates currently available for long-term debt with similar terms and average maturities, the estimated fair value of total long-term debt is approximately $29,525,000 and $30,497,000 at June 30, 1999 and 1998, respectively. 7. INCOME TAXES The Company and its domestic subsidiaries file a consolidated Federal income tax return. Taxes based on income for the years ended June 30, 1999, 1998 and 1997, have been provided as follows:
(Dollars In Thousands) 1999 1998 1997 ----------------------------------------------------------------- Currently payable: Federal $53,245 $49,798 $49,063 State and local 6,420 7,612 5,579 ----------------------------------------------------------------- Total current provision 59,665 57,410 54,642 Deferred Federal, state and local provision (credit) (1,332) 1,833 (889) ----------------------------------------------------------------- Total taxes based on income $58,333 $59,243 $53,753 =================================================================
15 Tax expense resulting from allocating certain tax benefits directly to common stock and retained earnings totaled $22,000, $647,000 and $323,000 for 1999, 1998 and 1997, respectively. The Company's effective tax rate varies from the statutory Federal income tax rate as a result of the following factors:
1999 1998 1997 --------------------------------------------------------- Statutory rate 35.0% 35.0% 35.0% State and local income taxes 2.9 3.1 2.5 Other 0.1 0.2 --------------------------------------------------------- Effective rate 38.0% 38.1% 37.7% =========================================================
Deferred income taxes recorded in the consolidated balance sheets at June 30, 1999 and 1998 consist of the following:
(Dollars In Thousands) 1999 1998 ----------------------------------------------------------------------------- Deferred tax assets (liabilities): Inventories $ 7,013 $ 5,729 Employee medical and other benefits 5,033 5,079 Receivable and other valuation allowances 3,976 2,421 Other accrued liabilities 3,631 3,031 ----------------------------------------------------------------------------- Total deferred tax assets 19,653 16,260 ----------------------------------------------------------------------------- Total deferred tax liabilities - property and other (13,538) (11,477) ----------------------------------------------------------------------------- Net deferred tax asset $ 6,115 $ 4,783 =============================================================================
Cash payments for income taxes were $51,119,000, $63,633,000 and $54,225,000 for 1999, 1998 and 1997, respectively. 8. SHAREHOLDERS' EQUITY The Company is authorized to issue 3,050,000 shares of preferred stock consisting of 750,000 shares of Class A Participating Preferred Stock with $1.00 par value, 1,150,000 shares of Class B Voting Preferred Stock without par value and 1,150,000 shares of Class C Nonvoting Preferred Stock without par value. In April 1990, the Company's Board of Directors adopted a Rights Agreement which provides for one preferred share purchase right to be associated with each share of the Company's outstanding common stock. Shareholders exercising these rights would become entitled to purchase shares of Class A Participating Preferred Stock. The rights may be exercised on or after the time when a person or group of persons without the approval of the Board of Directors acquire beneficial ownership of 15 percent or more of the Company's common stock or announce the initiation of a tender or exchange offer which if successful would cause such person or group to beneficially own 30 percent or more of the common stock. Such exercise may ultimately entitle the holders of the rights to purchase for $17.50 per right, common stock of the Company having a market value of $35. The person or groups effecting such 15 percent acquisition or undertaking such tender offer will not be entitled to exercise any rights. These rights expire April 2000 unless earlier redeemed by the Company under circumstances permitted by the Rights Agreement. In February 1999, the Company's Board of Directors approved a share repurchase authorization of 2,000,000 shares of which 1,041,500 remained authorized for future purchase as of June 30, 1999. 9. STOCK OPTIONS Under terms of an incentive stock option plan approved by the shareholders in November 1995, the Company has reserved 3,000,000 common shares for issuance to qualified key employees. All options granted under the plan are exercisable at prices not less than fair market value as of the date of grant. At June 30, 1999, 2,449,104 shares were available for future grants under the plan. In general, options granted under the plan vest immediately and have a maximum term of 10 years. Both reserved common shares and shares available for future grants have been restated to reflect the stock split in January 1998. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, in accounting for its stock-based compensation. Under APB Opinion No. 25, because the exercise price of the Company's stock options was at least equal to the market price of the underlying stock on the date of grant, no compensation expense was recognized. 16 The following summarizes for each of the three years in the period ended June 30, 1999 the activity relating to stock options granted under the 1995 plan mentioned above as well as those granted under a separate plan that expired in May 1995, as restated to reflect the stock split in January 1998:
1999 1998 1997 ------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price ------------------------------------------------------------------------------------------------------- Outstanding at beginning of period 277,986 $27.78 497,095 $28.18 335,121 $21.16 Exercised (21,108) 23.62 (215,659) 28.62 (217,976) 21.95 Granted 293,350 27.15 383,100 30.78 Forfeited (120,079) 30.85 (3,450) 30.75 (3,150) 27.71 ------------------------------------------------------------------------------------------------------- Outstanding at end of the period 430,149 $26.75 277,986 $27.78 497,095 $28.18 ======================================================================================================= Exercisable at end of period 318,449 $27.32 186,692 $29.73 354,179 $30.01 =======================================================================================================
The weighted average fair value of options granted during fiscal years 1999 and 1997 were $5.27 and $5.00 per share, respectively. The following table summarizes information about the options outstanding at June 30, 1999:
Options Outstanding Options Exercisable -------------------------------------------------------- ----------------------------- Weighted Average Range of Number Remaining Exercise Number Weighted Average Exercise Prices Outstanding Contractual Life Price Exercisable Exercise Price -------------------------------------------------------- ----------------------------- $30.75 82,500 2.59 $30.75 63,946 $30.75 $27.13 - $29.84 282,043 2.58 $27.15 236,915 $27.15 $17.06 - $22.25 65,606 4.18 $19.81 17,588 $17.06 ======================================================== =============================
The fair value of the options presented above was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for options granted in 1999 and 1997, respectively: risk free interest rate of 5.77% and 6.04%; dividend yield of 1.7% and 1.6%; volatility factors of the expected market price of the Company's common stock of 27.39% and 20.60%; and a weighted average expected option life of 2.71 and 2.29 years. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS No.123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
(Dollars In Thousands Except For Years Ended Per Share Figures) June 30, 1999 June 30, 1998 June 30, 1997 ----------------------------------------------------------------------------------- Net income As reported $95,129 $96,130 $88,706 Pro forma $94,555 $96,057 $87,746 Earnings per Share Basic and Diluted As reported $ 2.28 $ 2.22 $ 2.01 Pro forma $ 2.26 $ 2.22 $ 1.99 ===================================================================================
10. PENSION AND OTHER The Company and certain of its operating subsidiaries POSTRETIREMENT BENEFITS provide multiple defined benefit pension and postretirement medical and life insurance benefit plans. Benefits under the defined benefit pension plans are primarily based on negotiated rates and years of service and cover the union workers at such locations. The Company contributes to these pension plans at least the minimum amount required by regulation or contract. The Company recognizes the cost of postretirement medical and life insurance benefits as the employees render service in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." Benefits are funded as incurred. Relevant information with respect to these defined benefit pension and postretirement medical and life insurance benefits as of June 30, can be summarized as follows: 17
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------------------------------------------------------- ----------------------- (Dollars In Thousands) 1999 1998 1999 1998 ----------------------------------------------------------------- ----------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $28,409 $24,361 $2,850 $2,875 Service cost 491 559 109 102 Interest cost 1,851 1,785 192 215 Amendments 808 18 Actuarial loss (gain) (1,526) 3,165 (192) (119) Benefits paid (1,760) (1,479) (202) (223) ----------------------------------------------------------------- ----------------------- Benefit obligation at end of year 28,273 28,409 2,757 2,850 ----------------------------------------------------------------- ----------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 34,794 30,262 Actual return on plan assets 1,738 5,927 Employer contribution 294 84 202 223 Benefits paid (1,760) (1,479) (202) (223) ----------------------------------------------------------------- ----------------------- Fair value of plan assets at end of year 35,066 34,794 ----------------------------------------------------------------- ----------------------- Funded status 6,793 6,385 (2,757) (2,850) Unrecognized net actuarial (gain) (6,436) (6,430) (643) (463) Unrecognized prior service cost 2,797 2,189 Unrecognized net transition obligation 177 208 ----------------------------------------------------------------- ----------------------- Prepaid (accrued) benefit cost $ 3,331 $ 2,352 ($3,400) ($3,313) ================================================================= ======================= WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30 --------------------------------------------------------------------------------------------- Discount rate 7.25% 6.75% 7.25% 6.75% Expected return on plan assets 9.00% 9.00%
For measurement purposes, annual increases in medical costs are initially assumed to total approximately 7% per year and gradually decline to 5% by approximately the year 2003 and remain level thereafter.
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------------------------------------------------ ----------------------- (Dollars In Thousands) 1999 1998 1997 1999 1998 1997 ------------------------------------------------------------------------ ----------------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $491 $559 $537 $109 $102 $ 99 Interest cost 1,851 1,785 1,681 192 215 227 Expected return on plan assets (3,056) (2,649) (2,268) Amortization of unrecognized net gain (202) (230) (45) (11) (4) Amortization of prior service cost 200 148 147 Amortization of unrecognized net obligation existing at transition 31 31 31 ------------------------------------------------------------------------ ----------------------- Net periodic benefit cost (benefit) ($685) ($356) $ 83 $290 $313 $326 ======================================================================== =======================
The majority of the pension plan assets are invested in bonds, short-term investments and common stock including shares of the Company's common stock with a market value of $4,814,000, $5,284,000 and $4,500,000 as of June 30, 1999, 1998 and 1997, respectively. 18 Assumed health care cost rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect:
1-Percentage- 1-Percentage- (Dollars in Thousands) Point Increase Point Decrease --------------------------------------------------------------------------------------- Effect on total of service and interest cost components $29 ($25) Effect on postretirement benefit obligation as of June 30, 1999 $175 ($152)
The Company and certain of its subsidiaries also participate in multiemployer plans that provide pension and postretirement health and welfare benefits to the union workers at such locations. The Company's contributions required by its participation in the multiemployer plans totaled $2,904,000, $2,723,000 and $2,488,000 in 1999, 1998 and 1997, respectively. During fiscal 1998, the Company adopted the Lancaster Colony Corporation 401(k) Profit Sharing Plan and Trust ("401(k) Plan"). In general, the 401(k) Plan extends participation to all domestic employees, except those covered by a collective bargaining agreement. The Company's contribution is 40% of the participant's contribution up to a maximum of 4% of the participant's annual compensation and is funded annually at the end of the 401(k) Plan year, December 31. The funds are invested in mutual funds with the exception of the Company contribution which is invested in Company stock. The Company's 401(k) Plan contributions totaled approximately $800,000 and $174,000 for the years ended June 30, 1999 and 1998, respectively. The Company also sponsors an Employee Stock Ownership Plan ("ESOP"). Effective January 1, 1998, the ESOP was frozen and all benefit accruals under and further contributions to the ESOP ceased. All participants in the plan at that time were immediately 100% vested. The ESOP was fully paid by the Company and generally provided coverage to all domestic employees, except those covered by a collective bargaining agreement. Previously, in April 1990, the Company loaned $10,000,000 to the ESOP for the purpose of purchasing the Company's common stock in furtherance of the objectives of the Plan. The Company funded this transaction primarily through short-term bank borrowings. With the proceeds and as adjusted for all stock splits since April 1990, the ESOP effectively purchased 1,791,585 shares of the Company's common stock in the open market. Contributions to the ESOP were to be not less than that required by the terms of the loan agreement between the Company and the ESOP. The Company used the shares-allocated method of accounting in determining the amount of expense related to each contribution. The loan to the ESOP was paid in full in fiscal 1997. The pretax expense associated with 1997 totaled $1,169,000 which is net of dividends of $110,000 on the unallocated shares. 11. COMMITMENTS The Company has operating leases with initial noncancelable lease terms in excess of one year, covering the rental of various facilities and equipment, which expire at various dates through fiscal 2005. Certain of these leases contain renewal options, some provide options to purchase during the lease term and some require contingent rentals based on usage. The future minimum rental commitments due under these leases are summarized as follows (in thousands): 2000 - $4,259; 2001 - $2,985; 2002 - $1,970; 2003 - $1,535; 2004 - $1,041; thereafter - $118. Total rent expense, including short-term cancelable leases, during 1999, 1998 and 1997 is summarized as follows:
(Dollars In Thousands) 1999 1998 1997 ---------------------------------------------------------------- Operating leases: Minimum rentals $4,844 $5,477 $4,545 Contingent rentals 328 534 558 Short-term cancelable leases 2,172 2,113 2,808 ---------------------------------------------------------------- Total $7,344 $8,124 $7,911 ================================================================
19 12. CONTINGENCIES AND At June 30, 1999, the Company is a party to various ENVIRONMENTAL MATTERS legal and environmental matters which have arisen in the ordinary course of business. Such matters did not have a material adverse effect on the current year results of operations and, in the opinion of management, their ultimate disposition will not have a material adverse effect on the Company's consolidated financial statements. INDEPENDENT AUDITORS' REPORT To the Directors and Shareholders of Lancaster Colony Corporation We have audited the accompanying consolidated balance sheets of Lancaster Colony Corporation and its subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Lancaster Colony Corporation and its subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /S/ DELOITTE & TOUCHE LLP Columbus, Ohio August 25, 1999 20 SELECTED QUARTERLY FINANCIAL DATA Lancaster Colony Corporation and Subsidiaries For the Years Ended June 30, 1999 and 1998
Diluted (Thousands Except Per Net Gross Net Earnings Stock Prices(1) Dividends Paid Share Figures) Sales Margin Income Per Share(1) High Low Per Share(1) - --------------------------------------------------------------------------------------------------------- 1999 First quarter $ 244,080 $ 73,267 $20,338 $ .48 $40.000 $27.750 $ .140 Second quarter 300,590 92,284 28,213 .67 32.125 24.063 .150 Third quarter 247,227 76,519 21,834 .53 32.000 26.500 .150 Fourth quarter 253,805 79,846 24,744 .61 35.813 24.688 .150 - --------------------------------------------------------------------------------------------------------- Year $1,045,702 $321,916 $95,129 $2.28 $40.000 $24.063 $ .590 ========================================================================================================= 1998 First quarter $ 237,174 $ 75,154 $20,861 $ .48 $36.167 $32.000 $ .127 Second quarter 300,754 95,046 28,967 .67 38.500 31.833 .133 Third quarter 237,628 76,250 22,796 .53 44.750 37.333 .140 Fourth quarter 233,196 77,947 23,506 .55 45.375 36.750 .140 - --------------------------------------------------------------------------------------------------------- Year $1,008,752 $324,397 $96,130 $2.22 $45.375 $31.833 $ .540 =========================================================================================================
(1) Adjusted for the 3-for-2 stock split paid January 1998. Lancaster Colony common stock trades on The Nasdaq Stock Market(R) under the symbol LANC. Stock prices were provided by The Nasdaq Stock Market(R). The number of shareholders as of September 17, 1999 was approximately 8,700. The highest and lowest prices for the Company's common stock from July 1, 1999 to September 17, 1999 were $36.94 and $29.00. EX-21 4 EXHIBIT 21 1 Exhibit 21 LANCASTER COLONY CORPORATION SIGNIFICANT SUBSIDIARIES OF REGISTRANT
State Percent of Name of Incorporation Ownership ---- ---------------- ---------- Colony Printing & Labeling, Inc. Indiana 100% Dee Zee, Inc. Ohio 100% E. O. Brody Company Ohio 100% Fostoria Glass, LLC Ohio 100% Indiana Glass Company Indiana 100% Jackson Plastics Operations, Inc. Ohio 100% LRV Acquisition Corp. Ohio 100% LaGrange Molded Products, Inc. Delaware 100% Lancaster Colony Commercial Products, Inc. Ohio 100% Lancaster Glass Corporation Ohio 100% New York Frozen Foods, Inc. Ohio 100% Pretty Products, Inc. Ohio 100% T. Marzetti Company Ohio 100% The Quality Bakery Company, Inc. Ohio 100% Reames Foods, Inc. Iowa 100% Waycross Molded Products, Inc. Ohio 100%
All subsidiaries conduct their business under the names shown. EX-23 5 EXHIBIT 23 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT - ----------------------------- We consent to the incorporation by reference in Registration Statements No. 33-39102 and 333-01275 of Lancaster Colony Corporation on Form S-8 of our reports dated August 25, 1999, appearing in and incorporated by reference in this Annual Report on Form 10-K of Lancaster Colony Corporation for the year ended June 30, 1999. /S/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Columbus, Ohio September 23, 1999 EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1999 JUN-30-1999 18,860 0 126,568 3,300 169,421 328,379 394,061 218,444 550,014 116,217 3,575 0 0 50,912 363,943 550,014 1,045,702 1,045,702 723,786 723,786 0 0 2,718 153,462 58,333 95,129 0 0 0 95,129 2.28 2.28
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