-----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, UTTwppJQXqdvFgFFYSQrqAbsXh3zy/8KR1hOjpE3P0zHt5m5PSDScXqxOWV48q14 QAzomtIglTkg/NLibrLanw== 0000950144-99-010819.txt : 19990901 0000950144-99-010819.hdr.sgml : 19990901 ACCESSION NUMBER: 0000950144-99-010819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990717 FILED AS OF DATE: 19990831 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOWERS INDUSTRIES INC /GA CENTRAL INDEX KEY: 0000826227 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 580244940 STATE OF INCORPORATION: GA FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09787 FILM NUMBER: 99703830 BUSINESS ADDRESS: STREET 1: 1919 FLOWERS CIRCLE STREET 2: P O BOX 133I CITY: THOMASVILLE STATE: GA ZIP: 31757 BUSINESS PHONE: 9122269110 MAIL ADDRESS: STREET 1: PO BOX 1338 200 US HIGHWAY 19 S CITY: THOMASVILLE STATE: GA ZIP: 31792 FORMER COMPANY: FORMER CONFORMED NAME: FLOWERS INDUSTRIES OF GEORGIA INC DATE OF NAME CHANGE: 19871220 10-Q 1 FLOWERS INDUSTRIES, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JULY 17, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 1-9787 FLOWERS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-0244940 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA 31757 (Address of principal executive offices) (Zip Code)
912/226-9110 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) 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 [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
TITLE OF EACH CLASS OUTSTANDING AT AUGUST 27, 1999 - ------------------- ------------------------------ Common Stock, $.625 Par Value 100,241,649
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FLOWERS INDUSTRIES, INC. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements........................................ 1 Consolidated Balance Sheet at July 17, 1999 and January 2, 1999...................................................... 1 Consolidated Statement of Income for the Twelve and Twenty-Eight Weeks Ended July 17, 1999 and July 18, 1998...................................................... 2 Consolidated Statement of Cash Flows for the Twenty-Eight Weeks Ended July 17, 1999 and July 18, 1998............... 3 Notes to Consolidated Financial Statements.................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 16 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders......... 17 Item 5. Other Information........................................... 18 Item 6. Exhibits and Reports on Form 8-K............................ 18
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
JULY 17, JANUARY 2, 1999 1999 ------------- --------------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents................................. $ 37,225 $ 56,965 Accounts and notes receivable, net........................ 179,362 268,084 Inventories, net.......................................... 274,634 297,593 Deferred income taxes..................................... 74,958 76,327 Other..................................................... 115,961 84,276 ---------- ---------- 682,140 783,245 ---------- ---------- Property, Plant and Equipment: Land...................................................... 48,514 49,874 Buildings................................................. 329,715 339,342 Machinery and equipment................................... 790,348 816,495 Furniture, fixtures and transportation equipment.......... 124,240 116,219 Construction in progress.................................. 219,513 96,288 ---------- ---------- 1,512,330 1,418,218 Less: accumulated depreciation............................ (471,213) (430,516) ---------- ---------- 1,041,117 987,702 ---------- ---------- Other Assets................................................ 91,234 86,510 ---------- ---------- Cost in Excess of Net Tangible Assets, net.................. 989,181 1,003,443 ---------- ---------- $2,803,672 $2,860,900 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Commercial paper.......................................... $ 98,067 $ 74,870 Current maturities of long-term debt...................... 47,006 120,479 Accounts payable.......................................... 204,043 227,749 Facility closing costs and severance...................... 39,444 23,670 Other accrued liabilities................................. 327,338 314,270 ---------- ---------- 715,898 761,038 ---------- ---------- Long-Term Debt.............................................. 1,057,422 1,038,998 ---------- ---------- Other Liabilities: Deferred income taxes..................................... 174,522 182,244 Postretirement/postemployment obligations................. 64,064 63,754 Facility closing costs and severance...................... 40,503 41,331 Other..................................................... 58,780 52,915 ---------- ---------- 337,869 340,244 ---------- ---------- Minority Interest........................................... 149,306 147,659 ---------- ---------- Stockholders' Equity: Common stock par value $.625, authorized 350,000,000 shares, issued 100,860,838 and 100,202,414 shares, respectively............................................ 63,038 62,627 Capital in excess of par value............................ 286,277 274,255 Retained earnings......................................... 234,392 262,531 Common stock in treasury, 618,340 and 381,366 shares, respectively............................................ (11,837) (6,762) Stock compensation related adjustments.................... (28,693) (19,690) ---------- ---------- 543,177 572,961 ---------- ---------- $2,803,672 $2,860,900 ========== ==========
(See Accompanying Notes to Consolidated Financial Statements) 1 4 FLOWERS INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FOR THE 12 WEEKS ENDED FOR THE 28 WEEKS ENDED ---------------------- ----------------------- JULY 17, JULY 18, JULY 17, JULY 18, 1999 1998 1999 1998 --------- --------- ---------- ---------- Sales............................................ $942,963 $836,424 $2,247,476 $1,913,458 Materials, supplies, labor and other production costs.......................................... 443,928 375,052 1,051,872 861,342 Selling, marketing and administrative expenses... 434,505 371,600 995,799 872,171 Depreciation and amortization.................... 32,808 29,538 73,259 63,734 Non-recurring charge............................. 69,208 -- 69,208 -- -------- -------- ---------- ---------- Income (loss) from operations.................... (37,486) 60,234 57,338 116,211 Interest expense, net............................ 18,102 13,348 44,055 32,493 -------- -------- ---------- ---------- Income (loss) before income taxes, minority interest and cumulative effect of a change in accounting principle........................... (55,588) 46,886 13,283 83,718 Income tax expense (benefit)..................... (18,271) 19,675 11,113 35,161 -------- -------- ---------- ---------- Income (loss) before minority interest and cumulative effect of a change in accounting principle...................................... (37,317) 27,211 2,170 48,557 Minority interest................................ 9,582 (8,744) (5,070) (15,062) -------- -------- ---------- ---------- Income (loss) before cumulative effect of a change in accounting principle................. (27,735) 18,467 (2,900) 33,495 Cumulative effect of a change in accounting principle, net of tax benefit.................. -- -- -- (3,131) -------- -------- ---------- ---------- Net income (loss)................................ $(27,735) $ 18,467 $ (2,900) $ 30,364 ======== ======== ========== ========== Net Income (Loss) Per Common Share: Basic: Income (loss) before cumulative effect of a change in accounting principle.............. $ (0.28) $ 0.19 $ (0.03) $ 0.36 Cumulative effect of a change in accounting principle, net of tax benefit............... -- -- -- (0.04) -------- -------- ---------- ---------- Net income (loss) per share.................... $ (0.28) $ 0.19 $ (0.03) $ 0.32 ======== ======== ========== ========== Weighted average shares outstanding............ 100,039 97,548 99,976 93,835 ======== ======== ========== ========== Diluted: Income (loss) before cumulative effect of a change in accounting principle.............. $ (0.28) $ 0.19 $ (0.03) $ 0.36 Cumulative effect of a change in accounting principle, net of tax benefit............... -- -- -- (0.04) -------- -------- ---------- ---------- Net income (loss) per share.................... $ (0.28) $ 0.19 $ (0.03) $ 0.32 ======== ======== ========== ========== Weighted average shares outstanding............ 100,376 98,002 100,339 94,296 ======== ======== ========== ========== Cash Dividends Paid Per Common Share............. $ 0.1275 $ 0.1175 $ 0.2525 $ 0.2325 ======== ======== ========== ==========
(See Accompanying Notes to Consolidated Financial Statements) 2 5 FLOWERS INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
FOR THE 28 WEEKS ENDED ---------------------- JULY 17, JULY 18, 1999 1998 --------- --------- Cash flows provided by operating activities: Net income (loss)......................................... $ (2,900) $ 30,364 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Minority interest....................................... 5,070 15,062 Depreciation and amortization........................... 73,259 63,734 Non-recurring charge.................................... 46,071 -- Deferred income taxes................................... (6,567) (5,555) Cumulative effect of a change in accounting principle... -- 3,131 Other................................................... 6,908 87 Changes in assets and liabilities, net of acquisitions: Accounts and notes receivable, net...................... (16,351) (21,487) Inventories, net........................................ 23,102 (55,739) Other assets............................................ (32,405) 533 Accounts payable and other accrued liabilities.......... (3,814) 11,162 Income taxes payable.................................... -- 5,801 Facility closing costs and severance.................... 13,086 (488) --------- --------- Net cash provided by operating activities................... 105,459 46,605 --------- --------- Cash flows disbursed for investing activities: Purchase of property, plant and equipment................. (140,831) (50,277) Acquisition of majority interest in Keebler............... -- (285,203) Acquisition of other businesses........................... (11,852) (29,439) Other..................................................... 2,276 (155) --------- --------- Net cash disbursed for investing activities................. (150,407) (365,074) --------- --------- Cash flows from financing activities: Common stock offering proceeds, net of underwriters' discount and offering costs............................. -- 187,930 Dividends paid............................................ (25,239) (21,895) Treasury stock purchases.................................. (16,952) (3,987) Stock compensation and warrants exercised................. 4,163 20,305 Proceeds from receivables securitization.................. 106,000 -- Debentures proceeds....................................... -- 199,417 Debentures issuance costs................................. -- (1,750) Increase in commercial paper.............................. 23,197 21,249 Net debt repayments....................................... (65,961) (7,764) --------- --------- Net cash provided by financing activities................... 25,208 393,505 --------- --------- Net increase (decrease) in cash and cash equivalents........ (19,740) 75,036 Cash and cash equivalents at beginning of period............ 56,965 3,866 --------- --------- Cash and cash equivalents at end of period.................. $ 37,225 $ 78,902 ========= ========= Schedule of noncash investing and financing activities: Stock compensation transactions........................... $ 12,204 $ 9,049 ========= ========= Stock issued for acquisition.............................. $ -- $ 40,000 ========= ========= Note payable issued for purchase of equipment............. $ 5,347 $ -- ========= =========
(See Accompanying Notes to Consolidated Financial Statements) 3 6 FLOWERS INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Definitions. As used in this filing, unless the context otherwise indicates, (i) "FII" means Flowers Industries, Inc., the publicly traded holding company, which owns all of the outstanding common stock of Flowers Bakeries, Inc. ("Flowers Bakeries") and Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a majority of the outstanding common stock of Keebler Foods Company; (ii) "Keebler" means Keebler Foods Company and its consolidated subsidiaries; (iii) "Flowers" means FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs. Smith's Bakeries, and their respective subsidiaries, excluding Keebler, and (iv) the "Company" means Flowers and its consolidated, majority-owned subsidiary, Keebler, collectively. Interim Financial Statements. The accompanying unaudited consolidated financial statements of the Company have been prepared by the Company's management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The unaudited consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of July 17, 1999 and January 2, 1999, the results of operations for the twelve and twenty-eight week periods ended July 17, 1999 and July 18, 1998 and statement of cash flows for the twenty-eight weeks ended July 17, 1999 and July 18, 1998. The results of operations for the twelve and twenty-eight week periods ended July 17, 1999 and July 18, 1998, are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Reporting Periods. The Company's quarterly reporting periods for fiscal 1999 are as follows: first quarter ended April 24, 1999 (sixteen weeks), second quarter ended July 17, 1999 (twelve weeks), third quarter ending October 9, 1999 (twelve weeks) and fourth quarter ending January 1, 2000 (twelve weeks). Reclassifications. Certain reclassifications of prior period information have been made to conform with the current period presentation. 2. INVENTORIES
JULY 17, JANUARY 2, 1999 1999 --------- ----------- (AMOUNTS IN THOUSANDS) Inventories, net: Raw materials............................................. $ 64,589 $ 54,739 Packaging materials....................................... 28,847 27,056 Finished goods............................................ 177,231 207,620 Other..................................................... 3,967 8,178 -------- -------- $274,634 $297,593 ======== ========
4 7 FLOWERS INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. NET INCOME PER COMMON SHARE Basic net income per share is computed by dividing net income by weighted average common shares outstanding for the period. Diluted net income per share is computed by dividing net income by weighted average common and common equivalent shares outstanding for the period. Common stock equivalents consist of the incremental shares associated with the Company's stock option plans, as determined under the treasury stock method. The following table reconciles the numerator and denominator used in the computation of basic and diluted net income (loss) per share (amounts in thousands):
FOR THE 12 WEEKS FOR THE 28 WEEKS ENDED ENDED ------------------- ------------------- JULY 17, JULY 18, JULY 17, JULY 18, 1999 1998 1999 1998 -------- -------- -------- -------- Numerator: Income (loss) before cumulative effect of a change in accounting principle........... $(27,735) $18,467 $(2,900) $33,495 Cumulative effect of a change in accounting principal, net of tax benefit............ -- -- -- (3,131) -------- ------- ------- ------- Net income (loss)........................... $(27,735) $18,467 $(2,900) $30,364 ======== ======= ======= ======= Denominator: Basic weighted average shares............... 100,039 97,548 99,976 93,835 Effect of dilutive securities: Stock options............................ 337 454 363 461 -------- ------- ------- ------- Diluted weighted average shares............. 100,376 98,002 100,339 94,296 ======== ======= ======= =======
4. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into forward purchase commitments and derivative financial instruments in order to manage its exposure to commodity price and interest rate risk, and does not use them for trading purposes. As of July 17, 1999, the Company had entered into various arrangements that allow the Company to engage in commodity price and interest rate agreements based on fixed and floating commodity prices and interest rates, respectively. The Company's primary raw materials are flour, sugar, shortening, fruits and dairy products. Amounts payable or receivable under the commodity agreements which qualify as hedges are recognized as deferred gains or losses when the positions are closed, and are charged or credited to cost of sales as the related raw materials are used in production. For the twelve weeks ended July 17, 1999 and July 18, 1998, losses of $3.4 million and $3.6 million were recorded, respectively. For the twenty-eight weeks ended July 17, 1999 and July 18, 1998, losses of $6.6 million and $4.6 million were recorded, respectively. The losses were substantially offset by opposite movements in the cost of the underlying hedged item. Gains and losses on agreements which do not qualify as hedges are marked to market and recognized immediately as other income or expense, which is included in sales; as these agreements are closed, any gains or losses are also recognized as other income or expense. For the twelve weeks ended July 17, 1999 and July 18, 1998, losses of $.6 million and $0 million were recorded, respectively. Losses of $1.5 million and $.6 million were recorded for the twenty-eight weeks ended July 17, 1999 and July 18, 1998, respectively. At July 17, 1999, the Company had approximately $110.2 million of commitments outstanding related to commodity derivative financial instruments. Keebler uses interest rate swap agreements to effectively convert certain fixed rate debt to a floating rate instrument and certain floating rate debt to a fixed instrument. Amounts payable or receivable under the agreements, calculated as the difference between the fixed and floating rates multiplied by the notional 5 8 FLOWERS INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amount, is recorded as an adjustment to interest expense, in accordance with hedge accounting. At July 17, 1999, the notional amount of interest rate swap agreements outstanding was $521.5 million. 5. NON-RECURRING CHARGE As part of the continuing process of integrating President International, Inc. ("President") into Keebler's operations, on May 14, 1999, Keebler announced the decision to close its Sayreville, New Jersey, production facility due to excess capacity within its 18-plant production network. As a result, a pre-tax non-recurring charge of $69.2 million was recorded in the second quarter ended July 17, 1999. The non-recurring charge included approximately $23.1 million of severance and other exit costs related to the Sayreville facility. The remaining $46.1 million was noncash asset impairment charges related to writing down the Sayreville property, plant and equipment, as well as equipment at other locations, to net realizable value, less cost to sell, and a reduction of goodwill acquired in the acquisition of Sunshine Biscuits, Inc. in June 1996. Approximately 650 employees will be terminated as a result of the Sayreville closure, of which approximately 600 employees are represented by unions. As of July 17, 1999, approximately 460 employees under union contract had been terminated and approximately $3.2 million had been spent related to severance and other exit costs from the Sayreville facility closing. The exit activities are expected to be substantially complete by the end of the third quarter of fiscal 1999. 6. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131 -- "Disclosures about Segments of an Enterprise and Related Information" in fiscal 1998. This statement established new standards for the manner in which companies report operating segment information, as well as disclosures about products and services and major customers. As required by SFAS 131, the Company has restated the prior periods for comparability. The Company has three reportable segments: Flowers Bakeries, Mrs. Smith's Bakeries and Keebler. Flowers Bakeries produces fresh and frozen breads and rolls, Mrs. Smith's Bakeries produces fresh and frozen baked desserts, snacks, breads and rolls, and Keebler produces a full line of cookies and crackers. The segments are managed as strategic business units due to their distinct production processes and marketing strategies. 6 9 FLOWERS INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company evaluates each segment's performance based on income from operations (income or loss before interest and income taxes, excluding FII's and other unallocated expenses and non-recurring charges). Information regarding the operations in these reportable segments is as follows (amounts in thousands):
FOR THE 12 WEEKS ENDED FOR THE 28 WEEKS ENDED ----------------------------- ----------------------------- JULY 17, 1999 JULY 18, 1998 JULY 17, 1999 JULY 18, 1998 ------------- ------------- ------------- ------------- Sales: Flowers Bakeries..................... $231,434 $225,870 $ 526,568 $ 511,828 Mrs. Smith's Bakeries................ 140,898 137,091 321,544 317,968 Keebler.............................. 587,847 490,042 1,439,880 1,126,788 FII.................................. (646) -- (1,500) (550) Elimination(1)....................... (16,570) (16,579) (39,016) (42,576) -------- -------- ---------- ---------- $942,963 $836,424 $2,247,476 $1,913,458 ======== ======== ========== ========== Depreciation and Amortization: Flowers Bakeries..................... $ 7,476 $ 8,215 $ 17,140 $ 18,742 Mrs. Smith's Bakeries................ 4,005 4,436 9,221 9,841 Keebler.............................. 19,696 15,313 43,171 31,549 FII.................................. 1,631 1,574 3,727 3,602 -------- -------- ---------- ---------- $ 32,808 $ 29,538 $ 73,259 $ 63,734 ======== ======== ========== ========== Income (Loss) from Operations: Flowers Bakeries..................... $ 18,767 $ 17,602 $ 39,279 $ 37,597 Mrs. Smith's Bakeries................ (28,020) 9,832 (17,148) 19,888 Keebler.............................. 48,732 38,180 119,377 69,856 FII.................................. (7,757) (5,380) (14,962) (11,130) Non-recurring charge................. (69,208) -- (69,208) -- -------- -------- ---------- ---------- ($37,486) $ 60,234 $ 57,338 $ 116,211 ======== ======== ========== ==========
- --------------- (1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries to Flowers Bakeries which are transferred at standard costs. 7. RECEIVABLES SECURITIZATION On January 29, 1999, Keebler entered into a Receivables Purchase Agreement (the "Agreement") to replace $75.0 million of debt held under a Bridge facility allowing funds to be borrowed at a lower cost to Keebler. The accounting for this Agreement is governed by SFAS No. 125 -- "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the guidelines of SFAS 125, a special-purpose entity was created, Keebler Funding Corporation, as a subsidiary of Keebler. All transactions occurring under this Agreement occur through Keebler Funding Corporation and are treated as a sale of accounts receivable and not as a debt instrument. As of July 17, 1999, a net $106.0 million of accounts receivable had been sold at fair value. 8. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 -- "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new rules for accounting for derivative instruments and hedging activities. The statement requires all derivatives be recognized as either assets or liabilities in the balance sheet and the instruments be measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This standard is effective for the Company's fiscal year 2001. The Company is currently assessing the effects SFAS 133 will have on its financial position and results of operations. 7 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATTERS AFFECTING ANALYSIS During the second quarter of fiscal 1999, the Board of Directors of Keebler approved a plan to close its Sayreville, New Jersey, production facility due to excess capacity within Keebler's 18-plant production network. As a result of this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million, or $.25 per share after-tax and minority interest. The charge includes $46.1 million of noncash asset impairments and $23.1 million of severance and other exit costs related to the Sayreville facility. As a direct result of this plan, asset impairments were recorded to write-down the closed facility to net realizable value, less cost to sell, based on management's estimate of fair value. Also, as part of this plan, asset impairments were recorded to write-off certain other machinery and equipment currently held by Keebler and to reduce goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996, neither of which provides any future economic benefit. The intent is to dispose of or scrap such machinery and equipment by the end of fiscal 1999. Severance costs provide for the reduction of approximately 650 employees, and, as of July 17, 1999, approximately 460 employees had been severed. Ongoing costs, including, but not limited to, guard service, utilities, property taxes and preparing the facility for sale, primarily represent the other exit costs. Management anticipates that all significant actions related to the plan will be completed by the end of the third quarter of fiscal 1999. Mrs. Smith's Bakeries is in the midst of a major capital project involving 25 new or relocated and upgraded production lines at seven of Mrs. Smith's Bakeries' 11 operating facilities. This project is behind schedule due to delays in the receipt and installation of production equipment, the programming of production control software and the hiring and training of production employees. These delays have created less-than-anticipated production levels, a reduction in Mrs. Smith's Bakeries' original sales forecast, significant overruns in start-up costs, and large increases in promotional, administrative, and logistics costs. Mrs. Smith's Bakeries' realignment will negatively impact margins at Mrs. Smith's Bakeries in its seasonally heavy second half. Management expects this impact, while significant, to be temporary. Following a review of Mrs. Smith's Bakeries' business operations after the end of the Company's second quarter of fiscal 1999, the Company determined to recognize higher reserves than previously estimated for customer deductions previously believed to be collectible and trade promotions. The Company also revised estimates of the recoverable amount of certain out-of-code, damaged or discontinued inventory at Mrs. Smith's Bakeries. The conclusions reached by the Company relative to the ultimate realization of certain accounts receivable are based upon recent trends associated with Mrs. Smith's Bakeries' complex promotional and discount programs. These increased estimates, combined with the start-up costs being incurred as part of the massive production realignment at Mrs. Smith's Bakeries, will likely prevent Mrs. Smith's Bakeries from contributing to the Company's profitability for the year. The Company will have a clearer picture of Mrs. Smith's Bakeries' performance for the remainder of the year once the newly installed production lines are achieving anticipated production levels. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the twenty-eight weeks ended July 17, 1999 was $105.5 million. Negative net cash flow of $2.9 million resulted from a net loss for the twenty-eight weeks. Adding back to the net loss the noncash portion of the non-recurring charge at Keebler discussed above had a positive impact on cash flows. An increase in trade accounts receivable and the timing of payments of other accrued liabilities negatively impacted cash flows. Net cash disbursed for investing activities for the twenty-eight weeks ended July 17, 1999 of $150.4 million primarily consisted of capital expenditures of $42.1 million at Flowers Bakeries, $43.5 million at 8 11 Mrs. Smith's Bakeries and $49.8 million at Keebler. The capital expenditures were made principally to update and enhance production and distribution facilities, as well as management information systems. For the twenty-eight weeks ended July 17, 1999, net cash of $25.2 million was provided by financing activities. This was primarily attributable to proceeds of $106.0 million from the sale of certain accounts receivable at Keebler under the Receivables Purchase Agreement entered into on January 29, 1999 by Keebler. This increase was partially offset by the payment of dividends by FII and the purchase of treasury stock and debt payments by Keebler. At July 17, 1999, cash and cash equivalents were $37.2 million. Long-term debt was $1,057.4 million and current maturities of long-term debt were $145.1 million at July 17, 1999. Included in these amounts is debt of $500.1 million attributable to Keebler; however, Flowers has not guaranteed such indebtedness and it is to be repaid solely from the cash flows of Keebler. The Company believes that, in light of its current cash position, its cash flow from operating activities and its credit arrangements, it can adequately meet presently foreseeable financing requirements. For the twenty-eight weeks ended July 17, 1999, dividends paid per share increased 9% to $.2525 from $.2325 paid for the comparable period in the prior year. FII owns a majority of the outstanding stock of Keebler and therefore is consolidating Keebler for financial reporting purposes. FII is limited in its ability to access the cash flows of Keebler to support its other operations due to the fact that Keebler is not wholly owned by FII and due to restrictions on the payment of dividends in Keebler's existing credit facilities. RESULTS OF OPERATIONS Results of operations, expressed as a percentage of sales, for the twelve and twenty-eight weeks ended July 17, 1999 and July 18, 1998, are set forth below:
FOR THE 12 WEEKS FOR THE 28 WEEKS ENDED ENDED ------------------- ------------------- JULY 17, JULY 18, JULY 17, JULY 18, 1999 1998 1999 1998 -------- -------- -------- -------- Sales............................................... 100.00% 100.00% 100.00% 100.00% Gross margin........................................ 52.92 55.16 53.20 54.99 Selling, marketing and administrative expenses...... 46.08 44.43 44.31 45.58 Depreciation and amortization....................... 3.48 3.53 3.26 3.33 Non-recurring charge................................ 7.34 -- 3.08 -- Interest expense, net............................... 1.92 1.60 1.96 1.70 Income (loss) before income taxes, minority interest and cumulative effect of a change in accounting principle......................................... (5.90) 5.61 0.59 4.38 Income tax expense (benefit)........................ (1.94) 2.35 0.49 1.84 Net income (loss)................................... (2.94)% 2.21% (.13)% 1.59%
Twelve Weeks Ended July 17, 1999 Compared to Twelve Weeks Ended July 18, 1998 Sales. For the twelve weeks ended July 17, 1999, sales were $943.0 million, or 13% higher than sales for the comparable period in the prior year, which were $836.4 million. Sales at Flowers Bakeries for the second quarter of fiscal 1999 were $231.4 million, an increase of 3% over sales of $225.9 reported a year ago. Volume contributed 2% of the increase, while product mix and pricing contributed 1%. Sales at Mrs. Smith's Bakeries for the second quarter of fiscal 1999, after excluding intersegment sales, increased 3% to $124.3 million from $120.5 million reported a year ago. This increase was primarily due to a 9% gain in frozen retail, deli/bakery and foodservice categories, offset by an 8% decline in fresh non-branded retail and co-pack sales of fresh snack products. Sales at Keebler for the second quarter of fiscal 1999 increased 20% to $587.8 million from $490.0 million reported a year ago. This increase is primarily the result of gains in the core Keebler branded product line, new product introductions, integration of the President International, Inc. ("President") business acquired in September of fiscal 1998 and continued improvements in the direct-to-store delivery system. 9 12 Gross Margin. Gross margin for the second quarter of fiscal 1999 was $499.0 million, or 8% higher than gross margin reported a year ago, which was $461.4 million. As a percentage of sales, gross margin was 53% for the second quarter of fiscal 1999, compared to 55% for the second quarter of fiscal 1998. Flowers Bakeries' gross margin as a percentage of sales of 54% was unchanged for the second quarter of fiscal 1999 as compared to the second quarter of fiscal 1998. Mrs. Smith's Bakeries' gross margin for the second quarter of fiscal 1999 was 29% of sales compared to 42% reported a year ago. This decrease is primarily the result of delays associated with a massive production realignment project consisting of the installation and start-up of 25 new or relocated and upgraded production lines. Mrs. Smith's Bakeries experienced start-up costs and unabsorbed overhead associated with this project in the second quarter of fiscal 1999. Management anticipates this trend to continue during the third and fourth quarters of fiscal 1999 as Mrs. Smith's Bakeries continues to implement this production realignment project, which is expected to be completed by the end of fiscal 1999. Increased sales of lower margin items and an increased reserve due to a change in the estimated recovery of certain out-of-code, damaged or discontinued inventory during the second quarter of fiscal 1999 as compared to the second quarter of fiscal 1998 also contributed to the decrease. Gross margin at Keebler declined slightly to 58% of sales during the second quarter of fiscal 1999 from 59% during the same period a year ago. This decrease was due primarily to the inclusion of President, whose products carry a higher cost structure, partially offset by increased productivity and efficiencies at Keebler's production facilities, cost reduction programs and lower ingredient and packaging costs. Selling, Marketing and Administrative Expenses. During the second quarter of fiscal 1999, selling, marketing and administrative expenses were $434.5 million, or 46% of sales as compared to $371.6 million, or 44% of sales reported a year ago. Selling, marketing and administrative expenses increased at Flowers Bakeries primarily due to increased distribution costs as a result of higher-than-anticipated holiday foodservice sales and spending for its management information systems implementation. Mrs. Smith's Bakeries' selling, marketing and administrative expenses increased during the second quarter of fiscal 1999 as compared to the same period a year ago as a result of increased promotional costs, distribution costs, and administrative costs. These costs increased primarily due to higher promotional costs associated with Mrs. Smith's Bakeries higher-end retail business, where customers take deductions or allowances, in today's high velocity, electronically driven sales accounting world. With the implementation of SAP R/3 and sales tracking software, which is designed to better capture data regarding these deductions, Mrs. Smith's Bakeries should be better able to control these deductions. An increased reserve due to a change in estimate relating to the collectibility of these deductions was also a factor in the increase. The distribution and administrative costs are also higher due to the production realignment project discussed above. Management anticipates this trend to continue during the third and fourth quarters of fiscal 1999 as Mrs. Smith's Bakeries continues to implement these production realignment and computer programs. Keebler's selling, marketing and administrative expenses as a percentage of sales decreased during the second quarter of fiscal 1999 as compared to the second quarter of fiscal 1998 primarily due to savings gained on reduced distribution costs and synergies existing from the integration of President. Depreciation and Amortization. Depreciation and amortization expense was $32.8 million for the second quarter of fiscal 1999, an increase of 11% over the same period a year ago, which was $29.5 million. This increase is due primarily to increased goodwill amortization and depreciation relating to the purchase of President by Keebler and increased depreciation associated with capital improvements, partially offset by the benefit of reduced depreciation resulting from asset impairments recorded as part of the non-recurring charge in fiscal 1998. Non-Recurring Charge. See discussion under the heading "Matters Affecting Analysis" included in Management's Discussion and Analysis of Financial Condition and Results of Operations. Interest Expense. For the second quarter of fiscal 1999, interest expense was $18.1 million, an increase of 36% over the corresponding period in the prior year, which was $13.3 million. This increase is due primarily to interest on borrowings incurred to finance the acquisition of President by Keebler and on borrowings to partially fund capital improvement projects. 10 13 Income (Loss) Before Income Taxes. Loss before income taxes was $55.6 million for the second quarter of fiscal 1999, a decrease of 219% compared to income of $46.9 million reported for the same period a year ago. This decrease is primarily the result of the $69.2 million non-recurring charge at Keebler, increased costs associated with the production realignment project and increased selling expenses at Mrs. Smith's Bakeries, all of which is discussed above. Income Taxes. For the second quarter of fiscal 1999, income taxes were a benefit of $18.3 million, compared to expense of $19.7 million reported for the comparable period in the prior year. The effective rate of the tax benefit was 33% of the pre-tax loss in the second quarter of fiscal 1999. The effective tax rate for the year to date was 84% of pre-tax income. Excluding the effect of non-deductible goodwill included in the Keebler non-recurring charge, the tax benefit for the second quarter and the tax expense year to date would have been approximately 43%. Net Income (Loss). Net loss for the second quarter of fiscal 1999 was $27.7 million, a decrease of 250% as compared to the $18.5 million net income reported a year ago. This decrease is due to the items discussed above. Twenty-Eight Weeks Ended July 17, 1999 Compared to Twenty-Eight Weeks Ended July 18, 1998 Sales. For the twenty-eight weeks ended July 17, 1999, sales were $2,247.5 million, or 17% higher than sales for the same period a year ago, which were $1,913.5 million. Sales at Flowers Bakeries for the twenty-eight weeks of fiscal 1999 were $526.6 million, an increase of 3% over sales of $511.8 million reported a year ago. Volume contributed 2% of the increase, while product mix and pricing contributed 1%. Sales at Mrs. Smith's Bakeries for the twenty-eight weeks of fiscal 1999, after excluding intersegment sales, increased 3% to $282.5 million from $275.4 million reported a year ago. This increase was primarily due to a 10% gain in frozen retail, deli/bakery and foodservice categories, offset by a 10% decline in fresh non-branded retail and co-pack sales of fresh snack products. Sales at Keebler for the twenty-eight weeks of fiscal 1999 increased 28% to $1,439.9 million from $1,126.8 million reported a year ago. This increase is primarily due to gains in the core Keebler branded product line, new product introductions and the acquisition of President. Gross Margin. Gross margin for the twenty-eight weeks of fiscal 1999 was $1,195.6 million or 14% higher than gross margin reported a year ago, which was $1,052.1 million. As a percentage of sales, gross margin was 53% for the twenty-eight weeks of fiscal 1999, compared to 55% for the twenty-eight weeks of fiscal 1998. Flowers Bakeries' gross margin improved to 54% of sales for the twenty-eight weeks of fiscal 1999, compared to 53% of sales for the comparable period in the prior year. Improved volume, pricing and production efficiencies primarily contributed to the increase. Mrs. Smith's Bakeries' gross margin for the twenty-eight weeks of fiscal 1999 was 34% of sales compared to 41% reported a year ago. This decrease is primarily the result of delays associated with the massive production realignment project discussed in the twelve week analysis above, the increased inventory reserve discussed above and increased sales of lower margin items during the twenty-eight weeks of fiscal 1999 as compared to the twenty-eight weeks of fiscal 1998. Gross margin at Keebler declined to 57% of sales during the twenty-eight weeks of fiscal 1999 from 59% during the same period a year ago. This decrease was due primarily to the inclusion of President, whose products carry a higher cost structure, partially offset by increased productivity and efficiencies at Keebler's production facilities, cost reduction programs and lower ingredient and packaging costs. Selling, Marketing, and Administrative Expenses. During the twenty-eight weeks of fiscal 1999, selling, marketing and administrative expenses were $995.8 million, or 44% of sales as compared to $872.2 million, or 46% of sales reported a year ago. Selling, marketing and administrative expenses increased at Flowers Bakeries primarily due to increased distribution costs and spending for its management information systems implementation. Mrs. Smith's Bakeries' selling, marketing, and administrative expenses increased during the twenty-eight weeks of fiscal 1999 as compared to the same period a year ago as a result of the same reasons discussed above in the twelve week analysis. Keebler's selling, marketing, and administrative expenses, as a percentage of sales, decreased during the twenty-eight weeks of fiscal 1999 as compared to the twenty-eight weeks of fiscal 1998 primarily due to savings gained on reduced distribution costs and synergies achieved in the integration of President. 11 14 Depreciation and Amortization. Depreciation and amortization expense was $73.3 million for the twenty-eight weeks of fiscal 1999, an increase of 15% over the same period a year ago, which was $63.7 million. This increase is due primarily to increased goodwill amortization and depreciation relating to the purchase of President by Keebler and increased depreciation associated with capital improvements, partially offset by the benefit of reduced depreciation resulting from asset impairments recorded as part of the non-recurring charge in fiscal 1998. Non-Recurring Charge. See discussion under the heading "Matters Affecting Analysis" included in Management's Discussion and Analysis of Financial Condition and Results of Operations. Interest Expense. For the twenty-eight weeks of fiscal 1999, interest expense was $44.1 million, an increase of 36% over the corresponding period in the prior year, which was $32.5 million. This increase is due primarily to interest on borrowings incurred to finance the acquisition of President by Keebler and on borrowings to partially fund capital improvement projects. Income Before Income Taxes. Income before income taxes was $13.3 million for the twenty-eight weeks of fiscal 1999, a decrease of 84% compared to income of $83.7 million reported for the same period a year ago. This decrease is primarily the result of the non-recurring charge at Keebler, increased costs associated with the production realignment project and increased selling expenses at Mrs. Smith's Bakeries, all of which are discussed in the twelve week analysis above. The cost increases were somewhat offset by increased earnings as a result of the President acquisition by Keebler. Income Taxes. For the twenty-eight weeks of fiscal 1999, income taxes were $11.1 million, or 84% of pre-tax income, as discussed in the twelve week analysis above. Net Income (Loss). Net loss for the twenty-eight weeks of fiscal 1999 was $2.9 million, a decrease of 110% as compared to the $30.4 million of net income reported a year ago. This decrease is due primarily to the items discussed above, partially offset by a negative cumulative effect of a change in accounting principal of $3.1 million recorded in the first quarter of fiscal 1998. This cumulative effect was recorded as a result of the Company's early adoption of Statement of Position 98-5 -- "Reporting on the Costs of Start-up Activities". YEAR 2000 CONVERSION The Company utilizes a number of computer software programs and operating systems throughout its organization, including applications used in order processing, shipping and receiving, accounts payable and receivable processing, financial reporting and in various other administrative functions. The Company recognizes the need to make every effort to ensure that its operations will not be adversely impacted by applications and processing issues related to the upcoming calendar year 2000 (the "Year 2000 Issue"). The Year 2000 Issue is the result of computer programs that have been written to recognize two-digit, rather than four-digit, date codes to define the applicable year. To the extent that the Company's software applications contain source codes that are unable to appropriately interpret a code using "00" as the upcoming year 2000 rather than 1900, the Company could experience system failures or miscalculations that could disrupt operations and cause a temporary inability to process transactions, send and process invoices or engage in similar normal business activities. Based on its ongoing assessment of its systems, the Company has determined that it will be required to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with modifications to its existing software and certain conversions to new software, the Year 2000 Issue will not present significant operational problems for its computer systems. In addition, the Company's systems and operations are dependent, in part, on interaction with systems operated or provided by vendors, customers or other third parties, and the Company is currently surveying those parties about their progress in identifying and addressing problems that their computer systems may face in connection with the Year 2000 Issue. The Company believes that it has little or no exposure for contingencies related to the Year 2000 Issue for the products it has sold. 12 15 The Company's plan to resolve the Year 2000 Issue (the "Plan") identifies exposure with respect to the Company's three operating segments, Flowers Bakeries, Mrs. Smith's Bakeries and Keebler, in three different areas: information technology, operating equipment with embedded chips or software and third-party vendors. In addition, the Plan involves the following four phases for each of the potential exposure items: assessment, remediation, testing and implementation. The discussion set forth below will present a current assessment of these areas for each of the Company's operating segments. Flowers Bakeries With respect to information technology, Flowers Bakeries has completed its assessment of this risk area. This assessment indicated that most of Flowers Bakeries' significant information technology systems could be affected, particularly the general ledger, billing, payables, inventory and ordering systems. Flowers Bakeries has completed the remediation and testing phases of its critical systems and expects to complete the implementation phase by September 1999. To assess the remediation process of Flowers Bakeries' AS400 environment, including Hand Held Computers, a complete "end to end" test was conducted during the second quarter of fiscal 1999. The test incorporated the December 31, 1999 through January 1, 2000 and February 27, 2000 through March 1, 2000 timeframes. Testing encompassed production, distribution and administrative functions, beginning with daily orders continuing through delivery of the product. The overall success of the testing further indicates the risk factors for the Year 2000 are minimal for the AS400 environment. Additionally, Flowers Bakeries has engaged an independent consultant (the "Consultant") to inventory and assess all of its critical computer hardware. The inventory has been completed and non-compliant systems will either be remediated or replaced. The assessment of the operating equipment with embedded chips or software is 95% complete to date. Flowers Bakeries has contracted with the Consultant for the purposes of conducting the inventory and providing assistance with the remediation effort. The expected completion date of remediation is September 1999. Testing of this equipment is more difficult than the testing of information technology systems; as a result, Flowers Bakeries has completed approximately 90% of the testing of remediation of its operating equipment. Once testing is complete, the operating equipment should be compliant. Testing and implementation of affected equipment is expected to be complete by September 1999. The assessment of third-party vendors or customers and their exposure to the Year 2000 Issue is 90% complete for systems that directly interface with Flowers Bakeries as of August 1999. Flowers Bakeries expects to complete surveying all third parties and complete the testing phase for systems interface work by September 1999. Flowers Bakeries has queried its significant suppliers that do not share information systems with Flowers Bakeries (external agents). To date, Flowers Bakeries is not aware of any external agent with a Year 2000 Issue that would materially impact its results of operations, liquidity or capital resources. However, Flowers Bakeries has no means of ensuring that external agents will be Year 2000 compliant. The inability of external agents to complete their Year 2000 resolution processing in a timely fashion could materially impact Flowers Bakeries. The effect of noncompliance by external agents is not determinable by Flowers Bakeries. As Flowers Bakeries produces and distributes fresh baked products daily, detailed contingency plans are being put in place in an effort to ensure Flowers Bakeries is prepared to handle any possible interruptions to production and distribution, which would be the most reasonable likely worst case scenario. These plans are expected to be complete by September 1999. In addition to the assessments discussed above, a different independent consulting firm is reviewing the adequacy, completeness and feasibility of Flowers Bakeries' programs to address the Year 2000 Issue. The consulting firm continues to provide recommendations that Flowers Bakeries is constantly assessing regarding improvements to its program and monitors Flowers Bakeries' execution of remediation efforts. Mrs. Smith's Bakeries With respect to information technology, Mrs. Smith's Bakeries has completed its assessment of this risk area. This assessment indicated that most of Mrs. Smith's Bakeries' significant information technology systems would not be affected. Mrs. Smith's Bakeries has recently completed a four-year project of installing a new enterprise-wide information technology system. This system is Year 2000 compliant and is responsible for 13 16 running over 90% of the company's business processes. Mrs. Smith's Bakeries plans to perform similar "end to end" testing of its SAP environment, as discussed above for Flowers Bakeries' AS400 environment, in September 1999. Mrs. Smith's Bakeries has also engaged a consultant (the "Consultant") to inventory and assess all of its critical computer hardware. The inventory has been completed and non-compliant systems will either be remediated or replaced. The assessment of the operating equipment with embedded chips or software has been completed. Mrs. Smith's Bakeries has contracted with the Consultant for the purposes of conducting the inventory and providing assistance with the remediation effort. The expected completion date of remediation is September 1999. Testing of this equipment is more difficult than the testing of information technology systems; as a result, Mrs. Smith's Bakeries has completed approximately 90% of the testing of remediation of its operating equipment. Once testing is complete, the operating equipment should be compliant. Testing and implementation of affected equipment is expected to be complete by September 1999. The assessment of third-party vendors or customers and their exposure to the Year 2000 Issue has been completed for both systems that directly interface with Mrs. Smith's Bakeries and for all other material exposure. Mrs. Smith's Bakeries completed surveying all third parties in January 1999. Mrs. Smith's Bakeries has completed remediation efforts on its systems and is 80% complete with the testing and implementation phases of its third-party vendors or customers' system interfaces. Mrs. Smith's Bakeries is continually assisting its third-party vendors or customers and expects to complete the testing and implementation phases for systems interface work by September 1999. Mrs. Smith's Bakeries has queried its significant suppliers that do not share information systems with Mrs. Smith's Bakeries (external agents). To date, Mrs. Smith's Bakeries is not aware of any external agent with a Year 2000 Issue that would materially impact its results of operations, liquidity or capital resources. However, Mrs. Smith's Bakeries has no means of ensuring that external agents will be Year 2000 compliant. The inability of external agents to complete their Year 2000 resolution processing in a timely fashion could materially impact Mrs. Smith's Bakeries. The effect of noncompliance by external agents is not determinable by Mrs. Smith's Bakeries. As Mrs. Smith's Bakeries produces and distributes fresh and frozen baked products, detailed contingency plans are being put in place in an effort to ensure Mrs. Smith's Bakeries is prepared to handle any possible interruptions to production and distribution, which would be the most reasonable likely worst case scenario. These plans are expected to be complete by September 1999. Keebler Keebler has completed a comprehensive review of its computer systems and non-information technology systems to identify potential Year 2000 issues. As Keebler has implemented the SAP R/3 Enterprise Wide Information Systems and Manugistics software, both of which were developed/purchased as Year 2000 compliant, management does not anticipate that the impact of Year 2000 issues on its business will be material. In order to assess Year 2000 readiness, Keebler conducted a complete simulation of the SAP production environment during the second quarter of fiscal 1999 which incorporated the December 29, 1999 through January 4, 2000 and February 28, 2000 through March 2, 2000 timeframes. The overall success of the full production simulation is further indication that the risk factors for problems in the year 2000 are minimal for the SAP environment. Additionally, secondary information systems, which are not material to Keebler's ability to forecast, manufacture or deliver product, have been reviewed and Year 2000 issues identified. Currently, Keebler is in the process of correcting or upgrading these systems and intends to be Year 2000 compliant on all critical systems by October 1999. Keebler has submitted a comprehensive questionnaire to its material vendors and suppliers in an effort to verify that they will be Year 2000 compliant and to identify any problem areas with these groups. Although the results of the questionnaire indicated that material vendors and suppliers intend to be Year 2000 compliant before the end of fiscal 1999, they were not able to provide any assurances. Currently, Keebler is in the process of developing a contingency plan to address any potential Year 2000 failures caused by a third party and expects the plan to be finalized by October 1999. While there is no assurance that third parties will convert their systems in a timely manner and that they will be compatible with Keebler's systems, management 14 17 believes these risks will be minimized due to the procedures related to third parties discussed above and the development of a contingency plan. Keebler completed a comprehensive review of President's computer systems and non-information technology systems to identify potential Year 2000 issues for this subsidiary. Many of the Year 2000 risks at President will be mitigated through the implementation of the SAP R/3 Enterprise Wide Information Systems and Manugistics software at the President facilities. Management expects this implementation to be completed by October 1999. Based on the progress made to date in assessing its Year 2000 issues and its compliance with Year 2000 issues related to primary business information systems, Keebler does not foresee significant risks associated with its Year 2000 compliance at this time. However, Keebler is in the process of developing a comprehensive contingency plan to address potential critical Year 2000 issues. Keebler's proposal will include plans for such issues as utility outages, equipment failures, facility checks on January 1, 2000 and review of adequate stock levels. Keebler is also identifying activities that may be completed in advance of January 1, 2000. Keebler expects this contingency plan to be complete by October 1999. The information presented above sets forth the steps Keebler has taken to address Year 2000 issues. Keebler does not expect compliance with Year 2000 issues or the most reasonable likely worst case scenario and related contingency plan to have a material impact on its business, results of operations or financial condition. Summary The Company is utilizing both internal and external resources to reprogram, or replace, and test its software for Year 2000 modifications. The total cost of the Plan is estimated at $6 to $7 million and is being funded through operating cash flow and expensed as incurred. To date, the Company has expended approximately $4.3 million related to the assessment of, and preliminary efforts on, its Year 2000 modification projects, the development of the plan for the purchase of new systems and system modifications. The costs of the Plan and the time frame in which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. Specific factors that might result in additional costs or time delays include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. Based upon the Company's current estimates, the Company does not anticipate that the cost of compliance with the Year 2000 Issue will be material to its business, financial condition or results of operations; however, there can be no assurance that the Company's systems, or those of its vendors, customers or other third parties, will be made Year 2000 compliant in a timely manner or that the impact of the failure to achieve such compliance will not have a material adverse effect on the Company's business, financial condition or results of operations. Based on the progress the Company has made in addressing its Year 2000 issues and the Company's compliance with the Year 2000 Issue on its primary business information systems, the Company does not foresee significant risks associated with its Year 2000 compliance on such systems at this time. However, contingency plans are being developed by Flowers Bakeries, Mrs. Smith's Bakeries and Keebler, as discussed above. The discussion of the Company's efforts and management's expectations relating to Year 2000 compliance are forward-looking statements. Readers are cautioned that forward-looking statements contained herein should be read in conjunction with the Company's disclosures under the heading "Forward-Looking Statements" set forth below. FORWARD-LOOKING STATEMENTS Certain statements made herein are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor provisions of that Act. Such 15 18 forward-looking statements include, without limitation, the future availability and prices of raw materials, the availability of capital on acceptable terms, the competitive conditions in the baked foods industry, potential regulatory obligations, the Company's strategies and other statements contained herein that are not historical facts. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, changes in general economic and business conditions (including the baked foods markets), the Company's ability to recover its raw material costs in the pricing of its products, the availability of capital on acceptable terms, actions of competitors, the extent to which the Company is able to develop new products and markets for its products, the time required for such development, the level of demand for such products, timing in having newly installed production lines at Mrs. Smith's Bakeries fully operative, changes in the Company's business strategies and other factors discussed herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to commodity price and interest rate risks, primarily related to the purchase of raw materials and packaging supplies and changes in interest rates. The Company manages its exposure to these risks through the use of various financial instruments, none of which are entered into for trading purposes. The Company has established policies and procedures governing the use of financial instruments, specifically as it relates to the type and volume of financial instruments entered into. Financial instruments can only be used to hedge an economic exposure, and speculation is prohibited. The Company's accounting policy related to financial instruments is further described in Note 4 of Notes to Consolidated Financial Statements. COMMODITY PRICE RISK The Company enters into commodity future and option contracts and swap agreements for wheat and, to a lesser extent, other commodities, in order to provide a predictable and consistent commodity price, reducing the impact of volatility in its raw material and packaging prices. A sensitivity analysis has been prepared to estimate the Company's exposure to commodity price risk. Based on the Company's derivative portfolio as of July 17, 1999, a hypothetical ten percent adverse change in commodity prices under normal market conditions could potentially have a $12.4 million effect on the fair value of the derivative portfolio. The analysis disregards changes in the exposures inherent in the underlying hedged item; however, the Company expects that any loss in fair value of the portfolio would be substantially offset by increases in the fair value of those hedged items. INTEREST RATE RISK The Company manages its exposure to interest rate risk primarily through the use of a combination of fixed to floating rate debt, as well as interest rate swap agreements, in order to reduce overall interest costs. Keebler has entered into interest rate swap agreements on both its fixed and floating rate debt. A sensitivity analysis was prepared as of January 2, 1999 to estimate the Company's exposure to interest rate risk. As interest rates have not fluctuated materially from year end and the composition of the Company's debt has not materially changed since year end, the sensitivity analysis as of January 2, 1999 remains a valid estimate. The analysis disregards changes in the exposures inherent in the underlying hedged item; however, the Company expects that any loss in fair value of the interest rate swap agreements would be substantially offset by increases in the fair value of those hedged items. 16 19 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on May 28, 1999 in Thomasville, Georgia, for the following purposes: (1) To elect four (4) members to the Board of Directors to serve for three years or until their successor shall be elected and shall have qualified:
FOR WITHHELD ---------- --------- Edward L. Baker............................................. 81,099,279 8,702,249 G. Anthony Campbell......................................... 81,095,847 8,705,681 Jackie M. Ward.............................................. 81,056,997 8,744,531 C. Martin Wood III.......................................... 81,101,288 8,700,240
(2) To consider and act upon a proposal to select PricewaterhouseCoopers LLP as independent accountants for the Company for fiscal 1999: For......................................................... 89,664,014 Against..................................................... 54,647 Abstain..................................................... 82,867
17 20 ITEM 5. OTHER INFORMATION Information regarding each of the Company's segments' operations for each quarter of fiscal 1998 is as follows (amounts in thousands):
FOR THE 16 FOR THE 52 WEEKS ENDED FOR THE 12 WEEKS ENDED WEEKS ENDED ----------- ----------------------------------- ----------- APRIL 25, JULY 18, OCTOBER 10, JANUARY 2, JANUARY 2, 1998 1998 1998 1999 1999 ----------- -------- ----------- ---------- ----------- Sales: Flowers Bakeries.................... $ 285,958 $225,870 $221,795 $ 216,247 $ 949,870 Mrs. Smith's Bakeries............... 180,877 137,091 156,350 198,503 672,821 Keebler............................. 636,746 490,042 499,897 599,795 2,226,480 FII................................. (550) -- -- 893 343 Eliminations(1)..................... (25,997) (16,579) (15,258) (15,219) (73,053) ---------- -------- -------- ---------- ---------- $1,077,034 $836,424 $862,784 $1,000,219 $3,776,461 ========== ======== ======== ========== ========== Depreciation and Amortization: Flowers Bakeries.................... $ 10,527 $ 8,215 $ 7,989 $ 6,756 $ 33,487 Mrs. Smith's Bakeries............... 5,405 4,436 4,747 4,088 18,676 Keebler............................. 16,236 15,313 14,934 22,642 69,125 FII................................. 2,028 1,574 1,582 2,293 7,477 ---------- -------- -------- ---------- ---------- $ 34,196 $ 29,538 $ 29,252 $ 35,779 $ 128,765 ========== ======== ======== ========== ========== Income from Operations: Flowers Bakeries.................... $ 19,995 $ 17,602 $ 15,987 $ 22,195 $ 75,779 Mrs. Smith's Bakeries............... 10,056 9,832 16,102 9,865 45,855 Keebler............................. 31,676 38,180 57,251 72,784 199,891 FII................................. (5,750) (5,380) (6,221) (3,472) (20,823) Non-recurring charge(2)............. -- -- (2,453) (65,860) (68,313) ---------- -------- -------- ---------- ---------- $ 55,977 $ 60,234 $ 80,666 $ 35,512 $ 232,389 ========== ======== ======== ========== ==========
- --------------- (1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries to Flowers Bakeries which are transferred at standard costs. (2) Represents asset impairments at Keebler of $2.5 million in the third quarter of fiscal 1998 and a non-recurring charge for asset impairments and restructuring costs in the fourth quarter of fiscal 1998 of $32.2 million, $32.3 million and $1.4 million for Flowers Bakeries, Mrs. Smith's Bakeries and Keebler, respectively. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 -- Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K -- The Company filed a report on Form 8-K on July 29, 1999 relating to a press release by the Company regarding its second quarter of fiscal 1999 earnings and the amendment of its $500.0 million Amended and Restated Credit Agreement dated as of January 30, 1998. 18 21 SIGNATURES Pursuant to the requirements 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. FLOWERS INDUSTRIES, INC. /s/ AMOS R. MCMULLIAN -------------------------------------- By: Amos R. McMullian Chairman of the Board /s/ JIMMY M. WOODWARD -------------------------------------- By: Jimmy M. Woodward Vice President and Chief Administrative Officer Chief Accounting Officer Date: August 31, 1999 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FLOWERS INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE SEVEN MONTHS ENDED JULY 17, 1999 AND THE FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AT JULY 17, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 7-MOS JAN-01-2000 JAN-03-1999 JUL-17-1999 37,225 0 192,277 12,915 274,634 682,140 1,512,330 471,213 2,803,672 715,898 0 0 0 63,038 480,139 2,803,672 2,247,476 2,247,476 1,051,872 2,190,138 0 0 44,055 13,283 11,113 (2,900) 0 0 0 (2,900) (.03) (.03)
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