-----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, JOa/G1tzyn2HZmCpMQdCXKhSST/InY68WawFeYEFCCnmUehQU2tN6ILnoj52RfDd SY+pEYHWXIP5ssS+Ki7lFw== 0000950144-99-011712.txt : 19991018 0000950144-99-011712.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950144-99-011712 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19991007 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-K/A SEC ACT: SEC FILE NUMBER: 001-09787 FILM NUMBER: 99724605 BUSINESS ADDRESS: STREET 1: 1919 FLOWERS CIRCLE STREET 2: P O BOX 1338 CITY: THOMASVILLE STATE: GA ZIP: 31799 BUSINESS PHONE: 9122269110 MAIL ADDRESS: STREET 1: 1919 FLOWERS CIRCLE STREET 2: P O BOX 1338 CITY: THOMASVILLE STATE: GA ZIP: 31799 FORMER COMPANY: FORMER CONFORMED NAME: FLOWERS INDUSTRIES OF GEORGIA INC DATE OF NAME CHANGE: 19871220 10-K/A 1 FLOWERS INDUSTRIES, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A AMENDMENT NO. 1 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 2, 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 NO. 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 incorporation or organization) Identification No.) 1919 FLOWERS CIRCLE THOMASVILLE, GEORGIA 31757 (Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (912) 226-9110 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ------------------- ------------------------------ COMMON STOCK, $.625 PAR VALUE, TOGETHER WITH NEW YORK STOCK EXCHANGE PREFERRED SHARE PURCHASE RIGHTS 7.15% DEBENTURES DUE 2028 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None --------------------- 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 [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing sales price on the New York Stock Exchange on March 26, 1999: $2,343,363,083 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date.
TITLE OF EACH CLASS OUTSTANDING AT MARCH 26, 1999 ------------------- ----------------------------- COMMON STOCK, $.625 PAR VALUE 100,001,659
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 OF KEEBLER FOODS COMPANY, A DELAWARE CORPORATION, AND PORTIONS OF THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS ON MAY 28, 1999 IN PART III. 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 [ ]. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORM 10-K/A REPORT TABLE OF CONTENTS
PAGE ---- PART II ITEM NO. 6. SELECTED FINANCIAL DATA..................................... 1 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.......................... 2 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 11 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 12 PART IV ITEM NO. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K......................................................... 12
i 3 Explanatory Note: This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K ("Form 10-K") of Flowers Industries, Inc. (the "Company") for the fiscal year ended January 2, 1999, includes additional disclosure items added to Items 6, 7, and 8. Specifically, additional disclosure was added in the "Information on Restructurings and Acquisitions," "Liquidity and Capital Resources" and "Matters Affecting Analysis" sections of Item 7 and Notes 1, 2, 7 and 12 of the Notes to Consolidated Financial Statements. These additional disclosure items have been added as a result of suggested additional disclosures received from the United States Securities and Exchange Commission in connection with a review of the Company's Form 10-K. In addition, the Company is filing new consents of PricewaterhouseCoopers LLP, an amended Schedule II Valuation and Qualifying Accounts, and financial statements of Keebler Foods Company for the fiscal year ended January 2, 1999. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The Registrant incorporates by reference into this Annual Report on Form 10-K/A for the fiscal year ended January 2, 1999, certain portions of the Annual Report on Form 10-K of Keebler Foods Company for its fiscal year ended January 2, 1999, filed with the Securities and Exchange Commission on March 22, 1999 (File No. 001-13705) (the "Keebler Form 10-K"), as follows:
ITEM OF FLOWERS ANNUAL ITEM OF KEEBLER ANNUAL REPORT REPORT ON FORM 10-K/A INTO ON FORM 10-K BEING WHICH INFORMATION IS BEING INCORPORATED BY REFERENCE INCORPORATED BY REFERENCE ----------------------------- -------------------------- PART II PART II Item 6. Selected Financial Data........ Item 6. Selected Financial Data Item 7. Management's Discussion and Item 7. Management's Discussion and Analysis of Financial Condition Analysis of Results of and Results of Operations...... Operations and Financial Condition Item 7a. Quantitative and Qualitative Item 7a. Quantitative and Qualitative Disclosures About Market Disclosures About Market Risk Risk...........................
ii 4 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated historical financial data presented below as of and for the fiscal years 1998, transition period 1998, 1997, 1996, 1995 and 1994, have been derived from the consolidated financial statements of the Company which have been audited by PricewaterhouseCoopers LLP, independent accountants. The results of operations presented below are not necessarily indicative of results to be expected for any future period and should be read in conjunction with "Matters Affecting Analysis" included in Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition, of this Form 10-K/A.
FOR THE 27 FOR THE 52 WEEKS ENDED FOR THE 52 WEEKS ENDED WEEKS ENDED JANUARY 3, ----------------------------------------------------------- JANUARY 2, 1999 1998 JUNE 28, 1997 JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994 --------------- -------------- ------------- ------------- ------------ ------------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Sales............................ $3,776,461 $786,539 $1,441,253 $1,250,584 $1,139,954 $994,472 Materials, supplies, labor and other production costs......... 1,702,581 418,926 787,799 674,762 599,416 525,731 Selling, marketing and administrative expenses........ 1,644,413 303,868 537,825 473,630 428,833 383,073 Depreciation and amortization.... 128,765 26,930 45,970 40,848 36,604 34,110 Non-recurring charge............. 68,313 -- -- -- -- -- Interest expense, net............ 68,725 11,796 25,109 13,004 7,086 4,318 Gain on sale of distributor notes receivable 43,244 Income before income taxes, investment in unconsolidated affiliate, minority interest, extraordinary loss and cumulative effect of changes in accounting principles.......... 163,664 25,019 87,794 48,340 68,015 47,240 Income taxes..................... 74,391 9,632 33,191 18,185 25,714 17,744 Income from investment in unconsolidated affiliate....... -- 18,061 7,721 613 -- -- Income before minority interest, extraordinary loss and cumulative effect of changes in accounting principles.......... 89,273 33,448 62,324 30,768 42,301 29,496 Minority interest................ (43,305) -- -- -- -- -- Income before extraordinary loss and cumulative effect of changes in accounting principles..................... 45,968 33,448 62,324 30,768 42,301 29,496 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest....................... (938) -- -- -- -- -- Cumulative effect of changes in accounting principles, net of tax benefit.................... (3,131) (9,888) -- -- -- -- Net income....................... $ 41,899 $ 23,560 $ 62,324 $ 30,768 $ 42,301 $ 29,496 NET INCOME PER COMMON SHARE: Basic: Income before extraordinary loss and cumulative effect of changes in accounting principles................... $ .47 $ .38 $ .71 $ .35 $ .49 $ .35 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest..................... (.01) -- -- -- -- -- Cumulative effect of changes in accounting principles, net of tax benefit.................. (.03) (.11) -- -- -- -- Net income per common share.... $ .43 $ .27 $ .71 $ .35 $ .49 $ .35 Weighted average shares outstanding.................. 96,393 88,368 88,000 86,933 86,229 84,521 Diluted: Income before extraordinary loss and cumulative effect of changes in accounting principles................... $ .47 $ .38 $ .71 $ .35 $ .49 $ .35 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest..................... (.01) -- -- -- -- -- Cumulative effect of changes in accounting principles, net of tax benefit.................. (.03) (.11) -- -- -- -- Net income per common share.... $ .43 $ .27 $ .71 $ .35 $ .49 $ .35 Weighted average shares outstanding.................. 96,801 88,773 88,401 87,211 86,438 84,784 BALANCE SHEET DATA: Total assets................... $2,860,900 $898,880 $ 898,187 $ 849,443 $ 655,921 $559,682 Long-term debt................. 1,038,998 276,211 275,247 274,698 120,944 92,886 Stockholders' equity........... 572,961 348,567 340,012 305,324 303,981 275,731
1 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with "Selected Consolidated Historical Financial Data" included herein and the consolidated financial statements and the related notes thereto of the Company incorporated by reference or included elsewhere. The following information contains forward-looking statements which involve certain risks and uncertainties. See "Forward-Looking Statements." OVERVIEW General The Company produces and markets fresh baked breads, rolls and snack foods, frozen baked breads, desserts and snack foods, and cookies and crackers. Sales are principally affected by pricing, quality, brand recognition, new product introductions and product line extensions, marketing and service. The Company manages these factors to achieve a sales mix favoring its higher-margin branded products while using high-volume products to control costs and maximize use of capacity. The principal elements comprising the Company's production costs are ingredients, packaging materials, labor and overhead. The major ingredients used in the production of the Company's products are flour, sugar, shortening, fruits and dairy products. The Company also uses paper products, such as corrugated cardboard, aluminum products, such as pie plates, and plastic to package its products. The prices of these materials are subject to significant volatility. The Company has mitigated the effects of such price volatility in the past through its hedging programs, but may not be successful in protecting itself from fluctuations in the future. In addition to the foregoing factors, production costs are affected by the efficiency of production methods and capacity utilization. The Company's selling, marketing and administrative expenses are comprised mainly of distribution, logistics and advertising expenses. Distribution and logistics costs represent the largest component of the Company's cost structure, other than production costs, and are principally influenced by changes in sales volume. Depreciation and amortization expenses for the Company are comprised of depreciation of property, plant and equipment and amortization of costs in excess of net tangible assets associated with acquisitions. The Company's interest expense related to its outstanding debt is discussed in Note 4 of Notes to Consolidated Financial Statements. Matters Affecting Analysis As used herein, unless the context otherwise indicates, (i) "FII" means Flowers Industries, Inc., the publicly traded holding company, which owns all 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. On February 3, 1998, FII completed its purchase of additional shares of Keebler to increase its ownership from approximately 45% to 55% ("Keebler Acquisition"). Accordingly, the results of operations of Keebler are consolidated with those of Flowers for the fiscal year ended January 2, 1999. From January 26, 1996, the date of FII's initial investment in Keebler, through February 3, 1998, FII accounted for its investment in Keebler using the equity method of accounting. As a result of Flowers' change in fiscal year end, the Company's quarterly reporting periods for fiscal 1998 were as follows: first quarter ended April 25, 1998, second quarter ended July 18, 1998, third quarter ended October 10, 1998, and fourth quarter and fiscal year ended January 2, 1999 (the Saturday nearest December 31). Unless stated otherwise, all references to (i) "fiscal 1996" shall mean Flowers' full fiscal year ended June 29, 1996; (ii) "fiscal 1997" shall mean Flowers' full fiscal year ended June 28, 1997; (iii) "twenty- 2 6 seven week transition period ended January 3, 1998" shall mean Flowers' twenty-seven week transition period from June 29, 1997 through January 3, 1998; and (iv) "fiscal 1998" shall mean Flowers' full fiscal year ended January 2, 1999. For purposes of this analysis and in light of the change in fiscal year end discussed above, the Company has compared fiscal 1998 with the corresponding financial information for the fifty-two weeks ended January 3, 1998 which has been developed solely for comparative purposes, and has compared fiscal 1997 with fiscal 1996. Prior to September 1996, Flowers Bakeries sold its territories to independent distributors and financed such sales with ten year notes. In September 1996, Flowers Bakeries sold these notes, which totaled approximately $66.0 million, to a financial institution. Approximately $43.2 million of deferred pre-tax income was recognized. Subsequent to September 1996, all distributor loans have been made directly between the distributor and a financial institution. Pursuant to an agreement, Flowers Bakeries acts as the servicing agent for the financial institution and receives a fee for these services. Information on Restructurings and Acquisitions The Company has undertaken a number of rationalizations and reorganizations of its operations, all of which are expected to be completed by the end of fiscal 1999. As a result of this reorganization and the resulting plant closures, production capability has been eliminated or transferred to other facilities. The purpose of the various reorganization plans was to realize long-term improved overall efficiencies and to reduce costs. However, management expects that there may be short-term inefficiencies as the rationalizations and reorganizations are completed. During the fourth quarter of fiscal 1998, the Board of Directors of the Company approved a plan to realign production and distribution at Flowers Bakeries and Mrs. Smith's Bakeries in order to enhance efficiency. The Company recorded a pre-tax non-recurring charge of $68.3 million ($32.2 million, $32.3 million and $3.8 million for Flowers Bakeries, Mrs. Smith's Bakeries and Keebler, respectively), or $.45 per share after-tax. The charge includes $57.5 million of noncash asset impairments, $4.7 million of severance costs and $6.1 million of other related exit costs. The plan involves closing six less efficient facilities of Flowers Bakeries and Mrs. Smith's Bakeries and shifting their production and distribution to highly automated facilities. As a direct result of management's decision to implement production line rationalizations, asset impairments were recorded to write-down the closed facilities to net realizable value, less cost to sell, based on management's estimate of fair value, and the related cost in excess of net tangible assets. Also, as part of this plan, asset impairments were recorded to write-off certain duplicate machinery and equipment designated for disposal. The plan included severance costs for 695 employees, and, as of January 2, 1999, 405 employees had been terminated. The remaining exit costs include ongoing costs, such as guard service, utilities and property taxes of the closed facilities until time of disposal. Management anticipates that all significant actions related to the plan will be completed as of the end of fiscal 1999. Additionally, the Company recorded an extraordinary loss of $.9 million, net of tax benefit and minority interest, related to the early extinguishment of debt, and $3.1 million, net of tax benefit, for a cumulative effect of a change in accounting principle related to the early adoption of Statement of Position 98-5 -- "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). The effect of the above charges on fiscal 1998 net income was $.49 per share. Excluding the unusual charges, net income for fiscal 1998 was $.92 per share. Management anticipates the charges will result in operating savings of approximately $40.0 million over the next five years, principally from reduced depreciation of approximately $13.0 million and increased efficiencies and reduced employee expense of approximately $27.0 million. As part of accounting for the acquisition of President, Keebler recognized costs pursuant to a plan to exit certain activities and operations of President in order to rationalize productivity and reduce costs and inefficiencies. These exit costs, for which there is no anticipated future economic benefit, were provided for in the allocation of the purchase price and totaled $12.8 million. Company-wide staff reductions of approximately 360 employees were estimated at $6.7 million, with the balance of the reserves allocated to costs associated with the closing of seven production, sales or distribution facilities, which principally include noncancelable lease obligations and building maintenance costs of $5.7 million. Spending against the reserves established for the President acquisition for fiscal 1999 totaled $.1 million. Management's plan is expected to 3 7 be substantially complete before the end of fiscal 1999, except for noncancelable lease obligations and building maintenance costs, which will conclude in fiscal 2006. As part of the acquisition of Mrs. Smith's Inc., Flowers recorded a purchase accounting reserve of $37.1 million as an increase to cost in excess of net tangible assets, in order to realign production and distribution at Mrs. Smith's Bakeries to reduce inefficiencies. The realignment involved the shutdown of a leased production facility. The reserve includes $27.6 million of noncancelable lease obligations and building maintenance costs, $2.1 million of severance costs, and $7.4 million of other exit costs, including health insurance, incremental workers' compensation costs and the costs associated with dismantling and disposing of equipment, at the closed facility. Under the plan, approximately 300 employees were to be and have been terminated. With the exception of noncancelable lease obligations and building maintenance costs that continue through fiscal 2006, this plan was substantially complete as of the end of fiscal 1998. Spending against the reserve totaled $4.1 million, $.6 million and $1.6 million in fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997, respectively. As part of INFLO's acquisition of Keebler and Keebler's subsequent acquisition of Sunshine, Keebler's management team adopted and began executing a plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4 million were provided for in the allocation of the purchase price of both the Keebler and Sunshine acquisitions. Management's plan included company-wide staff reductions, the closure of production, distribution and sales force facilities and information system exit costs. Severance costs were estimated at $39.4 million for the approximate 1,400 employees anticipated to be terminated. As of the end of fiscal 1998, all had been terminated. The plan included the closure of its Atlanta, Georgia and Santa Fe Springs, California, production facilities, as well as 39 sales force and distribution facilities. Costs incurred related to the closing of production, distribution and sales force facilities, other than severance costs, included primarily noncancelable lease obligations and building maintenance costs of $31.2 million. An additional $6.8 million was anticipated for lease costs related to exiting legacy information systems. As of January 4, 1998, the date FII began consolidating Keebler for financial reporting purposes, the remaining liability was $22.5 million, of which $20.2 million related to noncancelable lease obligations and building maintenance costs, $.3 million related to severance costs and $2.0 million related to other exit costs. All activity prior to that date occurred while FII accounted for its investment in Keebler in accordance with the equity method of accounting. Spending against the remaining reserves of $22.5 million totaled $7.7 million for fiscal 1998. In addition, during fiscal 1998, Keebler expensed an additional $2.8 million, principally for costs related to the closure of two distribution facilities not included in the original plan. Also during fiscal 1998, Keebler adjusted accruals previously established in the accounting for prior acquisitions by reducing goodwill and other intangibles by $3.7 million to recognize exit costs that are now expected to be less than initially anticipated. The exit plan is expected to be complete as of the end of fiscal 1999, with the exception of noncancelable lease obligations that continue through fiscal 2006. 4 8 The Company's results of operations, expressed as a percentage of sales, are set forth below:
FOR THE 52 WEEKS ENDED ---------------------------------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ---------- ----------- -------- -------- (UNAUDITED) Sales........................................ 100.00% 100.00% 100.00% 100.00% Gross margin................................. 54.92 47.61 45.34 46.04 Selling, marketing and administrative expenses................................... 43.54 38.26 37.31 37.48 Depreciation and amortization................ 3.41 3.42 3.19 3.27 Non-recurring charge......................... 1.81 Interest expense, net........................ 1.82 1.60 1.74 1.04 Income before income taxes, investment in unconsolidated affiliate, minority interest, extraordinary loss and cumulative effect of changes in accounting principles................................. 4.34 4.34 6.09 3.86 Income taxes................................. 1.97 1.65 2.30 1.45 Net income................................... 1.12% 3.72% 4.32% 2.46%
FIFTY-TWO WEEKS ENDED JANUARY 2, 1999 COMPARED TO FIFTY-TWO WEEKS ENDED JANUARY 3, 1998 Sales. For fiscal 1998, sales were $3,776.5 million or 162% higher than sales for the comparable period in the prior year, which were $1,440.1 million. A majority of the increase was due to the consolidation of Keebler's sales, following the Keebler Acquisition, in the amount of $2,226.5 million. Sales at Flowers Bakeries and Mrs. Smith's Bakeries increased $46.6 million, or 5%, and $63.1 million, or 12%, respectively, for the comparable period in the prior year. Of the increase at Flowers Bakeries, 3%, 1% and 1% were due to an acquisition, increased volume, and pricing and product mix, respectively. Of the increase at Mrs. Smith's Bakeries, 8%, 3% and 1% were due to the acquisition of two businesses, increased volume, and pricing and product mix, respectively. Gross Margin. Gross margin for fiscal 1998 was $2,073.9 million, or 202% higher than the gross margin for the comparable period in the prior year, which was $685.6 million. The Company's gross margin for fiscal 1998 includes gross margin of $1,319.0 million attributable to Keebler, a factor not present in the prior year. Flowers Bakeries' gross margin improved to 54% of sales in fiscal 1998 as compared to 52% of sales for the comparable period in the prior year. Improved volume, production efficiencies and lower ingredient costs led to the increase. Mrs. Smith's Bakeries' gross margin improved to 41% of sales in fiscal 1998 as compared to 37% of sales for the comparable period in the prior year. This increase was due primarily to increased volume, cost control and greater plant efficiencies. Selling, Marketing and Administrative Expenses. For fiscal 1998, selling, marketing and administrative expenses were $1,644.4 million, or 198% higher than its expenses of $551.0 million for the comparable period in the prior year. The increase is due primarily to the inclusion of $1,053.8 million of such expenses attributable to Keebler. Selling, marketing and administrative expenses increased at Flowers Bakeries primarily due to increased sales volume and expenses related to a project to improve its information systems. Mrs. Smith's Bakeries' selling, marketing and administrative expenses increased primarily due to increased sales volume and logistics costs related to the closing of its production facility in Pottstown, Pennsylvania and the shifting of its production to other Mrs. Smith's Bakeries' facilities. Depreciation and Amortization. Depreciation and amortization expense was $128.8 million for fiscal 1998, an increase of 162% over the corresponding period in the prior year, which was $49.2 million. The increase was primarily a result of the consolidation of Keebler, increased goodwill amortization relating to the Keebler Acquisition and increased depreciation associated with capital improvements. Non-Recurring Charge. See discussion under the heading "Matters Affecting Analysis" above. Interest Expense. For fiscal 1998, interest expense was $68.7 million, an increase of 199% over the corresponding period in the prior year, which was $23.0 million. Approximately $26.5 million in interest 5 9 expense was attributable to the consolidation of Keebler, with the remaining increase due to borrowings used to fund the Keebler Acquisition. Income Before Income Taxes. Income before income taxes was $163.7 million for fiscal 1998, an increase of 162% over the $62.5 million reported for the comparable period in the prior year. Approximately $169.5 million of the increase was the result of the consolidation of Keebler, which was partially offset by the $68.3 million non-recurring charge, increased goodwill and interest expense, all of which are discussed above. Income Taxes. Income taxes for fiscal 1998 were $74.4 million, an increase of 213% over the comparable period in the prior year, which were $23.8 million. This increase is due primarily to the inclusion of $73.0 million of income taxes attributable to the consolidation of Keebler, partially offset by a reduction of income tax expense related to the non-recurring charge. Additionally, the effective tax rate increased to 45% from 38% due primarily to increased nondeductible goodwill amortization. Net Income. Net income for fiscal 1998 was $41.9 million, a decrease of 22%, as compared to $53.6 million reported in the prior year. The decrease was attributable to the non-recurring charge, an extraordinary loss due to early extinguishment of debt and a cumulative effect of a change in accounting principle relating to the Company's adoption of SOP 98-5. These decreases were partially offset by the consolidation of Keebler, which contributed $52.4 million, net of minority interest. FIFTY-TWO WEEKS ENDED JUNE 28, 1997 COMPARED TO FIFTY-TWO WEEKS ENDED JUNE 29, 1996 Sales. Sales for fiscal 1997 were $1,441.3 million, or 15% higher than sales of $1,250.6 million for fiscal 1996. Sales at Flowers Bakeries increased 8% to $904.6 million from $841.2 million, primarily as a result of an acquisition during the second quarter of fiscal 1997 and increased volume. Sales at Mrs. Smith's Bakeries increased 32% to $536.7 million from $405.3 million as a result of the acquisition of Mrs. Smith's Inc. in Pottstown, Pennsylvania during the fourth quarter of fiscal 1996 and increased volume at its existing production facilities. Gross Margin. Gross margin for fiscal 1997 was $653.5 million, an increase of 13% over $575.8 million reported during fiscal 1996. This increase was primarily due to increased sales as discussed above and decreased ingredient and packaging costs during the fourth quarter of fiscal 1997. Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses increased by 15% to $537.8 million for fiscal 1997 from $468.7 million for fiscal 1996. The increase was due primarily to increased sales volume and increased advertising and promotional expenditures, particularly at Mrs. Smith's Bakeries. Expenses as a percentage of sales remained relatively constant with the prior year as a result of increased volume and a more efficient cost structure, particularly in selling and distribution at Flowers Bakeries. Depreciation and Amortization. Depreciation and amortization expense increased by 13% to $46.0 million for fiscal 1997 from $40.8 million for fiscal 1996. This increase is primarily due to increased capital spending at both Flowers Bakeries and Mrs. Smith's Bakeries and the amortization of trademarks and goodwill at Mrs. Smith's Bakeries. Interest Expense. Interest expense for fiscal 1997 increased by 93% to $25.1 million from $13.0 million in fiscal 1996. The increase was attributable to higher overall borrowings to partially fund capital spending, to finance frozen inventory at Mrs. Smith's Bakeries and to finance FII's initial investment in Keebler. Interest expense for fiscal 1997 also reflects the payment of $2.5 million for an Internal Revenue Service settlement and a higher average interest rate as compared to the prior year. Income Before Income Taxes. Fiscal 1997 income before income taxes and investment in unconsolidated affiliate increased by 82% to $87.8 million from $48.3 million for fiscal 1996. This increase was due primarily to a gain of $43.2 million on the sale of Flowers Bakeries' distributor notes receivable, which occurred during the first quarter of fiscal 1997. 6 10 Income Taxes. Income taxes for fiscal 1997 increased to $33.2 million from $18.2 million for fiscal 1996 due to increased pre-tax income in fiscal 1997. The effective tax rate was 37.8% in fiscal 1997 as compared to 37.6% in fiscal 1996. Net Income. For fiscal 1997, net income increased by 102% to $62.3 million from $30.8 million for fiscal 1996. This increase was due primarily to the inclusion of the after-tax income from FII's initial investment in Keebler of $7.7 million in fiscal 1997 as compared to $.6 million in fiscal 1996, as well as the gain on the sale of Flowers Bakeries' distributor notes receivable and the other factors described above. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for fiscal 1998 was $200.6 million. Positive net cash flow of $84.4 million was provided from net income for the year. Net cash flows provided by operations were negatively impacted by the build-up of inventory at Mrs. Smith's Bakeries as a result of the production transition from its Pottstown, Pennsylvania facility, which was closed during the fourth quarter of fiscal 1998, to other Mrs. Smith's Bakeries' facilities. An increase in trade accounts receivable due to the just-completed high-selling holiday period, also had a negative impact. The timing of payments of other liabilities had a positive impact on cash flows. Net cash disbursed for investing activities for fiscal 1998 of $897.9 million primarily consisted of $285.2 million for the Keebler Acquisition, $444.8 million for the acquisition of President by Keebler and capital expenditures of $140.3 million. The capital expenditures, primarily consisting of $38.6 million at Flowers Bakeries, $34.7 million at Mrs. Smith's Bakeries and $66.8 million at Keebler, were made principally to update and enhance production and distribution facilities. For fiscal 1998, net cash provided by financing activities of $750.5 million resulted from FII's issuance of $200.0 million of 7.15% debentures due April 15, 2028 and the issuance of 9,000,000 shares of common stock in a public offering at $22 per share. These transactions were consummated on April 27, 1998. Debt incurred by Keebler to finance the acquisition of President and the exercise of Keebler warrants by a former shareholder, concurrent with Keebler's initial public offering on February 3, 1998, also contributed to net cash provided by financing activities. Dividends paid of $46.1 million partially offset these cash inflows. At January 2, 1999, cash and cash equivalents were $57.0 million. As described in Note 4 of Notes to Consolidated Financial Statements, long-term debt was $1,039.0 million and current maturities of long-term debt were $195.3 million at January 2, 1999. In connection with the consolidation of Keebler, the Company has recorded Keebler's indebtedness of $654.5 million as of January 2, 1999; 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. Cash dividends have grown at a compounded annual rate of 6% since 1993, increasing from an annual payout of $.3356 in calendar 1993 to $.4750 in calendar 1998. Spending for facility closing and severance costs related to exit plans established in the Keebler, Sunshine, Mrs. Smith's Inc. and President acquisitions and the non-recurring charge is expected to be substantially complete as of the end of fiscal 1999, except for noncancelable lease payments and building maintenance costs that will continue through fiscal 2006. Management anticipates these cash requirements will be funded through operating cash flow. 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. 7 11 NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 -- "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new rules for accounting for derivative instruments and hedging activities. The statement requires that all derivatives be recognized as either assets or liabilities in the balance sheet and that 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 2000. The Company is currently assessing the effects SFAS 133 will have on its financial position and results of operations. SEASONALITY The Company's sales, net income and cash flows are affected by the timing of new product introductions, promotional activities, price increases and a seasonal sales bias toward the first quarter and second half of the calendar year. The sales bias towards the first quarter is due primarily to Keebler being the leading supplier of Girl Scout cookies and the sales bias toward the second half of the year is primarily due to events such as back-to-school and the Thanksgiving and Christmas holidays. Sales for Mrs. Smith's Bakeries are highly seasonal since, historically, pie sales have been concentrated in the year-end holiday season. In 1998, Mrs. Smith's Bakeries commenced a program entitled "Operation 365" to promote increased pie consumption during the remainder of the year. 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. 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. 8 12 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. As of February 1999, Flowers Bakeries is 100% complete on the remediation phase of its critical systems. Flowers Bakeries has begun the testing and implementation phases. These phases run concurrently for different systems. As of February 1999, Flowers Bakeries has completed 50% of its testing. Completion of the testing phase for all significant systems is expected by June 1999, with all remediation and implementation of systems expected to be fully tested and operational by August 1999. Flowers Bakeries has also engaged a consultant (the "Consultant") to inventory and assess all of its critical computer hardware. The inventory is expected to be completed by April 1999 and non-compliant systems will either be remediated or replaced. The assessment of the operating equipment with embedded chips or software is 75% complete as of February 1999. 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 June 1999. Testing of this equipment is more difficult than the testing of information technology systems; as a result, Flowers Bakeries has completed approximately 2% 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 August 1999. The assessment of third-party vendors or customers and their exposure to the Year 2000 Issue is 50% complete for systems that directly interface with Flowers Bakeries as of February 1999. Flowers Bakeries expects to complete surveying all third parties by August 1999. Flowers Bakeries expects to complete the testing phase for systems interface work by August 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. Detailed contingency plans are being put in place in an effort to ensure Flowers Bakeries is prepared to handle any possible interruptions to production processing. In addition to the assessments discussed above, a different 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 running over 90% of the company's business processes. The assessment and remediation of the operating equipment with embedded chips or software is 90% complete. The expected completion date of remediation is April 1999. Mrs. Smith's Bakeries has completed approximately 75% 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 April 1999. The assessment of third-party vendors or customers and their exposure to the Year 2000 Issue is 50% complete for systems that directly interface with Mrs. Smith's Bakeries and 80% complete for all other material exposure. Mrs. Smith's Bakeries completed surveying all third parties in January 1999. Mrs. Smith's 9 13 Bakeries has completed remediation efforts on the systems and is 50% complete with the testing and implementation phases. Mrs. Smith's Bakeries expects to complete the testing phase for systems interface work by March 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. 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 management information system 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. 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 mid-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 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. 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 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 management information system, Manugistics software and Keebler's warehouse management system at the President facilities. Management expects this implementation to be completed during fiscal 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. As the plan is to address any significant risks associated with Year 2000 issues prior to being affected by them, a comprehensive contingency plan has not been developed, however, if a significant risk related to Year 2000 compliance or a delay in the anticipated timeline for compliance occurs, one will be developed as deemed necessary at that time. 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 incurred approximately $2.3 million in expenses 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. 10 14 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 at this time. As the Company plans to address any significant Year 2000 issues prior to being affected by them, a comprehensive contingency plan has not been developed. However, if a significant risk related to Year 2000 compliance or a delay in the anticipated schedule for compliance occurs, the Company will develop contingency plans as deemed necessary at that time. 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 elsewhere herein. FORWARD-LOOKING STATEMENTS Certain statements incorporated by reference or made herein under the captions "Business" and "Management's Discussion and Analysis of Results of Operations and Financial Condition," and elsewhere 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 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 in 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, changes in the Company's business strategies and other factors discussed herein. ITEM 7A. 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 1 of Notes to Consolidated Financial Statements. 11 15 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 January 2, 1999, a hypothetical ten percent adverse change in commodity prices under normal market conditions could potentially have a $11.6 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 has been prepared to estimate the Company's exposure to interest rate risk. Based on the Company's outstanding debt and related interest rate swap agreements as of January 2, 1999, a hypothetical ten percent adverse change in interest rates under normal market conditions could potentially result in a reduction of $7.6 million in the fair value. 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 value of those hedged items. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the Index to Financial Statements and Financial Statement Schedules for the required information. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K a. List of documents filed as part of this report 1. Financial Statements of the Registrant Report of independent accountants Consolidated statement of income for the fifty-two weeks ended January 2, 1999, the twenty-seven weeks ended January 3, 1998 and the fifty-two weeks ended June 28, 1997 and June 29, 1996 Consolidated balance sheet at January 2, 1999, January 3, 1998 and June 28, 1997 Consolidated statement of changes in stockholders' equity for the fifty-two weeks ended January 2, 1999, the twenty-seven weeks ended January 3, 1998, and the fifty-two weeks ended June 28, 1997 and June 29, 1996 Consolidated statement of cash flows for the fifty-two weeks ended January 2, 1999, the twenty-seven weeks ended January 3, 1998, and the fifty-two weeks ended June 28, 1997 and June 29, 1996 Notes to consolidated financial statements 2. Financial Statement Schedules of the Registrant Report of independent accountants on financial statement schedule Schedule II Valuation and Qualifying Accounts -- for the fiscal year ended January 2, 1999, the twenty-seven weeks ended January 3, 1998, and fiscal years ended June 28, 1997 and June 29, 1996 12 16 3. Exhibits
EXHIBIT NUMBER EXHIBIT - ------- ------- 2 -- Stock Purchase and Stockholder's Agreement dated as of January 28, 1998 by and among Flowers, Bermore, Ltd, Artal Luxembourg, S.A. and Keebler (Incorporated by reference to the Company's Report on Form 8-K dated February 18, 1998, File No. 1-9787) 3.1 -- Third Restated Articles of Incorporation (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999, File No. 1-9787) 3.2 -- Restated By-Laws, as of October 20, 1989 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992, File No. 1-9787) 4.1 -- Rights Agreement dated as of April 2, 1999 between Flowers Industries, Inc. and First Union National Bank, as Rights Agent (Incorporated by reference to the Company's Registration Statement on Form 8-A filed April 2, 1999, File No. 1-9787) 10.1 -- Flowers Industries, Inc. Annual Executive Bonus Plan dated August 4, 1995 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended July 1, 1995, File No. 1-9787)* 10.2 -- First Amendment to the Flowers Industries, Inc. Annual Executive Bonus Plan (Incorporated by reference to the Company's Transition Report on Form 10-K for the fiscal year ended January 3, 1998, File No. 1-9787)* 10.3 -- Flowers Industries, Inc. 401(k) Retirement Savings Plan (Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 13, 1995, File No. 33-91198)* 10.4 -- Severance Policy (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended July 1, 1989, File No. 1-9787)* 10.5 -- 1982 Incentive Stock Option Plan, as amended (Incorporated by reference to the Company's Registration Statement on Form S-3/S-8 filed May 18, 1990, File No. 33-34855)* 10.6 -- 1989 Executive Stock Incentive Plan (Incorporated by reference to the Company's Registration Statement on Form S-3/S-8 filed May 18, 1990, File No. 33-34855)* 10.7 -- Amendment to the 1989 Executive Stock Incentive Plan, dated as of August 4, 1995 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended July 1, 1995, File No. 1-9787)* 10.8 -- Second Amendment to Flowers Industries, Inc. 1989 Executive Stock Incentive Plan (Incorporated by reference to the Company's Transition Report on Form 10-K for the fiscal year ended January 3, 1998, File No. 1-9787)* 10.9 -- Flowers Industries, Inc. 1990 Supplemental Executive Retirement Plan (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, File No. 1-9787)* 10.10 -- Flowers Industries, Inc. Nonemployee Directors' Equity Plan (Incorporated by reference to the Company's Transition Report on Form 10-K for the fiscal year ended January 3, 1998, File No. 1-9787)* 10.11 -- Form of Separation Agreement between the Company and certain members of management of the Company* (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999, File No. 1-9787) 10.12 -- Stock Purchase Agreement dated as of November 5, 1995, between INFLO Holdings Corporation and UB Investments (Netherlands) BV, as amended by agreement dated January 26, 1996 (Incorporated by reference to the Company's Report on Form 8-K(A) dated April 10, 1996, File No. 1-9787)
13 17
EXHIBIT NUMBER EXHIBIT - ------- ------- 10.13 -- Note Purchase Agreement dated as of December 20, 1995, among Flowers and the Purchasers named therein, as amended by First Amendment effective as of January 23, 1998, as further amended by Second Amendment effective as of March 12, 1998 (Incorporated by reference to the Company's Transition Report on Form 10-K for the fiscal year ended January 3, 1998, File No. 1-9787) 10.14 -- Acquisition Agreement dated as of May 1, 1996, among Flowers Industries, Inc., Mrs. Smith's Bakeries, a wholly-owned subsidiary of Flowers Industries, Inc., The J. M. Smucker Company, and Mrs. Smith's Inc., a wholly owned subsidiary of The J. M. Smucker Company (Incorporated by reference to the Company's Report on Form 8-K dated June 13, 1996, File No. 1-9787) 10.15 -- $500,000,000 Amended and Restated Credit Agreement dated as of January 30, 1998, among Flowers, certain Banks listed therein, Wachovia Bank, N.A., as Agent, The Bank of Nova Scotia, as Documentation Agent and NationsBank, N.A. as Syndicating Agent (Incorporated by reference to the Company's Report on Form 8-K dated February 18, 1998, File No. 1-9787) 10.16 -- Indenture between Flowers Industries, Inc. and SunTrust Bank, Atlanta, as Trustee (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999, File No. 1-9787) 10.17 -- Agreement dated as of May 5, 1997, between the Company and Heeth Varnedoe III (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997, File No. 1-9787)* 11 -- Statement Re Computation of Per Share Earnings++ 21 -- Subsidiaries of the Registrant++ 23.1 -- Consent of PricewaterhouseCoopers LLP, Independent Accountants++ 23.2 -- Consent of PricewaterhouseCoopers LLP, Independent Accountants++ 27 -- Financial Data Schedule++ 99.1 -- Portions of the Annual Report on Form 10-K for the fiscal year ended January 2, 1999 of Keebler Foods Company (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year January 2, 1999, File No. 1-9787) 99.2 -- Financial Statements of Keebler Foods Company for the fiscal year ended January 2, 1999++
- --------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K. ++ Filed herewith. b. Reports on Form 8-K: The Company filed a report on Form 8-K on April 2, 1999, to report the declaration of a dividend of one right per share of Common Stock to the shareholders of record on April 2, 1999. 14 18 For purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-3/S-8, File No. 33-34855; and on Form S-8, File No. 33-91198 and File No. 333-23351. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 15 19 SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, Flowers Industries, Inc. has duly caused this Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized on this 7th day of October, 1999. FLOWERS INDUSTRIES, INC. /s/ JIMMY M. WOODWARD -------------------------------------- Jimmy M. Woodward Vice-President and Chief Administrative Officer Chief Accounting Officer 16 20 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of independent accountants........................... F-2 Consolidated statement of income for the fifty-two weeks ended January 2, 1999, the twenty-seven weeks ended January 3, 1998, and the fifty-two weeks ended June 28, 1997 and June 29, 1996.................................... F-3 Consolidated balance sheet at January 2, 1999, January 3, 1998 and June 28, 1997.................................... F-4 Consolidated statement of changes in stockholders' equity for the fifty-two weeks ended January 2, 1999, the twenty-seven weeks ended January 3, 1998, and the fifty-two weeks ended June 28, 1997 and June 29, 1996..... F-5 Consolidated statement of cash flows for the fifty-two weeks ended January 2, 1999, the twenty-seven weeks ended January 3, 1998, and the fifty-two weeks ended June 28, 1997 and June 29, 1996.................................... F-6 Notes to consolidated financial statements.................. F-8
F-1 21 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Flowers Industries, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Flowers Industries, Inc. and its subsidiaries (the "Company") at January 2, 1999, January 3, 1998, and June 28, 1997, and the results of their operations and their cash flows for the year ended January 2, 1999, for the twenty-seven week period ended January 3, 1998, and for each of the two years in the period ended June 28, 1997, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 of the Notes to Consolidated Financial Statements, during the year ended January 2, 1999, the Company changed its method of accounting for start-up costs and organizational costs. In addition, during the twenty-seven week period ended January 3, 1998, the Company changed its method of accounting for business process reengineering costs and the measurement date used in its accounting for pensions. /s/ PRICEWATERHOUSECOOPERS LLP Atlanta, Georgia February 2, 1999 F-2 22 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ----------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ----------- ----------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales.................................................. $3,776,461 $786,539 $1,441,253 $1,250,584 ---------- -------- ---------- ---------- Materials, supplies, labor and other production costs................................................ 1,702,581 418,926 787,799 674,762 Selling, marketing and administrative expenses......... 1,644,413 303,868 537,825 468,695 Depreciation and amortization.......................... 128,765 26,930 45,970 40,848 Non-recurring charge................................... 68,313 ---------- -------- ---------- ---------- Income from operations................................. 232,389 36,815 69,659 66,279 Interest expense..................................... 72,840 12,144 25,691 13,671 Interest (income).................................... (4,115) (348) (582) (667) ---------- -------- ---------- ---------- Interest expense, net.................................. 68,725 11,796 25,109 13,004 ---------- -------- ---------- ---------- Gain on sale of distributor notes receivable........... 43,244 Accrual for litigation settlement...................... 4,935 ---------- -------- ---------- ---------- Income before income taxes, income from investment in unconsolidated affiliate, minority interest, extraordinary loss and cumulative effect of changes in accounting principles............................. 163,664 25,019 87,794 48,340 Income taxes........................................... 74,391 9,632 33,191 18,185 Income from investment in unconsolidated affiliate..... 18,061 7,721 613 ---------- -------- ---------- ---------- Income before minority interest, extraordinary loss and cumulative effect of changes in accounting principles........................................... 89,273 33,448 62,324 30,768 Minority interest...................................... (43,305) ---------- -------- ---------- ---------- Income before extraordinary loss and cumulative effect of changes in accounting principles.................. 45,968 33,448 62,324 30,768 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest............. (938) Cumulative effect of changes in accounting principles, net of tax benefit................................... (3,131) (9,888) ---------- -------- ---------- ---------- Net income.................................... $ 41,899 $ 23,560 $ 62,324 $ 30,768 ========== ======== ========== ========== Net Income Per Common Share: Basic -- Income before extraordinary loss and cumulative effect of changes in accounting principles....... $ .47 $ .38 $ .71 $ .35 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest... (.01) Cumulative effect of changes in accounting principles, net of tax benefit................... (.03) (.11) ---------- -------- ---------- ---------- Net income per common share........................ $ .43 $ .27 $ .71 $ .35 ========== ======== ========== ========== Weighted average shares outstanding................ 96,393 88,368 88,000 86,933 ========== ======== ========== ========== Diluted -- Income before extraordinary loss and cumulative effect of changes in accounting principles....... $ .47 $ .38 $ .71 $ .35 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest... (.01) Cumulative effect of changes in accounting principles, net of tax benefit................... (.03) (.11) ---------- -------- ---------- ---------- Net income per common share........................ $ .43 $ .27 $ .71 $ .35 ========== ======== ========== ========== Weighted average shares outstanding................ 96,801 88,773 88,401 87,211 ========== ======== ========== ==========
(See Accompanying Notes to Consolidated Financial Statements) F-3 23 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 --------------- --------------- ------------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents.................................. $ 56,965 $ 3,866 $ 31,080 Accounts and notes receivable, net......................... 268,084 118,147 113,628 Inventories, net: Raw materials............................................ 54,739 27,310 25,479 Packaging materials...................................... 27,056 12,648 12,500 Finished goods........................................... 207,620 44,650 47,314 Other.................................................... 8,178 4,731 3,310 ---------- --------- --------- 297,593 89,339 88,603 ---------- --------- --------- Deferred income taxes...................................... 76,327 16,024 14,421 Other...................................................... 84,276 37,886 35,123 ---------- --------- --------- 783,245 265,262 282,855 ---------- --------- --------- Property, Plant and Equipment: Land....................................................... 39,149 20,388 20,692 Buildings.................................................. 350,067 208,179 206,469 Machinery and equipment.................................... 816,495 443,739 446,016 Furniture, fixtures and transportation equipment........... 116,219 28,095 24,774 Construction in progress................................... 96,288 46,262 49,062 ---------- --------- --------- 1,418,218 746,663 747,013 Less: accumulated depreciation............................. (430,516) (308,342) (299,014) ---------- --------- --------- 987,702 438,321 447,999 ---------- --------- --------- Other Assets: Investment in unconsolidated affiliate..................... 100,663 77,071 Other...................................................... 86,510 17,917 21,809 ---------- --------- --------- 86,510 118,580 98,880 ---------- --------- --------- Cost in Excess of Net Tangible Assets: Cost in excess of net tangible assets...................... 1,033,632 80,586 70,939 Less: accumulated amortization............................. (30,189) (3,869) (2,486) ---------- --------- --------- 1,003,443 76,717 68,453 ---------- --------- --------- $2,860,900 $ 898,880 $ 898,187 ========== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Commercial paper........................................... $ 74,870 $ 53,506 $ 40,792 Current maturities of long-term debt....................... 120,479 4,232 9,233 Accounts payable........................................... 227,749 72,311 78,451 Income taxes............................................... 220 Facility closing costs and severance....................... 23,670 4,812 577 Other accrued liabilities.................................. 314,270 67,109 78,243 ---------- --------- --------- 761,038 201,970 207,516 ---------- --------- --------- Long-Term Debt.............................................. 1,038,998 276,211 275,247 ---------- --------- --------- Other Liabilities: Deferred income taxes...................................... 182,244 39,686 38,886 Postretirement/postemployment obligations.................. 63,754 Facility closing costs and severance....................... 41,331 30,141 34,953 Other...................................................... 52,915 2,305 1,573 ---------- --------- --------- 340,244 72,132 75,412 ---------- --------- --------- Commitments and Contingencies............................... ---------- --------- --------- Minority Interest........................................... 147,659 ---------- --------- --------- Stockholders' Equity: Preferred Stock -- $100 par value, authorized 10,467 shares and none issued.......................................... Preferred Stock -- $100 par value, authorized 249,533 shares and none issued................................... Common stock -- $.625 par value, authorized 350,000,000 shares, issued 100,202,414, 88,636,089 and 88,636,089 shares, respectively..................................... 62,627 55,398 55,398 Capital in excess of par value............................. 274,255 45,200 43,147 Retained earnings.......................................... 262,531 266,734 260,094 Common stock in treasury, 381,366, 207,670 and 563,076 shares, respectively..................................... (6,762) (2,452) (6,567) Stock compensation related adjustments..................... (19,690) (16,313) (12,060) ---------- --------- --------- 572,961 348,567 340,012 ---------- --------- --------- $2,860,900 $ 898,880 $ 898,187 ========== ========= =========
(See Accompanying Notes to Consolidated Financial Statements) F-4 24 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ----------------------- TREASURY STOCK STOCK NUMBER OF CAPITAL IN ---------------------- COMPENSATION SHARES EXCESS OF RETAINED NUMBER OF RELATED ISSUED PAR VALUE PAR VALUE EARNINGS SHARES COST ADJUSTMENTS ----------- --------- ---------- -------- ----------- -------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Balances at July 1, 1995.............. 88,636,089 $55,398 $ 36,840 $236,645 (2,219,854) $(17,763) $ (7,139) Stock issued for acquisitions......... 180 137,003 1,119 Exercise of employee stock options.... (764) 285,366 2,337 Purchase of treasury stock............ (144,840) (1,303) Net income for the year............... 30,768 Exercise of Restricted Stock Award.... 769 (187,596) (1,650) 1,526 Exercise of Equity Incentive Award.... 301 (169,931) (1,830) 1,434 Stock issued into escrow in connection with Restricted Stock Award......... 2,286 1,180,295 9,640 (11,918) Stock issued into escrow in connection with Equity Incentive Award......... 705 358,547 2,957 (3,662) Amortization of Restricted Stock Award and Equity Incentive Award.......... 1,792 Dividends paid -- $.3833 per common share............................... (33,344) ----------- ------- -------- -------- ----------- -------- -------- Balances at June 29, 1996............. 88,636,089 55,398 40,317 234,069 (761,010) (6,493) (17,967) Stock issued for acquisitions......... 1,025 322,233 2,975 Exercise of employee stock options.... (1,017) 400,853 3,988 Purchase of treasury stock............ (19,335) (289) Net income for the year............... 62,324 Exercise of Restricted Stock Award.... 1,072 (78,106) (1,362) 1,169 Exercise of Equity Incentive Award.... 1,854 (151,469) (2,365) 1,738 Restricted Stock Award Reversions..... (104) (56,430) (456) 557 Amortization of Restricted Stock Award and Equity Incentive Award.......... 2,443 Stock received from escrow............ (219,812) (2,565) Dividends paid -- $.4125 per common share............................... (36,299) ----------- ------- -------- -------- ----------- -------- -------- Balances at June 28, 1997............. 88,636,089 55,398 43,147 260,094 (563,076) (6,567) (12,060) Exercise of employee stock options.... 45,000 524 Purchase of treasury stock............ (6,227) (117) Net income for the year............... 23,560 Equity from investment in unconsolidated affiliate............ 2,700 Stock issued into escrow in connection with Restricted Stock Award......... 2,118 347,609 3,965 (6,083) Restricted Stock Award Reversions..... (65) (30,976) (257) 435 Amortization of Restricted Stock Award and Equity Incentive Award.......... 1,395 Dividends paid -- $.2225 per common share............................... (19,620) ----------- ------- -------- -------- ----------- -------- -------- Balances at January 3, 1998........... 88,636,089 55,398 45,200 266,734 (207,670) (2,452) (16,313) Common stock offering................. 9,000,000 5,625 182,305 Stock issued for acquisition.......... 2,000,000 1,250 38,750 Exercise of employee stock options.... 225,000 141 2,797 (61,424) (2,419) Exercise of Equity Incentive Award.... 452 (44,263) (982) 524 Purchase of treasury stock............ (24,414) (532) Net income for the year............... 41,899 Adjustment for Keebler treasury stock transactions........................ (3,677) Stock issued into escrow in connection with Restricted Stock Award......... 345,973 216 8,653 (8,869) Restricted Stock Award Reversions..... (4,648) (3) (225) (43,595) (377) 513 Amortization of Restricted Stock Award and Equity Incentive Award.......... 4,455 Dividends paid -- $.4750 per common share............................... (46,102) ----------- ------- -------- -------- ----------- -------- -------- Balances at January 2, 1999........... 100,202,414 $62,627 $274,255 $262,531 (381,366) $ (6,762) $(19,690) =========== ======= ======== ======== =========== ======== ========
(See Accompanying Notes to Consolidated Financial Statements) F-5 25 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ---------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ----------- ----------- --------- ---------- (AMOUNTS IN THOUSANDS) Cash flows provided by operating activities: Net income....................................... $ 41,899 $ 23,560 $ 62,324 $ 30,768 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest.............................. 42,537 Income from investment in unconsolidated affiliate................................... (18,061) (7,721) (613) Depreciation and amortization.................. 128,765 26,930 45,970 40,848 Deferred income taxes.......................... (1,504) (803) 1,506 3,494 Gain on sale of distributor notes receivable... (43,244) Non-recurring charge........................... 68,313 Loss due to early extinguishment of debt....... 1,706 Cumulative effect of changes in accounting principles.................................. 3,131 9,888 Other.......................................... (1,486) (4,111) Changes in assets and liabilities, net of acquisitions: Accounts and notes receivable, net............. (10,773) (2,282) 7,863 (17,742) Inventories, net............................... (35,828) (413) (36,144) (12,821) Other assets................................... (53,486) (1,495) (2,242) (1,650) Accounts payable and other accrued liabilities................................. 27,076 (16,658) (13,199) 21,186 Facility closing costs and severance........... (9,798) (577) (1,606) --------- -------- -------- --------- Net cash provided by operating activities........ 200,552 20,089 13,507 59,359 --------- -------- -------- --------- Cash flows from investing activities: Purchase of property, plant and equipment...... (140,275) (32,857) (77,510) (75,542) Investment in unconsolidated affiliate......... (61,352) Acquisition of majority interest in Keebler.... (285,203) Acquisition of President by Keebler............ (444,818) Acquisition of other businesses, net of divestitures................................ (28,992) (5,532) 617 (26,884) Other.......................................... 1,378 2,145 63 (6,485) --------- -------- -------- --------- Net cash disbursed for investing activities...... (897,910) (36,244) (76,830) (170,263) --------- -------- -------- --------- Cash flows from financing activities: Common stock offering proceeds, net of underwriters discount and offering costs.... 187,930 Dividends paid................................. (46,102) (19,620) (36,299) (33,344) Treasury stock purchases....................... (8,059) (117) (289) (1,303) Stock compensation and warrants exercised...... 20,744 Debentures proceeds............................ 199,417 Debentures issuance costs...................... (1,750) Increase in commercial paper................... 21,364 7,713 40,792 Increase in long-term debt..................... 376,913 965 (794) 138,754 Distributor notes receivable proceeds.......... 65,954 --------- -------- -------- --------- Net cash provided by (disbursed for) financing activities..................................... 750,457 (11,059) 69,364 104,107 --------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents.................................... 53,099 (27,214) 6,041 (6,797) Cash and cash equivalents at beginning of period......................................... 3,866 31,080 25,039 31,836 --------- -------- -------- --------- Cash and cash equivalents at end of period....... $ 56,965 $ 3,866 $ 31,080 $ 25,039 ========= ======== ======== =========
(See Accompanying Notes to Consolidated Financial Statements) F-6 26 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ---------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ----------- ----------- --------- --------- (AMOUNTS IN THOUSANDS) Schedule of noncash investing and financing activities: Stock compensation transactions................. $20,431 $ 6,355 $ 9,263 $20,633 Stock issued for acquisition.................... 40,000 4,000 1,299 Note payable issued in acquisition of business..................................... 15,000 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized......... $62,982 $11,878 $25,955 $ 8,582 Income taxes................................. 87,063 10,867 32,729 16,748
(See Accompanying Notes to Consolidated Financial Statements) F-7 27 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company. As further described in Note 2, FII purchased an additional 11.5% of the common stock of Keebler on February 3, 1998 giving FII a majority ownership position in Keebler of approximately 55%. As a result, all amounts included herein as of January 2, 1999 and for the fifty-two weeks then ended, present Keebler with Flowers on a consolidated basis. All amounts included herein related to prior periods present FII's investment in Keebler under the equity method. Intercompany accounts and transactions are eliminated in consolidation. CHANGE IN FISCAL YEAR END In January 1998, Flowers changed its fiscal year end from the Saturday nearest June 30 to the Saturday nearest December 31. Unless stated otherwise, all references to (i) "fiscal 1996" shall mean Flowers' full fiscal year ended June 29, 1996; (ii) "fiscal 1997" shall mean Flowers' full fiscal year ended June 28, 1997; (iii) "twenty-seven week transition period ended January 3, 1998" shall mean Flowers' twenty-seven week transition period from June 29, 1997 through January 3, 1998, and (iv) "fiscal 1998" shall mean the Company's full fiscal year ended January 2, 1999. As a result, the Company has presented its financial position as of January 2, 1999, January 3, 1998 and June 28, 1997 and has presented its results of operations, cash flow and changes in stockholders' equity for fiscal 1998, the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and fiscal 1996. For comparative purposes the Company has included unaudited condensed consolidated financial information of Flowers in Note 15 for the fifty-two weeks ended January 3, 1998 and the twenty-seven weeks ended January 4, 1997. RECLASSIFICATIONS During fiscal 1998, the Company changed its method of presenting the statement of cash flows from the direct method to the indirect method. This and certain other reclassifications of prior year information have been made to conform with the current year presentation. REVENUE RECOGNITION Revenue from sale of product at Flowers Bakeries is recognized at the time of shipment to its independent distributors, with a discount given the distributor recorded as an expense in selling, marketing and administrative expenses. Revenue from sale of product at Mrs. Smith's Bakeries is recognized at the time of shipment to the customer, recorded net of customer discounts. Revenue from sale of product at Keebler is recognized at the time of shipment to the customer or independent distributor, recorded net of customer and distributor discounts. Information regarding sales to significant customers is described in Note 12. F-8 28 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers deposits in banks, certificates of deposits and short-term investments with original maturities of three months or less as cash and cash equivalents for the purposes of the statement of cash flows. ACCOUNTS RECEIVABLE Accounts receivable consists of trade receivables, current portion of notes receivable and miscellaneous receivables. At January 2, 1999, allowances of $7.8 million were recorded. CONCENTRATION OF CREDIT RISK The Company grants credit to its customers and independent distributors, who are primarily in the grocery and foodservice markets. INVENTORIES Inventories are carried at the lower of cost or market. Approximately 47%, 100% and 100% of inventories at January 2, 1999, January 3, 1998 and June 28, 1997, respectively, are valued using the first-in-first-out method, with Keebler's finished goods inventory valued primarily under the last-in-first-out ("LIFO") method. There was no reserve required at January 2, 1999 to state the inventory on a LIFO basis. At January 2, 1999, inventories are shown net of allowances for slow-moving and aged inventory of $9.6 million. 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 January 2, 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 fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997, losses of $7.9 million, $.6 million and $1.9 million, respectively, were recorded. For fiscal 1996, a gain of $10.2 million was recorded. Gains and losses described above were substantially offset by opposite movements in the cost of the underlying hedged items. Gains and losses on agreements which do not qualify as hedges are marked to market and recognized immediately as other income or expense. For fiscal 1998, a gain of $1.1 million was recorded and for the twenty-seven week transition period ended January 3, 1998, a loss of $.8 million was recorded. As of January 2, 1999, deferred losses on closed contracts accounted for as hedges were $3.8 million. At January 2, 1999, the Company had approximately $116.6 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 rate instrument. Amounts payable or receivable under the interest rate swap agreements, calculated as the difference between the fixed and floating rates multiplied by the notional amount, is recorded as an adjustment to interest expense, in accordance with hedge accounting. Keebler's interest rate swap agreements are further discussed in Note 4. F-9 29 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION The Company provides depreciation for financial reporting purposes over the estimated useful lives of fixed assets using the straight-line method. Upon retirement or sale of fixed assets, the book value is removed from the accounts and the difference between such net book value and salvage value received is recorded in income. Expenditures for maintenance and repairs are charged to expense; renovations and improvements are capitalized. Buildings are depreciated over ten to forty years, machinery and equipment over three to twenty-five years, and furniture, fixtures and transportation equipment over three to fifteen years. Depreciation expense for fiscal 1998, for the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and fiscal 1996 was $108.5 million, $25.9 million, $44.8 million and $40.6 million, respectively. RESEARCH AND DEVELOPMENT Activities related to new product development and major improvements to existing products and processes are expensed as incurred. Amounts were $11.4 million for fiscal 1998, $.7 million for the twenty-seven week transition period ended January 3, 1998, $1.0 million for fiscal 1997 and $.8 million for fiscal 1996. ADVERTISING AND CONSUMER PROMOTION Advertising and consumer promotion costs are generally expensed as incurred or no later than when the advertisement appears or the event is run. Advertising and consumer promotion expense was approximately $108.4 million for fiscal 1998, $17.0 million for the twenty-seven week transition period ended January 3, 1998, $19.1 million for fiscal 1997 and $15.1 million for fiscal 1996. There were no deferred advertising costs at January 2, 1999, January 3, 1998 or June 28, 1997. NOTES RECEIVABLE AND DEFERRED INCOME Prior to September 1996, Flowers Bakeries sold its territories to independent distributors and financed such sales with ten year notes. In September 1996, Flowers Bakeries sold these notes, which totaled approximately $66.0 million, to a financial institution. The proceeds were used to repay debt outstanding at that time. Concurrently, approximately $43.2 million of deferred pre-tax income was recognized by Flowers Bakeries during fiscal 1997. Subsequent to September 1996, all distributor arrangements are made directly between the distributor and a financial institution and, pursuant to an agreement, Flowers Bakeries acts as the servicing agent for the financial institution and receives a fee for these services. COST IN EXCESS OF NET TANGIBLE ASSETS
JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 --------------- --------------- ------------- (AMOUNTS IN THOUSANDS) Goodwill, net......................................... $ 748,456 $46,100 $39,261 Trademarks and trade names, net....................... 254,987 30,617 29,192 ---------- ------- ------- $1,003,443 $76,717 $68,453 ========== ======= =======
Costs in excess of the net tangible assets acquired are, in the opinion of management, attributable to long-lived intangibles having continuing value. Goodwill related to the purchases of businesses are amortized over forty years from the acquisition date using the straight-line method. Costs of purchased trademark and trade name rights are amortized over the period of expected future benefit, which is approximately ten to forty years. Amortization expense for fiscal 1998, the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and fiscal 1996 was $19.6 million, $1.0 million, $1.1 million and $.3 million, respectively. F-10 30 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TREASURY STOCK FII records acquisitions of its common stock for treasury at cost. Differences between proceeds for reissuances of treasury stock and average cost are credited or charged to capital in excess of par value to the extent of prior credits and thereafter to retained earnings. STOCK-BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its plans. The difference between the market price at the date of grant and the purchase price to be paid by the grantee is recognized ratably by the Company, as compensation expense, over the vesting period. NET INCOME PER COMMON SHARE The Company computes net income per common share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128 -- "Earnings Per 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. CHANGES IN ACCOUNTING PRINCIPLES On April 3, 1998, the Accounting Standards Executive Committee, a subcommittee of the American Institute of Certified Public Accountants, issued Statement of Position 98-5 -- "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organizational costs to be expensed as incurred. As a result of adopting SOP 98-5, the Company recorded a cumulative after-tax charge of $3.1 million, or $.03 per share. On November 20, 1997, the Emerging Issues Task Force ("EITF"), a subcommittee of the Financial Accounting Standards Board, issued EITF 97-13, which requires the cost of business process reengineering activities that are part of an information systems development project be expensed as those costs are incurred. Any unamortized costs that were previously capitalized were required to be written off as a cumulative adjustment in the quarter that included November 20, 1997. During the twenty-seven week transition period ended January 3, 1998, Flowers recorded a cumulative after-tax charge of $8.8 million, or $.10 per share, as a result of its adoption of this pronouncement. The Company measures its pension plan assets three months prior to the beginning of its fiscal year. As a result of Flowers changing its fiscal year, the measurement date has changed from March 31 to September 30 for Flowers-sponsored defined benefit plans. This change resulted in a cumulative adjustment, net of tax, of $1.0 million, or $.01 per share, for the twenty-seven week transition period ended January 3, 1998. COMPREHENSIVE INCOME As of January 4, 1998, the Company adopted SFAS No. 130 -- "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of this statement had no impact on the Company's net earnings or stockholders' equity. During fiscal 1998 and the prior periods presented, total comprehensive income substantially equaled net income. F-11 31 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company determines whether there has been an impairment of long-lived assets and the related unamortized goodwill, based on whether certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost of any long-lived assets and the related unamortized goodwill may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future gross, undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down is required. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 -- "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new rules for accounting for derivative instruments and hedging activities. The statement requires that all derivatives be recognized either as assets or liabilities on the balance sheet and that 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. The standard will be 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. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. ACQUISITIONS ACQUISITION OF KEEBLER On January 26, 1996, FII acquired, for $62.5 million, a 49.6% interest in INFLO Holdings Corporation ("INFLO"), a newly formed corporation jointly owned by FII and Artal Luxembourg Corporation S.A. On January 26, 1996, INFLO acquired 100% of Keebler Corporation for an aggregate consideration of $454.9 million from United Biscuits (Holdings) plc. The acquisition of Keebler Corporation was financed through the equity of INFLO and bank borrowings. FII accounted for its investment in INFLO using the equity method of accounting from January 26, 1996 up until the time of the control purchase as further described below. On June 4, 1996, Keebler Corporation acquired 100% of Sunshine Biscuits, Inc. ("Sunshine") from G.F. Industries, Inc. ("GFI") for an aggregate purchase price of $171.6 million. The acquisition was funded by Keebler Corporation's working capital, bank financing and the issuance to GFI of $23.6 million of INFLO common stock and warrants. As a result of this transaction, FII's interest in INFLO was reduced to 45.2%. On November 20, 1997, INFLO was merged into Keebler Corporation and subsequently changed its name to Keebler Foods Company. On February 3, 1998, FII acquired an additional 11.5% of the common stock of Keebler, concurrent with Keebler's initial public offering, giving FII a majority ownership position in Keebler of approximately 55% (the "Keebler Acquisition"). The aggregate purchase price of the additional interest in Keebler was approximately $312.4 million, including transaction expenses. The Keebler Acquisition was initially financed F-12 32 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) through borrowings under FII's $500.0 million Syndicated Loan Facility. The acquisition of the additional interest in Keebler was accounted for using the purchase method of accounting, and accordingly, Keebler's assets and liabilities are included in the consolidated balance sheet as of January 2, 1999. The acquisition of the majority interest resulted in FII consolidating Keebler's operating results effective January 4, 1998. Keebler's operating results for the period January 4, 1998 through February 3, 1998, the date FII acquired the majority interest, were not materially different had the investment in Keebler been accounted for under the equity method, the method by which FII previously accounted for its investment in Keebler. The excess of the purchase price over the fair value of the net assets underlying the additional interest acquired, approximately $264.2 million, has been recorded as goodwill and is being amortized over forty years. The purchase price has been allocated to the assets acquired and liabilities assumed based on the respective fair values at the date of purchase, as summarized below (amounts in thousands): Cash........................................................ $ 46,989 Accounts receivable......................................... 98,963 Inventory................................................... 112,462 Other current assets........................................ 63,033 Property, plant and equipment............................... 478,121 Cost in excess of net tangible assets....................... 201,205 Other assets................................................ 61,879 Current liabilities......................................... 368,185 Long-term debt.............................................. 272,390 Deferred income taxes....................................... 69,417 Postretirement/postemployment obligations................... 60,605 Other noncurrent liabilities................................ 50,203 Minority interest........................................... 108,833
The following unaudited condensed combined pro forma results of operations assume the Keebler Acquisition occurred as of the beginning of the period. Additionally, the pro forma results for the year ended January 3, 1998 give effect to (i) FII selling 9,000,000 shares of its common stock in a public offering at $22 per share on April 27, 1998 and (ii) FII selling $200.0 million of 7.15% debentures on April 27, 1998, due April 15, 2028, as if such transactions had occurred at the beginning of the period (amounts in thousands, except per share data):
FOR THE 53 WEEKS ENDED JANUARY 3, 1998 ---------------------- Sales....................................................... $3,505,263 Income before extraordinary loss and cumulative effect of changes in accounting principles.......................... 61,777 Net income.................................................. 48,255 Diluted Net Income Per Common Share: Income before extraordinary loss and cumulative effect of changes in accounting principles....................... .63 Net income................................................ .49
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the transactions been consummated as of the beginning of the period, nor are they necessarily indicative of future operating results. F-13 33 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACQUISITION OF MRS. SMITH'S INC. On May 31, 1996, Flowers acquired the trademark of Mrs. Smith's Inc., a producer and marketer of frozen pies, from the J.M. Smucker Company. Under the terms of the acquisition agreement, Flowers paid $30.0 million, which consisted of $15.0 million in cash at closing and a $15.0 million note payable. In addition, Flowers entered into ten year leases for the property, plant and equipment used in the business. The acquisition has been accounted for as a purchase, and accordingly, the results of operations of the acquired business have been included in the consolidated statement of income from the date of acquisition. As discussed in Note 7, during fiscal 1997, Flowers recorded a purchase accounting reserve of $37.1 million. Of this amount, $22.7 million was allocated to cost in excess of net tangible assets and $14.4 million was allocated to deferred tax assets. ACQUISITION OF PRESIDENT INTERNATIONAL, INC. On September 28, 1998, Keebler acquired President International, Inc. ("President") from President International Trade and Investment Corporation for an aggregate purchase price of $450.6 million, including transaction expenses paid at closing. The President acquisition was funded by Keebler, with approximately $75.0 million from existing resources and the remainder from borrowings under the $700.0 million Senior Credit Facility Agreement ("Credit Facility") and a $125.0 million Bridge Facility, both dated as of September 28, 1998. The acquisition of President has been accounted for as a purchase. The purchase price has been allocated to the net tangible and intangible assets of President based on a preliminary assessment of fair values. The excess of the purchase price over the fair value of net assets acquired is approximately $329.2 million, of which $12.8 million represents costs pursuant to a plan to exit certain activities and operations of President, as further discussed in Note 7. The unallocated excess purchase price is being amortized straight-line over forty years. Results of operations for President from the date of acquisition have been included in the consolidated statement of income. The following unaudited condensed combined pro forma results of operations of the Company assume the President acquisition, the Keebler Acquisition and FII's equity and debt offerings discussed above occurred as of the beginning of each period presented (amounts in thousands, except per share data):
FOR THE 52 WEEKS ENDED FOR THE 53 WEEKS ENDED JANUARY 2, 1999 JANUARY 3, 1998 ---------------------- ---------------------- Sales........................................ $4,133,481 $3,952,547 Income before extraordinary loss and cumulative effect of changes in accounting principles................................. 50,449 56,793 Net income................................... 46,380 42,835 Diluted Net Income Per Common Share: Income before extraordinary loss and cumulative effect of changes in accounting principles................... .52 .58 Net income................................. .48 .44
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the transactions been consummated as of the beginning of each period presented, nor are they necessarily indicative of future operating results. OTHER ACQUISITIONS On January 30, 1998, Flowers Bakeries acquired the outstanding common stock of Franklin Baking Company ("Franklin") in Goldsboro, North Carolina. Franklin is a producer and marketer of fresh bakery F-14 34 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) products primarily to supermarkets. On May 1, 1998, Mrs. Smith's Bakeries acquired the Pet-Ritz and Oronoque Orchard frozen dessert brands from Van de Kamp's, Inc. Both transactions have been accounted for as purchases, and accordingly, the results of operations are included in the consolidated statement of income from the date of acquisition. The Company does not consider the effects of either of the acquisitions significant for pro forma disclosure purposes. Additionally, Flowers acquired certain other businesses during fiscal 1996, fiscal 1997, the twenty-seven week transition period ended January 3, 1998 and fiscal 1998 which have been accounted for as purchases. These acquisitions are immaterial to the results of operations and financial condition of the Company. NOTE 3. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of:
JANUARY 2, JANUARY 3, JUNE 28, 1999 1998 1997 ---------- ---------- -------- (AMOUNTS IN THOUSANDS) Employee compensation.................................... $ 93,942 $18,123 $23,984 Pension.................................................. 19,511 12,217 12,438 Insurance................................................ 63,551 13,429 13,808 Marketing and consumer promotions........................ 65,075 12,592 7,119 Other.................................................... 72,191 10,748 20,894 -------- ------- ------- Total.......................................... $314,270 $67,109 $78,243 ======== ======= =======
FII does not guarantee Keebler's other accrued liabilities of $232.1 million, which are included in the consolidated amount at January 2, 1999. NOTE 4. DEBT Total debt consists of the following:
INTEREST FINAL JANUARY 2, JANUARY 3, JUNE 28, RATE MATURITY 1999 1998 1997 ----------- --------- ---------- ---------- -------- (AMOUNTS IN THOUSANDS) Flowers: Syndicated Loan Facility.... 6.11% 2003 $ 150,000 $122,000 $117,000 Senior Notes................ 6.80%-7.08% 2016 125,000 125,000 125,000 Debentures.................. 7.15% 2028 200,000 Commercial Paper............ 5.87% Various 74,870 53,506 40,792 Other....................... Various 2004-2017 29,982 33,443 42,480 ---------- -------- -------- 579,852 333,949 325,272 ---------- -------- -------- Keebler: Bridge Facility............. 6.26% 1999 75,000 Revolving Facility.......... 6.07% 2004 85,000 Term Facility............... 5.94% 2004 350,000 Senior Subordinated Notes... 10.75% 2006 124,400 Other....................... Various 2001-2042 20,095 ---------- -------- -------- 654,495 ---------- -------- -------- Consolidated Debt............. 1,234,347 333,949 325,272 Due within one year......... 195,349 57,738 50,025 ---------- -------- -------- Due after one year.......... $1,038,998 $276,211 $275,247 ========== ======== ========
F-15 35 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FLOWERS On July 10, 1996, FII entered into a five year $300.0 million Syndicated Loan Facility. The facility was amended in January 1998, increasing the limit to $500.0 million, and extending the term to January 30, 2003. The facility was amended primarily to provide financing for the purchase of the majority interest in Keebler on February 3, 1998. At January 2, 1999, $150.0 million was outstanding. Amounts are borrowed under this facility for periods not to exceed 180 days and can be reborrowed as necessary during the term of the facility. Interest under the facility is generally payable monthly and is variable based on a performance grid using a choice of LIBOR plus .38% or money market rates. On January 5, 1996, FII completed a private placement of $125.0 million of Senior Notes. These notes are due in three tranches: $100.0 million due in semiannual installments from January 5, 2004 through January 5, 2008 which bears interest at 6.80% per annum; $20.0 million due January 5, 2011 which bears interest at 6.99% per annum; and $5.0 million due January 5, 2016 which bears interest at 7.08% per annum. Interest is payable semiannually. On April 27, 1998, FII sold $200.0 million of 7.15% debentures due April 15, 2028, priced at 99.47%. Interest on the debentures is payable semiannually. Net proceeds from the offering were used to reduce borrowings under the $500.0 million Syndicated Loan Facility. On July 28, 1998, FII amended its short-term Commercial Paper Agreement to increase the limit from $75.0 million to $100.0 million. Borrowings under this Agreement are used to finance inventory at Mrs. Smith's Bakeries, and at January 2, 1999 were $74.9 million. FII also has a $10.0 million revolving-term loan agreement entered into in March 1993, of which no amounts were outstanding at January 2, 1999. KEEBLER At January 2, 1999, Keebler's primary credit financing was provided by a $700.0 million Credit Facility and a $125.0 million Bridge Facility. Keebler entered into new debt facilities in order to finance the acquisition of President on September 28, 1998. The new debt structure provides for borrowings of $825.0 million, consisting of $350.0 million under the Revolving Facility, $350.0 million under the Term Facility and an additional $125.0 million under the Bridge Facility. The current outstanding balance on the Term Facility was $350.0 million with quarterly scheduled principal payments through the final maturity of September 4, 2004. The Revolving Facility, with a current outstanding balance of $85.0 million and available balance of $265.0 million at January 2, 1999, has a final maturity of September 2004 with no scheduled principal payments. Certain letters of credit totaling $42.2 million reduce the available balance on the Revolving Facility. Any unused borrowings under the Revolving Facility are subject to a commitment fee. The current commitment fee will vary from .1250% - -.30% based on the relationship of debt to adjusted earnings with a minimum commitment fee of .20% required through March 28, 1999. The Bridge Facility, which is anticipated to be refinanced with a receivable facility, has a final maturity of September 1999 with no scheduled principal payments. The current outstanding balance on the Bridge Facility was $75.0 million with an additional $50.0 million in available borrowings. Interest on the Credit Facility is calculated based on base rate plus applicable margin. The base rate can, at Keebler's option, be: (i) the higher of the base domestic lending rate as established by the administrative agent for the lender of the Credit Facility, or the Federal Funds Rate plus one-half of one percent; or (ii) a reserve percentage adjusted LIBOR as offered by the administrative agent. The Credit Facility requires Keebler to meet certain financial covenants including debt to earnings before interest, taxes, depreciation and amortization ratio and cash flow coverage ratios. Interest on the Bridge Facility is calculated using the same components as the Credit Facility and also is restricted by the same financial covenants. In conjunction with the President acquisition on September 28, 1998, a term loan was extinguished by using $145.0 million of borrowings under the new Credit Facility. Keebler recorded a pre-tax extraordinary F-16 36 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) charge of $2.8 million related primarily to expensing certain bank fees which were being amortized and which were incurred at the time the term loan was issued. The related after-tax charge, net of tax benefit and minority interest, was $.9 million. On October 23, 1996, pursuant to an exchange and registration rights agreement, Keebler registered its 10.75% Senior Subordinated Notes due 2006 (the "Notes") under the Securities Act of 1933 in exchange for previously held Increasing Rate Notes. The Notes were issued under an indenture dated June 15, 1996 between Keebler, Keebler's Restricted Subsidiaries (as defined in the indenture) and the U.S. Trust Company of New York, as trustee. The Notes are unsecured, senior subordinated obligations of Keebler guaranteed by the Restricted Subsidiaries. Interest on the Notes is paid semiannually on January 1 and July 1 of each year, commencing January 1, 1997. At Keebler's option, up to 35.0% of the aggregate original principal of the Notes can be redeemed at a redemption price of 110.0% on or prior to July 1, 1999 following a public equity offering. In addition, Keebler's ability to pay dividends or make other distributions on its common stock is limited by the terms of the indenture governing the Notes. At January 2, 1999, Keebler had interest rate swap agreements with a notional amount of $403.3 million, with expiration dates from 2001 through 2004, used to hedge its floating rate debt and had a swap agreement with a notional amount of $124.0 million, expiring in 2001, used to hedge its fixed rate debt. These interest rate swap agreements are with the Bank of Nova Scotia. In connection with the consolidation of Keebler, FII has recorded Keebler's indebtedness of $654.5 million as of January 2, 1999, however, FII has not guaranteed such indebtedness and it is to be repaid solely from the cash flows of Keebler. Several loan agreements of the Company contain restrictions which, among other things, require maintenance of certain financial ratios and restrict encumbrance of assets and creation of indebtedness. At January 2, 1999, the Company was in compliance with these financial ratio requirements. Annual maturities of long-term debt for each of the five years following January 2, 1999 and thereafter are as follows:
FLOWERS KEEBLER CONSOLIDATED -------- -------- ------------ (AMOUNTS IN THOUSANDS) 1999.................................................. $ 82,619 $112,730 $ 195,349 2000.................................................. 4,214 27,814 32,028 2001.................................................. 1,467 51,151 52,618 2002.................................................. 1,579 68,871 70,450 2003.................................................. 1,701 105,929 107,630 Thereafter............................................ 488,272 288,000 776,272 -------- -------- ---------- Total....................................... $579,852 $654,495 $1,234,347 ======== ======== ==========
The total amount due for FII during fiscal 1999 includes $74.9 million of short-term commercial paper, which FII intends to refinance under its Commercial Paper Agreement. NOTE 5. COMMITMENTS AND CONTINGENCIES DESCRIPTION OF OPERATING LEASE ARRANGEMENTS The Company leases certain property and equipment under operating leases which expire over the next twenty-six years. Most of these operating leases provide the Company with the option, after the initial lease term, either to purchase the property at the then fair value or renew its lease at the then fair rental value for periods of one month to ten years. F-17 37 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has entered into certain operating lease obligations requiring the Company to purchase or guarantee the residual value to the lessor of approximately $29.0 million at the termination of the lease. Minimum payments for the Company's operating leases, exclusive of the amount discussed above, having initial or remaining noncancelable terms in excess of one year, are as follows (amounts in thousands): 1999........................................................ $ 47,132 2000........................................................ 42,058 2001........................................................ 36,725 2002........................................................ 32,045 2003........................................................ 30,414 Thereafter.................................................. 59,854 -------- Total............................................. $248,228 ========
Rent expense for all operating leases amounted to $61.3 million for fiscal 1998, $16.2 million for the twenty-seven week transition period ended January 3, 1998, $24.2 million for fiscal 1997 and $16.9 million for fiscal 1996. FII does not guarantee Keebler's lease obligations of $135.7 million which are included in the consolidated amount above. OTHER COMMITMENTS The Company's various commodity purchase agreements effectively commit the Company to purchase raw materials in amounts approximating $150.0 million at January 2, 1999, which will be used in production in future periods. NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, notes receivable and long-term debt approximates fair value at January 2, 1999, January 3, 1998 and June 28, 1997. The fair value of the Company's outstanding commodity derivative financial instruments, based on the stated market value as of January 2, 1999, was $113.8 million. The fair value of Keebler's interest rate swap agreements, a net receivable of $1.1 million, was obtained from the Bank of Nova Scotia and was estimated based on market prices as of January 2, 1999. NOTE 7. FACILITY CLOSING COSTS AND SEVERANCE NON-RECURRING CHARGE During the fourth quarter of fiscal 1998, the Board of Directors of the Company approved a plan to realign production and distribution at Flowers Bakeries and Mrs. Smith's Bakeries in order to enhance efficiency. The Company recorded a pre-tax non-recurring charge of $68.3 million ($32.2 million, $32.3 million and $3.8 million for Flowers Bakeries, Mrs. Smith's Bakeries and Keebler, respectively), or $.45 per share after-tax. The charge includes $57.5 million of noncash asset impairments, $4.7 million of severance costs and $6.1 million of other related exit costs. The plan involves closing six less efficient facilities of Flowers Bakeries and Mrs. Smith's Bakeries and shifting their production and distribution to highly automated facilities. As a direct result of management's decision to implement production line rationalizations, asset impairments were recorded to write-down the closed facilities to net realizable value, less cost to sell, based on management's estimate of fair value, and the related cost in excess of net tangible assets. Also, as part of this plan, asset impairments were recorded to write-off certain duplicate machinery and equipment to be disposed of. Severance costs provide for the reduction of 695 employees, and, as of January 2, 1999, 405 employees had been severed. Ongoing costs, including, but not limited to, guard service, utilities and property taxes, of the F-18 38 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) closed facilities until time of disposal primarily represent the other exit costs. Management anticipates that all significant actions related to the plan will be completed as of the end of fiscal 1999. PURCHASE ACCOUNTING RESERVES As part of accounting for the acquisition of President, Keebler recognized costs pursuant to a plan to exit certain activities and operations of President in order to rationalize productivity and reduce costs and inefficiencies. These exit costs, for which there is no anticipated future economic benefit, were provided for in the allocation of the purchase price and totaled $12.8 million. Company-wide staff reductions of approximately 360 employees were estimated at $6.7 million, with the balance of the reserves allocated to costs associated with the closing of seven production, sales or distribution facilities, which principally include noncancelable lease obligations and building maintenance costs of $5.7 million. Spending against the reserves established for the President acquisition for fiscal 1999 totaled $.1 million. Management's plan is expected to be substantially complete before the end of fiscal 1999, except for noncancelable lease obligations and building maintenance costs, which will conclude in fiscal 2006. As part of the acquisition of Mrs. Smith's Inc., Flowers recorded a purchase accounting reserve of $37.1 million as an increase to cost in excess of net tangible assets, in order to realign production and distribution at Mrs. Smith's Bakeries to reduce inefficiencies. The realignment involved the shutdown of a leased production facility. The reserve includes $27.6 million of noncancelable lease obligations and building maintenance costs, $2.1 million of severance costs and $7.4 million of other exit costs, including health insurance, incremental workers' compensation costs and the costs associated with dismantling and disposing of equipment, at the closed facility. Under the plan, approximately 300 employees were to be and have been terminated. With the exception of noncancelable lease obligations and building maintenance costs that continue through fiscal 2006, this plan was substantially complete as of the end of fiscal 1998. Spending against the reserve totaled $4.1 million, $.6 million and $1.6 million in fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997, respectively. As part of INFLO's acquisition of Keebler and Keebler's subsequent acquisition of Sunshine, Keebler's management team adopted and began executing a plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4 million were provided for in the allocation of the purchase price of both the Keebler and Sunshine acquisitions. Management's plan included company-wide staff reductions, the closure of production, distribution and sales force facilities and information system exit costs. Severance costs were estimated at $39.4 million for the approximate 1,400 employees anticipated to be terminated. As of the end of fiscal 1998, all had been terminated. The plan included the closure of its Atlanta, Georgia and Santa Fe Springs, California, production facilities, as well as 39 sales force and distribution facilities. Costs incurred related to the closing of production, distribution and sales force facilities, other than severance costs, included primarily noncancelable lease obligations and building maintenance costs of $31.2 million. An additional $6.8 million was anticipated for lease costs related to exiting legacy information systems. As of January 4, 1998, the date FII began consolidating Keebler for financial reporting purposes, the remaining liability was $22.5 million, of which $20.2 million related to noncancelable lease obligations and building maintenance costs, $.3 million related to severance costs and $2.0 million related to other exit costs. All activity prior to that date occurred while FII accounted for its investment in Keebler in accordance with the equity method of accounting. Spending against the remaining reserves of $22.5 million totaled $7.7 million for fiscal 1998. In addition, during fiscal 1998, Keebler expensed an additional $2.8 million, principally for costs related to the closure of two distribution facilities not included in the original plan. Also during fiscal 1998, Keebler adjusted accruals previously established in the accounting for prior acquisitions by reducing goodwill and other intangibles by $3.7 million to recognize exit costs that are now expected to be less than initially anticipated. The exit plan is expected to be complete as of the end of fiscal 1999, with the exception of noncancelable lease obligations that continue through fiscal 2006. F-19 39 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Activity with respect to the non-recurring charge and purchase accounting reserves was as follows (amounts in thousands): Non-Recurring Charge: Provision, fiscal 1998...................................... $68,313 Noncash asset impairments................................... (57,489) Severance costs............................................. (3,217) Other exit costs............................................ (94) ------- Balance at January 2, 1999........................ $ 7,513 =======
Purchase Accounting Reserves: Provision, fiscal 1997...................................... $37,136 Severance costs............................................. (67) Other exit costs............................................ (1,539) ------- Balance at June 28, 1997.......................... 35,530 Severance costs............................................. (316) Other exit costs............................................ (261) ------- Balance at January 3, 1998........................ 34,953 Keebler Acquisition......................................... 22,478 Provision, fiscal 1998...................................... 12,770 Severance costs............................................. (766) Other exit costs............................................ (11,000) Net reserve adjustments..................................... (947) ------- Balance at January 2, 1999........................ $57,488 =======
At January 2, 1999, January 3, 1998 and June 28, 1997, the facility closing costs and severance liability, which includes the non-recurring charge and purchase accounting reserves, totaled $65.0 million, $35.0 million and $35.5 million, respectively. NOTE 8. STOCKHOLDERS' EQUITY FII FII's Articles of Incorporation provide that the authorized capital of FII consists of 350,000,000 shares of common stock of $.625 par value per share (the "Common Stock"), 10,467 shares of preferred stock, par value $100 per share, convertible into Common Stock, and 249,533 shares of preferred stock, par value $100 per share that, at the discretion of the Board of Directors, may be either convertible or non-convertible, of which 100,000 shares has been designated by the Board of Directors as Series A Junior Participating Preferred Stock ("Series A Preferred Stock"). Common Stock The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Subject to preferential rights of any issued and outstanding preferred stock, including the Series A Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors of FII out of funds legally available therefor. In the event of a liquidation, dissolution or winding-up of FII, holders of Common Stock are entitled to share ratably in all assets of FII, if any, remaining after payment of liabilities and the liquidation preferences of any F-20 40 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) issued and outstanding preferred stock, including the Series A Preferred Stock. Holders of Common Stock have no preemptive rights, no cumulative voting rights and no rights to convert their shares of Common Stock into any other securities of FII or any other person. The Common Stock is not subject to redemption or sinking fund redemption. On April 27, 1998, FII sold 9,000,000 shares of its Common Stock in a public offering at $22 per share. Net proceeds from the offering were used to reduce borrowings under the $500.0 million Syndicated Loan Facility which were primarily incurred to purchase the majority interest in Keebler. Preferred Stock The Board of Directors of FII has the authority to issue up to 249,533 shares of preferred stock in one or more series and to fix the designations, relative powers, preferences, rights, qualifications, limitations and restrictions of all shares of each such series, including without limitation, dividend rates, conversion rights, voting rights, redemption and sinking fund provisions, liquidation preferences and the number of shares constituting each such series, without any further vote or action by the holders of Common Stock. Pursuant to such authority, the Board of Directors has designated 100,000 shares of preferred stock as Series A Preferred Stock in connection with the adoption of FII's Shareholder's Rights Plan. The issuance of one or more series of preferred stock will likely decrease the amount of earnings and assets available for distribution to holders of Common Stock as dividends or upon liquidation, respectively, and may adversely affect the rights and powers, including voting rights, of the holders of Common Stock. The issuance of preferred stock also could have the effect of delaying, deterring or preventing a change in control of FII. Treasury Stock In October 1990, FII's board of directors approved a program authorizing FII to repurchase up to 15% of the total shares of its outstanding Common Stock. The stock will be repurchased at times when securities are available at prices FII considers attractive. KEEBLER Common Stock On January 29, 1998, Keebler made an initial public offering of 13,386,661 shares of common stock. All the shares in the offering were sold by certain existing shareholders, with no proceeds from the offering going to Keebler. Concurrent with this public offering, FII acquired an additional 11.5% interest in Keebler increasing its ownership position to approximately 55%. Keebler declared no cash dividends for the year ended January 2, 1999. Keebler's ability to pay cash dividends is limited by the Credit Agreement and the Senior Subordinated Notes. The most limiting dividend restriction exists under the Senior Subordinated Notes, which limits dividend payments to the sum of: (i) 50% of consolidated cumulative net income; (ii) net cash proceeds received from the issuance of capital stock; (iii) net cash proceeds received from the exercise of stock options and warrants; (iv) net cash received from the conversion of indebtedness into capital stock; and (v) the net reduction in investments made by Keebler. Treasury Stock In March 1998, Keebler's board of directors authorized the repurchase, at management's discretion, of up to $30.0 million of Keebler's common stock. Such repurchases are to offset dilution from the issuance of shares related to employee stock option exercises. Keebler's equity is eliminated in consolidation and the approximate 45% minority interest that results represents shares owned other than by FII. F-21 41 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FII SHAREHOLDER'S RIGHTS PLAN Subsequent to year end, on March 19, 1999, the Company's board of directors declared a dividend of one preferred share purchase right ( a "Right" or collectively, the "Rights") for each share of Common Stock held of record on the close of business on April 2, 1999. Under certain circumstances, a Right may be exercised to purchase one ten-thousandth of a share of Series A Junior Participating Preferred Stock (the "Preferred Stock") at an exercise price of $90.00. The Rights become exercisable upon the earlier to occur of: (i) the tenth calendar day after a person or group acquires 15% or more of the Company's outstanding Common Stock or (ii) the tenth business day after the commencement of a tender offer for 15% or more of the Company's outstanding Common Stock. If the Rights become exercisable, each Right will entitle the holder thereof to purchase one ten-thousandth of a share of Preferred Stock. If a person or group acquires 15% or more of the outstanding Common Stock of the Company, the holder of each Right not owned by the 15% or more shareholder would be entitled to purchase for $90.00 (the exercise price of the Right) Common Stock of the Company having market value equal to $180.00. If the Company is a party to certain mergers or business combination transactions or transfers 50% or more of its assets or earning power to another party, each Right will entitle its holder to buy a number of shares of Common Stock of the acquiring or surviving company having a market value of twice the exercise price of the Rights, or $180.00. If the Rights are fully exercised, the shares issued thereby would cause a substantial dilution to the shareholders of the acquiring or surviving company. The Company may also, under certain circumstances, exchange the Rights not owned by the 15% or more shareholder at an exchange ratio of one share of Common Stock per Right. The Rights expire April 2, 2009, and may be redeemed by the Company for $.01 per Right at any time prior to the close of business on the later of: (i) the tenth calendar day after a person or group acquires 15% or more of the Company's outstanding Common Stock or (ii) the tenth business day after the commencement of a tender offer for 15% or more of the Company's outstanding Common Stock. FII STOCK INCENTIVE PLANS FII has two stock incentive plans that authorize the Compensation Committee of the Board of Directors to grant to eligible employees stock options, stock appreciation rights, restricted or deferred stock awards, stock purchase rights and other stock-based awards. The Executive Stock Incentive Plan ("ESIP"), the only plan with shares available for grant, is authorized to grant to eligible employees up to 12,050,000 shares of Common Stock, through October 17, 2007. The FII Stock Option Plan expired on October 15, 1992, therefore no additional grants will be made pursuant to this Plan. During fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1996, 345,972, 347,609 and 1,180,295 shares, respectively, of FII's Common Stock were issued as Restricted Stock Awards ("RSA"). These shares are held in escrow by FII and will be released to the grantee upon the grantee's satisfaction of continued employment at the same or a higher level during the restriction periods and payment of the purchase price. The restriction periods end at various dates through June 2001. The purchase price is 50% of the mean of the high and low market value of FII's Common Stock at the date of grant. The purchase price of the shares issued ranges from $4.22 to $12.82 per share. Compensation expense for fiscal 1998, the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and fiscal 1996 was $3.8 million, $1.1 million, $1.7 million and $1.3 million, respectively. During fiscal 1996, 358,547 shares of FII's Common Stock were issued as Equity Incentive Awards ("EIA"). These shares are held in escrow by FII and may be released ratably to the grantee upon the grantee's satisfaction of continued employment at the same or a higher level during the restriction period which ends May 20, 1999, and upon payment of the purchase price of $5.11 per share. The purchase price is 50% of the mean of the high and low market value of FII's Common Stock on the date of grant. F-22 42 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Compensation expense for fiscal 1998, the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and fiscal 1996 was $.7 million, $.3 million, $.8 million and $.5 million, respectively. During fiscal 1998 and fiscal 1996, 1,128,600 and 843,750 shares, respectively, of FII's Common Stock were granted as non-qualified stock options ("NQSOs"). The NQSOs vest over a one or four year period and expire ten years after the date of grant. The optionees are required to pay the market value of the shares, determined as of the grant date, which was $21.00 during fiscal 1998 and $8.45 during fiscal 1996. As of January 2, 1999, January 3, 1998 and June 28, 1997, there were 1,926,000, 1,165,000 and 1,211,000 NQSOs outstanding, respectively. Stock option activity for FII's stock incentive plans for fiscal 1998, the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and fiscal 1996 is set forth below:
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED --------------------------------------- JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 ------------------ ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- ------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Outstanding at beginning of year...................... 1,165 $ 7.57 1,211 $7.52 1,664 $7.11 1,114 $5.70 Granted..................... 1,129 $21.00 844 $8.44 Exercised................... (368) $ 8.10 (46) $6.06 (453) $6.03 (294) $5.59 ------ ------ ------ ------ Outstanding at end of year...................... 1,926 $15.34 1,165 $7.57 1,211 $7.52 1,664 $7.11 ====== ====== ====== ====== Exercisable at end of year...................... 798 1,165 1,211 820 ====== ====== ====== ====== Weighted average fair value of options granted during the year.................. $ 4.37 $ 2.91 ====== ======
At January 2, 1999, 798,000 of the options are exercisable with a weighted average price of $7.33. The weighted average remaining contractual life of FII's options outstanding at January 2, 1999 is approximately 7.6 years. Keebler's 1996 Stock Option Plan has 9,673,594 shares of Keebler's common stock authorized for future grant. All options granted have ten year terms and, due to acceleration resulting from the achievement of certain performance measures, vest by 2001. Under this plan, at January 2, 1999, options for 6,456,280 shares were outstanding, of which 4,433,774 are exercisable. Keebler's 1998 Omnibus Stock Incentive Plan has 2,850,200 shares of Keebler's common stock authorized for future grant. All options granted generally have ten year terms and vest at the end of five years. Vesting can be accelerated if certain stock price performance measures are met. Under this plan, at January 2, 1999, options for 2,715,636 shares were outstanding, of which none are exercisable. As the Company applies APB 25 in accounting for its plans, and the option price is the market price at date of grant, no compensation expense has been recognized for options granted under the Company's plans. F-23 43 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had compensation expense for the options and Restricted Stock Awards under the Company's plans, inclusive of Keebler's options, been determined based on the fair value at the grant dates for the awards consistent with the methodology prescribed under SFAS No. 123 -- "Accounting for Stock-Based Compensation," the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ----------------------------- JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 --------------- --------------- ------------- ------------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) As Reported: Net income....................... $41,899 $23,560 $62,324 $30,768 Net Income Per Common Share: Basic......................... .43 .27 .71 .35 Diluted....................... .43 .27 .71 .35 Pro Forma: Net income....................... $38,989 $22,735 $61,716 $29,694 Net Income Per Common Share: Basic......................... .40 .26 .70 .34 Diluted....................... .40 .26 .70 .34
The fair values of the awards granted were estimated as of the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions used for grants during fiscal 1998: expected dividend yield of 3.64%, expected volatility of 23.9%, risk-free interest rate of 5.60% and expected lives of five years; during the twenty-seven week transition period ended January 3, 1998: no expected dividend yield, expected volatility of 26.8%, risk-free interest rate of 6.31% and expected lives of four years; and for grants during fiscal 1996: dividend yield of 3.43%, expected volatility of 24.7%, risk-free interest rate of 6.23% and expected lives of five years. The weighted average assumptions used for Keebler's grants during fiscal 1998 were as follows: no expected dividend yield, expected volatility of 27.2%, risk-free interest rate of 5.04% and expected lives of five years. NOTE 9. RETIREMENT PLANS DEFINED BENEFIT PLANS Flowers Flowers has noncontributory defined benefit pension plans covering certain employees. The benefits are based on years of service and the employee's career earnings. Flowers also has a supplemental defined benefit pension plan covering certain Flowers' employees which provides benefits to participants commencing at retirement calculated according to the formula contained in the Company's tax-qualified retirement plan, but without regard to statutory limitations on the maximum amount of compensation which may be taken into account by, nor the maximum benefits which may be paid from, such plans. Benefits provided by this supplemental plan are reduced by benefits provided by the defined benefit pension plans. The plans are funded at amounts deductible for income tax purposes but not less than the minimum funding required by the Employee Retirement Income Security Act of 1974 ("ERISA"). As of January 2, 1999, January 3, 1998 and June 28, 1997, the assets of the plans include certificates of deposit, marketable equity securities, mutual funds, corporate and government debt securities and annuity contracts. The marketable equity securities include 506,250 shares of FII's Common Stock with a fair value of approximately $12.1 million, $10.3 million and $8.5 million at January 2, 1999, January 3, 1998 and June 28, 1997, respectively. F-24 44 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Keebler Keebler has a trusteed, noncontributory defined benefit pension plan covering certain employees. Benefits provided under the plan are primarily based on years of service and the employee's final level of compensation. Keebler contributes annually not less than the ERISA minimum funding requirements. As of January 2, 1999, assets held by the plan consist primarily of common stocks, government securities, bonds and a real estate investment of $3.1 million in a distribution center which is under an operating lease to Keebler. In addition to the pension plan, Keebler also maintains an unfunded supplemental retirement plan for certain highly compensated former executives. Benefits provided are based on years of service. Vesting is graduated depending on termination after age 55. The net periodic pension cost for the Company's plans that are not fully funded includes the following components:
FOR THE 52 WEEKS FOR THE 52 FOR THE 27 ENDED WEEKS ENDED WEEKS ENDED ------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ----------- ----------- -------- -------- (AMOUNTS IN THOUSANDS) Service cost............................... $ 6,268 $ 2,846 $ 5,603 $ 5,887 Interest cost.............................. 11,904 5,207 10,311 9,368 Expected return on plan assets............. (13,635) (5,585) (10,415) (9,104) Amortization of transition asset........... (841) (422) (841) (841) Prior service cost......................... 59 30 84 72 Recognized net actuarial (gain) loss....... (177) 35 118 396 Purchase accounting adjustment............. (118) -------- ------- -------- ------- Net periodic pension cost.................. $ 3,578 $ 2,111 $ 4,860 $ 5,660 ======== ======= ======== =======
F-25 45 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The funding status and the amounts recognized in the consolidated balance sheet for the Company's plans that are not fully funded are as follows:
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED JANUARY 2, JANUARY 3, JUNE 28, 1999 1998 1997 ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year........ $(146,937) $(139,594) $(124,662) Acquisitions................................... (10,303) (1,389) Service cost................................... (6,268) (2,846) (5,603) Interest cost.................................. (11,904) (5,207) (10,311) Amendments..................................... 29 Actuarial loss................................. (23,964) (9,744) (3,564) Adjustment for change in measurement date...... 7,266 Benefits paid.................................. 7,727 3,188 5,906 --------- --------- --------- Benefit obligation at end of year.............. (191,649) (146,937) (139,594) --------- --------- --------- Change in plan assets: Fair value of plan assets at beginning of year........................................ 154,828 137,819 116,556 Actual return on plan assets................... (2,199) 26,113 25,008 Employer contribution.......................... 1,141 3,333 788 Acquisitions................................... $ $ $ 1,373 Adjustment for change in measurement date...... (9,249) Benefits paid.................................. (6,977) (3,188) (5,906) --------- --------- --------- Fair value of plan assets at end of year....... 146,793 154,828 137,819 --------- --------- --------- Funded status.................................. (44,856) 7,891 (1,775) Unrecognized net actuarial (gain) loss......... 22,749 (16,900) (6,891) Contribution between measurement date and fiscal year end............................. 185 330 Unrecognized prior service cost................ 557 616 596 Unrecognized net transition asset.............. (3,313) (4,154) (4,368) --------- --------- --------- Net amount recognized at end of year........... $ (24,678) $ (12,217) $ (12,438) ========= ========= =========
The net amount recognized at the end of the year includes $19.5 million which is recorded in other accrued liabilities (see Note 3) and the remainder is included in other long-term liabilities. F-26 46 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assumptions used in accounting for the Company's plans that are not fully funded at each of the respective period-ends are as follows:
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ---------- ---------- -------- -------- Weighted average assumptions: Measurement date........................... 9/30/98 9/30/97 3/31/97 3/31/96 Discount rate.............................. 6.50%-7.50% 8.00% 8.00% 7.75% Expected return on plan assets............. 9.00% 9.00% 9.00% 9.00% Rate of compensation increase.............. 4.00%-5.00% 5.50% 5.50% 5.25%
The net periodic pension cost for the Company's fully funded plan includes the following components:
FOR THE 52 WEEKS ENDED JANUARY 2, 1999 ---------------------- (AMOUNTS IN THOUSANDS) Service cost................................................ $ 9,040 Interest cost............................................... 31,080 Expected return on plan assets.............................. (39,352) Prior service cost.......................................... 689 -------- Net periodic pension cost................................... $ 1,457 ========
F-27 47 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The funded status and the amounts recognized in the consolidated balance sheet for the Company's fully funded plan is as follows:
FOR THE 52 WEEKS ENDED JANUARY 2, 1999 --------------- (AMOUNTS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year................... $ -- Acquisitions.............................................. (460,139) Service cost.............................................. (9,040) Interest cost............................................. (31,080) Amendments................................................ (4,874) Actuarial loss............................................ (45,871) Benefits paid............................................. 30,692 --------- Benefit obligation at end of year......................... (520,312) --------- Change in plan assets: Fair value of plan assets at beginning of year............ -- Acquisitions.............................................. 515,290 Actual return on plan assets.............................. 77,731 Employer contribution..................................... 19,292 Benefits paid............................................. (30,692) --------- Fair value of plan assets at end of year.................. 581,621 --------- Funded status............................................. 61,309 Unrecognized net actuarial gain........................... (16,538) Contribution between measurement date and fiscal year end.................................................... 115 Unrecognized prior service cost........................... 9,230 --------- Net amount recognized at end of year...................... $ 54,116 =========
Assumptions used in accounting for the Company's fully funded plan for fiscal 1998 are as follows:
JANUARY 2, 1999 --------------- Weighted average assumptions: Measurement date.......................................... 9/30/98 Discount rate............................................. 6.50% Expected return on plan assets............................ 9.00% Rate of compensation increase............................. 4.00%
F-28 48 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER PLANS Flowers Flowers contributes to various multiemployer, union-administered defined benefit and defined contribution pension plans. Benefits provided under the multiemployer pension plans are generally based on years of service and employee age. Expense under these plans was $.3 million for fiscal 1998, $.5 million for the twenty-seven week transition period ended January 3, 1998, $.4 million for fiscal 1997 and $.3 million for fiscal 1996, respectively. The Flowers Industries, Inc. 401(k) Retirement Savings Plan covers substantially all Flowers employees who have completed certain service requirements. Generally, the cost and contributions for employees who participate in the defined benefit pension plan is 25% of the first $400 contributed by the employee. The costs and contributions for employees who do not participate in the defined benefit pension plan is 2% of compensation and 25% of the employees' contributions, up to 6% of compensation. During fiscal 1998, the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and fiscal 1996, the total cost and contributions were $1.3 million, $.6 million, $1.4 million and $1.3 million, respectively. Keebler Contributions are also made by Keebler to a retirement program for Grand Rapids union employees. Benefits provided under the plan are based on a flat monthly amount for each year of service and are unrelated to compensation. Contributions are made based on a negotiated hourly rate. For fiscal 1998, Keebler expensed contributions of $2.3 million. Keebler contributes to various multiemployer, union-administered defined benefit and defined contribution pension plans. Benefits provided under the multiemployer pension plans are generally based on years of service and employee age. Expense under these plans was $8.9 million for fiscal 1998. NOTE 10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Keebler provides certain medical and life insurance benefits for eligible retired employees of Keebler. The medical plan, which covers nonunion employees with ten or more years of service, is a comprehensive indemnity-type plan. The plan incorporates an up-front deductible, coinsurance payments and employee contributions which are based on length of service. The life insurance plan offers a small amount of coverage versus the amount the employees had while employed. Keebler does not fund the plan. The net periodic postretirement benefit expense includes the following components:
FOR THE 52 WEEKS ENDED JANUARY 2, 1999 --------------- (AMOUNTS IN THOUSANDS) Service cost................................................ $2,045 Interest cost............................................... 3,961 Amortization of prior service cost.......................... (115) ------ Net periodic postretirement benefit cost.................... $5,891 ======
F-29 49 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The unfunded status and the amounts recognized in the consolidated balance sheet for Keebler's postretirement obligation are as follows:
FOR THE 52 WEEKS ENDED JANUARY 2, 1999 --------------- (AMOUNTS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year................... $ -- Acquisitions.............................................. (58,288) Service cost.............................................. (2,045) Interest cost............................................. (3,961) Actuarial gain............................................ 3,641 Benefits paid............................................. 4,384 -------- Benefit obligation at end of year...................... $(56,269) Unrecognized actuarial gain............................ (7,856) Unrecognized prior service cost........................ (574) Benefit payments subsequent to measurement date........ 978 -------- Accrued benefit obligation............................. $(63,721) ========
The accumulated postretirement benefit obligation was determined using a weighted average discount rate of 6.5% for fiscal 1998. The weighted average annual assumed rate of increase in the cost of covered benefits is 6.0% for fiscal 1998, declining gradually to an ultimate trend rate of 5.0% for fiscal 1999. A one percent increase in the trend rate for health care costs would have increased the accumulated benefit obligation as of January 2, 1999 by $2.6 million and the net periodic benefit cost by $.3 million. A one percent decrease in the trend rate for health care costs would have decreased the accumulated benefit obligation and net periodic benefit cost by $2.7 million and $.3 million, respectively, as of January 2, 1999. Additionally, Keebler provides post employment medical benefits to employees on long-term disability. The plan is a comprehensive indemnity-type plan which covers nonunion employees on long-term disability. There is no length of service requirement. The plan incorporates coinsurance payments and deductibles. Keebler does not fund the plan. The postemployment obligation included in the consolidated balance sheet at January 2, 1999 was $4.7 million. F-30 50 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11. INCOME TAXES The Company's provision for income taxes consists of the following:
FOR THE 52 FOR THE 52 FOR THE 27 WEEKS ENDED WEEKS ENDED WEEKS ENDED ------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ----------- ----------- -------- -------- (AMOUNTS IN THOUSANDS) Current Taxes: Federal................................... $72,121 $5,686 $26,910 $13,915 State..................................... 6,010 2,395 5,557 2,621 ------- ------ ------- ------- 78,131 8,081 32,467 16,536 ------- ------ ------- ------- Deferred Taxes: Federal................................... (3,346) 2,395 1,587 1,636 State..................................... (394) (319) 347 347 ------- ------ ------- ------- (3,740) 2,076 1,934 1,983 ------- ------ ------- ------- Benefit of operating loss carryforwards..... (525) (1,210) (334) ------- ------ ------- ------- Provision for income taxes.................. $74,391 $9,632 $33,191 $18,185 ======= ====== ======= =======
Deferred tax liabilities (assets) are comprised of the following:
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED JANUARY 2, JANUARY 3, JUNE 28, 1999 1998 1997 ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) Depreciation..................................... $ 173,610 $ 52,936 $ 51,275 Trademarks, trade names and intangibles.......... 49,348 Prepaid pension.................................. 14,283 Inventory valuation.............................. 6,779 Other............................................ 13,816 13,871 8,673 --------- -------- -------- Gross deferred tax liabilities......... 257,836 66,807 59,948 --------- -------- -------- Workers compensation............................. (19,891) (5,228) (5,274) Postretirement/postemployment benefits........... (26,171) Employee benefits................................ (33,806) (5,326) (4,756) Facility closing costs and severance............. (56,805) (13,921) (14,483) Loss carryforwards............................... (84,447) (4,739) (4,117) Other............................................ (17,109) (16,050) (9,093) --------- -------- -------- Gross deferred tax assets.............. (238,229) (45,264) (37,723) Deferred tax assets valuation allowance.......... 86,310 2,119 2,240 --------- -------- -------- $ 105,917 $ 23,662 $ 24,465 ========= ======== ========
The net change in the valuation allowance for deferred tax assets was an increase of $84.1 million, related to operating loss carryforwards. The increase was primarily attributable to the consolidation of Keebler. F-31 51 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes differs from the amount computed by applying the U.S. federal income tax rate (35%) because of the effect of the following items:
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ---------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ----------- ----------- ----------- -------- (AMOUNTS IN THOUSANDS) Tax at U.S. federal income tax rate...... $57,283 $8,757 $30,728 $16,919 State income taxes, net of U.S. federal income tax benefit..................... 5,298 1,390 3,837 1,929 Benefit of operating loss carryforwards.......................... (525) (1,210) (334) Intangible amortization.................. 6,910 174 122 77 Other.................................... 4,900 (164) (286) (406) ------- ------ ------- ------- Provision for income taxes..... $74,391 $9,632 $33,191 $18,185 ======= ====== ======= =======
The amount of federal operating loss carryforwards generated by certain subsidiaries of FII prior to their acquisition is $2.8 million with expiration dates through the fiscal year 2009. The use of pre-acquisition operating losses and tax credit carryforwards is subject to limitations imposed by the Internal Revenue Code. FII does not anticipate that these limitations will affect utilization of the carryforwards prior to their expiration. Various subsidiaries have state operating loss carryforwards of $56.1 million with expiration dates through fiscal 2013. Keebler has net operating loss carryforwards totaling approximately $203.2 million through 1998 and expiring in 2008 through 2011. Pursuant to the terms of INFLO's purchase of Keebler, the predecessor company retained the right to use the net operating losses for potential carrybacks. Any unused operating losses are then available to Keebler, but are significantly restricted under current tax law. Therefore, all net operating loss carryforwards have been fully reserved due to the uncertainty of their realization. In the event the net operating loss carryforwards become realizable, the valuation allowance would be reversed against trademarks, trade names and other intangibles. During fiscal 1997, the Internal Revenue Service ("IRS") completed an examination of Flowers' federal income tax returns for fiscal years 1993 through 1995. During the examination, the IRS asserted that Flowers' independent distributor program generated ordinary income upon the initial sale of the territories. As a result, Flowers paid for certain claims by the IRS relating primarily to Flowers' independent distributor program. Currently, Flowers is under audit by the IRS for fiscal 1997 and fiscal 1996. NOTE 12. SEGMENT REPORTING In fiscal 1998, the Company adopted SFAS No. 131 -- "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). This statement establishes 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 prior years for comparability. The Company has three reportable segments: Flowers Bakeries, Mrs. Smith's Bakeries and Keebler. Flowers Bakeries produces fresh 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. F-32 52 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accounting policies of the segments are substantially the same as those described in Note 1. The Company evaluates each segment's performance based on income or loss before interest and income taxes, excluding corporate and other unallocated expenses and non-recurring charges. Information regarding the operations in these reportable segments is as follows:
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ----------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ----------- ----------- ---------- ---------- (AMOUNTS IN THOUSANDS) Sales: Flowers Bakeries..................... $ 949,870 $460,245 $ 904,585 $ 841,181 Mrs. Smith's Bakeries................ 672,821 369,262 615,637 474,932 Keebler.............................. 2,226,480 Eliminations and Other (1)........... (72,710) (42,968) (78,969) (65,529) ---------- -------- ---------- ---------- $3,776,461 $786,539 $1,441,253 $1,250,584 ========== ======== ========== ========== Depreciation and Amortization: Flowers Bakeries..................... $ 33,487 $ 16,505 $ 28,533 $ 25,601 Mrs. Smith's Bakeries................ 18,676 9,427 15,830 13,877 Keebler.............................. 69,125 Other................................ 7,477 998 1,607 1,370 ---------- -------- ---------- ---------- $ 128,765 $ 26,930 $ 45,970 $ 40,848 ========== ======== ========== ========== Income Before Interest and Taxes: Flowers Bakeries..................... $ 75,779 $ 31,388 $ 46,189 $ 47,045 Mrs. Smith's Bakeries................ 45,855 20,153 40,186 21,603 Keebler.............................. 199,891 Unallocated General Expenses......... (20,823) (14,726) (16,716) (2,369) Non-Recurring Charge................. (68,313) ---------- -------- ---------- ---------- $ 232,389 $ 36,815 $ 69,659 $ 66,279 ========== ======== ========== ========== Non-Recurring Charge: Flowers Bakeries..................... $ 32,161 Mrs. Smith's Bakeries................ 32,300 Keebler.............................. 3,852 ---------- -------- ---------- ---------- $ 68,313 ========== ======== ========== ========== Interest Expense, Net.................. $ 68,725 $ 11,796 $ 25,109 $ 13,004 ========== ======== ========== ==========
F-33 53 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ----------------------- JANUARY 2, JANUARY 3, JUNE 28, JUNE 29, 1999 1998 1997 1996 ----------- ----------- ---------- ---------- (AMOUNTS IN THOUSANDS) Income Before Income Taxes, Investment in Unconsolidated Affiliate, Minority Interest, Extraordinary Loss and Cumulative Effect of Changes in Accounting Principles................ $ 163,664 $ 25,019 $ 87,794 $ 48,340 ========== ======== ========== ========== Capital Expenditures: Flowers Bakeries..................... $ 38,573 $ 22,710 $ 48,334 $ 55,730 Mrs. Smith's Bakeries................ 34,711 9,817 28,577 18,919 Keebler.............................. 66,798 Other................................ 193 330 599 893 ---------- -------- ---------- ---------- $ 140,275 $ 32,857 $ 77,510 $ 75,542 ========== ======== ========== ========== Assets: Flowers Bakeries..................... $ 458,966 $401,787 $ 408,815 $ 441,856 Mrs. Smith's Bakeries................ 459,652 366,602 361,575 281,610 Keebler.............................. 1,655,780 Other................................ 286,502 130,491 127,797 125,977 ---------- -------- ---------- ---------- $2,860,900 $898,880 $ 898,187 $ 849,443 ========== ======== ========== ==========
- --------------- (1) Primarily represents elimination of intersegment sales from Mrs. Smith's Bakeries to Flowers Bakeries which are transferred at standard costs. Sales to a single customer were approximately $84.0 million, or 11% of sales during the twenty-seven week transition period ended January 3, 1998, $163.0 million, or 11% of sales during fiscal 1997, and $150.0 million, or 12% of sales during fiscal 1996. During fiscal 1998, no sales to a single customer accounted for more than 10% of sales. NOTE 13. NET INCOME PER SHARE Net income per share is calculated using the weighted average number of common and common equivalent shares outstanding during each period. The common stock equivalents consist of the incremental shares associated with FII's stock option plans, as determined under the treasury stock method. The following table sets forth the computation of basic and diluted net income per share:
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ----------------------------- JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 --------------- --------------- ------------- ------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Income before extraordinary loss and cumulative effect of changes in accounting principles................................ $45,968 $33,448 $62,324 $30,768 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest..................... (938) Cumulative effect of changes in accounting principles, net of tax benefit............ (3,131) (9,888) ------- ------- ------- ------- Net income................................... $41,899 $23,560 $62,324 $30,768 ======= ======= ======= =======
F-34 54 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ----------------------------- JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 --------------- --------------- ------------- ------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Denominator: Basic weighted average shares................ 96,393 88,368 88,000 86,933 Effect of dilutive securities: Stock options............................. 408 405 401 278 ------- ------- ------- ------- Diluted weighted average shares.............. 96,801 88,773 88,401 87,211 ======= ======= ======= ======= Net Income Per Common Share: Basic -- Income before extraordinary loss and cumulative effect of changes in accounting principles................... $ .47 $ .38 $ .71 $ .35 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest........... (.01) Cumulative effect of changes in accounting principles, net of tax benefit.......... (.03) (.11) ------- ------- ------- ------- Net income per common share............... $ .43 $ .27 $ .71 $ .35 ======= ======= ======= ======= Diluted -- Income before extraordinary loss and cumulative effect of changes in accounting principles................... $ .47 $ .38 $ .71 $ .35 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest........... (.01) Cumulative effect of changes in accounting principles, net of tax benefit.......... (.03) (.11) ------- ------- ------- ------- Net income per common share............... $ .43 $ .27 $ .71 $ .35 ======= ======= ======= =======
NOTE 14. UNAUDITED QUARTERLY FINANCIAL INFORMATION Results of operations for each of the four quarters in the respective fiscal years is as follows (each quarter represents a period of twelve weeks, except the first quarter of fiscal 1998 and the fourth quarter of fiscal 1997, both of which include sixteen weeks):
QUARTER FIRST SECOND THIRD FOURTH - ------- ---------- ---------- ---------- ---------- 1998 1998 1998 1998 1998(T) 1998(T) 1998(T) 1998(T) 1997 1997 1997 1997 ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales............................. $1,077,034 $ 836,424 $ 862,784 $1,000,219 310,063 476,476(1) -- -- 318,957 383,146 303,950 435,200 Gross margin...................... 590,744 461,372 480,578 541,186 144,587 223,026(1) -- -- 179,929 166,612 144,836 205,321 Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles...................... 15,028 18,467 25,555 (13,082) 14,529 18,919(1) -- -- 19,948 12,263 12,170 17,943
F-35 55 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER FIRST SECOND THIRD FOURTH - ------- ---------- ---------- ---------- ---------- 1998 1998 1998 1998 1998(T) 1998(T) 1998(T) 1998(T) 1997 1997 1997 1997 ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest........................ -- -- (938) -- -- -- -- -- -- -- -- -- Cumulative effect of changes in accounting principles, net of tax benefit..................... (3,131)(2) -- -- -- -- (9,888)(1) -- -- -- -- -- -- Net income (loss)................. 11,897 18,467 24,617 (13,082) 14,529 9,031(1) -- -- 19,948 12,263 12,170 17,943 Basic net income (loss) per common share........................... .13 .19 .25 (.13) .16 .10(1) -- -- .23 .14 .14 .20 Diluted net income (loss) per common share.................... .13 .19 .25 (.13) .16 .10(1) -- -- .23 .14 .14 .20
- --------------- (T) Twenty-seven week transition period ended January 3, 1998. (1) Amounts relate to a fifteen-week period ended January 3, 1998 and, as such, do not correspond to the amounts reported in the Company's second quarter Form 10-Q for the twelve-week period ended December 13, 1997. (2) During the fourth quarter of fiscal 1998, the Company adopted SOP 98-5. The cumulative effect of this change in accounting was retroactive to the first quarter of fiscal 1998 and does not correspond with the amounts reported in the Company's first quarter Form 10-Q for the sixteen weeks ended April 25, 1998. F-36 56 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15. UNAUDITED OPERATING RESULTS The unaudited condensed consolidated results of operations of Flowers for the fifty-two weeks ended January 3, 1998 and the twenty-seven weeks ended January 4, 1997 are presented below. In the opinion of management, the accompanying unaudited condensed consolidated results of operations contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the results of operations:
FOR THE 52 FOR THE 27 WEEKS ENDED WEEKS ENDED JANUARY 3, 1998 JANUARY 4, 1997 --------------- --------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales..................................................... $1,440,079 $774,767 Income before income taxes and cumulative effect of changes in accounting principles........................ 62,478 50,335 Income taxes.............................................. 23,796 19,027 Income (loss) from investment in unconsolidated affiliate............................................... 24,813 (195) Income before cumulative effect of changes in accounting principles.............................................. 63,495 31,113 Cumulative effect of changes in accounting principles..... (9,888) Net income................................................ 53,607 31,113 Net Income Per Common Share: Income per share before cumulative effect -- basic...... .72 .35 Income per share before cumulative effect -- diluted.... .72 .35 Net income per share -- basic........................... .61 .35 Net income per share -- diluted......................... .61 .35
NOTE 16. SUBSEQUENT EVENTS On January 29, 1999, Keebler entered into a Receivable Purchase Agreement ("Agreement") to replace the Bridge Facility existing at January 2, 1999. This Agreement allows funds to be borrowed at a lower cost to Keebler and is collateralized by the accounts receivable of Keebler. On January 21, 1999, certain stockholders of Keebler sold 16,200,000 shares of Keebler's common stock in a secondary public offering, reducing their ownership percentage to 7%, collectively. Keebler received no proceeds from the sale, and the ownership percentages of FII and the management of Keebler remained at approximately 55% and 2%, respectively. On March 19, 1999, the Board of Directors of the Company declared a dividend of one right per share of common stock outstanding on April 2, 1999, pursuant to the terms of the Rights Agreement effective as of April 2, 1999, between the Company and First Union National Bank, as Rights Agent. F-37 57 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Flowers Industries, Inc. Our audits of the consolidated financial statements referred to in our report dated February 2, 1999 of this Report on Form 10-K/A also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K/A. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP Atlanta, Georgia February 2, 1999 58 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Those valuation and qualifying accounts which are deducted in the balance sheet from the assets to which they apply:
ADDITIONS ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - -------------- ------------ ---------- ---------- ---------- --------- Year Ended January 2, 1999 Discounts and doubtful accounts......... $ -- $20,148 $ 7,844(1) $(20,210)(2) $ 7,782 ====== ======= ======= ======== ======= Deferred taxes.......................... $2,119 $ -- $84,350(3) $ (159) $86,310 ====== ======= ======= ======== ======= Inventory reserves...................... $ 501 $ 7,484 $ 8,589(4) $ (6,960)(5) $ 9,614 ====== ======= ======= ======== ======= Twenty-Seven Weeks Ended January 3, 1998 Deferred taxes.......................... $2,240 $ -- $ -- $ (121) $ 2,119 ====== ======= ======= ======== ======= Inventory reserves...................... $ -- $ 501 $ -- $ -- $ 501 ====== ======= ======= ======== ======= Year Ended June 28, 1997 Deferred taxes.......................... $2,774 $ -- $ -- $ (534) $ 2,240 ====== ======= ======= ======== ======= Year Ended June 29, 1996 Deferred taxes.......................... $1,659 $ -- $ 1,115(6) $ -- $ 2,774 ====== ======= ======= ======== =======
- --------------- (1) $4,965 and $2,879 acquired in the Keebler Acquisition and President International, Inc. acquisition by Keebler, respectively. (2) Primarily charges against reserves, net of recoveries. (3) Amount acquired in the Keebler Acquisition. (4) $6,782 and $1,807 acquired in the Keebler Acquisition and President International, Inc. acquisition by Keebler, respectively. (5) Inventory write-offs, net. (6) Operating loss carryforwards S-1 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED ----------------------------- JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 --------------- --------------- ------------- ------------- Computation of Net Income: Basic and Diluted: Income before extraordinary loss and cumulative effect of changes in accounting principles............... $45,968 $33,448 $62,324 $30,768 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest....... (938) Cumulative effect of changes in accounting principles, net of tax benefit............................. (3,131) (9,888) ------- ------- ------- ------- Net income............................ $41,899 $23,560 $62,324 $30,768 ======= ======= ======= ======= Number of Shares Used in Calculation of Per Common Share Data: Basic weighted average shares............ 96,393 88,368 88,000 86,933 Effect of Dilutive Securities: Stock options............................ 408 405 401 278 ------- ------- ------- ------- Diluted weighted average shares.......... 96,801 88,773 88,401 87,211 ======= ======= ======= ======= Net Income Per Common Share: Basic: Income before extraordinary loss and cumulative effect of changes in accounting principles............... $ .47 $ .38 $ .71 $ .35 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest....... (.01) Cumulative effect of changes in accounting principles, net of tax benefit............................. (.03) (.11) ------- ------- ------- ------- Net income per common share........... $ .43 $ .27 $ .71 $ .35 ======= ======= ======= ======= Diluted: Income before extraordinary loss and cumulative effect of changes in accounting principles............... $ .47 $ .38 $ .71 $ .35 Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest....... (.01) Cumulative effect of changes in accounting principles, net of tax benefit............................. (.03) (.11) ------- ------- ------- ------- Net income per common share........... $ .43 $ .27 $ .71 $ .35 ======= ======= ======= =======
EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT There is no parent of the Registrant. The Registrant owns 100% of the voting securities of each subsidiary listed below, with the exception of Keebler Foods Company, of which the Registrant owns 55%, except that each subsidiary marked with an asterisk owns 100% of the voting securities of the subsidiary or subsidiaries indented immediately below such marked subsidiary. All subsidiaries listed below are included in the consolidated financial statements of the Registrant. Flowers Industries, Inc. .................................. Georgia Flowers Investments, Inc. ............................... Georgia *Flowers Bakeries Brands, Inc. ........................... South Carolina *Flowers Bakeries, Inc. ............................... Georgia *Flowers Baking Company of Florida, Inc. ............ Florida Flowers Baking Company of Miami, Inc. ........... Florida Flowers Baking Company of Jacksonville, Inc. .... Florida Flowers Baking Company of Bradenton, Inc. ....... Florida Flowers Baking Company of Thomasville, Inc. ........ Georgia *Flowers Baking Company of Villa Rica, Inc. ......... Georgia Flowers Baking Company of Gadsden, Inc. ......... Alabama Flowers Baking Company of Opelika, Inc. ............ Alabama Hardin's Bakery, Inc. .............................. Alabama Midtown Bakery, Inc................................. Alabama *Huval Bakery, Inc................................... Louisiana *Bunny Bread, Inc................................. Louisiana Flowers Baking Company of Baton Rouge, Inc..... Louisiana Flowers Baking Company of Jamestown, Inc............ North Carolina Flowers Baking Company of Lynchburg, Inc............ Virginia Flowers Baking Company of Norfolk, Inc.............. Virginia Flowers Baking Company of Morristown, Inc........... Tennessee Schott's Bakery, Inc................................ Texas Flowers Baking Company of West Virginia, Inc........ West Virginia *Flowers Baking Company of Texas, Inc................ Texas *Flowers Baking Company of Tyler, Inc............. Georgia Butterkrust Bakery, Inc........................ Texas El Paso Baking Company, Inc...................... Texas Flowers Baking Company of Texarkana................. Arkansas Holsum Baking Company............................... Arkansas Shipley Baking Company.............................. Arkansas Franklin Baking Company.................................. North Carolina *Mrs. Smith's Brands, Inc................................. South Carolina *Mrs. Smith's Bakeries, Inc............................ Georgia *European Bakers, Ltd................................ Georgia Aunt Fanny's Bakery, Inc......................... Georgia *Dan-co Bakery, Inc.................................. Georgia Daniels Home Bakery of North Carolina, Inc....... North Carolina Table Pride, Inc.................................... Georgia *Mrs. Smith's Sales Support Group, Inc............... Georgia Mrs. Smith's Foil Company, Inc................... Georgia Flowers Specialty of Suwanee, Inc................... Georgia *Mrs. Smith's Frozen Bakery Distributors, Inc........ Georgia Mrs. Smith's Bakeries of Pennsylvania, Inc....... Georgia Flowers Specialty Foods of Montgomery, Inc.......... Alabama Flowers Baking Company of South Carolina, Inc....... South Carolina Flowers Baking Company of Fountain Inn, Inc......... South Carolina Flowers Baking Company of Chattanooga, Inc.......... Tennessee Flowers Fresh Bakery Distributors, Inc.............. Tennessee Mrs. Smith's Bakeries of London, Inc................ Kentucky Pies, Inc........................................... Minnesota Stilwell Foods, Inc................................. Oklahoma *Keebler Foods Company.................................... Delaware *Keebler Company..................................... Delaware Steamboat Corporation............................ Georgia
2 Illinois Baking Corporation...................... Delaware Keebler Cookie & Cracker Company................. Nevada Hollow Tree Company, L.L.C....................... Delaware Keebler Co./Puerto Rico, Inc..................... Delaware Keebler H.C., Inc................................ Illinois Keebler-Georgia, Inc............................. Georgia Keebler Foreign Sales Corporation................ Virgin Islands Hollow Tree Financial Company, L.L.C............. Delaware Godfrey Transport, Inc........................... Delaware Bishop Baking Company, Inc....................... Delaware Famous Amos Chocolate Chip Cookie Company, L.L.C............................................ Delaware Mother's Cookie Company, L.L.C................... Delaware Murray Biscuit Company, L.L.C.................... Delaware Barbara Dee Cookie Company, L.L.C................ Delaware Little Brownie Bakers, L.L.C..................... Delaware President Baking Company, L.L.C.................. Delaware Sunny Cookie Company, L.L.C...................... Delaware Sunshine Biscuits, L.L.C......................... Delaware Elfin Equity Co., L.L.C.(1)...................... Delaware Keebler Assets Company(2)........................ Delaware Keebler Leasing Corp...................................... Delaware Shaffer, Clarke & Co., Inc................................ Delaware Johnston's Ready-Crust Company............................ Delaware Bake-Line Products, Inc................................... Illinois
- --------------- (1) 64.6% owned by Keebler Company and 35.4% owned by Sunshine Biscuits, Inc. (2) 34% owned by Keebler Company, 33% owned by Keebler-Georgia, Inc. and 33% owned by Keebler Leasing Corp. EX-23.1 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-34855, No. 33-91198 and No. 333-23351) and in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-34855) of our report dated February 2, 1999 on page F-2 of this Form 10-K/A. We also consent to the incorporation by reference of our report on the Financial Statement Schedule of this Form 10-K/A. /s/ PRICEWATERHOUSECOOPERS LLP Atlanta, Georgia October 7, 1999 EX-23.2 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 of Flowers Industries, Inc. (No. 33-34855, No. 33-91198 and No. 333-23351) and in the Prospectus constituting part of the Registration Statement on Form S-3 of Flowers Industries, Inc. (No. 33-34855) of our report dated February 2, 1999 on page F-2 of the Keebler Foods Company Form 10-K included as Exhibit 99 of this Form 10-K/A /s/ PRICEWATERHOUSECOOPERS LLP Chicago, Illinois October 7, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FLOWERS INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE FIFTY-TWO WEEKS ENDED JANUARY 2, 1999, AND THE FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AT JANUARY 2, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS: 1,000 YEAR JAN-02-1999 JAN-04-1998 JAN-02-1999 56,965 0 275,884 7,800 297,593 783,245 1,418,218 430,516 2,860,900 761,038 0 0 0 62,627 510,334 2,860,900 3,776,461 3,776,461 1,702,581 3,544,072 0 0 68,725 163,664 74,391 45,968 0 (938) (3,131) 41,899 0.43 0.43
EX-99.2 7 FINANCIAL STATMENTS OF KEEBLER FOODS COMPANY 1 EXHIBIT 99.2 KEEBLER FOODS COMPANY AND UB INVESTMENTS US INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ---- FINANCIAL STATEMENTS: Report of Independent Accountants........................... F-2 Consolidated Balance Sheets at January 2, 1999 and January 3, 1998................................................... F-3 Consolidated Statements of Operations for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996.............................. F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996..................... F-5 Consolidated Statements of Cash Flows for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996.............................. F-6 Notes to Consolidated Financial Statements.................. F-8 FINANCIAL STATEMENT SCHEDULE: Report of Independent Accountants........................... S-1 Schedule II -- Valuation and Qualifying Accounts............ S-2
- --------------- Note: The consolidated financial statements listed in the above index for Keebler Foods Company include the financial statements of the successor company for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996, and the predecessor company for the four weeks ended January 26, 1996, the date on which UBIUS was acquired by INFLO. The distinction between the successor company's and the predecessor company's consolidated financial statements has been made by inserting a double line between such consolidated financial statements. F-1 2 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders of Keebler Foods Company We have audited the accompanying consolidated balance sheets of Keebler Foods Company and Subsidiaries as of January 2, 1999 and January 3, 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended, and the forty-eight week period ended December 28, 1996. We have also audited the consolidated statements of operations, shareholders' equity and cash flows of UB Investments US Inc. and Subsidiaries for the four-week period ended January 26, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keebler Foods Company and Subsidiaries as of January 2, 1999 and January 3, 1998, and the consolidated results of operations and cash flows of Keebler Foods Company and Subsidiaries for the years ended January 2, 1999 and January 3, 1998, and the forty-eight weeks ended December 28, 1996, and the consolidated results of operations and cash flows of UB Investments US Inc. and Subsidiaries for the four week period ended January 26, 1996 in conformity with generally accepted accounting principles. /s/ PRICEWATERHOUSECOOPERS LLP Chicago, Illinois February 2, 1999 F-2 3 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS
JANUARY 2, JANUARY 3, 1999 1998 ------------ ------------ (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current Assets: Cash and cash equivalents................................. $ 23,515 $ 27,188 Trade accounts and notes receivable, net.................. 141,077 98,963 Inventories, net: Raw materials.......................................... 31,722 25,543 Package materials...................................... 13,081 7,306 Finished goods......................................... 120,550 78,131 Other.................................................. 1,024 1,482 ---------- ---------- 166,377 112,462 Deferred income taxes..................................... 57,713 42,730 Other..................................................... 26,636 20,303 ---------- ---------- Total current assets.............................. 415,318 301,646 Property, Plant and Equipment, net.......................... 564,524 478,121 Goodwill, net............................................... 391,449 47,059 Trademarks, Trade Names and Other Intangibles, net.......... 226,084 154,146 Prepaid Pension............................................. 38,205 43,060 Assets Held for Sale........................................ 2,972 3,742 Other Assets................................................ 17,228 15,077 ---------- ---------- Total assets...................................... $1,655,780 $1,042,851 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt...................... $ 112,730 $ 26,365 Trade accounts payable.................................... 143,572 126,213 Other liabilities and accruals............................ 232,087 194,923 Income taxes payable...................................... 10,779 13,784 Plant and facility closing costs and severance............ 11,018 6,900 ---------- ---------- Total current liabilities......................... 510,186 368,185 Long-term Debt.............................................. 541,765 272,390 Other Liabilities: Deferred income taxes..................................... 147,098 69,417 Postretirement/postemployment obligations................. 63,754 60,605 Plant and facility closing costs and severance............ 15,563 15,578 Deferred compensation..................................... 19,368 18,669 Other..................................................... 28,745 15,956 ---------- ---------- Total other liabilities........................... 274,528 180,225 Commitments and Contingencies Shareholders' Equity: Preferred stock ($.01 par value; 100,000,000 shares authorized and none issued)............................ -- -- Common stock ($.01 par value; 500,000,000 shares authorized and 84,125,164 and 77,638,206 shares issued, respectively).......................................... 841 776 Additional paid-in capital................................ 169,532 148,613 Retained earnings......................................... 167,608 72,737 Treasury stock............................................ (8,680) (75) ---------- ---------- Total shareholders' equity........................ 329,301 222,051 ---------- ---------- Total liabilities and shareholders' equity........ $1,655,780 $1,042,851 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-3 4 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS
KEEBLER FOODS COMPANY UBIUS ----------------------------------------------------- ---------------- FORTY-EIGHT FOUR YEAR ENDED YEAR ENDED WEEKS ENDED WEEKS ENDED JANUARY 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996 JANUARY 26, 1996 --------------- --------------- ----------------- ---------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net Sales............................ $2,226,480 $2,065,184 $1,645,532 $101,656 Costs and Expenses: Cost of sales...................... 938,896 888,031 774,198 54,870 Selling, marketing and administrative expenses......... 1,080,044 1,026,245 794,837 71,427 Other.............................. 11,501 9,511 6,347 857 ---------- ---------- ---------- -------- Income (Loss) from Continuing Operations......................... 196,039 141,397 70,150 (25,498) Interest (income) from affiliates...................... -- -- -- (875) Interest (income).................. (3,763) (1,191) (450) (3) Interest expense to affiliates..... -- -- -- 664 Interest expense................... 30,263 35,038 38,921 98 ---------- ---------- ---------- -------- Interest Expense (Income), Net...................... 26,500 33,847 38,471 (116) ---------- ---------- ---------- -------- Income (Loss) from Continuing Operations before Income Tax Expense:........................... 169,539 107,550 31,679 (25,382) Income tax expense................. 72,962 45,169 14,002 -- ---------- ---------- ---------- -------- Income (Loss) from Continuing Operations before Extraordinary Item............................... 96,577 62,381 17,677 (25,382) Discontinued Operations: Gain on disposal of Frozen Food businesses, net of tax.......... -- -- -- 18,910 ---------- ---------- ---------- -------- Income (Loss) before Extraordinary Item 96,577 62,381 17,677 (6,472) Extraordinary Item: Loss on early extinguishment of debt, net of tax................ 1,706 5,396 1,925 -- ---------- ---------- ---------- -------- Net Income (Loss).......... $ 94,871 $ 56,985 $ 15,752 $ (6,472) ========== ========== ========== ======== Basic Net Income Per Share: Income from continuing operations before extraordinary item....... $ 1.16 $ 0.80 $ 0.24 Extraordinary item................. 0.02 0.07 0.03 ---------- ---------- ---------- Net income......................... $ 1.14 $ 0.73 $ 0.21 ========== ========== ========== Weighted Average Shares Outstanding........................ 83,254 77,604 75,244 ========== ========== ========== Diluted Net Income Per Share: Income from continuing operations before extraordinary item....... $ 1.10 $ 0.77 $ 0.23 Extraordinary item................. 0.02 0.07 0.02 ---------- ---------- ---------- Net income......................... $ 1.08 $ 0.70 $ 0.21 ========== ========== ========== Weighted Average Shares Outstanding........................ 87,486 80,562 76,076 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-4 5 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK ---------------- PAID-IN EARNINGS ---------------- SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT TOTAL ------ ------- ---------- --------- ------ ------- -------- (IN THOUSANDS) Balance at December 30, 1995 (UBIUS).... 1,000 $ 1,000 $ 745,000 $(694,243) -- $ -- $ 51,757 Net loss for the four weeks........... -- -- -- (6,472) -- -- (6,472) ------ ------- --------- --------- ---- ------- -------- Balance at January 26, 1996 (UBIUS)..... 1,000 1,000 745,000 (700,715) -- -- 45,285 Write-off of predecessor company equity.............................. (1,000) (1,000) (745,000) 700,715 -- -- (45,285) Purchase of the Company by INFLO Holdings Corporation effective January 26, 1996.................... 71,656 717 124,284 -- -- -- 125,001 Management investment................. 306 2 786 -- -- -- 788 Issuance of common stock and warrants to Bermore.......................... 5,676 57 23,543 -- -- -- 23,600 Net income for the forty-eight weeks............................... -- -- -- 15,752 -- -- 15,752 ------ ------- --------- --------- ---- ------- -------- Balance at December 28, 1996 (Keebler Foods Company)........................ 77,638 776 148,613 15,752 -- -- 165,141 Purchase of treasury shares........... -- -- -- -- (43) (75) (75) Net income............................ -- -- -- 56,985 -- -- 56,985 ------ ------- --------- --------- ---- ------- -------- Balance at January 3, 1998 (Keebler Foods Company)........................ 77,638 776 148,613 72,737 (43) (75) 222,051 Exercise of Bermore warrant........... 6,136 61 19,740 -- -- -- 19,801 Purchase of treasury shares........... -- -- -- -- (292) (8,605) (8,605) Exercise of employee stock options.... 351 4 1,179 -- -- -- 1,183 Net income............................ -- -- -- 94,871 -- -- 94,871 ------ ------- --------- --------- ---- ------- -------- Balance at January 2, 1999 (Keebler Foods Company)........................ 84,125 $ 841 $ 169,532 $ 167,608 (335) $(8,680) $329,301 ====== ======= ========= ========= ==== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 6 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
KEEBLER FOODS COMPANY UBIUS ----------------------------------------------------- ---------------- FORTY-EIGHT FOUR YEAR ENDED YEAR ENDED WEEKS ENDED WEEKS ENDED JANUARY 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996 JANUARY 26, 1996 --------------- --------------- ----------------- ---------------- (IN THOUSANDS) CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES: Net income (loss).................... $ 94,871 $ 56,985 $ 15,752 $(6,472) Adjustments to reconcile net income (loss) to cash from operating activities: Depreciation and amortization...... 69,125 60,708 49,461 1,973 Deferred income taxes.............. 10,075 18,548 12,254 -- Accretion on Seller Note........... -- 2,376 2,246 -- Loss on early extinguishment of debt, net of tax................ 1,706 3,761 1,925 -- Loss (gain) on sale of property, plant and equipment............. 424 (358) (328) 33 Gain on the disposal of the Frozen Food businesses, net of tax..... -- -- -- (18,910) Other.............................. 1,460 -- -- -- Changes in assets and liabilities: Trade accounts and notes receivable, net................. (5,082) 38,187 3,842 22,068 Accounts receivable/payable from affiliates, net................. -- -- -- (1,941) Inventories, net................... (13,830) 203 (9,809) 4,353 Recoverable income taxes and income taxes payable................... (4,556) 16,113 -- 25 Other current assets............... (2,845) (966) 1,644 1,192 Deferred debt issue costs.......... (1,845) (1,344) (8,032) -- Trade accounts payable and other current liabilities............. 869 36,806 26,105 11,550 Plant and facility closing costs and severance................... (5,373) (13,715) (41,279) -- Restructuring reserves............. -- -- -- (14,469) Other, net......................... (2,319) 1,044 (553) 246 --------- --------- --------- ------- Cash provided from (used by) operating activities............... 142,680 218,348 53,228 (352) CASH FLOWS (USED BY) PROVIDED FROM INVESTING ACTIVITIES: Capital expenditures............... (66,798) (48,429) (29,352) (3,228) Proceeds from property disposals... 917 6,950 9,236 644 Working capital adjustment paid by UB Investment (Netherlands) B.V............................. -- -- 32,609 -- Purchase of President International, Inc., net of cash acquired........................ (444,818) -- -- -- Purchase of Sunshine Biscuits, Inc., net of cash acquired...... -- -- (142,670) -- Disposition of the Frozen Food businesses...................... -- -- -- 67,749 --------- --------- --------- -------
F-6 7 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
KEEBLER FOODS COMPANY UBIUS ----------------------------------------------------- ---------------- FORTY-EIGHT FOUR YEAR ENDED YEAR ENDED WEEKS ENDED WEEKS ENDED JANUARY 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996 JANUARY 26, 1996 --------------- --------------- ----------------- ---------------- (IN THOUSANDS) Cash (used by) provided from investing activities............... (510,699) (41,479) (130,177) 65,165 CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES: Purchase of treasury stock/capital contributions................... (8,605) (75) 788 -- Exercise of options and warrant.... 20,577 -- -- -- Long-term debt borrowings.......... 425,000 109,750 220,000 -- Long-term debt repayments.......... (157,626) (271,310) (134,000) (2,377) Commercial paper and Revolving Loan facilities, net................. 85,000 -- -- (63,300) --------- --------- --------- ------- Cash provided from (used by) financing activities............... 364,346 (161,635) 86,788 (65,677) --------- --------- --------- ------- (Decrease) increase in cash and cash equivalents........................ (3,673) 15,234 9,839 (864) Cash and cash equivalents at beginning of period................ 27,188 11,954 2,115 2,978 --------- --------- --------- ------- Cash and cash equivalents at end of period............................. $ 23,515 $ 27,188 $ 11,954 $ 2,114 ========= ========= ========= =======
The accompanying notes are an integral part of these consolidated financial statements. F-7 8 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements of Keebler Foods Company ("the Company," "Keebler" or "successor company") include the financial statements of the successor company for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight week period ended December 28, 1996, and UB Investments US Inc. ("UBIUS" or "predecessor company") for the four week period ended January 26, 1996, the date on which UBIUS was acquired by INFLO Holdings Corporation ("INFLO"). The distinction between the consolidated financial statements of the successor company and predecessor company has been made by inserting a double line between such consolidated financial statements and related footnotes. 1. BASIS OF PRESENTATION BUSINESS AND OWNERSHIP Keebler Foods Company, a manufacturer and distributor of food products, was acquired by INFLO on January 26, 1996. INFLO was owned by Artal Luxembourg S. A. ("Artal"), a private investment company, Flowers Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company, Bermore, Limited ("Bermore"), a privately held corporation and the parent of G.F. Industries, Inc. ("GFI") and certain members of Keebler's current management. On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger"), and subsequently changed its name to Keebler Foods Company. The financial statements as of and for all periods subsequent to January 26, 1996 have been restated to reflect the Merger as if it had been effective January 26, 1996. INFLO was legally established as of November 2, 1995, but did not have any operating activity, assets or liabilities until the Keebler acquisition on January 26, 1996. On January 29, 1998, Keebler made an initial public offering of 13,386,661 shares of common stock ("the Offering"). As part of the transaction, Flowers acquired additional shares of common stock from Artal and Bermore so that its ownership of outstanding stock increased to approximately 55%. In addition, during 1998, Bermore, through a series of transactions, transferred its shares held to Claremont Enterprises, Limited ("Claremont"), a privately held Bahamian limited company. Keebler is comprised of primarily the following wholly-owned subsidiaries: Keebler Company, Bake-Line Products, Inc. ("Bake-Line"), Sunshine Biscuits, Inc. ("Sunshine"), President International, Inc. ("President"), Keebler Leasing Corp. and Johnston's Ready Crust Company. The Company, formerly UBIUS, had previously been owned by UB Investments (Netherlands) B.V., a Dutch company (See Note 3). UB Investments (Netherlands) B.V. is a member of the worldwide group of affiliated companies owned by United Biscuits (Holdings) plc., a publicly held company in the United Kingdom. FISCAL YEAR Keebler's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The 1998 fiscal year consisted of fifty-two weeks and the 1997 fiscal year consisted of fifty-three weeks. As a result of the Keebler acquisition, which closed on the last day of the first four week period of 1996, the 1996 fiscal year consisted of the forty-eight weeks ended December 28, 1996. PRINCIPLES OF CONSOLIDATION All subsidiaries are wholly-owned and included in the consolidated financial statements of Keebler. Intercompany accounts and transactions have been eliminated. GUARANTEES OF NOTES The subsidiaries of Keebler that are not Guarantors of the Senior Subordinated Notes are inconsequential (which means that the total assets, revenues, income or equity of such non-guarantors, both individually and on a combined basis, is less than 3% of Keebler's consolidated assets, revenues, income or equity), individually and in the aggregate, to the consolidated financial statements of Keebler. The guarantees are full, F-8 9 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unconditional and joint and several. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors in the Senior Subordinated Notes. RECLASSIFICATIONS Certain reclassifications of prior years' data have been made to conform with the current year reporting. 2. ACQUISITION OF PRESIDENT INTERNATIONAL, INC. On September 28, 1998, Keebler acquired President International, Inc. from President International Trade and Investment Corporation, a company limited by shares under the International Business Companies Ordinance of the British Virgin Islands, for an aggregate purchase price of $446.1 million, excluding related fees and expenses paid of $4.5 million. The acquisition of President was a cash transaction funded with approximately $75.0 million from existing resources and the remainder from borrowings under the $700.0 million Senior Credit Facility Agreement ("Credit Facility") and a $125.0 million Bridge Facility, both dated as of September 28, 1998. The acquisition of President by Keebler has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of President based on respective fair values. The acquisition has resulted in an unallocated excess purchase price over fair value of net assets acquired of $329.2 million, which is being amortized on a straight-line basis over a forty year period. Results of operations for President from September 28, 1998 to January 2, 1999 have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place at the beginning of fiscal year 1997. The unaudited pro forma information includes adjustments for interest expense that would have been incurred related to financing the purchase, additional depreciation of the property, plant and equipment acquired and amortization of the trademarks, trade names, other intangibles and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been reported had the President acquisition been effected on the assumed date.
UNAUDITED FOR THE YEAR ENDED ----------------------- JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- (IN THOUSANDS) Net sales................................................... $2,583.5 $2,501.5 Income before extraordinary item............................ $ 104.7 $ 56.7 Net income.................................................. $ 102.7 $ 49.3 Diluted net income per share: Income before extraordinary item.......................... $ 1.20 $ 0.70 Net income................................................ $ 1.18 $ 0.61
3. PREDECESSOR COMPANY UBIUS, the predecessor company to Keebler Foods Company, was formed in 1992 as a result of the legal restructuring of United Biscuit (Holdings) plc.'s operations in the United States. UBIUS received the stock of the subsidiaries in exchange for the $850.0 million in debt with UB Investments (Netherlands) B.V., as well as all of the capital stock of UBIUS. On May 20, 1995, the predecessor company adopted plans to sell the Salty Snacks business. On January 24, 1996, the predecessor company sold to Kelly Food Products, Inc. selected assets of the Salty F-9 10 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Snacks business including the production plant in Bluffton, Indiana, trademarks and other intangibles related to the business, inventory and property, plant and equipment, including selected assets related to the convenience sales division. During July 1995, the predecessor company adopted plans to discontinue the operations of its Frozen Food businesses. On January 9, 1996, UB Investments (Netherlands) B.V. sold the assets and stock of Bernardi Italian Foods Co., The Original Chili Bowl, Inc., Chinese Food Processing Corporation (wholly-owned subsidiaries collectively known as the Frozen Food businesses) and certain assets of Keebler Company to Windsor Food Company Ltd. for $70.0 million. There were no operating activities for the Frozen Food businesses during the four weeks ended January 26, 1996, as the sale was effective as of December 31, 1995. A gain on sale of $18.9 million was recorded during the four weeks ended January 26, 1996. Income tax expense was not recognized on the gain on the sale of the Frozen Food businesses as the predecessor company did not provide for any income taxes during the four weeks ended January 26, 1996. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS All highly liquid instruments purchased with an original maturity of three months or less are classified as cash equivalents. The carrying amount of cash equivalents approximates fair value due to the relatively short maturity of these investments. TRADE ACCOUNTS RECEIVABLE Substantially all of Keebler's trade accounts receivable are from retail dealers and wholesale distributors. Keebler performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Trade accounts receivable, as shown on the consolidated balance sheets, were net of allowances of $7.8 million as of January 2, 1999 and $5.0 million as of January 3, 1998. INVENTORIES Inventories are stated at the lower of cost or market with cost determined principally by the last-in, first-out ("LIFO") method. Inventories stated under the LIFO method represent approximately 94% of total inventories at January 2, 1999 and 88% of total inventories at January 3, 1998. Because Keebler has adopted a natural business unit single pool approach to determining LIFO inventory cost, classification of the LIFO reserve by inventory component is impractical. There was no reserve required at January 2, 1999 to state the inventory on a LIFO basis. The excess of the current production cost of inventories over LIFO cost was $2.2 million at January 3, 1998. At January 2, 1999 and January 3, 1998, inventories are shown net of an allowance for slow-moving and aged inventory of $9.6 million and $6.8 million, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation expense is computed using the straight-line method based on the estimated useful lives of the depreciable assets. Certain facilities and equipment held under capital leases are classified as property, plant and equipment and amortized using the straight-line method over the lease terms, and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense. F-10 11 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES Trademarks, trade names and other intangibles are stated at cost and are amortized on a straight-line basis over a period of twenty to forty years. Accumulated amortization of trademarks, trade names and other intangibles was $11.8 million and $7.1 million at January 2, 1999 and January 3, 1998, respectively. GOODWILL Goodwill represents the excess cost over the fair value of the tangible and identifiable intangible net assets of acquired businesses. Goodwill is amortized on a straight-line basis over a period of forty years. Accumulated amortization of goodwill was $4.9 million and $1.8 million at January 2, 1999 and January 3, 1998, respectively. REVENUE RECOGNITION Revenue from the sale of products is recognized at the time of the shipment to customers. RESEARCH AND DEVELOPMENT Activities related to new product development and major improvements to existing products and processes are expensed as incurred and were $10.2 million for the year ended January 2, 1999, $10.2 million for the year ended January 3, 1998, $4.3 million for the forty-eight weeks ended December 28, 1996 and $0.6 million for the four weeks ended January 26, 1996. ADVERTISING AND CONSUMER PROMOTION Advertising and consumer promotion costs are generally expensed when incurred or no later than when the advertisement appears or the event is run. Advertising and consumer promotion expense was $87.2 million for the year ended January 2, 1999, $67.6 million for the year ended January 3, 1998, $33.3 million for the forty-eight weeks ended December 28, 1996 and $5.1 million for the four weeks ended January 26, 1996. There were no deferred advertising costs at January 2, 1999 and January 3, 1998. DERIVATIVE FINANCIAL INSTRUMENTS Keebler uses derivative financial instruments as part of an overall strategy to manage market risk. Keebler uses forward commodity futures and options contracts to hedge existing or future exposures to changes in commodity prices. Interest rate swap agreements are used to reduce the impact of changes in interest rates. Keebler does not enter into these derivative financial instruments for trading or speculative purposes (See Note 16). INCOME TAXES The consolidated financial statements reflect the application of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes." Keebler files a consolidated federal income tax return. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the determination as to whether there has been an impairment of long-lived assets and the related unamortized goodwill, is based on whether certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost of any long-lived assets and the related unamortized goodwill may be impaired, an evaluation of recoverability would be performed. If an evaluation F-11 12 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." The consolidated financial statements reflect the application of SFAS No. 128 which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options and warrants. Diluted earnings per share is similar to fully diluted earnings per share. SEGMENTS In 1998, Keebler adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization used by management to make operating decisions and to assess performance as the source in identifying and reporting segment information. In addition, SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the results of operations or financial position, but did affect the disclosure of segment information (See Note 17). PENSION PLANS AND POSTRETIREMENT BENEFITS In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The consolidated financial statements and related footnotes reflect the application of SFAS No. 132 (See Notes 10 and 11). USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 5. PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment, including related accumulated depreciation follows:
JANUARY 2, 1999 JANUARY 3, 1998 --------------- --------------- (IN THOUSANDS) Land...................................................... $ 18,374 $ 16,487 Buildings................................................. 140,907 130,241 Machinery and equipment................................... 424,574 328,473 Office furniture and fixtures............................. 76,447 56,559 Delivery equipment........................................ 7,208 6,946 Construction in progress.................................. 51,717 38,080 --------- -------- 719,227 576,786 Accumulated depreciation.................................. (154,703) (98,665) ========= ======== $ 564,524 $478,121 ========= ========
F-12 13 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the depreciable assets. Buildings are depreciated over a useful life of ten to forty years. Machinery and equipment is depreciated over a useful life of three to twenty-five years. Office furniture and fixtures are depreciated over a useful life of three to fifteen years. Delivery equipment is depreciated over a useful life of two to twelve years. 6. ASSETS HELD FOR SALE In 1998, a warehouse located in Houston, Texas, acquired as part of the President acquisition, was placed for sale. In addition, Keebler continued to hold an idle manufacturing facility in Atlanta, Georgia and a distribution center in Kensington, Connecticut for sale. During 1998, Keebler recognized an impairment charge of $0.9 million in order to reflect the manufacturing facility at fair value. Disposition of all assets held for sale is expected to occur before the end of 1999 without a significant gain or loss. 7. OTHER CURRENT LIABILITIES AND ACCRUALS Other current liabilities and accruals consisted of the following at January 2, 1999 and January 3, 1998:
JANUARY 2, 1999 JANUARY 3, 1998 --------------- --------------- (IN THOUSANDS) Self insurance reserves................................... $ 52,202 $ 55,185 Employee compensation..................................... 73,017 55,724 Marketing and consumer promotions......................... 53,027 52,838 Other..................................................... 53,841 31,176 -------- -------- $232,087 $194,923 ======== ========
Keebler obtains insurance to manage potential losses and liabilities related to workers' compensation, health and welfare claims and general, product and vehicle liability. Keebler has elected to retain a significant portion of the expected losses through the use of deductibles and stop-loss limitations. Provisions for losses expected under these programs are recorded based on Keebler's estimates of aggregate liability for claims incurred. These estimates utilize Keebler's prior experience and actuarial assumptions provided by the Company's insurance carrier. The total estimated liability for these losses at January 2, 1999 and January 3, 1998 was $52.2 million and $55.2 million, respectively, and is included in other current liabilities and accruals. Keebler has collateralized its liability for potential self-insurance losses in several states by obtaining standby letters of credit which aggregate to approximately $17.0 million. F-13 14 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. DEBT AND LEASE COMMITMENTS Long-term debt consisted of the following at January 2, 1999 and January 3, 1998:
JANUARY 2, JANUARY 3, INTEREST RATE FINAL MATURITY 1999 1998 ------------- ------------------ ---------- ---------- (IN THOUSANDS) Bridge Facility.................... 6.263% September 26, 1999 $ 75,000 $ -- Revolving Facility................. 6.073% September 28, 2004 85,000 -- Term Facility...................... 5.944% September 28, 2004 350,000 -- Term-A Loans....................... 6.144% April 7, 2003 -- 156,000 Senior Subordinated Notes.......... 10.750% July 1, 2006 124,400 125,000 Other Senior Debt.................. Various 2001-2005 11,805 12,645 Capital Lease Obligations.......... Various 2002-2042 8,290 5,110 -------- -------- 654,495 298,755 Less: Current maturities........... 112,730 26,365 -------- -------- $541,765 $272,390 ======== ========
At January 2, 1999, Keebler's primary credit financing was provided by a $700.0 million Credit Facility and a $125.0 million Bridge Facility. Keebler entered into new debt facilities in order to finance the acquisition of President on September 28, 1998. The new debt structure specifically provides for available borrowings of $825.0 million consisting of $350.0 million under the Revolving Facility, $350.0 million under the Term Facility and an additional $125.0 million under the Bridge Facility. The current outstanding balance on the Term Facility at January 2, 1999 was $350.0 million with quarterly scheduled principal payments through the final maturity of September 2004. The Revolving Facility, with a current outstanding balance of $85.0 million and available balance of $265.0 million at January 2, 1999, has a final maturity of September 2004, with no scheduled principal payments. Certain letters of credit totaling $42.2 million reduce the available balance on the Revolving Facility. Any unused borrowings under the Revolving Facility are subject to a commitment fee. The current commitment fee will vary from 0.1250% -- 0.30% based on the relationship of debt to adjusted earnings with a minimum commitment fee of 0.20% required through March 28, 1999. The Bridge Facility, which is anticipated to be refinanced with a receivables facility (See Note 19), has a final maturity of September 1999, with no scheduled principal payments. At January 2, 1999, the current outstanding balance on the Bridge Facility was $75.0 million with an additional $50.0 million in available borrowings. Interest on the Credit Facility is calculated based on base rate plus applicable margin. The base rate can, at Keebler's option, be: i) the higher of the base domestic lending rate as established by the administrative agent for the lender of the Credit Facility, or the Federal Funds Rate plus one-half of one percent or ii) a reserve percentage adjusted LIBO Rate as offered by the administrative agent. The Credit Facility requires Keebler to meet certain financial covenants including debt to earnings before interest, taxes, depreciation and amortization ratio and cash flow coverage ratios. Interest on the Bridge Facility is calculated in the same manner as the Credit Facility and also is restricted by the same financial covenants. In conjunction with the President acquisition on September 28, 1998, Term Loan A was extinguished by using $145.0 million of borrowings under the new Credit Facility. Keebler recorded a before-tax extraordinary charge of $2.8 million related primarily to expensing certain bank fees which were being amortized and which were incurred at the time Term Loan A was issued. The related after-tax charge was $1.7 million. At January 3, 1998, Keebler's primary credit financing was provided by a $380.0 million Second Amended and Restated Credit Agreement ("Credit Agreement") consisting of a $140.0 million Revolving Loan facility and a $240.0 million Term Loan of which the outstanding balance at January 3, 1998 was $156.0 F-14 15 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) million. The amendment to the Credit Agreement was entered into on April 8, 1997 to obtain more favorable terms, fees and interest rates. The interest expense, including commitment fee, on the Credit Agreement was calculated in substantially the same manner as is done under the current Credit Facility. During the fourth quarter of 1997, using existing cash resources, Keebler pre-paid $70.0 million of principal on Term Loan A; $30.0 million on December 8, 1997 and $40.0 million on November 10, 1997. The pre-payments resulted in the recognition of a $1.1 million after-tax extraordinary charge related to the expensing of certain unamortized bank fees which were incurred at the time Term Loan A was issued. On November 21, 1997, Keebler settled the Seller Note with a payment of $31.7 million funded through working capital. Keebler assumed the $32.5 million Seller Note, previously held by INFLO, as a result of the Merger. The Seller Note did not bear interest until January 26, 1999 and was recorded at a discounted value of $24.4 million on January 26, 1996. The discount was being amortized over three years at an effective interest rate of 10.0%. Keebler recorded a before-tax extraordinary charge of $2.6 million on the early extinguishment of debt. The related after-tax charge was $1.6 million. In conjunction with the amendment to the Credit Agreement on April 8, 1997, Term Loans B and C were extinguished using $40.0 million of borrowings under the Revolving Loan facility, $109.8 million of increased borrowings against Term Loan A and $3.8 million from cash resources. Keebler recorded a before-tax extraordinary charge of $4.6 million related primarily to expensing certain unamortized bank fees which were incurred at the time Term Loans B and C were issued. The related after-tax charge was $2.7 million. On October 23, 1996, pursuant to an exchange and registration rights agreement, Keebler registered its 10.75% Senior Subordinated Notes due 2006 (the "Notes") under the Securities Act of 1933 in exchange for previously held Increasing Rate Notes. The Notes were issued under an indenture dated June 15, 1996 between Keebler, Keebler's Restricted Subsidiaries (as defined in the indenture) and the U.S. Trust Company of New York, as trustee. The Notes are unsecured, senior subordinated obligations of Keebler guaranteed by the Restricted Subsidiaries. Interest on the Notes is paid semi-annually on January 1 and July 1 of each year, commencing January 1, 1997. At Keebler's option, up to 35.0% of the aggregate original principal of the Notes can be redeemed at a redemption price of 110.0% on or prior to July 1, 1999 following a public equity offering. In addition, Keebler's ability to pay dividends or make other distributions on its common stock is limited by the terms of the indenture governing the Notes. The Increasing Rate Notes, issued to finance the Keebler acquisition, were repaid in June 1996 with the proceeds from a private placement offering for the 10.75% Senior Subordinated Notes due in 2006. Keebler recorded a before-tax extraordinary loss of $3.2 million on the early extinguishment of the Increasing Rate Notes. The loss consisted primarily of bank fees incurred at the time the Increasing Rate Notes were issued. The after-tax loss was $1.9 million. On July 1, 1998, Keebler entered into a swap transaction with the Bank of Nova Scotia, who also serves as the administrative agent for the lenders under the Credit Facility, which matures on July 1, 2001. The swap transaction had the effect of converting the fixed rate of 10.75% on $124.0 million of the Notes to a rate of 10.26% through January 1, 1999 and 10.32% through July 1, 1999. In addition, on September 30, 1998 and October 5, 1998, Keebler entered into two swap transactions with the Bank of Nova Scotia both maturing on September 30, 2004. Each swap transaction converts the base rate on $116.7 million of the Credit Facility to fixed rate debt of 5.084% and 4.89%, respectively. Keebler also continues to maintain the swap transaction entered into with the Bank of Nova Scotia on January 30, 1996 which converts the base rate on $170.0 million of the Credit Facility to a fixed rate obligation of 5.0185% through February 1, 1999. The maturity date on the $170.0 million swap transaction was extended to February 1, 2001 by the Bank of Nova Scotia on January 28, 1999. F-15 16 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest of $24.0 million, $39.0 million, $25.2 million and $3.8 million was paid on debt for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, respectively. Aggregate scheduled annual maturities of long-term debt as of January 2, 1999 are as follows:
(IN THOUSANDS) -------------- 1999........................................................ $112,730 2000........................................................ 27,814 2001........................................................ 51,151 2002........................................................ 68,871 2003........................................................ 105,929 2004 and thereafter......................................... 288,000 ======== $654,495 ========
Assets recorded under capitalized lease agreements included in property, plant and equipment consist of the following:
JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- (IN THOUSANDS) Land........................................................ $ 980 $ 980 Buildings................................................... 2,894 51 Machinery and equipment..................................... 2,853 212 Other leased assets......................................... 1 1 ------ ------ 6,728 1,244 Accumulated depreciation.................................... (242) (105) ------ ------ $6,486 $1,139 ====== ======
Future minimum lease payments under scheduled capital and operating leases that have initial or remaining noncancelable terms in excess of one year are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) 1999........................................................ $ 986 $ 29,488 2000........................................................ 1,018 25,450 2001........................................................ 1,073 21,454 2002........................................................ 1,481 17,614 2003........................................................ 460 16,186 2004 and thereafter......................................... 6,170 25,530 ------- -------- Total minimum payments...................................... $11,188 $135,722 ======= ======== Amount representing interest................................ (2,898) ------- Obligations under capital lease............................. 8,290 Obligations due within one year............................. (680) ------- Long-term obligations under capital leases.................. $ 7,610 =======
Rent expense for all operating leases was $38.7 million, $36.1 million, $30.1 million and $2.7 million, for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, respectively. F-16 17 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE As part of accounting for the acquisition of President, Keebler recognized costs pursuant to a plan to exit certain activities and operations of the acquired company. These exit costs, for which there is no future economic benefit, were provided for in the allocation of the purchase price and totaled $12.8 million. Company-wide staff reductions were estimated at $6.7 million, with the balance of the reserves allocated to costs associated with manufacturing, sales and distribution facility closings, which principally include lease termination and carrying costs. Spending against the reserves established related to the President acquisition for the year ended January 2, 1999 totaled $0.1 million. Management's plan is expected to be substantially complete before the end of 1999 with only noncancelable lease obligations exceeding the one year time frame. As part of acquiring Keebler and Sunshine, management adopted and began executing a plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4 million were provided for in the allocation of the purchase price of both the Keebler and Sunshine acquisitions. Management's plan included company-wide staff reductions, the closure of manufacturing, distribution and sales force facilities and information system exit costs. Severance, outplacement and other related costs associated with staff reductions were estimated at $30.7 million. Costs incurred related to the closing of manufacturing, distribution and sales force facilities, which include primarily severance and lease termination and carrying costs, were expected to total $39.9 million. An additional $6.8 million was anticipated for lease costs related to exiting legacy information systems. Spending against the reserves established for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996 totaled $7.7 million, $16.2 million and $41.4 million, respectively. In addition, during the years ended January 2, 1999 and January 3, 1998, Keebler expensed an additional $2.8 million and $2.7 million, respectively, principally for costs related to the closure of distribution facilities not included in the original plan. No additional provisions were made during the forty-eight weeks ended December 28, 1996. Also during the year ended January 2, 1999, Keebler adjusted accruals previously established in the accounting for prior acquisitions by reducing goodwill and other intangibles by $3.7 million to recognize exit costs that are now expected to be less than initially anticipated. At January 2, 1999 and January 3, 1998, the total plant and facility closing costs and severance reserve balance was $26.6 million and $22.5 million, respectively. Only noncancelable lease obligations are anticipated to extend beyond 1999, to be paid out over the next eight years concluding in 2006. 10. EMPLOYEE BENEFIT PLANS The Retirement Plan for Salaried and Certain Hourly-Paid Employees of Keebler Company (the "pension plan") is a trusteed, noncontributory, defined-benefit, pension plan. The pension plan covers certain salaried and hourly-paid employees. Assets held by the pension plan consist primarily of common stocks, government securities and bonds. Benefits provided under the pension plan are primarily based on years of service and the employee's final level of compensation. Keebler's funding policy is to contribute annually not less than the ERISA minimum funding requirements. Effective December 31, 1998, the pension plans of President were merged with Keebler's pension plan. The pension plans of Sunshine, Athens Packaging, Bake-Line and Emerald Industries were merged with Keebler's pension plan effective January 1, 1997. F-17 18 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pension expense included the following components:
FORTY-EIGHT FOUR WEEKS YEAR ENDED YEAR ENDED WEEKS ENDED ENDED JANUARY 2, JANUARY 3, DECEMBER 28, JANUARY 26, 1999 1998 1996 1996 ---------- ---------- ------------ ----------- (IN THOUSANDS) Service cost.............................. $ 9,040 $ 8,560 $ 7,711 $ 599 Interest cost............................. 31,080 29,673 21,338 1,133 Expected return on plan assets............ (39,352) (37,935) (28,247) (1,693) Amortization of transition obligation..... -- -- -- 47 Amortization of prior service cost........ 689 -- -- (12) -------- -------- -------- ------- Pension expense........................... $ 1,457 $ 298 $ 802 $ 74 ======== ======== ======== =======
The funded status of Keebler's pension plan and amounts recognized in the consolidated balance sheets are as follows:
JANUARY 2, 1999 JANUARY 3, 1998 --------------- --------------- (IN THOUSANDS) Change in projected benefit obligation: Benefit obligation at beginning of year................. $(437,334) $(408,060) Service cost............................................ (9,040) (8,560) Interest cost........................................... (31,080) (29,673) Amendments.............................................. (4,874) (5,045) Actuarial loss.......................................... (45,871) (14,795) Acquisition............................................. (22,805) -- Benefits and expenses paid.............................. 30,692 28,799 --------- --------- Benefit obligation at year end.......................... (520,312) (437,334) --------- --------- Change in plan assets: Fair value of plan assets at beginning of year.......... 499,379 464,433 Actual return on plan assets............................ 77,731 63,745 Acquisition............................................. 19,292 -- Benefits and expenses paid.............................. (30,692) (28,799) --------- --------- Fair value of plan assets at year end................... 565,710 499,379 --------- --------- Funded status........................................... 45,398 62,045 Unrecognized actuarial gain............................. (16,538) (24,029) Unrecognized prior service cost......................... 9,230 5,044 Contributions subsequent to measurement date............ 115 -- --------- --------- Prepaid pension......................................... $ 38,205 $ 43,060 ========= =========
Assumptions used in accounting for the pension plan at each of the respective period-ends are as follows:
FORTY-EIGHT FOUR WEEKS YEAR ENDED YEAR ENDED WEEKS ENDED ENDED JANUARY 2, JANUARY 3, DECEMBER 28, JANUARY 26, 1999 1998 1996 1996 ---------- ---------- ------------ ----------- Discount rate....................... 6.5% 7.3% 7.5% 7.5% Rate of compensation level increases......................... 4.0 4.0 4.0 4.0 Expected long-term rate of return on plan assets....................... 9.0 9.0 8.6 10.0
F-18 19 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The plan assets, as of January 2, 1999 and January 3, 1998, include a real estate investment of $3.1 million in a distribution center which is under an operating lease to Keebler. In addition to the pension plan, Keebler also maintains an unfunded supplemental retirement plan for certain highly compensated former executives. Benefits provided are based on years of service. Vesting is graduated depending on termination after age 55. The supplemental retirement plan expense includes the following components:
FORTY-EIGHT FOUR WEEKS YEAR ENDED YEAR ENDED WEEKS ENDED ENDED JANUARY 2, JANUARY 3, DECEMBER 28, JANUARY 26, 1999 1998 1996 1996 ---------- ---------- ------------ ----------- (IN THOUSANDS) Service cost.............................. $ -- $ -- $ -- $ 35 Interest cost............................. 722 732 637 66 Amortization of transition obligation..... -- -- -- 8 Amortization of prior service cost........ -- -- -- 13 ------ ------ ---- ---- Plan expense.............................. $ 722 $ 732 $637 $122 ====== ====== ==== ====
The unfunded status of the supplemental retirement plan and the amounts recognized in the consolidated balance sheets are as follows:
JANUARY 2, 1999 JANUARY 3, 1998 --------------- --------------- (IN THOUSANDS) Change in projected benefit obligation: Benefit obligation at beginning of year................. $ (10,303) $ (10,028) Interest cost........................................... (722) (732) Actuarial loss.......................................... (844) (296) Benefits and expenses paid.............................. 750 753 --------- --------- Benefit obligation at year end.......................... (11,119) (10,303) Fair value of plan assets............................... -- -- --------- --------- Funded status........................................... (11,119) (10,303) Unrecognized actuarial loss (gain)...................... 387 (458) Benefit payments subsequent to measurement date......... 109 206 --------- --------- Accrued obligation...................................... $ (10,623) $ (10,555) ========= =========
Assumptions used in accounting for the supplemental retirement plan at each of the respective period-ends are as follows:
FORTY-EIGHT FOUR WEEKS YEAR ENDED YEAR ENDED WEEKS ENDED ENDED JANUARY 2, JANUARY 3, DECEMBER 28, JANUARY 26, 1999 1998 1996 1996 ---------- ---------- ------------ ----------- Discount rate............................. 6.5% 7.3% 7.5% 7.5% Rate of compensation level increase....... 4.0 N/A N/A 4.0
Contributions are also made by Keebler to a retirement program for Grand Rapids union employees. Benefits provided under the plan are based on a flat monthly amount for each year of service and are unrelated to compensation. Contributions are made based on a negotiated hourly rate. For the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, Keebler expensed contributions of $2.3 million, $2.6 million, $2.3 million and $0.2 million, respectively. F-19 20 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Keebler contributes to various multiemployer union administered defined-benefit and defined-contribution pension plans. Benefits provided under the multiemployer pension plans are generally based on years of service and employee age. Expense under these plans was $8.9 million, $10.5 million, $7.8 million and $0.9 million for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, respectively. Prior to 1997, Bake-Line Products, Inc. administered a money purchase pension plan for certain hourly and salaried employees. Contributions were based on 4% of employees' annual salary. Effective January 1, 1997, the Bake-Line money purchase pension plan was merged into Keebler's pension plan. Expenses paid to administer the Bake-Line money purchase pension plan were nominal. 11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Keebler provides certain medical and life insurance benefits for eligible retired employees. The medical plan, which covers nonunion employees with ten or more years of service, is a comprehensive indemnity-type plan. The plan incorporates an up-front deductible, coinsurance payments and employee contributions which are based on length of service. The life insurance plan offers a small amount of coverage versus the amount the employees had while employed. Keebler does not fund the plan. The net periodic postretirement benefit expense includes the following components:
FORTY-EIGHT FOUR YEAR ENDED YEAR ENDED WEEKS ENDED WEEKS ENDED JANUARY 2, JANUARY 3, DECEMBER 28, JANUARY 26, 1999 1998 1996 1996 ---------- ---------- ------------ ----------- (IN THOUSANDS) Service cost............................. $ 2,045 $ 2,242 $2,142 $123 Interest cost............................ 3,961 3,888 2,729 246 Amortization of prior service cost....... (115) -- -- -- ------- ------- ------ ---- Net periodic postretirement benefit expense................................ $ 5,891 $ 6,130 $4,871 $369 ======= ======= ====== ====
The unfunded status of the plan reconciled to the postretirement obligation in Keebler's consolidated balance sheets are as follows:
JANUARY 2, 1999 JANUARY 3, 1998 --------------- --------------- (IN THOUSANDS) Change in accumulated postretirement benefit obligation: Benefit obligation at beginning of year................. $ (56,690) $ (54,324) Service cost............................................ (2,045) (2,242) Interest cost........................................... (3,961) (3,888) Amendments.............................................. -- 689 Actuarial gain.......................................... 3,641 357 Acquisition............................................. (1,598) -- Benefits and expenses paid.............................. 4,384 2,718 --------- --------- Benefit obligation at year end.......................... (56,269) (56,690) Fair value of plan assets............................... -- -- --------- --------- Funded status........................................... (56,269) (56,690) Unrecognized actuarial gain............................. (7,856) (4,215) Unrecognized prior service cost......................... (574) (689) Benefit payments subsequent to measurement date......... 978 614 --------- --------- Postretirement obligation............................... $ (63,721) $ (60,980) ========= =========
F-20 21 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accumulated postretirement benefit obligation was determined using a weighted average discount rate of 6.5% for the year ended January 2, 1999, 7.3% for the year ended January 3, 1998 and 7.5% for both the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996. The weighted average annual assumed rate of increase in the cost of covered benefits is 6.0% for 1998 declining to an ultimate trend rate of 5.0% in 1999. A 1% increase in the trend rate for health care costs would have increased the accumulated benefit obligation as of January 2, 1999 by $2.6 million and the net periodic benefit cost by $0.3 million. A 1% decrease in the trend rate for health care costs would have decreased the accumulated benefit obligation and net periodic benefit cost by $2.7 million and $0.3 million, respectively, as of January 2, 1999. Keebler also provides postemployment medical benefits to employees on long-term disability. The plan is a comprehensive indemnity-type plan which covers nonunion employees on long-term disability. There is no length of service requirement. The plan incorporates coinsurance payments and deductibles. Keebler does not fund the plan. The postemployment obligation included in the consolidated balance sheets at both January 2, 1999 and January 3, 1998 was $4.7 million. 12. INCOME TAXES The components of income tax expense were as shown below:
FORTY-EIGHT FOUR WEEKS YEAR ENDED YEAR ENDED WEEKS ENDED ENDED JANUARY 2, JANUARY 3, DECEMBER 28, JANUARY 26, 1999 1998 1996 1996 ---------- ---------- ------------ ----------- (IN THOUSANDS) Current: Federal................................. $58,269 $22,172 $ -- $ -- State................................... 4,618 3,840 -- -- ------- ------- ------- ------- Current provision for income taxes........ 62,887 26,012 -- -- Deferred: Federal................................. 8,494 17,203 11,524 6,490 State................................... 1,581 1,954 2,478 843 Valuation allowance (federal and state)............................... -- -- -- (7,333) ------- ------- ------- ------- Deferred provision for income taxes....... 10,075 19,157 14,002 -- ------- ------- ------- ------- $72,962 $45,169 $14,002 $ -- ======= ======= ======= =======
The differences between the income tax expense calculated at the federal statutory income tax rate and Keebler's consolidated income tax expense are as follows:
FORTY-EIGHT FOUR WEEKS YEAR ENDED YEAR ENDED WEEKS ENDED ENDED JANUARY 2, JANUARY 3, DECEMBER 28, JANUARY 26, 1999 1998 1996 1996 ---------- ---------- ------------ ----------- (IN THOUSANDS) U.S. federal statutory rate............... $59,339 $37,643 $11,140 $ -- State income taxes (net of federal benefit)................................ 5,813 3,766 1,608 -- Intangible amortization................... 3,160 1,836 1,268 -- All others................................ 4,650 1,924 (14) -- ------- ------- ------- ------- $72,962 $45,169 $14,002 $ -- ======= ======= ======= =======
F-21 22 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The deferred tax assets and deferred tax (liabilities) recorded on the consolidated balance sheets consist of the following:
JANUARY 2, 1999 JANUARY 3, 1998 --------------- --------------- (IN THOUSANDS) Depreciation.............................................. $(108,866) $ (82,204) Trademarks, trade names and intangibles................... (49,348) (88) Prepaid pension........................................... (14,283) (16,164) Inventory valuation....................................... (6,779) (5,257) --------- --------- (179,276) (103,713) --------- --------- Net operating loss carryforwards.......................... 80,195 80,195 Postretirement/postemployment benefits.................... 26,171 25,123 Plant and facility closing costs and severance............ 23,728 10,996 Workers' compensation..................................... 14,769 15,119 Incentives and deferred compensation...................... 12,063 11,493 Employee benefits......................................... 10,879 9,583 Charitable contributions.................................. 3,425 8,425 Other..................................................... 3,011 442 --------- --------- 174,241 161,376 Valuation allowance....................................... (84,350) (84,350) --------- --------- $ (89,385) $ (26,687) ========= =========
Net operating loss carryforwards total approximately $203.2 million through 1998 and expire in 2008 through 2011. Pursuant to the terms of the Keebler acquisition, the predecessor company retained the right to use the net operating losses for potential carrybacks. Any unused operating losses are then available to Keebler, but are significantly restricted under current tax law. Therefore, all net operating loss carryforwards have been fully reserved due to the uncertainty of their realization. In the event the net operating loss carryforwards become realizable, the valuation allowance would be reversed against trademarks, trade names and other intangibles. Income taxes paid, net of refunds, were approximately $67.1 million, $9.9 million and $1.6 million for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996, respectively. There were no taxes paid or refunded during the four weeks ended January 26, 1996. 13. SHAREHOLDERS' EQUITY COMMON STOCK There were no cash dividends declared for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 or the four weeks ended January 26, 1996. Keebler's ability to pay cash dividends is limited by the Credit Facility and the Senior Subordinated Notes. The most limiting dividend restriction exists under the Senior Subordinated Notes, which limits dividend payments to the sum of: (i) 50% of consolidated cumulative net income, (ii) net cash proceeds received from the issuance of capital stock, (iii) net cash proceeds received from the exercise of stock options and warrants, (iv) net cash proceeds received from the conversion of indebtedness into capital stock and (v) the net reduction in investments made by Keebler. On January 29, 1998, Keebler made an initial public offering of 13,386,661 shares of common stock. Concurrent with the Offering, Bermore exercised a warrant to purchase 6,135,781 shares of common stock that had been issued in conjunction with the Sunshine acquisition. The exercise of the warrant resulted in F-22 23 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Keebler receiving $19.8 million of cash proceeds. Artal and Bermore sold all of the shares in the Offering, with none of the proceeds going to Keebler. The consolidated financial statements reflect Keebler's declaration of a 57.325-for-1 stock split of common stock (the "Stock Split") effective January 22, 1998. The Stock Split was effected in the form of a stock dividend. On July 29, 1997, the Board of Directors of Keebler also approved a 1-for-10 reverse stock split of Keebler's common stock. Accordingly, all references in the consolidated financial statements to number of shares, options, warrants and the related prices, as well as per share amounts and the average number of shares outstanding, have been restated to reflect the stock splits as if they had been effective January 26, 1996. TREASURY STOCK In March 1998, Keebler's Board of Directors authorized the repurchase, at management's discretion, of up to $30.0 million of shares of the Company's common stock. The share repurchase program was primarily instituted to offset dilution which may result from the exercise and sale of shares related to employee stock options. The repurchases of shares of common stock are recorded as treasury stock using the cost method and result in a reduction of shareholders' equity. Should the treasury shares be reissued, Keebler intends to use a first-in, first-out method of reissuance. 14. STOCK OPTION PLAN Keebler has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of options equals the fair value (market value) of the underlying stock options at the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if Keebler had accounted for its employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The four weeks ended January 26, 1996 are not included in the pro forma disclosures, as it was prior to the Keebler acquisition and the adoption of any stock option plan. The following table summarizes the pro forma disclosures regarding net income and earnings per share for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28,1996:
FORTY-EIGHT YEAR ENDED YEAR ENDED WEEKS ENDED JANUARY 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996 --------------- --------------- ----------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net income: As reported.............................. $94,871 $56,985 $15,752 Pro forma................................ $91,032 $55,032 $14,027 Basic net income per share: As reported.............................. $ 1.14 $ 0.73 $ 0.21 Pro forma................................ $ 1.09 $ 0.71 $ 0.19 Diluted net income per share: As reported.............................. $ 1.08 $ 0.70 $ 0.21 Pro forma................................ $ 1.04 $ 0.68 $ 0.18 Weighted average grant date fair value of options granted during the year.......... $ 8.53 $ 8.09 $ 1.87
These pro forma amounts may not be representative of future disclosures because the estimated fair value of stock options is amortized to expense over the vesting period, which is variable, and additional options may F-23 24 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) be granted in future years. In 1998, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective input assumptions including the expected stock price volatility. Because Keebler's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of the pro forma disclosures for 1997 and 1996, the fair value for the options was estimated at the date of grant using a present value approach as Keebler was not a public company. For options granted, the following weighted average assumptions were used to determine the fair value:
FORTY-EIGHT WEEKS ENDED YEAR ENDED YEAR ENDED DECEMBER 28, JANUARY 2, 1999* JANUARY 3, 1998 1996 ---------------- --------------- ------------ Dividend yield................................ 0.0% 0.0% 0.0% Expected volatility........................... 27.2% 0.0% ** Risk-free interest rate....................... 5.04% 6.00% 6.00% Expected option life (years).................. 5 5 5
- --------------- * Utilized the Black-Scholes option-pricing model. ** Volatility accounted for with a discount rate of 20% applied to the valuation of Keebler's stock based upon the present value of future cash flows discounted at the weighted average cost of capital of 19% after tax. Under Keebler's 1996 Stock Option Plan, 9,673,594 shares of Keebler's stock were authorized for future grant. All options granted have ten year terms and, due to acceleration resulting from the achievement of certain performance measures, vest by 2001. The following table summarizes the 1996 Stock Option Plan activity:
FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996 -------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- -------------- Outstanding at the beginning of the period.................. -- $ -- Granted..................................................... 7,031,198 1.98 Exercised................................................... -- -- Forfeited................................................... 228,727 1.74 Expired..................................................... -- -- --------- Outstanding at the end of the period........................ 6,802,471 $1.98 ========= Exercisable at the period end............................... -- -- =========
F-24 25 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED JANUARY 3, 1998 -------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- -------------- Outstanding at the beginning of the period.................. 6,802,471 $1.98 Granted..................................................... 49,873 5.23 Exercised................................................... -- -- Forfeited................................................... -- -- Expired..................................................... -- -- --------- Outstanding at the end of the period........................ 6,852,344 $2.01 ========= Exercisable at the period end............................... 1,587,243 $1.98 =========
YEAR ENDED JANUARY 2, 1999 -------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- -------------- Outstanding at the beginning of the period.................. 6,852,344 $2.01 Granted..................................................... -- -- Exercised................................................... 351,177 2.21 Forfeited................................................... 44,887 3.23 Expired..................................................... -- -- --------- Outstanding at the end of the period........................ 6,456,280 $1.99 ========= Exercisable at the period end............................... 4,433,774 $1.98 =========
Exercise prices as of January 2, 1999 for options outstanding under the 1996 Stock Option Plan range from $1.74 to $5.23. The weighted average remaining contractual life of these options is approximately seven and one-half years. Under Keebler's 1998 Omnibus Stock Incentive Plan, 2,850,200 shares of Keebler's stock were authorized for future grant. All options granted generally have ten year terms and vest at the end of five years. Vesting can be accelerated if certain stock price performance measures are met. The following table summarizes the 1998 Omnibus Stock Incentive Plan activity:
YEAR ENDED JANUARY 2, 1999 -------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- -------------- Outstanding at the beginning of the period.................. -- $ -- Granted..................................................... 2,737,836 25.03 Exercised................................................... -- -- Forfeited................................................... 22,200 27.31 Expired..................................................... -- -- --------- Outstanding at the end of the period........................ 2,715,636 $25.01 ========= Exercisable at the period end............................... -- -- =========
Exercise prices as of January 2, 1999 for options outstanding under the 1998 Omnibus Stock Incentive Plan range from $24.00 to $32.13. The weighted average remaining contractual life of these options is approximately nine years. F-25 26 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under Keebler's Non-Employee Director Stock Plan, 22,500 shares of Keebler's stock were authorized for future grant, all of which have been granted. All options granted have ten year terms and vest automatically upon grant. The following table summarizes the Non-Employee Director Stock Plan activity:
YEAR ENDED JANUARY 2, 1999 ------------------------------ WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ----------- ---------------- Outstanding at the beginning of the period................. -- $ -- Granted.................................................... 22,500 27.44 Exercised.................................................. -- -- Forfeited.................................................. -- -- Expired.................................................... -- -- ------ Outstanding at the end of the period....................... 22,500 $27.44 ====== Exercisable at the period end.............................. 22,500 $27.44 ======
As of January 2, 1999, the exercise price for options outstanding under the Non-Employee Director Stock Plan was $27.44. The weighted average remaining contractual life of these options is approximately nine years. 15. NET INCOME PER SHARE Basic net income per share is calculated using the weighted average number of common shares outstanding during each period. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during each period. The common equivalent shares arise from the 1996 Stock Option Plan, the 1998 Omnibus Stock Incentive Plan, the Non-Employee Director Stock Plan and the warrant issued in connection with the Sunshine acquisition and are calculated using the treasury stock method. The following table sets forth the computation of basic and diluted net income per share:
FORTY-EIGHT YEAR ENDED YEAR ENDED WEEKS ENDED JANUARY 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996 --------------- --------------- ----------------- (IN THOUSANDS) Numerator: Income before extraordinary item......... $96,577 $62,381 $17,677 Extraordinary item, net of tax........... 1,706 5,396 1,925 ------- ------- ------- Net income............................... $94,871 $56,985 $15,752 ======= ======= ======= Denominator: Denominator for Basic Net Income Per Share Weighted average shares......... 83,254 77,604 75,244 Effect of Dilutive Securities: Stock options......................... 3,992 2,168 832 Warrants.............................. 240 790 -- ------- ------- ------- Diluted potential common shares....... 4,232 2,958 832 ------- ------- ------- Denominator for Diluted Net Income Per Share................................. 87,486 80,562 76,076 ======= ======= =======
For the year ended January 2, 1999, there were weighted average options to purchase 96,478 shares of common stock at an exercise price ranging from $28.88 to $32.13, which were excluded from the computation F-26 27 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. There were no antidilutive securities for the year ended January 3, 1998. For the forty-eight weeks ended December 28, 1996, there were weighted average options to purchase 56,216 shares of common stock at $3.23 per share and the weighted average warrant to purchase 3,768,863 shares of common stock at $3.23 per share which were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair market value of financial instruments, which includes short and long-term borrowings, was estimated using discounted cash flow analyses based on current interest rates which would be obtained for similar financial instruments. The carrying amounts of these financial instruments disclosed in Note 8 approximate fair value. 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 rate instrument. The interest rate swap agreements result in Keebler paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts. The interest rate differential to be paid or received is accrued as interest rates change and is recorded as interest expense. The fair values of the swap agreements were obtained from the Bank of Nova Scotia and were estimated using market prices at each respective year-end. The fair values of the swap agreements are not recognized in the financial statements as Keebler accounts for the agreements as hedges. In 1998, Keebler had entered into four swap transactions expiring between 2001 and 2004. At January 2, 1999, interest rate swap agreements with a notional amount of $403.3 million were used to hedge interest rate fluctuations on floating rate debt and a swap agreement with a notional amount of $124.0 million used to hedge interest rate fluctuations on fixed rate debt. The estimated fair value of the swap agreements at January 2, 1999 was a net receivable of $1.1 million. At January 3, 1998, there were two outstanding swap agreements, both maturing in 2001. A swap agreement with a notional amount of $170.0 million was used to hedge interest rate fluctuations on floating rate debt and another swap agreement with a notional amount of $81.3 million was used to hedge interest rate fluctuations on fixed rate debt. The estimated fair value of the swap agreements at January 3, 1998 was a net receivable of $1.6 million. Keebler often enters into exchange traded commodity futures and options contracts to protect or hedge against adverse raw material price movements related to anticipated inventory purchases. Realized gains or losses on contracts are determined based on the stated market value at the time the contracts are liquidated or expire and are deferred in inventory until the underlying raw material is purchased. Gains or losses realized from the liquidation or expiration of the contracts are recognized as part of the cost of raw materials. Cost of sales was increased by losses on futures and options transactions of $7.1 million and $3.8 million in the years ended January 2, 1999 and January 3, 1998, respectively, and reduced by gains on futures and options transactions of $0.8 million for the forty-eight weeks ended December 28, 1996. Operations for the four weeks ended January 26, 1996, were unaffected by gains or losses on futures and options as the $0.5 million loss was recorded as an adjustment to the opening balance sheet. The notional amount of open futures and options contracts at January 2, 1999 and January 3, 1998 were $61.7 million and $58.7 million, respectively. The fair values of the open futures and options contracts at January 2, 1999 and January 3, 1998, based on the stated market value at those dates, were $57.9 million and $53.8 million, respectively. The open contracts at January 2, 1999 will expire between January 1999 and July 1999. 17. SEGMENT INFORMATION In 1998, Keebler adopted SFAS 131 "Disclosures about Segments of an Enterprise and Related Information." Keebler's reportable segments are Branded and Specialty. The reportable segments were F-27 28 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) determined using Keebler's method of internal reporting, which divides and analyzes the business by sales channel. The nature of the customers, products and method of distribution can vary by sales channel. The reportable segments represent an aggregation of similar sales channels. The Branded segment is comprised of sales channels that principally market brand name cookie and cracker products to retail outlets. Products in the Branded segment are sold by either a Keebler sales employee or a distributor. The sales channels in the Specialty segment primarily sell cookie and cracker products that are manufactured on a made-to-order basis or that are produced in individual packs to be used in various institutions (i.e., restaurants, hospitals, etc.). Many of the products sold by the Specialty segment are done so through the use of brokers. Keebler evaluates the performance of the reportable segments and allocates resources based on the segment's profit contribution, defined as earnings before certain functional support costs, amortization, interest and income taxes. The accounting policies for each reportable segment are the same as those described in Note 4 "Summary of Significant Accounting Policies." The cost of sales, however, used to determine a segment's profit contribution is calculated using standard costs for each product, while actual cost of sales is used to determine consolidated operating income (loss). There are no intersegment transactions that result in revenue or profit (loss). Asset information by reportable segment is not presented, as Keebler does not report or generate such information internally. However, depreciation expense included in the determination of a segment's profit contribution has been presented. The depreciation expense for each reportable segment reflects the amount absorbed in the standard cost of products sold as well as the depreciation that relates to assets used entirely by the respective segment. The following table presents certain information included in the profit contribution of each segment for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996.
BRANDED SPECIALTY SEGMENT SEGMENT OTHER(1) TOTAL ---------- --------- -------- ---------- (IN THOUSANDS) Year Ended January 2, 1999: Net sales to external customers................... $1,726,668 $499,812 $ -- $2,226,480 Depreciation expense.............................. 31,087 7,934 20,382 59,403 Profit contribution............................... 282,639 85,898 -- 368,537 Year Ended January 3, 1998: Net sales to external customers................... $1,566,702 $498,482 $ -- $2,065,184 Depreciation expense.............................. 19,650 6,750 27,331 53,731 Profit contribution............................... 226,911 80,321 -- 307,232 Forty-Eight Weeks Ended December 28, 1996: Net sales to external customers................... $1,178,023 $467,509 $ -- $1,645,532 Depreciation expense.............................. 15,919 6,174 22,251 44,344 Profit contribution............................... 145,311 53,908 -- 199,219 Four Weeks Ended January 26, 1996: Net sales to external customers................... $ 69,842 $ 31,814 $ -- $ 101,656 Depreciation expense.............................. 1,121 502 223 1,846 Profit contribution............................... 8,660 4,295 -- 12,955
- --------------- (1) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments. F-28 29 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net sales to external customers from the reportable segments equal the consolidated net sales of Keebler. A reconciliation of segment profit contribution to total consolidated income from continuing operations before income tax expense (benefit) for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996 is as follows:
FORTY-EIGHT FOUR WEEKS WEEKS YEAR ENDED YEAR ENDED ENDED ENDED JANUARY 2, JANUARY 3, DECEMBER 28, JANUARY 26, 1999 1998 1996 1996 ---------- ---------- ------------ ----------- (IN THOUSANDS) Income (Loss) from Continuing Operations before Income Tax Expense (Benefit): Reportable segments profit contribution... $368,537 $307,232 $199,219 $ 12,955 Unallocated functional support costs(1)... 172,498 165,835 129,069 38,453 Interest expense (income), net............ 26,500 33,847 38,471 (116) -------- -------- -------- -------- Income (Loss) from Continuing Operations before Income Tax Expense (Benefit)............................ $169,539 $107,550 $ 31,679 $(25,382) ======== ======== ======== ========
- --------------- (1) Includes support costs such as distribution, research and development, corporate administration and other (income) expense, which are not allocated internally to reportable segments. Net sales to external customers consist of cookies, crackers and other baked goods for all periods presented. All long-lived assets at January 2, 1999 and January 3, 1998 are located in the United States. Net sales to external customers made outside the United States, as well as to any single customer, are not material to consolidated net sales for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996. 18. UNAUDITED QUARTERLY FINANCIAL DATA Results of operations for each of the four quarters of the fiscal years ended January 2, 1999 and January 3, 1998 follow. Each quarter represents a period of twelve weeks except the first quarter which includes sixteen weeks.
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4 --------------- --------------- --------------- --------------- 1998 1997 1998 1997 1998 1997 1998* 1997** ------ ------ ------ ------ ------ ------ ------ ------ (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Net sales....................... $636.8 $597.0 $490.0 $459.8 $499.9 $485.3 $599.8 $523.1 Gross profit.................... 372.7 337.0 281.3 259.7 294.4 277.0 339.2 303.5 Income before extraordinary item.......................... 14.1 7.6 19.4 13.0 29.0 18.5 34.1 23.3 Extraordinary item.............. -- 2.7 -- -- 1.7 -- -- 2.7 Net income...................... 14.1 4.9 19.4 13.0 27.3 18.5 34.1 20.6 Basic net income per share: Income before extraordinary item....................... $ 0.17 $ 0.10 $ 0.23 $ 0.16 $ 0.35 $ 0.24 $ 0.41 $ 0.30 Extraordinary item............ -- 0.04 -- -- 0.02 -- -- 0.03 ------ ------ ------ ------ ------ ------ ------ ------ Net income.................... $ 0.17 $ 0.06 $ 0.23 $ 0.16 $ 0.33 $ 0.24 $ 0.41 $ 0.27 ====== ====== ====== ====== ====== ====== ====== ======
F-29 30 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4 --------------- --------------- --------------- --------------- 1998 1997 1998 1997 1998 1997 1998* 1997** ------ ------ ------ ------ ------ ------ ------ ------ (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Diluted net income per share: Income before extraordinary item....................... $ 0.16 $ 0.10 $ 0.22 $ 0.16 $ 0.33 $ 0.23 $ 0.39 $ 0.28 Extraordinary item............ -- 0.04 -- -- 0.02 -- -- 0.03 ------ ------ ------ ------ ------ ------ ------ ------ Net income.................... $ 0.16 $ 0.06 $ 0.22 $ 0.16 $ 0.31 $ 0.23 $ 0.39 $ 0.25 ====== ====== ====== ====== ====== ====== ====== ======
- --------------- * Quarter 4, 1998 includes the operating results of President from the acquisition date of September 28, 1998 through January 2, 1999. ** Quarter 4, 1997 includes thirteen weeks as fiscal 1997 was a fifty-three week year. 19. SUBSEQUENT EVENTS On January 29, 1999 Keebler entered into a Receivables Purchase Agreement ("Agreement") to replace the Bridge Facility existing at January 2, 1999. This Agreement allows funds to be borrowed at a lower cost to the Company and is collateralized by the accounts receivable of Keebler. On January 21, 1999, Keebler made a secondary public offering of 16,200,000 shares of common stock. Artal and Claremont sold all of the shares, with no proceeds going to Keebler. As a result, Artal's ownership percentage decreased from approximately 21% to 2% and Claremont's ownership percentage was reduced from approximately 6% to 5% of the outstanding common stock. Management's ownership remained at approximately 2% and Flowers' ownership remained at approximately 55%. On January 4, 1999, Keebler engaged in a series of corporate-entity transactions that resulted in Sunshine and President being merged into Keebler Company. Consequently, these former subsidiaries of Keebler Foods Company are currently wholly-owned subsidiaries of Keebler Company. F-30 -----END PRIVACY-ENHANCED MESSAGE-----