AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 2000
FILE NO.
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
FLOWERS FOODS, INC.
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-2582379 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1919 FLOWERS CIRCLE THOMASVILLE, GEORGIA 31757 (Address of Principal Executive (Zip Code) Offices) |
(229) 226-9110
(Registrant's telephone number, including area code)
COPIES TO:
LIZANNE THOMAS, ESQ.
MARK L. HANSON, ESQ.
JONES, DAY, REAVIS & POGUE
3500 SUNTRUST PLAZA
303 PEACHTREE STREET
ATLANTA, GA 30308-3242
TELEPHONE: (404) 521-3939
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED ------------------- ------------------------------ Common Stock, $.01 per share The New York Stock Exchange Rights to Purchase Series A Junior The New York Stock Exchange Participating Preferred Stock |
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Registrant incorporates by reference into this Registration Statement
(i) certain portions of the Annual Report on Form 10-K for the fiscal year ended
January 1, 2000 of Flowers Industries, Inc. (File No. 1-9787) filed with the
Securities and Exchange Commission ("SEC") on March 31, 2000, and certain
portions of the Quarterly Report on Form 10-Q for the forty weeks ended October
7, 2000 of Flowers Industries, Inc. filed with the SEC on November 21, 2000,
(ii) the financial statements of Keebler Foods Company for the fiscal year ended
January 1, 2000 filed as an exhibit to the Flowers Industries, Inc. Annual
Report on Form 10-K on March 31, 2000 and (iii) certain portions of the
Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of
Keebler Foods Company (File No. 1-3705) filed with the SEC on November 21, 2000.
Items of Flowers Industries Annual Report on Form 10-K being incorporated by reference ----------------------------------------- PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7a. Quantitative and Qualitative Disclosures about Market Risk PART IV Item 14. Report of Independent Accountants Consolidated statement of income for the fifty-two weeks ended January 1, 2000 and January 2, 1999, the twenty-seven weeks ended January 3, 1998 and the fifty-two weeks ended June 28, 1997 Consolidated balance sheet at January 1, 2000 and January 2, 1999 Consolidated statement of changes in stockholders' equity for the fifty-two weeks ended January 1, 2000 and January 2, 1999, the twenty-seven weeks ended January 3, 1998 and the fifty-two weeks ended June 28, 1997 Consolidated statement of cash flows for the fifty-two weeks ended January 1, 2000 and January 2, 1999, the twenty-seven weeks ended January 3, 1998 and the fifty-two weeks ended June 28, 1997 Notes to consolidated financial statements |
Items of Flowers Industries Quarterly Report on Form 10-Q being incorporated by reference -------------------------------------------- PART I Item 1. Financial Statements Consolidated Balance Sheet at October 7, 2000 and January 1, 2000 Consolidated Statement of Income for the Forty weeks ended October 7, 2000 and October 9, 1999 Consolidated Statement of Cash Flows for the Forty weeks ended October 7, 2000 and October 9, 1999 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk |
Items of Keebler Quarterly Report on Form 10-Q being incorporated by reference ----------------------------------- PART I Item 1. Financial Statements Consolidated Balance Sheet at October 7, 2000 and January 1, 2000 Consolidated Statement of Operations for the Twelve weeks ended October 7, 2000 and October 9, 1999 and for the Forty weeks ended October 7, 2000 and October 9, 1999 Notes to Consolidated Financial Statements |
FLOWERS FOODS, INC.
INFORMATION REQUIRED IN INFORMATION STATEMENT AND INCORPORATED IN
FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS ON FORM 10
ITEM 1. BUSINESS
The information required by this item is contained under: (i) the sections "Summary -- Flowers Foods, Inc.," "Summary -- Strategic Focus," and "Summary -- Corporate Information," "Risk Factors," "Cautionary Note Regarding Forward Looking Statements," "The Spin-off," "Agreements Between Flowers Industries and Flowers Foods Relating to the Spin-Off" and "Business" of the Information Statement and such sections are incorporated herein by reference, (ii) portions of the Flowers Industries, Inc. Annual Report on Form 10-K for the fiscal year ended January 1, 2000 and Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000, each filed as an exhibit hereto, and such material is incorporated herein by reference and (iii) the financial statements of Keebler Foods Company for the fiscal year ended January 1, 2000 filed as an exhibit to the Flowers Industries, Inc. Annual Report on Form 10-K and certain portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of Keebler Foods Company filed with the SEC on November 21, 2000, filed as exhibits hereto and such material is incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained under: (i) the sections "Summary -- Summary Historical Financial Data," "Summary -- Summary Pro Forma Financial Data," "Selected Historical Financial Data," "Capitalization" and "Pro Forma Financial Data," of the Information Statement and such sections are incorporated herein by reference, (ii) portions of the Flowers Industries, Inc. Annual Report on Form 10-K for the fiscal year ended January 1, 2000 and Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000, each filed as an exhibit hereto, and such material is incorporated herein by reference and (iii) the financial statements of Keebler Foods Company for the fiscal year ended January 1, 2000 filed as an exhibit to the Flowers Industries, Inc. Annual Report on Form 10-K and certain portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of Keebler Foods Company filed with the SEC on November 21, 2000, filed as exhibits hereto, and such material is incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this item is contained under the section "Business -- Properties" of the Information Statement and such section is incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the section "Security Ownership of Certain Beneficial Owners and Management" of the Information Statement and such section is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained under the section "Management" of the Information Statement and such section is incorporated herein by reference.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained under the section "Management" of the Information Statement and such section is incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the sections "Agreements between Flowers Industries and Flowers Foods Relating to the Spin-Off," "Management" and "Certain Relationships and Related Party Transactions" of the Information Statement and such section is incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained under the section "Business -- Legal Proceedings" of the Information Statement and such section is incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is contained under the sections "The Spin-Off," "Dividend Policy" and "Description of Capital Stock" of the Information Statement and such sections are incorporated herein by reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On October 19, 2000 Flowers Foods, Inc. issued 1,000 shares of its common stock to Flowers Industries, Inc., its direct parent, for consideration of $500. In the opinion of Flowers Foods this transaction is exempt from registration under the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof in that such transaction did not involve any public offering.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained under the section "Description of Capital Stock" of the Information Statement and such section is incorporated herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained in the section "Description of Capital Stock -- Limited Liability and Indemnification Provisions" of the Information Statement and such section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained under: (i) the sections "Summary -- Summary Historical Financial Data," "Summary -- Summary Pro Forma Financial Data" "Selected Historical Financial Data," "Capitalization" and "Pro Forma Financial Data," of the Information Statement and such sections are incorporated herein by reference, (ii) portions of the Flowers Industries, Inc. Annual Report on Form 10-K for the fiscal year ended January 1, 2000 and Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000, each filed as an exhibit hereto, and such material is incorporated herein by reference and (iii) the financial statements of Keebler Foods Company for the fiscal year ended January 1, 2000 filed as an exhibit to the Flowers Industries, Inc. Annual Report on Form 10-K and certain portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of Keebler Foods Company filed with the SEC on November 21, 2000 filed as exhibits hereto and such material is incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) List of Financial Statements.
The information required by this section is contained in (i) portions of the Flowers Industries, Inc. Annual Report on Form 10-K for the fiscal year ended January 1, 2000 and the Flowers Industries, Inc. Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000, each filed as an exhibit hereto, and such material is incorporated herein by reference and (ii) the financial statements of Keebler Foods Company for the fiscal year ended January 1, 2000 filed as an exhibit to the Flowers Industries, Inc. Annual Report on Form 10-K and certain portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of Keebler Foods Company filed with the SEC on November 21, 2000, filed as exhibits hereto and such material is incorporated herein by reference.
(b) Exhibits. The following documents are filed as exhibits hereto:
EXHIBIT NO. NAME OF EXHIBIT ------- --------------- 2.1 -- Distribution Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc. dated as of October 26, 2000. 3.1 -- Form of Restated Articles of Incorporation of Flowers Foods, Inc.* 3.2 -- Form of Restated Bylaws of Flowers Foods, Inc.* 4.1 -- Form of Share Certificate of Common Stock of Flowers Foods, Inc.* 4.2 -- Form of Rights Agreement between Flowers Foods, Inc. and First Union National Bank as Rights Agent.* 10.1 -- Employee Benefits Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc. dated as of October 26, 2000. 21 -- Subsidiaries of Flowers Foods, Inc.* 27 -- Financial Data Schedule (for SEC use only) 99.1 -- Portions of the Annual Report on Form 10-K for the fiscal year ended January 1, 2000 of Flowers Industries, Inc., filed with the SEC on March 31, 2000. 99.2 -- Portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of Flowers Industries, Inc., filed with the SEC on November 21, 2000. 99.3 -- Financial Statements of Keebler Foods Company for the fiscal year ended January 1, 2000. 99.4 -- Portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of Keebler Foods Company filed with the SEC on November 21, 2000. |
* To be filed by amendment
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the undersigned registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
FLOWERS FOODS, INC.
By: /s/ G. ANTHONY CAMPBELL ----------------------------------- Name: G. Anthony Campbell Title: Secretary and General Counsel Dated: December 1, 2000 |
PRELIMINARY INFORMATION STATEMENT
SUBJECT TO COMPLETION, DATED DECEMBER 1, 2000
FLOWERS FOODS, INC.
Common Stock
$.01 Par Value
The board of directors of Flowers Industries, Inc. has approved an agreement and plan of restructuring and merger and related agreements under which Flowers Industries will:
- spin-off its Flowers Bakeries and Mrs. Smith's Bakeries businesses and certain other corporate assets and liabilities to its shareholders in the form of a new, publicly-traded company called Flowers Foods, Inc., as a result of which Flowers Industries' primary asset will be the majority interest in Keebler; and
- merge with a wholly-owned subsidiary of Kellogg.
This information statement is being sent to you to describe the spin-off and the business and financial position of Flowers Foods following the transaction and requires no action by you. Please refer to the proxy statement relating to the merger of Flowers Industries and Kellogg for detailed information regarding that transaction.
Currently, Flowers Foods is a wholly-owned subsidiary of Flowers Industries. Flowers Industries intends to distribute, in a taxable spin-off, all of the outstanding shares of Flowers Foods to Flowers Industries shareholders on a pro rata basis. As part of the spin-off, you will receive one share of Flowers Foods common stock for every shares of Flowers Industries common stock you own as of the close of business on the record date for the spin-off, which is currently expected to be on or about January , 2001.
The spin-off and the merger will each occur only if the other occurs. If Flowers Industries shareholders do not approve the merger, or if the other conditions to the merger are not met, the spin-off will not occur. If the merger is approved, the transaction will occur in three, effectively simultaneous steps:
- Flowers Industries will spin-off its Flowers Bakeries and Mrs. Smith's Bakeries businesses and certain other corporate assets and liabilities to its shareholders as a new, publicly-traded company called Flowers Foods. Shareholders of Flowers Industries will receive one share of Flowers Foods for every shares of Flowers Industries common stock they hold on the record date for the spin-off.
- Flowers Industries, which will then have as its primary asset the majority interest in Keebler, will merge with a wholly-owned subsidiary of Kellogg, becoming itself a wholly-owned subsidiary of Kellogg. The shareholders of Flowers Industries will become entitled to receive, subject to adjustments at closing, approximately $12.50 in cash in exchange for each share of Flowers Industries common stock that they owned.
- Keebler will then merge with a wholly-owned subsidiary of Kellogg, as a result of which Keebler will become a wholly-owned subsidiary of Kellogg. The public stockholders of Keebler common stock, other than Flowers Industries, will receive $42.00 per share in cash.
The record date and the distribution date for the spin-off, as well as the closing date for the merger, will all be the same day. When all three steps are completed -- the spin-off, the Flowers Industries/Kellogg merger, and the Kellogg/Keebler merger -- there will be a new publicly-owned company, Flowers Foods, which will own and operate the traditional Flowers Industries bakery businesses, and Kellogg will own all of the shares of Keebler stock. At the closing of the transaction, Flowers Industries shareholders will own an interest in Flowers Foods in the same proportion as their prior ownership interest in Flowers Industries.
If the merger is approved by Flowers Industries shareholders, no further action on your part is necessary for you to receive the shares of Flowers Foods common stock to which you are entitled in the spin-off. You do not need to take any action for the spin-off to occur. You do not have to pay for the shares of Flowers Foods common stock that you will receive in the spin-off, nor do you have to surrender or exchange shares of Flowers Industries common stock in order to receive shares of Flowers Foods common stock. However, you will be required to surrender your shares of Flowers Industries common stock in order to receive the cash consideration to be paid in connection with the Flowers Industries/Kellogg merger. That process is described in more detail in the proxy statement relating to the Flowers Industries/Kellogg merger.
Because Flowers Industries currently owns all the outstanding shares of Flowers Foods common stock, there has been no public trading market for the Flowers Foods common stock. We have applied for listing of Flowers Foods common stock on the New York Stock Exchange and, following the spin-off and the merger, we expect that Flowers Foods common stock will trade on the New York Stock Exchange under the symbol "FLO".
As you review this information statement, you should carefully consider the matters described in "Risk Factors," beginning on page 10.
NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THE SPIN-OFF.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this information statement is , 2001
TABLE OF CONTENTS
PAGE ---- Summary..................................................... 3 Risk Factors................................................ 10 Cautionary Note Regarding Forward Looking Statements........ 15 The Spin-Off................................................ 16 Agreements Between Flowers Industries and Flowers Foods Relating to the Spin-Off.................................. 20 Capitalization.............................................. 24 Dividend Policy............................................. 25 Selected Historical Financial Data.......................... 26 Pro Forma Financial Data.................................... 28 Business.................................................... 40 Management.................................................. 51 Certain Relationships and Related Party Transactions........ 57 Security Ownership of Certain Beneficial Owners and Management................................................ 58 Description of Capital Stock................................ 60 Where You Can Find Additional Information................... 70 Incorporation of Certain Information by Reference........... 71 |
SUMMARY
This summary highlights information relating to Flowers Industries, Flowers Foods and the Flowers Foods common stock being distributed in the spin-off. It is not a complete description of all the information that may be important to you. To fully understand the spin-off and Flowers Foods, you should read this information statement carefully, including the risk factors as well as the financial statements of Flowers Industries and the accompanying notes, which are incorporated by reference herein and the pro forma information for Flowers Foods which appear elsewhere in this information statement.
The information about us and our business contained in this information statement assumes that the spin-off and related merger with Kellogg have been completed. If Flowers Industries shareholders do not approve the merger, the spin-off will not occur.
FLOWERS FOODS, INC.
Flowers Foods is one of the largest producers and marketers of frozen and non-frozen bakery and dessert products in the United States. Flowers Foods will consist of the following businesses after they are spun off from Flowers Industries:
- Flowers Bakeries; and
- Mrs. Smith's Bakeries.
We have a leading presence in each of the major product categories in which we compete. In our Flowers Bakeries business, our Flowers Bakeries brands rank first in branded sales measured in dollars and units in the 22 major metropolitan markets we serve. Our Mrs. Smith's Bakeries business is one of the leading frozen dessert producers and marketers in the United States, and our Mrs. Smith's pies are the leading national brand of frozen pies sold at retail.
FLOWERS BAKERIES. Our Flowers Bakeries business produces and markets baked foods to customers in the super-regional 16 state area in and surrounding the southeastern United States. We have devoted significant resources to modernize, automate and expand our production facilities and distribution capabilities, and enhance our information technology. This bakery products business is comprised of 27 production facilities which are generally within or contiguous to our existing region and which can be served with our extensive direct store door delivery system. Our strategy is to continue to better serve new and existing customers, principally by:
- increasing the productivity and efficiency of our production facilities; and
- using information technology to enhance our direct store door delivery system.
MRS. SMITH'S BAKERIES. Our Mrs. Smith's Bakeries business produces and
markets frozen desserts as well as bread, rolls and buns for sale to retail and
foodservice customers. Traditionally, retail frozen pie sales are heavily
concentrated in the year-end holiday season. In an effort to increase sales
outside of the holiday season, we launched "Operation 365," a strategy aimed at
significantly expanding non-seasonal sales in the frozen dessert product line by
extending the well-recognized Mrs. Smith's brand name to existing and related
retail and foodservice products. Examples of significant retail product line
extensions include Mrs. Smith's Restaurant Classics and Mrs. Smith's Cookies and
Cream frozen pies, while the Grand Finales frozen pie product line was
introduced in the foodservice channel.
OUR STRATEGIC FOCUS
Our strategy is to be the country's leading producer and marketer of a full-line of frozen and non-frozen bakery and dessert products serving all categories of customers through all channels of distribution. Our Flowers Bakeries and Mrs. Smith's Bakeries businesses each develop strategies based on the requirements of their particular food category.
We employ the following five overall corporate strategies:
- maintain and extend strong brand recognition;
- invest in and operate efficient production facilities;
- provide customer service-oriented distribution;
- offer a broad range of products to customers in multiple channels of distribution; and
- continue to pursue growth through strategic acquisitions and investments.
CORPORATE INFORMATION
Our principal executive offices are located at 1919 Flowers Circle, Thomasville, Georgia 31757 and our telephone number is (229) 226-9110. References in this information statement to "Flowers Foods," "we," "our" and "us" collectively refer to Flowers Foods, Inc. We maintain internet sites at www.flowersfoods.com, www.flowersbakeries.com and www.mrssmiths.com. The information contained on, or connected to, our websites is not a part of this information statement.
THE TRANSACTION
THE MERGER. Flowers Foods is currently a wholly-owned subsidiary of Flowers Industries. On October 26, 2000, Flowers Industries entered into an agreement and plan of restructuring and merger with Kellogg Company under which a wholly-owned subsidiary of Kellogg will merge with and into Flowers Industries. Flowers Industries, whose principal asset at the time of the merger will be its majority ownership interest in Keebler, will survive the merger as a wholly-owned subsidiary of Kellogg. As a condition to the merger, Flowers Industries has agreed to transfer its fresh and frozen bakery operations, and certain other corporate assets and liabilities, to Flowers Foods, which is currently a wholly-owned subsidiary of Flowers Industries, and to distribute all of the outstanding shares of common stock of Flowers Foods to Flowers Industries' shareholders on a pro-rata basis immediately prior to the merger.
For more information about the merger, the agreement and plan of restructuring and merger and related matters, you should refer to the proxy statement relating to the Flowers Industries/Kellogg merger accompanying this information statement.
THE SPIN-OFF. Effective virtually simultaneously with the completion of
the merger described below, Flowers Industries will distribute all of the
outstanding shares of Flowers Foods common stock on a pro rata basis to its
shareholders. Following the effective time of the spin-off, all of the
outstanding shares of Flowers Foods common stock will be held by shareholders of
Flowers Industries who are shareholders as of the record date for the spin-off.
You will
not pay for the Flowers Foods common stock you will receive in the spin-off, but the spin-off will be taxable to you. The spin-off is summarized below:
Distributing Company: Flowers Industries, Inc., a Georgia corporation. Spun-off Company: Flowers Foods, Inc., a Georgia corporation and currently a wholly-owned subsidiary of Flowers Industries, Inc. Consideration to be Received by Flowers Industries Shareholders in the Spin-off and the Merger: The spin-off and merger will occur virtually simultaneously. Flowers Industries shareholders will receive approximately $12.50 per share in cash in exchange for each share of Flowers Industries common stock that they own and one share of Flowers Foods common stock in the spin-off for every shares of Flowers Industries common stock they hold at the close of business on the record date for the spin-off. Flowers Industries shareholders will be required to surrender their shares of Flowers Industries common stock to receive the cash consideration in the merger, but will not be required to take any additional action to receive shares of Flowers Foods common stock in the spin-off. Flowers Foods Common Stock: Immediately prior to the spin-off, shares of Flowers Foods common stock will be outstanding, and they will all be distributed in the spin-off. Immediately after the spin-off, we estimate that about shareholders of record will hold shares of Flowers Foods common stock, although some of the shares may be registered in "street name" by a single shareholder who represents a number of shareholders. Distribution Ratio: One share of Flowers Foods common stock for every shares of Flowers Industries common stock that you hold on the record date for the spin-off. Record Date/Spin-off Date: The close of business on or about January , 2001. Distribution Agent: First Union National Bank, which is also the registrar and transfer agent for Flowers Industries common stock and for Flowers Foods common stock. Proposed New York Stock Exchange Symbol: "FLO" Trading Market: Because Flowers Industries currently owns all of Flowers Foods common stock, there has not been a public trading market for the Flowers Foods common stock. We have applied for listing of Flowers Foods common stock on the New York Stock Exchange and, following the spin-off and the merger, we expect that Flowers Foods 5 |
common stock will be traded on the New York Stock Exchange. Federal Income Tax Consequences: The spin-off and merger should be treated as a single taxable transaction for United States federal income tax purposes. A Flowers Industries shareholder generally should recognize gain or loss in an amount equal to the difference between: - the sum of the fair market value of the shares of Flowers Foods common stock distributed in the spin-off plus the cash proceeds received pursuant to the merger; and - the Flowers Industries shareholder's adjusted tax basis immediately prior to the transaction in the shares of Flowers Industries common stock surrendered. Such gain or loss should be a capital gain or loss if the shares of Flowers Industries common stock are held as a capital asset by the Flowers Industries shareholder. However, if the receipt of Flowers Foods stock is treated as a separate transaction for tax purposes, it would be deemed to be a distribution taxable as an ordinary income dividend to the extent of our current or accumulated earnings and profits. For a more detailed description of the federal income tax consequences of the spin-off and the merger, see "The Spin-Off -- Principal United States Federal Income Tax Consequences." Our Management and Management Compensation: The management team of Flowers Industries will become the management of Flowers Foods following the spin-off. The compensation, awards and other benefits expected to be available to members of Flowers Foods management are described in "Management." 6 |
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary historical financial data of Flowers Industries, Flowers Foods' predecessor, as of and for the 52 weeks ended January 1, 2000, January 2, 1999, the 27 week transition period ended January 3, 1998 and for the 52 weeks ended June 28, 1997 have been derived from the consolidated financial statements of Flowers Industries, which have been audited by PricewaterhouseCoopers, LLP, independent accountants. The summary historical financial data of Flowers Industries as of and for the 40 weeks ended October 7, 2000 and October 9, 1999 are derived from the unaudited consolidated financial statements of Flowers Industries, which, in the opinion of management, include all adjustments necessary for a fair presentation. Operating results for the 40 weeks ended October 7, 2000 are not necessarily indicative of the results that may be achieved for the 52 weeks ending December 30, 2000.
This historical data should be read in conjunction with Flowers Industries' "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Flowers Industries' consolidated financial statements and the related notes, which are incorporated herein by reference and have been filed as exhibits to Flowers Foods' registration statement on Form 10, of which this information statement is a part.
FOR THE 52 WEEKS ENDED FOR THE 27 FOR THE 52 FOR THE 40 WEEKS ENDED --------------------------------- WEEKS ENDED WEEKS ENDED --------------------------------- JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 OCTOBER 7, 2000 OCTOBER 9, 1999 --------------- --------------- --------------- ------------- --------------- --------------- STATEMENT OF INCOME DATA: Sales................ $4,236,010 $3,765,367 $ 784,097 $1,437,713 $3,317,466 $3,222,157 Net income (loss).... 7,294 41,899 23,560 62,324 35,245 (12,002) Diluted net income (loss) per common share.............. $ 0.07 $ 0.43 $ 0.27 $ 0.71 $ 0.35 $ (0.12) Weighted average shares outstanding........ 100,420 96,801 88,773 88,401 100,372 100,388 BALANCE SHEET DATA (AT END OF PERIOD): Total assets......... $2,900,478 $2,860,900 $ 898,880 $ 898,187 $3,134,622 $2,845,579 Long-term debt....... $1,208,630 $1,038,998 $ 276,211 $ 275,247 $1,374,105 $1,115,982 Stockholders' equity............. $ 538,754 $ 572,961 $ 348,567 $ 340,012 $ 545,070 $ 521,646 |
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table represents summary unaudited pro forma condensed consolidated financial data for Flowers Foods. Following the spin-off, Flowers Foods will consist of the traditional bakery businesses of Flowers Industries. For accounting purposes, we will treat the transactions as a disposal of Keebler. Accordingly, the unaudited pro forma financial information, included elsewhere herein, reflects the exclusion of assets and liabilities and the results of operations of Keebler from the Flowers Industries consolidated financial statements. The summary pro forma condensed consolidated financial data have been derived from the Flowers Foods unaudited pro forma condensed consolidated financial statements which are included elsewhere in this information statement. The unaudited pro forma condensed consolidated statement of income data sets forth Flowers Foods' results of operations for the 52 weeks ended January 1, 2000, January 2, 1999, the 27 week transition period ended January 3, 1998, the 52 weeks ended June 28, 1997, and the 40 weeks ended October 7, 2000 and October 9, 1999, and assumes the spin-off and merger were completed at the beginning of the respective periods. The unaudited pro forma condensed consolidated balance sheet data sets forth Flowers Foods' financial position at October 7, 2000, and assumes the spin-off and merger were completed on October 7, 2000.
The pro forma adjustments are based upon available information and upon certain assumptions that Flowers Industries believes are reasonable and which are described in the notes to the unaudited pro forma condensed consolidated financial statements included elsewhere in this information statement. The unaudited pro forma condensed consolidated financial data is presented for informational purposes only and may not be indicative of the results of operations or financial position that would have occurred had the spin-off and merger occurred on the dates indicated, or which may be obtained in the future. You should read the summary unaudited pro forma condensed consolidated financial data presented below in connection with the unaudited pro forma condensed consolidated financial statements and the related notes included elsewhere in this information statement.
52 WEEKS ENDED --------------------------------------- 27 WEEKS ENDED 52 WEEKS ENDED JANUARY 1, 2000(A) JANUARY 2, 1999(B) JANUARY 3, 1998(C) JUNE 28, 1997(C) ------------------ ------------------ ------------------ ---------------- STATEMENT OF INCOME DATA: Sales..................... $1,568,239 $1,538,887 $784,097 $1,437,713 (Loss) income from operations.............. (6,971) 36,350 36,815 69,659 Net (loss) income from continuing operations... $ (9,177) $ (10,435) $ 5,499 $ 54,603 Diluted net (loss) income per share from continuing operations... $ (0.46) $ (0.54) $ 0.31 $ 3.09 Weighted average shares outstanding............. 20,084 19,360 17,755 17,680 |
40 WEEKS ENDED --------------------------------------- OCTOBER 7, 2000(A) OCTOBER 9, 1999(A) ------------------ ------------------ Sales................... $1,205,831 $1,166,433 Income (loss) from continuing operations............ 13,395 (19,071) Net loss from continuing operations............ $ (669) $ (16,317) Diluted net loss per share from continuing operations............ $ (.03) $ (0.81) Weighted average shares outstanding........... 20,074 20,078 |
OCTOBER 7, 2000 --------------- BALANCE SHEET DATA: Total assets................................................ $1,104,902 Long term debt.............................................. $ 203,001 Stockholders' equity........................................ $ 634,704 |
(a) The summary unaudited pro forma condensed consolidated income data for Flowers Foods has been derived from the historical consolidated statement of income of Flowers Industries, adjusted to reflect (i) the exclusion of the results of operations of Keebler Foods Company that is included in the Flowers Industries consolidated statement of income for the respective periods, (ii) the change in interest expense resulting from the elimination of approximately $625.0 million of long-term debt as a result of the merger, (iii) the change in amortization expense resulting from the elimination of Flowers Industries' investment in Keebler and (iv) the related income tax effects of (i), (ii) and (iii). This pro forma summary financial information has been prepared on the assumption that the spin-off and the merger occurred as of the beginning of the respective periods.
(b) The summary unaudited pro forma condensed consolidated income data for Flowers Foods has been derived from the historical consolidated statement of income of Flowers Industries, adjusted to reflect the exclusion of the results of operations of Keebler from Flowers Industries.
(c) The summary unaudited pro forma condensed consolidated income data for Flowers Foods has been derived from the historical consolidated statement of income of Flowers Industries, adjusted to reflect the elimination of its income from investment in its then unconsolidated affiliate, Keebler.
RISK FACTORS
RISKS FACTORS RELATING TO OUR BUSINESS
OUR MRS. SMITH'S BAKERIES BUSINESS MAY CONTINUE TO PERFORM BELOW EXPECTATIONS, WHICH COULD HARM OUR FINANCIAL RESULTS.
Our Mrs. Smith's Bakeries business has incurred net operating losses over the past six quarters and may not be profitable in the near future. Our ability to increase revenues, reduce costs and achieve profitability at Mrs. Smith's Bakeries in the future will primarily depend on our ability to increase sales of our products outside of the traditional holiday season through the retail and foodservice channels and to reduce production, distribution and other costs. We cannot assure you that our Mrs. Smith's Bakeries business will be able to increase revenues and reduce costs at a rate required to generate profitable results.
OUR ABILITY TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE FOOD INDUSTRY MAY AFFECT OUR OPERATIONAL PERFORMANCE AND FINANCIAL RESULTS.
The food industry is highly competitive. We face competition in all of our markets from large, national companies and smaller, regional operators, as well as from supermarket chains with their own production facilities or private label products and grocery stores with their own in-store bakeries. Some of our competitors, including other diversified food companies, are larger and may have greater financial resources than we do. From time to time we experience price pressure in certain of our markets as a result of competitors' promotional pricing practices as well as market conditions generally. Competition is based on product quality, distribution effectiveness, brand loyalty, price, effective promotional activities and the ability to identify and satisfy emerging consumer preferences.
OUR BUSINESS IS SUBJECT TO THE RISK OF PRICE FLUCTUATIONS OF RAW MATERIALS.
Our principal ingredients are flour, sugar, shortening and fruit, all of which are subject to price fluctuations. Any substantial fluctuation in the prices of raw materials would, if not offset by product price increases or commodities hedging activities, have an adverse impact on our profitability. We attempt to recover our commodity cost increases by increasing prices, promoting a higher-margin product mix and obtaining additional operating efficiencies. We may not be able to continue to offset raw material price increases to the same extent in the future. We enter into contracts for the purchase of raw materials at fixed prices, which are designed to protect us against raw material price increases during their term. These contracts could cause us to pay higher prices for our raw materials than would otherwise be available at the time we utilize the raw materials. We also use paper products, such as corrugated cardboard, aluminum products, such as pie plates, and films and plastics to package our products. We are dependent upon natural gas and propane as a fuel for firing ovens as well as gasoline and diesel as fuel for distribution vehicles. Substantial fluctuations in prices of packaging materials or continued higher prices of fuels could adversely affect our operating performance and financial results.
THE LOSS OR CONTINUED CONSOLIDATION OF ANY OF OUR KEY CUSTOMERS COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR FINANCIAL RESULTS.
The largest purchaser of our products, Winn-Dixie, Inc., accounted for approximately 10.2% of Flowers Foods' sales during fiscal 1999. We expect that our sales to Winn-Dixie will continue to constitute a significant percentage of our revenues. The loss of Winn-Dixie as an outlet for our products could significantly harm our competitive position. In addition, the continued consolidation of food retailers and foodservice distributors has reduced the number of customers for our products. The additional consolidation of customers for our products could have a significant adverse impact on our financial results.
THE PRESENCE OF LARGER COMPANIES COMPETING FOR ACQUISITION OPPORTUNITIES MAY AFFECT OUR STRATEGY OF GROWTH BY ACQUISITION OF ADDITIONAL FOODS BUSINESSES.
Our growth has depended, in significant part, on our ability to acquire and, thereafter, integrate and operate additional food businesses. Our strategy includes pursuing acquisition candidates that complement our existing product lines, geographic presence, or both, and leverage our production capacity, distribution network, purchasing power, brand management capabilities and operating efficiencies. Presently, we have no material acquisition candidates under active consideration. Potential competitors for acquisition opportunities include larger companies that may have greater financial resources. Competition for acquiring food businesses may result in acquisitions on terms that prove to be less advantageous to us than have been attainable in the past or may increase acquisition prices to levels unacceptable to us. As a result, we may not be able to find attractive acquisition candidates in the future. In addition, we may not be successful in integrating future acquisitions into our existing operations or succeed in reducing the costs and increasing the profitability of any businesses we acquire in the future.
OUR BUSINESS IS SUBJECT TO FEDERAL, STATE AND LOCAL GOVERNMENT REGULATIONS, THE IMPACT OF WHICH COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND FINANCIAL POSITION.
Our operations are subject to regulation by various federal, state and local government entities and agencies. As a producer of food products for human consumption, our operations are subject to stringent production, packaging, quality, labeling and distribution standards, including regulations mandated by the following laws:
- Federal Food and Drug Act;
- Occupational Safety and Health Act;
- Fair Labor Standards Act;
- Clean Air Act; and
- Clean Water Act.
We believe that our current legal and environmental compliance programs adequately address such regulations and that we are in substantial compliance with such applicable laws and regulations. However, we cannot predict whether future regulation by various federal, state and local governmental entities and agencies would harm our business and financial results.
IF OUR PRODUCTS CONTAIN DEFECTS, OUR SALES COULD SUFFER AND WE COULD INCUR INCREASED COSTS, WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR PROFITABILITY.
We could be liable if the consumption of any of our products cause injury, illness or death. We also may be required to recall certain of our products that become contaminated or are damaged. We are not aware of any material product liability judgment against us or product recall. However, a product liability judgment or product recall could severely affect our business or financial results.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS, WHICH COULD HARM OUR COMPETITIVE POSITION, RESULTING IN DECREASED REVENUE.
We believe that our trademarks and other proprietary rights are important to our success and competitive position. Accordingly, we devote substantial resources to the establishment and protection of our trademarks and proprietary rights. We have taken actions to establish and protect our trademarks and other proprietary rights. However, these actions may be inadequate to prevent imitation of our products by others or to prevent others from claiming violations of their trademarks and proprietary rights by us.
RISKS FACTORS RELATING TO THE SECURITIES MARKETS AND OWNERSHIP OF FLOWERS FOODS COMMON STOCK
FLOWERS FOODS DOES NOT HAVE AN OPERATING HISTORY AS AN INDEPENDENT COMPANY.
After completion of the spin-off, Flowers Foods will be an independent public company. Although Flowers Foods will be operated by members of senior management who operated Flowers Industries' bakery businesses prior to the spin-off, we do not have an operating history as an independent company. The pro forma financial information included in this information statement may not necessarily reflect the results of operations and financial position that would have been achieved had Flowers Foods and our subsidiaries operated as an independent company during the periods presented nor is it necessarily indicative of what our future results of operations will be. After the spin-off, we will be responsible for obtaining our own financing and corporate administrative services, including legal, human resources, information and technology systems and tax and accounting services. We may have difficulty obtaining financing or services on terms that are acceptable to us, if at all.
BECAUSE THERE HAS BEEN NO PRIOR TRADING MARKET FOR OUR COMMON STOCK, OUR STOCK PRICE MAY BE VOLATILE.
There is no current trading market for Flowers Foods common stock. We have applied for listing of Flowers Foods common stock on the New York Stock Exchange and, following the spin-off and the merger, we expect that Flowers Foods common stock will trade on the New York Stock Exchange under the symbol "FLO".
We cannot assure you that our shares will be approved for listing on the New York Stock Exchange, actively traded or as to the prices at which the shares will trade. Some Flowers Industries shareholders who receive Flowers Foods common stock may decide that they do not want to remain invested in us and may sell their shares following the spin-off. This may delay the development of an orderly trading market for Flowers Foods common stock for a period of time following the spin-off.
Prices for our shares will be determined in the marketplace and may be influenced by many factors, including, but not limited to:
- the depth and liquidity of the market for the shares;
- our results of operations;
- investors' evaluations of the future prospects for Flowers Foods and the food industry;
- our dividend policy;
- changes in the economic conditions in the food industry; and
- general economic and market conditions.
In addition, the stock market often experiences significant price fluctuations that are unrelated to the operating performance of the specific companies whose stock is traded. These market fluctuations could have a material adverse effect on the trading price of our shares.
OUR FAILURE TO ATTRACT AND RETAIN KEY MANAGEMENT PERSONNEL COULD HARM OUR BUSINESS.
Our business requires managerial, financial and operational expertise. We do not have employment agreements with any members of our current management. We have no reason to believe that any of our key management personnel will cease to be active in our business, but, if we lose any of our key personnel, our business operations could suffer.
OUR ARTICLES OF INCORPORATION AND BYLAWS, OUR SHAREHOLDER RIGHTS PLAN AND PROVISIONS OF GEORGIA LAW COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO COULD BE IN YOUR INTEREST.
Provisions of our articles of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be in the best interest of our shareholders. It could be difficult for a potential bidder to acquire us because:
- our directors serve for staggered terms;
- our directors may be removed only for a cause by a supermajority vote of our shareholders;
- our directors have adopted a shareholder rights plan; and
- we are subject to the fair-price and business combination provisions of the Georgia corporate law.
Also, our Board of Directors can issue preferred stock and determine the price, rights, and preferences of this preferred stock without shareholder approval. This authority gives our Board greater flexibility to take actions such as making acquisitions. However, if we issue preferred stock, a third party may find it more difficult to acquire control of us.
WE CANNOT GIVE ANY ASSURANCE THAT WE WILL PAY DIVIDENDS.
The payment of dividends on our common stock is subject to the discretion of our Board of Directors and will depend on factors such as our financial position, results of operations and such other factors as our Board of Directors may, in its discretion, consider relevant. We cannot assure you that we will pay any dividends in the future or if we do whether they will be at a level consistent with dividends paid by Flowers Industries in the past.
WE HAVE AGREED TO INDEMNIFY FLOWERS INDUSTRIES FOR CERTAIN LIABILITIES WHICH MAY ACCRUE FOLLOWING THE SPIN-OFF.
We have agreed in the distribution agreement and the employee benefits agreement relating to the spin-off and in the merger agreement with Kellogg, to indemnify Flowers Industries and its respective officers, directors, employees, successors and assigns, from and against any and all damages arising in connection with certain liabilities, including tax liabilities, that arise in connection with the spin-off or the operations of Flowers Industries prior to the spin-off. If certain events occur or certain liabilities arise, we may be required to pay substantial sums to meet our indemnification obligations. Such payments could have a material adverse effect on our operating performance and financial results.
THE CHARACTER AND AMOUNT OF INCOME, GAIN OR LOSS YOU MAY RECOGNIZE AS A RESULT OF THE SPIN-OFF AND MERGER CANNOT BE PRECISELY DETERMINED.
Your receipt of cash and Flowers Foods common stock in connection with the spin-off and the merger will be a taxable transaction. The spin-off and merger are intended to constitute a single integrated transaction pursuant to which each Flowers Industries shareholder generally will recognize capital gain or loss equal, in each case, to the difference between (1) the fair market value of the Flowers Foods shares distributed in the spin-off plus the cash proceeds received pursuant to the merger and (2) the shareholder's adjusted tax basis in the Flowers Industries common stock surrendered in exchange. However, if the receipt of Flowers Foods stock is treated as a separate transaction for tax purposes, it would be deemed to be a distribution taxable as an ordinary income dividend to the extent of our current or accumulated earnings and profits. In addition, the amount of income, gain or loss, if any, that you will recognize will depend, in part, on the fair market value of the Flowers Foods common stock you receive in the spin-off and your basis in the Flowers Industries common stock you sell in the merger. Accordingly, we cannot assure you as to the character and exact amount of income, gain or loss you may recognize as a result of the spin-off and the merger.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
We have made forward-looking statements in this information statement, including in the sections entitled "Summary," "Risk Factors," and "Business," that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, benefits resulting from the spin-off and the merger, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "continue," "may," "will," "should" or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we distribute this information statement.
Some of the risks and other factors that could affect our performance and operating results are discussed under "Risk Factors" and elsewhere in this information statement. There may also be other risks that we are unable to predict at this time.
THE SPIN-OFF
BACKGROUND OF THE SPIN-OFF
On October 26, 2000, Flowers Industries and Kellogg Company entered into an agreement and plan of restructuring and merger under which a wholly-owned subsidiary of Kellogg will merge with and into Flowers Industries. Flowers Industries, whose principal asset at the time of the merger will be the majority ownership interest in Keebler, will survive the merger as a wholly-owned subsidiary of Kellogg. As a condition to the merger, Flowers Industries has agreed to transfer its fresh and frozen bakery operations, and certain other corporate assets and liabilities, to Flowers Foods, which is currently a wholly-owned subsidiary of Flowers Industries. Effective virtually simultaneously with the merger, Flowers Industries will distribute all of the outstanding shares of Flowers Foods common stock on a pro rata basis to its shareholders.
MANNER OF EFFECTING THE SPIN-OFF
Flowers Industries will effect the spin-off on or about January , 2001 and will deliver all of the outstanding shares of Flowers Foods common stock to First Union National Bank, as transfer agent and registrar, for distribution to the holders of record of Flowers Industries common stock as of the close of business on that date. Shareholders of Flowers Industries will receive shares of Flowers Foods common stock in an amount equal to their proportionate interest in Flowers Industries. The distribution of Flowers Foods common stock will be made based on a ratio of one share of Flowers Foods common stock for every shares of Flowers Industries common stock held by Flowers Industries shareholders as of the close of business on the record date. The actual number of shares of Flowers Foods common stock to be distributed will depend on the number of shares of Flowers Industries common stock outstanding as of the record date. Any Flowers Industries shareholder who transfers his or her Flowers Industries common stock prior to January , 2001 will not receive shares of Flowers Foods even though he or she may have been a shareholder of record for purposes of voting at the Flowers Industries special meeting to approve the merger.
Flowers Industries currently intends to distribute the Flowers Foods shares by book entry. If you are a record holder of Flowers Industries common stock, instead of physical stock certificates, you will receive a statement of your book entry account for the Flowers Foods shares distributed to you. Following the spin-off, you may request physical stock certificates if you wish, and instructions for making that request will be furnished with your book entry account statement.
If you hold your Flowers Industries shares through a stockbroker, bank or other nominee, your shares are likely held in "street name," and you are probably not a shareholder of record. In such a case, your receipt of the Flowers Foods common stock depends on your arrangements with the nominee that holds your Flowers Industries shares for you.
NO ISSUANCE OF FRACTIONAL SHARES
No certificates representing fractional interests in shares of Flowers Foods common stock will be issued to Flowers Industries shareholders as part of the spin-off. After the spin-off, when regular trading in Flowers Foods common stock has begun, the distribution
agent, First Union National Bank, acting as agent for Flowers Industries shareholders otherwise entitled to receive certificates representing fractional shares of Flowers Foods common stock, will aggregate and sell all fractional shares in the open market at then prevailing market prices and distribute to each Flowers Foods shareholder who is entitled to payment in respect of such fractional shares his or her proportionate interest in the proceeds from the sale of the aggregated fractional shares.
PRINCIPAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal income tax consequences of the distribution to Flowers Industries shareholders of Flowers Foods common stock in the spin-off concurrent with the exchange of shares of Flowers Industries common stock for cash in the merger. We will refer to the spin-off and merger, collectively, as the "transaction." This discussion is based on currently operative provisions of the Internal Revenue Code of 1986, Treasury regulations under the Code and administrative rulings and court decisions, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to Flowers Industries, Flowers Foods or the Flowers Industries shareholders as described herein.
Flowers Industries shareholders should be aware that this discussion does not address all federal income tax considerations that may be relevant to particular shareholders of Flowers Industries in light of their particular circumstances, such as shareholders who are banks, insurance companies, pension funds, tax-exempt organizations, dealers in securities or foreign currencies, shareholders who are not United States persons, as defined in the Code, shareholders who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions, shareholders who hold Flowers Industries common stock as part of an integrated investment (including a "straddle") comprised of shares of Flowers Industries common stock and one or more other positions, or shareholders who have previously entered into a constructive sale of Flowers Industries common stock. In addition, the following discussion does not address the tax consequences of the transaction under foreign, state or local tax laws or the tax consequences of transactions effectuated prior or subsequent to or concurrently with the transaction (whether or not such transactions are in connection with the transaction), including, without limitation, transactions in which Flowers Industries common stock is acquired or Flowers Foods common stock is disposed of.
ACCORDINGLY, FLOWERS INDUSTRIES SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE SPECIFIC TAX CONSEQUENCES, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES, TO THEM OF THE TRANSACTION IN THEIR PARTICULAR CIRCUMSTANCES.
For United States federal income tax purposes, the transaction is intended
to constitute a single integrated transaction with respect to Flowers Industries
and its shareholders in which the spin-off will be treated as a distribution in
redemption of outstanding common stock of Flowers Industries in connection with
the complete termination of the Flowers Industries shareholders' interest in
Flowers Industries. Although Flowers Industries believes that the foregoing
description correctly characterizes the transaction for United States federal
income tax purposes and, therefore, that the spin-off should qualify under
Section 302(b) of the Code, either because the integrated combination of the
spin-off and the merger results in a complete termination of the
Flowers Industries shareholders' interests in Flowers Industries or because the spin-off, in conjunction with the merger, is not essentially equivalent to a dividend, there is no specific authority on this point and the issue is not free from doubt.
Assuming the spin-off qualifies as an exchange within the meaning of
Section 302(b) of the Code and that the shares of Flowers Industries common
stock surrendered in the transaction were held as capital assets, then, subject
to the assumptions, limitations and qualifications referred to in this
information statement, the transaction would result in the following federal
income tax consequences:
- Each holder of Flowers Industries common stock will generally recognize gain, if any, only to the extent of the excess of (i) the sum of the fair market value, on the date of the spin-off, of the Flowers Foods common stock distributed in the spin-off plus the cash proceeds received pursuant to the merger over (ii) the holder's adjusted basis immediately prior to the transaction in the Flowers Industries common stock surrendered. Such gain generally should be capital gain, and generally should be long-term capital gain if the Flowers Industries common stock exchanged in the transaction has been held for more than one year. In the event that a holder's adjusted basis in the Flowers Industries common stock exceeds the sum of the fair market value of the Flowers Foods stock and the amount of cash received by the holder in the transaction, the holder will recognize a loss. Such loss generally should be capital loss, and generally should be long-term capital loss if the Flowers Industries common stock exchanged in the transaction has been held for more than one year.
- The tax basis of the Flowers Foods common stock received by Flowers Industries shareholders in the transaction will be equal to the fair market value of such stock on the date of the spin-off. One reasonable method of determining this would be to use the weighted average trading price of Flowers Foods common stock on the first full day of trading ending after the spin-off; however, please consult with your own tax advisor with respect to your particular circumstances.
- The holding period of the Flowers Foods common stock received in the spin-off will commence on the day after the spin-off.
No ruling has been or will be obtained from the Internal Revenue Service in connection with the transaction, and the Internal Revenue Service could challenge the status of the transaction as a single integrated transaction for United States federal income tax purposes. Such a challenge, if successful, could result in Flowers Industries shareholders being treated as receiving a "dividend" distribution of Flowers Foods common stock in respect of their Flowers Industries common stock in the spin-off and as selling, in a separate transaction, their Flowers Industries common stock to Kellogg immediately after the spin-off. The amount treated as distributed in the spin-off would be equal to the fair market value of the Flowers Foods common stock on the date of the spin-off and generally would be (1) treated as a dividend taxable as ordinary income to the Flowers Industries shareholders to the extent of Flowers Industries current or accumulated earnings and profits, (2) to the extent such amount exceeded Flowers Industries earnings and profits, it would be applied to reduce, but not below zero, each Flowers Industries shareholder's adjusted basis in such shareholder's Flowers Industries stock, and (3) would be taxable as capital gain to each Flowers Industries shareholder to the extent the amount treated as received by such shareholder in the spin-off exceeded the amount described in (1) and (2) hereof. Flowers Industries shareholders would have a basis in the Flowers Foods
common stock equal to its fair market value on the date of the spin-off, and the holding period of such stock would commence on the day after the spin-off. Flowers Industries shareholders generally would recognize gain on the sale of their Flowers Industries common stock to Kellogg in the merger in an amount equal to the excess, if any, of the amount of cash received from Kellogg in the merger over their adjusted basis in the Flowers Industries common stock immediately prior to the merger, taking into account the effect of the spin-off of Flowers Foods common stock on such adjusted basis as described above. Such gain generally would be capital gain and generally would be long-term capital gain if the Flowers Industries common stock exchanged in the merger had been held for more than one year. In the event that a holder's adjusted basis in the Flowers Industries common stock, taking into account the effect of the spin-off of Flowers Foods common stock on such adjusted basis as described above, exceeded the amount of cash received from Kellogg in the merger, the holder would recognize a loss. Such loss generally would be a capital loss and generally would be a long-term capital loss if the Flowers Industries common stock exchanged in the merger had been held for more than one year.
You may be subject to "backup withholding" at a rate of 31% on payments (including the distribution of Flowers Foods common stock) received in connection with the transaction unless you (1) provide a correct taxpayer identification number (which, if you are an individual, is your social security number) and any other required information to the exchange agent, or (2) are a corporation or otherwise qualify under certain exempt categories and, when required, demonstrate this fact, all in accordance with the requirements of the backup withholding rules. If you do not provide a correct taxpayer identification number, you may be subject to penalties imposed by the Internal Revenue Service. Any amount paid as backup withholding does not constitute an additional tax and will be creditable against your United States federal income tax liability. You should consult with your own tax advisor as to your qualification for exemption from backup withholding and the procedure for obtaining such exemption. You may prevent backup withholding by completing a W-9 or substitute W-9 and submitting it to the exchange agent for the merger when you submit your stock certificate(s) following the effective time of the merger.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO. THUS, FLOWERS INDUSTRIES SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE TRANSACTION, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
AGREEMENTS BETWEEN FLOWERS INDUSTRIES AND
FLOWERS FOODS RELATING TO THE SPIN-OFF
We have entered into the agreements described in this section with Flowers Industries to facilitate an orderly transition and govern the ongoing relationship between the companies after completion of the spin-off and the merger. The following descriptions include a summary of all material terms of such agreements but are qualified in their entirety by reference to the agreements, which are filed as exhibits to Flowers Foods' registration statement on Form 10 of which this information statement is a part. We urge all shareholders to read these agreements carefully.
DISTRIBUTION AGREEMENT
Flowers Foods and Flowers Industries have entered into a distribution agreement which, in general, provides that:
- Flowers Industries will transfer its Flowers Bakeries and Mrs. Smith's Bakeries businesses and certain other corporate assets and liabilities to Flowers Foods;
- Flowers Industries will distribute all of the outstanding shares of Flowers Foods common stock to its shareholders on a pro rata basis;
- following the spin-off, Flowers Foods will indemnify Flowers Industries for liabilities incurred by Flowers Industries, whether arising before or after the spin-off, relating to tax liabilities of Flowers Industries arising out of the spin-off or relating to the operations of the Flowers Bakeries and Mrs. Smith's Bakeries businesses or otherwise, except for any liabilities relating to debt to be retained by Flowers Industries and up to $16.0 million of advisory fees payable in connection with the merger and spin-off; and
- following the spin-off, Flowers Industries will indemnify Flowers Foods for liabilities incurred by Flowers Foods relating to certain liabilities retained by Flowers Industries.
TRANSFER OF ASSETS. Under the distribution agreement, Flowers Industries will transfer the Flowers Bakeries and Mrs. Smith's Bakeries businesses and certain other corporate assets to Flowers Foods prior to the spin-off. As a result of these transfers, upon completion of the spin-off, Flowers Foods will consist of the traditional bakery businesses currently owned and operated by Flowers Industries.
ALLOCATION OF LIABILITIES. Following the spin-off, Flowers Industries (which will then be a wholly-owned subsidiary of Kellogg) will generally be responsible for, and has agreed to indemnify Flowers Foods, its affiliates and their respective officers, directors, employees, successors and assigns from and against, the following liabilities whether arising before or after the spin-off:
- any debt retained by Flowers Industries; and
- certain advisory fees payable in connection with the merger and spin-off not to exceed $16.0 million.
Except for the liabilities retained by Flowers Industries, Flowers Foods will be generally responsible for, and has agreed to indemnify Flowers Industries, its affiliates (including Kellogg) and their respective officers, directors, employees, successors and assigns from and against, all liabilities whether arising before, at or after the spin-off, of or relating to Flowers Industries, Flowers Foods or any subsidiary of Flowers Foods, whether arising from the conduct of or relating to the business of Flowers Foods, discontinued or divested businesses or operations of Flowers Industries or Flowers Foods or otherwise. Included in these liabilities are the following:
- liabilities (including tax liabilities) of Flowers Industries or any subsidiary to the extent arising from the conduct of, in connection with or relating to, any of Flowers Foods' assets or bakery businesses or the ownership or use thereof or any business or operations which Flowers Industries or Flowers Foods has discontinued or divested prior to the spin-off;
- any environmental liabilities of or relating to Flowers Industries, Flowers Foods or any business or operations which Flowers Industries or Flowers Foods has discontinued or divested prior to the spin-off;
- the debt to be assumed by Flowers Foods, which is anticipated to total approximately $250.0 million;
- advisory fees payable in connection with the merger and spin-off in excess of $16.0 million;
- litigation matters in which Flowers Industries or its officers, directors or employees are defendants;
- taxes, as discussed below; and
- employee benefits related liabilities allocated to Flowers Foods in the employee benefits agreement referred to below.
In addition, Flowers Foods has agreed to indemnify Kellogg, its affiliates (including Flowers Industries) and their respective directors, officers, employees, controlling persons, agents and representatives and their successors and assigns, from and against all liabilities arising out of, or relating to or resulting from the breach or failure of any representation, warranty, obligation or agreement of Flowers Industries contained in the agreement and plan of restructuring and merger to be true and correct when made or at the closing of the merger.
TAXES. Flowers Foods will be responsible for filing consolidated federal and consolidated, combined or unitary state tax returns that include Flowers Industries for periods through completion of the spin-off and pay the related taxes to the Internal Revenue Service or other relevant taxing authority. Flowers Industries shall be responsible for filing consolidated federal and consolidated, combined or unitary state tax returns with respect to Flowers Industries for periods following the spin-off and paying the related taxes to the Internal Revenue Service or other relevant taxing authority.
In addition, the distribution agreement specifies the tax liabilities against which each of Flowers Industries and Flowers Foods will indemnify the other. In general, Flowers Foods will indemnify Flowers Industries against:
- any tax liabilities attributable to Flowers Industries for periods ending on or prior to the spin-off;
- any tax liabilities relating to or resulting from the spin-off; and
- any tax liabilities resulting from the breach by Flowers Foods of its obligations under the distribution agreement.
In general, Flowers Industries will indemnify Flowers Foods for tax liabilities attributable to Flowers Industries for periods beginning after completion of the spin-off except for any tax liabilities relating to the spin-off or to Flowers Foods and its businesses.
TRADEMARKS; TRADENAMES. The distribution agreement provides in general that, when the spin-off is completed, Flowers Industries and its affiliates will not use the name "Flowers," marks or names derived therefrom or other specified marks and names.
CONDITIONS TO THE SPIN-OFF. The spin-off will not occur unless the following conditions are satisfied or waived:
- effectiveness of Flowers Foods' registration statement on Form 10, of which this information statement is a part;
- mailing of this information statement to the Flowers Industries shareholders;
- approval of the Flowers Foods common stock for listing on the New York Stock Exchange;
- effectiveness of our restated articles of incorporation;
- execution and delivery of the employee benefits agreement referred to below;
- effectiveness of the contribution of the Flowers Bakeries and Mrs. Smith's Bakeries capital stock to Flowers Foods and the assumption of the liabilities set forth above by Flowers Foods; and
- the conditions to the Flowers Industries/Kellogg merger shall have been satisfied or waived.
EMPLOYEE BENEFITS AGREEMENT
Below is a summary of material terms and conditions of the employee benefits agreement entered into between Flowers Industries and Flowers Foods on October 26, 2000.
Although the employment of all employees at Flowers Industries will be terminated by Flowers Industries at the completion of the spin-off, the employee benefits agreement provides that Flowers Foods will offer employment to all people who were employees of Flowers Industries immediately prior to the spin-off. Flowers Foods will be responsible for all obligations to employees arising out of or related to their employment with Flowers Industries, including as a result of the spin-off and any liabilities arising from an employee's acceptance or rejection of an offer of employment from Flowers Foods.
Following the completion of the spin-off, Flowers Foods will assume sponsorship of certain employee benefit plans of Flowers Industries. In addition, Flowers Foods will be responsible for any liabilities of Flowers Industries under the three multiemployer pension plans currently covering employees of affiliates of Flowers Industries other than the employees of Keebler and its subsidiaries.
The agreement provides that all share equivalents held by employees that have been issued under the Flowers Industries 1982 Incentive Stock Option Plan and the Flowers Industries 1989 Executive Stock Incentive Plan, whether vested or non-vested, shall remain outstanding according to their terms and be unaffected by the spin-off. All outstanding share equivalents will be cancelled at or immediately prior to the effective time of the merger and none will be outstanding following the merger. Kellogg will pay, for each cancelled share equivalent issued under the 1989 Executive Stock Incentive Plan, an amount determined as set forth in the agreement and plan of restructuring and merger between Flowers Industries and Kellogg.
CAPITALIZATION
The following table sets forth the consolidated debt and capitalization at October 7, 2000 of Flowers Industries on a historical basis and of Flowers Foods on a pro forma basis to give effect to the spin-off and the merger. You should read this table in conjunction with the information located under the heading "Pro Forma Financial Data" and the consolidated financial statements of Flowers Industries and the related notes. You should not construe this pro forma information to be indicative of our capitalization at the time of the spin-off and the merger. This pro forma information also does not project the capitalization for any future period or date.
OCTOBER 7, 2000 -------------------------- (IN THOUSANDS, EXCEPT SHARE DATA) FLOWERS INDUSTRIES FLOWERS FOODS HISTORICAL PRO FORMA ---------- ------------- Current maturities of long term debt and capital lease obligations.......................................... $ 58,309 $ 7,649 Long term debt and capital lease obligations........... 1,374,105 203,001 SHAREHOLDERS' EQUITY: Flowers Industries, Inc. Stock 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 -- $0.625 par value, authorized 350,000,000 shares, 100,527,893 shares issued........ 62,830 Treasury Stock......................................... (8,272) Stock compensation adjustments......................... (13,900) Flowers Foods, Inc. Stock Preferred stock -- $100 par value, authorized 100,000 shares and none issued............................... Preferred stock -- $0.01 par value, authorized 900,000 shares and none issued............................... Common Stock -- $0.01 par value, authorized 100,000,000 shares, 20,105,579 shares issued..................... 201(1) Capital in excess of par value......................... 289,127 500,926(1) Retained earnings...................................... 215,285 133,577 ---------- -------- Total capitalization................................... $1,977,484 $845,354 ========== ======== |
(1) We have assumed the issuance of one share of Flowers Foods common stock for every five shares of Flowers Industries common stock. However, the exact stock distribution ratio will be determined by the Flowers Industries board of directors prior to the spin-off.
DIVIDEND POLICY
Our Board of Directors has not yet determined whether to declare and pay dividends on Flowers Foods common stock. The Board will base its decisions on, among other things, general business conditions, our financial results, contractual, legal and regulatory restrictions regarding dividend payments and any other factors the Board may consider relevant.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected historical financial data of Flowers Industries, the predecessor of Flowers Foods. The selected historical financial data as of and for the 52 weeks ended January 1, 2000, January 2, 1999, the 27 week transition period ended January 3, 1998 and for the 52 weeks ended June 28, 1997 have been derived from the consolidated financial statements of Flowers Industries, which have been audited by PricewaterhouseCoopers, LLP, independent accountants. The selected historical financial data as of and for the 40 weeks ended October 7, 2000 and October 9, 1999 are derived from the unaudited consolidated financial statements of Flowers Industries, which, in the opinion of management, include all adjustments necessary for a fair presentation. Operating results for the 40 weeks ended October 7, 2000 are not necessarily indicative of the results that may be achieved for the year ending December 30, 2000.
The selected historical statement of income data set forth below do not reflect the many significant changes that will occur in the operations and capitalization of our company as a result of the spin-off and the merger. Before the spin-off, we operated as part of Flowers Industries. Because the data reflect periods during which we did not operate as an independent company, the data may not reflect the results of operations or the financial position that would have resulted if we had operated as a separate, independent company during the periods shown. In addition, the data may not necessarily be indicative of our future results of operations or financial position. Such historical data should be read in conjunction with Flowers Industries' "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Flowers Industries' consolidated financial statements and the related notes thereto, which are incorporated by reference herein and have been filed as exhibits to Flowers Foods' registration statement on Form 10, of which this information statement is a part.
FLOWERS INDUSTRIES, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE 52 WEEKS ENDED FOR THE 27 FOR THE 52 FOR THE 40 WEEKS ENDED --------------------------------- WEEKS ENDED WEEKS ENDED --------------------------------- JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 OCTOBER 7, 2000 OCTOBER 9, 1999 --------------- --------------- --------------- ------------- --------------- --------------- STATEMENT OF INCOME DATA: Sales.................. $4,236,010 $3,765,367 $784,097 $1,437,713 $3,317,466 $3,222,157 Materials, supplies, labor and other production costs..... 2,001,956 1,702,581 418,926 787,799 1,505,245 1,548,311 Selling, marketing and administrative expenses............. 1,845,101 1,633,319 301,426 534,285 1,445,318 1,408,420 Depreciation and amortization......... 144,619 128,765 26,930 45,970 129,145 107,240 Non-recurring charge (credit)............. 60,355 68,313 (2,424) 69,208 Insurance proceeds..... (4,774) Gain on sale of distributor notes receivable........... (43,244) Interest expense....... 82,565 72,840 12,144 25,691 89,239 63,595 Interest income........ (1,700) (4,115) (348) (582) (3,002) (1,190) Income before income taxes, investment in unconsolidated affiliate, minority interest, extraordinary loss and cumulative effect of changes in accounting principles........... 103,114 163,664 25,019 87,794 158,719 26,573 Income taxes........... 56,260 74,391 9,632 33,191 68,115 19,102 Income from investment in unconsolidated affiliate............ 18,061 7,721 Income before minority interest, extraordinary loss and cumulative effect of changes in accounting principles........... 46,854 89,273 33,448 62,324 90,604 7,471 Minority interest...... (39,560) (43,305) (55,359) (19,473) Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles........... 7,294 45,968 33,448 62,324 35,245 (12,002) Extraordinary loss due to early extinguishment of debt................. (938) Cumulative effect of changes in accounting principles, net of tax benefit.......... (3,131) (9,888) Net income (loss)...... $ 7,294 $ 41,899 $ 23,560 $ 62,324 $ 35,245 $ (12,002) Diluted net income (loss) per common share................ $ 0.07 $ 0.43 $ 0.27 $ 0.71 $ 0.35 $ (0.12) Weighted average shares outstanding.......... 100,420 96,801 88,773 88,401 100,372 100,388 BALANCE SHEET DATA (AT END OF PERIOD): Total assets........... $2,900,478 $2,860,900 $898,880 $ 898,187 $3,134,622 $2,845,579 Long-term debt......... $1,208,630 $1,038,998 $276,211 $ 275,247 $1,374,105 $1,115,982 Stockholders' equity... $ 538,754 $ 572,961 $348,567 $ 340,012 $ 545,070 $ 521,646 |
PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated income statements for the fiscal year ended January 1, 2000 and, January 2, 1999, the 27 week transition period ended January 3, 1998, the 52 weeks ended June 28, 1997 and the 40 weeks ended October 7, 2000 and October 9, 1999 and the unaudited pro forma condensed consolidated balance sheet as of October 7, 2000 present our combined results of operations and financial position assuming that the transactions contemplated by the spin-off and merger had been completed as of the beginning of the respective periods. In the opinion of management, these statements include all material adjustments necessary to reflect, on a pro forma basis, the impact of the transaction contemplated by the spin-off and the merger on the historical financial information of Flowers Industries. The adjustments are described in the Notes to Unaudited Pro Forma Condensed Consolidated Financial Information and are set forth in the "Pro Forma Adjustments" column.
Following the spin-off, Flowers Foods will consist of the traditional bakery businesses of Flowers Industries. For accounting purposes, we will treat the transactions as a disposal of Keebler Foods Company. Consequently, the financial statements of Flowers Foods will consist of the historical financial statements of Flowers Industries, with Keebler presented as a discontinued operation. Accordingly, the following unaudited pro forma financial information reflects the exclusion of the assets and liabilities and the results of operations of Keebler from the Flowers Industries consolidated financial statements. The pro forma financial information for the fiscal year ended January 1, 2000 and the 40 weeks ended October 7, 2000 and October 9, 1999 also reflect the estimated reduction in interest expense and amortization of intangibles that would have occurred had the transactions occurred at the beginning of the respective periods. As described in the notes to the unaudited pro forma financial information, certain costs related to the transaction will be charged to the operations of Flowers Foods. Since these costs will be reimbursed by Kellogg or deducted from the proceeds to Flowers Industries' shareholders, the costs charged to operations will be credited to capital in excess of par value.
Our unaudited pro forma condensed consolidated financial information should be read in conjunction with the selected condensed consolidated historical financial data of Flowers Industries and the related notes. The unaudited pro forma condensed consolidated financial information has been presented for informational purposes only and does not reflect the results of operations or financial position of Flowers Foods that would have existed had we operated as a separate, independent company for the periods presented. Actual results may have differed from pro forma results if we had operated independently. The unaudited pro forma condensed consolidated financial information should not be relied upon as being indicative of results we would have had or of our future results after the spin-off and the merger.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
The table below shows the unaudited pro forma condensed consolidated balance sheet of Flowers Foods. This balance sheet is based on the historical consolidated balance sheet of Flowers Industries at October 7, 2000 and assumes that the spin-off and the merger had occurred on that date. It is intended to give you an idea of what Flowers Foods' business would have looked like had the spin-off and the merger already occurred.
It is important that you read this unaudited pro forma condensed consolidated balance sheet together with Flowers Industries' consolidated financial statements, which are incorporated by reference herein and have been filed as exhibits to Flowers Foods' registration statement on Form 10, of which this information statement is a part. You should not rely on this balance sheet as being indicative of the financial position of Flowers Foods that would have resulted if the spin-off and the merger had occurred on October 7, 2000.
OCTOBER 7, 2000 -------------------------------- PRO FORMA ADJUSTMENTS PRO FORMA FLOWERS KEEBLER FOODS ---------------------- FLOWERS INDUSTRIES, INC. COMPANY(A) DEBIT CREDIT FOODS, INC. ---------------- ------------- ---------- -------- ----------- ASSETS: CURRENT ASSETS Cash and cash equivalents................... $ 23,766 $ 20,469 $ 3,297 Accounts receivable......................... 191,140 52,367 138,773 Inventories................................. 302,401 184,643 117,758 Deferred income taxes....................... 69,289 34,668 34,621 Prepaid and other........................... 99,765 38,583 61,182 ---------- ---------- ---------- 686,361 330,730 355,631 Net property plant and equipment............ 1,195,007 610,337 584,670 Other assets and deferred charges........... 1,253,254 816,001 272,652(b) 164,601 ---------- ---------- ---------- $3,134,622 $1,757,068 $1,104,902 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES Current portion of long term debt and capital leases............................ $ 58,309 $ 50,660 $ 7,649 Accounts payable............................ 252,352 146,750 105,602 Income taxes................................ 1,138 1,138 Facility closing cost and severance......... 17,539 12,232 5,307 Other accrued liabilities................... 344,156 237,406 106,750 ---------- ---------- ---------- 673,494 448,186 225,308 Long term debt and capital leases........... 1,374,105 546,104 625,000(c) 203,001 OTHER LONG-TERM LIABILITIES Deferred income taxes....................... 158,456 127,544 8,197(b) 22,715 Postretirement/postemployment obligations... 64,038 63,546 492 Facility closing cost and severance......... 22,204 7,397 14,807 Other....................................... 60,772 46,710 10,187(d) 3,875 Minority interest........................... 236,483 236,483(b) STOCKHOLDERS' EQUITY Common stock................................ 62,830 283(f) 201 62,346(f) Capital in excess of par value.............. 289,127 517,581 27,972(b) 625,000(c) 500,926 1,303(f) 24,809(d) 46,500(e) 62,346(f) Retained earnings........................... 215,285 28,522(d) 133,577 46,500(e) 6,686(f) Less: treasury stock........................ (8,272) 8,272(f) Stock compensation adjustments.............. (13,900) 13,900(d) ---------- ---------- ---------- 545,070 517,581 634,704 ---------- ---------- ---------- $3,134,622 $1,757,068 $1,104,902 ========== ========== ========== |
The notes to this Unaudited Pro Forma Condensed Consolidated Balance Sheet are an integral part of the pro forma financial information presented.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The table below shows the unaudited pro forma condensed consolidated statement of income of Flowers Foods for the 52 weeks ended January 1, 2000, and the 40 weeks ended October 7, 2000 and October 9, 1999. This statement of income is based on the historical consolidated statement of income of Flowers Industries and assumes that the spin-off and the merger occurred at the beginning of the respective periods. It is intended to give you an idea of what Flowers Foods' business would have looked like had the spin-off and the merger already occurred. Weighted average shares outstanding used to calculate diluted net income or loss from continuing operations per common share included in the unaudited pro forma condensed consolidated statement of income assumes the issuance of one share of Flowers Foods common stock for every five shares of Flowers Industries common stock outstanding. However, the exact stock distribution ratio will be determined by the Flowers Industries board of directors prior to the spin-off. Flowers Industries' historical weighted average shares outstanding for the respective periods have been adjusted accordingly.
It is important that you read this unaudited pro forma condensed consolidated statement of income together with Flowers Industries' consolidated financial statements, which are incorporated by reference herein and have been filed as exhibits to Flowers Foods' registration statement on Form 10, of which this information statement is a part. You should not rely on this statement of income as being indicative of the historical results that Flowers Foods would have had if the spin-off and the merger had already occurred, or the results that Flowers Foods will experience after the spin-off and the merger.
52 WEEKS ENDED JANUARY 1, 2000 PRO FORMA ADJUSTMENTS -------------------------------- ---------------------- KEEBLER PRO FORMA FLOWERS FOODS FLOWERS INDUSTRIES, INC. COMPANY(G) DEBIT CREDIT FOODS, INC. ---------------- ---------- -------- -------- ----------- Sales.................... $4,236,010 $2,667,771 $1,568,239 Materials, supplies, labor and other production costs....... 2,001,956 1,118,074 883,882 Selling, marketing and administrative expenses............... 1,845,101 1,201,669 643,432 Depreciation and amortization........... 144,619 84,125 $ 6,604(h) 53,890 Non-recurring charge (credit)............... 60,355 66,349 (5,994) ---------- ---------- ---------- Income (loss) from operations............. 183,979 197,554 (6,971) Interest expense......... 82,565 37,874 39,335(i) 5,356 Interest income.......... (1,700) (1,700) ---------- ---------- ---------- Interest expense, net.... 80,865 36,174 5,356 ---------- ---------- ---------- Income (loss) before income taxes and minority interest...... 103,114 161,380 (12,327) Income taxes............. 56,260 73,175 $ 13,765(j) (3,150) ---------- ---------- ---------- Income (loss) before minority interest...... 46,854 88,205 (9,177) Minority interest........ (39,560) (39,560) ---------- ---------- ---------- Net income (loss) from continuing operations............. $ 7,294 $ 48,645 $ (9,177) ========== ========== ========== Diluted net income (loss) from continuing operations per common share.................. $ 0.36 $ (0.46) ========== ========== Weighted average shares outstanding............ 20,084 20,084 |
The notes to this Unaudited Pro Forma Condensed Consolidated Statement of Income are an integral part of the pro forma financial information presented.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF INCOME -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
40 WEEKS ENDED OCTOBER 7, 2000 -------------------------------- KEEBLER PRO FORMA ADJUSTMENTS PRO FORMA FLOWERS FOODS ---------------------- FLOWERS INDUSTRIES, INC. COMPANY(G) DEBIT CREDIT FOODS, INC. ---------------- ---------- -------- -------- ----------- Sales................... $3,317,466 $2,111,635 $1,205,831 Materials, supplies, labor and other production costs...... 1,505,245 842,207 663,038 Selling, marketing and administrative expenses.............. 1,445,318 961,009 484,309 Depreciation and amortization.......... 129,145 72,547 $ 5,307(h) 51,291 Proceeds from insurance claims................ (4,774) (4,774) Non-recurring charge (credit).............. (2,424) (996) (1,428) ---------- ---------- ---------- Income from operations............ 244,956 236,868 13,395 Interest expense........ 89,239 37,189 37,796(i) 14,254 Interest income......... (3,002) (3,002) ---------- ---------- ---------- Interest expense, net... 86,237 34,187 14,254 ---------- ---------- ---------- Income (loss) before income taxes and minority interest..... 158,719 202,681 (859) Income taxes............ 68,115 80,767 $ 12,462(j) (190) ---------- ---------- ---------- Income (loss) before minority interest..... 90,604 121,914 (669) Minority interest....... (55,359) (55,359) ---------- ---------- ---------- Net income (loss) from continuing operations............ $ 35,245 $ 66,555 $ (669) ========== ========== ========== Diluted net income (loss) from continuing operations per common share................. $ 1.76 $ (0.03) ========== ========== Weighted average shares outstanding........... 20,074 20,074 |
The notes to this Unaudited Pro Forma Condensed Consolidated Statement of Income are an integral part of the pro forma financial information presented.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF INCOME -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
40 WEEKS ENDED OCTOBER 9, 1999 ------------------------------- KEEBLER PRO FORMA ADJUSTMENTS PRO FORMA FLOWERS FOODS --------------------- FLOWERS INDUSTRIES, INC. COMPANY(G) DEBIT CREDIT FOODS, INC. ---------------- ---------- -------- -------- ----------- Sales..................... $3,222,157 $2,055,724 $1,166,433 Materials, supplies, labor and other production costs................... 1,548,311 875,130 673,181 Selling, marketing and administrative expenses................ 1,408,420 935,606 472,814 Depreciation and amortization............ 107,240 62,651 $ 5,080(h) 39,509 Non-recurring charge...... 69,208 69,208 ---------- ---------- ---------- Income (loss) from operations.............. 88,978 113,129 (19,071) Interest expense.......... 63,595 29,687 31,063(i) 2,845 Interest income........... (1,190) (1,190) ---------- ---------- ---------- Interest expense, net..... 62,405 28,497 2,845 ---------- ---------- ---------- Income (loss) before income taxes and minority interest....... 26,573 84,632 (21,916) Income taxes.............. 19,102 41,204 $ 16,503(j) (5,599) ---------- ---------- ---------- Income (loss) before minority interest....... 7,471 43,428 (16,317) Minority interest......... (19,473) (19,473) ---------- ---------- ---------- Net (loss) income from continuing operations... $ (12,002) $ 23,955 $ (16,317) ========== ========== ========== Diluted net loss from continuing operations per common share........ $ (0.60) $ (0.81) ========== ========== Weighted average shares outstanding............. 20,078 20,078 |
The notes to this Unaudited Pro Forma Condensed Consolidated Statement of Income are an integral part of the pro forma financial information presented.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF INCOME -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The table below shows the unaudited pro forma condensed consolidated statement of income of Flowers Foods for the 52 weeks ended January 2, 1999, the 27 week transition period ended January 3, 1998 and for the 52 weeks ended June 28, 1997. This statement of income is based on the historical consolidated statement of income of Flowers Industries and assumes that the spin-off and the merger occurred at the beginning of each period presented. It is intended to give you an idea of what Flowers Foods' business would have looked like had the spin-off and the merger already occurred. This unaudited pro forma condensed consolidated statement of income also differs from the unaudited pro forma condensed consolidated statement of income on the preceding pages in that it does not give effect to (1) the reduction of debt and accordingly assumed decreased interest expense, which will occur in the transaction or (2) the reduction in amortization expense related to cost in excess of net tangible assets paid for the controlling interest in Keebler. Weighted average shares outstanding used to calculate diluted net income or loss from continuing operations per common share included in the unaudited pro forma condensed consolidated statement of income assumes the issuance of one share of Flowers Foods common stock for every five shares of Flowers Industries common stock outstanding. However, the exact stock distribution ratio will be determined by the Flowers Industries board of directors prior to the spin-off. Flowers Industries' historical weighted average shares outstanding for the respective periods have been adjusted accordingly.
It is important that you read this pro forma condensed consolidated statement of income together with Flowers Industries' consolidated financial statements, which has been filed as exhibits to Flowers Foods' registration statement on Form 10, of which this information statement is a part. You should not rely on this statement of income as being indicative of the historical results that would actually have resulted for Flowers Foods had the spin-off and the merger occurred at the beginning of the respective periods.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF INCOME -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED JANUARY 2, 1999 -------------------------------------------------- PRO FORMA FLOWERS KEEBLER FLOWERS INDUSTRIES, INC. FOODS COMPANY(G) FOODS, INC. ---------------- ----------------- ----------- Sales................................ $3,765,367 $2,226,480 $1,538,887 Materials, supplies, labor and other production costs................... 1,702,581 907,497 795,084 Selling, marketing and administrative expenses........................... 1,633,319 1,049,967 583,352 Depreciation and amortization........ 128,765 69,125 59,640 Non-recurring charge................. 68,313 3,852 64,461 ---------- ---------- ---------- Income from operations............... 232,389 196,039 36,350 Interest expense..................... 72,840 30,263 42,577 Interest income...................... (4,115) (3,763) (352) ---------- ---------- ---------- Interest expense, net................ 68,725 26,500 42,225 ---------- ---------- ---------- Income (loss) before income taxes, minority interest extraordinary loss and cumulative effect of changes in accounting principles... 163,664 169,539 (5,875) Income taxes......................... 74,391 72,962 1,429 ---------- ---------- ---------- Income (loss) before minority interest........................... 89,273 96,577 (7,304) Minority interest.................... (43,305) (43,305) ---------- ---------- ---------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles... 45,968 53,272 (7,304) Extraordinary loss due to early extinguishment of debt, net of tax................................ (938) (938) Cumulative effect of changes in accounting principles, net of tax................................ (3,131) (3,131) ---------- ---------- ---------- Net income (loss) from continuing operations......................... $ 41,899 $ 52,334 $ (10,435) ========== ========== ========== Diluted net income (loss) from continuing operations per share.... $ 2.16 $ (0.54) ========== ========== Weighted average shares outstanding........................ 19,360 19,360 |
The notes to this Unaudited Pro Forma Condensed Consolidated Statement of Income are an integral part of the pro forma financial information presented.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF INCOME -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
27 WEEKS ENDED JANUARY 3, 1998 -------------------------------------------------- PRO FORMA ADJUSTMENTS --------------------- FLOWERS FLOWERS INDUSTRIES, INC. DEBIT CREDIT FOODS, INC. ---------------- ------- ------ ----------- Sales................................. $784,097 $784,097 Materials, supplies, labor and other production costs.................... 418,926 418,926 Selling, marketing and administrative expenses............................ 301,426 301,426 Depreciation and amortization......... 26,930 26,930 -------- -------- Income from operations................ 36,815 36,815 Interest expense...................... 12,144 12,144 Interest income....................... (348) (348) -------- -------- Interest expense, net................. 11,796 11,796 -------- -------- Income before income taxes and cumulative effect of changes in accounting principles............... 25,019 25,019 Income taxes.......................... 9,632 9,632 Income from investment in unconsolidated affiliate............ 18,061 $18,061(k) -------- Net income before cumulative effect of changes in accounting principles.... 33,448 15,387 Cumulative effect of changes in accounting principles, net of tax... (9,888) (9,888) -------- -------- Net income from continuing operations.......................... $ 23,560 $ 5,499 ======== ======== Diluted net income from continuing operations per share................ $ 1.33 $ 0.31 ======== ======== Weighted average shares outstanding... 17,755 17,755 |
The notes to this Unaudited Pro Forma Condensed Consolidated Statement of Income are an integral part of the pro forma financial information presented.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF INCOME -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED JUNE 28, 1997 ------------------------------------------------- PRO FORMA ADJUSTMENTS --------------------- FLOWERS FLOWERS INDUSTRIES, INC. DEBIT CREDIT FOODS, INC. ---------------- ------ ------ ----------- Sales................................. $1,437,713 $1,437,713 Materials, supplies, labor and other production costs.................... 787,799 787,799 Selling, marketing and administrative expenses............................ 534,285 534,285 Depreciation and amortization......... 45,970 45,970 ---------- ---------- Income from operations................ 69,659 69,659 Interest expense...................... 25,691 25,691 Interest income....................... (582) (582) ---------- ---------- Net interest expense.................. 25,109 25,109 ---------- ---------- Gain on sale of distributor notes..... 43,244 43,244 ---------- ---------- Income before income taxes............ 87,794 87,794 Income taxes.......................... 33,191 33,191 Income from investment in unconsolidated affiliate............ 7,721 $7,721(k) ---------- ---------- Net income from continuing operations.......................... $ 62,324 $ 54,603 ========== ========== Diluted net income from continuing operations per share................ $ 3.53 $ 3.09 ========== ========== Weighted average shares outstanding... 17,680 17,680 |
The notes to this Unaudited Pro Forma Condensed Consolidated Statement of Income are an integral part of the pro forma financial information presented.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS
OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) Reflects the separation of the assets and liabilities of Keebler that are included in Flowers Industries' consolidated balance sheet as of October 7, 2000. Amounts have been derived from the Keebler unaudited interim financial statements as of October 7, 2000 filed with the Securities and Exchange Commission on Form 10-Q on November 21, 2000 and incorporated herein by reference and Flowers Industries' unaudited interim financial statements as of October 7, 2000 filed as an exhibit to Flowers Foods' registration statement on Form 10, of which this information statement is a part.
(b) Reflects the elimination of (i) cost in excess of Keebler net tangible
assets acquired, (ii) Flowers Industries' minority interest in Keebler and
(iii) deferred taxes provided on (a) unremitted earnings prior to
consolidation by Flowers Industries and (b) Keebler stock transactions, as
follows:
DR/(CR) --------- Goodwill and other intangible assets.................... $(272,652) Minority interest....................................... 236,483 Deferred taxes.......................................... 8,197 --------- Capital in excess of par value.......................... $ 27,972 ========= |
(c) Reflects the elimination of $625.0 million of debt to be retained by Flowers Industries as follows:
DR/(CR) --------- Long-term debt.......................................... $ 625,000 --------- Capital in excess of par value.......................... $(625,000) --------- |
At the effective date of the spin-off and merger, Flowers Foods' liabilities will include approximately $250.0 million of debt. In order to achieve this debt level, we estimate that Flowers Industries will retain approximately $625.0 million of debt.
(d) In connection with the spin-off and merger, various separation agreements and other employee costs will be incurred by Flowers Industries. These costs will reduce the proceeds received by Flowers Industries shareholders. The estimated payments expected to be made are as follows:
Separation agreements..................................... $13,583 Other contractual payments under benefit programs......... 28,919* ------- Total estimated cash payments................... $42,502 ======= |
* Based on an estimated stock price of $16.6875 per share.
Of the total estimated cash payments, $10.2 million is already accrued in Flowers Industries' liabilities and $3.8 million reflects equity compensation in the form of value of stock options which has no effect on the results of operations, as follows:
Total estimated cash payments............................ $ 42,502 Amount accrued........................................... (10,187) Equity compensation...................................... (3,793) -------- $ 28,522** ======== |
** The $28.5 million will be charged to income from continuing operations in the Flowers Foods statement of income when a measurement date is reached under discontinued operations accounting.
Accordingly, $28.5 million is reflected as a decrease in retained earnings in the unaudited pro forma condensed consolidated balance sheet. The $28.5 million is not reflected in the unaudited pro forma condensed consolidated statement of income because it is of a non-recurring nature. The pro forma entry is outlined as follows:
DR/(CR) -------- Decrease in retained earnings............................ $ 28,522 Decrease in other liabilities............................ 10,187 Stock compensation adjustments........................... (13,900) -------- Net increase in capital in excess of par value........... $(24,809) ======== |
Stock compensation adjustments represent the termination of the 1989 Flowers Industries Executive Stock Incentive Plan as follows:
Reversal of notes receivable to capital in excess of par value................................................... $10,102 Accelerated vesting of restricted stock awards............ 3,798+ ------- $13,900 ======= |
+ Accelerated vesting of restricted stock awards is included in the $28.5 million decrease in retained earnings.
(e) In connection with the spin-off and merger, various transaction and other costs of approximately $41.0 million will be incurred by Flowers Industries and approximately $10.0 million by Keebler. Of the $41.0 million incurred by Flowers Industries, $16.0 million will be borne by Kellogg and the balance will reduce the proceeds received by Flowers Industries' shareholders. Estimated costs reflected on the unaudited pro forma condensed consolidated balance sheet are outlined as follows:
Investment banking fees................................... $32,000 Legal and accounting...................................... 5,000 Debt prepayment penalty................................... 4,000 55% of Keebler transaction fees*.......................... 5,500 ------- $46,500 ======= |
* Represents the year to date weighted average ownership interest of Flowers Industries in Keebler
(f) Represents adjustments necessary to par value of common stock and capital in excess of par value to (i) reflect the retirement of Flowers Industries treasury stock upon completion of the merger and (ii) reflect the assumed issuance of one share of Flowers Foods common stock for every five shares of Flowers Industries common stock outstanding by adjusting Flowers Industries $0.625 par value common stock to newly issued Flowers Foods $0.01 par value common stock as follows:
DR/(CR) -------- (i) Retained earnings................................... $ 6,686 Capital in excess of par value...................... 1,303 Common stock........................................ 283 -------- Treasury stock...................................... $ (8,272) ======== (ii) Common stock........................................ $ 62,346 -------- Capital in excess of par value...................... $(62,346) -------- |
The exact stock distribution ratio will be determined by the Flowers Industries board of directors prior to the spin-off.
(g) Represents the exclusion of the results of operations of Keebler that are included in Flowers consolidated statements of income for the periods presented.
(h) Reflects the change in amortization expense resulting from the elimination of intangible assets related to the acquisition of Keebler. As a result of Flowers Industries' acquisition of Keebler, Flowers Industries recorded cost in excess of net tangible assets of approximately $272.7 million which was being amortized over 40 years.
(i) Reflects the change in interest expense resulting from the elimination of $625.0 million of debt as described in (c) above. The change in interest expense for the respective periods is based on the average debt outstanding after reflecting the reduction of $625.0 million, using interest rates in effect during the applicable periods.
(j) Represents the tax effect of the adjustments in (g), (h) and (i).
(k) Represents elimination of the results of operations of Keebler included in the consolidated statements of income prior to acquisition by Flowers Industries of a controlling ownership interest in Keebler which occurred on February 3, 1998.
BUSINESS
OUR COMPANY
Flowers Foods is one of the largest producers and marketers of frozen and non-frozen bakery and dessert products in the United States. Flowers Foods will consist of the following businesses after they are spun off from Flowers Industries:
- Flowers Bakeries; and
- Mrs. Smith's Bakeries.
Our core strategy is to be the country's leading producer and marketer of a full line of frozen and non-frozen bakery and dessert products serving all categories of customers through all channels of distribution. Our strategy focuses on responding to current market trends for our products and changing consumer preferences, which increasingly favor purchases of ready-made convenience food products as opposed to traditional foods to be prepared at home. To assist in accomplishing our core strategy, we have aggressively invested capital to modernize and expand our production and distribution capacity and have expanded a nationally branded business which complements our traditional strengths. We have established a presence in all distribution channels where bakery and dessert products are sold, including traditional supermarkets and their in-store deli/bakeries, foodservice distributors, convenience stores, mass merchandisers, club stores, wholesalers, restaurants, fast food outlets, schools, hospitals and vending machines.
Our Flowers Bakeries business focuses on the production and marketing of bakery products to customers in the super-regional 16 state area in and surrounding the southeastern United States. We have devoted significant resources to modernizing production facilities, improving our distribution capabilities and enhancing our information technology. We have acquired numerous local bakery operations which are generally within or contiguous to our existing region and which can be served with our extensive direct store door delivery system. Our strategy is to continue to better serve new and existing customers, principally by using information technology to enhance the productivity and efficiency of our production facilities and by extending our direct store door delivery system. This system utilizes approximately 3,300 independent distributors who own the right to sell our bakery products within their respective territories.
Our Mrs. Smith's Bakeries business produces and markets frozen desserts as well as bread, rolls and buns for sale to retail and foodservice customers. Traditionally, retail frozen pie sales are heavily concentrated in the year-end holiday season. In an effort to enhance sales outside of the holiday season, we launched "Operation 365," a strategy aimed at significantly expanding non-seasonal sales in the frozen dessert product line by extending the well-recognized Mrs. Smith's brand name to existing and related retail and foodservice products. Examples of significant retail product line extensions include Mrs. Smith's Restaurant Classics and Mrs. Smith's Cookies and Cream frozen pies, while the Grand Finales frozen pie product line was introduced in the foodservice channel.
We have a leading presence in each of the major product categories in which we compete. Our Flowers Bakeries brands rank first in branded sales measured in dollars and units in the 22 major metropolitan markets we serve. Our Mrs. Smith's Bakeries business is one of the leading frozen dessert producers and marketers in the United States, and our Mrs. Smith's pies are the leading national brand of frozen pies sold at retail. Our major branded products include, among others, the following:
FLOWERS BAKERIES MRS. SMITH'S BAKERIES ---------------- --------------------- Flowers Mrs. Smith's Nature's Own Mrs. Freshley's Cobblestone Mill Oregon Farms BlueBird European Bakers Regional Franchised Brands: Stilwell Sunbeam Our Special Touch Roman Meal Danish Kitchen Evangeline Maid Pour a Quiche Bunny Grand Finales ButterKrust Pet-Ritz Oronoque Orchard |
We are committed to producing high quality products at the lowest price in all of our operations and we have made significant capital investments in recent years to modernize, automate and expand our production and distribution capabilities and enhance our information technology. Capital spending has been primarily directed toward expanding and modernizing existing production facilities. The most recent production facility expenditure in our Flowers Bakeries business was the installation of a fully automated wrapping system for three production lines in a new 6,000 square foot facility at our Goldsboro, North Carolina facility. Production capabilities at our Mrs. Smith's Bakeries business were significantly realigned at an approximate cost of $230.0 million. This realignment included the relocation and upgrading of 25 production lines at seven of our 10 operating facilities, which offers us significantly more capacity at fewer locations. We believe these facilities will give us the ability to exploit many opportunities in the foodservice segment as well as continue our growth in the retail market.
In order to provide prompt and responsive service to customers, we tailor our distribution systems to the marketing and production aspects of our major product lines. Flowers Bakeries distributes its baked foods through an extensive direct store door delivery system of approximately 3,300 independent distributors who, as owners of their territories, are motivated to maintain and build retail brand shelf space and to monitor product freshness, which is essential in the marketing of short shelf life products such as fresh bread, rolls and buns. Mrs. Smith's Bakeries frozen foods are distributed through our two strategically-located frozen distribution facilities, as well as through additional commercial frozen warehouse space throughout the United States, in order to accommodate demands in the retail channel for seasonal products and to provide staging to expedite distribution throughout the year.
INDUSTRY OVERVIEW
The United States food industry is comprised of a number of distinct product lines and distribution channels for frozen and non-frozen bakery products and desserts. Changes in consumer preferences have shifted food purchases away from the traditional grocery store aisles for home preparation and consumption, and toward home meal replacement purchases, either in supermarket in-store deli/bakeries or in non-supermarket channels, such as mass merchandisers, convenience stores, club stores, restaurants and other convenience channels. Non-supermarket channels of distribution are extremely important throughout the food industry.
NON-FROZEN AND FROZEN BAKERY PRODUCTS
Retail sales of bakery products continue to experience modest growth, with expansion within the category occurring in a variety of premium and specialty breads. However, foodservice sales of bakery products continue to grow at a rate faster than retail sales as consumers who demand convenience increasingly are purchasing food products away from home. In addition to Flowers Foods, several large baking and diversified food companies market bakery products in the United States. Competitors in this category include Interstate, Earthgrains, Bestfoods and Pepperidge Farm. There are also a number of smaller, regional companies. We believe that the larger companies enjoy several competitive advantages over smaller operations due principally to economies of scale in areas such as information technology purchasing, production, advertising, marketing and distribution, as well as through greater brand awareness.
A significant trend in the baking industry over the last several years has been the consolidation of smaller bakeries into larger baking businesses. Consolidation continues to be driven by factors such as capital constraints on smaller companies that limit their ability to avoid technological obsolescence, to increase productivity or to develop new products, generational changes at family-owned businesses, and the need to serve the consolidated retail customers and the foodservice channel. We believe that the consolidation trend in the baking, food retailing and foodservice industries will continue to present opportunities for strategic acquisitions that complement our existing businesses and that extend our super-regional presence.
FROZEN DESSERT PRODUCTS
Sales of frozen desserts to foodservice institutions and other distribution channels, including restaurants and in-store bakeries have grown at a rate faster than sales to retail channels. We are a preferred supplier of frozen dessert products to the leading foodservice distributors in the United States. While retail sales of frozen desserts have experienced declining sales, Mrs. Smith's remains the leading brand in the frozen pie category. Primary competitors in the frozen dessert market include Sara Lee, Pepperidge Farm, Edwards and Pillsbury. We believe the increase in foodservice sales in the frozen dessert industry will provide us with additional revenue opportunities.
STRATEGY
Our core strategy is to be the country's leading producer and marketer of a full line of frozen and non-frozen bakery and dessert products serving all categories of customers through all channels of distribution. Our Flowers Bakeries and Mrs. Smith's Bakeries
businesses each develop strategies based on the production, distribution and marketing requirements of their particular food categories. We employ the following five overall strategies:
- STRONG BRAND RECOGNITION. We intend to capitalize on the success of our well-recognized brand names, which communicate product consistency and quality, by extending those brand names to additional products and channels of distribution. Many of our brands, including Nature's Own bread and Mrs. Smith's retail frozen baked pies are the top-selling brands in their categories.
- EFFICIENT PRODUCTION AND DISTRIBUTION FACILITIES. We intend to maintain a continuing level of capital improvements that, while substantially lower than our level of capital improvements in recent years, will permit us to fulfill our commitment to remaining among the most modern and efficient frozen and non-frozen bakery and dessert producers in the United States.
- CUSTOMER SERVICE-ORIENTED DISTRIBUTION. We intend to expand and refine our distribution systems to respond quickly and efficiently to changing customer service needs, consumer preferences and seasonal demands. We have distribution systems that are tailored to the nature of each of our food product categories and are designed to provide the highest levels of service to our retail and foodservice customers. We have developed a direct store door delivery network of approximately 3,300 independent distributors for our Flowers Bakeries bakery products. Our Mrs. Smith's Bakeries business utilizes a network of strategically located storage and distribution facilities for our frozen bakery and dessert products and a centralized distribution facility for our snack cake products.
- BROAD RANGE OF PRODUCTS SOLD THROUGH MULTIPLE DISTRIBUTION CHANNELS. Recognizing that consumers are increasingly seeking home meal replacements and other convenience food products, we intend to continue to emphasize expansion of our product lines and distribution channels to meet those preferences. Our product lines now include virtually every category of fresh and frozen bakery and dessert products. These products generally can be found in traditional supermarkets and their in-store deli/bakeries, convenience stores, mass merchandisers, club stores, wholesalers, restaurants, fast food outlets, schools, hospitals and vending machines.
- STRATEGIC ACQUISITIONS. We have consistently pursued growth in sales, geographic markets and products through strategic acquisitions. We intend to pursue growth through strategic acquisitions and investments that will complement and expand our existing markets, product lines and product categories.
PRODUCTS
We produce packaged bakery, frozen dessert and frozen bakery products.
FLOWERS BAKERIES
We market our packaged bakery products in the super-regional 16 state area in and surrounding the southeastern United States.
We market our packaged bakery products under numerous brand names, including Nature's Own and Cobblestone Mill. We also market fresh bread under regional franchised brands such as Sunbeam, Roman Meal, Evangeline Maid, Bunny and ButterKrust trademarks. Nature's Own is the best selling brand by volume of soft variety bread in the
United States, despite being marketed solely in the super-regional 16 state area in and surrounding the southeastern United States. Pastries, doughnuts, bakery snacks, cakes and english muffins are sold through our direct store door distribution system primarily under the BlueBird brand, as well as under the ButterKrust, Sunbeam, and Holsum trademarks. Our branded products account for approximately 65% of sales by Flowers Bakeries.
In addition to our branded products, we also produce and distribute packaged bakery products under private labels for such retailers as Winn-Dixie and Kroger. While private label products carry lower margins than our branded products, we use our private label offerings to expand our total shelf space and to effectively utilize production and distribution capacity.
We utilize our direct store door distribution system to supply foodservice companies, including Burger King, Krystal, Arby's, Hardees, Whataburger and Outback Steakhouse, with bakery products. In addition, we supply frozen bakery products to Wendy's.
MRS. SMITH'S BAKERIES
Mrs. Smith's frozen desserts are marketed throughout the United States and our frozen pies were the number one retail frozen pie brand in the United States for 1999.
Mrs. Smith's frozen desserts are sold at retail under the Mrs. Smith's, Pet-Ritz, Oregon Farms and Oronoque Orchard brand names. Frozen desserts in the foodservice channel are sold under the Grand Finales brand and under private labels for foodservice customers, such as Sysco.
We produce and distribute frozen bakery products such as bread, rolls and buns for sale to foodservice customers. We also produce packaged bakery products for distribution by Flowers Bakeries direct store door distribution network under the BlueBird brand. In addition, we produce packaged bakery products under the Mrs. Freshley's brand for sale to the vending channel and under various private labels for sale through the retail channel.
PRODUCTION AND DISTRIBUTION
We design our production facilities and distribution systems to meet the marketing and production demands of our major product lines. Through a significant program of capital improvements and careful planning of plant locations, which, among other things, allows us to establish reciprocal baking, or product transfer arrangements among our bakeries. In addition to the independent distributor system for our fresh baked products, we also use both owned and public warehouses and distribution centers in central locations for the distribution of certain of our Mrs. Smith's products.
FLOWERS BAKERIES
We operate 27 packaged bakery product facilities in 10 states. We have invested approximately $130.0 million over the past three years, primarily to build new state-of-the-art baking facilities and to significantly upgrade existing facilities. During this period, we also added 13 new highly-automated production lines in eight of our facilities, and a fully automated wrapping system for three production lines was installed in a new 6,000 square foot facility at our Goldsboro, North Carolina facility. We believe that these investments will make us the most efficient major producer of packaged bakery products in the United States. We believe that our capital investment yields long-term benefits in the form of
more consistent product quality, highly sanitary processes, and greater production volume at a lower cost per unit. While our major capital improvement program is largely complete, we intend to continue to invest in our production facilities and equipment to maintain high levels of efficiency.
Distribution of packaged bakery products involves determining appropriate order levels, delivering the product from the plant to the independent distributor for direct store door delivery to the customer, stocking the product on the shelves, visiting the customer daily to ensure that inventory levels remain adequate, and removing stale goods. We utilize a network of approximately 3,300 independent distributors who own the rights to distribute our packaged bakery products in their geographic territory. Distributor purchase arrangements generally are made directly with a financial institution, and, pursuant to an agreement, we manage and service these arrangements.
The distributors lease hand-held computers from us, which contain our proprietary software. The software permits distributors to track and communicate inventory data to the production facilities and to calculate recommended order levels based on historical sales data and recent trends. These orders are electronically transmitted to the appropriate production facility on a nightly basis. This system, which we believe is more sophisticated than comparable tracking programs currently used in the industry, is designed to ensure that adequate product, and the right mix of products, are available to meet the retail and foodservice customers' immediate needs. We believe our system minimizes returns of unsold goods. In addition to the hand-held distributor units, our main computer system permits tracking of sales, product returns and profitability by customer location, plant, day and other bases. Managers receive sales and profitability reports on a weekly basis, allowing prompt operational adjustments when appropriate.
We believe the independent distributor system is unique in the industry as to its size, with approximately 3,300 distributors, and with respect to its geographic coverage. The program is designed to provide retail customers with superior service because distributors, highly motivated by route ownership, strive to increase sales by maximizing service. In turn, distributors have the opportunity to benefit directly from the enhanced value of their routes resulting from higher sales volume.
MRS. SMITH'S BAKERIES
We operate 10 production facilities with 43 production lines for our frozen desserts, frozen bakery products and packaged bakery products. We significantly realigned our production capabilities over the last three years, spending approximately $230.0 million. This realignment included the relocation and upgrading of 25 production lines at seven of our 10 operating facilities, which offers us significantly more capacity at fewer locations. We believe product realignment will give us the ability to exploit many opportunities in the retail and foodservice channels.
Our distribution facilities are strategically located near our production facilities to simplify distribution logistics. Our plant in Stilwell, Oklahoma was the focus of a $60.0 million capital spending project in 1999 to add production capacity and will be the primary producer of frozen fruit and custard pies. This facility also serves as a principal point of distribution for our frozen desserts. Our Suwanee, Georgia facility is located on a major interstate corridor near four of our frozen dessert production facilities. This facility contains such innovations as five 78-foot tall, laser-guided cranes specifically designed for the facility, a six million cubic foot freezer, and computer-controlled bar-coding and
inventorying. The automation of this facility enables us to move extremely large volumes of product without a significant labor component and enables the facility to operate with extremely cold temperatures that preserve high product quality. These features allow our Suwanee facility to better serve customers by processing customer orders much more quickly than conventional freezer facilities. Production capacity was added to this facility as part of the overall realignment project, increasing our production capacity and enhancing operating efficiencies by having contiguous production and frozen storage and distribution.
In addition to our two strategically-located freezer and distribution facilities in Suwanee and Stilwell, we lease additional freezer and distribution facilities throughout the United States to facilitate distribution of our products nationwide. These owned and leased facilities allow us to build and store necessary inventory of raw materials and finished dessert products and to expedite the national distribution of both our seasonal and non-seasonal products.
We distribute our packaged bakery products from a centralized distribution facility located near Knoxville, Tennessee. Centralized distribution allows us to achieve both production and distributing efficiencies. The production facilities are able to operate longer, more efficient production runs of a single product, which are then shipped to the centralized distribution facility. Products coming from different production facilities are then cross-docked and shipped directly to customer warehouses.
CUSTOMERS
Our top 10 customers in 1999 accounted for 41.0% of Flowers Foods sales. Winn Dixie accounted for approximately 10.2% of sales during 1999.
FLOWERS BAKERIES
Our fresh baked foods have a highly diversified customer base, which includes grocery retailers, restaurants, fast-food chains, food wholesalers, institutions, and vending companies. We also sell returned and surplus product through a system of thrift outlets.
We supply numerous restaurants, institutions and foodservice companies with bakery products, including buns for fast-food outlets such as Burger King, Wendy's, Krystal, Hardees, Whataburger, Arby's and Outback Steakhouse. We also sell packaged bakery products to wholesale distributors for ultimate sale to a wide variety of food outlets.
MRS. SMITH'S BAKERIES
Our frozen desserts are marketed to traditional retail outlets, such as grocery stores, as well as non-traditional outlets, ranging from club stores and mass merchandisers to wholesalers, foodservice distributors and restaurants. Our branded frozen desserts are sold primarily through grocery retailers. Our frozen bakery products are sold to foodservice distributors, institutions, retail in-store bakeries and restaurants.
Our packaged bakery products under the Mrs. Freshley's brand are sold primarily through vending outlets. We produce packaged bakery products for our own distribution under our BlueBird brand. In certain circumstances, we enter into co-packing arrangements with some of our competitors. Through co-packing, we have produced packaged bakery
products for popular brands such as Weight Watchers, Stouffer, Lance, Pepperidge Farm and Little Debbie.
COMPETITION
FLOWERS BAKERIES
The United States packaged bakery category is intensely competitive and is comprised of large food companies, large independent bakeries with national distribution, and smaller regional and local bakeries. Primary national competitors include Interstate, Earthgrains and Bestfoods. We also face competition from private label brands. Competition is based on product availability, product quality, brand loyalty, price effective promotions and the ability to target changing consumer preferences. Customer service, including frequent delivery and well-stocked shelves, is an increasingly important competitive factor. While we experience price pressure from time to time, primarily as a result of competitors' promotional efforts, we believe that our customer relationships and the consumer's brand loyalty, as well as our diversity within our region in terms of geographic markets, products, and sales channels, limit the effects of such competition. Recent consolidation in the industry has further enhanced the ability of the larger firms to compete with small regional bakeries. We believe we have significant competitive advantages over smaller regional bakeries due to economies of scale in areas such as information technology, purchasing, production, advertising, marketing and distribution as well as greater brand awareness.
MRS. SMITH'S BAKERIES
Mrs. Smith's Bakeries, Sara Lee, Pepperidge Farm and Pillsbury lead the frozen dessert category. Other significant competitors in the frozen baked dessert category include Edwards and private label brands. Competitors for packaged bakery products produced by Mrs. Smith's Bakeries include Interstate (Hostess) and McKee (Little Debbie).
Competition for frozen desserts depends primarily on brand recognition and loyalty, perceived product quality, effective promotions and, to a lesser extent, price. For the frozen bakery and packaged bakery products manufactured by Mrs. Smith's Bakeries, competition is based upon the ability to meet production and distribution demands of foodservice and vending customers at an excellent price.
INTELLECTUAL PROPERTY
We own a number of trademarks and trade names, as well as certain patents and licenses. Such trademarks and trade names are considered to be important to our business since they have the effect of developing brand identification and maintaining consumer loyalty. We are not aware of any fact that would negatively impact the continuing use of any of our trademarks, trade names, patents or licenses. Following the spin-off we will have the exclusive use of the "Flowers" name and any trademark or tradename derived therefrom to the extent currently owned, licensed or sublicensed by Flowers Industries or its subsidiaries (including Flowers Foods) but excluding any intellectual property rights owned, licensed or sublicensed by Keebler. Flowers Industries will change its name, which is expected to be Keebler Holding Corp.
RAW MATERIALS
Our primary baking ingredients are flour, sugar, shortening and fruit. We also use paper products, such as corrugated cardboard, aluminum products, such as pie plates, and films and plastics to package our baked foods. In addition, we are also dependent upon natural gas and propane as a fuel for firing ovens as well as gasoline and diesel as fuel for distribution vehicles. On average, baking ingredients constitute approximately 10% to 15%, and packaging represents approximately 1% to 5%, of the wholesale selling price of our baked foods. We maintain diversified sources for all of our baking ingredients and packaging products.
Commodities, such as our baking ingredients, periodically experience price fluctuations and, for that reason, the market for these commodities is continuously monitored. From time to time, we enter into forward purchase agreements and derivative financial instruments to reduce the impact of volatility in raw materials prices.
RESEARCH AND DEVELOPMENT
We engage in research and development activities, which principally involve developing new products, improving the quality of existing products and improving and modernizing production processes. We also develop and evaluate new processing techniques for both current and proposed product lines.
LEGAL PROCEEDINGS
We are engaged in various legal proceedings which arise in the ordinary course of our business. We believe that the amount of the ultimate liability with respect to those proceedings will not be material to our financial position or results of operations.
REGULATION
As a producer and marketer of food items, our operations are subject to regulation by various federal governmental agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Environmental Protection Agency, and the Department of Commerce, as well as various state agencies, with respect to production processes, product quality, packaging, labeling, storage and distribution. Under various statutes and regulations, such agencies prescribe requirements and establish standards for quality, purity, and labeling. The finding of a failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines or compulsory withdrawal of products from store shelves.
In addition, advertising of our businesses is subject to regulation by the Federal Trade Commission, and we are subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act.
Our operations, like those of similar businesses, are subject to various federal, state, and local laws and regulations with respect to environmental matters, including air and water quality, underground fuel storage tanks, and other regulations intended to protect public health and the environment. Our operations and products also are subject to state and local regulation through such measures as licensing of plants, enforcement by state health agencies of various state standards and inspection of facilities. We believe that we are currently in material compliance with applicable laws and regulations.
PROPERTIES
Currently 30 of our production facilities are owned, four facilities are leased and three facilities are owned by local industrial development authorities under terms of industrial revenue bond financing agreements. The leased properties are leased for terms of 10 to 15 years with certain renewal options. Under the terms of the industrial revenue bond financing agreements, title to these properties pass to us at maturity for little or no consideration. We expect these bonds to be repaid in connection with the completion of the spin-off and merger, and title to the facilities will be conveyed to us. We consider that our properties are well maintained and sufficient for our present operations. Our production plant locations are:
FLOWERS BAKERIES ---------------- Birmingham, Alabama Baton Rouge, Louisiana Opelika, Alabama Lafayette, Louisiana Tuscaloosa, Alabama New Orleans, Louisiana Ft. Smith, Arkansas Goldsboro, North Carolina Pine Bluff, Arkansas Jamestown, North Carolina Texarkana, Arkansas Memphis, Tennessee Bradenton, Florida Morristown, Tennessee Jacksonville, Florida El Paso, Texas Miami, Florida Houston, Texas Atlanta, Georgia San Antonio, Texas Chamblee, Georgia Tyler, Texas Thomasville, Georgia Lynchburg, Virginia Villa Rica, Georgia Bluefield, West Virginia Charleston, West Virginia |
MRS. SMITH'S BAKERIES --------------------- Montgomery, Alabama London, Kentucky Atlanta, Georgia Pembroke, North Carolina Forest Park, Georgia Stilwell, Oklahoma Suwanee, Georgia Spartanburg, South Carolina Tucker, Georgia Crossville, Tennessee |
EMPLOYEES
We employ approximately 7,300 persons, approximately 535 of whom are covered by collective bargaining agreements. We believe that we have good relations with our employees.
EXECUTIVE OFFICES
The address and telephone number of our principal executive offices are 1919 Flowers Circle, Thomasville, Georgia 31757, (229) 226-9110.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of October 7, 2000 regarding the persons who are currently serving or will serve as the executive officers and directors of Flowers Foods after the spin-off. The proposed directors listed below are expected to begin serving as directors at the time the merger and the spin-off are completed, assuming approval of the merger by Flowers Industries shareholders. Our board of directors elects all executive officers for one-year terms with the exception of the positions of President and Chief Operating Officer, Flowers Bakeries, President and Chief Operating Officer, Mrs. Smith's Bakeries and Vice President of Communications and Investor Relations, which are appointed offices.
NAME AGE POSITION ---- --- -------- Amos R. McMullian......................... 63 Chairman of the Board of Directors and Chief Executive Officer Robert P. Crozer.......................... 53 Vice Chairman of the Board of Directors G. Anthony Campbell....................... 47 Director, Secretary and General Counsel Edward L. Baker........................... 65 Proposed Director Joe E. Beverly............................ 59 Proposed Director Franklin L. Burke......................... 59 Proposed Director Langdon S. Flowers........................ 78 Proposed Director Joseph L. Lanier, Jr...................... 68 Proposed Director J.V. Shields, Jr.......................... 62 Proposed Director Jackie M. Ward............................ 62 Proposed Director C. Martin Wood, III....................... 57 Proposed Director George E. Deese........................... 54 President and Chief Operating Officer of Flowers Bakeries Gary L. Harrison.......................... 62 President and Chief Operating Officer of Mrs. Smith's Bakeries Jimmy M. Woodward......................... 39 Vice President and Chief Financial Officer Marta Jones Turner........................ 46 Vice President of Communications and Investor Relations |
AMOS R. MCMULLIAN is Chairman of the Board of Directors and Chief Executive Officer of Flowers Industries and Flowers Foods. He will cease to serve as Chairman of the Board and Chief Executive Officer of Flowers Industries upon completion of the spin-off and merger. Mr. McMullian has served as Chairman of the Board of Flowers Industries since 1985 and as its Chief Executive Officer since 1981. He joined Flowers Industries in 1963. Mr. McMullian also has served as a director of Keebler since 1996 and will cease to
serve as a director of Keebler upon the completion of the spin-off and merger. Mr. McMullian is a director of Lanier Worldwide, Inc. (NYSE).
ROBERT P. CROZER is the Vice Chairman of the Board of Directors of Flowers Industries and Flowers Foods. Mr. Crozer joined Flowers Industries in 1973 and became a director in 1979. He has served as Vice Chairman of the Board of Flowers Industries since 1983 and Vice Chairman of the Board of Flowers Foods since it was formed in October, 2000. Mr. Crozer will cease to serve as Vice Chairman of the Board of Flowers Industries upon completion of the spin-off and merger. Mr. Crozer has served as a director of Keebler since 1996 and as Chairman of the Board of Keebler Foods Company since 1998 and will resign as Chairman of the Board of Keebler Foods Company upon completion of the spin-off and merger.
G. ANTHONY CAMPBELL joined Flowers Industries in 1983 and is currently General Counsel and Secretary of Flowers Industries and Flowers Foods. Mr. Campbell has served as a director of Keebler since 1998 and will resign as a director of Keebler upon the completion of the merger and spin-off. He has served as a director of Flowers Industries since 1991 and will cease to serve as Secretary and General Counsel and director of Flowers Industries upon completion of the spin-off and merger. Mr. Campbell has been a director of Flowers Foods since it was formed in October, 2000.
EDWARD L. BAKER is Chairman of the Board of Directors of Florida Rock Industries, Inc. (NYSE), a construction materials company based in Jacksonville, Florida, which produces and markets sand, gravel, crushed stock, concrete blocks and other building materials throughout the Southeast. He is also Chairman of the Board of Directors of Patriot Transportation Holding, Inc. (OTC) (formerly FRP Properties, Inc.). He has served as a director of Flowers Industries since 1992 and will cease to serve as a director of Flowers Industries upon completion of the spin-off and merger.
JOE E. BEVERLY is Chairman of the Board of Commercial Bank in Thomasville, Georgia, a wholly-owned subsidiary of Synovus Financial Corp. (NYSE), the former Vice Chairman of the Board of Synovus Financial Corp, and a director of Synovus Financial Corp. He was President of Commercial Bank from 1973 to 1989. Mr. Beverly has served as a director of Flowers Industries since August 1996 and will cease to serve as a director of Flowers Industries upon completion of the spin-off and merger.
FRANKLIN L. BURKE, a private investor since 1991, is the former Senior Executive Vice President and Chief Operating Officer of Bank South Corp., Atlanta, Georgia, and the former Chairman and Chief Executive Officer of Bank South, N.A., the principal subsidiary of Bank South Corp. Mr. Burke has served as a director of Keebler since 1998 and will cease to serve as a director of Keebler upon completion of the merger and spin-off. He has served as a director of Flowers Industries since 1994 and will cease to serve as a director of Flowers Industries upon completion of the spin-off and merger.
LANGDON S. FLOWERS retired as Chairman of the Board of Directors of Flowers Industries in 1985. He has served as a director of Flowers Industries since 1968 and will cease to serve as a director of Flowers Industries upon completion of the spin-off and merger.
JOSEPH L. LANIER, JR. has been Chairman of the Board of Directors and Chief Executive Officer of Dan River Inc. (NYSE), Danville, Virginia, a textile company, since 1989. He is also a director of Dimon, Inc. (NYSE), SunTrust Banks, Inc. (NYSE), Torchmark Corp. (NYSE) and Waddell & Reed Financial, Inc. (NYSE). Mr. Lanier has
served as a director of Flowers Industries since 1977 and will cease to serve as a director of Flowers Industries upon completion of the spin-off and merger.
J.V. SHIELDS, JR. is Chairman of the Board of Directors and Chief Executive Officer of Shields & Company, New York, New York, a diversified financial services company and member of the New York Stock Exchange, Inc. Mr. Shields also is the Chairman of the Board of Directors and Chief Executive Officer of Capital Management Associates, Inc., a registered investment advisor, and the Chairman of the Board of Trustees of The 59 Wall Street Trust, the Brown Brothers Harriman mutual funds group. He has served as a director of Flowers Industries since 1989 and will cease to serve as a director of Flowers Industries upon completion of the spin-off and merger.
JACKIE M. WARD is Chairman of the Board of Directors of Computer Generation Incorporated, a telecommunications company based in Atlanta, Georgia. She is also a director of Bank of America Corporation (NYSE), Equifax, Inc. (NYSE), Matria Healthcare, Inc. (Nasdaq), PTEK Holdings, Inc. (Nasdaq), Profit Recovery Group International, Inc. (Nasdaq), SCI Systems, Inc. (NYSE), and Trigon Healthcare, Inc. (NYSE). She has served as a director of Flowers Industries since March 1999 and will cease to serve as a director of Flowers Industries upon completion of the spin-off and merger.
C. MARTIN WOOD III retired as Senior Vice President and Chief Financial Officer of Flowers Industries on January 1, 2000. Mr. Wood has continued to serve on Flowers Industries Board of Directors, to which he was elected in 1975 and will cease to serve as a director of Flowers Industries upon completion of the spin-off and merger. Mr. Wood also has served as a director of Keebler since 1996 and will cease to serve as a director of Keebler upon the completion of the spin-off and merger.
GEORGE E. DEESE is President and Chief Operating Officer of Flowers Bakeries. He has previously served as President and Chief Operating Officer, Baked Products Group of Flowers Industries from 1983 to 1997, Regional Vice President, Baked Products Group of Flowers Industries from 1981 to 1983 and President of Atlanta Baking Company from 1980 to 1981. Mr. Deese joined Flowers Industries in 1964.
GARY L. HARRISON is President and Chief Operating Officer of Mrs. Smith's Bakeries, Inc. He previously served as President and Chief Operating Officer, Specialty Foods Group of Flowers Industries from 1989 to 1997, Executive Vice President, Baked Products Group of Flowers Industries from 1987 to 1989, Regional Vice President, Baked Products Group of Flowers Industries from 1977 to 1987 and President of Flowers Baking Company of Thomasville from 1976 to 1977. Mr. Harrison joined Flowers Industries in 1954.
JIMMY M. WOODWARD is Vice President and Chief Financial Officer of Flowers Industries and Flowers Foods and will cease to serve as Vice President and Chief Financial Officer of Flowers Industries upon completion of the spin-off and merger. Mr. Woodward previously served as Treasurer and Chief Accounting Officer of Flowers Industries from 1997 to 2000 and Assistant Treasurer of Flowers Industries for more than five years prior to that time. He joined Flowers Industries in 1985. Mr. Woodward also has served as a director of Keebler since 1998 and will cease to serve as a director of Keebler upon completion of the spin-off and merger. Mr. Woodward also serves as a director of Integrity, Inc. (Nasdaq).
MARTA JONES TURNER is Vice President of Communications and Investor Relations of Flowers Industries and Flowers Foods and will cease to serve as Vice President of
Communications and Investor Relations of Flowers Industries upon completion of the spin-off and merger. She previously served as Vice President of Public Affairs of Flowers Industries from May, 1997 until January, 2000 and Director of Public Affairs of Flowers Industries for more than five years prior to that time. She joined Flowers Industries in 1978.
Robert P. Crozer, J.V. Shields, Jr. and C. Martin Wood III are married to sisters, all of whom are nieces of Langdon S. Flowers.
BOARD OF DIRECTORS
The Flowers Foods Board of Directors currently has three members. Prior to the spin-off, Flowers Foods will change the size and composition of the Flowers Foods Board of Directors and committees of the Board of Directors will be established. At that time, it is expected that the eight proposed directors listed above, each of whom currently is a director of Flowers Industries, will join the Flowers Foods Board of Directors and we will have eleven directors.
The Flowers Foods Board intends to hold four regularly scheduled meetings each year.
COMMITTEES OF THE BOARD OF DIRECTORS
The Flowers Foods Board of Directors is expected to establish certain standing committees, which include the audit, nominating, and compensation committees. The functions and responsibilities of the standing committees of our Board of Directors are expected to be as described below.
The functions of the audit committee shall be: (a) recommending to the Board of Directors the engagement or discharge of independent auditors; (b) reviewing investigations into matters relating to audit functions; (c) reviewing with independent auditors the plan for and results of the audit engagement; (d) reviewing the scope and results of our internal auditing procedures; (e) reviewing the independence of the auditors; (f) considering the range of audit and non-audit fees and (g) reviewing the adequacy of our system of internal accounting controls.
The functions of the nominating committee shall be: (a) selecting or
recommending to the Board of Directors nominees for election as directors; and
(b) considering the performance of incumbent directors in determining whether to
nominate them for reelection.
The functions of the compensation committee shall be: (a) approving or
recommending to the Board of Directors approval of compensation plans for
officers and directors; (b) approving, or recommending to the Board of Directors
approval of, remuneration arrangements for directors and senior management; and
(c) granting benefits under compensation plans.
DIRECTOR'S FEES
Flowers Foods was formed in October, 2000. None of the directors of Flowers Foods has received compensation from Flowers Foods since it was formed. Once the Board has been expanded after the spin-off, each non-employee member of our Board of Directors is
expected to receive payments pursuant to a standard arrangement. Flowers Foods expects to adopt compensation arrangements for its directors prior to the spin-off.
POSSIBLE STOCK INCENTIVE PLAN
We expect to enter into a stock incentive plan designed to encourage ownership of Flowers Foods stock by employees and directors to align the interests of our employees and directors with Flowers Foods shareholders. The terms and conditions of the possible plan have not yet been determined.
SEPARATION AGREEMENTS
We expect to enter into separation agreements with certain of our executive officers to provide certain additional benefits in the event of termination of employment following a change of control. Our Board of Directors has not yet determined which executives will be offered such separation agreements or the proposed terms and conditions of any such agreements.
EXECUTIVE COMPENSATION
We were formed in October, 2000 and none of our executive officers has received compensation or been granted stock options or otherwise awarded securities by Flowers Foods since our formation. Accordingly, the information in this section relates to compensation paid by Flowers Industries to certain of its executive officers for the periods presented. Compensation of executive officers of Flowers Foods for the periods following the spin-off will be determined by the Flowers Foods Board of Directors or authorized committee thereof and can be expected to take into account factors such as the size and operating performance of Flowers Foods.
The following table provides certain summary information for the periods indicated concerning compensation of the Chief Executive Officer and each of the four other most highly compensated executive officers of Flowers Industries. All compensation described below has been paid by Flowers Industries.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION ---------------------------------------------- ------------------------------------- RESTRICTED LONG TERM OTHER STOCK OPTION INCENTIVE ALL OTHER NAME AND PRINCIPAL POSITION AT FISCAL SALARY BONUS COMP. AWARDS AWARDS(3) PAYOUTS COMP. FLOWERS INDUSTRIES YEAR $ $ $ $ # $ $ ------------------------------ ------ ------- ------- ----- ---------- --------- --------- --------- Amos R. McMullian............ 1999 850,000 0 0 908,392 0 0 0 Chairman of the Board and 1998 736,000 552,000 0 730,509 198,000 0 0 Chief Executive Officer 1997T(1) 313,096 187,858 0 498,593 0 0 0 1997(2) 505,680 505,680 0 0 0 0 0 Robert P. Crozer............. 1999 725,000 0 0 531,160 0 0 0 Vice Chairman of the 1998 579,616 405,731 0 279,399 146,000 0 0 Board 1997T(1) 211,327 105,663 0 190,698 0 0 0 1997(2) 389,235 311,388 0 0 0 0 0 Jimmy M. Woodward............ 1999 260,000 25,000 0 123,576 0 0 0 Vice President and 1998 238,462 90,769 0 39,200 28,000 0 0 Chief Financial Officer 1997T(1) 62,831 34,400 0 26,750 0 0 0 1997(2) 109,846 71,585 0 0 0 0 0 George E. Deese.............. 1999 353,600 0 0 1,413,044 0 0 0 President and Chief 1998 345,700 156,900 0 192,249 47,500 0 0 Operating Officer, Flowers 1997T(1) 162,623 73,180 0 131,215 0 0 0 Bakeries 1997(2) 268,695 188,087 0 0 0 0 0 Gary L. Harrison............. 1999 353,600 0 0 1,413,044 0 0 0 President and Chief 1998 345,700 0 0 192,249 0 0 0 Operating Officer, 1997T(1) 162,623 73,180 0 131,215 47,500 0 0 Mrs. Smith's Bakeries 1997(2) 268,695 263,087 0 0 0 0 0 |
(1) Represents the twenty-seven week transition period ended January 3, 1998.
(2) Represents the fifty-two week fiscal year ended June 28, 1997.
(3) Reflects restricted stock awards and options to acquire shares of Flowers Industries granted pursuant to Flowers Industries 1989 Executive Stock Incentive Plan. No Flowers Industries options will be outstanding following the spin-off and merger.
The individuals set forth in the table above held the following aggregate
shares under the Flowers Industries 1989 Executive Stock Incentive Plan, subject
to the restrictions of each grant, and valued at the 1999 fiscal year end
closing market price ($15.9375) of Flowers Industries common stock, less the
price required to be paid by the individual at the time the restrictions lapse:
Messrs. McMullian 197,764 shares, $1,014,370; Crozer 92,588 shares, $474,365;
Woodward 27,359 shares, $201,012; Deese 149,092 shares, $639,646; and Harrison
149,092 shares, $639,646. The shares are entitled to receive any dividends paid
on Flowers Industries common stock.
No options to purchase Flowers Industries common stock were granted in fiscal 1999. The following table provides information on option exercises of Flowers Industries common stock during fiscal 1999 by the named executive officers included in the summary compensation table above and the value, at the 1999 fiscal year end closing price
($15.9375), of unexercised options for Flowers Industries common stock held by each named executive officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
NUMBER OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY AT YEAR END OPTIONS SHARES ACQUIRED ON VALUE (#) AT YEAR END EXERCISE REALIZED EXERCISABLE/ ($) NAME (#) ($) UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- ------------------ -------- --------------- ------------------------- Amos R. McMullian...... 0 0 None/198,000 None/None Robert P. Crozer....... 0 0 269,294/146,000 2,388,656/None Jimmy M. Woodward...... 0 0 None/28,000 None/None George E. Deese........ 0 0 90,000/47,500 674,775/None Gary L. Harrison....... 0 0 145,544/47,500 1,229,316/None |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Under the terms of an agreement between Flowers Industries and Merrily Plantation, Inc., Flowers Industries was granted the use of approximately 6,000 acres of land owned by Merrily, together with the use of lodging, dining, and conference room facilities located thereon. The facilities were used primarily for the entertainment of customers. During fiscal 1999, Flowers Industries paid Merrily $92,370. Flowers Foods expects to assume the agreement and continue with those arrangements. We have surveyed facilities comparable to Merrily to assess the relative quality and cost of such facilities and have determined that the amount paid to Merrily for the use of its facilities is competitive with that charged for the use of comparable facilities. We have further determined that the use of the Merrily facilities in the past has been beneficial to the business of Flowers Industries, that it will be beneficial to our business and that its continued use for the entertainment of customers is in our best interest. All of the outstanding capital stock of Merrily is owned by the spouses of J. V. Shields, Jr., who is a proposed director of Flowers Foods, Robert P. Crozer, who is currently the Vice Chairman of the Board of Directors of Flowers Foods, C. Martin Wood III, who is a proposed director of Flowers Foods, and by the Fontaine Flowers McFadden Trust, a trust formed for the benefit of Ms. McFadden's descendants. The spouses of Messrs. Shields, Crozer and Wood are the nieces of Langdon S. Flowers, who is a proposed director of Flowers Foods.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the Flowers Foods common stock is currently owned by Flowers Industries and thus none of the executive officers, directors or director nominees of Flowers Foods will own any Flowers Foods common stock prior to the spin-off. To the extent executive officers, directors and proposed directors of Flowers Foods own shares of Flowers Industries common stock at the time of the spin-off, they will receive shares of Flowers Foods common stock in the spin-off on the same basis as all other holders of Flowers Industries common stock. The following table sets forth the number of shares of Flowers Industries common stock beneficially owned by each director, proposed director and each executive officer of Flowers Foods and by all directors, proposed directors and executive officers as a group, consisting of 15 persons, as of October 7, 2000. Any options to acquire shares of Flowers Industries stock that are unexercised at the time of the Flowers Industries/Kellogg merger will not represent the right to acquire shares of Flowers Foods stock after the spin-off.
We are not aware of any person who will beneficially own more than five percent of the Flowers Foods common stock as of the date of the spin-off.
SHARES BENEFICIALLY OWNED -------------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT ------------------------ ----------- --------- Edward L. Baker.......................................... 73,302(1) * Joe E. Beverly........................................... 52,584(2) * Franklin L. Burke........................................ 28,807(3) * G. Anthony Campbell...................................... 392,692(4) * Robert P. Crozer......................................... 1,669,741(5) 1.66% George E. Deese.......................................... 393,496(6) * L. S. Flowers............................................ 356,146(7) * Gary L. Harrison......................................... 454,018(8) * Joseph L. Lanier, Jr. ................................... 73,115(9) * Amos R. McMullian........................................ 943,878(10) * J. V. Shields, Jr. ...................................... 2,206,652(11) 2.20% Marta J. Turner.......................................... 12,781(12) * Jackie M. Ward........................................... 6,250 * C. Martin Wood III....................................... 568,761(13) * Jimmy M. Woodward........................................ 27,870(14) * All directors and executive officers as a group (15 persons)............................................... 7,260,093(15) 7.22% |
* Represents beneficial ownership of less than 1% of Flowers Industries common stock.
(1) Includes unexercised stock options for 17,340 shares and 23,300 shares owned by a family trust for which Mr. Baker is a co-trustee.
(2) Includes unexercised stock options for 7,584 shares. Does not include 45,982 shares owned by the spouse of Mr. Beverly and 11,164 shares owned by a trust for which his spouse is co-trustee, as to which shares Mr. Beverly disclaims any beneficial ownership.
(3) Includes unexercised stock options for 16,353 shares and 8,750 shares owned by the spouse of Mr. Burke, over which shares Mr. Burke has investment authority.
(4) Includes restricted stock awards of 21,117 shares, all of which are subject to forfeiture.
(5) Includes: (i) restricted stock awards of 70,794 shares, all of which are
subject to forfeiture; (ii) unexercised stock options for 135,000 shares;
and (iii) 982,780 shares held by limited partnerships in which Mr. Crozer
and his spouse are the general partners. Does not include the following
shares as to which Mr. Crozer disclaims any beneficial ownership: (i) 7,593
shares held by Mr. Crozer and his spouse as custodians for their minor son;
(ii) 209,038 shares held by trusts for the benefit of Mr. Crozer's minor
children; and (iii) 1,965,936 shares owned by the spouse of Mr. Crozer.
(6) Includes restricted stock awards of 134,096 shares, all of which are subject to forfeiture, and unexercised stock options for 90,000 shares. Does not include the following shares as to which Mr. Deese disclaims any beneficial ownership: 22,080 shares owned by the spouse of Mr. Deese; and 1,194 shares held by Mr. Deese as custodian for his minor grandchildren.
(7) Includes unexercised stock options for 10,432 shares. Does not include 355,598 shares owned by the spouse of Mr. Flowers, as to which shares Mr. Flowers disclaims any beneficial ownership.
(8) Includes: (i) restricted stock awards of 134,096 shares, all of which are subject to forfeiture; (ii) unexercised stock options for 145,544 shares; and (iii) 30,000 shares held by a limited partnership in which Mr. Harrison is a general partner. Does not include 40,000 shares owned by the spouse of Mr. Harrison, as to which shares Mr. Harrison disclaims any beneficial ownership.
(9) Includes unexercised stock options for 17,340 shares. Does not include 23,890 shares owned by the spouse of Mr. Lanier, as to which shares Mr. Lanier disclaims any beneficial ownership.
(10) Includes restricted stock awards of 140,782 shares, all of which are subject to forfeiture.
(11) Includes: (i) unexercised stock options for 16,353 shares; and (ii) 2,170,299 shares held by investment advisory clients of Capital Management Associates, Inc., of which Mr. Shields is Chairman of the Board of Directors and Chief Executive Officer. Does not include 3,241,503 shares owned by the spouse of Mr. Shields, as to which shares Mr. Shields disclaims beneficial ownership.
(12) Includes restricted stock awards of 2,962 shares, all of which are subject to forfeiture.
(13) Includes: (i) restricted stock awards of 8,818 shares, all of which are
subject to forfeiture; (ii) unexercised stock options for 28,000 shares;
(iii) 51,300 shares held by a trust of which Mr. Wood is co-trustee; and
(iv) 5,591 shares owned by a trust for which Mr. Wood serves as a trustee.
Does not include the following shares, as to which Mr. Wood disclaims
beneficial ownership: (i) 2,880,633 shares owned by the spouse of Mr. Wood
and (ii) 25,650 shares held by Mr. Wood as custodian for his nephew.
(14) Includes restricted stock awards of 14,457 shares, all of which are subject to forfeiture.
(15) Includes restricted stock awards of 527,112 shares, all of which are subject to forfeiture, and unexercised stock options for 483,946 shares. Does not include the shares with respect to which beneficial ownership is disclaimed as indicated in the preceding footnotes.
DESCRIPTION OF CAPITAL STOCK
The following discussion of our articles of incorporation, bylaws, rights agreement and Georgia law is a summary of the material terms thereof and is qualified in its entirety by the actual terms of such documents and Georgia law. Copies of our restated articles of incorporation, restated bylaws and rights agreement have been filed with the Securities and Exchange Commission as exhibits to the registration statement on Form 10 of which this information statement is a part.
INTRODUCTION
Our articles of incorporation provide that the authorized capital of Flowers Foods consists of 100,000,000 shares of common stock having a par value of $.01 per share and 1,000,000 shares of preferred stock, of which (a) 100,000 shares have been designated by our Board of Directors as Series A Junior Participating Preferred Stock, having a par value per share of $100 and (b) 900,000 shares of preferred stock, having a par value per share of $.01, have not been designated by the Board of Directors.
As a result of the spin-off, we expect there to be approximately million shares of Flowers Foods common stock outstanding held by approximately holders of record. No shares of preferred stock have been issued by Flowers Foods and no shares of preferred stock will be issued in the spin-off.
COMMON STOCK
The holders of Flowers Foods 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 Flowers Foods common stock are entitled to receive ratably such dividends, if any, as may be declared by our Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding-up of Flowers Foods, holders of Flowers Foods common stock are entitled to share ratably in all assets of Flowers Foods, if any, remaining after payment of liabilities and the liquidation preferences of any issued and outstanding preferred stock, including the Series A Preferred Stock. Holders of Flowers Foods common stock have no preemptive rights, no cumulative voting rights and no rights to convert their shares of Flowers Foods common stock into any other securities of Flowers Foods or any other person. The common stock is not subject to redemption or sinking fund redemption.
PREFERRED STOCK
Our Board of Directors has the authority to issue up to 1,000,000 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 Flowers Foods common stock. Pursuant to such authority, the board of directors has designated 100,000 shares of preferred stock as Series A Junior Participating Preferred Stock in connection with the adoption of our rights agreement. Although our Board of Directors does not presently intend to do so, it could issue from the 900,000 undesignated preferred shares, additional
series of preferred stock, with rights that could adversely affect the voting power and other rights of holders of Flowers Foods common stock without obtaining the approval of Flowers Foods shareholders. In addition, the issuance of preferred shares could delay or prevent a change in control of Flowers Foods without further action by its shareholders.
ANTITAKEOVER EFFECTS OF GEORGIA LAW PROVISIONS
We have elected in our bylaws to be subject to the fair price provisions of the Georgia Business Corporation Code, referred to in this information statement as the GBCC. These provisions require that, in addition to any vote otherwise required by law or our articles of incorporation, unless certain fair price provisions are satisfied, a business combination must be:
- unanimously approved by continuing directors, if such continuing directors constitute at least three members of the board of directors at the time of the approval; or
- recommended by at least two-thirds of the continuing directors and approved by a majority of the votes entitled to be cast by holders of voting shares, other than voting shares beneficially owned by the interested shareholder, unless fair price criteria are met.
INTERESTED SHAREHOLDERS UNDER THE FAIR PRICE PROVISIONS
An interested shareholder is defined by the GBCC to include any person other than Flowers Foods or our subsidiaries that:
- with its affiliates, beneficially owns or has the right to own 10% or more of the outstanding voting power of Flowers Foods; or
- is an affiliate of Flowers Foods and has, at any time within the preceding two-year period, been the beneficial owner of 10% or more of the voting power of Flowers Foods.
For purposes of determining whether a person is an interested shareholder, the number of voting shares deemed to be outstanding shall not include any unissued voting shares that may be issuable pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options or otherwise.
CONTINUING DIRECTORS UNDER THE FAIR PRICE PROVISIONS
A continuing director means:
- any director who is not an affiliate or associate of an interested shareholder or its affiliates other than Flowers Foods or our subsidiaries and who was a director prior to the date the shareholder became an interested shareholder, called the determination date; and
- any successor to that director who is not an affiliate or associate of an interested shareholder or its affiliates other than Flowers Foods or our subsidiaries and who is recommended or elected by a majority of all the continuing directors.
BUSINESS COMBINATIONS UNDER THE FAIR PRICE PROVISIONS
For the purposes of these provisions, a business combination includes:
- any merger of Flowers Foods or our subsidiaries with an interested shareholder or any other corporation that is, or after the merger would be, an affiliate of an interested shareholder that was an interested shareholder prior to the completion of the transaction;
- any share exchange with an interested shareholder or any other corporation that is, or after the merger would be, an affiliate of an interested shareholder that was an interested shareholder prior to the completion of the transaction;
- any sale, lease, transfer or other disposition of assets by us or any of our subsidiaries to any interested shareholder or any affiliate of any interested shareholder (other than Flowers Foods or any of our subsidiaries) in a transaction or series of transactions occurring within a twelve-month period and having an aggregate book value equal to 10% or more of our net assets;
- the issuance or transfer by us or any of our subsidiaries of any equity securities of Flowers Foods or any subsidiary in a transaction or series of transactions occurring within a twelve-month period to any interested shareholder or any affiliate of any interested shareholder (other than Flowers Foods or any of our subsidiaries) and having an aggregate market value of 5% or more of the total market value of our outstanding stock, except through the exercise of warrants or rights offered pro rata to all holders of our voting securities;
- the adoption of any plan or proposal for our liquidation or dissolution in which anything other than cash will be received by an interested shareholder or its affiliates; and
- any reclassification of securities or merger or share exchange with any subsidiary, which has the effect, in a transaction or series of transactions occurring within a twelve-month period, of increasing by 5% or more the proportionate amount of the outstanding shares of any class or series of equity securities of Flowers Foods or any of our subsidiaries that is beneficially owned by an interested shareholder or its affiliates.
WHEN THE FAIR PRICE PROVISIONS DO NOT APPLY
The fair price provisions do not restrict a business combination if:
- the aggregate amount of the cash, and fair market value of any non-cash property, to be received per share by the shareholders in the business combination is at least equal to the highest of:
- the highest per share price, including brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the interested shareholder for any shares of the same class or series acquired by it within two years before the public announcement of the business combination, referred to as the announcement date, or in the transaction in which it became an interested shareholder, whichever is higher;
- the higher of the fair market value per share as determined on the announcement date or the determination date; or
- in the case of shares other than common shares, the highest amount per share to which holders of such shares are entitled in the event of liquidation, dissolution or winding up of the corporation, but only if the interested shareholder acquired like shares within the two-year period immediately before the announcement date;
- shareholders receive cash or the form of consideration used by the interested shareholder to purchase the largest number of shares of the same class or series previously acquired by such interested shareholder.
- During the period after the shareholder became an interested shareholder and before the consummation of the business combination, without the approval of a majority of the continuing directors, there generally shall have been:
- no failure to declare and pay, at the regular date therefor, any full
periodic dividends on Flowers Foods' outstanding preferred shares unless
(i) the interested shareholder or its affiliate or associate did not
vote as a director in a manner inconsistent with this requirement, and
(ii) the interested shareholder notified the Board of Directors in
writing within ten days of such action or failure to act that it
disapproves of the action and that it requests the Board to rectify such
act or failure to act;
- no reduction in the annual rate of dividends paid on common shares, except to reflect any subdivision of the shares unless (i) the interested shareholder or its affiliate or associate did not vote as a director in a manner inconsistent with this requirement, and (ii) the interested shareholder notified the Board of Directors in writing within ten days of such action or failure to act that it disapproves of the action and that it requests the Board to rectify such act or failure to act;
- an increase the annual rate of dividends to reflect any reclassification of shares which has the effect of reducing the number of outstanding shares; and
- no increase by more than 1% in the interested shareholder's ownership of any class or series of Flowers Foods' shares in any twelve-month period;
- The interested shareholder has not received a direct or indirect benefit, except proportionately as a shareholder, of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the corporation or its subsidiaries.
The fair price provisions do not apply if the shareholder has been an interested shareholder continuously and has not increased its percentage interest in any class or series of Flowers Foods shares by more than 1% in any twelve-month period, for the three year period immediately preceding consummation of the business combination.
Repeal of the bylaw subjecting Flowers Foods to the fair price provisions of the GBCC requires the affirmative vote of: (i) at least 2/3 of the continuing directors, (ii) a majority of the shares of Flowers Foods other than shares beneficially owned by any interested shareholder and affiliates and associates of any interested shareholder, and (iii) 66 2/3% of the voting power of the then outstanding shares of Flowers Foods common
stock and preferred stock voting together, to the extent shares of preferred stock have been afforded voting rights.
BUSINESS COMBINATION PROVISIONS
We have also elected in our bylaws to be subject to the business combination provisions of the GBCC. These provisions prohibit business combinations between a Georgia corporation with at least 100 beneficial owners in Georgia and that meets other criteria and an interested shareholder or its affiliates for a period of five years after the shareholder becomes an interested shareholder of the corporation. During that five-year period, these provisions prohibit any business combination with an interested shareholder unless:
- prior to such time, the board of directors approved either the business combination or the transaction in which the shareholder became an interested shareholder;
- in the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder became the beneficial owner of at least 90% of the outstanding voting stock of the corporation which was not held by directors, officers, their affiliates, subsidiaries or specified employee stock plans of the corporation; or
- after becoming an interested shareholder, that shareholder acquired additional shares resulting in that shareholder owning at least 90% of the outstanding voting stock of the corporation, excluding shares held by directors, officers, their affiliates, subsidiaries or specified employee stock plans of the corporation, and the business combination was approved by a majority of voting stock not held by the interested shareholder, directors, officers, their affiliates, subsidiaries or specified employee stock plans of the corporation.
BUSINESS COMBINATIONS
For the purposes of these provisions, a business combination includes:
- any merger or consolidation of Flowers Foods or any of our subsidiaries with an interested shareholder or any other corporation that is, or after the merger or consolidation would be, an affiliate of an interested shareholder that was an interested shareholder prior to consummation of the transaction other than as a result of its ownership of Flowers Foods stock;
- any sale, lease, transfer or other disposition of our assets or those of any of our subsidiaries to an interested shareholder or its affiliates or associates other than Flowers Foods or our subsidiaries in a transaction or series of transactions having an aggregate book value of 10% or more of our net assets;
- the issuance or transfer by us or any of our subsidiaries of any of our or their equity securities to an interested shareholder or its affiliates or associates other than Flowers Foods or our subsidiaries in a transaction or series of transactions having an aggregate market value of 5% or more of the total market value of our outstanding stock, except through the exercise of warrants or rights offered pro rata to all holders of voting securities, or the exercise or conversion of securities outstanding before the shareholder became an interested shareholder;
- the adoption of any plan or proposal for our liquidation or dissolution;
- any reclassification of securities or merger of Flowers Foods with our subsidiaries that has the effect of increasing by 5% or more the proportionate amount of shares of any class or series of our equity securities that is beneficially owned by the interested shareholder or its affiliates;
- other than in the ordinary course of business, the receipt by an interested shareholder, except proportionally as a shareholder, of any benefit from any loan, advance, guarantee, pledge, financial benefit, tax credit or tax advantage from us; and
- any share exchange with an interested shareholder or any other corporation that is, or after the share exchange would be, an affiliate of an interested shareholder that was an interested shareholder prior to consummation of the transaction.
WHEN THE BUSINESS COMBINATION PROVISIONS DO NOT APPLY
The restrictions on business combinations do not apply to:
- any person who was an interested shareholder before the adoption of the bylaw that made the provisions applicable to the corporation; or
- any person who becomes an interested shareholder inadvertently, subsequently divests as soon as practicable sufficient shares so that the shareholder ceases to be an interested shareholder and would not, at any time within the five-year period immediately before the business combination, have been an interested shareholder but for the inadvertent acquisition.
Repeal of the bylaw subjecting Flowers Foods to the business combination provisions of the GBCC requires the affirmative vote of: (i) at least 2/3 of the continuing directors, (ii) a majority of the shares of Flowers Foods other than shares beneficially owned by any interested shareholder and affiliates and associates of any interested shareholder, and (iii) 66 2/3% of the voting power of the then outstanding shares of Flowers Foods common stock and preferred stock voting together, to the extent shares of preferred stock have been afforded voting rights. However, any such repeal would not be effective until 18 months after the shareholder vote to effect such repeal and would not exempt any business combination with an interested shareholder who became an interested shareholder prior to such repeal.
FLOWERS FOODS RIGHTS AGREEMENT
Our Board of Directors has determined that a dividend of one right will be paid in respect of each outstanding share of Flowers Foods common stock to the record holder of such share as of the record date of the spin-off. Pursuant to the rights agreement, each right entitles the registered holder thereof to purchase from Flowers Foods one thousandth of a share of series A preferred stock, par value $100 per share, of Flowers Foods at a price of $ per one thousandth of a preferred share, subject to adjustment.
Under the rights agreement, the rights will be evidenced by the certificates evidencing Flowers Foods common stock until the distribution date, which is the earlier of: (i) the close of business on the tenth calendar day following the first date of public announcement
that a person or group (other than Flowers Foods, a subsidiary or employee
benefit or stock ownership plan of Flowers Foods or any of its affiliates or
associates), together with its affiliates and associates, has acquired
beneficial ownership of 15% or more of the outstanding Flowers Foods common
stock (any such person or group being hereinafter called an acquiring person) or
(ii) the close of business on the tenth business day (or such later date as may
be specified by the directors) following the commencement of a tender offer or
exchange offer by a person (other than Flowers Foods, a subsidiary or employee
benefit or stock ownership plan of Flowers Foods or any of its affiliates or
associates), the consummation of which would result in beneficial ownership by
such person of 15% or more of the outstanding Flowers Foods common stock.
The rights agreement provides that, until the distribution date, the rights may be transferred with and only with the Flowers Foods common stock. Until the distribution date (or earlier redemption, exchange or expiration of the rights), any certificate evidencing Flowers Foods common stock issued upon transfer or new issuance of the Flowers Foods common stock will contain a notation incorporating the rights agreement by reference. Until the distribution date (or earlier redemption, exchange or expiration of the rights), the surrender for transfer of any certificates evidencing Flowers Foods common stock will also constitute the transfer of the rights associated with such certificates. As soon as practicable following the distribution date, separate certificates evidencing the rights will be mailed to holders of record of Flowers Foods common stock as of the close of business on the distribution date and such separate right certificates alone will evidence the rights. No right is exercisable at any time prior to the distribution date. The rights will expire on the tenth anniversary of the record date unless earlier redeemed, exchanged or amended by Flowers Foods as described below. Until a right is exercised, the holder thereof, as such, will have no rights as a shareholder of Flowers Foods, including the right to vote or to receive dividends.
The purchase price payable, and the number of the series A preferred stock or other securities issuable, upon exercise of the rights will be subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the preferred shares, (ii) upon the grant to holders of series A preferred stock of certain rights or warrants to subscribe for or purchase the series A preferred stock at a price, or securities convertible into the series A preferred stock with a conversion price, less than the then-current market price of the series A preferred stock, or (iii) upon the distribution to holders of the series A preferred stock of evidences of indebtedness, cash (excluding regular periodic cash dividends), assets, stock (excluding dividends payable on the series A preferred stock) or subscription rights or warrants (other than those referred to above). The number of outstanding rights and the number of one thousandths of the series A preferred stock issuable upon exercise of each right will be subject to adjustment in the event of a stock dividend on the Flowers Foods common stock payable in Flowers Foods common stock or a subdivision, combination or reclassification of Flowers Foods common stock occurring, in any such case, prior to the distribution date.
Rights will be exercisable to purchase series A preferred stock only after the distribution date occurs and prior to the occurrence of a flip-in event as described below. A distribution date resulting from the commencement of a tender offer or exchange offer described in clause (ii) of the second paragraph of this summary could precede the occurrence of a flip-in event and thus result in the rights being exercisable to purchase series A preferred stock. A distribution date resulting from any occurrence described in clause (i) of the second paragraph of this summary would necessarily follow the
occurrence of a flip-in event and thus result in the rights being exercisable to purchase Flowers Foods common stock or other securities as described below.
Under the rights agreement, in the event, referred to as a flip-in event, that (i) any person or group, together with its affiliates and associates, becomes an acquiring person, (ii) any acquiring person or any affiliate or associate thereof merges into or combines with Flowers Foods and Flowers Foods is the surviving corporation, (iii) any acquiring person or any affiliate or associate thereof effects certain other transactions with Flowers Foods, or (iv) during such time as there is an acquiring person, Flowers Foods effects certain transactions, in each case as described in the rights agreement, then, in each such case, proper provision will be made so that, from and after the latest of the share acquisition date, the distribution date and the date of the occurrence of such flip-in event, each holder of a right, other than rights that are or were owned beneficially by an acquiring person (which, from and after the date of a flip-in event, will be void), will have the right to receive, upon exercise thereof at the then-current exercise price of the right, that number of shares of Flowers Foods common stock (or, under certain circumstances, an economically equivalent security or securities of Flowers Foods) that at the time of such flip-in event has a market value of two times the exercise price of the right.
In the event referred to as a flip-over event, that, at any time after a person has become an acquiring person, (i) Flowers Foods merges with or into any person and Flowers Foods is not the surviving corporation, (ii) any person merges with or into Flowers Foods and Flowers Foods is the surviving corporation, but all or part of the Flowers Foods common stock is changed or exchanged for stock or other securities of any other person or cash or any other property, or (iii) 50% or more of our assets or earning power, including securities creating obligations of Flowers Foods, are sold, in each case as described in the rights agreement, then, and in each such case, proper provision will be made so that from and after the latest of the share acquisition date, the distribution date and the date of the occurrence of such flip-over event, each holder of a right, other than rights which have become void, will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the right, that number of shares of Flowers Foods common stock (or, under certain circumstances, an economically equivalent security or securities) of such other person that at the time of such flip-over event has a market value of two times the exercise price of the right.
From and after the later of the first date of public announcement that a person or group has acquired beneficial ownership of 15% or more of the outstanding shares of Flowers Foods common stock, which is called the share acquisition date and the distribution date, rights (other than any rights that have become void) will be exercisable as described above, upon payment of the aggregate exercise price in cash. In addition, at any time after the later of the share acquisition date and the distribution date and prior to the acquisition by any person or group of affiliated or associated persons of 50% or more of the outstanding Flowers Foods common stock, we may exchange the rights (other than any rights that have become void), in whole or in part, at an exchange ratio of one share of Flowers Foods common stock per right (subject to adjustment). Notwithstanding the foregoing, a majority of the continuing directors on the Board (defined to include incumbent directors of Flowers Foods and their successors who are nominated for election by a majority of the incumbent directors, but specifically excluding representatives of acquiring persons) must concur with the exchange of any of the rights on or following the date (i) a person becomes an acquiring person as defined in the rights agreement, or (ii) a
majority of the Board is replaced due to the actions of any person or persons who may become an acquiring person or who may cause a flip-in event or flip-over event.
With certain exceptions, no adjustment in the purchase price will be required until cumulative adjustments require an adjustment in the purchase price of at least 1%. We will not be required to issue fractional shares of series A preferred stock (other than fractions that are integral multiples of one thousandth of a share of series A preferred stock, which may, at our option, be evidenced by depositary receipts) or fractional shares of Flowers Foods common stock or other securities issuable upon the exercise of rights. In lieu of issuing such securities, we may make a cash payment, as provided in the rights agreement.
We may, at our option, redeem the rights in whole, but not in part, at a price of $.01 per right, subject to adjustment, at any time prior to the close of business on the later of the distribution date and the share acquisition date. Immediately upon any redemption of the rights, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the redemption price. Notwithstanding the foregoing, a majority of the continuing directors on the Board (defined to include incumbent directors of Flowers Foods and their successors who are nominated for election by a majority of the incumbent directors, but specifically excluding representatives of acquiring persons) must concur with the redemption of the rights on or following the date (i) a person becomes an acquiring person or (ii) a majority of the board is replaced due to the actions of any person or persons who may become an acquiring person or who may cause a flip-in event or flip-over event.
The rights agreement may be amended in certain instances so long as there are continuing directors and a majority of such continuing directors votes in favor of the proposed amendment. The rights agreement may be amended without the approval of any holders of rights certificates, including amendments that increase or decrease the purchase price, that add other events requiring adjustment to the purchase price payable and the number of shares of series A preferred stock or other securities issuable upon the exercise of the rights or that modify procedures relating to the redemption of the rights, except that no amendment may be made that decreases the stated redemption price to an amount less than $.01 per right.
Our directors will have the exclusive power and authority to administer the rights agreement and to exercise all rights and powers specifically granted to the directors or to Flowers Foods therein, or as may be necessary or advisable in the administration of the rights agreement, including without limitation, the right and power to interpret the provisions of the rights agreement and to make all determinations deemed necessary or advisable for the administration of the rights agreement (including any determination to redeem or not redeem the rights or to amend or not amend the rights agreement). All such actions, calculations, interpretations and determinations (including any omission with respect to any of the foregoing) which are done or made by the directors in good faith will be final, conclusive and binding on Flowers Foods, the rights agent, the holders of the rights and all other parties and will not subject the directors to any liability to any person, including without limitation, the rights agent and the holders of the rights.
ANTITAKEOVER EFFECTS OF THE PROVISIONS OF OUR ARTICLES AND BYLAWS
Our articles of incorporation and bylaws contain a number of provisions relating to corporate governance and the rights of shareholders that could have a potential anti-takeover effect. These provisions may delay or prevent a change of control of Flowers Foods. These provisions include:
- the classification of our Board of Directors into three classes, each class serving for a staggered three-year term;
- the requirement that shareholders may remove directors only for cause and only by the affirmative vote of at least 66 2/3% of our outstanding voting stock;
- the authority of our Board of Directors to issue series of preferred stock with voting rights and other provisions as the Board of Directors may determine;
- the requirement that shareholder action can be taken only at an annual or special meeting of shareholders or by written consent of holders of at least 75% of the common stock;
- an advance notice procedure in order for shareholders to nominate candidates for election as directors;
- the power of the Board of Directors to consider constituencies other than Flowers Foods shareholders in discharging their duties;
- the requirement that a special shareholders' meeting may only be called by the chairman of the board or at the direction of the majority of the Board of Directors, and not by shareholders; and
- a requirement that a vote of at least 66 2/3% of our voting stock is required to amend provisions of the articles of incorporation and bylaws relating to:
- the classification of the Board of Directors and removal of directors;
- special meetings of shareholders and the order of business of shareholder meetings;
- nominations of directors to fill vacancies or newly created directorships;
- the election to be subject to the fair price and business combination provisions of the GBCC; or
- the power of the Board of Directors to make, amend or repeal bylaws.
These provisions have some anti-takeover effects and may discourage proposals that could be viewed as favorable to shareholders. The description above is intended only as a summary of the material provisions. You should refer to our articles of incorporation and bylaws, which have been filed as exhibits to the registration statement for a more complete description.
LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
LIMITATION ON LIABILITY
Our articles of incorporation provide that a director of Flowers Foods shall not be liable to Flowers Foods or its shareholders for or with respect to any acts or omissions in the performance of his duties as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the GBCC as currently in effect or as the same may be amended or under any other applicable law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation and bylaws provide that each person who is or was or had agreed to become a director or officer of Flowers Foods, or each such person who is or was serving or who had agreed to serve at the request of the Board of Directors or an officer as an employee or agent of Flowers Foods or as a director, officer, employee or agent of another entity, shall be indemnified by us to the fullest extent permitted by the GBCC or any other applicable law as presently or hereafter in effect. This right of indemnification includes the advancement of expenses incurred in defending a proceeding. We may, by action of the Board of Directors, provide indemnification to other employees and agents of Flowers Foods with the same scope and effect as the foregoing indemnification of our directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Flowers Foods common stock will be First Union National Bank.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form 10 to register our shares being issued to you in the spin-off. This information statement is a part of that registration statement and, as allowed by Securities and Exchange Commission rules, does not include all of the information you can find in the registration statement or the exhibits to the registration statement. For additional information relating to us and the spin-off, reference is made to the registration statement and the exhibits to the registration statement. Statements contained in this information statement as to the contents of any contract or document referred to are not necessarily complete and in each instance, if the contract or document is filed as an exhibit to the registration statement, reference is made to the copy of the contract or other document filed as an exhibit to the registration statement. Each statement is qualified in all respects by the relevant reference.
After the spin-off, we will file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. We intend to furnish our shareholders with annual reports containing consolidated financial statements certified by an independent public accounting firm. The registration statement is, and any of these future filings with the Securities and Exchange Commission will be, available to the public over the Internet at the Securities and Exchange Commission's website at http://www.sec.gov. You may read and copy any filed document at the Securities and Exchange Commission's public reference rooms in Washington, D.C. at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D. C. 20549, and at the Securities and Exchange
Commission's regional offices in New York at 7 World Trade Center, 13th Floor, New York, NY 10048, and in Chicago at Suite 1400, Northwestern Atrium Center, 14th Floor, 500 W. Madison Street, Chicago, IL 60661. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information about the public reference rooms.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Flowers Foods incorporates by reference into this Registration Statement
(i) certain portions of the Annual Report on Form 10-K for the fiscal year ended
January 1, 2000 of Flowers Industries, Inc. (File No. 1-9787) filed with the
Securities and Exchange Commission on March 31, 2000 and certain portions of the
Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of
Flowers Industries, Inc. filed with the Securities and Exchange Commission on
November 21, 2000, (ii) the financial statements of Keebler Foods Company for
the fiscal year ended January 1, 2000 filed as an exhibit to the Flowers
Industries, Inc. Annual Report on Form 10-K on March 31, 2000 and (iii) certain
portions of the Quarterly Report on Form 10-Q for the forty weeks ended October
7, 2000 of Keebler Foods Company filed with the Securities and Exchange
Commission on November 21, 2000.
EXHIBIT 2.1
DISTRIBUTION AGREEMENT
BETWEEN
FLOWERS INDUSTRIES, INC.
AND
FLOWERS FOODS, INC.
DATED AS OF OCTOBER 26, 2000
TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS Section 1.01. Definitions.............................................. 1 ARTICLE 2 CONTRIBUTIONS AND ASSUMPTION OF LIABILITIES Section 2.01. Contribution of Contributed Subsidiaries................. 12 Section 2.02. Transfers of Certain Assets to Spinco Group.............. 12 Section 2.03. Assumption of Certain Liabilities........................ 13 Agreement Relating to Consents Necessary to Transfer Section 2.04. Assets................................................... 13 ARTICLE 3 THE DISTRIBUTION Section 3.01. Cooperation Prior to the Distribution.................... 13 Tulip Board Action; Conditions Precedent to the Section 3.02. Distribution............................................. 14 Section 3.03. The Distribution......................................... 14 Section 3.04. Stock Dividend........................................... 15 Section 3.05. Fractional Shares........................................ 15 Section 3.06. Representations of Spinco; Release....................... 15 ARTICLE 4 INDEMNIFICATION AND OTHER MATTERS Section 4.01. Spinco Indemnification of Tulip.......................... 15 Section 4.02. Tulip Indemnification of Spinco Group.................... 16 Insurance and Third Party Obligations; Limitation on Section 4.03. Liability................................................ 16 Section 4.04. Notice and Payment of Claims............................. 17 Section 4.05. Notice and Defense of Third-Party Claims................. 17 Section 4.06. Adjustment in Indemnity Payment for Tax Consequences..... 19 Section 4.07. Non-Exclusivity of Remedies.............................. 20 ARTICLE 5 EMPLOYEE MATTERS Section 5.01. Employee Matters Generally............................... 20 ARTICLE 6 ACCESS TO INFORMATION Section 6.01. Provision of Corporate Records........................... 20 Section 6.02. Access to Information.................................... 20 Section 6.03. Litigation Cooperation................................... 20 Section 6.04. Reimbursement............................................ 21 Section 6.05. Retention of Records..................................... 21 Section 6.06. Confidentiality.......................................... 22 Section 6.07. Right of Inquiry......................................... 22 ARTICLE 7 CERTAIN OTHER AGREEMENTS Section 7.01. Intercompany Accounts; Services; Guaranties.............. 23 Section 7.02. Trademarks; Trade Names.................................. 24 Section 7.03. Further Assurances and Consents.......................... 24 Section 7.04. Non-Solicitation......................................... 24 Section 7.05. Third Party Beneficiaries................................ 25 Section 7.06. Intellectual Property Rights and Licenses................ 25 Section 7.07. Insurance................................................ 25 |
PAGE ---- ARTICLE 8 TAXES Section 8.01. Liability for Taxes...................................... 27 Section 8.02. Tax Returns.............................................. 27 Section 8.03. Distribution............................................. 28 Section 8.04. Tax Refunds and Benefits................................. 29 Section 8.05. Tax Sharing Arrangements................................. 30 Section 8.06. Contest Provisions....................................... 30 Section 8.07. Cooperation on Tax Matters; Other Tax Matters............ 32 ARTICLE 9 MISCELLANEOUS Section 9.01. Notices.................................................. 32 Section 9.02. Amendments; No Waivers................................... 33 Section 9.03. Expenses................................................. 34 Section 9.04. Successors and Assigns................................... 34 Section 9.05. Governing Law............................................ 34 Section 9.06. Counterparts; Effectiveness.............................. 34 Section 9.07. Entire Agreement......................................... 34 Section 9.08. Certain Transfer Taxes................................... 35 Section 9.09. Jurisdiction............................................. 35 Section 9.10. Pre-Litigation Dispute Resolution........................ 35 Section 9.11. Severability............................................. 35 Section 9.12. Survival................................................. 35 Section 9.13. Captions................................................. 35 Section 9.14. Specific Performance..................................... 35 |
Schedule A -- Spinco Assets -- Contracts Schedule B -- Spinco Assets -- Other Assets, Properties and Business Schedule C -- Spinco Group Liabilities Schedule D -- Spinco Intellectual Property Rights Schedule E -- Spinco Litigation Schedule F -- Assumed Debt Schedule G -- Company Debt Schedule H -- Restated Spinco Charter Schedule 2.01 -- Contribution of Contributed Subsidiaries Schedule 7.01 -- Existing Arrangements Schedule 7.07 -- Group Policies Exhibit A -- Employee Benefits Agreement |
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT dated as of October 26, 2000 (this "AGREEMENT") between Flowers Industries, Inc., a Georgia corporation ("TULIP"), and Flowers Foods, Inc., a Georgia corporation ("SPINCO").
W I T N E S S E T H:
WHEREAS, Spinco is presently a wholly-owned subsidiary of Tulip;
WHEREAS, the Board of Directors of Tulip has determined that it is in the best interests of Tulip, its shareholders and Spinco that all outstanding shares of Spinco Common Stock (as defined below) be distributed pro rata to Tulip's shareholders (provided that all conditions precedent to the Distribution have been satisfied) and that, pursuant to an Agreement and Plan of Restructuring and Merger dated as of October 26, 2000 ("MERGER AGREEMENT") among Tulip, Kellogg Company, a Delaware corporation ("PARENT"), and Kansas Merger Subsidiary, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent ("MERGER SUBSIDIARY"), immediately after the Distribution Merger Subsidiary be merged with and into Tulip, as a result of which Tulip will become a wholly-owned subsidiary of Parent (the "MERGER");
WHEREAS, for United States federal income Tax (as defined below) purposes, it is intended that the holders of Tulip Common Stock be treated as having received cash consideration from Parent and the Spinco Common Stock in redemption and disposition of the outstanding Tulip Common Stock (as defined below);
WHEREAS, Tulip is concurrently herewith entering into, or proposes to enter into prior to the Distribution Date (as defined below), the Ancillary Agreements (as defined below); and
WHEREAS, the parties hereto desire to set forth herein the principal corporate transactions to be effected in connection with the Distribution and certain other matters relating to the relationship and the respective rights and obligations of the parties following the Distribution.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.01. Definitions. The following terms, as used herein, have the following meanings:
"Action" means any claim, suit, action, arbitration, inquiry, investigation or other proceeding of any nature (whether criminal, civil, legislative, administrative, regulatory, prosecutorial or otherwise) by or before any arbitrator or Governmental Entity or similar Person or body.
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of the Exchange Act (as defined herein) as of the date hereof.
"Agreement" has the meaning set forth in the recitals.
"Ancillary agreements" means the Employee Benefits Agreement and any additional agreement entered into between Tulip and Spinco, which shall not be entered into without the prior written consent of Parent (which shall not be unreasonably withheld to the extent any such agreement does not adversely affect Tulip or any of its Affiliates, including Parent, or the financial strength or creditworthiness of Spinco, in each case, following the Distribution Time).
"Assumed Debt" means all debt and similar obligations of Tulip immediately prior to the Distribution, all of which shall be assumed by Spinco pursuant to this Agreement (except for the Company Debt which shall remain an obligation of Tulip following the Distribution) including as set forth on Schedule F.
"Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close.
"Commission" means the Securities and Exchange Commission.
"Company Debt" means the debt of Tulip as set forth on Schedule G, including without limitation any other debt or similar obligations of Tulip immediately prior to the Distribution to the extent such debt is not expressly assumed by Spinco in accordance with the terms of such debt or similar obligations or otherwise refinanced, repaid or satisfied by Spinco, including, without limitation, if applicable, Tulip's 7.15% Debentures due 2028 and the Loan Facility Agreement by and among Tulip, Suntrust Bank, Atlanta and each of the participants party thereto, dated as of November 5, 1999, and all other agreements referenced in Section 4.04(1) of the Company Disclosure Schedule (as defined in the Merger Agreement).
"Confidential Information" has the meaning set forth in Section 6.06.
"Confidentiality Agreement" means the Confidentiality Agreement dated as of July 24, 2000 between Parent and Tulip.
"Contracts" means any agreement, lease, license, contract, treaty, note, mortgage, indenture, franchise, permit, concession, arrangement or other obligation.
"Contributed Subsidiaries" means (i) Flowers Bakeries Brands, Inc., a Georgia corporation, Mrs. Smith's Bakeries, Inc., a Georgia corporation, and Flowers Investments, Inc., a Georgia corporation, (ii) any subsidiaries formed for the purpose of effecting the Restructuring, and (iii) the respective direct and indirect Subsidiaries of the Persons referred to in clauses (i) and (ii).
"Contribution" has the meaning set forth in Section 2.01.
"Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "Controlling" and "Controlled" have meanings correlative to the foregoing.
"Controlling Party" has the meaning set forth in Section 8.06(b).
"Current Period" means, in the case of a Straddle Period, that portion of the Straddle Period that ends, with respect to Tulip, on and includes the Distribution Date.
"Damages" means, with respect to any Person, any and all damages (including punitive and consequential damages), losses, Liabilities and expenses incurred or suffered by such Person (including all expenses of investigation, all attorneys' and expert witnesses' fees and all other out-of-pocket expenses incurred in connection with any Action or threatened Action).
"Discontinued Business" means any assets, business or operations of Tulip, Spinco, their respective Subsidiaries or the Contributed Subsidiaries that are or have been discontinued, sold or otherwise divested prior to or on the Distribution Date.
"Distribution" means the distribution by Tulip, pursuant to the terms and subject to the conditions hereof, of all of the outstanding shares of Spinco Common Stock to the Tulip Shareholders of record as of the Record Date.
"Distribution Agent" means First Union National Bank, or such other nationally recognized banking institution as mutually agreed upon by Parent and Spinco.
"Distribution Date" means the Business Day on which the Distribution is effected.
"Distribution Documents" means this Agreement and the Ancillary Agreements and any other agreements or documents entered into, with Parent's prior written consent (which shall not be unreasonably withheld to the extent such other agreements or documents do not adversely affect Tulip or any of its Affiliates, including Parent, or the financial strength or creditworthiness of Spinco, in each case, following the Distribution Time) to effect the transactions contemplated hereby or by the Ancillary Agreements (but excluding the Confidentiality Agreement and the Merger Agreement).
"Distribution Time" means the time immediately before the Merger Effective Time (as defined below).
"Draft Return" has the meaning set forth in Section 8.02(b).
"ELF" means Keebler Foods Company, a Delaware corporation.
"ELF Intellectual Property Rights" means all Intellectual Property Rights (i) owned by ELF or (ii) owned by a third party and licensed or sublicensed to ELF.
"ELF Merger" means the merger provided for in the Agreement and Plan of Merger, dated as of October 26, 2000, among ELF, Flowers Industries, Inc. and FK Acquisition Corp. (the "ELF Merger Agreement").
"ELF Merger Date" means the date as of which the Effective Time (as defined in the ELF Merger Agreement) of the ELF Merger occurs.
"Employee Benefits Agreement" means the Employee Benefits Agreement in the form attached as Exhibit A hereto to be entered into before the Distribution Date between Tulip and Spinco, with only those amendments or modifications made with Parent's prior written consent (which shall not be unreasonably withheld to the extent such amendments or modifications do not adversely affect Tulip or any of its Affiliates, including Parent, or the financial strength or creditworthiness of Spinco in each case following the Distribution Time).
"Environmental Laws" means all Laws or any agreements with any Governmental Entity or other third party relating to human health, safety or the environment, including laws and agreements relating to emissions, discharges, Releases or threatened Releases of Hazardous Substances, or otherwise relating to the manufacture, generation, processing, distribution, use, sale, treatment, receipt, storage, disposal, transport or handling of Hazardous Substances, including the Comprehensive Environmental Response, Compensation and Liability Act and the Resource Conservation and Recovery Act, and the Occupational Safety and Health Act.
"Exchange Act" means the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder.
"Finally Determined" means, with respect to any Action, threatened Action or other matter, that the outcome or resolution of that Action, threatened Action or other matter either (i) has been decided through binding arbitration or by a Governmental Entity of competent jurisdiction by judgment, order, award, or other ruling or (ii) has been settled or voluntarily dismissed by the parties pursuant to the dispute resolution procedure set forth in Section 9.10 or otherwise and, in the case of each of clauses (i) and (ii), the claimants' rights to maintain that Action, threatened Action or other matter have been finally adjudicated, waived, discharged or extinguished, and that judgment, order, ruling, award, settlement or dismissal (whether mandatory or voluntary, but if voluntary that dismissal must be final, binding and with prejudice as to all claims specifically pleaded in that Action, threatened Action or other matter) is subject to no further appeal, vacatur proceeding or discretionary review.
"Finally Settled" has the meaning set forth in Section 8.04(c).
"Governmental Entity" means any federal, state, local or foreign government or any court, tribunal, administrative agency or commission or other governmental or other regulatory authority or agency, domestic, foreign or supranational.
"Group" means, as the context requires, the Spinco Group (as defined below) or Tulip.
"Group Policies" means all Policies, current or past, which prior to the Distribution Time are or at any time were maintained by or on behalf of or for the benefit or protection of Tulip or any Affiliate (or any of their predecessors) and/or one or more of the current or past directors, officers, employees or agents of any of the foregoing including, without limitation, the Policies identified on Schedule 7.07 hereto.
"Hazardous Substance" means (i) chemicals, pollutants, contaminants, hazardous wastes, toxic substances, and oil and petroleum products, (ii) any substance that is or contains friable asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum or petroleum-derived substances or wastes, radon gas or related materials, (iii) any substance that requires removal or remediation under any Environmental Law, or is defined, listed or identified as a "hazardous waste" or "hazardous substance" thereunder, or (iv) any substance that is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous.
"Indemnified Party" has the meaning set forth in Section 4.04.
"Indemnifying Party" has the meaning set forth in Section 4.04.
"Information Statement" means the information statement to be sent to each Tulip Shareholder of record as of the Record Date in connection with the Distribution.
"Insurance Proceeds" shall mean those monies (i) received by an insured from an insurance carrier or (ii) paid by an insurance carrier on behalf of an insured, in either case net of any applicable premium adjustment, retrospectively-rated premium, deductible, retention, or cost of reserve paid or held by or for the benefit of such insured.
"Insured Claims" shall mean those Liabilities that, individually or in the aggregate, are covered within the terms and conditions of any of the Group Policies, whether or not subject to premium adjustments, deductibles, retentions, co-insurance, cost of reserve paid or held by or for the benefit of the applicable insured(s), uncollectability or retrospectively-rated premiums, but only to the extent that such Liabilities (i) are within applicable Group Policy limits, including aggregates and (ii) are actually paid.
"Intellectual Property Rights" means (i) inventions, whether or not
patentable, reduced to practice or made the subject of one or more pending
patent applications, (ii) national and multinational statutory invention
registrations, patents and patent applications (including all reissues,
divisions, continuations, continuations-in-part, extensions and
reexaminations thereof) registered or applied for in the United States and
all other nations throughout the world, and all improvements to the
inventions disclosed in each such registration, patent or patent
application, (iii) trademarks, service marks, trade dress, logos, domain
names, trade names and corporate names (whether or not registered) in the
United States and all other nations throughout the world, including all
variations, derivations, combinations, registrations and applications for
registration of the foregoing and all goodwill associated therewith, (iv)
copyrights (whether or not registered) and registrations and applications
for registration thereof in the United States and all other nations
throughout the world, including all derivative works, moral rights,
renewals, extensions, reversions or restorations associated with such
copyrights, now or hereafter provided by law, regardless of the medium of
fixation or means of expression, (v) computer software (including source
code, object code, firmware, operating systems and specifications), (vi)
trade secrets and, whether or not confidential, business information
(including pricing and cost information, business and marketing plans and
customer and supplier lists) and know-how (including manufacturing and
production processes and techniques and research and development
information), (vii) industrial designs (whether or not registered), (viii)
databases and data collections, (ix) copies and tangible embodiments of any
of the foregoing, in whatever form or medium, (x) all rights to obtain and
rights to apply for patents, and to register trademarks and copyrights,
(xi) all rights in all of the foregoing provided by treaties, conventions
and common law and (xii) all rights to sue or recover and retain damages
and costs and attorneys' fees for past, present and future infringement or
misappropriation of any of the foregoing.
"IRS" means the Internal Revenue Service.
"Law" means any applicable federal, state, local or foreign law, statute, common law, ordinance, directive, rule, regulation, judgment, order, injunction, decree, arbitration award, agency requirement, license or permit of any Governmental Entity.
"Liability" or "Liabilities" means any and all claims, debts, liabilities, assessments, costs (including, with respect to matters under Environmental Laws, removal costs, remediation costs, closure costs and expenses of investigation and ongoing monitoring), deficiencies, charges, demands, fines, penalties, damages, losses, Taxes, disgorgements and obligations, of any kind, character or description (whether absolute, contingent, matured, not matured, liquidated, unliquidated, accrued, known, unknown, direct, indirect, derivative or otherwise) whenever arising, including, but not limited to, all costs, interest and expenses relating thereto (including, but not limited to, all expenses of investigation, all attorneys' and expert witnesses' fees and all other out-of-pocket expenses in connection with any Action or threatened Action) and expressly including those relating to an Indemnified Party's own negligence or other misconduct.
"Merger" has the meaning set forth in the recitals.
"Merger Agreement" has the meaning set forth in the recitals.
"Merger Effective Time" shall have the meaning assigned to the term Effective Time in the Merger Agreement.
"Merger Subsidiary" has the meaning set forth in the recitals.
"Noncontrolling Party" has the meaning set forth in Section 8.06(b).
"NYSE" has the meaning set forth in Section 3.01(d).
"Offset Amount" has the meaning set forth in Section 8.04(c).
"Offset Date" has the meaning set forth in Section 8.04(c).
"Parent" has the meaning set forth in the recitals.
"Parent-Directed Transactions" means any transactions that occur at the direction of Parent on the Distribution Date after the consummation of the Merger (other than any transaction contemplated by this Agreement, any restructuring undertaken in anticipation thereof and any transactions which occur in the ordinary course of business). For the absence of doubt, neither the Distribution, the Restructuring, the Merger, the ELF Merger or any transaction undertaken in anticipation thereof shall be considered a Parent-Directed Transaction.
"Person" means any individual, corporation (including not-for-profit corporations), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, Governmental Entity or other entity of any kind or nature.
"Policies" means insurance policies and insurance contracts of any kind, including, without limitation, primary, excess and umbrella policies, directors and officers', errors and omissions, commercial general liability policies, life and benefits policies and contracts, fiduciary liability, automobile, aircraft, property and casualty, workers' compensation and employee dishonesty insurance policies, bonds and ELF-insurance together with the rights, benefits and privileges thereunder.
"Proxy Statement" means the proxy statement of Tulip to be filed with the Commission pursuant to the Exchange Act in connection with the Merger.
"Record Date" means the date determined by Tulip's Board of Directors (or by a committee of that board or any other Person acting under authority duly delegated to that committee or Person by Tulip's Board of Directors or a committee of that Board) as the record date for determining the Tulip Shareholders of record entitled to receive the Distribution.
"Registration Statement" means the registration statement on Form 10, Form S-1, or Form S-4 to be filed by Spinco with the Commission to effect the registration of Spinco Common Stock (as defined below) pursuant to the Exchange Act or the Securities Act in connection with the Distribution, as such registration statement may be amended or supplemented from time to time.
"Releases" means any releasing, disposing, discharging, injecting, spilling, leaking, pumping, dumping, emitting, escaping, emptying, migrating, transporting, placing, including into or upon, any land, soil, surface water, ground water or air, or otherwise entering into the environment, that is not authorized by a Governmental Entity.
"Representatives" has the meaning set forth in Section 6.06.
"Request" has the meaning set forth in Section 6.03.
"Restated Spinco Charter" means the restated articles of incorporation of Spinco, which shall be in the form attached hereto as Schedule H, with such changes as the Board of Directors of Spinco reasonably determines, subject to the prior written approval of Parent (such approval not to be unreasonably withheld).
"Restructuring" means the contributions pursuant to Section 2.01 hereof, the settlement of intercompany accounts prior to or as of the Distribution Time, the Distribution and the other transactions contemplated by this Agreement and the Ancillary Agreements (other than the Merger).
"Securities Act" means the Securities Act of 1933, and the rules and regulations promulgated thereunder.
"Services" has the meaning set forth in Section 7.01(c).
"Spinco" has the meaning set forth in the recitals.
"Spinco Affiliated Group" has the meaning set forth in Section 8.01(a).
"Spinco Assets" means all assets, leases, properties and businesses, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, owned, held or used by Tulip or any member of the Spinco Group, excluding the Tulip Assets. Without limitation and for the avoidance of doubt, the following items are, and shall be, "Spinco Assets" (and are not, and shall not be, Tulip Assets):
(a) all right, title and interest in the real property situated at 1919 Flowers Circle, Thomasville, Georgia 31757, together with all buildings, fixtures, and improvements erected thereon;
(b) all rights of the Spinco Group (but excluding any and all rights of Tulip) under the Distribution Documents;
(c) to the extent relating to the business, assets or employees of any member of the Spinco Group, all rights of Tulip under the Confidentiality Agreement and the confidentiality agreements entered into by Tulip with potential purchasers of Tulip or certain of Tulip's businesses prior to the date hereof;
(d) all cash and cash equivalents, including all bank account balances and petty cash, of Tulip (provided, however, that the cash positions of Tulip cannot be increased or decreased in a manner that violates the Merger Agreement);
(e) all Spinco Intellectual Property Rights;
(f) all the rights to the contracts listed on Schedule A hereto to the extent such contracts have not been entered into by or for the benefit of ELF;
(g) the other assets, properties and businesses listed on Schedule B hereto;
(h) all goodwill associated with the Spinco Group, Tulip or the Spinco Assets prior to the Distribution Time (excluding goodwill associated with the Tulip Assets), together with the right to represent to third parties that the Spinco Group is the successor to all businesses and operations of the Spinco Group and Tulip (other than ELF).
"Spinco Business" means the businesses and operations of Spinco, its Subsidiaries and the Contributed Subsidiaries, as conducted on the date hereof, but taking into account the Restructuring.
"Spinco Common Stock" means the common stock, par value $.01 per share, of Spinco.
"Spinco Environmental Liabilities" means any and all Liabilities of or relating to (i) Tulip (including any Discontinued Business) or any member of the Spinco Group or (ii) the Spinco Business or the Spinco Assets, which, in either case, arise under or relate to Environmental Laws.
"Spinco Group" means Spinco, its direct and indirect Subsidiaries and the Contributed Subsidiaries (including all successors to each of those Persons).
"Spinco Group Liabilities" means, except as otherwise specifically
provided in the Merger Agreement or any Distribution Document, all
Liabilities (including Liabilities arising out of any litigation), whether
arising before, at or after the Distribution Time, of or relating to Tulip
or any member of the Spinco Group whether arising from the conduct of, in
connection with or relating to the Spinco Assets or the Spinco Business or
the ownership or use thereof or the Discontinued Business or otherwise; in
each case excluding the Tulip Liabilities. Without limiting the generality
of the foregoing, "Spinco Group Liabilities" shall include the following
Liabilities (a) whether arising before, at or after the Distribution Time:
(i) any Liabilities arising out of, in connection with or related to the
Spinco Assets, the Spinco Business or the Discontinued Business, (ii) the
Spinco Environmental Liabilities, (iii) the Assumed Debt, (iv) the Spinco
Litigation, (v) the Liabilities set forth on Schedule C hereto, (vi) the
contracts set forth on Schedule A, (vii) all other Liabilities of the
Spinco Group under any Distribution Document, (viii) except to the extent
otherwise expressly provided in this Agreement or the Merger Agreement, all
Liabilities of the Spinco Group or Tulip arising out of, or in connection
with or related to the
Distribution and any of the other transactions contemplated by this Agreement or any of the Ancillary Agreements, including any advisory fees for the Merger and the Distribution to the extent such fees exceed $16 million, (ix) (1) any Taxes imposed upon or relating to Spinco, the Spinco Assets, the Spinco Business, the Discontinued Business or the Contributed Subsidiaries and (2) any Taxes for which Spinco is liable pursuant to Article 8 hereof, or (x) any and all Liabilities (A) arising out of, in connection with or relating to any of the Benefit Arrangements and Employee Plans (as defined in the Tulip Merger Agreement), or (B) otherwise arising out of, in connection with or relating to the employment of any individual by Tulip, Spinco or any of their respective Affiliates (whether relating to periods before, including or after the Distribution Time), including without limitation Liabilities for compensation and benefits, other than employment of Elf Employees (as defined in the Elf Merger Agreement) by ELF and its Subsidiaries after the Distribution Time, and (b) to the extent arising prior to or at the Distribution Date, any Liabilities for any accounts payable of Tulip or the Spinco Group, unless expressly a Tulip Liability. Nothing in this Agreement shall be interpreted to mean that the obligations of Surviving Corporation (as defined in the Merger Agreement) under Section 7.02 of the Merger Agreement constitute Spinco Group Liabilities.
"Spinco Indemnitee" has the meaning set forth in Section 4.02(a).
"Spinco Intellectual Property Rights" means all Intellectual Property Rights (i) owned by a member of the Spinco Group or Tulip or (ii) owned by a third party and licensed or sublicensed to a member of the Spinco Group or Tulip, including without limitation:
(i) all Tulip Name Rights, other than ELF Intellectual Property Rights; and
(ii) the Intellectual Property Rights listed on Schedule D hereto, it being expressly understood that no Intellectual Property Rights owned by, licensed to, sublicensed to, used by or related to ELF or any of its Subsidiaries constitute Spinco Intellectual Property Rights.
"Spinco Litigation" means (i) any litigation in which Tulip or one or more of its officers, directors or employees is named a defendant (x) relating to, involving or arising out of the Spinco Assets, the Spinco Business or Tulip, including any Discontinued Business, (y) alleging violations of federal or state securities laws by Tulip or (z) alleging breaches of fiduciary duties of the Tulip directors under state law (in the case of clauses (y) and (z), including the cases set forth on Schedule E); and (ii) any litigation in which Tulip (or one or more of its officers, directors or employees) is named a defendant on or after the date hereof alleging violations of federal or state securities laws or breaches of fiduciary duties of the Tulip directors at or prior to the Merger Effective Time under state law, in each case described in this clause (ii) (x) relating to or arising out of the Merger or the Restructuring or (y) arising out of matters occurring before the Merger Effective Time.
"Straddle Period" means any taxable year or period beginning on or before and ending after, with respect to Tulip, the Distribution Date.
"Straddle Period Tax Proceeding" has the meaning set forth in Section 8.06(b).
"Subsidiary" means, with respect to any Person, any entity of which at least a majority of the securities or other ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned or controlled by such Person or by one or more of its respective Subsidiaries or by such Person and any one or more of its respective Subsidiaries.
"Tax" or "Taxes" means (i) any and all taxes, charges, fees, levies or other assessments, including income, gross receipts, excise, real or personal property, sales, withholding, social security, retirement, unemployment, occupation, use, goods and services, service use, license, value added, capital, net worth, payroll, profits, withholding, franchise, transfer and recording taxes, fees and charges, and any other taxes, assessment or similar charges imposed by the IRS or any taxing authority (whether domestic or foreign including any state, county, local or foreign government or any subdivision or taxing agency thereof (including a United States possession)) (a "Taxing Authority"), whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest whether paid or received, fines, penalties or additional amounts attributable to, or imposed upon, or with respect to, any such taxes, charges, fees, levies or other assessments, (ii) any liability for the payment of any amount of the type described in clause (i) as a result of being or having been a member of an affiliated, consolidated, combined or unitary group, or a party to any agreement or arrangement, as a result of which liability to a Taxing Authority is determined or taken into account with reference to the liability of any other Person (including, e.g., liability under Treasury Regulation 1.1502-6 or similar liability under any other Law), and (iii) any liability with respect to the payment of any amount of the type described in (i) or (ii) as a result of any existing express or implied obligation (including, but not limited to, an indemnification obligation).
"Tax Amount" has the meaning set forth in the Merger Agreement.
"Tax Proceeding" has the meaning set forth in Section 8.06(a).
"Tax Reporting Standard" has the meaning set forth in Section 8.02(b).
"Tax Return" shall mean any report, return, document, declaration or other information or filing required to be supplied to any Taxing Authority or jurisdiction (foreign or domestic) with respect to Taxes, including information returns, any documents with respect to or accompanying payments of estimated Taxes, or with respect to or accompanying requests for the extension of time in which to file any such report, return, document, declaration or other information.
"Taxing Authority" has the meaning set forth in the definition of "Tax".
"Third-Party Claim" has the meaning set forth in Section 4.05.
"Transfer" has the meaning set forth in Section 2.02.
"Tulip" has the meaning set forth in the recitals.
"Tulip Assets" means all assets as reflected in the unaudited pro
forma consolidated balance sheet as of July 15, 2000 of Tulip set forth in
Section 4.08 of the Company Disclosure Schedule accompanying the Merger
Agreement and the after-tax proceeds of the special dividend contemplated
by Section 6.06 of the ELF Merger Agreement to be received by Tulip.
Without limitation and for the avoidance of doubt, the following items are,
and shall be, "Tulip Assets" (and are not, and shall not be, Spinco
Assets):
(a) all rights of Tulip (but excluding any and all rights of the Spinco Group) under the Merger Agreement, the Confidentiality Agreement and the Distribution Documents; and
(b) all capital stock of ELF owned by Tulip and any rights related to its ownership interest in ELF.
"Tulip Common Stock" means the common stock, par value $0.625 per share, of Tulip.
"Tulip Indemnitee" has the meaning set forth in Section 4.01(a).
"Tulip Liabilities" means only the following Liabilities, whether arising before, at or after the Distribution Time: (i) the Company Debt but not any claim, action or litigation arising from the decision to pursue the transactions contemplated by this Agreement, the Merger Agreement, the Ancillary Agreements or the treatment in the transactions contemplated hereby of any third party debt and (ii) any advisory fees relating to the Merger and/or Distribution not to exceed $16 million, it being agreed that notwithstanding the structuring of the transaction as a merger between Tulip and Merger Subsidiary, it is the intention of the parties to place Parent and, after the Merger, Tulip, in the same position, with respect to assumption of or responsibility for Liabilities, as would occur if, instead of consummating the Merger, Parent were only to purchase the capital stock Tulip owns in ELF directly from Tulip (subject to clauses (i) and (ii) above of this definition). For the avoidance of doubt, "Tulip Liabilities" shall exclude among other matters (i) any and all Liabilities to the extent specifically retained or assumed by the Spinco Group under this Agreement or otherwise, (ii) any Taxes imposed upon or relating to Spinco, the Spinco Assets, the Spinco Business, the Discontinued Business or the Contributed Subsidiaries and (iii) any Taxes for which Spinco is liable pursuant to Article 8 hereof.
"Tulip Name Rights" means all right, title and interest in and use of the "Tulip" name and any derivative thereof including, without limitation, all trademarks, service marks, trade dress, logos, domain names, trade names and corporate names (whether or not registered) in the United States and all other nations throughout the world, including all variations, derivations, combinations, registrations and applications for registration of the foregoing and all goodwill associated therewith.
"Tulip Shareholders" means the holders of the Tulip Common Stock.
Any reference in this Agreement to a statute shall be to such statute, as amended from time to time, and to the rules and regulations promulgated thereunder.
Any reference to "including" or "include" means "including, without limitation" or "include, without limitation," respectively.
ARTICLE 2
CONTRIBUTIONS AND ASSUMPTION OF LIABILITIES
Section 2.01. Contribution of Contributed Subsidiaries. Upon the terms and subject to the conditions set forth in the Merger Agreement and the Distribution Documents, effective prior to the Distribution Time, Tulip shall contribute to Spinco all of the outstanding shares of capital stock of, or other ownership interests in, each of the Subsidiaries in clause (i) and clause (ii) of the definition of Contributed Subsidiaries in the manner described in Schedule 2.01, subject to receipt of any necessary consents or approvals of third parties or of Governmental Entities and subject to Section 7.03.
Section 2.02. Transfers of Certain Assets to Spinco Group. Upon the terms and subject to the conditions set forth in the Merger Agreement or any Distribution Document, except as otherwise expressly set forth therein, effective prior to or as of the Distribution Time, subject to receipt of any necessary consents or approvals of third parties or of Governmental Entities, Tulip shall assign, contribute, convey, transfer and deliver ("Transfer") to Spinco or to one or more of Spinco's wholly-owned Subsidiaries all of the right, title and interest of Tulip in and to all Spinco Assets that are not owned, held or used by a Contributed Subsidiary, if any, as the same shall exist on the Distribution Date immediately prior to the Distribution Time.
Section 2.03. Assumption of Certain Liabilities. Upon the terms and subject to the conditions set forth in the Merger Agreement or any Distribution Document, effective as of the Distribution Time (or of the time of Transfer, if earlier, of the assets to which such Liabilities are attributable), Spinco hereby unconditionally (i) assumes all Spinco Group Liabilities to the extent not then an existing obligation of the Spinco Group and (ii) undertakes to pay, satisfy and discharge when due in accordance with their terms all Spinco Group Liabilities.
Section 2.04. Agreement Relating to Consents Necessary to Transfer Assets. Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an agreement to transfer or assign any asset or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the necessary consent of a third party, would constitute a breach or other contravention thereof or in any way adversely affect the rights of Spinco, or any member of the Spinco Group, or Tulip thereunder. Spinco and Tulip shall cooperate with each other, keep each other informed and will, subject to Section 7.03, use their reasonable best efforts to obtain the consent of any third party or any Governmental Entity, if any, required in connection with the transfer or assignment pursuant to Sections 2.02, 2.03 or 2.04 of any such asset or any claim or right or any benefit arising thereunder. Until such required consent is obtained, or if such consent cannot be obtained or an attempted assignment thereof would be ineffective or would adversely affect the rights of the transferor thereunder so that the intended transferee would not in fact receive substantially all such rights, Spinco and Tulip will use reasonable efforts to cooperate in a mutually agreeable arrangement under which the intended transferee would obtain (at the transferee's expense and at no cost to the transferor) the benefits and assume the obligations thereunder in accordance with this Agreement, including (but not limited to) sub-contracting, sub-licensing or sub-leasing to such transferee, or under which the transferor would enforce for the benefit of the transferee and (except as otherwise provided herein or in any Ancillary Agreement) at the transferee's expense any and all rights of the transferor against, with the transferee assuming the transferor's obligations to, each third party thereto.
ARTICLE 3
THE DISTRIBUTION
Section 3.01. Cooperation Prior to the Distribution.
(a) As promptly as practicable after the date of this Agreement, Parent, Tulip and Spinco shall prepare, and Spinco shall file with the Commission, the Registration Statement, which shall include or incorporate by reference the Information Statement. Parent, Tulip and Spinco shall use their reasonable best efforts to cause the Registration Statement to become effective under the Exchange Act or Securities Act as soon as practicable. After the Registration Statement has become effective, Tulip shall mail the Information Statement as promptly as practicable to the Tulip Shareholders of record as of the Record Date.
(b) Parent, Tulip and Spinco shall cooperate in preparing, filing with the Commission and causing to become effective any registration statements or amendments or supplements thereto that are appropriate to reflect the establishment of or amendments to any employee benefit and other plans contemplated by the Ancillary Agreements.
(c) Tulip and Spinco shall take all such action as may be necessary or appropriate under the securities or blue sky laws of states or other political subdivisions of the United States in connection with the transactions contemplated hereby or by the Ancillary Agreements.
(d) Spinco shall prepare, file and pursue an application to permit the listing of the Spinco Common Stock on the New York Stock Exchange ("NYSE").
Section 3.02. Tulip Board Action; Conditions Precedent to the Distribution. Tulip's Board of Directors shall establish (or delegate authority to establish) the Record Date and the Distribution Date and any appropriate procedures in connection with the Distribution. In no event shall the Distribution occur unless the following conditions shall have been satisfied or, to the extent permitted, waived:
(a) the Registration Statement shall have become effective with the Commission under the Exchange Act or Securities Act and shall have been mailed to all Tulip shareholders of record on the Record Date;
(b) the Spinco Common Stock to be delivered in the Distribution shall have been approved for listing on the NYSE, subject to official notice of issuance;
(c) the Restated Spinco Charter shall be in effect;
(d) the contributions referred to in Section 2.01, the transfers referred to in Section 2.02, and the assumptions of Liabilities referred to in Section 2.03 of this Agreement shall have been effected;
(e) the Employee Benefits Agreement shall have been duly executed and delivered by the parties thereto; and
(f) each condition to the Merger set forth in Sections 9.01, 9.02 and 9.03 of the Merger Agreement shall have been satisfied or waived.
Section 3.03. The Distribution. Subject to the terms and conditions set
forth in this Agreement, (i) immediately prior to the Distribution Time, Tulip
shall deliver to the
Distribution Agent, for the benefit of the Tulip Shareholders of record on the
Record Date, a stock certificate or certificates, endorsed by Tulip in blank,
representing all of the then-outstanding shares of Spinco Common Stock owned by
Tulip, (ii) the Distribution shall be effective as of the Distribution Time and
(iii) Tulip shall instruct the Distribution Agent to distribute, on or as soon
as practicable after the Distribution Date, to each Tulip Shareholder of record
as of the Record Date one share of Spinco Common Stock (together with the
associated preferred share purchase rights), for that certain number of shares
(as determined by the Tulip Board of Directors) of Tulip Common Stock so held.
Spinco agrees to provide all certificates for shares of Spinco Common Stock that
Tulip shall require (after giving effect to Sections 3.04 and 3.05) in order to
effect the Distribution. The Merger and Distribution shall be effected such that
the Merger Consideration (as defined in the Merger Agreement) and the shares of
Spinco Common Stock to be distributed in the Distribution are payable and
distributable, as applicable, only to the same Tulip Shareholders, it being
understood that the Distribution shall be effective immediately before the
Merger Effective Time.
Section 3.04. Stock Dividend. On or before the Distribution Date, Spinco shall issue to Tulip as a stock dividend the number of shares of Spinco Common Stock (together with the associated preferred share purchase rights) that are required to effect the Distribution, as certified by the Distribution Agent. In connection with the Distribution, Tulip shall deliver to Spinco for cancellation all of the share certificates currently held by it representing Spinco Common Stock.
Section 3.05. Fractional Shares. No certificates representing fractional shares of Spinco Common Stock will be distributed in the Distribution. The Distribution Agent will be directed to determine the number of whole shares and fractional shares of Spinco Common Stock allocable to each Tulip Shareholder of record as of the Record Date. Upon the determination by the Distribution Agent of such number of fractional shares, as soon as practicable after the Distribution Date, the Distribution Agent, acting on behalf of the holders thereof, shall sell such fractional shares for cash on the open market in each case at the then prevailing market prices and shall disburse to each holder entitled thereto, in lieu of any fractional share, without interest, that holder's ratable share of the proceeds of that sale, after making appropriate deductions of the amount required, if any, to be withheld for United States federal income Tax purposes.
Section 3.06. Representations of Spinco; Release. Spinco represents and warrants to Tulip that at and following the Distribution Time Tulip has no Liabilities other than the Tulip Liabilities. Tulip is hereby unconditionally released, from and after the Distribution Time, from all Spinco Group Liabilities.
ARTICLE 4
INDEMNIFICATION AND OTHER MATTERS
Section 4.01. Spinco Indemnification of Tulip.
(a) Subject to Section 4.03, from and after the Distribution Date, Spinco shall indemnify, defend and hold harmless each of Tulip, its Affiliates (including, for the avoidance of doubt, Parent) and their respective officers, directors, employees, successors and assigns (each, a "Tulip Indemnitee") from and against any and all Damages incurred or suffered by any Tulip Indemnitee arising out of, in connection with or relating to (i) any and all Spinco Group Liabilities, and (ii) the breach by
any member of the Spinco Group of any obligation under any Distribution Document (subject to any limitation set forth therein), including Damages reasonably incurred, arising out of the enforcement of this Section 4.01.
(b) Subject to Section 4.03, from and after the Distribution Date, Spinco shall indemnify, defend and hold harmless each Tulip Indemnitee and each Person, if any, who controls any Tulip Indemnitee within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all Damages caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof or the Information Statement (in each case as amended or supplemented if Spinco shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except to the extent that those Damages are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information that is furnished to Spinco by Parent or any of its Affiliates (other than Tulip) in writing specifically for use therein.
Section 4.02. Tulip Indemnification of Spinco Group.
(a) Subject to Section 4.03, from and after the Distribution Date, Tulip shall indemnify, defend and hold harmless each member of the Spinco Group, their Affiliates and their respective officers, directors, employees, successors and assigns (each, a "Spinco Indemnitee") from and against any and all Damages incurred or suffered by any Spinco Indemnitee arising out of, in connection with or relating to (i) any and all Tulip Liabilities and (ii) the breach by Tulip after the Distribution Date of any obligation of Tulip under any Distribution Document (subject to any limitation set forth therein), including Damages reasonably incurred, arising out of the enforcement of this Section 4.02.
(b) Subject to Section 4.03, from and after the Distribution Date, Tulip shall indemnify, defend and hold harmless each Spinco Indemnitee and each Person, if any, who controls any Spinco Indemnitee within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all Damages caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof or the Information Statement (in each case as amended or supplemented if Spinco shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that those Damages are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information that is furnished by Parent in writing to Spinco or Tulip or any of their Affiliates specifically for use therein.
Section 4.03. Insurance and Third Party Obligations; Limitation on Liability. If an Indemnified Party shall receive any amount of Insurance Proceeds or any other amount from a third party in compensation for a specific Liability giving rise to indemnification hereunder (i) at any time subsequent to the actual receipt of a payment in full of indemnification of such Liability hereunder, then such Indemnified Party shall reimburse the Indemnifying Party for any such indemnification payment made up to the amount of
such Insurance Proceeds or other amounts actually received or (ii) at any time
prior to the receipt of any indemnification payment in respect of such Liability
hereunder, then the indemnification to be paid under Section 4.01 or 4.02 shall
be paid net of the amount of any such Insurance Proceeds or other amounts
actually received. Notwithstanding this Section 4.03, (x) in no event shall any
Indemnified Party be required (i) to take any action, or forebear from
exercising any right, under the Merger Agreement or any Distribution Document or
(ii) to take any action with respect to, make any demand under or claim any
coverage in connection with, any Policy, and (y) nothing herein shall permit any
Indemnifying Party to delay or refrain from making any payment to any
Indemnified Party because of the availability or alleged availability of any
Policy or Insurance Proceeds.
Section 4.04. Notice and Payment of Claims. If any Tulip Indemnitee or Spinco Indemnitee (the "Indemnified Party") determines that it is or may be entitled to indemnification by any party (the "Indemnifying Party") under this Article 4 (other than in connection with any Action subject to Section 4.05), the Indemnified Party shall deliver to the Indemnifying Party a written notice specifying, to the extent reasonably practicable, the basis for its claim for indemnification and the amount for which the Indemnified Party reasonably believes it is entitled to be indemnified. Within 30 calendar days after receipt of such notice, the Indemnifying Party shall pay the Indemnified Party such amount in cash or other immediately available funds unless the Indemnifying Party objects in writing to the claim for indemnification or the amount thereof. In the event of such an objection or failure to pay by the Indemnifying Party, the amount, if any, that is Finally Determined to be required to be paid by the Indemnifying Party in respect of such indemnity claim shall be paid by the Indemnifying Party to the Indemnified Party in cash within 15 calendar days after such indemnity claim has been so Finally Determined, with interest thereon at the prime rate of SunTrust Bank, Atlanta in effect from time to time for the period commencing on the 30th day following receipt of the initial notice of the claim from the Indemnified Party until the date of actual payment (inclusive).
Section 4.05. Notice and Defense of Third-Party Claims.
(a) Promptly (and in any event within 10 Business Days) following the earlier of (i) receipt of notice, whether by service of process or otherwise, of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (ii) receipt of information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought pursuant to this Agreement (a "Third-Party Claim"), the Indemnified Party shall give the Indemnifying Party written notice thereof. The failure of the Indemnified Party to give notice as provided in this Section 4.05 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is actually and materially prejudiced by such failure to give notice.
(b) Within 30 calendar days after receipt of notice from the Indemnified Party pursuant to Section 4.05(a), the Indemnifying Party may (by giving written notice thereof to the Indemnified Party) elect at its option to, and shall at the request of the Indemnified Party, assume the defense of such Third-Party Claim at the Indemnifying Party's sole cost and expense unless the Indemnifying Party objects in writing to such indemnification claim (in which case the Indemnified Party may not require the Indemnifying Party to assume the defense and the Indemnifying Party shall only assume the defense with the consent of the Indemnified Party). During such 30-calendar day period, unless and until the Indemnifying Party assumes the defense of a
Third-Party Claim or objects in writing, the Indemnified Party shall take such action as it deems appropriate, acting in good faith, in connection with the Third-Party Claim; provided, however, that the Indemnified Party shall not settle or compromise, or make any offer to settle or compromise, the Third-Party Claim without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld).
(c) If the Indemnifying Party assumes the defense of a Third-Party Claim, (w) it shall keep the Indemnified Party timely informed of all significant developments in connection therewith, (x) the defense shall be conducted by counsel retained by the Indemnifying Party, provided that the Indemnified Party shall have the right to participate in such proceedings and to be represented by counsel of its own choosing at the Indemnified Party's sole cost and expense, unless a conflict of interest is reasonably likely to exist if the Indemnifying Party's counsel represents the interests of the Indemnified Party in which case the Indemnified Party's counsel's fees shall be at the Indemnifying Party's sole cost and expense; and (y) the Indemnifying Party may settle or compromise the Third-Party Claim without the prior written consent of the Indemnified Party so long as such settlement or compromise includes an unconditional release of the Indemnified Party from all claims that are or could be the subject of such Third-Party Claim, provided that the Indemnifying Party may not agree to any such settlement or compromise pursuant to which there is any finding or admission of any violation of Law or pursuant to which any remedy or relief (including but not limited to the imposition of a consent order, injunction or decree which would restrict the future activity or conduct of the Indemnified Party or any Subsidiary or Affiliate thereof), other than monetary damages for which the Indemnifying Party shall be fully responsible hereunder, shall be applied to or against the Indemnified Party, without the prior written consent of the Indemnified Party (which shall not be unreasonably withheld).
(d) If the Indemnifying Party has not objected in writing to such indemnification claim, and, if at the end of the 30-calendar day period referred to in Section 4.05(b) the Indemnifying Party has not assumed the defense of such claim, or, if earlier, beginning at such time as the Indemnifying Party has declined in writing to assume the defense of a Third-Party Claim, (x) the Indemnified Party will take such steps as it deems appropriate to defend that Third-Party Claim and the defense shall be conducted by counsel retained by the Indemnified Party, provided that the Indemnifying Party shall have the right to participate in such proceedings and to be represented by counsel of its own choosing at the Indemnifying Party's sole cost and expense; and (y) the Indemnifying Party shall reimburse the Indemnified Party on a current basis (and in any event within 30-calendar days after the submission of invoices and bills by an Indemnified Party) for its expenses of investigation, attorneys' and expert witnesses' fees and other out-of-pocket expenses incurred in defending against such Third-Party Claim and the Indemnifying Party shall be bound by the result obtained with respect thereto by the Indemnified Party; provided further, that the Indemnified Party shall not settle or compromise, or make any offer to settle or compromise, the Third-Party Claim unless such settlement or compromise includes an unconditional release of the Indemnifying Party from all claims that are or could be the subject of such Third-Party Claim, provided that the Indemnified Party may not agree to any such settlement or compromise pursuant to which there is any finding or admission of any violation of Law or pursuant to which any remedy or relief (including but not limited to the imposition of a consent order, injunction or decree
which would restrict the future activity or conduct of the Indemnifying Party or any Subsidiary or Affiliate thereof), other than monetary damages for which the Indemnifying Party shall be fully responsible hereunder, shall be applied to or against the Indemnifying Party without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld).
(e) The Indemnifying Party shall pay to (or at the direction of) the Indemnified Party in cash the amount, if any, for which the Indemnified Party is entitled to be indemnified hereunder within 15 calendar days after such Third Party Claim has been Finally Determined, in the case of an indemnity claim as to which the Indemnifying Party has acknowledged liability or, in the case of any indemnity claim as to which the Indemnifying Party has not acknowledged liability, within 15 calendar days after such Indemnifying Party's liability, if any, hereunder has been Finally Determined.
(f) Notwithstanding any other provision of this Agreement, Tulip acknowledges and agrees that Spinco shall (solely at its own cost and expense) assume and continue the defense of all the Spinco Litigation and that, as long as such settlement or compromise includes an unconditional release of all Tulip Indemnitees, Spinco shall be permitted to settle or compromise such Actions without the consent of Tulip or any of its Affiliates (including, after the Merger Effective Time, Parent) provided that Spinco may not agree to any such settlement or compromise pursuant to which there is any finding or admission of any violation of Law or pursuant to which any remedy or relief (including but not limited to the imposition of a consent order, injunction or decree which would restrict the future activity or conduct of the Tulip Indemnitees), other than monetary damages for which Spinco shall be responsible hereunder, shall be applied to or against such Tulip Indemnitee, and which shall not jeopardize Spinco's ability to pay, perform or indemnify against other Spinco Group Liabilities without the prior written consent of such Tulip Indemnitee (which shall not be unreasonably withheld); provided, further, that Spinco shall use its reasonable best efforts to defend any Tulip Indemnitee and to cause any Tulip Indemnitee to be dismissed with prejudice as a party to any pending or future Spinco Litigation and, to the extent any Tulip Indemnitee believes, in its reasonable judgment, that Spinco has failed to diligently pursue such defense or dismissal, the Tulip Indemnitee shall be entitled (at its own cost and expense) to independently move for or otherwise pursue such defense or dismissal and to take such related actions as it may deem necessary or appropriate in connection therewith. Spinco shall keep Tulip timely informed of all significant developments with respect to the Spinco Litigation to which any Tulip Indemnitee is a party and Tulip may, at any time, at its option and expense, participate in the defense of all the Spinco Litigation with representatives of its own choosing.
(g) Subject to Article 6, each party shall cooperate, and cause their respective Representatives to cooperate, in the defense or prosecution of any Third-Party Claim and shall furnish or cause to be furnished such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials or appeals, as may be reasonably requested in connection therewith.
(h) Notwithstanding anything to the contrary in this Section 4.05, the above provisions of this Section 4.05 shall not apply to Tax Proceedings, which matters shall instead be governed by Section 8.06.
Section 4.06. Adjustment in Indemnity Payment for Tax Consequences. Notwithstanding any other provision, any indemnity payment hereunder shall be increased or decreased at the time such indemnity payment is made (and at any relevant later date) by such amount as is necessary to make the Indemnified Party whole, but not greater than whole, for any Tax consequences to such party or its Affiliates (including, with respect to Tulip, Parent after the Merger Effective Time) arising in connection with such indemnity payment.
Section 4.07. Non-Exclusivity of Remedies. The remedies provided for in this Article 4 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Party at law or in equity.
ARTICLE 5
EMPLOYEE MATTERS
Section 5.01. Employee Matters Generally. With respect to employee matters and employee benefits arrangements, the parties hereto agree as set forth herein and in the Employee Benefits Agreement. The parties hereto agree to execute and deliver the Employee Benefits Agreement prior to the Distribution Date.
ARTICLE 6
ACCESS TO INFORMATION
Section 6.01. Provision of Corporate Records. Except as otherwise specifically set forth in this Agreement or any Ancillary Agreement, immediately prior to or as soon as practicable following the Distribution Date, each Group shall provide to the other Group all documents, Contracts, books, records and data (including but not limited to minute books, stock registers, stock certificates and documents of title) in its possession relating primarily to the other Group or its business, assets and affairs (after giving effect to the transactions contemplated hereby); provided that if any such documents, Contracts, books, records or data relate to both Groups or the business and operations of both Groups, each such Group shall provide to the other Group true and complete copies of such documents, Contracts, books, records or data. Data stored in electronic form shall be provided in the format in which it existed at the Distribution Date, except as otherwise specifically set forth in this Agreement or any Ancillary Agreement.
Section 6.02. Access to Information. From and after the Distribution Date, each Group shall, for a reasonable period of time, afford promptly to the other Group and its accountants, counsel and other designated representatives reasonable access during normal business hours to all documents, Contracts, books, records, computer data and other data in such Group's possession relating to such other Group or the business and affairs of such other Group (after giving effect to the transactions contemplated hereby) (other than data and information subject to in the case of access provisions in any joint defense arrangements between a member or members of one Group and a member or members of the other Group, the terms of the relevant joint defense agreement), insofar as such access is reasonably required by such other Group, including, without limitation, for audit, accounting, litigation, regulatory compliance and disclosure and reporting purposes.
Section 6.03. Litigation Cooperation. From and after the Distribution Date:
(a) Each Group shall use all reasonable best efforts to make available to the other Group and its accountants, counsel, and other designated representatives, upon written request, its current and former directors, officers, employees and representatives as witnesses, and shall otherwise cooperate with the other Group, to the extent reasonably required in connection with any Action or threatened Action arising out of either Group's business and operations in which the requesting party may from time to time be involved.
(b) Each Group shall promptly notify the other Group hereto, upon its receipt or the receipt by any of its members, of a request or requirement (by oral questions, interrogatories, requests for information or documents, subpoenas, civil investigative demands or other similar processes) which relates to the business and operations of the other party (a "Request") reasonably regarded as calling for the inspection or production of any documents or other information in its possession, custody or control, as received from any Person that is a party in any Action, or, in the event the Person delivering the Request is not a party to such Action, as received from such Person. In addition to complying with the applicable provisions of Section 6.06, each Group shall assert and maintain, or cause its members to assert and maintain, any applicable claim to privilege, immunity, confidentiality or protection in order to protect such documents and other information from disclosure, and shall seek to condition any disclosure which may be required on such protective terms as may be appropriate. No Group may waive, undermine or fail to take any action necessary to preserve an applicable privilege without the prior written consent of the affected party hereto (or any affected Group member or Affiliates of any such party) except, in the opinion of such party's counsel, as required by law.
(c) Tulip hereby waives any conflict which might preclude counsel currently representing Tulip, Spinco or any of their respective Affiliates from representing Spinco and/or any of its Affiliates following the Distribution Date in connection with the Spinco Litigation existing at the Merger Effective Time.
(d) Tulip and Spinco shall enter into such joint defense agreements, in customary form, as Tulip and Spinco shall determine are advisable.
Section 6.04. Reimbursement. Except to the extent that any member of one Group is obligated to indemnify any member of the other Group under Article 4, each Group providing information or witnesses to the other Group, or otherwise incurring any expense in connection with cooperating, under Sections 6.01, 6.02 or 6.03, shall be entitled to receive from the recipient thereof, upon the presentation of invoices therefor, payment for all out-of-pocket costs and expenses that may reasonably be incurred in providing such information, witnesses or cooperation.
Section 6.05. Retention of Records. From and after the Distribution Date, except as otherwise required by law or agreed to in writing, each party shall, and shall cause the members of its respective Group to, retain all information relating to the other Group's business and operations in accordance with the then general practice of such party with respect to information relating to its own business and operations. Notwithstanding the foregoing, any party may destroy or otherwise dispose of any such information at any time, provided that, prior to such destruction or disposal, (i) such party shall provide not less than 90 or more than 120 calendar days' prior written notice to the other party, specifying
the information proposed to be destroyed or disposed of and the scheduled date for such destruction or disposal, and (ii) if the recipient of such notice shall request in writing prior to the scheduled date for such destruction or disposal that any of the information proposed to be destroyed or disposed of be delivered to such requesting party, the party proposing the destruction or disposal shall promptly arrange for the delivery of such of the information as was requested at the expense of the requesting party.
Section 6.06. Confidentiality. From and after the Distribution Date, each party shall hold and shall cause its Affiliates and their respective directors, officers, employees, counsel, accountants, agents, consultants, advisors and other authorized representatives ("Representatives") to hold in strict confidence all documents and other information (other than any such documents and other information relating solely to the business or affairs of such party) concerning the other party and/or its Affiliates ("Confidential Information") unless such party is compelled to disclose such documents and/or other information by judicial or administrative process or, in the opinion of its counsel, by other requirements of law or the rules of any applicable stock exchange. Confidential Information shall not include such documents and/or other information which can be shown to have been (A) in the public domain through no fault of such party, (B) lawfully acquired after the Distribution Date on a non-confidential basis from other sources or (C) acquired or developed independently by such party without violating this Section 6.06 or the Confidentiality Agreement. Notwithstanding the foregoing, such party may disclose such Confidential Information to its Representatives so long as such Persons are informed by such party of the confidential nature of such Confidential Information and are directed by such party to treat such documents and/or other information confidentially. In the event that such party or any of its Representatives is requested or required (by oral questions, interrogatories, requests for information or documents, subpoenas, civil investigative demands or other similar processes) to disclose any of the Confidential Information, such party will promptly notify the other party so that the other party may seek a protective order or other remedy or waive such party's compliance with this Section 6.06. Such party shall exercise reasonable efforts to preserve the confidentiality of the Confidential Information, including, but not limited to, by cooperating with the other party to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. If, in the absence of a protective order or other remedy or the absence of receipt of a waiver of the other party, such party or any of its Representatives is nonetheless legally compelled to disclose any of the Confidential Information, such party or such Representative may disclose only that portion of the Confidential Information which is legally required to be disclosed. Such party agrees to be responsible for any breach of this Section 6.06 by it and/or its Representatives.
Section 6.07. Right of Inquiry.
(a) In the event of a material adverse change after the Distribution Date in the financial condition of Spinco, which change creates a substantial risk that Spinco will not be able to satisfy or otherwise settle, when due, its indemnification obligations to the Tulip Indemnitees under this Agreement and the Ancillary Agreements. Parent shall have the right, at its own expense, subject to entering into an agreement with Spinco to preserve confidentiality and any applicable privilege for the benefit of Spinco, upon consultation with Spinco, to have limited access on reasonable prior notice to Spinco's senior management in order to monitor the status of pending and anticipated litigation and governmental investigations or proceedings for which Parent would reasonably be expected to have contingent liability. Such right of inquiry shall
terminate at such time as there is no longer a substantial risk that Spinco will not be able to satisfy its indemnification obligations under this Agreement and the Ancillary Agreements.
(b) In addition to the provisions of paragraph (a) above, Parent shall have the right on an annual basis and subject to reasonable prior notice to meet with the General Counsel of Spinco (or such corporate officer or employee who performs the responsibilities and duties of a general counsel) and receive an oral report, in a forum in which Parent may ask questions regarding the status of pending and threatened litigation and governmental investigations or proceedings for which Parent may reasonably be expected to have contingent liability. For the avoidance of doubt, no such right shall require Spinco to (i) provide confidential information, or (ii) jeopardize the benefit of any applicable privilege. In addition, Parent shall have the further right to request one additional meeting per year in connection with the public disclosure by Spinco during such year of a material adverse development in any pending or threatened litigation or governmental investigation or proceeding for which Parent may reasonably be expected to have contingent liability. Such meeting will be on the same terms as set forth in this Section 6.07(b).
ARTICLE 7
CERTAIN OTHER AGREEMENTS
Section 7.01. Intercompany Accounts; Services; Guaranties.
(a) Except as otherwise specifically set forth herein or in any of the
Ancillary Agreements or in the Merger Agreement, (i) all intercompany loan
balances in existence as of the Distribution Time between Tulip and any
member of the Spinco Group will be settled or paid in cash or other
immediately available funds prior to or as of the Distribution Time and
(ii) all intercompany accounts receivable and accounts payable between
Tulip and any member of the Spinco Group in existence at the Distribution
Time shall be paid in full, in cash or other immediately available funds,
by the party or parties owing such obligations prior to Distribution Time.
(b) Except as otherwise contemplated hereby or as set forth on Schedule 7.01 or in any Ancillary Agreements or in the Merger Agreement, all prior agreements and arrangements, including those relating to goods, rights or services provided or licensed, between any member of the Spinco Group and Tulip shall be terminated effective as of the Distribution Time, if not previously terminated. No such agreements or arrangements shall be in effect after the Distribution Time unless embodied in this Agreement, the Ancillary Agreements or set forth on Schedule 7.01.
(c) In addition to any services contemplated to be provided following the Distribution Date pursuant to any Ancillary Agreement, each party, upon written request of the other party, shall make available to the other party, during normal business hours and in a manner that will not unreasonably interfere with such party's business, its financial, tax, accounting, legal, employee benefits and similar staff and services (collectively "Services") whenever and to the extent that they may be reasonably required in connection with the preparation of tax returns, audits, claims, litigation or administration of employee benefit plans, and otherwise to assist in effecting an orderly transition following the Distribution Date.
(d) Spinco shall use its reasonable best efforts to cause itself or one or more of its Affiliates to be substituted in all respects for Tulip or any of its Affiliates, effective as of the Distribution Date, in respect of all obligations of Tulip or any of its Affiliates under any guaranties, letters of credit or letters of comfort obtained by Tulip or any such Affiliates for the benefit of the Spinco Group, any of its Affiliates or the Spinco Business (the "Guaranties"). If Spinco is unable to effect such a substitution with respect to any such Guaranty after using its reasonable best efforts to do so, Spinco shall obtain letters of credit, on terms and from financial institutions reasonably satisfactory to Parent, with respect to the obligations covered by each of the Guaranties for which Spinco does not effect such substitution. Subsequent to the Distribution Date, with respect to any uncancelled Guaranty for which no substitution is effected or letter of credit is provided, Spinco shall, pursuant to Section 4.01, indemnify each Tulip Indemnitee against any Liability under any such Guaranty.
Section 7.02. Trademarks; Trade Names.
(a) From and after the Distribution Date, Tulip will not, and will not permit any of its Affiliates to, use any of the Spinco Intellectual Property Rights.
(b) As promptly as practicable following the Distribution Time, and as contemplated by the Merger Agreement, Tulip will file with the applicable Governmental Entity amendments to its articles of incorporation or otherwise take all action necessary to delete from their name the word "Tulip" or any marks and names derived therefrom and shall do or cause to be done all other acts, including the payment of any fees required in connection therewith, to cause such amendments or other actions to become effective.
(c) Tulip acknowledges that from and after the Distribution Date, the Tulip Name Rights will remain an asset of the Spinco Group and shall include any goodwill associated with the use of the "Tulip" name, and any derivative thereof.
Section 7.03. Further Assurances and Consents. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, using its reasonable best efforts to obtain any consents and approvals and to make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement; provided that no party hereto shall be obligated to take any action or omit to take any action if the taking of or the omission to take such action would be unreasonably burdensome to the party, its Group or its Group's business. The parties agree to enter into and execute such additional Distribution Documents as may be reasonably necessary, proper or advisable to effect the transactions contemplated by this Agreement or the Ancillary Agreements, provided, however that such additional Distribution Documents shall not diminish any of the rights granted or increase any of the Liabilities assumed under this Agreement or the Ancillary Agreements, or otherwise adversely affect Tulip or any of its Affiliates following the Distribution Time, and shall not be entered into without the prior written consent of Parent, which shall not be unreasonably withheld.
Section 7.04. Non-Solicitation.
(a) Except as otherwise permitted by any Ancillary Agreement, for a period of two years from the Merger Effective Time, neither Group nor any of its Affiliates shall, directly or indirectly, solicit any employee of the other Group. Notwithstanding the foregoing, the restriction set forth in the immediately preceding sentence shall not apply to (i) Person who contacts such Group or any of its Affiliates in response to general advertisements or searches or other broad-based hiring methods or (ii) individuals who choose to leave for Good Reason the employment of, or are terminated by, a Group without the other Group having taken any action otherwise prohibited by this Section 7.04(a). "GOOD REASON" for the purposes of this Section 7.04(a) shall mean reduction in compensation, a relocation of more than 25 miles from the employee's current place of employment or a diminution of the employee's duties and responsibilities.
(b) If any provision contained in this Section 7.04 shall for any
reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provisions of this Section, but this Section shall be construed as if such
invalid, illegal or unenforceable provision had never been contained
herein. It is the intention of the parties that if any of the restrictions
or covenants contained herein is held to cover a geographic area or to be
for a length of time which is not permitted by applicable law, or in any
way construed to be too broad or to any extent invalid, such provision
shall not be construed to be null, void and of no effect, but to the extent
such provision would be valid or enforceable under applicable law, a court
of competent jurisdiction shall construe and interpret or reform this
Section to provide for a covenant having the maximum enforceable geographic
area, time period and other provisions (not greater than those contained
herein) as shall be valid and enforceable under such applicable law. In
addition to and not in limitation of the parties' obligations under Section
9.14, each of the parties hereto acknowledges that the other party would be
irreparably harmed by any breach of this Section and that there would be no
adequate remedy at law or in damages to compensate such party for any such
breach. Each of the parties hereto agrees that the other party shall be
entitled to injunctive relief requiring specific performance by such party
of this Section, and consents to the entry thereof.
Section 7.05. Third Party Beneficiaries. Parent shall be a third party beneficiary of this Agreement. Except as contemplated in the preceding sentence, nothing contained in this Agreement is intended to confer upon any Person or entity other than the parties hereto and their respective successors and permitted assigns and Parent, any benefit, right or remedies under or by reason of this Agreement, except that the provisions of Article 4 shall inure to the benefit of the Spinco Indemnitees and the Tulip Indemnitees.
Section 7.06. Intellectual Property Rights and Licenses. Except as otherwise specifically set forth in this Agreement or in any Ancillary Agreements, neither Group shall have any right or license in or to any technology, software, Intellectual Property Right or other proprietary right owned, licensed or held for use by the other Group.
Section 7.07. Insurance.
(a) The Spinco Assets shall include any and all rights of an insured
party under each of the Group Policies, subject to the terms of such Group
Policies and any limitations or obligations of Spinco contemplated by this
Section 7.07, specifically
including rights of indemnity and the right to be defended by or at the
expense of the insurer, with respect to all Actions and Liabilities
incurred or claimed to have been incurred prior to the Distribution Date by
any party in or in connection with the conduct of any of the Spinco Group
or Tulip or their respective businesses and operations, and which Actions
and Liabilities may arise out of an insured or insurable occurrence under
one or more of such Group Policies. With respect to all of the applicable
Group Policies, Spinco shall use its reasonable best efforts, at its
option, either (x) to cause Tulip and its Affiliates to be named or
maintained as additional insured parties thereunder to the extent of, or
(y) to obtain (at Spinco's expense at no cost to Tulip or any of its
Affiliates) a run-off or tail coverage policy with respect to, in each
case, their respective insurable interests in respect of Tulip Liabilities
incurred or claimed to have been incurred prior to the Distribution Date
and insured thereunder, and the Tulip Assets shall include such rights, to
the extent they relate to Tulip Liabilities, of an additional insured party
under each such Group Policy or under such run-off or tail policy, as
applicable, subject to the terms of such policy which shall include a term
of no less than six years.
(b) Spinco shall administer all Group Policies. In the event Tulip Liabilities are covered under the Group Policies for periods prior to the Distribution Date, or under any Group Policy covering claims made after the Distribution Date with respect to an action, error, omission or occurrence prior to the Distribution Date, then from and after the Distribution Date, upon request from Tulip, Spinco shall claim coverage for Insured Claims under such Group Policy as and to the extent that such insurance is available (subject to Section 7.07(c)) up to the full extent of the applicable limits of liability of such Group Policy.
(c) Spinco shall use its reasonable best efforts to cause Insurance Proceeds received with respect to claims, costs and expenses under the Group Policies (i) relating to Tulip Liabilities, to be paid directly to Tulip and (ii) relating to the Spinco Group Liabilities to be paid directly to Spinco (or the applicable member of the Spinco Group). In the event Spinco has been unable to cause Insurance Proceeds to be paid directly to Tulip in accordance with the preceding sentence, or to cause Tulip and its Affiliates to be named or maintained as additional insureds or to obtain run-off or tail policies in accordance with the last sentence of Section 7.07(a), Spinco shall inform Tulip of the reasons therefor and Tulip shall be entitled, at Spinco's cost and expense, to take such actions as may be necessary to (A) achieve such payment or (B) achieve such additional insured status or (C) obtain such run-off or tail policy, so long as the actions referenced in (B) and (C) are not materially adverse to Spinco. Payment of the allocable portions of indemnity costs out of Insurance Proceeds resulting from such Group Policies will be made by Spinco to the appropriate party upon receipt from the insurance carrier (to the extent not paid directly to Tulip pursuant to the first sentence of this Section 7.07(c)). In the event that the aggregate limits on any Group Policies are exceeded by the aggregate of outstanding Insured Claims by the parties hereto, the parties shall agree on an equitable allocation of Insurance Proceeds based upon their respective bona fide claims. Each party agrees to use reasonable best efforts to maximize available coverage under those Group Policies applicable to such party, and to take all reasonable steps to recover from all other responsible parties in respect of an Insured Claim to the extent coverage limits under a Group Policy have been exceeded or would be exceeded as a result of such Insured Claim. Notwithstanding any other provision of this Agreement, Spinco shall not be required to renew, extend or expand the coverage available under any of the Group
Policies provided, that prior to any termination (or failure to reinstate) such Group Policies with respect to coverage of any Tulip Liabilities insured thereunder, Spinco shall afford Tulip the opportunity of taking such commercially reasonable steps as may be necessary to maintain such coverage in place.
(d) Spinco shall maintain insurance policies issued in favor of Spinco or its Subsidiaries that are customary and appropriate for a company in its industry for a period of not less than six years from and after the Distribution Time.
ARTICLE 8
TAXES
Section 8.01. Liability for Taxes.
(a) Spinco shall be liable for and Spinco shall indemnify Tulip and its Affiliates for, all Taxes (A) imposed on or with respect to Tulip (or any consolidated, combined or unitary group of which Tulip was a member prior to the Distribution (each a "Spinco Affiliated Group")) (i) for any taxable year or period that ends, with respect to Tulip, on or before the Distribution Date; (ii) for the Current Period; (iii) resulting solely from Tulip's inclusion in any Spinco Affiliated Group pursuant to Treasury Regulation Section 1.1502-6 (or comparable provision of state, local or foreign law); or (iv) resulting from any adjustment pursuant to Section 481(a) of the Code (or comparable provision of state, local or foreign law) by reason of a change in the method of accounting or other change with respect to any taxable year or period that ends with respect to Tulip on or before the Distribution Date or with respect to the Current Period or (B) resulting from a breach of the representation set forth in Section 8.07(b); provided, however, that Spinco shall not be liable and shall not indemnify Tulip for any Taxes imposed on Tulip as a result of any Parent-Directed Transaction. Notwithstanding any other provision, Spinco shall be liable for any Tax imposed on Tulip, any Spinco Affiliated Group, any member of the Spinco Group or any Tulip Affiliate as a result of the Merger or the ELF Merger. Any reference in this Section 8.01(a) to Tulip shall include a reference to any Tulip predecessor entity or any entity as to which Tulip is the successor.
(b) Tulip shall be liable for, and Tulip shall indemnify Spinco and
its Affiliates for, all Taxes (other than any Taxes relating to Spinco, the
Spinco Assets, the Spinco Business, the Discontinued Business or the
Contributed Subsidiaries or otherwise the responsibility of Spinco under
Section 4.01, 8.01(a) or 8.03) imposed on or with respect to Tulip (i) for
any taxable year or period that begins, with respect to Tulip, after the
Distribution Date and (ii) with respect to the Straddle Period, for the
portion of such Straddle Period beginning, with respect to Tulip after the
Distribution Date.
(c) For purposes of Sections 8.01(a) and 8.01(b), whenever it is necessary to determine the liability for Taxes of Tulip for the Current Period or for the portion of the Straddle Period beginning on the day following the Distribution Date, such Taxes shall be determined on the basis of a closing of the books of Tulip at the close of the Distribution Date except that any such Tax imposed annually based on the ownership of assets on a particular date shall be determined by prorating such Taxes, on a daily basis, to the period to and including the Distribution Date and the period thereafter; provided, however,that (i) Taxes imposed on Tulip as a result of any Parent-Directed
Transactions shall be allocated to the taxable year or period that is deemed to begin at the beginning of the day following the Distribution Date, and (ii) Taxes imposed on Tulip that relate to Spinco, the Spinco Assets, the Spinco Business, the Discontinued Business or the Contributed Subsidiaries shall be allocated to the Current Period.
Section 8.02. Tax Returns.
(a) Spinco shall cause to be prepared and timely filed all Tax Returns that are required to be filed by or with respect to Tulip for taxable years or periods ending on or before the Distribution Date for which the Tax Return is due on or before the Distribution Date and shall timely pay in full any Taxes due in respect of such Tax Returns. All such Tax Returns shall be prepared and filed in accordance with the Tax Reporting Standard.
(b) Spinco shall cause to be prepared all Tax Returns that are required to be filed by or with respect to Tulip (i) for the Current Period and (ii) for any taxable years or periods ending, with respect to Tulip, on or before the Distribution Date for which the Tax Return is due after the Distribution Date. At least 45 days before the due date of any such Tax Return, Spinco agrees to provide Tulip a draft copy (the "Draft Return") of such Tax Return. Each such Tax Return shall not report any item in a manner that is inconsistent with the manner in which any corresponding item has been previously reported in any such Tax Return already filed, unless such inconsistent treatment is (w) required by law or due to a change in circumstances, or (x) is permitted by law, either Tulip or Spinco elects to make such change in treatment and such change would not be prejudicial to Spinco or Tulip (the "Tax Reporting Standard"). In the case of Tax Returns described in clause (i) or (ii) of this Section 8.02(b), (y) unless (A) Tulip believes that the proposed Tax Return does not comply with the Tax Reporting Standard or (B) Tulip disagrees with the manner in which the matters set forth in Section 8.03(a), (b), (c), (d) or (e) or the matters set forth in the definition of "Tax Amount" (as defined in the Merger Agreement) (or items affecting any Tax resulting from such matters) are treated on such Draft Return on the basis that such matters or items are calculated inconsistently with the definition of the Tax Amount, the Tax Return shall be filed as set forth in the Draft Return and (z) to the extent necessary for such Tax Return to be duly filed, Tulip shall cause an officer or other authorized person to execute such Tax Returns and Tulip agrees to cause such Tax Returns to be filed. In the event that Tulip believes that the proposed Tax Return does not comply with the Tax Reporting Standard or Tulip disagrees with such Draft Return as set forth in clause (B) above, the parties shall endeavor to resolve their disagreement over this matter, and failing that a neutral accountant mutually acceptable to Tulip and Spinco shall resolve the disagreement (consistent with the definition of Tax Amount, including the Reasonably Expected By The Accountants standard set forth therein) prior to the date the Tax Return is due. Tulip shall cause an officer or other authorized person to execute such Tax Return reflecting the resolution by the neutral accountants and Tulip agrees to cause such Tax Return to be filed. Spinco shall determine (subject to any audit adjustment and subject to the consent of Tulip (which consent shall not be unreasonably withheld)) the allocation and apportionment of any unused net operating losses and credits of Tulip or the Spinco Affiliated Group and Spinco and Tulip shall report consistently with such determination.
(c) Tulip shall prepare and timely file or shall cause to be prepared and timely filed all Tax Returns that are required to be filed by it for taxable years or periods beginning, with respect to Tulip, after the Distribution Date and shall timely pay in full any Taxes due in respect of such Tax Returns.
(d) Spinco shall pay Tulip, no later than two Business Days prior to the date such Taxes are due to the applicable Taxing Authority, the amount of any Taxes that (i) Tulip or any Tulip Affiliate is required to pay to the applicable Taxing Authority and (ii) are either Taxes for which Spinco is liable pursuant to Section 8.01(a) or 8.03 or are Spinco Group Liabilities. Spinco shall pay, or cause to be paid, directly to the applicable Taxing Authority any other Taxes that are Spinco Group Liabilities.
Section 8.03. Distribution. Notwithstanding any other provision, Spinco
shall be liable for any Taxes that are imposed on Tulip, any Spinco Affiliated
Group, any member of the Spinco Group, any Tulip Affiliate or any other Person
as a result (in whole or in part) of (a) the Distribution, (b) the
Restructuring, (c) any transaction undertaken in anticipation of the
Distribution or the Restructuring, (d) any reduction in Tulip's basis in Spinco
by reason of an indemnity payment or otherwise, or (e) any election made in
connection with any of the above (it being understood that, to the extent
required to avoid double-counting, the dollar amount of the reduction in the
Merger Consideration (as defined in the Merger Agreement) by reason of paragraph
(a) (6) of Schedule I to the Merger Agreement shall reduce such indemnification
obligation (except to the extent that Spinco receives a refund, credit or other
recovery of, or relating to, such amount)).
Section 8.04. Tax Refunds and Benefits.
(a) Spinco shall be entitled to any refund of any Taxes of Tulip, which Taxes are for taxable years or periods (or portions thereof) ending, with respect to Tulip, on or before the Distribution Date, including any interest paid by the applicable Governmental Entity thereon (net of any Tax on such interest), received by Tulip, Parent, or any of their respective Affiliates, and any amounts credited against Taxes of Tulip, which Taxes are for taxable years or periods (or portions thereof) ending, with respect to Tulip, on or before the Distribution Date, to which Tulip, Parent, or any of their respective Affiliates becomes entitled. Spinco shall have the right to determine whether any claim for refund of such Taxes to which Spinco is entitled shall be made on behalf of Spinco by Tulip, Parent or any of their respective Affiliates. If Spinco elects to make a claim for refund of such Taxes to which Spinco is entitled, Tulip and Parent shall cooperate fully in connection therewith. Without the prior written consent of Spinco, neither Tulip, Parent nor any of their respective Affiliates shall (i) make any election or (ii) file any amended Tax Return or propose or agree to any adjustment of any item with the IRS or any other taxing authority with respect to any taxable year or period of Tulip ending, with respect to Tulip, on or before the Distribution Date that would have the effect of increasing the Taxes of Tulip for any taxable year or period ending, with respect to Tulip, on or before the Distribution Date. Notwithstanding any other provision: Spinco shall not (and Tulip shall) be entitled to any refunds (and interest thereon) or credits (A) that result from a carryback of any Tax item (other than a Tax item relating to the Spinco Assets, the Spinco Business or the Discontinued Business), (B) of or against Taxes resulting from a Parent-Directed Transaction or (C) of or against Taxes (to the extent such refunds and credits do not exceed the Tax Amount) imposed as a result of any of the matters set forth in Section 8.03(a), (b), (c), (d) or (e), in the case of this clause (C), prior to the date on which all relevant Tax years have been Finally Settled.
(b) Tulip shall be entitled to any refund of any Taxes of Tulip, which Taxes are for taxable years or periods (or portions thereof) beginning, with respect to Tulip, after the Distribution Date, including any interest paid thereon, received by Tulip, Parent, or any of their respective Affiliates or any member of the Spinco Group, and any amounts credited against Taxes of Tulip, which Taxes are for taxable years or periods (or portions thereof) beginning, with respect to Tulip, after the Distribution Date, to which Tulip, Parent, or any of their respective Affiliates or any member of the Spinco Group becomes entitled. Tulip shall have the right to determine whether any claim for refund of Taxes of Tulip for taxable years or periods (or portions thereof) beginning, with respect to Tulip, after the Distribution Date (and any other claim for refund of Taxes to which Tulip is entitled) shall be made.
(c) Spinco and Tulip agree to determine (subject to any audit adjustment) the unused net operating losses of Tulip (or any consolidated, combined or unitary group of which Tulip was a member prior to the Closing Date) as of the close of the Distribution Date in a manner consistent with the closing of the books methodology described in Section 8.01(c) and applicable Tax law; provided, however, that any deductions or losses allowed under the Code that would not have arisen but for any obligations listed in paragraph (a) (1), (2), (4), (5) or (7) of Schedule I to the Merger Agreement for which Spinco or the shareholders of Tulip, immediately prior to the Distribution, are directly or indirectly responsible shall be allocated (subject to any audit adjustment) to the Current Period. Spinco and Tulip agree that, to the extent that under applicable Tax rules, such unused net operating loss is apportioned to Tulip, Spinco shall be entitled, from and after the Offset Date, to offset its indemnity obligations hereunder by an aggregate amount equal to the Offset Amount. The "Offset Amount" shall mean the dollar amount of any tax benefit (that is a reduction in taxes payable or is a refund, but not any deemed or actual interest on any amount) that Tulip (or any consolidated, combined or unitary group of which Tulip is a member after the Distribution Date) actually derives after the Distribution Date (taking into account all facts and circumstances as of the Offset Date) in cash from (but not in excess of the amount of any such tax benefit that Spinco and its Subsidiaries would have derived on or prior to the Offset Date if the net operating loss had been apportioned to Spinco), and would not have derived but for, the utilization of such losses. The "Offset Date" shall mean the latest of (i) the date on which the taxable year of Tulip in which such utilization occurs is Finally Settled, (ii) the date on which the taxable year of Tulip ending on the Distribution Date is Finally Settled and (iii) the date on which Spinco or its Subsidiaries would have derived such tax benefit if the net operating loss had been apportioned to Spinco. "Finally Settled" shall mean, with respect to a taxable year or period, finally and conclusively settled with the Internal Revenue Service or, if such year or period is not audited by the Internal Revenue Service, the date on which all applicable statutes of limitations with respect to such year or period have expired. For purposes of determining utilization and the benefit derived from utilization, such net operating losses shall be the last item to be taken into account for any taxable year or period. In the event that facts or circumstances arise or come to light after the Offset Date which would reduce the Offset Amount (treating references in the definition of Offset Amount to such later date), then the Offset Amount shall be reduced to such revised amount, and Spinco shall immediately remit to Tulip in cash the amount by which the reduction in the Offset Amount has reduced any indemnification obligation of Spinco hereunder.
Section 8.05. Tax Sharing Arrangements. Any Tax allocation or sharing agreement or arrangement, whether or not written, that may have been entered into by Spinco, Tulip or any of their respective Affiliates shall be terminated as to Tulip and its Affiliates as of the Distribution Date, and no payments which are owed by or to Tulip or any of its Affiliates pursuant thereto shall be made thereunder.
Section 8.06. Contest Provisions.
(a) Spinco shall have the sole right to represent Tulip's interests in any Tax audit or administrative or court proceeding (a "Tax Proceeding") of Tulip (or any consolidated, combined or unitary group of which Tulip is the common parent) for taxable periods ending, with respect to Tulip, on or before the Distribution Date, and to employ counsel of its choice at its expense; provided, however, that (i) Spinco shall provide Tulip with a timely and reasonably detailed account of each stage of such Tax Proceeding and a copy of all documents relating to such Tax Proceeding, (ii) Spinco shall consult with Tulip before taking any significant action in connection with such Tax Proceeding, (iii) Spinco shall consult with Tulip and offer Tulip an opportunity to comment before submitting any written materials prepared or furnished in connection with such Tax Proceeding, (iv) Spinco shall defend such Tax Proceeding diligently and in good faith as if it were the only party in interest in connection with such Tax Proceeding and (v) Spinco shall not settle, compromise or abandon any such Tax Proceeding without obtaining the prior written consent, which consent shall not be unreasonably withheld, of Tulip if such settlement, compromise or abandonment could reasonably be expected to adversely affect Tulip.
(b) In the case of a Tax Proceeding for a Straddle Period of Tulip (a "Straddle Period Tax Proceeding") (i) Spinco shall control such proceeding if the claims for which Spinco is responsible exceed the claims for which Tulip is responsible, and Tulip shall control such Tax Proceeding if the claims for which Tulip is responsible exceed the claims for which Spinco is responsible (Spinco or Tulip respectively, the "Controlling Party," and Tulip or Spinco, respectively, the "Noncontrolling Party"), (ii) the Controlling Party shall provide the Noncontrolling Party with a timely and reasonably detailed account of each stage of such Straddle Period Tax Proceeding and a copy of all documents (or portions thereof) relating to such Straddle Period Tax Proceeding, (iii) the Controlling Party shall consult with the Noncontrolling Party before taking any significant action in connection with such Straddle Period Tax Proceeding and shall consult with the Noncontrolling Party and offer the Noncontrolling Party an opportunity to comment before submitting any written materials prepared or furnished in connection with such Straddle Period Tax Proceeding, (iv) the Controlling Party shall defend such Straddle Period Tax Proceeding diligently and in good faith as if the taxpayer whose Tax Return is at issue were the only party in interest in connection with such Straddle Period Tax Proceeding, (v) the Noncontrolling Party shall have the right to participate in any conference with any Tax authority regarding any Tax for which the Noncontrolling Party may be required to indemnify the Controlling Party or any Affiliate of the Controlling Party or may otherwise be liable, and (vi) the Controlling Party shall not settle, compromise or abandon any such Straddle Period Tax Proceeding without obtaining the prior written consent, which consent shall not be unreasonably withheld, of the Noncontrolling Party. In the event that the Noncontrolling Party reasonably withholds consent pursuant to clause (vi) above, the Noncontrolling Party shall be entitled to assume the defense of the Straddle Period Tax Proceeding; provided that the Controlling
Party's liability in connection with the Straddle Period Tax Proceeding shall be limited to the amount such liability would have been under the proposed settlement.
(c) Tulip shall have the sole right to control (including as to settlement) any other Tax Proceeding of Tulip.
(d) Except to the extent set forth in Section 8.06(a), (b) or (c), Spinco shall have the sole right to control (including as to settlement) any Tax Proceeding of Spinco or any of the Contributed Subsidiaries.
(e) Tulip (or its Affiliate) shall have the sole right to control (including as to settlement) any Tax Proceeding of ELF or any of its Subsidiaries.
(f) Notwithstanding any other provision of this Agreement, Tulip and its Affiliates shall be entitled to (i) control (including as to settlement), and Spinco and its Affiliates shall not be entitled to participate in, any Tax Proceeding with respect to any consolidated, combined or unitary Tax Return that includes ELF, Parent or any of their respective Subsidiaries for any taxable period, or Tulip for any taxable period (or portion thereof) beginning, with respect to Tulip, after the Distribution Date and (ii) file in such manner as it chooses in its sole discretion any Tax Return described in clause (i) above (and neither Spinco nor any of its Affiliates shall be entitled to any copy of or information from any Tax Return described in clause (i) above (other than information relating solely to ELF, its Subsidiaries or Tulip)).
(g) Notwithstanding any other provision of this Agreement, Spinco and its Affiliates shall be entitled to (i) control (including as to settlement), and Tulip and its Affiliates shall not be entitled to participate in, any Tax Proceeding with respect to any consolidated, combined or unitary Tax Return that includes Spinco for any taxable period (or portion thereof) beginning, with respect to Spinco, after the Distribution Date, and (ii) file in such manner as it chooses in its sole discretion any Tax Return described in clause (i) above (and neither Tulip nor any of its Affiliates shall be entitled to any copy of or information from any Tax Return described in clause (i) above).
Section 8.07. Cooperation on Tax Matters; Other Tax Matters.
(a) Each of Tulip, Spinco or any of their respective Affiliates shall provide the others with such assistance as may reasonably be requested by each of them in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liability for Taxes, and each shall provide the others with any records or information which may be relevant to such Tax Return, audit or examination, proceedings or determination.
(b) Spinco hereby represents and warrants to Tulip and its Affiliates that there is no agreement or transaction pursuant to which ELF or any of its Subsidiaries will pay or will become obligated to pay Taxes of Tulip or any Person owned directly or indirectly by Tulip at any time (other than Taxes imposed directly (and not by reason of any such agreement or transaction) by the applicable Governmental Entity on ELF or any Person owned directly or indirectly by ELF at any time). Such representation shall survive until the end of the applicable statute of limitations (or such later time as all claims in respect thereof are resolved).
(c) In the event that the Distribution occurs on a different date from the date of the ELF Merger, references above in this Article 8 (or any definition used in this Article 8 for purposes of this Article 8) to "Distribution Date" shall instead refer to the ELF Merger Date.
ARTICLE 9
MISCELLANEOUS
Section 9.01. Notices. All notices and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be deemed given when received addressed as follows:
If to Tulip to:
Keebler Holding Corp.
c/o Kellogg Company
One Kellogg Square
Battle Creek, Michigan 49016
Telecopy: (616) 961-6598
Attention: Janet L. Kelly
With copies to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telecopy: (212) 403-2000
Attention: Daniel A. Neff
If to Spinco, to:
Flowers Foods, Inc.
1919 Flowers Circle
Thomasville, Georgia 31757
Telecopy: (912) 225-5433
Attention: G. Anthony Campbell
With a copy to:
Jones, Day, Reavis & Pogue
3500 SunTrust Plaza
303 Peachtree Street, N.E.
Atlanta, Georgia 30308-3242
Telecopy: (404) 581-8330
Attention: Robert W. Smith
Lizanne Thomas
Any party may, by written notice so delivered to the other parties, change the address to which delivery of any notice shall thereafter be made.
Section 9.02. Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by
Tulip and Spinco, or in the case of a waiver, by the party against whom the waiver that is materially adverse is to be effective. In addition, unless the Merger Agreement shall have been terminated in accordance with its terms, any such amendment or waiver shall be subject to the prior written consent of Parent.
(b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
Section 9.03. Expenses. All costs and expenses incurred by Tulip or Spinco in connection with the preparation, execution and delivery of the Ancillary Agreements and the consummation of the Merger, the Distribution and the other transactions contemplated hereby and therein (including the fees (other than up to $16 million in advisory fees) and expenses of all counsel, accountants and financial and other advisors of both Groups in connection therewith, and all expenses in connection with preparation, filing and printing of the Registration Statement) shall be paid by Spinco; provided that Parent and its Affiliates shall pay their own expenses, if any, incurred in connection with the Distribution, and Spinco shall pay all other expenses of Tulip or Spinco or any of their respective Subsidiaries, in connection with the Transaction Agreements (as defined in the Merger Agreement), in each case except as specifically provided otherwise herein, in the Merger Agreement or any Ancillary Agreement.
Section 9.04. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that neither party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of Parent and the other party hereto. If any party or any of its successors or assigns (i) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to any Person, then, and in each such case, proper provisions shall be made so that the successors and assigns of such party shall assume all of the obligations of such party under the Distribution Documents.
Section 9.05. Governing Law. Subject to the provisions of the Georgia Business Corporation Code applicable to the Distribution, this Agreement shall be construed in accordance with and governed by the law of the State of Delaware, without regard to the conflict of laws rules thereof.
Section 9.06. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto.
Section 9.07. Entire Agreement. This Agreement, the Merger Agreement, the Confidentiality Agreement, the Ancillary Agreements and the other Distribution Documents constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to the subject matter hereof and thereof. No representation, inducement, promise, understanding, condition or warranty not
set forth herein or in the Confidentiality Agreement, the Merger Agreement, the Ancillary Agreements or the other Distribution Documents has been made or relied upon by any party hereto. To the extent that the provisions of this Agreement are inconsistent with the provisions of any Ancillary Agreement, the provisions of such Ancillary Agreement shall prevail.
Section 9.08. Certain Transfer Taxes. Except as otherwise provided in the
Ancillary Agreements, all transfer, documentary, sales, use, stamp and
registration taxes and fees (including any penalties and interest) incurred in
connection with any of the transactions described in Article 2 or 3 of this
Agreement shall be borne and paid by Spinco. Subject to the following sentence,
the party that is required by applicable law to file any return or make any
payment with respect to any of those Taxes shall do so, and the other party
shall cooperate with respect to that filing or payment as necessary. To the
extent that Tulip is required to pay such Taxes to the applicable Governmental
Entity, Spinco shall pay Tulip the amount of such Taxes in accordance with this
Section 9.08, no later than two Business Days prior to the date such Taxes are
due.
Section 9.09. Jurisdiction. Except as otherwise expressly provided in this Agreement, any Action seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may be brought in any federal court located in the State of Delaware or any Delaware State court, and each of the parties hereby consents to the jurisdiction of such court (and of the appropriate appellate courts therefrom) in any such Action and irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such Action in any such court or that any such Action brought in any such court has been brought in an inconvenient forum. Process in any such Action may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 9.01 shall be deemed effective service of process on such party.
Section 9.10. Pre-Litigation Dispute Resolution. Prior to the bringing of any Action against the other, senior officers of Tulip and Spinco shall confer, consult and in good faith attempt for a period of 30 calendar days to resolve any dispute between such parties relating to this Agreement or any of the Ancillary Agreements without resort to legal remedies.
Section 9.11. Severability. If any one or more of the provisions contained in this Agreement should be declared invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained in this Agreement shall not in any way be affected or impaired thereby so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such a declaration, the parties shall modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner so that the transactions contemplated hereby are consummated as originally contemplated to the fullest extent possible.
Section 9.12. Survival. All covenants and agreements of the parties contained in this Agreement shall survive the Distribution Date indefinitely, unless a specific survival or other applicable period is expressly set forth therein.
Section 9.13. Captions. The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof.
Section 9.14. Specific Performance. Each party to this Agreement acknowledges and agrees that damages for a breach or threatened breach of any of the provisions of this Agreement would be inadequate and irreparable harm would occur. In recognition of this fact, each party agrees that, if there is a breach or threatened breach, in addition to any damages, the other non-breaching party to this Agreement, without posting any bond, shall be entitled to seek and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction, attachment, or any other equitable remedy which may then be available to obligate the breaching party (i) to perform its obligations under this Agreement or (ii) if the breaching party is unable, for whatever reason, to perform those obligations, to take any other actions as are necessary, advisable or appropriate to give the other party to this Agreement the economic effect which comes as close as possible to the performance of those obligations (including, but not limited to, transferring, or granting liens on the assets of the breaching party to secure the performance by the breaching party of those obligations).
IN WITNESS WHEREOF the parties hereto have caused this Distribution Agreement to be duly executed by their respective authorized officers as of the date first above written.
FLOWERS INDUSTRIES, INC.
By: /s/ G. Anthony Campbell ----------------------------------- Name: Title: |
FLOWERS FOODS, INC.
By: /s/ G. Anthony Campbell ----------------------------------- Name: Title: |
EXHIBIT 10.1
EMPLOYEE BENEFITS AGREEMENT
BETWEEN
FLOWERS INDUSTRIES, INC.
AND
FLOWERS FOODS, INC.
TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS............................................................................................. 1 1.1 General......................................................................................... 1 1.2 Other Definitions............................................................................... 3 ARTICLE 2 CHANGE IN OWNERSHIP..................................................................................... 3 2.1 Transfer of Certain Employees................................................................... 3 2.2 Conditions of Employment........................................................................ 3 2.3 Certain Payroll Deductions...................................................................... 4 2.4 Liabilities for Compensation.................................................................... 4 ARTICLE 3 EMPLOYEE BENEFIT PLANS AND ARRANGEMENTS................................................................. 4 3.1 Welfare Benefit Plans........................................................................... 4 3.2 Accrued Vacation Liability...................................................................... 5 3.3 Tulip Retirement Plan No. 1 and Tulip Retirement Plan No. 2..................................... 5 3.4 401(k) Plan..................................................................................... 6 3.5 Multiemployer Pension Plans..................................................................... 6 3.6 Share Equivalents............................................................................... 6 3.7 Flexible Spending Accounts...................................................................... 6 3.8 COBRA........................................................................................... 7 3.9 Severance....................................................................................... 7 3.10 In General...................................................................................... 7 3.11 Filings and Communications Regarding Employee Benefit Plans and Arrangements.................... 7 ARTICLE 4 INDEMNIFICATION......................................................................................... 8 4.1 Indemnification................................................................................. 8 4.2 Procedure for Indemnification................................................................... 8 ARTICLE 5 MISCELLANEOUS........................................................................................... 8 5.1 Binding Agreement............................................................................... 8 5.2 Assignment...................................................................................... 8 5.3 Notices......................................................................................... 8 5.4 No Waiver....................................................................................... 8 5.5 Entire Agreement; Amendment..................................................................... 9 5.6 Counterparts.................................................................................... 9 5.7 Governing Law................................................................................... 9 |
5.8 No Third Party Beneficiaries.................................................................... 9 5.9 Legal Enforceability............................................................................ 9 5.10 Interpretation.................................................................................. 9 5.11 Resolution...................................................................................... 10 |
EMPLOYEE BENEFITS AGREEMENT
THIS EMPLOYEE BENEFITS AGREEMENT ("Agreement") is made as of October 26, 2000. The parties ("Parties") to this Agreement are Flowers Industries, Inc., a Georgia corporation ("Tulip"), and Flowers Foods, Inc., a Georgia corporation ("Spinco").
RECITALS
WHEREAS, pursuant to the terms of that certain Distribution Agreement dated October 26, 2000 ("Distribution Agreement") by and between Tulip and Spinco, Tulip has agreed to distribute to its shareholders the stock of Spinco (the "Spin-Off"), to which it will have transferred the stock of those Subsidiaries and certain other assets owned by Tulip as referred to in Section 2.1 of the Distribution Agreement;
WHEREAS, Spinco will employ directly certain persons who were employed by Tulip, and the companies which are or will be owned by Spinco will employ or continue to employ certain persons who have participated in employee benefit programs sponsored by Tulip;
WHEREAS, the Parties desire to set forth the terms and conditions pursuant to which Spinco shall provide employee benefits to those employees of Spinco and its subsidiaries who currently are employed in connection with the Spinco Business (as that term is defined in Section 1.1 of the Distribution Agreement), including the arrangements for transition in the provision of said benefits from plans and programs sponsored by Tulip for its own employees and those of its Subsidiaries to plans sponsored directly by Spinco for its employees and those of its Subsidiaries;
NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 General. As used in this Agreement, capitalized terms defined immediately after their use shall have the respective meanings thereby provided, and the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
Action: any demand, action or cause of action, claim, suit, arbitration, inquiry, subpoena, discovery request, proceeding or investigation by or before any court or grand jury, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal related to, arising out of or resulting from any Employee Liability.
Affiliate: with respect to any specified person, a person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person; provided, that Tulip and Spinco shall not be deemed to be Affiliates of each other for purposes of this Agreement.
Code: the Internal Revenue Code of 1986, as it may be amended or recodified from time to time.
Controlled Group: two or more business entities affiliated within the meaning of Code Sections 414(b), 414(c), 414(m) and/or 414(o).
Distribution Time: Distribution Time will have the same meaning as specified in Section 1.1 of the Distribution Agreement.
Effective Time: the time at which the merger of Merger Subsidiary into Tulip pursuant to the Merger Agreement becomes effective.
Elf Agreement: the Agreement and Plan of Merger dated as of October 26, 2000, among Elf, Kellogg Company, a Delaware corporation ("Parent") and FK Acquisition Corp., a Delaware corporation.
Employee Benefit Plans and Arrangements: (i) any severance, disability, cafeteria, bonus, stock option, stock appreciation, stock purchase, deferred compensation, or similar types of plans, agreements, policies or arrangements that currently are established, maintained or contributed to by Tulip or a Subsidiary for the benefit of any former or present Employees or their beneficiaries, dependents or spouses, (ii) any employee welfare and employee pension benefit plans (as such terms are defined in Section 3(1) and 3(2), respectively, of ERISA) which are applicable to former or present Employees or their beneficiaries, dependents or spouses, and that currently are established, maintained or contributed to by Tulip or any Subsidiary of Tulip, and (iii) all other Benefit Arrangements and Employee Plans (as those terms are defined in the Merger Agreement).
Elf Employees: Elf Employees will have the same meaning as specified in the Elf Agreement.
Employee/Labor Law: any federal, state, local or municipal law (including common law), statute, ordinance, regulation, order, decree, judgment, decision, ruling, permit or authorization (each as may be in effect, applicable and binding, from time to time) relating or applicable to the work place or to the employer/employee relationship including, without limitation, any of the foregoing relating or applicable to wage and hour claims, collective bargaining and labor laws, ERISA-governed employee benefit and welfare plans, federal, state and local tax withholding and payment rules and regulations, workers' compensation and similar laws, accrued vacation statutes, and sexual harassment and anti-discrimination laws.
Employee Liability: any and all debts, charges, liabilities, warranties and obligations (of any nature or type whatsoever regardless of when arising), whether accrued, contingent or reflected on a balance sheet including, without limitation, liability for
administrative, civil or criminal penalties or forfeitures, arising out of or in
any way relating to any Employee/Labor Law, any of the Employee Benefit Plans
and Arrangements, or any other liability assumed by or made the responsibility
of Spinco and/or its Affiliates under this Agreement, together with any
attorneys' fees or other costs of defending an Action or a claim relating to any
of the foregoing, excluding only liabilities under any Employee/Labor Law that
(i) do not arise under or in any way relate to any of the Employee Benefit Plans
and Arrangements, (ii) are not assumed by or made the responsibility of Spinco
or any of its Affiliates under this Agreement, (iii) are not Spinco Liabilities,
and (iv) arise solely as a result of the employment of Elf Employees by Elf and
its Subsidiaries after the Distribution Time.
Employees: all individuals who either (i) are or have been at any time on or before the Effective Time employees of Tulip or any of its Affiliates, other than Elf and its Subsidiaries, or (ii) are or have been at any time (whether before, on or after the Effective Time) employees of Spinco or any of its Affiliates.
ERISA: the Employee Retirement Income Security Act of 1974, as amended.
Merger Agreement: the Agreement and Plan of Restructuring dated as of October 26, 2000, among Tulip, Parent and Kansas Merger Subsidiary, a Delaware corporation ("Merger Subsidiary").
Share Equivalent: means any stock option, warrant, performance share or right of conversion issued pursuant to a stock option compensatory plan or similar arrangements.
1.2 Other Definitions. Capitalized terms not specifically defined herein shall have the meanings ascribed thereto in the Distribution Agreement.
ARTICLE 2
CHANGE IN OWNERSHIP
2.1 Transfer of Certain Employees. The Parties acknowledge that Tulip has transferred or will transfer to Spinco all of the issued and outstanding capital stock of the Subsidiaries referred to in clause (i) and clause (ii) of the definition of "Contributed Subsidiaries" in the Distribution Agreement, in the manner described in Schedule 2.01 to the Distribution Agreement. Such stock transfers shall result in each such Subsidiary becoming a wholly-owned subsidiary of Spinco, and shall operate as a transfer of all of the Employees (other than those employed by Tulip) to the Controlled Group that includes Spinco immediately after the Distribution Time.
2.2 Conditions of Employment.
(a) Spinco shall make an offer of employment, effective not later than the Distribution Time, to all Employees who are employees of Tulip as of the Distribution Time. The employment with Tulip and its Affiliates of any such Employee who does not accept such offer of employment shall be terminated as of the Distribution Time. Spinco and its Affiliates shall be solely responsible for, and shall indemnify, defend, reimburse and hold Tulip and its
Affiliates harmless from and against, any and all obligations to such Employees, whether arising under any Employee Benefit Plan, any Employee/Labor Law or otherwise, arising out of or relating to their employment with Tulip and its Affiliates, including without limitation as a result of the consummation of the transactions contemplated hereby, the making of such offer of employment, and the consequences of such Employees' acceptance or rejection thereof.
(b) Nothing in this Agreement shall require either Spinco
or Tulip to employ any person who declines employment with Spinco. Section 2.1
hereof shall not be interpreted to prohibit or otherwise restrict Spinco from
terminating the employment of any Employee after the Distribution Time, or from
changing the salary or wage range, grade level or location of employment of any
Employee, in accordance with Spinco's personnel policies and procedures
following the Distribution Time, or from making an offer of employment to any
Employee following the Distribution Time. Without limiting the generality of
Section 5.9 hereof, no Employee or other person shall have any rights as a third
party beneficiary under this Agreement.
2.3 Certain Payroll Deductions. If an Employee has any outstanding liability or obligation to Tulip (for example, salary advances) which existed at the Distribution Time (or, if later, as of the time of such Employee's transfer to Spinco) which has resulted in a special payroll deduction for such Employee, then, to the extent permitted under applicable law, Spinco will withhold such amounts from the Employee's compensation (if any) and forward said amount to Tulip within five business days thereafter.
2.4 Liabilities for Compensation. Without limiting the generality of any other provision of this Agreement, Spinco and its Affiliates shall assume and be solely responsible for, and shall indemnify, defend, reimburse and hold Tulip and its Affiliates harmless from and against, any and all liabilities for compensation owed to Employees for services before, on or after the Distribution Time.
ARTICLE 3
EMPLOYEE BENEFIT PLANS AND ARRANGEMENTS
3.1 Welfare Benefit Plans.
(a) Spinco shall assume the sponsorship of the Tulip Group Insurance Plan (providing group medical benefits, group dental benefits, and group term life insurance benefits), the Tulip Long Term Disability Plan ("LTDP"), the Tulip Short-Term Disability Plan ("STDP") the Tulip Section 125 Plan, and the Tulip Section 125 Plan No. 2 (collectively these plans are referred to herein as the "Tulip Welfare Benefit Plans"), effective as of the Distribution Time. Tulip and Spinco agree to use their best efforts to arrange for the assignment from Tulip to Spinco of group insurance policies, contracts with health maintenance organizations, and all other agreements with third parties relating to the Tulip Welfare Benefit Plans.
(b) Spinco will provide Employees with credit for service with Tulip or any Affiliate for purposes of meeting the eligibility period under Spinco's welfare benefit plans.
(c) Any Employee who is receiving benefits under the STDP at the Distribution Time will continue to receive benefits from Spinco under the STDP under the material provisions in effect at the Distribution Time until he or she is no longer deemed to be disabled under said provisions or until said benefits end according to the terms of said Tulip plan or program. Spinco will be responsible for the administration of claims relating to Employees who are disabled employees under the STDP.
(d) Spinco and its Affiliates shall assume and be solely responsible for, and shall indemnify, defend, reimburse and hold Tulip and its Affiliates harmless from and against, all liabilities to any Employee who was, as of the Distribution Time, receiving long-term disability benefits under the LTDP, or who was disabled as of the Distribution Time but had not yet satisfied the qualification period for the LTDP. Spinco and Tulip shall cooperate to seek to cause the long-term disability carrier for the LTDP to credit Spinco with both the claims experience and premium history of Tulip Employees as of the Distribution Time under the LTDP.
(e) In the event that Tulip receives any premium payments
for health and/or welfare benefits after the Distribution Time from any
Employees with respect to participation in any benefit plan of Spinco subsequent
to the Distribution Time, Tulip will forward said amount to Spinco within two
(2) weeks after said receipt.
(f) Spinco and its Affiliates shall assume and be solely responsible for, and shall indemnify, defend, reimburse and hold Tulip and its Affiliates harmless from and against, any and all obligations that Spinco, Tulip and their respective Affiliates may have to re-employ or reinstate any Employee who is not in active employment as of the Distribution Time, including without limitation Employees who are receiving benefits under the STDP or the LTDP or who are on family and medical leave or other approved leave of absence.
3.2 Accrued Vacation Liability. Spinco shall credit all Employees for any accrued vacation and sick leave earned under Tulip vacation and sick leave policies but not taken by such Employees in the current year through the Distribution Time. Any such accrued vacation and sick leave shall be credited in accordance with the paid vacation policy and sick leave policy adopted by Spinco; provided, however, that without limiting the generality of Section 2.4 above, Spinco and its Affiliates shall assume and be solely responsible for all liablities for, and shall indemnify, defend, reimburse and hold Tulip and its Affiliates harmless from and against, any accrued vacation or sick leave, or pay in lieu thereof, with respect to any Employee, whether incurred by or imposed upon Tulip under its current vacation policy or sick leave policy, under any applicable state or local law or statute, or otherwise.
3.3 Tulip Retirement Plan No. 1 and Tulip Retirement Plan No. 2. Spinco shall assume sponsorship of the Tulip Retirement Plan No. 1 and of the Tulip Retirement Plan No. 2 (collectively, "the Pension Plans") as of the Distribution Time. Tulip shall amend the Pension Plans and transfer sponsorship thereof to Spinco by adopting amendments to the Pension Plans in substantially the forms attached hereto as Exhibit A and Exhibit B. Spinco shall acknowledge its agreement to assume the Pension Plans by executing such amendments.
3.4 401(k) Plan.
(a) Spinco agrees to assume sponsorship of the Tulip
401(k) Retirement Savings Plan ("401(k) Plan") as of the Distribution Time.
Tulip shall amend the 401(k) Plan and transfer sponsorship thereof to Spinco by
adopting an amendment to the 401(k) Plan in substantially the form attached
hereto as Exhibit C. Spinco shall acknowledge its agreement to assume the 401(k)
Plan by executing such amendment.
(b) Upon the distribution of all of the outstanding shares of Spinco common stock to the shareholders of Tulip, pursuant to the Distribution Agreement, the trustee of the 401(k) Plan shall receive shares of Spinco. Spinco shall direct such trustee to take the following actions: (i) to allocate those Spinco shares among the accounts under the 401(k) Plan in existence at the Distribution Time in proportion to the relative numbers of Tulip shares allocated to the accounts under the 401(k) Plan as of the Distribution Time; and (ii) to reinvest any cash received, pursuant to the transactions contemplated by the Distribution Agreement, in Spinco common stock, as soon as practicable following the Distribution Time; provided, however, that the Trustee shall act in accordance with the standards of fiduciary responsibility set forth in Part 4 of Subtitle B of Title I of ERISA; provided, further, that the Trustee may accomplish the reinvestment over such period of time as, in the Trustee's judgment in the exercise of its fiduciary responsibilities, is advisable in order to avoid a substantial impact on the market for the Spinco common stock.
3.5 Multiemployer Pension Plans. Spinco shall be solely responsible for, and shall indemnify, defend, reimburse and hold Tulip and its Affiliates harmless from and against, any and all liabilities (including without limitation any secondary withdrawal liability) of Tulip and its Affiliates to, with respect to or arising in connection with the Retail, Wholesale and Department Store International Union and Industry Pension Fund, the Bakery and Confectionery Workers Union and Industry Pension Fund, and the Employer-Teamsters Joint Council No. 84 Pension Fund.
3.6 Share Equivalents.
(a) All Share Equivalents held by Employees that have been issued under the Tulip 1982 Incentive Stock Option Plan and the Tulip 1989 Executive Stock Incentive Plan (together, the "Option Plans"), whether vested or non-vested, shall remain outstanding and unaffected by the Spin-Off.
(b) Each Share Equivalent outstanding after the Spin-Off shall be treated as set forth in the Merger Agreement.
3.7 Flexible Spending Accounts. Effective as of the Distribution Time, Spinco shall assume the sponsorship of, and assume all liabilities of Tulip and its Affiliates under, the Tulip Dependent Care Assistance Plan ("DCAP"). As soon as practicable following the Distribution Time, Tulip shall transfer to Spinco an amount of cash equal to the aggregate balance of the accounts of Employees under the DCAP.
3.8 COBRA. Spinco shall be responsible for complying with the requirements of Code Section 4980B and Part 6 of Title I of ERISA with respect to all Employees and their "qualified beneficiaries," regardless of whether the relevant "qualifying event" (as such terms are defined in Code Section 4980B) occurs prior to, or at or after the Distribution Time.
3.9 Severance. As soon as practicable hereafter, and in no event later than the day before the day during which the Distribution Time occurs: (i) Tulip shall terminate the Tulip Severance Policy pursuant to resolutions substantially in the form attached hereto as Exhibit D; and (ii) Spinco shall establish a severance policy that is in all material respects the same as the Tulip Severance Policy, except that references therein to Tulip and its Subsidiaries shall refer instead to Spinco and its Subsidiaries, respectively.
3.10 In General. Subject to the provisions of the Distribution Agreement, Spinco shall be permitted to take all actions that Spinco, in its discretion, considers necessary or advisable in order to give effect to this Agreement or to continue or terminate the operation of the Tulip Welfare Benefit Plans, the Pension Plans, the 401(k) Plan, the Option Plans, and the DCAP (collectively, the "Plans"), including without limitation: (i) further amendment or termination of the Plans and any related trust agreements and insurance contracts; (ii) submission of this Agreement and any such further amendments to the Pension Plans and the 401(k) Plan to the Internal Revenue Service for a determination that the Pension Plans and the 401(k) Plan continue to be qualified, and that the related trusts continue to be tax-exempt, for federal income tax purposes; (iii) notification to the Pension Benefit Guaranty Corporation of the assumption of the Pension Plans by Spinco; and (iv) engaging such investment advisors as Spinco shall select with respect to the assets held under the Plans at any time. Tulip shall cooperate with Spinco to the extent necessary to carry out the foregoing actions, provided that such cooperation shall not result in any liability or cost to Tulip or any of its Affiliates. Notwithstanding the foregoing: (i) in no event shall Spinco be permitted to take steps that could lead to the termination of either of the Pension Plans with a termination date at or before the Distribution Time without the prior written consent of Parent, as defined in the Merger Agreement; and (ii) if Spinco or any of its Affiliates receives any formal or informal notice from the Pension Benefit Guaranty Corporation (the "PBGC") regarding either of the Pension Plans, which notice either is received before the Distribution Time or involves actual or potential action by the PBGC that could result in the imposition of any liability on Tulip or any of its Affiliates, then Spinco shall promptly provide a copy thereof (or a description thereof, if such notice is not in writing) to Tulip and Parent, and shall permit Tulip and Parent to participate in any discussions and comment on any written communications with the PBGC relating to or arising out of such notice.
3.11 Filings and Communications Regarding Employee Benefit Plans and Arrangements. Without limiting the generality of any other provision of this Agreement, Spinco shall be responsible for making all filings with governmental authorities and all communications with participants with respect to the Employee Benefit Plans and Arrangements from and after the Distribution Time. Tulip shall cooperate with Spinco as to such filings and shall execute any appropriate forms relating thereto, in each case upon request by Spinco.
ARTICLE 4
INDEMNIFICATION
4.1 Indemnification. In addition to the indemnity obligations set forth in the Distribution Agreement, Spinco agrees to indemnify, defend, reimburse and hold harmless Tulip and its Affiliates, and the officers, directors, employees, agents and representatives of Tulip and its Affiliates (each, an "Indemnified Party"), from and against any and all Actions, assessments, losses, damages, liabilities, costs and reasonable expenses including, without limitation, interest, penalties, fines, excise taxes and reasonable attorneys' fees and expenses, asserted against or imposed upon or incurred by any Indemnified Party which result from, arise out of or are related to any Employee Liability or any failure by Spinco or any of its Affiliates to comply with the terms of this Employee Benefits Agreement.
Spinco agrees that it will bear full responsibility for, and indemnify Tulip against any damage, expense or loss resulting from, the design, administration or funding of all plans adopted and/or implemented by Spinco for the benefit of Employees and their beneficiaries before, at or after the Distribution Time.
Tulip agrees to indemnify, defend, reimburse and hold harmless Spinco and its Affiliates, and the officers, directors, employees, agents and representatives of said companies (each, an "Indemnified Party"), from and against any and all Actions, assessments, losses, damages, liabilities, costs and reasonable expenses including, without limitation, interest, penalties, fines, excise taxes and reasonable attorneys' fees and expenses, asserted against or imposed upon or incurred by any Indemnified Party which result from, arise out of or are related to any failure on the part of Tulip to comply with the terms of this Employee Benefits Agreement.
4.2 Procedure for Indemnification. In the event any action, suit or proceeding is brought against an Indemnified Party pursuant to this Article 4 hereof, the Parties shall comply with and be subject to the indemnification procedures set forth in the Distribution Agreement.
ARTICLE 5
MISCELLANEOUS
5.1 Binding Agreement. This Agreement is binding upon and is for the benefit of the Parties hereto and their respective successors and permitted assigns.
5.2 Assignment. No Party to this Agreement shall convey, assign or otherwise transfer any of its rights or obligations under this Agreement without the express written consent of the other Party hereto in its sole and absolute discretion. No assignment of this Agreement shall relieve the assigning Party of its obligations hereunder.
5.3 Notices. All notices or other communications required or permitted to be given hereunder shall be made pursuant to the notice provisions set forth in the Distribution Agreement.
5.4 No Waiver. No delay on the part of any Party hereto in exercising any right, power or privilege hereunder shall operate as a waiver, nor shall any waiver on the part of any Party of any right, power or privilege operate as a waiver of any other right, power or privilege hereunder, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which the Parties hereto may otherwise have at law or in equity.
5.5 Entire Agreement; Amendment. This Agreement, and the agreements and other documents referred to herein, shall constitute the entire agreement between the Parties with respect to the subject matter hereof and shall supersede all prior agreements, understandings, statements or representations, oral or in writing, of the Parties relating thereto. This Agreement may be modified or amended only by written agreement of the Parties. In addition to the foregoing, on and after the Distribution Time, any amendment to this Agreement must, in the case of Spinco, be approved by one of its elected officers and in the case of Tulip, be approved by one of its elected officers. Subject to the requirements of this Agreement, the employee benefit plans and policies which are referred to in this Agreement or attached as Exhibits to this Agreement may be amended by their sponsoring companies in any manner which they, in good faith, determine to be necessary or desirable, provided, that, the Party making any such amendment to take effect before the Distribution Time must give the other Party at least five (5) business days written notice before effecting the amendment.
5.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument.
5.7 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia (regardless of the laws that might otherwise govern under applicable principles of conflicts of laws) as to all matters including, without limitation, matters of validity, construction, effect, performance and remedies.
5.8 No Third Party Beneficiaries. This Agreement is solely for the benefit of the Parties hereto and is not intended to confer upon any other person any rights or remedies hereunder.
5.9 Legal Enforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
5.10 Interpretation. The Article and Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. The parties have made a good faith effort in this Agreement to provide for these issues involving employee benefits in the transaction which can be reasonably foreseen. The parties acknowledge that other such issues
may arise, and they agree to work in good faith to resolve any differences in light of the general philosophy that Spinco intends to be responsible, on an ongoing basis, for the administration and expense of those benefits which Spinco will continue for the Spinco Group Employees after the Distribution Time.
5.11 Resolution. Any disputes between the parties based upon, related to, or arising in connection with this Agreement shall be resolved in accordance with the dispute resolution procedure set forth in Section 9.10 of the Distribution Agreement.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.
FLOWERS INDUSTRIES, INC.
By: /s/ G. Anthony Campbell ------------------------------------------------ Name: Title: |
FLOWERS FOODS, INC.
By: /s/ G. Anthony Campbell ------------------------------------------------ Name: Title: |
ARTICLE 5 |
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FLOWERS FOODS, INC. UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED OCTOBER 7, 2000 AND THE FLOWERS FOODS, INC. UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET AT OCTOBER 7, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH. |
MULTIPLIER: 1,000 |
CURRENCY: U.S. DOLLARS |
PERIOD TYPE | 9 MOS |
FISCAL YEAR END | DEC 30 2000 |
PERIOD START | JAN 02 2000 |
PERIOD END | OCT 07 2000 |
EXCHANGE RATE | 1 |
CASH | 3,297 |
SECURITIES | 0 |
RECEIVABLES | 138,773 |
ALLOWANCES | 0 |
INVENTORY | 117,758 |
CURRENT ASSETS | 355,631 |
PP&E | 945,062 |
DEPRECIATION | 360,392 |
TOTAL ASSETS | 1,104,902 |
CURRENT LIABILITIES | 225,308 |
BONDS | 0 |
PREFERRED MANDATORY | 0 |
PREFERRED | 0 |
COMMON | 201 |
OTHER SE | 634,503 |
TOTAL LIABILITY AND EQUITY | 1,104,902 |
SALES | 1,205,831 |
TOTAL REVENUES | 1,205,831 |
CGS | 663,038 |
TOTAL COSTS | 1,192,436 |
OTHER EXPENSES | 0 |
LOSS PROVISION | 0 |
INTEREST EXPENSE | 14,254 |
INCOME PRETAX | (859) |
INCOME TAX | (190) |
INCOME CONTINUING | (669) |
DISCONTINUED | 0 |
EXTRAORDINARY | 0 |
CHANGES | 0 |
NET INCOME | (669) |
EPS BASIC | (.03) |
EPS DILUTED | (.03) |
EXHIBIT 99.1
Portions of the Annual Report on Form 10-K for the fifty-two weeks ended January 1, 2000 of Flowers Industries, Inc. filed with the SEC on March 31, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with "Selected 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.
Mrs. Smith's Bakeries experienced significant cost overruns in fiscal 1999 due primarily to the delay in completion of a major capital project involving 25 new or relocated and upgraded production lines at seven of its 10 operating facilities. Additionally, after the end of the second quarter of fiscal 1999, a review of Mrs. Smith's Bakeries business unit operations resulted in the recognition of higher reserves related to accounts receivable and inventory. These items are more fully addressed in the discussion of operating results by business segment below.
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 years ended January 1, 2000 and 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.
In January 1998, Flowers changed its fiscal year from the Saturday nearest June 30 to the Saturday nearest December 31. Unless stated otherwise, all references to: (i) "fiscal 1997" shall mean Flowers' full fiscal year ended June 28, 1997; (ii) the "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; (iii) "fiscal 1998" shall mean Flowers' full fiscal year ended January 2, 1999; and (iv) "fiscal 1999" shall mean Flowers' full fiscal year ended January 1, 2000. 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. The Company's quarterly reporting periods for fiscal 1999 were as follows, first quarter ended April 24, 1999, second quarter ended July 17, 1999, third quarter ended October 9, 1999, and fourth quarter and fiscal year ended January 1, 2000 (the Saturday nearest December 31).
Prior to September 1996, Flowers Bakeries sold certain of 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.
The Company enters into commodity future and option contracts and swap agreements for wheat and, to a lesser extent, other commodities, in an effort to provide a predictable and consistent commodity price, and thereby reduce the impact and volatility in its raw material and packaging prices. In fiscal 1999, the Company recorded a negative mark-to-market adjustment of $3.5 million related to these activities. In fiscal 1998, a gain of $1.1 million was recorded, and for the transition period ended January 3, 1998 and the fiscal year ended June 28, 1997 losses of $0.8 million and $0 were recorded, respectively. The charges are recorded as an FII expense and do not affect the results of operations on a segment basis at Flowers Bakeries, Mrs. Smith's Bakeries or Keebler.
Information on Restructurings and Acquisitions
The Company has undertaken a number of rationalizations and reorganizations of its operations during fiscal 1999 and fiscal 1998. As a result of these reorganizations 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 continue to be short-term inefficiencies as the rationalizations and reorganizations are completed.
During fiscal 1999, the Board of Directors of Keebler approved a plan to close its Sayreville, New Jersey production facility due to excess capacity within Keebler's 14-plant manufacturing network. As a result of this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million. The charge included $46.1 million of non-cash asset impairments and $23.1 million of severance and other exit costs related to the Sayreville facility. As a direct result of this plan, asset impairments were recorded to write-down the closed
facility to net realizable value, less cost to sell, based on management's estimate of fair value. Also, as part of this plan, asset impairments were recorded to write-off certain other machinery and equipment currently held by Keebler and to reduce goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996, neither of which provides any future economic benefit. Severance costs provided for the reduction of approximately 650 employees, of which 600 were represented by unions, and, as of January 1, 2000, approximately 640 employees, of which 595 were represented by unions, had been severed. This plan is substantially complete as of January 1, 2000. Accordingly, during the fourth quarter of fiscal 1999, an adjustment of $2.9 million was recorded against the original $69.2 million. The adjustment was due to lower than expected severance costs and an earlier than expected disposal of the facility as current real estate conditions resulted in a twelve month reduction in the estimated disposal period. The adjusted net charge in fiscal 1999 related to this plant closure was $66.3 million. Ongoing costs, including, but not limited to, guard service, utilities, property taxes and preparing the facility for sale, will continue for eighteen months or until the facility is disposed of, whichever occurs earlier. The amount of suspended depreciation and amortization that would have been recognized for year ended January 1, 2000 if prior period impairment had not been recognized was approximately $3.7 million, with $5.6 million of annualized savings anticipated in 2000.
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). The charge included $57.5 million of noncash asset impairments, $4.8 million of severance costs and $6.1 million of other related exit costs. The plan involved 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 1, 2000, all such employees had been terminated. During fiscal 1999, Flowers Bakeries and Mrs. Smith's Bakeries recorded adjustments to the fiscal 1998 restructuring reserve of $1.1 million and $4.9 million, respectively. These adjustments are the result of reduced carrying costs of plants held for sale, an adjustment to the value of these assets due to the identification of a buyer and changes in estimates of severance and other employee termination costs. As of January 1, 2000, all significant actions related to the plans have been completed. The remaining exit costs include ongoing costs such as guard service, utilities and property taxes of closed facilities until the time of disposal. 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.
During fiscal 1998, 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 were initially estimated at 410 employees and $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. At January 1, 2000, approximately 40 employees not under union contract had been terminated. In addition, during the year management reviewed its exit plan and made a determination that approximately 110 employees not under union contract, would not be terminated. During fiscal 1999, Keebler adjusted accruals previously established in the accounting for the President acquisition by reducing goodwill and other intangibles by $4.5 million to recognize exit costs that are now expected to be less than initially anticipated. The remainder of management's exit plan is expected to be substantially complete before the end of fiscal 2000 with only noncancelable lease obligations to be paid over the next six years, concluding in fiscal 2006.
As part of the acquisition of Mrs. Smith's Inc., Flowers recorded a purchase accounting reserve of $37.1 million 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 $6.8 million, $4.0 million, $.6 million and $1.6 million in fiscal 1999, 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 approximately 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 totaled $3.0 million for fiscal 1999 and $7.7 million for fiscal 1998. In addition, during fiscal 1999 and fiscal 1998, Keebler expensed $0.8 million and $2.8 million, respectively, principally for costs related to the closure of two distribution facilities not included in the original plan. During fiscal 1999, Keebler adjusted accruals previously established in the accounting for the Keebler acquisition by reducing goodwill and other intangibles by $0.5 million and reversing $1.3 million into income from operations to recognize exit costs that are now expected to be less than initially anticipated. The $1.3 million was credited to operating income as it had originally been charged to income from operations in fiscal 1999 and fiscal 1998. During fiscal 1998, Keebler also adjusted accruals previously established in the accounting for the Keebler and Sunshine 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 was substantially complete at January 1, 2000 with only noncancelable lease obligations continuing through 2006.
The Company's results of operations, expressed as a percentage of sales, are set forth below:
FOR THE 52 WEEKS ENDED ------------------------------------------------ JANUARY 1, JANUARY 2, JANUARY 3, JUNE 28, 2000 1999 1998 1997 ---------- ---------- ---------- -------- (UNAUDITED) Sales ........................................ 100.00% 100.00% 100.00% 100.00% Gross margin ................................. 52.74 54.78 47.32 45.20 Selling, marketing and administrative expenses ................................... 43.56 43.38 37.92 37.16 Depreciation and amortization ................ 3.41 3.42 3.44 3.20 Non-recurring charge ......................... 1.42 1.81 Interest expense, net ........................ 1.91 1.83 1.61 1.75 Income before income taxes, investment in unconsolidated affiliate, minority interest, extraordinary loss and cumulative effect of changes in accounting principles ........... 2.43 4.35 4.36 6.11 Income taxes ................................. 1.33 1.98 1.66 2.31 Net income ................................... .17% 1.11% 3.74% 4.33% |
FIFTY-TWO WEEKS ENDED JANUARY 1, 2000 COMPARED TO FIFTY-TWO WEEKS ENDED JANUARY
2, 1999
Consolidated Results
Sales. For the fiscal year ended January 1, 2000, sales were $4,236.0 million, or 12.5%, higher than sales for the prior year of $3,765.4 million. The effect on reported sales of businesses acquired, net of businesses sold subsequent to the start of 1999 was 8.8%. The overall sales increase, excluding acquisitions, is the result of a 5.3% increase at Keebler, a 2.4% increase at Flowers Bakeries and a 1.1% increase at Mrs. Smith's Bakeries.
Gross Margin. Gross profit margin was 52.7% in fiscal 1999 as compared to 54.8% in fiscal 1998. Production difficulties and inefficiencies due to the plant realignment project at Mrs. Smith's Bakeries offset improved efficiencies and cost reduction programs at Flowers Bakeries and Keebler.
Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses increased $211.8 million or 13.0% over fiscal 1998. These expenses were 43.6% of sales in fiscal 1999 as compared to 43.4% in fiscal 1998.
Depreciation and Amortization Expense. Depreciation and amortization expense was $144.6 million for fiscal 1999, an increase of 12.3% over $128.8 million for fiscal 1998. This is primarily due to increased capital spending and a full year of amortization related to Keebler's purchase of President.
Non-Recurring Charge. See discussion under the heading "Matters Affecting Analysis" above.
Interest Expense. For fiscal 1999, net interest expense was $80.9 million, an increase of 17.8% over fiscal 1998 interest expense of $68.7 million. Interest expense at Keebler was $36.2 million in fiscal 1999 and $26.5 million in fiscal 1998. The increase was primarily due to the overall higher average debt balance outstanding as a result of the President acquisition in fiscal 1998. Interest expense at Flowers was $44.7 million in fiscal 1999 and $42.2 million in fiscal 1998. The increase was due to higher borrowings required to fund capital expenditures at Flowers Bakeries and Mrs. Smith's Bakeries.
Income Before Income Taxes. Income before income taxes was $103.1 million for fiscal 1999, a decrease of 37.0% compared to income of $163.7 million reported in fiscal 1998. This decrease is primarily a result of losses in fiscal 1999 at Mrs. Smith's Bakeries due to costs related to a major production realignment as discussed below. Before considering non-recurring charges and credits, Mrs. Smith's Bakeries incurred an operating loss in fiscal 1999 of $53.3 million compared to operating income in fiscal 1998 of $45.9 million. Flowers Bakeries operating income, before non recurring credits, decreased $8.8 million in fiscal 1999 and unallocated expenses were higher by $12.5 million. These decreases are somewhat offset by increases in operating income of $64.0 million at Keebler. See below for further discussion of the results of operations by business segment.
Income Taxes. Income taxes were provided at an effective rate of 54.6% in fiscal 1999 and 45.5% in fiscal 1998. The consolidated effective rate in fiscal 1999 is based on the interaction of the effective rate on Keebler's profits of 45.3% and the effective rate of the tax benefit on Flowers loss (excluding Keebler) of 29.0%. In each year the effective rate exceeded the statutory rate due to nondeductible expenses, principally amortization of intangibles, including trademarks, trade names, other intangibles and goodwill. During fiscal 1999, nondeductible items increased at Keebler due to inclusion of a full year of amortization for President intangibles and goodwill impairment related to the closure of the Sayreville, New Jersey facility. The effective rate on the loss at Flowers is indicative of the nondeductible charges included in the calculation of the loss.
Net Income. For fiscal 1999, net income was $7.3 million, a decrease of 82.6% as compared to $41.9 million net income reported in fiscal 1998. Fiscal 1999 included a net non-recurring charge of $60.4 million and fiscal 1998 included a non-recurring charge of $68.3 million. Excluding the effect of these charges in fiscal 1999 and fiscal 1998, net income was $27.7 million in fiscal 1999 and $89.5 million in fiscal 1998. The decrease of $61.8 million is primarily attributable to production difficulties and inefficiencies at Mrs. Smith's Bakeries offset by increases at Keebler. These items are discussed in detail below.
Operating Results by Business Segment
Flowers Bakeries
Sales at Flowers Bakeries for fiscal 1999 were $961.7 million, an increase of $22.6 million and 2.4% over sales of $939.1 million reported a year ago. Acquisitions, net of divestitures, accounted for 0.5% of the increase. The total sales increase was attributable to increases of 2.2% and 8.7% in branded retail and foodservice sales, respectively, slightly offset by a decrease of 7.0% in private label sales. Exclusive of the effect of acquisitions, the overall sales increase was a result of an increase of 4.5% in overall pricing offset by a decrease in volume of 2.2%.
Gross margins increased to $515.1 million and 53.6% of sales for fiscal 1999 compared to $498.3 million and 53.1% of sales in fiscal 1998. This represents a combination of increased pricing offset by increased operating costs. While the cost of ingredients decreased during the year, the shift to sponge and dough production methods and the accompanying change in product formulation somewhat offset these savings. Flowers Bakeries believes that the sponge and dough process produces a better tasting product that will be valued in the market. Additional incremental costs were incurred due to the production disruption at the Goldsboro facility during construction of a new bun line.
Selling, marketing and administrative expenses increased 6.7% and $26.2 million to $415.3 million and 43.2% of sales in fiscal 1999 from $389.1 million and 41.4% of sales in fiscal 1998. Distribution costs in fiscal 1999 were higher
due to rising fuel costs, additional miles incurred throughout the route system and incremental distribution cost due to severe hurricanes and flooding in Florida and North Carolina. Administrative costs increased as a result of incremental costs associated with realigning the northern region to consolidate the Goldsboro, North Carolina facility (acquired in 1998) and incremental costs associated with the consolidation of the accounts receivable and accounts payable functions to a central Shared Services Center. Y2K costs during fiscal 1999 were $0.6 million.
Depreciation and amortization expense was $32.9 million for fiscal 1999, a decrease of 1.8% from $33.5 million for fiscal 1998. The decrease is a result of the asset impairments recorded as a part of the non-recurring charge and write-off of start-up costs recorded in the prior year, partially offset by increased depreciation associated with capital improvements.
Operating income was $67.0 million in fiscal 1999, a decrease of $8.8 million and 11.6% from fiscal 1998 operating income of $75.8 million. Despite these disappointing results in fiscal 1999, management expects operations at Flowers Bakeries to return to historic growth rates in 2000.
Mrs. Smith's Bakeries
Sales at Mrs. Smith's Bakeries for fiscal 1999, after excluding inter-segment sales, increased 1.1% to $606.5 million from $599.8 million reported a year ago. This increase was primarily driven by increases of 6.7%, 8.5% and 1.2% in foodservice, in-store bakery and branded retail sales, respectively, partially offset by a reduction of 7.8% in non-branded retail and co-pack fresh snack products. The disappointing sales increase is attributable to production difficulties, as discussed below, resulting in product shortages.
Gross margin for fiscal 1999 was $172.0 million and 28.4% of sales compared to $246.4 million and 41.1% reported a year ago. This decrease is primarily the result of costs associated with a massive production realignment project that included the installation and start-up of 25 new or relocated and upgraded production lines. Mrs. Smith's Bakeries experienced start-up costs, product damage, spoilage and unabsorbed overhead at seven of its 10 production facilities primarily in the third and fourth quarter of fiscal 1999. This project fell behind due to the delay in the receipt and installation of production equipment, and in the programming of production control software and the hiring and training of additional production employees. Traditionally, the third and fourth quarters are Mrs. Smith's Bakeries highest volume quarters. However, product shortages in these quarters hurt overall sales especially in the higher margin retail segment.
Selling, marketing and administrative expenses were $205.1 million and 33.8% of sales in fiscal 1999 as compared to $181.8 million and 30.3% of sales in fiscal 1998. These costs increased primarily due to increased administrative and distribution costs associated with Mrs. Smith's Bakeries' production realignment and increased promotional expenses which were committed to the retail market based on higher expected sales. As a result of lower production, sales volume was lower than anticipated during the seasonally high sales period of the third and fourth quarters. Also, following a review of Mrs. Smith's Bakeries' business operations after the end of the second quarter of fiscal 1999, the Company determined to recognize higher reserves for customer deductions, previously believed to be collectible, and trade promotions. At the same time, the Company also revised estimates of the recoverable amount of certain out of code, damaged or discontinued inventory. The conclusions reached by the Company relative to the ultimate realization of certain accounts receivable were based upon recent trends associated with Mrs. Smith's Bakeries' promotional and discount programs. The reserves at January 1, 2000 are considered adequate, and the promotional programs have been simplified. Y2K costs during fiscal 1999 were $.4 million.
Depreciation and amortization expense was $20.1 million for fiscal 1999, an increase of 7.5% over $18.7 million for fiscal 1998.
This increase is related to capital spending during the period offset by decreases in depreciation and amortization that resulted from the asset impairments recorded as a part of the non-recurring charge recorded in fiscal 1998. Depreciation and amortization expense will increase in fiscal 2000 as depreciation on the capital projects associated with the production realignment is reflected for a full year.
The operating loss, excluding non-recurring charge credits, was $53.3 million in fiscal 1999, a decrease of $99.2 million from operating income, excluding non-recurring charges, of $45.9 million in fiscal 1998. As discussed above, the primary cause of this decrease was the costs associated with the production realignment and the related effect on sales. Fiscal 1999 was a year of tremendous challenges at Mrs. Smiths Bakeries. Management continues to address these production issues and expects them to be fully resolved during fiscal 2000. With the resolution of the production issues, elimination of the unusual costs that were incurred in fiscal 1999 and increased sales volume, Mrs. Smith's Bakeries is expected to have improved operating results in 2000.
Keebler
Sales at Keebler for fiscal 1999 increased 19.8% to $2,667.8 million from $2,226.5 million in fiscal 1998. This increase is primarily due to an increase in Keebler sales of branded products of 16.7% and an increase in the sales of specialty products of 32.8%. The acquisition of President accounted for sales of $423.3 million in fiscal 1999 as compared to sales of $95.3 million in fiscal 1998. Excluding the effects of President, sales increased 5.3% overall. Volume gains in core Keebler branded business and specialty business of 6.0% and 2.3%, respectively, accounted for this gain.
Gross margins at Keebler declined slightly to 58.1% of sales during fiscal 1999 from 59.2% during the same period a year ago. This is attributable to a decrease in margins on specialty products, that was caused by a change in sales mix toward the high cost, custom-baked products. This decrease was partially offset by an increase in margins of branded products due to improved product mix and higher volume due to the inclusion of President for a full year. Excluding the impact of President, gross margins would have been 60.0% in fiscal 1999 and 58.8% in fiscal 1998. The improvement in year-over-year comparisons resulted from the benefits received on productivity and cost savings programs designed to improve efficiency at Keebler's production facilities, as well as from other cost reduction initiatives.
Selling, marketing and administrative expenses increased $151.7 million in fiscal 1999, but improved 2.1% as a percent of sales. In addition to the inclusion of President expenses for a full year in fiscal 1999, as compared to only fourteen weeks in fiscal 1998, higher selling, marketing and administrative expenses were also experienced as a result of core Keebler volume growth. After removing the expenses contributed by President, selling, marketing and administrative expenses, as a percent of sales, were essentially flat year-over- year. Total marketing expenses increased as Keebler continued its focus on building brand equity and incremental trade promotion programs were instituted in support of the national distribution of Famous Amos and Murray Sugar Free cookies. Despite higher sales levels in fiscal 1999, more efficient marketing processes resulted in a lower rate of marketing expenses as a percent of sales. In addition, increased administrative expenses were incurred in fiscal 1999, due principally to higher compensation costs resulting from growth in the core Keebler business. Increases in selling and distribution expenses resulted mainly from the volume gains, as savings were achieved through a more efficient selling and distribution network. Keebler spent $2.9 million in fiscal 1999 preparing for Y2K.
Depreciation and amortization expense was $84.1 million for fiscal 1999, an increase of 21.7% over $69.1 million for fiscal 1998. This increase is due primarily to increased goodwill amortization and depreciation relating to the purchase of President and increased depreciation associated with capital improvements.
Operating income for fiscal 1999 was $197.6 million, an increase of $1.6 million and 0.8% over fiscal 1998 operating income of $196.0 million.
Excluding the non-recurring charge in fiscal 1999, operating income was $263.9 million, an increase of $64.0 million and 32.0% over the prior year. As previously discussed, the increase in operating income before considering the non-recurring charge reflects growth due to the inclusion of the President business for a full year, growth in the Keebler core business and the benefits of productivity and cost savings programs.
FIFTY-TWO WEEKS ENDED JANUARY 2, 1999 COMPARED TO FIFTY-TWO WEEKS ENDED JANUARY
3, 1998
Consolidated Results
Sales. For fiscal 1998, sales were $3,765.4 million or 163% higher than sales in the prior year, which were $1,432.2 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. Excluding the Keebler Acquisition, the overall sales increase is the result of a 5% increase at Flowers Bakeries and a 12% increase at Mrs. Smith's Bakeries.
Gross Margin. Gross margin for fiscal 1998 was $2,062.8 million, or 204% higher than the gross margin for the prior year, for which gross margin was $677.7 million. The Company's gross margin for fiscal 1998 includes $1,319.0 million attributable to Keebler, a factor not present in the prior year. Flowers Bakeries' gross margin improved to 53% as compared to 51% of sales for fiscal 1997. Mrs. Smith's Bakeries' gross margin improved to 41% in fiscal 1998 from 37% in the prior year.
Selling, Marketing and Administrative Expense. For fiscal 1998, selling, marketing and administrative expenses were $1,633.3 million, or 201% higher than expense of $543.1 million for the prior year. The increase is due primarily to the inclusion of such expenses attributable to Keebler.
Depreciation and Amortization. Depreciation and amortization expense was $128.8 million for fiscal 1998, an increase of 162% over the prior year, in which it 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 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 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, and increased goodwill and interest expense, all of which are discussed above and in the following business segment section.
Income Taxes. Income taxes for fiscal 1998 were $74.4 million, an increase of 213% over the comparable period in the prior year, in which income taxes 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.
Operating Results by Business Segment
Flowers Bakeries
Fiscal 1998 sales at Flowers Bakeries increased $43.5 million, or 5% from the prior year. Of the increase, 3% was due to an acquisition, 1% due to increased volume and 1% due to pricing and product mix. Gross margin improved to 53% of sales in fiscal 1998 as compared to 51% in the prior year. Improved volume, production efficiencies and lower ingredient costs contributed to the increase in gross margin. Selling, marketing and administrative expenses increased, primarily due to increased sales volume and expenses related to a project to improve Flowers Bakeries' information systems.
Mrs. Smith's Bakeries
Sales at Mrs. Smith's Bakeries increased $63.1 million, or 12%, in
fiscal 1998 from the prior year. Of the increase, 8% was due to the acquisition
of two businesses, 3% due to increased volume, and 1% due to pricing and product
mix. Gross margin improved to 41% of sales in fiscal 1998 from 37% for the prior
year. This increase was due primarily to increased volume, cost control and
greater plant efficiencies. 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.
Keebler
As discussed in matters affecting analysis, on February 3, 1998 FII increased its ownership in Keebler to 55% from 45%, Prior to that date FII accounted for its investment in Keebler under the equity method. During fiscal 1998, the first year the results of Keebler operations were consolidated, sales and gross margin were $2,226.5 million, and $1,319.0 million, respectively. Selling, marketing and administrative expenses were $1,053.8 million in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
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. As a result of the consolidation of Keebler, the Company's balance sheet reflects Keebler's indebtedness of $456.4 million as of January 1, 2000; however, Flowers has not guaranteed such indebtedness and it is to be repaid solely from the cash flows of Keebler.
Net cash provided by operating activities for fiscal 1999 was $243.1 million. Operating cash flows were positively affected by decreases in inventory and the timing of payments for vendor accounts. Operating cash flows were negatively affected by increases in receivables, including income tax benefits, and payments against facility closing cost reserves.
Net cash disbursed for investing activities for fiscal 1999 was $273.7
million. This amount primarily consisted of $10.8 million for acquisitions and $266.6 million for capital expenditures. Capital expenditures of $73.6 million at Flowers Bakeries, $127.3 million at Mrs. Smith's Bakeries, including non-cash capital leases of $47.4 million, and $100.7 million at Keebler were made primarily to update and enhance production and distribution facilities. The remaining capital expenditures were $12.4 million at the FII corporate level.
In fiscal 2000, the Company expects capital spending at Flowers Bakeries and Mrs. Smith's Bakeries to be approximately $35 million, a substantial reduction from fiscal 1999, since the production enhancement program is largely complete. Capital expenditures in fiscal 2000 will be used to finish projects that carried over from fiscal 1999 and to perform normal repair and maintenance items at existing facilities. Spending for facility closing and severance costs related to exit plans established in the acquisitions effected by Flowers and Keebler and the non-recurring charges are 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.
In fiscal 1999, net cash provided by financing activities was $15.4 million. Gross cash proceeds resulted from a receivable securitization at Keebler of $103.0 million, a net decrease in debt of $30.6 million and receipts from the exercise of stock compensation awards of $15.3 million. Keebler's debt decreased $198.1 million and Flowers' debt increased $214.9 million (including non cash capitalized leases of $47.4 million). Flowers' $100 million commercial paper agreement terminated on January 14, 2000 and the outstanding balance of $25.0 million was paid with available funds under Flowers' $500 million revolving syndicated loan facility (the "Loan Facility").
For fiscal 1999, dividends paid per FII share increased 8.4% to $.515 from $.475 paid in the prior year. Dividends are declared at the discretion of the Board of Directors based on an assessment of the Company's financial position and other considerations. FII's ability to pay dividends is limited by the terms of its Loan Facility, as discussed below.
Keebler declared no cash dividends during fiscal 1999 or prior thereto. Keebler's ability to pay cash dividends is limited by terms of its credit facilities. The most restrictive provision limits dividend payments by Keebler 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. Keebler is in compliance with these dividend restrictions and, accordingly, Keebler's Board declared a dividend subsequent to year end of $0.1125 per share that was paid on March 22, 2000. As a result of its 55% ownership in Keebler, FII received approximately $5.2 million from this dividend.
The Company's credit facilities consist of the $500 million Loan Facility, $125 million of senior notes, a $100 million synthetic lease facility and $200 million of 7.15% debentures due 2028.
Since September 1996, the Company has been a party to an $80 million loan facility agreement relating to its distributor note program (the "Distributor Facility") which is subject to the same financial covenants as the Loan Facility. This agreement provides third party credit facilities for the independent distributors serving Flowers Bakeries. The Company receives payments from the independent distributors and remits such amounts, net of certain loan servicing fees, to the financial institution. Additionally, the agreement requires amounts to be placed in escrow by the Company upon the occurrence of certain events as defined in the agreement. No events have occurred as of January 1, 2000 that would require such funding by the Company.
During fiscal 1999 and subsequent to year-end, FII amended the Loan Facility and the Distributor Facility. The amendments provided for increased loan borrowing margins and facility fees and added and amended certain financial covenants. The covenants currently in effect include, among others, (i) a maximum leverage ratio of 0.65 to 1, (ii) an adjusted fixed charges coverage ratio of 1.10 to 1 for the second quarter of fiscal 2000, with increased levels for all quarters thereafter; (iii) minimum adjusted consolidated EBITDA at specified levels for each fiscal quarter, (iv) a borrowing base covenant requiring that FII's total indebtedness, measured quarterly, not exceed specified percentages of the book value of accounts receivable, inventory, property, plant and equipment and the fair market value of FII's interest in Keebler, (v) a prohibition on acquisitions, (vi) a negative pledge on all assets of the Company, (vii) a limit on Flowers capital expenditures, and (viii) limits on cash dividends unless the Company would have, following payment thereof, at least $15 million availability under the unused commitments and borrowing base tests of the Loan Facility. The amount of retained earnings available for payment of dividends at January 1, 2000 under the amendment was $125.0 million.
The Company was in compliance with all covenants under its Loan Facility as in effect on January 1, 2000 and believes that, in light of its current cash position, its cash flow from operating activities and its amended credit facilities, it can comply with the current terms of its Loan Facility, Distributor Facility and other credit facilities and can meet presently foreseeable financial requirements.
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 depend on the intended use of the derivative and the resulting designation. The effective date for this standard has been extended to 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.
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.
YEAR 2000 ISSUE
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 recognized the need to make every effort to ensure that its operations were not adversely impacted by applications and processing issues related to the 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 have experienced system failures or miscalculations that could have disrupted operations and caused a temporary inability to process transactions, send and process invoices or engage in similar normal business activities.
The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any significant impact to its ongoing business as a result of the Year 2000 Issue. However, it is possible that the full impact of the date change has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarterly, or year end. The Company believes that any such problems are likely to be minor and correctable. In addition, the Company could still be negatively affected if its customers or suppliers are adversely affected by the Year 2000 or similar issues. The Company currently is not aware of any significant Year 2000 or similar problems that have arisen for its customers and suppliers. Although a contingency plan does not exist regarding these potential problems, if significant risk is identified, the Company will develop contingency plans as deemed necessary at that time.
The Company expended $6.2 million on Year 2000 readiness efforts from 1997 to 1999. These efforts included replacing some outdated, non-compliant hardware and non-compliant software as well as identifying and remediating Year 2000 problems.
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject to the safe harbor provisions of the Reform Act. Such forward-looking statements include, without limitation, statements about:
- the competitiveness of the baking industry;
- the future availability and prices of raw and packaging materials;
- potential regulatory obligations;
- our strategies;
- other statements that are not historical facts; and
- Year 2000 issues.
When used in this discussion, the words "anticipate," "believe," "estimate" and similar expressions are generally intended to identify forward-looking statements. 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 or business conditions (including in the baking industry);
- actions of competitors;
- our ability to retain capital on terms acceptable to us;
- our ability to recover material costs in the pricing of our products;
- the extent to which we are able to develop new products and markets for our products;
- the time required for such development;
- the level of demand for such products; and
- changes in our business strategies.
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.
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 an effort to provide a predictable and consistent commodity price and thereby reduce 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 1, 2000, a hypothetical ten percent adverse change in commodity prices under normal market conditions could potentially have a $19.5 million effect on the fair value of the derivative portfolio. 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 reductions in raw material and packaging prices.
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 Flowers' mix of fixed and floating rate debt at January 1, 2000, assuming a ten percent increase in interest rates, Flowers' interest cost would increase $3.3 million, while the impact of a ten percent decrease in interest rates would reduce interest expense $3.3 million. Based on Flowers' mix of fixed and floating rate debt at January 2, 1999, assuming a ten percent increase in interest rates, Flowers' interest cost would increase $1.5 million, while the impact of a ten percent decrease in interest rates would reduce interest expense $1.5 million. Assuming a ten percent increase in market price, the fair value of Keebler's interest rate swap agreements at January 1, 2000, with a notional amount of $334.0 million, would increase the net receivable to $9.7 million, while the impact of a ten percent decrease in market price would reduce the net receivable to $6.0 million. The fair value of Keebler's interest rate swap agreements at January 2, 1999, with an assumed ten percent increase in market price and the notional amount of $527.3 million, would increase the net receivable to $3.1 million, while the impact of a ten percent decrease in market price would result in a net payable
of $4.4 million. 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. During 1999, an interest swap that no longer served as a hedge, with a notional amount of $170.0 million, was recognized in income from operations with a marked to market fair value of $2.8 million.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Flowers Industries, Inc.
In our opinion, the accompanying consolidated balance sheets 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 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for the years ended January 1, 2000 and January 2, 1999, for the twenty-seven week period ended January 3, 1998, and for the year ended June 28, 1997, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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.
/s/ PRICEWATERHOUSECOOPERS LLP Atlanta, Georgia February 3, 2000 except for Note 15 which is as of March 30, 2000 |
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE 52 WEEKS ENDED FOR THE 27 FOR THE 52 ----------------------------- WEEKS ENDED WEEKS ENDED JANUARY 1, JANUARY 2, JANUARY 3, JUNE 28, 2000 1999 1998 1997 ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales ................................................. $ 4,236,010 $ 3,765,367 $ 784,097 $ 1,437,713 ----------- ----------- --------- ----------- Materials, supplies, labor and other production costs ............................................... 2,001,956 1,702,581 418,926 787,799 Selling, marketing and administrative expenses ........ 1,845,101 1,633,319 301,426 534,285 Depreciation and amortization ......................... 144,619 128,765 26,930 45,970 Non-recurring charge .................................. 60,355 68,313 ----------- ----------- --------- ----------- Income from operations ................................ 183,979 232,389 36,815 69,659 Interest expense .................................... 82,565 72,840 12,144 25,691 Interest (income) ................................... (1,700) (4,115) (348) (582) ----------- ----------- --------- ----------- Interest expense, net ................................. 80,865 68,725 11,796 25,109 ----------- ----------- --------- ----------- Gain on sale of distributor notes receivable .......... 43,244 ----------- ----------- --------- ----------- Income before income taxes, income from investment in unconsolidated affiliate, minority interest, extraordinary loss and cumulative effect of changes in accounting principles ............................ 103,114 163,664 25,019 87,794 Income taxes .......................................... 56,260 74,391 9,632 33,191 Income from investment in unconsolidated affiliate .... 18,061 7,721 ----------- ----------- --------- ----------- Income before minority interest, extraordinary loss and cumulative effect of changes in accounting principles .......................................... 46,854 89,273 33,448 62,324 Minority interest ..................................... (39,560) (43,305) ----------- ----------- --------- ----------- Income before extraordinary loss and cumulative effect of changes in accounting principles ................. 7,294 45,968 33,448 62,324 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 ................................... $ 7,294 $ 41,899 $ 23,560 $ 62,324 =========== =========== ========= =========== Net Income Per Common Share: Basic -- Income before extraordinary loss and cumulative effect of changes in accounting principles ...... $ .07 $ .47 $ .38 $ .71 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 ....................... $ .07 $ .43 $ .27 $ .71 =========== =========== ========= =========== Weighted average shares outstanding ............... 100,112 96,393 88,368 88,000 =========== =========== ========= =========== Diluted -- Income before extraordinary loss and cumulative effect of changes in accounting principles ...... $ .07 $ .47 $ .38 $ .71 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 ....................... $ .07 $ .43 $ .27 $ .71 =========== =========== ========= =========== Weighted average shares outstanding ............... 100,420 96,801 88,773 88,401 =========== =========== ========= =========== |
(See Accompanying Notes to Consolidated Financial Statements)
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- (AMOUNTS IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents ............................................ $ 39,382 $ 54,542 Accounts and notes receivable, net ................................... 185,939 270,507 Inventories, net: Raw materials ...................................................... 68,110 54,739 Packaging materials ................................................ 29,855 27,056 Finished goods ..................................................... 175,281 207,620 Other .............................................................. 7,679 8,178 ----------- ----------- 280,925 297,593 Deferred income taxes ................................................ 71,498 76,327 Other ................................................................ 112,794 84,276 ----------- ----------- 690,538 783,245 ----------- ----------- Property, Plant and Equipment: Land ................................................................. 49,612 39,149 Buildings ............................................................ 386,197 350,067 Machinery and equipment .............................................. 958,176 816,495 Furniture, fixtures and transportation equipment ..................... 148,565 116,219 Construction in progress ............................................. 127,545 96,288 ----------- ----------- 1,670,095 1,418,218 Less: accumulated depreciation ....................................... (520,456) (430,516) ----------- ----------- 1,149,639 987,702 ----------- ----------- Other Assets ........................................................... 88,715 86,510 ----------- ----------- Cost in Excess of Net Tangible Assets: Cost in excess of net tangible assets ................................ 1,033,272 1,033,632 Less: accumulated amortization ....................................... (61,686) (30,189) ----------- ----------- 971,586 1,003,443 ----------- ----------- $ 2,900,478 $ 2,860,900 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Commercial paper ..................................................... $ -- $ 74,870 Current maturities of long-term debt and capital leases .............. 47,566 120,479 Accounts payable ..................................................... 248,153 227,749 Income taxes ......................................................... 23,603 -- Facility closing costs and severance ................................. 16,836 23,670 Other accrued liabilities ............................................ 319,639 314,270 ----------- ----------- 655,797 761,038 ----------- ----------- Long-term debt and capital leases ...................................... 1,208,630 1,038,998 ----------- ----------- Other liabilities: Deferred income taxes ................................................ 162,470 182,244 Postretirement/postemployment obligations ............................ 64,772 63,754 Facility closing costs and severance ................................. 30,188 41,331 Other ................................................................ 56,289 52,915 ----------- ----------- 313,719 340,244 ----------- ----------- Minority interest ...................................................... 183,578 147,659 ----------- ----------- 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 100,863,848 and 100,202,414 shares, respectively ....................................................... 63,040 62,627 Capital in excess of par value ....................................... 291,377 274,255 Retained earnings .................................................... 219,279 262,531 Common stock in treasury, 567,160 and 381,366 shares, respectively ....................................................... (10,594) (6,762) Stock compensation related adjustments ............................... (24,348) (19,690) ----------- ----------- 538,754 572,961 ----------- ----------- $ 2,900,478 $ 2,860,900 =========== =========== |
(See Accompanying Notes to Consolidated Financial Statements)
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 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 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) Net income for the year ................ 7,294 Adjustment for Keebler stock transactions ......................... 2,907 Exercise of employee stock options ..... (750) 78,044 1,494 Exercise of Equity Incentive Award ..... 1,043 (91,547) (2,161) 1,025 Exercise of Restricted Stock Award ..... 1,917 (121,078) (2,497) 1,666 Purchase of treasury stock ............. (15,053) (335) Stock issued into escrow in connection with Restricted Stock Award .......... 673,800 420 12,376 (12,796) Restricted Stock Award reversions ...... (12,366) (7) (371) (36,160) (333) 450 Amortization of Restricted Stock Award and Equity Incentive Award ........... 4,997 Dividends paid -- $.515 per common share ................................ (50,546) ----------- --------- --------- --------- -------- -------- -------- Balances at January 1, 2000 .............. 100,863,848 $ 63,040 $ 291,377 $ 219,279 (567,160) $(10,594) $(24,348) =========== ========= ========= ========= ======== ======== ======== |
(See Accompanying Notes to Consolidated Financial Statements)
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 52 WEEKS ENDED FOR THE 27 FOR THE 52 ----------------------- WEEKS ENDED WEEKS ENDED JANUARY 1, JANUARY 2, JANUARY 3, JUNE 28, 2000 1999 1998 1997 ---------- ---------- ----------- ----------- (AMOUNTS IN THOUSANDS) Cash flows provided by operating activities: Net income.............................................. $ 7,294 $ 41,899 $ 23,560 $ 62,324 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest..................................... 39,560 42,537 Income from investment in unconsolidated affiliate.... (18,061) (7,721) Depreciation and amortization......................... 144,619 128,765 26,930 45,970 Deferred income taxes................................. (16,782) (1,504) (803) 1,506 Gain on sale of distributor notes receivable.......... (43,244) Non-recurring charge.................................. 46,071 68,313 Loss due to early extinguishment of debt.............. 1,706 Cumulative effect of changes in accounting principles.......................................... 3,131 9,888 Other................................................. 6,946 (1,486) Changes in assets and liabilities, net of acquisitions: Accounts and notes receivable, net.................... (29,803) (11,330) (3,281) 2,343 Inventories, net...................................... 16,811 (35,828) (413) (36,144) Other assets.......................................... (13,425) (53,486) (1,495) (2,242) Accounts payable and other accrued liabilities........ 60,191 27,076 (16,658) (13,199) Facility closing costs and severance.................. (18,389) (9,798) (577) (1,606) --------- --------- -------- -------- Net cash provided by operating activities............... 243,093 199,995 19,090 17,987 --------- --------- -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment............. (266,607) (140,275) (32,857) (77,510) Acquisition of majority interest in Keebler (net of cash acquired)...................................... (285,203) Acquisition of President by Keebler (net of cash acquired)........................................... (444,818) Acquisition of other businesses, net of divestitures (net of cash acquired).............................. (10,772) (28,992) (5,532) 617 Other................................................. 3,696 1,378 2,145 63 --------- --------- -------- -------- Net cash disbursed for investing activities............. (273,683) (897,910) (36,244) (76,830) --------- --------- -------- -------- Cash flows from financing activities: Common stock offering proceeds, net of underwriters' discount and offering costs......................... 187,930 Dividends paid........................................ (50,546) (46,102) (19,620) (36,299) Treasury stock purchases.............................. (21,688) (8,059) (117) (289) Proceeds from receivables securitization.............. 103,000 Stock compensation and warrants exercised............. 15,306 20,744 Debentures proceeds................................... 199,417 Debentures issuance costs............................. (1,750) Increase (decrease) in commercial paper............... (74,870) 21,364 7,713 40,792 Increase (decrease) in debt and capital lease obligations......................................... 44,228 376,913 965 (794) Distributor notes receivable proceeds................. 65,954 --------- --------- -------- -------- Net cash provided by (disbursed for) financing activities............................................ 15,430 750,457 (11,059) 69,364 --------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents.... (15,160) 52,542 (28,213) 10,521 Cash and cash equivalents at beginning of period........ 54,542 2,000 30,213 19,692 --------- --------- -------- -------- Cash and cash equivalents at end of period.............. $ 39,382 $ 54,542 $ 2,000 $ 30,213 ========= ========= ======== ======== Schedule of noncash investing and financing activities: Stock compensation transactions....................... $ 4,658 $ 20,431 $ 6,355 $ 9,263 Stock issued for acquisition.......................... 40,000 4,000 Capital lease obligations............................. 47,406 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized................ $ 86,054 $ 62,982 $ 11,878 $ 25,955 Income taxes........................................ 38,281 87,063 10,867 32,729 |
(See Accompanying Notes to Consolidated Financial Statements)
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, for the fifty-two weeks then ended and forward, 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 1997" shall mean Flowers' full fiscal year ended June 28, 1997; (ii) "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; (iii) "fiscal 1998" shall mean the Company's full fiscal year ended January 2, 1999; and (iv) "fiscal 1999" shall mean the Company's full fiscal year ended January 1, 2000. As a result, the Company has presented its financial position as of January 1, 2000 and January 2, 1999 and has presented its results of operations, cash flow and changes in stockholders' equity for fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997. For comparative purposes the Company has included unaudited, condensed, consolidated financial information of Flowers in Note 14 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 were made to conform with the current 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. 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, and $163.0 million, or 11% of sales during fiscal 1997. During fiscal 1999 and fiscal 1998, no sales to a single customer accounted for more than 10% of sales.
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. Allowances of $22.0 million and $7.8 million were recorded at January 1, 2000 and January 2, 1999, respectively.
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 41% and 47% of inventories at January 1, 2000 and January 2, 1999, respectively, are valued using the first-in-first-out method ("FIFO"), with Keebler's finished goods inventory valued primarily under the last-in-first-out ("LIFO") method. Inventory valued under LIFO approximates FIFO at January 1, 2000 and January 2, 1999.
At January 1, 2000 and January 2, 1999, inventories are shown net of allowances for slow-moving and aged inventory of $13.0 million and $9.6 million, respectively.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
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.
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. Property under capital leases is amortized over the lease term. Depreciation expense for fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998, and fiscal 1997 was $113.1 million, $108.5 million, $25.9 million and $44.8 million, respectively.
NOTES RECEIVABLE AND DEFERRED INCOME
Prior to September 1996, Flowers Bakeries sold certain of 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. The agreement requires amounts to be placed in escrow by the Company upon the occurrence of certain events as defined in the agreement. No events have occurred as of January 1, 2000 that would require such funding by the Company.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COST IN EXCESS OF NET TANGIBLE ASSETS
JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- (AMOUNTS IN THOUSANDS) Goodwill, net............................... $731,804 $ 748,456 Trademarks and trade names, net............. 239,782 254,987 $971,586 $1,003,443 ======== ========== |
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 twenty to 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, ranging from ten to forty years. Amortization expense for fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997 was $31.5 million, $19.6 million, $1.0 million and $1.1 million, respectively. During fiscal 1999, the Company recorded $9.8 million of goodwill and trademark adjustments related to purchase accounting and non-recurring charge reserves (Note 7).
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments as part of an overall strategy to manage market risk. The Company uses forward commodity futures and options contracts to hedge existing or future exposure to changes in commodity prices. The Company does not enter into these derivative financial instruments for trading or speculative purposes.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The new statement establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized as either assets or liabilities in the statement of financial position 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 Company is currently assessing the effects SFAS133 will have on its financial position and results of operations.
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.
RESEARCH AND DEVELOPMENT
Activities related to new product development and major improvements to existing products and processes are expensed as incurred. Amounts were $13.1 million for fiscal 1999, $11.4 million for fiscal 1998, $.7 million for the twenty-seven week transition period ended January 3, 1998 and $1.0 million for fiscal 1997.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $111.2 million for fiscal 1999, $108.4 million for fiscal 1998, $17.0 million for the twenty-seven week transition period ended January 3, 1998 and $19.1 million for fiscal 1997.
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 excess of the market price at the date of grant over the purchase price to be paid by the grantee, if any, is recognized ratably by the Company, as compensation expense, over the vesting period.
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 to market value or discounted cash flow value is required.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP") 98-1, "Accounting for Cost of Computer Software Developed or Obtained for Internal Use". In accordance with SOP 98-1, the Company expenses costs incurred in the preliminary project stage, and thereafter, capitalizes costs incurred in developing or obtaining internally used software. Certain costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized over a period of not more than five years and are subject to impairment evaluation in accordance with the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." The Company capitalized software development costs of $14.7 million and $5.6 million in fiscal 1999 and fiscal 1998, respectively.
NET INCOME PER COMMON SHARE
The Company computes net income per common share in accordance with 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 November 20, 1997, the Emerging Issues Task Force ("EITF"), a subcommittee of the FASB, 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.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
On April 3, 1998, the Accounting Standards Executive Committee, a subcommittee of the American Institute of Certified Public Accountants, issued SOP 98-5 -- "Reporting on the Costs of Start-Up Activities". 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 in fiscal 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 1999 and the prior periods presented, total comprehensive income equaled net income.
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 a 49.6% interest in INFLO Holdings Corporation ("INFLO"), a newly formed corporation jointly owned by FII and Artal Luxembourg Corporation S.A. for $62.5 million. 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 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,
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordingly, Keebler's assets and liabilities are included in the consolidated balance sheet as of January 2, 1999 and January 1, 2000. 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 purchase price has been allocated to the net tangible and intangible assets acquired and liabilities assumed of Keebler's based on their respective fair values. 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.
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 their respective 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. The unallocated excess purchase price is being amortized straight-line over forty years.
Results of operations for President from September 28, 1998 to January 2, 1999 have been included in the consolidated statement of income for fiscal 1998. The following unaudited, condensed, combined pro forma results of operations of the Company assume the President acquisition and the Keebler Acquisition occurred as of the beginning of each period presented. 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:
FOR THE 52 WEEKS ENDED FOR THE 53 WEEKS ENDED JANUARY 2, 1999 JANUARY 3, 1998 ---------------------- ---------------------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 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.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of:
JANUARY 1, JANUARY 2, 2000 1999 ---------- ---------- (AMOUNTS IN THOUSANDS) Employee compensation....................................... $ 89,093 $ 93,942 Pension..................................................... 21,521 19,511 Insurance................................................... 61,268 63,551 Marketing and consumer promotions........................... 61,869 65,075 Other....................................................... 85,888 72,191 -------- -------- Total............................................. $319,639 $314,270 ======== ======== |
FII does not guarantee Keebler's other accrued liabilities of $237.4 million, which are included in the consolidated amount at January 1, 2000.
NOTE 4. DEBT AND LEASE COMMITMENTS
Long-term debt consisted of the following at January 1, 2000 and January 2, 1999:
INTEREST FINAL JANUARY 1, JANUARY 2, RATE MATURITY 2000 1999 -------- --------- ---------- ---------- (AMOUNTS IN THOUSANDS) Flowers: Syndicated Loan Facility................. 7.56% 2003 $ 350,000 $ 150,000 Senior Notes............................. 6.84% 2016 125,000 125,000 Debentures............................... 7.15% 2028 200,000 200,000 Commercial Paper......................... 5.55% 2000 25,027 74,870 Capital Lease Obligations................ 7.75% Various 51,317 2,853 Other.................................... Various 2004-2017 48,409 27,129 ---------- ---------- 799,753 579,852 ---------- ---------- Keebler: Bridge Facility.......................... 6.26% 1999 75,000 Revolving Facility....................... 5.84% 2004 85,000 Term Facility............................ 5.81% 2004 314,000 350,000 Senior Subordinated Notes................ 10.75% 2006 124,400 124,400 Capital Lease Obligations................ Various 2002-2042 7,588 8,290 Other Senior Debt........................ Various 2001-2005 10,455 11,805 ---------- ---------- 456,443 654,495 ---------- ---------- Consolidated Debt:......................... 1,256,196 1,234,347 Due within one year...................... 47,566 195,349 ---------- ---------- Due after one year....................... $1,208,630 $1,038,998 ========== ========== |
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 1, 2000 and January 2, 1999, $350.0 million and $150.0 million, respectively 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
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grid using a choice of LIBOR plus 1.375% or money market rates. At January 1, 2000, the commitment fee was 0.375%.
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 were used to finance inventory at Mrs. Smith's Bakeries. On January 14, 2000, this facility was terminated and repaid with borrowings from the Syndicated Loan Facility. In accordance with FASB Statement No. 6, "Classification of Short-Term Obligations Expected to be Refinanced", the outstanding balance of $25.0 million was classified as long-term debt on January 1, 2000.
FII also has a $10.0 million revolving-term loan agreement with no amounts outstanding at January 1, 2000 or January 2, 1999.
Several loan agreements of FII contain restrictions which, among other things, require maintenance of certain financial ratios and restrict encumbrance of assets and creation of indebtedness. At January 1, 2000, FII was in compliance with these requirements.
KEEBLER
At January 1, 2000, and January 2, 1999, Keebler's primary credit financing was provided by a $700.0 million Credit Facility consisting of $350.0 million under the Revolving Facility and $350.0 million under the Term Facility. At January 2, 1999, financing was also provided under a $125.0 million Bridge Facility.
Outstanding balances under the Term Facility were $314.0 million and $350.0 million at January 1, 2000 and January 2, 1999, respectively. Quarterly principal payments are scheduled through the final maturity at September 2004. The Revolving Facility had outstanding balances of zero and $85.0 million and available balances of $350.0 million and $265.0 million at January 1, 2000 and January 2, 1999, respectively. The Revolving Facility has no scheduled principal payment until maturity at September 2004. Any unused borrowings under the Revolving Facility are subject to a commitment fee that will vary from 0.125% - 0.30% based on the relationship of debt to adjusted earnings. At January 1, 2000, the commitment fee was 0.125%.
The $75.0 million Bridge Facility outstanding at January 2, 1999, that had a final maturity of September 1999, with no scheduled principal payments, was refinanced on January 29, 1999. Keebler entered into a Receivables Purchase Agreement ("the Agreement") to replace the $75.0 million of debt held under the Bridge Facility, allowing funds to be borrowed at a lower cost to Keebler. The accounting for this Agreement is governed by SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Under the guidelines of SFAS No. 125, a special purpose entity was created, Keebler Funding Corporation, as a subsidiary of Keebler Foods Company. All transactions under this Agreement occur through Keebler Funding Corporation and are treated as a sale of accounts receivable and not as a debt instrument. At January 1, 2000, a net of $103.0 million of accounts receivable had been sold at fair value, which is below the maximum amount currently available under the Agreement.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Interest on the Bridge Facility is calculated using the same components as the Credit Facility.
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 pre-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, net of minority interest, was $.9 million.
On July 1, 1998, Keebler entered into a swap transaction 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 11.33% through July 3, 2000. In addition, on September 30, 1998 and October 5, 1998, Keebler entered into two swap transactions both maturing on September 30, 2004, each of which converts the base rate on $105.0 million of Credit Facility to fixed rate debt of 5.084% and 4.89%, respectively.
Keebler also maintains an interest rate swap that does not qualify for hedge accounting, which has a notional amount of $170.0 million and a fixed rate obligation of 5.0185% through February 1, 2001. During fiscal 1999, $2.8 million was recognized in income from operations in order to mark-to-market the interest rate swap. The resulting receivable related to this transaction was recorded as a current receivable as part of other current assets for $0.5 million and a long-term receivable as part of other assets for $2.3 million in the statement of financial position.
Several loan agreements of Keebler contain restrictions which, among other things, require maintenance of certain financial ratios and restrict encumbrance of assets and creation of indebtedness. At January 1, 2000, Keebler was in compliance with these requirements.
Annual maturities of long-term debt and capital leases for each of the five years following January 1, 2000 and thereafter are as follows:
FLOWERS KEEBLER CONSOLIDATED ------- ------- ------------ (AMOUNTS IN THOUSANDS) 2000.................................................. $ 35,310 $ 37,283 $ 72,593 2001.................................................. 7,138 42,162 49,300 2002.................................................. 7,257 68,647 75,904 2003.................................................. 7,404 105,596 113,000 2004.................................................. 32,797 75,769 108,566 2005 and thereafter................................... 709,847 126,986 836,833 -------- -------- ---------- Total....................................... $799,753 $456,443 $1,256,196 ======== ======== ========== |
FII has not guaranteed any of the Keebler indebtedness and it is to be repaid solely from the cash flows of Keebler.
LEASES
The Company leases certain property and equipment under various operating and capital lease arrangements that expire over the next 25 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 value for periods from one month to ten years. Flowers has entered into certain capital lease obligations requiring the Company to guarantee the residual value to the lessor of approximately $29.0 million
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at the termination of the lease. Assets recorded under capitalized lease agreements included in property, plant and equipment consist of the following:
JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- (AMOUNTS IN THOUSANDS) Land...................................................... $ 980 $ 980 Buildings................................................. 2,894 2,894 Machinery and Equipment................................... 54,159 4,811 Other Leased Assets....................................... 1 1 ------- ------ 58,034 8,686 Accumulated Depreciation.................................. (2,172) (242) ------- ------ $55,862 $8,444 ======= ====== |
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 LEASES OPERATING LEASES -------------- ---------------- (AMOUNTS IN THOUSANDS) 2000...................................................... $10,388 $ 50,655 2001...................................................... 9,452 42,664 2002...................................................... 8,462 35,324 2003...................................................... 7,187 31,919 2004...................................................... 11,230 23,266 2005 and thereafter....................................... 31,998 113,266 ------- -------- Total minimum payments.......................... $78,717 $297,094 Amount representing interest.............................. (19,812) ------- Obligations under capital leases.......................... 58,905 Obligations due within one year........................... (7,666) ======= Long-term obligations under capital leases................ $51,239 ======= |
Rent expense for all operating leases amounted to $96.2 million for fiscal 1999, $61.3 million for fiscal 1998, $16.2 million for the twenty-seven week transition period ended January 3, 1998 and $24.2 million for fiscal 1997. FII does not guarantee Keebler's lease obligations of $7.6 million, which are included in the consolidated amount above.
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair market value of short and long-term borrowing was estimated using discounted cash flow analysis based on current interest rates which would be obtained for similar financial instruments. The carrying value of cash and cash equivalents and short-term debt approximates fair value at January 1, 2000 and January 2, 1999, because of the short-term maturity of the instruments. The fair value of Flowers long-term debt was $712.5 million at January 1, 2000 and approximately equaled carrying value at January 2, 1999. The fair value of Keebler's long-term debt was $417.2 million and $536.6 million at January 1, 2000 and January 2, 1999, respectively. The fair value of the Company's outstanding commodity derivative financial instruments, based on the stated market value as of January 1, 2000 and January 2, 1999, was $92.0 million and $113.8 million, respectively. The fair value of Keebler's interest rate swap agreements, a net receivable of $7.9 million, was estimated based on market prices as of January 1, 2000.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. COMMODITY PURCHASE AGREEMENTS
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. To qualify as a hedge, a commodity agreement must reduce the exposure of the Company to price risk and must show high correlation of changes in value with the value of the hedged item. For fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997, losses of $6.5 million, $7.9 million, $.6 million and $1.9 million, respectively, were recorded. As of January 1, 2000 and January 2, 1999, deferred losses on closed contracts accounted for as hedges were $5.8 million and $3.8 million, respectively. Gains and losses on agreements which do not qualify as hedges are marked to market and recorded immediately as other income or expense. For fiscal 1999, a loss of $3.5 million was recorded. 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. There was no gain or loss in fiscal 1997.
The Company's various commodity purchase agreements effectively commit the Company to purchase raw materials in amounts approximating $113.0 million at January 1, 2000, which will be used in production in future periods.
NOTE 7. FACILITY CLOSING COSTS AND SEVERANCE
NON-RECURRING CHARGES
During fiscal 1999, the Board of Directors of Keebler approved a plan to close its Sayreville, New Jersey production facility due to excess capacity within Keebler's 14-plant manufacturing network. As a result of this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million. The charge included $46.1 million of non-cash asset impairments and $23.1 million of severance and other exit costs related to the Sayreville facility. As a direct result of this plan, asset impairments were recorded to write-down the closed facility to net realizable value, less cost to sell, based on management's estimate of fair value. Also, as part of this plan, asset impairments were recorded to write-off certain other machinery and equipment currently held by Keebler and to reduce goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996, neither of which provides any future economic benefit. Severance costs provided for the reduction of approximately 650 employees, of which 600 were represented by unions. As of January 1, 2000, approximately 640 employees, of which 595 were represented by unions, had been severed. This plan is substantially complete as of January 1, 2000. Accordingly, during the fourth quarter of fiscal 1999, an adjustment of $2.9 million was recorded against the original $69.2 million. The adjustment was due to lower than expected severance costs and an earlier than expected disposal of the facility as current real estate conditions resulted in a twelve month reduction in the estimated disposal period. The adjusted net charge in fiscal 1999 related to this plant closure was $66.3 million. Ongoing costs, including but not limited to, guard service, utilities, property taxes and preparing the facility for sale, will continue for eighteen months or until the facility is disposed of, whichever occurs earlier. The amount of suspended depreciation and amortization that would have been recognized for the year ended January 1, 2000, if prior period impairment had not been recognized was approximately $3.7 million, with $5.6 million of annualized savings anticipated in 2000.
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). The charge included $57.5 million of noncash asset impairments, $4.8 million of severance costs and $6.1 million of other related exit costs. The plan involved 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
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1, 2000, all such employees had been terminated. During fiscal 1999, Flowers Bakeries and Mrs. Smith's Bakeries recorded adjustments to the fiscal 1998 restructuring reserve of $1.1 million and $4.9 million, respectively. These adjustments are the result of reduced carrying costs of plants held for sale, an adjustment to the value of these assets due to the identification of a buyer and changes in estimates of severance and other employee termination costs. As of January 1, 2000, all significant actions related to these plans have been completed. The remaining exit costs include ongoing costs such as guard service, utilities and property taxes of closed facilities until the time of disposal. 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.
PURCHASE ACCOUNTING RESERVES
During fiscal 1998, 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 were initially estimated at 410 employees and $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. At January 1, 2000, approximately 40 employees not under union contract had been terminated. In addition, during the year management reviewed its exit plan and made a determination that approximately 110 employees not under union contract, would not be terminated. During fiscal 1999, Keebler adjusted accruals previously established in the accounting for the President acquisition by reducing goodwill and other intangibles by $4.5 million to recognize exit costs that are now expected to be less than initially anticipated. The remainder of management's exit plan is expected to be substantially complete before the end of fiscal 2000 with only noncancelable lease obligations to be paid over the next six years, concluding in fiscal 2006.
As part of the acquisition of Mrs. Smith's Inc. in fiscal 1996, Flowers recorded a purchase accounting reserve of $37.1 million 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 $6.8 million, $4.0 million, $.6 million and $1.6 million in fiscal 1999, 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 approximately 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
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 totaled $3.0 million for fiscal 1999 and $7.7 million for fiscal 1998. In addition, during fiscal 1999 and fiscal 1998, Keebler expensed $0.8 million and $2.8 million, respectively, principally for costs related to the closure of two distribution facilities not included in the original plan. During fiscal 1999, Keebler adjusted accruals previously established in the accounting for the Keebler acquisition by reducing goodwill and other intangibles by $0.5 million and reversing $1.3 million into income from operations to recognize exit costs that are now expected to be less than initially anticipated. The $1.3 million was credited to operating income as it had originally been charged to income from operations in fiscal 1999 and fiscal 1998. During fiscal 1998, Keebler also adjusted accruals previously established in the accounting for the Keebler and Sunshine 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 was substantially complete at January 1, 2000 with only noncancelable lease obligations continuing through 2006.
Activity with respect to the non-recurring charges and purchase accounting reserves was as follows (amounts in thousands):
Non-Recurring Charges:
BALANCE AT BALANCE AT JANUARY 3, PROVISION/ NONCASH JANUARY 2, 1998 ADJUSTMENTS REDUCTIONS SPENDING 1999 ---------- ----------- ---------- -------- ---------- Noncash impairments................. $ -- $57,489 $(57,489) $ -- $ -- Severance........................... -- 4,755 -- (3,217) 1,538 Noncancelable lease obligations and facility closure costs............ -- 3,995 -- -- 3,995 Other............................... -- 2,074 -- (94) 1,980 ------ ------- -------- -------- ------ Total..................... $ -- $68,313 $(57,489) $ (3,311) $7,513 ====== ======= ======== ======== ====== |
BALANCE AT BALANCE AT JANUARY 2, PROVISION/ NONCASH JANUARY 1, 1999 ADJUSTMENTS REDUCTIONS SPENDING 2000 ---------- ----------- ---------- -------- ---------- Noncash impairments................. $ -- $42,049 $(42,049) $ -- $ -- Severance........................... 1,538 14,377 -- (13,878) 2,037 Noncancelable lease obligations and facility closure costs............ 3,995 1,358 -- (2,522) 2,831 Other............................... 1,980 2,571 -- (2,089) 2,462 ------ ------- -------- -------- ------ Total..................... $7,513 $60,355 $(42,049) $(18,489) $7,330 ====== ======= ======== ======== ====== |
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Accounting Reserves:
BALANCE AT BALANCE AT JANUARY 3, PROVISION/ JANUARY 2, 1998 ADJUSTMENTS SPENDING 1999 ---------- ----------- -------- ---------- Mrs. Smith's Bakeries Severance.................................... $ 1,735 $ -- $ (388) $ 1,347 Non cancelable lease obligations and other facility closure costs..................... 27,149 -- (1,350) 25,799 Other........................................ 6,069 -- (2,308) 3,761 ------- ------- -------- ------- Total.............................. $34,953 $ -- $ (4,046) $30,907 ------- ------- -------- ------- Keebler Foods Company Severance.................................... $ 231 $ 111 $ (293) $ 49 Non cancelable lease obligations and other facility closure costs..................... 12,505 2,244 (3,265) 11,484 Other........................................ 1,895 (182) (1,689) 24 ------- ------- -------- ------- Total.............................. $14,631 $ 2,173 $ (5,247) $11,557 ------- ------- -------- ------- Sunshine Biscuits, Inc. Severance.................................... $ 112 $ -- $ (26) $ 86 Non cancelable lease obligations and other facility closure costs..................... 7,735 (3,120) (2,388) 2,227 ------- ------- -------- ------- Total.............................. $ 7,847 $(3,120) $ (2,414) $ 2,313 ------- ------- -------- ------- President International, Inc. Severance.................................... $ -- $ 6,653 $ (59) $ 6,594 Non cancelable lease obligations and other facility closure costs..................... -- 5,670 -- 5,670 Other........................................ -- 447 -- 447 ------- ------- -------- ------- Total.............................. $ -- $12,770 $ (59) $12,711 ------- ------- -------- ------- GRAND TOTAL........................ $57,431 $11,823 $(11,766) $57,488 ======= ======= ======== ======= |
BALANCE AT BALANCE AT JANUARY 2, PROVISION/ JANUARY 1, 1999 ADJUSTMENTS SPENDING 2000 ---------- ----------- -------- ---------- Mrs. Smith's Bakeries Severance.................................... $ 1,347 $ -- $ (1,347) $ -- Non cancelable lease obligations and other facility closure costs..................... 25,799 (1,405) (4,208) 20,186 Other........................................ 3,761 -- (1,285) 2,476 ------- ------- -------- ------- Total.............................. $30,907 $(1,405) $ (6,840) $22,662 ------- ------- -------- ------- Keebler Foods Company Severance.................................... $ 49 $ 25 $ (50) $ 24 Non cancelable lease obligations and other facility closure costs..................... 11,484 (1,009) (2,646) 7,829 Other........................................ 24 (10) (14) -- ------- ------- -------- ------- Total.............................. $11,557 $ (994) $ (2,710) $ 7,853 ------- ------- -------- ------- |
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE AT BALANCE AT JANUARY 2, PROVISION/ JANUARY 1, 1999 ADJUSTMENTS SPENDING 2000 ---------- ----------- -------- ---------- Sunshine Biscuits, Inc. Severance ...................................... $ 86 $ -- $ (23) $ 63 Non cancelable lease obligations and other facility closure costs ....................... 2,227 -- (265) 1,962 -------- -------- -------- -------- Total ................................ $ 2,313 $ -- $ (288) $ 2,025 -------- -------- -------- -------- President International, Inc. .................. Severance ...................................... $ 6,594 $ (3,189) $ (576) $ 2,829 Non cancelable lease obligations and other facility closure costs ....................... 5,670 (991) (83) 4,596 Other .......................................... 447 (319) (118) 10 -------- -------- -------- -------- Total ................................ $ 12,711 $ (4,499) $ (777) $ 7,435 -------- -------- -------- -------- GRAND TOTAL .......................... $ 57,488 $ (6,898) $(10,615) $ 39,975 ======== ======== ======== ======== |
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. 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 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
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
FII SHAREHOLDER'S RIGHTS PLAN
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.
STOCK INCENTIVE PLANS
Flowers
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. Additionally, FII has a Non-Employee Directors' Equity Plan (the "Directors' Plan") pursuant to which an aggregate of 300,000 shares of Common Stock may be issued and awarded as stock options to non-employee directors. All options granted under this plan have ten year terms and vest one year from the date of grant.
During fiscal 1999, fiscal 1998 and the twenty-seven week transition period ended January 3, 1998, 673,800 shares, 345,972 shares and 347,609 shares respectively, of FII's Common Stock were issued as Restricted Stock Awards ("RSAs"). Pursuant to the ESIP, 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. During fiscal 1999, special grants were made to
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
key executives that include the attainment of specific financial goals as a condition of vesting. The restriction periods end at various dates through June 2003. 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 described above and shares still outstanding granted prior to fiscal 1997 ranges from $5.11 to $12.82 per share. Compensation expense for fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997 was $4.8 million, $3.8 million, $1.1 million and $1.7 million, respectively.
During fiscal 1996, 358,547 shares of FII's Common Stock were issued as Equity Incentive Awards ("EIA"). Pursuant to the ESIP, 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. Compensation expense for fiscal 1999, fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997 was $.2 million, $.7 million, $.3 million and $.8 million, respectively. The awards were fully exercised in fiscal 1999.
During fiscal 1998, 1,128,600 shares of FII's Common Stock were granted as non-qualified stock options ("NQSOs"). Pursuant to the ESIP, the NQSOs vest at the end of four years 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. As of January 1, 2000 and January 2, 1999, there were 1,854,000 and 1,926,000 NQSOs outstanding, respectively.
During fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997, the stock option activity pursuant to the ESIP is set forth below:
FOR THE 52 FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, 1998 JUNE 29, 1997 ------------------ ------------------ ------------------ ------------------ 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 ......... 1,926 $15.34 1,165 $ 7.57 1,211 $ 7.52 1,664 $ 7.11 Granted .................................. 1,129 21.00 Exercised ................................ (63) 5.50 (368) 8.10 (46) $ 6.06 (453) $ 6.03 Forfeitures .............................. (9) ------ ------ ------ ------ ------ ------ ------ ------ Outstanding at end of year ............... 1,854 $15.65 1,926 $15.34 1,165 $ 7.57 1,211 $ 7.52 ====== ====== ====== ====== Exercisable at end of year ............... 735 798 1,165 1,211 ====== ====== ====== ====== Weighted average fair value of options granted during the year ................ N/A $ 4.37 N/A N/A ====== ====== ====== ====== |
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options outstanding and exercisable, under the ESIP, on January 1, 2000 were as follows:
WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE REMAINING CONTRACTUAL RANGE OF EXERCISE PRICES PER SHARE SHARES PRICE PER SHARE LIFE IN YEARS ---------------------------------- --------- ---------------- --------------------- Outstanding: $ 5.50 - $ 6.06 ................. 262,234 $ 5.79 1.5 $ 8.45 .......................... 472,500 8.45 5.5 $21.00 .......................... 1,119,400 $21.00 8.5 --------- ------ --- $ 5.50 - $21.00 ................. 1,854,134 $15.65 6.7 ========= ====== === Exercisable: $ 5.50 - $ 6.06 ................. 262,234 $ 5.79 $ 8.45 .......................... 472,500 8.45 --------- ------ $ 5.50 - $ 8.45 ................. 734,734 $ 7.50 ========= ====== |
During fiscal 1999 and fiscal 1998, and the twenty-seven week transition period ended January 3, 1998 stock option activity pursuant to the Directors' Plan is set forth below:
FOR THE 52 FOR THE 52 FOR THE 27 WEEKS ENDED WEEKS ENDED WEEKS ENDED JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, 1998 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Outstanding at beginning of year ............ 57 $18.51 41 $17.50 Granted ..................................... 28 24.12 16 21.00 41 $17.50 Exercised ................................... Forfeitures ................................. ------ ------ ------ Outstanding at end of year .................. 85 $20.35 57 $18.51 41 $17.50 ====== ====== ====== Exercisable at end of year .................. 57 41 0 ====== ====== ====== Weighted average fair value of options granted during the year ................... $ 7.60 $ 4.37 $ 4.36 ====== ====== ====== |
As of January 1, 2000, 57,376 of the options, under the Directors' Plan are exercisable with a weighted average price of $18.51. The weighted average remaining contractual life of options outstanding is approximately eight and one half years. The exercise price of the options range from $17.50 to $24.12.
Keebler
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 1, 2000, options for 5,919,629 shares were outstanding, of which 4,493,801 are exercisable with a weighted average price of $1.96. Keebler's 1998 Omnibus Stock Incentive Plan has 6,500,000 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 1, 2000, options for 2,817,602 shares were outstanding, of which 899,699 are exercisable with a weighted average exercise price of $25.74. Exercise prices as of January 1, 2000, 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 six and one-half years. Exercise prices as of January 1, 2000, for options outstanding under the 1998 Omnibus Stock Incentive Plan range from $24.00 to $39.25. The weighted average remaining contractual life of these options is approximately five years.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Keebler's Non-Employee Director Stock Plan has 300,000 shares of Keebler's Common Stock authorized for future grant. All options granted have ten year terms and vest automatically upon grant. Under this plan, at January 1, 2000, options for 30,000 shares were outstanding and exercisable. The exercise price of these options range from $27.44 to $30.75. The weighted average remaining contractual life of these options is approximately eight and one half years.
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.
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 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 --------------- --------------- --------------- ------------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) As Reported: Net Income ............................. $ 7,294 $41,899 $23,560 $62,324 Net Income Per Common Share: Basic ............................... .07 .43 .27 .71 Diluted ............................. .07 .43 .27 .71 Pro Forma: Net Income ............................. $ 5,676 $38,989 $22,735 $61,716 Net Income Per Common Share: Basic ............................... .06 .40 .26 .70 Diluted ............................. .06 .40 .26 .70 |
For awards granted the following weighted average assumptions were used to determine fair value using the Black-Scholes option-pricing model:
FOR THE 52 WEEKS FOR THE 52 WEEKS FOR THE 27 ENDED ENDED WEEKS ENDED JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, ---------------- ---------------- 1998 FII KEEBLER FII KEEBLER FII ----- ------- ----- ------- ----------- Dividend Yield............................... 0.00% 0.00% 3.64% 0.00% 0.00% Expected Volatility.......................... 23.70% 24.80% 23.90% 27.20% 26.80% Risk-free Interest Rate...................... 5.80% 5.76% 5.60% 5.04% 6.31% Expected Option Life (Years)................. 4 5 5 5 4 |
NOTE 9. RETIREMENT PLANS
DEFINED BENEFIT PLANS
Flowers
Flowers has a trusteed, noncontributory defined benefit pension plan covering certain employees. The benefits are based on years of service and the employee's career earnings. The plan is 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 1, 2000 and January 2, 1999, the assets of the plan include certificates of deposit, marketable equity securities, mutual funds, corporate and government debt securities and annuity contracts. The marketable equity securities include
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
916,250 and 506,250 shares of FII's Common Stock, respectively, with a fair value of approximately $14.6 million and $12.1 million at January 1, 2000 and January 2, 1999, respectively. In addition to the pension plan, Flowers also has an unfunded supplemental retirement plan for certain highly compensated employees. Benefits provided by this supplemental plan are reduced by benefits provided under the defined benefit pension plan.
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. Assets held by the pension 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. Keebler contributes 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. In addition to the pension plan, Keebler also maintains an unfunded supplemental retirement plan for certain highly compensated former executives and an unfunded plan for certain highly compensated current and former executives ("the excess retirement plan"). Benefits provided are based on years of service.
The net periodic pension cost for the Flowers plans that are not fully funded and Keebler's unfunded supplemental retirement plan include the following components:
FOR THE 52 FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JANUARY 1, JANUARY 2, JANUARY 1, JUNE 28, 2000 1999 1998 1997 ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) Service cost.......................... $ 8,005 $ 6,268 $ 2,846 $ 5,603 Interest cost......................... 13,166 11,904 5,207 10,311 Expected return on plan assets........ (13,844) (13,635) (5,585) (10,415) Amortization of transition assets..... (841) (841) (422) (841) Prior service cost.................... 59 59 30 84 Recognized net actuarial (gain) loss................................ 448 (177) 35 118 -------- -------- ------- -------- Net periodic pension cost............. $ 6,993 $ 3,578 $ 2,111 $ 4,860 ======== ======== ======= ======== |
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 Flowers plans that are not fully funded and Keebler's unfunded supplemental retirement plan are as follows:
JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- (AMOUNTS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year .................. $ (191,649) $ (146,937) Acquisitions ............................................. (10,303) Service cost ............................................. (8,005) (6,268) Interest cost ............................................ (13,166) (11,904) Actuarial gain (loss) .................................... 24,650 (23,964) Benefits paid ............................................ 8,040 7,727 ---------- ---------- Benefit obligation at end of year ........................ (180,130) (191,649) ---------- ---------- Change in plan assets: Fair value of plan assets at beginning of year ........... 146,793 154,828 Actual return on plan assets ............................. 14,294 (2,199) Employer contribution .................................... 252 1,141 Benefits paid ............................................ (7,400) (6,977) ---------- ---------- Fair value of plan assets at end of year ................. 153,939 146,793 ---------- ---------- Funded status ............................................ (26,191) (44,856) Unrecognized net actuarial (gain) loss ................... (2,934) 22,749 Contribution between measurement date and fiscal year end ................................................... 183 185 Unrecognized prior service cost .......................... 498 557 Unrecognized net transition asset ........................ (2,472) (3,313) ---------- ---------- Net amount recognized at end of year ..................... $ (30,916) $ (24,678) ========== ========== |
The net periodic pension cost for Keebler's unfunded excess retirement plan includes the following components:
FOR THE 52 WEEKS ENDED ----------------------- JANUARY 1, JANUARY 2, 2000 1999 ---------- ---------- (AMOUNTS IN THOUSANDS) Service cost ................................................ $431 $173 Interest cost ............................................... 155 78 Recognized net actuarial (gain) loss ........................ 8 (47) ---- ---- Net periodic pension cost ................................... $594 $204 ==== ==== |
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unfunded status of Keebler's excess retirement plan and the amounts recognized in the consolidated balance sheet are as follows:
JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- (AMOUNTS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year ........ $ (2,395) $ (1,085) Service cost ................................... (431) (173) Interest cost .................................. (155) (78) Actuarial (loss) ............................... (158) (1,076) Benefits and expenses paid ..................... 31 17 -------- -------- Benefit obligation at end of year .............. (3,108) (2,395) Fair value of plan assets -------- -------- Funded status .................................. (3,108) (2,395) Unrecognized net actuarial loss ................ 501 351 Benefit paid subsequent to measurement date .... 17 -------- -------- Net amount recognized at end of year ........... $ (2,590) $ (2,044) ======== ======== |
The net amount recognized at the end of the year includes $21.5 million which is recorded in other accrued liabilities (Note 3) and the remainder is included in other long-term liabilities.
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 1, JANUARY 2, JANUARY 3, JUNE 28, 2000 1999 1998 1997 ---------- ---------- ---------- -------- Weighted average assumptions: Measurement date................... 9/30/99 9/30/98 9/30/97 3/31/97 Discount rate...................... 7.50%-7.75% 6.50%-7.50% 8.00% 8.00% Expected return on plan assets..... 9.00% 9.00% 9.00% 9.00% Rate of compensation increase...... 4.50%-5.25% 4.00%-5.00% 5.50% 5.50% |
The net periodic pension cost for the Company's fully funded plan includes the following components:
FOR THE 52 WEEKS ENDED --------------------------------- JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- (AMOUNTS IN THOUSANDS) Service cost ........................... $ 13,364 $ 9,040 Interest cost .......................... 32,841 31,080 Expected return on plan assets ......... (41,887) (39,352) Recognized net actuarial loss .......... 43 Prior service cost ..................... 689 689 -------- -------- Net periodic pension cost .............. $ 5,050 $ 1,457 ======== ======== |
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:
JANUARY 1, 2000 JANUARY 2, 2000 --------------- --------------- (AMOUNTS IN THOUSANDS) Benefit obligation at beginning of year .................... $ (520,312) $ 0 Acquisitions ............................................. (460,139) Service cost ............................................. (13,364) (9,040) Interest cost ............................................ (32,841) (31,080) Amendments ............................................... 0 (4,874) Actuarial gain (loss) .................................... 60,261 (45,871) Curtailment gain ......................................... 897 Benefits paid ............................................ 30,009 30,692 ---------- ---------- Benefit obligation at end of year ........................ (475,350) (520,312) ---------- ---------- Change in plan assets: Fair value of plan assets at beginning of year ........... 581,621 Acquisitions ............................................. 515,290 Actual return on plan assets ............................. 2,253 77,731 Employer contribution .................................... 115 19,292 Benefits paid ............................................ (30,009) (30,692) ---------- ---------- Fair value of plan assets at end of year ................. 553,980 581,621 ---------- ---------- Funded status ............................................ 78,630 61,309 Unrecognized net actuarial gain .......................... (37,209) (16,538) Contribution between measurement date and fiscal year end ................................................... 115 Unrecognized prior service cost .......................... 7,730 9,230 ---------- ---------- Net amount recognized at end of year ..................... $ 49,151 $ 54,116 ========== ========== |
Assumptions used in accounting for the Company's fully funded plan are as follows:
JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- Weighted average assumptions: Measurement date.................................... 9/30/99 9/30/98 Discount rate....................................... 7.50% 6.50% Expected return on plan assets...................... 8.70% 9.00% Rate of compensation increase....................... 4.50% 4.00% |
FII is not obligated to satisfy the pension obligations of Keebler.
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 $.5 million for fiscal 1999, $.3 million for fiscal 1998, $.5 million for the twenty-seven week transition period ended January 3, 1998 and $.4 million for fiscal 1997.
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 1999 and fiscal 1998, the twenty-seven week transition period ended January 3,
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 and fiscal 1997, the total cost and contributions were $1.9 million, $1.3 million, $.6 million and $1.4 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 1999 and fiscal 1998, Keebler expensed contributions of $2.5 million and $2.3 million, respectively.
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 $6.8 million and $8.9 million for fiscal 1999 and fiscal 1998, respectively.
NOTE 10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Flowers
FII provides certain medical and life insurance benefits for eligible retired employees. The medical plan covers eligible retirees under the active medical and dental plans. The plan incorporates an up front deductible, coinsurance payments and employee contributions at COBRA premium levels. Eligibility and maximum period of coverage is based on age and length of service. The life insurance plan offers coverage to a closed group of retirees.
Keebler
Keebler provides certain medical and life insurance benefits for eligible retired employees of Keebler. The medical plan, which covers nonunion and certain union 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.
Additionally, Keebler 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 pre-fund the plan. The postemployment obligation included in the consolidated balance sheet at January 1, 2000 and January 2, 1999 was $5.5 million and $4.7 million, respectively. The plan was amended in fiscal 1999 for a change in the calculation of retiree contribution rates that resulted in an $8.5 million reduction to the benefit obligation and a corresponding decrease in unrecognized prior service cost.
The net periodic postretirement benefit expense for the Company includes the following components:
52 WEEKS ENDED ----------------------------------- JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- (AMOUNTS IN THOUSANDS) Service cost ..................................... $ 2,348 $ 2,045 Interest cost .................................... 3,722 3,961 Amortization of prior service cost ............... (115) (115) Prior service cost ............................... 389 Amortization of net gain ......................... (375) -------- -------- Net periodic postretirement benefit cost ......... $ 5,969 $ 5,891 ======== ======== |
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unfunded status and the amounts recognized in the balance sheet for the Company's postretirement obligation are as follows:
JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- (AMOUNTS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year .......... $(60,738) Acquisitions ..................................... $(58,288) Service cost ..................................... (2,348) (2,045) Interest cost .................................... (3,722) (3,961) Amendments ....................................... 8,531 Participant contributions ........................ 38 Actuarial gain ................................... (21) (828) Curtailment ...................................... 108 Benefits paid .................................... 5,558 4,384 -------- -------- Benefit obligation at end of year ................ $(52,594) $(60,738) Unrecognized actuarial gain ................... (8,166) (7,856) Unrecognized prior service cost ............... (4,817) 3,895 Benefit payments subsequent to measurement date 880 978 -------- -------- Accrued benefit obligation .................... $(64,697) $(63,721) ======== ======== |
Assumptions used in accounting for the Company's postretirement benefit plans at each of the respective period ends are as follows:
JANUARY 1, 2000 JANUARY 2, 1999 --------------- --------------- Weighted average assumptions: Measurement date..................................... 9/30/99 9/30/98 Discount rate........................................ 6.75%-7.50% 6.50% Rate of increase..................................... 5.50%-8.00% 6.00% |
A one percent increase in the trend rate for health care costs would have increased the accumulated benefit obligation as of January 1, 2000 by $2.3 million and the net periodic benefit cost by $0.4 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 $2.1 million and $0.3, as of January 1, 2000 and January 2, 1999, respectively.
FII is not obligated to satisfy the postretirement and postemployment benefits of Keebler.
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 WEEKS ENDED FOR THE 27 FOR THE 52 ------------------------- WEEKS ENDED WEEKS ENDED JANUARY 1, JANUARY 2, JANUARY 3, JUNE 28, 2000 1999 1998 1997 ---------- ---------- ----------- ----------- (AMOUNTS IN THOUSANDS) Current Taxes: Federal ................ $ 60,139 $ 72,121 $ 5,686 $ 26,910 State .................. 9,203 6,010 2,395 5,557 -------- -------- -------- -------- 69,342 78,131 8,081 32,467 -------- -------- -------- -------- Deferred Taxes: Federal ................ (11,228) (3,346) 2,395 1,587 State .................. (1,854) (394) (844) (863) -------- -------- -------- -------- (13,082) (3,740) 1,551 724 -------- -------- -------- -------- Provision for income taxes $ 56,260 $ 74,391 $ 9,632 $ 33,191 ======== ======== ======== ======== |
Deferred tax liabilities (assets) are comprised of the following:
JANUARY 1, JANUARY 2, 2000 1999 ---------- ---------- (AMOUNTS IN THOUSANDS) Depreciation ................................ $ 132,792 $ 173,610 Trademarks, trade names and intangibles ..... 64,887 49,348 Prepaid pension ............................. 13,327 14,283 Inventory valuation ......................... 559 6,779 Other ....................................... 26,053 13,816 --------- --------- Gross deferred tax liabilities .... 237,618 257,836 --------- --------- Workers compensation ........................ (9,070) (19,891) Postretirement/postemployment benefits ...... (26,778) (26,171) Employee benefits ........................... (34,667) (33,806) Facility closing costs and severance ........ (37,342) (56,805) Loss carryforwards .......................... (21,910) (84,447) Other ....................................... (19,891) (17,109) --------- --------- Gross deferred tax assets ......... (149,658) (238,229) Deferred tax assets valuation allowance ..... 3,012 86,310 --------- --------- $ 90,972 $ 105,917 ========= ========= |
The net change in the valuation allowance for deferred tax assets was a decrease of $83.3 million, related to net operating loss carryforwards. The decrease was primarily attributable to the utilization of the Keebler pre-acquisition net operating loss carryforwards as a result of the resolution of the uncertainty regarding the availability of these losses.
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 WEEKS ENDED FOR THE 27 FOR THE 52 --------------------------- WEEKS ENDED WEEKS ENDED JANUARY 1, JANUARY 2, JANUARY 3, JUNE 28, 2000 1999 1998 1997 ---------- ---------- ----------- ----------- (AMOUNTS IN THOUSANDS) Tax at U.S. federal income tax rate ...... $ 36,090 $ 57,283 $ 8,757 $ 30,728 State income taxes, net of U.S. federal income tax benefit ..................... 6,923 5,298 1,390 3,837 Benefit of operating loss carryforwards .. (522) (525) (1,210) Intangible amortization .................. 9,150 6,910 174 122 Other .................................... 4,619 4,900 (164) (286) -------- -------- ------- -------- Provision for income taxes ..... $ 56,260 $ 74,391 $ 9,632 $ 33,191 ======== ======== ======= ======== |
The amount of federal net 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 net operating losses 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 net operating loss carryforwards of $156.0 million with expiration dates through fiscal 2014.
In fiscal 1998, Keebler's net operating loss carryforwards were approximately $207.1 million. All net operating loss carryforwards were used in fiscal 1999 to offset gains incurred through the Section 338 income tax election, which adjusted the tax basis of all assets and liabilities that resulted from INFLO's acquisition of Keebler. Keebler's intangible asset resulting from this transaction was reduced by a corresponding $11.8 million as a result of resolving the pre-acquisition tax basis of acquired assets and liabilities.
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.
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.
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.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the operations in these reportable segments is as follows:
FOR THE 52 WEEKS ENDED FOR THE 27 FOR THE 52 ------------------------------- WEEKS ENDED WEEKS ENDED JANUARY 1, JANUARY 2, JANUARY 3, JUNE 28, 2000 1999 1998 1997 ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) Sales: Flowers Bakeries ........................... $ 961,699 $ 939,119 $ 457,803 $ 901,045 Mrs. Smith's Bakeries ...................... 673,133 672,821 369,262 615,637 Keebler .................................... 2,667,771 2,226,480 Eliminations (1) ........................... (66,593) (73,053) (42,968) (78,969) ----------- ----------- ----------- ----------- $ 4,236,010 $ 3,765,367 $ 784,097 $ 1,437,713 =========== =========== =========== =========== Depreciation and Amortization: Flowers Bakeries ........................... $ 32,865 $ 33,487 $ 16,505 $ 28,533 Mrs. Smith's Bakeries ...................... 20,127 18,676 9,427 15,830 Keebler .................................... 84,125 69,125 Other ...................................... 7,502 7,477 998 1,607 ----------- ----------- ----------- ----------- $ 144,619 $ 128,765 $ 26,930 $ 45,970 =========== =========== =========== =========== Non-Recurring Charge: Flowers Bakeries ........................... $ (1,120) $ 32,161 Mrs. Smith's Bakeries ...................... (4,874) 32,300 Keebler .................................... 66,349 3,852 ----------- ----------- $ 60,355 $ 68,313 =========== =========== Income (Loss) Before Interest and Taxes: Flowers Bakeries ........................... $ 66,995 $ 75,779 $ 31,388 $ 46,189 Mrs. Smith's Bakeries ...................... (53,256) 45,855 20,153 40,186 Keebler .................................... 263,903 199,891 Unallocated General Expenses ............... (33,308) (20,823) (14,726) (16,716) Non-Recurring Charge ....................... (60,355) (68,313) ----------- ----------- ----------- ----------- $ 183,979 $ 232,389 $ 36,815 $ 69,659 =========== =========== =========== =========== Interest Expense, Net ........................ $ 80,865 $ 68,725 $ 11,796 $ 25,109 =========== =========== =========== =========== Income Before Income Taxes, Investment in Unconsolidated Affiliate, Minority Interest, Extraordinary Loss and Cumulative Effect of Changes in Accounting Principles ........... $ 103,114 $ 163,664 $ 25,019 $ 87,794 =========== =========== =========== =========== Capital Expenditures: Flowers Bakeries ........................... $ 73,553 $ 38,573 $ 22,710 $ 48,334 Mrs. Smith's Bakeries (2) .................. 127,340 34,711 9,817 28,577 Keebler .................................... 100,685 66,798 Other ...................................... 12,435 193 330 599 ----------- ----------- ----------- ----------- $ 314,013 $ 140,275 $ 32,857 $ 77,510 =========== =========== =========== =========== |
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE 52 WEEKS ENDED FOR THE 27 FOR THE 52 ---------------------------- WEEKS ENDED WEEKS ENDED JANUARY 1, JANUARY 2, JANUARY 3, JUNE 28, 2000 1999 1998 1997 ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) Assets: Flowers Bakeries ................. $ 491,396 $ 458,966 $401,787 $408,815 Mrs. Smith's Bakeries ............ 506,586 459,652 366,602 361,575 Keebler .......................... 1,528,183 1,655,780 Other ............................ 374,313 286,502 130,491 127,797 ---------- ---------- -------- -------- $2,900,478 $2,860,900 $898,880 $898,187 ========== ========== ======== ======== |
(1) Primarily represents elimination of intersegment sales from Mrs. Smith's Bakeries to Flowers Bakeries which are transferred at standard costs.
(2) Includes noncash capital leases of $47.4 million.
NOTE 13. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Results of operations for each of the four quarters in the respective fiscal years are as follows (each quarter represents a period of twelve weeks, except the first quarter, which includes sixteen weeks):
QUARTER FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales .............................. 1999 $1,301,695 $ 940,334 $ 983,223 $1,010,759 1998 1,075,037 833,059 859,517 997,754 Gross margin ....................... 1999 693,750 496,406 493,900 549,998 1998 588,747 458,007 477,311 538,721 Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles ....................... 1999 24,836 (27,735) (9,103) 19,296 1998 15,028 18,467 25,555 (13,082) Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest .... 1999 -- -- -- -- 1998 -- -- (938) -- Cumulative effect of changes in accounting principles, net of tax benefit .......................... 1999 -- -- -- -- 1998 (3,131)(1) -- -- -- Net income (loss) .................. 1999 24,836 (27,735) (9,103) 19,296 1998 11,897 18,467 24,617 (13,082) Basic net income (loss) per common share ............................ 1999 .25 (.28) (.09) .19 1998 .13 .19 .25 (.13) Diluted net income (loss) per common share ............................ 1999 .25 (.28) (.09) .19 1998 .13 .19 .25 (.13) |
(1) During the fourth quarter of fiscal 1998, the Company adopted SOP 98-5. The cumulative effect of this change in accounting principles 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.
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. 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 ............................................. $ 1,432,200 $ 774,767 Income before income taxes and cumulative effect of changes in accounting principles ................ 62,478 50,335 Income tax expense ................................ 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: Net income per share before cumulative effect -- basic ........................................ .72 .35 Net income per share before cumulative effect -- diluted ...................................... .72 .35 Net income per share -- basic ................... .61 .35 Net income per share -- diluted ................. .61 .35 |
NOTE 15. SUBSEQUENT EVENTS
In January 2000, Flowers Bakeries acquired The Kroger Co.'s bakery in Memphis, Tennessee ("Kroger"). The transaction was accounted for as a purchase. The Memphis Bakery has two production lines, which produce breads, buns and rolls for Kroger stores in Tennessee, northern Arkansas and southern Missouri.
On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin") in a business combination that was accounted for as a purchase. Austin is a leading producer and marketer of single serve baked snacks, including cracker sandwiches and bite-sized crackers and cookies.
The Austin and Kroger transactions, valued collectively at approximately $275 million, were financed with borrowings under the existing credit facilities of Keebler and Flowers, respectively.
On March 30, 2000 FII amended the $500 million Syndicated Loan
Facility. The amendment adjusted the applicable interest margin to 2.0 % and the
commitment fee to .05%. In addition, certain financial covenants were amended
while others were added. The covenants in effect currently include, among
others, (1) a maximum leverage ratio, (2) a minimum fixed charge coverage ratio,
(3) minimum adjusted EBITDA, as defined, (4) a borrowing base covenant requiring
that FII's total indebtedness not exceed specified percentages of the book value
of accounts receivable, inventory, property, plant and equipment and the fair
value of FII's interest in Keebler, (5) a prohibition on acquisitions, (6) a
negative pledge on all assets of the Company, (7) a limit on Flowers capital
expenditures, and (8) limits on cash dividends unless the Company would have,
following payment thereof, at least $15 million availability under the unused
commitments and borrowing base tests of the facility. As of January 1, 2000 and
the date of the amendment the Company was in compliance with all covenants.
Further, the amount of retained earnings available for payment of dividends at
January 1, 2000 under the amendment was $125.0 million.
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 3, 2000 and March 30, 2000 of this Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. 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 March 30, 2000 |
EXHIBIT 99.2
Portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 for Flowers Industries, Inc., filed with the SEC on November 21, 2000.
FLOWERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in Thousands, Except Share Data)
October 7, 2000 January 1, 2000 --------------- --------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 23,766 $ 39,382 Accounts and notes receivable, net 191,140 185,939 Inventories, net: Raw materials 52,277 68,110 Packaging materials 31,354 29,855 Finished goods 214,210 175,281 Other 4,560 7,679 ------------ ------------ 302,401 280,925 Deferred income taxes 69,289 71,498 Other 99,765 112,794 ------------ ------------ 686,361 690,538 ------------ ------------ Property, Plant and Equipment: Land 52,717 49,612 Buildings 427,566 386,197 Machinery and equipment 1,067,652 958,176 Furniture, fixtures and transportation equipment 165,154 148,565 Construction in progress 96,147 127,545 ------------ ------------ 1,809,236 1,670,095 Less: accumulated depreciation (614,229) (520,456) ------------ ------------ 1,195,007 1,149,639 ------------ ------------ Other Assets 84,988 88,715 ------------ ------------ Cost in Excess of Net Tangible Assets: Cost in excess of net tangible assets 1,259,346 1,033,272 Less: accumulated amortization (91,080) (61,686) ------------ ------------ 1,168,266 971,586 ------------ ------------ $ 3,134,622 $ 2,900,478 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ 58,309 $ 47,566 Accounts payable 252,352 248,153 Facility closing costs and severance 17,539 16,836 Other accrued liabilities 345,294 343,242 ------------ ------------ 673,494 655,797 ------------ ------------ Long-Term Debt and Capital Leases 1,374,105 1,208,630 ------------ ------------ Other Liabilities: Deferred income taxes 158,456 162,470 Postretirement/postemployment obligations 64,038 64,772 Facility closing costs and severance 22,204 30,188 Other 60,772 56,289 ------------ ------------ 305,470 313,719 ------------ ------------ Minority Interest 236,483 183,578 ------------ ------------ Stockholders' Equity: Preferred stock-$100 par value, 10,467 authorized and none issued Preferred stock-$100 par value, 249,533 authorized and none issued Common stock-$.625 par value, 350,000,000 authorized and 100,527,893 and 100,863,848 shares issued, respectively 62,830 63,040 Capital in excess of par value 289,127 291,377 Retained earnings 215,285 219,279 Common stock in treasury, 452,995 and 567,160 shares, respectively (8,272) (10,594) Stock compensation related adjustments (13,900) (24,348) ------------ ------------ 545,070 538,754 ------------ ------------ $ 3,134,622 $ 2,900,478 ============ ============ |
FLOWERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
For the Twelve Weeks Ended For the Forty Weeks Ended ---------------------------------- ----------------------------------- October 7, 2000 October 9, 1999 October 7, 2000 October 9, 1999 --------------- --------------- --------------- --------------- Sales $ 1,022,967 $ 982,664 $ 3,317,466 $ 3,222,157 Materials, supplies, labor and other production costs 460,383 491,204 1,505,245 1,548,311 Selling, marketing and administrative expenses 446,377 425,839 1,445,318 1,408,420 Depreciation and amortization 40,860 33,981 129,145 107,240 Insurance proceeds (3,105) 0 (4,774) 0 Non-recurring (credit) charge (1,428) 0 (2,424) 69,208 ----------- ---------- ----------- ----------- Income from operations 79,880 31,640 244,956 88,978 Interest (income) (1,517) (249) (3,002) (1,190) Interest expense 28,148 18,599 89,239 63,595 ----------- ---------- ----------- ----------- Interest expense, net 26,631 18,350 86,237 62,405 ----------- ---------- ----------- ----------- Income before income taxes and minority interest 53,249 13,290 158,719 26,573 Income taxes 21,462 7,990 68,115 19,102 ----------- ---------- ----------- ----------- Income before minority interest 31,787 5,300 90,604 7,471 Minority interest (18,829) (14,403) (55,359) (19,473) ----------- ---------- ----------- ----------- Net income (loss) $ 12,958 $ (9,103) $ 35,245 $ (12,002) =========== ========== =========== =========== Net Income (Loss) Per Common Share: Basic: Net income (loss) per share $ 0.13 $ (0.09) $ 0.35 $ (0.12) Weighted average shares outstanding 100,089 100,274 100,128 100,060 Diluted: Net income (loss)per share $ 0.13 $ (0.09) $ 0.35 $ (0.12) Weighted average shares outstanding 100,368 100,522 100,372 100,388 Cash Dividends Paid Per Common Share $ 0.1325 $ 0.1300 $ 0.3975 $ 0.3825 |
(See Accompanying Notes to Consolidated Financial Statements)
FLOWERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
For the Forty Weeks Ended ----------------------------------- October 7, 2000 October 9, 1999 --------------- --------------- Cash flows provided by operating activities: Net income (loss) $ 35,245 $ (12,002) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Minority interest 55,359 19,473 Depreciation and amortization 129,145 107,240 Non-recurring (credit) charge (2,043) 46,071 Deferred income taxes 5,338 (21,274) Income tax benefit related to stock options exercised 21,457 10,754 Gain on sale of property, plant and equipment (2,208) 0 Gain on sale of business (5,700) 0 Changes in assets and liabilities, net of acquisitions: Accounts and notes receivable, net (10,639) (68,561) Inventories, net (12,904) 2,745 Other assets 9,717 (33,471) Accounts payable and other accrued liabilities 7,310 45,542 Income taxes payable (21,329) 0 Facility closing costs and severance (21,129) 3,116 Other 831 8,941 --------- --------- Net cash provided by operating activities 188,450 108,574 --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment (91,624) (195,608) Acquisition of businesses, net of divestitures (258,867) (7,939) Sesame Street Trademark license agreement (10,000) 0 Proceeds from property sales 23,377 0 Other 106 0 --------- --------- Net cash disbursed for investing activities (337,008) (203,547) --------- --------- Cash flows from financing activities: Dividends paid, net of dividends received (52,139) (38,278) Treasury stock purchases (10,023) (21,683) Stock compensation and warrants exercised 10,405 4,888 Proceeds from receivables securitization 13,000 125,000 Decrease in commercial paper 0 (10,209) Increase (decrease) in debt and capital leases 171,699 (4,215) --------- --------- Net cash provided by financing activities 132,942 55,503 --------- --------- Net (decrease) in cash and cash equivalents (15,616) (39,470) Cash and cash equivalents at beginning of period 39,382 54,542 --------- --------- Cash and cash equivalents at end of period $ 23,766 $ 15,072 ========= ========= Schedule of noncash investing and financing activities: Stock compensation transactions $ 2,505 $ 0 ========= ========= |
(See Accompanying Notes to Consolidated Financial Statements)
FLOWERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Definitions - As used in this filing, unless the context otherwise indicates: (i) "FII" means Flowers Industries, Inc., the publicly traded holding company, which owns all of the outstanding common stock of Flowers Bakeries, Inc. ("Flowers Bakeries") and Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a majority of the outstanding common stock of Keebler Foods Company; (ii) "Keebler" means Keebler Foods Company and its consolidated subsidiaries; (iii) "Flowers" means FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs. Smith's Bakeries, and their respective subsidiaries, excluding Keebler; and (iv) the "Company" means Flowers and its consolidated, majority-owned subsidiary, Keebler, collectively.
Interim Financial Statements - The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company's management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The unaudited consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of October 7, 2000 and January 1, 2000, the results of operations for the twelve and forty week periods ended October 7, 2000 and October 9, 1999 and statement of cash flows for the forty weeks ended October 7, 2000 and October 9, 1999. The results of operations for the twelve and forty week periods ended October 7, 2000 and October 9, 1999, are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2000.
Reporting Periods - The Company's quarterly reporting periods for fiscal 2000 are as follows: first quarter ended April 22, 2000 (sixteen weeks), second quarter ended July 15, 2000 (twelve weeks), third quarter ended October 7, 2000 (twelve weeks) and fourth quarter ending December 30, 2000 (twelve weeks).
Reclassifications - Certain reclassifications of prior period data have been made to conform with the current period reporting.
2. BUSINESS ACQUISITIONS
On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin"), for an aggregate purchase price of $253.7 million, excluding related fees and expenses paid of approximately $3.0 million. The acquisition of Austin was a cash transaction funded with approximately $235.0 million from borrowings under Keebler's $700.0 million Senior Credit Facility Agreement and the remainder from cash received on additional sales of accounts receivable under Keebler's $125.0 million Receivables Purchase Agreement.
The acquisition of Austin 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 Austin based on respective fair values. The acquisition has resulted in an estimated unallocated excess purchase price over fair value of net assets acquired of $168.5 million, which is being amortized on a straight-line basis over a forty year period.
Results of operations for Austin from March 6, 2000, have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place on the first day of the year reported. The unaudited pro forma information includes adjustments for interest expense that would have been incurred related to financing the purchase 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 Austin acquisition been effected on the first day of the year reported.
Unaudited (Amounts In Thousands Except Per Share Data) For the Forty Weeks Ended --------------------------------- October 7, 2000 October 9, 1999 --------------- --------------- Net sales .................................................. $ 3,344,961 $ 3,384,350 Net income (loss) .......................................... $ 33,303 $ (12,776) Diluted net income (loss) per share ........................ $ .33 $ (.13) |
On January 26, 2000, Flowers completed the purchase of The Kroger Company's Memphis, Tennessee bakery. The results of operations of this bakery from January 26, 2000 are included in the consolidated statements of operations and are not significantly different from the results that would have been reported had the operations been included from January 2, 2000.
3. PURCHASE COMMITMENTS AND 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.
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. To qualify as a hedge, a commodity agreement must reduce the exposure of the Company to price risk and must show a high correlation of changes in value with the value of the hedged item. Assuming a ten percent decrease in market price, the fair value of open contracts with a notional amount of $85.0 million at October 7, 2000 would be impacted by $(6.3) million.
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 agreements, calculated as the difference between the fixed and floating rates multiplied by the notional amount, are recorded as adjustments to interest expense, in accordance with hedge accounting. The fair value of the interest rate swap agreements at October 7, 2000, with a notional amount of $316.5 million, remains comparable to year-end. Additionally, interest rates have not fluctuated materially from year end and therefore the sensitivity analysis performed as of January 1, 2000 for interest rate swap agreements remains a valid estimate.
4. DEBT
Long-term debt consisted of the following at October 7, 2000 and January 1, 2000, respectively:
FLOWERS: Interest Rate Maturity October 7, 2000 January 1, 2000 -------------- ---------- --------------- --------------- (Amounts in Thousands) Syndicated Loan Facility ..... 8.13% 1/29/2003 $ 440,000 $ 350,000 Senior Notes ................. 6.84% 1/5/2016 125,000 125,000 Debentures ................... 7.15% 4/15/2028 200,000 200,000 Capital Lease Obligations .... 8.07% 2000-2007 50,636 51,317 Other ........................ Various 2000-2014 20,014 73,436 ---------- ---------- 835,650 799,753 ---------- ---------- KEEBLER: Revolving Facility ........... 6.85% 9/28/2004 $ 170,000 $ -- Term Facility ................ 6.83% 9/28/2004 287,000 314,000 Senior Subordinated Notes .... 10.75% 7/1/2006 124,400 124,400 Other Senior Debt ............ Various 2001-2005 8,840 10,455 Capital Lease Obligations .... Various 2002-2042 6,524 7,588 ---------- ---------- 596,764 456,443 ---------- ---------- Consolidated Debt: ........... 1,432,414 1,256,196 Less current maturities ... 58,309 47,566 ---------- ---------- Total long term debt ...... $1,374,105 $1,208,630 ========== ========== |
On March 6, 2000, Keebler utilized existing credit facilities in order to finance the acquisition of Austin. The additional borrowings were under the Revolving Facility, which was originally entered into on September 28, 1998. At October 7, 2000, the outstanding balance on the Revolving Facility was $170.0 million, with an available balance of $180.0 million.
On March 30, 2000, FII amended its $500 million Syndicated Loan Facility and the $80.0 million loan facility agreement relating to its distributor program (the "Distributor Facility"). The amendments provided for increased loan borrowing margins and facility fees and added and amended certain financial covenants. The covenants currently in effect include, among others: (i) a maximum leverage ratio of .65 to 1; (ii) an adjusted fixed charges coverage ratio; (iii) minimum adjusted consolidated EBITDA at specified levels for each fiscal quarter; (iv) a borrowing base covenant requiring that FII's total indebtedness, measured quarterly, not exceed specified percentages of the book value of accounts receivable, inventory, property, plant and equipment and the fair market value of FII's interest in Keebler; (v) a prohibition on acquisitions; (vi) a negative pledge on all assets of the Company; (vii) a limit on capital expenditures of $40 million for fiscal 2000 and $37.5 million per fiscal year thereafter; and (viii) limits on cash dividends unless the Company would have, following payment thereof, at least $15 million availability under the unused commitments and borrowing base tests of the Loan Facility. The Company was in compliance with all covenants under its Loan Facility as in effect on October 7, 2000.
5. FACILITY CLOSING COSTS AND SEVERANCE
NON-RECURRING CHARGES
In May of 1999, Keebler closed its manufacturing facility in Sayreville, New Jersey, which resulted in a pre-tax restructuring and impairment charge of $69.2 million which was subsequently reduced by $2.9 million in the fourth quarter of 1999. The reduction was due to lower than expected severance costs and earlier than expected disposal of the facility. In the second quarter of fiscal 2000, the charge was reduced by an adjustment of $1.0 million. The additional adjustment resulted from lower-than expected severance costs and the earlier-than-expected sale of the facility. Only costs related to the settlement of workers compensation claims and health and welfare payments are expected to extend beyond the year ending December 30, 2000.
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). In the 12 weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this previously recorded non-recurring charge of an additional $1.4 million. This adjustment relates to Flowers Bakeries decision to reopen a closed bakery located in Norfolk, Virginia in order to meet the demands of its growing foodservice business. This bakery will be opened in early 2001. The remaining exit costs include ongoing costs such as guard service, utilities and property taxes of
closed facilities. Activity with respect to the reserve for non- recurring charges was as follows (amounts in thousands):
01/01/2000 Prov/Adj Spending 10/07/2000 ---------------------------------------------- Noncancelable lease obligations and other facility closing costs $2,831 $(1,577) $ (958) $ 296 Severance 2,037 (140) (1,196) 701 Other 2,462 700 (55) 3,107 ------ ------- ------- ------ Total $7,330 $(1,017) $(2,209) $4,104 ====== ======= ======= ====== |
PURCHASE ACCOUNTING RESERVES
As part of accounting for the acquisition of Austin in the first quarter of 2000, Keebler recognized estimated costs pursuant to a plan to exit certain activities 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 $14.5 million. At October 7, 2000, approximately 75 non-union employees had been terminated, with the remaining terminations scheduled to occur by February 2001. Spending on exit costs is expected to be substantially complete before the end of 2001, with primarily health and welfare payments extending beyond that time frame.
During fiscal 1998, as part of accounting for the acquisition of President, Keebler recognized costs pursuant to a plan to exit certain activities and operations of President. Exit costs related to the plan, totaling $12.8 million, were provided for in the allocation of the purchase price. Management's exit plan is expected to be substantially complete before the end of fiscal 2000 with only noncancelable lease obligations to be paid over the next six years, concluding in fiscal 2006.
As part of the acquisition of Mrs. Smith's Inc. in fiscal 1996, Flowers recorded a purchase accounting reserve of $37.1 million in order to realign production and distribution at Mrs. Smith's Bakeries. 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.
As part of INFLO's acquisition of Keebler and Keebler's subsequent acquisition of Sunshine in 1996, 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. During the quarter ended July 15, 2000, Keebler adjusted accruals previously established by reducing goodwill and other intangibles by $0.5 million and $1.1 million, respectively, to recognize exit costs that are now expected to be less than initially anticipated. The exit plan was substantially complete at January 2, 2000 with only noncancelable lease
obligations continuing through 2006. Activity with respect to the purchase accounting reserves was as follows (amounts in thousands):
MRS SMITH'S BAKERIES 01/01/2000 Prov/Adj Spending 10/07/2000 ------------------------------------------------------ Noncancelable lease obligations and other facility closing costs $20,186 $ (2,776) $17,410 Other 2,476 (542) 1,934 ----------------------------------------------------- Total 22,662 0 (3,318) 19,344 ----------------------------------------------------- KEEBLER FOODS COMPANY ----------------------------------------------------- Noncancelable lease obligations and other facility closing costs $ 7,829 $ (500) $ (1,430) $ 5,899 Severance 24 24 ----------------------------------------------------- Total 7,853 (500) (1,430) 5,923 ----------------------------------------------------- SUNSHINE BISCUITS, INC. ----------------------------------------------------- Noncancelable lease obligations and other facility closing costs $ 1,962 $ (1,116) $ (689) $ 157 Severance 63 (17) 46 ----------------------------------------------------- Total 2,025 (1,116) (706) 203 ----------------------------------------------------- PRESIDENT INTERNATIONAL, INC. ----------------------------------------------------- Noncancelable lease obligations and other facility closing costs $ 4,596 $ (569) $ 4,027 Severance 2,829 (2,235) 594 Other 10 (10) 0 ----------------------------------------------------- Total 7,435 0 (2,814) 4,621 ----------------------------------------------------- AUSTIN QUALITY FOODS ----------------------------------------------------- Noncancelable lease obligations and other facility closing costs $ 479 $ (408) $ 71 Severance 13,979 (8,398) 5,581 Other 28 (5) 23 ----------------------------------------------------- Total 0 14,486 (8,811) 5,675 ----------------------------------------------------- GRAND TOTAL $39,975 $ 12,870 $(17,079) $35,766 ===================================================== |
6. SEGMENT REPORTING
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.
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 (amounts in thousands):
For the Twelve Weeks Ended For the Forty Weeks Ended ------------------------------------------ ------------------------------------------ October 7, 2000 October 9, 1999 October 7, 2000 October 9, 1999 --------------- --------------- --------------- --------------- (Unaudited) (Unaudited) SALES: Flowers Bakeries $ 233,571 $ 223,459 $ 782,257 $ 743,080 Mrs. Smith's Bakeries 161,740 157,892 472,032 476,900 Keebler 642,203 615,844 2,111,635 2,055,724 Elimination (1) (14,547) (14,531) (48,458) (53,547) ----------- ----------- ----------- ----------- $ 1,022,967 $ 982,664 $ 3,317,466 $ 3,222,157 =========== =========== =========== =========== DEPRECIATION AND AMORTIZATION: Flowers Bakeries $ 9,238 $ 7,726 $ 28,884 $ 24,866 Mrs. Smith's Bakeries 6,699 4,908 21,650 14,129 Keebler 23,114 19,480 72,547 62,651 FII (2) 1,809 1,867 6,064 5,594 ----------- ----------- ----------- ----------- $ 40,860 $ 33,981 $ 129,145 $ 107,240 =========== =========== =========== =========== INCOME (LOSS) FROM OPERATIONS: Flowers Bakeries $ 10,905 $ 13,958 $ 55,598 $ 53,237 Mrs. Smith's Bakeries (5,014) (33,558) (30,489) (50,706) Keebler 75,645 62,960 235,872 182,337 FII (2) (6,189) (11,720) (23,223) (26,682) Insurance proceeds 3,105 0 4,774 0 Non-recurring (credit) charge 1,428 0 2,424 (69,208) ----------- ----------- ----------- ----------- $ 79,880 $ 31,640 $ 244,956 $ 88,978 =========== =========== =========== =========== |
(1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries to Flowers Bakeries which are transferred at cost
(2) Unallocated corporate expenses
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 established 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 on December 31, 2000, the first
day of fiscal year 2001. In accordance with the transition provisions
of SFAS 133, upon adoption, the Company will record a cumulative
effect-type adjustment to accumulated comprehensive income to recognize
at fair value all derivatives, and related losses deferred on the
balance sheet, designated as cash flow hedging instruments. The Company
does not believe the adoption of SFAS 133 will have a material impact
on the results of operations. At October 7, 2000, the fair value of all
derivative instruments designated as cash flow hedging instruments was
$(2.0) million, which would have resulted in a net liability. Related
losses deferred on the balance sheet at October 7, 2000 were $6.2
million. The fair value of the derivative instruments and the related
deferred losses could be materially different at the adoption date,
December 31, 2000.
On May 18, 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached consensus on Issue No. 00-14 "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement, and income statement classification of sales incentives offered by vendors (including manufacturers) that have the effect of reducing the price of a product or service to a customer at the point of sale. For cash sales incentives within the scope of this issue, costs are generally recognized at the date on which the related revenue is recorded by the vendor and are to be classified as a reduction of revenue. For non-cash sales incentives, such as package inserts, costs are to be classified within cost of sales. This issue is effective for the second quarter of fiscal 2001. Management has assessed the impact of this guidance and determined that adoption will not result in a material reclassification between net sales and selling, general, and administrative expense. Net earnings would not be affected.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is required to apply the accounting and disclosures described in this bulletin in the fourth quarter of fiscal 2000. Management has assessed the impact of SAB 101 and determined that issuance will have no material impact on the Company's sales or net earnings.
8. SUBSEQUENT EVENTS
On October 26, 2000, FII and Keebler announced that an agreement was reached for a series of transactions that will result in the sale of Keebler Foods Company to Kellogg Company and the spin-off to FII shareholders of a new company, Flowers Foods, Inc. FII agreed to sell its controlling stake in Keebler to Kellogg for $42.00 per share. Simultaneously with the sale of the Keebler controlling stake, FII will spin-off to its shareholders the new company, Flowers Foods, Inc., which is anticipated to trade on the New York Stock Exchange under the original symbol FLO. Flowers Foods, Inc. will include the Flowers Bakeries and Mrs. Smith's Bakeries businesses and approximately $250 million in debt. After deducting certain liabilities at FII, the proceeds from the transaction will be paid to FII's shareholders in cash. In addition to these proceeds, each FII shareholder will receive shares representing a proportionate interest in Flowers Foods. The new company will be headquartered in Thomasville, Georgia and will be led by the current FII management team.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Matters Affecting Analysis:
The following discussion of the financial condition and results of operations for the twelve and forty weeks ended October 7, 2000 should be read in conjunction with FII's annual report on Form 10-K for the fiscal year ended January 1, 2000, filed with the Securities and Exchange Commission on March 30, 2000.
The Company maintains insurance for property damage, mechanical breakdown, product liability, product contamination and business interruption applicable to its production facilities. During fiscal 1999, Mrs. Smith's Bakeries incurred substantial costs related to mechanical breakdown and product contamination at certain plants. Mrs. Smith's Bakeries filed claims under the Company's insurance policies for a portion of these costs that it believes to be insured. During the quarter ended July 15, 2000, Mrs. Smith's Bakeries recovered insurance proceeds of $1.7 million related to product contamination claims. In the quarter ended October 7, 2000, Mrs. Smith's Bakeries recovered additional insurance proceeds of $3.1 million related to mechanical breakdown, product contamination and payments under business interruption coverage. Mrs. Smith's Bakeries continues to pursue recovery under various insurance policies for covered losses. The claims process is lengthy and its outcome cannot be predicted with certainty. If future insurance proceeds are recovered, they will be reported as a separate line item, net of claims preparation expenses.
During the fourth quarter of fiscal 1998, Flowers Industries, Inc. recorded a pre-tax non-recurring charge of $68.3 million, of which $32.2 million was related to the operations of Flowers Bakeries. In the twelve weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this previously recorded non-recurring charge of $1.4 million. This adjustment relates to Flowers Bakeries decision to reopen a closed bakery located in Norfolk, Virginia in order to meet the demands of our growing foodservice business. This bakery will be operational in early 2001.
During the first quarter of fiscal 2000, Flowers completed its acquisition of The Kroger Company's bakery in Memphis, Tennessee (the "Kroger acquisition") and Keebler completed its acquisition of Austin Specialty Foods, Inc (the "Austin acquisition"). On January 4, 2000 Keebler sold its value brand business, which resulted in a pretax gain of $5.7 million in the first quarter. On a consolidated basis, after tax and minority interest, the gain on the sale of the value brands business of $1.8 million is included in the results for the forty weeks ended October 7, 2000. Additionally, operating results of the value brands business are not included in the twelve or forty week period ended October 7, 2000, however the comparable twelve and forty weeks ended October 9, 1999 do include the operating results of the value brands business.
During the second quarter of fiscal 1999, the Board of Directors of Keebler approved a plan to close its Sayreville, New Jersey, production facility due to excess capacity within Keebler's 18 plant production network. As a result of this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million, or $.25 per share after tax and minority interest. During the second quarter of
fiscal 2000, this facility was sold, which resulted in an adjustment to the previous charge of approximately $1.0 million for carrying costs and other facility expenses which were less than had originally been estimated. The sale of the Sayreville facility resulted in a pretax gain of $2.0 million during the quarter. On a consolidated basis, after tax and minority interest, the gain on this transaction was $0.7 million.
Results of Operations:
Results of operations, expressed as a percentage of sales, for the twelve and forty weeks ended October 7, 2000 and October 9, 1999, are set forth below:
For the Twelve Weeks Ended For the Forty Weeks Ended --------------------------------- ---------------------------------- October 7, 2000 October 9, 1999 October 7, 2000 October 9, 1999 --------------- --------------- --------------- --------------- (Unaudited) (Unaudited) Sales 100.00% 100.00% 100.00% 100.00% Gross margin 55.00% 50.01% 54.63% 51.95% Selling, marketing, and administrative expenses 43.64% 43.34% 43.57% 43.71% Depreciation and amortization 3.99% 3.46% 3.89% 3.33% Insurance proceeds (0.30)% 0.00% (0.14)% 0.00% Non-recurring charge (0.14)% 0.00% (0.07)% 2.15% Interest 2.60% 1.87% 2.60% 1.94% Income (loss) before income taxes and minority interest 5.21% 1.35% 4.78% 0.82% Income taxes 2.10% 0.81% 2.05% 0.59% Net income (loss) 1.27% (0.93)% 1.06% (0.37)% |
CONSOLIDATED RESULTS
TWELVE WEEKS ENDED OCTOBER 7, 2000 COMPARED TO TWELVE WEEKS ENDED OCTOBER 9,
1999
Sales. For the twelve weeks ended October 7, 2000, sales were $1,023.0 million, or 4.1% higher than sales for the comparable period in the prior year, which were $982.7 million. Sales increased 4.3%, 4.5% and 2.7% at Keebler, Flowers Bakeries and Mrs. Smith's Bakeries, respectively, from the third quarter of fiscal 1999. Additional sales analysis is included under the discussion of business segments.
Gross Margin. Gross margin for the third quarter of fiscal 2000 was $562.6 million, or 14.5% higher than gross margin reported a year ago of $491.5 million. As a percent of sales, gross margin was 55.0% for the third quarter of fiscal 2000, compared to 50.0% for the third quarter of fiscal 1999. Keebler improved margins to 61.7% during the period, up from 58.7% during the same period last year. Flowers Bakeries' margins improved to 54.7% from 52.9% during the third quarter of fiscal 1999. Mrs. Smith's margins increased substantially to 27.6% in the third quarter of fiscal 2000, as compared to margins of 8.9% in the same period a year ago. Mrs. Smith's margins were negatively effected in fiscal 1999 by mechanical breakdown and product contamination associated with the production realignment project.
Selling, Marketing and Administrative Expenses. During the third quarter of fiscal 2000, selling, marketing and administrative expenses were $446.4 million, or 43.6% of sales as compared to $425.8 million, or 43.3% of sales reported a year ago. Flowers Bakeries selling, marketing and administrative expenses increased to 46.0% of sales during the third quarter of fiscal 2000 versus 43.2% in the same period a year ago. Keebler's selling, marketing and administrative expenses were 46.3% of sales in the third quarter of fiscal 2000 as compared to 45.4% of sales in the third quarter of fiscal 1999. Mrs. Smith's Bakeries' selling, marketing and administrative expenses improved as a percent of sales to 26.4% in the third quarter of fiscal 2000 from 28.9% in the same period last year. During fiscal 1999, Mrs. Smith's incurred higher than expected distribution costs due to the production realignment as well as increased advertising and promotions. These excessive costs were not present in the current quarter.
Depreciation and Amortization. Depreciation and amortization expense was $40.9 million for the third quarter of fiscal 2000, an increase of 20.3% over the
corresponding period in the prior year, which was $34.0 million. This increase is due primarily to acquisitions and capital expenditures.
Proceeds from Insurance Policies. The Company maintains insurance for property damage, mechanical breakdown, product liability, product contamination and business interruption applicable to its production facilities. During fiscal 1999, Mrs. Smith's incurred substantial costs and expenses related to mechanical breakdown and product contamination at certain plants. Mrs. Smith's filed claims under the Company's insurance policies for a portion of these costs that it believes to be insured. In the quarter ended October 7, 2000, Mrs. Smith's Bakeries recovered insurance proceeds of $3.1 million related to mechanical breakdown, product contamination and business interruption coverage. Mrs. Smith's continues to pursue recovery under various insurance policies for covered losses. The claims process is lengthy and its outcome cannot be predicted with certainty. If future insurance proceeds are recovered, they will be reported as a separate line item, net of claims preparation expenses.
Non-recurring Charge. During the fourth quarter of fiscal 1998, Flowers Industries, Inc. recorded a pre-tax non-recurring charge of $68.3 million of which $32.2 million was related to operations of Flowers Bakeries. In the twelve weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this previously recorded non-recurring charge of $1.4 million. This adjustment relates to Flowers Bakeries decision to reopen a closed bakery located in Norfolk, Virginia in order to meet the demands of our growing foodservice business. This bakery will be operational in early 2001.
Interest Expense. For the third quarter of fiscal 2000, net interest expense was $26.6 million, an increase of $8.2 million or 44.6% over the corresponding period in the prior year, which was $18.4 million. Flowers' interest expense increased $5.2 million to $16.5 million in the third quarter of fiscal 2000 from $11.3 million in the third quarter of fiscal 1999. Keebler's interest expense increased $3.0 million to $10.1 million in the third quarter of fiscal 2000 as compared to $7.1 million in the same period of fiscal 1999. The increases are due to increased debt levels resulting from acquisitions, capital improvements, funding of operating losses at Mrs. Smith's Bakeries and higher interest rates in the current period as compared to the same period last year.
Income (Loss) Before Income Taxes and Minority Interest. Income before income taxes and minority interest for the third quarter of fiscal 2000 was $53.2 million, an increase of $39.9 million from $13.3 million reported in the third quarter of fiscal 1999. After adjusting third quarter of each year for the non-recurring items and insurance proceeds, income before income taxes and minority interest increased $35.4 million in the third quarter of fiscal 2000. These results are reflective of an increase in income from operations of $12.7 million at Keebler, a decrease in income from operations at Flowers Bakeries of $3.1 million and a reduction in the net loss at Mrs. Smith's Bakeries of $28.5 million. These increases in operating income at the segment level were partially offset by increased interest cost noted above and unallocated corporate expenses that decreased by $5.5 million from third quarter of fiscal 1999.
Income Taxes. Income taxes during the third quarter of fiscal 2000 were provided at an estimated effective rate of 40.3%. The effective rate differs from the statutory rate due to nondeductible expenses, principally amortization of intangibles, including trademarks, trade names, other intangibles and goodwill.
Net Income (Loss). Net income for the third quarter of fiscal 2000 was $13.0 million, an increase of $22.1 million from the net loss of $9.1 million reported a year ago. This is reflective of the items noted above. A further discussion of the comparative results of operations by business segment follows.
OPERATING RESULTS BY BUSINESS SEGMENT
FLOWERS BAKERIES
FOR THE TWELVE WEEKS ENDED ----------------------------------------------------------------------------------------- OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%) --------------- ---------- --------------- ---------- ------------ ---------- Sales $233,571 100.0% $223,459 100.0% $10,112 4.5% Gross margin $127,662 54.7% $118,278 52.9% $ 9,384 7.9% Selling, marketing, and administrative $107,519 46.0% $ 96,594 43.2% $10,925 11.3% Depreciation and amortization $ 9,238 4.0% $ 7,726 3.5% $ 1,512 19.6% Income from operations (EBIT) $ 10,905 4.7% $ 13,958 6.2% $(3,053) -21.9% |
Sales. Sales at Flowers Bakeries for the third quarter of fiscal 2000 were $233.6 million, an increase of 4.5% over sales of $223.5 million reported during the same period a year ago. Acquisitions accounted for 3.1% of this increase. After adjusting for the effect of acquisitions, the overall sales increase of 1.4% is primarily attributable to a shift in product mix toward higher priced branded products.
Gross Margin. Flowers Bakeries' gross margin improved to 54.7% of sales for the third quarter of fiscal 2000, compared to 52.9% of sales for the comparable period in the prior year. Lower ingredient cost and improved pricing was partially offset by higher labor, energy and packaging costs.
Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses increased to $107.5 million as compared to $96.6 million in the third quarter of fiscal 1999. These expenses increased to 46.0% of sales during the third quarter of fiscal 2000 from 43.2% in the third quarter of fiscal 1999. The increase in absolute terms as well as a percent of sales was composed of increases in labor, rent and energy costs, as well as integration costs associated with the Kroger market expansion. These increases were partially offset by decreases in advertising expenditures.
Depreciation and Amortization. Depreciation and amortization increased to $9.2 million in the third quarter of fiscal 2000 from $7.7 million in the same period last year. This increase is primarily attributable to capital expenditures and increased amortization resulting from the Kroger acquisition.
Operating Income. The factors noted above resulted in operating income of $10.9 million in the twelve weeks ended October 7, 2000, a decrease of $3.1 million from operating income of $14.0 million reported during the third quarter of fiscal 1999.
MRS. SMITH'S BAKERIES
FOR THE TWELVE WEEKS ENDED -------------------------------------------------------------------------------------- OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%) --------------- ---------- --------------- ---------- ------------ ---------- Sales $147,193 100.0% $143,361 100.0% $ 3,832 2.7% Gross margin $ 40,611 27.6% $ 12,792 8.9% $27,819 217.5% Selling, marketing, and administrative $ 38,926 26.4% $ 41,442 28.9% $(2,516) -6.1% Depreciation and amortization $ 6,699 4.6% $ 4,908 3.4% $ 1,791 36.5% Loss from operations (EBIT) $ (5,014) -3.4% $(33,558) -23.4% $28,544 -85.1% |
Sales. Sales at Mrs. Smith's Bakeries, excluding intersegment sales of $14.5 million, were $147.2 million in the third quarter of fiscal 2000 as compared to $143.4 million for the comparable period in the prior year, an increase of $3.8 million or 2.7%. Overall volumes decreased 3.0% from the same quarter last year, however average case price increased 5.9% which is due to both a price increase and favorable mix shift toward higher priced items. Retail sales were up approximately 11.7% from prior years, primarily due to favorable mix and increased volume. An increase in foodservice sales of 9.4% was driven by
favorable pricing trends and slight volume increases. Snack and deli sales decreased by 1.4% and 20.2%, respectively. The small decrease in snack sales was a combination of falling volumes partially offset by a shift in product mix towards higher priced products. The drop in deli sales was primarily volume driven. Mrs. Smith's sales are highly seasonal with the bulk of retail sales occurring in the holiday season during our fourth quarter. Management believes that our sales will continue to show growth next quarter as compared to the fourth quarter of last year.
Gross Margin. Mrs. Smith's Bakeries' gross margin for the third quarter of fiscal 2000 was 27.6% of sales compared to 8.9% reported a year ago. Prior year margins were unusually depressed due to costs associated with the manufacturing and production realignment that was in progress at the time. Current margins, while significantly improved, continued to suffer as Mrs. Smith's Bakeries sells inventory produced earlier in the year at higher operating costs.
Selling, Marketing and Administrative Expenses. Mrs. Smith's Bakeries' selling, marketing and administrative expenses were $38.9 million or 26.4% of sales during the third quarter of fiscal 2000 as compared to $41.4 million or 28.9% of sales during the same period a year ago. Distribution costs during the quarter were 1.7% lower than the same quarter last year and 11.2% better on a per case shipped basis. Fiscal 1999 distribution expenses were higher due to production and manufacturing realignment that caused unusually high freight expenses. Advertising and marketing expenses were level with prior years and administrative expenses were reduced approximately 5.4% when compared to the third quarter of fiscal 1999.
Depreciation and Amortization. Depreciation and amortization for Mrs. Smith's Bakeries in the third quarter of fiscal 2000 was $6.7 million as compared to $4.9 million in the same period of last year. This increase is due to substantial capital expenditures associated with the production realignment that was completed earlier this year.
Operating Loss. Mrs. Smith's Bakeries experienced an operating loss of $5.0 million for the third quarter of fiscal 2000 excluding proceeds from insurance claims of $3.1 million, as compared to an operating loss of $33.6 million in the third quarter of fiscal 1999. The third quarter of fiscal 1999 included substantial cost due to delays and mechanical breakdowns associated with the production realignment plan. While Mrs. Smith's Bakeries has not fully recovered, the third quarter of fiscal 2000 showed substantial improvement. With the production realignment completed, Mrs. Smith's expects to improve operating results in the fourth quarter of fiscal 2000 and into fiscal 2001.
KEEBLER
FOR THE TWELVE WEEKS ENDED --------------------------------------------------------------------------------------- OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%) --------------- ---------- --------------- ---------- ------------ ---------- Sales $642,203 100.0% $615,844 100.0% $26,359 4.3% Gross margin $396,041 61.7% $361,755 58.7% $34,286 9.5% Selling, marketing, and administrative $297,282 46.3% $279,315 45.4% $17,967 6.4% Depreciation and amortization $ 23,114 3.6% $ 19,480 3.2% $ 3,634 18.7% Income from operations (EBIT) $ 75,645 11.8% $ 62,960 10.2% $12,685 20.1% |
Sales. Sales at Keebler for the third quarter of fiscal 2000 increased $26.4 million or 4.3% to $642.2 million from $615.8 million reported a year ago. Excluding the revenues of Austin of $46.2 million and adjusting for the sales related to the value brands business which was sold in the first quarter of fiscal 2000, net sales declined $11.7 million and 1.9%. Sales increases in core branded channels was more than offset by volume shortfalls in private label, contract packing and low priced retail products.
Gross Margin. Gross margin at Keebler was $396.0 million and 61.7% of sales during the third quarter of fiscal 2000 as compared to $361.8 million and 58.7% of sales during the same period a year ago. The improved margins were mainly
attributable to improved productivity and cost savings as well as lower raw material costs. The increase in gross margin is also reflective of the growth in Keebler's branded business and the sale of its value brands business during the first quarter resulting in a product mix shift toward higher margin branded products.
Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses were $297.3 million and 46.3% of sales in the third quarter of fiscal 2000 as compared to $279.3 million and 45.4% in the third quarter of fiscal 1999. Expenses related to Austin that were not present in prior year accounted for 0.5% of the increase. Excluding Austin, additional branded volume contributed to increases in selling expenses. Rising fuel cost and higher maintenance cost due to expansion and relocation of a major distribution center negatively effected distribution costs. Marketing expenses as a percent of sales were flat as compared to prior year.
Depreciation and Amortization. Depreciation and amortization in the third quarter of fiscal 2000 was $23.1 million as compared to $19.5 million in the same period of last year. Austin accounted for $0.3 million of this increase due to adjustments made during the quarter.
Operating Income. Operating income, excluding nonrecurring items, increased $12.7 million to $75.6 million for the third quarter of fiscal 2000 from $63.0 million, excluding nonrecurring charges, during the third quarter of fiscal 1999. The increase is reflective of increased sales of higher margin, branded products and efficiencies gained in production realignments.
FORTY WEEKS ENDED OCTOBER 7, 2000 COMPARED TO FORTY WEEKS ENDED OCTOBER 9, 1999
Sales. For the forty weeks ended October 7, 2000, sales were $3,317.5 million, or 3.0% higher than sales for the comparable period in the prior year, which were $3,222.2 million. Sales during the first three quarters of fiscal 2000 increased 5.3% at Flowers Bakeries and 2.7% at Keebler over their respective sales during the first three quarters of fiscal 1999. Mrs. Smith's Bakeries' sales increased 0.1% over the prior year. Additional sales analysis is included under the discussion of business segments.
Gross Margin. For the forty weeks ended October 7, 2000, gross margin was $1,812.2 million, an increase of $138.4 million or 8.3% higher than gross margin reported for the same period last year of $1,673.8 million. As a percent of sales, gross margin was 54.6% as compared to 52.0% for the same period last year. Keebler improved margins to 60.1% during the period up from 57.4% during the same period last year and Flowers Bakeries' margins improved to 54.7% from 53.0% in the prior year. Gross margins at Mrs. Smith's Bakeries improved to 28.1% from 23.8% in the same period a year ago.
Selling, Marketing and Administrative Expenses. For the forty weeks ended October 7, 2000, selling, marketing and administrative expenses were $1,445.3 million, or 43.6% of sales as compared to $1,408.4 million, or 43.7% of sales reported a year ago. Flowers Bakeries' selling, marketing and administrative expenses increased to 43.9% of sales as compared to 42.5% during the first three quarters of fiscal 1999. Mrs. Smith's Bakeries selling, marketing and administrative expenses decreased to 30.1% of sales as compared to 32.4% in the same period a year ago. Keebler's selling, marketing and administrative expenses were 45.5% percent of sales for both the forty-week periods ended October 7, 2000 and October 9, 1999.
Depreciation and Amortization. Depreciation and amortization expense was $129.1 million for the forty weeks ended October 7, 2000, an increase of 20.4% over the corresponding period in the prior year, which was $107.2 million. This increase is due primarily to capital expenditures and acquisitions.
Proceeds from Insurance Policies. The Company maintains insurance for property damage, mechanical breakdown, product liability, product contamination and business interruption applicable to its production facilities. During fiscal 1999, Mrs. Smith's incurred substantial costs and expenses related to mechanical breakdown and product contamination at certain plants. Mrs. Smith's filed claims
under the Company's insurance policies for a portion of these costs that it believes to be insured. During the forty weeks ended October 7, 2000, Mrs. Smith's recovered insurance proceeds of $4.8 million related to mechanical breakdown, product contamination and business interruption coverage. Mrs. Smith's continues to pursue recovery under various insurance policies for losses sustained. The claims process is lengthy and its outcome cannot be predicted with certainty. If future insurance proceeds are recovered, they will be reported as a separate line item, net of claims preparation expenses.
Non-recurring Charge. During the fourth quarter of fiscal 1998, Flowers Industries, Inc. recorded a pre-tax non-recurring charge of $68.3 million of which $32.2 million was related to operations of Flowers Bakeries. In the twelve weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this previously recorded non-recurring charge of $1.4 million. This adjustment relates to Flowers Bakeries' decision to reopen a closed bakery located in Norfolk, Virginia in order to meet the demands of our growing foodservice business. This bakery will be operational in early 2001. During the second quarter of fiscal 1999, Keebler recorded a non-recurring charge of $69.2 million. Adjustments to Keebler's reserve totaling $1.0 million were made during the second quarter of fiscal 2000 to reflect decreased carrying cost associated with the Sayreville, New Jersey facility that was sold during the period. See discussion under the heading "Matters Affecting Analysis" above.
Interest Expense. For the forty weeks ended October 7, 2000, net interest expense was $86.2 million, an increase of 38.1% over the corresponding period in the prior year, which was $62.4 million. Flowers' interest expense increased $18.1 million to $52.0 million in the forty week period ended October 7, 2000 from $33.9 million in the same period last year. The increase is due to increased debt levels resulting from acquisitions, capital improvements, funding of operating losses at Mrs. Smith's Bakeries and higher interest rates in the current period as compared to the same period last year. Keebler's interest expense increased $5.7 million to $34.2 million in the first three quarters of fiscal 2000 as compared to $28.5 million in the same period of fiscal 1999.
Income Before Income Taxes and Minority Interest. Income before income taxes and minority interest for the forty weeks ended October 7, 2000, was $158.7 million, an increase of $132.1 million over income before income taxes and minority interest of $26.6 million reported in the forty weeks ended October 9, 1999. After adjusting income for the non-recurring charges and insurance proceeds, income before income taxes and minority interest increased $55.7 million in the forty weeks ended October 7, 2000. These results are reflective of increases in income from operations of $53.5 million at Keebler and $2.4 million at Flowers Bakeries, a reduction in the net loss at Mrs. Smith's Bakeries of $20.2 million and increased interest expense of $23.8 million. Additionally, unallocated corporate expenses decreased $3.5 million from the forty weeks ended October 9, 1999.
Income Taxes. Income taxes for the forty weeks ended October 7, 2000, were provided at an estimated effective rate of 42.9%. The effective rate differs from the statutory rate due to nondeductible expenses, principally amortization of intangibles, including trademarks, trade names, other intangibles and goodwill.
Net Income (Loss). Net income for the forty weeks ended October 7, 2000 was $35.2 million, an increase of $47.2 million over the net loss of $12.0 million reported a year ago. This is reflective of the items noted above. A further discussion of the comparative results of operations by business segment follows.
OPERATING RESULTS BY BUSINESS SEGMENT
FLOWERS BAKERIES
FOR THE FORTY WEEKS ENDED ---------------------------------------------------------------------------------------- OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%) --------------- ---------- --------------- ---------- ------------ ---------- Sales $782,257 100.0% $743,080 100.0% $39,177 5.3% Gross margin $427,885 54.7% $393,848 53.0% $34,037 8.6% Selling, marketing, and administrative $343,403 43.9% $315,745 42.5% $27,658 8.8% Depreciation and amortization $ 28,884 3.7% $ 24,866 3.3% $ 4,018 16.2% Income from operations (EBIT) $ 55,598 7.1% $ 53,237 7.2% $ 2,361 4.4% |
Sales. Sales at Flowers Bakeries for the forty weeks ended October 7, 2000 were $782.3 million, an increase of 5.3% over sales of $743.1 million reported a year ago. After adjusting for the increase related to the Kroger acquisition of 3.7%, the remaining 1.6% increase from the prior year was primarily attributable to increased pricing and a shift in product mix toward higher priced branded products as well as lower ingredient costs.
Gross Margin. Flowers Bakeries' gross margin improved to 54.7% of sales for the forty weeks ended October 7, 2000, compared to 53.0% of sales for the comparable period in the prior year. Improved pricing and production efficiencies primarily contributed to this increase.
Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses for the forty weeks ended October 7, 2000, increased to $343.4 million as compared to $315.7 million for the comparable period in the prior year. As a percent of sales, these expenses increased to 43.9% in the first three quarters of fiscal 2000 from 42.5% in same period a year ago. The increase was composed of increases in labor, rent and energy costs, as well as start-up costs associated with the Kroger acquisition. These increases were partially offset by decreases in advertising costs.
Depreciation and Amortization. Depreciation and amortization increased to $28.9 million in the forty week period ended October 7, 2000 from $24.9 million in the same period last year. This increase is primarily attributable to capital expenditures and increased amortization due to the Kroger acquisition.
Operating Income. Operating income, excluding adjustments to non-recurring charges, increased 4.4% to $55.6 million for the forty weeks ended October 7, 2000 from $53.2 million during the comparable period last year. This increase is reflective of the increasing margins and continued cost control measures implemented at Flowers Bakeries.
MRS. SMITH'S BAKERIES
FOR THE FORTY WEEKS ENDED ----------------------------------------------------------------------------------------- OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%) --------------- ---------- --------------- ----------- ------------ ---------- Sales $423,574 100.0% $423,353 100.0% $ 221 0.1% Gross margin $118,864 28.1% $100,769 23.8% $18,095 18.0% Selling, marketing, and administrative $127,703 30.1% $137,346 32.4% $(9,643) -7.0% Depreciation and amortization $ 21,650 5.1% $ 14,129 3.3% $ 7,521 53.2% Loss from operations (EBIT) $(30,489) -7.2% $(50,706) -12.0% $20,217 -39.9% |
Sales. Sales at Mrs. Smith's Bakeries, excluding intersegment sales of $48.5 million, were $423.6 million for the forty weeks ended October 7, 2000 as compared to $423.4 million for the comparable period in the prior year, an increase of $0.2 million or 0.1%. Overall, volumes decreased 3.9% from the prior year, however average case prices increased 4.1% which is due to both a price increase and favorable product mix shift. Foodservice sales increased 4.7% due to improved pricing and volume increases. Current year-to-date retail sales were flat when compared to prior year. While retail volumes were down, there was a
significant shift in product mix toward higher priced products. Year to date snack and deli sales decreased by 1.4% and 7.9% respectively, as compared to the prior year. The small decrease in snack was a combination of falling volumes offset by a shift in product mix towards higher priced products. The drop in deli sales was primarily volume driven with little pricing or product mix effects. Mrs. Smith's sales are highly seasonal with the bulk of retail sales occurring in the holiday season during the fourth quarter.
Gross Margin. Mrs. Smith's Bakeries' gross margin for the forty week period ended October 7, 2000 was 28.1% of sales compared to 23.8% reported a year ago. Margins continue to be depressed as Mrs. Smith's Bakeries works through higher cost inventory that was produced during the plant restructuring. However, Mrs. Smith's margins are improving as the year progresses and the fourth quarter should result in further improvement of gross margin due to higher retail sales and lower cost inventory being produced.
Selling, Marketing and Administrative Expenses. Mrs. Smith's Bakeries' selling, marketing and administrative expenses were $127.7 million or 30.1% of sales during the forty week period ended October 7, 2000 as compared to $137.3 million or 32.4% of sales during the same period a year ago. Expenses in the first three quarters of fiscal 1999 included significant increases in estimates for customer deductions and trade promotions and increased reserves for certain out-of-code, damaged or discontinued inventory. These costs were not incurred to the same extent in the current year period.
Depreciation and Amortization. Depreciation and amortization expense in the forty week period ended October 7, 2000 was $21.7 million as compared to $14.1 million in the same period of last year. This increase is due to substantial capital improvements associated with the production realignment.
Operating Loss. Mrs. Smith's Bakeries experienced an operating loss, excluding insurance proceeds, of $30.5 million during the forty week period ended October 7, 2000 as compared to an operating loss of $50.7 million in the same period last year. Sales and margins were slightly higher during the first three quarters of fiscal 2000 as compared to the same period in fiscal 1999. The first three quarters of fiscal 1999 included significant increases in estimates for customer deductions and trade promotions and increased reserves for certain out-of-code, damaged or discontinued inventory which were not present to the same extent in the first three quarters of fiscal 2000. Mrs. Smith's has shown significant improvement in the last twelve months but as the results show, has not completed the recovery. Mrs. Smith's expects to continue showing improvement in the next quarter and to build on this foundation in 2001.
KEEBLER
FOR THE FORTY WEEKS ENDED ---------------------------------------------------------------------------------------- OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%) --------------- ---------- --------------- ----------- ------------ ---------- Sales $2,111,635 100.0% $2,055,724 100.0% $55,911 2.7% Gross margin $1,269,428 60.1% $1,180,594 57.4% $88,834 7.5% Selling, marketing, and administrative $ 961,009 45.5% $ 935,606 45.5% $25,403 2.7% Depreciation and amortization $ 72,547 3.4% $ 62,651 3.0% $ 9,896 15.8% Income from operations (EBIT) $ 235,872 11.2% $ 182,337 8.9% $53,535 29.4% |
Sales. Sales at Keebler for the forty week period ended October 7, 2000 increased $55.9 million and 2.7% to $2,111.6 million from $2,055.7 million reported a year ago. Excluding the Austin sales and adjusting for the sales related to the value brands business which was sold in the first quarter of fiscal 2000, net sales declined 1.9%. Volume declines in lower margin contract packing and value business reflect the shift away from lower margin business. While we the market is becoming more competitive, we feel that Keebler is positioned for continued growth. New products and focused marketing such as the Sesame Street program should reap continued benefits in the fourth quarter and next year.
Gross Margin. Gross margin at Keebler was $1,269.4 million and 60.1% of sales for the forty weeks ended October 7, 2000, as compared to $1,180.6 million and 57.4% of sales during the same period a year ago. Sales related to Austin, which have a lower gross margin than Keebler or President products, negatively affected the margin by approximately 0.9%. The improved margins were mainly attributable to improved productivity and cost savings as well as lower raw material costs. The increase in gross margin is also reflective of the growth in Keebler's branded business and the sale of its value brands business during the first quarter, resulting in a product mix shift toward higher margin branded products.
Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses were $961.0 million and 45.5% of sales for the forty week period ended October 7, 2000, as compared to $935.6 million and 45.5% in same period a year ago. Excluding Austin expenses, selling, marketing and administrative expenses as a percent of sales was slightly higher in the first three quarters of fiscal 2000 than in the same period last year. The increase was due primarily to increased branded sales volume, transition expenses from converting certain non-core independent distributor routes acquired in the President acquisition to Keebler's direct store delivery system and higher fuel costs. Offsetting these increases were one-time gains on the sale of the Sayreville facility of $2.0 million in the second quarter and on the sale of the value brands business of $5.7 million in the first quarter.
Depreciation and Amortization. Depreciation and amortization for the forty week period ended October 7, 2000 was $72.5 million as compared to $62.7 million in the same period of last year. This increase is primarily a result of the depreciation and amortization of $5.6 million related to the Austin acquisition that occurred during the first quarter of fiscal 2000.
Operating Income. Operating income, excluding nonrecurring items, increased $53.5 million to $235.9 million for the forty weeks ended October 7, 2000 from $182.3 million, excluding nonrecurring charges, during the same period in the prior year. The primary factors contributing to growth in operating income were increased sales of higher margin, branded products and efficiencies gained in production realignments which resulted in higher gross margin. Selling, marketing and administrative expenses remained constant as a percent of sales, however, after adjusting for gains on facility and business sales, they increased slightly due to higher fuel and other distribution costs associated with increased branded volume.
Liquidity and Capital Resources:
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. On October 26, 2000, Flowers Industries, Inc. and Keebler Foods Company announced that an agreement was reached for a series of transactions that will result in the sale of Keebler Foods Company to Kellogg Company and the spin-off to FII shareholders of a new company, Flowers Foods, Inc. As a result of the completion of this transaction, it is expected that Flowers Foods, Inc., consisting of Flowers Bakeries and Mrs. Smith's Bakeries businesses, will have significantly less debt and accordingly, more financial flexibility. The expected debt level of Flowers Foods upon completion of the transactions will be approximately $250 million.
Net cash provided by operating activities for the forty weeks ended October 7, 2000 was $188.5 million. Positive net cash flow of $236.6 million was provided from net income for the forty weeks. Contributing to operating cash flows was the income tax benefit of $21.5 million on stock options exercised. Accounts receivable increased $10.6 million due primarily to increasing sales. A net inventory increase of $12.9 million was attributable to the seasonal increase in inventory at Mrs. Smith's Bakeries. A decrease in other assets of $9.7 million is primarily due to the collection of an income tax refund at Flowers. Also reducing working capital sources were tax payments of $21.3 million at Keebler and spending of $21.1 million against plant and facility closing costs and severance.
Net cash disbursed for investing activities for the forty weeks ended October 7, 2000 of $337.0 million included capital expenditures of $17.7 million at Flowers Bakeries, $20.7 million at Mrs. Smith's Bakeries and $53.2 million at Keebler. The capital expenditures were incurred principally to update and enhance production and distribution facilities, as well as management information systems at Flowers Bakeries. Keebler used $253.8 million to fund the acquisition of Austin and paid $10.0 million for a licensing agreement with the Sesame Workshop, formerly known as the Children's Television Workshop. Net cash proceeds of $23.4 million were received from the disposal of other assets.
For the forty weeks ended October 7, 2000, cash provided by financing activities was $132.9 million. The Company paid dividends to shareholders of $52.1 million. FII paid dividends of $39.2 million during the period and Keebler paid dividends totaling $28.5 million during the period, of which $15.6 million was paid to FII as a result of its 55% ownership of Keebler. Dividends are declared at the discretion of the Board of Directors based on an assessment of the Company's financial position and other considerations. Contributing to the increase were net cash proceeds of $13.0 million from the receivables securitization under Keebler's Receivable Purchase Agreement and $10.4 million of cash generated from employee stock options exercised during the first three quarters of fiscal 2000. Keebler had treasury stock purchases totaling $10.0 million during the period. Consolidated debt increased $171.7 million primarily due to the use of existing credit facilities to finance the Austin acquisition.
At October 7, 2000, cash equivalents were $23.8 million. Consolidated long-term debt was $1,374.1 million and current maturities of long-term debt were $58.3 million at October 7, 2000. As a result of the consolidation of Keebler, the Company's balance sheet reflects Keebler's indebtedness of $596.8 million at October 7, 2000; 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.
On March 30, 2000, FII amended its $500 million Syndicated Loan Facility and the
$80.0 million loan facility agreement relating to its distributor program (the
"Distributor Facility"). The amendments provided for increased loan borrowing
margins and facility fees and added and amended certain financial covenants. The
covenants currently in effect include, among others: (i) a maximum leverage
ratio of .65 to 1; (ii) an adjusted fixed charges coverage ratio; (iii) minimum
adjusted consolidated EBITDA at specified levels for each fiscal quarter; (iv) a
borrowing base covenant requiring that FII's total indebtedness, measured
quarterly, not exceed specified percentages of the book value of accounts
receivable, inventory, property, plant and equipment and the fair market value
of FII's interest in Keebler; (v) a prohibition on acquisitions; (vi) a negative
pledge on all assets of the Company; (vii) a limit on capital expenditures of
$40 million for fiscal 2000 and $37.5 million per fiscal year thereafter; and
(viii) limits on cash dividends unless the Company would have, following payment
thereof, at least $15 million availability under the unused commitments and
borrowing base tests of the Loan Facility.
The Company was in compliance with all covenants under its Loan Facility as in effect on October 7, 2000 and believes that, in light of its current cash position, its cash flow from operating activities and its amended credit facilities, it can comply with the current terms of its Loan Facility, Distributor Facility and other credit facilities and can meet presently foreseeable financial requirements.
Year 2000 Issue
The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any significant impact to its on-going business as a result of the "Year 2000 Issue." However, it is possible that the full impact of the date change, which was of concern due
to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarter or year-end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively impacted if our customers or suppliers are adversely affected by the Year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers or suppliers.
The above statement in its entirety is designated a Year 2000 readiness disclosure under the Year 2000 Information and Readiness Disclosure Act.
Forward-Looking Statements:
Statements contained in this filing that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. Other factors that may cause actual results to differ from forward-looking statements and that may affect the company's prospects in general include, but are not limited to, changes in general economic and business conditions (including the baked foods markets), the company's ability to operate the manufacturing lines according to schedule and train personnel to run the new production capacity, the availability of capital on acceptable terms, actions of competitors and customers, the extent to which the company is able to develop new products and markets for its products, the likelihood that all conditions to the Kellogg transactions will be fulfilled, and the ability to obtain financing for Flowers Foods, Inc. on acceptable terms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
In the normal course of business, the Company is exposed to commodity price and interest rate risks, primarily related to the purchase of raw materials and packaging supplies and changes in interest rates. The Company manages its exposure to these risks through the use of various financial instruments, none of which are entered into for trading purposes. The Company has established policies and procedures governing the use of financial instruments, specifically as it relates to the type and volume of financial instruments entered into. Financial instruments can only be used to hedge an economic exposure, and speculation is prohibited. The Company's accounting policy related to financial instruments is further described in Note 1 of Notes to Consolidated Financial Statements in our report on Form 10-K for the fiscal year ended January 1, 2000.
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. To qualify as a hedge, a commodity agreement must reduce the exposure of the Company to price risk and must show a high correlation of changes in value with the value of the hedged item. Assuming a ten percent decrease in market price, the fair value of open contracts with a notional amount of $85.0 million at October 7, 2000 would be impacted by $(6.3) million.
Keebler uses interest rate swap agreements to effectively convert certain fixed rate debt to a floating rate instrument and certain floating rate debt to a fixed instrument. Amounts payable or receivable under the agreements, calculated as the difference between the fixed and floating rates multiplied by the notional amount, is recorded as an adjustment to interest expense, in accordance with hedge accounting. The fair value of the interest rate swap agreements at October 7, 2000, with a notional amount of $316.5 million, remains comparable to year-end. Additionally, interest rates have not fluctuated materially from year end and therefore, the sensitivity analysis performed as of January 1, 2000 for interest rate swap agreements remains a valid estimate.
EXHIBIT 99.3
Financial statements of Keebler Foods Company for the fiscal year ended January 1, 2000, filed as an exhibit to the Flowers Industries, Inc. Annual Report on Form 10-K on March 31, 2000.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Keebler Foods Company and Subsidiaries at January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 1, 2000, except note 18, as to
which the date is March 6, 2000
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 1, 2000 January 2, 1999 --------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 20,717 $ 23,515 Trade accounts and notes receivable, net 65,052 141,077 Inventories, net: Raw materials 34,243 31,722 Package materials 13,907 13,081 Finished goods 126,954 120,550 Other 1,176 1,024 ---------- ---------- 176,280 166,377 Deferred income taxes 46,252 57,713 Other 27,278 26,636 ---------- ---------- Total current assets 335,579 415,318 PROPERTY, PLANT AND EQUIPMENT, NET 553,031 564,524 GOODWILL, NET 370,188 391,449 TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 211,790 226,084 PREPAID PENSION 33,240 38,205 ASSETS HELD FOR SALE 6,662 2,972 OTHER ASSETS 17,693 17,228 ---------- ---------- Total assets $1,528,183 $1,655,780 ========== ========== |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 1, 2000 January 2, 1999 --------------- --------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 37,283 $ 112,730 Trade accounts payable 147,862 143,572 Other liabilities and accruals 237,447 232,087 Income taxes payable 23,603 10,779 Plant and facility closing costs and severance 11,290 11,018 ------------ ------------ Total current liabilities 457,485 510,186 LONG-TERM DEBT 419,160 541,765 OTHER LIABILITIES: Deferred income taxes 124,389 147,098 Postretirement/postemployment obligations 64,383 63,754 Plant and facility closing costs and severance 12,062 15,563 Deferred compensation 24,581 19,368 Other 16,808 28,745 ------------ ------------ Total other liabilities 242,223 274,528 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 84,655,874 and 84,125,164 shares issued, respectively) 846 841 Additional paid-in capital 182,686 169,532 Retained earnings 255,813 167,608 Treasury stock (30,030) (8,680) ------------ ------------ Total shareholders' equity 409,315 329,301 ------------ ------------ Total liabilities and shareholders' equity $ 1,528,183 $ 1,655,780 ============ ============ |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Years Ended ----------------------------------------------------------- JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- NET SALES $ 2,667,771 $ 2,226,480 $ 2,065,184 COSTS AND EXPENSES: Cost of sales 1,150,553 938,896 888,031 Selling, marketing and administrative expenses 1,227,481 1,080,044 1,026,245 Other 25,834 11,501 9,511 Restructuring and impairment charge 66,349 -- -- ------------ ------------ ------------ INCOME FROM OPERATIONS 197,554 196,039 141,397 Interest (income) (1,700) (3,763) (1,191) Interest expense 37,874 30,263 35,038 ------------ ------------ ------------ INTEREST EXPENSE, NET 36,174 26,500 33,847 ------------ ------------ ------------ INCOME BEFORE INCOME TAX EXPENSE 161,380 169,539 107,550 Income tax expense 73,175 72,962 45,169 ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEM 88,205 96,577 62,381 EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of tax -- 1,706 5,396 ------------ ------------ ------------ NET INCOME $ 88,205 $ 94,871 $ 56,985 ============ ============ ============ BASIC NET INCOME PER SHARE: Income before extraordinary item $ 1.05 $ 1.16 $ 0.80 Extraordinary item -- 0.02 0.07 ------------ ------------ ------------ Net income $ 1.05 $ 1.14 $ 0.73 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 83,759 83,254 77,604 ============ ============ ============ DILUTED NET INCOME PER SHARE: Income before extraordinary item $ 1.01 $ 1.10 $ 0.77 Extraordinary item -- 0.02 0.07 ------------ ------------ ------------ Net income $ 1.01 $ 1.08 $ 0.70 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 87,645 87,486 80,562 ============ ============ ============ |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK ----------------- PAID-IN EARNINGS ------------------- SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT TOTAL ------ ------ ---------- --------- ------ -------- -------- BALANCE AT DECEMBER 28, 1996 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 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 84,125 841 169,532 167,608 (335) (8,680) 329,301 Purchase of treasury shares -- -- -- -- (646) (21,350) (21,350) Exercise of employee stock options 531 5 13,154 -- -- -- 13,159 Net income -- -- -- 88,205 -- -- 88,205 ------ ---- -------- -------- ---- -------- -------- BALANCE AT JANUARY 1, 2000 84,656 $846 $182,686 $255,813 (981) $(30,030) $409,315 ====== ==== ======== ======== ==== ======== ======== |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended ------------------------------------------------------- JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES Net income $ 88,205 $ 94,871 $ 56,985 Adjustments to reconcile net income to cash from operating activities: Depreciation and amortization 84,125 69,125 60,708 Deferred income taxes (11,248) 10,075 18,548 Accretion on Seller Note -- -- 2,376 Loss on early extinguishment of debt, net of tax -- 1,706 3,761 Loss (gain) on sale of property, plant and equipment 1,799 424 (358) Restructuring and impairment charge 46,071 -- -- Other -- 1,460 -- Changes in assets and liabilities: Trade accounts and notes receivable, net (26,975) (5,082) 38,187 Inventories, net (9,903) (13,830) 203 Income taxes payable 12,824 (4,556) 16,113 Other current assets (642) (2,845) (966) Trade accounts payable and other current liabilities 9,840 869 36,806 Plant and facility closing costs and severance (3,641) (5,373) (13,715) Other, net 6,771 (2,319) 1,044 --------- --------- --------- Cash provided from operating activities 197,226 144,525 219,692 CASH FLOWS USED BY INVESTING ACTIVITIES Capital expenditures (100,685) (66,798) (48,429) Proceeds from property disposals 3,904 917 6,950 Purchase of President International, Inc., net of cash acquired -- (444,818) -- --------- --------- --------- Cash used by investing activities (96,781) (510,699) (41,479) CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES Purchase of treasury stock (21,350) (8,605) (75) Exercise of options and warrant 3,203 20,577 -- Proceeds from receivables securitization 103,000 -- -- Deferred debt issue costs -- (1,845) (1,344) Long-term debt borrowings -- 425,000 109,750 Long-term debt repayments (113,052) (157,626) (271,310) Revolving facility, net (85,000) 85,000 -- Income tax benefit related to stock options exercised 9,956 -- -- --------- --------- --------- Cash (used by) provided from financing activities (103,243) 362,501 (162,979) --------- --------- --------- (Decrease) increase in cash and cash equivalents (2,798) (3,673) 15,234 Cash and cash equivalents at beginning of period 23,515 27,188 11,954 --------- --------- --------- Cash and cash equivalents at end of period $ 20,717 $ 23,515 $ 27,188 ========= ========= ========= |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
BUSINESS AND OWNERSHIP
Keebler Foods Company ("the Company" or "Keebler"), a manufacturer and distributor of food products, was acquired by INFLO Holdings Corporation ("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. 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%. 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 acquisition of Sunshine Biscuits, Inc. ("Sunshine"). The exercise of the warrant resulted in 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. 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. 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%. During 1999, all remaining shares owned by both Artal and Claremont were sold in the open market. Keebler is comprised of primarily the following wholly-owned subsidiaries: Keebler Company, Bake-Line Products, Inc. ("Bake-Line"), Sunshine, President International, Inc. ("President"), Keebler Leasing Corp., Keebler Funding Corporation and Johnston's Ready Crust Company. 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. Additional operating subsidiaries of Keebler Company include Elfin Equity Company, L.L.C., Hollow Tree Company, L.L.C., Hollow Tree Financial Company, L.L.C. and Godfrey Transport, Inc.
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 1999 and 1998 fiscal years consisted of fifty-two weeks and the 1997 fiscal year consisted of fifty-three weeks.
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, 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.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
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, 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 (IN THOUSANDS, EXCEPT PER SHARE DATA) For the Years Ended ---------------------------------- January 2, 1999 January 3, 1998 --------------- --------------- 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. RESTRUCTURING AND IMPAIRMENT CHARGE
As part of the continuing process of integrating the business of President into the Company's operations, on May 14, 1999, Keebler announced the decision to close its manufacturing facility in Sayreville, New Jersey due to excess capacity within the Company's 15-plant manufacturing network. As a result, a pre-tax restructuring and impairment charge to operating income of $66.3 million was recorded in 1999. The restructuring and impairment charge included $20.2 million for cash costs related to severance and other exit costs from the Sayreville facility. The remaining $46.1 million was non-cash charges for asset impairments related to the Sayreville closing, including write-downs of property, plant and equipment at Sayreville and equipment at other locations, and a proportionate reduction of goodwill acquired in the acquisition of Sunshine in June 1996. The impairment charge for equipment at other locations resulted from a combination of factors. The acquisition of President brought a new capability to Keebler's production network. The President baking process is principally based on shorter, more flexible ovens compared to the larger ovens common to Keebler and Sunshine bakeries. This new capability resulted in a comprehensive analysis of system-wide production needs. The acquisition and resulting exit plans of Keebler, Sunshine and President, when considered together, resulted in redundant productive equipment, which ultimately became idle.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTRUCTURING AND IMPAIRMENT CHARGE (CONTINUED)
The original $69.2 million charge recorded in the second quarter of 1999 was reduced by a fourth quarter adjustment of $2.9 million. The adjustment was for costs related to severance and other exit costs from the facility due to lower-than-expected severance costs and an earlier-than-expected disposal of the facility. Of the total $66.3 million charge, approximately $65.6 million was recorded as plant and facility closing costs and severance, with the remaining $0.7 million recorded as other liabilities and accruals. Approximately 650 employees were expected to be terminated as a result of the closing of the Sayreville facility, of which approximately 600 employees were represented by unions. At January 1, 2000, approximately 595 employees under union contract and approximately 45 employees not under union contract had been terminated.
The following table sets forth the activity related to the liabilities accrued in conjunction with the restructuring and impairment charge:
January 2, JANUARY 1, (IN THOUSANDS) 1999 Provision Spending Adjustment 2000 ---------- --------- -------- ---------- ---------- Severance .................... $ -- $ 15,564 $(12,442) $ (1,085) $ 2,037 Facility closure ............. -- 4,570 (438) (1,565) 2,567 Fixed asset impairment ....... -- 37,824 (37,824) -- -- Goodwill impairment .......... -- 7,600 (7,600) -- -- Other ........................ -- 3,650 (1,724) (209) 1,717 -------- -------- -------- -------- -------- Total .................... $ -- $ 69,208 $(60,028) $ (2,859) $ 6,321 ======== ======== ======== ======== ======== |
At January 1, 2000, $6.0 million remained for plant and facility closing costs and severance accruals and $0.3 million for other liabilities and accruals. Substantially all of the remaining severance liability is expected to be spent in 2000, as nearly all employees have been terminated. Production at the Sayreville, New Jersey manufacturing facility ceased on September 3, 1999. Spending for exit costs associated with the closure of the facility will continue into the year 2000 as the facility is prepared for sale. Spending for exit costs related to the facility closure is expected to continue for eighteen months or until the facility is disposed of, whichever occurs earlier. The majority of the remaining reserves are cash costs.
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 $8.6 million as of January 1, 2000 and $7.8 million as of January 2, 1999.
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 both January 1, 2000 and at January 2, 1999. 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 1, 2000 or January 2, 1999 to state the inventory on a LIFO basis.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At January 1, 2000 and January 2, 1999, inventories are shown net of an allowance for slow-moving and aged inventory of $6.7 million and $9.6 million, respectively.
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 $9.2 million, $7.1 million and $3.8 million in the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively. The notional amount of open futures and options contracts at January 1, 2000 and January 2, 1999 was $48.7 million and $61.7 million, respectively. The fair values of the open futures and options contracts at January 1, 2000 and January 2, 1999, based on the stated market value at those dates, were $44.1 million and $57.9 million, respectively. The open contracts at January 1, 2000, will expire between March 2000 and December 2000.
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.
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 $18.9 million and $11.8 million at January 1, 2000 and January 2, 1999, 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 $14.7 million and $4.9 million at January 1, 2000 and January 2, 1999, 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 $13.1 million for the year ended January 1, 2000, and $10.2 million for the years ended January 2, 1999 and January 3, 1998, respectively.
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 $87.3 million, $87.2 million and $67.6 million for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively. There were no deferred advertising costs at January 1, 2000 or January 2, 1999.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 8).
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 AND INTANGIBLE 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 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The new statement establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized as either assets or liabilities in the statement of financial position 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. However, in June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133 - an amendment to FASB Statement No. 133." Citing concerns about companies' ability to both modify their information systems for year 2000 readiness and become educated with the new derivatives and hedging standard, the FASB has delayed the effective date on SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. We have not yet determined the impact SFAS No. 133 may have on the consolidated financial statements.
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.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment, including related accumulated depreciation follows:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 --------------- --------------- Land .............................. $ 16,290 $ 18,374 Buildings ......................... 138,288 140,907 Machinery and equipment ........... 437,032 424,574 Office furniture and fixtures ..... 90,266 76,447 Delivery equipment ................ 6,689 7,208 Construction in progress .......... 68,156 51,717 ---------- ---------- 756,721 719,227 Accumulated depreciation .......... (203,690) (154,703) ---------- ---------- Total ........................ $ 553,031 $ 564,524 ========== ========== |
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
On May 14, 1999, management announced the closure of the Sayreville, New Jersey manufacturing facility in order to eliminate excess capacity within Keebler's manufacturing network. As part of the total restructuring and impairment charge, the Sayreville facility was placed for sale together with other idle machinery and equipment held at various Keebler facilities. Disposition of the remaining assets held for sale is expected to occur within the next eighteen months without a significant gain or loss.
Also in 1999, land in Fort Worth, Texas, which had been acquired in conjunction with the President acquisition in 1998, was placed for sale. This land, along with a warehouse in Houston, Texas and a distribution center in Kensington, Connecticut, which had both been held for sale during 1998, were disposed of in the current year without a significant gain or loss. Additionally, in June 1999, the Atlanta, Georgia manufacturing facility, which had been held for sale, was sold for $1.2 million with a realized loss of approximately $0.6 million. During 1998, Keebler had recognized an impairment charge of $0.9 million in order to reflect the Atlanta, Georgia manufacturing facility at fair value.
7. OTHER CURRENT LIABILITIES AND ACCRUALS
Other current liabilities and accruals consisted of the following at January 1, 2000 and January 2, 1999:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 --------------- --------------- Self insurance reserves ................ $ 52,266 $ 52,202 Employee compensation .................. 72,527 73,017 Marketing and consumer promotions ...... 60,954 53,027 Other .................................. 51,700 53,841 ---------- ---------- Total ............................. $ 237,447 $ 232,087 ========== ========== |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OTHER CURRENT LIABILITIES AND ACCRUALS (CONTINUED)
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 1, 2000 and January 2, 1999 was $52.3 million and $52.2 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 $18.6 million.
8. DEBT AND LEASE COMMITMENTS
DEBT
Long-term debt consisted of the following at January 1, 2000 and January 2, 1999:
(IN THOUSANDS) Interest Rate Final Maturity JANUARY 1, 2000 January 2, 1999 ------------- ------------------ --------------- --------------- Bridge Facility ............. 6.263% September 26, 1999 $ -- $ 75,000 Revolving Facility .......... 5.843% September 28, 2004 -- 85,000 Term Facility ............... 5.814% September 28, 2004 314,000 350,000 Senior Subordinated Notes ... 10.750% July 1, 2006 124,400 124,400 Other Senior Debt ........... Various 2001-2005 10,455 11,805 Capital Lease Obligations ... Various 2002-2042 7,588 8,290 -------- -------- 456,443 654,495 Less: Current maturities .... 37,283 112,730 -------- -------- Total .................. $419,160 $541,765 ======== ======== |
At January 1, 2000 and January 2, 1999, Keebler's primary credit financing was provided by a $700.0 million Credit Facility, consisting of $350.0 million under the Revolving Facility and $350.0 million under the Term Facility. At January 2, 1999, financing was also provided under a $125.0 million Bridge Facility.
The current outstanding balance on the Term Facility at January 1, 2000, was $314.0 million, with quarterly scheduled principal payments through the final maturity of September 2004. The Revolving Facility, with no outstanding balance and an available balance of $350.0 million at January 1, 2000, also has a final maturity of September 2004, but with no scheduled principal payments. Certain letters of credit totaling $28.7 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 0.125% - 0.30% based on the relationship of debt to adjusted earnings. At January 1, 2000, the commitment fee was 0.125%.
At January 2, 1999, the outstanding balance on the Term Facility was $350.0 million and the Revolving Facility had an outstanding balance of $85.0 million and an available balance of $265.0 million. Certain letters of credit totaling $42.2 million reduced the available balance on the Revolving Facility and any unused borrowings under the Revolving Facility were subject to a commitment fee. The commitment fee varied from 0.125% - 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 outstanding balance on the Bridge Facility at January 2, 1999, was $75.0 million, with an additional $50.0 million in available borrowings.
Interest on the Credit Facility is calculated based on a 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 was calculated in the same manner as the Credit Facility and also was restricted by the same financial covenants.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
The $75.0 million Bridge Facility outstanding at January 2, 1999, that had a final maturity of September 1999, with no scheduled principal payments, was refinanced on January 29, 1999. Keebler entered into a Receivables Purchase Agreement ("Agreement") to replace the $75.0 million of debt held under the Bridge Facility, allowing funds to be borrowed at a lower cost to the Company. The accounting for this Agreement is governed by SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the guidelines of SFAS No. 125, a special-purpose entity was created, Keebler Funding Corporation, as a subsidiary of Keebler Foods Company. All transactions under this Agreement occur through Keebler Funding Corporation and are treated as a sale of accounts receivable and not as a debt instrument. At January 1, 2000, a net $103.0 million of accounts receivable had been sold at fair value, which is below the maximum amount currently available under the Agreement.
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 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 a 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.
Interest of $37.5 million, $24.0 million and $39.0 million was paid on debt for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively.
Aggregate scheduled annual maturities of long-term debt as of January 1, 2000 are as follows:
(IN THOUSANDS)
2000 .................... $ 37,283 2001 .................... 42,162 2002 .................... 68,647 2003 .................... 105,596 2004 .................... 75,769 2005 and thereafter ..... 126,986 -------- Total .............. $456,443 ======== |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
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 value of cash and cash equivalents and short-term debt approximates fair value because of the short-term maturity of the instruments. The fair value of long-term debt was $417.2 million and $536.6 million at January 1, 2000 and January 2, 1999, respectively, which was based on current rates offered to Keebler for similar debt with the same maturities.
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 typically 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. There were no new swap transactions entered into during 1999.
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 11.33% through July 3, 2000. 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 $105.0 million of the Credit Facility to fixed rate debt of 5.084% and 4.89%, respectively. The estimated fair values of the hedged swap agreements at January 1, 2000 and January 2, 1999, were a net receivable of $7.9 million and $1.1 million, respectively.
In 1999, Keebler also maintained an interest rate swap that no longer served as a hedge with the Bank of Nova Scotia, which has a notional amount of $170.0 million and a fixed rate obligation of 5.0185% through February 1, 2001. During the year, $2.8 million was recognized in income from operations in order to mark-to-market the interest rate swap. The receivable resulting from this transaction was recorded as a $0.5 million current receivable in other current assets and a $2.3 million long-term receivable in other assets in the consolidated balance sheet.
LEASE COMMITMENTS
Assets recorded under capitalized lease agreements included in property, plant and equipment consist of the following:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 --------------- --------------- Land .............................. $ 980 $ 980 Buildings ......................... 2,894 2,894 Machinery and equipment ........... 2,842 2,853 Other leased assets ............... 1 1 -------- -------- 6,717 6,728 Accumulated depreciation .......... (417) (242) -------- -------- Total ........................ $ 6,300 $ 6,486 ======== ======== |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
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 (IN THOUSANDS) Leases Leases -------- --------- 2000 ............................................. $ 1,046 $ 32,230 2001 ............................................. 1,063 26,690 2002 ............................................. 1,390 21,375 2003 ............................................. 449 18,725 2004 ............................................. 4,827 11,152 2005 and thereafter .............................. 1,324 24,312 -------- -------- Total minimum payments ........................... 10,099 $134,484 ======== Amount representing interest ..................... (2,511) -------- Obligations under capital lease .................. 7,588 Obligations due within one year .................. (670) -------- Long-term obligations under capital leases ....... $ 6,918 ======== |
Rent expense for all operating leases was $50.1 million, $38.7 million and $36.1 million for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively.
9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE
During 1998, 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. 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. Initially, it was estimated that 410 employees were to be terminated as a result of this plan, of which approximately 175 employees were represented by a union. At January 1, 2000, approximately 40 employees not under union contract had been terminated. In addition, during the year management reviewed its exit plan and made a determination that approximately 110 employees not under union contract, would not be terminated. During the year ended January 1, 2000, Keebler adjusted accruals previously established in the accounting for the President acquisition by reducing goodwill and other intangibles by $4.5 million to recognize exit costs that are now expected to be less than initially anticipated. The remainder of management's exit plan is expected to be substantially complete before the end of 2000, with only noncancelable lease obligations to be paid over the next six years concluding in 2006.
During 1996, 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 initially 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. Approximately 1,420 employees were terminated as a result of this plan. An additional $6.8 million was anticipated for lease costs related to exiting legacy information systems. During the year ended January 1, 2000, Keebler adjusted accruals previously established in the accounting for the Keebler acquisition by reducing goodwill and other intangibles by $0.5 million and reversing $1.3 million into income from operations to recognize exit costs that are now expected to be less than initially anticipated. The $1.3 million was credited to operating income as it had originally been charged to income from operations in the year ended January 3, 1998, January 2, 1999 or January 1, 2000. During the year ended January 2, 1999, Keebler also adjusted accruals previously established in the accounting for the Keebler and Sunshine 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. Only noncancelable lease obligations are anticipated to extend beyond 2000, to be paid over the next six years concluding in 2006.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)
In addition, during the years ended January 1, 2000, January 2, 1999 and January 3, 1998, Keebler expensed an additional $0.8 million, $2.8 million and $2.7 million, respectively. These charges were principally for costs related to the closure of distribution facilities not included in the original plan adopted by management for the acquisition of Keebler Company.
The following table sets forth the activity in Keebler's plant and facility closing costs and severance liabilities exclusive of the liabilities resulting from the restructuring and impairment charge recorded in 1999:
(IN THOUSANDS) December 28, 1996 Provision Spending Adjustment January 3, 1998 ----------------- --------- -------- ---------- --------------- KEEBLER COMPANY Severance ........... $ 3,293 $ 85 $ (3,147) $ -- $ 231 Facility closure .... 13,933 2,482 (3,910) -- 12,505 Other ............... 3,771 100 (1,976) -- 1,895 ------- ------ -------- ---------- ------- Subtotal .......... 20,997 2,667 (9,033) -- 14,631 ------- ------ -------- ---------- ------- SUNSHINE BISCUITS, INC Severance ........... $ 3,114 $ -- $ (3,002) $ -- $ 112 Facility closure .... 11,873 -- (4,138) -- 7,735 Other ............... -- -- -- -- -- ------- ------ -------- ---------- ------- Subtotal .......... 14,987 -- (7,140) -- 7,847 ------- ------ -------- ---------- ------- TOTAL ........... $35,984 $2,667 $(16,173) $ -- $22,478 ======= ====== ======== ========== ======= |
(IN THOUSANDS) January 3, 1998 Provision Spending Adjustment January 2, 1999 --------------- --------- -------- ---------- --------------- KEEBLER COMPANY Severance ........... $ 231 $ 139 $ (293) $ (28) $ 49 Facility closure .... 12,505 2,662 (3,265) (418) 11,484 Other ............... 1,895 -- (1,689) (182) 24 ------- ------ -------- ---------- ------- Subtotal .......... 14,631 2,801 (5,247) (628) 11,557 ------- ------ -------- ---------- ------- SUNSHINE BISCUITS, INC Severance ........... $ 112 $ -- $ (26) $ -- $ 86 Facility closure .... 7,735 -- (2,388) (3,120) 2,227 Other ............... -- -- -- -- -- ------- ------ -------- ---------- ------- Subtotal .......... 7,847 -- (2,414) (3,120) 2,313 ------- ------ -------- ---------- ------- PRESIDENT INTERNATIONAL, INC. ------- Severance ........... $ -- $6,653 $ (59) $ -- $ 6,594 Facility closure .... -- 5,670 -- -- 5,670 Other ............... -- 447 -- -- 447 ------- ------ -------- ---------- ------- Subtotal .......... -- 12,770 (59) -- 12,711 ------- ------ -------- ---------- ------- TOTAL ........... $22,478 $15,571 $ (7,720) $ (3,748) $26,581 ======= ====== ======== ========== ======= |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)
(IN THOUSANDS) January 2, 1999 Provision Spending Adjustment JANUARY 1, 2000 --------------- --------- -------- ---------- --------------- KEEBLER COMPANY Severance .............. $ 49 $ 25 $ (50) $ -- $ 24 Facility closure ....... 11,484 751 (2,646) (1,760) 7,829 Other .................. 24 -- (14) (10) -- ------- ------ -------- ---------- ------- Subtotal ........... 11,557 776 (2,710) (1,770) 7,853 ------- ------ -------- ---------- ------- SUNSHINE BISCUITS, INC ... Severance .............. $ 86 $ -- $ (23) $ -- $ 63 Facility closure ....... 2,227 -- (265) -- 1,962 Other .................. -- -- -- -- -- ------ -------- ---------- ------- Subtotal ........... 2,313 -- (288) -- 2,025 ------ -------- ---------- ------- PRESIDENT INTERNATIONAL, INC. Severance ........... $ 6,594 $ -- $ (576) $ (3,189) $ 2,829 Facility closure .... 5,670 -- (83) (991) 4,596 Other ............... 447 -- (118) (319) 10 ------ -------- ---------- ------- Subtotal ........ 12,711 -- (777) (4,499) 7,435 ------ -------- ---------- ------- TOTAL ......... $26,581 $ 776 $ (3,775) $ (6,269) $17,313 ======= ====== ======== ========== ======= |
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, bonds, mortgages and money market funds. 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.
Pension expense included the following components:
Years Ended -------------------------------------------------------------- (IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Service cost .......................... $ 13,364 $ 9,040 $ 8,560 Interest cost ......................... 32,841 31,080 29,673 Expected return on plan assets ........ (41,887) (39,352) (37,935) Amortization of prior service cost .... 689 689 -- Amortization of net loss .............. 43 -- -- -------- -------- -------- Pension expense ....................... $ 5,050 $ 1,457 $ 298 ======== ======== ======== |
The expected long--term rate of return on plan assets was 8.7% for the year ended January 1, 2000 and 9.0% for the years ended January 2, 1999 and January 3, 1998, respectively.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of Keebler's pension plan and amounts recognized in the consolidated balance sheets are as follows:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 --------------- --------------- Change in projected benefit obligation: Benefit obligation at beginning of year ........... $(520,312) $(437,334) Service cost ...................................... (13,364) (9,040) Interest cost ..................................... (32,841) (31,080) Amendments ........................................ -- (4,874 Actuarial gain (loss) ............................. 60,261 (45,871) Acquisition ....................................... -- (22,805 Benefits and expenses paid ........................ 30,009 30,692 Curtailment gain .................................. 897 -- --------- --------- Benefit obligation at year end .................... (475,350) (520,312) --------- --------- Change in plan assets: Fair value of plan assets at beginning of year .... 565,710 499,379 Actual return on plan assets ...................... 2,253 77,731 Employer contributions ............................ 115 -- Acquisition ....................................... -- 19,292 Benefits and expenses paid ........................ (30,009) (30,692) --------- --------- Fair value of plan assets at year end ............. 538,069 565,710 --------- --------- Funded status ..................................... 62,719 45,398 Unrecognized actuarial gain ....................... (37,209) (16,538) Unrecognized prior service cost ................... 7,730 9,230 Contributions subsequent to measurement date ...... -- 115 --------- --------- Prepaid pension ................................... $ 33,240 $ 38,205 ========= ========= |
The pension plan uses the September 30 preceding the fiscal year end as the measurement date. Assumptions used in accounting for the pension plan at each of the respective year ends are as follows:
Years Ended ------------------------------------------------------------- JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Discount rate ............................ 7.5% 6.5% 7.3% Rate of compensation level increases ..... 4.5 4.0 4.0 |
As a result of the closure of the Sayreville, New Jersey manufacturing facility in 1999, the plan recognized a net curtailment gain of $0.1 million resulting from a liability gain of $0.9 million offset by the recognition of $0.8 million of unrecognized prior service cost.
The plan assets, as of January 1, 2000 and January 2, 1999, 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 and an unfunded plan for certain highly compensated current and former executives ("the excess retirement plan"). Benefits provided are based on years of service.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The supplemental retirement plan expense includes the following components:
Years Ended -------------------------------------------------------------- (IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Interest cost ......................... $ 698 $ 722 $ 732 -------- -------- -------- Plan expense .......................... $ 698 $ 722 $ 732 ======== ======== ======== |
The unfunded status of the supplemental retirement plan and the amounts recognized in the consolidated balance sheets are as follows:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 --------------- --------------- Change in projected benefit obligation: Benefit obligation at beginning of year ............ $ (11,119) $ (10,303) Interest cost ...................................... (698) (722) Actuarial gain (loss) .............................. 944 (844) Benefits and expenses paid ......................... 640 750 --------- --------- Benefit obligation at year end ..................... (10,233) (11,119) Fair value of plan assets .......................... -- -- --------- --------- Funded status ...................................... (10,233) (11,119) Unrecognized actuarial loss (gain) ................. (558) 387 Benefit payments subsequent to measurement date .... 168 109 --------- --------- Accrued obligation ................................. $ (10,623) $ (10,623) ========= ========= |
The excess retirement plan expense includes the following components:
Years Ended ------------------------------------------------------------ (IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Service cost .............................. $ 431 $ 173 $ 306 Interest cost ............................. 155 78 43 Amortization of net loss (gain) ........... 8 (47) (84) -------- -------- -------- Pension expense ........................... $ 594 $ 204 $ 265 ======== ======== ======== |
The unfunded status of the excess retirement plan and the amounts recognized in the consolidated balance sheets are as follows:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 --------------- --------------- Change in projected benefit obligation: Benefit obligation at beginning of year ........... $ (2,395) $ (1,085) Service cost ...................................... (431) (173) Interest cost ..................................... (155) (78) Actuarial loss .................................... (158) (1,076) Benefits and expenses paid ........................ 31 17 --------- --------- Benefit obligation at year end .................... (3,108) (2,395) Fair value of plan assets ......................... -- -- --------- --------- Funded status ..................................... (3,108) (2,395) Unrecognized actuarial loss ....................... 501 351 Benefit payments subsequent to measurement date ... 17 -- --------- --------- Accrued obligation ................................ $ (2,590) $ (2,044) ========= ========= |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The supplemental and excess retirement plans use the September 30 preceding the fiscal year end as the measurement date. Assumptions used in accounting for the supplemental and excess retirement plans for each of the respective year ends are as follows:
Years Ended ------------------------------------------------------------ JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Discount rate ............................ 7.5% 6.5% 7.3% Rate of compensation level increase ...... 4.5 4.0 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 years ended January 1, 2000, January 2, 1999 and January 3, 1998, Keebler expensed contributions of $2.5 million, $2.3 million and $2.6 million, respectively.
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 $6.8 million, $8.9 million and $10.5 million for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively.
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Keebler provides certain medical and life insurance benefits for eligible retired employees. The medical plan, which covers nonunion and certain union 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:
(IN THOUSANDS) Years Ended ------------------------------------------------------------- JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Service cost ............................... $ 2,178 $ 2,045 $ 2,242 Interest cost .............................. 3,424 3,961 3,888 Amortization of prior service cost ......... (115) (115) -- Amortization of net gain ................... (375) -- -- -------- -------- -------- Net periodic postretirement benefit cost ... $ 5,112 $ 5,891 $ 6,130 ======== ======== ======== |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The unfunded status of the plan reconciled to the postretirement obligation in Keebler's consolidated balance sheets is as follows:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 ----------------- --------------- Change in accumulated postretirement benefit obligation: Benefit obligation at beginning of year ............... $ (56,269) $ (56,690) Service cost .......................................... (2,178) (2,045) Interest cost ......................................... (3,424) (3,961) Amendments ............................................ 8,531 -- Actuarial gain ........................................ 717 3,641 Acquisition ........................................... -- (1,598) Curtailment gain ...................................... 108 -- Benefits and expenses paid ............................ 4,411 4,384 --------- --------- Benefit obligation at year end ........................ (48,104) (56,269) Fair value of plan assets ............................. -- -- --------- --------- Funded status ......................................... (48,104) (56,269) Unrecognized actuarial gain ........................... (8,187) (7,856) Unrecognized prior service cost ....................... (8,897) (574) Benefit payments subsequent to measurement date ....... 880 978 --------- --------- Postretirement obligation ............................. $ (64,308) $ (63,721) ========= ========= |
The plan was amended in 1999 for a change in the calculation of retiree contribution rates that resulted in an $8.5 million reduction to the benefit obligation and a corresponding decrease in unrecognized prior service cost. In addition, as a result of the closure of the Sayreville, New Jersey manufacturing facility in 1999, the plan also recognized a net curtailment gain of $0.2 million resulting in a liability reduction of $0.1 million plus the recognition of $0.1 million of unrecognized prior service credit.
The accumulated postretirement benefit obligation was determined using a weighted average discount rate of 7.5%, 6.5% and 7.3% for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively. The plan uses the September 30 preceding the fiscal year end as the measurement date.
The weighted average annual assumed rate of increase in the cost of covered benefits was 8.0% for 1999 declining to an ultimate trend rate of 5.0% in 2002. A 1% increase in the trend rate for health care costs would have increased the accumulated benefit obligation for the year ended January 1, 2000 by $1.9 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 $1.8 million and $0.3 million, respectively, for the year ended January 1, 2000.
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 January 1, 2000 and January 2, 1999 was $5.5 million and $4.7 million, respectively.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
The components of income tax expense were as shown below:
Years Ended ------------------------------------------------------------ (IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Current: Federal ............................. $ 71,794 $ 58,269 $ 22,172 State ............................... 6,739 4,618 3,840 -------- -------- -------- Current provision for income taxes .... 78,533 62,887 26,012 Deferred: Federal ............................. (4,837) 8,494 17,203 State ............................... (521) 1,581 1,954 -------- -------- -------- Deferred provision for income taxes ... (5,358) 10,075 19,157 -------- -------- -------- $ 73,175 $ 72,962 $ 45,169 ======== ======== ======== |
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:
Years Ended ---------------------------------------------------------- (IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- State income taxes (net of federal benefit) 5,849 5,813 3,766 Intangible amortization ................... 6,306 3,160 1,836 All others ................................ 4,537 4,650 1,924 -------- -------- -------- $ 73,175 $ 72,962 $ 45,169 ======== ======== ======== |
The deferred tax assets and deferred tax (liabilities) recorded on the consolidated balance sheets consist of the following:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 --------------- --------------- Depreciation ................................... $ (57,604) $(108,866) Trademarks, trade names and intangibles ........ (64,887) (49,348) Prepaid pension ................................ (13,327) (14,283) Inventory valuation ............................ (559) (6,779) Other .......................................... (10,503) -- --------- --------- (146,880) (179,276) --------- --------- Net operating loss carryforwards ............... -- 80,195 Postretirement/postemployment benefits ......... 26,778 26,171 Plant and facility closing costs and severance . 17,469 23,728 Workers' compensation .......................... 5,695 14,769 Incentives and deferred compensation ........... 7,801 12,063 Employee benefits .............................. 11,000 10,879 Other .......................................... -- 6,436 --------- --------- 68,743 174,241 Valuation allowance ............................ -- (84,350) --------- --------- $ (78,137) $ (89,385) ========= ========= |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
In 1998, net operating loss carryforwards were approximately $207.1 million. All net operating loss carryforwards were used in 1999 to offset gains incurred through the Section 338 income tax election, which adjusted the tax basis of all assets and liabilities that resulted from the Keebler acquisition. The intangible asset related to the Keebler acquisition was reduced by $11.8 million as a result of resolving the preacquisition tax basis of acquired assets and liabilities. In 1999, the previously established valuation allowance on deferred tax assets of $84.4 million was eliminated due to the resolution of the uncertainty regarding the availability of preacquisition net operating losses.
Income taxes paid, net of refunds, were approximately $49.6 million, $67.1 million and $9.9 million for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively.
13. SHAREHOLDERS' EQUITY
COMMON STOCK
There were no cash dividends declared for the years ended January 1, 2000, January 2, 1999 or January 3, 1998. 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.
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. Keebler repurchased the remaining authorized shares in 1999, which fulfilled the treasury stock plan. 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 following table summarizes the pro forma disclosures regarding net income and earnings per share for the years ended January 1, 2000, January 2, 1999 and January 3, 1998:
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED ----------------------------------------------------------- JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Net income: As reported ................................... $ 88,205 $ 94,871 $ 56,985 Pro forma ..................................... $ 86,890 $ 91,032 $ 55,032 Basic net income per share: As reported ................................... $ 1.05 $ 1.14 $ 0.73 Pro forma ..................................... $ 1.04 $ 1.09 $ 0.71 Diluted net income per share: As reported ................................... $ 1.01 $ 1.08 $ 0.70 Pro forma ..................................... $ 0.99 $ 1.04 $ 0.68 Weighted average grant date fair value of options granted during the year ....................... $ 11.88 $ 8.53 $ 8.09 |
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 be granted in future years. In 1999 and 1998, the fair value of each option grant was 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, 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:
YEARS ENDED -------------------------------------------------------------- JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- Dividend yield ................................... 0.0% 0.0% 0.0% Expected volatility .............................. 24.8% 27.2% 0.0% Risk-free interest rate .......................... 5.76% 5.04% 6.00% Expected option life (years) ..................... 5 5 5 |
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:
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 ========= |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
YEAR ENDED JANUARY 3, 1998 ------------------------------------ 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 ========= |
YEAR ENDED JANUARY 3, 1998 ------------------------------------ Weighted Average Options Exercise Price --------- -------------- Outstanding at the beginning of the period ..... 6,456,280 $ 1.99 Granted ........................................ -- -- Exercised ...................................... 491,570 2.23 Forfeited ...................................... 45,081 1.93 Expired ........................................ -- -- --------- Outstanding at the end of the period ........... 5,919,629 $ 1.97 ========= Exercisable at the period end .................. 4,493,801 $ 1.96 ========= |
Exercise prices as of January 1, 2000, for options outstanding under the 1996 Stock Option Plan ranged from $1.74 to $5.23. The weighted average remaining contractual life of these options is approximately six and one-half years.
Under Keebler's 1998 Omnibus Stock Incentive Plan, 6,500,000 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 3, 1998 ------------------------------------ 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 .................. -- -- ========= |
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
YEAR ENDED JANUARY 3, 1998 ------------------------------------ Weighted Average Options Exercise Price --------- -------------- Outstanding at the beginning of the period ..... 2,715,636 $ 25.01 Granted ........................................ 270,234 34.98 Exercised ...................................... 39,140 24.82 Forfeited ...................................... 123,634 25.27 Expired ........................................ 5,494 27.31 --------- Outstanding at the end of the period ........... 2,817,602 $ 25.96 ========= Exercisable at the period end .................. 899,699 $ 25.74 ========= |
Exercise prices as of January 1, 2000, for options outstanding under the 1998 Omnibus Stock Incentive Plan ranged from $24.00 to $39.25. The weighted average remaining contractual life of these options is approximately five years.
Under Keebler's Non-Employee Director Stock Plan, 300,000 shares of Keebler's stock were authorized for future grant. 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 3, 1998 ------------------------------------ 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 ====== |
YEAR ENDED JANUARY 3, 1998 ------------------------------------ Weighted Average Options Exercise Price --------- -------------- Outstanding at the beginning of the period ..... 22,500 $ 27.44 Granted ........................................ 7,500 30.75 Exercised ...................................... -- -- Forfeited ...................................... -- -- Expired ........................................ -- -- ------ Outstanding at the end of the period ........... 30,000 $ 28.27 ====== Exercisable at the period end .................. 30,000 $ 28.27 ====== |
Exercise prices as of January 1, 2000 for options outstanding under the Non-Employee Director Stock Plan ranged from $27.44 to $30.75. The weighted average remaining contractual life of these options is approximately eight and one-half years.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
Years Ended --------------------------------------------------------- (IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- NUMERATOR: Income before extraordinary item ................. $88,205 $96,577 $62,381 Extraordinary item, net of tax ................... -- 1,706 5,396 ------- ------- ------- Net income ....................................... $88,205 $94,871 $56,985 ======= ======= ======= DENOMINATOR: Denominator for Basic Net Income Per Share Weighted Average Shares ..................... 83,759 83,254 77,604 Effect of Dilutive Securities: Stock options ............................... 3,886 3,992 2,168 Warrants .................................... -- 240 790 ------- ------- ------- Diluted potential common shares ............. 3,886 4,232 2,958 ------- ------- ------- Denominator for Diluted Net Income Per Share ..... 87,645 87,486 80,562 ======= ======= ======= |
For the year ended January 1, 2000, there were weighted average options to purchase 143,122 shares of common stock at an exercise price ranging from $32.13 to $39.25, 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. 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 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.
16. 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 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, cracker and brownie products to retail outlets, as well as private label biscuit products. Either a Keebler sales employee or a distributor sells products in the Branded segment. 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.), as well as cookies manufactured for the Girl Scouts of the U.S.A. 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 for the total company 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, whereas actual cost of sales is used to determine consolidated income from operations.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SEGMENT INFORMATION (CONTINUED)
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 years ended January 1, 2000, January 2, 1999 and January
3, 1998. Prior year numbers have been restated for reclassifications between
reportable segments.
Branded Specialty (IN THOUSANDS) Segment Segment Other (1) Total ---------- --------- --------- ----------- YEAR ENDED JANUARY 1, 2000: NET SALES TO EXTERNAL CUSTOMERS ........... $2,099,257 $568,514 $ -- $2,667,771 DEPRECIATION EXPENSE ...................... 22,820 6,700 35,014 64,534 PROFIT CONTRIBUTION ....................... 339,847 119,705 -- 459,552 Year Ended January 2, 1999: Net sales to external customers ........... $1,798,347 $428,133 $ -- $2,226,480 Depreciation expense ...................... 24,457 6,563 28,383 59,403 Profit contribution ....................... 277,791 90,746 -- 368,537 Year Ended January 3, 1998: Net sales to external customers ........... $1,646,627 $418,557 $ -- $2,065,184 Depreciation expense ...................... 20,798 5,602 27,331 53,731 Profit contribution ....................... 223,437 83,795 -- 307,232 |
(1) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments.
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 for the years ended January 1, 2000, January 2, 1999 and January 3, 1998 is as follows:
Years Ended ------------------------------------------------------ (IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998 --------------- --------------- --------------- INCOME BEFORE INCOME TAX EXPENSE: Reportable segment's profit contribution................. $ 459,552 $ 368,537 $ 307,232 Unallocated functional support costs (1)................. 195,649 172,498 165,835 Restructuring and impairment charge...................... 66,349 -- -- Interest expense, net.................................... 36,174 26,500 33,847 ---------- ---------- ---------- Income before Income Tax Expense...................... $ 161,380 $ 169,539 $ 107,550 ========== ========== ========== |
(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 1, 2000 and January 2, 1999 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 years ended January 1, 2000, January 2, 1999 and January 3, 1998.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA
Results of operations for each of the four quarters of the fiscal years ended January 1, 2000 and January 2, 1999 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 ------------------- -------------------- ------------------- ------------------ (IN MILLIONS EXCEPT PER SHARE DATA) 1999 1998 1999 1998 1999 1998 1999 1998* ------- ------- ------- ------- ------- ------- ------- ------- Net sales ............................ $ 852.0 $ 636.8 $ 587.9 $ 490.0 $ 615.8 $ 499.9 $ 612.1 $ 599.8 Gross profit ......................... 471.3 372.7 330.5 281.3 354.6 294.4 360.8 339.2 Restructuring and impairment charge .. -- -- 69.2 -- -- -- (2.9) -- Income before extraordinary item ..... 32.7 14.1 (21.4) 19.4 32.1 29.0 44.8 34.1 Extraordinary item ................... -- -- -- -- -- 1.7 -- -- Net income (loss) .................... 32.7 14.1 (21.4) 19.4 32.1 27.3 44.8 34.1 Basic net income per share: Income before extraordinary item .. $ 0.39 $ 0.17 $ (0.25) $ 0.23 $ 0.38 $ 0.35 $ 0.53 $ 0.41 Extraordinary item ................ -- -- -- -- -- 0.02 -- -- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) ................. $ 0.39 $ 0.17 $ (0.25) $ 0.23 $ 0.38 $ 0.33 $ 0.53 $ 0.41 ======= ======= ======= ======= ======= ======= ======= ======= Diluted net income per share: Income before extraordinary item .. $ 0.37 $ 0.16 $ (0.24) $ 0.22 $ 0.37 $ 0.33 $ 0.51 $ 0.39 Extraordinary item ................ -- -- -- -- -- 0.02 -- -- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) ................. $ 0.37 $ 0.16 $ (0.24) $ 0.22 $ 0.37 $ 0.31 $ 0.51 $ 0.39 ======= ======= ======= ======= ======= ======= ======= ======= |
* Quarter 4, 1998 includes the operating results of President from the acquisition date of September 28, 1998 through January 2, 1999.
18. SUBSEQUENT EVENTS
On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin"), for $252.4 million, in a business combination that will be accounted for as a purchase. Austin is a leading producer and marketer of single serve baked snacks, including cracker sandwiches and bite-sized crackers and cookies. Keebler will finance the acquisition with borrowings under its existing credit facilities.
On February 23, 2000, the Board of Directors declared an initial quarterly cash dividend of $0.1125 per common share payable on March 22, 2000, to stockholders of record on March 8, 2000.
On February 2, 2000, Keebler's Board of Directors authorized the repurchase, at management's discretion, of up to an additional $30.0 million in shares of Keebler common stock. Purchases will be made through the open market or through private transactions. The share repurchase program was approved primarily to offset future dilution, which may result from the exercise and sale of shares related to employee stock options.
On January 4, 2000, Keebler sold its Birmingham, Alabama and North Little Rock, Arkansas bakeries and the SUNNY and GREGS brands to Consolidated Biscuit Company ("Consolidated"). Keebler received $17.0 million from Consolidated, which is estimated to result in an after-tax gain of approximately $3.5 million that will be included in income from operations during the first quarter of fiscal 2000.
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY
Our report on the consolidated financial statements of Keebler Foods Company and Subsidiaries is included on page F-2 of the Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page F-1 of the Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 1, 2000
ITEM 14 (D). FINANCIAL STATEMENT SCHEDULE SCHEDULE II
KEEBLER FOODS COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E ------------------------------------------------------------------------------------------------------------------------ ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS/ OTHER END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ----------- ---------- ---------- ---------- ---------- ---------- Those valuation and qualifying accounts which are deducted in the balance sheet from the assets to which they apply: YEAR ENDED JANUARY 1, 2000 For discounts and doubtful accounts .... $ 7,782 $ 22,474 $ -- $(21,688)(2) $ 8,568 ======= ======== ======== ======== ======= For deferred taxes ..................... $84,350 $ -- $(84,350)(4) $ -- $ -- ======= ======== ======== ======== ======= For inventory reserves ................. $ 9,614 $ 4,026 $ -- $ (6,965)(3) $ 6,675 ======= ======== ======== ======== ======= YEAR ENDED JANUARY 2, 1999 For discounts and doubtful accounts .... $ 4,965 $ 20,148 $ 2,879(1) $(20,210)(2) $ 7,782 ======= ======== ======== ======== ======= For deferred taxes ..................... $84,350 $ -- $ -- $ -- $84,350 ======= ======== ======== ======== ======= For inventory reserves ................. $ 6,782 $ 7,484 $ 1,807(1) $ (6,459)(3) $ 9,614 ======= ======== ======== ======== ======= YEAR ENDED JANUARY 3, 1998 For discounts and doubtful accounts .... $ 5,390 $ 18,970 $ -- $(19,395)(2) $ 4,965 ======= ======== ======== ======== ======= For deferred taxes ..................... $84,350 $ -- $ -- $ -- $84,350 ======= ======== ======== ======== ======= For inventory reserves ................. $ 5,508 $ 9,716 $ -- $ (8,442)(3) $ 6,782 ======= ======== ======== ======== ======= |
(1) Amount acquired in the acquisition of President International, Inc.
(2) Primarily charges against reserves, net of recoveries.
(3) Inventory write-offs, net.
(4) Amount eliminated due to the resolution of a pre-acquisition contingency.
EXHIBIT 99.4
Portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of Keebler Foods Company filed with the SEC on November 21, 2000.
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
OCTOBER 7, 2000 January 1, 2000 --------------- ---------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 20,469 $ 20,717 Trade accounts and notes receivable, net 52,367 65,052 Inventories, net: Raw materials 28,120 34,243 Package materials 17,170 13,907 Finished goods 137,273 126,954 Other 2,080 1,176 ---------- ---------- 184,643 176,280 Deferred income taxes 34,668 46,252 Other 38,583 27,278 ---------- ---------- Total current assets 330,730 335,579 PROPERTY, PLANT AND EQUIPMENT, NET 610,337 553,031 GOODWILL, NET 527,611 370,188 TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 239,177 211,790 PREPAID PENSION 30,914 33,240 ASSETS HELD FOR SALE 1,159 6,662 OTHER ASSETS 17,140 17,693 ---------- ---------- Total assets $1,757,068 $1,528,183 ========== ========== |
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
OCTOBER 7, 2000 January 1, 2000 ------------------ ------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 50,660 $ 37,283 Trade accounts payable 146,750 147,862 Other liabilities and accruals 237,406 237,447 Income taxes payable 1,138 23,603 Plant and facility closing costs and severance 12,232 11,290 ----------- ----------- Total current liabilities 448,186 457,485 LONG-TERM DEBT 546,104 419,160 OTHER LIABILITIES: Deferred income taxes 127,544 124,389 Postretirement/postemployment obligations 63,546 64,383 Plant and facility closing costs and severance 7,397 12,062 Deferred compensation 26,312 24,581 Other 20,398 16,808 ----------- ----------- Total other liabilities 245,197 242,223 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 86,348,001 and 84,655,874 shares issued, respectively) 863 846 Additional paid-in capital 207,492 182,686 Retained earnings 349,238 255,813 Treasury stock (40,012) (30,030) ----------- ----------- Total shareholders' equity 517,581 409,315 ----------- ----------- Total liabilities and shareholders' equity $ 1,757,068 $ 1,528,183 =========== =========== |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
TWELVE TWELVE FORTY FORTY WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED OCTOBER 7, 2000 OCTOBER 9, 1999 OCTOBER 7, 2000 OCTOBER 9, 1999 ---------------- --------------- --------------- --------------- NET SALES $ 642,203 $ 615,844 $ 2,111,635 $ 2,055,724 COSTS AND EXPENSES: Cost of sales 254,237 261,244 870,967 899,296 Selling, marketing and administrative expenses 301,752 284,375 983,999 952,066 Other 10,569 7,265 20,797 22,025 Restructuring and impairment charge -- -- (996) 69,208 --------- --------- ----------- ----------- INCOME FROM OPERATIONS 75,645 62,960 236,868 113,129 Interest (income) (1,517) (249) (3,002) (1,190) Interest expense 11,568 7,346 37,189 29,687 --------- --------- ----------- ----------- INTEREST EXPENSE, NET 10,051 7,097 34,187 28,497 --------- --------- ----------- ----------- INCOME BEFORE INCOME TAX EXPENSE 65,594 55,863 202,681 84,632 Income tax expense 24,644 23,742 80,767 41,204 --------- --------- ----------- ----------- NET INCOME $ 40,950 $ 32,121 $ 121,914 $ 43,428 ========= ========= =========== =========== BASIC NET INCOME PER SHARE $ 0.48 $ 0.38 $ 1.44 $ 0.52 WEIGHTED AVERAGE SHARES OUTSTANDING 84,994 83,708 84,365 83,785 DILUTED NET INCOME PER SHARE $ 0.46 $ 0.37 $ 1.39 $ 0.50 WEIGHTED AVERAGE SHARES OUTSTANDING 88,240 87,423 87,728 87,741 |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FORTY FORTY WEEKS ENDED WEEKS ENDED OCTOBER 7, 2000 OCTOBER 9, 1999 ------------------ ------------------ CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES Net income $ 121,914 $ 43,428 Adjustments to reconcile net income to cash from operating activities: Depreciation and amortization 72,547 62,651 Deferred income taxes 22,367 (11,018) (Gain) loss on sale of property, plant and equipment (1,623) 249 Gain on sale of value brands assets (5,700) -- Restructuring and impairment charge (615) 46,071 Income tax benefit related to stock options exercised 18,875 8,838 Changes in assets and liabilities: Trade accounts and notes receivable, net 10,890 (35,241) Inventories, net (211) (10,853) Income taxes payable (21,329) (4,651) Other current assets (10,202) (7,827) Trade accounts payable and other current liabilities (17,313) 27,016 Plant and facility closing costs and severance (17,592) 11,554 Other, net 2,819 7,622 --------- --------- Cash provided from operating activities 174,827 137,839 CASH FLOWS USED BY INVESTING ACTIVITIES Capital expenditures (53,174) (68,637) Proceeds from property disposals 8,617 2,833 Purchase of Sesame Street license (10,000) -- Proceeds from sale of value brands assets 17,000 -- Purchase of Austin Quality Foods, Inc., net of cash acquired (253,797) -- --------- --------- Cash used by investing activities (291,354) (65,804) CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES Purchase of treasury stock (9,982) (21,350) Exercise of employee stock options 5,948 2,741 Proceeds from receivables securitization 13,000 125,000 Long-term debt repayments (34,198) (103,861) Revolving facility, net 170,000 (77,800) Dividends paid (28,489) -- --------- --------- Cash provided from (used by) financing activities 116,279 (75,270) --------- --------- Decrease in cash and cash equivalents (248) (3,235) Cash and cash equivalents at beginning of period 20,717 23,515 --------- --------- Cash and cash equivalents at end of period $ 20,469 $ 20,280 ========= ========= |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements included herein were prepared pursuant to the rules and regulations for interim reporting under the Securities Exchange Act of 1934. Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements were omitted. The interim consolidated financial statements and notes should be read in conjunction with the annual audited consolidated financial statements and notes thereto. The accompanying unaudited interim consolidated financial statements contain all adjustments, consisting only of normal adjustments, which in the opinion of management were necessary for a fair statement of the results for the interim periods. Results for the interim periods are not necessarily indicative of results for the full year.
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 first quarter consists of four four-week periods.
RECLASSIFICATIONS
Certain reclassifications of prior period data have been made to conform with the current period reporting.
2. ACQUISITION OF AUSTIN QUALITY FOODS, INC.
On March 6, 2000, Keebler Foods Company ("Keebler") acquired Austin Quality Foods, Inc. ("Austin") from R&H Trust Co. (Jersey) Limited, as Trustee, HB Marketing & Franchising L.P., 697163 Alberta Ltd., and William C. Burkhardt, for a purchase price, net of cash acquired, of $253.7 million, excluding related fees and expenses paid of approximately $3.0 million. The acquisition of Austin was a cash transaction funded with approximately $235.0 million from borrowings under the $700.0 million Senior Credit Facility Agreement dated as of September 28, 1998, and the remainder from cash received on additional sales of accounts receivable under Keebler's Receivables Purchase Agreement.
The acquisition of Austin 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 Austin based on respective fair values. The acquisition has resulted in an unallocated excess purchase price over fair value of net assets acquired of $168.5 million, which is being amortized on a straight-line basis over a forty year period.
Results of operations for Austin from March 6, 2000 to October 7, 2000 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 each respective fiscal year reported. 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 Austin acquisition been effected on the first day of the year reported.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITION OF AUSTIN QUALITY FOODS, INC. (CONTINUED)
Unaudited (IN THOUSANDS EXCEPT PER SHARE DATA) For the Forty Weeks Ended ------------------------------------ October 7, 2000 October 9, 1999 ----------------- ----------------- Net sales....................................................................... $ 2,139,130 $ 2,217,917 Net income...................................................................... $ 117,478 $ 42,148 Diluted net income per share.................................................... $ 1.35 $ .48 |
3. ASSETS HELD FOR SALE
On May 2, 2000, the Sayreville, New Jersey manufacturing facility, which had been held for sale after its closure, was sold for $7.5 million. The sale resulted in a pre-tax gain of approximately $2.0 million, which was recorded in other income during the first half of the year. Disposition of the remaining assets held for sale is expected to occur within the next thirty-three months without a significant gain or loss.
4. DEBT
Long-term debt consisted of the following at October 7, 2000:
(IN THOUSANDS) Interest Rate Final Maturity OCTOBER 7,2000 ------------- -------------- -------------- Revolving Facility.................................. 6.845% September 28, 2004 $ 170,000 Term Facility....................................... 6.827% September 28, 2004 287,000 Senior Subordinated Notes........................... 10.750% July 1, 2006 124,400 Other Senior Debt................................... Various 2001-2005 8,840 Capital Lease Obligations........................... Various 2002-2042 6,524 --------- 596,764 Less: Current maturities............................ 50,660 --------- Total.......................................... $ 546,104 ========= |
On March 6, 2000, Keebler utilized existing credit facilities in order to finance the acquisition of Austin. The additional borrowings were under the Revolving Facility, which was originally entered into on September 28, 1998. At October 7, 2000, the outstanding balance on the Revolving Facility was $170.0 million, with an available balance of $180.0 million.
5. RESTRUCTURING AND IMPAIRMENT CHARGE
In May of 1999, Keebler closed its manufacturing facility in Sayreville, New Jersey, which resulted in a pre-tax restructuring and impairment charge, in 1999, to operating income of $66.3 million in total. In the second quarter of 2000, the charge was reduced by an adjustment of $1.0 million. The adjustment related to severance and other exit costs from the facility closure due to lower-than-expected severance costs and the earlier-than-expected sale of the facility. The restructuring and impairment charge included $19.2 million for cash costs related to severance and other exit costs from the Sayreville facility. The remaining $46.1 million were non-cash charges for asset impairments related to the Sayreville closing, including write-downs of property, plant and equipment at Sayreville and equipment at other locations, and a proportionate reduction of goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996. Approximately 650 employees were terminated as a result of the closing of the Sayreville facility, of which approximately 600 employees were represented by unions.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. RESTRUCTURING AND IMPAIRMENT CHARGE (CONTINUED)
The following table sets forth the activity related to the liabilities accrued in conjunction with the restructuring and impairment charge:
(IN THOUSANDS) January 1, 2000 Provision Spending Adjustment OCTOBER 7, 2000 --------------- ----------- ------------ ------------- --------------- Severance................... $2,037 $ -- $(1,196) $ (140) $ 701 Facility closure............ 2,567 -- (852) (1,556) 159 Other....................... 1,717 -- 56 700 2,473 ------ --------- ------- ------- ------ Total................... $6,321 $ -- $(1,992) $ (996) $3,333 ====== ========= ======= ======= ====== |
At October 7, 2000, $3.2 million remained for plant and facility closing costs and severance accruals and $.1 million for other liabilities and accruals. Only costs related to the settlement of worker's compensation claims (included in other above), and health and welfare payments are expected to extend beyond the year ended December 30, 2000.
6. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE
In conjunction with the March 6, 2000 Austin acquisition, Keebler has recognized estimated costs pursuant to a plan to exit certain activities of the acquired company. These exit costs, for which there is no future economic benefit, were provided for in the purchase price allocation and were equal to $14.5 million. Spending equal to $8.8 million has occurred through October 7, 2000. Staff reductions of approximately 80 non-union employees are expected as part of the exit plan. Approximately 75 employees had been terminated at October 7, 2000. The remaining terminations are expected to occur by February 23, 2001. Spending on exit costs is expected to be substantially complete before the end of 2001, with primarily health and welfare payments extending beyond that timeframe.
During 1998, as part of acquiring President International, Inc. ("President"), Keebler provided for $12.8 million in exit costs in the allocation of the purchase price. At January 1, 2000, there remained $7.4 million in reserves of which $2.8 million was spent during the first three quarters of 2000. There were 260 employees at January 1, 2000, still expected to be terminated as part of the exit plan, of which approximately 175 were represented by a union. Throughout the first forty weeks of 2000, approximately 150 employees under union contract and approximately 35 employees not under union contract had been terminated. The remaining terminations are scheduled to occur in the fourth quarter of 2000.
In the second quarter of the current year, Keebler adjusted accruals previously established in the accounting for the Keebler and Sunshine acquisitions by reducing goodwill and other intangibles by $0.5 million and $1.1 million, respectively, to recognize exit costs that are now expected to be less than initially anticipated.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. PLANT AND FACILITY CLOSING COST AND SEVERANCE (CONTINUED)
The following table sets forth the activity in Keebler's plant and facility closing costs and severance liabilities exclusive of the liabilities resulting from the restructuring and impairment charge recorded during 1999:
January 1, OCTOBER 7, (IN THOUSANDS) 2000 Provision Spending Adjustment 2000 ---------- --------- -------- ---------- --------- KEEBLER COMPANY Severance .................... $ 24 $ -- $ -- $ -- $ 24 Facility closure ............. 7,829 -- (1,430) (500) 5,899 ------- ------- -------- ------- ------- Subtotal ................. 7,853 -- (1,430) (500) 5,923 ------- ------- -------- ------- ------- SUNSHINE BISCUITS, INC Severance .................... $ 63 $ -- $ (17) $ -- $ 46 Facility closure ............. 1,962 -- (689) (1,116) 157 ------- ------- -------- ------- ------- Subtotal ................. 2,025 -- (706) (1,116) 203 ------- ------- -------- ------- ------- PRESIDENT INTERNATIONAL, INC Severance .................... $ 2,829 $ -- $ (2,235) $ -- $ 594 Facility closure ............. 4,596 -- (569) -- 4,027 Other ........................ 10 -- (10) -- -- ------- ------- -------- ------- ------- Subtotal ................. 7,435 -- (2,814) -- 4,621 ------- ------- -------- ------- ------- AUSTIN QUALITY FOODS, INC Severance .................... $ -- $13,979 $ (8,398) $ -- $ 5,581 Facility closure ............. -- 479 (408) -- 71 Other ........................ -- 28 (5) -- 23 ------- ------- -------- ------- ------- Subtotal ................. -- 14,486* (8,811) -- 5,675 ------- ------- -------- ------- ------- Total .................. $17,313 $14,486 $(13,761) $(1,616) $16,422 ======= ======= ======== ======= ======= |
* Recorded as part of the purchase price allocation.
7. SEGMENT INFORMATION
Keebler has adopted Statement of Financial Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" for reporting segment information. Keebler's reportable segments are Branded and Specialty. The reportable segments were 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. Either a Keebler sales employee or a distributor sells products in the Branded segment. The sales channels in the Specialty segment primarily sell cookie, cracker and brownie 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.), as well as cookies manufactured for the Girl Scouts of the U.S.A. Many of the products sold by the Specialty segment are done so through the use of brokers.
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SEGMENT INFORMATION (CONTINUED)
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. While the accounting policies for each reportable segment are the same as for the total company, the cost of sales used to determine a segment's profit contribution is calculated using standard costs for each product, whereas actual cost of sales is used to determine consolidated income from operations.
There are no intersegment transactions that result in revenue or profit. 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 twelve weeks ended October 7, 2000 and October 9, 1999 and the forty weeks ended October 7, 2000 and October 9, 1999. Prior year amounts have been restated for reclassifications between reportable segments.
Branded Specialty Segment Segment Other (a) Total ---------- ---------- --------- ---------- (IN THOUSANDS) TWELVE WEEKS ENDED OCTOBER 7, 2000: NET SALES TO EXTERNAL CUSTOMERS ........ $ 512,412 $129,791 $ -- $ 642,203 DEPRECIATION EXPENSE ................... 5,205 2,404 9,475 17,084 PROFIT CONTRIBUTION .................... 92,896 23,108 -- 116,004 TWELVE WEEKS ENDED OCTOBER 9, 1999: Net sales to external customers ........ $ 479,598 $136,246 $ -- $ 615,844 Depreciation expense ................... 5,297 2,034 7,673 15,004 Profit contribution .................... 83,362 17,759 -- 101,121 FORTY WEEKS ENDED OCTOBER 7, 2000: NET SALES TO EXTERNAL CUSTOMERS ........ $1,597,553 $514,082 $ -- $2,111,635 DEPRECIATION EXPENSE ................... 19,194 9,216 25,743 54,153 PROFIT CONTRIBUTION .................... 264,305 103,594 -- 367,899 FORTY WEEKS ENDED OCTOBER 9, 1999: Net sales to external customers ........ $1,533,543 $522,181 $ -- $2,055,724 Depreciation expense ................... 15,804 6,275 25,510 47,589 Profit contribution .................... 240,905 90,148 -- 331,053 |
(a) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments.
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 for the twelve weeks ended October 7, 2000 and October 9, 1999 and the forty weeks ended October 7, 2000 and October 9, 1999 is as follows:
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SEGMENT INFORMATION (CONTINUED)
Twelve Weeks Ended Forty Weeks Ended --------------------------------- ------------------------------------ OCTOBER 7, 2000 October 9, 1999 OCTOBER 7, 2000 October 9, 1999 --------------- --------------- --------------- --------------- (IN THOUSANDS) INCOME BEFORE INCOME TAX EXPENSE: Reportable segment's profit contribution .... $116,004 $101,121 $ 367,899 $331,053 Unallocated functional support costs (b) .... 40,359 38,161 132,027 148,716 Restructuring and impairment charge ......... -- -- (996) 69,208 Interest expense, net ....................... 10,051 7,097 34,187 28,497 -------- -------- --------- -------- Income before Income Tax Expense ......... $ 65,594 $ 55,863 $ 202,681 $ 84,632 ======== ======== ========= ======== |
(b) Includes support costs such as distribution, research and development, corporate administration and other (income) expense, which are not allocated internally to reportable segments.
8. SALE OF VALUE BRANDS ASSETS
On January 4, 2000, Keebler sold its Birmingham, Alabama, and North Little Rock, Arkansas bakeries and the SUNNY and GREGS brands to Consolidated Biscuit Company. As a result of the sale, Keebler recorded a $5.7 million pre-tax gain in other income during the first quarter of 2000.
9. INCOME TAXES
During the quarter, Keebler decreased the annual effective tax rate from 41.0%
to 39.8%. The effective tax rate declined due to increased earnings, the
adoption of a change in the tax basis of the assets acquired and liabilities
assumed in the Keebler acquisition, in accordance with the Internal Revenue Code
Section 338, and a satisfactory resolution of certain income tax contingencies.
Partially offsetting the reduction in the effective tax rate was the increase in
intangible amortization expense as a result of the Austin acquisition. The
effective tax rate remains above the federal statutory rate due to nondeductible
expenses, primarily the amortization of intangibles, resulting from the
Sunshine, President and Austin acquisitions.
10. SUBSEQUENT EVENTS
On October 26, 2000, Kellogg Company announced it reached an agreement to acquire Keebler Foods Company in a transaction entered into with Keebler and with Flowers Industries, Inc., the majority shareholder of Keebler. Completion of the merger is subject to customary closing conditions and regulatory approvals. There can be no assurance that such approvals will be obtained. The transaction is expected to close during the first quarter of 2001.
On November 7, 2000, the Board of Directors of Keebler declared a quarterly cash dividend of $0.1125 per common share payable on December 20, 2000, to stockholders of record on December 6, 2000.