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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-12619
RALCORP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS ARTICLES)
MISSOURI 43-1766315
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
800 MARKET STREET
ST. LOUIS, MISSOURI 63101
(314) 877-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
____________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value............ New York Stock Exchange, Inc.
Common Stock Purchase Rights............ New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Registrant has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months and has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[x]
Aggregate market value of the voting stock held by nonaffiliates of
the Registrant $522,146,730 based upon the closing market price on
November 30, 1998. Excluded from this figure is the voting stock held
by Registrant's Directors, who are the only persons known to Registrant
who may be considered to be its "affiliates" as defined under Rule
12b-2.
Number of shares of Common Stock, $.01 par value, outstanding as of
close of business on November 30, 1998: 31,124,949.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the year ended September 30,
1998, to the extent indicated in Parts I, II and IV. Except as to
information specifically incorporated, the 1998 Annual Report to
Shareholders is not to be deemed filed as part of this Form 10-K report.
2. Proxy Statement filed with the Commission dated December 17,
1998, to the extent indicated in Part III.
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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Report. These
forward-looking statements are sometimes identified by their use of
terms and phrases such as "anticipates," "intends," "should," "believes"
and similar expressions elsewhere in this report. The Company's results
of operations and liquidity status may differ materially from those in
the forward-looking statements. Such statements are based on
management's current view and assumptions, and involve risks and
uncertainties that could affect expected results. For example any of
the following factors cumulatively or individually may impact expected
results:
(i) If the Company is unable to maintain a meaningful price gap
between its private label products and the branded products of its
competitors, successfully introduce new products or successfully manage
costs across all parts of the Company, then the Company's private label
operations could incur operating losses;
(ii) Consolidation among members of the grocery trade may lead to
increased wholesale price pressure from large grocery trade customers
and could result in the loss of key accounts if the surviving entities
are not customers of the Company;
(iii) Significant increases in the cost of certain raw materials
used in the Company's products, to the extent not reflected in the price
of the Company's products, could adversely impact the Company's results.
For example, the cost of wheat can change significantly;
(iv) In light of its significant ownership in Vail Resorts, Inc.,
the Company's non-cash earnings can be adversely affected by Vail's
unfavorable performance;
(v) The Company is currently generating profit from certain co-
packing contract arrangements with other manufacturers within its
competitive categories. The termination or expiration of these
contracts, and the inability of the Company to replace this level of
business could negatively affect the Company's operating results;
(vi) The Company's businesses compete in mature segments with
competitors having large percentages of segment sales; and
(vii) The Company's disclosure under the heading "INFORMATION
SYSTEMS DEVELOPMENTS AND YEAR 2000 ISSUES" in the "Financial Review"
section of the Annual Report to Shareholders for the year ended
September 30, 1998 includes cautionary statements regarding the
Company's ability to successfully address Year 2000 compliance issues,
and such statements are incorporated herein.
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 2
Recent Business Developments 2
Other Information Pertaining to the Business of the Company 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 4(a). Executive Officers of the Registrant 9
PART II
Item 5. Market for Registrant's Common Equity and Related Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 10
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk 10
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10
PART III
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 11
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PART I
ITEM 1. BUSINESS.
Ralcorp Holdings, Inc. is a Missouri corporation incorporated on
October 23, 1996. Its principal executive offices are located at 800
Market Street, St. Louis, Missouri 63101. The terms "Company", "Ralcorp"
and "Registrant" as used herein refer to Ralcorp Holdings, Inc. and its
consolidated subsidiaries.
The Company is primarily engaged in the manufacturing, distribution
and marketing of private label ready-to-eat and hot cereal products,
private label and branded crackers and cookies, and private label and
value branded snack nuts.
The following sections of the 1998 Annual Report to Shareholders
contain financial and other information concerning the Company's
business developments and operations, and are incorporated herein by
reference: "Financial Review" on pages 14 through 21; "Business Segment
Information" on pages 22 through 23; "Acquisitions" on page 32; and
"Supplemental Earnings Statement Information" on page 34.
The Company was incorporated on October 23, 1996, under the name
"New Ralcorp Holdings, Inc." as a wholly owned subsidiary of the company
known as Ralcorp Holdings, Inc. ("Old Ralcorp"). The Company was formed
to facilitate Old Ralcorp's divestiture of its branded cereal and snack
business. To effect the divestiture, Old Ralcorp undertook a series of
internal transactions whereby the businesses, assets and liabilities of
Old Ralcorp's branded cereal and snack business (the "Branded Business")
were transferred to a newly formed subsidiary ("Chex Inc.") and the
businesses, assets and liabilities of Old Ralcorp's private label foods
businesses, baby food business and ownership interest in Vail Resorts,
Inc. were owned by the Company. Following this internal restructuring
on January 31, 1997, Old Ralcorp spun-off the Company by distributing
the Company's Common Stock to each owner of Old Ralcorp Common Stock on
a share-for-share basis (the "Distribution"). Following the
Distribution on January 31, 1997, a subsidiary of General Mills, Inc.
("General Mills") was merged (the "Merger") into Old Ralcorp (which then
consisted solely of Old Ralcorp's branded cereal and snack business
through its subsidiary Chex Inc.), with Old Ralcorp surviving the Merger
as a subsidiary of General Mills. The Merger Agreement setting forth
the terms of the Merger (the "Merger Agreement") is an Exhibit to this
Report. After the Merger, the Company changed its name to "Ralcorp
Holdings, Inc." Unless the context otherwise indicates, references to
"Ralcorp" and "Company" for periods prior to the Distribution are
references to Old Ralcorp.
RECENT BUSINESS DEVELOPMENTS
On April 23, 1998, the Company acquired Flavor House, Inc. a private
label and branded snack nut company with sales of approximately $62 million.
On August 25, 1998, the Company acquired Sugar Kake Cookie Inc. a
private label and branded cookie business with sales of approximately
$28 million.
On September 4, 1998, the Company purchased Nutcracker Brands,
Inc. a private label and value branded snack nut company with sales of
approximately $42 million.
On September 10, 1998, the Company sold its Beech-Nut Nutrition
Corporation subsidiary for $68 million in cash.
On September 24, 1998, the Company announced it had completed the
repurchase of all shares available under its Board of Directors approved
stock repurchase program.
On November 13, 1998, the Company completed the repurchase of
586,368 shares of its Common Stock at a price of $16.00 per share
through a Dutch Auction Self-Tender Offer.
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OTHER INFORMATION PERTAINING TO THE BUSINESS OF THE COMPANY
AGREEMENT AND PLAN OF REORGANIZATION
The Company, Old Ralcorp and General Mills entered into an
Agreement and Plan of Reorganization (the "Reorganization Agreement")
providing for, among other things, the principal corporate transactions
required to effect the Distribution and certain other agreements
governing the relationship between the Company and General Mills with
respect to or in consequence of the Distribution. The Reorganization
Agreement is an Exhibit to this Report.
Indemnification. Pursuant to the Reorganization Agreement,
General Mills and the Company agreed to indemnify each other for losses,
liabilities, claims, damages, obligations, payments, costs and expenses
(including, without limitation, reasonable attorneys' fees)
(collectively, "Indemnifiable Losses"), arising from certain matters.
The indemnification provided by the Reorganization Agreement also
applies to the indemnified parties' respective affiliates, employees,
directors, benefit plan fiduciaries, shareholders, agents, consultants,
representatives, successors, transferees and assigns.
(I) Specifically, General Mills agreed to indemnify the Company
against Indemnifiable Losses arising from the following:
(a) essentially all liabilities of the Branded Business (the
"Branded Liabilities") except for litigation set forth as identified in
the Reorganization Agreement (the "Scheduled Branded Litigation") and
the "Unknown Branded Liabilities" (defined as all Branded Liabilities
other than Branded Liabilities disclosed to General Mills in the
Reorganization Agreement, the Scheduled Branded Litigation and Post-
Closing Branded Liabilities (as defined below)), to the extent the
Company is obligated to indemnify General Mills pursuant to the
Reorganization Agreement;
(b) any breach or violation of any covenant made in the Merger
Agreement, the Reorganization Agreement or any other ancillary agreement
by General Mills, or, with respect to covenants to be performed after
the Merger, by Old Ralcorp or Chex Inc.; or
(c) subject to the limitations described below, any breach or
violation of any representation or warranty (without regard to
materiality qualifications contained therein) made by General Mills in
the Merger Agreement.
(II) The Company agreed to indemnify General Mills against
Indemnifiable Losses arising from the following:
(a) any and all liabilities assumed by the Company pursuant to
the Reorganization Agreement;
(b) subject to the limitations described below, any and all
Branded Liabilities other than (i) the Known Branded Liabilities and
(ii) the "Post-Closing Branded Liabilities," which are defined as
Branded Liabilities relating to or arising from the ownership, use or
possession of the assets of the Branded Business or the operation of the
Branded Business after the Merger;
(c) any breach or violation of any covenant made in the Merger
Agreement, the Reorganization Agreement or any other ancillary agreement
thereto by the Company or, with respect to covenants to be performed
before the Distribution, by the Company;
(d) the ownership, use or possession of the Company's Assets or
the operation of the Company's business, whether relating to or arising
out of occurrences prior to or after the Merger, except to the extent
liability therefor is assumed pursuant to the Reorganization Agreement;
(e) subject to the limitations described below, any breach or
violation of any representation or warranty (without regard to
materiality qualifications contained therein) made by Old Ralcorp in the
Merger Agreement or made by the Company in the Reorganization Agreement;
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(f) any third party claim to the extent relating to the actions
of the Old Ralcorp Board in authorizing the Distribution or the Merger;
or
(g) any third party claim arising out of the disclosures
contained in the Information Statement describing the Distribution,
other than disclosures based on information provided by or on behalf of
General Mills for inclusion herein.
(III) The indemnification obligations described above are subject to the
following limitations:
(a) Notwithstanding the expiration of the representations and
warranties in the Merger Agreement or anything else to the contrary in
the Merger Agreement, the indemnification obligations described above
with respect to breaches of representations or warranties will survive
the Distribution for eighteen months, at which time they will expire
automatically, except with respect to written claims for indemnification
made in good faith prior to such expiration (which claims will survive
such expiration);
(b) The indemnification obligation of the Company described in
paragraph (II)(b) above with respect to certain pre-closing Branded
Liabilities will survive the Distribution Date for five years, at which
time it will expire automatically, except with respect to written claims
for indemnification made in good faith prior to such expiration (which
claims will survive such expiration);
(c) The indemnification obligations of General Mills for breaches
of representations or warranties will apply only to the extent
Indemnifiable Losses therefrom exceed $6 million in the aggregate; and
(d) The indemnification obligations of the Company for breaches
of representations or warranties and for certain pre-closing Branded
Liabilities will apply only to the extent Indemnifiable Losses therefrom
exceed $6 million in the aggregate.
Post-Distribution Covenants. In the Reorganization Agreement, the
Company has agreed to covenants whereby the Company will not engage in
certain transactions for a period of time after the Distribution. For
example, for a period of two years following the Distribution the
Company may not: make a material disposition of its assets or capital
stock; repurchase its shares without satisfying applicable federal tax
regulations; issue capital stock in the aggregate exceeding ten percent
of its issued and outstanding stock; liquidate or merge with another
company; or cease conducting its businesses. If the Company desires to
undertake any of the foregoing within the two year period, the Company
must first obtain an opinion of legal counsel or ruling from the IRS
that such desired activity will not jeopardize the tax-free nature of
the Distribution or Merger.
Additionally, the Company has agreed to maintain a certain minimum
net worth level for a period up to five years after the Distribution
Date. For the first two years the net worth of the Company can be not
less than $100 million. As of September 30, 1998 the Company's net
worth was $307.3 million.
POST-DISTRIBUTION AGREEMENTS
Tax Sharing Agreement. The Tax Sharing Agreement provides that
each of General Mills and the Company are responsible for, and will
indemnify the other party against, its (and its respective affiliates)
allocable share of tax liabilities before and after the Distribution.
The Company is liable for all taxes of (a) the Company or any of its
affiliates for any pre- or post-Distribution tax period, (b) Old Ralcorp
or any affiliate for any pre-Distribution tax period, including any
liabilities resulting from an audit or other adjustment to previously
filed tax returns and (c) any person arising out of or directly
resulting from any of the transactions set forth in the Reorganization,
or the Merger Agreement unless such liability results from a breach of
certain covenants by General Mills with respect to taxes. General Mills
will be liable for all taxes of Old Ralcorp or any Old Ralcorp affiliate
attributable to any post-Distribution tax period. In the Tax Sharing
Agreement, General Mills and the Company agreed to cooperate with
respect to the preparation and filing of tax returns and with respect to
any tax-related challenges or proceedings.
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Technology Agreement. The Company and General Mills are subject
to a Technology Agreement (the "Technology Agreement") pursuant to which
the parties' rights with respect to certain shared technology is
determined. Generally, the Company licenses from General Mills the
technology necessary to produce certain cereal and snack mix products
produced by Old Ralcorp immediately prior to the Distribution.
Additionally, the Technology Agreement contains certain provisions
pursuant to which the Company has agreed not to make certain products
for certain periods of time, except as may otherwise be provided in the
Supply Agreement or in the Distribution Agreement. The Company has also
agreed not to use on its products any snack mix recipes that have been
used in the three years prior to the Distribution in connection with
Chex products. The Technology Agreement provides that the Company will
not make or sell (a) any ready-to-eat cereals that are Cookie Crisp-type
products in the United States, its territories, possessions, military
installations or the Commonwealth of Puerto Rico for the eighteen month
period commencing upon the Distribution; (b) any ready-to-eat cereals
that are Chex and Cookie Crisp-type products outside of the United
States, its territories, possessions, military installations or the
Commonwealth of Puerto Rico for the five year period commencing upon the
Distribution; (c) any snack mix, cereal-based or otherwise, anywhere in
the world for the two year period commencing upon the Distribution; and
(d) any snack mix containing those products, or a product substantially
similar to, or identical to, products which have been, prior to the
Distribution, offered for sale in connection with any form of the Chex
trademark, which shall include products sold under the Crispy Hexagon
designation, for the five year period commencing upon the Distribution.
Trademark Agreement. The Company and General Mills are also
subject to a Trademark Agreement that facilitates the assignment and/or
license among the Company and General Mills and its subsidiaries of
certain trademarks, service marks, trade dress and copyrights.
TRADEMARKS
The Company owns a number of trademarks that it considers
substantially important to its business, including "NUTCRACKER", and
"FLAVOR HOUSE".
SEGMENTS
The Company is presently comprised of two business segments:
Consumer Foods and Snack Nuts.
CONSUMER FOODS
The Consumer Foods segment is comprised of two product lines:
private label cereal, (the "Private Label Cereal Business"); and
private label and branded crackers and cookies (the "Cracker and Cookie
Business").
PRIVATE LABEL CEREAL BUSINESS
Currently, the Private Label Cereal Business accounts for
approximately 50% of the Company's Consumer Foods segment sales.
Private label ready-to-eat cereals are currently produced at three
operating facilities. The Company's Cracker and Cookie Business
produces a shredded wheat cereal for the Private Label Cereal Business.
Private label and branded hot cereals are produced at one facility. The
hot cereal products include old fashioned oatmeal, quick oats, plain
instant oatmeal, flavored instant oatmeal, farina and instant Ralston, a
branded hot wheat cereal. The Private Label Cereal Business also sells
hot cereal under the brand Three Minute Oats. The Company believes it
is the largest manufacturer of the private label ready-to-eat and hot
cereals.
The Company's ready-to-eat and hot cereals are warehoused in and
distributed through four independent distribution facilities and two of
its plants and shipped to customers principally via independent truck
lines. The ready-to-eat and hot cereal products are sold to grocery
wholesalers, retail chains, mass merchandisers, warehouse club outlets
and other customers through in-house district sales managers and
independent food brokers.
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CRACKER AND COOKIE BUSINESS
The Company believes its Cracker and Cookie Business is currently
the leading private-label cracker manufacturer and a producer of private
label and branded cookies for sale in the United States. The Cracker
and Cookie Business also produces Ry Krisp branded crackers. Management
positions the Cracker and Cookie Business as the premier quality and low
cost producer of a wide variety of private label crackers and cookies.
The Cracker and Cookie Business operates four plants: one produces
solely Ry Krisp crackers, two produce private label crackers and cookies
and one produces private label and branded cookies. The Cracker and
Cookie Business' products are largely produced to order and shipped
directly to customers. Private label crackers and cookies are sold
through a broker network. Branded Ry Krisp crackers are sold through a
direct store distributor network.
SNACK NUTS
The Snack Nuts segment is comprised of Flavor House Products, Inc.
and Nutcracker Brands, Inc. which were acquired during the fiscal year.
The segment operates two plants that produce a variety of jarred, canned
and bagged snack nuts. The segment's products are largely produced to
order and shipped directly to customers. The segment sells its products
through an internal sales staff and a broker network. The segment
produces store brand products and value branded products under the
Nutcracker and Flavor House brands.
OWNERSHIP OF VAIL STOCK
The Company owns 7,554,406 shares of Vail Resorts, Inc. Common
Stock (approximately 21.9 percent of the shares outstanding as of
September 30, 1998). Additionally, two of the Company's Directors,
Messrs. Stiritz and Micheletto, are on the Vail Board of Directors.
Currently, the Company utilizes the equity method of accounting to
reflect the portion of Vail's earnings (or losses) applicable to the
Company on a non-cash basis.
Pursuant to a Shareholder Agreement entered into in connection
with the acquisition of the Vail Common Stock, the Company can only sell
its Vail Common Stock in a registered offering allowed under the
Shareholder Agreement or in private transactions after July 3, 1998
(provided the purchaser agrees to be bound by the Shareholder
Agreement). Vail's results of operations are highly seasonal and are
dependent in part on weather conditions and consumers' discretionary
spending trends. In light of the significance of the Company's
ownership in Vail in comparison to earnings and assets of the Company,
changes in the price of Vail's Common Stock can impact the Company's
stock price.
COMPETITION
The Company's businesses face intense competition from large
branded cereal, cracker and cookie, and snack nut manufacturers, and
highly competitive private label cereal, cracker and cookie, and snack
nut manufacturers. Top branded ready-to-eat cereal competitors include
Kellogg, General Mills, Kraft Foods and Quaker Oats. Recent promotional
spending by large branded ready-to-eat cereal manufacturers have
negatively impacted the Company's sales of ready-to-eat cereal. The
Cracker and Cookie Business faces intense competition from large branded
manufacturers such as Nabisco and Keebler/Sunshine who possess
approximately 40% and 25%, respectively, of the branded cracker category
and similar shares in the cookie category (on a volume basis). In
addition, private label cracker and cookie manufacturers provide
significant competition in the store brand segment. The Snack Nuts
segment faces significant competition from one significant branded snack
nut producer and many private label snack nut manufacturers.
The industries in which the Company compete are highly sensitive
to both pricing and promotion. Competition is based upon product
quality, price, effective promotional activities, and the ability to
identify and satisfy emerging consumer preferences. These industries
are expected to remain highly competitive in the foreseeable future.
Future growth opportunities for the Company are expected to depend on
the Company's ability to implement strategies for competing effectively
in all of its businesses, including strategies relating to enhancing the
performance of its employees, maintaining effective cost control programs,
developing and implementing methods for more efficient manufacturing and
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distribution operations, and developing successful new products, while
at the same time maintaining aggressive pricing and promotion of its
products.
EMPLOYEES
The Company employs approximately 2,400 people in the United
States. Approximately 1,000 of the Company's personnel are covered by
eight union contracts and, from time to time the Company has experienced
union organizing activities at its non-union plants. The contracts
expire at various times beginning on March 6, 1999 and ending October 6,
2002. The Company believes its relations with its employees, including
union employees, are good.
RAW MATERIALS
The principal raw materials used in the Company's businesses are
grain and grain products, flour, sugar, and various nuts such as peanuts
and cashews. The Company purchases such raw materials from local,
regional, national and international suppliers. The cost of raw
materials used in the Company's products may fluctuate widely due to
weather conditions, government regulations, economic climate, or other
unforeseen circumstances. Agricultural products represent 35% to 45% of
the Company's cost of goods sold in fiscal 1998. Packaging prices
represent 20% to 30% of the Company's cost of good sold in fiscal 1998.
From time to time the Company will enter into supply contracts for
periods up to twelve months to secure favorable pricing for ingredient
and packaging supplies.
GOVERNMENTAL REGULATION; ENVIRONMENTAL MATTERS
The operations of the Company are subject to regulation by various
federal, state and local governmental entities and agencies. As a
producer of goods for human consumption, such operations are subject to
stringent production and labeling standards. In the early 1990's, new
labeling regulations were promulgated and implemented which have
required the Company businesses to modify the information disclosed on
their packaging. Management expects that similar changes in laws in the
future could be implemented without a material adverse impact on the
Company businesses if existing packaging stock may be used during a
transition period while packaging information is modified.
The operations of the Company businesses, 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, waste handling and
disposal and other regulations intended to protect public health and the
environment. While it is difficult to quantify with certainty the
potential financial impact of actions regarding expenditures for
environmental matters, particularly remediation, and future capital
expenditures for environmental control equipment, in the opinion of
management, based upon the information currently available, the ultimate
liability arising from such environmental matters, taking into account
established accruals for estimated liabilities, should not have a
material effect on the Company's capital expenditures or consolidated
results of operations or financial position. For additional information
on Environmental matters, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 14
"Commitments and Contingencies" on page 37 of the Company's 1998 Annual
Report to Shareholders filed herewith.
ITEM 2. PROPERTIES.
The Company's principal properties are its manufacturing
locations. Shown below are the Company's owned, and where indicated, leased
principal properties. The Company leases its principal executive offices and
research and development facilities in St. Louis, Missouri. Management
believes its facilities are suitable and adequate for the purposes for which
they are used and are adequately maintained.
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Cereal Plants Cracker and Cookie Plants Snack Nut Plants
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Battle Creek, MI Princeton, KY Dothan, AL (Leased)
Cedar Rapids, IA Poteau, OK Billerica, MA
Lancaster, OH Minneapolis, MN
Sparks, NV Tonawanda, NY
ITEM 3. LEGAL PROCEEDINGS.
Ralcorp is a party to a number of legal proceedings in various
state and federal jurisdictions arising out of the operations of its
businesses. These proceedings are in varying stages and many may proceed
for protracted periods of time. Some proceedings involve highly complex
questions of fact and law.
On January 4, 1993, Ralston Purina Company ("Ralston") was served
with the first of nine substantively identical actions currently pending
in the United States District Court for the District of New Jersey. The
suits have been consolidated and styled In Re Baby Food Antitrust
Litigation, No. 92-5495 (NHP). The consolidated proceeding is a
certified class action by and on behalf of all direct purchasers of baby
foods (other than the defendants and governmental entities), alleging
that the Beech-Nut baby food business (and its predecessor, Nestle
Holdings, Inc.) together with Gerber Products Company and H.J. Heinz
Company, conspired to fix, maintain and stabilize the prices of baby
foods during the period January 1, 1975 to August 31, 1992, and seeking
treble damages. On January 19 and 21, 1993, Ralston was served with two
actions on behalf of indirect purchasers (consumers) of baby food in
California which contain substantively identical charges. These actions
have been consolidated in the Superior Court for the County of San
Francisco and styled Bruce, et al. v. Gerber Products Company, et al.,
No. 94-8857. On July 28, 1997, Judge Nicholas H. Politan granted
Ralston's Motion For Summary Judgment in the case then pending in the
U.S. District Court for the District of New Jersey and dismissed the
case with prejudice. Plaintiffs have appealed Judge Politan's ruling
and oral arguments were held on the appeal and the Company is awaiting a
ruling. On January 19, 1993, Ralston was served with a similar action
filed in Alabama state court on behalf of indirect purchasers of baby
food in Alabama, styled Johnson, et al. v. Gerber Products Company et
al., No. 93-L-0333-NE. Both state actions allege violations of state
antitrust laws and are substantively identical to each other. On July
28, 1997, Judge Nicholas H. Politan granted Ralston's Motion For Summary
Judgment in the case then pending in the U.S. District Court for the
District of New Jersey and dismissed the case with prejudice.
Plaintiffs appealed Judge Politan's ruling, and the appeal was argued
before the U.S. Court of Appeals for the Third Circuit on October 1,
1998. No decision has yet been rendered in this matter. The Bruce and
Johnson cases remain inactive pending resolution of In Re Baby Food,
Antitrust Litigation. Similar state actions may be filed in states
having laws permitting suits by indirect purchasers. Ralston and the
Company through the Reorganization Agreement with General Mills have
agreed in the Reorganization Agreement with Ralston in connection with
the 1994 spin-off ("Ralston Reorganization Agreement") that all expenses
related to the above antitrust matters will be shared equally, but that
Ralcorp's liability for any settlement or judgment will not exceed $5
million, any amount in excess of that would be paid by Ralston. Expenses
and liability with respect to certain other lawsuits which are not
believed by Ralcorp to be material, either individually or in the
aggregate, will also be shared pursuant to the Ralston Reorganization
Agreement.
Based upon a review of the petitions in the above antitrust
matters, it appears that those actions contain questionable allegations
and that there are numerous meritorious defenses. The amount of alleged
liability, if any, from these proceedings cannot be determined with
certainty; however, in the opinion of management, based upon the
information presently known, as well as upon the limitation of its
liabilities set forth in the Ralston Reorganization Agreement, the
ultimate liability of the Company, if any, arising from the pending
legal proceedings, as well as from asserted legal claims and known
potential legal claims which are probable of assertion, taking into
account established accruals for estimated liabilities, should not be
material to the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the security holders during the
fourth quarter of fiscal year 1998.
8
<PAGE>
<PAGE> 10
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT.
Joe R. Micheletto 62 Chief Executive Officer and President since
1996. He served as Co-Chief Executive
Officer and Chief Financial Officer from 1994
to 1996 with the Company. He served as Vice
President and Controller of Ralston Purina
from 1985 to 1994, and as Chief Executive
Officer of Ralston Resorts from 1991 to 1997.
Mr. Micheletto is also a Director of the
Company.
Kevin J. Hunt 47 Corporate Vice President; and President,
Bremner, Inc. He has held the same position
with the Company since 1995. Mr. Hunt joined
Ralston Purina in 1985. In 1988, he was
named Director of Marketing for Continental
Baking Company, and in 1992 he was named
Director of Planning for Ralston Purina and
President of Bremner, Inc.
Robert W. Lockwood 55 Corporate Vice President; General Counsel and
Secretary of the Company. He has held the
same position with the Company since 1994.
Mr. Lockwood joined Ralston Purina in 1976.
In 1981, he was named Associate Counsel and
Assistant Secretary; and in 1989, he was
named Vice President, Senior Counsel and
Assistant Secretary.
James A. Nichols 50 Corporate Vice President and President,
Ralston Foods. He has held the same position
with the Company since 1995. Mr. Nichols
joined Ralston Purina in 1975. In 1985 he
was named Vice President and Director of
Marketing-Cereal. In 1989, he was named
President, Beech-Nut Nutrition Corporation.
In 1994, he was named Corporate Vice
President and President of Beech-Nut
Nutrition Corporation.
David P. Skarie 52 Corporate Vice President and Director of
Customer Development of Ralston Foods. He
has held the same position with the Company
since 1994. Mr. Skarie joined Ralston Purina
in 1986. In 1988, he was named National
Sales Director, General Merchandise. In
1990, he was named Vice President, Eastern
Division Sales. In 1991, he was named Vice
President, Field Sales. In 1993, he was
named Vice President-Director, Customer
Development, Human Foods.
Ronald D. Wilkinson 48 Corporate Vice President and Director of
Product Supply of Ralston Foods. He has held
the same position with the Company since
1996. Mr. Wilkinson joined Ralcorp in
November, 1995. In 1991, he was named
Director, Engineering U.S. Cereals for the
Quaker Oats Company; and in 1992, was named
Vice President, Supply Chain U.S. Cereals for
The Quaker Oats Company. In November, 1995,
Mr. Wilkinson joined Old Ralcorp as Executive
Vice President and Director, Manufacturing
for Ralston Foods; and in June, 1996, was
named Executive Vice President and Director
of Product Supply for Ralston Foods.
(Ages are as of December 31, 1998)
9
<PAGE>
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS.
The Company's common stock (RAH) is traded on the New York Stock
Exchange. There were 16,464 common shareholders of record on November
30, 1998. Other information required by Item 5 appears under the
caption, "Common Stock Data", on inside back cover of the 1998 Annual
Report to Shareholders and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The summary of financial data appears on page 13 of the 1998
Annual Report to Shareholders under the caption "Five Year Financial
Summary" and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information appearing under the captions "Financial Review" on
pages 14 through 21 and "Business Segment Information" on pages 22
through 23 of the 1998 Annual Report to Shareholders is hereby
incorporated by reference.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Information appearing in the "Market Risk" section of "Financial
Review," in the "Inventories" portion of Note 2 "Basis of Presentation
And Summary of Significant Accounting Policies," and in Note 13 "Financial
Instruments And Risk Management" on pages 20, 30 and 37, respectively, of
the 1998 Annual Report to Shareholders are hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Unaudited Pro Forma Combined Financial Information on page 24,
the Consolidated Financial Statements of the Company and its
subsidiaries and related Notes thereto, appearing on pages 26 through
42, together with the report thereon of PricewaterhouseCoopers LLP on
page 25, and the supplementary data under the caption "Quarterly
Financial Information" on page 43 of the 1998 Annual Report to
Shareholders are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding directors on pages 3 through 5 of the
Company's Notice of Annual Meeting and Proxy Statement dated December
17, 1998, is hereby incorporated by reference. Information regarding
Executive Officers of the Company is included under Item 4(a) of Part I.
ITEM 11. EXECUTIVE COMPENSATION.
Information appearing under "Information on Executive
Compensation" on pages 8 through 11, and the remuneration information
under the caption "How does Ralcorp compensate its directors?" on page
7 of the Company's Notice of Annual Meeting and Proxy Statement dated
December 17, 1998, is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion of the security ownership of certain beneficial
owners and management appearing under the caption "How much Ralcorp stock
do directors and executive officers own?" on page 6 of the Company's Notice
of Annual Meeting and Proxy Statement dated December 17, 1998, is hereby
incorporated by reference.
10
<PAGE>
<PAGE> 12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information appearing under the captions "Compensation Committee
Interlocks and Insider Participation" on page 13 of the Company's Notice
of Annual Meeting and Proxy Statement dated December 17, 1998, is hereby
incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed with this report:
(1) Financial statements previously incorporated by reference
under Item 8 herein above.
-Report of Independent Accountants.
-Consolidated Statement of Earnings for years ended
September 30, 1998, 1997 and 1996.
-Consolidated Balance Sheet at September 30, 1998 and 1997.
-Consolidated Statement of Cash Flows for years ended
September 30, 1998, 1997 and 1996.
-Consolidated Statement of Shareholders' Equity for the three
years ended September 30, 1998.
-Notes to Consolidated Financial Statements.
-Unaudited Pro Forma Combined Financial Information for the
year ended September 30, 1998.
(2) Financial Statement Schedules: None
(3) Exhibits. See the Index to Exhibits that appears at the end
of this document and which is incorporated herein. Exhibits
10.14 to 10.34 are management compensation plans or
arrangements.
(b) Reports on Form 8-K. The Company filed the following reports on
Form 8-K during the last quarter of the fiscal year:
(i) Form 8-K filed August 6, 1998 announcing the divestiture of
Beech-Nut Nutrition Corporation and announcing third quarter
earnings.
(ii) Form 8-K filed September 25, 1998 filing Pro Forma
financial statements relating to the sale of Beech-Nut Nutrition
Corporation.
11
<PAGE>
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, Ralcorp Holdings, Inc. has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RALCORP HOLDINGS, INC.
By: /s/Joe R. Micheletto
------------------------------
Joe R. Micheletto
Chief Executive Officer
and President
December 23, 1998
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints R. W. Lockwood and T. G.
Granneman and each of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resolution, for him and in
his name, place, and stead, in any and all capacities, to sign any and
all amendments to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises,
as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Joe R. Micheletto Chief Executive Officer, President December 23, 1998
- ------------------------- and Director (Principal Executive
Joe R. Micheletto Officer and Principal Financial
Officer)
/s/Thomas G. Granneman Vice President and Controller December 23, 1998
- ------------------------- (Principal Accounting Officer)
Thomas G. Granneman
/s/William H. Danforth Director December 23, 1998
- -------------------------
William H. Danforth
/s/William D. George, Jr. Director December 23, 1998
- -------------------------
William D. George, Jr.
/s/Jack W. Goodall Director December 23, 1998
- -------------------------
Jack W. Goodall
/s/David W. Kemper Director December 23, 1998
- -------------------------
David W. Kemper
/s/William P. Stiritz Director December 23, 1998
- -------------------------
William P. Stiritz
</TABLE>
12
<PAGE>
<PAGE> 14
FINANCIAL STATEMENTS AND SCHEDULES
The consolidated financial statements of the Registrant have been
incorporated by reference under Item 8. Financial statements of the
Registrant's 50% or less owned companies have been omitted because, in
the aggregate, they are not significant. Financial Schedules not
included have been omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
13
<PAGE>
<PAGE> 15
RALCORP HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <S>
<F*>3.1 Restated Articles of Incorporation of Ralcorp Holdings, Inc. (Filed as Exhibit 3.1 to
the Company's Form 10-Q for the period ending December, 31, 1996).
<F*>3.2 Bylaws of Ralcorp Holdings, Inc. (Filed as Exhibit 3.2 to the Company's Registration
Statement on Form 10 dated December 27, 1996).
<F*>4.1 Shareholder Protection Rights Agreement (Filed as Exhibit 4.1 to the Company's
Registration Statement on Form 10 dated December 27, 1996).
<F*>4.2 First Amendment to Shareholder Rights Protection Plan (Filed as Exhibit 4 to the
Company's Form 10-Q for the period ending June 30, 1997).
<F*>10.1 Credit Agreement dated as of January 31, 1997 among Ralcorp Holdings, Inc., the
Lenders named therein and The First National Bank of Chicago, as Agent (Filed as
Exhibit 10.1 to the Company's Form 10-Q for the period ending December 31, 1996).
<F*>10.1(a) Amendment dated October 16, 1998, to the Credit Agreement dated January 31, 1997 by
and among the Company, the Lenders named therein and the First National Bank of Chicago
as agent (Filed as Exhibit 99.(B)(2) to the Company's Schedule 13E-4 dated October 16,
1998).
<F*>10.2 Reorganization Agreement dated as of January 31, 1997 by and among Ralcorp Holdings,
Inc. New Ralcorp Holdings, Inc., Ralston Foods, Inc. Chex, Inc. and General Mills, Inc.
(Filed as Exhibit 10.2 to the Company's Form 10-Q for the period ending December 31, 1997).
<F*>10.3 Tax Sharing Agreement dated as of January 31, 1997 between Ralcorp Holdings, Inc. and New
Ralcorp Holdings, Inc. (Filed as Exhibit 10.5 to the Company's Form 10-Q for the period
ending December 31, 1996).
<F*>10.4 Stock Purchase Agreement made as of July 29, 1998 by and among Milnot Holding Corporation,
RH Financial Corporation and Ralcorp Holdings, Inc. (filed as Exhibit 99.2 to the
Company's Form 8-K dated September 10, 1998).
<F*>10.5 Technology Agreement dated as of January 31, 1997 by and among Ralcorp Holdings, Inc., New
Ralcorp Holdings, Inc. and Chex, Inc. (Filed as Exhibit 10.4 to the Company's Form 10-Q
for the period ending December 31, 1996).
<F*>10.6 Trademark Agreement dated as of January 31, 1997 by and among Ralcorp Holdings, Inc., New
Ralcorp Holdings, Inc. and Chex, Inc. (Filed as Exhibit 10.3 to the Company's Form 10-Q
for the period ending December 31, 1996).
<F*>10.7 Agreement and Plan of Merger dated as of August 13, 1996 by and among Ralcorp Holdings,
Inc., General Mills, Inc. and General Mills Missouri, Inc. (Filed as Exhibit 2.6 to the
Company's Form 10-Q for the period ending December 31, 1996).
<F*>10.8 Stock Purchase Agreement by and among Vail resorts, Inc., Ralston Foods, Inc. and Ralston
Resorts, Inc. dated July 22, 1996 (Filed as Exhibit 10.10 to the Company's Registration
Statement on Form 10, dated December 27, 1996).
<F*>10.9 Shareholder Agreement dated as of January 3, 1997 among Vail Resorts, Inc., Ralston Foods,
Inc. and Apollo Ski Partners L.P. (Filed as Exhibit 10.9 to the Company's Form 10-Q for
the period ending December 31, 1996).
<F*>10.10 Stock Purchase Agreement among Bremner, Inc. and all of the shareholders of the Wortz
Company dated March 14, 1997 (Filed as exhibit 10.0 to the Company's Form 10-Q for the
period ending March 31, 1997).
14
<PAGE>
<PAGE> 16
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<F*>10.11 Amendment to Agreement and Plan of Merger dated October 26, 1996 by and among Ralcorp
Holdings, Inc., General Mills, Inc. and General Mills Missouri, Inc. (filed as Exhibit
10.11 to the Company's Form 10-K for the period ending September 30, 1997).
<F*>10.12 Second Amendment to Agreement and Plan of Merger dated January 29, 1997 by and among
Ralcorp Holdings, Inc., General Mills, Inc., and General Mills Missouri, Inc. (Filed as
Exhibit 10.7 to the Company's Form 10-Q for the period ending December 31, 1996).
<F*>10.13 Third Amendment to Agreement and Plan of Merger dated January 31, 1997 by and among
Ralcorp Holdings, Inc., General Mills, Inc. and General Mills Missouri, Inc. (Filed as
Exhibit 10.8 to the Company's Form 10-Q for the period ending December 31, 1996).
<F*>10.14 Incentive Stock Plan (Filed as Exhibit 10.01 to the Company's Registration Statement on
Form 10 dated December 27, 1997).
<F*>10.15 Form of 1997 Non-Qualified Stock Option Agreement (Filed as Exhibit 10.01 to Company's
Form 10-Q for the period ending June 30, 1997).
<F*>10.16 Form of 1997 Non-Qualified Stock Option Agreement for Non-Management Directors (Filed as
Exhibit 10.01 to Company's Form 10-Q for the period ending June 30, 1997).
<F*>10.17 Form of Management Continuity Agreement (Filed as Exhibit 10.3 to the Company's Form 10-Q
for the period ending June 30, 1997).
<F*>10.18 Employment Agreement For J. R. Micheletto (Filed as Exhibit 10.4 to the Company's Form
10-Q for the period ending June 30, 1997).
<F*>10.18(a) Amendment to Employment Agreement For J. R. Micheletto (Filed as Exhibit 10.18 to the
Company's Form 10-K for the year ending September 30, 1997).
<F*>10.19 Employment Agreement For K. J. Hunt (Filed as Exhibit 10.5 to the Company's Form 10-Q for
the period ending June 30, 1997).
<F*>10.20 Employment Agreement For R. W. Lockwood (Filed as Exhibit 10.6 to the Company's Form 10-Q
for the period ending June 30, 1997).
<F*>10.21 Employment Agreement For J. A. Nichols (Filed as Exhibit 10.7 to the Company's Form 10-Q
for the period ending June 30, 1997).
<F*>10.22 Employment Agreement For D. P. Skarie (Filed as Exhibit 10.8 to the Company's Form 10-Q
for the period ending June 30, 1997).
10.23 Summary of Terms for 1998 Non-Qualified Stock Options.
<F*>10.24 Employment Agreement for R. D. Wilkinson (Filed as Exhibit 10.24 to the Company's Form
10-K for the year ending September 30, 1997).
<F*>10.25 Split Dollar Second to Die Life Insurance Arrangement (Filed as Exhibit 10.07 to the
Company's Registration Statement on Form 10 dated December 27, 1996).
<F*>10.26 Change in Control Severance Plan (Filed as Exhibit 10.06 to the Company's Registration
Statement on Form 10 dated December 27, 1996).
<F*>10.28 Deferred Compensation Plan for Non-Management Directors (Filed as Exhibit 10.08 to the
Company's Registration Statement on For 10 dated December 27, 1996).
<F*>10.29 Deferred Compensation Plan for Key Employees (Filed as Exhibit 10.09 to the Company's
Registration Statement on Form 10 dated December 27, 1996).
<F*>10.30 Executive Life Insurance Plan (Filed as Exhibit 10.10 to the Company's Registration
statement on Form 10 Dated December 27, 1996).
<F*>10.31 Executive Health Plan (Filed as Exhibit 10.11 to the Company's Registration Statement
on Form 10 Dated December 27, 1996).
<F*>10.32 Executive Long Term Disability Plan (Filed as Exhibit 10.12 to the Company's
Registration Statement on Form 10 dated December 27, 1996).
<F*>10.33 Supplemental Retirement Plan (Filed as Exhibit 10.14 to the Company's Registration
Statement on Form 10 dated December 27, 1996).
<F*>10.34 Executive Savings Investment Plan (Filed as Exhibit 10.15 to the Company's
Registration Statement on Form 10 dated December 27, 1996).
15
<PAGE>
<PAGE> 17
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<F*>10.35 Form of Indemnification Agreement (Filed as Exhibit 10.13 to the Company's
Registration Statement on Form 10 dated December 27, 1996).
13 Portion of the 1998 Annual Report to Shareholders
21 Subsidiaries of the Company
23(a) Consent of PricewaterhouseCoopers LLP
23(b) Consent of Arthur Andersen LLP
<F*>24 Power of Attorney (Included in Part II)
27 Financial Data Schedule
99.1 Opinion of Arthur Anderson LLP
<FN>
- ---------
<F*> Incorporated by reference
</TABLE>
16
<PAGE> 1
EXHIBIT 10.23
NON-QUALIFIED STOCK OPTIONS
Summary of Terms
Date of Grant: September 24, 1998
Exercise Price: NYSE Closing Price on Grant Date - $14.625
Exercisable: 25% - September 24, 2001
25% - September 24, 2002
25% - September 24, 2003
25% - September 24, 2004
Expiration Date: September 23, 2008
Acceleration: Award becomes fully exercisable upon:
(a) Death of Optionee (exercisable for three
years)
(b) Optionee's total and permanent disability
(exercisable for three years)
(c) Optionee's voluntary termination after age
62 (exercisable for three years)
(d) Involuntary termination of Optionee, other
than for cause (exercisable for six
months)
(e) A change in control of the Company
(exercisable for six months after
Optionee's voluntary or involuntary
termination following a change in control)
Forfeiture: All shares not exercisable at the time of the
declaration of forfeiture are forfeited upon:
(a) Optionee's termination for cause
(b) Optionee's voluntary termination prior to
age 62
(c) Optionee engaging in any activity or
conduct contrary to the best interests of
the Company
(d) Optionee engaging in competition with the
Company
Change in Control: In a change of control in which Ralcorp is not
the survivor, recipients would be entitled to be
paid, in cash, the spread between the strike
price and the merger consideration or tender
offer price.
<PAGE> 1
- -------------------------------------------------------------------------------
COMPANY BUSINESS The Company is presently comprised of two business
segments - Consumer Foods and Snack Nuts.
The Consumer Foods segment produces and sells store brand ready-
to-eat and hot cereals, store brand and branded crackers and store brand
cookies, and, until September 10, 1998, baby food and baby juice under
the Beech-Nut brand.
The Company's revenues are primarily generated by sales within the
United States. The Consumer Foods segment is comprised of the following
production facilities: four cereal plants; two cracker and cookie
plants; one cookie plant; one branded cracker plant; and two snack nut
plants. Store brand cereals are warehoused in independent warehouse
facilities and at several plants and shipped to customers principally
via independent truck lines. These products are marketed primarily
through food brokers to grocery wholesalers, retail chains, mass
merchandisers, warehouse club outlets and other customers.
Store brand and branded crackers and store brand cookies are
manufactured in four locations, marketed through a broker network and
shipped directly to accounts' warehouses. The Snack Nuts segment is
comprised of Flavor House Products, Inc., and Nutcracker Brands, Inc.,
which were acquired during the fiscal year. The segment operates two
plants that produce a variety of jarred, canned and bagged snack nuts.
The segment's products are largely produced to order and shipped
directly to customers. The segment sells its products through an
internal sales staff and broker network. The Company, through a
divestiture of its ski resort operations, owns approximately 22% of Vail
Resorts, Inc. Vail is the leading ski resort operation in North
America. The Company employs approximately 2,400 people in the United
States.
The continuing policy of the Company is to provide equal
opportunity for all its employees and applicants on the basis of merit
and without discrimination because of race, sex, color, age, religion,
national origin, creed, ancestry, veteran status, or physical or mental
disability. In addition to providing equal opportunity, affirmative
action is taken at each step of the employment process. The Company
realizes that only through the cooperation of all employees can the
Company's nondiscrimination policy be meaningful.
Financial information relating to the Company's business is
summarized beginning on page 13.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS Certain forward-
looking statements are made throughout this Annual Report. Please
see page 21 for a description of certain factors that may cause actual
results to differ from those in the forward-looking statements.
COMMUNITY COMMITMENT Ralcorp has proudly defined its commitment to the
communities where its employees live and work through a sizable hunger
relief effort in 1998 consisting of donated food products and charitable
contributions.
PRODUCT DONATIONS. Ralcorp's giving priorities strategically link
what the Company does best -- produce quality food products -- with a
great need in this country to provide nourishing food to the hungry.
This past year, Ralston Foods, Beech-Nut Nutrition Corporation and
Bremner, Inc. provided food products to thousands of people in need.
UNITED WAY. With so many worthwhile organizations in need, it is
impossible for a company the size of Ralcorp to have enough dollars to
single-handedly make a lasting difference. Like many companies
throughout the country, Ralcorp turned to the expertise of the United
Way, an organization that combines the resources of many companies and
individuals to help make a positive difference in communities. The
United Way is generously supported at Ralcorp headquarters and
manufacturing locations through Company and employee contributions.
CHARITABLE GRANTMAKING. In addition to the sizable amount of in-
kind product donations made by Ralcorp subsidiary operations, a limited
amount of charitable grants were made in fiscal 1998 to targeted
programs that share the Company's commitment to hunger relief.
By providing food donations, United Way support and strategic grant
money, Ralcorp is dedicated to doing what it can to make its communities
better places to live for its employees and all citizens.
12
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 2
<TABLE>
FIVE YEAR FINANCIAL SUMMARY
- --------------------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
STATEMENT OF EARNINGS DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $582.9 $739.7 $1,027.4 $1,013.4 $987.0
Depreciation and Amortization 18.2 24.4 46.4 46.7 44.2
Earnings (Loss) before Income Taxes
and Interest Expense 70.4<Fa> 549.8<Fb> (46.3)<Fc> 83.0<Fd> 100.2
As a Percent of Sales 12.1% 74.3% (4.5%) 8.2% 10.2%
Earnings (Loss) before Income Taxes $ 70.4<Fa> $541.9<Fb> $ (73.1)<Fc> $ 54.8<Fd> $ 87.9
Income Taxes 26.8 10.4 (26.3) 21.4 34.3
Net Earnings (Loss) 43.6<Fa> 531.5<Fb> (46.8)<Fc> 33.4<Fd> 53.6
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital <Fe> $ 33.3 $ 56.5 $ 92.4 $ 104.7 $ 81.8
Property at Cost, Net 150.2 154.3 322.6 417.1 416.2
Additions (during the period) 15.0 21.0 60.2 59.3 38.2
Depreciation (during the period) 16.1 22.5 43.5 44.1 41.7
Total Assets 417.9 400.3 627.1 716.2 700.1
Long-Term Debt -- -- 376.6 395.4 389.4
Shareholders' Equity 307.3 286.7 107.4 162.4 141.2
<FN>
<Fa> Includes an $18.7 pre-tax gain ($11.6 after taxes) on the sale of
Beech-Nut.
<Fb> Includes a $515.4 non-taxable gain on the sale of Ralcorp's
branded cereal and snack business, and a $19.7 pre-tax
restructuring charge ($12.4 after taxes) to cover severance
payments for employees eliminated as a result of that sale and
certain other employees.
<Fc> Includes a $109.5 pre-tax impairment charge ($68.8 after taxes)
related to Ralcorp's private label ready-to-eat cereal and
consumer hot cereal operations, a $16.5 pre-tax restructuring
charge ($10.4 after taxes) to recognize the costs related to the
restructuring of its ready-to-eat cereal business, and $4.0 of
transaction fees ($2.5 after taxes) related to the sale of Resort
Operations.
<Fd> Includes $21.9 pre-tax nonrecurring charges ($13.6 after taxes)
related to exit of industrial oats and oats milling operations and
impairment of the consumer hot cereal business.
<Fe> Excludes cash and cash equivalents and current maturities of long-
term debt, where applicable.
</TABLE>
13
1998 ANNUAL REPORT
<PAGE>
<PAGE> 3
FINANCIAL REVIEW
- -------------------------------------------------------------------------------
This discussion summarizes significant factors affecting the
consolidated operating results, financial condition and liquidity and
capital resources of Ralcorp Holdings, Inc. (Company). This discussion
should be read in conjunction with the Business Segment Information,
Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
The comparisons of fiscal 1998 operations to those of 1997, and of
1997 to 1996, are affected by the significant changes the Company has
made to its mix of businesses, as well as the accounting charges that
have been recorded over these years. As a result, comparative results
are more difficult to analyze and explain. Where practicable, this
discussion will attempt to address not only the financial results as
reported, but also the key results and factors affecting Ralcorp's on-
going businesses.
For financial reporting purposes, Ralcorp is a "successor
registrant" to the Ralcorp Holdings, Inc. that was acquired by General
Mills, Inc. on January 31, 1997 (Old Ralcorp) and, as such, all
financial statements represent the historical financial information of
Old Ralcorp, for periods prior to January 31, 1997, and Ralcorp, for
subsequent periods. Therefore, references to the "Company" or
"Ralcorp", as they relate to financial information for periods prior to
January 31, 1997, are references to Old Ralcorp.
OVERVIEW
Fiscal 1998 was again a year that included significant changes to
the Company's business composition. Ralcorp further transitioned to a
company whose core operations compete primarily from leadership
positions in private label, or store brand, foods. Faced with an
intensely price competitive and shrinking baby food category, Ralcorp
management made the difficult decision to sell its branded baby food
subsidiary, Beech-Nut Nutrition Corporation (Beech-Nut). Beech-Nut was
sold on September 10, 1998 for $68 million in cash. The results of
Beech-Nut operations are included in the Company's consolidated
operating results through that date. Entering fiscal 1998, Beech-Nut
represented Ralcorp's last significant business competing in the branded
food arena. It was in fiscal 1997 that the Company completed two
significant sale transactions, the branded cereal and snack mix business
(Branded Business) was sold to General Mills, Inc. (General Mills) and
the Company's ski resorts operations (Resort Operations) were sold to
Vail Resorts, Inc. (Vail). These transactions resulted in the
elimination of all outstanding debt, and the distribution to
shareholders of $355 million in General Mills stock. In addition,
Ralcorp retained an equity ownership interest in Vail, the largest ski
resort company in North America.
Acquisition activity over the past two fiscal years has greatly
enhanced the Company's goal to command niche leadership positions in
each of its categories, as well as taking the Company into the new
segment of snack nuts. The Company's private label cracker and cookie
subsidiary has grown through two strategic acquisitions. First, in
fiscal 1997, the Company acquired the Wortz Company (Wortz), a private
label cracker and cookie operation, which gave the Bremner operation a
formidable position in store brand crackers. Secondly, in late August
1998, Sugar Kake Cookie Inc. (Sugar Kake), a quality producer of store
brand cookies, was added. Sugar Kake provides Bremner with important
critical mass on the cookie side of its operation. During fiscal 1998,
Ralcorp gained a leading position in store brand and value brand snack
nuts sold in jars and cans with the additions of Flavor House, Inc.
(Flavor House) in April, and Nutcracker Brands, Inc. (Nutcracker), in
September.
Operationally, fiscal 1998 was a good year for each of Ralcorp's
on-going businesses. The Bremner cracker and cookie business
experienced favorable operating results primarily through having a full
year of operations from Wortz and a favorable product mix of higher
margin products. Store brand cereals recorded year-over-year volume
improvement in both ready-to-eat and hot cereals. The results of the
Company's cereal division were also favorably influenced by maintaining
the lower cost base attained by downsizing the business. Significant
promotional activity on the part of branded cereal competitors, however,
had a negative impact on the entire category, including Ralston Foods,
late in fiscal 1998. The Company's snack nut business was able to
generate an operating profit during its short time as part of Ralcorp
and appears well positioned for the coming fiscal year. Finally, for
the period of October 1, 1997 through July 31, 1998, the Company
recorded $10.6 million in equity earnings from its equity investment in
Vail Resorts. These results are for only a ten month period due to Vail
changing its fiscal year end.
As mentioned earlier, the results of Beech-Nut are included in the
Company's consolidated results of operations through September 10, 1998,
the effective date of the sale. During this period, Beech-Nut continued
to be pressured by heavy price competition and a shrinking category.
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OPERATING RESULTS
The Company's Consolidated Statement of Earnings for each of the
years ended September 30, 1998, 1997 and 1996 include certain items
which make year-to-year comparisons difficult. The following describes
each of these items and quantifies their effect on net earnings.
The single unusual operating item included in the Company's
operating results for fiscal 1998 was an $18.7 million pre-tax ($11.6
million after tax, or $.35 per diluted share) gain on the sale of Beech-
Nut. In fiscal 1997, the Company recorded a $515.4 million ($15.52 per
diluted share) tax-free gain on the sale of the Branded Business to
General Mills. Also in fiscal 1997, the Company recorded two
restructuring charges totaling $19.7 million ($12.4 million after taxes,
or $.37 per diluted share). In fiscal 1996, the Company recorded a
$109.5 million pre-tax impairment charge ($68.8 million after taxes, or
$2.09 per diluted share) related to its private label ready-to-eat
cereal and consumer hot cereal operations. This charge was recorded
under the provisions of Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" (FAS 121); see Note 6 -- "Nonrecurring Charge"
in the Notes to Consolidated Financial Statements. Also, in fiscal
1996, the Company recorded a pre-tax charge of $16.5 million ($10.4
million after taxes, or $.31 per diluted share) to recognize the costs
related to the restructuring of its ready-to-eat cereal operations.
FISCAL 1998 COMPARED TO FISCAL 1997
CONSUMER FOODS
Comparisons of operating results in the Consumer Foods segment on
a historical basis are complicated by the fact that the operations of
the Company's Branded Business are included only through January 31,
1997, the date of the Branded Business sale to General Mills.
Actual Consumer Foods net sales declined $148.4 million from
fiscal 1997 to fiscal 1998. Net sales for fiscal 1998 were $558.2
million compared to $706.6 million in the prior fiscal year, as the year
ended September 30, 1997 includes the October 1996 through January 1997
sales of the Branded Business. Comparing sales of the current fiscal
year to the prior year, excluding the benefit of the Branded Business,
sales rose $24.1 million, or approximately 4.5 percent. The year-to-
year sales growth in this segment, excluding the sold Branded Business,
was due primarily to the increase from the Bremner cracker and cookie
operation, which benefited from a full year of integrating Wortz, which
was acquired on April 21, 1997. In addition, fiscal 1998 store brand
cereal sales improved over fiscal 1997 on volume increases of 3.3
percent and 6.3 percent for ready-to-eat and hot cereals, respectively.
Offsetting a good portion of the Consumer Foods sales improvement was a
$28.7 million sales decline from Beech-Nut baby foods. Current year
sales for baby foods reflect only the period of October 1, 1997 through
September 10, 1998, the date this divestiture was completed. Beech-Nut
continued to be plagued by both significant competitive pricing
pressures and a declining category.
From an operating results perspective, the Consumer Foods segment
recorded an operating profit of $45.6 million for the year ended
September 30, 1998. This fiscal 1998 operating profit level was
significantly below the Branded Business-enhanced operating profit of
the prior year, excluding the $19.7 million restructuring charge.
Bremner operating profit improved considerably in fiscal 1998 primarily
as a result of the addition of Wortz, an improved product mix and
favorable ingredient costs. Ralston Foods operations reflected
considerable improvement for fiscal 1998 over the prior year (on a store
brand only basis). Key contributors to the improvement were increased
volumes of both ready-to-eat and hot cereals, improved margins obtained
by maintaining a substantially lower cost base, and the benefit of lower
raw material costs. The growth of the Company's store brand cereal
division was slowed, however, in the fourth quarter of fiscal 1998.
Significant promotional and trade dealing initiatives on the part of
larger, branded cereal competitors negatively influenced Ralston Foods
operations, as well as the profitability of the entire ready-to-eat
cereal category. Operating results of Beech-Nut for fiscal 1998 were
well below the levels attained in fiscal 1997. Beech-Nut recorded an
operating loss for the year-to-date period ended September 10, 1998.
In addition, operating results in the Consumer Foods segment were
favorably affected by certain co-packing arrangements with other
companies operating in the same competitive categories. Through these
co-packing partnerships, Ralcorp is contractually committed to provide
its partner companies quality products that are packaged for sale under
the individual partner company's label. In return, Ralcorp is
compensated according to the terms of the respective contracts. As with
any of the Company's other customers, these arrangements terminate at
various times.
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SNACK NUTS
The operating results of the Company's snack nut subsidiary were
reported as a separate operating segment. This segment is comprised of
Flavor House, acquired in late April 1998, and Nutcracker, acquired in
early September 1998. Based on the timing of these acquisitions, there
are no prior year comparisons. For the five-month period during which
the Company competed in the snack nut category, sales were $24.7 million
and operating profit was $.9 million.
EQUITY INTEREST IN VAIL RESORTS, INC.
Ralcorp continues to hold an equity ownership interest in Vail.
As of November 1, 1998, the 7.55 million shares owned by the Company
equates to an approximate 22 percent equity stake. On November 6, 1997,
Vail announced a change in its fiscal year end from September 30 to July
31. As a result, Ralcorp now reports equity earnings on a two-month
time lag and the Company's entire current fiscal year includes only ten
months of equity earnings from Vail.
For the year ended September 30, 1998, the Company's equity stake
in Vail resulted in non-cash, pre-tax earnings of $10.6 million compared
to $4.7 million during the prior year. Ralcorp's reporting through
September 30, 1998 includes Vail's results for only the period of
October 1997 through July 1998 and the prior year's equity earnings
reflects only the months of January 1997 through September 1997 (the
period subsequent to the Vail transaction). Vail's earnings are highly
seasonal with operating losses normally reported in the first and fourth
fiscal quarters.
As the Company moves forward with its current mix of businesses,
the equity earnings from the Company's investment in Vail could become
more significant. It must be noted that the skiing industry is mature,
with slow growth, and high levels of competition. Any adverse operating
performance at Vail will have a negative effect on the Company's
results. Company management, however, is confident that Vail management
will operate their ski resort operations in a manner consistent with the
best interest of the Company.
CONSOLIDATED
Costs of products sold as a percentage of sales was 66.2% for
fiscal 1998 compared to 57.5% for the prior year. This increase can be
primarily attributed to the fact that many of the Company's higher
margin products were eliminated through the sale of the Branded
Business. In a comparison of fiscal 1998 fourth quarter to the same
prior year quarter, costs of products sold as a percentage of sales
increased to 69.6% from 66.9%. This increase is attributable to margin
contraction from baby food operations through September 10, 1998
(effective date of the Beech-Nut sale) and the current quarter inclusion
of the snack nut division, partially offset by favorable raw material
costs for the cereal and cracker and cookie operations. Selling,
general and administrative expense as a percent of sales decreased to
16.8% for fiscal 1998 compared to 17.1% for the prior year. This
basically flat comparison indicates how the Company has been able to
maintain the significantly reduced cost structure achieved through
reshaping the Company as a primarily private label corporation.
Advertising and promotion expense as a percentage of sales has declined
from 18.7% in fiscal 1997 to 10.0% in fiscal 1998, reflecting the
reduced level of advertising and promotional support necessary for a
primarily private label company. The Company recorded no interest
expense for fiscal 1998 due to its ability to remain essentially debt-
free following the sales of the Branded Business and Resort Operations.
Net interest expense for fiscal 1997 was $7.9 million, or 1.1% of net
sales, which represents interest expense incurred on outstanding debt
balances through January 1997. Income tax provisions generally reflect
statutory tax rates for each of the fiscal years, excluding the tax-free
gain on sale of the Branded Business.
FISCAL 1997 COMPARED TO FISCAL 1996
CONSUMER FOODS
As indicated above, comparisons of operating results in the
Consumer Foods segment on a historical basis are complicated by the
January 31, 1997 sale of the Company's Branded Business.
Consumer Foods net sales declined significantly from fiscal 1996
to fiscal 1997, as net sales dropped to $706.6 million in fiscal 1997
from $892.0 million in the prior fiscal year. This decline is due to
the inclusion of the divested Branded Business in the full fiscal 1996
results. On a pro forma basis, excluding Branded Business sales,
Consumer Foods net sales recorded slight improvements in fiscal 1997
primarily on the strength of increased cracker and cookie sales.
Bremner cracker and cookie sales benefited on a year-over-year
comparison through the inclusion of Wortz, since its acquisition. Sales
from the original Bremner operation also improved on favorable volume
growth
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and product mix. Baby food sales were virtually flat in fiscal 1997
compared to fiscal 1996 as the effects of favorable pricing were offset
by volume declines. Year-over-year comparisons of store brand cereal
sales showed a slight decline from fiscal 1996; however, store brand
cereal volume improved in each of the last two quarters of fiscal 1997.
Operating profit, exclusive of the charges mentioned earlier,
declined $7.1 million, or 10.5%, to $60.2 million in fiscal 1997. This
decline again is primarily attributable to the Branded Business being
included for the full 1996 fiscal year. However, the Ralston Foods
store brand cereal business was able to operate profitably for the full
year reflecting the success of the Company's cost reduction initiatives.
Bremner's operating profit improved significantly over fiscal 1996 on
the inclusion of Wortz, as well as on volume growth, a favorable product
mix and favorable ingredient costs. The decline in Beech-Nut's
operating profit, however, practically offset the improvements at
Bremner. A meaningful decline in volumes, partially offset by increased
prices, and higher advertising and promotion expenses made
necessary in the increasingly competitive baby food industry, caused
Beech-Nut's operating profit decrease.
RESORTS
During the period of October 1, 1996 through the January 3, 1997
sale date of Resort Operations to Vail, the Company recorded net sales
of $33.1 million and operating profit of $.3 million.
Ralcorp sold its three ski resort operations to Vail in exchange
for the assumption of Resort debt and an equity interest in Vail. As a
result of its ownership interest in Vail, Ralcorp recorded $4.7 million
of pre-tax equity earnings, or $.09 per diluted share after taxes.
CONSOLIDATED
Costs of products sold as a percentage of sales was 57.5% for
fiscal 1997 compared to 52.3% for fiscal 1996. Selling, general and
administrative expense as a percent of sales decreased to 17.1% for the
fiscal 1997 fourth quarter compared to 20.1% for the same quarter of the
prior year and was basically flat in a comparison of full fiscal years.
The decline in selling, general and administrative expense as a percent
of sales on a quarter-to-quarter comparison, as well as the flat
comparison between fiscal years, are both indications of how the Company
has been able to remove significant portions of a cost structure that
was historically in place to support a larger corporation. The increase
in costs of products sold as a percentage of sales, however, reflects
the fact that many of the Company's higher margin products were
eliminated through the sale of the Branded Business. Advertising and
promotion expense as a percentage of sales declined significantly,
reflecting the reduced level of advertising and promotional support
necessary for a primarily private label company. Net interest expense,
for fiscal 1997 was $7.9 million or 1.1% of net sales, compared to $26.8
million or 2.6% of net sales in fiscal 1996. This decline reflects the
predominantly debt-free status the Company experienced subsequent to the
two January 1997 sale transactions. Income taxes, which include federal
and state taxes, were 39.2% of pre-tax earnings, excluding the tax-free
gain on sale of the Branded Business, for fiscal 1997, compared to 36.0%
of pre-tax losses in fiscal 1996. This difference in the effective tax
rate is primarily due to the Company recording significant one-time
charges in fiscal 1996. Tax provisions generally reflect statutory tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
The Company's primary source of liquidity is cash flow from
operations, which decreased to $38.1 million in 1998 compared to $77.5
million in 1997. The $39.4 million drop in operating cash flow is
primarily due to the changes in assets and liabilities used in
operations. In 1997, working capital decreased substantially,
resulting in a large cash inflow. In 1998, excluding the effects of the
1998 acquisitions and divestiture, the changes in the components of
working capital were relatively minor. The $14.3 million decrease in
operating cash flow in 1997 compared to 1996 was due primarily to the
reduced level of earnings before non-cash items such as depreciation,
amortization, non-cash portions of restructuring reserves and the tax-
free gain on sale of the Branded Business. The elimination of two
earnings streams through the fiscal 1997 sale transactions contributed
to the net earnings decline. Partially offsetting the net earnings
decrease was the favorable cash flow impact of reduced operating assets,
primarily inventories and accounts receivable, as mentioned previously.
Working capital, excluding cash and cash equivalents and current
maturities of long-term debt, was $33.3 million at September 30, 1998
compared to $56.5 million and $92.4 million at September 30, 1997 and
1996, respectively. The Company had no cash balances at September 30,
1996.
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1998 ANNUAL REPORT
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The Company's businesses have historically focused on generating
positive cash flows through operations. For the three years ended
September 30, 1998, the Company was able to generate $207.4 million of
cash from operations. Management believes that the Company will
continue to generate operating cash flow through its mix of businesses
and expects that future liquidity requirements will be met through a
combination of operating cash flow and strategic use of borrowings
available under its working capital credit facility.
INVESTING ACTIVITIES
Investing activities in 1998 of $55.2 million include the
acquisitions of Flavor House, Sugar Kake and Nutcracker, as well as a
final payment related to the fiscal 1997 Wortz acquisition. Investing
activities in 1997 include the purchase of Wortz for $41.6 million. In
addition, the 1998 sale of Beech-Nut resulted in net cash proceeds of
$67.1 million. Capital expenditures were $24.6 million, $24.9 million
and $66.7 million in fiscal years 1998, 1997 and 1996, respectively.
Capital expenditures for fiscal 1999 are expected to be approximately
$25-$30 million. The significant reduction in capital expenditures in
fiscal 1997 is due to the decrease in the overall size of the Company,
as well as the incorporation of sound cost controls while maintaining
efficient operating facilities.
FINANCING ACTIVITIES
Ralcorp closed its second consecutive year with no outstanding
debt on its Consolidated Balance Sheet. As a result of the sale
transactions in January 1997, the Company had emerged debt-free. During
fiscal 1998, the Company made three acquisitions and repurchased 1.3
million shares of its Common Stock. Operating cash flow and the
proceeds from the sale of Beech-Nut were sufficient sources of funds to
pay for the acquisition and repurchase activities. In the prior fiscal
year, borrowings to fund the acquisition of Wortz were completely repaid
by September 30, 1997.
To meet its on-going working capital needs, the Company has
available a $100 million credit facility. The proceeds of the facility
may be used to fund Ralcorp's working capital needs, capital
expenditures, acquisitions and other general corporate purposes.
Provisions of the $100 million credit facility require the Company to
maintain certain financial ratios and a minimum level of shareholders'
equity. The Company's operating results and financial condition were
well within the parameters of these debt covenants throughout fiscal
1998. Management is currently unaware of any risks inherent in the
Company's on-going businesses that could prevent the maintenance of the
requisite ratios or level of shareholders' equity.
During fiscal 1998, the Company repurchased $23.0 million of its
Common Stock compared to no repurchases in fiscal 1997 and $8.6 million
in the year ended September 30, 1996. As of September 30, 1998, there
was no authorization from the Company's Board of Directors to allow
management to repurchase its Common Stock. Subsequent to September 30,
1998, however, the Company's Board approved a Dutch Auction self-tender
offer to repurchase from existing shareholders up to 5 million shares.
The tender offer expired at midnight (EST) on November 13, 1998 with
586,368 shares purchased at $16.00 per share. On November 19, 1998, the
Company's Board approved an authorization for Company management to
repurchase up to 2 million shares of Common Stock.
OUTLOOK
Ralcorp management firmly believes the key to the Company's future
growth and prosperity is to focus primarily on the store brand arena and
the opportunities this presents. A key opportunity for private label
growth may exist through the rapid consolidation occurring among the
members of the grocery trade. Retail models outside the United States
suggest that as fewer retail operations gain control of the majority of
the grocery trade, the concept of "store branding" becomes much more
important to their operations. Ralcorp is well positioned with the size
and flexibility to be a private label supplier to these larger
retailers, providing both the quality and service that will be required.
Retail consolidation, however, brings with it more pricing and product
quality pressures. While such pressures could be a near term negative
for the Company, it is management's belief that there are significant
long-term benefits. Store brands will most likely be a key component of
these larger retailers' plans and there is obvious volume potential in
the long term. Important to each of Ralcorp's businesses will be to
further develop and maintain the relationships with these big retailers.
Any loss of key accounts could be detrimental to future operations.
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RALCORP HOLDINGS, INC.
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Ralcorp, through its Ralston Foods division, continues to operate
in the intensely competitive ready-to-eat cereal category. In addition
to the competition from branded boxed offerings, there is also the
increased competitive presence of low priced branded bagged cereals.
Unfortunately, the domestic cereal category continues to experience
declining volumes. To be successful, Ralcorp must maintain an effective
price gap between its private label cereal products and those products
of top branded cereal competitors. Ralcorp management has been somewhat
successful at removing excess costs from its cereal operations in order
to attain a cost basis that will allow it to maintain an adequate price
gap and still provide a quality alternative to branded cereals.
Management intends to continue to focus on cost elimination where
appropriate. Cost containment will be vital in a current category
environment that is filled with profit impairing promotional initiatives
on the part of branded cereal manufacturers. This promotional
environment, which developed primarily in the latter portion of fiscal
1998, had a negative impact on the results of all cereal companies,
including Ralston Foods. Fortunately, the continued focus of our
management on cost cutting and volume growth should allow Ralston Foods
to compete today and into the future.
Another key to the Company's outlook will be its ability to
diversify its business mix. This diversification strategy is most
evident by the growth of the Bremner cracker and cookie business. It is
expected that in fiscal 1999 the cracker and cookie business should
represent approximately one third of the Company's revenue base, a
significant change from just two years ago when cracker and cookie sales
represented less than 9 percent of total food revenues. Much of this
growth has come through strategic acquisitions. The addition of Wortz,
in fiscal 1997, had an immediate and positive effect on sales, operating
profit and customer base, while nearly doubling the size of the original
Bremner. In fiscal 1998, Sugar Kake was added, providing Bremner with a
low cost store brand cookie producer with an excellent reputation in the
trade. Bremner management intends to focus on completing the
integration of Wortz and capitalizing on the flexibility afforded by
Sugar Kake. In addition, Bremner hopes to continue to improve its
product mix by growing the cracker and cookie volume of its quality,
higher margin products. Combining these strategic initiatives with
Bremner's cost containment and product innovation goals places Bremner
on a firm foundation for future growth and profitability. Despite the
present positive outlook, it must be noted that Bremner still faces
significant competition from large branded and regional private label
producers.
The diversification strategy took Ralcorp into the snack nut
category in fiscal 1998. This represented a departure from the
primarily grain-based segments in which the Company has traditionally
operated, but the snack nut category has become more stable with a
single dominant branded leader. The tandem of Nutcracker and Flavor
House allowed Ralcorp to immediately assemble an important position in
the value end of snack nuts sold in jars and cans. The opportunity for
this division's management to capitalize on the combined strength of
Nutcracker and Flavor House, leveraging its key North/South
manufacturing locations, as well as the continued focus on producing
quality products while maintaining low costs, should provide the Company
with a key source of operating earnings.
Ralcorp management intends to take the appropriate steps to
continue the growth of the Company's businesses. Such steps could
include additional improvement in operating efficiencies, expanding the
customer base where possible, continued product improvement and
innovation.
A key growth opportunity for each of the Company's current
businesses may exist through strategic acquisitions or alliances. With
a goal of being a consolidator in private label, management intends to
explore, where appropriate, those acquisition opportunities that
strategically fit with the Company's current mix of businesses, as well
as to look for other key categories to penetrate. Ralcorp's ample debt
capacity should provide the Company flexibility to act upon any such
opportunities.
ENVIRONMENTAL MATTERS
The operations of the Company, like those of similar businesses,
are subject to various federal, state, and local laws and regulations
intended to protect public health and the environment, including air and
water quality and waste handling and disposal. The Company has received
notices from the U.S. Environmental Protection Agency, state agencies,
and/or private parties seeking contribution, that it has been identified
as a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act, and the Company
may be required to share in the cost of cleanup with respect to one
waste disposal site related to the Branded Business, which was sold to
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1998 ANNUAL REPORT
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General Mills. Pursuant to a Reorganization Agreement with General
Mills, General Mills has agreed to indemnify and defend the Company
against liabilities associated with the site. General Mills
indemnification and defense obligations are limited as more fully
discussed in "Note 14 -- Commitments and Contingencies" in the Notes to
Consolidated Financial Statements. The Company's ultimate liability in
connection with environmental matters may depend on many factors
including, but not limited to, the volume of material contributed to the
site, the existence of other parties responsible for remediation and
their financial viability, reports of experts (internal or external),
and the remediation methods and technology to be used. Based upon the
information currently available, the ultimate liability arising from
environmental matters is not expected to have a material effect on the
Company's financial position or results of operations.
INFLATION
Management recognizes that inflationary pressures may have an
adverse effect on the Company through higher asset replacement costs,
related depreciation and higher material costs. The Company tries to
minimize these effects through cost reductions and productivity
improvements as well as price increases to maintain reasonable profit
margins. It is management's view, however, that inflation has not had a
significant impact on operations in the three years ended September 30,
1998.
MARKET RISK
In the ordinary course of business, the Company is exposed to
commodity price risks relating to the acquisition of raw materials. The
Company utilizes derivative financial instruments, including futures
contracts and options, to manage certain of these exposures when it is
practical to do so.
A volatility analysis of the Company's derivatives portfolio,
which indicates potential changes in the fair value of the Company's
derivative holdings under certain market movements, yields a commodity
price risk of $.7 million. This sensitivity analysis reflects the
impact of a hypothetical 10% adverse change in the market price for the
Company's principal commodities. In actuality, commodity price
volatility is dependent on many factors impacting supply and demand that
are impossible to forecast. Therefore, changes in fair value over time
could differ substantially from the hypothetical change shown above.
The preceding volatility analysis ignores changes in the exposures
inherent in the underlying hedged transactions. Because the Company
does not hold or trade derivatives for speculation or profit, all
changes in derivative values are effectively offset by corresponding
changes in the underlying exposures. See INVENTORIES in "Note 2 --
Basis of Presentation and Summary of Significant Accounting Policies" of
the Notes to Consolidated Financial Statements.
INFORMATION SYSTEMS DEVELOPMENTS
AND YEAR 2000 ISSUES
The Company uses computer hardware and software in various aspects
of its business, including production, distribution and administration,
which will require modification or replacement in order to interpret the
Year 2000 appropriately. The Company is in the process of implementing
a plan to identify and correct all affected hardware and software. The
plan includes monitoring and testing the implementation of needed
corrections.
The Company's on-going information technology strategy includes
the elimination of mainframe computer systems and the migration to a
server environment in order to reduce costs and improve functionality.
A key component to the execution of this strategy is currently in
progress as the Company is replacing, upgrading or enhancing primary
systems and technology necessary to manage the business. The Company's
current accounting policy is to capitalize the related external costs
and amortize them over a period not to exceed five years. The Company's
replacement of primary systems is now substantially complete and the
resulting information systems hierarchy is substantially Year 2000
ready. The initial assessment of all other systems hardware and
software, including processors within production and other equipment, is
complete and remediation is currently underway. The Company anticipates
that most modifications and replacements to these systems and equipment
will be in place in early fiscal 1999. Testing of these changes will be
commenced as soon as they are completed. The Company expects all
testing should be completed by the end of fiscal 1999.
Based upon current expectations, management anticipates that the
incremental future costs to the Company to modify or replace
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its systems in order to remediate the Year 2000 issue should not exceed
$1 million. Such costs do not include normal system upgrades and
replacements.
The Company has implemented a program of contacting significant
customers, critical suppliers and certain other outside parties to help
determine the extent to which the Company's systems and operations are
vulnerable to any failures by these outside parties to satisfactorily
address their Year 2000 issues. In the event that any of the Company's
significant customers, critical suppliers or outside parties do not
successfully and timely achieve Year 2000 readiness, and the Company is
unable to replace them with new customers or alternate suppliers, the
Company's business or operations could be adversely affected.
While the Company expects to identify and resolve its Year 2000
issues in a timely manner, if modifications and replacements are not
made on a timely basis there can be no absolute assurance that there
will not be a material adverse effect on the Company. In addition, if
critical third parties fail to convert their systems in a timely manner
and in a way that is compatible with the Company's systems, such
failures would result in an interruption of critical service to the
Company resulting in a material adverse effect on the Company.
During fiscal 1999, the Company will develop contingency plans to
be implemented in the event of untimely or incomplete remediation of
both internal and third party Year 2000 issues.
The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 readiness are forward-looking
statements. The Company's ability to achieve Year 2000 readiness and
the level of incremental costs associated therewith, could be adversely
impacted by, among other things, the availability of testing resources,
vendors ability to modify proprietary software, and unanticipated
problems identified in the ongoing compliance review.
CAUTIONARY STATEMENT ON
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 21E of
the Exchange Act are made throughout this document and include
information under the section titled "Financial Review," and are
sometimes preceded by, followed by or include the words "believes,"
"expects," "anticipates" or similar expressions elsewhere in this
document. The Company's results of operations and liquidity status may
differ materially from those in the forward-looking statements. Such
statements are based on management's current views and assumptions, and
involve risks and uncertainties that could affect expected results. For
example, any of the following factors cumulatively or individually may
impact expected results:
(i) If the Company is unable to maintain a meaningful price gap
between its private label products and the branded products of its
competitors, successfully introduce new products or successfully manage
costs across all parts of the Company, then the Company's private label
businesses could incur operating losses;
(ii) Consolidation among members of the grocery trade may lead to
increased wholesale price pressure from larger grocery trade customers
and could result in the loss of key accounts if the surviving entities
are not customers of the Company;
(iii) Significant increases in the cost of certain raw materials
used in the Company's products, to the extent not reflected in the price
of the Company's products, could adversely impact the Company's results.
For example, the cost of wheat can change significantly;
(iv) In light of its significant ownership in Vail Resorts, Inc.,
the Company's non-cash earnings can be adversely affected by Vail's
unfavorable performance;
(v) The Company is currently generating profit from certain co-
packing contract arrangements with other manufacturers within its
competitive categories. The termination or expiration of these
contracts, and the inability of the Company to replace this level of
business could negatively affect the Company's operating results;
(vi) The Company's businesses compete in mature segments with
competitors having large percentages of segment sales; and
(vii) The Company's disclosure under the heading "INFORMATION
SYSTEMS DEVELOPMENTS AND YEAR 2000 ISSUES" includes cautionary
statements regarding the Company's ability to successfully address Year
2000 compliance issues, and such statements are incorporated herein.
21
1998 ANNUAL REPORT
<PAGE>
<PAGE> 11
BUSINESS SEGMENT INFORMATION
- -------------------------------------------------------------------------------
Summarized financial information by business segment follows. The
Company's segments were comprised of:
Consumer Foods
Cereals and Snacks
Baby Foods (through September 10, 1998)
Crackers and Cookies
Snack Nuts (since April 23, 1998)
Resort Operations (through January 3, 1997)
The Consumer Foods segment consists of cereals, baby food products
(through September 10, 1998), crackers, cookies, snacks, and the coupon
redemption business (through January 31, 1996). Reflected in the
Consumer Foods segment is the sale of the Company's branded cereal and
snack mix business on January 31, 1997; the purchase of the Wortz
Company, a private label cracker and cookie company, on April 21, 1997;
the purchase of Sugar Kake Cookie Inc., a cookie manufacturer, on August
25, 1998; and the sale of the Company's branded baby food subsidiary,
Beech-Nut Nutrition Corporation, on September 10, 1998.
The Snack Nuts segment consists of Flavor House, Inc. and
Nutcracker Brands, Inc., private label and value brand snack nut
businesses purchased on April 23, 1998 and September 8, 1998,
respectively.
The Resort Operations segment consisted of the Keystone, Arapahoe
Basin and Breckenridge resorts, through January 3, 1997, the date of its
sale to Vail Resorts, Inc. As of September 30, 1998, however, the
Company maintained an approximate 22% equity interest in Vail Resorts,
Inc.
Sales between business segments were immaterial. No single customer
accounted for 10% or more of sales.
22
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 12
<TABLE>
- -----------------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES BY PRODUCT LINES AND SEGMENTS
Consumer Foods
Cereal and Snacks $278.2 $437.0 $ 661.4
Baby Foods 122.4 151.1 152.8
Crackers and Cookies 157.6 118.5 77.8
----------------------------------
Subtotal $558.2 $706.6 $ 892.0
Snack Nuts 24.7
Resort Operations 33.1 135.4
----------------------------------
Total $582.9 $739.7 $1,027.4
==================================
OPERATING PROFIT (LOSS)
Consumer Foods<Fa> $ 45.6 $ 40.5 $ (58.7)
Snack Nuts .9
Resort Operations .3 23.0
----------------------------------
Total $ 46.5 $ 40.8 $ (35.7)
Gain on Sale of Beech-Nut 18.7
Gain on Sale of Branded Business 515.4
Equity Earnings in Vail Resorts, Inc. 10.6 4.7
Unallocated Corporate and Miscellaneous Expense<Fb> (5.4) (11.1) (10.6)
Interest Expense, Net (7.9) (26.8)
----------------------------------
Earnings (Loss) before Income Taxes $ 70.4 $541.9 $ (73.1)
==================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS TO PROPERTY DEPRECIATION ASSETS AT YEAR END
(Dollars in millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer Foods<Fc> $ 14.5 $ 13.2 $ 42.3 $ 15.5 $ 18.6 $ 29.8 $ 270.5 $ 304.2 $ 342.5
Snack Nuts<Fd> .5 .6 55.1
Resort Operations<Fe> 7.8 17.9 3.9 13.7 236.2
Corporate<Ff> 92.3 96.1 48.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 15.0 $ 21.0 $ 60.2 $ 16.1 $ 22.5 $ 43.5 $ 417.9 $ 400.3 $ 627.1
==================================================================================================================================
<FN>
<Fa> Reflects $19.7 in pre-tax restructuring charges taken as part of
extensive downsizing initiatives at the Company in 1997. Includes
pre-tax nonrecurring charges of $109.5 and pre-tax restructuring
charge of $16.5 in 1996.
<Fb> Includes a cash settlement of stock options and awards of $2.8 and
miscellaneous resort transaction fees of $.8 in 1997. Includes
$4.0 of transaction fees related to the sale of the Company's
Resort Operations in 1996.
<Fc> In 1998, assets at year end exclude assets of Beech-Nut sold to
Milnot and include acquired assets of Sugar Kake. In 1997, assets
at year end exclude assets of the Branded Business sold to General
Mills and include acquired assets of the Wortz Company. In 1996,
assets at year end include the asset impairment charge of $109.5
and the asset writedown of $7.3 relating to the restructuring
charge.
<Fd> Includes assets acquired through the purchases of Flavor House and
Nutcracker in 1998.
<Fe> Assets eliminated through the sale of Resort Operations to Vail
Resorts, Inc. in 1997.
<Ff> Assets include the equity investment in Vail Resorts, Inc. of
$66.0 and $55.4 as of September 30, 1998 and 1997, respectively.
</TABLE>
23
1998 ANNUAL REPORT
<PAGE>
<PAGE> 13
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
- ------------------------------------------------------------------------
The Unaudited Pro Forma Combined Statement of Earnings for the
year ended September 30, 1998 presents the combined results of Ralcorp's
operations assuming the sale of Beech-Nut Nutrition Corporation had
occurred as of October 1, 1997. This statement of earnings has been
prepared by adjusting the historical statement of earnings for the
effect of costs and expenses and the recapitalization which might have
occurred had the sale of Beech-Nut occurred at the beginning of the
period. The "Beech-Nut Operations" column in the Unaudited Pro Forma
Combined Statement of Earnings represents the combined historical
results of operation of Beech-Nut.
As in the historical statement of earnings, the Unaudited Pro
Forma Combined Statement of Earnings for the year ended September 30,
1998 includes only the post-acquisition operations of each of the
companies acquired during the year. See "Note 4 -- Acquisitions" in the
Notes to Consolidated Financial Statements.
Please read the Notes to Unaudited Pro Forma Combined Financial
Information that follow the Unaudited Pro Forma Combined Statement of
Earnings for a discussion of adjustments made to the historical
financial information in order to calculate the Ralcorp pro forma
financial information. This pro forma financial information may not
necessarily reflect the actual results of operations that would have
been achieved, nor are they necessarily indicative of future results of
operations.
<TABLE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
(In millions except per share data) FOR THE YEAR ENDED SEPTEMBER 30, 1998
------------------------------------------------------------
HISTORICAL BEECH-NUT PRO FORMA PRO FORMA
RALCORP OPERATIONS ADJUSTMENTS RALCORP
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $582.9 $(122.4) $460.5
----------------------------------------------------------
Costs and Expenses
Cost of products sold 386.0 (64.5) 321.5
Selling, general and administrative 97.7 (21.6) $ 1.0 <Fa> 77.1
Advertising and promotion 58.1 (37.4) 20.7
Interest expense, net -- (3.0)<Fb> (3.0)
Gain on sale of Beech-Nut (18.7) 18.7 <Fc> --
Equity earnings in Vail Resorts, Inc. (10.6) (10.6)
----------------------------------------------------------
512.5 (123.5) 16.7 405.7
==========================================================
Earnings before Income Taxes 70.4 1.1 (16.7) 54.8
Income Taxes 26.8 .4 (6.4)<Fd> 20.8
----------------------------------------------------------
Net Earnings $ 43.6 $ .7 $(10.3) $ 34.0
==========================================================
Basic Earnings per Share<Fe> $ 1.33 $ 1.04
========= =========
Diluted Earnings per Share<Fe> $ 1.32 $ 1.03
========= =========
Weighted Average Shares Outstanding - Basic<Fe> 32.7 32.7
========= =========
Weighted Average Shares Outstanding - Diluted<Fe> 33.1 33.1
========= =========
<FN>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
<Fa> To reflect the fixed costs (i.e., information systems, general
administrative and corporate overhead) included in the historical
results of operations of Beech-Nut absorbed by Ralcorp with the
sale of Beech-Nut.
<Fb> Interest income shown of $3.0 million reflects residual interest
earned on short-term investments.
<Fc> To eliminate the gain on sale of Beech-Nut reflected in the
historical statement of earnings.
<Fd> To reflect the tax effect of the pro forma adjustments shown at an
effective rate of 38%.
<Fe> The weighted average number of shares used to compute Ralcorp
earnings per share (basic and diluted) is based on the weighted
average number of Ralcorp common shares outstanding (basic and
diluted) during the year ended September 30, 1998.
</TABLE>
24
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 14
- -------------------------------------------------------------------------------
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The preparation and integrity of the financial statements of
Ralcorp Holdings, Inc. are the responsibility of its management. These
statements have been prepared in accordance with generally accepted
accounting principles and in the opinion of management fairly present
the Company's financial position, results of operations and cash flow.
The Company maintains accounting and internal control systems
which it believes are adequate to provide reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition
and that the financial records are reliable for preparing financial
statements. The selection and training of qualified personnel, the
establishment and communication of accounting and administrative
policies and procedures, and an extensive program of internal audits are
important elements of these control systems.
The report of PricewaterhouseCoopers LLP, independent accountants,
on their audits of the accompanying financial statements follows. This
report states that their audits were performed in accordance with
generally accepted auditing standards. These standards include an
evaluation of internal control for the purpose of establishing a basis
for reliance thereon relative to the scope of their audits of the
financial statements.
The Board of Directors, through its Audit Committee consisting
solely of nonmanagement directors, meets periodically with management
and the independent accountants to discuss audit and financial reporting
matters. To assure independence, PricewaterhouseCoopers LLP has direct
access to the Audit Committee.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of
Directors of Ralcorp Holdings, Inc.
In our opinion, based upon our audits and the report of other
auditors, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position
of Ralcorp Holdings, Inc. and its subsidiaries at September 30, 1998 and
1997, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audits.
We did not audit the financial statements of Vail Resorts, Inc.,
an investment which is reflected in the accompanying financial
statements using the equity method of accounting. The Company's
investment in Vail Resorts, Inc. at September 30, 1998 and 1997 was
$66,000,000 and $55,400,000, respectively, and the equity in its net
income was $10,600,000 and $4,700,000 for the years then ended. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates
to the amounts included for Vail Resorts, Inc., is based solely on the
report of the other auditors.
We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
/s/ Pricewaterhouse Coopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
November 5, 1998, except as to Note 20,
which is as of November 20, 1998
25
1998 ANNUAL REPORT
<PAGE>
<PAGE> 15
<TABLE>
CONSOLIDATED STATEMENT OF EARNINGS
- -----------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions except per share data) FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $582.9 $ 739.7 $1,027.4
==========================================
Costs and Expenses
Cost of products sold 386.0 425.2 536.8
Selling, general and administrative 97.7 126.5 177.6
Advertising and promotion 58.1 138.6 233.3
Interest expense, net 7.9 26.8
Gain on sale of Beech-Nut (18.7)
Gain on sale of Branded Business (515.4)
Restructuring charges 19.7 16.5
Nonrecurring charges 109.5
Equity earnings in Vail Resorts, Inc. (10.6) (4.7)
------------------------------------------
512.5 197.8 1,100.5
------------------------------------------
Earnings (Loss) before Income Taxes 70.4 541.9 (73.1)
Income Taxes 26.8 10.4 (26.3)
------------------------------------------
Net Earnings (Loss) $ 43.6 $ 531.5 $ (46.8)
==========================================
Basic Earnings (Loss) per Share $ 1.33 $ 16.11 $ (1.42)
==========================================
Diluted Earnings (Loss) per Share $ 1.32 $ 16.01 $ (1.42)
==========================================
The above financial statement should be read in conjunction with the
Notes to Consolidated Financial Statements.
</TABLE>
26
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 16
<TABLE>
CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) SEPTEMBER 30,
-----------------------
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12.3 $ 8.4
Receivables, less allowance for doubtful accounts 45.2 52.9
Inventories 61.5 72.5
Prepaid expenses 8.0 9.3
-----------------------
Total Current Assets 127.0 143.1
Investments and Other Assets 137.6 89.1
Deferred Income Taxes 3.1 13.8
Property at Cost
Land 2.1 2.2
Buildings 43.6 49.5
Machinery and equipment 194.7 204.4
Construction in progress 9.8 8.0
-----------------------
250.2 264.1
Accumulated depreciation 100.0 109.8
-----------------------
150.2 154.3
-----------------------
Total Assets $417.9 $400.3
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 81.4 $ 78.2
-----------------------
Total Current Liabilities 81.4 78.2
Long-Term Debt
Other Liabilities 29.2 35.4
Commitments and Contingencies
Shareholders' Equity
Common stock - $.01 par value, issued shares:
1998 and 1997 - 33,011,317 .3 .3
Capital in excess of par value 110.1 110.1
Retained earnings 219.9 176.3
Common stock in treasury, at cost, 1,300,000 shares in 1998 (23.0)
-----------------------
Total Shareholders' Equity 307.3 286.7
-----------------------
Total Liabilities and Shareholders' Equity $417.9 $400.3
=======================
The above financial statement should be read in conjunction with the
Notes to Consolidated Financial Statements.
</TABLE>
27
1998 ANNUAL REPORT
<PAGE>
<PAGE> 17
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operations
Net earnings (loss) $ 43.6 $ 531.5 $(46.8)
Adjustments to reconcile earnings to net cash flow provided by operations:
Depreciation and amortization 18.2 24.4 46.4
Gain on sale of Beech-Nut (18.7)
Gain on sale of Branded Business (515.4)
Restructuring charges, net of cash paid 2.4 11.0
Nonrecurring charges 109.5
Equity earnings in Vail Resorts, Inc. (10.6) (4.7)
Deferred income taxes 11.4 8.6 (45.8)
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Decrease in receivables 5.7 24.9 10.8
(Increase) decrease in inventories (5.0) 15.8 6.9
Decrease (increase) in prepaid expenses .6 (27.0) (.9)
(Decrease) increase in accounts payable and accrued liabilities (5.5) 10.8 (5.9)
Other, net (1.6) 6.2 6.6
--------------------------------------
Net cash flow provided by operations 38.1 77.5 91.8
--------------------------------------
Cash Flows from Investing Activities
Business acquisitions, net of cash acquired (55.2) (41.6)
Proceeds from sale of Beech-Nut 67.1
Additions to property and intangible assets (24.6) (24.9) (66.7)
Proceeds from sale of property 1.5 3.4 6.0
Other, net (2.9) (3.7)
--------------------------------------
Net cash used by investing activities (11.2) (66.0) (64.4)
--------------------------------------
Cash Flows from Financing Activities
Repurchase of common stock (23.0) (8.6)
Repayments of long-term debt, including current maturities (3.1) (1.8)
Net repayments under credit agreement (17.0)
--------------------------------------
Net cash used by financing activities (23.0) (3.1) (27.4)
--------------------------------------
Net Increase in Cash and Cash Equivalents 3.9 8.4 --
Cash and Cash Equivalents, Beginning of Year 8.4 -- --
--------------------------------------
Cash and Cash Equivalents, End of Year $ 12.3 $ 8.4 $ --
======================================
The above financial statement should be read in conjunction with the
Notes to Consolidated Financial Statements.
</TABLE>
28
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 18
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions, shares in thousands) FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------------------
COMMON STOCK UNEARNED
COMMON STOCK CAPITAL IN IN TREASURY, AT COST PORTION OF
------------------- EXCESS OF -------------------- RETAINED RESTRICTED
SHARES AMOUNT PAR VALUE SHARES AMOUNT EARNINGS STOCK
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 33,925 $ .3 $131.0 (659) $(13.8) $ 46.6 $(1.7)
Net loss (46.8)
Purchase of treasury stock (349) (8.6)
Activity under stock plans (.1) (.3)
Amortization of restricted stock .8
----------------------------------------------------------------------------------
Balance, September 30, 1996 33,925 $ .3 $130.9 (1,008) $(22.7) $ (.2) $ (.9)
Net earnings 531.5
Activity under stock plans (52) (.7) 146 2.6
Amortization of restricted stock .1
Accelerated vesting of restricted stock .8
Distribution of General Mills Stock
to Shareholders (355.0)
Retirement of treasury stock (862) (20.1) 862 20.1
----------------------------------------------------------------------------------
Balance, September 30, 1997 33,011 $ .3 $110.1 -- $ -- $176.3 $ --
Net earnings 43.6
Purchase of treasury stock (1,300) (23.0)
----------------------------------------------------------------------------------
Balance, September 30, 1998 33,011 $ .3 $110.1 (1,300) $(23.0) $219.9 $ --
==================================================================================
The above financial statement should be read in conjunction with the
Notes to Consolidated Financial Statements.
</TABLE>
29
1998 ANNUAL REPORT
<PAGE>
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
(Dollars in millions except per share data)
NOTE 1 - GENERAL INFORMATION
On January 3, 1997, Ralcorp sold its ski resort holdings to Vail
Resorts, Inc. (Vail) in exchange for the assumption of $165 in Resort
Operations debt and an approximate 22.6 percent post-IPO equity interest
in the combined Vail. Vail stock began trading on the New York Stock
Exchange on February 4, 1997. As of Vail's fiscal year ended July 31,
1998, Ralcorp's equity interest was approximately 22 percent (see Note 7).
On January 31, 1997, the original Ralcorp Holdings, Inc. (Old
Ralcorp) was merged with a subsidiary of General Mills, Inc. (the
Merger). Immediately prior to the Merger, Old Ralcorp spun-off its
private label cereal, branded baby food and private label cracker and
cookie businesses and its ownership interest in Vail (the Spin-Off) by
distributing one share of New Ralcorp Holdings, Inc. Common Stock for
each share of Old Ralcorp Common Stock owned as of the close of business
on January 31, 1997 (Distribution Date). Immediately prior to the Spin-
Off, New Ralcorp Holdings, Inc. (Ralcorp) changed its name to Ralcorp
Holdings, Inc. and in the Merger, Old Ralcorp, which was now comprised
of the branded cereal and snack mix businesses (the Branded Business),
changed its name to General Mills Missouri, Inc. This completed the
$570 transaction with General Mills, Inc. (General Mills) that was first
announced in August 1996. The $570 value was reached by General Mills
assuming $215 in Ralcorp debt and related accrued interest and funding
the remaining $355 through the distribution of General Mills stock to
Ralcorp shareholders of record on January 31, 1997.
For financial reporting purposes, Ralcorp is a "successor
registrant" to Old Ralcorp and, as such, the accompanying Ralcorp
financial statements represent the historical financial position and
results of operations of Old Ralcorp, for periods prior to January 31,
1997, and Ralcorp, for subsequent periods. Therefore, references to the
"Company" or "Ralcorp" for periods prior to January 31, 1997, are
references to Old Ralcorp, without giving effect to the Merger or the
Spin-Off.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION - The financial statements are presented on
a consolidated basis. All significant intercompany transactions have
been eliminated.
These financial statements include the accounts of Ralcorp and its
majority-owned subsidiaries. Investments in affiliated companies, 20%
through 50%-owned, are carried at equity (see Note 7).
CASH EQUIVALENTS are considered to be all highly liquid
investments with an original maturity of three months or less.
FINANCIAL INSTRUMENTS - The Company has a policy which allows the
use of various derivative financial instruments to manage the Company's
financial risk that exists as part of conducting business. Under the
policy, the Company is not permitted to engage in speculative or
leveraged transactions that have the potential for a disproportionate
ratio between the change in value of the asset or liability being hedged
and the expected change in value of the related derivative instrument.
The Company will not hold or issue financial instruments for trading
purposes. As of September 30, 1998, the Company had no material
derivative financial instruments outstanding.
INVENTORIES are valued generally at the lower of average cost
or market. In connection with purchasing key raw ingredient materials,
the Company follows a policy of from time to time using commodities
futures contracts and options in the management of commodities pricing
risks that are inherent to its business operations. Such instruments
are not held or issued for trading purposes. The Company uses these
hedging instruments to reduce the risk of price fluctuations related to
future raw materials requirements for commodities such as corn, wheat,
oats and flour. The terms of such instruments generally do not exceed
twelve months, and depend on the commodity and other market factors.
Such contracts are accounted for as hedges, with related gains and
losses ultimately included as part of the cost of products sold. The
effect of any realized or deferred gains or losses is immaterial to the
financial condition and results of operations of the Company.
PROPERTY AT COST - Expenditures for new facilities and those which
substantially increase the useful lives of the property, including
interest during construction, are capitalized. Maintenance, repairs and
minor renewals are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the accounts and gains or losses on the disposition are
reflected in earnings.
DEPRECIATION is generally provided on the straight-line basis by
charges to costs or expenses at rates based on the estimated useful
lives of the properties. Estimated useful lives range from
30
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 20
- --------------------------------------------------------------------------
3 to 25 years for machinery and equipment and 10 to 50 years for
buildings.
INTANGIBLE ASSETS include the excess of cost over the net tangible
assets of acquired businesses and are amortized over estimated periods
of related benefit ranging from 4 to 40 years. The Company also defers
systems development costs when they reach technological feasibility.
Amounts deferred are amortized over estimated periods of related benefit
not to exceed 5 years. Intangible assets are included in Investments
and Other Assets.
LONG-LIVED ASSETS - The Company continually evaluates whether
events or circumstances have occurred which might impair the
recoverability of the carrying value of its long-lived assets, including
identifiable intangibles and goodwill. See Note 6.
ADVERTISING COSTS are expensed in the year in which the costs are
incurred.
INCOME TAXES have been provided in accordance with the liability
method of income tax accounting; accordingly, a deferred tax liability
or asset is recognized for the effect of temporary differences between
financial and tax reporting.
EARNINGS PER SHARE - In fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS
128), which requires dual presentation of basic and diluted earnings per
share on the statement of earnings. While earnings per share amounts
for all periods presented have been restated to meet FAS 128
requirements, the Company's adoption of this new standard has not
significantly impacted previously reported earnings per share. All
earnings per share amounts are presented on a diluted basis unless
otherwise noted. See Note 10 for related disclosures.
OTHER NEW ACCOUNTING RULES - In fiscal 1998, the Company adopted
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which
revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of
those plans. See Note 11.
In fiscal 1997, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). As allowed under the provisions of
that statement, the Company continues to account for the employee stock
option plan using the intrinsic value method of accounting. See Note
16.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," were issued. These standards, which will become
effective in fiscal 1999, expand or modify disclosures and will have no
effect on the Company's consolidated financial position, results of
operations or cash flows.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was
issued. This standard will become effective for quarterly reporting in
the last quarter of fiscal 1999 and for annual reporting in fiscal 2000.
The Company has not quantified the impact, if any, resulting from
adoption of this standard.
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, liabilities, revenues and expenses and the disclosure
of contingent assets and liabilities. Actual results could differ from
those estimates.
NOTE 3 - DIVESTITURES
On September 10, 1998, the Company completed the sale of its
branded baby food subsidiary, Beech-Nut Nutrition Corporation, to The
Milnot Company, a privately held company based in St. Louis, MO, for $68
million in cash. The Company recorded an $18.7 pre-tax ($11.6 after
tax) gain related to this sale transaction.
On January 31, 1997, the Company effectively sold its Branded
Business through a tax-free transaction with General Mills. This
transaction was valued at $570, comprised of General Mills assuming $215
in Company debt and related accrued interest and the remaining $355
coming through the distribution of General Mills stock to Ralcorp
shareholders of record on January 31, 1997. Subsequent to the Merger,
the Company recorded a $515.4 tax-free gain related to this sale
transaction.
On January 3, 1997, the Company sold its ski resort operations to
Vail in exchange for an approximate 22.6% of Vail's outstanding common
stock, or 7,554,406 shares, and the assumption by Vail of $165 of
Resorts debt. In accordance with Accounting Principles Board Opinion
No. 29, "Accounting for Nonmonetary Transactions," the Resort Operations
sale transaction with Vail was treated as a nonmonetary exchange.
31
1998 ANNUAL REPORT
<PAGE>
<PAGE> 21
- --------------------------------------------------------------------------
The assumption of debt and the issuance of equity qualified this
transaction as being nonmonetary in nature. Therefore, the initial
equity investment in Vail was recorded at Ralcorp's net book value of
assets contributed, or $50.7. The Company records the pre-tax amount of
the Company's equity interest in the earnings of Vail as an increase to
its Investment account. Included in the Company's equity earnings is
amortization income. This amortization income is the result of the
basis difference between the net book value of the net assets
contributed to Vail and the Company's equity interest in the Vail net
assets, and is being amortized over 20 years.
NOTE 4 - ACQUISITIONS
On April 23, 1998, the Company completed the purchase of Flavor
House, Inc., a leading private label snack nut business located in
Dothan, AL. Flavor House had estimated annual sales of approximately
$62.
On September 8, 1998, the Company increased its position in the
snack nut category through the purchase of Nutcracker Brands, Inc.
located in Billerica, MA. Nutcracker is a value brand and private label
snack nut business with estimated annual sales of approximately $42.
On August 25, 1998, the Company increased its cookie production
capacity through the purchase of Sugar Kake Cookie Inc., a privately
held cookie manufacturer located in Tonawanda, NY, with net sales of
$28.6 for its fiscal 1997. Sugar Kake is being operated as part of
Ralcorp's Bremner cracker and cookie subsidiary.
On April 21, 1997, the Company completed the purchase of the Wortz
Company, a private label cracker and cookie operation with headquarters
in Poteau, OK. Wortz is also operated as part of the Company's Bremner
operation. The total consideration given in relation to this
acquisition was approximately $46.0, of which $4.4 was paid out in
fiscal 1998.
All of the above acquisitions were accounted for using the
purchase method of accounting, whereby the results of operations are
included in the consolidated statement of earnings from the date of
acquisition. Goodwill associated with each of the above acquisitions is
included in the "Investments and Other Assets" line of the accompanying
Consolidated Balance Sheet at September 30, 1998 and 1997.
The following unaudited pro forma information presents the results
of operations of the Company as if the fiscal 1998 acquisitions
described above, and the divestitures described in Note 3, had occurred
at the beginning of each period presented. These pro forma results may
not necessarily reflect the actual results of operations that would have
been achieved, nor are they necessarily indicative of future results of
operations.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Net sales $556.9 $512.3
Net earnings 36.9 8.7
Basic earnings per share 1.13 .26
Diluted earnings per share 1.12 .26
</TABLE>
NOTE 5 - RESTRUCTURING CHARGES
During the year ended September 30, 1997, the Company recorded a
pre-tax restructuring charge of $15.1 ($9.5 after taxes, or $.29 per
share) to cover costs associated with the sale of the Company's Branded
Business, including severance payments to employees whose jobs were
eliminated and financial penalties related to the early termination of
information systems contracts. The level of systems support included in
these contracts was no longer warranted after the Branded Business sale.
Also, during the year ended September 30, 1997, the Company recorded a
pre-tax restructuring charge of $4.6 ($2.9 after taxes, or $.09 per
share). This charge covered severance costs for certain employees whose
jobs were eliminated in downsizing initiatives.
For the year ended September 30, 1996, the Company recorded a pre-
tax charge of $16.5 ($10.4 after taxes or, $.31 per share) to recognize
the costs related to the restructuring of its ready-to-eat cereal
subsidiary, Ralston Foods. As a result of this restructuring plan,
certain positions were eliminated from the Ralston Foods subsidiary and
corporate support groups, primarily at the Company's headquarters in
St. Louis, MO. In addition, the restructuring plan included the partial
closing of the Ralston Foods production facility in Battle Creek, MI.
The restructuring charges and their utilization are summarized in the
following table.
<PAGE>
<TABLE>
<CAPTION>
Salaries,
severance Assets
and write- Contract
benefits downs penalties Other Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FY 1996 Charges $ 8.0 $ 7.3 $ - $ 1.2 $ 16.5
Utilized in FY 1996 (5.0) (7.3) - (.5) (12.8)
FY 1997 Charges 8.8 3.0 6.2 1.7 19.7
Utilized in FY 1997 (11.2) (2.2) (6.2) (1.0) (20.6)
Utilized in FY 1998 (.6) (.8) - (.6) (2.0)
-----------------------------------------------------------------
Balance of Reserve $ - $ - $ - $ .8 $ .8
=================================================================
</TABLE>
32
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 22
- -------------------------------------------------------------------------
NOTE 6 - NONRECURRING CHARGE
In September 1996, the Company recorded a $109.5 pre-tax
impairment charge related to its private label ready-to-eat and hot
cereal operations. Dramatic changes in the pricing and promotion
environment of the ready-to-eat cereal category in fiscal 1996 and the
effect these changes had on the Company's private label cereal business,
caused the Company to record this charge. Ultimately, it was determined
that the projection of future cash flows generated by the private label
cereal operations would not be sufficient to recover the carrying value
of assets associated with such operations. The amount of the September
1996 impairment loss was recognized by the Company as a write-down of
fixed assets to fair value. Fair value was determined as the present
value of estimated expected future cash flows using a discount rate
commensurate with the risks involved.
NOTE 7 - EQUITY INVESTMENT IN VAIL RESORTS, INC.
The following table summarizes information about the Company's
equity investment in Vail at September 30.
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Ownership percentage 21.9% 22.6%
Carrying value $ 66.0 $ 55.4
Market value 150.5 202.1
</TABLE>
As of the January 1997 sale of Ralston Resorts, the Company's
equity interest in the underlying net assets of Vail exceeded the net
book value of the net assets contributed by the Company to Vail by
$37.5. This excess is being amortized ratably to the investment in Vail
over 20 years.
Except in limited circumstances, terms of a shareholder agreement
provide that, the Company will not acquire any additional shares of Vail
stock. The Company has registration rights with respect to the Vail
stock, but the shareholder agreement provides that, with certain limited
exceptions, Vail and its controlling shareholder can purchase at market
prices any Vail stock the Company desires to sell. The shareholder
agreement provides that the Company will vote the shares of Vail stock
in accordance with the recommendation of Vail's Board of Directors with
respect to shareholder proposals and nominations to that Board, and with
respect to other proposals, in proportion to the votes of all other
shareholders. However, the Company may vote as it deems appropriate
with respect to proposals for the merger of Vail, the sale of all Vail
assets, the creation of any other class of voting stock of Vail or
changes to Vail's certificate of incorporation or bylaws if such changes
adversely affect the Company's rights under the shareholder agreement.
The Company has two representatives on the 17-member Vail Board of
Directors.
On November 6, 1997, Vail announced a change in its fiscal year
end from September 30 to July 31. As a result, the Company reports
current year equity earnings on a two-month time lag, with only ten
months of equity earnings from Vail included in fiscal 1998. Presented
below is summary financial information of Vail as of, and for the ten
months ended, July 31, 1998, and as of, and for the nine months ended,
September 30, 1997.
<PAGE>
<TABLE>
<CAPTION>
July 31, September 30,
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Current assets $ 71.7 $ 76.4
Noncurrent assets 840.4 779.5
------------------------------
Total assets $912.1 $855.9
==============================
Current liabilities $ 59.0 $ 77.9
Noncurrent liabilities 390.5 372.3
Stockholders' equity 462.6 405.7
------------------------------
Total liabilities and
stockholders' equity $912.1 $855.9
==============================
<CAPTION>
Ten Months Nine Months
Ended Ended
July 31, September 30,
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Net sales $410.3 $246.2
Total operating expenses 321.7 205.2
-------------------------------
Income from operations $ 88.6 $ 41.0
===============================
Net income $ 41.0 $ 14.1
===============================
Company equity income,
net of deferred taxes $ 6.6 $ 2.9
===============================
</TABLE>
33
1998 ANNUAL REPORT
<PAGE>
<PAGE> 23
- -------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The provisions for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal $13.7 $ 1.6 $ 17.9
State 1.7 .2 1.6
-------------------------------------------
Total current 15.4 1.8 19.5
-------------------------------------------
DEFERRED:
Federal $9.8 $ 7.5 $(42.1)
State 1.6 1.1 (3.7)
-------------------------------------------
Total deferred 11.4 8.6 (45.8)
-------------------------------------------
Provision (benefit) for
income taxes $26.8 $10.4 $(26.3)
===========================================
</TABLE>
<TABLE>
A reconciliation of income taxes with amounts computed at the
statutory federal rate follows:
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed tax at federal
statutory rate
(35.0% for all years) $24.6 $ 189.7 $(25.6)
Effect of nontaxable gain on
sale of Branded Business (180.4)
State income taxes, net of
federal tax benefit 2.1 .9 (2.3)
Other, net .1 .2 1.6
-------------------------------------------
$26.8 $ 10.4 $(26.3)
===========================================
</TABLE>
Deferred tax assets (liabilities) at September 30, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
CURRENT:
Accrued liabilities $ 3.2 $ 4.3
Inventories 1.7 2.2
Other items 1.3 .4
---------------------------
Total current 6.2 6.9
---------------------------
NONCURRENT:
Property basis differences $ 5.0 $ 8.0
Postretirement benefits 5.6 5.5
Pension 3.1 1.5
Intangible assets 2.5 6.6
Insurance reserves 2.5 2.6
Deferred compensation 2.0 2.2
Equity investment in Vail (17.7) (13.9)
Other items .1 1.3
---------------------------
Total noncurrent 3.1 13.8
---------------------------
Net deferred tax assets $ 9.3 $ 20.7
===========================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. The Company believes it is probable that the net deferred
tax assets, reflected above, will be realized on future tax returns,
primarily from the generation of future taxable income.
NOTE 9 - SUPPLEMENTAL EARNINGS STATEMENT INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Maintenance and repairs $20.2 $21.2 $32.5
Research and development 4.2 3.9 6.5
</TABLE>
<PAGE>
NOTE 10 - EARNINGS PER SHARE
Basic and diluted earnings per share were calculated
using the following:
<TABLE>
<CAPTION>
(Shares in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $ 43.6 $ 531.5 $ (46.8)
==============================================
Weighted average shares for
basic earnings per share 32,684 32,955 32,997
Dilutive effect of:
Stock options 295 199 --
Deferred compensation awards 104 61 --
----------------------------------------------
Weighted average shares for
diluted earnings per share 33,083 33,215 32,997
==============================================
</TABLE>
34
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 24
Options to purchase approximately 300,000 shares of common stock
at prices ranging from $22.27 to $26.14 per share were outstanding
during the first half of 1997 but were not included in the computation
of diluted earnings per share because the options' exercise prices were
greater than the average market price of the shares.
Since the Company incurred a net loss for fiscal 1996, there were
no adjustments for the effect of stock options and deferred compensation
awards as the adjustments would have been antidilutive. If the Company
had earned net income in 1996, adjustments would have been included to
increase the number of shares by approximately 400,000.
At the end of 1998 and 1997, all exercise prices were lower than
the average market price for the years then ended. See Note 16 for more
information on outstanding options.
NOTE 11 - PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors qualified and supplemental noncontributory
defined benefit pension plans and other postretirement benefit plans for
its employees. The following tables provide a reconciliation of the
changes in the plans' benefit obligations and fair value of assets over
the two-year period ending September 30, 1998, and a statement of the
funded status as of September 30 of both years.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------ -----------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
beginning of year $ 65.6 $ 79.4 $ 14.8 $ 14.3
Service cost 3.4 4.3 .1 .2
Interest cost 5.3 5.8 1.0 1.1
Plan amendments (.2)
Executive Life Plan .2
Actuarial (gain) loss 18.8 (6.1) .3 2.1
Acquisitions (divestitures) 3.2 (.1)
Benefit payments (4.6) (3.3) (.9) (.8)
Increase due to special
termination benefits .6
Curtailments (2.1) (5.1) (2.1)
Settlements (2.8) (10.0)
---------------------------------------------------------
Benefit obligation at end
of year $ 86.8 $ 65.6 $ 15.2 $ 14.8
---------------------------------------------------------
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at
beginning of year $ 98.2 $ 86.3 $ - $ -
Actual return on plan assets 4.2 24.5
Acquisitions 2.2
Employer contributions .5 1.8
Benefit payments (4.6) (3.3)
Settlements (2.9) (11.1)
---------------------------------------------------------
Fair value of plan assets at
end of year $ 97.6 $ 98.2 $ - $ -
---------------------------------------------------------
Funded status $ 10.8 $ 32.6 $(15.2) $(14.8)
Unrecognized net (gain) loss (14.8) (37.7) .2
Unrecognized prior service cost 1.0 1.5 .3 .5
Unrecognized transition asset (.4) (.4)
---------------------------------------------------------
Accrued benefit liability $ (3.4) $ (4.0) $(14.7) $(14.3)
=========================================================
</TABLE>
35
1998 ANNUAL REPORT
<PAGE>
<PAGE> 25
The following table provides the components of net periodic
benefit cost for the plans for fiscal years 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 3.4 $ 4.3 $ 4.3 $ .1 $ .2 $ .3
Interest cost 5.3 5.8 5.6 1.0 1.1 1.0
Expected return
on plan assets (7.7) (7.4) (6.8)
Amortization of
net (gain) loss (1.0) (.3) (.1)
Amortization of
prior service cost .4 .5 .9 .1 .1 .1
Amortization of
transition asset (.1) (.1)
-------------------------------------------------------------------
Net periodic
benefit cost .3 2.8 4.0 1.1 1.4 1.4
Curtailment gain (2.1) (2.9) (.7) (1.8) (.2)
Settlement
(gain) loss .6 (1.2)
Special termination
benefits .6
-------------------------------------------------------------------
Net periodic benefit
cost after
curtailments and
settlements $(1.2) $ (.7) $ 3.3 $1.1 $(.4) $1.2
===================================================================
</TABLE>
The Company recognized a curtailment gain and a settlement loss in
1998 resulting from the reduction of employees and asset transfers
related to the Beech-Nut sale. The Company recognized curtailment and
settlement gains in 1997 and 1996 resulting from the reduction of
employees through the Branded Business sale and restructuring
initiatives. See Note 5 for further discussion of restructuring
activities.
The weighted-average assumptions used in the measurement of the
Company's benefit obligation as of September 30 are shown in the
following table.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ -------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.000% 7.625% 7.000% 7.625%
Expected return
on plan assets 9.50% 9.50% N/A N/A
Rate of com-
pensation increase 5.25% 5.25% N/A N/A
</TABLE>
For measurement purposes, a 6% annual rate of increase in the
future per capita cost of covered health care benefits was assumed for
1998 and 1997, as well as for all subsequent years. Assumed health care
cost trend rates have a significant effect on the amounts reported for
the health care plans. A 1% change in assumed health care cost trend
rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
- ------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest
cost components of net periodic post-
retirement health care benefit cost $ .1 $ (.1)
Effect on the health care component
of the accumulated postretirement
benefit obligation 1.8 (1.6)
In addition to the above plans, the Company sponsors defined
contribution plans under which the Company makes matching contributions.
The costs of the Company's defined contribution plan for the years ended
September 30, 1998, 1997 and 1996 were $1.5, $2.8 and $5.2,
respectively. During fiscal 1997, the Company revised its defined
contribution plan whereby; effective on April 1, 1997 and depending on
years of service, for each dollar contributed by participants, up to 6%
of pre-tax earnings, the Company will contribute fifty cents. Prior to
this modification the Company made "dollar-for-dollar" matching
contributions up to 6% of pre-tax earnings.
<PAGE>
NOTE 12 - LONG-TERM DEBT
As of September 30, 1998 and 1997, the Company had no outstanding
long-term debt.
As of September 30, 1998, the Company had a $50 working capital
credit facility. The proceeds of the facility may be used to fund
Ralcorp's working capital needs, capital expenditures, and other general
corporate purposes. Provisions of the $50 credit facility require the
Company to maintain certain financial ratios and a minimum level of
shareholders' equity. In October 1998, this credit facility was
increased to $100. In addition, on September 4, 1998, the Company
entered into an uncommitted line of credit agreement with a financial
institution which should allow an additional $10 of borrowing. The
Company had no outstanding balances relating to any of these credit
lines as of September 30, 1998.
36
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 26
- -------------------------------------------------------------------------
As of September 30, 1998, $4.1 in letters of credit and surety
bonds were outstanding with various financial institutions, principally
related to self-insurance requirements.
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FAIR VALUES
The Company's financial instruments primarily will include certain
short-term instruments and short and long-term debt. The Company had no
short or long-term debt at September 30, 1998 and 1997 (see Note 12).
Due to their nature, the carrying amounts of short-term financial
instruments, such as marketable securities, receivables and accounts
payable, reported on the Consolidated Balance Sheet approximate fair
value.
CONCENTRATION OF CREDIT RISK
The Company's primary concentration of credit risk is related to
certain trade accounts receivable due from several highly leveraged or
"at risk" customers. At September 30, 1998 and 1997 the amount of such
receivables was $3.2 and $2.4, respectively. Consideration was given to
the financial position of these customers when determining the
appropriate allowance for doubtful accounts.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings in various
state and federal jurisdictions. These proceedings are in varying
stages and many may proceed for protracted periods of time. Some
proceedings involve highly complex questions of fact and law.
On January 4, 1993, Ralston Purina Company (Ralston), the former
parent of the Company, was served with the first of nine substantively
identical actions currently pending in the United States District Court
for the District of New Jersey. The suits have been consolidated and
styled In Re Baby Food Antitrust Litigation, No. 92-5495 (NHP). The
consolidated proceeding is a certified class action by and on behalf of
all direct purchasers of baby foods (other than the defendants and
governmental entities), alleging that the Beech-Nut baby food business
(and its predecessor Nestle Holdings, Inc.) together with Gerber
Products Company and H. J. Heinz Company, conspired to fix, maintain and
stabilize the prices of baby foods during the period January 1, 1975 to
August 31, 1992, and seeking treble damages.
On January 19 and 21, 1993, Ralston was served with two class
actions on behalf of indirect purchasers (consumers) of baby food in
California, which contain substantially identical charges. These
actions have been consolidated in the Superior Court for the County of
San Francisco and styled Bruce, et al. v. Gerber Products Company, et
al., No. 94-8857. On January 19, 1993, Ralston was served with a
similar action filed in Alabama state court on behalf of indirect
purchasers of baby food in Alabama, styled Johnson, et al. v. Gerber
Products Company, et al., No. 93-L-0333-NE. Both state actions allege
violations of state antitrust laws and are substantively identical to
each other. On July 28, 1997, Judge Nicholas H. Politan granted
Ralston's Motion For Summary Judgment in the case then pending in the
U.S. District Court for the District of New Jersey and dismissed the
case with prejudice. Plaintiffs appealed Judge Politan's ruling, and
the appeal was argued before the U.S. Court of Appeals for the Third
Circuit on October 1, 1998. No decision has yet been rendered in this
matter. The Bruce and Johnson cases remain inactive pending resolution
of In Re Baby Food Antitrust Litigation.
When the Company was spun-off from Ralston in 1994, an Agreement
and Plan of Reorganization (the 1994 Spin-off Reorganization Agreement)
was signed. Ralston and the Company agreed in the 1994 Spin-off
Reorganization Agreement that all expenses related to the above
antitrust matters will be shared equally, but that Ralcorp's liability
for any settlement or judgment will not exceed $5. Any amount in excess
of that will be paid by Ralston. Expenses and liability with respect to
certain other lawsuits which are not believed by the Company to be
material, either individually or in the aggregate, will also be shared
pursuant to the 1994 Spin-off Reorganization Agreement. In divesting of
its Beech-Nut Nutrition Corporation subsidiary on September 10, 1998,
the Company retained responsibility for its exposure to liability from
these cases by indemnifying the purchaser against any related liability.
The operations of the Company, like those of similar businesses, are
subject to various federal, state, and local laws
37
1998 ANNUAL REPORT
<PAGE>
<PAGE> 27
- -----------------------------------------------------------------------
and regulations intended to protect public health and the environment,
including air and water quality and waste handling and disposal. The
Company has received notices from the U.S. Environmental Protection
Agency, state agencies, and/or private parties seeking contribution,
that it has been identified as a "potentially responsible party" under
the Comprehensive Environmental Response, Compensation and Liability
Act, and the Company may be required to share in the cost of cleanup
with respect to one waste disposal site related to the Branded Business.
Pursuant to a Reorganization Agreement with General Mills, General Mills
has agreed to indemnify and defend the Company for and against
liabilities associated with the site. General Mills' indemnification
and defense obligations are limited as more fully discussed below. The
Company's ultimate liability in connection with environmental matters
may depend on many factors including, but not limited to, the volume of
material contributed to the site, the existence of other parties
responsible for remediation and their financial viability, reports of
experts (internal or external), and the remediation methods and
technology to be used.
Except as noted, many of the foregoing matters are in preliminary
stages, involve complex issues of law and fact and may proceed for
protracted periods of time. The amount of alleged liability, if any,
from these proceedings cannot be determined with certainty; however, in
the opinion of Company management, based upon the information presently
known as well as upon the limitation of its liabilities set forth in the
1994 Spin-off Reorganization Agreement, and the Reorganization Agreement
with General Mills, the ultimate liability of the Company, if any,
arising from the pending legal proceedings, as well as from asserted
legal claims and known potential legal claims which are probable of
assertion, taking into account established accruals for estimated
liabilities (if any), are not expected to be material to the Company's
consolidated financial position and results of operation. In addition,
while it is difficult to quantify with certainty the potential financial
impact of actions regarding expenditures for environmental matters, in
the opinion of management, based upon the information currently
available, the ultimate liability arising from such environmental
matters should not be material to the Company's consolidated financial
position and results of operation.
Through the Reorganization Agreement with General Mills, General
Mills assumed all liabilities associated with the Branded Business,
whether arising prior to or after General Mills' acquisition of the
Branded Business. However, if the combined liabilities for matters
unknown at the Distribution Date, for known litigation disclosed to
General Mills on the Distribution Date and related to the Branded
Business, and for breaches of representations and warranties made by the
Company to General Mills, exceed $6, then the Company may be required to
indemnify General Mills for the foregoing matters to the extent
associated liabilities exceed $6. The Company's potential
indemnification responsibility associated with breaches of
representations and warranties expired July 31, 1998, and no claim was
asserted prior to that date. The Company's potential indemnification
responsibilities related to unknown liabilities and disclosed litigation
expire January 31, 2002, provided no claim is asserted prior to that
date. Presently, management believes there is not a significant
likelihood that liabilities assumed by General Mills will exceed $6 in
the aggregate.
Additionally, the Company has retained certain potential
liabilities associated with divested businesses (Vail and Beech-Nut).
Presently, management believes that taking into account applicable
liability caps and sharing arrangements with acquiring entities,
potential insurance coverage, and the likelihood of any claims arising
out of such retained matters, the ultimate result of retaining potential
liabilities of the divested businesses should not be material to the
Company's consolidated financial position and results of operations.
LEASE COMMITMENTS
Future minimum rental commitments under noncancellable operating
leases in effect as of September 30, 1998 were: 1999 - $3.6, 2000 -
$3.2, 2001 - $3.2, 2002 - $2.4, 2003 - $2.4, thereafter - $2.9.
Future minimum rental commitments to be received under
noncancellable operating subleases in effect as of September 30, 1998
were: 1999 - $.4, 2000 - $.4, 2001 - $.5, 2002 - $.5, 2003 - $.5,
thereafter - $.9.
Total rental expense for all operating leases was $3.9 in 1998,
$4.0 in 1997 and $5.3 in 1996.
38
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 28
- -----------------------------------------------------------------------
OTHER CONTINGENCIES
In connection with the sale of the Company's Resort Operations in
1997, Vail assumed the obligation to repay, when due, certain
indebtedness of Resort Operations consisting of the following: Series
1990 Sports Facilities Refunding Revenue Bonds in the aggregate
principal amount of $20.36, bearing interest at rates ranging from 7.2%
to 7.875% and maturing in installments in 1998, 2006 and 2008; and
Series 1991 Sports Facilities Refunding Revenue Bonds in the aggregate
principal amount of $3, bearing interest at 7.125% for the portion
maturing in 2002 and 7.375% for the portion maturing in 2010
(collectively, "Resort Operations Debt"). The Resort Operations Debt is
guaranteed by Ralston. Pursuant to the 1994 Spin-off Reorganization
Agreement, the Company agreed to indemnify Ralston for any liabilities
associated with the guarantees. To facilitate the sale of the Branded
Business, General Mills acquired the legal entity originally obligated
to so indemnify Ralston. Pursuant to the Reorganization Agreement with
General Mills, however, the Company has agreed to indemnify General
Mills for any liabilities it may incur with respect to indemnifying
Ralston relating to aforementioned guarantees. Presently, management
believes that there is not a significant likelihood that Vail will
default on its repayment obligations with respect to the Resort
Operations Debt.
In the opinion of management, the sale of Resorts (see Note 3)
qualified as a non-taxable exchange of stock under Section 368(a)(1)(B)
of the Internal Revenue Code. Therefore, the Company's tax basis in
Resorts stock was carried over to its investment in the 7,554,406 shares
of Vail stock (approximately $3 per share). Accordingly, no deferred
tax (or interest, if any) was provided on this transaction.
NOTE 15 - SHAREHOLDERS' EQUITY
The Company's Restated Articles of Incorporation authorize the
issuance of up to 300,000,000 shares of $.01 par value Common Stock. As
of September 30, 1998, the Company had approximately 33,011,000 shares
of Common Stock issued and approximately 31,711,000 shares outstanding.
The Company has not issued any shares of Preferred Stock. The terms of
any series of Preferred Stock (including but not limited to the dividend
rate, voting rights, convertibility into other Company securities and
redemption) may be set by the Company's Board of Directors.
On December 18, 1996, the Company's Board of Directors declared a
dividend distribution of one share purchase right (Right) for each
outstanding share of the Company's Common Stock. Each Right entitles a
shareholder to purchase from the Company one common share at an exercise
price of $30 per share subject to antidilution adjustments. The Rights,
however, become exercisable only at the time a person or group acquires,
or commences a public tender offer for, 20% or more of the Company's
Common Stock. If an acquiring person or group acquires 20% or more of
the Company's Common Stock, the price will be further adjusted so that
each Right (other than those held by the acquiring person or group)
would entitle the holder to acquire for the exercise price a number of
shares of the Company's Common Stock found by dividing the then current
exercise price by the number of shares of Company Common Stock for which
a Right is then exercisable and dividing that amount by 50% of the then
current per share market price of the Company's Common Stock. In the
event that the Company merges with, or transfers 50% or more of its
assets or earning power to, any person or group after the Rights become
exercisable, holders of the Rights may purchase, at the exercise price,
Common Stock of the acquiring entity having a value equal to twice the
exercise price. The Rights can be redeemed by the Board of Directors at
$.01 per Right only up to the tenth business day after a person or group
acquires 20% or more of the Company's Common Stock. Also, following the
acquisition by a person or group of beneficial ownership of at least 20%
but less than 50% of the Company's Common Stock, the Board may exchange
the Rights for Common Stock at a ratio of one share of Common Stock per
Right. The Rights expire on January 31, 2007. The Rights replaced
similar rights that were redeemed on January 31, 1997, by payment of a
redemption price of $.05 per Right in connection with the sale of the
Branded Business to General Mills, Inc. The total payment made by the
Company as a result of this redemption was approximately $1.7.
The Company repurchased 1,300,000 shares of its Common Stock
during the year ended September 30, 1998.
At September 30, 1998 there were 2,891,924 shares of Company
Common Stock reserved under various employee incentive compensation and
benefit plans.
39
1998 ANNUAL REPORT
<PAGE>
<PAGE> 29
- ------------------------------------------------------------------------
NOTE 16 - INCENTIVE COMPENSATION
During fiscal 1997 and shortly before the Spin-Off, the Board of
Directors adopted the Incentive Stock Plan (Plan), which reserves shares
to be used for various stock based compensation awards. The Plan
provides that eligible employees may receive stock option awards and
other stock awards payable in whole or part by the issuance of stock.
In connection with the Spin-Off, all previous outstanding stock-based
compensation awards and the Old Ralcorp plan were terminated. To effect
this termination, the Company's Board of Directors accelerated the
vesting of the outstanding stock options and the value of those "in-the-
money" options were paid to the recipients in cash. Stock options that
had an exercise price higher than the market price of the Company's
Common Stock were valued at $.50 per share. As a result, included in
the Consolidated Statement of Earnings for the year ended September 30,
1997, was a stock option settlement expense of $2.8. In addition, the
Company's Board of Directors accelerated the vesting of all outstanding
restricted stock awards.
Under the provisions of the Plan, 431,000 and 850,000 stock option
awards were issued in 1998 and 1997, respectively, at an option price
equal to the fair market value of the shares at grant date and
accordingly, no charge against earnings was made. Generally, options
are exercisable beginning from three to nine years after date of grant
and have a maximum term of ten years. The weighted average remaining
contractual life of the stock options outstanding at September 30, 1998
and 1997, was 9.1 years and 9.6 years, respectively.
Changes in incentive and nonqualified stock options outstanding
are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
Weighted Avg.
Shares Under Exercise
Option Prices
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 30, 1995
($13.23 to $26.14 per share) 1,302,627 $17.94
------------
Granted - -
Exercised ($13.23 to $24.08 per share) (13,555) 14.10
Canceled (63,191) 19.21
------------
Outstanding at September 30, 1996
($13.23 to $26.14 per share) 1,225,881 17.93
------------
Granted ($12.00 per share) 850,000 12.00
Exercised ($13.23 to $24.08 per share) (186,271) 15.46
Spin-Off Termination/Canceled (1,039,610) 18.38
------------
Outstanding at September 30, 1997
($12.00 per share) 850,000 12.00
------------
Granted ($14.625 per share) 431,000 14.63
Exercised -
Canceled (24,000) 12.00
------------
Outstanding at September 30, 1998
($12.00 to $14.625 per share) 1,257,000 12.90
============
Weighted average fair value of
options granted during fiscal 1997 6.05
Weighted average fair value of
options granted during fiscal 1998 7.77
Shares exercisable at:
September 30, 1996 245,019 15.05
------------
September 30, 1997 - -
------------
September 30, 1998 16,000 12.00
------------
</TABLE>
At September 30, 1998, under the Plan there were 1,553,091 shares
available for future awards. In addition, at September 30, 1998 no
restricted stock awards were outstanding; however, the Company's
accounting policy for restricted stock awards provides that compensation
cost be recognized over the appropriate vesting period.
Effective September 30, 1997, the Company elected to disclose the
pro forma effects of FAS 123. As allowed under the provisions of FAS
123, the Company will continue to apply APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and related Interpretations in accounting
for the stock options awarded under the Plan. Accordingly, as
previously discussed, no compensation cost has been recognized for the
stock options granted. Had compensation cost for the Plan been
determined
40
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 30
- ------------------------------------------------------------------------
consistent with FAS 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Diluted Earnings
Net Earnings Per Share
------------------------ -------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As reported $43.6 $531.5 $1.32 $16.01
Pro forma 43.1 531.0 1.31 15.99
</TABLE>
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Expected volatility 43.37% 30.00%
Risk-free interest rate 4.48% - 4.55% 6.67%
Expected lives 6.5 - 8 years 5 - 9.5 years
</TABLE>
NOTE 17 - SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Receivables
Trade $ 44.1 $ 43.7
Income taxes 8.5
Other 2.3 1.7
Allowance for doubtful accounts (1.2) (1.0)
---------------------------
$ 45.2 $ 52.9
===========================
Inventories
Raw materials and supplies $ 23.7 $ 23.5
Finished products 37.8 49.0
---------------------------
$ 61.5 $ 72.5
===========================
Prepaid Expenses
Deferred income tax benefits $ 6.2 $ 6.9
Other items 1.8 2.4
---------------------------
$ 8.0 $ 9.3
===========================
Investments and Other Assets
Goodwill (net of accumulated
amortization: 1998--$2.2
and 1997--$.9) $ 53.0 $ 22.7
Other intangible assets (net of
accumulated amortization:
1998--$2.3 and 1997--$1.6) 17.3 9.6
Investments in affiliated companies 66.0 55.4
Deferred charges and other assets 1.3 1.4
---------------------------
$137.6 $ 89.1
===========================
Accounts Payable and
Accrued Liabilities
Trade accounts payable $ 50.7 $ 40.9
Incentive compensation,
salaries and vacations 6.0 4.9
Income taxes 4.7
Shutdown reserves 1.7 4.2
Advertising and promotion 6.0 4.9
Accrued Wortz acquisition-
related items 4.4
Other items 12.3 18.9
---------------------------
$ 81.4 $ 78.2
===========================
Other Liabilities
Postretirement medical and life $ 14.7 $ 14.3
Deferred compensation 5.3 5.7
Workers' compensation 5.4 7.3
Other items 3.8 8.1
---------------------------
$ 29.2 $ 35.4
===========================
</TABLE>
41
1998 ANNUAL REPORT
<PAGE>
<PAGE> 31
- ------------------------------------------------------------------------
NOTE 18 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $1.0 $1.0 $ .8
Provision charged to expense .4 .2 .8
Write-offs, less recoveries (.2) (.2) (.6)
------------------------------------------
Balance, end of year $1.2 $1.0 $1.0
==========================================
</TABLE>
NOTE 19 - SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
As of September 30, 1998, $1.2 of the agreed-upon purchase price
of Nutcracker Brands, Inc. had not been paid and was treated as a
noncash transaction for 1998 cash flow purposes. There were no material
noncash transactions in 1997 and 1996. Other cash flow information is
shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ .2 $4.5 $27.6
Income taxes paid 8.1 4.6 25.9
</TABLE>
NOTE 20 - SUBSEQUENT EVENTS
In October 1998, the Company's Board of Directors approved a
tender offer for up to 5,000,000 shares of the Company's Common Stock.
As a result, the Company purchased 586,368 shares in November 1998 at
$16.00 per share in accordance with the terms of the tender offer.
On November 19, 1998, the Company's Board of Directors approved an
authorization for Company management to repurchase up to 2,000,000
shares of Common Stock.
42
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 32
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------------------------------------
(Dollars in millions except per share data)
The results of any single quarter are not necessarily indicative of the
Company's results for the full year. Subsequent to January 1997, the
Company changed dramatically with the sales of the Company's Branded
Business and Resort Operations to General Mills, Inc. and Vail Resorts,
Inc., respectively. Earnings of the Company remain seasonal, however,
due to the Company's continuing equity interest in Vail, which typically
earns more than the entire year's operating profit during the Company's
second and third fiscal quarters.
<TABLE>
<CAPTION>
Fiscal 1998 First Second Third Fourth
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $137.2 $147.1 $143.3 $155.3
Gross profit 47.0 54.2 48.5 47.2
Net earnings 4.8 10.5 13.2 15.1<Fa>
Diluted earnings per share <Ff> .14 .32 .40 .46<Fa>
<CAPTION>
Fiscal 1997 First Second Third Fourth
- -----------------------------------------------------------------------------------------------
Net sales $292.9 $161.4 $140.7 $144.7
Gross profit 151.7 67.1 47.8 47.9
Net earnings 13.1<Fb> 510.4<Fc><Fd> 3.1 4.9<Fe>
Diluted earnings per share<Ff> .40<Fb> 15.33<Fc><Fd> .09 .15<Fe>
<FN>
<Fa> Net earnings and earnings per share include an $18.7 pre-tax gain
($11.6 after taxes, or $.35 per share) on the sale of Beech-Nut.
<Fb> Net earnings and earnings per share were negatively affected by
the inclusion of a pre-tax restructuring charge of $4.6 ($2.9
after taxes, or $.09 per share).
<Fc> Net earnings and earnings per share were negatively affected by
the inclusion of a pre-tax restructuring charge of $18.4 ($11.6
after taxes, or $.35 per share).
<Fd> Net earnings and earnings per share include a $516.5 tax-free gain
($15.55 per share) on the sale of the Branded Business.
<Fe> Net earnings and earnings per share include the favorable affect
of a $3.3 ($2.1 after taxes, or $.06 per share) adjustment to the
restructuring charge taken in the second quarter, partially offset
by $1.1 ($.03 per share) in net charges to the tax-free gain
referred to in note (d).
<Ff> Diluted earnings per share is computed independently based on
actual weighted-average outstanding shares of Ralcorp Common Stock
and the dilutive effects of stock options and deferred
compensation awards for each of the periods presented; therefore,
the sum of the earnings per share amounts for the quarters may not
equal the total for the year.
</TABLE>
43
1998 ANNUAL REPORT
<PAGE>
<PAGE> 33
GENERAL CORPORATE INFORMATION
- ------------------------------------------------------------------------
GENERAL OFFICE
Ralcorp Holdings, Inc.
P.O. Box 618
St. Louis, MO 63188-0618
Telephone: 314/877-7000
Internet: www.ralcorp.com
DATE AND STATE OF INCORPORATION
Ralcorp - October 23, 1996 - Missouri
Old Ralcorp - January 19, 1994 - Missouri
NUMBER OF RECORD SHAREHOLDERS
16,498
NUMBER OF EMPLOYEES
Approximately 2,400
NOTICE OF ANNUAL MEETING
The 1999 Annual Meeting of Shareholders will be held at the Gateway
Center, One Gateway Drive, Collinsville, Illinois at 10:00 a.m.,
Thursday, January 28, 1999. Proxy material for the Meeting is enclosed.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, St. Louis, Missouri
FISCAL YEAR END
September 30
FORM 10-K INFORMATION AND
INVESTOR INQUIRIES
Shareholders may obtain, without charge, a copy of the Company's most
recent Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission, by directing inquiries to:
Ralcorp Holdings, Inc.
Attn: Shareholder Services
P.O. Box 618
St. Louis, MO 63188-0618
Telephone: 314/877-7046
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York (FCTC)
SHAREHOLDER TELEPHONE CALLS:
(Operators are available Monday - Friday,
8:30 a.m. to 7:00 p.m. Eastern time.
An interactive automated system is available
around the clock everyday.)
Inside the United States: 1-800-446-2617
Outside the United States: 1-201-324-0498
TDD/TTY for hearing impaired: 1-201-222-4955
INTERNET:
Internet: http://www.fctc.com
E-mail: [email protected]
FCTC ADDRESSES:
For Questions Regarding Stock Transfers,
Change of Address or Lost Certificates:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
To Send Stock Certificates for Transfer
Via Regular Mail:
First Chicago Trust Company of New York
P.O. Box 2506
Jersey City, NJ 07303-2506
To Send Stock Certificates By Messenger
or Drop Off by Shareholder:
First Chicago Trust Company of New York
c/o Securities Transfer and Reporting Service, Inc.
One Exchange Plaza - Third Floor
New York, NY 10006
To Send Stock Certificates Via Express Courier:
First Chicago Trust Company of New York
14 Wall Street, Suite 4680 - 8th Floor
New York, NY 10005
44
RALCORP HOLDINGS, INC.
<PAGE>
<PAGE> 34
- ------------------------------------------------------------------------
COMMON STOCK DATA
(for the year ended September 30)
MARKET PRICE RANGE:
1998 1997
First Quarter First Quarter
$15-13/16 -- $19-11/16 $18-3/4 -- $21-1/2
Second Quarter Second Quarter<F*>
$15-15/16 -- $20-15/16 $10-1/4 -- $23
Third Quarter Third Quarter
$18-7/8 -- $21-11/16 $9-3/4 -- $14-3/4
Fourth Quarter Fourth Quarter
$14 -- $21-1/4 $15 -- $20-5/8
[FN]
<F*> On January 31, 1997, General Mills, Inc. acquired Old Ralcorp in
connection with its purchase of the Branded Business. Stock prices on
or before that date are those of Old Ralcorp. After that date, stock
prices are those of Ralcorp.
EXCHANGE LISTING
New York Stock Exchange, Inc.
(Ticker Symbol -- RAH)
BOARD OF DIRECTORS
William H. Danforth <F1>,<F2>
Chairman of the Board, Washington University
William D. George, Jr. <F1>,<F2>
Retired President and Chief Executive Officer,
S.C. Johnson & Son, Inc. (consumer products)
Jack W. Goodall <F1>,<F2>
Chairman of the Board, Foodmaker, Inc. (restaurants)
David W. Kemper <F1>,<F2>
Chairman, President and Chief Executive Officer, Commerce Bancshares,
Inc. (bank holding company)
Joe R. Micheletto
Chief Executive Officer and President, Ralcorp Holdings, Inc.
William P. Stiritz <F1>,<F2>,<F3>
Chairman of the Board, Chief Executive Officer and President,
Agribrands International, Inc. (animal feed and agricultural products)
[FN]
<F1> Member of Audit Committee
<F2> Member of Nominating and Compensation Committee
<F3> Chairman of the Board
EXECUTIVE OFFICERS
Joe R. Micheletto<F*>
Chief Executive Officer and President
Thomas G. Granneman
Vice President and Controller
Kevin J. Hunt<F*>
Corporate Vice President; and President, Bremner, Inc.
Robert W. Lockwood<F*>
Corporate Vice President, General Counsel and Secretary
James A. Nichols<F*>
Corporate Vice President; and President, Ralston Foods
Daniel J. Sescleifer
Vice President and Treasurer
David P. Skarie<F*>
Corporate Vice President and Director of Customer Development
Ronald D. Wilkinson<F*>
Corporate Vice President and Director of Product Supply
[FN]
<F*> Corporate Officer RAH
LISTED
NYSE
THE NEW YORK STOCK EXCHANGE
1998 ANNUAL REPORT
<PAGE> 1
EXHIBIT 21
LIST OF RALCORP HOLDINGS, INC. SUBSIDIARIES
Bremner, Inc.
State of Incorporation: Nevada
Flavor House Products, Inc.
State of Incorporation: Delaware
National Oats Company
State of Incorporation: Nevada
Nutcracker Brands, Inc.
Commonwealth of Incorporation: Massachusetts
RH Financial Corporation
State of Incorporation: Nevada
Ralston Foods Sales, Inc.
State of Incorporation: Nevada
Sugar Kake Cookie Inc.
State of Incorporation: New York
Sugar Kake Cookie of Canada Ltd.
Province of Incorporation: Ontario
Wortz Company
State of Incorporation: Arkansas
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-20879 and No. 333-20881) of Ralcorp
Holdings, Inc. of our report dated November 5, 1998, except as to Note 20,
which is as of November 20, 1998 appearing on page 25 of the 1998 Annual
Report to Shareholders which is incorporated in this Annual Report on Form
10-K.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
December 23, 1998
<PAGE> 1
EXHIBIT 23(b)
On Arthur Andersen LLP Letterhead
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated October 15, 1998 (related
to the consolidated financial statements of Vail Resorts, Inc. and
subsidiaries for the ten-month period ended July 31, 1998, not presented
separately herein), included in this Form 10-K into Ralcorp Holdings,
Inc. previously filed Registration Statements on Form S-8, File No.
333-20879 and No. 333-20881, pertaining to Ralcorp Holdings, Inc.
/s/ Arthur Andersen LLP
----------------------------
Denver, Colorado
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 2
<SECURITIES> 10
<RECEIVABLES> 46
<ALLOWANCES> 1
<INVENTORY> 62
<CURRENT-ASSETS> 127
<PP&E> 250
<DEPRECIATION> 100
<TOTAL-ASSETS> 418
<CURRENT-LIABILITIES> 81
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 307
<TOTAL-LIABILITY-AND-EQUITY> 418
<SALES> 583
<TOTAL-REVENUES> 583
<CGS> 386
<TOTAL-COSTS> 386
<OTHER-EXPENSES> 126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 71
<INCOME-TAX> 27
<INCOME-CONTINUING> 44
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.32
<FN>
<F1>Included in other expenses above are a pre-tax gain
on sale of $19 and equity earnings of $11, pre-tax.
</TABLE>
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Vail Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of VAIL
RESORTS, INC., formerly known as Gillett Holdings, Inc. (a Delaware
corporation), and subsidiaries as of July 31, 1998 and September 30,
1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the ten-month period ended July
31, 1998 and for the years ended September 30, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, all material respects, the financial position of Vail Resorts,
Inc. and subsidiaries as of July 31, 1998 and September 30, 1997 and the
results of their operations and their cash flows for the ten-month
period ended July 31, 1998 and for the years ended September 30, 1997
and 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
---------------------------
ARTHUR ANDERSEN LLP
Denver, Colorado
October 15, 1998
