<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 9, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission file number 1-9787
----------
FLOWERS INDUSTRIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-0244940
------- ----------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA
-----------------------------------------
(Address of principal executive offices)
31757
-------
(Zip Code)
912/226-9110
------------
(Registrant's telephone number, including area code)
N/A
---------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OUTSTANDING AT NOVEMBER 12, 1999
------------------- --------------------------------
<S> <C>
Common Stock, $.625 Par Value 100,307,939
</TABLE>
<PAGE> 2
FLOWERS INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet
October 9, 1999 and January 2, 1999 3
Consolidated Statement of Income
Twelve and Forty Weeks Ended October 9, 1999
and October 10, 1998 5
Consolidated Statement of Cash Flows
Forty Weeks Ended October 9, 1999
and October 10, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
PART II. Other Information
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FLOWERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
OCTOBER 9, 1999 JANUARY 2, 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 22,995 $ 56,965
Accounts and notes receivable, net 194,776 268,084
Inventories, net 294,788 297,593
Deferred income taxes 81,522 76,327
Other 110,317 84,276
----------- -----------
704,398 783,245
----------- -----------
Property, Plant and Equipment:
Land 48,481 49,874
Buildings 330,875 339,342
Machinery and equipment 800,215 816,495
Furniture, fixtures and transportation equipment 127,544 116,219
Construction in progress 255,896 96,288
----------- -----------
1,563,011 1,418,218
Less: accumulated depreciation (495,809) (430,516)
----------- -----------
1,067,202 987,702
----------- -----------
Other Assets 91,667 86,510
----------- -----------
Cost in Excess of Net Tangible Assets, net 982,312 1,003,443
----------- -----------
$ 2,845,579 $ 2,860,900
=========== ===========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
3
<PAGE> 4
FLOWERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET (CONT.)
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
OCTOBER 9, 1999 JANUARY 2, 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Commercial paper $ 64,661 $ 74,870
Current maturities of long-term debt 44,365 120,479
Accounts payable 219,454 227,749
Facility closing costs and severance 29,755 23,670
Other accrued liabilities 356,185 314,270
----------- -----------
714,420 761,038
----------- -----------
Long-Term Debt 1,115,982 1,038,998
----------- -----------
Other Liabilities:
Deferred income taxes 166,378 182,244
Postretirement/postemployment obligations 63,591 63,754
Facility closing costs and severance 38,397 41,331
Other 62,415 52,915
----------- -----------
330,781 340,244
----------- -----------
Minority Interest 162,750 147,659
----------- -----------
Stockholders' Equity:
Common stock par value $.625, authorized
350,000,000 shares, issued 100,854,353
and 100,202,414 shares, respectively 63,034 62,627
Capital in excess of par value 283,799 274,255
Retained earnings 212,252 262,531
Common stock in treasury, 558,914 and
381,366 shares, respectively (10,517) (6,762)
Stock compensation related adjustments (26,922) (19,690)
----------- -----------
521,646 572,961
----------- -----------
$ 2,845,579 $ 2,860,900
=========== ===========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
4
<PAGE> 5
FLOWERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE 12 WEEKS ENDED FOR THE 40 WEEKS ENDED
----------------------------- -------------------------------
OCTOBER 9, OCTOBER 10, OCTOBER 9, OCTOBER 10,
1999 1998 1999 1998
--------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 983,236 $ 862,784 $ 3,230,712 $ 2,776,242
Materials, supplies, labor and other production costs 489,323 382,206 1,541,195 1,243,548
Selling, marketing and administrative expenses 428,292 368,207 1,424,091 1,240,378
Depreciation and amortization 33,981 29,252 107,240 92,986
Non-recurring charge -- 2,453 69,208 2,453
--------- --------- ----------- -----------
Income from operations 31,640 80,666 88,978 196,877
--------- --------- ----------- -----------
Interest expense 18,618 15,819 63,736 49,926
Interest (income) (268) (1,688) (1,331) (3,302)
--------- --------- ----------- -----------
Interest expense, net 18,350 14,131 62,405 46,624
--------- --------- ----------- -----------
Income before income taxes, minority interest,
cumulative effect of a change in accounting principle
and extraordinary loss 13,290 66,535 26,573 150,253
Income tax 7,990 27,945 19,102 63,106
--------- --------- ----------- -----------
Income before minority interest, cumulative
effect of a change in accounting principle and
extraordinary loss 5,300 38,590 7,471 87,147
Minority interest (14,403) (13,035) (19,473) (28,097)
--------- --------- ----------- -----------
Income (loss) before cumulative effect of a change
in accounting principle and extraordinary loss (9,103) 25,555 (12,002) 59,050
Cumulative effect of a change in accounting principle,
net of tax benefit -- -- -- (3,131)
Extraordinary loss due to early extinguishment
of debt, net of tax benefit and minority interest -- (938) -- (938)
--------- --------- ----------- -----------
Net income (loss) $ (9,103) $ 24,617 $ (12,002) $ 54,981
========= ========= =========== ===========
Net Income (Loss) Per Common Share:
Basic:
Income (loss) before cumulative effect of a change
in accounting principle and extraordinary loss $ (0.09) $ 0.26 $ (0.12) $ 0.62
Cumulative effect of a change in accounting principle,
net of tax benefit -- -- -- (0.04)
Early extinguishment of debt, net of tax benefit
and minority interest -- (0.01) -- (0.01)
--------- --------- ----------- -----------
Net income (loss) per share $ (0.09) $ 0.25 $ (0.12) $ 0.57
========= ========= =========== ===========
Weighted average shares outstanding 100,274 99,794 100,060 95,460
========= ========= =========== ===========
Diluted:
Income (loss) before cumulative effect of a change
in accounting principle and extraordinary loss $ (0.09) $ 0.26 $ (0.12) $ 0.62
Cumulative effect of a change in accounting principle,
net of tax benefit -- -- -- (0.04)
Early extinguishment of debt, net of tax benefit
and minority interest -- (0.01) -- (0.01)
--------- --------- ----------- -----------
Net income (loss) per share $ (0.09) $ 0.25 $ (0.12) $ 0.57
========= ========= =========== ===========
Weighted average shares outstanding 100,522 100,203 100,388 95,907
========= ========= =========== ===========
Cash Dividends Paid Per Common Share $ 0.1300 $ 0.1200 $ 0.3825 $ 0.3525
========= ========= =========== ===========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
5
<PAGE> 6
FLOWERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE 40 WEEKS ENDED
---------------------------------
OCTOBER 9, 1999 OCTOBER 10, 1998
--------------- ----------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $ (12,002) $ 54,981
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interest 19,473 28,097
Depreciation and amortization 107,240 92,986
Non-recurring charge 46,071 2,453
Deferred income taxes (21,274) 1,690
Cumulative effect of a change in accounting principle -- 3,131
Loss due to early extinguishment of debt -- 938
Other 8,941 (1,483)
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable, net (63,063) (58,544)
Inventories, net 2,745 (69,274)
Other assets (33,471) (14,196)
Accounts payable and other accrued liabilities 56,296 33,767
Income taxes payable -- (6,696)
Facility closing costs and severance 3,116 8,937
--------- ---------
Net cash provided by operating activities 114,072 76,787
--------- ---------
Cash flows disbursed for investing activities:
Purchase of property, plant and equipment (195,608) (81,367)
Acquisition of majority interest in Keebler -- (285,203)
Acquisition of President International, Inc. by Keebler -- (444,818)
Acquisition of other businesses (7,939) (30,206)
Other -- 949
--------- ---------
Net cash disbursed for investing activities (203,547) (840,645)
--------- ---------
Cash flows from financing activities:
Common stock offering proceeds, net of underwriters'
discount and offering cost -- 187,930
Dividends paid (38,278) (33,875)
Treasury stock purchases (21,683) (5,597)
Stock compensation and warrants exercised 4,888 20,353
Proceeds from receivables securitization 125,000 --
Debentures proceeds -- 199,417
Debentures issuance costs -- (1,750)
Increase (decrease) in commercial paper (10,209) 42,808
Net debt repayments (4,215) 385,215
--------- ---------
Net cash provided by financing activities 55,503 794,501
--------- ---------
Net increase (decrease) in cash and cash equivalents (33,972) 30,643
Cash and cash equivalents at beginning of period 56,965 3,866
--------- ---------
Cash and cash equivalents at end of period $ 22,993 $ 34,509
========= =========
Schedule of noncash investing and financing activities:
Stock compensation transactions $ -- $ 9,345
========= =========
Stock issued for acquisition $ -- $ 40,000
========= =========
Note payable issued for purchase of equipment $ -- $ --
========= =========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
6
<PAGE> 7
FLOWERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Definitions. As used in this filing, unless the context otherwise indicates: (i)
"FII" means Flowers Industries, Inc., the publicly traded holding company, which
owns all of the outstanding common stock of Flowers Bakeries, Inc. ("Flowers
Bakeries") and Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a
majority of the outstanding common stock of Keebler Foods Company; (ii)
"Keebler" means Keebler Foods Company and its consolidated subsidiaries; (iii)
"Flowers" means FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs.
Smith's Bakeries, and their respective subsidiaries, excluding Keebler; and (iv)
the "Company" means Flowers and its consolidated, majority-owned subsidiary,
Keebler, collectively.
Interim Financial Statements. The accompanying unaudited consolidated financial
statements of the Company have been prepared by the Company's management in
accordance with generally accepted accounting principles for interim financial
information and applicable rules and regulations under the Securities Exchange
Act of 1934. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. The unaudited consolidated financial statements included
herein contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of October 9, 1999 and
January 2, 1999, the results of operations for the twelve and forty week periods
ended October 9, 1999 and October 10, 1998 and statement of cash flows for the
forty weeks ended October 9, 1999 and October 10, 1998. The results of
operations for the twelve and forty week periods ended October 9, 1999 and
October 10, 1998, are not necessarily indicative of the results to be expected
for a full year. These financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K/A for the fiscal year ended January 2,
1999.
Reporting Periods. The Company's quarterly reporting periods for fiscal 1999 are
as follows: first quarter ended April 24, 1999 (sixteen weeks), second quarter
ended July 17, 1999 (twelve weeks), third quarter ended October 9, 1999 (twelve
weeks) and fourth quarter ending January 1, 2000 (twelve weeks).
Reclassifications. Certain reclassifications of prior period information have
been made to conform with the current period presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
OCTOBER 9, 1999 JANUARY 2, 1999
--------------- ---------------
(Amounts in Thousands)
<S> <C> <C>
Inventories, Net:
Raw materials $ 66,196 $ 54,739
Packaging materials 33,620 27,056
Finished goods 190,840 207,620
Other 4,132 8,178
-------- --------
$294,788 $297,593
======== ========
</TABLE>
7
<PAGE> 8
NOTES (CONTINUED)
3. NET INCOME PER COMMON SHARE
Basic net income per share is computed by dividing net income by weighted
average common shares outstanding for the period. Diluted net income per
share is computed by dividing net income by weighted average common and
common equivalent shares outstanding for the period. Common stock
equivalents consist of the incremental shares associated with the Company's
stock option plans, as determined under the treasury stock method. The
following table reconciles the numerator and denominator used in the
computation of basic and diluted net income (loss) per share (amounts in
thousands):
<TABLE>
<CAPTION>
FOR THE 12 WEEKS ENDED FOR THE 40 WEEKS ENDED
----------------------------- ------------------------------
OCTOBER 9, OCTOBER 10, OCTOBER 9, OCTOBER 10,
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before cumulative effect of a
change in accounting principle
and extraordinary loss ($ 9,103) $ 25,555 ($ 12,002) $ 59,050
Cumulative effect of a change in accounting
principle net of tax benefit -- -- -- (3,131)
Extraordinary loss due to early extinguishment
of debt, net of tax benefit and minority interest -- (938) -- (938)
--------- --------- --------- --------
Net income (loss) ($ 9,103) $ 24,617 ($ 12,002) $ 54,981
========= ========= ========= ========
Denominator:
Basic weighted average shares 100,274 99,794 100,060 95,460
Effect of dilutive securities
Stock options 248 409 328 447
--------- --------- --------- --------
Diluted weighted average shares 100,522 100,203 100,388 95,907
========= ========= ========= ========
</TABLE>
4. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into forward purchase commitments and derivative
financial instruments in order to manage its exposure to commodity price and
interest rate risk, and does not use them for trading purposes. As of
October 9, 1999, the Company had entered into various arrangements that
allow the Company to engage in commodity price and interest rate agreements
based on fixed and floating commodity prices and interest rates,
respectively.
The Company's primary raw materials are flour, sugar, shortening, fruits and
dairy products. Amounts payable or receivable under the commodity agreements
which qualify as hedges are recognized as deferred gains or losses when the
positions are closed, and are charged or credited to cost of sales as the
related raw materials are used in production. For the twelve weeks ended
October 9, 1999 and October 10, 1998, losses of $6.3 million and $1.4
million were recorded, respectively. For the forty weeks ended October 9,
1999 and October 10, 1998, losses of $12.9 million and $6.0 million were
recorded, respectively. The losses were partially offset by opposite
movements in the cost of the underlying hedged item. Gains and losses on
agreements which do not qualify as hedges are marked to market and
recognized immediately as other income or expense; as these agreements are
closed, any gains or losses are also recognized as other income or expense.
For the twelve weeks ended October 9, 1999 and October 10, 1998, losses of
$3.8 million and $0 million were recorded, respectively. Losses of $5.3
million and $.6 million were recorded for the forty weeks ended October 9,
1999 and October 10, 1998, respectively. At October 9, 1999, the Company had
approximately $83.1 million of commitments outstanding related to commodity
derivative financial instruments.
8
<PAGE> 9
NOTES (CONTINUED)
Keebler uses interest rate swap agreements to effectively convert certain
fixed rate debt to a floating rate instrument and certain floating rate debt
to a fixed instrument. Amounts payable or receivable under the agreements,
calculated as the difference between the fixed and floating rates multiplied
by the notional amount, is recorded as an adjustment to interest expense, in
accordance with hedge accounting. At October 9, 1999, the notional amount of
interest rate swap agreements outstanding at Keebler was $509.8 million.
5. NON-RECURRING CHARGES AND PURCHASE ACCOUNTING RESERVES
As part of the continuing process of integrating President International,
Inc. ("President") into Keebler's operations, on May 14, 1999, Keebler
announced the decision to close its Sayreville, New Jersey, production
facility due to excess capacity within its 18-plant production network. As a
result, a pre-tax non-recurring charge of $69.2 million was recorded in the
second quarter ended July 17, 1999. The non-recurring charge included
approximately $23.1 million of severance and other exit costs related to the
Sayreville facility. The remaining $46.1 million was noncash asset
impairment charges related to writing down the Sayreville property, plant
and equipment, as well as equipment at other locations, to net realizable
value, less cost to sell, and a reduction of goodwill acquired in the
acquisition of Sunshine Biscuits, Inc. in June 1996. Of the total $69.2
million charge, approximately $68.6 million was recorded as plant and
facility closing costs and severance, with the remaining $0.6 million
recorded as other liabilities and accruals. Approximately 650 employees will
be terminated as a result of the Sayreville closure, of which approximately
600 employees are represented by unions. As of October 9, 1999,
approximately 590 employees under union contract and approximately 40
employees not under union contract had been terminated and approximately
$9.2 million had been spent related to severance and other exit costs from
the Sayreville facility closing. The exit activities are expected to be
substantially complete by the end of fiscal 1999.
Activity with respect to the non-recurring charges recorded in the fourth
quarter of fiscal 1998, and the second quarter of fiscal 1999, as discussed
above, as well as, purchase accounting reserves recorded in prior years is
as follows (amounts in thousands):
Non-Recurring Charges
<TABLE>
<CAPTION>
BALANCE AT PROVISION/ NONCASH BALANCE AT
1/2/99 ADJUSTMENTS REDUCTIONS SPENDING 10/9/99
---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Provision - Fiscal 1998
Severance costs $ 1,538 $ (207)(1) $ -- $ (1,331) $ --
Other exit costs:
Guard service 591 -- -- (204) 387
Utilities 261 -- -- (239) 22
Property taxes 563 -- -- (152) 411
Other 4,560 -- -- (1,748) 2,812
-------- -------- -------- -------- -------
$ 7,513 $ (207) $ -- $ (3,674) $ 3,632
-------- -------- -------- -------- -------
Provision - Fiscal 1999
Fixed asset impairments $ -- $ 37,824 $(37,824) $ -- $ --
Goodwill impairments -- 7,600 (7,600) -- --
Noncancelable lease obligations and
building maintenance costs -- 4,570 -- -- 4,570
Severance costs -- 15,564 -- (8,666) 6,898
Other exit costs -- 3,650 -- (555) 3,095
-------- -------- -------- -------- -------
$ -- $ 69,208 $(45,424) $ (9,221) $14,563
-------- -------- -------- -------- -------
Total $ 7,513 $ 69,001 $(45,424) $(12,895) $18,195
======== ======== ======== ======== =======
</TABLE>
(1) Reflects an adjustment to the Company's estimate of severance cost which was
recorded as income in the third quarter of 1999.
9
<PAGE> 10
NOTES (CONTINUED)
Purchase Accounting Reserves:
<TABLE>
<CAPTION>
BALANCE AT PROVISION/ BALANCE AT
1/2/99 ADJUSTMENTS SPENDING 10/9/99
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Mrs. Smith's Inc.
Noncancelable lease obligations and
building maintenance costs $25,799 $ -- $ (3,126) $22,673
Severance costs 1,347 -- (1,347) --
Other 3,761 -- (498) 3,263
------- ------- -------- -------
$30,907 $ -- $ (4,971) $25,936
------- ------- -------- -------
Keebler Foods Company
Noncancelable lease obligations and
building maintenance costs $11,484 $ 751 $ (2,015) $10,220
Severance costs 49 25 (50) 24
Other 24 -- (14) 10
------- ------- -------- -------
$11,557 $ 776 $ (2,079) $10,254
------- ------- -------- -------
Sunshine Biscuits, Inc.
Noncancelable lease obligations and
building maintenance costs $ 2,227 $ -- $ (204) $ 2,023
Severance costs 86 -- (17) 69
------- ------- -------- -------
$ 2,313 $ -- $ (221) $ 2,092
------- ------- -------- -------
President International, Inc.
Noncancelable lease obligations and
building maintenance costs $ 5,670 $ -- $ (46) $ 5,624
Severance costs 6,594 -- (555) 6,039
Other 447 -- (101) 346
------- ------- -------- -------
$12,711 $ -- $ (702) $12,009
------- ------- -------- -------
TOTAL $57,488 $ 776 $ (7,973) $50,291
======= ======= ======== =======
</TABLE>
Spending for facility closing and severance costs related to exit plans
established in the Keebler, Sunshine, Mrs. Smith's and President
acquisitions and the non-recurring charges is expected to be substantially
complete as of the end of fiscal 1999, except for noncancelable lease
payments and building maintenance costs that will continue through fiscal
2006.
6. SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
131 -- "Disclosures about Segments of an Enterprise and Related Information"
in fiscal 1998. This statement established new standards for the manner in
which companies report operating segment information, as well as disclosures
about products and services and major customers. As required by SFAS 131, the
Company has restated the prior periods for comparability.
The Company has three reportable segments: Flowers Bakeries, Mrs. Smith's
Bakeries and Keebler. Flowers Bakeries produces fresh and frozen breads and
rolls, Mrs. Smith's Bakeries produces fresh and frozen baked desserts,
snacks, breads and rolls, and Keebler produces a full line of cookies and
crackers. The segments are managed as strategic business units due to their
distinct production processes and marketing strategies.
10
<PAGE> 11
NOTES (CONTINUED)
The Company evaluates each segment's performance based on income from operations
(income or loss before interest and income taxes, excluding FII's and other
unallocated expenses and non-recurring charges). Information regarding the
operations in these reportable segments is as follows (amounts in thousands):
<TABLE>
<CAPTION>
FOR THE 12 WEEKS ENDED FOR THE 40 WEEKS ENDED
----------------------------------- -----------------------------------
OCTOBER 9, 1999 OCTOBER 10, 1998 OCTOBER 9, 1999 OCTOBER 10, 1998
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
SALES:
Flowers Bakeries $ 227,245 $ 221,795 $ 753,813 $ 733,623
Mrs. Smith's Bakeries 158,451 156,350 479,995 474,318
Keebler 615,844 499,897 2,055,724 1,626,685
FII (3,773) 0 (5,273) (550)
Elimination (1) (14,531) (15,258) (53,547) (57,834)
--------- ----------- ----------- -----------
$ 983,236 $ 862,784 $ 3,230,712 $ 2,776,242
========= =========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Flowers Bakeries $ 7,726 $ 7,989 $ 24,866 $ 26,731
Mrs. Smith's Bakeries 4,908 4,747 14,129 14,588
Keebler 19,480 14,934 62,651 46,483
FII 1,867 1,582 5,594 5,184
--------- ----------- ----------- -----------
$ 33,981 $ 29,252 $ 107,240 $ 92,986
========= =========== =========== ===========
INCOME (LOSS) FROM OPERATIONS:
Flowers Bakeries $ 13,958 $ 15,987 $ 53,237 $ 53,584
Mrs. Smith's Bakeries (33,558) 16,102 (50,706) 35,990
Keebler 62,960 57,251 182,337 127,107
FII (11,720) (6,221) (26,682) (17,351)
Non-recurring charge 0 (2,453) (69,208) (2,453)
--------- ----------- ----------- -----------
$ 31,640 $ 80,666 $ 88,978 $ 196,877
========= =========== =========== ===========
</TABLE>
(1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries
to Flowers Bakeries which are transferred at standard costs.
7. RECEIVABLES SECURITIZATION
On January 29, 1999, Keebler entered into a Receivables Purchase Agreement
(the "Agreement") to replace $75.0 million of debt held under a Bridge
facility, allowing funds to be borrowed at a lower cost to Keebler. The
accounting for this Agreement is governed by SFAS No. 125 -- "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Under the guidelines of SFAS 125, a special-purpose entity was
created, Keebler Funding Corporation, as a subsidiary of Keebler. All
transactions occurring under this Agreement occur through Keebler Funding
Corporation and are treated as a sale of accounts receivable and not as a
debt instrument. As of October 9, 1999, a net $125.0 million of accounts
receivable had been sold at fair value, which is the maximum amount
available under the Agreement.
11
<PAGE> 12
NOTES (CONTINUED)
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
-- "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes new rules for accounting for derivative instruments and hedging
activities. The statement requires all derivatives be recognized as either
assets or liabilities in the balance sheet and the instruments be measured at
fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This standard is effective for the Company's fiscal year 2001. The Company is
currently assessing the effects SFAS 133 will have on its financial position
and results of operations.
9. SUBSEQUENT EVENT
As part of a system-wide operations analysis that began in September 1998
when Keebler purchased President International, Inc., Keebler announced the
closing of its Lake Bluff, Illinois bakery on November 12, 1999. The closing
of the facility, expected to take place in January of 2000, will eliminate
approximately 190 employees and should save approximately $4.2 million on an
annualized basis. The costs associated with the closure were recognized as
part of the purchase accounting reserves established upon the initial
acquisition of President International, Inc. in September 1998.
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<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Matters Affecting Analysis:
The Company enters into commodity future and option contracts and swap
agreements for wheat and, to a lesser extent, other commodities, in an effort to
provide a predictable and consistent commodity price, and thereby reduce the
impact and volatility in its raw material and packaging prices. In the third
quarter ended October 9, 1999, the Company recorded a negative mark-to-market
adjustment of $3.8 million related to these activities. The charge is recorded
as an FII expense and does not affect the results of operations on a segment
basis at Flowers Bakeries, Mrs. Smith's Bakeries or Keebler.
Hurricanes and severe flooding in North Carolina and Florida in the third
quarter of 1999 had adverse effects on the operations of Flowers Bakeries.
Although production facilities were not damaged, several production facilities
were temporarily idled and distribution was disrupted. This resulted in lost
sales and increased logistics costs.
Mrs. Smith's Bakeries is in the process of completing a major capital project
involving 25 new or relocated and upgraded production lines at seven of Mrs.
Smith's Bakeries' 11 operating facilities. This project is behind schedule due
to delays in the receipt and installation of production equipment, the
programming of production control software and the hiring and training of
production employees. These delays have created less-than-anticipated production
levels, a reduction in Mrs. Smith's Bakeries' original sales forecast,
significant overruns in start-up costs, and large increases in promotional,
administrative, and logistics costs. This realignment had a negative impact on
margins in the third quarter of 1999, and is expected to continue to have
negative implications into the fourth quarter.
Following a review of Mrs. Smith's Bakeries' business operations after the end
of the Company's second quarter of fiscal 1999, the Company determined to
recognize higher reserves than previously estimated for customer deductions
previously believed to be collectible and trade promotions. The Company also
revised estimates of the recoverable amount of certain out-of-code, damaged or
discontinued inventory at Mrs. Smith's Bakeries. The conclusions reached by the
Company relative to the ultimate realization of certain accounts receivable are
based upon recent trends associated with Mrs. Smith's Bakeries' complex
promotional and discount programs.
During the second quarter of fiscal 1999, the Board of Directors of Keebler
approved a plan to close its Sayreville, New Jersey, production facility due to
excess capacity within Keebler's 18-plant production network. As a result of
this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million,
or $.25 per share after-tax and minority interest. The charge includes $46.1
million of non-cash asset impairments and $23.1 million of severance and other
exit costs related to the Sayreville facility. As a direct result of this plan,
asset impairments were recorded to write-down the closed facility to net
realizable value, less cost to sell, based on management's estimate of fair
value. Also, as part of this plan, asset impairments were recorded to write-off
certain other machinery and equipment currently held by Keebler and to reduce
goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996,
neither of which provides any future economic benefit. The intent is to dispose
of or scrap such machinery and equipment by the end of fiscal 1999. Severance
costs provide for the reduction of approximately 650 employees, and, as of
October 9, 1999, approximately 630 employees had been severed. Ongoing costs,
including, but not limited to, guard service, utilities, property taxes and
preparing the facility for sale, primarily represent the other exit costs with
spending related to such costs continuing for thirty-six months or until the
facility is disposed of, whichever occurs earlier.
Liquidity and Capital Resources:
Net cash provided by operating activities for the forty weeks ended October 9,
1999 was $114.1 million. Negative net cash flow of $12.0 million resulted from a
net loss for the forty weeks. Adding back to the net loss the noncash portion of
the non-recurring charge at Keebler discussed above and the timing of payments
of other accrued liabilities had a positive impact on cash flows. An increase in
trade accounts receivable and other assets negatively impacted cash flows.
Net cash disbursed for investing activities for the forty weeks ended October 9,
1999 of $203.5 million primarily consisted of capital expenditures of $56.5
million at Flowers Bakeries, $59.4 million at Mrs. Smith's Bakeries and $68.6
13
<PAGE> 14
million at Keebler. The capital expenditures were made principally to update and
enhance production and distribution facilities, as well as management
information systems.
For the forty weeks ended October 9, 1999, net cash of $55.5 million was
provided by financing activities. This was primarily attributable to proceeds of
$125.0 million from the sale of certain accounts receivable at Keebler under the
Receivables Purchase Agreement entered into on January 29, 1999 by Keebler. This
increase was partially offset by the payment of dividends by FII and the
purchase of treasury stock and debt payments by Keebler.
At October 9, 1999, cash and cash equivalents were $23.0 million. Long-term debt
was $1,116.0 million and current maturities of long-term debt were $109.0
million at October 9, 1999. Included in these amounts is debt of $472.8 million
attributable to Keebler; however, Flowers has not guaranteed such indebtedness
and it is to be repaid solely from the cash flows of Keebler.
During the third quarter of 1999, FII amended the $500.0 million Syndicated Loan
Facility and the $100.0 million Commercial Paper Agreement. The amendments
provided for increased loan borrowing margins and facility fees based on the
Company's credit rating and added and amended certain financial covenants.
Additionally, the $100.0 million Commercial Paper program will terminate in
January of 2000 at which time any balance remaining will be repaid with funds
drawn from the Company's existing line of credit. The Company believes that, in
light of its current cash position, its cash flow from operating activities and
its credit arrangements, it can adequately meet presently foreseeable financial
requirements.
Since September 1996, the Company has been a party to a Distributor Note
Purchase, Loan Commitment and Servicing Agreement which is subject to the same
financial covenants as the Syndicated Loan Facility. This agreement provides
third party credit facilities for the independent distributors serving Flowers
Bakeries. The Company receives payments from the independent distributors and
remits such amounts, net of certain loan servicing fees, to the financial
institution. Additionally the agreement requires amounts to be placed in escrow
by the Company upon the occurrence of certain events as defined in the
agreement. No events have occurred as of October 9, 1999 that would require such
funding by the Company.
The Company was in compliance with all covenants in its loan facilities as of
the end of the third quarter of 1999.
For the forty weeks ended October 9, 1999, dividends paid per share increased
8.5% to $.3825 from $.3525 paid for the comparable period in the prior year.
Dividends are declared at the discretion of the Board of Directors based on an
assessment of the Company's financial position and other considerations.
FII owns a majority of the outstanding stock of Keebler and therefore is
consolidating Keebler for financial reporting purposes. FII is limited in its
ability to access the cash flows of Keebler to support its other operations due
to the fact that Keebler is not wholly owned by FII.
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<PAGE> 15
Results of Operations:
Results of operations, expressed as a percentage of sales, for the twelve and
forty weeks ended October 9, 1999 and October 10, 1998 are set forth below:
<TABLE>
<CAPTION>
FOR THE 12 WEEKS ENDED FOR THE 40 WEEKS ENDED
--------------------------- --------------------------
OCTOBER 9, OCTOBER 10, OCTOBER 9, OCTOBER 10,
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 50.23 55.70 52.30 55.21
Selling, marketing and administrative expenses 43.56 42.68 44.08 44.68
Depreciation and amortization 3.46 3.39 3.32 3.35
Non-recurring charge -- .28 2.14 .09
Interest expense, net 1.87 1.64 1.93 1.68
Income before income taxes, minority
interest cumulative effect of a change in
accounting principle and extraordinary loss 1.35 7.71 0.82 5.41
Income taxes 0.81 3.24 0.59 2.27
Net income (loss) (.93)% 2.85% (0.37)% 1.98%
</TABLE>
Twelve Weeks Ended October 9, 1999 Compared to Twelve Weeks Ended October
10, 1998
Sales. For the twelve weeks ended October 9, 1999, sales were $983.2 million, or
14.0% higher than sales for the comparable period in the prior year, which were
$862.8 million. Sales at Flowers Bakeries for the third quarter of fiscal 1999
were $227.2 million, an increase of 2.4% over sales of $221.8 million reported a
year ago. The sales increase at Flowers Bakeries can be attributed to increases
of 4.3% and 6.0% in branded and foodservice sales, respectively, slightly offset
by a decrease of 6.2% in private label sales. Sales at Mrs. Smith's Bakeries for
the third quarter of fiscal 1999, after excluding inter-segment sales, increased
2.0% to $143.9 million from $141.1 million reported a year ago. This increase
was primarily driven by an 11.5% increase in foodservice and bakery deli sales
partially offset by reductions of 1.5% in frozen retail and 9.2% in non-branded
retail and co-pack sales of fresh snack products. The reduction of sales in the
frozen retail sector is attributable to production difficulties, as discussed
above, resulting in product shortages. Sales at Keebler for the third quarter of
fiscal 1999 increased 23.2% to $615.8 million from $500.0 million reported a
year ago. This increase is primarily the result of gains in the core Keebler
branded product line, new product introductions, integration of the President
International, Inc. ("President") business acquired in September of fiscal 1998
and continued improvements in the direct-to-store delivery system.
Gross Margin. Gross margin for the third quarter of fiscal 1999 was $493.9
million, or 2.8% higher than gross margin reported a year ago of $480.6 million.
As a percentage of sales, gross margin was 50.2% for the third quarter of fiscal
1999, compared to 55.7% for the third quarter of fiscal 1998. Flowers Bakeries'
gross margin as a percentage of sales of 53.7% for the third quarter of fiscal
1999 was essentially the same as the 53.8% in the third quarter of fiscal 1998.
Mrs. Smith's Bakeries' gross margin for the third quarter of fiscal 1999 was
10.6% of sales compared to 42.4% reported a year ago. This decrease is primarily
the result of delays associated with a massive production realignment project
consisting of the installation and start-up of 25 new or relocated and upgraded
production lines. Mrs. Smith's Bakeries experienced start-up costs and
unabsorbed overhead associated with this project in the third quarter of fiscal
1999. Management expects gross margins as a percent of sales to improve in the
fourth quarter but will continue to be depressed from prior year levels.
Increased sales of lower margin items during the third quarter of fiscal 1999 as
compared to the third quarter of fiscal 1998 also contributed to the decrease.
Gross margin at Keebler declined slightly to 58.7% of sales during the third
quarter of fiscal 1999 from 60.4% during the same period a year ago. This
decrease was due primarily to the inclusion of President, whose products carry a
higher cost structure, partially offset by increased productivity and
efficiencies at Keebler's production facilities, cost reduction programs and
lower ingredient and packaging costs.
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<PAGE> 16
Selling, Marketing and Administrative Expenses. During the third quarter of
fiscal 1999, selling, marketing and administrative expenses were $428.3 million,
or 43.6% of sales as compared to $368.2 million, or 42.7% of sales reported a
year ago. Selling, marketing and administrative expenses increased at Flowers
Bakeries primarily due to increased distribution costs as a result of severe
weather in North Carolina and Florida. Selling, marketing and administrative
expenses at Mrs. Smith's Bakeries were 30.5% of sales in the third quarter of
fiscal 1999 as compared to 28.6% of sales in the comparable quarter of 1998.
These costs were higher as a percent of sales due primarily to increased
distribution costs associated with Mrs. Smith's Bakeries' production realignment
and advertising and promotional expenses which were committed to the retail
market based on higher expected sales. Management believes that these costs will
continue to be higher as a percent of sales in the fourth quarter and will
return to more traditional levels as the new year begins. Due to the production
realignment at Mrs. Smith's Bakeries discussed above, production was lower than
anticipated which resulted in lower sales volumes during this seasonally high
sales period. Selling, marketing and administrative expenses at Keebler were
$279.3 million and 45.4% of sales for the third quarter of 1999 as compared to
$232.2 million and 46.4% of sales in the third quarter of 1998. This reduction
of expenses as a percent of sales is primarily attributable to savings gained on
reduced distribution costs and synergies existing from the integration of
President.
Depreciation and Amortization. Depreciation and amortization expense was $34.0
million for the third quarter of fiscal 1999, an increase of 16.2% over the same
period a year ago. This increase is due primarily to increased goodwill
amortization and depreciation relating to the purchase of President by Keebler
and increased depreciation associated with capital improvements, partially
offset by the benefit of reduced depreciation of approximately $2.6 million
resulting from asset impairments recorded as part of the non-recurring charges
in fiscal 1998 and fiscal 1999.
Interest Expense. For the third quarter of fiscal 1999, net interest expense was
$18.4 million, an increase of 29.9% over the corresponding period in the prior
year, which was $14.1 million. This increase is due primarily to interest on
borrowings incurred to finance the acquisition of President by Keebler and on
borrowings to partially fund capital improvement projects at Flowers.
Income Before Income Taxes. Income before income taxes was $13.3 million for the
third quarter of fiscal 1999, a decrease of 80.0% compared to income of $66.5
million reported for the same period a year ago. This decrease is primarily the
result of the increased costs associated with the production realignment project
and increased selling expenses at Mrs. Smith's Bakeries, all of which is
discussed above.
Income Taxes. For the third quarter of fiscal 1999, income taxes were $8.0
million, compared to $27.9 million reported for the comparable period in the
prior year. Income tax expense for the quarter and year-to-date is effected by
(1) the interaction of the effective rate on Keebler's profits and the effective
rate on the overall net loss before income taxes excluding Keebler and (2) the
second quarter effect of the non-deductible goodwill in the Keebler charge. The
overall effective rate for the year is expected to be approximately 45%.
Net Income (Loss). Net loss for the third quarter of fiscal 1999 was $9.1
million, a decrease of 137.0% as compared to $24.6 million net income reported a
year ago. This decrease is due to the items discussed above.
Forty Weeks Ended October 9, 1999 Compared to Forty Weeks Ended October 10, 1998
Sales. For the forty weeks ended October 9, 1999, sales were $3,231.0 million,
or 16.4% higher than sales for the same period a year ago, which were $2,776.2
million. Sales at Flowers Bakeries for the forty weeks of fiscal 1999 were
$753.8 million, an increase of 2.8% over sales of $733.6 million reported a year
ago. The sales increase at Flowers Bakeries can be attributed to increases of
2.5% and 9.6% in branded and foodservice sales, respectively, slightly offset by
a decrease of 8.5% in private label sales. Sales at Mrs. Smith's Bakeries after
excluding inter-segment sales for the forty weeks of fiscal 1999 were $426.4
million, an increase of 2.4% over sales of $416.5 million reported in the same
period last year. Bakery deli and foodservice sales were up 6.9% and frozen
retail sales were up 12.6%; however sales of non-branded and co-pack snack
products experienced a decrease of 10.0%. Sales at Keebler for the forty weeks
of fiscal 1999 increased 26.4% to $2,055.7 million from $1,626.7 million
reported a year ago. This increase is primarily due to gains in the core Keebler
branded product line, new product introductions and the acquisition of
President.
16
<PAGE> 17
Gross Margin. Gross margin for the forty weeks of fiscal 1999 was $1,689.5
million or 10.2% higher than gross margin reported a year ago, which was
$1,532.7 million. As a percentage of sales, gross margin was 52.3% for the forty
weeks of fiscal 1999, compared to 55.2% for the forty weeks of fiscal 1998.
Flowers Bakeries' gross margin improved to 53.7% of sales for the forty weeks of
fiscal 1999, compared to 53.3% of sales for the comparable period in the prior
year. Product mix, pricing and production efficiencies primarily contributed to
the increase. Mrs. Smith's Bakeries' gross margin for the forty weeks of fiscal
1999 was 26.0% of sales compared to 41.3% reported a year ago. This decrease is
primarily the result of delays associated with the massive production
realignment project discussed in the twelve week analysis above, the increased
inventory reserve and increased sales of lower margin items during the forty
weeks of fiscal 1999 as compared to the forty weeks of fiscal 1998. Gross margin
at Keebler declined to 57.4% of sales during the forty weeks of fiscal 1999 from
59.7% during the same period a year ago. This decrease was due primarily to the
inclusion of President, whose products carry a higher cost structure, partially
offset by increased productivity and efficiencies at Keebler's production
facilities, cost reduction programs and lower ingredient and packaging costs.
Selling, Marketing, and Administrative Expenses. During the forty weeks of
fiscal 1999, selling, marketing and administrative expenses were $1,424.1
million, or 44.1% of sales as compared to $1,240.4 million, or 44.7% of sales
reported a year ago. Selling, marketing and administrative expenses increased at
Flowers Bakeries primarily due to increased distribution costs and spending for
its management information systems implementation. Mrs. Smith's Bakeries'
selling, marketing, and administrative expenses increased during the forty weeks
of fiscal 1999 as compared to the same period a year ago as a result of the
production realignment issues discussed in the twelve week analysis. Keebler's
selling, marketing, and administrative expenses, as a percentage of sales,
decreased during the forty weeks of fiscal 1999 as compared to the forty weeks
of fiscal 1998 primarily due to savings gained on reduced distribution costs and
synergies achieved in the integration of President.
Depreciation and Amortization. Depreciation and amortization expense was $107.2
million for the forty weeks of fiscal 1999, an increase of 15.3% over the same
period a year ago, which was $93.0 million. This increase is due primarily to
increased goodwill amortization and depreciation relating to the purchase of
President by Keebler and increased depreciation associated with capital
improvements, partially offset by the benefit of reduced depreciation of
approximately $6.4 million resulting from asset impairments recorded as part of
the non-recurring charges in fiscal 1998 and fiscal 1999.
Non-Recurring Charge. See discussion under the heading "Matters Affecting
Analysis" above.
Interest Expense. For the forty weeks of fiscal 1999, net interest expense was
$62.4 million, an increase of 33.9% over the corresponding period in the prior
year, which was $46.6 million. This increase is due primarily to interest on
borrowings incurred to finance the acquisition of President by Keebler and on
borrowings to partially fund capital improvement projects at Flowers and an
acquisition at Flowers Bakeries.
Income Before Income Taxes. Income before income taxes was $26.6 million for the
forty weeks of fiscal 1999, a decrease of 82.3% compared to income of $150.3
million reported for the same period a year ago. This decrease is primarily the
result of the non-recurring charge at Keebler, increased costs associated with
the production realignment project and increased selling expenses at Mrs.
Smith's Bakeries, all of which are discussed in the twelve week analysis above.
The cost increases were somewhat offset by increased earnings as a result of the
President acquisition by Keebler.
Income Taxes. For the forty weeks of fiscal 1999, income taxes were $19.1
million, or 71.9% of pre-tax income as compared to $63.1 million or 41.9% for
the comparable period in the prior year. Income tax expense for the quarter and
year-to-date is effected by (1) the interaction of the effective rate on
Keebler's profits and the effective rate on the overall net loss before income
taxes excluding Keebler and (2) the second quarter effect of the non-deductible
goodwill in the Keebler charge. The overall effective rate for the year is
expected to be approximately 45%.
Net Income (Loss). Net loss for the forty weeks of fiscal 1999 was $12.0
million, a decrease of 121.8% as compared to the $55.0 million of net income
reported a year ago. This decrease is due primarily to the items discussed
above, partially offset by a negative cumulative effect of a change in
accounting principal of $3.1 million recorded in the first quarter of fiscal
1998. This cumulative effect was recorded as a result of the Company's early
adoption of Statement of Position
17
<PAGE> 18
98-5 -- "Reporting on the Costs of Start-up Activities". An extraordinary charge
due to early extinguishment of debt at Keebler in the third quarter of fiscal
1998 of $.9 million, net of tax and minority interest, also was a factor.
Year 2000 Conversion:
The Company utilizes a number of computer software programs and operating
systems throughout its organization, including applications used in order
processing, shipping and receiving, accounts payable and receivable processing,
financial reporting and in various other administrative functions. The Company
recognizes the need to make every effort to ensure that its operations will not
be adversely impacted by applications and processing issues related to the
upcoming calendar year 2000 (the "Year 2000 Issue"). The Year 2000 Issue is the
result of computer programs that have been written to recognize two-digit,
rather than four-digit, date codes to define the applicable year. To the extent
that the Company's software applications contain source codes that are unable to
appropriately interpret a code using "00" as the upcoming year 2000 rather than
1900, the Company could experience system failures or miscalculations that could
disrupt operations and cause a temporary inability to process transactions, send
and process invoices or engage in similar normal business activities.
Based on its ongoing assessment of its systems, the Company has modified or
replaced significant portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with these modifications to its existing
software and certain conversions to new software, the Year 2000 Issue will not
present significant operational problems for its computer systems. In addition,
the Company's systems and operations are dependent, in part, on interaction with
systems operated or provided by vendors, customers or other third parties, and
the Company has surveyed those parties about their progress in identifying and
addressing problems that their computer systems may face in connection with the
Year 2000 Issue. The Company believes that it has little or no exposure for
contingencies related to the Year 2000 Issue for the products it has sold.
The Company's plan to resolve the Year 2000 Issue (the "Plan") identifies
exposure with respect to the Company's three operating segments, Flowers
Bakeries, Mrs. Smith's Bakeries and Keebler, in three different areas:
information technology, operating equipment with embedded chips or software and
third-party vendors. In addition, the Plan involves the following four phases
for each of the potential exposure items: assessment, remediation, testing and
implementation. The discussion set forth below will present a current assessment
of these areas for each of the Company's operating segments.
Flowers Bakeries
With respect to information technology, Flowers Bakeries has completed the
remediation, testing and implementation phases for its critical systems. A
second Hand Held Computer (HHC) upload/download test (using critical Y2K dates
such as YearEnd rollover) was conducted to validate the implementation of
Version 4010. Version 4010 is considered to be the Y2K compliant version of the
software utilized on the HHC which plays a key role in Flowers Bakeries' current
exchange of information with customers.
All critical computer hardware items previously identified in inventory and
assessed by an independent consultant have been tested, remediated or replaced
by Y2K compliant equipment. The testing, remediation and replacement by plant
engineers of operating equipment with embedded chips or software is 100%
complete.
The assessment of third-party vendors or customers and their exposure to the
Year 2000 Issue is complete for systems that directly interface with Flowers
Bakeries. To date, Flowers Bakeries is not aware of any external agent with a
Year 2000 Issue that would materially impact its results of operations,
liquidity or capital resources. However, Flowers Bakeries has no means of
ensuring that external agents will be Year 2000 compliant. The inability of
external agents to complete their Year 2000 resolution processing in a timely
fashion could materially impact Flowers Bakeries. As Flowers Bakeries produces
and distributes fresh baked products daily, detailed contingency plans are being
finalized and put in place in an effort to ensue Flowers Bakeries is prepared to
handle possible interruptions to production and distribution, which would be the
most reasonable likely worst case scenario.
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<PAGE> 19
Flowers Bakeries has engaged a consulting firm to audit Y2K progress. The firm
has completed its final review with no new recommendations other than to
complete implementation of Y2K plans developed by Flowers Bakeries, which has
been accomplished.
As a backup strategy, Flowers Bakeries has developed several overlapping methods
to ensure that any possible Year 2000 contingencies will be addressed quickly
and decisively. A plant backup strategy will be in effect should the need arise.
In emergency situations such as Year 2000, hurricane evacuations, power outages
and major breakdowns, Flowers Bakeries currently uses a plan based on using
primary and secondary plants to satisfy sales orders.
Flowers Bakeries operational regions (based on logistics, customer base,
manufacturing facilities) have been designated as "primary" and "secondary" for
the purpose of providing a backup mechanism. Corporate and Regional War Rooms
will be activated in early December to monitor Year End activities (i.e., plant,
branch and distribution operational status, utilities, communications,
transportation and raw materials availability). A year-end schedule will be put
into effect, which includes hand held computers, distribution system testing and
plant checks before and immediately following the arrival of the new year to
ensure that Flowers Bakeries capabilities are intact. Flowers Bakeries
contingency planning efforts address customers, suppliers and Flowers Bakeries
employees. A third-party payroll vendor will process a special payroll (i.e., a
pre-Year 2000 run) to ensure employees will be paid in the unlikely event our
internal payroll processing fails. Secondary raw material suppliers have been
established should a primary supplier be unable to deliver. Additionally,
suppliers are establishing two bulk raw material storage sites as another level
of reinsuring that Flowers Bakeries' manufacturing plants can produce and
deliver product. Plants will enter the new year with all on-site storage areas
stocked at full capacity. Major customers have been personally contacted to make
sure they are aware of Flowers Bakeries' Year 2000 preparations. The information
presented above sets forth the principle steps Flowers Bakeries has taken to
address Year 2000 issues. Flowers Bakeries does not expect compliance with Year
2000 issues or the most reasonable likely worst case scenario and related
contingency plans to have a material impact on its business, results of
operations or financial condition.
Mrs. Smith's Bakeries
With respect to information technology, Mrs. Smith's Bakeries has completed its
assessment of this risk area. This assessment indicated that Mrs. Smith's
Bakeries' significant information technology systems would not be affected. Mrs.
Smith's Bakeries has recently completed a four-year SAP Enterprise-Wide
Information Technology System Installation Project. This system is Year 2000
compliant and is responsible for running over 90% of the company's business
processes. Mrs. Smith's Bakeries has completed similar "end to end" testing of
its SAP environment, as discussed above for Flowers Bakeries' AS400 environment,
and confirmed compliance.
Mrs. Smith's Bakeries has also engaged a consultant (the "Consultant") to
inventory, assess and assist with remediation of all its critical computer
hardware. The inventory has been completed and non-compliant systems have either
been remediated or replaced. The assessment of the operating equipment with
embedded chips or software has been completed. Testing of this equipment is more
difficult than the testing of information technology systems. Mrs. Smith's
Bakeries has completed testing and evaluation of remediation work completed on
its existing operating equipment, but additional testing and evaluation of
operating equipment will be ongoing as changes are made and new equipment is
added to its operations. This process will continue through year end.
The assessment of third-party vendors or customers and their exposure to the
Year 2000 Issue has been completed for both systems that directly interface with
Mrs. Smith's Bakeries and for all other material exposure. Mrs. Smith's Bakeries
completed surveying all third parties in January 1999. Mrs. Smith's Bakeries has
completed remediation efforts on its systems and is 95% complete with the
testing and implementation phases of its third-party vendors or customers'
system interfaces. Mrs. Smith's Bakeries is continually assessing its
third-party vendors or customers and expects to complete the testing and
implementation phases for systems interface work by year end. Mrs. Smith's
Bakeries has queried its significant suppliers that do not share information
systems with Mrs. Smith's Bakeries (external agents). To date, Mrs. Smith's
Bakeries is not aware of any external agent with a Year 2000 Issue that would
materially impact its results of operations, liquidity or capital resources.
However, Mrs. Smith's Bakeries has no means of ensuring that external agents
will be Year 2000 compliant. The inability of external agents to complete their
Year 2000 resolution processing in a timely fashion could materially impact Mrs.
Smith's Bakeries. The effect of noncompliance by external agents is not
determinable by Mrs. Smith's Bakeries. As Mrs. Smith's Bakeries produces and
distributes fresh and frozen baked
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<PAGE> 20
products, detailed contingency plans are being put in place in an effort to
ensure Mrs. Smith's Bakeries is prepared to handle possible interruptions to
production and distribution, which would be the most reasonable likely worst
case scenario. The plans have been completed and will be reviewed on an ongoing
basis through the end of the year.
Based on the progress made to date in assessing its Year 2000 issues and its
compliance with Year 2000 issues related to primary business information
systems, Mrs. Smith's Bakeries does not foresee significant risks associated
with its Year 2000 compliance at this time. However, Mrs. Smith's Bakeries has
developed comprehensive contingency plans and will continually review these
plans through the end of the year to address potential critical Year 2000
issues. The plan includes performing a complete backup of all computer systems
(i.e., operational, financial and human resources) on December 31, 1999. In
addition, facility checks will be performed at each administrative, production,
distribution and shipping locations on January 1, 2000 to determine if utilities
and equipment are functioning properly. In the event of a power failure at a
specific location or order entry difficulties, manual sales orders will be
completed and sent to another Mrs. Smith's Bakeries facility for processing into
SAP. Mrs. Smith's Bakeries has also identified a sister location for each of our
facilities, which will allow it to shift production and/or distribution
capabilities in the event of failures at specific sites. In addition, since Mrs.
Smith's Bakeries does not rely on any one supplier, second source suppliers and
vendors are in place in the event that a supplier is unable to meet our material
requirements. Finally, Mrs. Smith's Bakeries has established a plan with our
third-party payroll processing company for payroll processing in the event that
we are completely unable to perform the processing internally. The information
presented above sets forth the principle steps Mrs. Smith's Bakeries has taken
to address Year 2000 issues. Mrs. Smith's Bakeries does not expect compliance
with Year 2000 issues or the most reasonable likely worst case scenario and
related contingency plans to have a material impact on its business, results of
operations or financial condition.
Keebler
Keebler has completed a comprehensive review of its computer systems and
non-information technology systems to identify potential Year 2000 issues. As
Keebler has implemented the SAP R/3 Enterprise Wide Information Systems and
Manugistics software, both of which were developed/purchased as Year 2000
compliant, management does not anticipate that the impact of Year 2000 issues on
its business will be material. In order to assess Year 2000 readiness, Keebler
conducted a complete simulation of the SAP production environment during the
second quarter of fiscal 1999 which incorporated the December 29, 1999 through
January 4, 2000 and February 28, 2000 through March 2, 2000 timeframes. The
overall success of the full production simulation is further indication that the
risk factors for problems in the year 2000 are minimal for the SAP environment.
Additionally, secondary information systems, which are not material to Keebler's
ability to forecast, manufacture or deliver product, have been reviewed and Year
2000 issues identified. Currently, Keebler is in the process of correcting or
upgrading these systems and intends to be Year 2000 compliant on all critical
systems by December 1999.
Keebler has submitted a comprehensive questionnaire to its material vendors and
suppliers in an effort to verify that they will be Year 2000 compliant and to
identify any problem areas with these groups. Although the results of the
questionnaire indicated that material vendors and suppliers intend to be Year
2000 compliant before the end of fiscal 1999, they were not able to provide any
assurances. Keebler has developed a contingency plan to address potential Year
2000 failures caused by a third party. While there is no assurance that third
parties will convert their systems in a timely manner and that they will be
compatible with Keebler's systems, management believes these risks will be
minimized due to the procedures related to third parties discussed above and the
development of a contingency plan.
Keebler completed a comprehensive review of President's computer systems and
non-information technology systems to identify potential Year 2000 issues for
this subsidiary. Many of the Year 2000 risks at President have been mitigated
through the implementation of the SAP R/3 Enterprise Wide Information Systems
and Manugistics software at the President facilities.
Based on the progress made to date in assessing its Year 2000 issues and its
compliance with Year 2000 issues related to primary business information
systems, Keebler does not foresee significant risks associated with its Year
2000 compliance at this time. However, Keebler has developed a comprehensive
contingency plan to address potential critical Year 2000 issues. The plan
includes performing a complete backup of all of our computer systems (i.e.
operational, financial and human resources) on December 31, 1999. In addition,
facility checks will be performed at each of our corporate, manufacturing,
distribution and shipping locations on January 1, 2000 to determine if utilities
and equipment
20
<PAGE> 21
are functioning properly. In the event of a power failure at a specific location
or order entry difficulties with our hand-held personal computers, manual sales
orders will be completed and sent to another Keebler facility for processing
into SAP. We have also identified a sister location for each of our facilities,
which will allow us to shift production and/or distribution capabilities in the
event of failures at specific sites. In addition, since Keebler does not rely on
any one supplier, second source suppliers and vendors are in place in the event
that a supplier is unable to meet our material requirements. Finally, we have
established a plan with our third-party payroll processing company for payroll
processing in the event that we are completely unable to perform, the processing
internally.
The information presented above sets forth the principle steps Keebler has taken
to address Year 2000 issues. Keebler does not expect compliance with Year 2000
issues or the most reasonable likely worst case scenario and related contingency
plan to have a material impact on its business, results of operations or
financial condition.
Summary
The Company is utilizing both internal and external resources to reprogram, or
replace, and test its software for Year 2000 modifications. The total cost of
the plan is estimated at $5 to $6 million and is being funded through operating
cash flow and expensed as incurred. To date, the Company has expended
approximately $4.7 million related to the assessment of, and remediation efforts
on, its Year 2000 modification projects, the development of the plan for the
purchase of new systems and system modifications.
The costs of the plan and the time frame in which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. Specific factors that might result in additional costs or
time delays include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties. Based upon the Company's current
estimates, the Company does not anticipate that the cost of compliance with the
Year 2000 Issue will be material to its business, financial condition or results
of operations; however, there can be no assurance that the Company's systems, or
those of its vendors, customers or other third parties, will be made Year 2000
compliant in a timely manner or that the impact of the failure to achieve such
compliance will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Based on the progress the Company has made in addressing its Year 2000 issues
and the Company's compliance with the Year 2000 Issue on its primary business
information systems, the Company does not foresee significant risks associated
with its Year 2000 compliance on such systems at this time. However, contingency
plans have been developed by Flowers Bakeries, Mrs. Smith's Bakeries and
Keebler, as discussed above.
The discussion of the Company's efforts and management's expectations relating
to Year 2000 compliance are forward-looking statements. Readers are cautioned
that forward-looking statements contained herein should be read in conjunction
with the Company's disclosures under the heading "Forward-Looking Statements"
set forth below.
Forward-Looking Statements:
Certain statements made herein are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and are subject
to the safe harbor provisions of that Act. Such forward-looking statements
include, without limitation, the future availability and prices of raw
materials, the availability of capital on acceptable terms, the competitive
conditions in the baked foods industry, potential regulatory obligations, the
Company's strategies and other statements contained herein that are not
historical facts. Because such forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by such forward-looking
statements, including, but not limited to, changes in general economic and
business conditions (including the baked foods markets), the Company's ability
to recover its raw material costs in the pricing of its products, the
availability of capital on acceptable terms, actions of competitors, the impact
of any Year 2000 disruptions, the extent to which the Company is able to develop
new products and markets for its products, the time required for such
development, the level of demand for such products, timing in having newly
installed production lines at Mrs. Smith's Bakeries fully operative, changes in
the Company's business strategies and other factors discussed herein.
21
<PAGE> 22
Item 3. Quantitative And Qualitative Disclosures About Market Risk:
In the normal course of business, the Company is exposed to commodity price and
interest rate risks, primarily related to the purchase of raw materials and
packaging supplies and changes in interest rates. The Company manages its
exposure to these risks through the use of various financial instruments, none
of which are entered into for trading purposes. The Company has established
policies and procedures governing the use of financial instruments, specifically
as it relates to the type and volume of financial instruments entered into.
Financial instruments can only be used to hedge an economic exposure, and
speculation is prohibited. The Company's accounting policy related to financial
instruments is further described in Note 4 of Notes to Consolidated Financial
Statements.
Commodity Price Risk
The Company enters into commodity future and option contracts and swap
agreements for wheat and, to a lesser extent, other commodities, in an effort to
provide a predictable and consistent commodity price and thereby reduce the
impact of volatility in its raw material and packaging prices. A sensitivity
analysis has been prepared to estimate the Company's exposure to commodity price
risk. Based on the Company's derivative portfolio as of October 9, 1999, a
hypothetical ten percent adverse change in commodity prices under normal market
conditions could potentially have a $18.6 million effect on the fair value of
the derivative portfolio. The analysis disregards changes in the exposures
inherent in the underlying hedged item; however, the Company expects that any
loss in fair value of the portfolio would be substantially offset by reductions
in raw material and packaging prices.
Interest Rate Risk
The Company manages its exposure to interest rate risk primarily through the use
of a combination of fixed to floating rate debt, as well as interest rate swap
agreements, in order to reduce overall interest costs. Keebler has entered into
interest rate swap agreements on both its fixed and floating rate debt. A
sensitivity analysis was prepared as of January 2, 1999 to estimate the
Company's exposure to interest rate risk. As interest rates have not fluctuated
materially from year end and the composition of the Company's debt has not
materially changed since year end, the sensitivity analysis as of January 2,
1999 remains a valid estimate. The analysis disregards changes in the exposures
inherent in the underlying hedged item; however, the Company expects that any
loss in fair value of the interest rate swap agreements would be substantially
offset by increases in the fair value of those hedged items.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION - Information regarding each of the Company's
segments' operations for each quarter of fiscal 1998 is as follows (amounts in
thousands):
<TABLE>
<CAPTION>
For the 16
Weeks For the 52
Ended For the 12 Weeks Ended Weeks Ended
------------ ------------------------------------------------- -----------
April 25, July 18, October 10, January 2, January 2,
1998 1998 1998 1999 1999
------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales:
Flowers Bakeries $ 285,958 $ 225,870 $ 221,795 $ 216,247 $ 949,870
Mrs. Smith's Bakeries 180,877 137,091 156,350 198,503 672,821
Keebler 636,746 490,042 499,897 599,795 2,226,480
FII (550) -- -- 893 343
Eliminations(1) (25,997) (16,579) (15,258) (15,219) (73,053)
----------- --------- ----------- ----------- -----------
$ 1,077,034 $ 836,424 $ 862,784 $ 1,000,219 $ 3,776,461
=========== ========= =========== =========== ===========
Depreciation and Amortization:
Flowers Bakeries $ 10,527 $ 8,215 $ 7,989 $ 6,756 $ 33,487
Mrs. Smith's Bakeries 5,405 4,436 4,747 4,088 18,676
Keebler 16,236 15,313 14,934 22,642 69,125
FII 2,028 1,574 1,582 2,293 7,477
----------- --------- ----------- ----------- -----------
$ 34,196 $ 29,538 $ 29,252 $ 35,779 $ 128,765
=========== ========= =========== =========== ===========
Income from Operations:
Flowers Bakeries 19,995 $ 17,602 $ 15,987 $ 22,195 $ 75,779
Mrs. Smith's Bakeries 10,056 9,832 16,102 9,865 45,855
Keebler 31,676 38,180 57,251 72,784 199,891
FII (5,750) (5,380) (6,221) (3,472) (20,823)
Non-recurring charge(2) -- -- (2,453) (65,860) (68,313)
----------- --------- ----------- ----------- -----------
$ 55,977 $ 60,234 $ 80,666 $ 35,512 $ 232,389
=========== ========= =========== =========== ===========
</TABLE>
(1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries
to Flowers Bakeries which are transferred at standard costs.
(2) Represents asset impairments at Keebler of $2.5 million in the third
quarter of fiscal 1998 and a non-recurring charge for asset impairments
and restructuring costs in the fourth quarter of fiscal 1998 of $32.2
million, $32.3 million and $1.4 million for Flowers Bakeries, Mrs. Smith's
Bakeries and Keebler, respectively.
23
<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 -- Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K --- The Company filed a report on Form 8-K on
October 5, 1999 relating to a press release by the Company regarding its third
quarter fiscal 1999 earnings.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOWERS INDUSTRIES, INC.
/s/ AMOS R. MCMULLIAN
----------------------------------
By: Amos R. McMullian
Chairman of the Board
/s/ JIMMY M. WOODWARD
-----------------------------------
By: Jimmy M. Woodward
Vice President and
Chief Administrative Officer
Chief Accounting Officer
Date: November 23, 1999
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FLOWERS
INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE FORTY WEEKS ENDED
OCTOBER 9, 1999 AND THE FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AT
OCTOBER 9, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-09-1999
<CASH> 22,995
<SECURITIES> 0
<RECEIVABLES> 210,118
<ALLOWANCES> 15,342
<INVENTORY> 294,788
<CURRENT-ASSETS> 704,398
<PP&E> 1,563,011
<DEPRECIATION> 495,809
<TOTAL-ASSETS> 2,845,579
<CURRENT-LIABILITIES> 714,420
<BONDS> 0
0
0
<COMMON> 63,034
<OTHER-SE> 458,612
<TOTAL-LIABILITY-AND-EQUITY> 2,845,579
<SALES> 3,230,712
<TOTAL-REVENUES> 3,230,712
<CGS> 1,541,195
<TOTAL-COSTS> 3,141,734
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,405
<INCOME-PRETAX> 26,573
<INCOME-TAX> 19,102
<INCOME-CONTINUING> (12,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,002)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
