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