<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 7, 2000
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
of incorporation or organization) Identification Number)
1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA
-----------------------------------------
(Address of principal executive offices)
31757
-----
(Zip Code)
229/226-9110
------------
(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.
TITLE OF EACH CLASS OUTSTANDING AT NOVEMBER 17, 2000
------------------- --------------------------------
COMMON STOCK, $.625 PAR VALUE 100,085,442
<PAGE> 2
FLOWERS INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet
October 7, 2000 and January 1, 2000 3
Consolidated Statement of Income
Twelve and Forty Weeks Ended
October 7, 2000 and October 9, 1999 4
Consolidated Statement of Cash Flows
Forty Weeks Ended October 7, 2000
and October 9, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
PART II. Other Information
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE> 3
FLOWERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
October 7, 2000 January 1, 2000
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 23,766 $ 39,382
Accounts and notes receivable, net 191,140 185,939
Inventories, net:
Raw materials 52,277 68,110
Packaging materials 31,354 29,855
Finished goods 214,210 175,281
Other 4,560 7,679
----------- ----------
302,401 280,925
Deferred income taxes 69,289 71,498
Other 99,765 112,794
----------- ----------
686,361 690,538
----------- ----------
Property, Plant and Equipment:
Land 52,717 49,612
Buildings 427,566 386,197
Machinery and equipment 1,067,652 958,176
Furniture, fixtures and transportation equipment 165,154 148,565
Construction in progress 96,147 127,545
----------- ----------
1,809,236 1,670,095
Less: accumulated depreciation (614,229) (520,456)
----------- ----------
1,195,007 1,149,639
----------- ----------
Other Assets 84,988 88,715
----------- ----------
Cost in Excess of Net Tangible Assets:
Cost in excess of net tangible assets 1,259,346 1,033,272
Less: accumulated amortization (91,080) (61,686)
----------- ----------
1,168,266 971,586
----------- ----------
$ 3,134,622 $ 2,900,478
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 58,309 $ 47,566
Accounts payable 252,352 248,153
Facility closing costs and severance 17,539 16,836
Other accrued liabilities 345,294 343,242
----------- ----------
673,494 655,797
----------- ----------
Long-Term Debt and Capital Leases 1,374,105 1,208,630
----------- ----------
Other Liabilities:
Deferred income taxes 158,456 162,470
Postretirement/postemployment obligations 64,038 64,772
Facility closing costs and severance 22,204 30,188
Other 60,772 56,289
----------- ----------
305,470 313,719
----------- ----------
Minority Interest 236,483 183,578
----------- ----------
Stockholders' Equity:
Preferred stock-$100 par value, 10,467 authorized and none issued
Preferred stock-$100 par value, 249,533 authorized and none issued
Common stock-$.625 par value, 350,000,000 authorized and
100,527,893 and 100,863,848 shares issued, respectively 62,830 63,040
Capital in excess of par value 289,127 291,377
Retained earnings 215,285 219,279
Common stock in treasury, 452,995 and
567,160 shares, respectively (8,272) (10,594)
Stock compensation related adjustments (13,900) (24,348)
----------- ----------
545,070 538,754
----------- ----------
$ 3,134,622 $ 2,900,478
=========== ===========
</TABLE>
3
<PAGE> 4
FLOWERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For the Twelve Weeks Ended For the Forty Weeks Ended
-------------------------------- -----------------------------------
October 7, 2000 October 9, 1999 October 7, 2000 October 9, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 1,022,967 $ 982,664 $ 3,317,466 $ 3,222,157
Materials, supplies, labor and other production costs 460,383 491,204 1,505,245 1,548,311
Selling, marketing and administrative expenses 446,377 425,839 1,445,318 1,408,420
Depreciation and amortization 40,860 33,981 129,145 107,240
Insurance proceeds (3,105) 0 (4,774) 0
Non-recurring (credit) charge (1,428) 0 (2,424) 69,208
----------- --------- ----------- -----------
Income from operations 79,880 31,640 244,956 88,978
Interest (income) (1,517) (249) (3,002) (1,190)
Interest expense 28,148 18,599 89,239 63,595
----------- --------- ----------- -----------
Interest expense, net 26,631 18,350 86,237 62,405
----------- --------- ----------- -----------
Income before income taxes and minority interest 53,249 13,290 158,719 26,573
Income taxes 21,462 7,990 68,115 19,102
----------- --------- ----------- -----------
Income before minority interest 31,787 5,300 90,604 7,471
Minority interest (18,829) (14,403) (55,359) (19,473)
----------- --------- ----------- -----------
Net income (loss) $ 12,958 $ (9,103) $ 35,245 $ (12,002)
=========== ========= =========== ===========
Net Income (Loss) Per Common Share:
Basic:
Net income (loss) per share $ 0.13 $ (0.09) $ 0.35 $ (0.12)
Weighted average shares outstanding 100,089 100,274 100,128 100,060
Diluted:
Net income (loss)per share $ 0.13 $ (0.09) $ 0.35 $ (0.12)
Weighted average shares outstanding 100,368 100,522 100,372 100,388
Cash Dividends Paid Per Common Share $ 0.1325 $ 0.1300 $ 0.3975 $ 0.3825
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
4
<PAGE> 5
FLOWERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Forty Weeks Ended
---------------------------------
October 7, 2000 October 9, 1999
--------------- ---------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $ 35,245 $ (12,002)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Minority interest 55,359 19,473
Depreciation and amortization 129,145 107,240
Non-recurring (credit) charge (2,043) 46,071
Deferred income taxes 5,338 (21,274)
Income tax benefit related to stock options exercised 21,457 10,754
Gain on sale of property, plant and equipment (2,208) 0
Gain on sale of business (5,700) 0
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable, net (10,639) (68,561)
Inventories, net (12,904) 2,745
Other assets 9,717 (33,471)
Accounts payable and other accrued liabilities 7,310 45,542
Income taxes payable (21,329) 0
Facility closing costs and severance (21,129) 3,116
Other 831 8,941
--------- ---------
Net cash provided by operating activities 188,450 108,574
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (91,624) (195,608)
Acquisition of businesses, net of divestitures (258,867) (7,939)
Sesame Street Trademark license agreement (10,000) 0
Proceeds from property sales 23,377 0
Other 106 0
--------- ---------
Net cash disbursed for investing activities (337,008) (203,547)
--------- ---------
Cash flows from financing activities:
Dividends paid, net of dividends received (52,139) (38,278)
Treasury stock purchases (10,023) (21,683)
Stock compensation and warrants exercised 10,405 4,888
Proceeds from receivables securitization 13,000 125,000
Decrease in commercial paper 0 (10,209)
Increase (decrease) in debt and capital leases 171,699 (4,215)
--------- ---------
Net cash provided by financing activities 132,942 55,503
--------- ---------
Net (decrease) in cash and cash equivalents (15,616) (39,470)
Cash and cash equivalents at beginning of period 39,382 54,542
--------- ---------
Cash and cash equivalents at end of period $ 23,766 $ 15,072
========= =========
Schedule of noncash investing and financing activities:
Stock compensation transactions $ 2,505 $ 0
========= =========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
5
<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 condensed
consolidated financial statements of the Company have been prepared by the
Company's management in accordance with generally accepted accounting
principles for interim financial information and applicable rules and
regulations of the Securities Exchange Act of 1934. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for annual financial statements. The unaudited
consolidated financial statements included herein contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly
the financial position as of October 7, 2000 and January 1, 2000, the
results of operations for the twelve and forty week periods ended October 7,
2000 and October 9, 1999 and statement of cash flows for the forty weeks
ended October 7, 2000 and October 9, 1999. The results of operations for the
twelve and forty week periods ended October 7, 2000 and October 9, 1999, are
not necessarily indicative of the results to be expected for a full year.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 1,
2000.
Reporting Periods - The Company's quarterly reporting periods for fiscal
2000 are as follows: first quarter ended April 22, 2000 (sixteen weeks),
second quarter ended July 15, 2000 (twelve weeks), third quarter ended
October 7, 2000 (twelve weeks) and fourth quarter ending December 30, 2000
(twelve weeks).
Reclassifications - Certain reclassifications of prior period data have been
made to conform with the current period reporting.
2. BUSINESS ACQUISITIONS
On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin"),
for an aggregate purchase price of $253.7 million, excluding related fees
and expenses paid of approximately $3.0 million. The acquisition of Austin
was a cash transaction funded with approximately $235.0 million from
borrowings under Keebler's $700.0 million Senior Credit Facility Agreement
and the remainder from cash received on additional sales of accounts
receivable under Keebler's $125.0 million Receivables Purchase Agreement.
The acquisition of Austin by Keebler has been accounted for as a purchase.
The total purchase price and the fair value of liabilities assumed have been
allocated to the tangible and intangible assets of Austin based on
respective fair values. The acquisition has resulted in an estimated
unallocated excess purchase price over fair value of net assets acquired of
$168.5 million, which is being amortized on a straight-line basis over a
forty year period.
Results of operations for Austin from March 6, 2000, have been included in
the consolidated statements of operations. The following unaudited pro forma
information has been prepared assuming the acquisition had taken place on
the first day of the year reported. The unaudited pro forma information
includes adjustments for interest expense that would have been incurred
related to financing the purchase and amortization of the trademarks, trade
names, other intangibles and goodwill arising from the acquisition. The
unaudited pro forma consolidated results of operations are not necessarily
indicative of the results that would have been reported had the Austin
acquisition been effected on the first day of the year reported.
<TABLE>
<CAPTION>
Unaudited
(Amounts In Thousands Except Per Share Data) For the Forty Weeks Ended
------------------------------------
October 7, 2000 October 9, 1999
----------------- -----------------
<S> <C> <C>
Net sales .................................................. $ 3,344,961 $ 3,384,350
Net income (loss) .......................................... $ 33,303 $ (12,776)
Diluted net income (loss) per share ........................ $ .33 $ (.13)
</TABLE>
On January 26, 2000, Flowers completed the purchase of The Kroger Company's
Memphis, Tennessee bakery. The results of operations of this bakery from
January 26, 2000 are included in the consolidated statements of operations
and are not significantly different from the results that would have been
reported had the operations been included from January 2, 2000.
6
<PAGE> 7
3. PURCHASE COMMITMENTS AND FINANCIAL INSTRUMENTS
The Company enters into forward purchase commitments and derivative
financial instruments in order to manage its exposure to commodity price and
interest rate risk, and does not use them for trading purposes.
The Company's primary raw materials are flour, sugar, shortening, fruits and
dairy products. Amounts payable or receivable under the commodity agreements
which qualify as hedges are recognized as deferred gains or losses when the
positions are closed, and are charged or credited to cost of sales as the
related raw materials are used in production. To qualify as a hedge, a
commodity agreement must reduce the exposure of the Company to price risk
and must show a high correlation of changes in value with the value of the
hedged item. Assuming a ten percent decrease in market price, the fair value
of open contracts with a notional amount of $85.0 million at October 7, 2000
would be impacted by $(6.3) million.
Keebler uses interest rate swap agreements to effectively convert certain
fixed rate debt to a floating rate instrument and certain floating rate debt
to a fixed rate instrument. Amounts payable or receivable under the
agreements, calculated as the difference between the fixed and floating
rates multiplied by the notional amount, are recorded as adjustments to
interest expense, in accordance with hedge accounting. The fair value of the
interest rate swap agreements at October 7, 2000, with a notional amount of
$316.5 million, remains comparable to year-end. Additionally, interest rates
have not fluctuated materially from year end and therefore the sensitivity
analysis performed as of January 1, 2000 for interest rate swap agreements
remains a valid estimate.
4. DEBT
Long-term debt consisted of the following at October 7, 2000 and January 1,
2000, respectively:
<TABLE>
<CAPTION>
FLOWERS: Interest Rate Maturity October 7, 2000 January 1, 2000
-------------- ---------- --------------- ----------------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
Syndicated Loan Facility ..... 8.13% 1/29/2003 $ 440,000 $ 350,000
Senior Notes ................. 6.84% 1/5/2016 125,000 125,000
Debentures ................... 7.15% 4/15/2028 200,000 200,000
Capital Lease Obligations .... 8.07% 2000-2007 50,636 51,317
Other ........................ Various 2000-2014 20,014 73,436
---------- ----------
835,650 799,753
---------- ----------
KEEBLER:
Revolving Facility ........... 6.85% 9/28/2004 $ 170,000 $ --
Term Facility ................ 6.83% 9/28/2004 287,000 314,000
Senior Subordinated Notes .... 10.75% 7/1/2006 124,400 124,400
Other Senior Debt ............ Various 2001-2005 8,840 10,455
Capital Lease Obligations .... Various 2002-2042 6,524 7,588
---------- ----------
596,764 456,443
---------- ----------
Consolidated Debt: ........... 1,432,414 1,256,196
Less current maturities ... 58,309 47,566
---------- ----------
Total long term debt ...... $1,374,105 $1,208,630
========== ==========
</TABLE>
On March 6, 2000, Keebler utilized existing credit facilities in order to
finance the acquisition of Austin. The additional borrowings were under the
Revolving Facility, which was originally entered into on September 28, 1998.
At October 7, 2000, the outstanding balance on the Revolving Facility was
$170.0 million, with an available balance of $180.0 million.
7
<PAGE> 8
On March 30, 2000, FII amended its $500 million Syndicated Loan Facility and
the $80.0 million loan facility agreement relating to its distributor
program (the "Distributor Facility"). The amendments provided for increased
loan borrowing margins and facility fees and added and amended certain
financial covenants. The covenants currently in effect include, among
others: (i) a maximum leverage ratio of .65 to 1; (ii) an adjusted fixed
charges coverage ratio; (iii) minimum adjusted consolidated EBITDA at
specified levels for each fiscal quarter; (iv) a borrowing base covenant
requiring that FII's total indebtedness, measured quarterly, not exceed
specified percentages of the book value of accounts receivable, inventory,
property, plant and equipment and the fair market value of FII's interest in
Keebler; (v) a prohibition on acquisitions; (vi) a negative pledge on all
assets of the Company; (vii) a limit on capital expenditures of $40 million
for fiscal 2000 and $37.5 million per fiscal year thereafter; and (viii)
limits on cash dividends unless the Company would have, following payment
thereof, at least $15 million availability under the unused commitments and
borrowing base tests of the Loan Facility. The Company was in compliance
with all covenants under its Loan Facility as in effect on October 7, 2000.
5. FACILITY CLOSING COSTS AND SEVERANCE
NON-RECURRING CHARGES
In May of 1999, Keebler closed its manufacturing facility in Sayreville, New
Jersey, which resulted in a pre-tax restructuring and impairment charge of
$69.2 million which was subsequently reduced by $2.9 million in the fourth
quarter of 1999. The reduction was due to lower than expected severance
costs and earlier than expected disposal of the facility. In the second
quarter of fiscal 2000, the charge was reduced by an adjustment of $1.0
million. The additional adjustment resulted from lower-than expected
severance costs and the earlier-than-expected sale of the facility. Only
costs related to the settlement of workers compensation claims and health
and welfare payments are expected to extend beyond the year ending December
30, 2000.
During the fourth quarter of fiscal 1998, the Board of Directors of the
Company approved a plan to realign production and distribution at Flowers
Bakeries and Mrs. Smith's Bakeries in order to enhance efficiency. The
Company recorded a pre-tax non-recurring charge of $68.3 million ($32.2
million, $32.3 million and $3.8 million for Flowers Bakeries, Mrs. Smith's
Bakeries and Keebler, respectively). In the 12 weeks ended October 7, 2000,
Flowers Bakeries reported an adjustment to this previously recorded
non-recurring charge of an additional $1.4 million. This adjustment relates
to Flowers Bakeries decision to reopen a closed bakery located in Norfolk,
Virginia in order to meet the demands of its growing foodservice business.
This bakery will be opened in early 2001. The remaining exit costs include
ongoing costs such as guard service, utilities and property taxes of closed
facilities.
Activity with respect to the reserve for non-recurring charges was as
follows (amounts in thousands):
<TABLE>
<CAPTION>
01/01/2000 Prov/Adj Spending 10/07/2000
----------------------------------------------
<S> <C> <C> <C> <C>
Noncancelable lease obligations
and other facility closing costs $2,831 $(1,577) $ (958) $ 296
Severance 2,037 (140) (1,196) 701
Other 2,462 700 (55) 3,107
------ ------- ------- ------
Total $7,330 $(1,017) $(2,209) $4,104
====== ======= ======= ======
</TABLE>
PURCHASE ACCOUNTING RESERVES
As part of accounting for the acquisition of Austin in the first quarter of
2000, Keebler recognized estimated costs pursuant to a plan to exit certain
activities of the acquired company. These exit costs, for which there is no
future economic benefit, were provided for in the allocation of the purchase
price and totaled $14.5 million. At October 7, 2000, approximately 75
non-union employees had been terminated, with the remaining terminations
scheduled to occur by February 2001. Spending on exit costs is expected to
be substantially complete before the end of 2001, with primarily health and
welfare payments extending beyond that time frame.
During fiscal 1998, as part of accounting for the acquisition of President,
Keebler recognized costs pursuant to a plan to exit certain activities and
operations of President. Exit costs related to the plan, totaling $12.8
million, were provided for in the allocation of the purchase price.
Management's exit plan is expected to be substantially complete before the
end of fiscal 2000 with only noncancelable lease obligations to be paid over
the next six years, concluding in fiscal 2006.
As part of the acquisition of Mrs. Smith's Inc. in fiscal 1996, Flowers
recorded a purchase accounting reserve of $37.1 million in order to realign
production and distribution at Mrs. Smith's Bakeries. With the exception of
noncancelable lease obligations and building maintenance costs that continue
through fiscal 2006, this plan was substantially complete as of the end of
fiscal 1998.
8
<PAGE> 9
As part of INFLO's acquisition of Keebler and Keebler's subsequent
acquisition of Sunshine in 1996, Keebler's management team adopted and began
executing a plan to reduce costs and inefficiencies. Certain exit costs
totaling $77.4 million were provided for in the allocation of the purchase
price of both the Keebler and Sunshine acquisitions. During the quarter
ended July 15, 2000, Keebler adjusted accruals previously established by
reducing goodwill and other intangibles by $0.5 million and $1.1 million,
respectively, to recognize exit costs that are now expected to be less than
initially anticipated. The exit plan was substantially complete at January
2, 2000 with only noncancelable lease obligations continuing through 2006.
Activity with respect to the purchase accounting reserves was as follows
(amounts in thousands):
<TABLE>
<CAPTION>
MRS SMITH'S BAKERIES 01/01/2000 Prov/Adj Spending 10/07/2000
------------------------------------------------------
<S> <C> <C> <C> <C>
Noncancelable lease obligations
and other facility closing costs $20,186 $ (2,776) $17,410
Other 2,476 (542) 1,934
------------------------------------------------------
Total 22,662 0 (3,318) 19,344
------------------------------------------------------
KEEBLER FOODS COMPANY
------------------------------------------------------
Noncancelable lease obligations
and other facility closing costs $ 7,829 $ (500) $ (1,430) $ 5,899
Severance 24 24
------------------------------------------------------
Total 7,853 (500) (1,430) 5,923
------------------------------------------------------
SUNSHINE BISCUITS, INC.
------------------------------------------------------
Noncancelable lease obligations
and other facility closing costs $ 1,962 $ (1,116) $ (689) $ 157
Severance 63 (17) 46
------------------------------------------------------
Total 2,025 (1,116) (706) 203
------------------------------------------------------
PRESIDENT INTERNATIONAL, INC.
------------------------------------------------------
Noncancelable lease obligations
and other facility closing costs $ 4,596 $ (569) $ 4,027
Severance 2,829 (2,235) 594
Other 10 (10) 0
------------------------------------------------------
Total 7,435 0 (2,814) 4,621
------------------------------------------------------
AUSTIN QUALITY FOODS
------------------------------------------------------
Noncancelable lease obligations
and other facility closing costs $ 479 $ (408) $ 71
Severance 13,979 (8,398) 5,581
Other 28 (5) 23
------------------------------------------------------
Total 0 14,486 (8,811) 5,675
------------------------------------------------------
GRAND TOTAL $39,975 $ 12,870 $(17,079) $35,766
======================================================
</TABLE>
6. SEGMENT REPORTING
The Company has three reportable segments: Flowers Bakeries, Mrs. Smith's
Bakeries and Keebler. Flowers Bakeries produces fresh breads and rolls,
Mrs. Smith's Bakeries produces fresh and frozen baked desserts, snacks,
breads, and rolls, and Keebler produces a full line of cookies and
crackers. The segments are managed as strategic business units due to their
distinct production processes and marketing strategies.
The Company evaluates each segment's performance based on income or loss
before interest and income taxes, excluding corporate and other unallocated
expenses and non-recurring charges. Information regarding the operations in
these reportable segments is as follows (amounts in thousands):
9
<PAGE> 10
<TABLE>
<CAPTION>
For the Twelve Weeks Ended For the Forty Weeks Ended
-------------------------------- --------------------------------
October 7, 2000 October 9, 1999 October 7, 2000 October 9, 1999
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES:
Flowers Bakeries $ 233,571 $ 223,459 $ 782,257 $ 743,080
Mrs. Smith's Bakeries 161,740 157,892 472,032 476,900
Keebler 642,203 615,844 2,111,635 2,055,724
Elimination (1) (14,547) (14,531) (48,458) (53,547)
----------- ----------- ----------- -----------
$ 1,022,967 $ 982,664 $ 3,317,466 $ 3,222,157
=========== =========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Flowers Bakeries $ 9,238 $ 7,726 $ 28,884 $ 24,866
Mrs. Smith's Bakeries 6,699 4,908 21,650 14,129
Keebler 23,114 19,480 72,547 62,651
FII (2) 1,809 1,867 6,064 5,594
----------- ----------- ----------- -----------
$ 40,860 $ 33,981 $ 129,145 $ 107,240
=========== =========== =========== ===========
INCOME (LOSS) FROM OPERATIONS:
Flowers Bakeries $ 10,905 $ 13,958 $ 55,598 $ 53,237
Mrs. Smith's Bakeries (5,014) (33,558) (30,489) (50,706)
Keebler 75,645 62,960 235,872 182,337
FII (2) (6,189) (11,720) (23,223) (26,682)
Insurance proceeds 3,105 0 4,774 0
Non-recurring (credit) charge 1,428 0 2,424 (69,208)
----------- ----------- ----------- -----------
$ 79,880 $ 31,640 $ 244,956 $ 88,978
=========== =========== =========== ===========
</TABLE>
(1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries to
Flowers Bakeries which are transferred at cost
(2) Unallocated corporate expenses
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
established new rules for accounting for derivative instruments and hedging
activities. The statement requires that all derivatives be recognized as
either assets or liabilities in the balance sheet and that the instruments
be measured at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This standard is effective for the Company on December 31,
2000, the first day of fiscal year 2001. In accordance with the transition
provisions of SFAS 133, upon adoption, the Company will record a cumulative
effect-type adjustment to accumulated comprehensive income to recognize at
fair value all derivatives, and related losses deferred on the balance
sheet, designated as cash flow hedging instruments. The Company does not
believe the adoption of SFAS 133 will have a material impact on the results
of operations. At October 7, 2000, the fair value of all derivative
instruments designated as cash flow hedging instruments was $(2.0) million,
which would have resulted in a net liability. Related losses deferred on the
balance sheet at October 7, 2000 were $6.2 million. The fair value of the
derivative instruments and the related deferred losses could be materially
different at the adoption date, December 31, 2000.
10
<PAGE> 11
On May 18, 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached consensus on Issue No. 00-14 "Accounting
for Certain Sales Incentives." This issue addresses the recognition,
measurement, and income statement classification of sales incentives offered
by vendors (including manufacturers) that have the effect of reducing the
price of a product or service to a customer at the point of sale. For cash
sales incentives within the scope of this issue, costs are generally
recognized at the date on which the related revenue is recorded by the
vendor and are to be classified as a reduction of revenue. For non-cash
sales incentives, such as package inserts, costs are to be classified within
cost of sales. This issue is effective for the second quarter of fiscal
2001. Management has assessed the impact of this guidance and determined
that adoption will not result in a material reclassification between net
sales and selling, general, and administrative expense. Net earnings would
not be affected.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to apply the accounting and disclosures described in this bulletin
in the fourth quarter of fiscal 2000. Management has assessed the impact of
SAB 101 and determined that issuance will have no material impact on the
Company's sales or net earnings.
8. SUBSEQUENT EVENTS
On October 26, 2000, FII and Keebler announced that an agreement was reached
for a series of transactions that will result in the sale of Keebler Foods
Company to Kellogg Company and the spin-off to FII shareholders of a new
company, Flowers Foods, Inc. FII agreed to sell its controlling stake in
Keebler to Kellogg for $42.00 per share. Simultaneously with the sale of the
Keebler controlling stake, FII will spin-off to its shareholders the new
company, Flowers Foods, Inc., which is anticipated to trade on the New York
Stock Exchange under the original symbol FLO. Flowers Foods, Inc. will
include the Flowers Bakeries and Mrs. Smith's Bakeries businesses and
approximately $250 million in debt. After deducting certain liabilities at
FII, the proceeds from the transaction will be paid to FII's shareholders in
cash. In addition to these proceeds, each FII shareholder will receive
shares representing a proportionate interest in Flowers Foods. The new
company will be headquartered in Thomasville, Georgia and will be led by the
current FII management team.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Matters Affecting Analysis:
The following discussion of the financial condition and results of operations
for the twelve and forty weeks ended October 7, 2000 should be read in
conjunction with FII's annual report on Form 10-K for the fiscal year ended
January 1, 2000, filed with the Securities and Exchange Commission on March 30,
2000.
The Company maintains insurance for property damage, mechanical breakdown,
product liability, product contamination and business interruption applicable to
its production facilities. During fiscal 1999, Mrs. Smith's Bakeries incurred
substantial costs related to mechanical breakdown and product contamination at
certain plants. Mrs. Smith's Bakeries filed claims under the Company's insurance
policies for a portion of these costs that it believes to be insured. During the
quarter ended July 15, 2000, Mrs. Smith's Bakeries recovered insurance proceeds
of $1.7 million related to product contamination claims. In the quarter ended
October 7, 2000, Mrs. Smith's Bakeries recovered additional insurance proceeds
of $3.1 million related to mechanical breakdown, product contamination and
payments under business interruption coverage. Mrs. Smith's Bakeries continues
to pursue recovery under various insurance policies for covered losses. The
claims process is lengthy and its outcome cannot be predicted with certainty. If
future insurance proceeds are recovered, they will be reported as a separate
line item, net of claims preparation expenses.
During the fourth quarter of fiscal 1998, Flowers Industries, Inc. recorded a
pre-tax non-recurring charge of $68.3 million, of which $32.2 million was
related to the operations of Flowers Bakeries. In the twelve weeks ended October
7, 2000, Flowers Bakeries reported an adjustment to this previously recorded
non-recurring charge of $1.4 million. This adjustment relates to Flowers
Bakeries decision to reopen a closed bakery located in Norfolk, Virginia in
order to meet the demands of our growing foodservice business. This bakery will
be operational in early 2001.
During the first quarter of fiscal 2000, Flowers completed its acquisition of
The Kroger Company's bakery in Memphis, Tennessee (the "Kroger acquisition") and
Keebler completed its acquisition of Austin Specialty Foods, Inc (the "Austin
acquisition"). On January 4, 2000 Keebler sold its value brand business, which
resulted in a pretax gain of $5.7 million in the first quarter. On a
consolidated basis, after tax and minority interest, the gain on the sale of the
value brands business of $1.8 million is included in the results for the forty
weeks ended October 7, 2000. Additionally, operating results of the value brands
business are not included in the twelve or forty week period ended October 7,
2000, however the comparable twelve and forty weeks ended October 9, 1999 do
include the operating results of the value brands business.
11
<PAGE> 12
During the second quarter of fiscal 1999, the Board of Directors of Keebler
approved a plan to close its Sayreville, New Jersey, production facility due to
excess capacity within Keebler's 18 plant production network. As a result of
this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million,
or $.25 per share after tax and minority interest. During the second quarter of
fiscal 2000, this facility was sold, which resulted in an adjustment to the
previous charge of approximately $1.0 million for carrying costs and other
facility expenses which were less than had originally been estimated. The sale
of the Sayreville facility resulted in a pretax gain of $2.0 million during the
quarter. On a consolidated basis, after tax and minority interest, the gain on
this transaction was $0.7 million.
Results of Operations:
Results of operations, expressed as a percentage of sales, for the twelve and
forty weeks ended October 7, 2000 and October 9, 1999, are set forth below:
<TABLE>
<CAPTION>
For the Twelve Weeks Ended For the Forty Weeks Ended
---------------------------------- ----------------------------------
October 7, 2000 October 9, 1999 October 7, 2000 October 9, 1999
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales 100.00% 100.00% 100.00% 100.00%
Gross margin 55.00% 50.01% 54.63% 51.95%
Selling, marketing, and administrative expenses 43.64% 43.34% 43.57% 43.71%
Depreciation and amortization 3.99% 3.46% 3.89% 3.33%
Insurance proceeds (0.30)% 0.00% (0.14)% 0.00%
Non-recurring charge (0.14)% 0.00% (0.07)% 2.15%
Interest 2.60% 1.87% 2.60% 1.94%
Income (loss) before income taxes and minority interest 5.21% 1.35% 4.78% 0.82%
Income taxes 2.10% 0.81% 2.05% 0.59%
Net income (loss) 1.27% (0.93)% 1.06% (0.37)%
</TABLE>
CONSOLIDATED RESULTS
TWELVE WEEKS ENDED OCTOBER 7, 2000 COMPARED TO TWELVE WEEKS ENDED OCTOBER 9,
1999
Sales. For the twelve weeks ended October 7, 2000, sales were $1,023.0 million,
or 4.1% higher than sales for the comparable period in the prior year, which
were $982.7 million. Sales increased 4.3%, 4.5% and 2.7% at Keebler, Flowers
Bakeries and Mrs. Smith's Bakeries, respectively, from the third quarter of
fiscal 1999. Additional sales analysis is included under the discussion of
business segments.
Gross Margin. Gross margin for the third quarter of fiscal 2000 was $562.6
million, or 14.5% higher than gross margin reported a year ago of $491.5
million. As a percent of sales, gross margin was 55.0% for the third quarter of
fiscal 2000, compared to 50.0% for the third quarter of fiscal 1999. Keebler
improved margins to 61.7% during the period, up from 58.7% during the same
period last year. Flowers Bakeries' margins improved to 54.7% from 52.9% during
the third quarter of fiscal 1999. Mrs. Smith's margins increased substantially
to 27.6% in the third quarter of fiscal 2000, as compared to margins of 8.9% in
the same period a year ago. Mrs. Smith's margins were negatively effected in
fiscal 1999 by mechanical breakdown and product contamination associated with
the production realignment project.
Selling, Marketing and Administrative Expenses. During the third quarter of
fiscal 2000, selling, marketing and administrative expenses were $446.4 million,
or 43.6% of sales as compared to $425.8 million, or 43.3% of sales reported a
year ago. Flowers Bakeries selling, marketing and administrative expenses
increased to 46.0% of sales during the third quarter of fiscal 2000 versus 43.2%
in the same period a year ago. Keebler's selling, marketing and administrative
expenses were 46.3% of sales in the third quarter of fiscal 2000 as compared to
45.4% of sales in the third quarter of fiscal 1999. Mrs. Smith's Bakeries'
selling, marketing and administrative expenses improved as a percent of sales to
26.4% in the third quarter of fiscal 2000 from 28.9% in the same period last
year. During fiscal 1999, Mrs. Smith's incurred higher than expected
distribution costs due to the production realignment as well as increased
advertising and promotions. These excessive costs were not present in the
current quarter.
Depreciation and Amortization. Depreciation and amortization expense was $40.9
million for the third quarter of fiscal 2000, an increase of 20.3% over the
corresponding period in the prior year, which was $34.0 million. This increase
is due primarily to acquisitions and capital expenditures.
12
<PAGE> 13
Proceeds from Insurance Policies. The Company maintains insurance for property
damage, mechanical breakdown, product liability, product contamination and
business interruption applicable to its production facilities. During fiscal
1999, Mrs. Smith's incurred substantial costs and expenses related to mechanical
breakdown and product contamination at certain plants. Mrs. Smith's filed claims
under the Company's insurance policies for a portion of these costs that it
believes to be insured. In the quarter ended October 7, 2000, Mrs. Smith's
Bakeries recovered insurance proceeds of $3.1 million related to mechanical
breakdown, product contamination and business interruption coverage. Mrs.
Smith's continues to pursue recovery under various insurance policies for
covered losses. The claims process is lengthy and its outcome cannot be
predicted with certainty. If future insurance proceeds are recovered, they will
be reported as a separate line item, net of claims preparation expenses.
Non-recurring Charge. During the fourth quarter of fiscal 1998, Flowers
Industries, Inc. recorded a pre-tax non-recurring charge of $68.3 million of
which $32.2 million was related to operations of Flowers Bakeries. In the twelve
weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this
previously recorded non-recurring charge of $1.4 million. This adjustment
relates to Flowers Bakeries decision to reopen a closed bakery located in
Norfolk, Virginia in order to meet the demands of our growing foodservice
business. This bakery will be operational in early 2001.
Interest Expense. For the third quarter of fiscal 2000, net interest expense was
$26.6 million, an increase of $8.2 million or 44.6% over the corresponding
period in the prior year, which was $18.4 million. Flowers' interest expense
increased $5.2 million to $16.5 million in the third quarter of fiscal 2000 from
$11.3 million in the third quarter of fiscal 1999. Keebler's interest expense
increased $3.0 million to $10.1 million in the third quarter of fiscal 2000 as
compared to $7.1 million in the same period of fiscal 1999. The increases are
due to increased debt levels resulting from acquisitions, capital improvements,
funding of operating losses at Mrs. Smith's Bakeries and higher interest rates
in the current period as compared to the same period last year.
Income (Loss) Before Income Taxes and Minority Interest. Income before income
taxes and minority interest for the third quarter of fiscal 2000 was $53.2
million, an increase of $39.9 million from $13.3 million reported in the third
quarter of fiscal 1999. After adjusting third quarter of each year for the
non-recurring items and insurance proceeds, income before income taxes and
minority interest increased $35.4 million in the third quarter of fiscal 2000.
These results are reflective of an increase in income from operations of $12.7
million at Keebler, a decrease in income from operations at Flowers Bakeries of
$3.1 million and a reduction in the net loss at Mrs. Smith's Bakeries of $28.5
million. These increases in operating income at the segment level were partially
offset by increased interest cost noted above and unallocated corporate expenses
that decreased by $5.5 million from third quarter of fiscal 1999.
Income Taxes. Income taxes during the third quarter of fiscal 2000 were provided
at an estimated effective rate of 40.3%. The effective rate differs from the
statutory rate due to nondeductible expenses, principally amortization of
intangibles, including trademarks, trade names, other intangibles and goodwill.
Net Income (Loss). Net income for the third quarter of fiscal 2000 was $13.0
million, an increase of $22.1 million from the net loss of $9.1 million reported
a year ago. This is reflective of the items noted above. A further discussion of
the comparative results of operations by business segment follows.
OPERATING RESULTS BY BUSINESS SEGMENT
FLOWERS BAKERIES
<TABLE>
<CAPTION>
FOR THE TWELVE WEEKS ENDED
-----------------------------------------------------------------------------------------
OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%)
--------------- ---------- --------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $233,571 100.0% $223,459 100.0% $10,112 4.5%
Gross margin $127,662 54.7% $118,278 52.9% $ 9,384 7.9%
Selling, marketing, and administrative $107,519 46.0% $ 96,594 43.2% $10,925 11.3%
Depreciation and amortization $ 9,238 4.0% $ 7,726 3.5% $ 1,512 19.6%
Income from operations (EBIT) $ 10,905 4.7% $ 13,958 6.2% $(3,053) -21.9%
</TABLE>
Sales. Sales at Flowers Bakeries for the third quarter of fiscal 2000 were
$233.6 million, an increase of 4.5% over sales of $223.5 million reported during
the same period a year ago. Acquisitions accounted for 3.1% of this increase.
After adjusting for the effect of acquisitions, the overall sales increase of
1.4% is primarily attributable to a shift in product mix toward higher priced
branded products.
13
<PAGE> 14
Gross Margin. Flowers Bakeries' gross margin improved to 54.7% of sales for the
third quarter of fiscal 2000, compared to 52.9% of sales for the comparable
period in the prior year. Lower ingredient cost and improved pricing was
partially offset by higher labor, energy and packaging costs.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses increased to $107.5 million as compared to $96.6 million
in the third quarter of fiscal 1999. These expenses increased to 46.0% of sales
during the third quarter of fiscal 2000 from 43.2% in the third quarter of
fiscal 1999. The increase in absolute terms as well as a percent of sales was
composed of increases in labor, rent and energy costs, as well as integration
costs associated with the Kroger market expansion. These increases were
partially offset by decreases in advertising expenditures.
Depreciation and Amortization. Depreciation and amortization increased to $9.2
million in the third quarter of fiscal 2000 from $7.7 million in the same period
last year. This increase is primarily attributable to capital expenditures and
increased amortization resulting from the Kroger acquisition.
Operating Income. The factors noted above resulted in operating income of $10.9
million in the twelve weeks ended October 7, 2000, a decrease of $3.1 million
from operating income of $14.0 million reported during the third quarter of
fiscal 1999.
MRS. SMITH'S BAKERIES
<TABLE>
<CAPTION>
FOR THE TWELVE WEEKS ENDED
---------------------------------------------------------------------------------------
OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%)
--------------- ---------- --------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $147,193 100.0% $143,361 100.0% $ 3,832 2.7%
Gross margin $ 40,611 27.6% $ 12,792 8.9% $27,819 217.5%
Selling, marketing, and administrative $ 38,926 26.4% $ 41,442 28.9% $(2,516) -6.1%
Depreciation and amortization $ 6,699 4.6% $ 4,908 3.4% $ 1,791 36.5%
Loss from operations (EBIT) $ (5,014) -3.4% $(33,558) -23.4% $28,544 -85.1%
</TABLE>
Sales. Sales at Mrs. Smith's Bakeries, excluding intersegment sales of $14.5
million, were $147.2 million in the third quarter of fiscal 2000 as compared to
$143.4 million for the comparable period in the prior year, an increase of $3.8
million or 2.7%. Overall volumes decreased 3.0% from the same quarter last year,
however average case price increased 5.9% which is due to both a price increase
and favorable mix shift toward higher priced items. Retail sales were up
approximately 11.7% from prior years, primarily due to favorable mix and
increased volume. An increase in foodservice sales of 9.4% was driven by
favorable pricing trends and slight volume increases. Snack and deli sales
decreased by 1.4% and 20.2%, respectively. The small decrease in snack sales was
a combination of falling volumes partially offset by a shift in product mix
towards higher priced products. The drop in deli sales was primarily volume
driven. Mrs. Smith's sales are highly seasonal with the bulk of retail sales
occurring in the holiday season during our fourth quarter. Management believes
that our sales will continue to show growth next quarter as compared to the
fourth quarter of last year.
Gross Margin. Mrs. Smith's Bakeries' gross margin for the third quarter of
fiscal 2000 was 27.6% of sales compared to 8.9% reported a year ago. Prior year
margins were unusually depressed due to costs associated with the manufacturing
and production realignment that was in progress at the time. Current margins,
while significantly improved, continued to suffer as Mrs. Smith's Bakeries sells
inventory produced earlier in the year at higher operating costs.
Selling, Marketing and Administrative Expenses. Mrs. Smith's Bakeries' selling,
marketing and administrative expenses were $38.9 million or 26.4% of sales
during the third quarter of fiscal 2000 as compared to $41.4 million or 28.9% of
sales during the same period a year ago. Distribution costs during the quarter
were 1.7% lower than the same quarter last year and 11.2% better on a per case
shipped basis. Fiscal 1999 distribution expenses were higher due to production
and manufacturing realignment that caused unusually high freight expenses.
Advertising and marketing expenses were level with prior years and
administrative expenses were reduced approximately 5.4% when compared to the
third quarter of fiscal 1999.
Depreciation and Amortization. Depreciation and amortization for Mrs. Smith's
Bakeries in the third quarter of fiscal 2000 was $6.7 million as compared to
$4.9 million in the same period of last year. This increase is due to
substantial capital expenditures associated with the production realignment that
was completed earlier this year.
14
<PAGE> 15
Operating Loss. Mrs. Smith's Bakeries experienced an operating loss of $5.0
million for the third quarter of fiscal 2000 excluding proceeds from insurance
claims of $3.1 million, as compared to an operating loss of $33.6 million in the
third quarter of fiscal 1999. The third quarter of fiscal 1999 included
substantial cost due to delays and mechanical breakdowns associated with the
production realignment plan. While Mrs. Smith's Bakeries has not fully
recovered, the third quarter of fiscal 2000 showed substantial improvement. With
the production realignment completed, Mrs. Smith's expects to improve operating
results in the fourth quarter of fiscal 2000 and into fiscal 2001.
KEEBLER
<TABLE>
<CAPTION>
FOR THE TWELVE WEEKS ENDED
-------------------------------------------------------------------------------------
OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%)
--------------- ---------- --------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $642,203 100.0% $615,844 100.0% $26,359 4.3%
Gross margin $396,041 61.7% $361,755 58.7% $34,286 9.5%
Selling, marketing, and administrative $297,282 46.3% $279,315 45.4% $17,967 6.4%
Depreciation and amortization $ 23,114 3.6% $ 19,480 3.2% $ 3,634 18.7%
Income from operations (EBIT) $ 75,645 11.8% $ 62,960 10.2% $12,685 20.1%
</TABLE>
Sales. Sales at Keebler for the third quarter of fiscal 2000 increased $26.4
million or 4.3% to $642.2 million from $615.8 million reported a year ago.
Excluding the revenues of Austin of $46.2 million and adjusting for the sales
related to the value brands business which was sold in the first quarter of
fiscal 2000, net sales declined $11.7 million and 1.9%. Sales increases in core
branded channels was more than offset by volume shortfalls in private label,
contract packing and low priced retail products.
Gross Margin. Gross margin at Keebler was $396.0 million and 61.7% of sales
during the third quarter of fiscal 2000 as compared to $361.8 million and 58.7%
of sales during the same period a year ago. The improved margins were mainly
attributable to improved productivity and cost savings as well as lower raw
material costs. The increase in gross margin is also reflective of the growth in
Keebler's branded business and the sale of its value brands business during the
first quarter resulting in a product mix shift toward higher margin branded
products.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses were $297.3 million and 46.3% of sales in the third
quarter of fiscal 2000 as compared to $279.3 million and 45.4% in the third
quarter of fiscal 1999. Expenses related to Austin that were not present in
prior year accounted for 0.5% of the increase. Excluding Austin, additional
branded volume contributed to increases in selling expenses. Rising fuel cost
and higher maintenance cost due to expansion and relocation of a major
distribution center negatively effected distribution costs. Marketing expenses
as a percent of sales were flat as compared to prior year.
Depreciation and Amortization. Depreciation and amortization in the third
quarter of fiscal 2000 was $23.1 million as compared to $19.5 million in the
same period of last year. Austin accounted for $0.3 million of this increase due
to adjustments made during the quarter.
Operating Income. Operating income, excluding nonrecurring items, increased
$12.7 million to $75.6 million for the third quarter of fiscal 2000 from $63.0
million, excluding nonrecurring charges, during the third quarter of fiscal
1999. The increase is reflective of increased sales of higher margin, branded
products and efficiencies gained in production realignments.
FORTY WEEKS ENDED OCTOBER 7, 2000 COMPARED TO FORTY WEEKS ENDED OCTOBER 9, 1999
Sales. For the forty weeks ended October 7, 2000, sales were $3,317.5 million,
or 3.0% higher than sales for the comparable period in the prior year, which
were $3,222.2 million. Sales during the first three quarters of fiscal 2000
increased 5.3% at Flowers Bakeries and 2.7% at Keebler over their respective
sales during the first three quarters of fiscal 1999. Mrs. Smith's Bakeries'
sales increased 0.1% over the prior year. Additional sales analysis is included
under the discussion of business segments.
Gross Margin. For the forty weeks ended October 7, 2000, gross margin was
$1,812.2 million, an increase of $138.4 million or 8.3% higher than gross margin
reported for the same period last year of $1,673.8 million. As a percent of
sales, gross margin was 54.6% as compared to 52.0% for the same period last
year. Keebler improved margins to 60.1% during the period up from 57.4% during
the same period last year and Flowers Bakeries' margins improved to 54.7% from
53.0% in the prior year. Gross margins at Mrs. Smith's Bakeries improved to
28.1% from 23.8% in the same period a year ago.
15
<PAGE> 16
Selling, Marketing and Administrative Expenses. For the forty weeks ended
October 7, 2000, selling, marketing and administrative expenses were $1,445.3
million, or 43.6% of sales as compared to $1,408.4 million, or 43.7% of sales
reported a year ago. Flowers Bakeries' selling, marketing and administrative
expenses increased to 43.9% of sales as compared to 42.5% during the first three
quarters of fiscal 1999. Mrs. Smith's Bakeries selling, marketing and
administrative expenses decreased to 30.1% of sales as compared to 32.4% in the
same period a year ago. Keebler's selling, marketing and administrative expenses
were 45.5% percent of sales for both the forty-week periods ended October 7,
2000 and October 9, 1999.
Depreciation and Amortization. Depreciation and amortization expense was $129.1
million for the forty weeks ended October 7, 2000, an increase of 20.4% over the
corresponding period in the prior year, which was $107.2 million. This increase
is due primarily to capital expenditures and acquisitions.
Proceeds from Insurance Policies. The Company maintains insurance for property
damage, mechanical breakdown, product liability, product contamination and
business interruption applicable to its production facilities. During fiscal
1999, Mrs. Smith's incurred substantial costs and expenses related to mechanical
breakdown and product contamination at certain plants. Mrs. Smith's filed claims
under the Company's insurance policies for a portion of these costs that it
believes to be insured. During the forty weeks ended October 7, 2000, Mrs.
Smith's recovered insurance proceeds of $4.8 million related to mechanical
breakdown, product contamination and business interruption coverage. Mrs.
Smith's continues to pursue recovery under various insurance policies for losses
sustained. The claims process is lengthy and its outcome cannot be predicted
with certainty. If future insurance proceeds are recovered, they will be
reported as a separate line item, net of claims preparation expenses.
Non-recurring Charge. During the fourth quarter of fiscal 1998, Flowers
Industries, Inc. recorded a pre-tax non-recurring charge of $68.3 million of
which $32.2 million was related to operations of Flowers Bakeries. In the twelve
weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this
previously recorded non-recurring charge of $1.4 million. This adjustment
relates to Flowers Bakeries' decision to reopen a closed bakery located in
Norfolk, Virginia in order to meet the demands of our growing foodservice
business. This bakery will be operational in early 2001. During the second
quarter of fiscal 1999, Keebler recorded a non-recurring charge of $69.2
million. Adjustments to Keebler's reserve totaling $1.0 million were made during
the second quarter of fiscal 2000 to reflect decreased carrying cost associated
with the Sayreville, New Jersey facility that was sold during the period. See
discussion under the heading "Matters Affecting Analysis" above.
Interest Expense. For the forty weeks ended October 7, 2000, net interest
expense was $86.2 million, an increase of 38.1% over the corresponding period in
the prior year, which was $62.4 million. Flowers' interest expense increased
$18.1 million to $52.0 million in the forty week period ended October 7, 2000
from $33.9 million in the same period last year. The increase is due to
increased debt levels resulting from acquisitions, capital improvements, funding
of operating losses at Mrs. Smith's Bakeries and higher interest rates in the
current period as compared to the same period last year. Keebler's interest
expense increased $5.7 million to $34.2 million in the first three quarters of
fiscal 2000 as compared to $28.5 million in the same period of fiscal 1999.
Income Before Income Taxes and Minority Interest. Income before income taxes and
minority interest for the forty weeks ended October 7, 2000, was $158.7 million,
an increase of $132.1 million over income before income taxes and minority
interest of $26.6 million reported in the forty weeks ended October 9, 1999.
After adjusting income for the non-recurring charges and insurance proceeds,
income before income taxes and minority interest increased $55.7 million in the
forty weeks ended October 7, 2000. These results are reflective of increases in
income from operations of $53.5 million at Keebler and $2.4 million at Flowers
Bakeries, a reduction in the net loss at Mrs. Smith's Bakeries of $20.2 million
and increased interest expense of $23.8 million. Additionally, unallocated
corporate expenses decreased $3.5 million from the forty weeks ended October 9,
1999.
Income Taxes. Income taxes for the forty weeks ended October 7, 2000, were
provided at an estimated effective rate of 42.9%. The effective rate differs
from the statutory rate due to nondeductible expenses, principally amortization
of intangibles, including trademarks, trade names, other intangibles and
goodwill.
Net Income (Loss). Net income for the forty weeks ended October 7, 2000 was
$35.2 million, an increase of $47.2 million over the net loss of $12.0 million
reported a year ago. This is reflective of the items noted above. A further
discussion of the comparative results of operations by business segment follows.
OPERATING RESULTS BY BUSINESS SEGMENT
16
<PAGE> 17
FLOWERS BAKERIES
<TABLE>
<CAPTION>
FOR THE FORTY WEEKS ENDED
----------------------------------------------------------------------------------------
OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%)
--------------- ---------- --------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $782,257 100.0% $743,080 100.0% $39,177 5.3%
Gross margin $427,885 54.7% $393,848 53.0% $34,037 8.6%
Selling, marketing, and administrative $343,403 43.9% $315,745 42.5% $27,658 8.8%
Depreciation and amortization $ 28,884 3.7% $ 24,866 3.3% $ 4,018 16.2%
Income from operations (EBIT) $ 55,598 7.1% $ 53,237 7.2% $ 2,361 4.4%
</TABLE>
Sales. Sales at Flowers Bakeries for the forty weeks ended October 7, 2000 were
$782.3 million, an increase of 5.3% over sales of $743.1 million reported a year
ago. After adjusting for the increase related to the Kroger acquisition of 3.7%,
the remaining 1.6% increase from the prior year was primarily attributable to
increased pricing and a shift in product mix toward higher priced branded
products as well as lower ingredient costs.
Gross Margin. Flowers Bakeries' gross margin improved to 54.7% of sales for the
forty weeks ended October 7, 2000, compared to 53.0% of sales for the comparable
period in the prior year. Improved pricing and production efficiencies primarily
contributed to this increase.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses for the forty weeks ended October 7, 2000, increased to
$343.4 million as compared to $315.7 million for the comparable period in the
prior year. As a percent of sales, these expenses increased to 43.9% in the
first three quarters of fiscal 2000 from 42.5% in same period a year ago. The
increase was composed of increases in labor, rent and energy costs, as well as
start-up costs associated with the Kroger acquisition. These increases were
partially offset by decreases in advertising costs.
Depreciation and Amortization. Depreciation and amortization increased to $28.9
million in the forty week period ended October 7, 2000 from $24.9 million in the
same period last year. This increase is primarily attributable to capital
expenditures and increased amortization due to the Kroger acquisition.
Operating Income. Operating income, excluding adjustments to non-recurring
charges, increased 4.4% to $55.6 million for the forty weeks ended October 7,
2000 from $53.2 million during the comparable period last year. This increase is
reflective of the increasing margins and continued cost control measures
implemented at Flowers Bakeries.
MRS. SMITH'S BAKERIES
<TABLE>
<CAPTION>
FOR THE FORTY WEEKS ENDED
-----------------------------------------------------------------------------------------
OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%)
--------------- ---------- --------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $423,574 100.0% $423,353 100.0% $ 221 0.1%
Gross margin $118,864 28.1% $100,769 23.8% $18,095 18.0%
Selling, marketing, and administrative $127,703 30.1% $137,346 32.4% $(9,643) -7.0%
Depreciation and amortization $ 21,650 5.1% $ 14,129 3.3% $ 7,521 53.2%
Loss from operations (EBIT) $(30,489) -7.2% $(50,706) -12.0% $20,217 -39.9%
</TABLE>
Sales. Sales at Mrs. Smith's Bakeries, excluding intersegment sales of $48.5
million, were $423.6 million for the forty weeks ended October 7, 2000 as
compared to $423.4 million for the comparable period in the prior year, an
increase of $0.2 million or 0.1%. Overall, volumes decreased 3.9% from the prior
year, however average case prices increased 4.1% which is due to both a price
increase and favorable product mix shift. Foodservice sales increased 4.7% due
to improved pricing and volume increases. Current year-to-date retail sales were
flat when compared to prior year. While retail volumes were down, there was a
significant shift in product mix toward higher priced products. Year to date
snack and deli sales decreased by 1.4% and 7.9% respectively, as compared to the
prior year. The small decrease in snack was a combination of falling volumes
offset by a shift in product mix towards higher priced products. The drop in
deli sales was primarily volume driven with little pricing or product mix
effects. Mrs. Smith's sales are highly seasonal with the bulk of retail sales
occurring in the holiday season during the fourth quarter.
17
<PAGE> 18
Gross Margin. Mrs. Smith's Bakeries' gross margin for the forty week period
ended October 7, 2000 was 28.1% of sales compared to 23.8% reported a year ago.
Margins continue to be depressed as Mrs. Smith's Bakeries works through higher
cost inventory that was produced during the plant restructuring. However, Mrs.
Smith's margins are improving as the year progresses and the fourth quarter
should result in further improvement of gross margin due to higher retail sales
and lower cost inventory being produced.
Selling, Marketing and Administrative Expenses. Mrs. Smith's Bakeries' selling,
marketing and administrative expenses were $127.7 million or 30.1% of sales
during the forty week period ended October 7, 2000 as compared to $137.3 million
or 32.4% of sales during the same period a year ago. Expenses in the first three
quarters of fiscal 1999 included significant increases in estimates for customer
deductions and trade promotions and increased reserves for certain out-of-code,
damaged or discontinued inventory. These costs were not incurred to the same
extent in the current year period.
Depreciation and Amortization. Depreciation and amortization expense in the
forty week period ended October 7, 2000 was $21.7 million as compared to $14.1
million in the same period of last year. This increase is due to substantial
capital improvements associated with the production realignment.
Operating Loss. Mrs. Smith's Bakeries experienced an operating loss, excluding
insurance proceeds, of $30.5 million during the forty week period ended October
7, 2000 as compared to an operating loss of $50.7 million in the same period
last year. Sales and margins were slightly higher during the first three
quarters of fiscal 2000 as compared to the same period in fiscal 1999. The first
three quarters of fiscal 1999 included significant increases in estimates for
customer deductions and trade promotions and increased reserves for certain
out-of-code, damaged or discontinued inventory which were not present to the
same extent in the first three quarters of fiscal 2000. Mrs. Smith's has shown
significant improvement in the last twelve months but as the results show, has
not completed the recovery. Mrs. Smith's expects to continue showing improvement
in the next quarter and to build on this foundation in 2001.
KEEBLER
<TABLE>
<CAPTION>
FOR THE FORTY WEEKS ENDED
-----------------------------------------------------------------------------------------
OCTOBER 7, 2000 % OF SALES OCTOBER 9, 1999 % OF SALES CHANGE ($'S) CHANGE (%)
--------------- ---------- --------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $2,111,635 100.0% $2,055,724 100.0% $55,911 2.7%
Gross margin $1,269,428 60.1% $1,180,594 57.4% $88,834 7.5%
Selling, marketing, and administrative $ 961,009 45.5% $ 935,606 45.5% $25,403 2.7%
Depreciation and amortization $ 72,547 3.4% $ 62,651 3.0% $ 9,896 15.8%
Income from operations (EBIT) $ 235,872 11.2% $ 182,337 8.9% $53,535 29.4%
</TABLE>
Sales. Sales at Keebler for the forty week period ended October 7, 2000
increased $55.9 million and 2.7% to $2,111.6 million from $2,055.7 million
reported a year ago. Excluding the Austin sales and adjusting for the sales
related to the value brands business which was sold in the first quarter of
fiscal 2000, net sales declined 1.9%. Volume declines in lower margin contract
packing and value business reflect the shift away from lower margin business.
While we the market is becoming more competitive, we feel that Keebler is
positioned for continued growth. New products and focused marketing such as the
Sesame Street program should reap continued benefits in the fourth quarter and
next year.
Gross Margin. Gross margin at Keebler was $1,269.4 million and 60.1% of sales
for the forty weeks ended October 7, 2000, as compared to $1,180.6 million and
57.4% of sales during the same period a year ago. Sales related to Austin, which
have a lower gross margin than Keebler or President products, negatively
affected the margin by approximately 0.9%. The improved margins were mainly
attributable to improved productivity and cost savings as well as lower raw
material costs. The increase in gross margin is also reflective of the growth in
Keebler's branded business and the sale of its value brands business during the
first quarter, resulting in a product mix shift toward higher margin branded
products.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses were $961.0 million and 45.5% of sales for the forty
week period ended October 7, 2000, as compared to $935.6 million and 45.5% in
same period a year ago. Excluding Austin expenses, selling, marketing and
administrative expenses as a percent of sales was slightly higher in the first
three quarters of fiscal 2000 than in the same period last year. The increase
was due primarily to increased branded sales volume, transition expenses from
converting certain non-core independent distributor routes acquired in the
President acquisition to Keebler's direct store delivery system and higher fuel
costs. Offsetting these increases were one-time gains on the sale of the
Sayreville facility of $2.0 million in the second quarter and on the sale of the
value brands business of $5.7 million in the first quarter.
Depreciation and Amortization. Depreciation and amortization for the forty week
period ended October 7, 2000 was $72.5 million as compared to $62.7 million in
the same period of last year. This increase is primarily a result of the
depreciation and amortization of $5.6 million related to the Austin acquisition
that occurred during the first quarter of fiscal 2000.
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<PAGE> 19
Operating Income. Operating income, excluding nonrecurring items, increased
$53.5 million to $235.9 million for the forty weeks ended October 7, 2000 from
$182.3 million, excluding nonrecurring charges, during the same period in the
prior year. The primary factors contributing to growth in operating income were
increased sales of higher margin, branded products and efficiencies gained in
production realignments which resulted in higher gross margin. Selling,
marketing and administrative expenses remained constant as a percent of sales,
however, after adjusting for gains on facility and business sales, they
increased slightly due to higher fuel and other distribution costs associated
with increased branded volume.
Liquidity and Capital Resources:
FII owns a majority of the outstanding stock of Keebler, and therefore is
consolidating Keebler for financial reporting purposes. FII is limited in its
ability to access the cash flows of Keebler to support its other operations due
to the fact that Keebler is not wholly owned by FII. On October 26, 2000,
Flowers Industries, Inc. and Keebler Foods Company announced that an agreement
was reached for a series of transactions that will result in the sale of Keebler
Foods Company to Kellogg Company and the spin-off to FII shareholders of a new
company, Flowers Foods, Inc. As a result of the completion of this transaction,
it is expected that Flowers Foods, Inc., consisting of Flowers Bakeries and Mrs.
Smith's Bakeries businesses, will have significantly less debt and accordingly,
more financial flexibility. The expected debt level of Flowers Foods upon
completion of the transactions will be approximately $250 million.
Net cash provided by operating activities for the forty weeks ended October 7,
2000 was $188.5 million. Positive net cash flow of $236.6 million was provided
from net income for the forty weeks. Contributing to operating cash flows was
the income tax benefit of $21.5 million on stock options exercised. Accounts
receivable increased $10.6 million due primarily to increasing sales. A net
inventory increase of $12.9 million was attributable to the seasonal increase in
inventory at Mrs. Smith's Bakeries. A decrease in other assets of $9.7 million
is primarily due to the collection of an income tax refund at Flowers. Also
reducing working capital sources were tax payments of $21.3 million at Keebler
and spending of $21.1 million against plant and facility closing costs and
severance.
Net cash disbursed for investing activities for the forty weeks ended October 7,
2000 of $337.0 million included capital expenditures of $17.7 million at Flowers
Bakeries, $20.7 million at Mrs. Smith's Bakeries and $53.2 million at Keebler.
The capital expenditures were incurred principally to update and enhance
production and distribution facilities, as well as management information
systems at Flowers Bakeries. Keebler used $253.8 million to fund the acquisition
of Austin and paid $10.0 million for a licensing agreement with the Sesame
Workshop, formerly known as the Children's Television Workshop. Net cash
proceeds of $23.4 million were received from the disposal of other assets.
For the forty weeks ended October 7, 2000, cash provided by financing activities
was $132.9 million. The Company paid dividends to shareholders of $52.1 million.
FII paid dividends of $39.2 million during the period and Keebler paid dividends
totaling $28.5 million during the period, of which $15.6 million was paid to FII
as a result of its 55% ownership of Keebler. Dividends are declared at the
discretion of the Board of Directors based on an assessment of the Company's
financial position and other considerations. Contributing to the increase were
net cash proceeds of $13.0 million from the receivables securitization under
Keebler's Receivable Purchase Agreement and $10.4 million of cash generated from
employee stock options exercised during the first three quarters of fiscal 2000.
Keebler had treasury stock purchases totaling $10.0 million during the period.
Consolidated debt increased $171.7 million primarily due to the use of existing
credit facilities to finance the Austin acquisition.
At October 7, 2000, cash equivalents were $23.8 million. Consolidated long-term
debt was $1,374.1 million and current maturities of long-term debt were $58.3
million at October 7, 2000. As a result of the consolidation of Keebler, the
Company's balance sheet reflects Keebler's indebtedness of $596.8 million at
October 7, 2000; however, Flowers has not guaranteed such indebtedness and it is
to be repaid solely from the cash flows of Keebler. The Company believes that,
in light of its current cash position, its cash flow from operating activities
and its credit arrangements, it can adequately meet presently foreseeable
financing requirements.
On March 30, 2000, FII amended its $500 million Syndicated Loan Facility and the
$80.0 million loan facility agreement relating to its distributor program (the
"Distributor Facility"). The amendments provided for increased loan borrowing
margins and facility fees and added and amended certain financial covenants. The
covenants currently in effect include, among others: (i) a maximum leverage
ratio of .65 to 1; (ii) an adjusted fixed charges coverage ratio; (iii) minimum
adjusted consolidated EBITDA at specified levels for each fiscal quarter; (iv) a
borrowing base covenant requiring that FII's total indebtedness, measured
quarterly, not exceed specified percentages of the book value of accounts
receivable, inventory, property, plant and equipment and the fair market value
of FII's interest in Keebler; (v) a prohibition on acquisitions; (vi) a negative
pledge on all assets of the Company; (vii) a limit on capital expenditures of
$40 million for fiscal 2000 and $37.5 million per fiscal year thereafter; and
(viii) limits on cash dividends unless the Company would have, following payment
thereof, at least $15 million availability under the unused commitments and
borrowing base tests of the Loan Facility.
19
<PAGE> 20
The Company was in compliance with all covenants under its Loan Facility as in
effect on October 7, 2000 and believes that, in light of its current cash
position, its cash flow from operating activities and its amended credit
facilities, it can comply with the current terms of its Loan Facility,
Distributor Facility and other credit facilities and can meet presently
foreseeable financial requirements.
Year 2000 Issue
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its on-going business as a result of the "Year 2000 Issue." However,
it is possible that the full impact of the date change, which was of concern due
to computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 or
similar issues such as leap year-related problems may occur with billing,
payroll, or financial closings at month, quarter or year-end. We believe that
any such problems are likely to be minor and correctable. In addition, we could
still be negatively impacted if our customers or suppliers are adversely
affected by the Year 2000 or similar issues. We currently are not aware of any
significant Year 2000 or similar problems that have arisen for our customers or
suppliers.
The above statement in its entirety is designated a Year 2000 readiness
disclosure under the Year 2000 Information and Readiness Disclosure Act.
Forward-Looking Statements:
Statements contained in this filing that are not historical facts are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ from those
projected. Other factors that may cause actual results to differ from
forward-looking statements and that may affect the company's prospects in
general include, but are not limited to, changes in general economic and
business conditions (including the baked foods markets), the company's ability
to operate the manufacturing lines according to schedule and train personnel to
run the new production capacity, the availability of capital on acceptable
terms, actions of competitors and customers, the extent to which the company is
able to develop new products and markets for its products, the likelihood that
all conditions to the Kellogg transactions will be fulfilled, and the ability to
obtain financing for Flowers Foods, Inc. on acceptable terms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
In the normal course of business, the Company is exposed to commodity price and
interest rate risks, primarily related to the purchase of raw materials and
packaging supplies and changes in interest rates. The Company manages its
exposure to these risks through the use of various financial instruments, none
of which are entered into for trading purposes. The Company has established
policies and procedures governing the use of financial instruments, specifically
as it relates to the type and volume of financial instruments entered into.
Financial instruments can only be used to hedge an economic exposure, and
speculation is prohibited. The Company's accounting policy related to financial
instruments is further described in Note 1 of Notes to Consolidated Financial
Statements in our report on Form 10-K for the fiscal year ended January 1, 2000.
The Company's primary raw materials are flour, sugar, shortening, fruits and
dairy products. Amounts payable or receivable under the commodity agreements
which qualify as hedges are recognized as deferred gains or losses when the
positions are closed, and are charged or credited to cost of sales as the
related raw materials are used in production. To qualify as a hedge, a commodity
agreement must reduce the exposure of the Company to price risk and must show a
high correlation of changes in value with the value of the hedged item. Assuming
a ten percent decrease in market price, the fair value of open contracts with a
notional amount of $85.0 million at October 7, 2000 would be impacted by $(6.3)
million.
Keebler uses interest rate swap agreements to effectively convert certain fixed
rate debt to a floating rate instrument and certain floating rate debt to a
fixed instrument. Amounts payable or receivable under the agreements, calculated
as the difference between the fixed and floating rates multiplied by the
notional amount, is recorded as an adjustment to interest expense, in accordance
with hedge accounting. The fair value of the interest rate swap agreements at
October 7, 2000, with a notional amount of $316.5 million, remains comparable to
year-end. Additionally, interest rates have not fluctuated materially from year
end and therefore, the sensitivity analysis performed as of January 1, 2000 for
interest rate swap agreements remains a valid estimate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 19, 2000 and July 25, 2000, substantially identical purported class
action lawsuits (C.A. Nos. 18159NC (Behrens) and 18175NC (Lewis)) challenging
the proposed sale of Keebler by the Company were filed in the Delaware Court of
Chancery by purported stockholders of Keebler against the Company, Keebler and
the following directors of Keebler: Robert P. Crozer, Sam K. Reed, Amos R.
McMullian, Jimmy M. Woodward, G. Anthony Campbell, C. Martin Wood, Melvin T.
Stith, Johnston C. Adams, Jr. and Wayne H. Pace. The complaints allege, among
other things, that the Company intends to appropriate for itself a premium for
its control stake in Keebler to the exclusion of Keebler's public stockholders,
that the Company intends to effect a transaction that would enable it to capture
a disproportionate share of Keebler's value at the expense of Keebler's public
stockholders, that the Company intends to insulate itself from liability by
causing the Keebler board to form a special committee of independent directors
to approve the transactions and that, by reason of the company's majority stake
in Keebler and its ability to elect all of Keebler's directors, none of the
directors can protect the interests of Keebler's minority stockholders. The
complaints seek, among other things, that any sale of Keebler be enjoined or
rescinded and that the defendants pay unspecified monetary damages as well as
unspecified costs and attorneys' fees. The plaintiffs have not filed motions to
preliminarily enjoin the merger transactions or to expedite the proceedings.
Both Keebler and the Company believe that these lawsuits are without merit and
intend to defend these matters vigorously.
20
<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 26, 2000, FII and Keebler announced that an agreement was reached for
a series of transactions that will result in the sale of Keebler Foods Company
to Kellogg Company and the spin-off to FII shareholders of a new company,
Flowers Foods, Inc. FII agreed to sell its controlling stake in Keebler to
Kellogg for $42.00 per share. Simultaneously with the sale of the Keebler
controlling stake, FII will spin-off to its shareholders a new company, Flowers
Foods, Inc., which is anticipated to trade on the New York Stock Exchange under
the original symbol FLO. Flowers Foods, Inc. will include the Flowers Bakeries
and Mrs. Smith's Bakeries businesses and approximately $250 million in debt.
After deducting certain liabilities at FII, the proceeds from the transaction
will be paid to FII's shareholders in cash. In addition to these proceeds, each
FII shareholder will receive shares representing a proportionate interest in
Flowers Foods. The new company will be headquartered in Thomasville, Georgia and
will be led by the FII management team.
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 - On November 6, 2000, Flowers Industries, Inc.
filed a current report on form 8-K under Item 5 with respect to the
transactions with Kellogg Co. announced on October 26, 2000
21
<PAGE> 22
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 Financial Officer
November 21, 2000
-----------------
Date
22
