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F I V E Y E A R F I N A N C I A L S U M M A R Y
(In millions except per share data) FOR THE YEAR ENDED SEPTEMBER 30,
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STATEMENT OF EARNINGS DATA 1997 1996 1995 1994 1993
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Net Sales $739.7 $1,027.4 $1,013.4 $987.0 $902.8
Depreciation and Amortization 24.4 46.4 46.7 44.2 35.3
Earnings (Loss) before Income Taxes,
Interest Expense and Cumulative
Effect of Accounting Changes 549.8 (46.3) 83.0 100.2 87.7
As a Percent of Sales 74.3% (4.5%) 8.2% 10.2% 9.7%
Earnings (Loss) before Income Taxes and
Cumulative Effect of Accounting Changes $541.9 $(73.1) $54.8 $87.9 $85.1
Income Taxes 10.4 (26.3) 21.4 34.3 33.2
Earnings (Loss) before Cumulative Effect
of Accounting Changes 531.5 (46.8) 33.4 53.6 51.9
Net Earnings (Loss) <Fa>,<Fb>,<Fc>,<Fd>,<Fe>,<Ff> 531.5 (46.8) 33.4 53.6 42.6
SEPTEMBER 30,
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BALANCE SHEET DATA 1997 1996 1995 1994 1993
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Working Capital <Fg> $ 56.5 $ 92.4 $104.7 $ 81.8 $ 54.8
Property at Cost, Net 154.3 322.6 417.1 416.2 412.6
Additions (during the period) 21.0 60.2 59.3 38.2 50.8
Depreciation (during the period) 22.5 43.5 44.1 41.7 34.0
Total Assets 400.3 627.1 716.2 700.1 626.4
Long-Term Debt - 376.6 395.4 389.4 30.3
Shareholders' Equity 286.7 107.4 162.4 141.2
Ralston Equity Investment 474.4
<FN>
<Fa> Includes, in 1997, a $515.4 non-taxable gain on the sale of Ralcorp's
branded cereal and snack business.
<Fb> Includes, in 1997, a $19.7 pre-tax restructuring charge ($12.4 after
taxes) to cover severance payments to employees eliminated as a result
of the Company's sale of its branded cereal and snack business and also
severance packages received by certain separated employees. The
original charges of $23.0 were taken in the first and second quarters
of 1997. In the fourth quarter of 1997, Ralcorp reversed $3.3 of the
second quarter charge.
<Fc> Includes, in 1996, a $109.5 pre-tax impairment charge ($68.8 after
taxes) related to its private label ready-to-eat cereal and consumer
hot cereal operations.
<Fd> Includes, in 1996, a $16.5 pre-tax restructuring charge ($10.4 after
taxes) to recognize the costs related to the restructuring of its
ready-to-eat cereal business. The original charge of $20.7 was taken
in the third quarter of 1996. In the fourth quarter of 1996, Ralcorp
reversed $4.2 of the original amount. This reversal was offset by $4.0
($2.5 after taxes) of transaction fees related to the sale of Resort
Operations.
<Fe> Includes, in 1995, $21.9 pre-tax nonrecurring charge ($13.6 after
taxes) related to the exit of industrial oats and oats milling
operations and impairment of the consumer hot cereal business.
<Ff> The cumulative effect of accounting changes for postretirement benefits
other than pensions and for income taxes reduced earnings by $9.3,
after taxes, in the year ended September 30, 1993.
<Fg> Excludes cash and cash equivalents and current maturities of long-term
debt, where applicable.
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F I N A N C I A L R E V I E W
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity and capital
resources of Ralcorp Holdings, Inc. (Company). This discussion should be
read in conjunction with the Business Segment Information, Unaudited Pro
Forma Combined Financial Information, Consolidated Financial Statements and
Notes to Consolidated Financial Statements.
The comparisons of fiscal 1997 operations to those of 1996, and of 1996
to 1995, are affected by the significant changes to the Company's mix of
businesses, as well as the restructuring and nonrecurring charges recorded
over these years. As a result, comparative results are more difficult to
analyze and explain. Where practicable, this discussion will attempt to
address not only the financial results as reported, but also the key results
and factors affecting Ralcorp's on-going businesses.
For financial reporting purposes, Ralcorp is a "successor registrant"
to the Ralcorp Holdings, Inc. that was acquired by General Mills, Inc. on
January 31, 1997 (Old Ralcorp) and, as such, all financial statements
represent the historical financial information of Old Ralcorp, for periods
prior to January 31, 1997, and Ralcorp, for subsequent periods. Therefore,
references to the "Company" or "Ralcorp", as they relate to financial
information for periods prior to January 31, 1997, are references to Old
Ralcorp.
OVERVIEW
The Company and the businesses which comprise the Company experienced
dramatic changes in fiscal 1997. In January 1997, the Company completed two
significant divestitures, as the branded cereal and snack mix businesses
(Branded Business) were sold to General Mills, Inc. (General Mills) and the
Company's ski resorts operations (Resort Operations) were sold to Vail
Resorts, Inc. (Vail). The sale of the Branded Business to General Mills
generated $570 million, comprised of $355 million in General Mills stock for
distribution to Ralcorp shareholders and the assumption of $215 million in
Ralcorp debt and related accrued interest. In exchange for the Company's
Resort Operations, Vail assumed $165 million in Resorts debt and Ralcorp
received an approximate 22.6% ownership interest in Vail. In addition, on
April 21, 1997 the Company acquired the Wortz Company (Wortz), a private
label cracker and cookie operation. Since its acquisition, Wortz has been
operated as part of the Company's Bremner operation.
The business landscape at Ralcorp has changed and as a result, the
Company again recorded charges for restructuring its business processes.
These charges covered expenses related to the unfortunate loss of jobs, as
well as important process improvement costs needed to reduce an operational
structure previously in place to support a much larger company.
Operationally, fiscal 1997 was a year in which the on-going businesses
of Ralcorp achieved mixed performance levels throughout the year. The
Bremner cracker and cookie business experienced favorable operating results
through improved volume and product mix and the inclusion of Wortz since its
acquisition. The Beech-Nut baby food business operating results declined as
volumes fell below prior year levels and an increasingly competitive
environment continued to pressure Beech-Nut's results. Store brand cereals
struggled on lower volumes in the first half of fiscal 1997, but posted
volume improvements in both the third and fourth quarters of the year.
Though this limited period of improvement is not sufficient to indicate a
trend toward regular volume increases, the turnaround is encouraging.
Finally, for the period subsequent to the sale of Resort Operations to Vail
through September 30, 1997, the Company recorded $4.7 in equity earnings, an
amount in line with management's expectations.
OPERATING RESULTS
Operating results for fiscal 1997 and fiscal 1996 were impacted by
certain significant one-time items, which make year-to-year comparisons
difficult. In fiscal 1997, the Company recorded a $515.4 million tax-free
gain on the sale of the Branded Business to General Mills. Also in fiscal
1997, the Company recorded two restructuring charges totaling $19.7 million
($12.4 million after taxes or $.37 per share). The first of these charges
taken in the first quarter was $4.6 million ($2.9 million after taxes or $.09
per share) and covered expenses related to the severance packages received by
certain separated employees. The second charge of $15.1 million ($9.5
million after taxes or $.28 per share) was directly attributable to the sale
of the Branded Business, and covered expenses for severance payments,
information systems contract termination penalties and other costs related to
the disposition. In fiscal 1996, the Company recorded a $109.5 million pre-tax
impairment charge ($68.8 million after taxes or $2.09 per share) related
to its private label ready-to-eat cereal and consumer hot cereal operations.
This charge was recorded under the provisions of Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" (FAS 121); see the
"Nonrecurring Charges" footnote in the Notes to Consolidated Financial
Statements. Also, in fiscal 1996, the Company recorded a pre-tax charge of
$16.5 million ($10.4 million after taxes or $.31 per share) to recognize the
costs related to the restructuring of its ready-to-eat cereal operations.
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Including the above referenced charges, the Company recorded net
earnings of $531.5 million or $16.11 per share for fiscal 1997, compared to a
net loss of $46.8 million or $1.42 per share for fiscal 1996. Exclusive of
the charges, fiscal 1997 resulted in net earnings of $28.5 million or $.86
per share compared to fiscal 1996 net earnings of $32.4 million or
$.98 per share. Net sales in fiscal 1997 were $739.7 million compared to
$1,027.4 million in fiscal 1996, a decline of $287.7 million or 28.0%. This
significant drop in net sales reflects the fact that sales from the Branded
Business and Resort Operations are included only through their respective
sale dates, partially offset by the additional net sales from Wortz since its
April 21, 1997 acquisition, as well as increased sales volume from the
original Bremner operation.
FISCAL 1997 COMPARED TO FISCAL 1996
Consumer Foods
Comparisons of operating results in the Consumer Foods segment on a
historical basis are complicated by the inclusion of the Company's Branded
Business only through January 31, 1997, the date of the Branded Business'
sale.
Consumer Foods net sales declined significantly from fiscal 1997 to
fiscal 1996, as net sales dropped to $706.6 million in fiscal 1997 from
$892.0 million in the prior fiscal year. This decline is due to the
inclusion of the now divested branded cereal and snack operation in the full
prior fiscal year's results. On a pro forma basis, excluding Branded
Business sales, Consumer Foods net sales recorded slight improvements
primarily on the strength of increased cracker and cookie sales. Cracker and
cookie sales benefited on a year-over-year comparison through the inclusion
of Wortz, since its acquisition, while sales from the original Bremner
operation also improved on favorable volume growth and product mix. Baby
food sales were virtually flat in fiscal 1997 compared to fiscal 1996 as the
effects of favorable pricing were offset by volume declines. Year-over-year
comparisons of store brand cereal sales showed a slight decline from fiscal
1996, however, store brand cereal volume improved in each of the last two
1997 fiscal quarters.
Operating profit, exclusive of the charges mentioned earlier, declined
$7.1 million, or 10.5%, to $60.2 million in fiscal 1997. This decline again
is primarily attributable to the Branded Business being included for the full
prior year. The store brand cereal business was able to operate profitably
for the full year. Previously, management had anticipated that it would be
sometime in fiscal 1998 before the store brand cereal business would return
to profitability. Bremner's operating profit improved significantly over the
prior year on the inclusion of Wortz, as well as on volume growth, a
favorable product mix and more favorable ingredient costs. The decline in
Beech-Nut's operating profit, however, practically offset the improvements at
Bremner. A meaningful decline in volumes, partially offset by increased
prices, and higher advertising and promotion expenses made necessary in the
increasingly competitive baby food industry, caused Beech-Nut's operating
profit decrease.
Resorts
During the period of October 1, 1996 through the January 3, 1997 sale
date of Resort Operations to Vail, the Company recorded net sales of $33.1
million and operating profit of $.3 million.
Ralcorp sold its three ski resort operations to Vail, in exchange for
the assumption of $165 million in Resort debt and an approximate 22.6% post-IPO
equity interest in Vail. Through this transaction, the Company directly
holds approximately 7.55 million shares of Vail Common Stock. As a result of
its approximate 22.6% ownership interest in Vail, Ralcorp recorded $4.7
million of pre-tax equity earnings, or $.09 per share, after taxes.
Typically, the Company will record more than 100 percent of its annual equity
earnings related to Vail in its fiscal second and third quarters. As the
Company moves forward with its current mix of businesses, the equity earnings
from the Company's investment in Vail could become more significant. It must
be noted that the skiing industry is mature, with slow growth, and high
levels of competition and any adverse operating performance at Vail will have
a negative effect on the Company's results. Company management, however, is
confident that Vail management will operate their ski resort operations in a
manner consistent with the best interest of the Company.
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Consolidated
Costs of products sold as a percentage of sales was 57.5% for the
current fiscal year compared to 52.3% for the prior year. Selling, general
and administrative expense as a percent of sales decreased to 17.1% for the
current year fourth quarter compared to 20.1% for the same quarter of the
prior year and was basically flat in a comparison of full fiscal years. The
decline in selling, general and administrative expense as a percent of sales
on a quarter-to-quarter comparison, as well as the flat comparison between
fiscal years, are indications of how the Company has been able to remove
significant portions of a cost structure that was historically in place to
support a larger corporation. The increase in costs of products sold as a
percentage of sales, however, reflects the fact that many of the Company's
higher margin products were eliminated through the sale of the Branded
Business. Advertising and promotion expense as a percentage of sales has
declined significantly in a year-to-year comparison, reflecting the reduced
level of advertising and promotional support necessary for a primarily
private label company. Net interest expense, for fiscal 1997 was $7.9
million or 1.1% of net sales compared to $26.8 million or 2.6% of net sales
in fiscal 1996. This decline reflects the predominantly debt-free status the
Company has experienced subsequent to the two January 1997 sale transactions.
Income taxes, which include federal and state taxes, were 39.2% of pre-tax
earnings, excluding the tax-free gain on sale of the Branded Business, for
fiscal 1997, compared to 36.0% of pre-tax losses in fiscal 1996. This
difference in the effective tax rate is primarily due to the Company
recording significant one-time charges in fiscal 1996. Tax provisions
generally reflect statutory tax rates.
FISCAL 1996 COMPARED TO FISCAL 1995
During the full fiscal years of 1996 and 1995 the Company operated in
two business segments, the "Consumer Foods" segment, comprised of the branded
and private label cereals and branded snacks, baby food and crackers and
cookies businesses, and the "Resort Operations" segment, consisting of the
Keystone, Breckenridge and Arapahoe Basin ski resorts.
Consumer Foods
Consumer Foods sales were essentially flat from 1995 to 1996, as segment
sales went from $886.0 million in fiscal 1995 to $892.0 million in fiscal 1996.
This slight increase was driven by significantly higher Chex Mix snack volume
(which continued to realize the positive effects of a successful restage),
increased cereal prices taken in advance of the category-wide pricing declines,
higher baby food prices and volume, and improved cracker and cookie volumes.
Substantially offsetting these positive factors were the significantly lower
branded and private label cereal volumes. Dramatic price decreases coupled
with promotional activities during fiscal 1996, directly and negatively
effected the Company's cereal volumes. Branded cereal volume declined
approximately 10% in the year and private label cereal volume declined
approximately 4%. Although minor branded cereal products volumes were down
significantly, the mainline Chex franchise performed reasonably well, down only
slightly from fiscal 1995. Sales of branded cereal is somewhat seasonal
because of the Company's Chex Party Mix holiday promotion. Management believes
that erosion of a portion of the price gap between branded and private label
cereal products, occurring primarily in the third and fourth quarters of fiscal
1996, resulted in the Company's first private label cereal volume decline.
As referred to earlier, Consumer Foods operating results for fiscal
1996 included certain significant one-time charges. In addition, in fiscal
1995, the Company recorded pre-tax nonrecurring charges totaling $21.9
million ($13.6 million after taxes or $.41 per share) related to management's
decision to exit the industrial oats business, close oats milling operations
and impair certain long-lived assets related to the remaining consumer hot
cereal business. These fiscal 1995 charges were determined under the
provisions of FAS 121. The combination of charges included in both fiscal
1996 and 1995 make year-to-year comparisons difficult. Therefore, in an
effort to present an analysis of the most comparable operating results, the
following discussion of Consumer Foods operating profit will exclude those
charges.
Operating profit for the segment decreased 29.5% in fiscal 1996 to
$67.3 million compared to $95.5 million in the previous year. The
significant decline is due primarily to lower cereal results partially offset
by improvements in Chex Mix and the baby food and cracker and cookie
businesses. In the cereal and snack business, operating profit declined as a
result of higher advertising and promotion expense, the continued negative
impact of increased ingredient costs and higher information systems costs,
partially offset by the strong performance of Chex Mix snacks and cereal
pricing increases taken in advance of the category-wide pricing decline.
Spider-Man cereal, introduced in fiscal 1995's fourth quarter, was an
earnings disappointment with volumes significantly below expectations.
Production of Spider-Man cereal has been discontinued. The Beech-Nut baby
food business results improved primarily on strong domestic volume gains and
favorable pricing, partially offset by higher ingredient costs. In addition,
baby food operations were slowed in the second half of fiscal 1996 due to
increased competitive pressures. The Bremner cracker and cookie business
increased its operating results in fiscal 1996 by adding new product sales
and new accounts, resulting in additional volume, and by continuing to lower
production costs.
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Resort Operations
Resort Operations sales improved 6.3% in fiscal 1996 to $135.4 million
compared to $127.4 million in 1995. The sales increase resulted primarily
from a 5% improvement in skier visits, as well as an approximate 3% increase
in room nights. Total skier visits for fiscal 1996 were 2.7 million. These
improvements were the direct result of good ski conditions during the key
winter months. As a result of these factors, Resort Operations recorded a
record $23.0 million operating profit in fiscal 1996 compared to $17.1
million in the prior year, an improvement of 34.5%.
The skiing industry is mature with slow overall growth and is highly
competitive. The Company's ski resorts compete with all types of recreation
and vacation alternatives for the consumers' discretionary spending.
Operating results for this segment are highly seasonal. Historically,
the resorts have earned more than the entire fiscal year's operating profit
during the fiscal second quarter, which contains the peak of the ski season.
Consolidated
Consolidated net sales increased 1.4% in fiscal 1996 to $1,027.4
million due to improved revenues of Chex Mix and the Resort Operations, as
well as favorable volume gains in both the cracker and cookie and baby food
businesses. Cost of products sold as a percentage of sales was 52.3% in both
fiscal 1996 and 1995 as increased Resort Operations revenues offset the
increase in ingredient costs that affected the Company's other businesses.
Selling, general and administrative expenses increased to 17.3% of sales in
1996 compared to 16.3% of sales in 1995 due to higher information systems
costs and the inclusion, in fiscal 1996, of approximately $4.0 million of
transaction costs related to the Company's proposed sale of its Resort
Operations. Advertising and promotion expense as a percentage of sales
increased to 22.7% of sales in fiscal 1996 from 21.0% in fiscal 1995. A
significant portion of this increase was due to spending associated with
Spider-Man, a new branded cereal in fiscal 1996, which was discontinued, and
stepped up promotional spending necessary to protect the Company's mainline
Chex franchise and its declining private label cereal business. Advertising
and promotion spending in support of the very successful Chex Mix restage was
also higher in fiscal 1996. Income taxes, which include federal and state
taxes, were 36.0% of pre-tax losses in fiscal 1996 compared to 39.1% of
pre-tax earnings in fiscal 1995. This decline in the effective tax rate is
primarily due to the Company recording significant one-time charges in fiscal
1996. Tax provisions on earnings generally reflect statutory tax rates.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
The Company's primary source of liquidity is cash flow from operations,
which decreased to $77.5 million in 1997 compared to $91.8 million in 1996
due primarily to the reduced level of earnings before non-cash items such as
depreciation, amortization, non-cash portions of restructuring charges and
the tax-free gain on sale of the Branded Business. The elimination of two
earnings streams through the sale transactions completed during the current
fiscal year's second quarter contributed to the net earnings decline.
Partially offsetting the net earnings decrease was the favorable cash flow
impact of reduced operating assets, primarily inventories and accounts
receivable. The $11.4 million increase in operating cash flow in 1996
compared to 1995 was due primarily to reduced working capital needs. Working
capital, excluding cash and cash equivalents and current maturities of long-
term debt, was $56.5 million at September 30, 1997 compared to $92.4 million
and $104.7 million at September 30, 1996 and 1995, respectively. The Company
had no cash balances at September 30, 1996 and 1995.
The Company's businesses have historically focused on generating
positive cash flows through operations. For the three years ended September
30, 1997, the Company was able to generate $249.7 million of cash from
operations. Management believes that the Company will continue to generate
operating cash flow through its mix of businesses and expects that future
liquidity requirements will be met through a combination of operating cash
flow and strategic use of borrowings available under its working capital
credit facility.
INVESTING ACTIVITIES
Investing activities in 1997 include the April 1997 purchase, for $41.6
million, of Wortz, a private label cracker and cookie operation headquartered
in Poteau, OK. Capital expenditures were $24.9 million, $66.7 million and
$66.1 million in fiscal years 1997, 1996 and 1995, respectively. Capital
expenditures for fiscal 1998 are expected to be approximately $25-$30
million. The significant reduction in capital expenditures in fiscal 1997 is
due to the decrease in the overall size of the Company, as well as the
incorporation of sound cost controls while maintaining efficient operating
facilities.
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FINANCING ACTIVITIES
As a result of the Branded Business and Resort Operations sales in
January 1997, Ralcorp emerged debt free. On April 21, 1997, the Company
borrowed $20.6 million through its existing credit facility, the proceeds of
which were used as partial consideration for the purchase of Wortz. By
September 30, 1997 this amount had been completely repaid leaving no
outstanding debt as of that time, compared to total long-term debt at
September 30, 1996 of $376.6 million.
To meet its on-going working capital needs the Company
has available a $50 million working capital credit facility. The proceeds of
the facility may be used to fund Ralcorp's working capital needs, capital
expenditures, and other general corporate purposes. Provisions of the $50
million credit facility require the Company to maintain certain financial
ratios and a minimum level of shareholders' equity. At no time subsequent to
the obtaining of this credit facility through the remainder of fiscal 1997,
was the Company in danger of violating any of these provisions. Management
does not currently believe that any risks inherent in the Company's on-going
businesses are likely to materially endanger the maintenance of the requisite
ratios or level of shareholders' equity.
During fiscal 1997, the Company made no repurchases of its Common Stock
compared to repurchases of $8.6 million and $13.5 million in the years ended
September 30, 1996 and 1995, respectively. Subsequent to the end of fiscal
1997, the Company's Board of Directors approved an authorization to buy back
up to one million shares of the Company's Common Stock. This authorization
allows Company management to make purchases from time to time at prevailing
market prices.
OUTLOOK
Ralcorp, through its Ralston Foods division, continues to operate in
the highly competitive ready-to-eat cereal category. Management believes the
increased presence of competitors' low priced branded bagged cereals is
having, and may continue to have, a negative impact on industry-wide profits.
Also, consolidation among members of the grocery trade may lead to increased
wholesale price pressure from larger grocery trade customers and could result
in the loss of key cereal accounts if the surviving entities are not
customers of the Company. To be successful, Ralcorp must maintain an
effective price gap between its private label cereal products and those
products of top branded cereal competitors. Ralcorp management has been
somewhat successful at removing excess costs from its cereal operations in
order to attain a cost basis that will allow it to maintain an adequate price
gap and still provide a quality alternative to branded cereals. Management
intends to continue to focus on cost elimination where appropriate. During
the second half of fiscal 1997, Ralcorp's cereal subsidiary posted an
operating profit, further demonstrating the success of its cost cutting
efforts to date. Despite the return to profitability, it must be cautioned
that this does not guarantee future profitability.
In baby foods, significant competitive pressures and an overall decline
in the baby food category are important concerns for the management of
Beech-Nut. Beech-Nut continues to focus on the production of high quality
products, maintaining its presence in key regional markets and emphasizing
cost reductions and controls. With regard to the Bremner cracker and cookie
business, the addition of the Wortz Company, acquired on April 21, 1997, had
an immediate and positive effect on sales, operating profit and customer
base. The existing Bremner business continued to achieve good results for
the fiscal year on improved volume, sales and product mix. Despite the
present positive performance and favorable results from the Wortz
acquisition, Bremner still faces significant competition from large branded
and regional private label producers.
With much of the transition to a predominantly private label foods
company completed, Ralcorp management intends to take the appropriate steps
necessary to grow the Company's businesses. Such steps could include
additional improvement in operating efficiencies, expanding the customer base
where possible, continued product improvement and innovation, and, as
previously mentioned, maintaining a meaningful price gap between branded
products and all of its private label offerings.
Management realizes that in addition to improved operations and
enhanced efficiencies, a key growth opportunity may exist through strategic
acquisitions. The acquisition of the Wortz Company serves as an example.
Management intends to explore, where appropriate, those acquisition
opportunities that strategically fit with the Company's current mix of
businesses. Ralcorp's low level of outstanding debt should provide the
Company greater flexibility to act upon any such opportunities.
ENVIRONMENTAL MATTERS
The operations of the Company, like those of similar businesses, are
subject to various federal, state, and local laws and regulations intended to
protect public health and the environment, including air and water quality
and waste handling and disposal. The Company has received notices from the
U.S. Environmental Protection Agency, state agencies, and/or private parties
seeking contribution, that it has been identified as a "potentially
responsible party" (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act, and the Company may be required to share in
the cost of cleanup with respect to one waste disposal site related to the
Branded
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Business. Pursuant to a Reorganization Agreement with General Mills, General
Mills has agreed to indemnify and defend the Company for and against
liabilities associated with the site. General Mills' indemnification and
defense obligations are limited as more fully discussed in the "Commitments
and Contingencies" footnote in the Notes to Consolidated Financial
Statements. The Company's ultimate liability in connection with
environmental matters may depend on many factors including, but not limited
to, the volume of material contributed to the site, the existence of other
parties responsible for remediation and their financial viability, reports of
experts (internal or external), and the remediation methods and technology to
be used. Based upon the information currently available, the ultimate
liability arising from environmental matters should not have a material
effect on the Company's financial position or results of operations.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128 - "Earnings per
Share" (FAS 128). This Statement establishes standards for computing and
presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. FAS 128 simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15 -
"Earnings per Share". FAS 128 replaces the presentation of primary earnings
per share with basic earnings per share. As applicable, FAS 128 retains the
presentation of fully diluted earnings per share for those entities with
complex capital structures. The provisions of FAS 128 are effective for the
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted and
restatement of all prior period earnings per share is required. Company
management believes that the provisions of this Statement will not have a
significant effect on the Company's historical calculations of earnings per
share.
In June 1997, the FASB issued two new Statements of Financial
Accounting Standards. The first, Statement of Financial Accounting Standards
No. 130 - "Reporting Comprehensive Income" (FAS 130), establishes standards
for reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. FAS 130 is effective for
fiscal years beginning after December 15, 1997 and any restatement of
financial statements for earlier periods provided for comparative purposes is
required. Company management does not expect the provisions of FAS 130 to
have a material impact on the Company's consolidated financial statements.
Also issued in June 1997 was Statement of Financial Accounting Standards No.
131 - "Disclosure about Segments of an Enterprise and Related Information"
(FAS 131), which establishes standards for how public business enterprises
report information about operating segments in annual financial statements
and requires selected information about operating segments in interim
financial reports. FAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. FAS 131 is effective for financial statements for periods
beginning after December 15, 1997. Company management continues to evaluate
the definition of a segment as presented in FAS 131 and what its impact will
have on future disclosures.
INFLATION
Management recognizes that inflationary pressures may have an adverse
impact on the Company through higher asset replacement costs, related
depreciation and higher material costs. The Company tries to minimize these
effects through cost reductions and productivity improvements as well as
price increases to maintain reasonable profit margins. It is management's
view, however, that inflation has not had a significant impact on operations
in the three years ended September 30, 1997.
CAUTIONARY STATEMENT ON
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act are made throughout this document and including
information under the section titled "Financial Review", and are preceded by,
followed by or include the words "intends," "believes," "expects,"
"anticipates," "should" or similar expressions elsewhere in this document.
The Company's results of operations and liquidity status may differ
materially from those in the forward-looking statements. Such statements are
based on management's current views and assumptions, and involve risks and
uncertainties that could affect expected results. For example, any of the
following factors cumulatively or individually may impact expected results:
(i) If the Company is unable to maintain a meaningful price gap between
its private label products and the branded products of its competitors, then
the Company's private label operations could incur operating losses;
(ii) Significant increases in the cost of certain raw materials used in
the Company's products, to the extent not reflected in the price of the
Company's products, could adversely impact the Company's results. For
example, the cost of wheat can change significantly;
-19-
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(iii) In light of its significant ownership in Vail Resorts, Inc., the
Company's non-cash earnings can be adversely affected by Vail's unfavorable
performance;
(iv) The baby food segment has experienced volume declines which have
and could continue to negatively impact the Company's results;
(v) The Company's businesses compete in mature segments with
competitors having large percentages of segment sales; and
(vi) The Company's profit growth depends largely on the ability to
successfully introduce new products and aggressively manage costs across all
parts of the Company. For example, increased promotional spending by the
baby food segment leader could negatively impact the Company's results.
- -------------------------------------------------------------------------------
B U S I N E S S S E G M E N T I N F O R M A T I O N
Summarized financial information by business segment follows. The segments
were comprised of the following:
Consumer Foods
Cereals and Snacks
Baby Foods
Crackers and Cookies
Resort Operations (through January 3, 1997)
The Consumer Foods segment consists of cereals, baby food products and
other specialty grocery products, primarily crackers, cookies, and snacks,
and the coupon redemption business, through January 31, 1996, the effective
sale date of this business. Reflected in the Consumer Foods segment is the
sale of the Company's branded cereal and snack business on January 31, 1997,
and the purchase of the Wortz Company, a private label cracker and cookie
company, on April 21, 1997. The Resort Operations segment consisted of the
Keystone, Arapahoe Basin and Breckenridge resorts, through January 3, 1997,
the date of its sale to Vail Resorts, Inc. As of September 30, 1997, however
the Company maintained an approximate 22.6% equity interest in Vail Resorts,
Inc.
Sales between business segments were immaterial. No single customer
accounted for 10% or more of sales.
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B U S I N E S S S E G M E N T I N F O R M A T I O N ( C O N T I N U E D )
(Dollars in millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
SALES BY PRODUCT LINES AND SEGMENTS
Consumer Foods
Cereal and Snacks $437.0 $ 661.4 $ 670.1
Baby Foods 151.1 152.8 147.2
Crackers and Cookies 118.5 77.8 68.7
-------------------------------------------------------
Subtotal $706.6 $ 892.0 $ 886.0
Resort Operations 33.1 135.4 127.4
-------------------------------------------------------
Total $739.7 $1,027.4 $1,013.4
=======================================================
OPERATING PROFIT
Consumer Foods <Fa> $ 40.5 $ (58.7) $ 73.6
Resort Operations .3 23.0 17.1
-------------------------------------------------------
Total $ 40.8 $ (35.7) $ 90.7
Gain on Sale of Branded Business 515.4
Equity Earnings in Vail Resorts, Inc. 4.7
Unallocated Corporate and
Miscellaneous Expense <Fb> (11.1) (10.6) (7.7)
Interest Expense (7.9) (26.8) (28.2)
-------------------------------------------------------
Earnings (Loss) before Income Taxes $541.9 $ (73.1) $ 54.8
=======================================================
ASSETS AT YEAR END
Consumer Foods <Fc> $304.2 $ 342.5 $ 472.9
Resort Operations <Fd> 236.2 226.4
Corporate <Fe> 96.1 48.4 16.9
-------------------------------------------------------
Total $400.3 $ 627.1 $ 716.2
=======================================================
DEPRECIATION EXPENSE
Consumer Foods $ 18.6 $ 29.8 $ 31.3
Resort Operations 3.9 13.7 12.8
PROPERTY ADDITIONS
Consumer Foods $ 13.2 $ 42.3 $ 49.7
Resort Operations 7.8 17.9 9.6
<FN>
<Fa> Reflects $19.7 in pre-tax restructuring charges taken as part of
extensive downsizing initiatives at the Company in 1997. Includes the
pre-tax nonrecurring charges of $109.5 and the pre-tax restructuring
charge of $16.5 in 1996. Includes the pre-tax nonrecurring charges of
$21.9 in 1995.
<Fb> Corporate expenses includes a cash settlement of stock options and
awards of $2.8 and $.8 in miscellaneous resort transaction fees in
1997. Includes the $4.0 transaction fees related to the sale of the
Company's Resort Operations in 1996.
<Fc> Reflects assets of the Branded Business being sold to General Mills and
assets of the Wortz Company acquisition, in 1997. Includes the asset
impairment charge of $109.5 and the asset writedown of $7.3 relating to
the restructuring charge in 1996. Includes the asset writedown portion
of the nonrecurring charges related to the consumer hot cereal business
of $20.5 in 1995.
<Fd> Assets eliminated through sale of Resort Operations to Vail Resorts in
1997.
<Fe> Includes $55.4 representing the equity investment in Vail Resorts as of
September 30, 1997.
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RESPONSIBILITY FOR FINANCIAL STATEMENTS
The preparation and integrity of the financial statements of Ralcorp
Holdings, Inc. are the responsibility of its management. These statements
have been prepared in accordance with generally accepted accounting
principles and in the opinion of management fairly present the Company's
financial position, results of operations and cash flow.
The Company maintains accounting and internal control systems which it
believes are adequate to provide reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition and that the
financial records are reliable for preparing financial statements. The
selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures, and
an extensive program of internal audits are important elements of these
control systems.
The report of Price Waterhouse LLP, independent accountants, on their
audits of the accompanying financial statements follows. This report states
that their audits were performed in accordance with generally accepted
auditing standards. These standards include an evaluation of internal
control for the purpose of establishing a basis for reliance thereon relative
to the scope of their audits of the financial statements.
The Board of Directors, through its Audit Committee consisting solely
of nonmanagement directors, meets periodically with management and the
independent accountants to discuss audit and financial reporting matters. To
assure independence, Price Waterhouse LLP has direct access to the Audit
Committee.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Ralcorp Holdings, Inc.
In our opinion, based upon our audits and the report of other auditors,
the accompanying consolidated balance sheets and the related consolidated
statements of earnings, of shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of Ralcorp Holdings,
Inc. and its subsidiaries at September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits.
We did not audit the financial statements of Vail Resorts, Inc., an
investment which is reflected in the accompanying financial statements using
the equity method of accounting. The Company's investment in Vail Resorts,
Inc. at September 30, 1997 was $55,400,000 and the equity in its net income
was $4,700,000 for the year then ended. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Vail
Resorts, Inc., is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
St. Louis, Missouri
November 5, 1997
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- -------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F E A R N I N G S
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
(Dollars in millions except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Net Sales $ 739.7 $1,027.4 $1,013.4
-----------------------------------------------
Costs and Expenses
Cost of products sold 425.2 536.8 530.4
Selling, general and administrative 126.5 177.6 164.9
Advertising and promotion 138.6 233.3 213.2
Interest expense, net 7.9 26.8 28.2
Restructuring charges 19.7 16.5
Nonrecurring charges 109.5 21.9
Gain on sale of Branded Business (515.4)
Equity earnings in Vail Resorts, Inc. (4.7)
-----------------------------------------------
197.8 1,100.5 958.6
-----------------------------------------------
Earnings (Loss) before Income Taxes 541.9 (73.1) 54.8
Income Taxes 10.4 (26.3) 21.4
-----------------------------------------------
Net Earnings (Loss) $ 531.5 $ (46.8) $ 33.4
===============================================
Earnings (Loss) per Common Share $ 16.11 $ (1.42) $ 1.00
===============================================
The above financial statement should be read in conjunction with the Notes to Consolidated Financial Statements.
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C O N S O L I D A T E D B A L A N C E S H E E T
SEPTEMBER 30,
--------------------------------
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 8.4 $ -
Receivables, less allowance for doubtful accounts 52.9 75.5
Inventories 72.5 103.3
Prepaid expenses 9.3 14.2
--------------------------------
Total Current Assets 143.1 193.0
Investments and Other Assets 89.1 88.1
Deferred Income Taxes 13.8 23.4
Property at Cost
Land 2.2 27.9
Buildings 49.5 112.6
Machinery and equipment 204.4 370.4
Construction in progress 8.0 26.1
--------------------------------
264.1 537.0
Accumulated depreciation 109.8 214.4
--------------------------------
154.3 322.6
--------------------------------
Total Assets $400.3 $627.1
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ - $ 1.8
Accounts payable and accrued liabilities 78.2 100.6
--------------------------------
Total Current Liabilities 78.2 102.4
Long-Term Debt 376.6
Other Liabilities 35.4 40.7
Commitments and Contingencies
Shareholders' Equity
Common stock - $.01 par value, issued shares:
1997 - 33,011,317 and 1996 - 33,924,848 .3 .3
Capital in excess of par value 110.1 130.9
Retained earnings (deficit) 176.3 (.2)
Common stock in treasury, at cost, 1,007,932 shares in 1996 (22.7)
Unearned portion of restricted stock (.9)
--------------------------------
Total Shareholders' Equity 286.7 107.4
--------------------------------
Total Liabilities and Shareholders' Equity $400.3 $627.1
================================
The above financial statement should be read in conjunction with the Notes to Consolidated Financial Statements.
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C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
(Dollars in millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Cash Flow from Operations
Net earnings (loss) $ 531.5 $(46.8) $ 33.4
Adjustments to reconcile earnings to net cash
flow provided by operations:
Depreciation and amortization 24.4 46.4 46.7
Gain on sale of Branded Business (515.4)
Nonrecurring charges 109.5 21.9
Restructuring charges (net of cash paid) 2.4 11.0
Deferred income taxes 8.6 (45.8) (8.4)
Changes in assets and liabilities used in operations
Decrease (increase) in receivables 24.9 10.8 (8.6)
Decrease (increase) in inventories 15.8 6.9 (16.0)
(Increase) decrease in prepaid expenses (27.0) (.9) (1.0)
Decrease (increase) in long-term receivables 5.7
Increase (decrease) in accounts payable and
accrued liabilities 10.8 (5.9) (.4)
Other, net 1.5 6.6 7.1
--------------------------------------------
Net cash flow from operations 77.5 91.8 80.4
============================================
Cash Flow from Investing Activities
Acquisition (41.6)
Additions to property and intangible assets (24.9) (66.7) (66.1)
Proceeds from the sale of property 3.4 6.0 4.3
Other, net (2.9) (3.7) (2.7)
--------------------------------------------
Net cash used by investing activities (66.0) (64.4) (64.5)
--------------------------------------------
Cash Flow from Financing Activities
Net repayments under credit agreement (17.0) (2.2)
Repayments of long-term debt, including current
maturities (3.1) (1.8) (.2)
Repurchase of common stock (8.6) (13.5)
Other, net
--------------------------------------------
Net cash used by financing activities (3.1) (27.4) (15.9)
--------------------------------------------
Net Increase in Cash and Cash Equivalents 8.4 - -
Cash and Cash Equivalents, Beginning of Year - - -
--------------------------------------------
Cash and Cash Equivalents, End of Year $ 8.4 $ - $ -
============================================
The above financial statement should be read in conjunction with the Notes to Consolidated Financial Statements.
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- -------------------------------------------------------------------------------
CO N S O L I D A T E D S T A T E M E N T O F S H A R E H O L D E R S ' E Q U I T Y
(Dollars in millions, shares in thousands) FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997
------------------------------------------------------------------------------------
Common Stock Unearned
Common Stock Capital in in Treasury, at cost Portion of
----------------- Excess of ------------------------ Retained Restricted
Shares Amount Par Value Shares Amount Earnings Stock
------------------------------------------------------------------------------------
Balance, September 30, 1994 33,922 $ .3 $ 130.9 - $ - $ 13.2 $(3.2)
Net earnings 33.4
Treasury stock purchased (633) (13.5)
Activity under stock plans 3 .1 (26) (.3)
Amortization of restricted stock 1.5
------------------------------------------------------------------------------------
Balance, September 30, 1995 33,925 $ .3 $ 131.0 (659) $(13.8) $ 46.6 $(1.7)
Net earnings (loss) (46.8)
Treasury stock purchased (349) (8.6)
Activity under stock plans (.1) (.3)
Amortization of restricted stock .8
------------------------------------------------------------------------------------
Balance, September 30, 1996 33,925 $ .3 $ 130.9 (1,008) $(22.7) $ (.2) $ (.9)
Net earnings 531.5
Activity under stock plans (52) (.7) 146 2.6
Amortization of restricted stock .1
Accelerated vesting of restricted stock .8
Distribution of General Mills Stock to
Shareholders (355.0)
Retire treasury stock (862) (20.1) 862 $ 20.1
------------------------------------------------------------------------------------
Balance, September 30, 1997 33,011 $ .3 $ 110.1 - $ - $176.3 $ -
====================================================================================
The above financial statement should be read in conjunction with the Notes to Consolidated Financial Statements.
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(Dollars in millions except per share data)
NOTE 1 - GENERAL INFORMATION
Effective at the close of business on March 31, 1994 (the 1994 Spin-off
Date) Ralcorp Holdings, Inc. became an independent, publicly owned company as
a result of the distribution by Ralston Purina Company (Ralston) of Ralcorp's
$.01 par value Common Stock (Ralcorp Stock) to holders of Ralston-Ralston
Purina Group Common Stock $.10 par value (RPG Stock), at a distribution ratio
of one for three (the 1994 Spin-off). Included in this transaction was the
transfer of substantially all of the assets and liabilities related to the
branded and private label cereal business (excluding cereal products
manufactured in Korea and France), baby food business, branded and private
label crackers and cookies business, coupon redemption business and the ski
operations business (collectively, the Ralcorp Businesses), all of which were
previously owned by Ralston. Ralston did not retain any ownership interest
in Ralcorp Holdings, Inc.
For the purpose of governing certain of the relationships between
Ralston and Ralcorp, as well as providing an orderly transition, Ralston and
Ralcorp entered into various agreements, including the Agreement and Plan of
Reorganization (the 1994 Spin-off Reorganization Agreement), Tax Sharing
Agreement, Bridging Agreement, Trademark Agreement and other agreements.
On January 3, 1997, Ralcorp sold its ski resort holdings to Vail
Resorts, Inc. (Vail) in exchange for the assumption of $165 in Resort
Operations debt and an approximate 22.6% post-IPO equity interest in the
combined Vail. Vail stock began trading on the New York Stock Exchange on
February 4, 1997.
On January 31, 1997, the original Ralcorp Holdings, Inc.
(Old Ralcorp) was merged with a subsidiary of General Mills, Inc. (the
Merger). Immediately prior to the Merger, Old Ralcorp spun-off its private
label cereal, branded baby food and private label cracker and cookie
businesses and its ownership interest in Vail (the Spin-Off) by distributing
one share of New Ralcorp Holdings, Inc. Common Stock for each share of Old
Ralcorp Common Stock owned as of the close of business on January 31, 1997
(Distribution Date). Immediately prior to the Spin-Off, New Ralcorp
Holdings, Inc. (Ralcorp) changed its name to Ralcorp Holdings, Inc. and in
the Merger, Old Ralcorp, which was now comprised of the branded cereal and
snack mix businesses (the Branded Business), changed its name to General
Mills Missouri, Inc. This completed the $570 transaction with General Mills,
Inc. (General Mills) that was first announced in August 1996. The $570 value
was reached by General Mills assuming $215 in Ralcorp debt and related
accrued interest and funding the remaining $355 through the distribution of
General Mills stock to Ralcorp shareholders of record on January 31, 1997.
For financial reporting purposes, Ralcorp is a "successor registrant"
to Old Ralcorp and, as such, the accompanying Ralcorp financial statements
represent the historical financial position and results of operations of Old
Ralcorp, for periods prior to January 31, 1997, and Ralcorp, for subsequent
periods. Therefore, references to the "Company" or "Ralcorp", for periods
prior to January 31, 1997, are references to Old Ralcorp, without giving
effect to the Merger or the Spin-Off.
NOTE 2 - BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation - The financial statements as of, and for the years
ended September 30, 1997 and 1996 are presented on a consolidated basis. All
significant intercompany transactions have been eliminated.
These financial statements include the accounts of Ralcorp and its
majority-owned subsidiaries. Investments in affiliated companies, 20%
through 50%-owned, are carried at equity.
Cash equivalents for purposes of the Consolidated Statement of Cash
Flows are considered to be all highly liquid investments with an original
maturity of three months or less.
Financial Instruments - The Company has a policy which allows the use
of various derivative financial instruments to manage the Company's financial
risk that exists as part of conducting business. Under the policy, the
Company is not permitted to engage in speculative or leveraged transactions
that have the potential for a disproportionate ratio between the change in
value of the liability being hedged and the expected change in value of the
related derivative instrument. The Company will not hold or issue financial
instruments for trading purposes. As of September 30, 1997, the Company
had no material derivative financial instruments outstanding.
Inventories are valued generally at the lower of average cost or
market. In connection with purchasing key raw ingredient materials, the
Company follows a policy of from time to time using commodities futures
contracts in the management of commodities pricing risks that are inherent to
its business operations. Such instruments are not held or issued for trading
purposes. The Company uses these hedging instruments to reduce the risk of
price fluctuations related to future raw materials requirements for
commodities such as corn, wheat, oats and flour. The terms of such
instruments generally do not exceed twelve months, and depend on the
commodity and other market factors. Such contracts are accounted for as
hedges, with related gains and losses ultimately included as part of the cost
of products sold. The effect of any realized or deferred gains or losses is
immaterial to the financial condition and results of operations of the
Company.
-29-
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- -------------------------------------------------------------------------------
Property at Cost - Expenditures for new facilities and those which
substantially increase the useful lives of the property, including interest
during construction, are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from
the accounts and gains or losses on the disposition are reflected in
earnings.
Depreciation is generally provided on the straight-line basis by
charges to costs or expenses at rates based on the estimated useful lives of
the properties. Estimated useful lives range from 3 to 25 years for
machinery and equipment and 10 to 50 years for buildings.
Intangible Assets include the excess of cost over the net tangible
assets of acquired businesses and are amortized over estimated periods of
related benefit ranging from 4 to 40 years. The Company also defers systems
development costs when they reach technological feasibility. Amounts
deferred are amortized over estimated periods of related benefit not to
exceed 5 years. Intangible assets are included in Investments and Other
Assets.
Impairment - The Company continually evaluates whether events or
circumstances have occurred which might impair the recoverability of the
carrying value of its long-lived assets, identifiable intangibles and
goodwill.
Income Taxes have been provided in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS
109). FAS 109 requires the liability method of income tax accounting,
accordingly, a deferred tax liability or asset is recognized for the effect
of temporary differences between financial and tax reporting.
Earnings per Share - The computation of earnings per common share for
the years ended September 30, 1997, 1996 and 1995 are based on the weighted
average number of shares of Ralcorp Stock outstanding for the years then
ended.
Advertising Costs are expensed in the year in which the costs are
incurred.
Estimates - The preparation of financial statements in conformity with
Generally Accepted Accounting Principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingent assets
and liabilities. Actual results could differ from those estimates.
NOTE 3 - EQUITY INVESTMENT IN VAIL RESORTS, INC.
The Company's equity investment in affiliated companies includes an
approximate 22.6% interest in Vail at September 30, 1997. The Company
accounts for its investment in Vail by the equity accounting method. The
carrying value of this investment was $55.4 at September 30, 1997. The
market value of the Company's investment in Vail was $202.1 at September 30,
1997. As of the January 1997 sale of Ralston Resorts, the Company's equity
interest in the underlying net assets of Vail exceeded the net book value of
the net assets contributed by the Company to Vail by $37.5. This excess is
being amortized ratably to the investment in Vail over 20 years.
Except in limited circumstances, terms of a shareholder agreement
provide that, the Company will not acquire any additional shares of Vail
stock. The Company has registration rights with respect to the Vail stock,
but the shareholder agreement provides that, with certain limited exceptions,
Vail and its largest shareholder can purchase at market prices any Vail stock
the Company desires to sell. The shareholder agreement provides that the
Company will vote the shares of Vail stock in accordance with the
recommendation of Vail's Board of Directors with respect to shareholder
proposals and nominations to that Board, and with respect to other proposals,
in proportion to the votes of all other shareholders. However, the Company
may vote as it deems appropriate with respect to proposals for the merger of
Vail, the sale of all Vail assets, the creation of any other class of voting
stock of Vail or changes to Vail's certificate of incorporation or bylaws if
such changes adversely affect the Company's rights under the shareholder
agreement. The Company has two representatives on the 17-member Vail Board
of Directors.
Presented below is summary financial information of Vail:
SEPTEMBER 30,
1997
- ----------------------------------------------------------------------
Current assets $ 79.5
Noncurrent assets 779.6
----------------
Total assets $859.1
================
Current liabilities $ 81.1
Noncurrent liabilities 372.3
Stockholders' equity 405.7
----------------
Total liabilities and stockholders' equity $859.1
================
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- -------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
- ------------------------------------------------------------------------
Net sales $246.2
Total operating expenses 205.2
------------------
Income from operations $ 41.0
==================
Net income $ 14.1
==================
Company's equity income, net of deferred taxes $ 2.9
==================
NOTE 4 - RESTRUCTURING CHARGES
During the year ended September 30, 1997, the Company recorded a pre-
tax restructuring charge of $15.1 ($9.5 after taxes or $.29 per common share)
to cover costs associated with the sale of the Company's Branded Business,
including severance payments to employees whose jobs were eliminated and
financial penalties related to the early termination of information systems
contracts. The level of systems support included in these contracts was no
longer warranted after the Branded Business sale. Also, during the year
ended September 30, 1997, the Company recorded a pre-tax restructuring charge
of $4.6 ($2.9 after taxes or $.09 per common share). This charge covered
severance costs for certain employees whose jobs were eliminated in
downsizing initiatives.
For the year ended September 30, 1996, the Company recorded a pre-tax
charge of $16.5 ($10.4 after taxes or $.31 per common share) to recognize the
costs related to the restructuring of its ready-to-eat cereal subsidiary,
Ralston Foods. As a result of this restructuring plan, certain positions
were eliminated from the Ralston Foods division and corporate support groups,
primarily at the Company's headquarters in St. Louis, MO. In addition, the
restructuring plan included the partial closing of the Ralston Foods
production facility in Battle Creek, MI.
The restructuring charges and their utilization are summarized in the
following table.
FY 1996 UTILIZED IN FY 1997 UTILIZED IN BALANCE OF
CHARGES FY 1996 CHARGES FY 1997 RESERVE
- --------------------------------------------------------------------------------------------------------------------------
Salaries, severance
and benefits $ 8.0 $ (5.0) $ 8.8 $(11.2) $ .6
Asset writedowns 7.3 (7.3) 3.0 (2.2) .8
Contract penalties 6.2 (6.2) -
Other 1.2 (.5) 1.7 (1.0) 1.4
---------------------------------------------------------------------------
Total restructuring
charges $16.5 $(12.8) $19.7 $(20.6) $2.8
===========================================================================
NOTE 5 - NONRECURRING CHARGES
In September 1996, the Company recorded a $109.5 pre-tax impairment
charge related to its private label ready-to-eat and hot cereal operations.
Dramatic changes in the pricing and promotion environment of the ready-to-eat
cereal category and the effect these changes had and will continue to have on
the Company's private label cereal business, caused the Company to record
this charge. The charge was determined under the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," (FAS 121)
which was issued by the Financial Accounting Standards Board in March 1995.
FAS 121 established accounting standards for recognizing the impairment of
long-lived assets, identifiable intangibles and goodwill, whether to be
disposed of or to be held and used. In general, FAS 121 requires recognition
of an impairment loss when the sum of undiscounted expected future cash flows
is less than the carrying amount of such assets. Ultimately, it was
determined that the projection of future cash flows generated by the private
label cereal operations would not be sufficient to recover the carrying value
of assets associated with such operations. The amount of the September 1996
impairment loss was recognized by the Company as a write-down of fixed assets
to fair value.
In September 1995, the Company decided to exit the industrial oats
business and close oats milling operations at its Cedar Rapids, IA facility.
This decision did not affect the Company's branded and private label consumer
hot cereal business which continues to operate at the Cedar Rapids location.
The consumer and industrial oats businesses were acquired in November 1993 as
part of the acquisition of the National Oats Company from Curtice Burns
Foods, Inc.
The decision to exit the industrial business and close milling
operations was reached due to excess industry capacity which depressed
selling prices despite significantly higher raw ingredient costs. In
addition, the location of the milling operations placed the Company at a
competitive disadvantage due to higher freight costs. As a result, the
Company recorded, in fiscal 1995, a nonrecurring pre-tax charge of $10.1 to
cover the costs of exit, consisting primarily of the write-down of the
carrying value of related fixed assets, or $9.8, to fair value less related
disposition costs. The fiscal 1995 operating loss, for the operations
affected by the exit decision, was approximately $3.7.
In addition to the exit-related charge, the Company also recorded a
non-recurring pre-tax charge of $11.8 in fiscal 1995 representing the
impairment of the remaining fixed and intangible assets related to the
consumer hot cereal business. A portion of the fiscal 1996 impairment charge
also pertained to these assets. The entry of a significant new competitor
into
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R A L C O R P H O L D I N G S, I N C.
- -------------------------------------------------------------------------------
the private label hot cereal category adversely affected the price structure
of the category and precipitated the impairment charge. Like the fiscal 1996
charge, this charge and the previously mentioned exit charge, were determined
under the provisions of FAS 121. The amount of the September 1995 impairment
loss was recognized by the Company as a write-down of goodwill and fixed
assets to fair value.
With regard to all the above referenced charges, fair value was
determined as the present value of estimated expected future cash flows using
a discount rate commensurate with
the risks involved.
NOTE 6 - TRANSACTIONS WITH RALSTON
The Company and Ralston entered into a Bridging Agreement in connection
with the 1994 Spin-off under which Ralston continued to provide certain
administrative, technical services and office facilities for the Company's
headquarters. As of September 30, 1995 most of these arrangements had ended.
Prior to the 1994 Spin-off the expenses related to these services were
allocated to the Company based on utilization or other methods deemed
reasonable by management. Actual expenses paid by the Company to Ralston
were $1.6, $1.7 and $19.2 for the years ended September 30, 1997, 1996 and
1995, respectively.
NOTE 7 - ACQUISITION
On April 21, 1997, the Company completed the purchase of the Wortz
Company, a private label cracker and cookie operation. Wortz, which will be
operated as part of the Company's Bremner operation, is headquartered in
Poteau, OK, with annual sales of approximately $70. The acquisition was
financed by a combination of available cash and debt under the Company's
credit facility and accounted for using the purchase method of accounting,
whereby, the results of operations are included in the consolidated statement
of earnings from the date of acquisition.
The total consideration given in relation to this acquisition was
approximately $46.0, of which, $4.4 is expected to be paid in fiscal 1998.
Goodwill associated with this acquisition is included in the "Investments and
Other Assets" line of the accompanying Consolidated Balance Sheet at
September 30, 1997.
NOTE 8 - DIVESTITURES
On January 31, 1997, the Company effectively sold its Branded Business
through a tax-free transaction with General Mills. This transaction was
valued at $570, comprised of General Mills assuming $215 in Company debt and
related accrued interest and the remaining $355 coming through the
distribution of General Mills stock to Ralcorp shareholders of record on
January 31, 1997. Subsequent to the Merger, the Company recorded a $515.4
tax-free gain related to this sale transaction.
On January 3, 1997, the Company effectively sold its ski resort
operations to Vail in exchange for an approximate 22.6% of Vail's outstanding
common stock, or 7,554,406 shares, and the assumption by Vail of $165 of
Resorts debt. In accordance with Accounting Principles Board Opinion No. 29
- - "Accounting for Nonmonetary Transactions" (APB 29), the Resort Operations
transaction with Vail has been treated as a nonmonetary exchange. The
assumption of debt and the issuance of equity qualifies this transaction as
being nonmonetary in nature. Therefore, the initial equity investment in
Vail has been recorded at Ralcorp's net book value of assets contributed, or
$50.7. The Company records the pre-tax amount of the Company's equity
interest in the earnings of Vail as an increase to its Investment account.
Equity earnings aggregated $4.7 in fiscal 1997, including $1.5 of
amortization income. This amortization income is the result of the basis
difference between the net book value of the net assets contributed to Vail
and the Company's approximate 22.6% equity interest in the Vail net assets,
which is being amortized over 20 years.
NOTE 9 - INCOME TAXES
The provisions for income taxes consisted of the following:
1997 1996 1995
- -------------------------------------------------------------------------------------------------
CURRENT:
United States $ 1.6 $ 17.9 $ 26.2
State .2 1.6 3.6
-------------------------------------------
Total current 1.8 19.5 29.8
-------------------------------------------
DEFERRED:
United States 7.5 (42.1) (7.9)
State 1.1 (3.7) (.5)
-------------------------------------------
Total deferred 8.6 (45.8) (8.4)
-------------------------------------------
Provision (benefit) for
income taxes $10.4 $(26.3) $(21.4)
===========================================
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- -------------------------------------------------------------------------------
Income taxes were 39.2%, 36.0% and 39.1% of pre-tax earnings in 1997,
1996 and 1995, respectively. A reconciliation of income taxes with amounts
computed at the statutory federal rate follows:
1997 1996 1995
- -------------------------------------------------------------------------------------------------
Computed tax at federal statutory
rate (35.0% for all years) $ 9.3 $(25.6) $19.2
State income taxes, net of federal
tax benefit .9 (2.3) 2.0
Other, net .2 1.6 .2
---------------------------------------
$10.4 $(26.3) $21.4
=======================================
The deferred tax assets and deferred tax liabilities as set forth on
the Consolidated Balance Sheet at September 30, 1997 and 1996 are as follows:
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
-----------------------------------------------------------------
1997 1996 1997 1996
-----------------------------------------------------------------
CURRENT:
Accrued liabilities $ 4.3 $ 5.4
Inventories 2.2 3.0
Other items .4 .4
-----------------------------------------------------------------
Total current 6.9 8.8 - -
-----------------------------------------------------------------
NONCURRENT:
Property basis differences 8.0 4.0
Postretirement benefits 5.5 5.9
Intangible assets 6.6 7.0
Workers' compensation 2.6 3.0
Deferred compensation 2.2 1.7
Equity investment in Vail 12.1
Equity earnings 1.8
Other items 2.8 1.8
-----------------------------------------------------------------
Total noncurrent 27.7 23.4 13.9 -
-----------------------------------------------------------------
Total deferred taxes $34.6 $32.2 $13.9 $ -
=================================================================
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The Company believes it is probable that the net deferred tax assets,
reflected above, will be realized on future tax returns, primarily from the
generation of future taxable income.
Total income tax payments made by the Company were $4.5 and $25.9 for the
years ended September 30, 1997 and 1996, respectively.
NOTE 10 - PENSION PLAN
The Company sponsors a noncontributory defined benefit pension plan
which covers substantially all regular employees in the United States. The
plan provides retirement benefits based on years of service and final-average
or career-average earnings. It is the Company's practice to fund pension
liabilities in accordance with the minimum and maximum limits imposed by the
Employee Retirement Income Security Act of 1974 (ERISA) and federal income
tax laws. Plan assets consist primarily of investments in commingled
employee benefit trusts consisting of marketable equity securities, corporate
and government debt securities and real estate.
The components of net pension costs include the following:
YEAR ENDED SEPTEMBER 30,
----------------------------------
DEFINED BENEFIT PLAN 1997 1996 1995
----------------------------------
Service cost (benefits earned
during the period) $ 4.3 $ 4.3 $ 4.0
Interest cost on projected
benefit obligation 5.8 5.6 4.8
Return on plan assets (24.5) (10.7) (8.3)
Net amortization and deferral 17.2 4.8 3.1
----------------------------------
Total $ 2.8 $ 4.0 $ 3.6
==================================
The following table presents the funded status of the Company's defined
benefit plan and amounts recognized in the balance sheet at September 30,
1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------------------------
ACTUARIAL PRESENT VALUE OF:
Vested benefits $(48.1) $(54.6)
Nonvested benefits (6.3) (7.5)
--------------------------
Accumulated benefit obligation (54.4) (62.1)
Effect of projected future salary increases (11.2) (17.3)
--------------------------
Projected benefit obligation (65.6) (79.4)
Plan assets at fair value 98.2 86.3
--------------------------
Plan assets in excess of projected
benefit obligation 32.6 6.9
Unrecognized net gain (37.7) (16.7)
Unrecognized prior service cost 1.5 3.9
Unrecognized net asset at transition (.4) (.6)
--------------------------
Accrued pension costs included in the
Consolidated Balance Sheet $ (4.0) $ (6.5)
==========================
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The Company recognized curtailment gains in 1997 and 1996 of $3.4 and
$.7, respectively, to the pension plan. The fiscal 1997 curtailment gain
resulted from the reduction of employees through the Branded Business sale
and fiscal 1997 restructuring initiatives. The curtailment gain in fiscal
1996 was a result of jobs eliminated through restructuring initiatives in
that fiscal year. See the "Restructuring Charges" footnote for further
discussion of restructuring activities that took place in fiscal years 1997
and 1996.
The key actuarial assumptions used in determining net pension costs and
the projected benefit obligation were as follows:
1997 1996
- ------------------------------------------------------------------------
Discount rate 7.625% 7.625%
Rate of future compensation
increases 5.25% 5.25%
Long-term rate of return on
plan assets 9.50% 9.50%
In addition, the Company sponsors a defined contribution plan covering
a substantial majority of its employees under which the Company makes
matching contributions. The Company matching contribution is capped at a
certain percentage of employee earnings. The costs of the Company's defined
contribution plan for the years ended September 30, 1997, 1996 and 1995 were
$2.8, $5.2 and $5.7, respectively. During fiscal 1997, the Company revised
its defined contribution plan whereby; effective on April 1, 1997 and
depending on years of service, for each dollar contributed by participants,
up to 6% of pre-tax earnings, the Company will contribute fifty cents. Prior
to this modification the Company made "dollar-for-dollar" matching
contributions up to 6% of pre-tax earnings.
NOTE 11 - POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS AND OTHER
POSTEMPLOYMENT BENEFITS
The Company provides health care and life insurance benefits for
certain groups of retired employees who meet specified age and years of
service requirements. The Company is, however, phasing out its subsidy of
medical benefits for a substantial majority of its future retirees. Retiree
contributions are adjusted periodically in order to share increases in the
costs of providing medical benefits.
The net periodic cost of postretirement benefits includes the following
components:
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
Service cost $ .2 $ .3 $ .3
Interest cost 1.1 1.0 .9
Amortization of unrecognized
prior service cost .1 .1 (.1)
-------------------------------------
Net periodic postretirement
benefit cost $1.4 $1.4 $1.1
=====================================
The following table sets forth the status of the Company's
postretirement benefit plans at September 30, 1997 and 1996:
1997 1996
- -------------------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ 8.5 $ 3.4
Fully eligible active plan participants 3.0 6.5
Other active plan participants 3.3 4.4
------------------------
Total accumulated postretirement benefit
obligation 14.8 14.3
Unrecognized net gain - 1.8
Unrecognized prior service cost (.5) (.7)
------------------------
Accrued postretirement benefit costs
included in Consolidated Balance Sheet $14.3 $15.4
========================
The Company recognized curtailment gains in 1997 and 1996 of $1.8 and
$.2, respectively, to the postretirement medical and life insurance plan.
The fiscal 1997 curtailment gain resulted from the reduction of employees,
and their related postretirement benefit liability, through the Branded
Business sale and fiscal 1997 restructuring initiatives. The curtailment
gain in fiscal 1996 was a result of jobs eliminated through restructuring
initiatives in the fiscal year. See the "Restructuring Charges" footnote for
further discussion of restructuring activities that took place in the fiscal
years 1997 and 1996.
Actuarial assumptions used to determine the accumulated postretirement
benefit obligation include a discount rate of 7-5/8% in 1997 and 1996. For
1997 and 1996, the annual increase in per capita costs of covered health care
benefits is assumed to be 6%. If the health care trend rates were increased
one percentage point, the current year postretirement benefit costs would
have increased $.2 and the accumulated postretirement benefit obligation as
of September 30, 1997 would have increased by $1.7.
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NOTE 12 - LONG-TERM DEBT
As of September 30, 1997, the Company had no outstanding long-term debt
remaining on its Consolidated Balance Sheet.
As discussed in the "General Information" footnote of this document,
terms of the respective individual sale agreements provided that Vail
Resorts, Inc. assume $165 of Resorts debt and General Mills, Inc. assume the
balance of outstanding Company debt.
At September 30, 1996, long-term debt associated with the Company's
businesses consisted of the following:
September 30, 1996
- -------------------------------------------------------------------------------
8.75% Notes due 2004 $150.0
Bank Credit Agreements 200.1
10.85% and 11.15% Notes due
9/30/97 and 9/30/98 3.0
Refunding Revenue Bonds Series 90-
7.20% -7.875% due 9/2/98, 9/1/06
and 9/1/08 20.4
Refunding Revenue Bonds Series 91-
7.125% and 7.375% due 9/1/02
and 9/1/10 3.0
Other 1.9
----------
378.4
Less Current Portion (1.8)
----------
$376.6
==========
Included in the Bank Credit Agreements line item, at September 30,
1996, was $140.0 of bank debt borrowed directly by the Company's Resort
Operations and fully guaranteed by the Company. This debt amount represents
a portion of the Resorts debt assumed by Vail through the January 3, 1997
sale of Resort Operations to Vail.
The Company has a $50 working capital credit facility. The proceeds of
the facility may be used to fund Ralcorp's working capital needs, capital
expenditures, and other general corporate purposes. Provisions, of the $50
credit facility require the Company to maintain certain financial ratios and
a minimum level of shareholders' equity.
NOTE 13 - FINANCIAL INSTRUMENTS
AND RISK MANAGEMENT
Fair Values
The Company's financial instruments primarily will include certain
short-term instruments and short and long-term debt. As of September 30,
1996, the fair value of long-term debt, including current maturities, was
$391.6 compared to the carrying value of $378.4. The fair value of the
Company's long-term debt has been estimated using primarily quoted market
prices obtained through independent pricing sources for the same or similar
types of borrowing arrangements, taking into consideration the underlying
terms of the debt, such as the coupon rate, term to maturity, tax impact to
investors and imbedded call options, if any.
Due to their nature, the carrying amounts of short-term financial
instruments, such as marketable securities, receivables and accounts payable,
reported on the Consolidated Balance Sheet approximate fair value.
Interest Rate Swap Agreements
In fiscal 1996, the Company entered into two interest rate swap
transactions, in order to hedge its exposure to interest rate fluctuations on
$100 of existing floating rate borrowings under the bank credit agreements.
Through these interest rate swaps, the Company paid interest based on a fixed
rate while receiving a LIBOR-based floating rate. The impact of these
interest rate swaps on interest expense was immaterial to the Company's
results of operations. As a result of the sale of the Branded Business to
General Mills, General Mills assumed these interest rate swap transactions.
Therefore, at September 30, 1997, the Company was not party to any interest
rate swap agreements.
Concentration of Credit Risk
The Company's primary concentration of credit risk is related to
certain trade accounts receivable due from several highly leveraged or "at
risk" customers. At September 30, 1997 and 1996 the amount of such
receivables was $2.4 and $3.1, respectively. Consideration was given to the
financial position of these customers when determining the appropriate
allowance for doubtful accounts.
NOTE 14 - SHAREHOLDERS' EQUITY
The Company's Restated Articles of Incorporation authorize the issuance
of up to 300,000,000 shares of $.01 par value Common Stock. As of September
30, 1997, the Company had approximately 33,011,000 shares of Common Stock
issued and outstanding. The Company has not issued any shares of Preferred
Stock. The terms of any series of Preferred Stock (including but not limited
to the dividend rate, voting rights, convertibility into other Company
securities and redemption) may be set by the Company's Board of Directors.
On December 18, 1996, the Company's Board of Directors declared a
dividend distribution of one share purchase right (Right) for each
outstanding share of the Company's Common Stock. Each Right entitles a
shareholder to purchase from the Company one common share at an exercise
price of $30 per share subject to antidilution adjustments. The Rights,
however,
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- -------------------------------------------------------------------------------
become exercisable only at the time a person or group acquires, or commences
a public tender offer for 20% or more of the Company's Common Stock. If an
acquiring person or group acquires 20% or more of the Company's Common Stock,
the price will be further adjusted so that each Right (other than those held
by the acquiring person or group) would entitle the holder to acquire for the
exercise price a number of shares of the Company's Common Stock found by
dividing the then current exercise price by the number of shares of Company
Common Stock for which a Right is then exercisable and dividing that amount
by 50% of the then current per share market price of the Company's Common
Stock. In the event that the Company merges with, or transfers 50% or more
of its assets or earning power to, any person or group after the Rights
become exercisable, holders of the Rights may purchase, at the exercise
price, Common Stock of the acquiring entity having a value equal to twice the
exercise price. The Rights can be redeemed by the Board of Directors at $.01
per Right only up to the tenth business day after a person or group acquires
20% or more of the Company's Common Stock. Also, following the acquisition
by a person or group of beneficial ownership of at least 20% but less than
50% of the Company's Common Stock, the Board may exchange the Rights for
Common Stock at a ratio of one share of Common Stock per Right. The Rights
expire on January 31, 2007. The Rights replaced similar rights that were
redeemed on January 31, 1997, by payment of a redemption price of $.05 per
Right in connection with the sale of the Branded Business to General Mills,
Inc. The total payment made by the Company as a result of this redemption
was approximately $1.7.
The Company did not repurchase any shares of its Common Stock during
the fiscal year. Subsequent to the end of fiscal 1997, the Company's Board
of Directors approved an authorization to buy back up to one million shares
of the Company's Common Stock. This authorization allows Company management
to make purchases from time to time at prevailing market prices.
At September 30, 1997, there were 2,894,300 shares of Company Common
Stock reserved under various employee incentive compensation and benefit
plans.
NOTE 15 - INCENTIVE COMPENSATION
During fiscal 1997 and shortly before the Spin-Off, the
Board of Directors adopted the Incentive Stock Plan (Plan), which reserves
shares to be used for various stock based compensation awards. The Plan
provides that eligible employees may receive stock option awards and other
stock awards payable in whole or part by the issuance of stock. In
connection with the Spin-Off, all previous outstanding stock-based
compensation awards and the Old Ralcorp plan were terminated. To effect this
termination, the Company's Board of Directors accelerated the vesting of the
outstanding stock options and the value of those "in-the-money" options were
paid to the recipients in cash. Stock options that had an exercise price
higher than the market price of Ralcorp Stock were valued at $.50 per share.
As a result, included in the Consolidated Statement of Earnings for the year
ended September 30, 1997, was a stock option settlement expense of $2.8. In
addition, the Company's Board of Directors accelerated the vesting of all
outstanding restricted stock awards.
Under the provisions of the Plan, 850,000 stock option awards were
issued at an option price equal to the fair market value of the shares at
grant date and accordingly, no charge against earnings was made. The
weighted-average remaining contractual life of the 850,000 stock options
outstanding at September 30, 1997, is 9.6 years.
Changes in incentive and nonqualified stock options outstanding are
summarized as follows:
WEIGHTED AVG.
SHARES UNDER EXERCISE
OPTION PRICES
- ----------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1995
($13.23 to $26.14 per share) 1,302,627 $17.94
--------------------------------------
Granted -
Exercised ($13.23 to $24.08 per share) (13,555) 14.10
Canceled (63,191) 19.21
--------------------------------------
Outstanding at September 30, 1996
($13.23 to $26.14 per share) 1,225,881 17.93
--------------------------------------
Granted ($12.00 per share) 850,000 12.00
Exercised ($13.23 to $24.08 per share) (186,271) 15.46
Spin-Off Termination/Canceled (1,039,610) 18.38
--------------------------------------
Outstanding at September 30, 1997
($12.00 per share) 850,000 12.00
======================================
Weighted-average fair value of
options granted during fiscal 1997 6.05
Shares exercisable at:
September 30, 1996 245,019 15.05
--------------------------------------
September 30, 1997 - -
--------------------------------------
At September 30, 1997, under the Plan, there were 2,012,431 shares
available for future awards. In addition, at September 30, 1997 there were
no restricted stock awards outstanding. However, the Company's accounting
policy for restricted stock awards provides that compensation cost be
recognized over the appropriate vesting period.
Effective September 30, 1997, the Company elected to disclose the pro
forma effects of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based
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R A L C O R P H O L D I N G S, I N C.
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Compensation" (FAS 123). As allowed under the provisions of FAS 123, the
Company will continue to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations in accounting for the stock
options awarded under the Plan. Accordingly, as previously discussed, no
compensation cost has been recognized for the stock options granted in fiscal
1997. Had compensation cost for the Plan been determined consistent with FAS
123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
1997
- -------------------------------------------------------------------------------------
Net Income:
As reported $531.5
Pro forma $531.0
Earnings per share:
As reported $ 16.11
Pro forma $ 16.09
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1997
- -------------------------------------------------------------------------------------
Expected volatility 30.00%
Risk-free interest rate 6.67%
Expected lives 5 - 9.5 years
NOTE 16 - COMMITMENTS
AND CONTINGENCIES
The Company is a party to a number of legal proceedings
in various state and federal jurisdictions. These proceedings are in varying
stages and many may proceed for protracted periods of time. Some proceedings
involve highly complex questions of fact and law.
On January 4, 1993, Ralston was served with the first of nine
substantively identical actions currently pending in the United States
District Court for the District of New Jersey. The suits have been
consolidated and styled In Re Baby Food Antitrust Litigation, No. 92-5495
(NHP). The consolidated proceeding is a certified class action by and on
behalf of all direct purchasers of baby foods (other than the defendants and
governmental entities), alleging that the Beech-Nut baby food business (and
its predecessor Nestle Holdings, Inc.) together with Gerber Products Company
and H. J. Heinz Company, conspired to fix, maintain and stabilize the prices
of baby foods during the period January 1, 1975 to August 31, 1992, and
seeking treble damages.
On January 19 and 21, 1993, Ralston was served with two class actions
on behalf of indirect purchasers (consumers) of baby food in California,
which contain substantially identical charges. These actions have been
consolidated in the Superior Court for the County of San Francisco and styled
Bruce, et al. v. Gerber Products Company, et al., No. 94-8857. On January
19, 1993, Ralston was served with a similar action filed in Alabama state
court on behalf of indirect purchasers of baby food in Alabama, styled
Johnson, et al. v. Gerber Products Company, et al., No. 93-L-0333-NE. Both
state actions allege violations of state antitrust laws and are substantively
identical to each other. On July 28, 1997, Judge Nicholas H. Politan granted
Ralston's Motion For Summary Judgment in the case then pending in the U.S.
District Court for the District of New Jersey and dismissed the case with
prejudice. Plaintiffs have appealed Judge Politan's ruling. The Bruce and
Johnson cases remain inactive pending resolutions of In Re Baby Food,
Antitrust Litigation. Similar state actions may be filed in states having
laws permitting suits by indirect purchasers. Ralston and the Company have
agreed in the 1994 Spin-off Reorganization Agreement that all expenses
related to the above antitrust matters will be shared equally, but that
Ralcorp's liability for any settlement or judgment will not exceed $5, any
amount in excess of that would be paid by Ralston. Expenses and liability
with respect to certain other lawsuits which are not believed by the Company
to be material, either individually or in the aggregate, will also be shared
pursuant to the 1994 Spin-off Reorganization Agreement.
The operations of the Company, like those of similar businesses, are
subject to various federal, state, and local laws and regulations intended to
protect public health and the environment, including air and water quality
and waste handling and disposal. The Company has received notices from the
U.S. Environmental Protection Agency, state agencies, and/or private parties
seeking contribution, that it has been identified as a "potentially
responsible party" (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act, and the Company may be required to share in
the cost of cleanup with respect to one waste disposal site related to the
Branded Business. Pursuant to a Reorganization Agreement with General Mills,
General Mills has agreed to indemnify and defend the Company for and against
liabilities associated with the site. General Mills' indemnification and
defense obligations are limited as more fully discussed below. The Company's
ultimate liability in connection with environmental matters may depend on
many factors including, but not limited to, the volume of material
contributed to the site, the existence of other parties responsible for
remediation and their financial viability, reports of experts (internal or
external), and the remediation methods and technology to be used.
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- -------------------------------------------------------------------------------
Except as noted, many of the foregoing matters are in preliminary
stages, involve complex issues of law and fact and may proceed for protracted
periods of time. The amount of alleged liability, if any, from these
proceedings cannot be determined with certainty; however, in the opinion of
Company management, based upon the information presently known as well as
upon the limitation of its liabilities set forth in the 1994 Spin-off
Reorganization Agreement and the Reorganization Agreement with General Mills,
the ultimate liability of the Company, if any, arising from the pending legal
proceedings, as well as from asserted legal claims and known potential legal
claims which are probable of assertion, taking into account established
accruals for estimated liabilities (if any), should not be material to the
Company's consolidated financial position and results of operation. In
addition, while it is difficult to quantify with certainty the potential
financial impact of actions regarding expenditures for environmental matters,
in the opinion of management, based upon the information currently available,
the ultimate liability arising from such environmental matters should not be
material to the Company's consolidated financial position and results of
operation.
Through the Reorganization Agreement with General Mills, General Mills
assumed all liabilities associated with the Branded Business, whether arising
prior to or after General Mills' acquisition of the Branded Business.
However, if the combined liabilities for matters unknown at the Distribution
Date, for known litigation disclosed to General Mills on the Distribution
Date and related to the Branded Business, and for breaches of representations
and warranties made by the Company to General Mills, exceed $6, then the
Company may be required to indemnify General Mills for the foregoing matters
to the extent associated liabilities exceed $6. The Company's potential
indemnification responsibility associated with breaches of representations
and warranties expires July 31, 1998, provided no claim is asserted prior to
that date. The Company's potential indemnification responsibilities related
to unknown liabilities and disclosed litigation expire January 31, 2002,
provided no claim is asserted prior to that date. Presently, management
believes there is not a significant likelihood that liabilities assumed by
General Mills and breaches of representations and warranties will exceed in
the aggregate, $6.
In connection with the sale of the Company's Resort Operations in 1997,
Vail assumed the obligation to repay, when due, certain indebtedness of
Resort Operations consisting of the following: Series 1990 Sports Facilities
Refunding Revenue Bonds in the aggregate principal amount of $20.36, bearing
interest at rates ranging from 7.2% to 7.875% and maturing in installment in
1998, 2006, and 2008; and Series 1991 Sports Facilities Refunding Revenue
Bonds in the aggregate principal amount of $3, bearing interest at 7.125% for
the portion maturing in 2002 and 7.375% for the portion maturing in 2010
(collectively, "Resort Operations Debt"). The Resort Operations Debt is
guaranteed by Ralston. Pursuant to the 1994 Spin-off Reorganization
Agreement, the Company agreed to indemnify Ralston for any liabilities
associated with the guarantees. To facilitate the sale of the Branded
Business, General Mills acquired the legal entity originally obligated to so
indemnify Ralston. Pursuant to the Reorganization Agreement with General
Mills, however, the Company has agreed to indemnify General Mills for any
liabilities it may incur with respect to indemnifying Ralston relating to the
aforementioned guarantees. Presently, management believes that there is not
a significant likelihood that Vail will default on its repayment obligations
with respect to the Resort Operations Debt.
In the opinion of management, the sale of Resorts (see the
"Divestitures" footnote) qualifies as a non-taxable exchange of stock under
Section 368 (a) (1) (B) of the Internal Revenue Code. Therefore, the
Company's tax basis in Resorts stock was carried over to its investment in
the 7,554,406 shares of Vail stock (approximately $3 per share).
Accordingly, no deferred tax (or interest, if any) has been provided on this
transaction.
Lease Commitments
Future minimum rental commitments under noncancelable operating leases
in effect as of September 30, 1997 were: 1998 - $2.0, 1999 - $1.8, 2000 -
$1.7, 2001 - $1.9, 2002 - $1.8, thereafter - $4.7.
Future minimum rental commitments to be received under noncancelable
operating subleases in effect as of September 30, 1997 were: 1998 - $.3,
1999 - $.4, 2000 - $.4, 2001 - $.5, 2002 - $.5, thereafter - $1.5.
Total rental expense for all operating leases was $4.0 in 1997, $5.3 in 1996
and $4.1 in 1995.
NOTE 17 - SUPPLEMENTAL EARNINGS
STATEMENT INFORMATION
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Maintenance and repairs $21.2 $32.5 $29.7
Research and development 3.9 6.5 7.4
NOTE 18 - SUPPLEMENTAL CASH FLOW
STATEMENT INFORMATION
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Interest paid $4.5 $27.6 $27.9
Income taxes paid 4.6 25.9 29.7
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R A L C O R P H O L D I N G S, I N C.
- -------------------------------------------------------------------------------
NOTE 19 - SUPPLEMENTAL BALANCE SHEET
INFORMATION
1997 1996
- ---------------------------------------------------------------------------------------------------------------
RECEIVABLES-
Trade $43.7 $ 63.3
Income Taxes 8.5 6.6
Other 1.7 6.6
Allowance for doubtful accounts (1.0) (1.0)
------------------------------
$52.9 $ 75.5
==============================
INVENTORIES-
Raw materials and supplies $23.5 $ 26.5
Finished products 49.0 76.8
------------------------------
$72.5 $103.3
==============================
PREPAID EXPENSES-
Deferred income tax benefits $ 6.9 $ 8.8
Prepaid expenses 2.4 5.4
------------------------------
$ 9.3 $ 14.2
==============================
INVESTMENTS AND OTHER ASSETS-
Goodwill (net of accumulated amortization:
1997-$.9 and 1996-$7.9) $22.7 $ 29.1
Intangible assets (net of accumulated
amortization: 1997-$1.6
and 1996-$2.5) 9.6 14.1
Property held for development 12.4
Investments in affiliated companies 55.4 29.1
Deferred charges and other assets 1.4 3.4
------------------------------
$89.1 $ 88.1
==============================
ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES-
Trade accounts payable $40.9 $ 54.7
Incentive compensation, salaries
and vacations 4.9 7.0
Property taxes 2.5 5.3
Shutdown reserves 4.2 7.6
Advertising and promotion 4.9 9.6
Accrued Wortz acquisition-related items 4.4
Other items 16.4 16.4
------------------------------
$78.2 $100.6
==============================
OTHER LIABILITIES-
Postretirement medical and life $14.3 $ 15.4
Deferred compensation 5.7 4.4
Workers' compensation 7.3 7.7
Other items 8.1 13.2
------------------------------
$35.4 $ 40.7
==============================
NOTE 20 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, beginning of year $1.0 $ .8 $ .7
Provision charged to expense .2 .8 .4
Writeoffs, less recoveries (.2) (.6) (.3)
---------------------------------------------------
Balance, end of year $1.0 $1.0 $ .8
===================================================
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R A L C O R P H O L D I N G S, I N C.
- --------------------------------------------------------------------------------
Q U A R T E R L Y F I N A N C I A L I N F O R M A T I O N (U N A U D I T E D)
(Dollars in millions, except per share data)
The results of any single quarter are not necessarily indicative of the
Company's results for the full year. Prior to fiscal 1997, earnings of the
Company were highly seasonal, primarily due to Resort Operations which earned
more than the entire year's operating profit during the second fiscal
quarter. Cereal operations were also affected by seasonal Chex party mix
promotions which increased sales volume during the first fiscal quarters.
Subsequent to January 1997, however, the Company changed dramatically with
the sales of the Company's Branded Business and Resort Operations to General
Mills, Inc. and Vail Resorts, Inc., respectively. Earnings of the Company
remain seasonal, however, due to the Company's continuing equity interest in
Vail.
FISCAL 1997 First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $292.9 $161.4 $140.7 $144.7
Gross profit 151.7 67.1 47.8 47.9
Net earnings 13.1 <Fa> 510.4 <Fb><Fc> 3.1 4.9 <Fd>
Net earnings per common share<Fh><Fi> .40 <Fa> 15.47 <Fb><Fc> .09 .15 <Fd>
FISCAL 1996 First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $295.3 $277.4 $230.1 $224.6
Gross profit 153.0 138.0 103.5 96.1
Net earnings (loss) 14.7 21.2 (16.3) <Fe> (66.4) <Ff><Fg>
Net earnings (loss) per common share<Fh><Fi> .44 .64 (.50) <Fe> (2.02) <Ff><Fg>
<FN>
<Fa> Net earnings and earnings per share were negatively affected by the
inclusion of a pre-tax restructuring charge of $4.6 ($2.9 after taxes,
or $.09 per share).
<Fb> Net earnings and earnings per share were negatively affected by the
inclusion of a pre-tax restructuring charge of $18.4 ($11.6 after
taxes, or $.35 per share).
<Fc> Net earnings and earnings per share include a $516.5 tax-free gain on
the sale of the Branded Business.
<Fd> Net earnings and earnings per share include the favorable affect of a
$3.3 ($2.1 after tax or $.06 per share) adjustment to the restructuring
charge taken in the second quarter, partially offset by $1.1 in net
charges to the tax-free gain referred to in note (c).
<Fe> Net earnings (loss) and earnings (loss) per share were negatively
effected by the inclusion of pre-tax restructuring charge of $20.7
($12.7 after taxes, or $.39 per share).
<Ff> Net earnings (loss) and earnings (loss) per share were negatively
affected by the inclusion of pre-tax nonrecurring charges of $109.5
($68.8 after taxes, or $2.09 per share) and the recording of certain
transaction costs related to the Company's Resort Operations sale
totaling $4.0, pre-tax ($2.5 after taxes, or $.08 per share).
Partially offsetting these negative factors was a pre-tax adjustment to
the third quarter restructuring charge of $4.2 ($2.6 after taxes, or
$.08 per share).
<Fg> Net earnings were favorably impacted by adjustments to advertising and
promotion accruals recorded earlier in the year. This adjustment
became necessary when it was determined that redemption levels for in
-ad coupon programs and cereal sales volumes were below the
expectations used to record advertising and promotion expense in the
previous fiscal 1996 quarters.
<Fh> Based on actual weighted-average outstanding shares of Ralcorp Stock
for all periods presented.
<Fi> Earnings (loss) per common share is computed independently for each of
the periods presented, therefore, the sum of the earnings
per common share amounts for the quarters may not equal the total for
the year.
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R A L C O R P H O L D I N G S, I N C.
- -------------------------------------------------------------------------------
G E N E R A L C O R P O R A T E I N F O R M A T I O N
GENERAL OFFICE
Ralcorp Holdings, Inc.
P.O. Box 618
St. Louis, MO 63188-0618
Telephone: 314/877-7000
Internet: www.ralcorp.com
DATE AND STATE OF
INCORPORATION
Ralcorp - October 23, 1996 - Missouri
Old Ralcorp - January 19, 1994 - Missouri
NUMBER OF RECORD
SHAREHOLDERS
18,780
NUMBER OF EMPLOYEES
Approximately 2,500
NOTICE OF ANNUAL MEETING
The 1998 Annual Meeting of Shareholders will be held at the Gateway Center,
One Gateway Drive, Collinsville, Illinois at 10:00 a.m., Thursday, January
29, 1998. Proxy material for the Meeting is enclosed.
INDEPENDENT ACCOUNTANTS
Price Waterhouse, St. Louis, Missouri
FISCAL YEAR END
September 30
COMMON STOCK DATA
(for the year ended September 30)
MARKET PRICE RANGE:
1997 1996
First Quarter First Quarter
$18-3/4 - $21-1/2 $23 - $27-5/8
Second Quarter<F*> Second Quarter
$10-1/4 - $23 $23-5/8 - $28-3/8
Third Quarter Third Quarter
$9-3/4 - $14-3/4 $20-5/8 - $25-3/8
Fourth Quarter Fourth Quarter
$15 - $20-5/8 $19-3/4 - $22-1/2
<FN>
<F*> On January 31, 1997, General Mills, Inc. acquired Old Ralcorp in connection
with its purchase of the Branded Business. Stock prices on or before that
date are those of Old Ralcorp. After that date, the stock prices are those
of Ralcorp.
FORM 10-K INFORMATION
AND INVESTOR INQUIRIES
Shareholders may obtain, without charge, a copy of the Company's most recent
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission, by directing inquiries to:
Ralcorp Holdings, Inc.
Attn: Shareholder Services
P.O. Box 618
St. Louis, MO 63188-0618
Telephone: 314/877-7046
TRANSFER AGENT
AND REGISTRAR
Shareholder inquiries should be directed as indicated below:
For Address Changes and
Other Miscellaneous Inquiries:
First Chicago Trust Company
of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
(201) 324-0498
(800) 446-2617
For Stock Transfers and Changes
of Ownership:
Same as above, except
P.O. Box 2506
Shareholders may also communicate with First Chicago through the Internet.
Address: http://www.fctc.com
EXCHANGE LISTING
New York Stock Exchange, Inc.
(Ticker Symbol - RAH)
BOARD OF DIRECTORS
William H. Danforth <F1>,<F2>
Chairman of the Board,
Washington University
William D. George, Jr. <F1>,<F2>
Retired President and Chief Executive Officer,
S.C. Johnson & Son, Inc.
(consumer products)
Jack W. Goodall <F1>,<F2>
Chairman of the Board, Foodmaker, Inc.
(restaurants)
David W. Kemper <F1>,<F2>
Chairman, President and
Chief Executive Officer,
Commerce Bancshares, Inc.
(bank holding company)
Joe R. Micheletto
Chief Executive Officer and
President, Ralcorp Holdings, Inc.
William P. Stiritz <F1>,<F2>,<F3>
Chairman of the Board, Ralston Purina
Company (consumer products)
[FN]
<F1> Member of Audit Committee
<F2> Member of Nominating and
Compensation Committee
<F3> Chairman of the Board
A photograph of each director appears in the Proxy Statement for the
Company's Annual Meeting of Shareholders to be held on January 29, 1998.
OFFICERS
Joe R. Micheletto<F*>
Chief Executive Officer and President
Thomas G. Granneman
Vice President and Controller
Kevin J. Hunt<F*>
Corporate Vice President; and President,
Bremner, Inc.
Robert W. Lockwood<F*>
Corporate Vice President,
General Counsel and Secretary
James A. Nichols<F*>
Corporate Vice President; and President,
Ralston Foods
Daniel J. Sescleifer
Vice President and Treasurer
David P. Skarie<F*>
Corporate Vice President and
Director of Customer Development
Susan P. Widham<F*>
Corporate Vice President; and President,
Beech-Nut Nutrition Corporation
Ronald D. Wilkinson<F*>
Corporate Vice President and
Director of Product Supply
[FN]
<F*>Corporate Officer RAH
Listed
NYSE
THE NEW YORK STOCK EXCHANGE
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