1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter (Twenty-Six Weeks) Ended June 26, 1999
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from To
--------------------- -----------------------
Commission file number 0-398
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LANCE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0292920
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
8600 South Boulevard (P.O. Box 32368), Charlotte, North Carolina 28232
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(Address of principal executive offices) (Zip Code)
704-554-1421
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.83-1/3 par value -
29,957,997 shares outstanding as of August 5, 1999
2
LANCE, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Financial Statements:
Condensed Consolidated Balance Sheets -
June 26, 1999 (Unaudited) and December 26, 1998 . . . . . 3
Condensed Consolidated Statements of Income (Unaudited) -
Thirteen and Twenty-six Weeks Ended June 26, 1999 and
Twelve and Twenty-four Weeks Ended June 13, 1998 . . . . 4
Condensed Consolidated Statements of Stockholders'
Equity (Unaudited) - Twenty-six Weeks Ended June 26, 1999
and Twenty-four Weeks Ended June 13, 1998 . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Twenty-six Weeks Ended June 26, 1999 and Twenty-four Weeks
Ended June 13, 1998 . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION:
Changes in Securities and Use of Proceeds . . . . . . . .. . . . . 16
Submission of Matters to a Vote of Security Holders . . . . . . . . 16
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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LANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - JUNE 26, 1999 (UNAUDITED) AND
DECEMBER 26, 1998
(In thousands, except share data)
June 26, December 26,
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,111 $ 7,856
Marketable securities -- 9,126
Accounts receivable (less allowance for doubtful accounts) 46,378 39,616
Inventories 24,262 20,331
Deferred income tax benefit 4,759 5,808
Prepaid income taxes -- 2,800
Prepaid expenses and other 3,001 1,943
--------- ---------
TOTAL CURRENT ASSETS 91,511 87,480
NON CURRENT ASSETS:
Property, plant & equipment, net 183,436 161,683
Goodwill, net 29,675 --
Other intangible assets, net 12,005 --
Other assets 2,413 2,240
--------- ---------
TOTAL ASSETS $ 319,040 $ 251,403
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 202 $ --
Accounts payable 11,235 9,231
Accrued liabilities 22,743 25,160
--------- ---------
TOTAL CURRENT LIABILITIES 34,180 34,391
--------- ---------
OTHER LIABILITIES AND DEFERRED CREDITS:
Long-term debt 68,461 --
Deferred income taxes 14,494 12,122
Accrued postretirement health care costs 12,661 12,350
Accrual for insurance claims 3,296 3,529
Supplemental retirement benefits 2,818 2,927
--------- ---------
TOTAL OTHER LIABILITIES AND DEFERRED CREDITS 101,730 30,928
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.83 1/3 par value (authorized: 75,000,000 shares;
issued 29,957,997 shares in 1999; 29,989,210 in 1998) 24,964 24,991
Preferred stock, $1.00 par value (authorized: 5,000,000 shares;
none issued) -- --
Additional paid-in capital 3,004 1,981
Unamortized portion of restricted stock awards (1,265) (502)
Retained earnings 156,402 159,524
Foreign currency translation adjustment 25 --
Net unrealized gain on marketable securities -- 90
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 183,130 186,084
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 319,040 $ 251,403
========= =========
See notes to condensed consolidated financial statements (unaudited).
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4
LANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JUNE 26, 1999 AND THE
TWELVE AND TWENTY-FOUR WEEKS ENDED JUNE 13, 1998 (Note 2)
(In thousands, except share and per share data)
Thirteen Twelve Twenty-Six Twenty-Four
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
June 26, 1999 June 13, 1998 June 26, 1999 June 13, 1998
------------- ------------- ------------- -------------
NET SALES AND OTHER OPERATING REVENUE $ 134,145 $ 118,264 $ 254,934 $ 228,490
------------ ------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of sales (Note 3) 60,697 52,745 114,721 103,561
Selling, marketing and delivery 54,028 47,915 105,064 92,137
General and administrative 6,261 4,422 11,623 8,930
Provision for profit-sharing retirement
plan 1,280 1,522 2,518 2,953
Amortization of goodwill and other
intangibles 346 -- 346 --
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 122,612 106,604 234,272 207,581
------------ ------------ ------------ ------------
PROFIT FROM OPERATIONS 11,533 11,660 20,662 20,909
OTHER INCOME, NET 137 449 230 1,067
INTEREST INCOME (EXPENSE), NET (638) 549 (480) 1,149
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 11,032 12,658 20,412 23,125
INCOME TAXES 4,191 4,699 7,697 8,652
------------ ------------ ------------ ------------
NET INCOME $ 6,841 $ 7,959 $ 12,715 $ 14,473
============ ============ ============ ============
SHARE AND PER SHARE AMOUNTS (NOTE 5)
NET INCOME:
Basic $ 0.23 $ 0.27 $ 0.43 $ 0.48
============ ============ ============ ============
Diluted $ 0.23 $ 0.27 $ 0.42 $ 0.48
============ ============ ============ ============
CASH DIVIDENDS $ 0.24 $ 0.24 $ 0.48 $ 0.48
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING:
Basic 29,851,000 29,916,000 29,896,000 29,908,000
------------ ------------ ------------ ------------
Diluted 29,871,000 30,030,000 29,927,000 30,069,000
------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements (unaudited)
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LANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED JUNE 26, 1999 AND THE TWENTY-FOUR WEEKS
ENDED JUNE 13, 1998
(In thousands, except share data)
Unamortized Net
Portion of Foreign Unrealized
Additional Restricted Currency Gain on
Common Paid-in Stock Retained Translation Marketable
Shares Stock Capital Awards Earnings Adjustment Securities Total
--------------------------------------------------------------------------------------------
BALANCE, DECEMBER 27, 1997 29,923,287 $24,936 $999 ($488) $160,682 $0 $ 393 $186,522
--------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
Net income - - - - 14,473 - - 14,473
Net change in unrealized gain
on marketable securities - - - - - (386) (386)
--------------------------------------------------------------------------------------------
Total comprehensive income - - - - 14,473 - (386) 14,087
--------------------------------------------------------------------------------------------
CASH DIVIDENDS PAID - - - - (14,369) - - (14,369)
ISSUANCE OF RESTRICTED STOCK 24,450 20 491 (511) - - - -
RECOGNITION OF RESTRICTED STOCK
AWARDS - - (112) 231 - - - 119
STOCK OPTIONS EXERCISED 39,751 33 679 - - - - 712
PURCHASE OF COMMON STOCK (9,359) (7) (222) - - - - (229)
--------------------------------------------------------------------------------------------
BALANCE, JUNE 13, 1998 29,978,129 $24,982 $1,835 ($ 768) $160,786 $0 $ 7 $186,842
============================================================================================
BALANCE, DECEMBER 26, 1998 29,989,210 $24,991 $1,981 ($ 502) $159,524 $0 $ 90 $186,084
--------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
Net income - - - - 12,715 - - $ 12,715
Net change in unrealized gain on
marketable securities - - - - - - (90) (90)
Foreign currency translation
adjustment - - - - - 25 - 25
--------------------------------------------------------------------------------------------
Total comprehensive income - - - - 12,715 25 (90) 12,650
--------------------------------------------------------------------------------------------
CASH DIVIDENDS PAID - - - - (14,425) - - (14,425)
ISSUANCE OF RESTRICTED STOCK 65,300 54 1,081 (1,135) - - - -
RECOGNITION OF RESTRICTED STOCK
AWARDS - - (115) 372 - - - 257
STOCK OPTIONS EXERCISED 3,487 3 57 - - - - 60
PURCHASE OF COMMON STOCK (100,000) (84) - - (1,412) - - (1,496)
--------------------------------------------------------------------------------------------
BALANCE, JUNE 26, 1999 29,957,997 $24,964 $ 3,004 ($ 1,265) $156,402 $25 $0 $183,130
============================================================================================
See notes to condensed consolidated financial statements (unaudited).
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LANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED JUNE 26, 1999 AND THE TWENTY-FOUR WEEKS
ENDED JUNE 13, 1998 (Note 2)
(In thousands)
Twenty-Six Weeks Twenty-Four Weeks
Ended Ended
June 26, 1999 June 13, 1998
---------------- -----------------
OPERATING ACTIVITIES:
Net income $ 12,715 $ 14,473
Adjustments to reconcile net income to cash provided
by operating activities -
Depreciation and amortization 13,640 9,698
Gain on sale of property, net (161) (443)
Deferred income taxes 2,391 818
Other, net -- (460)
Changes in operating assets and liabilities (8,345) (9,192)
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES 20,240 14,894
-------- --------
INVESTING ACTIVITIES:
Purchases of property (16,341) (18,188)
Proceeds from sale of property 259 936
Acquisition of businesses, net of cash acquired (53,647) --
Purchases of marketable securities (556) (688)
Sales of marketable securities 7,643 3,630
Maturities of marketable securities 1,886 4,701
Other, net 63 (41)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (60,693) (9,650)
-------- --------
FINANCING ACTIVITIES:
Dividends paid (14,425) (14,369)
Issuance (purchase) of common stock, net (1,436) 483
Proceeds from debt issued, net of acquisition costs 66,187 --
Repayments of debt (4,644) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 45,682 (13,886)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 26 --
-------- --------
NET INCREASE (DECREASE) IN CASH 5,255 (8,642)
CASH, BEGINNING OF PERIOD 7,856 34,040
-------- --------
CASH, END OF PERIOD $ 13,111 $ 25,398
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ 1,637 $ 7,804
Cash paid for interest $ 538 $ --
======== ========
See notes to condensed consolidated financial statements (unaudited).
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LANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal, recurring accruals) necessary to present fairly the
consolidated financial position of the Company and its subsidiaries as of
June 26, 1999 and December 26, 1998, the consolidated results of
operations for the thirteen and twenty-six weeks ended June 26, 1999 and
the twelve and twenty-four weeks ended June 13, 1998 and the consolidated
cash flows for the twenty-six weeks ended June 26, 1999 and the
twenty-four weeks ended June 13, 1998.
2. Effective for fiscal 1999, the Company has adopted a quarterly reporting
calendar based on four 13-week quarters. Historically, the Company has
reported interim results on the basis of three 12-week quarters and one
16-week quarter. Management believes the new quarterly reporting provides
more useful, comparative information.
The table below summarizes revenues, operating profit, net income and
earnings per share as filed with the Securities and Exchange Commission
for 1998 on the basis of three 12-week quarters and one 16-week quarter:
Quarter Ended
------------------------------------------------------------------------- Year Ended
March 21 June 13 September 5 December 26 December 26
(12 wks) (12 wks) (12 wks) (16 wks) (52 wks)
----------------- ---------------- ------------------ ------------------- -------------------
Revenues $110,226 $118,264 $112,098 $145,844 $486,432
Operating Profit 9,249 11,660 10,017 9,149 40,075
Net Income 6,514 7,959 6,868 6,267 27,608
Earnings per share:
Basic $0.22 $0.27 $0.23 $0.21 $0.92
Diluted $0.22 $0.27 $0.23 $0.21 $0.92
Weighted average shares outstanding:
Basic 29,900,000 29,916,000 29,935,000 29,942,000 29,925,000
Diluted 30,073,000 30,030,000 30,043,000 30,018,000 30,043,000
In order to better compare 1999 results with 1998, the table below
summarizes estimated revenues, operating profit, net income and earnings
per share for 1998 on the basis of four 13-week quarters:
Quarter Ended
------------------------------------------------------------------------- Year Ended
March 28 June 27 September 26 December 26 December 26
(13 wks) (13 wks) (13 wks) (13 wks) (52 wks)
----------------- ---------------- ------------------ ------------------- -------------------
Revenues $119,955 $126,313 $121,259 $118,905 $486,432
Operating Profit 9,968 12,268 10,377 7,462 40,075
Net Income 6,991 8,346 7,102 5,169 27,608
Earnings per share:
Basic $0.23 $0.28 $0.24 $0.17 $0.92
Diluted $0.23 $0.28 $0.24 $0.17 $0.92
Weighted average shares outstanding:
Basic 29,901,000 29,918,000 29,937,000 29,943,000 29,925,000
Diluted 30,073,000 30,021,000 30,028,000 30,018,000 30,043,000
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LANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated results of operations for the twenty-six weeks ended June
26, 1999 or for the twenty-four weeks ended June 13, 1998 are not
necessarily indicative of the results to be expected for a full year.
3. The Company's primary raw materials include peanuts, peanut butter, flour
and other grain products. The Company enters into various forward purchase
agreements and derivative financial instruments to reduce the impact of
volatility in raw material prices. The Company has only limited
involvement with derivative financial instruments and does not use them
for trading purposes. Amounts payable or receivable under the agreements,
which qualify as hedges, are recognized as deferred gains or losses and
included in other assets or other liabilities. These deferred amounts are
charged or credited to cost of sales as the related raw materials costs
are charged to operations.
4. The Company utilizes the dollar value last-in, first-out (LIFO) method of
determining the cost of substantially all of its inventories. Because
inventory calculations under the LIFO method are based on annual
determinations, the determination of interim LIFO valuations requires that
estimates be made of year-end costs and levels of inventories. The
possibility of variation between estimated year-end costs and levels of
LIFO inventories and the actual year-end amounts may materially affect the
results of operations as finally determined for the full year.
Inventories at June 26, 1999 and December 26, 1998 consisted of (in
thousands):
1999 1998
-------- --------
Finished goods $ 17,346 $ 16,627
Raw materials 5,247 3,653
Supplies, etc 6,071 4,437
-------- --------
Total inventories at FIFO cost 28,664 24,717
Less: Adjustment to reduce FIFO costs to LIFO (4,402) (4,386)
-------- --------
Total inventories at LIFO cost $ 24,262 $ 20,331
======== ========
5. The following table provides a reconciliation of the denominator used in
computing basic earnings per share to the denominator used in computing
diluted earnings per share for the thirteen weeks ended June 26, 1999 and
the twelve weeks ended June 13, 1998 (there were no reconciling items for
the numerator amounts of basic and diluted earnings per share):
June 26, 1999 June 13, 1998
---------------------- ----------------------
Weighted average number of common shares used in
computing basic earnings per share 29,851,000 29,916,000
Effect of dilutive stock options 20,000 114,000
---------------------- ----------------------
Weighted average number of common shares and
dilutive potential common stock used in computing
diluted earnings per share 29,871,000 30,030,000
====================== ======================
Stock options excluded from the above reconciliation
because they are anti-dilutive 1,690,000 119,000
====================== ======================
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LANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. During the twenty-six weeks ended June 26, 1999, other comprehensive
income consisted of a $90,000 reclassification adjustment, net of taxes,
for realized gains included in net income; and, a $26,000 translation
adjustment related to the translation of the financial statements of
foreign subsidiaries.
7. Effective April 2, 1999, the Company acquired 100% of the outstanding
common stock of Tamming Foods Ltd. ("Tamming") headquartered in Waterloo,
Ontario, Canada. Tamming manufactures high quality sugar wafer
products that are sold under private label in the United States, Canada
and Mexico.
Effective May 24, 1999, the Company acquired 100% of the outstanding
common stock of Cape Cod Potato Chip Company, Inc. ("Cape Cod")
headquartered in Hyannis, Massachusetts. Cape Cod manufactures premium,
kettle-cooked potato chips and other salty snacks, which are distributed
throughout the U.S., Canada, Spain and England under the Cape Cod brand.
The acquisitions described above were accounted for using the purchase
method of accounting for business combinations. The accompanying
consolidated financial statements include the operating results of these
entities since their respective effective dates.
The aggregate purchase price of the acquisitions was $53.6 million, which
includes the costs of acquisition. The terms of the Tamming acquisition
also provide for additional consideration to be paid if Tamming's earnings
exceed certain targeted levels through the year 2002. The maximum amount
of remaining contingent consideration is approximately $14.1 million. The
additional consideration is payable in cash in 2004 and will result in
additional goodwill if earned. In connection with the acquisitions, the
amount of assets acquired, liabilities assumed and cash paid were as
follows ($ thousands):
Fair value of assets acquired, including acquisition costs $69,439
--------------
Less liabilities assumed:
Capital lease obligations (1,521)
Long-term debt (2,504)
Borrowings under short-term line of credit (2,114)
Accounts payable and accrued expenses (9,653)
--------------
Total liabilities assumed (15,792)
--------------
Cash paid $53,647
==============
Maturities under the capital lease obligations are $202,000 in 1999,
$371,000 in 2000, $395,000 in 2001, $490,000 in 2002 and $63,000 in 2003.
The long-term debt and borrowings under the short-term line of credit
totaling $4,618,000 were paid during the second quarter.
The excess of the purchase prices over the fair value of the net assets
acquired (goodwill) totaled $29,248,000. Other intangibles, including
trademarks and covenants-not-to-compete, totaled $11,996,000. The
convenants-not-to-compete are being amortized on a straight-line basis
over the contract life; goodwill and other intangibles are being amortized
on a straight-line basis over periods up to 40 years. Amortization expense
and accumulated amortization totaled $346,000 during the second quarter.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company evaluates the
recoverability of goodwill and other intangible assets by measuring the
carrying amounts of the assets against the estimated undiscounted future
cash flows associated with them.
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10
LANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. In connection with the Tamming acquisition, the Company entered into a
180-day unsecured term bridge loan in the amount of Canadian $46.3 million
(U.S. $31.6 million at June 26, 1999) bearing interest at Canadian Dollar
LIBOR rate plus 0.75%. The Company also utilized its existing unsecured
bank credit line agreement in the amount of $5.0 million, bearing interest
at U.S. prime rate plus 0.25%. The borrowings under the $5.0 million
unsecured line of credit were repaid in connection with the borrowings
under the $60 million revolving line of credit described below. Borrowings
under the bridge loan are classified as long-term in the accompanying
consolidated balance sheet since the Company intends to refinance during
the third quarter of 1999 with a six-year term loan facility.
On April 12, 1999, the Company entered into a $60 million revolving credit
facility with a group of three U.S. banks. Use of the proceeds is
unrestricted and the borrowings are unsecured. Interest accrues at LIBOR
plus 0.35% to 0.75% and is payable quarterly. Certain of the borrowings
under this line of credit were used to fund the acquisition of Cape Cod.
The unused credit available under this facility at June 26, 1999 was $20.1
million. The commitments under this revolving credit agreement expire and
are payable in full on April 12, 2004. Under the terms of the revolving
credit agreement, the Company is required to meet certain financial
ratios, which the Company complied with at the end of the second quarter.
During the second quarter, a subsidiary borrowed $525,000 under the terms
of a credit line with a U.S. bank. Subsequent to June 26, 1999, the
outstanding amount under this line of credit was paid.
As of June 26, 1999, long-term debt consisted of the following (U.S. $
thousands):
Borrowings under U.S. $60 million revolving credit facility $35,000
Borrowings under Canadian term bridge loan 31,643
Capital lease obligations 1,495
Borrowings by subsidiary under credit line 525
-------
Subtotal 68,663
Less: Current portion of capital lease obligations 202
-------
Total long-term debt as of June 26, 1999 $68,461
=======
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11
LANCE, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CHANGE IN INTERIM REPORTING PERIODS
Effective for the fiscal year ending December 25, 1999, the Company has revised
its interim quarterly reporting periods to 13-week fiscal quarters. A summary of
estimated 1998 quarterly operating results on a 13-week basis is presented in
Note 2 of the accompanying condensed consolidated financial statements. For
purposes of discussion and analysis of the Company's results of operations for
the quarter (13 weeks) and year-to-date (26 weeks) ended June 26, 1999, the
operating results for 1998 shown below have been presented on the basis of
13-week quarters to improve comparability. Cash flows for 1998 have not been
presented on the basis of a 13-week quarter. Management does not believe cash
flows would be significantly different between a 12-week quarter basis and a
13-week quarter basis for purposes of understanding financial condition and
liquidity.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 26, 1999 COMPARED TO THE THIRTEEN WEEKS ENDED JUNE 27,
1998
($ In Thousands) 1999 1998 Change
- ------------------------------------------------------------------------------------------------------------------
Revenues $134,145 100.0% $126,313 100.0% $7,832 6.2%
Cost of sales 60,697 45.2% 56,442 44.7% (4,255) -7.5%
- ------------------------------------------------------------------------------------------------------------------
Gross margin 73,448 54.8% 69,871 55.3% 3,577 5.1%
- ------------------------------------------------------------------------------------------------------------------
Selling, marketing, and delivery expenses 54,028 40.3% 51,337 40.6% (2,691) -5.2%
General and administrative expenses 6,261 4.7% 4,664 3.7% (1,597) -34.2%
Provision for profit sharing retirement plan 1,280 1.0% 1,602 1.3% 322 20.1%
Amortization of goodwill and intangibles 346 0.2% - - (346) N/A
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses 61,915 46.2% 57,603 45.6% (4,312) -7.5%
- ------------------------------------------------------------------------------------------------------------------
Operating profit 11,533 8.6% 12,268 9.7% (735) -6.0%
Other income, net 137 0.1% 343 0.3% (206) -60.1%
Interest income (expense), net (638) (0.5)% 667 0.5% (1,305) -195.7%
Income taxes 4,191 3.1% 4,932 3.9% 741 15.0%
- ------------------------------------------------------------------------------------------------------------------
Net income $6,841 5.1% $8,346 6.6% ($1,505) -18.0%
==================================================================================================================
Revenues increased $7.8 million, or 6.2%, due to the acquisitions of Tamming and
Cape Cod. Sales volume increases through grocery (both branded and private label
products) were offset by lower sales volume through "up and down the street" and
food service accounts.
Gross margin for the quarter decreased by 0.5 percentage points from 1998 to
54.8% due to lower gross margins of the recently acquired businesses. Gross
margin from base business was 56.3% reflecting manufacturing improvements and
lower raw material and packaging costs. In the base business, unit labor costs
were reduced through labor-reducing capital expenditures while raw material
utilization improved through better controlled manufacturing processes.
The $2.7 million increase in selling, marketing and delivery costs were a result
of higher personnel costs, depreciation, increased provisions for bad debts and
from the acquired businesses. General and administrative expenses increased $1.6
million due primarily to personnel costs. Of the $4.3 million increase in these
expenses for the quarter, $1.5 million were unplanned costs related to a major
information systems implementation. Amortization of goodwill and intangibles
results from the recent acquisitions of Tamming and Cape Cod. Provision for
profit sharing retirement plan was $0.3 million lower due to the
profitability-based formula for these contributions.
Other income includes gains and losses on dispositions of fixed assets and
marketable securities. The $0.2 million decrease in other income was due to the
absence of $0.2 million in securities gains from
11
12
LANCE, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1998. Net interest expense amounted to $0.6 million in 1999 compared to $0.7
million of net interest income in 1998 due to reductions in cash and marketable
securities to fund capital expenditures and acquisitions.
The effective income tax rate increased from 37.1% in 1998 to 38.0% in 1999 due
to higher effective rates for the recently acquired businesses.
TWENTY-SIX WEEKS ENDED JUNE 26, 1999 COMPARED TO THE TWENTY-SIX WEEKS ENDED JUNE
27, 1998
($ In Thousands) 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
Revenues $254,934 100.0% $246,268 100.0% $8,666 3.5%
Cost of sales 114,721 45.0% 111,562 45.3% (3,159) -2.8%
- -------------------------------------------------------------------------------------------------------------------
Gross margin 140,213 55.0% 134,706 54.7% 5,507 4.1%
- -------------------------------------------------------------------------------------------------------------------
Selling, marketing, and delivery expenses 105,064 41.2% 99,713 40.5% (5,351) -5.4%
General and administrative expenses 11,623 4.6% 9,628 3.9% (1,995) -20.7%
Provision for profit sharing retirement plan 2,518 1.0% 3,129 1.3% 611 19.5%
Amortization of goodwill and intangibles 346 0.1% - - (346) N/A
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 119,551 46.9% 112,470 45.7% (7,081) -6.3%
- -------------------------------------------------------------------------------------------------------------------
Operating profit 20,662 8.1% 22,236 9.0% (1,574) -7.1%
Other income, net 230 0.1% 878 0.3% (648) -73.8%
Interest income (expense), net (480) (0.2)% 1,397 0.6% (1,877) -134.4%
Income taxes 7,697 3.0% 9,174 3.7% 1,477 16.1%
- -------------------------------------------------------------------------------------------------------------------
Net income $12,715 5.0% $15,337 6.2% ($2,622) -17.1%
===================================================================================================================
Revenues increased $8.7 million, or 3.5%, due to the acquisitions of Tamming and
Cape Cod. Sales volume increases through grocery (both branded and private label
products) were offset by lower sales volume through "up and down the street" and
food service accounts.
Gross margin improved by 0.3 percentage points to 55.0% primarily as a result of
manufacturing improvements and lower raw material and packaging costs. In the
base business, unit labor costs were reduced through labor-reducing capital
expenditures while raw material utilization improved through better controlled
manufacturing processes. Gross margins of the recently acquired businesses are
generally lower than the base business. Gross margin from base business equaled
55.8%.
The $5.4 million increase in selling, marketing and delivery expenses was a
result of higher personnel costs, depreciation, increased provisions for bad
debts and the addition of the acquired businesses. General and administrative
expenses increased $2.0 million due primarily to personnel costs. Amortization
of goodwill and intangibles results from the recent acquisitions of Tamming and
Cape Cod. Provision for profit sharing retirement plan was $0.6 million lower
due to the profitability-based formula for these contributions.
Other income includes gains and losses on dispositions of fixed assets and
marketable securities. The $0.6 million decrease in other income was due to the
absence of $0.5 million in securities gains from 1998. Net interest expense
amounted to $0.5 million in 1999 compared to $1.4 million of net interest income
in 1998 due to reductions in cash and marketable securities to fund capital
expenditures and acquisitions.
The effective income tax rate increased from 37.4% in 1998 to 37.7% in 1999 due
to higher effective rates for the recently acquired businesses.
12
13
LANCE, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Traditionally, the Company has met its liquidity needs for capital expenditures,
cash dividends and stock repurchases through cash from operations and
investments. In addition, the Company has historically maintained relatively
high liquidity and no outstanding debt. During 1999, the Company has changed its
capital structure by liquidating its marketable securities and incurring
indebtedness available under new credit agreements, primarily to fund the
acquisitions of Tamming Foods Ltd. and Cape Cod Potato Chip Company, Inc. The
Company has maintained its regular quarterly dividend rate of $0.24 per share
with cash dividends totaling $14.4 million in 1999.
Cash flow from operations for the twenty-six weeks ended June 26, 1999 totaled
$20.2 million. Working capital (other than cash and marketable securities)
increased to $44.2 million from $36.1 million at December 28, 1998.
Approximately $1.1 million of the $8.1 million increase occurred as of the dates
of the acquisitions. The remaining working capital increase is primarily a
result of payments for previously accrued profit-sharing contributions and
employee benefits and reductions in accounts payable related to capital
expenditures.
Cash used in investing activities for the twenty-six weeks ended June 26, 1999
totaled $60.7 million. The acquisitions of Tamming and Cape Cod totaled $53.6
million. Purchases of property totaled $16.3 million and included expenditures
for vending equipment, sales displays and automated packaging equipment. During
1999, the Company liquidated its investments in marketable securities providing
approximately $9.0 million of cash towards funding the property purchases and
acquisitions.
Cash flow from financing activities for the twenty-six weeks ended June 26, 1999
totaled $45.7 million. During the second quarter, the Company entered into four
new credit agreements. Borrowings under three of the credit agreements totaled
$66.4 million, of which $4.6 million was used to repay short- and long-term debt
assumed in the acquisition of Cape Cod. Cash dividends of $0.24 per quarter
amounted to $14.4 million. During the first quarter, the Company repurchased
100,000 shares for $1.5 million representing the entire share repurchases
authorized by the Board of Directors on February 16, 1999.
As of June 26, 1999, cash and cash equivalents totaled $13.1 million and total
debt outstanding was $68.5 million. Borrowings available under all credit
facilities exceed $20 million. The Company has met all financial covenants
contained in the financing agreements. Available cash, cash from operations and
available credit under the credit facilities are expected to be sufficient to
meet normal operating requirements for the foreseeable future.
MARKET RISK
The principal market risks to which the Company is exposed that may adversely
impact results of operations and financial position include changes in certain
raw material prices, interest rates and foreign exchange rates.
Raw materials used by the Company are exposed to the impact of changing
commodity prices, particularly the price of wheat used for flour. Accordingly,
the Company enters into commodity future and option contracts to manage
fluctuations in prices of anticipated purchases of certain raw materials. The
Company's Board-approved policy is to use such commodity derivative financial
instruments only
13
14
LANCE, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
to the extent necessary to manage these exposures. The Company does not use
these financial instruments for trading purposes.
Since the Company uses commodity price-sensitive instruments to hedge a certain
portion of its existing and anticipated transactions, any loss in value for
these instruments generally would be offset by increases in the value for the
hedged transactions. At June 26, 1999, the Company's position included futures
contracts for 150,000 bushels of wheat maturing during 2000 with contract and
fair market values each totaling $0.4 million. A 10% decrease in the cost of
wheat futures at the time of offset or maturity would result in an immaterial
realized loss.
The Company's long-term debt obligations incur interest at floating rates and,
thus, the Company has an exposure to changes in these interest rates. On
July 22, 1999, the Board of Directors authorized interest rate exchange
agreements to more effectively manage the effects of changing interest rates.
However, no such agreements have been entered into.
Through the operations of Tamming, the Company has an exposure to foreign
exchange rate fluctuations, primarily between the U.S. and Canadian dollars. The
indebtedness used to finance the acquisition of Tamming is denominated in
Canadian dollars and serves as an effective hedge of the net asset investment in
Tamming.
YEAR 2000 READINESS
The Company has organized its activities to address Year 2000 issues in four
phases: (1) initial assessment and project organization; (2) remediation and
testing; (3) assessment of third-party readiness and impacts and (4) contingency
planning. The timing of each of these phases overlap each other. The Company has
completed the first phase, which included an assessment of hardware and software
applications; implementation of a vendor management program; awareness training
throughout the Company; establishment of compliance testing principles and
standards; and development of the project master plan.
The second phase consists of remediation and testing. All critical internal
hardware and software applications (commonly referred to as "IT systems") have
been remediated and tested. In addition, a comprehensive, integrated test of all
applications was completed during the second quarter of 1999. Other applications
not internal to the Company (commonly referred to as "non-IT systems") include
applications such as energy supply, telecommunications, facility operation and
security, automated production controllers and financial services such as
banking and benefit plan administration. The Company also has non-IT systems
included in its vending machine operations and DSD system. Remediation and
testing for all critical non-IT systems was completed during the second quarter
of 1999. Further remediation and testing for non-IT systems will be continuing
in connection with the assessments of third party readiness and contingency
planning.
In the third phase, an initial assessment of third party readiness and impacts
was completed in the second quarter of 1999. The Company has received a majority
of responses to these initial inquiries. The survey base continues to expand to
include additional third parties. The Company plans to validate readiness
responses for its key relationships as it assesses its contingency planning
requirements. The Company's key relationships include suppliers of flour,
peanuts, peanut butter, energy and production and distribution equipment. The
fourth phase, contingency planning, began in the fourth quarter of 1998 and is
expected to be completed early in the fourth quarter of 1999.
14
15
LANCE, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Year 2000 readiness activities are also being performed for the recent
acquisitions of Tamming and Cape Cod. The status of the Year 2000 readiness for
these two new businesses is as described above.
Year 2000 compliance costs are expected to range from $0.7 million to $1.0
million of external costs, of which approximately $0.7 million have been
incurred. In addition, the Company is using internal resources for a
cross-functional steering committee and three project co-managers. The estimated
compliance costs do not include costs for system replacements. Essentially all
of the Company's systems have been replaced during the last three years as part
of an integrated information systems project initiated in late 1995.
At this stage of the Company's Year 2000 readiness activities, the Company's
assessment is that the failure of non-IT systems and lack of readiness by third
parties would not have a material adverse effect on revenues since a majority of
sales are to a large number and wide variety of customers. While such failures
would likely cause increased operating expenses, the Company does not expect a
material effect on the results of operations, liquidity or financial condition.
The Company will continue to assess possible increased operating expenses as the
Company's Year 2000 readiness activities continue.
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially from those forward-looking statements. Factors that may cause
actual results to differ materially include price competition, industry
consolidation, raw material costs, effectiveness of sales and marketing
activities, operation of a leveraged business and effectiveness of Year 2000
readiness activities, as described in the Company's filings with the Securities
and Exchange Commission.
15
16
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds
On April 14, 1999, a subsidiary of the Company ("Lance Sub") issued
$14.1 million of Lance Sub's Deferred Notes due April 2, 2004 (the
"Notes") to four corporations incorporated under the laws of the
province of Ontario, Canada (the "Corporations"). None of the
shareholders of the Corporations were residents of the United
States. The Notes were issued in partial consideration for the
acquisition of 100% of the outstanding Common Stock of Tamming Foods
Ltd. ("Tamming") pursuant to the terms of an Agreement of Purchase
and Sale dated as of March 31, 1999 among the Company, Lance Sub and
the shareholders of Tamming. The Notes were issued without
registration in reliance on Section 4(2) of the Securities Act of
1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
At the Registrant's Annual Meeting of Stockholders held on April 16,
1999, the following matters were submitted to a vote of the
stockholders of the Registrant:
1. Election of nominees to the Board of Directors of the
Registrant:
Shares Voted in Favor Shares Withheld
--------------------- ---------------
For term ending in 2002:
------------------------
John W. Disher 25,201,250 980,514
Scott C. Lea 25,914,476 267,288
Wilbur J. Prezzano 25,943,608 238,157
Robert V. Sisk 25,933,247 248,873
2. Ratification of the selection of KPMG LLP as independent
public accountants for fiscal year 1999 which was approved by
a vote of 26,097,341 shares in favor, 31,545 shares against
and 47,090 shares abstaining. There were 600 shares of broker
non-votes.
16
17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement of Purchase and Sale dated as of March 31, 1999
among the Registrant, a subsidiary of the Registrant and the
shareholders of Tamming Foods Ltd., incorporated herein by
reference to Exhibit 2 to the Registrant's Report on Form 8-K
dated April 14, 1999.
4.1 Deferred Notes Agreement dated April 14, 1999 among 1346242
Ontario Inc. (now Tamming Foods Ltd.), Blairco Equities Inc.,
Linkco Equities Inc., Tam-Di Equities Inc. and Tam-Ri Equities
Inc. providing for the issuance of $14.1 million of Tamming
Foods Ltd.'s Deferred Notes due 2004. The total amount of the
Deferred Notes due 2004 does not exceed 10% of the total
assets of the Registrant and the Registrant agrees to furnish
a copy of the Deferred Notes Agreement to the Securities and
Exchange Commission upon request.
4.2 First Supplement to Preferred Shares Rights Agreement dated as
of July 1, 1999 between the Registrant and First Union
National Bank.
10.1 Credit Agreement dated April 12, 1999 among the Registrant,
NationsBank, N.A., First Union National Bank and Wachovia
Bank, N.A.
27 Financial Data Schedule (Filed in electronic format only.
Pursuant to Rule 402 of Regulation S-T, this schedule shall
not be deemed filed for purposes of Section 11 of the
Securities Act of 1933 or Section 18 of the Securities
Exchange Act of 1934).
99.1 Cautionary Statement under Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
99.2 1998 Statements of Income for the Quarters (13 Weeks) Ended
March 28, 1998, June 27, 1998, September 26, 1998 and December
26, 1998
(b) Reports on Form 8-K
On April 29, 1999, the Registrant filed Form 8-K to report the
acquisition of 100% of the outstanding Common Stock of Tamming Foods
Ltd., a corporation organized under the laws of Ontario, Canada. The
description and terms of the acquisition are set forth in the
Agreement of Purchase and Sale filed as an exhibit to the Form 8-K.
No other reports on Form 8-K were filed during the 13 weeks ended
June 26, 1999.
Items 1, 3 and 5 are not applicable and have been omitted.
17
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the Report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANCE, INC.
By: /s/ B. Clyde Preslar
---------------------------------
B. Clyde Preslar
Vice President and Principal
Financial Officer
Dated: August 10, 1999
18