1
Exhibit 13
BUSINESS SEGMENTS
Lancaster Colony Corporation and Subsidiaries
For the Years Ended 1998, 1997 and 1996
The Company operates in three business segments - Specialty Foods, Glassware and
Candles, and Automotive. The net sales of each segment are principally domestic.
A further description of each business segment follows:
SPECIALTY FOODS-includes production and marketing of a family of pourable and
refrigerated produce salad dressings, croutons, sauces, refrigerated produce
vegetable and fruit dips, chip dips, dairy snacks and desserts, dry and frozen
egg noodles, caviar, frozen ready-to-bake pies and frozen hearth-baked breads.
The salad dressings, sauces and frozen bread products are sold to both retail
and foodservice markets. The remaining products of this business segment are
primarily directed to retail markets.
GLASSWARE AND CANDLES-includes the production and marketing of table and
giftware consisting of domestic glassware, both machine pressed and machine
blown; imported glassware; candles in all popular sizes, shapes and scents;
potpourri and related scented products; industrial glass and lighting
components; and glass floral containers. This segment's products are sold
primarily to mass merchandisers, discount and department stores.
AUTOMOTIVE-includes production and marketing of rubber, vinyl and
carpet-on-rubber car mats for original equipment manufacturers, importers and
for the auto aftermarket; truck and trailer splash guards; pickup truck bed mats
and liners; aluminum running boards for pickup trucks and vans; and a broad line
of auto accessories.
Operating income represents net sales less operating expenses related to the
business segments. The Glassware and Candles segment's 1998 operating income
includes approximately $1,800,000 in nonrecurring gains on the sales of real
estate. Expenses of a general corporate nature, including interest expense and
income taxes, have not been allocated to the business segments. Identifiable
assets for each segment include those assets used in its operations and
intangible assets allocated to purchased businesses. Corporate assets consist
principally of cash, cash equivalents and deferred income taxes.
The 1998 and 1996 capital expenditures of the Specialty Foods segment includes
property relating to business acquisitions totaling $3,690,000 and $213,000,
respectively.
The following sets forth certain financial information attributable to the
Company's business segments for the three years ended June 30, 1998, 1997 and
1996:
(Dollars In Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Net Sales
Specialty Foods $ 411,373 $351,012 $329,420
Glassware and Candles 363,835 336,200 297,937
Automotive 233,544 235,601 228,555
- --------------------------------------------------------------------------------------------------------------------------
Total $1,008,752 $922,813 $855,912
==========================================================================================================================
Operating Income
Specialty Foods $ 61,154 $ 47,308 $ 35,579
Glassware and Candles 82,317 81,455 76,068
Automotive 18,501 20,310 18,561
- --------------------------------------------------------------------------------------------------------------------------
Total 161,972 149,073 130,208
Corporate expenses (6,599) (6,614) (6,987)
- --------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 155,373 $142,459 $123,221
==========================================================================================================================
Identifiable Assets
Specialty Foods $ 121,659 $ 95,130 $102,606
Glassware and Candles 264,569 235,154 205,232
Automotive 108,238 110,525 113,003
Corporate 34,901 43,585 14,518
- --------------------------------------------------------------------------------------------------------------------------
Total $ 529,367 $484,394 $435,359
==========================================================================================================================
Capital Expenditures
Specialty Foods $ 9,347 $ 4,625 $ 8,856
Glassware and Candles 29,847 21,986 33,038
Automotive 9,372 10,817 8,501
Corporate 59 100 47
- --------------------------------------------------------------------------------------------------------------------------
Total $ 48,625 $ 37,528 $ 50,442
==========================================================================================================================
Depreciation and Amortization
Specialty Foods $ 7,425 $ 5,546 $ 4,753
Glassware and Candles 16,367 12,520 10,767
Automotive 8,684 8,814 8,749
Corporate 95 101 130
- --------------------------------------------------------------------------------------------------------------------------
Total $ 32,571 $ 26,981 $ 24,399
==========================================================================================================================
2
FIVE YEAR FINANCIAL SUMMARY
Lancaster Colony Corporation and Subsidiaries
(Thousands Except Per Share Figures) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Operations
Net Sales $1,008,752 $922,813 $855,912 $795,126 $721,732
Gross Margin $ 324,397 $290,762 $263,952 $247,942 $232,096
Percent of Sales 32.2% 31.5% 30.8% 31.2% 32.2%
Interest Expense $ 2,626 $ 2,596 $ 2,875 $ 2,736 $ 2,849
Percent of Sales 0.3% 0.3% 0.3% 0.3% 0.4%
Income Before Income Taxes $ 155,373 $142,459 $123,221 $114,808 $ 98,093
Percent of Sales 15.4% 15.4% 14.4% 14.4% 13.6%
Taxes Based on Income $ 59,243 $ 53,753 $ 47,086 $ 44,284 $ 38,233
Net Income $ 96,130 $ 88,706 $ 76,135 $ 70,524 $ 59,860
Percent of Sales 9.5% 9.6% 8.9% 8.9% 8.3%
Per Common Share:(1)
Net Income- Basic And Diluted $ 2.22 $ 2.01 $ 1.71 $ 1.57 $ 1.32
Cash Dividends $ 0.54 $ 0.48 $ 0.44 $ 0.37 $ 0.29
- --------------------------------------------------------------------------------------------------------------------------
Financial Position
Total Assets $ 529,367 $484,394 $435,359 $379,904 $355,445
Working Capital $ 235,031 $235,079 $203,988 $189,255 $163,546
Property, Plant and Equipment--Net $ 170,766 $151,309 $139,095 $113,187 $101,570
Long-Term Debt $ 29,095 $ 30,685 $ 31,230 $ 31,840 $ 32,933
Property Additions $ 44,935 $ 37,528 $ 50,229 $ 31,745 $ 23,532
Depreciation and Amortization $ 32,571 $ 26,981 $ 24,399 $ 22,717 $ 22,403
Shareholders' Equity $ 410,563 $368,000 $323,563 $277,148 $236,847
Per Common Share(1) $ 9.60 $ 8.45 $ 7.29 $ 6.19 $ 5.22
Weighted Average
Common Shares Outstanding- Diluted(1) 43,364 44,108 44,624 45,057 45,476
- --------------------------------------------------------------------------------------------------------------------------
Statistics
Price-Earnings Ratio at Year End 17.1 16.0 14.6 15.2 18.0
Current Ratio 4.1 4.2 3.9 4.1 3.2
Long-Term Debt as
a Percent of Shareholders' Equity 7.1% 8.3% 9.7% 11.5% 13.9%
Dividends Paid as a Percent
of Net Income 24.3% 23.8% 25.7% 23.4% 22.3%
Return on Average Equity 24.7% 25.7% 25.3% 27.4% 27.9%
- --------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for 3-for-2 stock split paid January 1998, 4-for-3 stock split
paid July 1994 and/or adoption of Statement of Financial Accounting
Standard No. 128 "Earnings Per Share" in Fiscal 1998.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
Of Results of Operations and Financial Condition
Review of Consolidated Operations
For the fiscal year ended June 30, 1998, the Company achieved a record level of
consolidated net sales totaling $1,008,752,000. This amount represented a 9%
increase over the $922,813,000 recorded for fiscal 1997. The overall sales
increase for fiscal 1998 of $85,939,000 was primarily attributable to the
Specialty Foods segment which increased by $60,361,000 as this segment benefited
from the July 1997 acquisition of the Chatham Village product lines. The
Glassware and Candles segment also achieved a sales increase of $27,635,000
during fiscal 1998 although the Automotive segment declined by $2,057,000.
Consistent with recent years, competitive conditions have minimized the effect
of any year-over-year increases in unit selling prices. For fiscal 1997,
increased sales of the Glassware and Candles segment were primarily responsible
for that year's consolidated net sales increasing 8% over the fiscal 1996 total
of $855,912,000.
A record level of net income was also attained in fiscal 1998 totaling
$96,130,000, an 8% increase over the $88,706,000 recorded in fiscal 1997. This
improvement was essentially the result of the increased sales volume discussed
above. Net income for 1997 was 17% above the fiscal 1996 total of $76,135,000.
The relative proportion of sales and operating income contributed by each of the
Company's operating segments can impact a year-to-year comparison of the
consolidated statements of income. The following table summarizes the sales mix
and related operating income percentages achieved by the operating segments over
each of the last three years:
Segment Sales Mix(1): 1998 1997 1996
- --------------------------------------------------------------------------------
Specialty Foods 41% 38% 38%
Glassware and Candles 36% 36% 35%
Automotive 23% 26% 27%
Segment Operating Income(2):
- --------------------------------------------------------------------------------
Specialty Foods 15% 13% 11%
Glassware and Candles 23% 24% 26%
Automotive 8% 9% 8%
(1) Expressed as a percentage of consolidated net sales.
(2) Expressed as a percentage of the related segment's net sales.
Expressed as a percentage of net sales, the Company's consolidated gross margins
increased to 32.2% in 1998 compared to 31.5% in 1997 and 30.8% in 1996.
Influencing the current year's improvement were better margins within the
Specialty Foods segment as it benefited from a more favorable sales mix. The
consolidated percentage also reflects a higher proportion of sales of specialty
foods and candles. These products have higher average gross margins than many of
the Company's other products. However, during fiscal 1998, this improvement was
somewhat offset by the Automotive segment's margins declining slightly on lower
production volumes. Compared to 1996, the 1997 margins were enhanced primarily
by the Specialty Foods segment experiencing lower raw material costs and a more
favorable sales mix. This improvement was somewhat offset by the Glassware and
Candles segment experiencing a decline in margins due to increases in certain
raw material costs and certain production inefficiencies.
Total selling, general and administrative expenses for 1998 of $168,526,000
increased 15% over the 1997 total of $146,403,000. The total of such expenses
for fiscal 1997 also increased 6% over the 1996 total of $138,206,000. These
increases generally result from the effects of higher sales volumes on
sales-related costs. Particularly impacting the fiscal 1998 total is the greater
mix of sales from the Specialty Foods segment relative to the consolidated
total. Such sales have a higher level of associated selling costs compared to
that of the other segments. The relative level of promotional selling costs also
increased within the Specialty Foods segment during 1998 and included expenses
associated with the development of new retail markets.
Consistent with the increased sales volume, 1998 consolidated operating income
increased by 8% to $155,871,000 compared to $144,359,000 recorded in 1997. The
prior year's operating income had increased 15% over the 1996 total of
$125,746,000.
Stated as a percentage of pretax income, the Company's effective tax rate
increased slightly to 38.1% compared to 37.7% in 1997. The effective rate for
1996 was 38.2%.
Earnings per share of $2.22 increased 10% in 1998 over the $2.01 reported in
1997, after adjustment for the three-for-two stock split paid in January 1998.
Compared to the adjusted 1996 earnings per share of $1.71, the 1997 total had
increased 18%. In addition to the increased levels of corporate earnings,
earnings per share have been beneficially affected by the Company's share
repurchases which have totaled in excess of $88 million over the three-year
period ended June 30, 1998.
Segment Review - Specialty Foods
Record net sales of $411,373,000 were achieved by the Specialty Foods segment
during fiscal 1998. This total increased 17% over the 1997 total of
$351,012,000. Compared to 1996 sales of $329,420,000, 1997 sales had increased
7%. In all three years, retail and foodservice sales comprised 55% and 45% of
total sales, respectively.
The increase in retail sales during 1998 was influenced by the acquisition of
the Chatham Village crouton business in July 1997. Sales increases were also
provided by fruit and vegetable dips and by the success of recently introduced
Texas Toast frozen bread products. Sales in 1997 benefited from volume increases
in products sold to grocery produce departments, increased private label sales
and the growth in product lines sold through specialty distributors. The
November 1995 purchase of the Cardini lines of food products significantly
contributed to the growth of the latter category of products. Foodservice sales
during the last two years have also increased due to the expansion of sales to
both national restaurant chains and wholesale distributors.
Operating margins of $61,154,000 in 1998 improved due to such factors as better
capacity utilization and a more favorable sales mix. Compared to 1996 operating
income of $35,579,000, this segment had significantly improved operating margins
during 1997 as operating income totaled $47,308,000. This improvement was
influenced by a generally broad-based reduction in raw material costs which was
primarily concentrated in the latter half of the fiscal year. Soybean oil cost
returned to more historic norms after three years at considerably higher levels.
As this segment enters fiscal 1999, soybean oil costs are above the levels of
1998.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
Segment Review - Glassware and Candles
Net sales for this segment totaled $363,835,000 in fiscal 1998 which was an 8%
improvement over the $336,200,000 achieved in 1997. Sales of candles and related
products to mass merchants were principally responsible for this
internally-generated growth. Partially offsetting this growth was a decline in
private label wax-filled glass products and a generally lackluster demand for
glass tableware. The 1997 sales level increased 13% over the 1996 total of
$297,937,000. Candle products also led the growth for 1997 with private label
business providing a significant component of this growth.
This segment's operating income increased by 1% in 1998 and totaled $82,317,000
compared to $81,455,000 achieved in 1997. Among the factors adversely affecting
1998 margins were higher wax costs, certain operating inefficiencies at the
consumer glassware plants, competitive pricing conditions, promotional expenses
and a less favorable sales mix. Also included in this segment's 1998 income is
approximately $1,800,000 in nonrecurring gains on the sales of real estate. The
7% increase in 1997 operating income over the 1996 total of $76,068,000 was
primarily attributable to the effect of increased sales volumes. Offsetting this
effect were such factors as a less favorable sales mix, higher wax and natural
gas costs and certain production inefficiencies occurring in both the candle and
glassware manufacturing operations.
Segment Review - Automotive
Adversely affected by a decline in aftermarket sales, fiscal 1998 net sales of
the Automotive segment totaling $233,544,000 declined 1% from the 1997 total of
$235,601,000. The sales of light truck bedliners were adversely impacted by
industry over-capacity and intense competitive pricing conditions. Sales to
original equipment manufacturers ("OEMs") increased during 1998 with particular
strength in aluminum accessories for light trucks and sport utility vehicles.
Sales of automotive floor mats and aluminum truck and van accessories led the 3%
increase in 1997 sales over the 1996 total of $228,555,000. A decline in
bedliner sales during 1997 mitigated this increase.
The operating income of this segment for 1998 totaled $18,501,000, a 9% decrease
from the $20,310,000 recorded in 1997. This decline is attributable to the lower
sales volume, a less favorable sales mix and pricing pressures, particularly on
sales to OEMs. Unrelated labor work stoppages occurring in June 1998, at both a
major customer and at the Company's Wapakoneta, Ohio facility, also adversely
affected this segment's capacity utilization. The level of 1997 operating income
improved 9% from the $18,561,000 recorded in 1996. Contributing to this
improvement were greater production efficiencies and generally lower raw
material costs.
This segment's sales to OEMs are made both directly to the OEMs and indirectly
through a third party, "Tier 1" supplier. Such sales are sensitive to the
overall rate of new vehicle sales, the availability of competitive alternatives
and the Tier 1 supplier's ongoing ability to maintain its relationship with the
OEMs. Additionally, the extent of pricing flexibility associated with these
sales continues to be particularly limited with certain products subject to
annual price reductions. During 1998, sales to OEMs comprised 49% of this
segment's sales compared to 44% and 43% in 1997 and 1996, respectively.
Liquidity and Capital Resources
As of June 30, 1998 the Company's balance sheet maintains a position of
financial strength. This posture has been accomplished through the benefits of
increasing cash flow with net cash provided by operating activities totaling
$120,045,000, $113,461,000 and $84,474,000 for 1998, 1997 and 1996,
respectively. The primary influence on these amounts has been the Company's
increasing net income. This cash flow generated from operations remains the
primary source of financing the Company's internal growth.
Over the last three fiscal years the Company has made investments in property,
plant and equipment totaling $132,692,000, including $44,935,000 in 1998. The
Glassware and Candles segment has been the primary user of such funds during
each of these years. During 1998, this segment completed a new distribution
facility adjacent to the existing candle manufacturing facility located in
Leesburg, Ohio. Substantial progress was also made in completing a manufacturing
addition at the same facility. Additionally, during July 1997, the Company
acquired the outstanding stock of Chatham Village Foods, Inc., a manufacturer
and marketer of croutons and related products. The total of cash paid and debt
assumed by the Company in consummating this acquisition exceeded $20,000,000.
Significant financing activities conducted during 1998 included the purchase of
$37,083,000 of the Company's common stock compared to $29,554,000 in 1997. Total
dividend payments for 1998 were $23,326,000 which was more than 10% greater than
the 1997 total of $21,114,000. This increase reflects the higher dividend payout
rate of $.54 in 1998 as compared to $.48 in 1997. The future levels of share
purchases and declared dividends continue to be subject to periodic review of
the Company's Board of Directors and are generally determined after an
assessment is made of such factors as anticipated earnings levels, cash flow
requirements and general business conditions.
The Company's balance sheet reflects a relatively low level of leverage as the
debt to total capital ratio remains low at 7% at June 30, 1998 compared to 8% at
June 30, 1997. Management believes this posture provides the Company with
considerable flexibility to acquire businesses complementary to the Company's
existing operations. It is anticipated that adequate borrowings will continue to
be made available under discretionary bank lines of credit to meet any
short-term cash requirements not otherwise met by cash generated from
operations.
The Company's ongoing business activities continue to be subject to
compliance with various laws, rules and regulations as may be issued and
enforced by various Federal, state and local agencies. With respect to
environmental matters, costs are incurred pertaining to regulatory compliance
and, upon
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
occasion, remediation. Such costs have not been, and are not anticipated to
become, material.
Impact of Inflation
Generally, fiscal 1998 encountered relatively moderate changes in raw material
costs. Wax costs trended somewhat higher while many other material costs
actually held steady or declined modestly. Compared to 1996, 1997 had markedly
lower level of food commodity costs although higher costs of plastics, wax and
natural gas prevailed throughout the year.
The Company generally attempts to adjust its selling prices to offset the
effects of increased raw material costs. However, these adjustments have
historically been difficult to implement on a timely basis relative to the
increase in costs incurred. Minimizing the exposure to such increased costs is
the Company's diversity of operations and its ongoing efforts to achieve greater
manufacturing and distribution efficiencies through the improvement of work
processes.
Year 2000
Lancaster Colony is in the process of preparing for the consequences that the
year 2000 may have on its ability to rely on data processing and other automated
operational functions which are date-dependent. This "Year 2000" problem arises
as a result of many automated calculations being written in computer code which
does not properly recognize dates after 1999. Problems associated with this
issue can occur not only on "mainframe" applications, but also with such devices
as personal computers, telecommunication equipment and programmable logic
controllers associated with certain manufacturing equipment. Without correction,
it is possible that business and operational functions that rely on this
improper code could fail and cause significant business disruption and loss.
The Company's existing data processing structure could be characterized as
decentralized in nature. Management believes the Company's business units have
completed an adequate assessment of the internal Year 2000 dependencies relating
to their critical data processing functions. However, there are no assurances
that this process has identified all the existing Year 2000 exposures.
Furthermore, such a failure could result in a materially adverse impact to the
Company although the extent of this impact is not believed to be reasonably
estimable.
Depending on the business unit's particular circumstance, the manner of
resolving the identified Year 2000 shortcomings has included strategies such as
implementing Year 2000 compliant versions of third party software, modifying
portions of existing software and replacing non-compliant business systems with
new third party software. A combination of internal and external resources is
being used to assist the Company through a multi-phased concurrent approach,
which encompasses identification, implementation and testing phases, to address
the associated Year 2000 issues. Generally, the Company has completed the
identification phase and is currently engaged in the implementation and testing
phases. Based on existing plans, it is anticipated that the Company's ongoing
efforts to remediate data processing systems to be Year 2000 compliant will be
completed by the middle of calendar 1999.
The most significant data processing expenditures are being made within the
Company's Automotive segment. This segment is in the process of implementing
comprehensive new third party software and hardware with Year 2000 compliance
being regarded as one of the several resulting benefits. The Company's aggregate
costs to date are approximately $3 million, which include capitalized costs
incurred by the Automotive segment of approximately $2.2 million. The Company
estimates an additional $3 million of cost will be incurred, of which
approximately $2 million will relate to the Automotive segment's data processing
project. Expenditures associated with making changes to existing systems for
Year 2000 compliance are being expensed as incurred. Costs associated with the
Company's efforts, both incurred and planned, are not believed to be material to
the Company's consolidated results of operations, liquidity and financial
condition. Due to the nature of the Company's efforts, actual costs could vary
significantly from that currently anticipated and there are no guarantees
regarding the timing or efficacy of completion.
As noted above, the Year 2000 issue may also affect systems ("non-IT systems")
not traditionally identified with information technology. For example,
production machinery which is dependent on reading the current date could become
inoperable if the machine's embedded code does not allow for proper
interpretation of a year beyond 1999. The Company is in the process of
inventorying and assessing its Year 2000 exposure with respect to non-IT systems
but is not currently aware of any significant deficiencies. There can be no
assurances, however, that such deficiencies do not exist. The effect of not
resolving these issues on a timely basis could have a materially adverse impact
on the Company.
Another risk presented by the Year 2000 issue is that significant customers and
suppliers of the Company could fail to become fully Year 2000 compliant. This
failure, in turn, could result in a significant adverse effect to the Company's
operations. The Company is in the process of making inquiries of its significant
suppliers as to the state of their Year 2000 readiness. It is believed that
these inquiries will become increasingly more meaningful as the year 2000
approaches. Regardless, there can be no assurance that the data processing and
non-IT systems utilized by these other companies will become Year 2000 compliant
on a timely basis. The impact of noncompliance is not currently estimable, but
it is possible that significant failures could have a material adverse effect on
the Company's operations.
Although the Company has not yet adopted formal contingency arrangements to
address the possibility that internal, customer or supplier systems may not
become Year 2000 compliant, management will develop such plans which may be
required as fiscal 1999 evolves and the risk of such exposures, if any, become
better clarified. The costs and business implications which might be associated
with the adoption of any such contingency plan is not estimable but could be
significant.
6
CONSOLIDATED STATEMENTS OF INCOME
Lancaster Colony Corporation and Subsidiaries
For the Years Ended June 30, 1998, 1997 and 1996
Years Ended June 30
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Net Sales $1,008,752,000 $922,813,000 $855,912,000
Cost of Sales 684,355,000 632,051,000 591,960,000
- -------------------------------------------------------------------------------------------------------------------------
Gross Margin 324,397,000 290,762,000 263,952,000
Selling, General and Administrative Expenses 168,526,000 146,403,000 138,206,000
- -------------------------------------------------------------------------------------------------------------------------
Operating Income 155,871,000 144,359,000 125,746,000
Other Income (Expense):
Interest expense (2,626,000) (2,596,000) (2,875,000)
Interest income and other--net 2,128,000 696,000 350,000
- -------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 155,373,000 142,459,000 123,221,000
Taxes Based on Income 59,243,000 53,753,000 47,086,000
=========================================================================================================================
Net Income $ 96,130,000 $ 88,706,000 $ 76,135,000
=========================================================================================================================
Net Income Per Common Share:
Basic $2.22 $2.01 $1.71
Diluted $2.22 $2.01 $1.71
=========================================================================================================================
Weighted Average Common Shares Outstanding:
Basic 43,271,000 44,060,000 44,558,000
Diluted 43,364,000 44,108,000 44,624,000
=========================================================================================================================
See Notes to Consolidated Financial Statements
7
CONSOLIDATED BALANCE SHEETS
Lancaster Colony Corporation and Subsidiaries
as of June 30, 1998 and 1997
June 30
Assets 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and Equivalents $ 23,224,000 $ 32,109,000
Receivables (less allowance for doubtful accounts,
1998--$2,774,000; 1997--$2,861,000) 99,870,000 102,457,000
Inventories:
Raw materials and supplies 44,915,000 42,339,000
Finished goods and work in process 130,282,000 118,912,000
- --------------------------------------------------------------------------------------------------------------------------
Total inventories 175,197,000 161,251,000
Prepaid expenses and other current assets 13,257,000 12,966,000
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 311,548,000 308,783,000
Property, Plant And Equipment:
Land, buildings and improvements 103,252,000 89,232,000
Machinery and equipment 270,781,000 248,069,000
- --------------------------------------------------------------------------------------------------------------------------
Total cost 374,033,000 337,301,000
Less accumulated depreciation 203,267,000 185,992,000
- --------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment--net 170,766,000 151,309,000
Other Assets:
Goodwill (net of accumulated amortization,
1998--$6,872,000; 1997--$5,438,000) 37,045,000 19,810,000
Other Assets 10,008,000 4,492,000
- --------------------------------------------------------------------------------------------------------------------------
Total $529,367,000 $484,394,000
==========================================================================================================================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt $ 510,000 $ 545,000
Accounts payable 41,804,000 33,203,000
Accrued liabilities 34,203,000 39,956,000
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 76,517,000 73,704,000
Long-Term Debt--Less Current Portion 29,095,000 30,685,000
Other Noncurrent Liabilities 7,325,000 7,895,000
Deferred Income Taxes 5,867,000 4,110,000
Shareholders' Equity:
Preferred stock--authorized 3,050,000 shares;
outstanding--none
Common stock--authorized 75,000,000 shares;
Shares outstanding, 1998--42,753,488; 1997--29,016,836 50,392,000 43,573,000
Retained earnings 477,587,000 404,783,000
Foreign currency translation adjustment 98,000 75,000
- --------------------------------------------------------------------------------------------------------------------------
Total 528,077,000 448,431,000
Less common stock in treasury, at cost 117,514,000 80,431,000
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 410,563,000 368,000,000
- --------------------------------------------------------------------------------------------------------------------------
Total $529,367,000 $484,394,000
==========================================================================================================================
See Notes To Consolidated Financial Statements
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Lancaster Colony Corporation and Subsidiaries
For the Years Ended June 30, 1998, 1997 and 1996
Years Ended June 30
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 96,130,000 $ 88,706,000 $ 76,135,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 32,571,000 26,981,000 24,399,000
Provision for losses on accounts receivable 1,691,000 1,813,000 2,089,000
Deferred income taxes and other noncash charges 887,000 (669,000) (190,000)
(Gain) loss on sale of property (1,965,000) 530,000 233,000
Changes in operating assets and liabilities:
Receivables 2,661,000 1,133,000 (18,478,000)
Inventories (12,635,000) (9,656,000) (8,982,000)
Prepaid expenses and other current assets 81,000 208,000 334,000
Accounts payable and accrued liabilities 624,000 4,415,000 8,934,000
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 120,045,000 113,461,000 84,474,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Payments on property additions (44,935,000) (37,528,000) (50,229,000)
Acquisitions net of cash acquired (19,749,000)
Proceeds from sale of property 3,634,000 52,000 1,784,000
Other--net (9,165,000) (3,629,000) (638,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (70,215,000) (41,105,000) (49,083,000)
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Payment of dividends (23,326,000) (21,114,000) (19,591,000)
Purchase of treasury stock (37,083,000) (29,554,000) (21,457,000)
Payments on long-term debt, including acquisition debt payoff (5,148,000) (610,000) (1,026,000)
Reduction of ESOP debt 1,279,000 1,278,000
Common stock issued, including stock issued upon
exercise of stock options and related tax benefit 6,819,000 5,082,000 1,785,000
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (58,738,000) (44,917,000) (39,011,000)
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 23,000 51,000
- ----------------------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents (8,885,000) 27,439,000 (3,569,000)
Cash and equivalents at beginning of year 32,109,000 4,670,000 8,239,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 23,224,000 $ 32,109,000 $ 4,670,000
============================================================================================================================
See Notes To Consolidated Financial Statements
9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Lancaster Colony Corporation and Subsidiaries
For the Years Ended June 30, 1998, 1997 and 1996
Foreign
Currency Amount
Outstanding Common Retained Translation Treasury Due From
Shares Stock Earnings Adjustment Stock ESOP
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 29,829,000 $28,086,000 $280,538,000 $501,000 $ 29,420,000 $2,557,000
Year Ended June 30, 1996:
Net income 76,135,000
Cash dividends-- common stock
($.44 per share) (19,591,000)
Purchase of treasury shares (601,955) 21,457,000
Shares issued upon exercise of stock
options including related tax benefits 63,629 1,405,000
Tax benefit of cash dividends paid
on ESOP unallocated shares 71,000
Shares issued in business acquisition 272,727 9,000,000
Reduction of ESOP debt (1,278,000)
Translation adjustment (426,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 29,563,401 38,491,000 337,153,000 75,000 50,877,000 1,279,000
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1997:
Net income 88,706,000
Cash dividends-- common stock
($.48 per share) (21,114,000)
Purchase of treasury shares (691,882) 29,554,000
Shares issued upon exercise of stock
options including related tax benefits 145,317 5,082,000
Tax benefit of cash dividends paid
on ESOP unallocated shares 38,000
Reduction of ESOP debt (1,279,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 29,016,836 43,573,000 404,783,000 75,000 80,431,000
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1998:
Net income 96,130,000
Cash dividends-- common stock
($.54 per share) (23,326,000)
Purchase of treasury shares (987,150) 37,083,000
Shares issued upon exercise of stock
options including related tax benefits 215,659 6,819,000
Shares issued in connection with
three-for-two stock split 14,508,143
Translation adjustment 23,000
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 42,753,488 $50,392,000 $477,587,000 $ 98,000 $117,514,000
=================================================================================================================================
See Notes to Consolidated Financial Statements
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lancaster Colony Corporation and Subsidiaries
1. SUMMARY OF Principles of Consolidation
SIGNIFICANT
ACCOUNTING The accompanying consolidated financial statements include
POLICIES the accounts of Lancaster Colony Corporation and its
wholly-owned subsidiaries, collectively referred to as the
"Company." All significant intercompany transactions have
been eliminated.
Use of Estimates
The preparation of the consolidated financial statements of
the Company in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements, as
well as their related disclosures. Such estimates and
assumptions also affect the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassed to conform
to the current year presentation.
Cash Equivalents
The Company considers all highly liquid investments
purchased with maturities of three months or less to be
cash equivalents.
Property, Plant and Equipment
The Company uses the straight-line method of computing
depreciation for financial reporting purposes based on the
estimated useful lives of the corresponding assets.
Estimated useful lives for buildings and improvements range
from ten to forty years while machinery and equipment range
from three to ten years. For tax purposes, the Company
generally computes depreciation using accelerated methods.
Goodwill
For financial reporting purposes goodwill is being
amortized over ten to forty years, with the exception of
$2,243,000 which relates to a company acquired prior to
November 1, 1970. Such amount is not being amortized as, in
the opinion of management, there has been no diminution in
value. Management periodically evaluates the future
economic benefit of its recorded goodwill and other
long-term assets and appropriately adjusts such amounts
when determined to have been impaired based on the
difference between the fair value of an asset and its
carrying amount.
Revenue Recognition
Net sales and related cost of sales are recognized upon
shipment of products. Net sales are recorded net of
estimated sales discounts and returns.
Per Share Information
Net income per common share is computed based on the
weighted average number of shares of common stock and
common stock equivalents (stock options) outstanding during
each period. In December 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share." SFAS No. 128 is effective for
financial statements for periods ending after December 15,
1997, including interim periods, and requires restatement
of prior periods. Accordingly, all net income per share and
weighted average common shares outstanding data has been
presented in accordance with SFAS No. 128 in the
accompanying consolidated financial statements. Under SFAS
No. 128, the Company is required to present basic earnings
per share and diluted earnings per share. Basic earnings
per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted
average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing
income available to common stockholders by the diluted
weighted average number of common shares outstanding during
the period, which includes the dilutive potential common
shares associated with outstanding stock options. There are
no adjustments to net income necessary in the calculation
of basic and diluted earnings per share. On January 27,
1998, a three-for-two stock split was affected whereby one
additional common share was issued for each two shares
outstanding to shareholders of record on January 6, 1998.
Accordingly, per share data and weighted average common
shares outstanding for all periods presented in the
accompanying consolidated financial statements have been
retroactively adjusted for this split.
11
Credit Risk
Financial instruments which potentially subject the Company
to concentrations of credit risk consist primarily of cash
equivalents and trade accounts receivable. The Company
places its cash equivalents with high-quality institutions
and, by policy, limits the amount of credit exposure to any
one institution. Concentration of credit risk with respect
to trade accounts receivable is limited by the Company
having a large and diverse customer base.
Business Segments
The business segments information for 1998, 1997 and 1996
included on page 10 and 11 of this Annual Report is an
integral part of these financial statements. In June 1997,
the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This Statement establishes standards
to be utilized by public business enterprises in reporting
information about operating segments in annual financial
statements and requires reporting of selected information
about operating segments in interim financial reports to
shareholders. It also establishes standards for related
disclosures regarding products and services, geographic
areas and major customers.
The Statement will be effective for the Company for fiscal
1999 and will require comparative information for earlier
years. Interim financial information will not be required
during the initial year of application; however,
comparative interim financial information will be required
for interim periods in the second year of application.
Management has not yet completed its analysis of this
Statement as to its impact on the Company's financial
disclosures.
Comprehensive Income
During June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income." This
Statement will be effective for fiscal years beginning
after December 15, 1997 or the Company's fiscal year
beginning July 1, 1998. The Statement is effective for
interim periods and will require reclassification of
financial statements for earlier periods provided for
comparative purposes. SFAS No. 130 will require the Company
to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated
balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the
equity section of the Consolidated Balance Sheet.
Derivative Instruments and Computer Software Costs
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities," which revises the accounting for
derivative financial instruments. In March 1998, the
American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,"
which revises the accounting for software development
costs. The Statements will be effective for the Company the
first quarter of fiscal 2000. Management has not yet
completed its analysis of these Statements as to their
impact on the Company's financial statements and/or
disclosures.
2. ACQUISITIONS During July 1997, the Company acquired all of the common
stock of Chatham Village Foods, Inc., an upscale salad
crouton business, for cash of approximately $19,749,000.
This amount was financed through the use of internally
generated funds. The related liabilities assumed totalled
approximately $5,747,000. During November 1995, the Company
acquired all of the common stock of a specialty foods
marketer of upscale salad dressings via a stock-for-stock
transaction. This transaction resulted in the issuance of
approximately 409,500 shares of Lancaster Colony
Corporation common stock, restated for the effect of the
stock split in January 1998, having a fair market value of
approximately $9,000,000 in exchange for cash of $380,000
and other assets and liabilities having a fair market value
of $1,718,000 and $825,000, respectively. These
acquisitions were accounted for under the purchase method
of accounting and the non-cash aspects have been excluded
from the accompanying Consolidated Statement of Cash Flows.
The results of operations of these entities have been
included in the consolidated financial statements from the
dates of acquisition and are immaterial in relation to the
consolidated totals.
3. INVENTORIES Inventories are valued at the lower of cost or market.
Inventories which comprise approximately 22% and 21% of
total inventories at June 30, 1998 and 1997, respectively,
are costed on a last-in, first-out (LIFO) basis.
Inventories which are costed by various other methods
approximate actual cost on a first-in, first-out (FIFO)
basis. If the FIFO method (which approximates current cost)
of inventory accounting had been used for inventories
costed on a LIFO basis, these inventories would have been
$14,531,000 and $14,704,000 higher than reported at June
30, 1998 and 1997, respectively.
It is not practicable to segregate work in process from
finished goods inventories. Management estimates, however,
that work in process inventories amount to less than 10% of
the combined total of finished goods and work in process
inventories at June 30, 1998 and 1997.
12
4. SHORT-TERM BORROWINGS As of June 30, 1998, 1997 and 1996, the Company had
unused lines of credit for short-term borrowings from
various banks of $85,000,000, $174,000,000 and
$199,000,000, respectively. The lines of credit are
granted at the discretion of the lending banks and
are generally subject to periodic review. As of June
30, 1998 and 1997, the Company had no short-term
borrowings under its line of credit arrangements.
5. ACCRUED LIABILITIES Accrued liabilities at June 30, 1998 and 1997 are
composed of:
(Dollars In Thousands) 1998 1997
--------------------------------------------------------------------------------------------
Income and other taxes ($ 4,603) $ 2,496
Accrued compensation and employee benefits 25,813 25,103
Accrued marketing and distribution 4,839 6,287
Other 8,154 6,070
--------------------------------------------------------------------------------------------
Total accrued liabilities $34,203 $39,956
============================================================================================
6. LONG-TERM DEBT Long-term debt (including current portion) at
June 30, 1998 and 1997 consists of:
(Dollars In Thousands) 1998 1997
--------------------------------------------------------------------------------------------
Notes payable (8.9%, due in February 2000) $25,000 $25,000
Obligations with various industrial development
authorities-collateralized by real estate
and equipment:
Floating rate due in installments to 2005 4,605 5,010
7%, paid in 1998 1,220
--------------------------------------------------------------------------------------------
Total 29,605 31,230
Less current portion 510 545
--------------------------------------------------------------------------------------------
Long-term debt $29,095 $30,685
============================================================================================
No material debt was assumed for the purchase of
property additions in 1998, 1997 and 1996. Cash
payments for interest were $2,646,000, $2,603,000 and
$2,875,000 for 1998, 1997 and 1996, respectively.
Various debt agreements require the maintenance of
certain financial statement amounts and ratios,
including a requirement to maintain a specified
minimum net worth, as defined. At June 30, 1998, the
Company exceeded this net worth requirement by
approximately $76,741,000.
Long-term debt matures as follows: (Dollars In Thousands)
--------------------------------------------------------------------------------------------
Year ending June 30:
1999 $ 510
2000 25,520
2001 535
2002 545
2003 555
After 2003 1,940
--------------------------------------------------------------------------------------------
Total $29,605
============================================================================================
Based on the borrowing rates currently available for
long-term debt with similar terms and average
maturities, the estimated fair value of total
long-term debt is approximately $30,497,000 and
$32,179,000 at June 30, 1998 and 1997, respectively.
13
7. INCOME TAXES The Company and its domestic subsidiaries file a
consolidated Federal income tax return. Taxes based
on income for the years ended June 30, 1998, 1997 and
1996, have been provided as follows:
(Dollars In Thousands) 1998 1997 1996
--------------------------------------------------------------------------------------------
Currently payable:
Federal $49,798 $49,063 $40,476
State and local 7,612 5,579 5,863
--------------------------------------------------------------------------------------------
Total current provision 57,410 54,642 46,339
Deferred Federal, state and local
provision (credit) 1,833 (889) 747
--------------------------------------------------------------------------------------------
Total taxes based on income $59,243 $53,753 $47,086
============================================================================================
Tax expense resulting from allocating certain tax
benefits directly to common stock and retained
earnings totaled $647,000, $323,000 and $427,000 for
1998, 1997 and 1996, respectively. The Company's
effective tax rate varies from the statutory Federal
income tax rate as a result of the following factors:
1998 1997 1996
--------------------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes 3.1 2.5 3.0
Other 0.2 0.2
--------------------------------------------------------------------------------------------
Effective rate 38.1% 37.7% 38.2%
============================================================================================
Deferred income taxes recorded in the consolidated
balance sheets at June 30, 1998 and 1997 consist of
the following:
(Dollars In Thousands) 1998 1997
--------------------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Inventories $ 5,729 $ 4,797
Employee medical and other benefits 5,079 5,010
Receivable valuation allowances 2,421 2,195
Other accrued liabilities 3,031 3,519
--------------------------------------------------------------------------------------------
Total deferred tax assets 16,260 15,521
--------------------------------------------------------------------------------------------
Total deferred tax liabilities - Property and other (11,477) (8,930)
--------------------------------------------------------------------------------------------
Net deferred tax asset $ 4,783 $ 6,591
============================================================================================
Cash payments for income taxes were $63,633,000,
$54,225,000 and $46,547,000 for 1998, 1997 and 1996,
respectively.
8. SHAREHOLDERS' EQUITY The Company is authorized to issue 3,050,000 shares
of preferred stock consisting of 750,000 shares of
Class A Participating Preferred Stock with $1.00 par
value, 1,150,000 shares of Class B Voting Preferred
Stock without par value and 1,150,000 shares of Class
C Nonvoting Preferred Stock without par value.
In April 1990, the Company's Board of Directors
adopted a Rights Agreement which provides for one
preferred share purchase right to be associated with
each share of the Company's outstanding common stock.
Shareholders exercising these rights would become
entitled to purchase shares of Class A Participating
Preferred Stock. The rights may be exercised on or
after the time when a person or group of persons
without the approval of the Board of Directors
acquire beneficial ownership of 15 percent or more of
the Company's common stock or announce the initiation
of a tender or exchange offer which if successful
would cause such person or group to beneficially own
30 percent or more of the common stock. Such exercise
may ultimately entitle the holders of the rights to
purchase for $17.50 per right common stock of the
Company having a market value of $35. The person or
groups effecting such 15 percent acquisition or
undertaking such tender offer will not be entitled to
exercise any rights. These rights expire April 2000
unless earlier redeemed by the Company under
circumstances permitted by the Rights Agreement.
14
9. STOCK OPTIONS Under terms of an incentive stock option plan approved by the
shareholders in November 1995, the Company has reserved
3,000,000 common shares for issuance to qualified key
employees. All options granted under the plan are exercisable
at prices not less than fair market value as of the date of
grant. At June 30, 1998, 2,622,375 shares were available for
future grants under the plan. In general, options granted
under the plan vest immediately and have a maximum term of 10
years. Both reserved common shares and shares available for
future grants have been restated to reflect the stock split
in January 1998.
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which in accordance with the Statement, the
Company adopted in fiscal 1997. As permitted by SFAS No. 123,
the Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, in accounting for its
stock based compensation because, as discussed below, the
alternative fair value provided for under SFAS No. 123
requires use of option valuation models that were not
developed for use in valuing stock options. Under APB Opinion
No. 25, because the exercise price of the Company's stock
options was at least equal to the market price of the
underlying stock on the date of grant, no compensation
expense was recognized.
The following summarizes for each of the three years in the
period ended June 30, 1998 the activity relating to stock
options granted under the 1995 plan mentioned above as well
as those granted under a separate plan that expired in May
1995, as restated to reflect the stock split in January 1998:
1998 1997 1996
-------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 497,095 $28.18 335,121 $21.16 459,063 $19.25
Exercised, net of stock tendered (215,659) 28.62 (217,976) 21.95 (120,717) 13.88
in payment
Granted 383,100 30.78
Forfeited (3,450) 30.75 (3,150) 27.71 (3,225) 22.25
-------------------------------------------------------------------------------------------------------
Outstanding at end of the period 277,986 $27.78 497,095 $28.18 335,121 $21.16
=======================================================================================================
Exercisable at end of period 186,692 $29.73 354,179 $30.01
=======================================================================================================
The weighted average fair value of options granted during the
fiscal year 1997 was $5.00.
The following table summarizes information about the options
outstanding at June 30, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ---------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at June 30, 1998 Contractual Life Exercise Price at June 30, 1998 Exercise Price
-------------------------------------------------------------------- ---------------------------------
$30.75- $33.83 203,104 1.68 $30.75 171,542 $30.75
$17.06- $22.25 74,882 3.92 $19.71 15,150 $18.22
==================================================================== =================================
The fair value of the options presented above was estimated
at the date of grant using the Black-Scholes option pricing
model with the following assumptions: risk free interest rate
of 6.04%; dividend yield of 1.6%; volatility factors of the
expected market price of the Company's common stock of
20.60%; and a weighted average expected option life of 2.29
years.
Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant dates
for awards under the Plan consistent with the method of FASB
Statement 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts
indicated below:
For Years Ended
(Dollars In Thousands Except Per Share Figures) June 30, 1998 June 30, 1997
-------------------------------------------------------------------------------------------------------
Net income As reported $96,130 $88,706
Pro forma $96,057 $87,746
Earnings per Share
Basic and Diluted As reported $2.22 $2.01
Pro forma $2.22 $1.99
=======================================================================================================
15
10. PENSION AND OTHER Defined Benefit Pension Plans:
POSTRETIREMENT
BENEFITS The Company and certain of its operating subsidiaries
sponsor five noncontributory defined benefit plans
which cover the union workers at such locations.
Additionally, the Company and certain of its
operating subsidiaries participate in two
multiemployer defined benefit plans covering the
union workers at such locations. Benefits under these
plans are primarily based on negotiated rates and
years of service. The Company contributes to these
pension funds at least the minimum amount required by
regulation or contract.
Net pension cost relating to these plans for each of
the three years in the period ended June 30, 1998 is
summarized as follows:
(Dollars In Thousands) 1998 1997 1996
------------------------------------------------------------------------------------------
Company sponsored plans-
Service cost - benefits earned during the period $ 559 $ 537 $ 472
Interest cost on projected benefit obligations 1,785 1,681 1,662
Actual return on pension plan assets (5,927) (5,361) (2,895)
Net amortization and deferrals 3,227 3,226 889
------------------------------------------------------------------------------------------
Net pension cost for Company plans (356) 83 128
Multiemployer plans 970 886 806
------------------------------------------------------------------------------------------
Net pension cost $ 614 $ 969 $ 934
==========================================================================================
The following table summarizes the funded status of
the Company's plans at June 30, 1998 and 1997:
(Dollars In Thousands) 1998 1997
------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefits $28,197 $24,230
==========================================================================================
Accumulated benefit obligation $28,409 $24,361
==========================================================================================
Projected benefit obligation $28,409 $24,361
Plan assets at fair value 34,794 30,262
------------------------------------------------------------------------------------------
Excess of assets over projected benefit obligation 6,385 5,901
Unrecognized net gain (6,430) (6,548)
Unrecognized prior service costs 2,189 2,318
Remaining unrecognized net transition obligation 208 240
------------------------------------------------------------------------------------------
Net recorded pension asset $ 2,352 $ 1,911
==========================================================================================
The majority of plan assets are invested in bonds,
short-term investments and common stock including
shares of the Company's common stock with a market
value of $5,284,000, $4,500,000 and $3,476,000 as of
June 30, 1998, 1997 and 1996, respectively. The
weighted average discount rates used in determining
the projected benefit obligation were 6.75% for 1998
and 7.50% for 1997 and 1996. The expected long-term
rate of return on assets was 9.0% for the three
years.
Employee Stock Ownership Plan and 401(k) Profit
Sharing Plan and Trust:
The Company sponsors an Employee Stock Ownership Plan
(ESOP). In April 1990, the Company loaned $10,000,000
to the ESOP for the purpose of purchasing the
Company's common stock in furtherance of the
objectives of the Plan. The Company funded this
transaction primarily through short-term bank
borrowings. With the proceeds and as adjusted for all
stock splits since April 1990, the ESOP effectively
purchased 1,791,585 shares of the Company's common
stock in the open market.
Effective January 1, 1998, the ESOP was frozen and
all benefit accruals under and further contributions
to the ESOP ceased. All participants in the plan at
that time were immediately 100% vested.
Prior to this time, the ESOP was fully paid by the
Company and generally provided coverage to all
domestic employees, except those covered by a
collective bargaining agreement. Contributions to the
ESOP were not less than that required by the terms of
the loan agreement between the Company and the ESOP.
The Company used the shares-allocated method of
accounting in determining the amount of expense
related to each contribution. The loan to the ESOP
was paid in full in fiscal 1997.
Dividends accumulated on the Company's unallocated
common stock held by the ESOP were used to repay the
loan to the Company. Accordingly, the pretax expense
associated with 1997 and 1996 totaled $1,169,000 and
$1,077,000, which is net of dividends of $110,000 and
$201,000 on the unallocated shares, respectively.
16
The Company adopted the Lancaster Colony Corporation 401(k)
Profit Sharing Plan and Trust (401(k) Plan) effective January
1, 1998. The 401(k) Plan allows participation to all domestic
employees, except those covered by a collective bargaining
agreement. The Company contribution is 40% of the
participant's contribution up to 4% of the participant's
annual compensation. The Company contribution will be funded
annually at the end of the 401(k) Plan year, December 31. The
Company's contribution for the year ended June 30, 1998 is
approximately $174,000. The funds are invested in mutual
funds.
Postretirement Benefits Other Than Pensions:
In addition to pension benefits, the Company also provides
certain employees other postretirement benefits including
health care and life insurance coverage. As of June 30, 1998,
the Company provides such coverage under three active benefit
plans of which two relate to collectively bargained benefits.
In general, all eligible employees are entitled to receive
medical and life insurance benefits upon meeting certain age
and service requirements at the time of their retirement.
The Company recognizes the cost of postretirement medical and
life insurance benefits as the employees render service in
accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Benefits are
funded as incurred. Relevant information with respect to
these postretirement benefits as of June 30, 1998 and 1997
can be summarized as follows:
(Dollars In Thousands) 1998 1997
----------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retired participants $1,825 $1,768
Fully eligible active plan participants 247 214
Other active plan participants 778 892
----------------------------------------------------------------------------------------------------
Total 2,850 2,874
Unrecognized net gain from
past experience and changes in assumptions 463 348
----------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $3,313 $3,222
====================================================================================================
Net postretirement benefits expense relating to the plans for
each of the three years in the period ended June 30, 1998, is
summarized as follows:
(Dollars In Thousands) 1998 1997 1996
----------------------------------------------------------------------------------------------------
Net postretirement benefit cost:
Service cost $ 102 $ 99 $ 111
Interest cost 215 227 226
Net amortization (4)
----------------------------------------------------------------------------------------------------
Total $ 313 $ 326 $ 337
====================================================================================================
Estimated effect of 1% increase in assumed medical cost trend rates:
Increase in accumulated postretirement benefit obligation $ 179 $ 230 $ 245
====================================================================================================
Increase in net periodic postretirement benefit cost $ 28 $ 47 $ 50
====================================================================================================
Assumed weighted average discount rate 6.75% 7.50% 7.50%
====================================================================================================
For 1998, annual increases in medical costs are initially
assumed to total approximately 7.5% per year and gradually
decline to 5% by approximately the year 2003. Annual
increases in medical costs for 1997 were assumed to total
approximately 8% per year and gradually decline to 5% by
approximately the year 2003.
The Company and certain of its subsidiaries participate in
two multiemployer plans that provide various postretirement
health and welfare benefits to the union workers at such
locations. The Company's contributions required by its
participation in the multiemployer plans totaled $1,753,000,
$1,602,000 and $1,463,000 in 1998, 1997 and 1996,
respectively.
17
In February 1998, the Financial Accounting Standards Board
issued SFAS No. 132, "Employers Disclosures about Pensions
and Other Postretirement Benefits." This Statement is
effective for fiscal years beginning after December 15, 1997
or for the Company's year ending June 30, 1999. SFAS No. 132
revises employers disclosures about pension and other
postretirement benefit plans for purposes of standardization
in disclosure. SFAS No. 132 suggests combined formats for
presentation of pension and other postretirement benefit
disclosures and requires restatement of disclosures for
earlier periods provided for comparative purposes. Management
has not yet completed its analysis of this Statement as to
its impact on the Company's financial disclosures.
11. COMMITMENTS The Company has operating leases with initial noncancelable
lease terms in excess of one year, covering the rental of
various facilities and equipment, which expire at various
dates through fiscal 2005. Certain of these leases contain
renewal options, some provide options to purchase during the
lease term and some require contingent rentals based on
usage. The future minimum rental commitments due under these
leases are summarized as follows (in thousands): 1999 -
$4,036; 2000 - $2,521; 2001 - $1,556; 2002 - $1,220; 2003 -
$888; thereafter - $591.
Total rent expense, including short-term cancelable leases,
during 1998, 1997 and 1996 is summarized as follows:
(Dollars In Thousands) 1998 1997 1996
--------------------------------------------------------------------------------------------------
Operating leases:
Minimum rentals $5,477 $4,545 $4,393
Contingent rentals 534 558 579
Short-term cancelable leases 2,113 2,808 2,330
--------------------------------------------------------------------------------------------------
Total $8,124 $7,911 $7,302
==================================================================================================
12. CONTINGENCIES At June 30, 1998, the Company is a party to various legal and
AND environmental matters which have arisen in the ordinary
ENVIRONMENTAL course of business. Such matters did not have a material
MATTERS adverse effect on the current year results of operations and,
in the opinion of management, their ultimate disposition will
not have a material adverse effect on the Company's
consolidated financial statements.
18
INDEPENDENT AUDITORS' REPORT
To The Shareholders And Directors Of Lancaster Colony Corporation
We have audited the accompanying consolidated balance sheets of Lancaster Colony
Corporation and its subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended June 30, 1998. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Lancaster Colony Corporation and
its subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
COLUMBUS, OHIO
AUGUST 26, 1998
SELECTED QUARTERLY FINANCIAL DATA
Lancaster Colony Corporation and Subsidiaries
for the Years Ended June 30, 1998 and 1997
Diluted
(Thousands Except Net Gross Net Earnings Stock Prices(1) Dividends Paid
Per Share Figures) Sales Margin Income Per Share(1) High Low Per Share(1)
- --------------------------------------------------------------------------------------------------------------------------------
1998
First quarter $ 237,174 $ 75,154 $20,861 $ .48 $36.167 $32.000 $.127
Second quarter 300,754 95,046 28,967 .67 38.500 31.833 .133
Third quarter 237,628 76,250 22,796 .53 44.750 37.333 .140
Fourth quarter 233,196 77,947 23,506 .55 45.375 36.750 .140
- -------------------------------------------------------------------------------------------------------------------------------
Year $1,008,752 $324,397 $96,130 $2.22 $45.375 $31.833 $.540
===============================================================================================================================
1997
First quarter $ 218,918 $ 66,345 $18,259 $ .41 $25.833 $23.500 $.113
Second quarter 259,023 82,290 25,405 .57 30.667 24.083 .120
Third quarter 218,141 69,157 21,022 .48 32.250 28.833 .120
Fourth quarter 226,731 72,970 24,020 .55 32.583 26.167 .127
- -------------------------------------------------------------------------------------------------------------------------------
Year $ 922,813 $290,762 $88,706 $2.01 $32.583 $23.500 $.480
===============================================================================================================================
(1) Adjusted for the 3-for-2 stock split paid January 1998.
Lancaster Colony common shares are traded in the Nasdaq National Market System
(Nasdaq Symbol: LANC). Stock quotations were obtained from the National
Association of Securities Dealers. The number of shareholders as of
September 15, 1998 was approximately 12,100. The highest and lowest prices for
the Company's common shares from July 1, 1998 to September 15, 1998 were $40.00
and $27.75.