10-Q/A 1 e10-qa.txt BESTFOODS 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-Q/A1 ------------ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 1-4199 BESTFOODS (Exact name of Registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 36-2385545 (I.R.S. Employer Identification Number) 700 SYLVAN AVENUE INTERNATIONAL PLAZA ENGLEWOOD CLIFFS, N.J. 07632-9976 (Address of principal executive offices) (Zip Code) (201) 894-4000 (Registrant's telephone number, including area code) (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 registrant's classes of common stock, as of the latest practicable date.

2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BESTFOODS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See notes to consolidated financial statements. 1 3 BESTFOODS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements. 2 4 BESTFOODS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to consolidated financial statements. 3 5 BESTFOODS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

---------------- See notes to consolidated financial statements. 4 6 BESTFOODS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INTERIM FINANCIAL STATEMENTS The unaudited consolidated interim financial statements included herein were prepared by management and reflect all adjustments (consisting solely of normal recurring items) which are, in the opinion of management, necessary to present a fair statement of results of operations for the interim periods ended June 30, 2000 and 1999 and the financial position as of June 30, 2000. References to "the Company" are to Bestfoods and its consolidated subsidiaries. These statements should be read in conjunction with the consolidated financial statements and the related footnotes to these statements contained in the Company's Annual Report to Stockholders which were incorporated by reference in Form 10-K for the fiscal year ended December 31, 1999. 2. ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities", as amended in June 2000 by Statement No. 138 (FAS 138), "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which requires the recognition of all derivatives as assets or liabilities in the statement of financial position and measure those instruments at fair value. Changes in fair value of derivatives are recorded in earnings or other comprehensive income depending upon the intended use of the derivative and the resulting designation. The effective date of this statement has been delayed to fiscal years beginning after June 15, 2000. The Company is in the process of determining the impact the adoption of this statement will have on its financial position and results of operations, which is not expected to be significant. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation", which provides guidance for issues that have arisen in applying APB No. 25, "Accounting for Stock Issued to Employees". This Interpretation, which is effective July 1, 2000, applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 31, 1998. The Company is in the process of determining the impact the adoption of this Interpretation will have on its financial position and results of operations, which is not expected to be significant. 3. ACQUISITIONS On February 8, 2000, the Company became the 100% owner of Arisco Produtos Alimenticios S.A. (Arisco), a privately-held food company in Brazil. Bestfoods paid $490 million for 100% of the shares in Arisco. Included on the Arisco balance sheet was approximately $262 million of net debt. In 1999 Arisco had annual sales of approximately $440 million. This transaction was accounted for as a purchase. The Company financed this investment through existing credit facilities. Consistent with the Company's international reporting schedule, Arisco's financial results and financial condition are included for the first time in the Company's financial statements this quarter. Arisco had sales of $54.6 million and an operating loss of $1.1 million for the second quarter. 5 7 4. INVENTORIES Inventories are summarized as follows:

5. LONG-TERM DEBT Long-term debt is summarized as follows:

6. CONSOLIDATED STATEMENTS OF CASH FLOWS Supplementary information for the consolidated statements of cash flows is set forth below:

6 8 7. FINANCIAL INSTRUMENTS The Company's policies regarding hedging of foreign currency cash flows and commodity purchases are set forth in the Annual Report to Stockholders which was filed as Exhibit 13 to Form 10-K for the year ended December 31, 1999. FOREIGN EXCHANGE CONTRACTS At June 30, 2000, the Company had forward exchange contracts to deliver $3 million in Hong Kong dollars and $5 million in German marks and to purchase $33 million in German marks and $3 million in Swiss francs. COMMODITIES At June 30, 2000 the outstanding commodity contracts were not material to the Company's financial position or results of operations. INTEREST RATE SWAPS At June 30, 2000, the Company had interest rate swap agreements outstanding with notional amounts of $200 million. A portion of the Company's fixed-rate debt position was hedged with these agreements. The fixed weighted-average receive rate was 5.3% at June 30, 2000 and the floating weighted average rate was 6.5%. These swap agreements terminate on various dates through 2003. 8. PENDING MERGER TRANSACTION AND RELATED EXPENSES As previously reported, on June 6, 2000, the Company and Unilever PLC and Unilever N.V. (collectively "Unilever") announced that they had signed a definitive merger agreement, as a result of which the Company will become an indirect wholly owned subsidiary of Unilever. Under the terms of the agreement, as amended, upon the effectiveness of the merger of an indirect subsidiary of Unilever into the Company, each outstanding share of the Company will be converted into the right to receive $73 per share in cash. The transaction is expected to close in the fourth quarter of 2000, subject to the vote of the Company's and Unilever's stockholders and customary regulatory approvals and closing conditions. Reference is made to the Company's Schedule 14A filed June 6, 2000, Form 8-K filed June 21, 2000, Form 8-A/A filed June 23, 2000 and Schedule 14A filed July 7, 2000. As a result of the pending merger, the Company has accrued a charge of $45 million ($30 million after tax or $.11 per share) through June 30, 2000 for merger-related costs taken in the second quarter. 7 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS NET SALES for the three months ended June 30, 2000 increased $53 million to $2,208 million, up 2.5% from the $2,155 million for the same period last year. This increase was due to a 7.4% improvement in worldwide volumes (including the impact of acquisitions of 4.7%). Significantly offsetting this increase was the negative 4% impact of currency values, particularly in Europe. An analysis of net sales by division is as follows:

North American sales were up 4.8% for the quarter and 8.3% for the six-month period due to increased volumes from the Case-Swayne food ingredient acquisition. Mayonnaise volumes were lower in the quarter, but 5.6% higher for the six-month period. Volumes of dressings, Knorr products and peanut butter were up for the quarter while volumes of Mueller's and Mazola products decreased. Overall, prices for the division decreased. In Europe, net sales declined 6.9% or $63 million for the quarter and 5.4% for the six-month period due entirely to unfavorable exchange rates. Volumes improved 1.8%, mainly from existing businesses, and prices were up. Excluding the impact of exchange sales would have been up 2%. Net sales in Latin America for the second quarter were 29% higher compared to the prior year, when a Brazilian currency devaluation had a strong negative impact on results. Volumes excluding acquisitions were up 7.2% and including the Arisco acquisition were up 33%. These volume increases were slightly offset by lower prices and negative currency impacts. In Asia, net sales improved 10.8% for the quarter and 13% for the six-month period compared to the prior year. A 21% volume improvement accounted for this increase. Prices were lower, and currency comparisons were slightly negative for the quarter. Net sales in the Baking business increased 3.2% for the quarter and 3.7% for the six-month period compared to last year. Volumes increased 3.2% in the quarter due to higher volumes of breads and Thomas' products. COST OF SALES AND OPERATING EXPENSES. Cost of sales as a percentage of net sales was 52% for the three months ended June 30, 2000, resulting in a gross profit margin of 47.6%, which is flat compared to the same period last year. Operating expenses decreased 1% from the prior year excluding a $45 million pre-tax charge for merger-related costs taken in the second quarter. OPERATING INCOME for the three months ended June 30, 2000 increased 10% to $366 million excluding the merger-related charge. This increase was chiefly the result of the higher volumes and improved margins in all divisions except Latin America. Unfavorable exchange rates partially offset the gains mentioned above. 8 10 FINANCING COSTS of $59 million increased 17% compared to the last year mainly due to increased interest expense related to the Arisco acquisition. PROVISION FOR INCOME TAXES. The effective tax rate was 33.5% in the second quarter of 2000 compared to 34.5% for the same period a year ago. The lower rate in 2000 resulted from a decrease in the effective tax rates in various foreign jurisdictions. The Company expects the effective tax rate to remain at 33.5% for the foreseeable future. NET INCOME AND EARNINGS PER DILUTED COMMON SHARE for the three months ended June 30, 2000 increased 9.9% and 11.5%, respectively to $193 million or $.68 per diluted share compared to $176 million or $.61 per diluted share last year. Contributing to the improved results were a $.08 per share improvement in operating income, a slightly lower effective tax rate contributing $.01 per share, and fewer shares outstanding also adding $.01 per share. Higher financing costs and increased minority equities lowered earnings per share by $.02 and $.01, respectively. MERGER CHARGE. The Company accrued a charge of $45 million ($30 million after tax) through June 30, 2000 for costs relating to the pending Bestfoods Unilever merger. RISKS AND UNCERTAINTIES The Company operates in more than sixty countries, and in each country, the business is subject to varying degrees of risk and uncertainty. It insures its business and assets in each country against insurable risks in a manner it deems appropriate. Because of its diversity, the Company believes that the risk of loss from non-insurable events in any one business or country would not have a material adverse affect on the Company's operations as a whole. Additionally, the Company believes there is no concentration of risk with any single customer or supplier, or small group of suppliers or customers, whose failure or non-performance would materially affect the Company's results. Also because of the Company's broad operational reach, it is subject to risks due to changes in foreign currencies that could affect earnings. As a practical matter, it is not feasible to cover these fluctuations with currency hedges. Additionally, the Company believes that over time most currencies of major countries in which it operates will equalize against the U.S. dollar. However, the Company does maintain a policy of hedging its exposure to foreign currency cash flows to cover planned dividends, fees and royalties, inter-company loans, and other similar transactions. In addition, the Company hedges certain net investments with borrowings denominated in the particular currency. As a matter of policy, the Company does not speculate in foreign currencies. For certain of its North American raw material purchases, the Company hedges its exposure to commodity price fluctuations with commodity futures contracts. The Company's products are manufactured from a number of raw materials, including soybean and other edible oils, peanuts and wheat, all of which are, and are expected to be, in adequate supply. Such raw materials may or may not be hedged at any given time based on management's decisions as to the need to fix the cost of raw materials to protect the Company's profitability. The value of raw materials subject to commodity hedging represents a small percentage of the total worldwide cost of sales. The historical price volatility of raw materials, combined with the relatively low percentage of raw materials to cost of sales, have never yielded a material adverse effect on gross margins and are not expected to in the future. In addition, any significant change in commodity prices can generally be recovered in higher selling prices, thereby further minimizing the impact on the Company's margins. 9 11 LIQUIDITY AND CAPITAL RESOURCES During the six-month period ended June 30, 2000, strong cash flows from operations continued to fund the Company's working capital requirements, capital expenditures and dividend payments. Working capital on a cash flow basis increased $93 million during the first six months of 2000 compared to $88 million for the same period of 1999. Capital expenditures at $96 million were lower than last year's six-month period of $124 million. The Company share buyback program continued until April 25, 2000 totaling $176 million (4.0 million shares) for the year until such date. The Company's indebtedness at June 30, 2000 and December 31, 1999 is summarized herein under the caption "Long-term debt" on page 6. Material terms of all loans, lines of credit and covenants are discussed in the "Long-term debt" note found on pages 35 and 36 of the Company's 1999 Annual Report and filed as Exhibit 13 to the 1999 Form 10-K. At June 30, 2000, the ratio of consolidated borrowed debt to EBITDA was 2.1. Additionally, the ratio of EBITDA to interest was 8.1 at June 30, 2000. FORWARD LOOKING AND CAUTIONARY STATEMENTS This report may contain forward-looking statements based on our best current information and reasonable assumptions about anticipated developments. Statements including such words as "believes," "expects," "anticipates," "intends," "plans," "estimates," and other similar expressions are intended to identify such forward-looking statements. Because of the risks and uncertainties that always exist in any operating environment or business, we cannot make assurances that these expectations will prove correct. Actual results and developments may differ materially depending upon currency values, competitive pricing, consumption levels, costs and political and social conditions in the economies and environments where Bestfoods operates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative Disclosure - There have been no material changes in the Company's market risk during the six months ended June 30, 2000. Qualitative Disclosure - This information is set forth on page 33, under the caption "Financial Instruments," of the Company's 1999 Annual Report which was filed as Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and is incorporated herein by reference. 10 12 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed, immediately following public announcement on May 2, 2000, of the Board of Directors' determination to reject an earlier unsolicited proposal from Unilever to acquire all of the outstanding shares of Bestfoods, ten shareholders, each purporting to sue on behalf of a class of all Bestfoods shareholders, began to file putative class actions against the Company and the Board of Directors in the Court of Chancery for the State of Delaware in and for New Castle County. There have been no developments in these proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits pursuant to Item 601 of Regulation S-K. (Exhibits filed with the original 10-Q submission dated August 3, 2000.) Exhibit 10 - Standard form of amendment to severance agreement for executive officers of the Company Exhibit 11 - Statements regarding the computation of earnings per share. Exhibit 12 - Statement regarding the computation of ratios of earnings to fixed charges. Exhibit 27 - Financial data schedule. b) Reports on Form 8-K. There was one report filed on Form 8-K on June 21, 2000 during the second quarter of 2000 which incorporated under Item 5, Other Events, the Agreement and Plan of Merger, dated June 6, 2000 by and among Unilever PLC, Unilever N.V., Conopco, Inc., Titan Acquisition Company and Bestfoods and a joint press release, dated June 6, 2000, describing the Company's announcement regarding the signing of the merger agreement. 11 13 BESTFOODS AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BESTFOODS DATE: August 10, 2000 /S/ Robert J. Gillespie -------------------------------------------- (Robert J. Gillespie) Executive Vice President, Strategic Business Development and Finance DATE: August 10, 2000 /S/ Philip V. Terenzio -------------------------------------------- (Philip V. Terenzio) Vice President and Controller 12

BESTFOODS 10-Q/A