NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
Summary of Significant Accounting Policies
Unaudited Consolidated Financial Statements
: The accompanying unaudited consolidated financial statements of Bob Evans Farms, Inc. ("Bob Evans") and its subsidiaries (collectively, Bob Evans and its subsidiaries are referred to as “the Company,” “we,” “us” and “our”) are presented in accordance with the requirements of this Quarterly Report on Form 10-Q and, consequently, do not include all of the disclosures normally required by U.S. generally accepted accounting principles or those normally made in our Annual Report on Form 10-K filing. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial position and results of operations have been included. The consolidated financial statements are not necessarily indicative of the results of operations for a full fiscal year. The information in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended
April 28,
2017
. Throughout the Unaudited Consolidated Financial Statements and Notes to the Consolidated Financial Statements, dollars are in thousands, except share and per-share amounts.
Pending Acquisition by Post Holdings, Inc.:
On
September 18, 2017
, the Company, Post Holdings, Inc., a Missouri corporation ("Post" or "Post Holdings"), and Haystack Corporation, a Delaware corporation and a wholly owned subsidiary of Post (“Merger Sub”), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"). As a result of the Merger, Merger Sub will cease to exist, and the Company will survive as a wholly owned subsidiary of Post. Upon the closing of the Merger, each share of the Company’s common stock, par value
$0.01
per share (other than treasury stock and any shares of the Company’s common stock owned by the Company, Post, Merger Sub or any of their wholly owned subsidiaries, or any Company stockholder who properly demands statutory appraisal of such stockholder’s shares), will be converted into the right to receive an amount in cash equal to
$77.00
without interest. Upon completion of the Merger, the Company’s common stock will no longer be publicly traded and will be delisted from the Nasdaq Global Select Market.
The pending Merger is expected to be completed during the first calendar quarter of 2018, and is subject to customary closing conditions, including adoption of the Merger by the Company’s stockholders.
The Merger Agreement contains certain termination rights for the Company and Post. Upon termination of the Merger Agreement, under specified circumstances, including if the Company terminates the Merger Agreement in order to accept a qualifying Proposal or if the Company's Board of Directors changes its recommendation in favor of the transaction, the Company may be required to pay Post a termination fee of
$50,000
.
Description of Business
: We produce and distribute a variety of complementary home-style, refrigerated side-dish convenience food items and pork sausage under the Bob Evans ®, Owens ®, Country Creek ® and Pineland ® brand names. These food products are available throughout the United States at grocery retailers. We also manufacture and sell similar products to food-service accounts, including Bob Evans Restaurants and other restaurants.
In the fourth quarter of fiscal 2017, we completed the sale of the Bob Evans Restaurants business (the "Restaurants Business") to Bob Evans Restaurants LLC, a Delaware limited liability company formed by affiliates of Golden Gate Capital Opportunity Fund, L.P. (the "Buyer") in accordance with the Asset Membership Interest Purchase Agreement entered into on January 24, 2017 (the "Restaurants Transaction"). For all periods presented in our Consolidated Statements of Net Income, all sales, costs, expenses, gains and income taxes attributable to our Restaurants Business as well as the Restaurants Transaction have been reported under the caption "Income from Discontinued Operations, Net of Income Taxes." See Note 3 for additional information.
On May 1, 2017, the Company completed its acquisition ("the Acquisition") of Pineland Farms Potato Company, Inc., a Maine corporation ("Pineland"). The Acquisition increases our side-dish production capacity and provides us with the capability to produce and sell diced and shredded potato products in both the retail and food-service channels. The Company purchased and acquired all of the equity interests of Pineland outstanding immediately prior to the closing. See Note 2 for additional information.
Income Statement Reclassifications:
Historically, the cost of goods sold line in the Consolidated Statement of Net Income has primarily represented the cost of materials and has excluded depreciation expense, which was presented separately. In the first quarter of fiscal 2018, we changed the presentation of our Consolidated Statements of Net Income. The changes were made to conform the Consolidated Statements of Net Income to how management views the business subsequent to the
divestiture of Bob Evans Restaurants and to better align with presentation that is consistent with our industry peers. The primary change was to classify all production costs, including production labor, depreciation and other plant operating costs, as costs of goods sold. These costs totaled
$27,227
and
$22,656
for the three months ended
October 27, 2017
, and
October 28, 2016
, respectively, and
$52,751
and
$42,062
for the six months ended
October 27, 2017
, and
October 28, 2016
, respectively. We also have changed our income statement presentation to separately present advertising, selling and distribution costs, consistent with how management views the business. These classification changes had no impact on reported operating income or net income, and prior period amounts have been reclassified to conform to the current presentation.
Revenue Recognition:
Revenue is recognized when products are received by our customers. We engage in promotional (sales incentive / trade spend) programs in the form of "off-invoice" deductions, billbacks, cooperative advertising and coupons with our customers. Costs associated with these programs are classified as a reduction of gross sales in the period in which the sale occurs. Promotional spending for continuing operations, primarily comprised of off-invoice deductions and billbacks, was
$23,377
and
$19,330
for the three months ended
October 27, 2017
, and
October 28, 2016
, respectively, and
$41,257
and
$35,621
for the six months ended
October 27, 2017
, and
October 28, 2016
, respectively.
Cost of Goods Sold:
Cost of goods sold includes the cost of raw materials, packaging materials, production labor and all other operating costs associated with our production facilities including depreciation. Prior to the income statement reclassification, cost of goods sold was comprised primarily of raw material and packaging material costs. Production labor was previously included in operating wages and fringe benefit expenses, production related operating expenses were included in other operating expenses and depreciation was presented separately on the Consolidated Statements of Net Income.
Advertising and Marketing Costs:
Advertising and marketing costs are primarily comprised of media advertising and consumer research costs. Media advertising is expensed over the expected benefit period and is fully expensed in the fiscal year the media first airs. We expense all other advertising and marketing costs as incurred. Advertising and marketing expense from continuing operations was
$5,313
and
$3,543
in the three months ended
October 27, 2017
, and
October 28, 2016
, respectively,
and
$8,377
and
$6,782
in the six months ended
October 27, 2017
, and
October 28, 2016
, respectively, and is recorded separately
in the Consolidated Statements of Net Income. Prior to the changes in income statement presentation, advertising costs were included in other operating expenses and marketing costs were included in S,G&A.
Distribution Costs:
Distribution costs primarily consist of expenditures related to shipping products to our customers and are expensed as incurred. Distribution costs were
$5,373
and
$4,674
for the three months ended
October 27, 2017
, and
October 28, 2016
, respectively, and
$10,736
and
$8,623
for the six months ended
October 27, 2017
, and
October 28, 2016
, respectively, and are recorded separately on the Consolidated Statements of Net Income. These costs were primarily presented as other operating expenses prior to the first quarter of fiscal 2018.
Selling Costs:
Selling costs include compensation, travel and support costs for our sales organization as well as broker fees. Selling costs were
$4,257
and
$4,099
for the three months ended
October 27, 2017
, and
October 28, 2016
, respectively, and
$8,690
and
$7,813
for the six months ended
October 27, 2017
, and
October 28, 2016
, respectively, and are recorded separately on the Consolidated Statements of Net Income. These costs were previously classified in S,G&A.
Accounts Receivable:
Accounts receivable represents amounts owed to us through our operating activities and are presented net of allowances for doubtful accounts and promotional incentives. Accounts receivable consist primarily of trade receivables from customer sales. We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. In addition, we recognize allowances for bad debts based on the length of time receivables are past due with allowance percentages, based on our historical experiences, applied on a graduated scale relative to the age of the receivable amounts. If circumstances such as higher than expected bad debt experience or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us were to occur, the recoverability of amounts due to us could change by a material amount. We had allowances for doubtful accounts of
$401
and
$269
as of
October 27, 2017
, and
April 28, 2017
, respectively. Accounts receivable were reduced by
$7,063
and
$8,055
as of
October 27, 2017
, and
April 28, 2017
, respectively, related to promotional incentives that reduce what is owed to the Company from certain customers.
Inventories:
We value inventories at the lower of net realizable value or average cost, which approximates a first-in first-out basis due to the perishable nature of that inventory. Inventory includes raw materials and supplies (
$12,793
at
October 27, 2017
, and
$6,037
at
April 28, 2017
) and finished goods (
$16,916
at
October 27, 2017
, and
$11,173
at
April 28, 2017
).
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost less accumulated depreciation. The straight-line depreciation method is used. Depreciation is calculated at rates adequate to amortize costs over the estimated useful lives of buildings and improvements (primarily
5
to
25
years) and machinery and equipment (primarily
3
to
10
years). Improvements to leased properties are depreciated over the shorter of their useful lives or the initial lease terms. Total depreciation expense from continuing operations was
$6,607
and
$5,684
in the
three months ended
October 27, 2017
, and
October 28, 2016
, respectively, and
$13,152
and
$10,779
in the six months ended
October 27, 2017
, and
October 28, 2016
, respectively. Net assets acquired from the acquisition of Pineland are recorded at the preliminary estimated fair value, net of estimated depreciation expense. See Note 2 for additional information.
We evaluate property, plant and equipment held and used in the business for impairment whenever events or changes in circumstance indicate that the carrying amount of a long-lived asset may not be recoverable. Impairment is determined by comparing the estimated fair value for the asset group to the carrying amount of its assets. If impairment exists, the amount of impairment is measured as the excess of the carrying amount over the estimated fair values of the assets.
Assets associated with our Richardson, Texas, location totaling
$3,334
are classified as Current Assets Held for Sale in the Consolidated Balance Sheet as of
October 27, 2017
and
April 28, 2017
.
Goodwill:
Goodwill, which represents the cost in excess of fair market value of net assets acquired was
$99,829
and
$19,634
as of
October 27, 2017
and
April 28, 2017
, respectively. The increase in goodwill of
$80,195
from the prior year was acquired as part of our acquisition of Pineland. See Note 2 for additional information. The remaining goodwill balance was acquired as part of our fiscal 2013 acquisition of Kettle Creations.
Goodwill is not amortized, but rather is tested for impairment during the fourth quarter each year or on a more frequent basis when indicators of impairment exist. Goodwill and indefinite lived intangible asset impairment testing involves a comparison of the estimated fair value of reporting units to the respective carrying amount. If the estimated fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the estimated fair value, then a second step is performed to determine the amount of impairment, if any. We perform our impairment test using a combination of income-based and market-based approaches. The income-based approach indicates the fair value of an asset or business based on the cash flows it can be expected to generate over its remaining useful life. Under the market-based approach, fair value is determined by comparing our reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. There have been
no
impairments to our goodwill in the current or prior year.
Other Intangible Assets:
The net book value of other intangible asset was
$35,167
and
$39
as of
October 27, 2017
and
April 28, 2017
, respectively. As part of the Pineland acquisition, we acquired identifiable intangible assets associated with the Pineland trade name and customer relationships. The Pineland trade name and customer relationships are being amortized on a straight-line basis over their estimated economic useful life of
20 years
and
10 years
, respectively.
We recorded
$936
and
$1,837
of amortization expense associated with intangible assets in the
three months ended
and six months ended
October 27, 2017
, respectively.
As of
October 27, 2017
, other intangible assets were comprised of the following:
|
|
|
|
|
(in thousands)
|
October 27, 2017
|
|
Customer relationships
|
$
|
33,193
|
|
Trademark
|
1,974
|
|
Total other intangible assets, net
|
$
|
35,167
|
|
Earnings Per Share ("EPS"):
Our basic EPS computation is based on the weighted-average number of shares of common stock outstanding during the period presented. Our diluted EPS calculation reflects the assumed vesting of restricted shares and market-based performance shares, the exercise and conversion of outstanding employee stock options and the settlement of share-based obligations recorded as liabilities on the Consolidated Balance Sheet, net of the impact of anti-dilutive shares. See Note 7 for more information.
The numerator in calculating both basic and diluted EPS for each period is reported net income. The denominator is based on the following weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands)
|
October 27, 2017
|
|
October 28, 2016
|
|
October 27, 2017
|
|
October 28, 2016
|
Basic
|
20,188
|
|
|
19,825
|
|
|
20,166
|
|
|
19,807
|
|
Dilutive shares
|
33
|
|
|
139
|
|
|
35
|
|
|
175
|
|
Diluted
|
20,221
|
|
|
19,964
|
|
|
20,201
|
|
|
19,982
|
|
In the
three months and six months
ended
October 27, 2017
,
38,722
and
33,952
shares, respectively, were excluded from the diluted EPS calculations because they were anti-dilutive. In the
three months and six months
ended
October 28, 2016
,
337,218
and
326,605
shares, respectively, of common stock were excluded from the diluted EPS calculations because they were anti-dilutive.
Dividends:
In both the three months ended
October 27, 2017
, and
October 28, 2016
, the Company paid dividends equal to $
0.34
per share on our outstanding common stock. In the six months ended
October 27, 2017
and
October 28, 2016
, the Company paid dividends equal to
$8.18
and
$0.68
, respectively, per share on our outstanding common stock. Dividends paid during the first six months of fiscal 2018 include a special dividend of
$7.50
per share, which represents the majority of net cash proceeds from the Restaurants Transaction, after income tax payments and the settlement of outstanding borrowings under our former credit agreement.
Individuals that hold awards for unvested and outstanding restricted stock units, performance share units and outstanding deferred stock awards are entitled to receive dividend equivalent rights equal to the per-share cash dividends paid on outstanding units. Dividend equivalent rights are forfeitable until the underlying share-units from which they were derived vest. Share-based dividend equivalents are recorded as a reduction to retained earnings, with an offsetting increase to capital in excess of par value. Refer to table below:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(in thousands)
|
October 27, 2017
|
|
October 28, 2016
|
Cash dividends paid to common stockholders
|
$
|
163,013
|
|
|
$
|
13,452
|
|
Dividend equivalent rights
|
2,021
|
|
|
253
|
|
Total dividends
|
$
|
165,034
|
|
|
$
|
13,705
|
|
Accrued Non-Income Taxes:
Accrued non-income taxes primarily represent obligations for real estate and personal property taxes, as well as sales and use taxes. Accrued non-income taxes were
$1,126
and
$3,353
as of
October 27, 2017
, and
April 28, 2017
, respectively.
Self-Insurance Reserves:
We record estimates for certain health, workers’ compensation and general insurance costs that are self-insured programs. Self-insurance reserves include actuarial estimates of both claims filed, carried at their expected ultimate settlement value, and claims incurred but not yet reported. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. In the first quarter of fiscal 2018, we corrected the classification of self-insurance reserves. We recorded an adjustment on our
April 28, 2017
, Consolidated Balance Sheet to classify
$2,814
of our self-insurance reserves as non-current. Self-insurance reserves were
$6,820
and
$10,692
as of
October 27, 2017
, and
April 28, 2017
, respectively, of which
$1,991
and
$2,814
were classified as non-current liabilities.
Other Accrued Expenses:
Other accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
October 27, 2017
|
|
April 28, 2017
|
Legal and professional fees
|
$
|
7,485
|
|
|
$
|
10,807
|
|
Accrued customer incentives
|
2,852
|
|
|
1,912
|
|
Accrued advertising
|
1,292
|
|
|
515
|
|
Accrued broker fees
|
1,112
|
|
|
945
|
|
Other
|
5,419
|
|
|
3,726
|
|
Total other accrued expenses
|
$
|
18,160
|
|
|
$
|
17,905
|
|
Other Non-Current Liabilities:
Other non-current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
October 27, 2017
|
|
April 28, 2017
|
Deferred rent
|
$
|
1,430
|
|
|
$
|
1,091
|
|
Contingent consideration
(1)
|
24,059
|
|
|
—
|
|
Non-current deferred gain
(2)
|
2,072
|
|
|
2,192
|
|
Self-insurance reserves
|
1,991
|
|
|
2,814
|
|
Total other non-current liabilities
|
$
|
29,552
|
|
|
$
|
6,097
|
|
(1) See Note 2 for additional information.
(2) In fiscal 2016, we entered into sale leaseback transactions for
two
of our production facilities.
The transactions included
20
-year initial lease terms for each facility with additional renewal periods, as well as payment and performance guaranties. A gain of $
2,305
on the sale of our Lima, Ohio, facility was deferred and is being recognized on a straight-line basis over the initial term of the lease.
Commitments and Contingencies:
We occasionally use purchase commitment contracts to stabilize the potentially volatile pricing associated with certain commodity items.
We are self-insured for most casualty losses and employee health-care claims up to certain stop-loss limits per claimant. We have accounted for liabilities for casualty losses, including both reported claims and incurred, but not reported claims, based on information provided by independent actuaries. We have estimated our employee health-care claims liability through a review of incurred and paid claims history. The Company retained liabilities for health insurance and general liability claims associated with the Restaurants Business that were incurred prior to the closing of the Restaurants Transaction. We do not believe that our calculation of casualty losses and employee health-care claims liabilities would change materially under different conditions and/or different methods. However, due to the inherent volatility of actuarially determined casualty losses and employee health care claims, it is reasonably possible that we could experience changes in estimated losses, which could be material to net income.
New Accounting Pronouncements:
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standard Board ("FASB"), the Securities and Exchange Commission ("SEC"), the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company’s consolidated financial statements.
In May 2014, the FASB and the International Accounting Standards Board ("IASB") issued new joint guidance surrounding revenue recognition. Under US GAAP, this guidance is being introduced to the ASC as Topic 606, Revenue from Contracts with Customers ("Topic 606"), by Accounting Standards Update ("ASU") No. 2014-09. The new standard supersedes a majority of existing revenue recognition guidance under US GAAP, and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to use more judgment and make more estimates while recognizing revenue, which could result in additional disclosures to the financial statements. Topic 606 allows for either a "full retrospective" adoption or a "modified retrospective" adoption. The standard will become effective for us in fiscal 2019.
We are in the process of implementing the new standard, focusing on promotional arrangements with customers. We do not believe the implementation will be material to our current or historical financial statements. We are in the process of developing additional controls to ensure proper oversight of new customer relationships and promotional activity, as well as to ensure we meet all of the disclosure requirements associated with the new standard. We have not yet concluded which transition method we will elect, but anticipate we will use the modified retrospective approach.
In February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance requires companies to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will become effective for us beginning in fiscal 2020, with early adoption permitted. We are currently evaluating this standard, including the timing of adoption and the related impact on our consolidated financial statements.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The standard will become effective for us in our fiscal 2021. We do not expect this standard to have a material impact on the consolidated financial statements.
In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The guidance is to be applied using a retrospective transition method to each period presented. This standard will become effective for us in our fiscal 2019. We are currently evaluating the impact this standard will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment test. Under the previous guidance an impairment of goodwill exists when the carrying amount of goodwill exceeds its implied fair value, whereas under the new guidance a goodwill impairment loss would be recognized if the carrying amount of the reporting unit exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The ASU is effective for annual and any interim
impairment tests for periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact this standard will have on our consolidated financial statements.
2.
Pineland Acquisition
On May 1, 2017, the Company completed the Acquisition. The Acquisition increases our side-dish production capacity and provides us with the capability to produce and sell diced and shredded potato products in both the retail and food-service channels. The Acquisition also diversifies our production capability by adding a second state-of-the-art potato processing facility with approximately
180 million
pounds of annual capacity. Pineland also owns and operates a
900
-acre potato farm and is surrounded by an estimated
55,000
acres of annual potato production.
The Company purchased and acquired all of the equity interests of Pineland outstanding immediately prior to the closing. Net of working capital adjustments and cash acquired, the Company paid
$115,811
in cash, and may be required to pay up to an additional
$25,000
in cash as potential earn-out consideration, which is subject to the achievement of certain operating EBITDA performance milestones over a consecutive
12
-month period during the
24
months following the acquisition date. The following table summarizes the total preliminary purchase price allocated to the net assets acquired:
|
|
|
|
|
(in thousands)
|
|
Cash paid
|
$
|
115,811
|
|
Preliminary fair value of contingent consideration
|
23,746
|
|
Total purchase price to allocate
|
$
|
139,557
|
|
The earn-out consideration arrangement requires the Company to pay a maximum of
$25,000
to Pineland's former shareholders, if Pineland reaches certain EBITDA performance milestones over a consecutive
12
-month period during the
24
months following the acquisition date. The preliminary fair value of the earn-out consideration at the acquisition date was estimated to be
$23,746
. We preliminarily estimated the fair value of the earn-out consideration using a probability-weighted discounted cash flow model. The key assumptions in the discounted cash flow model were Pineland forecasted revenues and profits over the
24
month period following the acquisition date. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. Subsequent adjustments to the fair value of the earn-out consideration will be recorded to the general and administrative expense line of the Consolidated Statements of Net Income. The earn-out vests at the maximum amount and becomes immediately due and payable in the event of a change in control.
The following table summarizes the estimated fair value of assets acquired and liabilities, on the acquisition date. We are in the process of reviewing a third party valuation of the assets acquired and liabilities assumed, including the earn-out consideration, and as a result the provisional measurements disclosed below are preliminary and subject to change.
|
|
|
|
|
(in thousands)
|
Acquisition date fair value
|
Accounts receivable
|
$
|
6,008
|
|
Inventory
|
3,216
|
|
Other assets
|
944
|
|
Property, plant and equipment
|
35,915
|
|
Identifiable definite-lived intangible assets
|
36,965
|
|
Goodwill
|
80,195
|
|
Total identifiable assets acquired
|
$
|
163,243
|
|
|
|
Current liabilities assumed
|
5,081
|
|
Deferred tax liabilities
|
$
|
18,605
|
|
The identifiable intangible assets acquired include preliminary values of
$34,940
associated with customer relationships that are being amortized over a
10
-year period, and
$2,025
associated with trademarks that are being amortized over a
20
-year period. The trademarks were preliminarily valued using the relief-from-royalty method while the customer relationships were valued using the excess-earnings method. Key assumptions in the preliminary valuation of identifiable intangible assets included projected sales and profit margins, customer attrition rates and other third party benchmarking information. There are inherent uncertainties and management judgment required in these determinations.
The preliminary valuation of the Acquisition resulted in a purchase price that exceeded the estimated fair value of net assets acquired, which was allocated to goodwill. We believe the amount of goodwill relative to the fair value of consideration relates to several factors including potential synergies related to market opportunities for our product offerings, the potential to leverage our combined sales force to attract new customers and potential synergies that will result in cost reductions for the combined company.
None
of the goodwill is expected to be deductible for income tax purposes.
In the second quarter, we recorded adjustments to the acquisition fair value of certain assets and liabilities based on revisions to the preliminary third party valuation. The changes resulted in a
$782
increase to property, plant and equipment, a
$1,474
increase in identifiable intangible assets, a
$786
increase in deferred tax liabilities, and a
$1,470
decrease to goodwill. The impact of these changes to our Consolidated Statements of Net Income were immaterial.
We incurred
$579
of integration costs during the
six months ended
October 27, 2017
, primarily related to legal and professional fees associated with the Acquisition. These expenses were recorded in the general and administrative expenses line of the Consolidated Statements of Net Income. The following table represents sales and operating income associated with the acquired Pineland business in the first six months of fiscal 2018:
|
|
|
|
|
|
Six Months Ended
|
(in thousands)
|
October 27, 2017
|
Net sales (excluding intercompany sales)
|
$
|
18,052
|
|
Operating income
|
$
|
2,869
|
|
Pro Forma Information
The following pro forma financial information presents our combined results of operations as if the Acquisition had occurred on April 30, 2016, the first day of fiscal 2017. The unaudited pro forma financial information is not necessarily indicative of what our condensed consolidated results of operations actually would have been had the Acquisition been completed on April 30, 2016. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.
|
|
|
|
|
(in thousands)
|
Six Months Ended Q2 2017
Pro forma Results
|
Revenue (excluding intercompany sales)
|
$
|
200,476
|
|
Operating income
|
4,210
|
|
Income before taxes
|
968
|
|
Provision for income taxes
|
339
|
|
Net income
|
$
|
629
|
|
3.
Discontinued Operations
In the fourth quarter of fiscal 2017, we completed the sale of the Restaurants Business for an aggregate purchase price of
$565,000
in cash. The Buyer also purchased our corporate headquarters as part of the transaction.
The Restaurants Transaction was effected by (i) the sale of the Restaurants Business assets by the Company’s affiliates to the Buyer and (ii) the sale by the Company of
fifty
percent of the equity interest in a newly formed special purpose entity that holds specified intellectual property assets used by both the Restaurants Business and the Company’s food production business. As part of the Restaurants Transaction the Company also conveyed to the Buyer the majority of working capital liabilities associated with the Restaurants Business, including outstanding payables, accrued wages, and other accrued current liabilities, other than debt.
The Company continues to supply the Restaurants Business with certain of its products under a multi-year supply agreement. Net sales to the Restaurants Business were
$6,012
and
$5,963
during the three months ended
October 27, 2017
and
October 28, 2016
, respectively, and
$11,212
and $
10,737
during the six months ended
October 27, 2017
and
October 28, 2016
. Sales to the Restaurants Business in the prior year were eliminated in consolidation. Additionally, pursuant to a transition services agreement entered into in connection with the Restaurants Transaction, the Company is supplying certain services, primarily information technology related, to the Restaurants Business, and the Company is receiving certain human resource, tax and accounting services from the Restaurants Business. These services will be provided at cost for a period up to
18
months, which can be further extended.
Results associated with the Restaurants Business in the prior year are classified as income from discontinued operations, net of income taxes, in our Consolidated Statements of Net Income. Prior year results have been recast to conform to the current presentation. Income from discontinued operations in the prior year was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands)
|
October 27, 2017
|
|
October 28, 2016
|
|
October 27, 2017
|
|
October 28, 2016
|
Net sales
|
$
|
—
|
|
|
$
|
219,805
|
|
|
$
|
—
|
|
|
$
|
440,181
|
|
Costs of sales
|
—
|
|
|
56,007
|
|
|
—
|
|
|
111,243
|
|
Other operating expenses
|
—
|
|
|
157,562
|
|
|
—
|
|
|
317,269
|
|
Operating income from discontinued operations
|
$
|
—
|
|
|
$
|
6,236
|
|
|
$
|
—
|
|
|
$
|
11,669
|
|
Net interest expense
(1)
|
—
|
|
|
406
|
|
|
—
|
|
|
812
|
|
Income from discontinued operations before income taxes
|
—
|
|
|
5,830
|
|
|
—
|
|
|
10,857
|
|
Provision for income taxes
|
—
|
|
|
1,478
|
|
|
—
|
|
|
1,919
|
|
Net income from discontinued operations
|
$
|
—
|
|
|
$
|
4,352
|
|
|
$
|
—
|
|
|
$
|
8,938
|
|
(1) Interest expense associated with the mortgage loan on our corporate headquarters facility, which was sold to the Buyer as part of the Restaurants Transaction, was allocated to discontinued operations.
Total operating and investing cash flows from discontinued operations were immaterial in the six months ended
October 27, 2017
. Cash provided by operating activities from discontinued operations was
$16,942
in the six months ended
October 28, 2016
, while cash used in investing activities was
$6,610
in the six months ended
October 28, 2016
. Cash used in investing activities of discontinued operations in the six months ended
October 28, 2016
, relates to
$17,022
of capital expenditures and is net of proceeds from the sale of closed restaurant locations.
Lease Guarantee
As part of the Restaurants Transaction, the Buyer assumed all operating leases associated with the Restaurants Business, including leases for the
143
restaurant properties that were sold as part of a sale leaseback transaction in the fourth quarter of fiscal 2016. The Company and BEF Foods, Inc. continue to guarantee certain payment and performance obligations associated with the lease agreements for those restaurant properties (the "Guarantee"). In the event the Buyer fails to meet its payment and performance obligations under these lease agreements, the Company may be required to make rent and other payments to the landlord under the requirements of the Guarantee. Should the Company, as guarantor of the lease obligations, be required to make all lease payments due for the remaining term of the lease subsequent to
October 27, 2017
, the maximum amount we may be required to pay is the annual rent amount, for the remainder of the lease term. The annual rent on these leases in the first year subsequent to the Restaurants Transaction is approximately
$13,300
, and will increase up to
1.5%
annually based on indexed inflation. The lease term extends for approximately
19
more years as of
October 27, 2017
, and the Company would remain a guarantor of the leases in the event the leases are extended for a renewal period. In the event that the Company is obligated to make payments under the guarantor obligations, we believe the exposure is limited due to contractual protections and recourse available in the master lease agreements as well as the BER Sale Agreement, including a requirement of the landlord to mitigate damages by re-letting the properties in default. There have not been any events that would indicate that the Buyer will fail to continue to meet the obligations of the leases. As such, the fair value of the Guarantee is immaterial as of
October 27, 2017
.
4.
Long-Term Debt and Credit Arrangements
As of
October 27, 2017
, long-term debt was comprised of
$124,119
outstanding under our
$300,000
revolving credit facility ("Credit Facility") and an interest-free loan of
$1,000
, due
10
years from the date of borrowing, with imputed interest, which as a result is discounted to
$904
. The remaining principal on our
$3,000
Research and Development Investment Loan ("R&D Loan") was paid in full during the third quarter of fiscal year 2018. Refer to the table below:
|
|
|
|
|
|
|
|
|
(in thousands)
|
October 27, 2017
|
|
April 28, 2017
|
Credit Facility borrowings
(1)
|
$
|
124,119
|
|
|
$
|
—
|
|
R&D Loan
(2)
|
1,588
|
|
|
1,801
|
|
Interest-free loan
(1)
|
904
|
|
|
894
|
|
Total borrowings
|
126,611
|
|
|
2,695
|
|
Less current debt payable
(2)
|
(1,588
|
)
|
|
(428
|
)
|
Long-term debt
|
$
|
125,023
|
|
|
$
|
2,267
|
|
(1) The Credit Facility and Interest-free loan mature in fiscal 2022.
(2) The remaining principal on the R&D Loan was paid in full on November 17, 2017.
Credit Facility Borrowings
On
April 28, 2017
, the Company entered into the Credit Facility, which established a syndicated secured revolving credit facility under which up to $
300,000
will be available, with a letter of credit sub-facility of $
20,000
, and an accordion option to increase the revolving credit commitment to $
400,000
. All obligations under the Credit Facility are unconditionally guaranteed by the Company as well as certain wholly owned subsidiaries, and are secured by a first-priority security interest in certain property and assets of the Company, including accounts receivable, inventory, equipment, intellectual property and certain other assets, including stock pledges of certain material direct subsidiaries of the Company. The Credit Facility has a maturity date of April 28, 2022. We incurred financing costs of
$1,542
associated with the Credit Facility, which are being amortized over the
five
-year term of the facility.
The primary purposes of the Credit Facility are for stand-by letters of credit in the ordinary course of business as well as working capital, capital expenditures, acquisitions, stock repurchases, dividends and other general corporate purposes.
Borrowings under the Credit Facility bear interest, at borrower’s option, at a rate based on the Eurodollar Rate or the Base Rate, plus a margin based on the Consolidated Leverage Ratio, as detailed in the Credit Facility, ranging from
1.25%
to
2.00%
per annum for Eurodollar Rate, and ranging from
0.25%
to
1.00%
per annum for Base Rate. Base Rate means, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the Federal Funds Rate, plus
0.50%
, and (ii) Bank of America, N.A.’s “prime rate”, and (iii) the Eurodollar Rate, plus
1.0%
. As of
October 27, 2017
, the margin on LIBOR-based loans was
1.50%
per annum and the margin on Base Rate-based loans was
0.50%
per annum. Commitment fees payable under the Credit Facility are also based on the Consolidated Leverage Ratio as defined in the Credit Facility and range from
0.20%
per annum to
0.30%
per annum of the average unused portion of the total lender commitments then in effect.
The terms of the Credit Facility provide for customary representations and warranties and affirmative covenants. The Credit Facility contains negative covenants usual and customary for a transaction of this nature. The Credit Agreement also contains financial covenants that require us to maintain a specified minimum coverage ratio of not less than
3.00
to 1.00, and a maximum leverage ratio that may not exceed
3.50
to 1.00. As of
October 27, 2017
, we had
$124,119
outstanding on the Credit Agreement, and we were in compliance with all covenants. A breach of any of these covenants could result in a default under our Credit Facility, in which case all amounts under the Credit Facility may become immediately due and payable, and all commitments under our Credit Facility to extend further credit may be terminated. The carrying value of our Credit Facility borrowings approximates its fair value due to the variable rate nature the debt instrument.
As of
October 27, 2017
, we had outstanding letters of credit that totaled
$4,414
, all of which were utilized as part of the total amount available under our Credit Facility. If certain conditions are met under these arrangements, we would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience and future expectations, we do not expect to make any significant payment outside of the terms set forth in these arrangements.
Our effective interest rate for the Credit Facility was
2.89%
for the
three months
ended
October 27, 2017
and
2.84%
for
the six months ended
October 27, 2017
. Our effective interest rate on outstanding borrowings was
2.23%
for the
three months
ended
October 28, 2016
and
2.35%
for the six months ended
October 28, 2016
.
Net interest expense during the
three months
ended and six months ended
October 27, 2017
and
October 28, 2016
was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands)
|
October 27, 2017
|
|
October 28, 2016
|
|
October 27, 2017
|
|
October 28, 2016
|
Interest expense:
|
|
|
|
|
|
|
|
Variable-rate debt
(1)
|
$
|
939
|
|
|
$
|
1,840
|
|
|
$
|
1,385
|
|
|
$
|
3,805
|
|
Fixed-rate debt
(2)
|
91
|
|
|
304
|
|
|
184
|
|
|
700
|
|
Capitalized interest
|
(15
|
)
|
|
(116
|
)
|
|
(23
|
)
|
|
(314
|
)
|
Total interest expense on outstanding borrowings
|
1,015
|
|
|
2,028
|
|
|
1,546
|
|
|
4,191
|
|
Interest income:
|
|
|
|
|
|
|
|
Accretion on note receivable
(3)
|
—
|
|
|
(574
|
)
|
|
—
|
|
|
(1,133
|
)
|
Other
|
—
|
|
|
(119
|
)
|
|
(71
|
)
|
|
(236
|
)
|
Total interest income
|
—
|
|
|
(693
|
)
|
|
(71
|
)
|
|
(1,369
|
)
|
Net interest expense from continuing operations
|
$
|
1,015
|
|
|
$
|
1,335
|
|
|
$
|
1,475
|
|
|
$
|
2,822
|
|
|
|
(1)
|
Primarily interest expense on our Credit Facility borrowings for the three and six months ended
October 27, 2017
, and interest expense on our former credit agreement for the three and six months ended
October 28, 2016
.
|
|
|
(2)
|
Includes the amortization of debt issuance costs.
|
|
|
(3)
|
Accretion on our
$30,000
note receivable, obtained as part of the sale of Mimi’s Café to Le Duff which was settled in the third quarter of fiscal 2017.
|
5.
Income Taxes
The provision for income taxes is based on our current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. The Company's effective income tax rate from continuing operations was a
38.2%
benefit for the three months ended
October 27, 2017
, as compared to
32.3%
benefit for the corresponding period last year. The Company's effective income tax rate from continuing operations was a provision of
24.1%
for the six months ended
October 27, 2017
as compared to a provision of
34.5%
for the corresponding period a year ago. The change in tax rate for the three and six months ended
October 27, 2017
, as compared to the corresponding periods last year, was driven primarily by the impact of the discrete items booked during the quarter.
6.
Restructuring and Severance Charges
In the second half of fiscal 2017, we incurred severance charges related to a reduction of personnel as part of the Company's overall strategic initiatives, including the sale of the Restaurants Business. Severance charges associated with employees who worked in shared service functions were recorded in the general and administrative line of the Consolidated Statements of Net Income, while charges associated with employees who supported the Restaurants Business were recorded in results from discontinued operations.
Liabilities associated with severance charges as of
October 27, 2017
were
$498
and are recorded in the accrued wages and related liabilities line of the Consolidated Balance Sheet. The majority of these liabilities are expected to be paid in fiscal 2018.
See tables below for detail of restructuring activity for the
six months
ended
October 27, 2017
, and
October 28, 2016
, respectively:
|
|
|
|
|
(in thousands)
|
Restructuring charges
|
Balance at April 28, 2017
|
$
|
2,800
|
|
Restructuring and related severance charges incurred
|
—
|
|
Amounts paid
|
(1,974
|
)
|
Adjustments
|
(328
|
)
|
Balance at October 27, 2017
|
$
|
498
|
|
|
|
|
|
|
(in thousands)
|
Restructuring charges
|
Balance at April 29, 2016
|
$
|
2,698
|
|
Restructuring and related severance charges incurred
(1)
|
807
|
|
Amounts paid
|
(2,333
|
)
|
Adjustments
|
(42
|
)
|
Balance at October 28, 2016
|
$
|
1,130
|
|
(1) Restructuring charges of
$807
were recorded in discontinued operations for the
six months
ended
October 28, 2016
, related to charges incurred for closed restaurants.
7.
Share-Based Compensation
The Stock Compensation Topic of the FASB ASC 718 ("ASC 718") requires that we measure the cost of employee services received in exchange for an equity award, such as stock options, restricted stock awards, restricted stock units and market-based performance share units, based on the estimated fair value of the award on the grant date. The cost is recognized in the income statement over the vesting period of the award on a straight-line basis. Compensation cost is recognized based on the grant date fair value estimated in accordance with ASC 718.
As of
October 27, 2017
, there were equity awards outstanding under the Amended and Restated Bob Evans Farms, Inc. 2010 Equity and Cash Incentive Plan (the “2010 Plan”). The types of awards that may be granted under the 2010 Plan include: stock options, stock appreciation rights, restricted stock awards, restricted stock units ("RSUs"), cash incentive awards, performance share units ("PSUs"), and other awards. During the
six months
ended
October 27, 2017
, the Company granted approximately
11,000
RSUs and
19,000
PSUs under the 2010 Plan. During the
six months
ended
October 28, 2016
, the Company granted approximately
98,000
RSUs and
142,000
PSUs under the 2010 Plan. With the exception of awards granted to nonemployee directors, all awards granted prior to fiscal 2018 vested on
April 28, 2017
.
The RSUs granted in fiscal 2018 vest ratably, over
three
years. The PSUs granted in fiscal 2018 have performance-based vesting conditions and are designed to vest at the end of a
three
-year performance period if the vesting conditions are achieved. Concurrent with the adoption of ASU 2016-09, Improvements to Employee Share-Based Compensation Accounting, the Company has elected to account for forfeitures of share-based awards when they occur.
Total share-based compensation expense associated with continuing operations, included within the general and administrative line on the
Consolidated Statements of Net Income
, was
$249
and
$904
for the
three months
ended
October 27, 2017
, and
October 28, 2016
, respectively, and
$546
and
$1,628
for the six months ended
October 27, 2017
, and
October 28, 2016
, respectively.
8.
Other Compensation Plans
Defined Contribution Plan:
We have a defined contribution 401(k) retirement savings plan that is available to substantially all employees who have at least
1,000
hours of service.
Nonqualified Deferred Compensation Plans:
We have
three
nonqualified deferred compensation plans, the Bob Evans Executive Deferral Plans I and II (collectively referred to as “BEEDP”) and Bob Evans Directors’ Deferral Plan (“BEDDP”), which provide certain executives and Board of Directors members, respectively, the opportunity to defer a portion of their current year salary or stock compensation to future years. A third party manages the investments of employee deferrals. Expenses related to investment results of these deferrals are based on the change in quoted market prices of the underlying investments elected by plan participants, and are recorded within general and administrative expenses.
Obligations to participants who defer stock compensation through our deferral plans are satisfied only in Company stock. There is no change in the vesting term for stock awards that are deferred into these plans. Obligations related to these deferred stock awards are treated as "Plan A" instruments, as defined by ASC 710. These obligations are classified as equity instruments within the Capital in excess of par value line of the Consolidated Balance Sheets. No subsequent changes in fair value are recognized in the Consolidated Financial Statements for these instruments. Participants earn share-based dividend equivalents in an amount equal to the value of per-share dividends paid to common shareholders. These dividends accumulate into additional shares of common stock, and are recorded through retained earnings in the period in which dividends are paid. Vested, deferred shares are included in the denominator of basic and diluted EPS from continuing operations in accordance with ASC 260 - Earnings per Share. The dilutive impact of unvested, deferred stock awards is included in the denominator of our diluted EPS calculation from continuing operations.
Participants who defer cash compensation into our deferral plans have a range of investment options, one of which is Company stock. Obligations for participants who choose this investment election are satisfied only in shares of Company stock, while all other obligations are satisfied in cash. These share-based obligations are treated as "Plan B" instruments, as defined by ASC 710. These deferred compensation obligations are recorded as liabilities on the Consolidated Balance Sheets, in the deferred compensation line. We record compensation cost for subsequent changes in fair value of these obligations. Participants earn share-based dividend equivalents in an amount equal to the value of per-share dividends paid to common shareholders. These dividends accumulate into additional shares of common stock, and are recorded as compensation cost in the period in which the dividends are paid. At
October 27, 2017
, our deferred compensation obligation included
$892
of share based obligations, which represents approximately
12,000
shares. The dilutive impact of these shares is included in the
denominator of our EPS calculation. Compensation cost (benefit) recognized on the adjustment of fair value for deferred awards was immaterial in the current and prior year.
Upon closing of the Merger with Post, all equity-based obligations in our deferred compensation plans will be converted into the right to receive an amount in cash equal to
$77.00
without interest. Refer to Note 1 for additional information regarding the planned merger.
Supplemental Executive Retirement Plan:
The Supplemental Executive Retirement Plan ("SERP") provides awards to a limited number of executives in the form of nonqualified deferred cash compensation. Gains and losses related to these benefits and the related investment results are recorded within the general and administrative costs caption in the Consolidated Statements of Net Income. The SERP is frozen and no further persons can be added
,
and funding was reduced to a nominal amount per year for the remaining participants.
Our deferred compensation liabilities as of
October 27, 2017
, and
April 28, 2017
, consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
October 27, 2017
|
|
April 28, 2017
|
Liability for deferred cash obligations in BEEDP and BEDDP Plans
|
$
|
12,294
|
|
|
$
|
13,986
|
|
Liability for deferred cash obligations in SERP Plan
|
5,696
|
|
|
5,830
|
|
Liability for deferred share-based obligations in BEEDP and BEDDP Plans
|
892
|
|
|
1,398
|
|
Other non-current compensation arrangements
|
93
|
|
|
110
|
|
Total deferred compensation liabilities
|
18,975
|
|
|
21,324
|
|
Less current portion
(1)
|
(1,850
|
)
|
|
(4,047
|
)
|
Non-current deferred compensation liabilities
|
$
|
17,125
|
|
|
$
|
17,277
|
|
(1)
Current portion of deferred compensation is included within the accrued wages and related liabilities line on the Consolidated Balance Sheets.
The Rabbi Trust is intended to be used as a source of funds to match respective funding obligations in our nonqualified deferred compensation plans. Assets held by the Rabbi Trust are recorded on our Consolidated Balance Sheets, and include company-owned life insurance ("COLI") policies, short-term money market securities and Bob Evans common stock. The COLI policies held by the Rabbi Trust are recorded at cash surrender value on the Rabbi Trust Assets line of Consolidated Balance Sheets and totaled
$23,346
and
$22,353
as of
October 27, 2017
, and
April 28, 2017
, respectively. The cash receipts and payments related to the COLI proceeds are included in cash flows from continuing operating activities on the Consolidated Statements of Cash Flows and changes in the cash surrender value for these assets are reflected within the general and administrative costs line in the Consolidated Statements of Net Income.
The short-term securities held by the Rabbi Trust are recorded at their carrying value, which approximates fair value, on the prepaid expenses and other current assets line of the Consolidated Balance Sheets and totaled
$378
and
$984
as of
October 27, 2017
, and
April 28, 2017
, respectively. All assets held by the Rabbi Trust are restricted to their use as noted above.
9.
Commitments and Contingencies
We are from time to time involved in ordinary and routine litigation, typically involving claims from customers, employees and others related to operational issues common to the food manufacturing industry, and incidental to our business. As part of the Restaurants Transaction, we also retained liability for claims associated with our Restaurant Business that occurred prior to closing. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position, cash flows or results of operations.
10.
Supplemental Cash Flow Information
Cash paid for income taxes and interest for the
six months
ended
October 27, 2017
, and
October 28, 2016
, is summarized below:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(in thousands)
|
October 27, 2017
|
|
October 28, 2016
|
Income taxes paid
|
$
|
41,681
|
|
|
$
|
21,263
|
|
Income taxes refunded
|
(99
|
)
|
|
(318
|
)
|
Income taxes paid, net
|
41,582
|
|
|
20,945
|
|
Interest paid
|
$
|
982
|
|
|
$
|
4,716
|
|
11.
Subsequent Events
Dividend
On
November 28, 2017
, the Board of Directors approved a quarterly cash dividend of
$0.34
per share, payable on
December 22, 2017
, to shareholders of record at the close of business on
December 11, 2017
.
Litigation Related to the Merger
Following the announcement of the Merger, on or around October 31, 2017,
two
putative class action complaints were filed by purported stockholders of the Company in the United States District Courts for the District of Delaware and the Southern District of Ohio. The cases are captioned Miller v. Bob Evans Farms, Inc., et al., Case No. 1:17-CV-01538-VAC-CJB and Franchi v. Bob Evans Farms, Inc., et al., Case No. 2:17-CV-00961-MHW-CMV (the “Actions”). The Actions name as defendants the Company and the current and certain former members of the Company’s board of directors, and one of the Actions also names as defendants Post and Merger Sub. The complaints allege, among other things, that the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and certain rules promulgated thereunder by omitting or misrepresenting certain allegedly material information in the preliminary proxy statement filed with the SEC by the Company on October 24, 2017, which information the plaintiffs argue is necessary for stockholders of the Company to make an informed decision whether to vote in favor of the Merger. The complaints seek, among other things, a declaratory judgment, preliminary or permanent injunctive relief against the stockholder vote on the Merger, unspecified damages, and an award of costs, fees, and disbursements. The Company believes that the claims asserted in the Actions are without merit. However, solely in order to alleviate the costs, risks and uncertainties inherent in litigation and to provide additional information to its stockholders, the Company and the other named defendants in the complaints entered into a memorandum of understanding with the plaintiffs on November 13, 2017 to resolve the individual claims asserted in the Actions, pursuant to which the Company included certain additional disclosures in the definitive proxy statement filed with the SEC by the Company on November 17, 2017.