-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M0+kLBDX/MqIlyHlhh+Fr0w93gepjIcJJvRLEaIbHV74oh61nfkiIQOyFW2V6qgm AbC7TmxI2wgJFSauC8cKYg== 0001068800-99-000281.txt : 19990629 0001068800-99-000281.hdr.sgml : 19990629 ACCESSION NUMBER: 0001068800-99-000281 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990330 FILED AS OF DATE: 19990628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EARTHGRAINS CO /DE/ CENTRAL INDEX KEY: 0001004985 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 363201045 STATE OF INCORPORATION: DE FISCAL YEAR END: 0326 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27426 FILM NUMBER: 99653362 BUSINESS ADDRESS: STREET 1: 8400 MARYLAND AVE CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3142597000 MAIL ADDRESS: STREET 1: 8400 MARYLAND AVE CITY: ST LOUIS STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: CAMPBELL TAGGART INC /DE/ DATE OF NAME CHANGE: 19960328 10-K 1 THE EARTHGRAINS COMPANY FORM 10-K ============================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 1-7554 THE EARTHGRAINS COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-3201045 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 8400 MARYLAND AVENUE, ST. LOUIS, MISSOURI 63105 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (314) 259-7000 - ---------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- COMMON STOCK -- $.01 PAR VALUE NEW YORK STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE - ---------------------------------------------------------------------------- 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 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. $962,351,369 AS OF MAY 25, 1999 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. $.01 PAR VALUE COMMON STOCK: 42,680,017 SHARES AS OF MAY 25, 1999 DOCUMENTS INCORPORATED BY REFERENCE Portions of Annual Report to Shareholders for the Fiscal Year Ended March 30, 1999 PART I, PART II, and PART IV Portions of Definitive Proxy Statement for the Annual Meeting of Shareholders on July 16, 1999 PART II and PART III
- ---------------------------------------------------------------------------- ============================================================================ CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS Matters discussed in this Report (particularly Item 7) contain forward-looking information, as defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements discussed in this report involve risks and uncertainties, including, but not limited to, variations in income levels of consumers, fluctuations in currency exchange rates for the Spanish peseta and French franc versus the U.S. dollar, the costs of raw materials, the ability of the Company to realize projected savings from productivity and product quality improvements, the ability of the Company to continue to participate in industry consolidation and to successfully integrate acquired businesses, legal proceedings to which the Company may become a party, competitive pricing, economic conditions in the Company's countries of operations, the impact of the year 2000 date on the Company's information systems, or of those of its customers or suppliers, the impact of the European currency conversion, and other risks indicated in filings by the Company with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS. Earthgrains Overview - -------------------- The Earthgrains Company (the "Company") is an international manufacturer, distributor and consumer marketer of packaged fresh bread and baked goods and refrigerated dough products. The Company began operations in 1925 with one bakery. In 1982, Anheuser-Busch Companies, Inc. ("AB") acquired the Company (then a publicly-traded company known as Campbell-Taggart, Inc.). The Company again became an independent, publicly-traded company on March 26, 1996 when Anheuser-Busch distributed 100% of the shares of the Company to its shareholders in a spin-off. The Company's common stock began trading on the New York Stock Exchange on March 27, 1996 under its present name and the symbol "EGR." The Company's operations are divided into two principal businesses: Bakery Products and Refrigerated Dough Products. The Company's Bakery Products business manufactures and distributes fresh- baked goods such as baked breads, buns, rolls, bagels, cookies, snack cakes and other sweet goods in the United States and fresh-baked sliced bread, buns, rolls, bagels, snack cakes and other sweet goods in Spain and Portugal. The Company's Refrigerated Dough Products business manufactures many different refrigerated dough products in the United States including biscuits, dinner rolls, sweet rolls, danishes, cookie dough, crescent rolls, breadsticks, cinnamon rolls, pizza crust and pie crusts, as well as shelf-stable toaster pastries. The Company's Refrigerated Dough Products business also manufactures and sells refrigerated dough products in Europe, primarily in France and Germany, and makes packaged rolled dough, which is used to prepare foods such as quiches, tarts and pies. BAKERY PRODUCTS Overview - -------- The Company operates fresh packaged-bread and bakery-products businesses in the United States and Europe. The Company offers a wide range of products in the popular, premium and superpremium segments of the market. It sells primarily to retail grocers and other food outlets, and also serves leading food service and fast food customers with products. The products are delivered to customers' outlets primarily by way of a Company owned direct store delivery route system. In accordance with the fresh-baked goods industry practice, the Company accepts fresh-baked goods that have not been sold by retailers by a prescribed freshness date, and operates retail thrift stores that sell certain returned products. U.S. Bakery Products - -------------------- The Company's U.S. Bakery Products division operates 39 direct store-delivery bakeries and 4 Diversified Products bakeries that supply the entire system with specialized products. U.S. Bakery Products division markets its white and wheat breads, buns, rolls and other bakery products under leading brand names in 7 regions across 28 states, 1 primarily in the southern half of the United States, and across the country to food-service and fast-food customers such as Burger King(R), Pizza Hut(R), Waffle House(R) and Jack in the Box(R). The markets serving these 7 regions include 39 bakeries and 21 sales zones. The Company's 4 Diversified Products bakeries make products including hearth breads, shelf-stable bagels, croissants, breadsticks, frozen dough products and snack cakes, which are distributed to all 7 regions and nationally to food service customers. The fresh-baked goods are sold primarily on a wholesale basis through a variety of distribution systems, including approximately 3500 Company-owned direct store delivery routes, to grocers, restaurants, and institutions in areas generally within a 300 mile radius of the producing bakery. The Company operates approximately 275 retail thrift stores that sell certain returned products. U.S. Bakery Products is an industry leader in the use of information technology for category management and scan based trading. The division is also active in industry consolidation, making six acquisitions and entering into three major retailer supply agreements in the last three years. European Bakery Products - ------------------------ The Company's European Bakery Products division markets more than 240 branded products through almost 1,100 direct store delivery routes in Spain, the Canary Islands and Portugal. The European Bakery Products subsidiary, Bimbo, S.A., operates 10 bakeries in Spain and one in northern Portugal. The division is the leading producer of fresh-baked sliced bread, buns and rolls in Spain and the second largest producer of sliced bread in Portugal. European Bakery Products also produces and markets snack cakes and other sweet goods. In March 1999, the Company acquired Reposteria Martinez Group, the branded market leader in the retail sweet-good segments of cake and morning goods. Bimbo, S.A. also operates a separate store-brand bread and bun business, Pimad, S.A., a subsidiary that uses a separate manufacturing and distribution system. REFRIGERATED DOUGH PRODUCTS Overview - -------- The Company operates refrigerated dough businesses in the United States and Europe, and offers a wide variety of dough products that are convenienced packaged for in-home preparation and bake-off by the ultimate consumer. These products are sold primarily to retail grocers by both Company salespeople and food brokers, and are delivered to retailers' central warehouses. The Company also co-packs product for other branded food manufacturers. U.S. Refrigerated Dough Products - -------------------------------- The Company's U.S. Refrigerated Dough Products division is one of only two manufacturers of canned refrigerated dough in the United States. The Company is the only manufacturer of store-brand (private label) canned refrigerated dough and one of the largest store-brand toaster pastry producers in the United States. The Company's Refrigerated Dough Products include biscuits, specialty biscuits, dinner rolls, crescent rolls, cinnamon rolls, cookie dough, breadsticks, pizza crust and pie crusts. U.S. Refrigerated Dough Products markets its products nationwide under more than 100 store brands. The division also sells products under the Company's brand name, Merico, and under a licensed brand name. The products are sold in grocery retailers' refrigerated sections. European Refrigerated Dough Products - ------------------------------------ The Company's European Refrigerated Dough Products subsidiary, EuroDough, S.A.R.L., is based in France, operates 3 plants, and produces branded products under the Croustipate and HappyRoll brand names, as well as store-brand products. The Company also has a contract-packaging arrangement to manufacture products for The Pillsbury Company. The product lines include canned, rolled, block and frozen dough in France and much of western Europe. The Company is the only manufacturer of canned refrigerated dough in Europe. European Refrigerated Dough Products has recently expanded distribution of its products to Spain and Portugal. Last year's acquisition of Chevalier Servant, S.A. increased the Company's production capacity and added new production capabilities including packaged yeast-leavened pizza dough. 2 Competition - ----------- GENERALLY The Company's ability to sell its products depends on its ability to attain store shelf space in relation to competing brands and other food products. Future growth for the Company will depend on the Company's ability to continue streamlining and reducing operating costs, maintaining effective cost control programs, improving branded product mix, taking advantage of industry consolidation opportunities, developing successful new products, maintaining effective pricing and promotion of its products, and providing superior customer service. Effective investment in capital and technology will play an important role in achieving these goals. The fresh-baked, refrigerated, and frozen dough product lines also compete with other alternative foods. BAKERY PRODUCTS The packaged bakery products business is highly competitive. There is intense price, product, and service competition with respect to all of the Company's products. Competition is based on product quality, price, brand loyalty, effective promotional activities, and the ability to identify and satisfy emerging consumer preferences. Customer service, including frequency of deliveries and maintenance of fully stocked shelves, also is an important competitive factor and is central to the competition for retail shelf space among fresh-baked goods manufacturers. Certain market areas of the fresh baked-goods business continue to exhibit lower margins due to regional differences in price levels, product mix, and input costs. The Company competes with other national and regional wholesale bakeries, large grocery chains that have vertically integrated or in- store bakeries, small retail bakeries, and many producers of alternative foods. The identities and number of competitors vary from market to market. The Company's leading competitors in the fresh-baked goods business include Interstate Bakeries Corporation, Flowers Industries Inc., Bestfoods, and Specialty Foods Corporation. The Company's leading competitor in Spain manufactures products under the brand name PANRICO, but the Company experiences competition from small regional bakeries in Spain as well. REFRIGERATED DOUGH PRODUCTS In the refrigerated dough product business in the U.S., the Company competes primarily with The Pillsbury Company, which produces branded products with which the Company's store brand products compete. In addition, the Company's other major competitors in the refrigerated and toaster pastry business include the Kellogg Company and Nabisco, Inc. In Europe, the Company is the only manufacturer of canned refrigerated dough in Europe. However, the Company competes with Nestle Inc., Danone and some small regional manufacturers of rolled, block and frozen dough products. Raw Materials - ------------- The products manufactured by both of the Company's business segments require a large volume of various agricultural products, including wheat for flours, soybean oil for shortening, and corn for high fructose corn syrup. Agricultural commodities represented 22-25% of the Company's cost of products sold for the 1999 fiscal year. The Company fulfills its commodities requirements through purchases from various sources, including futures contracts, options, contractual arrangements, and spot purchases on the open market. The commodity markets have experienced, and may continue to experience, significant price volatility. The price and supply of raw materials will be determined by, among other factors, the level of crop production, weather conditions, export demand, government regulations, and legislation affecting agriculture. The Company believes that adequate supplies of agricultural products are available at the present time, but cannot predict future availability or prices of such products and materials. 3 Brand Names and Trademarks - -------------------------- GENERALLY The Company regards consumer recognition of and loyalty to its brand names and trademarks as being extremely important to its long-term success. The Company believes that its registered and common law trademarks are instrumental to its ability to create demand for and to market its products. There are currently no pending challenges to the use or registration of any of the Company's significant trademarks. BAKERY PRODUCTS The Company sells bakery products in the popular, premium and superpremium segments. The U.S. Bakery Products division's brand names in the popular segment for breads, buns and rolls are Colonial, Rainbo, Heiner's, Kern's, Sunbeam(R), Waldensian Heritage and Bost's. IronKids is a brand of special-recipe white bread for chidren. In the premium segment, products include premium wheat and variety breads under the Grant's Farm(R), Smith's, and Country Recipe brand names. Superpremium specialty breads, bagels and other bakery products are sold under the brand names Earth Grains, San Luis Sourdough and Cooper's Mill. Break Cake is the brand name for snack cakes and other sweet goods. The division sells products in the United States under the licensed brands Sunbeam(R), Roman Meal(R), Country Hearth(R) and Sun Maid(R). The Company owns several federally registered trademarks, including Rainbo, IronKids, and Earth Grains. In addition, pursuant to a license agreement with Anheuser Busch Companies Inc., the Company has the right to use the federally registered trademark Grant's Farm. The European Bakery Products division's popular segment products include white breads, buns and rolls under the Bimbo brand name. Silueta is the brand name for premium wheat and variety breads. Superpremium specialty breads and bagels are sold under the Semilla de Oro and Mr. Bagel brand names respectively, and snack cakes and sweet goods are manufactured and sold under brand names including Martinez, Madame Brioche and Bimbo Cao. REFRIGERATED DOUGH PRODUCTS In addition to manufacturing and selling refrigerated dough products under many different store brands, the U.S. Refrigerated Dough Products division sells its products under the Company's Merico brand name and the licensed Sun Maid(R) brand name. The European Refrigerated Dough Products division sells canned and rolled dough under various store brands as well as under the CroustiPate and HappyRoll brand names. Seasonality - ----------- The Company does experience minimal seasonal fluctuation in demand. Typically, sales of bakery products are seasonally stronger in the first and second quarters of the Company's fiscal year and sales of refrigerated dough products are seasonally stronger in the third quarter of the Company's fiscal year. Backlog - ------- The Company's relationship with its customers and its manufacturing and inventory practices do not provide for the traditional backlog associated with some manufacturing entities and no backlog data is regularly prepared or used by management. Research and Development - ------------------------ The Company actively works to develop new products and to improve existing products. The dollar amounts expended by the Company during each of the past three fiscal years on such development activities are not considered to be material relative to the Company's overall business and operations. Environmental Matters - --------------------- The operations of the Company are subject to various Federal, state, and local laws and regulations with respect to environmental matters. Additional information regarding such matters is provided in Item 3 of this report. 4 Employees - --------- As of March 30, 1999, the Company employed approximately 19,400 persons, of which approximately 15,500 were based in the U.S. Approximately 60% of the Company's domestic employees are subject to approximately 200 union contracts. The Company believes its labor relations to be satisfactory. Business Segment and Geographic Information - ------------------------------------------- The percentage of net sales attributable to the Company's business segments for fiscal year 1999 was 84.8% for Bakery Products and 15.2% for Refrigerated Dough Products. In addition to the information provided in Items 1 and 2 in this Form 10-K, further information regarding the Company's business segments and geographic information is contained in Notes 14 and 15 on pages 37 and 38 of the Company's Annual Report to Shareholders for fiscal year 1999, and is hereby incorporated by reference. Year 2000 - --------- Information regarding the Year 2000's possible effects on the Company is hereby incorporated by reference to pages 22 and 23 of the Company's Annual Report to Shareholders for fiscal year 1999. ITEM 2. PROPERTIES. Domestically, the Company operates 45 manufacturing facilities in 17 states. The Company's European subsidiaries own and operate 10 bakeries in Spain, 1 bakery in Portugal and 3 refrigerated dough manufacturing plants in France. The Company's domestic bakeries operate at approximately 80% of capacity. The Company owns all of its manufacturing facilities, except for the facility in Ft. Payne, Alabama and both manufacturing facilities in San Luis Obispo, California, which are subject to leases. The Ft. Payne facility is subject to two leases which expire in 2010 and 2016; both leases give the Company an option to purchase the property. The leases for the San Luis Obispo facilities expire in 2000 (with an option to renew the lease for 5 more years) and 2008 and both leases give the Company an option to purchase the property. The Company also operates approximately 275 retail thrift stores and maintains approximately 475 distribution centers, the majority of which are leased. In addition, the Company owns its corporate headquarters and a research and development facility in St. Louis, Missouri. The Company leases space in St. Louis, Missouri for its Financial Shared Services Center under a lease that will expire in 2004 (with an option to renew for 5 more years). The Company leases its Spanish corporate headquarters in Barcelona, Spain. The Company maintains approximately 7,000 motor vehicles used principally in the sales and distribution of its products. The Company's Worldwide Bakery Products facilities and the products produced at each are as follows: U.S. BAKERY PRODUCTS PLANTS PRODUCTS - ------ -------- Albuquerque, New Mexico Bread & Buns Atlanta, Georgia Bread & Buns Birmingham, Alabama Bread & Buns Chattanooga, Tennessee Bread & Buns Dallas, Texas Bread & Buns Denver, Colorado Bread & Buns Des Moines, Iowa Bread & Buns Dothan, Alabama Bread & Buns El Paso, Texas Bread & Buns Fresno, California Bread & Buns Grand Junction, Colorado Bread & Buns Harlingen, Texas Bread & Buns Houston, Texas Bread & Buns Huntington, West Virginia Bread & Buns 5 Huntsville, Alabama Bread & Buns Hutchinson, Kansas Buns Johnson City, Tennessee Bread & Buns Knoxville, Tennessee Buns London, Kentucky Bread & Buns Louisville, Kentucky Bread & Buns Lubbock, Texas Bread & Buns Memphis, Tennessee Bread & Buns Meridian, Mississippi Bread & Buns Mobile, Alabama Bread & Buns Nashville, Tennessee Bread & Buns Oakland, California Bread, Buns & English Muffins Oklahoma City, Oklahoma Bread & Buns Orangeburg, South Carolina Bread & Buns Owensboro, Kentucky Bread & Buns Phoenix, Arizona Bread & Buns Sacramento, California Bread & Buns San Antonio, Texas Bread & Buns San Luis Obispo, California (2) Bread & Buns Springfield, Missouri Bread & Buns Stockton, California Bread, Buns & Sweet Goods Tucson, Arizona Bread & Buns Valdese, North Carolina Bread, Buns & Sweet Goods Wichita, Kansas Bread & Buns DIVERSIFIED PRODUCTS PLANTS PRODUCTS - ------ -------- Albuquerque, New Mexico Bagels Ft. Payne, Alabama Bread, Buns, Sweet Goods & Bagels Paris, Texas Bread, Buns, Sweet Goods & Frozen Dough Rome, Georgia Cookies EUROPEAN BAKERY PRODUCTS PLANTS PRODUCTS - ------ -------- Albergaria-a-Velha, Portugal Bread Almansa, Spain Bread & Buns Antequera, Spain Bread & Buns Azuqueca, Spain Bread Briviesca, Spain Sweet Goods Canary Islands, Spain Bread & Buns El Espinar, Spain Sweet Goods Granollers, Spain Bread, Buns & Sweet Goods Madrid (Las Mercedes), Spain Bread, Buns & Sweet Goods Palma, Spain Bread & Buns Solares, Spain Bread & Buns 6 The Company's Worldwide Refrigerated Dough Products facilities and the products produced at each are as follows: U.S. REFRIGERATED DOUGH PRODUCTS PLANTS PRODUCTS - ------ -------- Carrollton, Texas Refrigerated Dough Forest Park, Georgia Refrigerated Dough & Toaster Pastries EUROPEAN REFRIGERATED DOUGH PRODUCTS PLANTS PRODUCTS - ------ -------- Lievin, France Refrigerated & Frozen Dough Valence, France Refrigerated Dough Vittel, France Refrigerated Dough The Company believes that its facilities are well maintained, suitable, and adequate for its immediate needs. Additional space is available if needed to accommodate expansion. ITEM 3. LEGAL PROCEEDINGS. As a manufacturer and marketer of food items, the Company's operations are subject to regulation by various government agencies, including the United States Food and Drug Administration. Under various statutes and regulations, such agencies prescribe requirements and establish standards for quality, purity, and labeling. Under the Nutrition and Labeling Act of 1990, as amended, food manufacturers are required to disclose nutritional information on their labels in a uniform manner. The finding of a failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines or compulsory withdrawal of products from store shelves. The Company may also be required to comply with state and local laws regulating food handling and storage. The operations of Earthgrains, like those of similar businesses, are subject to various Federal, state, and local laws and regulations with respect to environmental matters, including air and water quality, underground fuel storage tanks, and other regulations intended to protect public health and the environment. Earthgrains has received notices from the U.S. Environmental Protection Agency that it has been identified as a potentially responsible party ("PRP") with respect to certain locations under the Comprehensive Environmental Response, Compensation and Liability Act and may be required to share in the cost of cleanup with respect to two sites. While it is difficult to quantify with certainty the financial impact of actions related to environmental matters, based on the information currently available, it is management's opinion that the ultimate liability arising from such matters, taking into account established liability accruals, should not have a material effect on Earthgrains' financial results, financial position, or cash flows from operations. The Company is involved in certain legal proceedings arising in the normal course of business. Although it is impossible to predict the outcome of any legal proceeding and the Company cannot estimate the range of the ultimate liability, if any, relating to these proceedings, the Company believes that it has meritorious defenses to the claims pending against it in such proceedings and that the outcome of such proceedings should not, individually or in the aggregate, have a material adverse effect on the results of operations or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the 1999 fiscal year. 7 EXECUTIVE OFFICERS OF THE REGISTRANT BARRY H. BERACHA (age 57) presently is Chief Executive Officer and Chairman of the Board of Directors of the Company, positions he has held since September 1993. From 1976 through March 1996, he was a Vice President and Group Executive of Anheuser-Busch Companies, Inc. ("AB"), and during that time served in various positions for various AB subsidiaries. In addition, he currently serves as a member of the board of directors of the Pepsi Bottling Group, a position he has held since April 1999. JOHN W. ISELIN, JR. (age 46) presently is the Company's President, Worldwide Bakery Products, a position he has held since March 1999. He served as Executive Vice President (U.S. Bakery Products) of the Company, from May 1994 through February 1999. From January 1994 through April 1994, he served as President and Chief Operating Officer of the Company's refrigerated dough operations. Mr. Iselin served as Executive Vice President and Chief Financial Officer for Eagle Snacks, Inc. (a subsidiary of AB) from January 1992 through December 1993. XAVIER ARGENTE (age 39) presently is the Company's Executive Vice President--European Bakery Operations, a position he has held since March 1999. He served as Executive Vice President (Bimbo) from December 1995 through February 1999. From June 1995 through December 1995, he was Vice General Manager of Operations. From 1990 through June 1995, he was the Commercial Director of Marketing, Sales and Distribution of Bimbo Operations. WILLIAM H. OPDYKE (age 55) presently is the Company's President, Worldwide Refrigerated Dough Products, Technology and Purchasing, a position he has held since March 1999. He served as Executive Vice President (Refrigerated Dough Products), from June 1995 through February 1999. He previously served as Executive Vice President--Operations (U.S. Bakery Products) of the Company from May 1994 to June 1995. From November 1993 until May 1994, Mr. Opdyke served as Executive Vice President--Corporate Quality for Eagle Snacks, Inc., and between November 1990 and November 1993 he was Executive Vice President--Sales and Marketing for Eagle Snacks, Inc. LARRY G. BERGNER (age 47) presently is the Vice President--Technology and Purchasing of the Company. He has held the Vice-President--Technology position since December 1995 and has held the Purchasing position since December 1997. He served as Vice President of Engineering and Management Information Systems of the Company from September 1995 until December 1995. He served as Vice President of Engineering of the Company from February 1994 until September 1995. Prior to that appointment, he served as Manager of Project Management and Construction for AB from 1984 through February 1994. TODD A. BROWN (age 51) presently is the Company's Vice President-- Operations & Administration (U.S. Refrigerated Dough Products), a position he has held since September 1995. From January 1995 through September 1995, Mr. Brown was the Company's Vice President of Quality & Technology. From April 1993 through December 1993 he was the Company's Vice President of Quality. He was Vice President of Quality of Metal Container Corporation (a subsidiary of AB). BARRY M. HORNER (age 50) presently is the Company's President, U.S. Bakery Products, a position he has held since March 1999. He served as Vice President (Bakery Operations) from June 1996 through February 1999. Mr. Horner served as Executive Vice President of Sales and Distribution of the Company's domestic baking operations from May 1994 until June 1996. From December 1993 until May 1994 he served as Executive Vice President of the Western Region (U.S. Bakery Products), and from May 1989 to December 1993 he served as Vice President and General Manager of the Company's Earth Grains (Diversified Products - U.S. Bakery Products) division. MARK H. KRIEGER (age 45) presently is the Company's Vice President and Chief Financial Officer, positions he has held since January 1994. He was Vice President of Corporate Planning from 1986 to December 1993. TIMOTHY J. MITCHELL (age 39) presently is the Company's Vice President--Sales and Customer Service (U.S. Refrigerated Dough Products), a position he has held since March 1996. From December 1994 until March 1996 he served as Regional Vice President of Eagle Snacks, Inc., a subsidiary of AB. From January 1994 until December 1994 he served as President of Screaming Eagle, Inc., a Chicago-based distributor of Eagle Snacks. He served as Director, Sales Administration of Eagle Snacks, Inc. from September 1982 until January 1994. JOSEPH M. NOELKER (age 50) presently is the Vice President, General Counsel, and Corporate Secretary of the Company, positions he has held since March 1996. Mr. Noelker served as Associate General Counsel of AB from January 1987 until March 1996. 8 LARRY PEARSON (age 53) presently is the Company's Vice President-- Diversified Products (U.S. Bakery Products), a position he has held since July 1994. He served as Vice President--Marketing of Earthgrains Baking Companies, Inc. from 1986 until 1994. BRYAN A. TORCIVIA (age 39) presently is the Company's Vice President--Corporate Planning and Development, a position he has held since January 1994. From January 1992 to December 1993, he served as Executive Assistant to the Chief Executive Officer of the Company. Prior to that he served in the Planning and Finance Department of Metal Container Corporation (a subsidiary of AB) from 1989 to January 1992. MARTHA S. UHLHORN (age 44) presently is the Company's Vice President--Electronic Commerce and Category Management (U.S. Bakery Products), a position she has held since March 1999. She was Vice President--ECR and Sales Technology (U.S. Bakery Products) from 1999 through February 1999. Prior to that, Ms. Uhlhorn spent 16 years in the packaging industry with Metal Container Corporation and Continental Can Companies. EDWARD J. WIZEMAN (age 57) presently is the Company's Vice President--Human Resources, a position he has held since January 1994. Mr. Wizeman also served as Director of Human Resources (Operations) of AB from May 1991 to December 1993 and as Director of Human Resources of Metal Container Corporation (a subsidiary of AB) from 1986 to May 1991. OTHER SIGNIFICANT OFFICERS VIRGIL REHKEMPER (age 40) presently is Vice President and Controller of the Company, positions he has held since April 1997. Prior to that he served as Controller of the Company from April 1995 until 1997 and from 1990 to March 1995 he was Manager, Financial and Operational Audit of AB. MICHAEL SALAMONE (age 40) presently is Vice President and Treasurer of the Company, positions he has held since September 1996. From 1991 until 1993 he served as Assistant Treasurer of Pet Incorporated and as Vice President and Treasurer from 1993 until 1995. Prior to that, he held several positions in Corporate Finance at AB from 1983 until 1991. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is hereby incorporated by reference to a portion of page 43 of the Company's Annual Report to Shareholders for fiscal year 1999 and page 6 of the Company's Proxy Statement for the Annual Meeting of Shareholders on July 16, 1999. The issuance of shares to non-employee directors discussed on page 6 in the Company's Proxy Statement was exempt from registration and constituted a private placement under the Securities Act of 1933. As of May 28, 1999, the Company had approximately 17,600 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is hereby incorporated by reference to page 40 of the Company's Annual Report to Shareholders for fiscal year 1999. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS The information required by this Item is hereby incorporated by reference to pages 18-23 of the Company's Annual Report to Shareholders for fiscal year 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is hereby incorporated by reference to pages 24-39 of the Company's Annual Report to Shareholders for fiscal year 1999. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements with PricewaterhouseCoopers LLP, the Company's independent accountants, on accounting principles or practices or financial statement disclosures. The Company has not changed its independent accountants during the two most recent fiscal years, nor since the end of the most recent fiscal year. 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item with respect to Directors is hereby incorporated by reference to pages 3-5 and 20 of the Company's Proxy Statement for the Annual Meeting of Shareholders on July 16, 1999. The information required by this Item with respect to Executive Officers is presented in this Form 10-K immediately following the response to Item 4. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is hereby incorporated by reference to page 5 and pages 12 through 18 of the Company's Proxy Statement for the Annual Meeting of Shareholders on July 16, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is hereby incorporated by reference to pages 2 and 7 of the Company's Proxy Statement for the Annual Meeting of Shareholders on July 16, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are no reportable relationships or related transactions under Item 13. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS: Page ---- Consolidated Balance Sheets as of March 30, 1999 and March 31, 1998 24 Consolidated Statements of Earnings for the year ended March 30, 1999; the year ended March 31, 1998; and the year ended March 25, 1997 25 Consolidated Statements of Cash Flows for the year ended March 30, 1999; the year ended March 31, 1998; and the year ended March 25, 1997 26 Consolidated Statements of Shareholders' Equity for the year ended March 30, 1999; the year ended March 31, 1998; and the year ended March 25, 1997 27 Notes to Consolidated Financial Statements 28-39 Report of Independent Accountants 41 Incorporated herein by reference to the indicated pages of the Annual Report to Shareholders for fiscal 1999.
2. FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. 3. EXHIBITS 3.1 -- Amended and Restated Certificate of Incorporation of The Earthgrains Company (dated February 26, 1996) (incorporated by reference to Exhibit 3.1 to Form 10-K for the fiscal year ended March 25, 1997). 3.2 -- Certificate of Amendment of the Amended and Restated Certificate of Incorporation of The Earthgrains Company (filed November 17, 1998). 3.3 -- By-Laws of The Earthgrains Company (amended and restated as of February 22, 1996) (incorporated by reference to Exhibit 3.2 to Form 10-K for the fiscal year ended March 25, 1997). 4.1 -- Form of Rights Agreement dated as of February 22, 1996 between the Company and Boatmen's 10 Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to Form 10-K for the fiscal year ended March 25, 1997). 10.1 -- The Earthgrains Company 1996 Stock Incentive Plan (As Amended April 11, 1996, March 21, 1997, May 30, 1997 and April 29, 1999; Restated to reflect two 2-for-1 Stock Splits on July 28, 1997and July 20, 1998). 10.2 -- The Earthgrains Company Non-Employee Directors Deferred Fee Plan effective October 6, 1998. 10.3 -- Amendment No. 1 to The Earthgrains Company Employee Stock Ownership Plan dated June 30, 1996 (amendment no. 1 also restated the Plan) (incorporated by reference to Exhibit 10.3 to Form 10-K for the fiscal year ended March 25, 1997). 10.4 -- Amendment No. 2 to The Earthgrains Company Employee Stock Ownership/401(k) Plan dated July 1, 1996 (incorporated by reference to Exhibit 10.4 to Form 10-K for the fiscal year ended March 31, 1998). 10.5 -- The Earthgrains Company Employee Stock Ownership/ 401(k) Plan Trust Agreement (Dated July 1, 1996) (incorporated by reference to Exhibit 10.4 to Form 10-K for the fiscal year ended March 25, 1997). 10.6 -- The Earthgrains Company Exceptional Performance Plan (Effective as of March 26, 1997) (incorporated by reference to Exhibit 10.5 to Form 10-K for the fiscal year ended March 25, 1997). 10.7 -- The Earthgrains Company Excess Benefit Plan (Effective October 1, 1993) (incorporated by reference to Exhibit 10.6 to Form 10 filed February 28, 1996). 10.8 -- The Earthgrains Company Supplemental Executive Retirement Plan (Effective April 1, 1996) (incorporated by reference to Exhibit 10.7 to Form 10 filed February 28, 1996). 10.9 -- The Earthgrains Company 401(k) Restoration Plan (Effective April 1, 1996) (incorporated by reference to Exhibit 10.8 to Form 10 filed February 28, 1996). 10.10 -- The Earthgrains Company Executive Deferred Compensation Plan (Effective March 27, 1996) (incorporated by reference to Exhibit 10.9 to Form 10 filed February 28, 1996). 10.11 -- License Agreement with Anheuser-Busch Companies, Inc. (incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended March 26, 1996). 10.12 -- Form of Second Amended and Restated Credit Agreement (Effective as of October 3, 1997) among the Registrant, the Bank of America National Trust and Savings Association, as Administrative Agent and Letter of Credit Issuing Lender, and the other financial institutions party thereto (incorporated by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended March 31, 1998). 10.13 -- Form of First Amendment to the Second Amended and Restated Credit Agreement (dated as of February 2, 1999) among the Registrant, various financial institutions, and Bank of America National Trust and Savings Association, as Administrative Agent. 10.14 -- Employment Agreement between the Company and Barry H. Beracha (incorporated by reference to Exhibit 10.14 to Form 10-K for the fiscal year ended March 25, 1997). 10.15 -- Senior Executive Agreement between the Company and Mr. Argente (Dated October 23, 1996)(incorporated by reference to Exhibit 10.16 to Form 10-K for the fiscal year ended March 25, 1997). 13. -- Pages 17 through 41 and a portion of page 43 of the Company's Annual Report to Shareholders for fiscal year 1999, a copy of which is furnished for the information of the Commission. Portions of the Annual Report not incorporated herein by reference are not deemed "filed" with the Commission. 11 21. -- Subsidiaries of the Company. 23.1 -- Consent of independent accountants. 23.2 -- Consent of independent accountants. 27. -- Financial Data Schedules. [FN] _____________________ Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(a)(3) of Form 10-K. (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K during the fourth quarter of fiscal year 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. THE EARTHGRAINS COMPANY (Registrant) By: BARRY H. BERACHA ------------------------------------ Barry H. Beracha Chairman of the Board and Chief Executive Officer Date: June 25, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- BARRY H. BERACHA Chairman of the Board, June 25, 1999 - ------------------------ Chief Executive (Barry H. Beracha) Officer, and Director (Principal Executive Officer) MARK H. KRIEGER Vice President and Chief June 25, 1999 - ------------------------ Financial Officer (Mark H. Krieger) (Principal Financial Officer) VIRGIL REHKEMPER Vice President and June 25, 1999 - ------------------------ Controller (Principal (Virgil Rehkemper) Accounting Officer) 12 J. JOE ADORJAN Director June 25, 1999 - ------------------------ (J. Joe Adorjan) PETER F. BENOIST Director June 25, 1999 - ------------------------ (Peter F. Benoist) MAXINE K. CLARK Director June 25, 1999 - ------------------------ (Maxine K. Clark) JAIME IGLESIAS Director June 25, 1999 - ------------------------ (Jaime Iglesias) JERRY E. RITTER Director June 25, 1999 - ------------------------ (Jerry E. Ritter) WILLIAM E. STEVENS Director June 25, 1999 - ------------------------ (William E. Stevens)
13 EX-3.2 2 CERTIFICATE OF AMENDMENT STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 11/17/1998 981444749 - 0942744 STATE of DELAWARE CERTIFICATE of AMENDMENT of CERTIFICATE of INCORPORATION * FIRST: That at a meeting of the Board of Directors of The Earthgrains --------------------- Company --------------------------------------------------------------------------- resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "Fourth" so that, as ------ amended, said Article shall be and read as follows: "See Attached Exhibit A ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------" * SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. * THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. * FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment. * IN WITNESS WHEREOF, said The Earthgrains Company --------------------------------------------------- has caused this certificate to be signed by Joseph Noelker , an Authorized Officer, ---------------------------------------------------- this day of November , A.D. 19 98 . ------------------- ----------------------- ---- By: /s/ Joseph Noelker ------------------------------- Authorized Officer EXHIBIT A THE EARTHGRAINS COMPANY AMENDMENT TO ARTICLES OF INCORPORATION The following Articles are hereby amended to read as follows: FOURTH: The aggregate number of shares which the Corporation shall have authority to issue is 160,000,000. 150,000,000 of which shares shall be Common Stock having a par value of $.01 per share and 10,000,000 of which shares shall be Preferred Stock having a par value of $.01 per share. A description of each of such classes of stock and the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of stock of the Corporation which are fixed by the Certificate of Incorporation of the Corporation, and the express grant of authority to the Board of Directors of the Corporation (the "Board") to fix by resolution the designations and the powers, preferences and rights of each other class, and the qualifications, limitations or restrictions thereof, are as follows: 1. The Board shall have authority, by resolution or resolutions, at any time and from time to time to divide and establish any or all of the unissued shares of Preferred Stock not then allocated to any series of Preferred stock into one or more series, and, without limiting the generality of the foregoing, to fix and determine the designation of each such series, the number of shares which shall constitute such series and the following relative rights and preferences of the shares of each series so established: (a) the annual dividend rate payable on shares of such series, the time of payment thereof, whether such dividends shall be cumulative or non-cumulative, and the date or dates from which any cumulative dividends shall commence to accrue; (b) the price or prices at which and the terms and conditions, if any, on which shares of such series may be redeemed; (c) the amounts payable upon shares of such series in the event of the voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Corporation; (d) the sinking fund provisions, if any, for the redemption or purchase of shares of such series; (e) the extent of the voting powers, if any, of the shares of such series; (f) the terms and conditions, if any, on which shares of such series may be converted into shares of stock of the Corporation of any other class or classes or into shares of any other series of the same or any other class or classes; (g) whether, and if so the extent to which, shares of such series may participate with the Common Stock in any dividends in excess of the preferential dividend fixed for shares of such series or in any distribution of the assets of the Corporation, upon a liquidation, dissolution or winding-up thereof, if excess of the preferential amount fixed for shares of such series; and (h) any other designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of shares of such series not fixed and determined by law or in the Certificate of Incorporation of the Corporation. EX-10.1 3 THE EARTHGRAINS COMPANY 1996 STOCK INCENTIVE PLAN THE EARTHGRAINS COMPANY 1996 STOCK INCENTIVE PLAN (AS AMENDED APRIL 11, 1996, MARCH 21, 1997, MAY 30, 1997, AND APRIL 29, 1999; RESTATED TO REFLECT 2-FOR-1 STOCK SPLITS ON JULY 28, 1997 AND JULY 20, 1998) SECTION 1. PURPOSE. The purpose of the Plan is to attract, retain, motivate and reward employees of the Company and its Subsidiaries and Affiliates with stock- related compensation arrangements. SECTION 2. MAXIMUM NUMBER OF SHARES. (a) The maximum number of shares of Stock which may be issued pursuant to Awards under the Plan, and the maximum number of shares for which ISOs may be granted under the Plan, shall be 5,720,000 shares, subject to adjustment as provided in Section 11. For this purpose: (i) The number of shares underlying an Award shall be counted against the Plan maximum ("used") at the time of grant; shares underlying alternative Awards shall be counted only once. (ii) When an Award is payable in cash and the amount of such cash is based on the value of a number of shares of Stock which is determinable at the time of grant, that determinable number of shares shall be deemed to underlie that Award for purposes of the Plan. If the amount of such cash, including any cash provided pursuant to Section 15 below, in effect is calculated by applying a percentage to the Fair Market Value of a certain number of shares of Stock, if such percentage is determinable at the date of grant, and if such determinable percentage in effect exceeds 100%, the Committee shall determine at the time of grant the number of shares which is deemed to underlie such Award. (iii) If the number of shares underlying an Award is not determinable at the time of grant, the Committee shall determine at the time of grant a number of shares which is deemed to underlie such Award; that number may be adjusted after grant as the Committee deems appropriate. (iv) Shares which underlie Awards that (in whole or part) expire, terminate, are forfeited, or otherwise become non-payable, or which are recaptured by the Company in connection with a forfeiture event, may be re-used in new grants to the extent of such expiration, termination, forfeiture, non-payability, or recapture. (b) Notwithstanding any other provisions of the Plan, the maximum number of shares underlying Awards that may be granted to any Eligible Employee during any calendar year shall be 1,300,000, subject to adjustment as provided in Section 11. (c) No more than 666,204 shares of Restricted Stock shall be granted under the Plan (not counting, for this purpose, Restricted Stock issuable upon exercise of Options or SARs), subject to adjustment as provided in Section 11. (d) In its discretion, the Company may issue treasury shares or authorized but previously unissued shares. SECTION 3. ELIGIBILITY. Officers and management employees of the Company, Subsidiaries or Affiliates shall be eligible to receive Awards under the Plan. A Director of the Company or a Subsidiary or an Affiliate shall be eligible only if he or she also is an officer or employee of the Company, a Subsidiary or an Affiliate. Notwithstanding the foregoing, persons employed only by Affiliates shall not be eligible to receive ISOs. SECTION 4. GENERAL PROVISIONS RELATING TO AWARDS. (a) Subject to the limitations in the Plan, the Committee may cause the Company to grant Awards to such Eligible Employees, at such times, of such types, in such amounts, for such periods, becoming exercisable at such times, with such features, with such option prices, purchase prices or base prices, and subject to such other terms, conditions, and restrictions as the Committee deems appropriate. Each Award shall be evidenced by a written Award Agreement between the Company and the Recipient. In granting an Award, the Committee may take into account any factor it deems appropriate and consistent with the purpose of the Plan. (b) Except as otherwise provided in the Plan, one or more Awards may be granted separately or as alternatives to each other. If Awards are alternatives to each other: (i) the exercise of all or part of one automatically shall cause an immediate equal and corresponding termination of the other; and (ii) unless the Award Agreement or the Committee expressly permit otherwise, alternative Awards which are transferable may be transferred only as a unit, and alternative Awards which are exercisable must be exercisable by the same person or persons. (c) All or any portion of any payment to a Recipient, whether in cash or shares of Stock, may be deferred to a later date if and as provided in the Award Agreement. Deferrals may be for such periods and upon such terms and conditions (including the provision of interest, dividend equivalents, or other return on such amounts) as the Committee may determine. The Committee may structure Award Agreements so that the imposition of income and other taxes on Recipients is deferred in whole or part. (d) Award Agreements may contain any provision approved by the Committee relating to the period for exercise or vesting after termination of employment. Except to the extent otherwise expressly provided in the Award Agreement, termination of employment includes separation from the group of companies comprised of the Company and its Subsidiaries and Affiliates for any reason, including death, Disability, retirement, resignation, dismissal, disposition of a Subsidiary or operation (whether by stock or asset sale or otherwise), disposition of an interest in an Affiliate, spin-off, shutdown, or any other event. (e) Award Agreements may, in the discretion of the Committee, contain a provision permitting a Recipient to designate the person who may exercise or receive an Award upon the Recipient's death, either by will or by appropriate notice to the Company. (f) A Recipient shall have none of the rights of a shareholder with respect to shares of Stock covered by his or her Award until shares are issued in his or her name. (g) The Committee may provide in Award Agreements that Awards, except for ISOs and SARs which are alternatives to ISOs, are transferable. Transferability may be subject to such conditions - 2 - and limitations as the Committee deems appropriate. Except to the extent otherwise expressly set forth in the Award Agreement, Awards shall not be transferable other than by will or the laws of descent and distribution, and (if exercise is required) shall be exercisable during the Recipient's lifetime only by the Recipient or his or her guardian or legal representative. This paragraph shall not apply to Restricted Stock after it vests. SECTION 5. OPTIONS AND SARS. (a) Except as provided in Section 11(b), the option price per share of Options or the base price of SARs shall not be less than Fair Market Value per share of Stock on the Options' or the SARs' grant date, nor less than the par value of a share of Stock, except that SARs which are alternatives to Options but which are granted at a later time may have a base price equal to the option price even though the base price is less than Fair Market Value on the date the SARs are granted. (b) The grant of Options and their related Option Agreement must clearly identify the Options as either ISOs or as NQSOs. (c) If Options, SARs, and/or Limited Rights are granted as alternatives to each other: (i) the option prices and the base prices (as applicable) shall be equal, (ii) SARs and/or Limited Rights which are alternatives to ISOs may be granted only at the same time the ISOs are granted, and (iii) SARs which are alternatives to Options, and Limited Rights which are alternatives to Options or SARs, shall expire or terminate at the same time as the Options or SARs to which they are alternatives. (d) In the case of SARs, the Award Agreement may specify the form of payment or may provide that the form is to be determined at a later date, and may require the satisfaction of any rules or conditions in connection with receiving payment in any particular form. If the Recipient is a Reporting Person at the time of grant or during the SARs' term and is given an election to receive cash in full or partial settlement of SARs, the Committee shall have sole discretion to approve or disapprove such election at any time after it is made. (e) Notwithstanding any other provision of the Plan, no Options or SARs shall contain a so-called "reload" feature under which Options or SARs are automatically granted to Recipients upon exercise of Options or SARs. SECTION 6. LIMITED RIGHTS. (a) The Committee shall have authority to grant limited stock appreciation rights ("Limited Rights") to any Recipient of any Options or SARs granted under the Plan (the "Related Award") with respect to all or some of the shares of Stock which underlie such Related Award. Limited Rights shall not be granted separately, but shall be granted only as alternatives to their Related Award. Limited Rights may be granted either at the time of grant of the Related Award or (except in the case of ISOs) at any time thereafter during its term. Limited Rights shall be exercisable or payable at such times, payable in such amounts, and subject to such other terms, conditions, and restrictions as the Committee deems appropriate. (b) The Committee shall place on any Limited Rights granted to a Reporting Person such restrictions as may be required by Rule 16b-3 at the time of grant, and shall amend the Plan accordingly to the extent required by Rule 16b-3. The Committee shall place on any Limited Rights for which the Related Award is ISOs such restrictions as may be required by the Code at the time of grant, and shall amend the Plan accordingly to the extent required by the Code. - 3 - SECTION 7. RESTRICTED STOCK. (a) "Restricted Stock" means Stock issued to a Recipient which is subject to transfer restrictions prior to vesting and is subject to forfeiture upon the happening of such events or such conditions or upon the failure to satisfy such rules, requirements and conditions as the Committee specifies in the Award Agreement. Stock issued in connection with an Award Agreement is not Restricted Stock unless so designated in the Award Agreement or in a rule or resolution of the Committee. When Restricted Stock vests, it ceases to be Restricted Stock for purposes of the Plan. (b) The certificate representing the shares of Restricted Stock issued in the name of the Recipient may be held by the Company and/or may have a legend placed upon it to the effect that the shares represented by it are subject to, and may not be transferred except in accordance with the Plan and the Award Agreement relating to such shares. Dividends relating to shares of Restricted Stock may be paid to the Recipient or held by the Company for the Recipient's benefit, as the Committee may provide in the Award Agreement; if held by the Company, the Committee may require that the Company pay interest or other return to the Recipient on any cash dividends at such rate(s) and time(s) as the Committee provides in the Award Agreement. (c) If the Recipient of Restricted Stock is a Reporting Person on the grant date, at least one of the following requirements shall be satisfied: (i) the Award is a stock bonus granted for no consideration (other than services rendered or to be rendered); (ii) the Award is a stock bonus granted for the minimum amount of consideration (other then services) required by applicable corporate law, which amount in no event exceeds 10% of the Fair Market Value of a share of Stock on the payment date, and which amount is paid to the Company within 60 days after the grant date: (iii) the Award consists of Options which are payable in Restricted Stock; or (iv) the Award is an Other Stock Interest which is payable in Restricted Stock and which either is granted in conformity with (i) or (ii) above, or constitutes an option or similar right (including a stock appreciation right) or any other type of derivative security for the purposes of Rule 16b-3. This paragraph (c) shall apply to a grant only when required by Rule 16b-3 at the time and under the circumstances of the grant. SECTION 8. OTHER STOCK INTERESTS. "Other Stock Interest" means any compensatory arrangement not inconsistent with the Plan which is established by the Committee and which might (a) involve the issuance of Stock to an Eligible Employee or (b) involve or be treated as involving the acquisition or disposition of an equity security of the Company for purposes of Section 16 of the Act. Other Stock Interests are not limited to any specific form or structure. Without limiting the above, Other Stock Interests may include stock bonuses, deferred stock, variable priced stock options, performance shares, phantom stock, and convertible securities, and may be granted in connection with or apart from other compensation programs or plans or other types of Awards under the Plan. In connection with the grant of Other Stock Interests, the Committee may provide for payment to the Recipient of amounts equal to dividends which would have been paid had Stock actually been issued to the Recipient. In addition, - 4 - Other Stock Interests may provide for payment of cash or other property in lieu of Stock or other securities of the Company. The Committee shall place on any Other Stock Interest granted to a Reporting Person such restrictions as may be required by Rule 16b-3 at the time of grant, and shall amend the Plan accordingly to the extent required by Rule 16b-3. SECTION 9. STOCK ISSUANCE, PAYMENT, AND WITHHOLDING. (a) If an Award contemplates the payment of a purchase price (including the option price of Options), the Recipient may pay the purchase price in cash, Stock (including shares of previously-owned Stock, or Stock issuable in connection with the Award), or other property, to the extent permitted or required by the Award Agreement or the Committee from time to time. The Committee may permit deemed or constructive transfers of shares in lieu of actual transfer and physical delivery of certificates. Except to the extent prohibited by applicable law, the Committee or its delegate may take any necessary or appropriate steps in order to facilitate the payment of any such purchase price. Without limiting the foregoing, the Committee may allow the Recipient to defer payment of such purchase price, or may cause the Company to loan the purchase price to the Recipient or to guaranty that any shares to be issued will be delivered to a broker or lender in order to allow the Recipient to borrow the purchase price. The Committee may require satisfaction of any rules or conditions in connection with paying the purchase price at any particular time, in any particular form, or with the Company's assistance. (b) If shares used to pay any such purchase price are subject to any prior restrictions imposed in connection with any plan of the Company (including the Plan), an equal number of the shares of Stock purchased shall be made subject to such prior restrictions in addition to any further restrictions imposed on such purchased shares by the terms of the Award Agreement or Plan. (c) When the obligation arises to collect and pay Required Withholding Taxes, the Recipient shall promptly reimburse the Company or Employer (as required by the Committee or Company) for the amount of such Required Withholding Taxes in cash, unless the Award Agreement or the Committee permits or requires payment in another form. In the discretion of the Committee or its delegate and at the Recipient's request, the Committee or its delegate may cause the Company or Employer to pay to the appropriate taxing authority Withholding Taxes in excess of Required Withholding Taxes on behalf of a Recipient, which shall be reimbursed by the Recipient. In the Award Agreement or otherwise, the Committee may allow a Recipient to reimburse the Company or Employer for payment of Withholding Taxes with shares of Stock or other property. The Committee may require the satisfaction of any rules or conditions in connection with any non-cash payment of Withholding Taxes. If a Recipient is a Reporting Person at the time of grant or during the Award's term and is given an election to pay any Withholding Taxes with Stock, the Committee shall have sole discretion to approve or disapprove such election at any time after the election is made. (d) If provided in the Award Agreement relating to an ISO, the Committee may prohibit the transfer by a Recipient of shares of Stock issued to him or her upon exercise of an ISO into the name of a nominee, and the Committee may require the placement of a legend on certificates for such shares reflecting such prohibition. - 5 - SECTION 10. FORFEITURES. (a) The Committee may include in any Award Agreement any provisions relating to forfeitures of Awards that it deems appropriate. Such forfeiture provisions may include, among others, prohibitions on competing with the Company and its Subsidiaries and Affiliates and other detrimental conduct. Forfeiture provisions for one Award type may differ from those for another type, and also may differ among Awards of the same type. As used in the Plan, a "forfeiture" of an Award includes the recapture of economic benefits derived from an Award, as well as the forfeiture of an Award itself; however, the Committee may define the term more narrowly in specific Award Agreements or contexts. (b) Award Agreements may provide for any forfeiture provision to terminate or be waived upon an Acceleration Date. In its discretion, the Committee may provide in any Award Agreement for the termination of any forfeiture provision upon the happening of any specified event, and may terminate or waive any forfeiture provision by action taken after grant. SECTION 11. ADJUSTMENTS AND ACQUISITIONS. (a) In the event of (i) any change in the outstanding shares of Stock by reason of any stock split, combination of shares, stock dividend, reorganization, merger, consolidation, or other corporate change having a similar effect, (ii) any separation of the Company including a spin-off or other distribution of stock or property by the Company, or (iii) any distribution to shareholders generally other than a normal dividend, the Committee shall make such equitable adjustments to the Plan and to outstanding Awards as it shall deem appropriate in order to prevent the dilution or enlargement of (A) the Awards which may be granted, the shares of Stock which may be issued, or the shares for which ISOs may be granted under the Plan, (B) the economic value of outstanding Awards or (C) the limitations imposed by Section 2(b) of the Plan, provided, however, that the Committee shall not make any adjustment which would constitute or result in an increase in the aggregate number of Shares available under the Plan, or the annual limit on the number of Awards which may be granted to an Eligible Employee under Section 2(b) of the Plan, requiring shareholder approval under Section 422 or Section 162(m) of the Code. Any such determination by the Committee shall be conclusive and binding on all concerned. (b) In the event the Company or a Subsidiary enters into a transaction described in Section 424(a) of the Code with any other corporation, the Committee may grant Options, SARs or Limited Rights to employees or former employees of such corporation in substitution of stock awards, stock appreciation rights or limited stock appreciation rights (respectively) previously granted to them by such corporation upon such terms and conditions as shall be necessary to qualify such grant as a substitution described in Section 424(a) of the Code. SECTION 12. ACCELERATION. (a) An "Acceleration Date" occurs when any of the following events occur: (i) any Person (as defined herein) becomes the beneficial owner directly or indirectly (within the meaning of Rule 13d-3 under the Act) of more than 30% of the Company's then outstanding voting securities (measured on the basis of voting power), provided, however, that shares issued or distributed by the Company in connection with the acquisition of another company or business from such Person shall be counted as being - 6 - outstanding, but otherwise shall be ignored in determining the percentage beneficially owned by such Person; (ii) the shareholders of the Company approve a definitive agreement of merger or consolidation with any other corporation or business entity, other than (x) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (y) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; (iii) a change occurs in the composition of the Board of Directors during any period of twenty-four consecutive months such that individuals who at the beginning of such period were members of the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved; or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. For purposes of this paragraph, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (aa) the Company or any of its subsidiaries, (bb) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (cc) an underwriter temporarily holding securities pursuant to an offering of such securities, or (dd) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of Stock. (b) If an Acceleration Date occurs while Awards remain outstanding under the Plan, then all Awards shall "vest," which means: (i) all Options and SARs shall become fully exercisable; and (ii) all shares of Restricted Stock shall become nonforfeitable and freely transferable (except for such restrictions as may be imposed by the Securities Act of 1933, as amended, or applicable state securities laws), and all conditions to unrestricted ownership provided in their Award Agreements which have not previously been satisfied shall lapse. In the case of Other Stock Interests, the term "vest" shall have that meaning given it by the Committee at the time of grant. (c) Except to the extent prohibited by Rule 16b-3 in the case of Reporting Persons, the Committee may accelerate the date on which any Award or Stock or property issued pursuant to an Award shall vest and may remove any restrictions on such Award at any time after grant and for any reason the Committee deems appropriate. - 7 - (d) All Awards, and all shares of Stock or property issued pursuant to an Award, shall automatically vest upon a termination of employment caused by the death, Disability, or (except for Restricted Stock and Other Stock Interests) retirement of the Recipient. The Committee may determine the circumstances under which a Recipient is deemed to have retired. SECTION 13. ADMINISTRATION. (a) The Plan shall be administered by the Compensation and Human Resources Committee of the Board, or another committee appointed by the Board from time to time, consisting of three or more persons, each of whom at all times shall be a member of the Board and none of whom shall be an officer or employee of the Company or any of its subsidiaries at the time of service. Committee members shall not be eligible for selection to receive Awards under the Plan. (b) During any time when one or more Committee members may not be qualified to serve under Rule 16b-3 or Section 162(m) of the Code, the Committee may form a sub-Committee from among its qualifying members to act, in lieu of the full Committee, with respect to all or any specified category of Awards granted to all or any specified group of Recipients, and may take other actions deemed appropriate and convenient to prevent, control, minimize, or eliminate any adverse effects of such potential disqualification. At the Committee's request or on its own motion, the Board may ratify or approve grants, or any terms of any grants, made by the Committee or a sub-Committee during any time that any member of the Committee may not be qualified to approve such grants or terms under Rule 16b-3. (c) A majority of the members of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the members of the Committee, shall be the acts of the Committee. The Committee may meet in person, by telephone or television conference, or in any other manner permitted by applicable law. From time to time the Committee may adopt, amend, and rescind such rules and regulations for carrying out the Plan and implementing Award Agreements, and the Committee may take such action in the administration of the Plan, as it deems proper. The interpretation of any provisions of the Plan by the Committee shall be final and conclusive unless otherwise determined by the Board. (d) To the extent the Committee deems it convenient and appropriate, the Committee may delegate such of its powers and duties, including (among other things) its power to grant Awards, to one or more members of the Committee or to one or more officers of the Company. Any such delegation shall be subject to such limitations and conditions as the Committee deems appropriate. However, notwithstanding the foregoing: (i) the power to grant Awards may not be delegated to an officer who is not also a director of the Company except in conformity with applicable Delaware law; and, (ii) no officer may grant Awards to him- or herself or to his or her superiors unless such grants are ratified by the Committee or the Board. SECTION 14. AMENDMENT, TERMINATION, SHAREHOLDER APPROVAL. (a) The Board may amend or terminate the Plan at any time, except that without the approval of the Company's shareholders, no amendment shall (i) increase the maximum number of shares issuable, or the maximum number of shares for which ISOs may be granted, under the Plan, (ii) change the class of persons eligible to be Recipients, (iii) change the annual limit on Awards which - 8 - may be granted to an Eligible Employee provided in Section 2(b), (iv) withdraw the authority of the Committee to administer the Plan, or (v) change the provisions of this Section 14(a). (b) The Committee may amend the Plan from time to time to the extent necessary to (i) comply with Rule 16b-3 and, to the extent it deems appropriate, (ii) prevent benefits under the Plan from constituting "applicable employee remuneration" within the meaning of Section 162(m) of the Code. (c) No Awards may be granted under the Plan after February 21, 2006. (d) The approval by shareholders described in this Section shall consist of the approving vote of the holders of a majority of the outstanding shares of Stock present (in person or by proxy) at a meeting of the shareholders at which a quorum is present, unless a greater vote is required by the Company's charter or by-laws, by the Board, by the Company's principal stock exchange, or by applicable law (including Rule 16b-3 or Section 162(m) of the Code). SECTION 15. ADDITIONAL PAYMENTS. The Committee may grant a Recipient the right to receive additional compensation in cash or other property (in addition to any cash or other property payable under the terms of the Award itself) upon the exercise of Options, SARs, or exercisable Other Stock Interests, or the vesting of Restricted Stock or non-exercisable Other Stock Interests, provided that (i) in the case of ISOs such compensation is includible in income under Sections 61 and 83 of the Code at the time of such exercise or vesting and (ii) no such right may be granted in connection with any SARs or Limited Rights which are alternatives to ISOs. SECTION 16. DEFINITIONS. (a) "Acceleration Date" has the meaning given in Section 12(a). (b) "Act" means the Securities Exchange Act of 1934, as amended from time to time. (c) "Affiliate" means any entity in which the Company has a substantial direct or indirect equity interest (other than a Subsidiary), as determined by the Committee. (d) "Award" means a grant of ISOs, NQSOs, SARs, Limited Rights, Restricted Stock or Other Stock Interests. (e) "Award Agreement" means the written agreement referred to in Section 4(a) between the Company and the Recipient evidencing an Award. (f) "Board" means the Board of Directors of the Company. (g) Options "cease to qualify as ISOs" when they fail or cease to qualify for the exclusion from income provided in Section 421 (or any successor provision) of the Code. (h) "Code" means the U.S. Internal Revenue Code as in effect from time to time. (i) "Committee" means the Compensation and Human Resources Committee described in Section 13 hereof. (j) "Company" means The Earthgrains Company and its successors. (k) "Disability" means the condition of being "disabled" within the meaning of Section 422(c)(6) of the Code or any successor provision. - 9 - (l) "Eligible Employee" means a person who is eligible to receive an Award under Section 3 of the Plan. (m) "Employer" means the Company, the Subsidiary, or the Affiliate which employs the Recipient. (n) "Fair Market Value" of Stock on a given date means (i) the average of the highest and lowest selling prices per share of Stock reported on the New York Stock Exchange Composite Tape or similar quotation service for such date, (ii) if Stock is not listed on the New York Stock Exchange, the average of the highest and lowest selling prices per share of Stock as reported for such date on the principal stock exchange or quotation system in the U.S. on which Stock is listed or quoted (as determined by the Committee), or (iii) if neither of the preceding clauses is applicable, the value per share determined by the Committee in a manner consistent with the Treasury Regulations under Section 2031 of the Internal Revenue Code. If no sale of Stock occurs on such date, but there were sales reported within a reasonable period both before and after such date, the weighted average of the means between the highest and lowest selling prices on the nearest date before and the nearest date after such date shall be used, with the average to be weighted inversely by the respective numbers of trading days between the selling dates and such date. "Fair Market Value" of Restricted Stock is the same as the Fair Market Value of any other Stock. (o) "Forfeiture" has the meaning given in Section 10(a). (p) "ISO" or "Incentive Stock Option" means an option to purchase one share of Stock for a specified option price which is designated by the Committee as an "Incentive Stock Option" and which qualifies as an "incentive stock option" under Section 422 (or any successor provision) of the Code. (q) "Limited Right" has the meaning given in Section 6. (r) "NQSO" or "Non-Qualified Stock Option" means an option to purchase one share of Stock for a specified option price which is designated by the Committee as a "Non-Qualified Stock Option," or which is designated by the Committee as an ISO but which ceases to qualify as an ISO. (s) "Option" means an ISO or an NQSO. (t) "Option Agreement" means an Award Agreement which evidences a grant of Options. (u) "Optionee" means a person to whom Options are granted pursuant to the Plan. (v) "Other Stock Interest" has the meaning given in Section 8. (w) "Plan" means The Earthgrains Company 1996 Stock Incentive Plan, as amended from time to time. (x) "Recipient" means an Eligible Employee to whom an Award is granted pursuant to the Plan. (y) "Reporting Person," as of a given date, means a Recipient who would be required to report a purchase or sale of Stock occurring on such date to the Securities and Exchange Commission pursuant to Section 16(a) of the Act and the rules and regulations thereunder. (z) "Restricted Stock" has the meaning given in Section 7. (aa) "Rule 16b-3" means Rule 16b-3 (as amended from time to time) promulgated by the Securities and Exchange Commission under the Act, and any successor thereto. - 10 - (bb) "SAR" means a stock appreciation right, which is a right to receive cash, Stock, or other property having a value on the date the SAR is exercised equal to (i) the excess of the Fair Market Value of one share of Stock on the exercise date over (ii) the base price of the SAR. The term "SAR" does not include a Limited Right. (cc) "Stock" means shares of the common stock of the Company, par value $0.01 per share, or such other class or kind of shares or other securities as may be applicable under Section 11. The term "Stock" shall include shares of Restricted Stock unless expressly provided otherwise in the Plan or an Award Agreement. (dd) "Subsidiary" means a "subsidiary corporation" of the Company as defined in Section 424(f) (or any successor provision) of the Code. (ee) "Vest" has the meaning given in Section 12(b). (ff) "Withholding Taxes" means, in connection with an Award, (i) the total amount of Federal and state income taxes, social security taxes, and other taxes which the Employer of the Recipient is required to withhold ("Required Withholding Taxes") plus (ii) any other such taxes which the Employer, in its sole discretion, withholds at the request of the Recipient. SECTION 17. MISCELLANEOUS. (a) Each provision of the Plan and Option Agreement relating to ISOs shall be construed so that all ISOs shall be "incentive stock options" as defined in Section 422 of the Code or any statutory provision that may replace Section 422, and any provisions thereof which cannot be so construed shall be disregarded. Except as provided in Section 10, no discretion granted or allowed to the Committee under the Plan shall apply to ISOs after their grant except to the extent the related Option Agreement shall so provide. Notwithstanding the foregoing, nothing shall prohibit an amendment to or action regarding outstanding ISOs which would cause them to cease to qualify as ISOs, so long as the Company and the Optionee shall consent to such amendment or action. (b) Without amending the Plan, Awards may be granted to Eligible Employees who are foreign nationals or who are employed outside the United States or both, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to further the purposes of the Plan. Such different terms and conditions may be reflected in Addenda to the Plan. However, in the case of ISOs, no such different terms or conditions shall be employed if such term or condition constitutes, or in effect results in, an increase in the aggregate number of shares which may be issued under the Plan or a change in the definition of Eligible Employee. (c) Notwithstanding any other provision in the Plan, the Committee shall not act with respect to any Reporting Person in a manner which would contravene any requirement of Rule 16b-3 as in effect at the time of such action, without the knowing consent of such Reporting Person. (d) Nothing in the Plan or any Award Agreement shall confer on any person or expectation to continue in the employ of his or her Employer, or shall interfere in any manner with the absolute right of the Employer to change or terminate such person's employment at any time for any reason or for no reason. - 11 - EX-10.2 4 NON-EMPLOYEE DIRECTORS DEFERRED FEE PLAN THE EARTHGRAINS COMPANY DIRECTORS DEFERRED FEE PLAN Effective October 6, 1998 THE EARTHGRAINS COMPANY DIRECTORS DEFERRED FEE PLAN ARTICLE I DEFINITIONS 1.01. Account Balance: For each Participant, the from ---- --------------- time-to-time aggregate amount of the Cash Account balance, the Mandatory Share Account balance and the Elective Share Account balance. 1.02. Board: The Board of Directors of the Company. ---- ----- 1.03. Borrowing Rate: For a month, the rate of interest ---- -------------- at which the Company may borrow money for the term corresponding with the Participant's Deferral Period, as determined by the Chief Financial Officer of the Company. 1.04. Cash Account: An account administered for the ---- ------------ benefit of a Participant pursuant to Section 4.01. 1.05. Company: The Earthgrains Company. ---- ------- 1.06. Credited Shares. The shares of the Company's common ---- --------------- stock which, for accounting purposes only, are credited to a Participant's Mandatory Share Account and/or Elective Share Account from time to time in accordance with Section 4.04. 1.07. Deferral Period: For each month, the length of time ---- --------------- until the Payment Start Date (rounded to the nearest whole year but not less than one year); provided, however, that for a Participant whose Payment Start Date relates to his or her retirement date, the Normal Retirement Age shall be treated as the Payment Start Date for purposes of computing the Deferral Period and for a Participant who has already reached Normal Retirement Age and whose Payment Start Date has not yet occurred the Deferral Period shall be deemed to be one year. 1.08. Director: Any duly elected or appointed member of ---- -------- the Board as determined from time to time. 1.09. Director's Fees: The total amount of any retainer, ---- --------------- annual fee, fees for attending meeting of the Board or committees thereof, committee chair fees and other similar fees payable to a Director by the Company for services rendered to the Company as a Director. 1.10. Effective Date: October 6, 1998. ---- -------------- 1.11. Elective Deferred Fees. The amount of a ---- ---------------------- Participant's Eligible Fees deferred under Section 3.01. 1.12. Elective Share Account: An account administered for ---- ---------------------- the benefit of a Participant pursuant to Section 4.03. 1.13. Eligible Fees: All Director's Fees other than those ---- ------------- required to be deferred and maintained in the Mandatory Share Account. 1.14. Form of Payment: The form in which a Participant is ---- --------------- to receive payment of his or her Account Balance, which may be in a single lump sum or in two or more annual installments for a period of up to ten years, as changed from time to time pursuant to Section 3.02, subject to acceleration as provided for in Sections 5.03, 5.04, and 5.05. 1.15. Mandatory Deferred Fees. The amount of a Director's ---- ----------------------- Fees required to be deferred and maintained in his or her Mandatory Share Account pursuant to Article II. 1.16. Mandatory Share Account: An account administered ---- ----------------------- for the benefit of a Participant pursuant to Section 4.02. 1.17. Market Value: For any day, the mean between the ---- ------------ high and low price per share of the Company's common stock on such day, as reported on the New York Stock Exchange. 1.18. Normal Retirement Age: Age 70. ---- --------------------- 1.19. Participant: Any Director or former Director who ----- ----------- has an Account Balance. 1.20. Payment Start Date: The date on which a Participant ---- ------------------ is to receive either a lump sum distribution of his or her Account Balance or the first of two or more annual installments pursuant to an election under Section 3.01(d) as changed from time to time under Section 3.02; provided, however, that the Payment Start Date shall in all events be no later than the first day of the month following the Participant's actual termination of service as a Director for any reason, including death or disability. 1.21. Plan: The Earthgrains Company Directors Deferred ---- ---- Fee Plan, as set forth herein, and as duly amended from time to time. 1.22. Year: Each calendar year commencing on or after ---- ---- January 1, 1998, provided, however, that the initial plan Year shall be a short year commencing on the Effective Date and ending December 31, 1998. 2 ARTICLE II MANDATORY DEFERRALS Mandatory Deferred Fees. Each Director shall be required to defer 25% - ----------------------- of his or her Director's Fees and to maintain such amounts in his or her Mandatory Share Account. In addition, each year on the date of the Annual Meeting of the Company's shareholders, each person who is a Non- Employee Director shall, automatically and without necessity of any action by such Director or the Company, be credited with 400 shares (the "Annual Grant") in his or her Mandatory Share Account, adjusted in the manner described in Section 4.04(d) for all events occurring prior to such date of distribution. Further, any initial grant of the Company's Common Stock that a new Non-Employee Director receives upon becoming a Director, after the effective date of the Plan, shall be shares in his or her Mandatory Share Account, adjusted in the manner described in Section 4.04(d) for all events occurring prior to such date of distribution. ARTICLE III DEFERRAL ELECTIONS 3.01. Types of Election; Time of Election. Any Director ---- ----------------------------------- may make the following elections for a Year in writing on a form provided by the Company and delivered to the Company not later than the Company may direct, but in any event before the first day of the Year: (a) The portion of the Participant's Eligible Fees that shall be deferred, if any (the "Elective Deferred Fees"); (b) The proportion of the Participant's Elective Deferred Fees which shall be deferred into each of the Cash Account and the Elective Share Account; (c) The Payment Start Date; and (d) The Form of Payment. The elections made pursuant to this Section 3.01 shall remain in effect for subsequent Years until such time as the Participant changes his or her elections as permitted by the terms of this Plan. 3.02. Change in Payment Start Date and/or Form of Payment. ---- --------------------------------------------------- A Participant may change his or her Payment Start Date and/or Form of Payment in writing on a form provided by and delivered to the Company at any time which is at least one year in advance of the previously elected Payment Start Date. No such change shall be effective if the Participant terminates service as a Director less than one year after the date of the election change. 3 3.03. Special Rule for Newly Eligible Participants. ---- -------------------------------------------- Notwithstanding the foregoing, an individual who becomes a Director after the beginning of a Year may make his or her elections pursuant to Section 3.01 after the first day of the Year, but not later than thirty (30) days after the first day on which he or she becomes a Director; provided that any election made by such a Director after the first day of the Year shall be effective only with respect to Director's Fees attributable to services rendered subsequent to the election. 3.04. Special Rule for Initial Plan Year. Notwithstanding ---- ---------------------------------- Section 3.01 above, any Director as of the Effective Date of the Plan may make his or her elections pursuant to Section 3.01 above within 30 days after the Effective Date; provided that any election so made shall be effective only with respect to Director's Fees attributable to services rendered subsequent to the election. ARTICLE IV DETERMINATION OF ACCOUNT BALANCES 4.01. Cash Account. ---- ------------ (a) Cash Account Balance. Each Participant's Cash Account -------------------- shall consist of all Elective Deferred Fees credited to his or her Cash Account pursuant to his or her elections under Section 3.01, all amounts transferred from his or her Elective Share Account to his or her Cash Account pursuant to Section 4.05, and interest credited to the Cash Account in accordance with Section 4.01(b), less any transfers to his or her Elective Share Account from his or her Cash Account pursuant to Section 4.05 and any payments from the Cash Account pursuant to Section 4.06. (b) Accrual of Interest. ------------------- (i) Interest Prior to Termination and During Deferral ------------------------------------------------- Period. Interest at the applicable Borrowing Rate shall ------ accrue and be credited to each Participant's Cash Account balance monthly. (ii) Accrual of Interest on Installment Payments. If ------------------------------------------- any amount is paid in installments pursuant to a Participant's election in accordance with Section 3.01(d), interest shall accrue on any balance thereof remaining to be paid in installments from time to time at the Borrowing Rate then in effect with respect to such amount on the day prior to the due date of the first installment. (iii) If Payment is Delayed. In the event payment of --------------------- an amount due a Participant occurs thirty (30) or fewer days after its due date, no interest shall accrue during the period between the due date and the date of payment. In the event payment of any amount due a Participant occurs more than thirty (30) 4 days after its due date, interest shall accrue during the period between the due date and the date of payment at the then applicable Borrowing Rate. 4.02. Mandatory Share Account. ---- ----------------------- (a) Mandatory Share Account Balance. Each Participant's ------------------------------- Mandatory Share Account balance shall equal the number of Credited Shares in such Mandatory Share Account, as determined pursuant to Section 4.04 below, times the then Market Value of the Company's common stock. (b) Components of Mandatory Share Account. Each ------------------------------------- Participant's Mandatory Share Account shall consist of all Mandatory Deferred Fees credited to his or her Share Account as required under Article II, plus any amounts credited under Sections 4.04(b)-(d), less any payments from the Mandatory Share Account pursuant to Section 4.06. 4.03. Elective Share Account. ---- ---------------------- (a) Elective Share Account Balance. Each Participant's ------------------------------ Elective Share Account balance shall equal the number of Credited Shares in such Elective Share Account times the then Market Value of the Company's common stock. (b) Components of Elective Share Account. Each ------------------------------------ Participant's Elective Share Account shall consist of all Elective Deferred Fees credited to his or her Elective Share Account pursuant to his or her election under Section 3.01, all amounts transferred from his or her Cash Account to his or her Elective Share Account pursuant to Section 4.05, plus any amounts credited under Sections 4.04(b)-(d), less any transfers to his or her Cash Account from his or her Elective Share Account pursuant to Section 4.05 and any payments from the Elective Share Account pursuant to Section 4.06. 4.04. Credited Shares. The number of Credited Shares ---- --------------- credited to each of the Mandatory Share Account and the Elective Share Account shall be determined as follows. (a) On each date on which a Participant would otherwise receive a payment of Director's Fees as determined in accordance with Section 6.04 or an Annual Grant pursuant to Article II, (i) his or her Mandatory Share Account shall be credited with the amount of Director's Fees required to be credited to such Mandatory Share Account in accordance with Article II above, and (ii) his or her Elective Share Account shall be credited with the amount of Eligible Fees elected to be deferred into such Elective Share Account in accordance with Section 3.01. The amounts so credited shall be converted into the maximum whole number of shares of common stock of the Company which could be purchased at the then Market Value of such stock with the amount so credited. (b) On each date on which the Company pays a cash dividend or other distribution on its common stock, each Participant's Mandatory Share Account and each Participant's Elective Share Account shall be credited with an amount equal to the amount 5 of the cash dividend or other distribution per share times the number of Credited Shares in each such Account on the dividend or distribution record date. The amount so credited to each account shall be converted into the maximum whole number of shares of common stock of the Company which could be purchased at the then Market Value of such stock with the amount so credited. (c) On each date on which the Company pays a stock dividend on its common stock, each Participant's Mandatory Share Account and each Participant's Elective Share Account shall be credited with a number of shares equal to the stock dividend per share times the Credited Shares in such Account on the record date. (d) In the event of (i) any change in the outstanding shares of Company stock by reason of a stock split, combination of shares, reorganization, merger, consolidation or other corporate change having a similar effect, or (ii) any separation of the Company including a spin-off or other distribution of stock or property by the Company, the Company shall make such equitable adjustments to the number of Credited Shares in each Participant's Mandatory Share Account and Elective Share Account as it shall deem appropriate to prevent the dilution or enlargement of each such Account. The Company's determination as to the appropriateness of any such adjustment, including, but not limited to, values and exchange ratios, shall be binding and conclusive. (e) All conversions into Credited Shares under this Section 4.04 shall be made in full shares. Amounts not so converted shall be carried as excess cash in each such Account and shall be added to any additional amounts subsequently credited to each such Account. 4.05. Transfers Between Accounts. Subject to Section 6.01(g), ---- -------------------------- a Participant may elect to transfer amounts between the Cash Account and the Elective Share Account at any time provided such election is made in writing in the form and manner required by the Company. Amounts transferred to and from the Elective Share Account shall be converted from or into the maximum whole number of shares of common stock of the Company which could be purchased at the then Market Value of such stock with the amount so transferred. 4.06. Payment From Accounts. Subject to Section 6.01(g), any ---- --------------------- payment made to a Participant under the Plan shall be in cash and shall be debited from the Cash Account, the Mandatory Share Account and the Elective Share Account in proportion to the percentage each such Account comprises of the total Account Balance on the date of payment. Payments from the Mandatory Share Account or Elective Share Account shall be debited from such account by subtracting the number of shares of common stock of the Company which could be purchased at the then Market Value with the amount of such payment. 4.07. Vesting. Any Credited Shares accrued in a Participant's ---- ------- Elective Share Account or accrued in a Participant's Mandatory Share Account other than by virtue of an Annual Grant shall be fully vested on the date of accrual. Credited Shares accrued in a Participant's Mandatory Share Account by virtue of an Annual Grant shall vest on the earlier of the tenth anniversary of the date 6 of grant or the Participant's cessation as a director of the Company for any reason other than removal by the vote of the stockholders of the Company, in which case such Credited Shares shall be forfeited. Notwithstanding the foregoing, Credited Shares accrued for the account of a Participant as an Annual Grant shall vest and shall not be forfeited upon such Participant's removal as a director by the vote of the stockholders of the Company if such vote occurs after a Change of Control. ARTICLE V PAYMENTS TO PARTICIPANTS 5.01. General Rule Respecting Payment Start Date. Subject ---- ------------------------------------------ to the remaining provisions of this Article, each Participant's lump sum payment or the first of the elected number of equal annual installments, as applicable pursuant to his or her election under Section 3.01(d) above, shall be made on his or her Payment Start Date. 5.02. Installment Payments. If payment of a Participant's ---- -------------------- Account Balance is to be made in two or more annual installments pursuant to an election under Section 3.01(d): (a) Each installment after the first installment made on the Payment Start Date shall be due and payable as of the first day of the same month of the next succeeding Year until all annual installments have been paid; and (b) The amount of each installment shall be equal to the Account Balance on the date of the installment divided by the number of installments remaining to be paid. 7 5.03. Acceleration of Payment for Unforeseeable Emergency. ---- --------------------------------------------------- (a) Notwithstanding any other provision of the Plan, the Company may decide that payment of any portion of a Participant's Account Balance shall be accelerated on application of the Participant or beneficiary on account of and subject to reasonable proof of unforeseeable emergency. (b) For purposes of this Section 5.03, an unforeseeable emergency is severe financial hardship to the Participant or beneficiary resulting from a sudden and unexpected illness or accident of the Participant or beneficiary or of a dependent (as defined in section 152(a) of the Internal Revenue Code) of the Participant or beneficiary, loss of the Participant's or beneficiary's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or beneficiary. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved-- (i) Through reimbursement or compensation by insurance or otherwise, (ii) By liquidation of the Participant's or beneficiary's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (iii) By cessation of deferrals under the Plan if and when possible under the remaining provisions of the Plan, or by cessation of elective deferrals if and when possible under any other deferred compensation plan for which the Participant or beneficiary is eligible. Examples of what are not considered to be unforeseeable emergencies include the need to send a Participant or beneficiary's child to college or the desire to purchase a home. (c) Withdrawal of amounts because of an unforeseeable emergency shall be permitted only to the extent reasonably needed to satisfy the emergency need. (d) All determinations under this Section 4.03 shall be made by the Board of Directors of the Company, with the Participant requesting such a determination to be excluded from voting with respect thereto, and (with respect to certain legal restrictions) by the General Counsel pursuant to Section 6.01(g). 8 5.04. Change in Control. ---- ----------------- (a) Upon a Change in Control, as defined in The Earthgrains Company Executive Deferred Compensation Plan from time to time, the Company shall pay each Participant (or beneficiary) his or her entire Account Balance. (b) If, by reason of this Section 5.04, an excise or other special tax ("Excise Tax") is imposed on any payment under the Plan (a "Required Payment"), the amount of each Required Payment shall be increased by an amount which, after payment of income taxes, payroll taxes and Excise Tax on such additional amount, will equal such Excise Tax on the Required Payment. (c) This Section 5.04 may be amended in any way before a Change in Control as the Board may determine in its sole discretion. Notwithstanding any other provision of the Plan, this Section 5.04 may not be amended following any Change in Control. (d) This Section 5.04 shall survive termination of the Plan. 5.05. Acceleration of Payment. Notwithstanding Section ---- ----------------------- 5.01, the Company in its sole discretion may direct current payment of any or all of a Participant's Account Balance. No Participant or beneficiary shall have any right to demand acceleration of payment of any portion of his or her Account Balance. 5.06. Payments After Death. ---- -------------------- (a) Except as otherwise provided in this Section 5.06, any amount payable under this Plan as a result of or following the death of a Participant shall be applied only for the benefit of the beneficiary or beneficiaries designated by the Participant pursuant to this Section 5.06. Each Participant shall specifically designate, by name, on forms provided by the Company, the beneficiary(ies) to whom any such amounts shall be paid. A Participant may change or revoke a beneficiary designation without the consent of the beneficiary(ies) at any time by filing a new beneficiary designation form with the Company. The filing of a new form shall automatically revoke any forms previously filed with the Company. A beneficiary designation form not properly filed with the Company prior to the death of the Participant shall have no validity under the Plan. (b) More than one beneficiary, and alternative or contingent beneficiaries, may be designated, in which case the Participant shall specify the shares, terms and conditions upon which amounts shall be paid to such multiple or alternative or contingent beneficiaries, all of which must be satisfactory to the Company. (c) If, at the time of the Participant's death, (i) no beneficiary designation is on file with the Company, (ii) no beneficiary designated by the Participant has survived the Participant, or (iii) there are other circumstances which are not covered by the beneficiary designation form on file with the Company, then the Participant's estate shall be conclusively 9 deemed to be the beneficiary designated to receive any amounts then remaining payable under this Plan. (d) In answering any question concerning a Participant's beneficiary, the latest designation filed with the Company shall control and intervening changes in circumstances shall be ignored; provided, however, that if a Participant's spouse is designated as beneficiary but thereafter is divorced from the Participant, such designation shall be invalid and the Participant's estate shall be deemed to be the Participant's beneficiary unless and until a replacement beneficiary designation form has been filed with the Company. (e) Any check issued on or before the date of a Participant's death shall remain payable to the Participant, whether or not the check is received by the Participant prior to death. Any check issued after the date of the Participant's death shall be the property of the Participant's beneficiaries determined in accordance with this Section 5.06. (f) Payment of any installments due a Participant under the Plan shall not be automatically accelerated by reason of the Participant's death; provided, however, that the Company may exercise its power to accelerate at any time as set forth in Section 5.05 without regard to the timing of a Participant's death. ARTICLE VI ADMINISTRATION 6.01. Administrative Duties of the Company. ---- ------------------------------------ (a) The Board shall have responsibility for the administration of the Plan. (b) The Board shall administer the Plan in accordance with its terms and shall have all powers necessary to carry out the provisions of the Plan. The Board shall interpret the Plan; shall make all factual determinations arising in the administration, interpretation, and application of the Plan; and shall construe any ambiguity, supply any omission, and reconcile any inconsistency in such manner and to such extent as the Board deems proper. Any interpretation or construction placed upon any term or provision of the Plan by the Board, any decisions and determinations of the Board arising under the Plan, including without limiting the generality of the foregoing: (i) the eligibility of any individual to become or remain a Participant and a Participant's status as such; (ii) the time, method and amounts of payments payable under the Plan; (iii) the rights of Participants and beneficiaries; and any other action or determination or decision whatsoever taken or made by the Board in good faith shall be final, conclusive, and binding upon all persons concerned, including, but not limited to, all Participants and beneficiaries. 10 (c) The Board may adopt such rules as it deems necessary, desirable, or appropriate to carry out its duties under the Plan. All rules, decisions and determinations of the Board shall be uniformly and consistently applied. (d) The Board may appoint any officer or employee of the Company to carry out its duties hereunder. (e) The Board may employ accountants, counsel, specialists, and other persons necessary to help carry out its duties and responsibilities as fiduciary under the Plan. The Board shall be entitled to rely conclusively upon any opinions or reports which shall be furnished to it by such accountants, counsel, specialists, and other persons. (f) No Director shall participate in determining his or her own entitlement under the Plan. (g) The General Counsel of the Company shall have complete power from time to time to adopt, amend, and rescind such rules as the General Counsel shall deem necessary, appropriate, or prudent in order to comply with or avoid liability under Section 16 of the Securities Exchange Act of 1934, as amended, or the rules promulgated thereunder from time to time. Without limiting the generality of such authority, the General Counsel may adopt, amend, and rescind rules which may have the effect of adding to, deleting from, or otherwise modifying the terms of the Plan in any respect, provided only that the General Counsel in good faith determines that such rules are reasonably likely to further the objective of complying with or lawfully avoiding liability under Section 16 or the rules thereunder. In addition, from time to time the General Counsel may (but need not) adopt, amend, and rescind rules which relax Plan restrictions if and to the extent the General Counsel determines that such restrictions no longer are necessary to conform the Plan to any applicable legal requirements and no longer are appropriate to the prudent and convenient administration of the Plan. Any rules adopted, amended, or rescinded by the General Counsel hereunder shall become effective at such times as the General Counsel may determine, without approval or other action by the Board of Directors of the Company. The General Counsel shall notify the Board promptly of any rules adopted, amended, or rescinded hereunder. The Board at all times shall retain the power to annul in whole or part any action taken by the General Counsel hereunder. 6.02. Books and Records. ---- ----------------- (a) The Board shall keep such books, records, and other data as it deems necessary for proper administration of the Plan, including but not limited to records of each Participant's Director's Fees, Eligible Compensation elections, and Account Balances. (b) The records of the Company shall be conclusive as to all persons unless proved incorrect to the satisfaction of the Company. 11 (c) The Company shall comply with all reporting and disclosure requirements of the law and shall maintain all records required by law. 6.03. Notices. ---- ------- (a) Any notice from the Company to any Participant or beneficiary shall be in writing and shall be given by delivery to the Participant or beneficiary, or by mailing to the last known residence address of the Participant or beneficiary. Any notice from a Participant or beneficiary to the Company shall be in writing and shall be given by delivery to the Board, or by mailing to the Board at the Company's headquarters. Notices which are given by delivery shall be effective on the date of delivery. Notices given by mailing shall be effective on the date of postmark. (b) Each Participant or beneficiary shall furnish all information, including, without limitation, post office address and each change of post office address, proofs, receipts and releases, as may be required by the Company. (c) Any communication, statement or notice addressed to any individual at the last post office address filed with the Company shall be binding for all purposes of the Plan, and the Company shall not be obligated to search for or ascertain the whereabouts of any such individual. (d) Except as provided in Article III, any notice required by the Plan may be waived by the person entitled thereto. 6.04. Payment/Accrual of Director's Fees. Market Value for ---- ---------------------------------- each accrual of Credited Shares shall be computed and such Credited Shares and cash payments (if any) shall be payable or accruable pursuant to the following: (a) For any annual fee and any committee chair fee payable and/or accruable to any Participant, the Market Value of shares to be credited in the Participant's Share Accounts shall be calculated and such Credited Shares shall be accruable and cash payments (if any) shall be payable as of the date of the first Board meeting of each fiscal year. (b) For any fee for attendance at a Board or committee meeting, the Market Value of shares to be credited in the Participant's Share Accounts shall be calculated as of the date of such Board or committee meeting. ARTICLE VII AMENDMENT AND TERMINATION 7.01. Amendment. Except as provided in Section 5.04(c), ---- --------- the Company may amend the Plan on a prospective basis at any time. Except as provided in Section 5.04(c), the Company 12 shall have no authority to amend the Plan retroactively in any manner which is or may be detrimental to any Participant or beneficiary without the prior written consent of all affected Participants or beneficiaries, except to the extent that a failure to amend the Plan would result in required inclusion in taxable income by Participants or beneficiaries of amounts not yet received. 7.02. Termination. The Company may terminate the Plan on ---- ----------- a prospective basis at any time by paying each Participant his or her Account Balance. ARTICLE VIII MISCELLANEOUS 8.01. Company's Obligations Unsecured. Participants and ---- ------------------------------- beneficiaries have only the status of general unsecured creditors of the Company. The Plan constitutes a mere promise by the Company to make payments in the future. It is the intention of the Company and all Participants that the Plan shall be unfunded for tax purposes and, to the extent applicable, for purpose of Title I of Employee Retirement Income Security Act of 1974, as amended from time to time. 8.02. No Alienation. Amounts payable under this Plan ---- ------------- shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by any Participant or beneficiary. 8.03. No Waiver of Rights. No failure or delay by the ---- ------------------- Company or any Participant or beneficiary to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 8.04. Severability. The invalidity of any particular ---- ------------ clause, provision or covenant herein shall not invalidate all or any part of the remainder of this Plan, but such remainder shall be and remain valid in all respects as fully as the law will permit. 8.05. Presumption of Competence. Every person receiving ---- ------------------------- or claiming amounts payable under this Plan shall be conclusively presumed to be mentally competent and of legal age unless the Company receives proof satisfactory to the Company that the person is incompetent or is a minor or that a guardian or other person legally vested with the care of the person's estate has been appointed. 8.06. Facility of Payment. If any amount is payable ---- ------------------- hereunder to a minor or other person under legal disability or otherwise incapable of managing his or her own affairs, as determined by the Company in its sole discretion, payment thereof shall be made in one (or any combination) of the following ways, as the Company shall determine in its sole discretion: (a) directly to said minor or other person; 13 (b) to the legal representatives of said minor or other person; or (c) to some relative or friend of such minor or other person for the support, welfare or education of such minor. The Company shall not be required to see to the application of any payment so made, and the receipt of the person to whom such payment is actually made shall fully discharge the Company from any further accountability or responsibility with respect to the amount so paid. 8.07. No Guarantee of Position or Directors Fees. No ---- ------------------------------------------ provision of this Plan shall restrict the Company from removing a Participant from his or her position as a Director or restrict any Participant from resigning from his or her position as a Director. No provision of this Plan shall restrict the Company from increasing or decreasing the Director's Fees payable to any Participant or other Director. 8.08. Plan Provisions Binding. The provisions of the Plan ---- ----------------------- shall be binding upon the Company and all persons entitled to benefits under the Plan and their respective successors, heirs and legal representatives. 8.09. Missouri Law Controls. Subject to any applicable ----- --------------------- provisions of the Employee Retirement Income Security Act of 1974 which provide to the contrary, this Plan shall be administered, construed, and enforced according to the laws of the State of Missouri and in Courts situated in that State. 14 EX-10.13 5 FORM OF FIRST AMENDMENT FIRST AMENDMENT --------------- This FIRST AMENDMENT dated as of February 22, 1999 (this "Amendment") amends the Second Amended and Restated Credit Agreement --------- dated as of October 3, 1997 (the "Credit Agreement") among The ---------------- Earthgrains Company (the "Company"), various financial institutions ------- (the "Lenders") and Bank Of America National Trust and and Savings ------- Association, as Administrative Agent (in such capacity, the "Administrative Agent"). Terms defined in the Credit Agreement are, -------------------- unless otherwise defined herein or the context otherwise requires, used herein as defined therein. WHEREAS, the Company, the Lenders and the Administrative Agent have entered into the Credit Agreement; and WHEREAS, the parties hereto desire to amend the Credit Agreement in certain respects as more fully set forth herein; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 Amendments. Effective on (and subject to the ---------- occurrence of) the Amendment Effective Date (as defined below), the Credit Agreement shall be amended as set forth below: 1.1 Addition of Definition. Section 1.1 is amended by adding ---------------------- the following definition in proper sequence: Restructuring Charges means the first $18,600,000 of --------------------- restructuring charges taken by the Company after January 5, 1999 in connection with the restructuring of its manufacturing and distribution operations in Spain. 1.2 Amendments to Definitions. The definitions of "EBITA" and ------------------------- "Loan Documents" in Section 1.1 are amended in their entirety to read as follows: EBITA means, for any Computation Period, the Company's ----- consolidated earnings from continuing operations for such period plus, to the extent deducted in determining such earnings, Interest Expense, income taxes, any amortization of the goodwill on the Company's balance sheet as of January 2, 1996, any non-cash special charge and, without duplication, all Restructuring Charges. Loan Documents means this Agreement, any Notes, the -------------- L/C-Related Documents and all other documents delivered to the Administrative Agent or any Lender in connection herewith. 1.3 Deletion of Definitions. Section 1.1 is amended by ----------------------- deleting the definitions of "Guarantor" and "Guaranty". 1.4 Amendments to Representations and Warranties. Sections --------------------------------------------- 6.2, 6.3 and 6.4 are amended in their entirety to read as follows: 6.2 Corporate Authorization; No Contravention. The execution, -------------------------------------- delivery and performance by the Company of each Loan Document have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of the Company's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which the Company or any of its Subsidiaries is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or any of its Subsidiaries or any of its or their property is subject; or (c) violate any Requirement of Law. 6.3 Governmental Authorization. No approval, consent, -------------------------- exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company of this Agreement or any other Loan Document. 6.4 Binding Effect. This Agreement and the other Loan -------------- Documents constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 1.5 Deletion of Further Assurances. Section 7.13 is deleted in ------------------------------ its entirety. 1.6 Amendment to Investment Covenant. Each of subsection (c) -------------------------------- and subsection (e) of Section 8.5 is amended by deleting the percentage 12.5% thereon and substituting "20%" therefor. 1.7 Amendments of Certain Negative Covenants. Sections 8.6 and ---------------------------------------- 8.10 are amended in their entirety to read as follows, respectively: 8.6 Limitation on Superior Indebtedness. The Company shall ----------------------------------- not permit the aggregate amount, without duplication, 2 of (a) all Indebtedness of the Company and its Subsidiaries which is secured by Liens described in subsection (a), (i), (j) or ------------------------ (l) of Section 8.2 plus (b) all Indebtedness of Subsidiaries --- ----------- (excluding Indebtedness owed to the Company or a Wholly-Owned Subsidiary) at any time to exceed 20% of Consolidated Total Assets. 8.10 [Intentionally Deleted]. 1.8 Amendments to Events of Default. (i) Subsection 9.1 (d) ------------------------------- is amended by deleting the phrase "or any Guarantor" therein and (ii) subsection 9.1(k) is deleted in its entirety. SECTION 2 Representations and Warranties. The Company ------------------------------ represents and warrants to the Lenders that (a) each warranty set forth in Article VI of the Credit Agreement, as amended hereby (as so amended, the "Amended Credit Agreement"), is true and correct as of the date of ------------------------ the execution and delivery of this Amendment by the Company, with the same effect as if made on such date (except to the extent such representations and warranties expressly refer to any earlier date, in which case they were true and correct as of such earlier date), (b) the execution and delivery by the Company of this Amendment, and the performance by the Company of its obligations under the Amended Credit Agreement, (i) are within the powers of the Company, (ii) have been duly authorized by all necessary action on the part of the Company, (iii) have received all necessary governmental approval and (iv) do not and will not contravene or conflict with any Requirement of Law or any provision of the Organization Documents of the Company or of any document evidencing any Contractual Obligation to which the Company or any Subsidiary is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or any Subsidiary or any of its or their property is subject and (c) the Amended Credit Agreement is the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. SECTION 3 Effectiveness. The amendments set forth in Section 1 ------------- --------- above shall become effective on the date (the "Amendment Effective ------------------- Date") when the Administrative Agent shall have received each of the - ---- following documents, each in form and substance satisfactory to the Administrative Agent: (a) counterparts of this Amendment executed by the Company and the Required Lenders; 3 (b) copies, certified by the Secretary or Assistant Secretary of the Company, of resolutions of the Board of Directors of the Company authorizing or ratifying the execution, delivery and performance by the Company of this Amendment; (c) a certificate, certified by the Secretary or Assistant Secretary of the Company, certifying the names and true signatures of the officers of the Company authorized to sign this Amendment; (d) an opinion of Bryan Cave LLP, counsel to the Company; and (e) such other documents as the Administrative Agent or any Lender may reasonably request in connection with the Company's authorization, execution and delivery of this Amendment. SECTION 4 Miscellaneous. ------------- 4.1 Continuing Effectiveness, etc. As herein amended, the ----------------------------- Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. After the Amendment Effective Date, all references in the Credit Agreement and the Notes to "Credit Agreement", "Agreement" or similar terms shall refer to the Amended Credit Agreement. 4.2 Counterparts. This amendment may be executed in any number ------------ of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Amendment. 4.3 Governing Law. This Amendment shall be a contract made ------------- under and governed by the laws of the State of Illinois applicable to contracts made and to be fully performed within such state. 4.4 Successors and Assigns. This Amendment shall be binding ---------------------- upon the Company, the Lenders and the Administrative Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Administrative Agent and the respective successors and assigns of the Lenders and the Administrative Agent. 4.5 Release of Guarantors. The Required Banks hereby agree --------------------- that, on the Amendment Effective Date (and without any further action by any Person), (i) all Guarantors shall be released from their obligations under the Guaranty and (ii) the Guaranty shall terminate and be of no further force or effect. The Required 4 Banks hereby authorize the Administrative Agent to execute and deliver such documents as the Company may reasonably request to evidence such release and termination. Delivered at Chicago, Illinois, as of the day and year first above written. THE EARTHGRAINS COMPANY By: /s/ ----------------------------------- Vice President and Treasurer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent By: /s/ ----------------------------------- Title: Managing Director -------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Swing Line Lender, as an Issuing Lender and as a Lender By: /s/ ----------------------------------- Title: Managing Director -------------------------------- THE CHASE MANHATTAN BANK, as Co-Agent and as a Lender By: /s/ ----------------------------------- Title: Vice President -------------------------------- THE FIRST NATIONAL BANK OF CHICAGO, as Co-Agent and as a Lender By: /s/ ----------------------------------- Title: Vice President -------------------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Co-Agent and as a Lender By: /s/ ----------------------------------- Title: Vice President -------------------------------- NATIONSBANK, N.A., as Co-Agent and as a Lender By: /s/ ----------------------------------- Title: Managing Director -------------------------------- BANCO BILBAO VIZCAYA By: /s/ ----------------------------------- Title: Vice President -------------------------------- By: /s/ ----------------------------------- Title: Vice President -------------------------------- WACHOVIA BANK, N.A. By: /s/ ----------------------------------- Title: Senior Vice President -------------------------------- WELLS FARGO BANK, N.A. By: /s/ ----------------------------------- Title: Vice President -------------------------------- THE BANK OF NEW YORK By: /s/ ----------------------------------- Title: Vice President -------------------------------- UBS AG, STAMFORD BRANCH (successor in interest to Swiss Bank Corporation) By: /s/ ----------------------------------- Title: Director -------------------------------- By: /s/ ----------------------------------- Title: Executive Director -------------------------------- EX-13 6 PORTIONS OF ANNUAL REPORT 17 FINANCIAL CONTENTS - --------------------------------------------------------- Management's Discussion and Analysis of Results of Operations and Financial Condition 18 - --------------------------------------------------------- Consolidated Financial Statements 24 - --------------------------------------------------------- Notes to Consolidated Financial Statements 28 - --------------------------------------------------------- Five-Year Financial Highlights 40 - --------------------------------------------------------- Responsibility for Financial Statements and Report of Independent Accountants 41 - --------------------------------------------------------- FORWARD-LOOKING STATEMENTS Matters discussed in this Annual Report (particularly in this section and the Letter to Shareholders), contain forward-looking information, as defined in the Private Securities Litigation Reform Act of 1995. All such forward-looking information in this report involves risk and uncertainties, including, but not limited to, variations in income levels of consumers, fluctuations in currency exchange rates for the Spanish peseta and French franc versus the U.S. dollar, the costs of raw materials, the ability of the Company to realize projected savings from productivity and product quality improvements, the ability of the Company to continue to participate in industry consolidation and to successfully integrate acquired businesses, legal proceedings to which the Company may become a party, competitive pricing, economic conditions in the Company's countries of operations, the impact of the Year 2000 date on the Company's information systems, operating systems, or those of its customers or suppliers, the impact of the European currency conversion, and other risks indicated in filings by the Company with the Securities and Exchange Commission. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 18 INTRODUCTION A number of significant factors, which are discussed below, affected the consolidated results of operations, financial condition, and liquidity of Earthgrains during the current fiscal year ended March 30, 1999, and the prior fiscal years ended March 31, 1998, and March 25, 1997. This discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto for such periods, which are included elsewhere in this report. Effective at the close of business on March 26, 1996 (the Distribution Date), shares of the Company were distributed to shareholders of Anheuser-Busch Companies, Inc. (Anheuser-Busch) Common Stock, based upon a ratio of 1-to-25. Following the distribution, the Company began operations as an independent publicly held company. Accordingly, since the Company was a wholly-owned subsidiary of Anheuser-Busch during the periods presented prior to fiscal 1997, financial highlights presented for these prior periods may not necessarily reflect the consolidated results of operations or the financial position of the Company or what the results of operations would have been if the Company had been an independent public company during those periods. OVERVIEW AND OUTLOOK For the third consecutive year since its spinoff as an independent company, Earthgrains delivered significantly improved operating results. The Company's multidisciplined strategy of enhancing cost-effectiveness, gaining volume and efficiencies through acquisitions, and focusing on higher margin products is paying off. Customer partnering is proving a valuable means of effective category management. Driving growth of value-added superpremium and specialty product lines, as part of the fundamental strategy to build branded and value-added specialty store- brand business, has produced positive margin effects for both business segments -- Bakery Products and Refrigerated Dough Products. During fiscal 1999, Earthgrains continued its active role in the consolidation of the bakery products industry. Added volume from retailer supply agreements and manufacturing synergies from acquisition- related capacity and delivery route rationalization have contributed significantly to improved operating results. Earthgrains' investment in information systems has provided a platform to enable successful and swift integration to achieve efficiency gains. Benefits have continued during the current year from integrating the fourth quarter fiscal 1998 acquisition of CooperSmith, Inc. Initiatives are under way involving the integration of supply agreements entered into with Kroger Co. in Texas and Lucky Stores, Inc. in California, as well as the recent acquisition of Reposteria Martinez Group of Santander, Spain. Resposteria Martinez's high-profile brands in sweet goods will make a strong complement to the existing product lines and provide a good opportunity to capture manufacturing and distribution synergies with the Company's bakery operations in Spain. As a result of significant integration costs, it is expected to be slightly dilutive through fiscal 2000 and additive to earnings thereafter. Acquisitions continue to be an important component of Earthgrains' growth and increased profitability, both in the United States and Europe. The Company will continue to evaluate opportunities for industry consolidation in all of its businesses in line with its strategy to enhance revenues, profitability and return on capital. Additionally, the Company has maintained a focus on optimizing efficiencies and enhancing cost-effectiveness throughout its operations in manufacturing, sales and distribution, and administration. Further operating improvements have resulted from the Company's restructuring and consolidation program aimed at reducing excess capacity and rationalizing business mix. Creation of the Financial Shared Services Center in St. Louis to streamline and centralize accounting and administrative functions, is also expected to generate significant operating efficiencies, while further facilitating the ability to integrate acquisitions. This year's results have also benefited from lower raw material costs. Since the spinoff, Earthgrains has demonstrated the ability to successfully implement its strategies to drive shareholder value. These same initiatives are expected to continue delivering benefits going forward. The Company is poised to capitalize on opportunities for further industry consolidation and to continue making progress in fundamental improvements in its existing operations. Earthgrains will continue to focus on driving sustainable growth in profits and cash flow by partnering with key customers, to improve service by understanding consumers, to bring ever-improving quality, value and variety of products and services to the market, and by using quality-driven cost reduction to maximize manufacturing, distribution and administrative efficiencies. RESTRUCTURING AND CONSOLIDATION PROVISIONS The Company recorded the following provisions during the periods presented: * A $28.0 million charge in fiscal 1999 for restructuring of existing operations in Spain related to the The Earthgrains Company 1999 Annual Report 19 Reposteria Martinez acquisition, for estimated expenses to close three bakeries, and for severance costs related to creation of the centralized Financial Shared Services Center in St. Louis * A $12.7 million charge in fiscal 1997 primarily for estimated expenses in conjunction with closing one bakery and one refrigerated dough plant The Company believes that notable improvements in the current fiscal year's operating results reflect further benefits achieved through the restructuring and consolidation program. Continued benefits are expected to be achieved in the upcoming fiscal year. The Company will continue to review its operations to balance capacity and to seek additional opportunities to improve efficiencies. See Note 5 in the Notes to the Consolidated Financial Statements for additional information concerning the details of the Company's restructuring charges, including a reconciliation of the balance sheet reserve relating thereto. RESULTS OF OPERATIONS The following discussion addresses the operating results and financial condition of the Company for the current year ended March 30, 1999, and the prior years ended March 31, 1998, and March 25, 1997. This discussion has been modified to reflect business results by operating segment, as reported consistently with how management assesses operating segment performance. See Note 14 for comparative presentation of business segment data. FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998 Net sales for the 52-week fiscal year ended March 30, 1999, of $1,925.2 million increased from sales of $1,719.0 million for the 53- week fiscal year ended March 31, 1998. Both operating segments, Bakery Products and Refrigerated Dough Products, posted increased sales, but the majority of the increase can be attributed to acquisitions and supply agreements in Bakery Products, most notably CooperSmith. Foreign exchange rates for the current year had a $2.9 million favorable impact. Adjusting for the additional week a year ago and the foreign exchange impact, sales increased 13.8%. Gross margin increased to 43.3% in the current year from 42.9% in fiscal 1998. Despite weaker performance from the European Bakery Products operations, profit-margin improvements were experienced by both business segments through a continued focus on mix-shift improvement to branded products and to premium and superpremium categories for Bakery Products and to specialty dough products for Refrigerated Dough Products. Added volume from supply agreements and manufacturing synergies related to acquisitions along with lower raw material costs continued to drive margin improvements. Agricultural commodity costs represented 22-25% of cost of products sold during the 1999 fiscal year, which is consistent with the prior year. Costs of products sold include agricultural commodities whose prices are influenced by weather conditions, government regulations and economic conditions. The Company utilized futures contracts or options to hedge approximately 55-65% of such agricultural commodity costs or 12-16% of cost of products sold during the 1999 fiscal year. As of March 30, 1999, the amount of the Company's aggregate obligation to purchase commodities under such contracts was $23.0 million. Marketing, distribution and administrative expenses decreased significantly in 1999 to 38.0% from 39.0% on a percentage-of-sales basis. This decrease can be primarily attributed to further benefits in the consolidation of selling, distribution and administrative expenses from capacity and delivery route rationalization as a result of integrating the CooperSmith and Southern Bakeries, Inc. acquisitions into the Bakery Products operations in the southeast United States. The charge of $28.0 million for restructuring and consolidation during the current year is for expenses in conjunction with closing bakeries in Pueblo, Colo., Macon, Ga., and Montgomery, Ala., for severance costs related to creation of the centralized Financial Shared Services Center in St. Louis, and for the restructuring of existing operations in Spain related to the Reposteria Martinez acquisition. Excluding the charge, operating income for fiscal 1999 increased by $34.0 million. The increase in other income is related substantially to gains on the sales of property. The lower effective tax rate for fiscal 1999 is a direct result of a $2.0 million one-time tax benefit from a structure put into place during the fourth quarter to improve management of the Company's benefit programs. This benefit is offset slightly with the effect of increased nondeductible goodwill amortization from current-year and prior-year acquisitions. In the prior year, the $1.8 million net-of-tax charge for the change in accounting principle represents the effect of compliance with a new accounting interpretation related to the recognition of costs associated with business process re-engineering. See Note 3 for additional information. Net earnings for fiscal 1999 were $38.0 million or $0.89 per diluted share, compared with $36.0 million, The Earthgrains Company 1999 Annual Report 20 or $0.85 per diluted share for fiscal 1998. The increase in net earnings for the current year is a result of the factors noted above. FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997 Net sales for the 53-week fiscal year ended March 31, 1998, of $1,719.0 million increased from sales of $1,662.6 million for the comparable 52-week fiscal year ended March 25, 1997. Sales increases in Bakery Products added through the acquisition of CooperSmith since January 17, 1998, and a full year of Heiner's, acquired in November 1996, combined with the additional week were partially offset by the unfavorable impact of foreign exchange rates during the year. Improved pricing and favorable product-mix shift across both business segments also contributed to the increase in sales. After adjustment for the additional week and effect of foreign exchange rates, sales for fiscal 1998 increased by $79.7 million or 4.8%. Gross margin increased significantly to 42.9% in 1998 from 40.5% in fiscal 1997. Profit margin improvements were experienced across both Bakery Products and Refrigerated Dough Products segments. These solid margin improvements can be attributed to focus on branded and superpremium product categories, favorable pricing, and improved manufacturing efficiencies. Refrigerated Dough operations demonstrated the strongest margin-performance improvement, through efficiencies gained from closing the Indianapolis, Ind., plant in March 1997 and a positive mix shift toward value-added specialty dough products. Additionally, flour costs continued to decrease since the first half of fiscal 1997 after reaching record highs thereby resulting in margin improvements. Agricultural commodity costs represented 22-25% of cost of products sold during the 1998 fiscal year, which was down from prior years. Costs of products sold include agricultural commodities whose prices are influenced by weather conditions, government regulations and economic conditions. The Company utilized futures contracts or options to hedge approximately 55-65% of such agricultural commodity costs or 12-16% of cost of products sold during the 1998 fiscal year. As of March 31, 1998, the amount of the Company's aggregate obligation to purchase commodities under such contracts was $20.4 million. Marketing, distribution and administrative expenses increased in 1998 from 38.1% to 39.0% on a percentage-of-sales basis. A primary factor is the increased spending in marketing and advertising to focus on building core brands as well as supporting new premium product introductions. The prior-year charge of $12.7 million for restructuring and consolidation covered expenses in conjunction with closing one bakery and one refrigerated dough plant. Excluding the prior-year charge, operating income for fiscal 1998 increased $26.9 million. This significant increase in operating results reflects a strong contribution from Heiner's, the benefits of lower ingredient costs, and the continued focus on cost-effectiveness combined with an improvement in product mix. The effective tax rate for fiscal 1998 represents a more typical tax rate expected for the Company on an on-going basis but may increase slightly with the effect of nondeductible goodwill amortization from acquisitions. The lower effective tax rate for fiscal 1997 is a direct result of $5.3 million in one-time Spanish tax incentives and credits associated principally with investments made in the Canary Islands. The Company substantially completed the expansion of its Canary Islands bakery in that year. The $1.8 million net-of-tax charge for the change in accounting principle in fiscal 1998 represents the effect of compliance with a new accounting interpretation related to the recognition of costs associated with business process re-engineering. See Note 3 for additional information. Net earnings for fiscal 1998 were $36.0 million or $0.85 per diluted share, compared to $16.2 million, or $0.39 per diluted share for fiscal 1997. The marked increase in net earnings for the current year is a result of the factors noted above. FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1995 Net sales for the fiscal year ended March 25, 1997, of $1,662.6 million were consistent with sales of $1,664.6 million for the comparable 52-week period ended January 2, 1996 (fiscal 1995). The decrease in sales attributed to the closing or sale of underperforming and noncore businesses as part of the planned consolidation and restructuring was partially offset by the effect of price increases taken early in the year and favorable product-mix shift. Sales contributed through the acquisition of Heiner's, as of November 30, 1996, were more than offset by the unfavorable impact of foreign exchange rates near the end of the year. After adjustment for the closed or sold facilities in both periods presented, sales for fiscal 1997 increased by $88.8 million or 5.6% represented across both Bakery Products and Refrigerated Dough Products segments. Gross margin increased to 40.5% in 1997 from 37.8% in fiscal 1995. Profit margin improvements were experienced by Bakery Products while margins for the Refrigerated Dough Products operations were down The Earthgrains Company 1999 Annual Report 21 slightly from fiscal 1995. The margin improvements can be attributed to price increases, benefits of the restructuring and consolidation process, and improved operating efficiencies. Additionally, flour costs which began to increase dramatically in the last half of fiscal 1995 decreased, thereby resulting in improved margins from 1995. Agricultural commodity costs represented 25-30% of cost of products sold during the 1997 fiscal year, which is consistent with the prior year. The Company utilized futures contracts or options to hedge approximately 45-55% of such agricultural commodity costs or 11-17% of cost of products sold during the 1997 fiscal year. As of March 25, 1997, the amount of the Company's aggregate obligation to purchase commodities under such contracts was $11.4 million. Marketing, distribution and administrative expenses increased by $6.0 million in 1997 and from 37.7% to 38.1% on a percentage-of-sales basis. The elimination of costs through the closing or sale of facilities and the effect of the charge for the Spanish work force reduction program reflected in 1995 were more than offset by the costs of operating as a stand-alone public company. The prior-year charge of $27.5 million for restructuring and consolidation was netted with an $18.4 million gain on the sale of businesses, resulting in the net charge of $9.1 million. Excluding the fiscal 1997 charge of $12.7 million and the 1995 net charge of $9.1 million to consolidate certain inefficient facilities, operating income for fiscal 1997 increased $37.9 million compared to the prior year. This significant increase in operating results reflects benefits from our consolidation and restructuring program and our continued focus on cost- effectiveness combined with an improvement in product mix and lower raw material costs. The lower effective tax rate for fiscal 1997 is a direct result of $5.3 million in one-time Spanish tax incentives and credits associated principally with investments made in the Canary Islands. The Company substantially completed the expansion of its Canary Islands bakery during 1997. Typically, the Company's effective income tax rate is higher primarily due to the relative impact of the nondeductible fixed goodwill amortization on the respective earnings level. Net earnings for fiscal 1997 were $16.2 million or $0.39 per diluted share, compared with a loss of $6.6 million, or a $0.16 loss per diluted share, computed on the basis of pro forma average shares outstanding for fiscal 1995. The historical statement of earnings for fiscal 1995 does not reflect interest expense related to long-term debt assumed by the Company upon the distribution on March 26, 1996, and certain administrative expenses associated with operating as an independent, stand-alone company. LIQUIDITY AND CAPITAL RESOURCES Concurrent with the Distribution on March 26, 1996, the Company used borrowings under a $215 million unsecured revolving credit facility with several financial institutions to pay Anheuser-Busch as a partial payment of its net intercompany payable, to fund working capital needs and for general corporate purposes. In conjunction with the acquisition of CooperSmith in the fourth quarter of fiscal 1998, the existing credit facility was renegotiated to $450 million with a maturity date of September 2002. During the current year, three separate lines of credit for $25 million each, due in 1999, and a 27 million Euro Revolving Credit Facility, due in 2004, were added to increase the Company's borrowing flexibility. The Company's primary source of liquidity is cash flow from operations, which was $131.9 million for the current fiscal year ended March 30, 1999. Improved operating efficiencies, favorable product-mix shift, results from acquisitions and continued lower ingredient costs have contributed to the strong cash flows from operations for the current year. Net working capital, excluding cash and cash equivalents, was $49.0 million at March 30, 1999, consistent with $48.6 million a year ago. The Company's primary routine cash requirements will continue to consist of funding capital expenditures, interest payments pursuant to the credit facility, and dividends to shareholders. The Company invested $86.5 million in capital expenditures during the current fiscal year and expects to fund capital investments of approximately $90 million in the upcoming year. The consolidated capital expenditure plan for fiscal 2000 includes expansion of one of the CooperSmith plants, information systems, new hand held computers and equipment related to the Reposteria Martinez acquisition, and a project in the southeast United States to convert delivery racks and trays to a more efficient basket process. The Company will also continue ongoing investments in systems technology along with modernization plans for various domestic and international bakeries and refrigerated dough plants. The Company's stock repurchase program authorizes the repurchase of up to 2 million shares of common stock through open market transactions as the Company determines. In fiscal 1999, Earthgrains purchased 557,700 shares of the Company's common stock on the open market at a cost of $13.4 million. During the two years of the program, 894,900 shares, adjusted to The Earthgrains Company 1999 Annual Report 22 reflect the two stock splits, have been purchased to date for the treasury at a cost of $20.4 million. Additionally, Earthgrains filed a shelf registration statement with the Securities and Exchange Commission to issue up to $250 million in debt securities, which became effective in April 1999. These debt securities may be offered by the Company from time to time at prices and on terms to be determined at the time of any such offering. On April 20, 1999, Earthgrains issued $150 million in 10-year, 6.5% fixed-rate senior debentures. Proceeds from the offering will be used to fund capital expenditures, acquisition opportunities, and for general corporate purposes. On both a short-term and long-term basis, management believes that its cash flows from operations, together with its available borrowings under the existing credit facilities and the new shelf registration, will provide it with sufficient resources to meet its seasonal working capital needs, to finance its projected capital expenditures, to fund acquisition opportunities, and to meet its foreseeable liquidity requirements. MARKET RISK The Company actively monitors its exposure to commodity price, foreign currency exchange rate and interest rate risks and uses derivative financial and commodity instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the instruments themselves or on a speculative basis, nor does it use instruments where there are not underlying exposures. The Company has estimated its market risk exposures using sensitivity analyses. Market risk exposure has been defined as the change in fair value of a derivative commodity or financial instrument assuming a hypothetical 10 percent adverse change in market prices or rates. Fair value was determined using quoted market prices, if available. Actual changes in market prices or rates may differ from hypothetical changes. * COMMODITIES - Earthgrains uses commodity futures and options to manage price risk on commodity inventories or anticipated commodity purchases. The Company typically purchases certain commodities such as wheat, corn and soy oil. Based on the results of the sensitivity analysis, the estimated market risk exposure on such instruments was approximately $2.6 million and $1.4 million as of March 30, 1999 and March 31, 1998, respectively. * FOREIGN EXCHANGE - For the Company's international operations, the functional currency is the local currency and any transactions denominated in a currency other than the respective functional currency are immaterial. The Company does not use derivative instruments to manage exchange risk of net investments in or earnings of its foreign operations. * INTEREST RATES - The Company manages its interest rate exposures to reduce its borrowing costs and risks through the use of a mix of floating and fixed rate debt, as well as interest rate swap agreements and other appropriate hedging instruments. The Company's interest-rate related financial instruments consist of outstanding debt and a $100 million interest rate swap agreement which was terminated on April 20, 1999 in conjunction with the issuance of $150 million of debentures due April 15, 2009. Based on the Company's outstanding floating rate debt at fiscal year- end, an assumed adverse 10% increase in interest rates would have increased annual interest expense by $1.9 million and $1.5 million during fiscal 1999 and fiscal 1998, respectively. A similar 10% decline in interest rates would have the potential to reduce the fair market value of the $100 million ten-year swap by $4.6 million and $4.5 million as of March 30, 1999, and March 31, 1998, respectively. This sensitivity analysis for the interest rate swap does not take into account changes in the fair market value of the underlying exposures being hedged. YEAR 2000 Many computer systems process dates in application software and data files based upon two digits for the year of a transaction rather than a full four digits. As a result, these systems may not be able to properly process dates in the year 2000. Consequently, businesses and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operations. In 1994, in order to improve access to business information through integrated systems across the company, and accordingly gain efficiencies and cost improvements, Earthgrains embarked on a companywide systems integration project using SAP software. Additionally, in the past two years, the Company has purchased a new mainframe computer to increase capacity in support of its acquisition growth strategy and has replaced all handheld computers, upgrading to the latest technology to enhance route distribution efficiency. These new components, which comprise the majority of the Company's core business computer systems, are Year 2000 compliant. The purchase of new systems and hardware as a The Earthgrains Company 1999 Annual Report 23 part of the companywide business systems improvement program are being capitalized. This improvement program is proceeding as planned in support of the Company's ongoing business strategy. The Company is also in the process of executing a plan to address the Year 2000 issue with the objective to have all significant business systems and software applications that are date-sensitive, including those related to facilities and manufacturing activities, operating effectively before January 1, 2000. A project team is in place and is supervising the Company's activity regarding this issue, monitoring progress, and reporting such findings regularly to management and the Board of Directors. The project is structured into three major categories -- Internal Information Systems; Property, Plant and Equipment Systems; and Third Party Suppliers and Trading Partners. The six phases of the project common to each of the categories are: (1) establishing an inventory of Year 2000 affected items; (2) assessing the risk of these identified items; (3) assessing the compliance of items considered to have a potential for material impact; (4) remediating items determined not to be in compliance; (5) testing such items; and (6) formulating contingency and business continuation plans for any areas as deemed necessary. Inventory, assessment, and remediation of internal information systems began in 1997. All critical internal information systems, within the U.S. operations and European Refrigerated Dough Products operations, were remediated by March 1999 and will be tested by mid-1999. Property, plant and equipment systems, for these operations, have been inventoried and assessed with remediation scheduled to be completed by June 1999, and testing to be completed by July 1999. Within the European Bakery Products operations, inventory and assessment of critical internal information systems are scheduled to be completed by May 1999, while a schedule for remediation and testing is under review due to the recent Reposteria Martinez acquisition. For property, plant and equipment systems, inventory, assessment, and remediation are scheduled to be completed by September 1999, and testing to be completed by October 1999. The Company is in the process of communicating with Third Party Suppliers and Trading Partners to coordinate Year 2000 conversion and obtain assurances that their systems are Year 2000 compliant. Contingency plans are being developed, as considered necessary, for each of the three project categories with completion targeted for July 1999. Contingency plans will be reviewed and updated throughout 1999. Incremental project costs associated with Year 2000 compliance will be expensed or capitalized where appropriate as incurred and are expected to total approximately $5 million, based upon current estimates. Such costs are not anticipated to be material to the Company's financial position or results of operations. Although the Company believes that the cost of Year 2000 modification efforts for internal-use software and systems are not material, due to the inherent uncertainties surrounding Year 2000 compliance issues, there can be no assurances that Year 2000 failures or implications, including litigation, will not have a material adverse effect on the Company's business, operating results or financial position, particularly in the event any significant third parties cannot in a timely manner provide the Company with products, services or systems that meet Year 2000 requirements. The Year 2000 project is designed to reduce risks surrounding Year 2000 issues and, coupled with the ongoing business systems improvement effort, the possibility of significant interruptions of routine business operations should be reduced. The conclusions and estimates in this Year 2000 information include forward-looking statements and are based upon management's current best estimates of future events. Risks to achieving this plan include the availability of resources, the ability to discover and correct the potential Year 2000 sensitive problems, and the ability of suppliers and trading partners to bring their systems into Year 2000 compliance. ENVIRONMENTAL MATTERS The operations of Earthgrains, like those of similar businesses, are subject to various federal, state and local laws and regulations with respect to environmental matters, including air and water quality, underground fuel-storage tanks, and other regulations intended to protect public health and the environment. Earthgrains has been identified as a potentially responsible party ("PRP") at certain locations under the Comprehensive Environmental Responses, Compensation and Liability Act, and may be required to share in the cost of cleanup with respect to two sites. While it is difficult to quantify with certainty the financial impact of actions related to environmental matters, based on the information currently available it is management's opinion that the ultimate liability arising from such matters taking into consideration established reserves should not have a material effect on Earthgrains' results of operations or financial position. The Earthgrains Company 1999 Annual Report 24 CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------- March 30, March 31, (In millions, except share data) 1999 1998 - -------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 53.1 $ 43.7 Accounts receivable, net 184.5 156.5 Inventories, net 77.7 68.9 Deferred income taxes 39.8 30.4 Other current assets 29.6 26.8 - -------------------------------------------------------------------------- Total current assets 384.7 326.3 Other assets, net 46.0 35.0 Goodwill, net 399.8 311.0 Plant and equipment, net 761.1 722.0 - -------------------------------------------------------------------------- Total assets $1,591.6 $1,394.3 ========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 125.5 $ 132.1 Accrued salaries, wages and benefits 56.9 56.5 Accrual for restructuring and consolidation 32.4 6.1 Other current liabilities 67.8 39.3 - -------------------------------------------------------------------------- Total current liabilities 282.6 234.0 Postretirement benefits 114.0 115.3 Long-term debt 369.3 266.7 Deferred income taxes 102.7 99.5 Other noncurrent liabilities 73.6 72.2 Commitments and contingencies -- -- Minority interest -- mandatorily redeemable preferred stock of subsidiary 10.0 -- Shareholders' equity: Common stock, $.01 par value, 150,000,000 authorized, 42,851,851 and 21,498,864 (pre-split) shares issued in 1999 and 1998, respectively 0.4 0.2 Additional paid-in capital 616.6 608.1 Retained earnings 79.1 47.1 Unearned ESOP shares (13.0) (14.1) Treasury stock (20.4) (7.0) Unearned portion of restricted stock (2.5) (3.3) Accumulated other comprehensive income (20.8) (24.4) - -------------------------------------------------------------------------- Total shareholders' equity 639.4 606.6 - -------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,591.6 $1,394.3 ========================================================================== See accompanying Notes to Consolidated Financial Statements.
The Earthgrains Company 1999 Annual Report 25 CONSOLIDATED STATEMENTS OF EARNINGS
- ---------------------------------------------------------------------------------------------- For the years ended ------------------------------------- March 30, March 31, March 25, (In millions, except per-share data) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Net sales $1,925.2 $1,719.0 $1,662.6 Cost of products sold 1,092.4 981.6 988.8 - ---------------------------------------------------------------------------------------------- Gross profit 832.8 737.4 673.8 Marketing, distribution and administrative expenses 731.6 670.2 633.5 Provision for restructuring and consolidation 28.0 -- 12.7 - ---------------------------------------------------------------------------------------------- Operating income 73.2 67.2 27.6 Other income and expenses: Interest (expense) (19.5) (8.2) (6.3) Other income, net 6.2 3.0 1.4 - ---------------------------------------------------------------------------------------------- Income before income taxes 59.9 62.0 22.7 Provision for income taxes 21.9 24.2 6.5 - ---------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 38.0 37.8 16.2 Cumulative effect of change in accounting principle, net of tax -- 1.8 -- - ---------------------------------------------------------------------------------------------- Net income $ 38.0 $ 36.0 $ 16.2 ============================================================================================== Earnings per share: Basic Earnings before cumulative effect of change in accounting principle $ 0.93 $ 0.93 $ 0.40 Cumulative effect of accounting change -- 0.04 -- - ---------------------------------------------------------------------------------------------- Net earnings per share $ 0.93 $ 0.89 $ 0.40 ============================================================================================== Weighted average shares outstanding 40.7 40.7 40.6 ============================================================================================== Diluted Earnings before cumulative effect of change in accounting principle $ 0.89 $ 0.89 $ 0.39 Cumulative effect of accounting change -- 0.04 -- - ---------------------------------------------------------------------------------------------- Net earnings per share $ 0.89 $ 0.85 $ 0.39 ============================================================================================== Weighted average shares outstanding 42.7 42.5 41.3 ============================================================================================== Fiscal year contains 53 weeks. Prior-year shares and per-share amounts have been restated to reflect the two-for-one stock splits effective July 20, 1998 and July 28, 1997. See accompanying Notes to Consolidated Financial Statements.
The Earthgrains Company 1999 Annual Report 26 CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------- For the years ended ------------------------------------- March 30, March 31, March 25, (In millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 38.0 $ 36.0 $ 16.2 Adjustments to reconcile earnings to net cash flow provided by operations: Depreciation and amortization 102.4 84.6 84.5 Deferred income taxes (2.0) 6.7 1.7 Provision for restructuring and consolidation ($28.0 million, less cash payments of $2.8; $12.7 million, less cash payments of $0.2) 25.2 -- 12.5 (Gain) on disposal of fixed assets (5.6) (1.3) (0.2) (Increase) in noncash working capital (18.9) (15.3) (6.9) Other, net (7.2) 15.2 (6.0) - ---------------------------------------------------------------------------------------------- Net cash flow from operations 131.9 125.9 101.8 - ---------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (86.5) (79.6) (71.2) Acquisitions, net of cash acquired (169.7) (206.6) (38.5) Proceeds from sale of property/business 40.7 7.8 4.5 - ---------------------------------------------------------------------------------------------- Net cash used by investing activities (215.5) (278.4) (105.2) - ---------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in revolving credit facility 90.1 163.7 10.4 Issuance of long-term debt 9.9 -- -- Principal payments on long-term debt, including current maturities (0.9) -- (1.3) Dividends to shareholders (6.0) (3.6) (1.5) Purchases of treasury stock (13.4) (7.0) -- Proceeds from issuance of preferred stock of subsidiary 10.0 -- -- Other 3.3 -- -- - ---------------------------------------------------------------------------------------------- Net cash provided by financing activities 93.0 153.1 7.6 - ---------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 9.4 0.6 4.2 Cash and cash equivalents, beginning of year 43.7 43.1 38.9 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 53.1 $ 43.7 $ 43.1 ============================================================================================== Fiscal year contains 53 weeks. See accompanying Notes to Consolidated Financial Statements.
The Earthgrains Company 1999 Annual Report 27 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------ Accum. Other Anheuser- Common Stock Additional Unearned Unearned Compre- Busch ----------------- Paid-In Retained ESOP Treasury Restricted hensive Equity (In millions, except share data) Shares Amount Capital Earnings Shares Stock Stock Income Investment Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance March 26, 1996 -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 582.1 $582.1 Comprehensive income: Net income 16.2 16.2 Other comprehensive income, translation adjustments (17.5) (17.5) -------------------------------------------------------------------------------------------------- Comprehensive income 16.2 (17.5) (1.3) Shares issued upon distribution 10,092,133 0.1 582.0 (582.1) -- Dividends ($.15 per share) (1.5) (1.5) Shares issued under stock plan 166,551 5.1 (5.1) -- Amortization of restricted stock 0.9 0.9 Shares issued to ESOP 513,114 16.8 (16.8) -- Shares allocated under ESOP 0.3 1.7 2.0 Other 6,252 0.2 0.2 - ------------------------------------------------------------------------------------------------------------------------------------ Balance March 25, 1997 10,778,050 0.1 604.4 14.7 (15.1) -- (4.2) (17.5) -- 582.4 Comprehensive income: Net income 36.0 36.0 Other comprehensive income, translation adjustments (6.9) (6.9) -------------------------------------------------------------------------------------------------- Comprehensive income 36.0 (6.9) 29.1 Dividends ($.175 per share) (3.6) (3.6) Two-for-one stock split 10,778,050 0.1 (0.1) -- Shares issued under stock plan and related tax benefits 106,336 2.3 2.3 Amortization of restricted stock 0.9 0.9 Shares allocated under ESOP 1.3 1.0 2.3 Purchases of treasury stock (168,600) (7.0) (7.0) Other 5,028 0.2 0.2 - ------------------------------------------------------------------------------------------------------------------------------------ Balance March 31, 1998 21,498,864 0.2 608.1 47.1 (14.1) (7.0) (3.3) (24.4) -- 606.6 Comprehensive income: Net income 38.0 38.0 Other comprehensive income, translation adjustments 3.6 3.6 -------------------------------------------------------------------------------------------------- Comprehensive income 38.0 3.6 41.6 Dividends ($.145 per share) (6.0) (6.0) Two-for-one stock split 21,498,864 0.2 (0.2) -- Shares issued under stock plan and related tax benefits 405,086 5.7 5.7 Amortization of restricted stock 0.9 0.9 Shares allocated under ESOP 2.8 1.1 3.9 Purchases of treasury stock (557,700) (13.4) (13.4) Other 6,737 0.2 (0.1) 0.1 - ------------------------------------------------------------------------------------------------------------------------------------ Balance March 30, 1999 42,851,851 $0.4 $616.6 $79.1 $(13.0) $(20.4) $(2.5) $(20.8) $ -- $639.4 ==================================================================================================================================== See accompanying Notes to Consolidated Financial Statements.
The Earthgrains Company 1999 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 NOTE 1. BASIS OF PRESENTATION Effective March 26, 1996, one share of The Earthgrains Company (the Company or Earthgrains) $.01 par value common stock was distributed to holders of Anheuser-Busch Companies, Inc. (Anheuser-Busch) common stock for every 25 shares of Anheuser-Busch common stock owned at the established record date (the Distribution). At the time of the Distribution, Earthgrains began operations as a separate publicly owned company. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES This summary of the Company's significant accounting principles and policies is presented to assist in evaluating the Company's financial statements included in this report. These principles and policies conform to generally accepted accounting principles and are applied on a consistent basis among years, except for a change in the Company's method of accounting for business process re-engineering costs in fiscal year 1998, as discussed in Note 3. PRINCIPLES OF CONSOLIDATION These consolidated financial statements include the Company and all its subsidiaries. All significant intercompany transactions are eliminated. FISCAL YEAR END The Company has a 52- or 53-week year. Concurrent with the Distribution, the Company changed its fiscal year end from the Tuesday closest to December 31 to the last Tuesday in March. The following table summarizes the periods covered in each of the three fiscal years presented in these financial statements and footnotes thereto unless otherwise stated:
- --------------------------------------------------- Fiscal Year Period Covered - --------------------------------------------------- 1999 52-week period ended March 30, 1999 1998 53-week period ended March 31, 1998 1997 52-week period ended March 25, 1997
FOREIGN CURRENCY TRANSLATION Adjustments resulting from foreign currency transactions are recognized in income, whereas adjustments resulting from the translation of financial statements are reflected within accumulated comprehensive income in shareholders' equity. GOODWILL Goodwill is amortized on a straight-line basis over a period of 40 years. Accumulated amortization at March 30, 1999, and March 31, 1998, was $86.8 million and $76.6 million, respectively. $115.2 million of the goodwill balance at March 30, 1999, relates to the acquisition of the Company by Anheuser-Busch in 1982. SUPPLY AGREEMENTS Cash payments made in conjunction with long-term supply agreements with customers are capitalized as other assets and amortized over the term of the respective agreement. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and temporary investments purchased with an initial maturity of three months or less. INVENTORIES AND PRODUCTION COSTS Inventories are valued at the lower of cost or market. Cost is determined under the first-in, first-out method. Inventories include the cost of materials, direct labor and manufacturing overhead. Obsolete or unsaleable inventories are reflected at their estimated realizable values. The Company uses commodity futures and option contracts to hedge certain of its commodity purchases as considered necessary to reduce the inherent risk associated with market-price fluctuations. Such contracts are accounted for as hedges; and accordingly, gains and losses on hedges of future commodity purchases are recognized as a component of inventory in the same period as the related purchase transaction. For any contracts that expire or are terminated, any related gains or losses are recognized in income or expense during the same period. The effect of any realized or deferred gains or losses is immaterial to the financial position or results of operations of the Company. PLANT AND EQUIPMENT Plant and equipment is carried at cost and includes expenditures for new facilities and expenditures that substantially increase the useful lives of existing facilities. Maintenance, repairs and minor renewals are expensed as incurred. When plant and equipment is retired or otherwise disposed, the related cost and accumulated depreciation are eliminated and any gain or loss on disposition is reflected in income or expense. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, resulting in depreciation rates on buildings ranging from 2-10% and on machinery and equipment ranging from 5-25%. The Earthgrains Company 1999 Annual Report 29 In conjunction with the acquisition of the Company by Anheuser-Busch in 1982, a portion of the purchase price was associated with reflecting the property, plant and equipment (buildings) at fair value through purchase accounting. Additionally, the effect of the adoption of Statement of Financial Accounting Standards No. 109 (SFAS 109) in fiscal 1992 was applied to these assets. Such amounts are being amortized on a straight- line basis over 40 years. The remaining unamortized purchase price assigned to fixed assets amounted to $202.1 million, with related deferred taxes of $76.8 million, at March 30, 1999. CAPITALIZATION OF INTEREST Interest relating to the cost of acquiring certain fixed assets is capitalized. The capitalized interest is included as part of the cost of the related asset and is amortized over its estimated useful life. INCOME TAXES The provision for income taxes is based on the income and expense amounts as reported in the Consolidated Statements of Earnings. Deferred income taxes are recognized for the effect of temporary differences between financial and tax reporting in accordance with the requirements of SFAS 109. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK The Company is a party to certain financial instruments with off- balance-sheet risk incurred in the normal course of business. These financial instruments include forward and option contracts designated as hedges. Derivative financial instruments are used solely as hedges to manage existing risks or exposure. The Company's exposure to credit loss in the event of nonperformance by the counterparties to these financial instruments (either individually or in the aggregate) is not material to the financial condition or results of operations of the Company. Derivative financial instruments, which are used by the Company in the management of commodity exposures, are accounted for on an accrual basis. Income and expense are recognized in the same category as that of the related asset or liability. The fair value of derivative instruments is monitored based on the estimated amounts the Company would receive or pay to terminate the contracts. In fiscal 1998, the Company entered into a forward starting interest rate swap transaction, in order to lock-in its future borrowing costs for an anticipated ten-year fixed rate debt issuance. Through this swap transaction, the Company was obligated at a future date, up to one year, to make payments based upon a fixed rate while receiving a LIBOR-based floating rate during a ten-year term. Any gains or losses on the swap agreement would be recognized as an adjustment to interest expense on the underlying debt instrument. The impact of the swap transaction on interest expense was immaterial to the Company's results of operations. The Company does not have a material concentration of accounts receivable or credit risk. FAIR VALUE OF FINANCIAL INSTRUMENTS As of March 30, 1999, and March 31, 1998, the fair value of long-term debt was approximately equal to its recorded value of $374.1 million and $267.6 million, respectively. The fair value of long-term debt was estimated based on the quoted market values for the same or similar debt issues, or rates currently available for debt with similar terms. The fair market value of the Company's $100 million forward starting swap as of March 30, 1999 was a net payable of $1.2 million. As of March 31, 1998, this instrument was a net asset of $0.8 million. RESEARCH AND DEVELOPMENT AND ADVERTISING AND PROMOTIONAL COSTS Research and development and advertising and promotional costs are expensed in the year in which these costs are incurred. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and goodwill for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs nondiscounted cash-flow analyses to determine whether an impairment exists. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business. SYSTEMS DEVELOPMENT COSTS The Company capitalizes certain systems development costs as allowed in accordance with established criteria. Amounts capitalized are amortized over a five-year period. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires that certain internal and external costs associated with the purchase and/or development of internal use software be The Earthgrains Company 1999 Annual Report 30 capitalized rather than expensed. The Company adopted this statement as of the beginning of fiscal year 1999. Such adoption did not have a material impact on the Company's financial position or results of operations. EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares of common stock outstanding during the year. The difference in the weighted average shares outstanding used in the basic and dilutive earnings-per- share calculations represents the assumed conversion of stock options and restricted stock awards. STOCK-BASED COMPENSATION The Company accounts for employee stock options using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Under APB 25, the Company does not recognize compensation expense for options granted, because options are only granted at a price equal to market value on the date of grant. In 1996, Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation" became effective, which prescribes recognition of compensation expense based upon the fair value of the options at the date of grant. However, SFAS 123 allows companies to continue to apply APB 25 and disclose pro forma effects of the fair value method. See Note 9 for additional discussion and pro forma disclosures as if the fair value method had been utilized. COMPREHENSIVE INCOME Comprehensive income represents net income plus certain items that are charged directly to stockholders' equity. Other comprehensive income for the Company relates only to foreign currency translation adjustments. USE OF ESTIMATES In conformity with generally accepted accounting principles, the preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on our knowledge of current events and the actions that we may undertake in the future, they may ultimately differ from actual results. NEW ACCOUNTING PRONOUNCEMENTS In fiscal 1999, the Company adopted several statements issued by the Financial Accounting Standards Board (FASB). In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income" and SFAS No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." The adoption of SFAS 130 modifies the format the Company uses to report noncash changes in shareholders' equity. These changes are shown together with net income in a new category of the statement of shareholders' equity titled "Comprehensive Income." SFAS 131 requires certain information to be reported about operating segments consistent with management's internal view of the Company. See Note 14 for required disclosures. In February 1998, the FASB issued SFAS No. 132 (SFAS 132), "Employers' Disclosure about Pensions and Other Postretirement Benefits." SFAS 132 revises the required disclosures about pension and other postretirement benefit plans. In June 1998, the FASB issued SFAS No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, requiring recognition of the fair value of all derivatives as assets or liabilities on the balance sheet. SFAS 133 will become effective for fiscal 2001 financial reporting. Based upon preliminary reviews of the provisions of this standard, the Company believes that it will not have a significant impact on its financial position or results of operations or have a material effect on its financial statement reporting. NOTE 3. CHANGE IN ACCOUNTING PRINCIPLE In November 1997, the Emerging Issues Task Force (EITF), a subcommittee of the FASB, reached a consensus requiring that costs of business process re- engineering be expensed as those costs are incurred. Any such unamortized costs that were previously capitalized must be written off as a cumulative adjustment in the quarter containing November 20, 1997. Accordingly, in the third quarter of fiscal 1998, the Company recorded a $1.8 million, net of tax, (or $0.04 per diluted share (post-split)) charge against earnings to comply with the new required accounting interpretation. The charge is presented as a separate cumulative effect of accounting change line item in the Consolidated Statement of Earnings. Most of Earthgrains' system development costs affected by the accounting change are associated with implementation of the Company's new integrated SAP systems. The Earthgrains Company 1999 Annual Report 31 NOTE 4. ACQUISITIONS On August 3, 1998, Earthgrains acquired the assets of Societe De Concept en Produits Agro-Alimentaires, S.A., which owns Chevalier Servant, S.A., of Vittel, France. Chevalier Servant, a refrigerated- and frozen-dough producer, has been combined with the Company's existing French-based refrigerated dough operations. On August 19, 1998, the Company acquired the assets of Palmetto Baking Company of Orangeburg, S.C., and Tatum Bakeries of Birmingham, Ala., from Southern Bakeries, Inc. Palmetto produces Sunbeam(R) and Country Hearth(R) brand bread, buns and rolls in South Carolina and eastern Georgia. Tatum produces specialty rolls for sale to other wholesale bakers. Effective October 5, 1998, Earthgrains completed the transaction with Interstate Bakeries Corporation to exchange assets of Earthgrains' My Bread Baking Co. in New Bedford, Mass., for those of IBC's Holsum Bakery in Grand Junction, Colo., plus a cash payment from IBC. The exchange, which added new brands and contiguous sales territory in western Colorado, did not significantly affect financial results. On March 25, 1999, the Company completed the acquisition of Reposteria Martinez Group of Santander, Spain. Reposteria Martinez Group is a producer of fresh-baked sweet goods and with this acquisition, the Company becomes the branded market leader in the retail sweet-good segments of cake and morning goods in Spain. All of these acquisitions were purchased for cash and will be accounted for using the purchase method. Accordingly, the results of operations are reflected in the Consolidated Statement of Earnings from the date of acquisition. The purchase price has been preliminarily allocated to the assets acquired and the liabilities assumed based upon their estimated fair market value, and the excess costs over net tangible assets are being amortized over 40 years. Had these purchases taken place on March 26, 1997, unaudited pro forma consolidated net sales would have been $2,035.0 million and $2,076.1 million for fiscal years 1999 and 1998, respectively. Consolidated net earnings and earnings per share would not have been significantly different from the amounts reflected in the accompanying financial statements. On July 22, 1998, the Company entered into a multiyear agreement to supply store-brand fresh bread and bakery products to Kroger Food Stores in Texas and Louisiana. Earthgrains will service this contract through its existing bakeries in Dallas and Houston. On September 21, 1998, the Company entered into a multiyear agreement to supply store-brand fresh bread, buns and rolls to Lucky Stores, Inc., in northern California. Earthgrains will service this contract through its existing bakeries in Oakland and Sacramento. Cash payments made in conjunction with long-term supply agreements with customers are capitalized as other assets and amortized over the term of the respective agreement. Effective January 17, 1998, the Company completed the acquisition of all of the stock of CooperSmith, Inc. of Atlanta, Ga., for a purchase price of $193 million. CooperSmith operated eight bakeries producing bread, buns and rolls in the South, Southeast and Northeast United States. On March 11, 1998, the Company acquired the assets of San Luis Sourdough, Inc., of San Luis Obispo, Calif. San Luis Sourdough produces sourdough, French and specialty hearth breads that are marketed in central and northern California and parts of Arizona. Both acquisitions were purchased for cash and were accounted for using the purchase method. Accordingly, the results of operations are reflected in the Consolidated Statement of Earnings from the respective dates of acquisition. The estimated purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair market value, and the excess costs over net tangible assets are being amortized over 40 years. Had these purchases taken place on March 27, 1996, unaudited pro forma consolidated net sales would have been $1,933.2 million and $1,920.3 million for fiscal years 1998 and 1997, respectively. Consolidated net earnings and earnings per share would not have been significantly different from the amounts reflected in the accompanying financial statements. On November 30, 1996, the assets of Heiner's Bakery, Inc., of Huntington, W.Va., were purchased for cash. Heiner's is a wholesale manufacturer and distributor of branded bread, buns and rolls with marketing territory throughout West Virginia and in portions of Ohio and Kentucky. This acquisition has also been accounted for using the purchase method. Accordingly, the results of operations are reflected in the Consolidated Statement of Earnings from the date of acquisition. The acquisition agreement contains a provision for additional payments over the two years subsequent to the transaction date if certain minimum earnings requirements are met. The amounts earned in fiscal 1999 and 1998 under the terms of the agreement were recorded as an increase in the excess of the total acquisition cost over the fair value of the net assets acquired. Had the purchase taken place on March 27, 1996, unaudited pro forma consolidated net sales, net income and earnings per diluted share for fiscal 1997 would have been $1,691.1 million, $17.7 million and $0.43, respectively. The Earthgrains Company 1999 Annual Report 32 Pro forma data do not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and such data are not intended to be a projection of future results. NOTE 5. PROVISIONS FOR RESTRUCTURING AND CONSOLIDATION During fiscal 1997, the Company recorded a provision of $12.7 million primarily in conjunction with closing one bakery and one refrigerated dough plant. During fiscal 1999, provisions totaling $28.0 million were recorded in conjunction with closing three bakeries, severance costs associated with the creation of a centralized Financial Shared Services Center in St. Louis, and for the restructuring of existing operations in Spain related to the fourth quarter acquisition of Reposteria Martinez Group. These provisions reflect costs of writing off certain fixed assets, employee severance benefits, and other related closing costs. In the case of plant closings, production was transferred to other facilities. Costs for the respective-year provisions are categorized as follows (in millions):
- ------------------------------------------------------ Fiscal Year 1999 1997 - ------------------------------------------------------ Noncash asset write-offs $ 3.0 $ 8.8 Other, primarily severance 25.0 3.9 - ------------------------------------------------------ $28.0 $12.7 ======================================================
Additionally, reserves have been established in conjunction with certain acquisitions for restructuring related to the acquiree's operations. During fiscal 1998, a reserve of $4.7 million was established in conjunction with the CooperSmith acquisition related to closure of certain of that company's plants. The reserve was primarily for severance and equipment removal and relocation. During fiscal 1999, reserves totaling $7.2 million were recorded primarily for severance relative to the Chevalier Servant and Reposteria Martinez Group acquisitions. In accordance with generally accepted accounting principles, these reserves were recorded as an increase to goodwill and no provision was recorded. The reserve balance at March 30, 1999 is comprised primarily of severance yet to be paid. A reconciliation of activity with respect to the Company's restructuring and consolidation is as follows (in millions): - ----------------------------------------------------- Balance, March 26, 1996 $ 15.4 Provision, 1997 12.7 Noncash asset write-offs (11.5) Cash payments associated with severance (1.1) Other miscellaneous items, net (0.1) - ----------------------------------------------------- Ending balance, March 25, 1997 15.4 Acquisition-related reserve 4.7 Noncash asset write-offs (11.3) Cash payments associated with severance (1.8) Other miscellaneous items, net (0.9) - ----------------------------------------------------- Ending balance, March 31, 1998 6.1 Provision, 1999 28.0 Acquisition-related reserves 7.2 Noncash asset write-offs (2.0) Cash payments associated with severance (5.8) Other miscellaneous items, net (1.1) - ----------------------------------------------------- ENDING BALANCE, MARCH 30, 1999 $ 32.4 =====================================================
NOTE 6. LONG-TERM DEBT Long-term debt is as follows (in millions):
- ---------------------------------------------------------------- March 30, March 31, 1999 1998 - ---------------------------------------------------------------- Revolving Credit Facility due 2002 $355.3 $265.2 Euro Revolving Credit Facility 3.25%, due 2004 8.6 -- Reposteria Martinez Notes Payable, 3.3% wtd. avg., due 2000-2003 6.0 -- Eurodough Notes Payable, 5.3% wtd. avg., due 2000-2007 2.7 -- Industrial Development Bonds, 9.5%, due 2001 1.5 1.5 Note Payable, 9.375%, due 1998 -- 0.9 - ---------------------------------------------------------------- 374.1 267.6 Less current portion 4.8 0.9 - ---------------------------------------------------------------- $369.3 $266.7 ================================================================
Concurrent with the Distribution, the Company used borrowings under a $215 million unsecured revolving credit facility with several financial institutions to pay $80 million to Anheuser-Busch as a settlement on its net intercompany payable, to fund working capital needs and for general corporate purposes. During fiscal 1998, the credit agreement was increased to $450 million with a maturity date of September 30, 2002, and interest on the borrowings is based on the rate for Eurodollar deposits plus a margin. Including the margin, the one month borrowing rate was 5.15% at March 30, 1999. As of March 30, 1999, $65.8 million in letters of credit were also outstanding under this credit facility, The Earthgrains Company 1999 Annual Report 33 principally related to self-insurance requirements. During the current year, three separate lines of credit for $25 million each, due in 1999, and a 27 million Euro Revolving Credit Facility, due in 2004, were added to increase the Company's borrowing flexibility. These credit facilities also contain customary covenants, including maintenance of an interest coverage ratio and certain other restrictions. The three additional components of long-term debt included in the table for fiscal 1999 relate to acquisitions completed during the year. NOTE 7. RETIREMENT BENEFITS PENSION PLANS Net pension expense for single-employer defined benefit plans was comprised of the following for the three fiscal years (in millions):
- ----------------------------------------------------------------------- Fiscal Year 1999 1998 1997 - ----------------------------------------------------------------------- Service cost (benefits earned during the year) $ 4.4 $ 3.2 $ 2.8 Interest cost on projected benefit obligation 1.4 1.1 0.9 Expected return on assets (1.0) (0.6) (0.2) Amortization of actuarial gains, prior service cost, and the excess of market value of plan assets over projected benefit obligation at January 1, 1986 1.0 1.0 1.1 - ----------------------------------------------------------------------- Net pension expense $ 5.8 $ 4.7 $ 4.6 =======================================================================
The key actuarial assumptions used in determining pension expense for single-employer defined benefit plans were as follows for each of the three fiscal years:
- ------------------------------------------------------------- Fiscal Year 1999 1998 1997 - ------------------------------------------------------------- Discount rate 7.25% 7.5% 7.5% Long-term rate of return on plan assets 10.0% 10.0% 10.0% Weighted-average rate of compensation increase 4.5% 4.5% 4.5%
The actual gain on pension assets was $1.1 million in fiscal 1999, $0.6 million in fiscal 1998, and $0 in fiscal 1997. The following tables set forth a reconciliation of funded status to pension liability of all Company single-employer defined benefit plans for the two years ended (in millions):
- ----------------------------------------------------------------------- March 30, March 31, 1999 1998 - ----------------------------------------------------------------------- Funded status -- Plan assets (less than) projected benefit obligation (PBO) $(12.3) $(10.4) Unamortized excess of market value of plan assets over projected benefit obligation at January 1, 1986, being amortized over 15 years (0.4) (0.4) Unrecognized net actuarial gains 2.7 1.1 Unrecognized prior service costs 5.4 6.4 - ----------------------------------------------------------------------- Accrued pension liability $ (4.6) $ (3.3) =======================================================================
The assumptions used in determining the funded status of these plans were as follows:
- ------------------------------------------------- 1999 1998 - ------------------------------------------------- Discount rate 7.0% 7.25% Weighted-average rate of compensation increase 4.5% 4.5%
The following tables summarize the change in the projected benefit obligation and the change in fair market value of plan assets for all company single-employer defined benefit pension plans for the years ended (in millions): CHANGE IN PROJECTED BENEFIT OBLIGATION (PBO):
- -------------------------------------------------- March 30, March 31, 1999 1998 - -------------------------------------------------- PBO, beginning of year $19.9 $14.7 Service cost 4.4 3.2 Interest cost 1.4 1.1 Actuarial loss 1.8 1.3 Benefits paid (0.5) (0.4) - -------------------------------------------------- PBO, end of year $27.0 $19.9 ==================================================
CHANGE IN PLAN ASSETS (CONSISTING PRIMARILY OF CORPORATE EQUITY SECURITIES AND PUBLICLY TRADED BONDS):
- ----------------------------------------------------------------- March 30, March 31, 1999 1998 - ----------------------------------------------------------------- Fair market value, beginning of year $ 9.5 $ 6.3 Actual return on plan assets 1.1 0.6 Employer contributions 4.6 3.0 Benefits paid (0.5) (0.4) - ----------------------------------------------------------------- Fair market value, end of year $14.7 $ 9.5 =================================================================
The Earthgrains Company 1999 Annual Report 34 Contributions to multiple and multi-employer plans in which the Company participates are determined in accordance with the provisions of negotiated labor contracts. Contributions to these plans were $24.9 million, $24.4 million, and $23.2 million for fiscal 1999, 1998, and 1997, respectively. POSTRETIREMENT BENEFITS The Company provides certain health care and life insurance benefits to eligible retired employees. Salaried and bargaining unit employees generally become eligible for retiree health care benefits after reaching age 55 with 15 years of service. The following table sets forth the accumulated postretirement benefit obligation (APBO) and the total postretirement benefit liability for all single-employer defined benefit plans in the Company's Consolidated Balance Sheets as of (in millions):
- ------------------------------------------------------------------- March 30, March 31, 1999 1998 - ------------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO) $ 72.0 $ 82.3 Unrecognized prior service benefits 35.2 40.2 Unrecognized net actuarial gains (losses) 13.5 1.0 - ------------------------------------------------------------------- Total postretirement benefit liabilities $120.7 $123.5 ===================================================================
As of March 30, 1999, and March 31, 1998, $114.0 million and $115.3 million of this obligation was classified as a long-term liability, respectively, and $6.7 million and $8.2 million was classified as a current liability, respectively. Net periodic postretirement benefits expense for single-employer defined benefit plans for the following periods was comprised of the following (in millions):
- ----------------------------------------------------------------------- Fiscal Year 1999 1998 1997 - ----------------------------------------------------------------------- Service cost (benefits attributed to service during the year) $ 3.4 $ 4.2 $ 3.3 Interest cost on accumulated postretirement benefit obligation 6.1 5.9 6.7 Amortization of prior service benefit (4.9) (4.7) (6.4) Amortization of actuarial gain (0.8) (1.9) -- - ----------------------------------------------------------------------- Net periodic postretirement benefits expense $ 3.8 $ 3.5 $ 3.6 =======================================================================
In measuring the APBO, the medical indemnity costs were assumed to increase 8.5% in fiscal year 1999, decreasing 0.5% per year to an ultimate rate of 5.0% in fiscal year 2006. Medicare Risk HMO costs were assumed to increase at 4.0% annually. The indemnity medical trend rate for fiscal years 1998 and 1997 were assumed to be 8.8% and 10.0%, respectively; the Medicare Risk HMO medical trend rate was an assumed 4.0%. The weighted average discount rate used in determining the APBO was 7.5% at March 30, 1999, and 8.0% at March 31, 1998. If the assumed health care cost trend rates were changed by 1%, the APBO as of the end of fiscal year 1999 would change by 9.1%, and the aggregate impact on the interest cost and service cost components of the net periodic postretirement benefit cost would also be an increase of 9.1%. NOTE 8. EMPLOYEE STOCK OWNERSHIP PLAN Substantially all domestic regular salaried and hourly employees are eligible for participation in the company-sponsored Employee Stock Ownership Plan (ESOP) that became effective July 1, 1996. The ESOP borrowed $16.8 million from the Company for a term of 10 years at an interest rate of 8.0% and used the proceeds to buy 2,052,456 shares of common stock from the Company. ESOP shares are being allocated to participants over the 10- year period, as contributions are made to the plan. At March 30, 1999, 477,856 shares have been allocated to participants. The ESOP cash contributions and ESOP expense accrued during the plan year are determined by several factors, including the market price and number of shares allocated to participants, ESOP debt service, dividends on unallocated shares and the Company's 401(k) matching contribution. Over the 10-year life of the ESOP, total expense recognized will equal the total cash contributions made by the Company. The ESOP is based on a June 30 plan year with cash contributions made monthly. Cash contributions and dividends on unallocated ESOP shares for fiscal 1999 and 1998 were $1.4 million and $0.2 million, and $1.7 million and $0.2 million, respectively. NOTE 9. STOCK OPTIONS AND RESTRICTED STOCK In connection with its spinoff from Anheuser-Busch, Earthgrains adopted and Anheuser-Busch, then the sole shareholder of the Company, approved The Earthgrains Company 1996 Stock Incentive Plan (the 1996 Incentive Plan). The 1996 Incentive Plan authorized the issuance of up to 4,520,000 shares of Earthgrains Common Stock pursuant to the grant of restricted stock and the exercise of incentive stock options, nonqualified stock options and stock appreciation rights. Grants under the 1996 Incentive Plan are made at the market price on the date of the grant. Options granted pursuant to the 1996 The Earthgrains Company 1999 Annual Report 35 Incentive Plan vest over a three-year period from the date of grant and, once vested, are generally exercisable over 10 years from the anniversary of the grant date. The plan also provides for the granting of stock appreciation rights (SARs) in tandem with stock options. The exercise of a SAR cancels the related option and the exercise of an option cancels the related SAR. At March 30, 1999, there were no SARs outstanding under the plan. Under the 1996 Incentive Plan, 666,204 restricted shares of Earthgrains Common Stock were issued to certain officers of the Company. Restricted share awards vest one-half each after 54 and 66 months following the date of the award. Compensation cost is recognized over the vesting period. No further shares of restricted stock are authorized under the 1996 Incentive Plan. The Company applies Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," in accounting for its stock option plans. Accordingly, because the grant price equals the market price on the date of grant, no compensation expense is recognized for stock option grants. Had compensation cost for the Company's stock options been determined based upon the fair value at the grant date consistent with the methodology prescribed under FAS 123, the Company's net income and earnings per share for the years ended March 30, 1999 and March 31, 1998 would have been affected as follows (in millions except shares, per grant and per share amounts):
- ---------------------------------------------------------------- Fiscal Year 1999 1998 - ---------------------------------------------------------------- Reported net income $38.0 $36.0 Pro forma net income $35.1 $33.6 Reported earnings per diluted share $0.89 $0.85 Pro forma earnings per diluted share $0.82 $0.80
The weighted-average fair value of options granted (which is amortized to expense over the option vesting period in determining the pro forma impact), is estimated on the date of grant using the Black-Scholes option- pricing model with the following assumptions:
- ---------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------- Risk-free interest rate 6.1% 6.3% Expected life of option 4 Yrs. 4 Yrs. Expected volatility of Earthgrains stock 34% 25% Expected dividend yield on Earthgrains stock 0.75% 0.75%
The weighted-average fair value of options granted during 1999 and 1998 is as follows:
- ---------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------- Fair value of each option granted $7.19 $6.32 Number of options granted 681,928 514,370 - ---------------------------------------------------------------------- Total fair value of all options granted $4.9 $3.3
In accordance with FAS 123, the weighted-average fair value of stock options granted is required to be based on a theoretical statistical model in accord with assumptions noted above. In actuality, because employee stock options do not trade on a secondary exchange, employees receive no benefit and derive no value from holding stock options under these plans without an increase in the market price of Earthgrains stock. Such an increase in stock price would benefit all stockholders. The following table summarizes the stock option transactions under the Earthgrains 1996 Incentive Plan:
- ------------------------------------------------------------------------- Wtd. Avg. Option Exercise Options Shares Price Exercisable - ------------------------------------------------------------------------- Outstanding, March 26, 1996 0 -- 0 Granted 3,318,580 $ 9.35 Exercised -- -- Cancelled 111,488 $ 7.66 - ------------------------------------------------------------------------- Outstanding, March 25, 1997 3,207,092 $ 9.40 0 Granted 514,370 $21.74 Exercised 212,672 $ 7.78 Cancelled 61,170 $ 9.98 - ------------------------------------------------------------------------- Outstanding, March 31, 1998 3,447,620 $11.33 977,750 Granted 681,928 $22.41 Exercised 405,086 $ 8.43 Cancelled 38,608 $15.10 - ------------------------------------------------------------------------- OUTSTANDING, MARCH 30, 1999 3,685,854 $13.66 1,001,309 =========================================================================
The following table summarizes information for options currently outstanding at March 30, 1999: - ----------------------------------------------------------------------- Options Outstanding - -----------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Range Remaining Exercise of Prices Number Life Price - ----------------------------------------------------------------------- $7-13 2,505,006 8 Yrs. $ 9.67 21 498,920 9 Yrs. 21.74 22 681,928 10 Yrs. 22.41 - ----------------------------------------------------------------------- $7-22 3,685,854 8.5 Yrs. $13.66
At March 30, 1999, 750,184 shares of Earthgrains Common Stock were available for future awards under the 1996 Incentive Plan. The plan provides for acceleration of exercisability of outstanding options and the vesting of restricted shares upon the occurrence of certain events relating to a change of control, merger, sale of assets or liquidation of the Company. The Earthgrains Company 1999 Annual Report 36 NOTE 10. CAPITAL AND PREFERRED STOCK On February 26, 1996, the Board of Directors of Anheuser-Busch declared a distribution (the Distribution) of one share of Earthgrains common stock, $.01 par value, for every 25 shares of Anheuser-Busch common stock outstanding. On March 26, 1996, Earthgrains was spun off from Anheuser- Busch, and 40,368,532 shares of Earthgrains Common Stock were distributed to Anheuser-Busch shareholders. Effective March 29, 1996, 4,520,000 shares were authorized for the issuance under the 1996 Stock Incentive Plan. Of those shares, 666,204 were issued as restricted share grants to certain Earthgrains Officers. Additionally, 2,052,456 shares were authorized for the Employee Stock Ownership Plan, activated on July 1, 1996, of which 477,856 shares have been allocated to participants. 19,200 shares have been granted as restricted shares and 22,601 shares issued as compensation to members of the Board of Directors. The Company's stock repurchase program authorizes the repurchase of up to 2 million shares of common stock. 894,900 shares have been repurchased into the treasury as of March 30, 1999. As of March 30, 1999, 42,851,851 shares of Earthgrains Common Stock were issued and outstanding. All share and per-share amounts have been adjusted to reflect the two-for-one common stock splits effective July 20, 1998 and July 28, 1997. During March 1999, the Company sold $10.0 million of mandatorily redeemable preferred stock in a wholly-owned subsidiary of Earthgrains. This preferred stock is presented as a Minority Interest between long-term debt and shareholders' equity. The Company authorized and issued 10,000 shares of preferred stock, which at any time on or after March 1, 2006, all (but not less than all) of the shares may be redeemed at the option of the Company, at the redemption price of $1,000 per share. On March 1, 2019, the Company shall redeem all of the then outstanding shares at the redemption price. During fiscal year 2000, the Company will begin paying dividends on this preferred stock at a LIBOR-based variable interest rate. Such dividends will be recorded as Minority Interest Expense, net of tax, below the income tax provision line. NOTE 11. INCOME TAXES The provision for income taxes consists of the following amounts for the periods ended (in millions):
- ----------------------------------------------------------------------- Fiscal Year 1999 1998 1997 - ----------------------------------------------------------------------- Current tax provision: Federal $20.1 $13.3 $ 2.0 State and foreign 3.8 4.2 2.8 - ----------------------------------------------------------------------- 23.9 17.5 4.8 - ----------------------------------------------------------------------- Deferred tax provision (benefit): Federal 3.1 2.6 (0.8) State and foreign (5.1) 4.1 2.5 - ----------------------------------------------------------------------- (2.0) 6.7 1.7 - ----------------------------------------------------------------------- Provision for income taxes $21.9 $24.2 $ 6.5 =======================================================================
The deferred tax assets and deferred tax liabilities as of the end of each period are comprised of the following (in millions):
- -------------------------------------------------------------------------- March 30, March 31, 1999 1998 - -------------------------------------------------------------------------- Deferred tax liabilities: Depreciation and property differences $ 143.5 $142.2 Deferred systems development costs 6.8 7.9 Pension plan 4.3 4.9 Other 16.4 13.2 - -------------------------------------------------------------------------- Deferred tax liabilities 171.0 168.2 - -------------------------------------------------------------------------- Deferred tax assets: Postretirement benefits other than pensions (44.0) (46.4) Self-insurance reserves (23.9) (21.7) Reserve for restructuring and consolidation (12.0) (1.9) Accrued liabilities (11.2) (11.7) Deductible goodwill (6.8) (8.7) Other (10.2) (8.7) - -------------------------------------------------------------------------- Deferred tax (assets) (108.1) (99.1) - -------------------------------------------------------------------------- Net deferred tax liabilities $ 62.9 $ 69.1 ==========================================================================
A reconciliation between the statutory rate and the effective rate is presented below:
- -------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------- Tax at statutory rate $21.0 $21.7 $ 7.9 State income taxes, net of federal benefit 1.0 1.4 -- Amortization of goodwill 3.0 2.0 1.9 Foreign tax credits and other (1.5) (1.6) (4.4) Benefit management program (2.0) -- -- Other, net 0.4 0.7 1.1 - -------------------------------------------------------------------------- Provision for income taxes $21.9 $24.2 $ 6.5 ==========================================================================
The Earthgrains Company 1999 Annual Report 37 NOTE 12. CASH FLOWS Supplemental information with respect to the Consolidated Statements of Cash Flows for each of the periods is presented below (in millions):
- -------------------------------------------------------------------------- Fiscal Year 1999 1998 1997 - -------------------------------------------------------------------------- Interest paid, net of capitalized interest $ 19.2 $ 6.4 $ 5.4 Income taxes paid 34.0 19.4 3.4 - -------------------------------------------------------------------------- Changes in noncash working capital, net of effect of acquisitions: Decrease (increase) in noncash current assets: Accounts receivable, net (9.2) 4.6 (2.9) Inventories, net (1.9) 1.9 2.1 Other current assets 8.2 (13.0) (0.3) Increase (decrease) in current liabilities: Accounts payable (21.2) 2.3 23.1 Accrued salaries, wages and benefits (2.9) (5.4) (2.1) Accrual for restructuring and consolidation (3.0) -- (12.5) Other current liabilities 11.1 (5.7) (14.3) - -------------------------------------------------------------------------- (Increase) in noncash working capital $(18.9) $(15.3) $ (6.9) ==========================================================================
NOTE 13. COMMITMENTS AND CONTINGENCIES The Company and certain of its subsidiaries are involved in certain claims and legal proceedings in which monetary damages and other relief are sought. These proceedings, arising in the normal course of business, are in varying stages and may proceed for protracted periods of time. Although it is impossible to predict the outcome of any legal proceeding, the Company believes that it has meritorious defenses or insurance coverage to meet the proceedings pending against it and that the outcome of such proceedings should not, individually or in the aggregate, have a material adverse effect on the results of operations or financial condition of the Company. The operations of Earthgrains, like those of similar businesses, are subject to various Federal, state and local laws and regulations with respect to environmental matters, including air and water quality, underground fuel storage tanks, and other regulations intended to protect public health and the environment. Earthgrains has been identified as a potentially responsible party ("PRP") at certain locations under the Comprehensive Environmental Responses, Compensation and Liability Act, and the Company may be required to share in the cost of cleanup with respect to two sites. Although it is difficult to quantify with certainty the financial impact of actions related to environmental matters, based on the information currently available it is management's opinion that the ultimate liability arising from such matters, taking into consideration established reserves, should not have a material effect on the Company's results of operations or financial position. Future rental commitments under noncancelable operating leases in effect as of the end of fiscal year 1999 were, in millions: 2000 - $12.6; 2001 - $9.8; 2002 - $6.5; 2003 - $4.3; 2004 - $3.1; thereafter - $1.9. NOTE 14. BUSINESS SEGMENTS In fiscal 1999, the Company adopted FAS 131, "Disclosures about Segments of an Enterprise and Related Information." The business segments of the Company are Bakery Products, which consists of the U.S. Bakery Products division and the European Bakery Products division, and Refrigerated Dough Products, which contains the U.S. Refrigerated Dough Products division and the European Refrigerated Dough Products division. Other amounts included in the results for fiscal 1998 and 1997 represent an operation disposed of during 1998. Summarized below is the Company's business segment information for 1999, 1998 and 1997 (in millions):
- -------------------------------------------------------------------------- Fiscal Year 1999 1998 1997 - -------------------------------------------------------------------------- INCOME STATEMENT INFORMATION NET SALES Bakery Products $1,632.7 $1,441.0 $1,382.1 Refrigerated Dough Products 292.5 276.4 278.5 Other -- 1.6 2.0 - -------------------------------------------------------------------------- Total $1,925.2 $1,719.0 $1,662.6 ========================================================================== DEPRECIATION & AMORTIZATION Bakery Products $ 77.8 $60.7 $59.5 Refrigerated Dough Products 13.0 12.2 13.3 Corporate 11.6 11.6 11.6 Other -- 0.1 0.1 - -------------------------------------------------------------------------- Total $102.4 $84.6 $84.5 ========================================================================== OPERATING INCOME Bakery Products $ 48.8 $ 53.1 $ 34.4 Refrigerated Dough Products 36.0 25.5 5.2 Corporate (11.6) (11.6) (11.6) Other -- 0.2 (0.4) - -------------------------------------------------------------------------- Total $ 73.2 $ 67.2 $ 27.6 ========================================================================== The Earthgrains Company 1999 Annual Report 38 - -------------------------------------------------------------------------- Fiscal Year 1999 1998 1997 - -------------------------------------------------------------------------- BALANCE SHEET INFORMATION TOTAL ASSETS Bakery Products $1,111.5 $ 918.0 $ 669.0 Refrigerated Dough Products 162.8 147.5 161.2 Corporate 317.3 328.8 340.4 Other -- -- 1.5 - -------------------------------------------------------------------------- Total $1,591.6 $1,394.3 $1,172.1 ========================================================================== CAPITAL EXPENDITURES Bakery Products $71.1 $69.0 $57.4 Refrigerated Dough Products 15.4 10.6 13.8 - -------------------------------------------------------------------------- Total $86.5 $79.6 $71.2 ========================================================================== Amounts represent purchase accounting valuation in conjunction with the acquisition of the Company by Anheuser-Busch in 1982 and the related depreciation and amortization thereon. 1999 operating income was reduced by the $28.0 million pre-tax provision for restructuring and consolidation. This amount related to the Bakery Products segment. 1997 operating income was reduced by the $12.7 million pre-tax provision for restructuring and consolidation. $1.0 million of this amount related to Bakery Products, $10.9 million related to Refrigerated Dough Products and $0.8 million related to Other.
NOTE 15. GEOGRAPHIC INFORMATION The Company operates in the United States and Europe. The foreign information below is comprised primarily of the Company's Spanish subsidiary.
- -------------------------------------------------------------------------- (In millions) 1999 1998 1997 - -------------------------------------------------------------------------- NET SALES Domestic $1,611.1 $1,400.4 $1,297.1 Foreign 314.1 318.6 365.5 - -------------------------------------------------------------------------- Consolidated Total $1,925.2 $1,719.0 $1,662.6 ========================================================================== OPERATING INCOME (LOSS) Domestic $79.2 $51.7 $ 8.0 Foreign (6.0) 15.5 19.6 - -------------------------------------------------------------------------- Consolidated Total $73.2 $67.2 $27.6 ========================================================================== IDENTIFIABLE ASSETS Domestic $ 852.5 $ 829.5 $ 775.1 Foreign 339.3 253.8 257.0 - -------------------------------------------------------------------------- Consolidated Total $1,191.8 $1,083.3 $1,032.1 ========================================================================== 1999 operating income was reduced by the $28.0 million pre-tax provision for restructuring and consolidation. 1997 operating income was reduced by the $12.7 million pre-tax provision for restructuring and consolidation.
NOTE 16. SUPPLEMENTAL BALANCE SHEET INFORMATION
- ----------------------------------------------------------------------- March 30, March 31, (In millions) 1999 1998 - ----------------------------------------------------------------------- Receivables: Trade $190.1 $162.7 Allowance for doubtful accounts 5.6 6.2 - ----------------------------------------------------------------------- $184.5 $156.5 ======================================================================= Inventories: Raw materials $59.8 $53.5 Finished goods 17.9 15.4 - ----------------------------------------------------------------------- $77.7 $68.9 ======================================================================= Plant and equipment: Land $ 66.5 $ 68.9 Buildings 461.3 459.6 Machinery and equipment 860.7 757.7 Construction in progress 31.9 51.8 - ----------------------------------------------------------------------- 1,420.4 1,338.0 Less accumulated depreciation (659.3) (616.0) - ----------------------------------------------------------------------- $ 761.1 $ 722.0 ======================================================================= Accrued salaries, wages and benefits: Accrued payroll $25.5 $23.0 Accrued vacation 17.8 16.6 Accrued group benefits 13.6 16.9 - ----------------------------------------------------------------------- $56.9 $56.5 ======================================================================= Other current liabilities: Current portion of self-insurance reserves $14.2 $18.6 Accrued taxes, other than income taxes 11.0 8.1 Other items 42.6 12.6 - ----------------------------------------------------------------------- $67.8 $39.3 ======================================================================= Other noncurrent liabilities: Self-insurance reserves $40.0 $39.3 Other items 33.6 32.9 - ----------------------------------------------------------------------- $73.6 $72.2 =======================================================================
- ----------------------------------------------------------------------- Fiscal Year 1999 1998 1997 - ----------------------------------------------------------------------- Allowance for doubtful accounts Balance, beginning of period $ 6.2 $ 6.0 $ 6.8 Provision charged to expense 0.9 0.8 0.2 Write-offs, less recoveries (1.5) (0.6) (1.0) - ----------------------------------------------------------------------- Balance, end of period $ 5.6 $ 6.2 $ 6.0 =======================================================================
The Earthgrains Company 1999 Annual Report 39 NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for each of the fiscal years appear below (each quarter represents a period of twelve weeks except for the December quarter, which includes sixteen weeks):
- ----------------------------------------------------------------------------------------------------------------------------------- Selected Quarterly Financial Data (Unaudited) --------------------------------------------------------------------------------------- June September December March Fiscal (In millions, except per share data) Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------------------------------------------------------- 1999 Net sales $433.0 $442.4 $609.2 $440.6 $1,925.2 Gross profit 188.9 192.4 261.3 190.2 832.8 Net income 10.9 10.0 17.0 0.1 38.0 Basic earnings per share: Net earnings per share $ 0.27 $ 0.25 $ 0.42 $ 0.00 $ 0.93 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Net earnings per share $ 0.26 $ 0.23 $ 0.40 $ 0.00 $ 0.89 =================================================================================================================================== 1998 Net sales $377.4 $382.5 $514.7 $444.4 $1,719.0 Gross profit 162.7 164.0 218.9 191.8 737.4 Income before cumulative effect of accounting change 6.9 9.3 14.1 7.5 37.8 Cumulative effect of accounting change -- -- 1.8 -- 1.8 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 6.9 9.3 12.3 7.5 36.0 - ----------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Earnings before cumulative effect of accounting change $ 0.17 $ 0.23 $ 0.34 $ 0.19 $ 0.93 Cumulative effect of accounting change -- -- 0.04 -- 0.04 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings per share $ 0.17 $ 0.23 $ 0.30 $ 0.19 $ 0.89 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Earnings before cumulative effect of accounting change $ 0.17 $ 0.22 $ 0.33 $ 0.18 $ 0.89 Cumulative effect of accounting change -- -- 0.04 -- 0.04 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings per share $ 0.17 $ 0.22 $ 0.29 $ 0.18 $ 0.85 =================================================================================================================================== Quarter's results include a $5.8 million pre-tax provision for restructuring and consolidation and severance costs related to creation of a Financial Shared Services Center. Quarter's results include a $2.6 million pre-tax provision for restructuring and consolidation. Quarter's results include a $19.6 million pre-tax provision for restructuring and consolidation and a $2.0 million one-time tax benefit. Earnings per share is computed independently for each of the periods presented, therefore, the sum of the earnings per-share amounts for the quarters may not equal the total for the year. Prior-year earnings per-share amounts have been restated to reflect the two-for-one stock split effective July 20, 1998. See Note 3 in the Notes to the Consolidated Financial Statements describing the required change in accounting principle in the third quarter of fiscal 1998. March 1998 quarter includes 13 weeks. Fiscal 1998 contains 53 weeks. - ------------------------------------------------------------------------------------------------------------------------------------
NOTE 18. SUBSEQUENT EVENT On April 20, 1999, Earthgrains issued $150 million in 10-year, 6.5% fixed-rate senior debentures from a shelf registration statement filed with the Securities and Exchange Commission authorizing issuance of up to $250 million in debt securities, which became effective in April 1999. Proceeds from this issuance were used to repay a portion of outstanding indebtedness under the Company's Revolving Credit Facility due in 2002. The interest rate swap agreement, described in Note 2, was terminated in conjunction with this issuance. The Earthgrains Company 1999 Annual Report FIVE-YEAR FINANCIAL HIGHLIGHTS 40 - ------------------------------------------------------------------------------------------------------------------------------------
For the twelve Fiscal Years weeks ended Fiscal Years -------------------------------------- March 26, ------------------------------- (In millions, except per-share data) 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF EARNINGS DATA: Net sales $1,925.2 $1,719.0 $1,662.6 $ 367.7 $1,664.6 $1,720.5 Cost of products sold 1,092.4 981.6 988.8 228.8 1,034.7 1,071.0 - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 832.8 737.4 673.8 138.9 629.9 649.5 Marketing, distribution and administrative expenses 731.6 670.2 633.5 146.0 627.5 623.9 Provision for restructuring and consolidation, net 28.0 -- 12.7 -- 9.1 -- - ------------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) 73.2 67.2 27.6 (7.1) (6.7) 25.6 Other income and expenses: Interest (expense) (19.5) (8.2) (6.3) (0.1) (1.9) (1.9) Other income (expense), net 6.2 3.0 1.4 (0.1) 4.7 2.6 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 59.9 62.0 22.7 (7.3) (3.9) 26.3 Provision (benefit) for income taxes 21.9 24.2 6.5 (2.2) 2.7 15.0 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) before cumulative effect of accounting change 38.0 37.8 16.2 (5.1) (6.6) 11.3 Cumulative effect of change in accounting principle, net of tax -- 1.8 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 38.0 $ 36.0 $ 16.2 $ (5.1) $ (6.6) $ 11.3 ==================================================================================================================================== EARNINGS PER SHARE: Basic Earnings before cumulative effect of change in accounting principle $ 0.93 $ 0.93 $ 0.40 Cumulative effect of accounting change -- 0.04 -- - --------------------------------------------------------------------------------- Net earnings per share $ 0.93 $ 0.89 $ 0.40 ================================================================================= Weighted average shares outstanding 40.7 40.7 40.6 ================================================================================= Diluted Earnings before cumulative effect of change in accounting principle $ 0.89 $ 0.89 $ 0.39 Cumulative effect of accounting change -- 0.04 -- - --------------------------------------------------------------------------------- Net earnings per share $ 0.89 $ 0.85 $ 0.39 ================================================================================= Weighted average shares outstanding 42.7 42.5 41.3 ================================================================================= BALANCE SHEET DATA: Working capital $ 102.1 $ 92.3 $ 80.6 $ 74.0 $ 63.1 $ 69.3 Current ratio 1.4x 1.4x 1.4x 1.4x 1.3x 1.4x Plant and equipment, net $ 761.1 $ 722.0 $ 706.7 $ 723.2 $ 713.6 $ 706.2 Long-term debt $ 369.3 $ 266.7 $ 103.0 $ 92.6 $ 1.5 $ 1.6 Deferred income taxes, net $ 62.9 $ 69.1 $ 73.9 $ 72.2 $ 109.4 $ 106.9 Anheuser-Busch equity investment $ -- $ -- $ -- $ 582.1 $ 701.3 $ 684.3 Shareholders' equity $ 639.4 $ 606.6 $ 582.4 $ -- $ -- $ -- Total assets $1,591.6 $1,394.3 $1,172.1 $1,177.6 $1,197.2 $1,177.2 - ------------------------------------------------------------------------------------------------------------------------------------ Earthgrains was a wholly-owned subsidiary of Anheuser-Busch Companies, Inc., until March 27, 1996. Accordingly, statements for prior periods do not include costs associated with being an independent public company. Fiscal years 1998 and 1994 contain 53 weeks. See Footnote 3 in the Notes to the Consolidated Financial Statements describing the required change in accounting principle in the third quarter of fiscal 1998. Reflects the effect of the provision for restructuring and consolidation and a one-time tax benefit. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Note 5 in the Notes to the Consolidated Financial Statements. Reflects the effect of the provision for restructuring and consolidation and one-time Spanish tax incentives and credits. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Note 5 in the Notes to the Consolidated Financial Statements. Reflects the effect of the provision for restructuring and consolidation. Prior-year shares and per-share amounts have been restated to reflect the two-for-one stock splits effective July 20, 1998 and July 28, 1997.
The Earthgrains Company 1999 Annual Report 41 RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of The Earthgrains Company is responsible for the preparation and integrity of the consolidated financial statements appearing in this annual report. The financial statements were prepared in conformity with generally accepted accounting principles appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates. We are responsible for maintaining a system of internal accounting controls and procedures which we believe are adequate to provide reasonable assurance, at an appropriate cost/benefit relationship, that assets are safeguarded against loss from unauthorized use or disposition and financial records provide a reliable basis for preparation of the financial statements. The internal accounting control system is augmented by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written Code of Business Conduct adopted by our Company's Board of Directors, applicable to all management employees of our Company. The Audit and Finance Committee of our Company's Board of Directors, composed solely of directors who are not officers of our Company, meets with the independent auditors, management and internal auditors periodically to discuss internal accounting controls and auditing and financial reporting matters. The Committee reviews with the independent auditors the scope and results of the audit effort. The Committee also meets with the independent auditors and the chief internal auditor without management present to ensure that the independent auditors and the chief internal auditor have free access to the Committee. PricewaterhouseCoopers LLP is engaged to audit the consolidated financial statements of The Earthgrains Company and conduct such tests and related procedures as it deems necessary in conformity with generally accepted auditing standards. The opinion of the independent auditors, based upon their audits of the consolidated financial statements, is shown below. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of The Earthgrains Company In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of cash flows, and of shareholders' equity present fairly, in all material respects, the financial position of The Earthgrains Company at March 30, 1999 and March 31, 1998, and the results of its operations and its cash flows for the fiscal years ended March 30, 1999, March 31, 1998, and March 25, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 3 to the financial statements, the Company changed its method of accounting for business process re-engineering costs in fiscal year 1998. /s/ Pricewaterhousecoopers LLP PricewaterhouseCoopers LLP St. Louis, Missouri April 29, 1999 The Earthgrains Company 1999 Annual Report 43 QUARTERLY COMMON STOCK PRICE (UNAUDITED) RANGES AND DIVIDENDS The Earthgrains Company common stock is listed and traded on the New York Stock Exchange under the ticker symbol "EGR." The table below presents the high and low market for the stock and per-share cash dividend information for each quarter of fiscal 1999.
- ----------------------------------------------------------------- FISCAL 1999 High Low Dividends - ----------------------------------------------------------------- June Quarter $30 1/8 $21 7/16 $.025 September Quarter $35 9/0 $26 3/4 .04 December Quarter $37 1/4 $28 11/16 .04 March Quarter $32 1/4 $20 1/2 .04
The Earthgrains Company 1999 Annual Report EX-21 7 SUBSIDIARIES OF THE EARTHGRAINS COMPANY SUBSIDIARIES OF THE EARTHGRAINS COMPANY
NAME PLACE OF INCORPORATION (DOING BUSINESS AS NAME[S]) OR FORMATION Earthgrains Baking Companies, Inc. Delaware Earthgrains International Holdings, Inc. Delaware EGR Resources, Inc. Delaware EGR Benefits Management, Inc. Delaware Earthgrains of West Virginia, L.L.C. Delaware (Heiner's Bakery) Cooper Smith, Inc. Georgia (Specialty Baking Company; Smith's Bakery; Kern's Bakeries; American Bread Company; Waldensian Bakeries) EGR Texas General Partner, Inc. Delaware EGR Texas Limited Partner, Inc. Delaware EGR International, Inc. Delaware Earthgrains Refrigerated Dough Products, L.P. Texas Bimbo, S.A. Spain EuroDough, S.A.R.L. France Earthgrains European Holdings, C.V. Holland Catdes, S.A. Spain Pimad, S.A. Spain Bimbo-Produtos Alimentares, Limitada Portugal Supan, S.A. Spain Bimbo France, S.A.R.L. France EuroVita, S.A.S. France EuroRol, S.A.S. France Euro Maintenance et Hygiene, S.A.R.L. France EuroGourmet, S.A.R.L. France Earthgrains European Investments, B.V. Holland SUBSIDIARIES OF THE EARTHGRAINS COMPANY, CONTINUED Earthgrains Iberian Investments, S.L. Spain Panaderias Unificadas Santaderinas, S.A. Spain Reposteria Martinez, S.A. Spain Bolleria Gusten, S.L. Spain Recartran, S.L. Spain Seleccion Reposteria, S.L. Spain Reposteria Martinez Canarias, S.L. Spain Patisserie Martinez, S.A.R.L. France Marticake de Portugal Produtos de Pasteleria e Confeitaria, S.A. Portugal
EX-23.1 8 CONSENT OF EXPERT CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-2858, 333-2636, and 333-37483) of The Earthgrains Company of our report dated April 29, 1999 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP St. Louis, Missouri June 28, 1999 EX-23.2 9 CONSENT OF EXPERT CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-74267) of The Earthgrains Company of our report dated April 29, 1999 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP St. Louis, Missouri June 28, 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the Company's consolidated financial statements for the fifty-two weeks ended March 30, 1999 included in this report on Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS MAR-30-1999 APR-01-1998 MAR-30-1999 53,100 0 190,100 5,600 77,700 384,700 1,420,400 659,300 1,591,600 282,600 1,500 400 0 0 639,000 1,591,600 1,925,200 1,925,200 1,092,400 1,092,400 0 900 19,500 59,900 21,900 38,000 0 0 0 38,000 0.93 0.89 Footnote to electronic filing only: as presented, data is rounded to the nearest $100 except for per share data.
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