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This prospectus supplement relates to an effective registration statement under
the Securities Act of 1933, and is subject to completion or amendment.
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Subject to Completion dated April 9, 1999
Prospectus Supplement
(To Prospectus dated April 8, 1999)
EARTHGRAINS(R)
[GRAPHIC OMITTED]
$150,000,000
% Notes due , 2009
Issue price: %
Interest payable and
The Notes will mature on ______________, 2009. Interest will accrue from
________________, 1999. We will not have the right to redeem the Notes prior to
their scheduled maturity. We will issue the Notes in minimum denominations of
$1,000 increased in multiples of $1,000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Notes or passed upon the adequacy
or accuracy of this prospectus supplement or the prospectus. Any representation
to the contrary is a criminal offense.
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Price to Discounts and Proceeds to
Public Commissions Earthgrains
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Per Note % % %
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Total $ $ $
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We do not intend to apply for listing of the Notes on any national securities
exchange. Currently, there is no public market for the Notes.
We expect that delivery of the Notes will be made to investors on or about
___________, 1999.
J.P. Morgan & Co.
Banc One Capital Markets, Inc.
Chase Securities Inc.
NationsBanc Montgomery Securities LLC
Warburg Dillon Read LLC
April , 1999
<PAGE>
You should only rely on the information contained or incorporated by
reference in this prospectus supplement and the prospectus. We have not, and the
underwriters have not, authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the underwriters are not, making an
offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in this
prospectus supplement and the prospectus, as well as information we previously
filed with the Securities and Exchange Commission and incorporated by reference,
is accurate as of the date on the front cover of this prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
TABLE OF CONTENTS
Prospectus Supplement
The Earthgrains Company............................................S-3
Recent Developments................................................S-7
Selected Financial Information.....................................S-8
Capitalization.....................................................S-10
Use of Proceeds....................................................S-10
Management's Discussion and Analysis of Results
of Operations and Financial Condition............................S-11
40 Weeks Ended January 5, 1999..................................S-11
Fiscal Year Ended March 31, 1998................................S-12
The Notes..........................................................S-17
Underwriting.......................................................S-18
Legal Counsel......................................................S-18
Prospectus
Table of Contents ................................................. 2
Where You Can Find More Information ............................... 2
Risk Factors ...................................................... 3
Information About Earthgrains ..................................... 5
Use of Proceeds.................................................... 6
The Debt Securities ............................................... 6
Book-Entry Debt Securities......................................... 11
Ratio of Earnings to Fixed Charges ................................ 12
Stock Split ....................................................... 12
Plan of Distribution .............................................. 13
Legal Opinion ..................................................... 13
Experts ........................................................... 13
S-2
<PAGE>
THE EARTHGRAINS COMPANY
Earthgrains Overview
Earthgrains is an international manufacturer, distributor and consumer
marketer of packaged fresh bread and baked goods and refrigerated dough
products.
Our origins date back to 1925 when we began operations with one bakery.
Anheuser-Busch Companies, Inc. acquired Earthgrains (then a publicly-traded
company named Campbell Taggart, Inc.) in 1982. We again became an independent,
publicly-traded company on March 26, 1996, when Anheuser-Busch distributed 100%
of the shares of Earthgrains to its shareholders in a spin-off. Earthgrains
common stock is listed and traded on the New York Stock Exchange under the
symbol "EGR".
Our operations are divided into two principal businesses: Bakery Products
and Refrigerated Dough Products. Our 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 and snack cakes in Spain and Portugal. Our
Refrigerated Dough Products business manufactures many different refrigerated
dough products in the United States, including biscuits, dinner rolls, sweet
rolls, danishes, cookie dough, cookies, crescent rolls, breadsticks, cinnamon
rolls, pizza crust and pie crusts, as well as shelf-stable toaster pastries. Our
Refrigerated Dough Products business also 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
We are one of the largest packaged bread and baked goods producers in the
United States, one of the largest packaged branded fresh-baked sliced bread,
buns and rolls producers in Spain and one of the largest packaged branded
fresh-baked sliced bread producers in Portugal. Based on independent market
data, for the 52-week period ended February 14, 1999, we were the overall dollar
market share leader in the United States in supermarket sales for branded
packaged fresh-baked bread, buns and rolls (excluding licensed brands) in the
geographic markets in which we operate, with a dollar market share of
approximately 17.3%. Our nearest competitor had a dollar market share of 11.9%
for these same products in the same market areas for the comparable period.
Also, based on independent market data, we believe that our European baking
subsidiary is the dollar market share leader in supermarket sales of branded
packaged fresh-baked bread, buns and rolls in Spain, and is second in dollar
market share for branded packaged fresh-baked sliced bread in Portugal.
United States Operations
Our Bakery Products business operates 43 bakeries in the United States. Of
those bakeries, 39 distribute products throughout the south, southeast,
southwest and midwest United States, and in northern and central California,
through approximately 3,300 company-owned direct-store delivery routes covering
approximately 40% of the United States population. The markets served are
organized into seven regions which include these 39 bakeries and 21 sales zones.
Our other four bakeries make products including hearth breads, shelf-stable
bagels, croissants, breadsticks, frozen dough products and snack cakes which are
distributed through our company-owned route system or sold directly to major
food-service customers.
In the United States, our Bakery Products business sells branded baked
goods in the popular, premium and superpremium categories, including white and
wheat breads, buns and rolls, specialty hearth-baked breads and rolls,
shelf-stable bagels and snack cakes.
Our primary company brands are:
o Popular Category: We manufacture popular white breads, buns and rolls
under the Colonial(TM), Rainbo(R), IronKids(R), Heiner's(TM),
Kern's(TM), Waldensian Heritage(R) and Bost's(R) brand names; and
snack cakes under the Break Cake(TM) brand.
S-3
<PAGE>
o Premium Category: We market premium wheat and soft variety breads
under the Grant's Farm(R), Smith's(TM) and Country Recipe(R) brand
names.
o Superpremium Category: We sell specialty breads, bagels and other
bakery products under the Earth Grains(R), San Luis Sourdough(R) and
Cooper's Mill(R) brand names.
We also sell products in the United States under the licensed brands
Sunbeam(R), Roman Meal(R), Country Hearth(R) and Sun Maid(R). Branded sales
(including licensed brands) for the Bakery Products business represented
approximately 80.4% of our net sales in the United States during the fiscal
quarter ended January 5, 1999. We also manufacture similar fresh-baked goods
under store brands (private label) for certain major retail customers.
Our operational strategy for our Bakery Products business in the United
States involves a number of different components. We intend to improve category
growth and service through brand development, new products and customer
partnering. We also intend to create a competitive advantage through investments
in technology that relate to category management, scan-based trading and new
hand-held computers for route salesmen. Scan-based trading allows us to deliver
products to our customers without check-in at the customer stores and with
expanded delivery time windows. The retailer pays us based on when our products
are sold to consumers at the point of sale. We believe that this improves route
productivity and fleet utilization due to the elimination of product check-in
and widening of delivery time windows, and also allows for improved customer
service by allowing more time for product merchandising activities at customers'
retail stores.
We will also continue to capitalize on opportunities to produce further
cost reductions and to improve service to customers. In this regard, our areas
of focus include:
o reducing the amounts of stale products;
o controlling overuse of ingredients and raw materials in our production
process;
o continuing to manage controllable manufacturing expenses and directing
capital expenditures to lower operating costs;
o improving the productivity of our selling, distribution and
administrative activities;
o implementing integrated SAP business applications software to
reorganize and centralize certain financial functions and to reduce
administrative expenses.
Furthermore, we intend to integrate businesses which we acquire to achieve
synergies and improve our competitiveness while offering improved products and
services to customers and consumers.
European Operations
Our European baking subsidiary, Bimbo S.A., which is headquartered in
Barcelona, Spain, was founded in 1964. Earthgrains acquired Bimbo in 1971. Bimbo
introduced American-style sliced bread in Spain, and as noted above, is a market
leader in Spain in supermarket sales of packaged branded fresh-baked sliced
bread, buns and rolls and is ranked second in Portugal in supermarket sales of
packaged branded fresh-baked sliced bread. Bimbo also makes snack cakes and
other fresh-baked sweet goods. Approximately 90% of Bimbo's sales come from
branded products, consisting primarily of Bimbo(R) brand white breads and
Silueta(R) brand wheat breads. The March 1999 acquisition of the Reposteria
Martinez Group in Spain, described under "Recent Developments" on page S-7,
makes Bimbo the branded market share leader in Spain in the packaged fresh-baked
sweet goods segments of cake and morning goods.
Including the two bakeries acquired from Reposteria Martinez, Bimbo
operates ten bakeries in Spain and completed construction in 1998 of a bakery in
Portugal which is now operational. It markets and distributes branded products
through direct-store delivery routes in Spain and in Portugal. Bimbo also
operates a separate store-brand (private label) bread and bun business through a
subsidiary in Spain.
Bimbo is embarking on several improvement initiatives, including
development of new products, reorganization of distribution operations,
implementation of information technology, enhancing customer partnering efforts,
S-4
<PAGE>
and taking advantage of consolidation opportunities in other packaged
fresh-baked products. During 1998, Bimbo introduced a line of brioche products
under the Madame Brioche(R) brand and has launched a product line of fresh-baked
sliced bread targeted to adults under the Semilla de Oro(R) label. In addition,
our Bakery Products business is reorganizing and restructuring its sales and
distribution system in Spain to adapt to the consolidating retail environment
and to improve cost-effectiveness. Bimbo is also implementing SAP business
application software to reorganize and centralize certain financial functions
and to reduce administrative costs. SAP will also complement the existing
information system to improve the quality and availability of data for better
decision making.
Refrigerated Dough Products
Overview
Our Refrigerated Dough Products business is one of only two manufacturers
of canned refrigerated dough in the United States and the only manufacturer of
canned refrigerated dough in Europe. In addition, we are the only manufacturer
of store-brand (private label) canned refrigerated dough, and we also produce
store-brand toaster pastries. Based on independent market data, we believe that
our dollar market share of supermarket sales for canned refrigerated dough
products in the United States geographic markets in which we serve was
approximately 14.1% in the 52-weeks ended February 14, 1999.
United States Operations
In the United States, we manufacture refrigerated dough products at our
Forest Park, Georgia and Carrollton, Texas plants. We manufacture many different
refrigerated and frozen dough products in the United States, including biscuits,
dinner rolls, sweet rolls, danishes, cookie dough, cookies, crescent rolls,
breadsticks, cinnamon rolls, pizza crust and pie crusts. We sell these products
under many different store brands throughout the United States. We also sell
these products under our Merico(R) and Sun Maid(R) brand names. We distribute
these products throughout the United States, primarily through direct sales to
large retail grocery chains and grocery wholesalers. We are continuing to direct
re-engineering efforts and investments in information technology and capital to
improve efficiencies and customer service levels. We expect these investments to
reduce downtime, overuse and to enhance product and service quality. Our
Refrigerated Dough Products business is integrating SAP business application
software into its sales, production planning, distribution and administration in
the United States. In addition, we are directing our new product development and
other efforts to shift the mix to more value-added products.
European Operations
EuroDough, S.A.R.L., our French subsidiary, operates three refrigerated
dough plants and sells canned refrigerated dough products primarily in France
and Germany. EuroDough also makes packaged refrigerated rolled dough, which is
used to prepare foods such as quiches, tarts and pies. It sells its products
through contract-packaging arrangements with major international food companies.
In France, we sell canned dough and rolled dough under various store brands as
well as our CroustiPate(R) and HappyRoll(R) brands.
In July 1998, EuroDough acquired Societe De Concept en Produits
Agro-Alimentaires, S.A., which owns Chevalier Servant, S.A., a French
manufacturer of refrigerated and frozen rolled and block dough. The operational
plan of our Refrigerated Dough Products business in Europe will be to complete
the integration of this acquisition, to focus on partnering with key customers
to develop store-brand (private label) refrigerated dough products.
Business Initiatives
Each of our businesses (Bakery Products and Refrigerated Dough Products)
has several initiatives directed at revenue growth and cost reduction. The
following are some of those initiatives.
Revenue Growth:
o Acquisitions and certain capital expenditures are helping to increase
our revenue base and to build incremental capacity, as in the case of
our new Portugal bakery completed in 1998.
S-5
<PAGE>
o We have entered into supply agreements with several retail customers
to manufacture their store-brand products while expanding the shelf
space allocated to our branded products.
o We have made technology investments which are directed at increasing
our revenues through better category management and improved customer
service.
o We have focused our marketing programs on enhancing our product mix,
introducing new products and attaining preferred supplier status with
our customers through cooperative programs and through technology
investments.
Cost Reduction:
o Ongoing changes in our organization and operations are providing
significant cost savings. Earthgrains began its restructuring program
in 1993. The initial restructuring program and subsequent initiatives
have included the divestiture of two non-core businesses, the sale
and/or swap of four bakeries, the closing of 19 manufacturing
facilities and the centralization of administrative transaction
processing activities using SAP business application software. These
cost reduction initiatives have allowed us to increase efficiencies
and improve the profitability of our businesses.
o We have made acquisitions which have offered opportunities for
consolidation of capacity, which have reduced manufacturing,
distribution and administrative costs.
o We have made capital investments which have been designed to increase
efficiency and reduce operating costs.
In addition to savings in raw material costs, these initiatives have been
important contributors to improvements in our profitability and operating cash
flow, as a result of enhanced manufacturing, distribution and administration
efficiencies and the synergies and incremental sales volume from acquisitions.
Acquisitions and Strategic Alliances
The packaged fresh-baked goods industry has been characterized by regional
and fragmented industry ownership. In the past, several large bakery companies
have been held by publicly-owned companies with diversified businesses, for
which fresh-baked goods was not their most important business, or by
privately-held companies which were not subject to the discipline of the public
capital markets. Also, some major grocery retailers operated captive bakeries to
produce their store-brand packaged fresh-baked products. These factors
contributed to industry over-capacity. Since the mid-1990s, plant closings
resulting from acquisitions and restructuring programs by Earthgrains and
others, as well as decisions by certain major retailers to close their captive
bakeries and enter into long-term arrangements with suppliers, have resulted in
significant consolidation in the industry. We anticipate further industry
consolidation in the United States packaged fresh-baked goods industry.
Consistent with this industry consolidation trend, we have made several
acquisitions and entered into several significant supply agreements in the
United States and Europe since we became an independent company in 1996,
including:
o April 1996: Supply Agreement with Jitney-Jungle Stores of America, Inc.
(Mississippi)
o April 1996: Earthgrains and Interstate Bakeries Corporation exchange of
assets in Roanoke, Virginia and Dallas, Texas
o November 1996: Acquisition of Heiner's Bakery, Inc. (West Virginia)
o July 1997: Acquisition of H & L Bagel Company, Inc. (New Mexico)
o January 1998: Acquisition of CooperSmith, Inc. (Southeast U.S.)
o March 1998: Acquisition of San Luis Sourdough, Inc. (California)
S-6
<PAGE>
o July 1998: Supply agreement with The Kroger Co. (Texas) and closing of
Kroger Bakery in Houston, Texas
o August 1998: Acquisition of Chevalier Servant, S.A. (France)
o August 1998: Acquisition of two bakeries from Southern Bakeries. Inc.
(Southeast U.S.)
o September 1998: Supply agreement with Lucky's Stores Inc. (California) and
closing of Lucky's San Leandro, California bakery
o October 1998: Earthgrains and Interstate Bakeries Corporation exchange of
bakeries in New Bedford, Massachusetts and Grand Junction,
Colorado
o March 1999 Acquisition of the Reposteria Martinez Group (Spain)
Acquisitions and strategic alliances have been an important part of our
business strategy, and we continue to seek attractive acquisition opportunities
within the packaged fresh-baked goods and packaged refrigerated and frozen dough
products businesses, primarily in the United States and Europe, where we already
have operations and a management organization. Acquisition candidates must
satisfy our strategic objectives relating to geographic expansion, ability to
consolidate with our existing operations, partnering with retailers through
supply agreements, or diversification into related fresh-baked and refrigerated
dough product segments. Acquisitions provide opportunities to increase our
profit margins by taking advantage of Earthgrains' manufacturing and
distribution efficiencies, information technology, brands and marketing.
RECENT DEVELOPMENTS
On March 25, 1999, we acquired the Reposteria Martinez Group of Spain, a
privately-held producer of fresh-baked sweet goods. Reposteria Martinez, which
had sales of approximately $80 million in 1998, operates production facilities
and distributes fresh-baked sweet goods including morning goods and snack cake
products under the Martinez(R) brand across Spain and in parts of Portugal and
France. Morning goods include sweet buns, cupcakes and croissants.
We believe that this acquisition will allow us to increase our
manufacturing efficiency, and the resulting realignment of our sales and
distribution efforts for bread and sweet goods will improve our customer service
and partnering with our customers. With this acquisition, our Bimbo subsidiary
will become the branded market leader in the retail sweet-good segments of cake
and morning goods in its market areas.
We will be taking a one-time pre-tax restructuring charge of approximately
$20 million in the fiscal quarter ended March 30, 1999. This charge includes the
costs associated with reallocating production to the most efficient plants,
sales and distribution organizations and the costs associated with integrating
corporate functions. We do not plan to close any bakeries of Bimbo or Reposteria
Martinez as a result of the acquisition. We expect that this transaction will
add to our earnings after approximately 12 months.
S-7
<PAGE>
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
(In millions, except per share information and ratios)
For the year
For the forty weeks For the years ended ended
ended and at and at March 26,
January 5, December March 31, March 25, 1996
1999 30, 1997 1998 1997 (pro forma)(1)
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<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ........................................... $ 1,484.6 $ 1,274.6 $ 1,719.0 $ 1,662.6 $ 1,660.5
Cost of products sold ............................... 842.0 729.0 981.6 988.8 1,040.9
Gross profit ........................................ 642.6 545.6 737.4 673.8 619.6
Marketing, distribution and administrative 561.5 493.1 670.2 633.5 652.4
expenses ..........................................
Provision for restructuring and consolidation, net .. 8.4 -- -- 12.7 3.0
Operating income (loss) ............................. 72.7 52.5 67.2 27.6 (35.8)
Other income and expenses:
Interest (expense) ................................ (15.1) (4.6) (8.2) (6.3) (7.0)
Other income, net ................................. 5.1 1.9 3.0 1.4 3.8
Income (loss) before income taxes .................. 62.7 49.8 62.0 22.7 (39.0)
Provision (benefit) for income taxes ................ 24.8 19.5 24.2 6.5 (9.1)
Cumulative effect of change in accounting
principle, net of tax ............................. -- 1.8 1.8 -- --
Net income (loss) ................................... 37.9 28.5 36.0 16.2 (29.9)
Common Stock Data:
Earnings (loss) per diluted share: (2)(3)(4) 0.89 0.67 0.85 0.39 (0.73)
Cash dividends per diluted share (2) ................ 0.105 0.061 0.085 0.036 N.M.
Diluted weighted average shares outstanding (2)(3) .. 42.8 42.3 42.5 41.3 40.8
Balance Sheet Data:
Cash and cash equivalents ........................... 61.5 46.6 43.7 43.1 N.A.
Noncash working capital ............................. N.A.
Total assets ........................................ 1,495.0 1,140.8 1,394.3 1,172.1 N.A.
Short-term debt ..................................... 0.5 0.9 0.9 -- N.A.
Long-term debt ...................................... 295.2 66.2 266.7 103.0 N.A.
Shareholders' equity ................................ 652.5 604.9 606.6 582.4 N.A.
Cash Flow Data:
Net cash flow from operations 98.5 86.7 125.9 101.8 N.A.
Net cash used by investing activities (99.8) (40.7) (278.4) (105.2) N.A.
Net cash provided by (used by) financing activities 19.1 (42.5) 153.1 7.6 N.A.
Other Data:
Depreciation and amortization ....................... 76.7 62.9 84.6 84.5 81.1
Capital expenditures ................................ 57.2 41.8 79.6 71.2 116.3
Operating margin (5)(6) ............................. 4.9% 4.1% 3.9% 1.7% (2.2)%
EBITDA (7) .......................................... 162.9 117.3 154.8 126.2 67.5
EBITDA margin (7)(8) ................................ 11.0% 9.2% 9.0% 7.6% 4.1%
Ratio of EBITDA to interest expense (7) ............. 10.8x 25.5x 18.9x 20.0x 9.6x
Ratio of earnings to fixed charges (9)(10) .......... 4.3x 7.4x 5.9x 3.1x (11)
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</TABLE>
(1) Earthgrains was a wholly-owned subsidiary of Anheuser-Busch Companies, Inc.
until March 26, 1996 when it was spun off and became an independent,
publicly traded company. The unaudited pro forma financial information for
the year ended March 26, 1996 includes several pro forma adjustments. The
resulting unaudited pro forma information is not necessarily indicative of
results that would have occurred if Earthgrains had been an independent
company during 1996.
(2) Adjusted to reflect the two-for-one stock splits effective July 28, 1997
and July 20, 1998.
(3) Earnings per share for the year ended March 26, 1996 was computed using the
weighted average shares of Anheuser-Busch common stock outstanding during
the period adjusted to a 1-to-25 distribution ratio.
(4) Includes certain non-recurring items. Fiscal 1999 amounts include an $8.4
million pre-tax provision for restructuring for the forty weeks ended
January 5, 1999; fiscal 1998 amounts include the $1.8 million after-tax
charge due to a change in accounting principle; fiscal 1997 amounts include
the $12.7 million pre-tax restructuring provision and $5.3 million in
Spanish tax incentives and credits; fiscal 1996 amounts include a $3.0
million pre-tax provision for restructuring, a $7.8 million pre-tax charge
for the Spanish work force reduction program and a $7.6 million pre-tax
S-8
<PAGE>
charge for a legal settlement and other non-recurring costs. If these
non-recurring items were excluded, earnings per diluted share would be
$1.01 for the forty weeks ended January 5, 1999, $0.71 for the forty weeks
ended December 30, 1997, $0.89 for the year ended March 31, 1998, $0.47 for
the year ended March 25, 1997, and a $0.45 pro forma loss for the year
ended March 26, 1996.
(5) Ratio of operating income to net sales.
(6) Includes certain non-recurring items. Fiscal 1999 amounts include an $8.4
million pre-tax provision for restructuring for the forty weeks ended
January 5, 1999; fiscal 1997 amounts include a $12.7 million pre-tax
provision for restructuring; fiscal 1996 amounts include a $3.0 million
pre-tax provision for restructuring, $7.8 million pre-tax charge for the
Spanish work force reduction program and a $7.6 million pre-tax charge for
a legal settlement and other non-recurring costs. If these non-recurring
items were excluded, operating margin would be 5.5% for the forty weeks
ended January 5, 1999, 2.4% for the year ended March 25, 1997 and (1.0)%
pro forma for the year ended March 26, 1996. Fiscal 1999, 1998, 1997 and
1996 amounts all include pre-tax $11.6 million in annual goodwill
amortization and depreciation on the asset write-up related to purchase
accounting for the acquisition of Earthgrains by Anheuser-Busch Companies,
Inc.
in 1982.
(7) EBITDA is earnings before interest expense, income taxes, depreciation and
amortization, and the special items referred to in footnote (6). EBITDA is
presented because it is a widely accepted financial indicator of a
company's ability to service indebtedness and also because the vesting and
payout under Earthgrains' Medium-Term Incentive program under its
Exceptional Performance Plan is based in part on the attainment of certain
EBITDA margins. EBITDA, however, should not be considered an alternative to
income from operations or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and
should not be construed as an indication of a company's operating
performance or as a measure of liquidity.
(8) Ratio of EBITDA to net sales.
(9) Computed by dividing earnings available for fixed charges (income before
income taxes plus fixed charges) by fixed charges (interest expense plus
that portion of rental expenses deemed to represent interest).
(10) Excluding the non-recurring items described in footnote (6) above, the
ratios would be 4.7x for the forty weeks ended January 5, 1999 and 4.4x for
the year ended March 25, 1997, and the deficiency (pro forma) for the year
ended March 26, 1996 would be approximately $21.6 million.
(11) As a result of the historical loss incurred and incremental pro forma
adjustments to represent Earthgrains as an independent company for this
period, earnings were less than fixed charges for the year ended March 26,
1996. The coverage deficiency for this period was approximately $40.0
million.
S-9
<PAGE>
CAPITALIZATION
The following table shows the consolidated current liabilities and the
capitalization of Earthgrains as of January 5, 1999, and as adjusted to give
effect to the sale of the Notes and the application of the proceeds of the
Notes.
<TABLE>
<CAPTION>
January 5, 1999
---------------------------------
Actual As Adjusted
-------------- --------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 0.5 $ 0.5
Other current liabilities 259.0 259.0
============== ==============
Total current liabilities .................................... 259.5 259.5
============== ==============
Long-term debt:
Revolving Credit Facilities 292.2 142.2
Notes offered hereby -- 150.0
Industrial Development Bonds 9.5%, due 2001 1.5 1.5
Other long-term debt, excluding current portion 1.5 1.5
-------------- --------------
Total long-term debt, excluding current portion 295.2 295.2
-------------- --------------
Shareholders' equity ......................................... 652.5 652.5
-------------- --------------
Total liabilities and shareholders' equity .................. $ 1,495.0 $ 1,495.0
============== ==============
</TABLE>
USE OF PROCEEDS
We intend to use the proceeds of the Notes to repay a portion of our
outstanding indebtedness under our revolving Credit Agreement with a group of
banks. The final maturity of the loans under the Credit Agreement is September
30, 2002. The average interest rate on the outstanding loans is approximately
5.27%. We used the proceeds of these borrowings for a portion of the cost of
certain acquisitions referred to under "The Earthgrains Company-Acquisitions and
Strategic Alliances" above, for capital expenditures and for working capital.
S-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following information is taken from our quarterly report on Form 10-Q
for the 40 weeks ended January 5, 1999 and our annual report on Form 10-K for
our 1998 fiscal year, as filed with the SEC. This does not include all of the
information included in the Management's Discussion and Analysis sections of
those reports, and per-share information has been adjusted to reflect the
two-for-one split of our common stock which was effective on July 20, 1998.
40 WEEKS ENDED JANUARY 5, 1999
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity of The
Earthgrains Company for the 16- and 40-week periods ended January 5, 1999
compared to the 16- and 40-week periods ended December 30, 1997. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto for the fiscal year ended March 31, 1998 included in the Company's
Annual Report to Shareholders.
Results of Operations
Net sales for the 16-week period ended January 5, 1999, increased to $609.2
million from $514.7 million reported for the comparable prior-year period,
substantially from sales attributable to acquisitions, most notably CooperSmith.
Net sales for the 40-week period ended January 5, 1999 were $1,484.6 million, up
from $1,274.6 million reported a year ago. Favorable product mix shift and price
improvements in the domestic refrigerated dough business also continued to
contribute to the increase in sales both for its seasonally strong quarter and
year to date. International sales increased slightly from the prior year and
experienced a $4.9 million favorable foreign exchange rate impact year to date.
Gross margins increased to 42.9% in the current 16-week period from 42.5% a
year ago and to 43.3% from 42.8% year to date. The margin improvements can be
attributed to price and mix improvements, the continued effect of lower raw
material costs, and enhanced capacity utilization from acquisitions.
On a percentage-of-sales basis, marketing, distribution and administrative
expenses decreased to 37.1% from 38.0% in the year-ago quarter and to 37.8% from
38.7% on a year-to-date comparison. This decrease can primarily be attributed to
further benefit in the consolidation of selling, distribution and administrative
expenses through integration of the CooperSmith business and lower advertising
as a percent of sales.
The $2.6 million pre-tax restructuring charge recorded in the current
quarter was in accordance with the previously announced plans to close the
Pueblo, Colorado bakery in conjunction with the asset exchange completed with
Interstate Bakeries Corporation. The $5.8 million charge recorded in the
previous quarter was for costs to close the Macon, Georgia and Montgomery,
Alabama bakeries, and for severance costs related to the creation of a Financial
Shared Services Center in St. Louis. The Company will continue to review its
operations both domestically and internationally to further improve efficiencies
and in conjunction with integrating acquisitions.
The increase in other income is related substantially to the first quarter
gain on the sale of property.
The effective income tax rate is consistent with that of the prior year and
reflects the impact of nondeductible goodwill amortization relative to the
respective earnings level.
During the year-ago quarter, the Company recorded a $1.8 million,
net-of-tax, or $0.04-per-share charge against earnings to comply with a newly
required FASB accounting interpretation announced November 20, 1997. Any
unamortized costs that were previously capitalized for business process
reengineering activities were required to be written off as a cumulative
adjustment in the quarter containing November 20, 1997. Most of the business
process reengineering costs affected by the accounting change for the Company
are associated with implementation of the Company's new integrated SAP systems.
Net earnings for the 16-week period ended January 5, 1999 increased to
$17.0 million or $0.40 per diluted share, from $14.1 million, or $0.33 per share
in the prior year's comparable period, excluding the cumulative effect of the
accounting change. Including the accounting change, net earnings for the
year-ago third quarter were $12.3 million, or $0.29 per diluted share.
Year-to-date earnings were $37.9 million or $0.89 per diluted share compared to
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$30.3 million or $0.71 per share in fiscal 1998 before the accounting change.
Earnings for the 40-week period ended December 30, 1997, were $0.67 per diluted
share, including the accounting change. The significant improvement in earnings
is reflective of strong operating results from the business along with continued
benefits and efficiencies achieved as discussed above.
Liquidity and Capital Resources
The Company's primary source of liquidity continues to be cash flow from
operations. Cash flows from operations for the year-to-date period increased by
$11.8 million from the year-ago period primarily as a result of increased
earnings. Net working capital, excluding cash and cash equivalents, was $54.9
million at January 5, 1999 compared to $48.6 million at March 31, 1998. The
increase can be primarily attributed to the timing of disbursements at each
period end and seasonality of the business.
$57.2 million has been invested in capital expenditures to date, with
spending for the fiscal year planned for a level of $80-85 million. No
additional share repurchases were made in the current quarter. 163,600
(post-split) shares have been repurchased for the treasury to date during fiscal
1999 at a cost of $3.5 million. The increase in long-term debt is a result of
current year acquisitions partially offset by the cash payment received from IBC
in conjunction with the asset exchange in the current quarter. The Company's
primary routine cash requirements will consist of funding capital expenditures,
interest payments pursuant to the credit facility and dividends to shareholders.
Cash provided by operations and borrowings available under the $450 million
credit facility continues to provide the necessary funding for ongoing cash
requirements. Extension of this line and other financing alternatives will be
pursued as necessary for future acquisition or business opportunities.
FISCAL YEAR ENDED MARCH 31, 1998
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 31, 1998, the prior
fiscal year ended March 25, 1997, the 12-week transition period ended March 26,
1996, and the fiscal year ended January 2, 1996. This discussion should be read
in conjunction with the Consolidated Financial Statements and notes thereto for
such periods 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, these financial statements may not
necessarily reflect the consolidated results of operations or 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
Earthgrains' operating results in its second fiscal year as an independent
company demonstrate further accomplishments from elements of a fundamental
strategy of improving revenues, enhancing cost-effectiveness, gaining
efficiencies, and taking advantage of industry consolidation. This strategy,
which has been facilitated through enhanced information made available through
the Company's investment in systems technology, has enabled Earthgrains to focus
its sales force and business plans in markets with the greatest growth
opportunities and on products that offer higher margins. A renewed effort to
provide better-quality products and services to customers is paying off.
Customer partnering has become a fundamental way of doing business. New product
initiatives and increased advertising for these offerings as well as for core
brands have contributed to the Company's strategy to build branded business.
Since its inception as an independent company, Earthgrains has stated that
taking advantage of acquisition opportunities in its core fresh baked-goods
business line is key to enhancing the Company's ability to compete successfully
in this industry. Earthgrains has taken an active role in the consolidation
process of the packaged bakery products industry that remains in a condition of
excess capacity and underutilization. Acquisitions are contributing to
Earthgrains' success and more benefits are expected in fiscal 1999. The
integration of the fourth-quarter acquisition of CooperSmith, Inc. (CooperSmith)
is on schedule. Related plant consolidations have taken place, and route
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consolidation and handheld computer rollouts are under way, as well as
transition onto the Company's management information systems. While CooperSmith
will be a significant contributor to Earthgrains, it is expected to be slightly
dilutive to earnings through the first quarter of fiscal 1999. San Luis
Sourdough, Inc., the specialty superpremium baker in San Luis Obispo, Calif.,
also acquired in the fourth quarter, is expected to make an immediate positive
contribution to results. The acquisition of Heiner's Bakery, Inc. (Heiner's) in
November 1996, which was additive to earnings from the outset, has been a big
success and continues to exceed expectations. The Company will continue to seek
opportunities to participate in industry consolidation that are a good fit with
its strategy to enhance revenues, profitability and return on capital.
Along with strengthening core business and growth through acquisition,
emphasis has been placed on driving gains through efficiencies. Operating
improvements from the Company's restructuring and consolidation program aimed at
reducing excess capacity and withdrawal from unprofitable markets and
lower-margin accounts continued into the current year. Results are showing from
the emphasis on product quality and operating and distribution efficiencies.
Additionally, a positive impact has resulted from the stabilization of commodity
costs. Commodity costs, which represent approximately 22-25% of the Company's
cost of products sold, have continued to decrease from the first half of fiscal
1997 after reaching record levels in that year and during the 1996 transition
period.
Earthgrains has made significant achievements since the spinoff. Benefits
are expected to continue from these actions and the impact of acquisitions. The
Company is poised for continued fundamental improvement in its existing
operations and participation in industry consolidation opportunities. While
strong progress has been demonstrated in improving underlying performance,
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. These effects will be monitored and continuing efforts will be made to
maximize manufacturing, distribution and administrative efficiencies and to
strive for even better operating results.
Restructuring and Consolidation Provisions
Beginning in late 1993, the Company established a restructuring and
consolidation program designed to reduce costs and maximize operating
efficiencies. The Company recorded $12.7 million and $27.5 million charges in
fiscal 1997 and 1995, respectively, covering estimated expenses in conjunction
with closing certain domestic bakery operations and one refrigerated dough
plant.
The Company believes continued improvements in the current fiscal year's
operating results reflect further benefits achieved through the restructuring
and consolidation program. The Company will continue to review its operations
for 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
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 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 all businesses 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 the current year from
40.5% in fiscal 1997. Profit-margin improvements were experienced across fresh
bakery and refrigerated dough operations both domestically and internationally.
These solid margin improvements can be attributed to focus on branded and
superpremium product categories, favorable pricing, and improved manufacturing
efficiencies. Domestic refrigerated dough operations demonstrated the strongest
margin-performance improvement, through efficiencies gained from closing its
Indianapolis, Ind., plant in March 1997 and a positive mix shift. Additionally,
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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 is down from prior years. Costs of products
sold includes 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, 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 will likely increase slightly
with the effect of nondeductible goodwill amortization from current-year
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 the current year represents the effect of compliance with a new accounting
interpretation related to the recognition of costs associated with business
process re-engineering.
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 fresh bakery and refrigerated dough operations both
domestically and internationally.
Gross margin increased to 40.5% in 1997 from 37.8% in fiscal 1995.
Profit-margin improvements were experienced by domestic fresh bakery operations
and both international bakery and refrigerated dough operations. Margins for
domestic refrigerated dough operations were down slightly from fiscal 1995.
These margin improvements can be attributed to the achieved 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 have 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 prior years. 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.
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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 current-year 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.
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 the year-ago period does not
reflect interest expense related to long-term debt assumed by the Company upon
the distribution at March 26, 1996, and certain administrative expenses
associated with operating as an independent, stand-alone company.
Twelve-Week Period Ended March 26, 1996, Compared with
Twelve-Week Period Ended March 28, 1995
For the 12-week period ended March 26, 1996, sales declined $4.1 million or
1.1% from the comparable prior-year period. The decrease can be attributed to
the planned consolidation and restructuring that resulted in the closing or sale
of underperforming and noncore businesses. This decrease in sales was partially
offset by increased volume in refrigerated dough products, a $4.9 million
increase in international sales and a $5.6 million favorable effect of
exchange-rate fluctuations. After adjustment for the closed or sold facilities
in both periods presented, sales increased by $19.8 million.
Gross margin for the March 1996 period of 37.8% compared unfavorably with
the prior-year period's 39.2%. As expected, margins were adversely affected by
the dramatic increases in prices for ingredients, specifically flour costs,
which increased to record levels.
The increase in marketing, distribution and administrative expenses to
$146.0 million from $140.9 million in the comparable period is the result of
one-time charges of $7.6 million, including $6.3 million related to a settlement
agreement in a case that involved alleged price-fixing and antitrust violations
in the state of Texas.
In the comparable period, $6.1 million of the fiscal 1995 provision for
restructuring and consolidation was recorded to cover estimated expenses arising
from the consolidation of certain domestic bakery operations identified at that
date.
The variance in the effective income-tax rate reflects the relative impact
of the nondeductible fixed goodwill amortization on the respective earnings
levels.
As a result of the March 1996 charge for the legal settlement and other
factors discussed above, the Company incurred a loss of $5.1 million, or $0.12
per diluted share, computed on the basis of pro forma average shares
outstanding, compared with a loss of $0.3 million, or $0.01 per diluted share in
the prior year's comparable period.
Fiscal Year 1995 Compared with Fiscal Year 1994
Net sales in 1995 decreased $55.9 million or 3.2% compared with the same
period in the prior year. Domestic fresh baked-goods sales decreased by $89.6
million in part as a result of the planned consolidation and restructuring,
including the withdrawal from underperforming territories. Lower domestic fresh
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baked-goods volume was partially offset by higher net prices, higher
international sales of $32.5 million, and a $13.7 million favorable effect of
foreign currency exchange rate fluctuations. Excluding the sales of the closed
facilities and divested businesses, foreign currency exchange-rate fluctuations
and the extra week in the 1994 fiscal year, net sales decreased $6.5 million on
a comparable basis.
Gross profit decreased $19.6 million or 3.0% versus fiscal 1994. As a
percentage of sales, gross profit remained constant at 37.8%. Margins for the
1995 fiscal year would have improved but were adversely affected by the dramatic
increases in commodity prices for ingredients in the last half of the year.
Marketing, distribution, and administrative expenses in 1995 increased $3.6
million compared to the prior year. As a percent of sales, these expenses
increased to 37.7% in 1995 versus 36.3% in 1994, as the reduction in
volume-related selling expenses was more than offset by increases in other
costs, including the Spanish work force reduction program and domestic employee
relocation expenses.
Excluding the 1995 charge of $27.5 million to consolidate certain
inefficient domestic bakery facilities, operating income for the 1995 fiscal
year decreased $23.2 million compared with the prior year. This decrease in
operating results was primarily attributable to the impact of commodity prices
for ingredients and the work force reduction in Spain.
The increase in the effective tax rate primarily reflects the relative
effect of the nondeductible fixed goodwill amortization on a reduced earnings
level.
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 $80 million to Anheuser-Busch as a partial payment
of its net intercompany payable, to fund working capital needs and for general
corporate purposes. Prior to the Distribution, as a subsidiary, the Company
obtained funds for its capital needs, including working capital, from
Anheuser-Busch, primarily through a non-interest-bearing intercompany account.
The Company's primary source of liquidity is cash flow from operations,
which was $125.9 million for the current fiscal year ended March 31, 1998.
Improved operating efficiencies, continued favorable product-mix shift,
favorable ingredient costs and stable pricing have contributed to the strong
cash flows from operations for the current year. Net working capital, excluding
cash and cash equivalents, was $48.6 million at March 31, 1998, up from $37.5
million a year ago, primarily attributable to the effect of acquisitions.
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. The Company's primary routine cash
requirements will continue to consist of funding capital expenditures and
interest payments pursuant to the credit facility. The Company invested $79.6
million in capital expenditures during the current fiscal year and expects to
fund capital investments of approximately $80-90 million in the upcoming year.
The consolidated capital expenditure plan for fiscal 1999 includes
completion of the new bakery in northern Portugal, continued rollout of new
handheld computers for route sales drivers and CooperSmith equipment upgrades.
The Company will also continue ongoing investments in systems technology along
with modernization and expansion plans for various domestic and international
bakeries.
Additionally, a favorable IRS tax ruling was received during the year on
the stock repurchase program authorized by the Company's Board of Directors in
March 1997. The program authorizes the repurchase of up to 1 million shares of
common stock as the Company determines. At March 31, 1998, 168,600 shares had
been purchased for the treasury at a cost of $7.0 million.
On both a short-term and long-term basis, management believes that its cash
flows from operations, together with its available borrowings under the Credit
Facility, will provide it with sufficient resources to meet its seasonal working
capital needs, to finance its projected capital expenditures, and to meet its
foreseeable liquidity requirements.
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THE NOTES
We will issue the Notes under an Indenture dated as of , 1999 between
Earthgrains and The Bank of New York, as Trustee. Information about the
Indenture and the general terms and provisions of the Notes is in the
accompanying prospectus under "The Debt Securities." Certain capitalized terms
we use below have the meanings given in the prospectus or the Indenture.
The defeasance provisions of the Indenture, which are described in the
prospectus, will apply to the Notes.
The Notes will be issued in book-entry form, as a single note registered in
the name of the nominee of The Depository Trust Company, which will act as
depositary. Beneficial interests in book-entry Notes will be shown on, and
transfers of the Notes will be made only through, records maintained by the
depositary and its participants. The provisions set forth under "Book-Entry Debt
Securities" in the accompanying prospectus will apply to the Notes.
Payment of Principal and Interest
The interest rate on the Notes will be ___% per annum. We will pay interest
in arrears on ________ and ___________ beginning ___________, 1999. Interest
will accrue from , 1999 or from the most recent interest payment date to which
we have paid or provided for the payment of interest to the next interest
payment date or the scheduled maturity date, as the case may be. We will pay
interest computed on the basis of a 360-day year of twelve 30-day months.
The Notes will mature on _____________________, 2009.
We will pay interest on the Notes in immediately available funds to the
persons in whose names the Notes are registered at the close of business on the
or preceding the respective interest payment date. At maturity, we will pay the
principal, together with final interest on the Notes, in immediately available
funds.
If an interest payment date or the maturity date is not a Business Day, we
will make the required payment on the next Business Day.
Redemption
We will not have the right to redeem the Notes prior to their scheduled
maturity, and you will not have the right to require us to redeem the Notes
prior to their scheduled maturity.
Events of Default
The Events of Default described in the prospectus under "The Debt
Securities-Events of Default, Notice and Waiver" will apply to the Notes.
Same-Day Settlement and Payment
The Notes will trade in the depositary's same-day funds settlement system
until maturity or until we issue the Notes in definitive form. The depositary
will therefore require secondary market trading activity in the Notes to settle
in immediately available funds. We can give no assurance as to the effect, if
any, of settlement in immediately available funds on trading activity in the
Notes.
Governing Law
The Notes will be governed by and construed in accordance with the laws of
the State of New York.
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UNDERWRITING
Earthgrains is selling the Notes to the underwriters named below under an
Underwriting Agreement dated as of , 1999. The underwriters, and the amount of
the Notes each of them has severally agreed to purchase from us, are as follows:
Principal Amount
Underwriters of Notes
- ------------ --------
J.P. Morgan Securities Inc. ........................... $
Banc One Capital Markets, Inc. ........................
Chase Securities Inc. .................................
NationsBanc Montgomery Securities LLC .................
Warburg Dillon Read LLC,
a subsidiary of UBS AG ............................
Total ........................................... $ 150,000,000
===========
The Underwriting Agreement provides that, if the underwriters take any of
the Notes, then they are obligated to take and pay for all of the Notes.
The Notes are a new issue of securities with no established trading
market. We do not intend to apply for listing of the Notes on any national
securities exchange. The underwriters have advised us that they intend to make a
market for the Notes, but they have no obligation to do so. They also may
discontinue market making at any time without providing any notice. We cannot
give any assurance as to the liquidity of any trading market for the Notes.
The underwriters initially propose to offer part of the Notes directly to
the public at the public offering price set forth on the cover page and part to
certain dealers at a price that represents a concession not in excess of % of
the principal amount of the Notes. Any underwriter may allow, and any such
dealer may reallow, a concession not in excess of % of the principal amount of
the Notes to certain other dealers. After the initial offering of the Notes, the
underwriters may, from time to time, vary the offering price and other selling
terms.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute payments which the underwriters may be required to make in respect of
such liabilities.
We estimate that we will spend approximately $350,000 for printing, rating
agency fees, trustee's fees, legal fees and other expenses of the offering.
In connection with the offering of the Notes, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the prices of the
Notes. Specifically, the underwriters may overallot in connection with the
offering of the Notes, creating a short position in the Notes for their own
account. In addition, the underwriters may bid for, and purchase, the Notes in
the open market to cover short positions or to stabilize the price of the Notes.
Finally, the underwriters may reclaim selling concessions allowed for
distributing the Notes in the offering, if the underwriters repurchase
previously distributed Notes in transactions to cover short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market prices of the Notes above independent market levels. The
underwriters are not required to engage in any of these activities and may end
any of these activities at any time.
In the ordinary course of their respective businesses, the underwriters and
their affiliates have engaged, and may in the future engage, in commercial
banking and/or investment banking transactions with us and our affiliates.
Affiliates of each of the underwriters are participants in our revolving credit
agreement under which they have committed to advance funds to us on the terms
provided in the credit agreement. Because more than 10 percent of the net
proceeds of the offering may be paid to affiliates of NASD members which are
participating in the distribution of the Notes, the offering is being made in
compliance with Rule 2710(c)(8) of the NASD Conduct Rules.
LEGAL COUNSEL
Bryan Cave LLP, St. Louis, Missouri, has served as our counsel, and
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, has served as
counsel to the underwriters, in connection with the issuance of the Notes.
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<PAGE>
EARTHGRAINS(R)
[GRAPHIC OMITTED]
$250,000,000
Debt Securities
-----------------------------
This Prospectus describes Debt Securities which The Earthgrains Company may
issue and sell at various times. More detailed information is under "The Debt
Securities."
o The Debt Securities may be debentures, notes or other senior unsecured
evidences of indebtedness.
o We may issue them in one or several series.
o The total principal amount of the Debt Securities to be issued under
this Prospectus will not exceed $250,000,000 (or the equivalent amount
in other currencies).
o We will determine the terms of each series of Debt Securities
(interest rates, maturity, redemption provisions and other terms) at
the time of sale, and we will specify the terms in a Prospectus
Supplement which will be delivered together with this Prospectus at
the time of the sale.
We may sell Debt Securities directly or through underwriters, dealers or
agents. We may also sell Debt Securities directly to investors. More information
about the way we will distribute the Debt Securities is under the heading "Plan
of Distribution." Information about the underwriters or agents who will
participate in any particular sale of Debt Securities will be in the Prospectus
Supplement relating to that series of Debt Securities.
See the information under the heading "Risk Factors" starting on page 3,
which describes certain factors you should consider before purchasing Debt
Securities.
Our principal office is at 8400 Maryland Avenue, St. Louis, Missouri 63105,
and our telephone number is (314) 259-7000.
-------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is April 8, 1999.
<PAGE>
We have not authorized anyone to give any information or to make any
representations concerning the offering of the Debt Securities except that which
is in this Prospectus or in the Prospectus Supplement which is delivered with
this Prospectus, or which is referred to under "Where You Can Find More
Information." If anyone gives or makes any other information or representation,
you should not rely on it. This Prospectus is not an offer to sell or a
solicitation of an offer to buy any securities other than the Debt Securities
which are referred to in the Prospectus Supplement. This Prospectus is not an
offer to sell or a solicitation of an offer to buy Debt Securities in any
circumstances in which the offer or solicitation is unlawful. You should not
interpret the delivery of this Prospectus, or any sale of Debt Securities, as an
indication that there has been no change in our affairs since the date of this
Prospectus. You should also be aware that information in this Prospectus may
change after this date.
TABLE OF CONTENTS
Table of Contents...............................2
Where You Can Find More Information.............2
Risk Factors....................................3
Information about Earthgrains...................5
Use of Proceeds.................................6
The Debt Securities.............................6
Book-Entry Debt Securities......................11
Ratio of Earnings to Fixed Charges..............12
Stock Split.....................................12
Plan of Distribution............................13
Legal Opinion...................................13
Experts.........................................13
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any of these documents at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
at the SEC's Internet website at http://www.sec.gov. The SEC allows us to
incorporate by reference the information we file with them, which means that we
can disclose important information to you by referring you to those documents.
The information incorporated by reference is considered to be part of this
Prospectus, and later information that we file with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future filings made with the SEC under Sections 13(a),
13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until we sell all of
the Debt Securities. This Prospectus is part of a registration statement we
filed with the SEC.
o Our Annual Report on Form 10-K for the year ended March 31, 1998.
o Our Quarterly Reports on Form 10-Q for the quarters ended June 23 and
September 15, 1998 and January 5, 1999.
You may receive a copy of any of these filings, at no cost, by writing or
calling the Investor Relations Department, The Earthgrains Company, 8400
Maryland Avenue, St. Louis, Missouri 63105, telephone 314-259-7000. You can also
find information about Earthgrains at our Internet website at
http://www.earthgrains.com.
We have filed with the SEC a Registration Statement to register the Debt
Securities under the Securities Act of 1933. This Prospectus omits certain
information contained in the Registration Statement, as permitted by SEC rules.
You may obtain copies of the Registration Statement, including exhibits, as
noted in the first paragraph above.
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RISK FACTORS
Forward-Looking Statements
Certain statements under this heading and under the heading "Information
about Earthgrains" in this prospectus, as well as certain information
incorporated by reference which is referred to under the heading "Where You Can
Find More Information," constitute "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. All such forward-looking
information involves risks and uncertainties and may be affected by many
factors, some of which are beyond our control. These factors include:
o the costs of raw materials,
o our ability to realize projected savings from productivity and product
quality improvements,
o our ability to continue to participate in industry consolidation and
to successfully integrate acquired businesses,
o economic conditions in the U.S., Spain and France,
o fluctuations in currency exchange rates for the Euro, the Spanish
peseta and the French franc versus the U.S. dollar,
o the impact of the European currency conversion,
o legal proceedings to which we may become a party, and
o other factors described in this section and in our filings with the
SEC.
Competition
The packaged bakery products business is highly competitive. We face
intense price, product, and service competition for all of our products. We
compete on the basis of product quality, price, brand loyalty, effective
promotional activities, and our 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.
We compete 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. Some of our
competitors have significantly greater financial resources than we do.
Our ability to sell our products depends on our ability to attain store
shelf space in relation to competing brands and other food products. Our future
growth will depend on our 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 our products, and providing superior customer service. If we are not
successful in our competitive efforts, it could adversely affect our financial
condition and our ability to make the required payments on the Debt Securities.
Raw Materials Prices and Availability
Our products require a large volume of various agricultural products,
including wheat for flour, soybean oil for shortening, and corn for high
fructose corn syrup. Agricultural commodities represented 22-25% of the cost of
our products sold for our fiscal year ended March 31, 1998. 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. Commodity prices
have declined significantly from record levels in 1996 and 1997. We cannot
predict what future commodity price levels will be. A significant increase in
commodity prices could significantly reduce our profitability if we are not able
to pass along the price increases through increased prices for our products, or
if our sales volumes decline because of increases in our prices.
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We regularly enter into futures contracts or hedging contracts to protect
us against increases in prices for our raw materials. If market prices fall
after we enter into such contracts, we may pay more than market price for the
raw materials subject to those arrangements.
Risks of Acquisitions
We have made several significant acquisitions since we became an
independent company in 1996, and we expect to continue making acquisitions in
the United States and Europe to take advantage of continued consolidation in our
industry. We believe that identifying appropriate acquisition opportunities and
taking advantage of them will be important to our continued success. Our future
success could be adversely affected if we are not able to make further
acquisitions due to competition for acquisitions or regulatory restrictions, or
if we are not successful in integrating the acquired businesses with our
existing businesses and in accomplishing our objectives of increasing
efficiency.
Holding Company Structure
The Earthgrains Company is organized as a holding company, and
substantially all of our operations are carried on through subsidiaries. As
such, creditors of our subsidiaries would have a claim against the assets of our
subsidiaries which would be prior to any claim we may assert (except to the
extent we may be recognized as creditors of our subsidiaries) and prior to the
claims of the holders of the Debt Securities. At January 5, 1999, the amount of
debt of our subsidiaries to which the Debt Securities would be effectively
subordinated was $3.5 million. Our principal source of income is the dividends
and distributions we receive from our subsidiaries. There are no limitations on
our ability or the ability of our subsidiaries to incur additional debt in the
future, except for certain restrictions on the ability of certain domestic
(U.S.) subsidiaries to incur long-term debt, as described under "The Debt
Securities-Certain Restrictions-Limitation on Funded Debt of Restricted
Subsidiaries."
Risks of International Operations
A significant portion of our business is based outside the United States,
primarily in Spain, France and Portugal. We anticipate that we may continue to
expand our international operations as suitable opportunities become available.
International operations present various risks which do not apply to our
domestic businesses, including currency exchange risks. Our foreign subsidiaries
are subject to government regulation and political risk in each market in which
they operate.
Certain of our operations may at times in the future be subject to
expropriation, confiscatory taxation or price controls, and political and
economic changes may damage operating and growth prospects by causing political
and regulatory uncertainty or economic difficulties.
Governmental Regulation
The food industry is subject to regulation by federal, state and local
government in the U.S. and by various governmental bodies in other countries.
These regulations may affect our raw materials costs, our production cost and
the costs and methods involved in packaging and distributing our products.
Antitrust laws and regulations may also affect our ability to make acquisitions
or the manner in which we operate companies which we acquire.
Absence of Public Market for the Debt Securities
Prior to the issuance of the Debt Securities, there is no public trading
market for our debt securities. We do not intend to list the Debt Securities on
any national securities exchange. Although the underwriters for the various
series of Debt Securities may make a market in those Debt Securities, they will
not be obligated to do so. If a public market develops for the Debt Securities,
there is no assurance that it will continue to be maintained. If there is not a
public market for the Debt Securities, that may have an adverse effect on the
market price of your Debt Securities.
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INFORMATION ABOUT EARTHGRAINS
Earthgrains is an international manufacturer, distributor and consumer
marketer of fresh packaged bread and baked goods and refrigerated dough
products.
Our origins date back to 1925 when we began operations with one bakery. We
became an independent, publicly-owned company on March 26, 1996, when
Anheuser-Busch Companies, Inc. distributed the shares of Earthgrains to its
shareholders. Anheuser-Busch acquired Earthgrains (then named Campbell Taggart,
Inc.) in 1982.
o Operating Divisions. Our operations are divided into two principal
divisions: Bakery Products and Refrigerated Dough Products.
o Bakery Products.
o In the United States, we operate 43 bakeries and distribute our
products through approximately 3,300 company-owned delivery
routes and directly to food-service customers. Based on
independent market data, for the 52-week period ended January 17,
1999, we were the overall dollar market share leader of
supermarket sales for branded packaged fresh baked bread, buns
and rolls (excluding licensed brands) in the geographic markets
in which we operate, with a dollar market share of approximately
17.3%. These categories of products (excluding private label and
licensed brands) represented approximately 43% of the U.S. net
sales of the Bakery Products division for fiscal 1998. We
manufacture and distribute fresh-baked goods such as baked
breads, rolls, bagels, cookies, snack cakes and other sweet goods
in various states throughout the South, Southeast, Southwest and
Midwest United States and Northern and Central California. Our
primary brands for fresh baked goods are Earth Grains(R),
Colonial(TM), Rainbo(R), IronKids(R), Grant's Farm(R),
Heiner's(TM), Smith's(TM), Kern's(TM), Waldensian Heritage(R),
Bost's(R), Country Recipe(R), Cooper's Mill(R)and San Luis
Sourdough(R). We also sell our products under the licensed brands
Sunbeam(R), Roman Meal(R), Country Hearth(R)and Sun Maid(R). We
sell our snack cakes and other sweet goods principally under the
Break Cake(TM)brand name. We also manufacture similar fresh-baked
goods for sale under the brand names of our customers. In
addition, we supply specialty breads and rolls, sandwich buns and
other products to major fast food and family restaurant chains.
o In Europe, Bimbo, S.A., our Spanish subsidiary, operates ten
bakeries in Spain and one bakery in Portugal. Based on
independent market data, we believe that Bimbo is the dollar
market share leader in supermarket sales of packaged branded
fresh-baked sliced bread, buns and rolls in Spain, and is second
in dollar market share for packaged branded fresh-baked sliced
bread in Portugal. These products are sold primarily under the
Bimbo(R), Semilla de Oro(R) and Silueta(R) brand names.
o Refrigerated Dough Products.
o In the United States, the Refrigerated Dough division manufactures
refrigerated and frozen dough products in two plants, including
biscuits, dinner rolls, sweet rolls, danishes, cookie dough, cookies,
crescent rolls, breadsticks, cinnamon rolls, pizza crust and pie
crusts. These products are sold under different store brands
throughout the United States. We are one of only two manufacturers of
canned refrigerated dough in the United States. In addition, we
believe that we are the only manufacturer of store brand (private
label) canned refrigerated dough products in the United States, and we
produce store brand toaster pastries. In the United States, our
Refrigerated Dough Products division ranked second in dollar market
share of supermarket sales for packaged refrigerated dough products in
the geographic markets in which we operate, with a dollar market share
of approximately 14.1% for the 52-week period ended February 14, 1999.
Our refrigerated dough products and refrigerated English muffins are
also sold under the Merico brand name as well as under the Sun
Maid(R)licensed brand.
o In Europe, our Refrigerated Dough Division operates three refrigerated
dough plants in France and sells refrigerated dough products primarily
in France and Germany. It is the only manufacturer of canned
refrigerated dough in Europe. We also make rolled dough, which is used
to prepare foods such as quiches, tarts and pies. In France, we sell
canned dough and rolled dough under various store brands as well as
under our CroustiPate(R) and HappyRoll(R) brands, and we sell these
products throughout Europe through contract packaging arrangements
with major international food companies.
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USE OF PROCEEDS
Unless we indicate otherwise in the Prospectus Supplement which accompanies
this Prospectus, we intend to use the proceeds of the Debt Securities for
general corporate purposes, including acquisitions, capital expenditures,
repayment of short-term borrowings and working capital. Before we use the
proceeds for these purposes, we may invest them in short-term investments.
THE DEBT SECURITIES
This section describes some of the general terms of the Debt Securities.
The Prospectus Supplement describes the particular terms of the Debt Securities
we are offering. The Prospectus Supplement also indicates the extent, if any, to
which these general provisions may not apply to the Debt Securities being
offered. If you would like more information on these provisions, you may review
the Indenture which is filed as an exhibit to the Registration Statement we have
filed with the SEC. See "Where You Can Find More Information."
We will issue the Debt Securities under an Indenture dated as of April 1,
1999 between us and The Bank of New York, as trustee. We are summarizing certain
important provisions of the Debt Securities and the Indenture. This is not a
complete description of the important terms. You should refer to the specific
terms of the Indenture for a complete statement of the terms of the Indenture
and the Debt Securities. When we use capitalized terms which we do not define
here, those terms have the meanings given in the Indenture. When we use
references to Sections, we mean Sections in the Indenture.
General
The Debt Securities will be senior unsecured obligations of Earthgrains.
The Indenture does not limit the amount of Debt Securities that we may
issue under the Indenture, nor does it limit other debt that we may issue. We
may issue the Debt Securities at various times in different series, each of
which may have different terms. If we so indicate in the Prospectus Supplement
for any series, we may treat a subsequent offering of Debt Securities as a part
of the same series as that series.
The Prospectus Supplement relating to the particular series of Debt
Securities we are offering includes the following information concerning those
Debt Securities:
o The title of the Debt Securities.
o The total principal amount of the series of Debt Securities, and
whether we may treat a subsequent offering of Debt Securities as a
part of the same series as that series. o
o The date on which the principal and interest will be paid, any rights
we may have to extend the maturity of the Debt Securities and any
rights the holders may have to require payment of the Debt Securities
at any time.
o The interest rate on the Debt Securities. We may specify a fixed rate
or a variable rate, or a rate to be determined under procedures we
will describe in the Prospectus Supplement, and the interest rate may
be subject to adjustment.
o The dates on which we will pay interest on the Debt Securities and the
regular record dates for determining the holders who are entitled to
receive the interest payments.
o Where payments on the Debt Securities will be made, if it is other
than the office mentioned under "Payments on Debt Securities;
Transfers" below.
o If applicable, the prices at which we may redeem all or a part of the
Debt Securities and the time periods during which we may make the
redemptions. The redemptions may be made under a sinking fund or
otherwise.
o Any obligation we may have to redeem, purchase or repay any of the
Debt Securities under a sinking fund or otherwise or at the option of
the holder, and the prices, time periods and other terms which would
apply.
o Any additional Events of Default or covenants that will apply to the
Debt Securities.
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o The amounts we would be required to pay if the maturity of the Debt
Securities is accelerated, if it is less than the principal amount.
o If we will make payments on the Debt Securities in any currency other
than U.S. dollars, the currencies in which we will make the payments.
o If applicable, the terms under which we or a holder may elect that
payments on the Debt Securities be made in a currency other than U.S.
dollars.
o If amounts payable on the Debt Securities may be determined by a
currency index, information on how the payments will be determined.
o Any other special terms that may apply to the Debt Securities.
Payments on Debt Securities; Transfers
We will make payments on the Debt Securities to the persons in whose names
the securities are registered at the close of business on the record date for
the interest payments. As explained under "Book-Entry Debt Securities" below,
The Depositary Trust Company or its nominee will be the initial registered
holder unless the Prospectus Supplement provides otherwise.
Unless we indicate otherwise in the Prospectus Supplement, we will make
payments on the Debt Securities at the Trustee's office, which is now located at
101 Barclay Street, New York, New York 10286. Transfers of Debt Securities can
be made at the same offices. (Sections 202, 301, 305, 307 and 1002)
Form and Denominations
Unless we otherwise indicate in the Prospectus Supplement:
o We will issue the Debt Securities of each series only in registered
form without coupons in denominations of $1,000 and any integral
multiple thereof.
o We will not charge any fee to register any transfer or exchange of the
Debt Securities, except for taxes or other governmental charges, if
any. (Section 305)
Certain Restrictions
Creation of Secured Indebtedness
Under the Indenture, we and our Restricted Subsidiaries (defined below) may
not create, assume, guarantee or permit to exist any indebtedness for borrowed
money which is secured by a pledge of, or a mortgage or lien on, any Principal
Plants (defined below) or on any of our Restricted Subsidiaries' capital stock,
unless we also provide equal and ratable security for the Debt Securities. A
"Restricted Subsidiary" is a subsidiary which owns or operates a Principal
Plant, unless it is incorporated or has its principal place of business outside
the United States, and any other subsidiary which we elect to treat as a
Restricted Subsidiary. A "Principal Plant" is any of our production facilities,
but does not include a facility which our Board of Directors determines shall
not be treated as a Principal Plant, as long as all such plants which are
determined not to be Principal Plants, taken together, are not of material
importance to the total business conducted by Earthgrains and our Subsidiaries.
Our Board of Directors may change any such designation of a facility as a
Principal Plant or as excluded from the category of Principal Plant at varying
times, subject to the limit described in the preceding sentence.
The restriction described in the preceding paragraph does not apply to:
o purchase money liens, including liens for indebtedness incurred in
connection with the acquisition or construction of a Principal Plant
(so long as we incur the indebtedness within 180 days after the
acquisition or completion of construction of such Principal Plant),
o liens existing on property when we acquire it,
o liens on property of a Restricted Subsidiary when it becomes a
Restricted Subsidiary,
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o liens to secure the cost of development or construction of property,
or improvements of property, and which are released or satisfied
within 180 days after completion of the development or construction,
o liens in connection with the acquisition or construction of Principal
Plants or additions thereto financed by tax-exempt securities,
o liens securing indebtedness to Earthgrains or a wholly-owned
Restricted Subsidiary by a Restricted Subsidiary,
o liens existing at the date of the Indenture,
o liens on property of a corporation existing at the time of such
corporation is merged with or consolidated with Earthgrains or a
Restricted Subsidiary, or at the time Earthgrains or a Restricted
Subsidiary acquires all or substantially all of the properties of such
corporation,
o liens in favor of the United States government or any U.S. state
government incurred in connection with financing the acquisition or
construction of properties pursuant to a statute or a contract with
any such governmental body,
o extensions, renewals or replacements of the liens referred to above.
(Section 1006(a))
There is an additional exception described below under "Basket Amount."
Sale-Leaseback Financings
Under the Indenture, neither we nor any Restricted Subsidiary may enter
into any sale and leaseback transaction involving a Principal Plant, except a
sale by us to a Restricted Subsidiary or a sale by a Restricted Subsidiary to us
or another Restricted Subsidiary or a lease not exceeding three years, by the
end of which we intend to discontinue use of the property, unless:
o the net proceeds of the sale are at least equal to the fair market
value of the property, and
o within 180 days of the transfer we repay Funded Debt (defined below)
and/or make expenditures for the expansion, construction or
acquisition of a Principal Plant at least equal to the net proceeds of
the sale. (Section 1007)
There is an additional exception described below under "Basket Amount."
Basket Amount
In addition to the exceptions described above under "Creation of Secured
Indebtedness" and "Sale-Leaseback Financings" the Indenture allows additional
secured indebtedness and additional sale-leaseback financings as long as the
total of the additional indebtedness and the fair market value of the property
transferred in the additional sale-leaseback financings does not exceed 5% of
our consolidated total assets. (Sections 1006(d) and 1007(c))
Limitation on Funded Debt of Restricted Subsidiaries
We may not permit any Restricted Subsidiary to create, assume or permit to
exist any Funded Debt other than:
o Funded Debt secured by a mortgage, pledge or lien which is permitted
under the provisions described above under "Creation of Secured
Indebtedness,"
o Funded Debt owed to us or any wholly-owned Restricted Subsidiary,
o Funded Debt of a corporation existing at the time it becomes a
Restricted Subsidiary,
o Funded Debt created in connection with, or with a view to, compliance
with the requirements of any program, law, statute or regulation of
any federal, state or local governmental authority and applicable to
the Restricted Subsidiary and providing financial or tax benefits to
the Restricted Subsidiary which are not available directly to us, or
not available on as favorable terms,
o guarantees existing at the date of the Indenture, and
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o other Funded Debt which, when added to outstanding secured debt and
sale-leaseback financings permitted under the provision described
under "Basket Amount" above, does not exceed 10% of our consolidated
total assets. (Section 1008)
"Funded Debt" means indebtedness for money borrowed and indebtedness
represented by notes, debentures and other similar evidences of indebtedness,
including purchase money indebtedness, having a maturity of more than twelve
months from the date of determination or having a maturity of less than twelve
months but by its terms being renewable or extendible beyond twelve months at
our option, subject only to conditions which we are then capable of fulfilling,
and guarantees of similar indebtedness of others, except that Funded Debt does
not include:
o Any indebtedness of a person held in treasury by that person; or
o Any indebtedness with respect to which sufficient money has been
deposited or set aside in trust to pay the indebtedness; or
o Certain contingent obligations in respect of indebtedness of other
persons, such as keep-well, maintenance of working capital or earnings
or similar agreements.
Merger
We may not consolidate with or merge into any other corporation or transfer
or lease our properties and assets substantially as an entirety unless certain
conditions are met, including the assumption of the securities by any successor
corporation. (Sections 801 and 1006)
Modification or Amendment of the Indenture
We may modify and amend the Indenture if the holders of a majority in
principal amount of the outstanding Debt Securities affected by the modification
or amendment give their consent, except that no supplemental indenture may
reduce the principal amount of or interest or premium payable on any Debt
Security, change the maturity date or dates of principal, the interest payment
dates or other terms of payment, or reduce the percentage of holders necessary
to approve a modification or amendment of the Indenture, without the consent of
each holder of outstanding Debt Securities affected by the supplemental
indenture. (Section 902)
We and the Trustee may amend the Indenture without the holders' consent for
certain specified purposes, including any change which is not otherwise
inconsistent with the Indenture and which does not materially adversely affect
the holders' interests. (Section 901)
Defeasance
The Indenture includes provisions allowing defeasance of the Debt
Securities of any series. In order to defease Debt Securities, we would deposit
with the Trustee or another trustee money or U.S. Government Obligations
sufficient to make all payments on those Debt Securities. If we make a
defeasance deposit with respect to your Debt Securities, we may elect either:
o to be discharged from all our obligations on your Debt Securities,
except for our obligations to register transfers and exchanges, to
replace temporary or mutilated, destroyed, lost or stolen Debt
Securities, to maintain an office or agency in respect of the Debt
Securities and to hold moneys for payment in trust; or
o to be released from the restrictions described above relating to
liens, sale-leaseback transactions, Funded Debt of Restricted
Subsidiaries and certain other restrictions and obligations of the
Company contained in the Indenture (specifically not including,
however, the obligation of the Company to pay the principal and
interest on any Debt Securities).
To establish the trust, we must deliver to the Trustee an opinion of our
counsel that the holders of the Debt Securities will not recognize gain or loss
for Federal income tax purposes as a result of the defeasance and will be
subject to Federal income tax on the same amount, in the same manner and at the
same times as would have been the case if the defeasance had not occurred.
(Article Thirteen)
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Events of Default, Notice and Waiver
An Event of Default in respect of any series of Debt Securities means:
o default for 30 days in any payment of interest;
o default in payment of principal or premium when due;
o default in payment of any sinking fund amount in accordance with the
terms of such Debt Security;
o default in performance of or breach of any covenant in the Indenture
which applies to the series which continues for 60 days after notice
to Earthgrains by the Trustee or by the holders of 25% in principal
amount of the outstanding Debt Securities of the affected series;
o default in our payment of indebtedness which we have incurred or
guaranteed exceeding $30 million or acceleration of the maturity such
indebtedness exceeding $30 million;
o certain events of bankruptcy, insolvency and reorganization; and
o any other events which are designated as Events of Default in respect
of that series. (Section 501)
If an Event of Default occurs and is continuing in respect of one or more
series, either the Trustee or the holders of 25% in principal amount of the
outstanding Debt Securities of those series may declare the principal of and
accrued interest, if any, on all securities of those series to be due and
payable. If other specified Events of Default occur and are continuing, either
the Trustee or the holders of 25% in principal amount of the outstanding Debt
Securities of all series may declare the principal of and accrued interest, if
any, on all the outstanding Debt Securities to be due and payable. (Section 501)
Within 60 days after a default in respect of any series of Debt Securities,
the Trustee must give to the holders of the Debt Securities of that series
notice of all uncured and unwaived defaults by us known to it. However, except
in the case of default in payment, the Trustee may withhold the notice if it in
good faith determines that it is in the interest of the holders. The term
"default" means, for this purpose, the occurrence of any event that, upon notice
or lapse of time, would be an Event of Default. (Section 602)
Before the Trustee is required to exercise rights under the Indenture at
the request of holders, it is entitled to be indemnified by the holders, subject
to its duty, during an Event of Default, to act with the required standard of
care. (Sections 6.1 through 6.13)
Subject to the Trustee's duty during default to act with the required
standard of care, the Trustee has the right to be indemnified by the holders of
Debt Securities issued under the Indenture before proceeding to exercise any
right or power under the Indenture at the request of the holders. (Section
603(e)) The holders of a majority in principal amount of the outstanding
securities of any series (voting as a single class) may direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred upon the Trustee in respect of the
securities of that series. (Section 512)
The holders of a majority in principal amount of the outstanding securities
of all series affected by a default (voting as a single class) may, on behalf of
the holders of all that securities, waive the default except a default in
payment of the principal of or premium, if any, or interest on any security.
(Section 513) The holders of a majority in principal amount of outstanding
securities of all series entitled to the benefits thereof (voting as a single
class) may waive compliance with certain covenants under the Indenture. (Section
1011)
We will furnish to the Trustee, annually, a statement as to the fulfillment
by us of our obligations under the Indenture. (Section 1004)
Regarding the Trustee
The Bank of New York is the Trustee under the Indenture. The Bank of New
York also is a party to our credit agreement, under which it has committed to
lend us up to $30 million, and it may provide other banking services to us.
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BOOK-ENTRY DEBT SECURITIES
The Prospectus Supplement will indicate whether we are issuing the related
Debt Securities as book-entry securities. Book-entry securities of a series will
be issued in the form of one or more global notes that will be deposited with
The Depository Trust Company, New York, New York, and will evidence all of the
Debt Securities of that series. This means that we will not issue certificates
to each holder. We will issue one or more global securities to DTC, which will
keep a computerized record of its participants (for example, your broker) whose
clients have purchased the Debt Securities. The participant will then keep a
record of its clients who own the Debt Securities. Unless it is exchanged in
whole or in part for a security evidenced by individual certificates, a global
security may not be transferred, except that DTC, its nominees and their
successors may transfer a global security as a whole to one another. Beneficial
interests in global securities will be shown on, and transfers of beneficial
interests in global notes will be made only through, records maintained by DTC
and its participants. Each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if the person is not a
participant, on the procedures of the participant through which the person owns
its interest to exercise any rights of a holder of Debt Securities under the
Indenture.
The laws of some jurisdictions require that certain purchasers of
securities such as Debt Securities take physical delivery of the securities in
definitive form. These limits and laws may impair your ability to acquire or
transfer beneficial interests in the global security.
We will make payments on each series of book-entry Debt Securities to DTC
or its nominee, as the sole registered owner and holder of the global security.
Neither Earthgrains nor the Trustee nor any of their agents will be responsible
or liable for any aspect of DTC's records relating to or payments made on
account of beneficial ownership interests in a global security or for
maintaining, supervising or reviewing any of DTC's records relating to the
beneficial ownership interests.
DTC has informed us that, when it receives any payment on a global
security, it will immediately, on its book-entry registration and transfer
system, credit the accounts of participants with payments in amounts
proportionate to their beneficial interests in the global security as shown on
DTC's records. Payments by participants to you, as an owner of a beneficial
interest in the global security, will be governed by standing instructions and
customary practices (as is now the case with securities held for customer
accounts registered in "street name") and will be the sole responsibility of the
participants.
A global security representing a series will be exchanged for certificated
Debt Securities of that series if (a) DTC notifies us that it is unwilling or
unable to continue as Depositary or if DTC ceases to be a clearing agency
registered under the Securities Exchange Act of 1934 and we don't appoint a
successor within 90 days or (b) we decide that the global security shall be
exchangeable. If that occurs, we will issue Debt Securities of that series in
certificated form in exchange for the global security. An owner of a beneficial
interest in the global security then will be entitled to physical delivery of a
certificate for Debt Securities of the series equal in principal amount to that
beneficial interest and to have those Debt Securities registered in its name. We
would issue the certificates for the Debt Securities in denominations of $1,000
or any larger amount that is an integral multiple thereof, and we would issue
them in registered form only, without coupons.
DTC has advised us that it is a limited-purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered under the 1934 Act. DTC was created to hold the
securities of its participants and to facilitate the clearance and settlement of
securities transactions among its participants through electronic book-entry
changes in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. DTC's participants include
securities brokers and dealers, banks, trust companies, clearing corporations,
and certain other organizations, some of whom (and/or their representatives) own
DTC. Access to DTC's book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. The
rules applicable to DTC and its participants are on file with the SEC. No fees
or costs of DTC will be charged to you.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table shows the ratio of our earnings to fixed charges for
the periods indicated. We do not show information for periods prior to the year
ended March 26, 1996 because information reflecting what our expenses would have
been as an independent company are not available. Prior to the spin-off from
Anheuser-Busch in 1996, Anheuser-Busch provided funds to Earthgrains by
intercompany advances, without interest charges.
We have computed these ratios by dividing earnings available for fixed
charges (income before income taxes plus fixed charges) by fixed charges
(interest expense plus that portion of rental expenses deemed to represent
interest).
For the Forty Weeks Ended For the Years Ended
March 26,
January 5, December 30, March 31, March 25, 1996
1999 1997 1998 1997 (pro forma)
Ratio of earnings -----------------------------------------------------------
to fixed charges 4.3x (1) 7.4x 5.9x 3.1x(1) (1)(2)
- -----------------------
(1) These calculations reflect certain non-recurring items. The forty weeks
ended January 5, 1999 include an $8.4 million pre-tax provision for
restructuring; fiscal 1997 includes a $12.7 million pre-tax provision for
restructuring; fiscal 1996 includes a $3.0 million pre-tax provision for
restructuring, a $7.8 million pre-tax charge for the Spanish work force
reduction program and a $7.6 million pre-tax charge for a legal settlement
and other non-recurring costs. If these non-recurring items were excluded,
the ratios would be 4.7x for the forty weeks ended January 5, 1999 and 4.4x
for the year ended March 25, 1997, and the deficiency (pro forma) for the
year ended March 26, 1996 would be approximately $21.6 million.
(2) As a result of the historical loss incurred and incremental pro forma
adjustments to represent Earthgrains as an independent company for this
period, earnings were less than fixed charges for the year ended March 26,
1996. The coverage deficiency was approximately $40.0 million.
STOCK SPLIT
A two-for-one split of our common stock was effective on July 20, 1998. The
following table shows certain information which has been restated to show the
effect of the stock split:
For the Years Ended
(In millions, except per share information) March 31, 1998 March 25, 1997
--------------- ---------------
Earnings per share
Basic
Earnings before cumulative effect of change
in accounting principle ...................... $ 0.93 $ 0.40
Cumulative effect of accounting change ........ 0.04 -
Net earnings per share ........................ $ 0.89 $ 0.40
Weighted average shares outstanding ........... 40.7 40.6
Diluted
Earnings before cumulative effect of change
in accounting principle ...................... $ 0.89 $ 0.39
Cumulative effect of accounting change ........ .04 -
Net earnings per share ........................ $ 0.85 $ 0.39
Weighted average shares outstanding ........... 42.5 41.3
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PLAN OF DISTRIBUTION
We may sell Debt Securities to or through one or more underwriters or
dealers, and also may sell Debt Securities directly to other purchasers or
through agents. These firms may also act as our agents in the sale of Debt
Securities. Only underwriters named in the Prospectus Supplement will be
considered as underwriters of the Debt Securities offered by the Prospectus
Supplement.
We may distribute Debt Securities at different times in one or more
transactions. We may sell Debt Securities at fixed prices, which may change, at
market prices prevailing at the time of sale, at prices related to the
prevailing market prices or at negotiated prices.
In connection with the sale of Debt Securities, underwriters may receive
compensation from us or from purchasers of Debt Securities in the form of
discounts, concessions or commissions. Underwriters, dealers and agents that
participate in the distribution of Debt Securities may be deemed to be
underwriters. Discounts or commissions they receive and any profit on their
resale of Debt Securities may be considered underwriting discounts and
commissions under the Securities Act of 1933. We will identify any underwriter
or agent, and we will describe any compensation, in the Prospectus Supplement.
We may agree to indemnify underwriters, dealers and agents who participate
in the distribution of Debt Securities against certain liabilities, including
liabilities under the 1933 Act.
We may authorize dealers or other persons who act as our agents to solicit
offers by certain institutions to purchase Debt Securities from us under
contracts which provide for payment and delivery on a future date. We may enter
into these contracts with commercial and savings banks, insurance companies,
pension funds, investment companies, educational and charitable institutions and
others. If we enter into these agreements concerning any series of Debt
Securities, we will indicate that in the Prospectus Supplement.
In connection with an offering of Debt Securities, underwriters may engage
in transactions that stabilize, maintain or otherwise affect the price of the
Debt Securities. Specifically, underwriters may over-allot in connection with
the offering, creating a syndicate short position in the Debt Securities for
their own account. In addition, underwriters may bid for, and purchase, Debt
Securities in the open market to cover short positions or to stabilize the price
of the Debt Securities. Finally, underwriters may reclaim selling concessions
allowed for distributing the Debt Securities in the offering if the underwriters
repurchase previously distributed Debt Securities in transactions to cover short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Debt Securities above
independent market levels. Underwriters are not required to engage in any of
these activities and may end any of these activities at any time.
Each series of Debt Securities offered will be a new issue of securities
and will have no established trading market. The Debt Securities may or may not
be listed on a national securities exchange. No assurance can be given as to the
liquidity of or the existence of trading markets for any Debt Securities
offered.
LEGAL OPINION
Bryan Cave LLP, St. Louis, Missouri, as our counsel, has issued an opinion
as to the legality of the Debt Securities.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Annual Report on Form 10-K of the Company for the year ended
March 31, 1998 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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