Prospectus Supplement
(To Prospectus dated April 8, 1999)
[GRAPHIC OMITTED]
$150,000,000
6 1/2% Notes due April 15, 2009
Issue price: 99.740%
Interest payable April 15 and October 15
The Notes will mature on April 15, 2009. Interest will accrue from April 20,
1999. We may redeem the Notes in whole or in part at any time at the redemption
prices described on page S-17. 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
- --------------------------------------------------------------------------------
Per Note 99.740% .650% 99.090%
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Total $149,610,000 $975,000 $148,635,000
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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 April
20, 1999.
J.P. Morgan & Co.
Banc One Capital Markets, Inc.
Chase Securities Inc.
NationsBanc Montgomery Securities LLC
Warburg Dillon Read LLC
April 15, 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-19
Legal Counsel...............................................................S-20
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; and
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.
S-5
<PAGE>
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.
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)
S-6
<PAGE>
o January 1998: Acquisition of CooperSmith, Inc. (Southeast U.S.)
o March 1998: Acquisition of San Luis Sourdough, Inc. (California)
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 ............................. 54.9 58.6 48.6 37.5 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
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
S-8
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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
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CAPITALIZATON
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
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<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
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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.
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Year-to-date earnings were $37.9 million or $0.89 per diluted share compared to
$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,
flour costs continued to decrease since the first half of fiscal 1997 after
reaching record highs thereby resulting in margin improvements.
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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.
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
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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
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
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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 April 1, 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 6 1/2% per annum. We will pay
interest in arrears on April 15 and October 15 beginning October 15, 1999.
Interest will accrue from April 20, 1999 or from the most recent interest
payment date to which we have paid or provided for the payment of interest. We
will pay interest computed on the basis of a 360-day year of twelve 30-day
months.
The Notes will mature on April 15, 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
April 1 or October 1 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, the redemption date or the maturity date is
not a Business Day, we will make the required payment on the next Business Day.
Optional Redemption
The Notes will be redeemable, in whole or in part, at our option at any
time at a redemption price equal to the greater of (i) 100% of the principal
amount of such Notes or (ii) as determined by a Quotation Agent (as defined
below), the sum of the present values of the remaining scheduled payments of
principal and interest thereon (not including any portion of such payments of
interest accrued as of the date of redemption) discounted to the date of
redemption on a semi-annual basis (assuming a 360-day year consisting of twelve
30-day months) at the Adjusted Treasury Rate (as defined below) plus 25 basis
points plus, in each case, accrued interest thereon to the date of redemption.
"Adjusted Treasury Rate" means, with respect to any redemption date, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by a Quotation Agent as having a maturity comparable to the remaining
term of the Notes to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of such Notes.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the Reference Treasury Dealer Quotations for such redemption
date, after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (ii) if the Trustee obtains fewer than three such Reference
Treasury Dealer Quotations, the average of all such Quotations.
"Quotation Agent" means the Reference Treasury Dealer appointed by us.
"Reference Treasury Dealer" means (i) J.P. Morgan Securities Inc., Banc One
Capital Markets, Inc., Chase Securities Inc., NationsBanc Montgomery Securities
LLC, Warburg Dillon Read LLC, and their respective successors; provided,
however, that if any of the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"), we
shall substitute therefor another Primary Treasury Dealer; and (ii) any other
Primary Treasury Dealer we select.
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"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
us, of the bid and asked prices for the Comparable Treasury Issue (expressed in
each case as a percentage of its principal amount) quoted in writing to the
Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day
preceding such redemption date.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of the Notes to be redeemed.
Unless we default in payment of the redemption price, on and after the
redemption date, interest will cease to accrue on the Notes or portions thereof
called for redemption.
The Notes will not be subject to any sinking fund.
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 April 15, 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. ........................ $ 90,000,000
Banc One Capital Markets, Inc. ..................... 15,000,000
Chase Securities Inc. .............................. 15,000,000
NationsBanc Montgomery Securities LLC .............. 15,000,000
Warburg Dillon Read LLC,
a subsidiary of UBS AG ......................... 15,000,000
----------
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 .40% of
the principal amount of the Notes. Any underwriter may allow, and any such
dealer may reallow, a concession not in excess of .25% 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.
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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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