<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER
1-4199
BESTFOODS
(Exact name of registrant as specified in its charter)
DELAWARE 36-2385545
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
700 SYLVAN AVENUE
INTERNATIONAL PLAZA
ENGLEWOOD CLIFFS, NEW JERSEY 07632-9976
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) 201-894-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange where registered
Common Stock par value New York, Chicago, Pacific, Frankfurt,
$.25 per share London, Paris, Swiss
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to its
Form 10-K [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Aggregate market value
Outstanding at held by non-affiliates at
Class January 31, 1998 January 31, 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $.25 144,054,968 $14,045,359,380
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated into Part I and Part II hereof.
2. Portions of the registrant's Proxy Statement dated March 12, 1998 are
incorporated into Part III hereof.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
Bestfoods and its consolidated subsidiaries (the "Company") is a worldwide
business, principally engaged in one industry segment, consumer foods. Following
the spin-off of its corn refining business on December 31, 1997, the Company
changed its name to Bestfoods. The development of the Company's business since
the beginning of 1997 and financial information on geographical divisions are
described in the 1997 Annual Report to Stockholders (the "Annual Report"), the
following portions of which are incorporated herein by reference:
- Text on pages 6 through 14 under the heading "Business
Review."
- Text on pages 16 and 17 under the heading "Bestfoods Values
and Policies."
- Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 18 through 22.
- Financial Statements and Notes to Consolidated Financial
Statements on pages 23 through 38.
The Company employs approximately 44,200 people of whom approximately
29,400 are located outside the United States. Total employee costs amounted to
$1.8 billion in 1997 compared with $1.9 billion and $1.5 billion in 1996 and
1995, respectively.
The Company's products are manufactured from various agricultural raw
materials including soybean and other vegetable oils, peanuts, and wheat, all of
which are expected to continue to be, in adequate supply. As prices of these raw
materials depend on a number of unpredictable factors, such as, farm plantings
and weather, which cannot always be fully protected through hedging,
fluctuations in raw material prices may have an effect on the Company's
earnings.
The Company's products are manufactured and sold primarily by the sales
organizations of its various operating units and subsidiaries. Exports represent
a small portion of total net sales. Mayonnaise sales accounted for 13 percent,
13 percent and 13.5 percent of consolidated net sales in 1997, 1996 and 1995,
respectively.
The Company has approximately 2,320 trademarks, some of which are of
significant importance to the Company. The Company also has over 846 patents of
various durations, some of which are licensed to affiliates and joint ventures
in which the Company or an affiliate participates. No individual patent has a
material effect on the earnings of the Company.
The Company's products, both within the United States and abroad,
generally face strong competition, and as a result, the Company engages in
extensive marketing, advertising and promotional activities. The Company also
conducts market research to assist in determining consumer preferences. The
amount spent on these activities was $978 million in 1997, $932 million in 1996
and $827 million in 1995.
In addition, the Company conducts product and process research and
development activities. Research related to food and food technology is
conducted at facilities in Somerset, New Jersey; Bay Shore, New York; Heilbronn,
Germany; and Thayngen, Switzerland.
1
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Research has resulted in the development of new and improved products
based on studies in nutrition, food technology, vegetable oils, enzymes,
carbohydrates, and carbohydrate-derived products, as well as developments and
improvements in process technology. The amount spent for research and
development in 1997, 1996, and 1995 was $66 million, $71 million and $66
million, respectively. Approximately 720 full-time professional employees were
engaged in such activities during 1997.
The Company operates in more than 60 countries, and accordingly,
operations are subject to varying degrees of political risk and uncertainty.
Loss of earnings from any one country other than the United States and Germany
would not have a material adverse effect on the Company as a whole. Also,
because of its diversity, the Company is subject to fluctuations in foreign
currencies which could affect earnings. As a practical matter it is not feasible
to cover these fluctuations with currency hedges. However, the Company does
maintain a policy to hedge its exposure to foreign currency cash flows.
ITEM 2. PROPERTIES.
The Company's headquarters buildings in Englewood Cliffs, New Jersey are
held under a lease which, including all renewal terms, expires in May 2019. The
Company owns or leases other property appropriate to its business, including
distribution centers and warehouses. None of the leases involved are considered
to be a material lease.
The Company has a total of 142 operating plants, of which 33 are in the
United States, 3 in Canada, 42 in Europe, 23 in Africa and the Middle East, 22
in Latin America, and 19 in Asia. In general, it is the Company's belief that
its plants are suitable and adequate for its needs, and, subject to fluctuations
in market demand, are fully utilized.
Included below is a complete listing of all plants owned and operated by
the Company and its subsidiaries as of December 31, 1997. Based on past loss
experience, the Company believes it is adequately insured in respect of those
assets, and for liabilities which are likely to arise from its operations.
UNITED STATES: ARKANSAS-Little Rock; CALIFORNIA-Montebello, San Francisco;
COLORADO-Denver; CONNECTICUT-Greenwich; FLORIDA-Miami, Riviera Beach;
ILLINOIS-Argo, Chicago, Franklin Park, Northlake; INDIANA-Indianapolis;
MARYLAND-Frederick; NORTH CAROLINA-Asheboro, Gastonia; NEW JERSEY-Bayonne,
Jersey City; NEW YORK-Albany (2), Bay Shore (2), Hudson, Plattsburg;
OREGON-Beaverton; PENNSYLVANIA-Hazleton; TEXAS-Dallas, Irving;
VERMONT-Burlington; WISCONSIN-Germantown, Milwaukee (2), Oconomowoc; PUERTO
RICO-Arecibo
CANADA: QUEBEC-Baie d'Urfe, Pointe Claire (2)
EUROPE: AUSTRIA-Wels; CZECH REPUBLIC-Zabreh; DENMARK-Levring, Vadum;
FRANCE-Duppigheim (2), Faverolles, Grande Synthe, Ludres (Nancy), Verneuil;
GERMANY-Auerbach, Bremen, Cloppenburg, Heilbronn, Krefeld, Krumbach, Reinbek,
Stavenhagen, Wittingen; GREECE-Schimatari; HUNGARY-Roszke; IRELAND-Dublin;
ITALY-Sanguinetto; NETHERLANDS-Baarn, Loosdrecht; POLAND-Poznan (2), Torun;
PORTUGAL-Carregado; ROMANIA-Otopeni;SPAIN-Martorell, Montmelo;
SWEDEN-Simrishamn; SWITZERLAND-Carouge, Thayngen; UNITED KINGDOM-Bristol,
Burton-on-Trent, Crumlin, Erith, Lifton, Paisley, Redditch
LATIN AMERICA: ARGENTINA-Barracas, Florida, Mendoza, Pilar, Tucuman;
BRAZIL-Cabo, Campina Grande, Garanhuns, Mogi-Guacu, Pouso Alegre;
CHILE-Llay-Llay; COLOMBIA-Barranquilla (2), Cali; COSTA RICA-Alajuela;
DOMINICAN REPUBLIC-Santo Domingo; MEXICO-Aguascalientes, Aguida, Lerma;
PERU-Callao; VENEZUELA-Maracay, Valencia
2
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AFRICA & MIDDLE EAST: ISRAEL-Arad, Arara, Barkan, Hadera, Haifa, Zefat;
JORDAN-Wadi Dleil; KENYA-Nairobi; MOROCCO-Casablanca; SAUDI ARABIA-Yanbu;
SOUTH AFRICA-Cape Town, Durban (3), East London, Estcourt, Johannesburg,
Kimberley, Klerksdrop (2), Vryheid; TURKEY-Cayirova, Kartal
ASIA: CHINA-Beijing, Conghua, Feng Xian, Weifang; HONG KONG-Tai Po;
INDIA-Dharwar, Thane; INDONESIA-Purwakarta; MALAYSIA-Kuala Lumpur;
PAKISTAN-Faisalabad, Pernawan; PHILIPPINES-Cavite, Las Pinas, Paranaque; SRI
LANKA-Katana; TAIWAN-Hsin Chu Hsien; THAILAND-Bangpoo, Gateway City; VIET
NAM-Bien Hoa
ITEM 3. LEGAL PROCEEDINGS.
In previous reports concerning the site of a former subsidiary, Ott
Chemical Company, located in Muskegon, Michigan, the Company reported that it
had been held liable under the Comprehensive Environmental Response,
Compensation and Liability Act, in a 1991 decision by the U.S. District Court
for the Western District of Michigan. The Company also previously reported that
on July 14, 1995, the U.S. Court of Appeals for the Sixth Circuit reversed the
District Court's finding of liability against the Company and that following
such reversal, the Court of Appeals directed an en banc rehearing of this
decision, which reaffirmed the Sixth Circuit's reversal. The Company also
reported previously that the U.S. government and the State of Michigan
petitioned the U.S. Supreme Court for certiorari. The government's petition for
certiorari was granted on December 12, 1997 and the case was heard on March 24,
1998. The court's ruling is expected by June 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
3
<PAGE> 5
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of all elected officers of the
Registrant, as of December 31, 1997, indicating their positions and offices with
the Registrant and the period of time during which each has served as such:
Name Age All positions and offices with the Registrant
---- --- ---------------------------------------------
Charles R. Shoemate 58 Chairman of the Board since September 1990;
Chief Executive Officer since August 1990;
President since October 1988; Vice President,
1984 - October 1988 and Director since
October 1988.
Robert J. Gillespie 55 Executive Vice President since July 1995;
Senior Vice President November 1991 - July
1995; Vice President 1980 - November 1991
and Director since October 1988.
Alain Labergere 63 Executive Vice President since July 1995;
Senior Vice President October 1991 - July
1995; Vice President January 1991 - November
1991 and Director since December 1992.
Richard P. Bergeman 59 Senior Vice President since March 1997; Vice
President since 1982.
Bernard H. Kastory 52 Senior Vice President since March 1997; Vice
President since 1992.
Axel C.A. Krauss 53 Senior Vice President since March 1997; Vice
President since 1992.
Michael J. Bevilacqua 58 Vice President since 1992.
Charles Feldberg 64 Vice President since 1984.
Robert S. Gluck 47 Vice President and Treasurer since May 1997;
Vice President, Finance Corn Products
Division 1995 - April 1997; Vice President,
Business Development, Best Foods Division
1992 - 1995.
Gale L. Griffin 54 Vice President since December 1995;
Director, Corporate Communications December
1991 - November 1995.
Heribert H. Grunert 53 Vice President since April 1995; President
Bestfoods Asia since 1992.
Hanes A. Heller 57 Vice President since December 1995; General
Counsel since April 1997; Secretary since
November 1997; Deputy General Counsel 1987-
November 1995.
4
<PAGE> 6
Nina Henderson 47 Vice President since September 1997;
President Best Foods Grocery Division since
September 1997; Vice President, Best Foods
Division 1986 - August 1997.
John J. Langdon 57 Vice President since March 1997; President
and Chief Executive Officer Bestfoods Baking
Company since March 1997; President Best
Foods Baking Group 1992 - February 1997.
Rainer H. Mimberg 55 Vice President since March 1997; Comptroller
since June 1997; Senior Vice President,
Finance and Human Resources Bestfoods Europe
1995 - February 1997; Vice President,
Finance Bestfoods Latin America 1990 - 1995.
Luis Schuchinski 60 Vice President since December 1995; Director
Taxes and Insurance 1987 - November 1995.
Anthony J. Simon 52 Vice President since February 1997; Senior
Vice President, Business Development and
Planning and Operations, Bestfoods Europe
from 1992 - 1997.
Mohammed Wahby 62 Vice President since December 1995; President
Bestfoods Africa/Middle East Division since
March 1995; Vice President, Bestoods Europe
1993-February 1995.
All officers serve at the pleasure of the Board of Directors.
5
<PAGE> 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information regarding the Company's common stock and market prices for
each quarterly period during the past two years is set forth on pages 40 and 41
of the Annual Report and is incorporated herein by reference.
The approximate number of equity stockholders as of December 31, 1997 was
26,100.
The history of the Company's dividends declared for the last two years on
pages 40 and 41 of the Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data for the ten years ended December 31, 1997 for the
Company, as set forth on pages 40 and 41 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's discussion and analysis of financial condition and results of
operations of the Company for the three years ended December 31, 1997, is set
forth on pages 18 through 22 of the Annual Report and is incorporated herein by
reference.
On March 17, 1998, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock outstanding on March 31, 1998, to be
effective in the form of a 100% stock dividend, payable on April 24, 1998.
In addition on March 24, 1998, the Company issued $250 million 6.625%
notes maturing in 2028 under a shelf registration filed in August 1997. The
issuance of these notes completes the authorization under this shelf
registration.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative disclosure about market risk is set forth on page 32 of the
Annual Report under the caption "Financial Instruments" and is incorporated
herein by reference.
Qualitative disclosure about market risk is set forth on pages 28 and 29
of the Annual Report under the caption " Financial Instruments" and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements comprising the consolidated balance sheets at
December 31, 1997 and 1996, and the consolidated statements of income,
stockholders' equity and cash flows, and notes to financial statements for each
of the years in the three year period ended December 31, 1997 are set forth on
pages 23 through 38 of the Annual Report and are incorporated herein by
reference.
Selected quarterly financial data for the years ended December 31, 1997
and 1996, set forth on pages 40 and 41 of the Annual Report is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
6
<PAGE> 8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's Proxy Statement dated March 12, 1998 (the "1998 Proxy
Statement") has been filed pursuant to Regulation 14A and is incorporated herein
by reference. Information regarding directors of the Registrant is set forth on
pages 19 through 26 of the 1998 Proxy Statement under the caption "Election of
Directors". Information regarding executive officers of the Registrant is set
forth on pages 4 and 5 of this report.
Information regarding Section 16(a) Compliance is set forth on page 8 of
the 1998 Proxy Statement under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is set forth on pages 14
through 17 of the 1998 Proxy Statement under the caption "Executive
Compensation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is set forth on pages 18 and 19 of the 1998 Proxy Statement under the
caption "Stock Ownership Table" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) Financial Statements - See index on page 8.
b) Reports on Form 8-K - There was one report on Form 8-K filed during
the fourth quarter of 1997 regarding the Board of Directors'
approval of the spin off of the corn refining operations. This
report was filed on December 1, 1997.
c) Exhibits - Exhibits to this report are filed as part of this report as
set forth in the Index to Exhibits on pages 11 and 12 hereof.
7
<PAGE> 9
INDEX TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The consolidated financial statements and reports of the independent
auditors are included in Part II of this report through incorporation by
reference from the Annual Report which is filed as Exhibit 13. The
documents referred to above can be found on the following pages of the
Annual Report.
<TABLE>
<CAPTION>
Annual Report
Page
--------------
<S> <C>
a) Consolidated statements of income for the years
ended December 31, 1997, 1996 and 1995 23
b) Consolidated balance sheets for the years ended
December 31, 1997 and 1996 24 - 25
c) Consolidated statements of cash flows for the
years ended December 31, 1997, 1996 and 1995 26
d) Consolidated statements of stockholders' equity
for the years ended December 31, 1997, 1996 and 27
1995
e) Notes to consolidated financial statements 28 - 38
f) Independent auditors' report. 39
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted either because
the information is not required or is otherwise included in the financial
statements and notes thereto.
8
<PAGE> 10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 1998.
BESTFOODS
-----------------------------------
By /S/ Charles R. Shoemate
-----------------------------------
Charles R. Shoemate,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on the behalf of the
Registrant and in the capacities indicated, on the 26th day of March, 1998.
Signature Title
/S/ Charles R. Shoemate Chairman, President, and Chief Executive Officer
- -----------------------------
(Charles R. Shoemate)
/S/ Bernard H. Kastory Senior Vice President, Finance and Administration
- -----------------------------
(Bernard H. Kastory)
/S/ Rainer H. Mimberg Vice President Finance and Comptroller
- -----------------------------
(Rainer H. Mimberg)
/S/ Theodore H. Black * Director
- -----------------------------
(Theodore H. Black)
/S/ Clateo Castellini * Director
- -----------------------------
(Clateo Castellini)
/S/ Alfred C. DeCrane, Jr. * Director
- -----------------------------
(Alfred C. DeCrane, Jr.)
/S/ William C. Ferguson * Director
- -----------------------------
(William C. Ferguson)
/S/ Robert J. Gillespie * Director
- -----------------------------
(Robert J. Gillespie)
9
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/S/ Ellen R. Gordon * Director
- -------------------------------
(Ellen R. Gordon)
/S/ George V. Grune * Director
- -------------------------------
(George V. Grune)
/S/ Leo I. Higdon, Jr. * Director
- -------------------------------
(Leo I. Higdon, Jr.)
/S/ Richard G. Holder * Director
- -------------------------------
(Richard G. Holder)
/S/ Eileen S. Kraus * Director
- -------------------------------
(Eileen S. Kraus)
/S/ Alain Labergere * Director
- -------------------------------
(Alain Labergere)
/S/ William S. Norman * Director
- -------------------------------
(William S. Norman)
/S/ Henrique de Campos * Director
Meirelles
- -------------------------------
(Henrique de Campos
Meirelles)
*/S/ Hanes A. Heller
- -------------------------------
(Hanes A. Heller)
Attorney-in-fact
10
<PAGE> 12
INDEX TO EXHIBITS
EXHIBIT NO.
- ---------------
3 (a) The Certificate of Incorporation as restated January 20, 1998
is filed herewith.
3 (b) The By-Laws as amended on January 20, 1998 are filed herewith.
4 (a) No instruments defining rights of holders of debt securities
are included as exhibits because each authorized issue of debt
securities is less than 10% of total assets. The Company agrees
to furnish a copy of any such instrument upon request.
4 (b) Rights Agreement dated March 19, 1991 between the Company and
First Chicago Trust Company of New York is incorporated by
reference to Exhibit 4 (b) of Form 10-K for the year ended
December 31, 1991.
10 (a) The 1984 Stock and Performance Plan is incorporated by
reference from Exhibit A to the Prospectus contained in
Post-Effective Amendment No. 1 to the Registration Statement on
Form S-8, File No. 2-92248.
10 (b) The 1993 Stock and Performance Plan is incorporated by
reference to the Registration Statement filed on Form S-8, File
No. 33-49847.
10 (c) Deferred Compensation Plan for Outside Directors is
incorporated by reference to Exhibit 10 (c) of Form 10-K for the
year ended December 31, 1996.
10 (d) Standard form of severance agreement for executive officers
of the Company is incorporated by reference to Exhibit 10 of
Form 10-Q for the quarter ended June 30, 1996.
10 (e) Indemnification agreements for all directors and the five
most highly compensated executive officers are incorporated by
reference to Exhibit 10 (e) of Form 10-K for the year ended
December 31, 1996.
10 (f) Deferred Compensation Plan for senior executives, dated
November 10, 1988 is incorporated by reference to Exhibit 10 (e)
of Form 10-K for the year ended December 31, 1988.
10 (g) Special Severance Program for Salaried Employees, dated
January 17, 1989 is incorporated by reference to Exhibit 10 (f)
of Form 10-K for the year ended December 31, 1988. An amendment
dated March 19, 1991 to the Special Severance Program for
Salaried Employees is incorporated by reference to Exhibit 10 (f)
of Form 10-K for the year ended December 31, 1991.
10 (h) Deferred Stock Unit Plan for senior executives, dated
December 20, 1994, is incorporated by reference to Exhibit 10 (h)
of Form 10-K for the year ended December 31, 1994.
10 (i) Executive Life Insurance Plan and Amendment No. 1 related
thereto are incorporated by reference to Exhibit 10 (i) of Form
10-K for the year ended December 31, 1994.
11 Schedule of computation of earnings per share is filed herewith.
11
<PAGE> 13
12 Statement regarding the computation of ratios of earnings to
fixed charges is filed herewith.
13 1997 Annual Report to Stockholders is filed herewith. Except for
such parts thereof as are expressly incorporated by reference in
this Form 10-K, this exhibit is furnished for the information of
the Securities and Exchange Commission and is not deemed filed as
a part hereof. Graphic material contained in the Annual Report is
not included in the electronic filing of this report.
21 Subsidiaries of the Registrant is filed herewith.
23 Consent of Independent Auditors is filed herewith.
24 Powers of Attorney are filed under separate cover with the
Commission.
27 Financial Data Schedule is filed herewith.
12
<PAGE> 1
Exhibit 3(a)
RESTATED CERTIFICATE OF INCORPORATION
OF
BESTFOODS
Bestfoods (hereinafter called the 'Corporation') was originally incorporated
in the State of Delaware under the name 'Corn Products Company,' and its
original Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on February 17, 1959. This Restated Certificate of
Incorporation was duly adopted by the Board of Directors effective as of January
20, 1998 in accordance with the provisions of Section 245 of the General
Corporation Law of the State of Delaware without a vote of the stockholders. It
only restates and integrates and does not further amend the provisions of the
Certificate of Incorporation as heretofore amended or supplemented, and there is
no discrepancy between those provisions and the provisions of this Restated
Certificate of Incorporation.
FIRST : The name of the Corporation is Bestfoods.
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle. The
name of the Corporation's registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 925,000,000 shares, consisting of
(a) 25,000,000 shares of Preferred Stock, par value $1.00 per share,
and
(b) 900,000,000 shares of Common Stock, par value $.25 per share.
Except as otherwise provided by law, the shares of stock of the
Corporation, regardless of class, may be issued by the Corporation from time
to time in such amounts, for such consideration and for such corporate
purposes as the Board of Directors may from time to time determine.
Shares of Preferred Stock may be issued from time to time in one or more
series of any number of shares as may be determined from time to time by the
Board of Directors, provided that the aggregate number of shares issued and
not cancelled of any and all such series shall not exceed the total number of
shares of Preferred Stock authorized by this Certificate of Incorporation.
Each series of Preferred Stock shall be distinctly designated. Except in
respect of the particulars fixed for series by the Board of Directors as
permitted hereby, all shares of Preferred Stock shall be of equal rank and
shall be identical. All shares of any one series of Preferred Stock shall be
alike in every particular, except that shares of any one series issued at
different times may differ as to the dates from which dividends thereon shall
be cumulative. The voting powers, if any, of each such series and the
preferences and relative, participating, optional and other special rights of
each such series and the qualifications, limitations and restrictions thereof,
if any, may differ from those of any and all other series at any time
outstanding; and the Board of Directors is hereby expressly granted authority
to fix, in the resolution or resolutions providing for the issue of stock of a
particular series of Preferred Stock, the voting powers, if any, of each such
series and the designations, preferences and relative, participating, optional
and other special rights of each such series and the qualifications,
limitations and restrictions thereof to the full extent now or hereafter
permitted by this Certificate of Incorporation and the laws of the State of
Delaware.
Subject to the provisions of any applicable law or of the By-laws with
respect to the closing of the transfer books or the fixing of a record date
for the determination of stockholders entitled to vote, and except as
otherwise provided by law or by the resolution or resolutions providing for
the issue of any series of Preferred Stock, the holders of outstanding shares
of Common Stock shall exclusively possess the voting power for the election of
directors and for all other purposes, each holder of record of shares of
Common Stock being entitled to one vote for each share of Common Stock
standing in his name on the books of the Corporation.
<PAGE> 2
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
SECTION 1. Designation and Amount. The shares of such series shall be
designated as 'Series A Junior Participating Preferred Stock' and the number
of shares constituting such series shall initially be 600,000, par value $1.00
per share, such number of shares to be subject to increase or decrease by
action of the Board of Directors as evidenced by a certificate of designation.
SECTION 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash
on the last day of March, June, September and December in each year (each such
date being referred to herein as a 'Quarterly Dividend Payment Date'),
commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Junior Participating
Preferred Stock, in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $110 or (b) subject to the provision for adjustment
hereinafter set forth, 200 times the aggregate per share amount of all cash
dividends, and 200 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock, par
value $.25 per share, of the Corporation (the 'Common Stock') since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share
or fraction of a share of Series A Junior Participating Preferred Stock. In
the event the Corporation shall at any time after March 19, 1991 (the 'Rights
Declaration Date') (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each
such case the amount to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series
A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $110 per share
on the Series A Junior Participating Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of
Series A Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Junior Participating Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends
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shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series A Junior Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a record
date for the determination of holders of shares of Series A Junior
Participating Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than 30 days
prior to the date fixed for the payment thereof.
SECTION 3. Voting Rights. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Junior Participating Preferred Stock shall entitle
the holder thereof to 200 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any
time after the Rights Declaration Date (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the number of votes per share to
which holders of shares of Series A Junior Participating Preferred Stock
were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Junior Participating Preferred Stock and the holders of
shares of Common Stock shall vote together as one class on all matters
submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6)
quarterly dividends thereon, the occurrence of such contingency shall mark
the beginning of a period (herein called a 'default period') which shall
extend until such time when all accrued and unpaid dividends for all
previous quarterly dividend periods and for the current quarterly dividend
period on all shares of Series A Junior Participating Preferred Stock then
outstanding shall have been declared and paid or set apart for payment.
During each default period, all holders of Preferred Stock (including
holders of the Series A Junior Participating Preferred Stock) with
dividends in arrears in an amount equal to six (6) quarterly dividends
thereon, voting as a class, irrespective of series, shall have the right
to elect two (2) directors.
(ii) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially
at a special meeting called pursuant to subparagraph (iii) of this Section
3(C) or at any annual meeting of stockholders, and thereafter at annual
meetings of stockholders, provided that neither such voting right nor the
right of the holders of any other series of Preferred Stock, if any, to
increase, in certain cases, the authorized number of directors shall be
exercised unless the holders of ten percent in number of shares of
Preferred Stock outstanding shall be present in person or by proxy. The
absence of a quorum of the holders of Common Stock shall not affect the
exercise by the holders of Preferred Stock of such voting right. At any
meeting at which the holders of Preferred Stock shall exercise such voting
right initially during an existing default period, they shall have the
right, voting as a class, to elect directors to fill such vacancies, if
any, in the Board of Directors as may then exist up to two (2) directors
or, if such right is exercised at an annual meeting, to elect two (2)
directors. If the number which may be so elected at any special meeting
does not amount to the required number, the holders of the Preferred Stock
shall have the right to make such increase in the number of directors as
shall be necessary to permit the election by them of the required number.
After the holders of the Preferred Stock shall have exercised their right
to elect directors in any default period and during the continuance of
such period, the number of directors shall not be increased or decreased
except by vote of the holders of Preferred Stock as herein provided or
pursuant to the rights of any equity securities ranking senior to or pari
passu with the Series A Junior Participating Preferred Stock.
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(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect directors,
the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent (10%) of the total
number of shares of Preferred Stock outstanding, irrespective of series,
may request, the calling of a special meeting of the holders of Preferred
Stock, which meeting shall thereupon be called by the President, a
Vice-President or the Secretary of the Corporation. Notice of such meeting
and of any annual meeting at which holders of Preferred Stock are entitled
to vote pursuant to this paragraph (C) (iii) shall be given to each holder
of record of Preferred Stock by mailing a copy of such notice to him at
his last address as the same appears on the books of the Corporation. Such
meeting shall be called for a time not earlier than 20 days and not later
than 60 days after such order or request or in default of the calling of
such meeting within 60 days after such order or request, such meeting may
be called on similar notice by any stockholder or stockholders owning in
the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding. Notwithstanding the provisions of
this paragraph (C) (iii), no such special meeting shall be called during
the period within 60 days immediately preceding the date fixed for the
next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of directors until the holders of
Preferred Stock shall have exercised their right to elect two (2)
directors voting as a class, after the exercise of which right (x) the
directors so elected by the holders of Preferred Stock shall continue in
office until their successors shall have been elected by such holders or
until the expiration of the default period, and (y) any vacancy in the
Board of Directors may (except as provided in paragraph (C) (ii) of this
Section 3) be filled by vote of a majority of the remaining directors
theretofore elected by the holders of the class of stock which elected the
director whose office shall have become vacant. References in this
paragraph (C) to directors elected by the holders of a particular class of
stock shall include directors elected by such directors to fill vacancies
as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Preferred Stock as a class to elect directors shall
cease, (y) the term of any directors elected by the holders of Preferred
Stock as a class shall terminate, and (z) the number of directors shall be
such number as may be provided for in the Certificate of Incorporation or
By-laws irrespective of any increase made pursuant to the provisions of
paragraph (C) (ii) of this Section 3 (such number being subject, however,
to change thereafter in any manner provided by law or in the Certificate
of Incorporation or By-laws). Any vacancies in the Board of Directors
effected by the provisions of clauses (y) and (z) in the preceding
sentence may be filled by a majority of the remaining directors.
(D) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
SECTION 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series A
Junior Participating Preferred Stock outstanding shall have been paid in full,
the Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Participating
Preferred Stock, except dividends paid ratably on the Series A Junior
Participating Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders
of all such shares are then entitled;
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(iii) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Junior Participating Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Junior Participating
Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series
A Junior Participating Preferred Stock, or any shares of stock ranking on a
parity with the Series A Junior Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section
4, purchase or otherwise acquire such shares at such time and in such manner.
SECTION 5. Reacquired Shares.
Any shares of Series A Junior Participating Preferred Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject
to the conditions and restrictions on issuance set forth herein.
SECTION 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Corporation, no distribution shall be made to the holders of shares
of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock unless, prior thereto, the holders of shares of Series A Junior
Participating Preferred Stock shall have received $50 per share, plus an
amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the 'Series A
Liquidation Preference'). Following the payment of the full amount of the
Series A Liquidation Preference, no additional distributions shall be made to
the holders of shares of Series A Junior Participating Preferred Stock unless,
prior thereto, the holders of shares of Common Stock shall have received an
amount per share (the 'Common Adjustment') equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) 200 (as appropriately
adjusted as set forth in subparagraph (C) below to reflect such events as
stock splits, stock dividends and recapitalizations with respect to the Common
Stock) (such number in clause (ii), the 'Adjustment Number'). Following the
payment of the full amount of the Series A Liquidation Preference and the
Common Adjustment in respect of all outstanding shares of Series A Junior
Participating Preferred Stock and Common Stock, respectively, holders of
Series A Junior Participating Preferred Stock and holders of shares of Common
Stock shall receive their ratable and proportionate share of the remaining
assets to be distributed in the ratio of the Adjustment Number to 1 with
respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences. In
the event, however, that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
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(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each
such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
SECTION 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares
of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the
provision for adjustment hereinafter set forth) equal to 200 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series A Junior
Participating Preferred Stock shall be adjusted by multiplying such amount by
a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
SECTION 8. No Redemption. The shares of Series A Junior Participating
Preferred Stock shall not be redeemable.
SECTION 9. Ranking. The Series A Junior Participating Preferred Stock
shall rank junior to all other series of the Corporation's Preferred Stock as
to the payment of dividends and the distribution of assets, unless the terms
of any such series shall provide otherwise.
SECTION 10. Amendment. The Restated Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A
Junior Participating Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of two-thirds (2/3) or more of the
outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
SECTION 11. Fractional Shares. Series A Junior Participating Preferred
Stock may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
SERIES B ESOP CONVERTIBLE PREFERRED STOCK
SECTION 1. Designation and Amount; Special Purpose Restricted-Transfer
Issue.
(A) The shares of such series shall be designated as 'Series B ESOP
Convertible Preferred Stock' ('Series B Preferred Stock') and the number of
shares constituting such series initially shall be 3,000,000, such number of
shares to be subject to increase or decrease by the Board of Directors as
evidenced by a certificate of designations; provided, however, that no
decrease shall reduce the number of shares of Series B Preferred Stock to a
number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights
or warrants issued by, or upon the conversion of any outstanding securities
convertible into Series B Preferred Stock issued by, the Corporation.
(B) Shares of Series B Preferred Stock shall be issued only to Fidelity
Management Trust Company or its successors as trustee, or their respective
nominees (the 'Trustee'), of the employee stock ownership plan (together with
any successor plan, the 'Plan') portion of the CPC International Inc.
Savings/Retirement Plan for Salaried Employees. All references to the holder
of shares of Series B Preferred Stock shall mean the Trustee. In the event of
any transfer of shares of Series B Preferred
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Stock to any person or entity other than the Corporation or a Trustee, the
shares of Series B Preferred Stock so transferred, upon such transfer and
without any further action by the Corporation, the holder thereof or the
transferee thereof, shall be automatically converted into shares of Common
Stock pursuant to paragraph 5(H) hereof and no such transferee shall have any
of the voting powers, preferences and relative, optional or special rights
ascribed to shares of Series B Preferred Stock hereunder but, rather, only the
powers and rights pertaining to the Common Stock into which such shares of
Series B Preferred Stock shall be so converted. In the event of such a
conversion, the transferee of the shares of Series B Preferred Stock shall be
treated for all purposes as the record holder of the shares of Common Stock
into which such shares of Series B Preferred Stock have been automatically
converted as of the date of such transfer. Notwithstanding the foregoing, the
pledge of Series B Preferred Stock as collateral by or pursuant to any credit
agreement, indenture or other document or instrument shall not constitute a
transfer for purposes of this paragraph 1(B), but the foreclosure or other
realization upon such pledged shares shall constitute a transfer. Certificates
representing shares of Series B Preferred Stock shall bear a legend to reflect
the foregoing provisions. Notwithstanding the foregoing provisions of this
paragraph 1(B), shares of Series B Preferred Stock (i) may be converted into
shares of Common Stock as provided by Section 5 hereof and the shares of
Common Stock issued upon such conversion may be transferred by the holder
thereof as permitted by law and (ii) shall be redeemable by the Corporation
upon the terms and conditions provided by Sections 6, 7 and 8 hereof.
SECTION 2. Dividends and Distributions.
(A) Subject to the provisions for adjustment hereinafter set forth, the
holders of shares of Series B Preferred Stock, in preference to any shares of
any stock ranking as to dividends, or as to distributions in the event of a
liquidation in whole, dissolution or winding-up of the Corporation, junior to
the Series B Preferred Stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available therefor,
cash dividends ('Preferred Dividends') in an amount per share equal to $7.14
per share per annum, and no more, payable semi-annually in arrears, one-half
on the 15th day of June and one-half on the 15th day of December of each year
(each a 'Dividend Payment Date') commencing on June 15, 1998, to the holders
of record at the start of business on such Dividend Payment Date. In the event
that any Dividend Payment Date shall fall on any day other than a Business Day
(as defined in paragraph 9(F) hereof), the dividend payment due on such
Dividend Payment Date shall be payable on the Business Day immediately
preceding such Dividend Payment Date. Preferred Dividends shall begin to
accrue on outstanding shares of Series B Preferred Stock from and including
December 15, 1997 or, if later, the date of issuance thereof. Preferred
Dividends shall accrue on a daily basis whether or not the Corporation shall
have earnings or surplus at the time, but Preferred Dividends accrued after
issuance on the shares of Series B Preferred Stock for any period less than a
full semi-annual period between Dividend Payment Dates shall be computed on
the basis of a 360-day year of 30-day months. Accrued but unpaid Preferred
Dividends shall cumulate as of the Dividend Payment Date on which they first
become payable, but no interest shall accrue on accumulated but unpaid
Preferred Dividends.
(B) So long as any shares of Series B Preferred Stock shall be
outstanding, no dividend shall be, directly or indirectly, declared or paid or
set apart for payment on any other series of stock ranking on a parity with
the Series B Preferred Stock as to dividends, unless there shall also be or
have been declared and paid or set apart for payment on the Series B Preferred
Stock, dividends for all dividend payment periods of the Series B Preferred
Stock ending on or before the dividend payment date of such parity stock,
ratably in proportion to the respective amounts of dividends accumulated and
unpaid or payable through such dividend payment period on the Series B
Preferred Stock and accumulated and unpaid or payable on such parity stock
through the dividend payment period on such parity stock next preceding such
dividend payment date, and the Corporation shall have redeemed (i) all of the
shares of Series B Preferred Stock that it is required to redeem pursuant to
Section 7 hereof if the mandatory obligation to redeem shares of Series B
Preferred Stock set forth therein is applicable and (ii) all of the shares of
Series B Preferred Stock for which a notice of redemption has been sent
pursuant to paragraph 6(B) hereof, if any. In the event that full cumulative
dividends on the Series B Preferred Stock have not been declared and paid or
set apart for payment when due or the Corporation shall fail to discharge its
obligation to redeem shares of Series B Preferred Stock pursuant to Section 6
hereof once notice of
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redemption has been sent or pursuant to Section 7 hereof once the mandatory
obligation to redeem shares of Series B Preferred Stock set forth therein is
applicable, the Corporation shall not, directly or indirectly, declare or pay
or set apart for payment any dividends or make any other distributions on, or
make any payment on account of the purchase, redemption or other retirement of
any other class of stock or series thereof of the Corporation ranking, as to
dividends or as to distributions in the event of a liquidation in whole,
dissolution or winding-up of the Corporation, junior to the Series B Preferred
Stock until full cumulative dividends on the Series B Preferred Stock shall
have been paid in full or declared and set apart for payment in full and any
such obligation shall have been discharged; provided, however, that the
foregoing shall not apply to (i) any dividend payable solely in any shares of
any stock ranking, as to dividends and as to distributions in the event of a
liquidation in whole, dissolution or winding-up of the Corporation, junior to
the Series B Preferred Stock, (ii) the acquisition of shares of any stock
ranking, as to dividends or as to distributions in the event of a liquidation
in whole, dissolution or winding-up of the Corporation, junior to the Series B
Preferred Stock either (A) pursuant to any employee or director incentive or
benefit plan or arrangement (including any employment, severance or consulting
agreement) of the Corporation or any subsidiary of the Corporation heretofore
or hereafter adopted or (B) in exchange solely for shares of any other stock
ranking, as to dividends and as to distributions in the event of a liquidation
in whole, dissolution or winding-up of the Corporation, junior to the Series B
Preferred Stock or (iii) any payment made in respect of the purchase or
redemption of the Rights, as defined in paragraph 5(G) hereof, or any rights
similar thereto.
SECTION 3. Voting Rights.
(A) The holders of Series B Preferred Stock shall be entitled to vote on
all matters submitted to a vote of the holders of Common Stock of the
Corporation, voting together with the holders of Common Stock (and the holders
of any other class or series of stock which may similarly be entitled to vote
with shares of Common Stock) as one class. The holder of each share of Series
B Preferred Stock shall be entitled to a number of votes equal to the number
of shares of Common Stock into which such share of Series B Preferred Stock
could be converted on the record date for determining the stockholders
entitled to vote, rounded to the nearest one-tenth of a vote; it being
understood that whenever the 'Conversion Price' (as defined in Section 5
hereof) is adjusted as provided in Section 9 hereof, the voting rights of the
Series B Preferred Stock shall also be similarly adjusted.
(B) Except as otherwise required by law or set forth herein, the holders
of Series B Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with the holders of Common Stock and the holders of any other class or series
of stock which may similarly be entitled to vote with the shares of Common
Stock as set forth herein) for the taking of any corporate action.
(C) The Restated Certificate of Incorporation of the Corporation
(including this Certificate of Designations) shall not be amended, altered or
repealed in any manner (including any amendment, alteration or repeal effected
by any merger or consolidation) which would adversely alter or change the
powers, preferences or special rights of the Series B Preferred Stock without
the affirmative vote or consent of the holders of a majority of the
outstanding shares of Series B Preferred Stock, voting separately as a series;
provided, that any increase in the authorized Preferred Stock or the creation
and issuance (whether or not authorized on or prior to the issuance of any
Series B Preferred Stock) of any other class or series of Preferred Stock
ranking senior to or on a parity with or junior to the Series B Preferred
Stock as to payment of dividends and upon liquidation in whole, dissolution or
winding-up of the Corporation or any increase or decrease in the number of
shares which constitute the Series B Preferred Stock (but not below the number
of shares thereof then outstanding) shall not be deemed to alter or change the
powers, preferences or special rights of the Series B Preferred Stock so as to
affect the holders thereof adversely within the meaning of the Delaware
General Corporation Law (the 'DGCL').
SECTION 4. Liquidation, Dissolution or Winding-Up.
(A) Upon any voluntary or involuntary liquidation in whole, dissolution or
winding-up of the Corporation, the holders of Series B Preferred Stock shall
be entitled to receive out of assets of the Corporation which remain after
satisfaction in full of all valid claims of creditors of the Corporation and
which are available for payment to stockholders, and subject to the rights of
the holders of any stock of
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the Corporation ranking senior to or on a parity with the Series B Preferred
Stock in respect of distributions upon liquidation in whole, dissolution or
winding-up of the Corporation, before any amount shall be paid or distributed
among the holders of Common Stock or any other shares ranking junior to the
Series B Preferred Stock in respect of distributions upon liquidation in
whole, dissolution or winding-up of the Corporation, liquidating distributions
in the amount of $89.21 per share (the 'Liquidation Preference'), plus an
amount equal to all accumulated and unpaid dividends (including dividends
declared and set aside) and accrued dividends thereon to the date fixed for
distribution, and no more. If upon any liquidation in whole, dissolution or
winding-up of the Corporation, the amounts payable with respect to the Series
B Preferred Stock and any other stock ranking as to any such distribution on a
parity with the Series B Preferred Stock are not paid in full, the holders of
the Series B Preferred Stock and such other stock shall share ratably in any
distribution of assets in proportion to the full respective preferential
amounts to which they are entitled. After payment of the full amount to which
they are entitled as provided by the foregoing provisions of this paragraph
4(A), the holders of shares of Series B Preferred Stock shall not be entitled
as such to any further right or claim to any of the remaining assets of the
Corporation.
(B) Neither the merger or consolidation of the Corporation with or into
any other corporation, nor the merger or consolidation of any other
corporation with or into the Corporation, nor the sale, lease, exchange or
other transfer of all or any portion of the assets of the Corporation, nor any
partial liquidation of the Corporation, shall be deemed to be a liquidation in
whole, dissolution or winding-up of the affairs of the Corporation for
purposes of this Section 4, but the holders of Series B Preferred Stock shall
nevertheless be entitled in the event of any such merger or consolidation to
the rights provided by Section 8 hereof.
(C) Written notice of any voluntary or involuntary liquidation in whole,
dissolution or winding-up of the Corporation, stating the payment date or
dates when, and the place or places where, the amounts distributable to the
holders of Series B Preferred Stock in such circumstances shall be payable,
shall be given by first-class mail, postage prepaid, mailed not less than
thirty (30) calendar days prior to any payment date stated therein, or such
shorter period prior to such payment date as may be necessary under the
circumstances, to the holders of Series B Preferred Stock at the addresses
shown on the books of the Corporation or any transfer agent for the Series B
Preferred Stock.
SECTION 5. Conversion into Common Stock.
(A) A holder of shares of Series B Preferred Stock shall be entitled, at
any time prior to the close of business on the date fixed for redemption of
such shares pursuant to Section 6, 7 or 8 hereof, to cause any or all of such
shares to be converted into shares of Common Stock at a conversion rate equal
to the ratio of (i) the Liquidation Preference per share to (ii) an amount
which initially shall be $44.605 and which shall be adjusted as hereinafter
provided (and which amount, as it may be so adjusted from time to time, is
hereinafter sometimes referred to as the 'Conversion Price') (that is, a
conversion rate initially equivalent to two shares of Common Stock for each
share of Series B Preferred Stock so converted, which is subject to adjustment
as the Conversion Price may be adjusted as hereinafter provided).
(B) Any holder of shares of Series B Preferred Stock desiring to convert
such shares into shares of Common Stock shall surrender the certificate or
certificates representing the shares of Series B Preferred Stock being
converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto), at the principal
executive office of the Corporation or the offices of the transfer agent for
the Series B Preferred Stock or such office or offices in the continental
United States of an agent for conversion as may from time to time be
designated by notice to the holders of the Series B Preferred Stock by the
Corporation or the transfer agent for the Series B Preferred Stock,
accompanied by written notice of conversion, on any Business Day. Such notice
of conversion shall specify (i) the number of shares of Series B Preferred
Stock to be converted and the name or names in which such holder wishes the
certificate or certificates for Common Stock and for any shares of Series B
Preferred Stock not to be so converted to be issued (subject to compliance
with applicable legal requirements if any of said certificates are to be
issued in a name other than the name of the holder), and (ii) the address to
which such holder wishes delivery to be made of such new certificates to be
issued upon such conversion.
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<PAGE> 10
(C) Upon surrender of a certificate representing a share or shares of
Series B Preferred Stock for conversion, the Corporation shall, as promptly as
practicable after such surrender, issue and send by hand delivery (with
receipt to be acknowledged) or by first-class mail, postage prepaid, to the
holder thereof or to such holder's designee, at the address designated by such
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled upon conversion. In the event that
there shall have been surrendered a certificate or certificates representing
shares of Series B Preferred Stock, only part of which are to be converted,
the Corporation shall issue and deliver to such holder a new certificate or
certificates representing the number of shares of Series B Preferred Stock
which shall not have been converted.
(D) The issuance by the Corporation of shares of Common Stock upon a
conversion of shares of Series B Preferred Stock into shares of Common Stock
(otherwise than pursuant to paragraph 1(B), 5(H) or 5(I) hereof) shall be
effective as of the close of business on the day of the surrender to the
Corporation of the certificate or certificates for the shares of Series B
Preferred Stock to be converted, duly assigned or endorsed for transfer to the
Corporation (or accompanied by duly executed stock powers relating thereto)
and accompanied by a written notice of conversion, as provided by this
Resolution. After the effective day of conversion, the shares of Series B
Preferred Stock so converted shall no longer be deemed to be outstanding for
any purpose, and the person or persons entitled to receive the Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock, but no allowance or
adjustment shall be made in respect of dividends payable to the holders of
Common Stock of record on any date prior to such effective date. Except as
otherwise expressly provided for herein, the Corporation shall not be
obligated to pay any accumulated and unpaid dividends and accrued dividends on
any shares of Series B Preferred Stock being converted pursuant to the
provisions hereof or any dividends which shall have been declared and shall be
payable to holders of shares of Series B Preferred Stock on a Dividend Payment
Date if such Dividend Payment Date for such dividend shall be on or subsequent
to the effective date of the conversion of such shares.
(E) The Corporation shall not be obligated to deliver to the holders of
Series B Preferred Stock any fractional share or shares of Common Stock
issuable upon any conversion of such shares of Series B Preferred Stock, but
in lieu thereof may make a cash payment in an amount equal to such fraction
multiplied by the Current Market Price (as defined in paragraph 9(F) hereof)
per share of the Common Stock at the close of business on the effective date
of conversion of such shares. The Corporation shall pay all issue taxes, if
any, incurred in respect of the Common Stock on conversion of shares of Series
B Preferred Stock as set forth in paragraph 11(C) hereof.
(F) The Corporation shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for issuance upon the
conversion of shares of Series B Preferred Stock as herein provided, free from
any preemptive rights, such number of shares of Common Stock as shall from
time to time be issuable upon the conversion of all the shares of Series B
Preferred Stock then outstanding and convertible pursuant to paragraph 5(A)
hereof. Nothing contained herein shall preclude the Corporation from
delivering shares of Common Stock held in its treasury upon the conversion of
shares of Series B Preferred Stock into Common Stock pursuant to the terms
hereof; provided, that such shares of Common Stock held in the Corporation's
treasury shall, at the effective time of such conversion, be free and clear of
all liens and similar encumbrances. The Corporation shall prepare and shall
use its best efforts to obtain and keep in force such governmental or
regulatory or listing (to the extent the Common Stock is then listed) permits
or other authorizations as may be required by law or the securities exchange
or exchanges on which the Common Stock is then listed, if any, and shall
comply with all requirements as to registration or qualification of the Common
Stock, in order to enable the Corporation lawfully to issue and deliver to
each holder of record of Series B Preferred Stock such number of shares of its
Common Stock as shall from time to time be sufficient to effect the conversion
of all shares of Series B Preferred Stock then outstanding and convertible
into shares of Common Stock. The Corporation shall also take any corporate or
other action which is reasonably necessary and permissible in order that the
Corporation deliver such number of legally and validly issued and fully paid
and nonassessable shares of Common Stock as may be required to effect said
conversion.
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<PAGE> 11
(G) Prior to the Distribution Date (as defined in Section 3(a) of the
Rights Agreement (defined below)), if the Corporation issues shares of Common
Stock upon conversion of shares of Series B Preferred Stock as contemplated by
this Section 5, the Corporation shall issue together with each such share of
Common Stock one right (a 'Right,' and collectively the 'Rights') to purchase
Series A Junior Participating Preferred Stock of the Corporation (or other
securities in lieu thereof) pursuant to the Rights Agreement dated as of March
19, 1991 between the Corporation and First Chicago Trust Company of New York,
as Rights Agent, as such agreement may from time to time be amended (the
'Rights Agreement'), or any similar rights issued to the holders of Common
Stock of the Corporation in addition thereto or in replacement therefor. After
the Distribution Date and prior to the redemption or expiration of the Rights,
if the Corporation issues shares of Common Stock upon conversion of shares of
Series B Preferred Stock as contemplated by this Section 5, the Corporation
shall issue together with such shares of Common Stock the appropriate number
of Rights, or any similar rights, in connection therewith, in accordance with
Section 22, clause (a), of the Rights Agreement, or any similar successor
provision, subject to the provisos therein.
(H) In the event that the Trustee ceases to be the holder of any share of
Series B Preferred Stock (except in the case of the redemption or repurchase
of shares by the Corporation), such share of Series B Preferred Stock will
automatically, without any act or deed on the part of the Corporation, the
Trustee or any other person, be converted into the number of shares of Common
Stock into which such share of Series B Preferred Stock would then be
convertible if it were voluntarily presented for conversion in accordance with
the other provisions of this Section 5 plus the right to receive an amount in
cash equal to all accumulated and unpaid dividends (including dividends
declared and set aside) and accrued dividends thereon through the date of such
automatic conversion. To the extent applicable, the other provisions of this
Section 5 shall govern any automatic conversion pursuant to this paragraph
5(H), subject to the following:
(a) any share surrendered for transfer by the Trustee shall be deemed
to have been surrendered for conversion by the transferee prior to the
close of business on the day such share would otherwise be transferred
into the transferee's name on the books of the Corporation;
(b) no notice of conversion need be submitted by either the Trustee or
its transferee in order to effect the automatic conversion provided for
hereby; and
(c) notwithstanding any provisions of paragraph 5(A) hereof, each
share of Series B Preferred Stock is subject to automatic conversion
pursuant to this paragraph 5(H) at any time prior to such share having
been redeemed or otherwise purchased by the Corporation.
(I) In the event that the Trustee shall certify that conversion of a share
of Series B Preferred Stock is necessary either (a) to provide for
distributions required to be made to participants under, or to satisfy an
investment election provided to participants in accordance with, the Plan or
(b) to make any payments of principal, interest or premium due and payable
(whether as scheduled, upon redemption, upon acceleration or otherwise) under
any indebtedness incurred by the holder for the benefit of the Plan, then such
share of Series B Preferred Stock will automatically, upon notice to the
Corporation given not less than five (5) Business Days prior to the date fixed
for conversion by the holder of such shares of Series B Preferred Stock in
such notice but without any further act or deed on the part of the
Corporation, the Trustee or any other person, be converted into the greater of
(i) the number of shares of Common Stock into which such share of Series B
Preferred Stock would then be convertible if it were voluntarily presented for
conversion in accordance with the other provisions of this Section 5 or (ii)
the number of shares of Common Stock that, when multiplied by the Fair Market
Value (as defined in paragraph 9(F) hereof) per share of Common Stock on the
date of such automatic conversion, equals the Liquidation Preference per share
plus, in each case, the right to receive an amount of cash equal to all
accumulated and unpaid dividends (including dividends declared and set aside)
and accrued dividends thereon through the date of such automatic conversion;
provided that the automatic conversion provided for in this paragraph 5(I)
shall take effect only when and to the extent necessary for the satisfaction
of either of the conditions set forth in clauses (a) and (b) of this paragraph
5(I); and provided, further, that, upon conversion of a share of Series B
Preferred Stock in satisfaction of the condition described in clause (b) of
this paragraph 5(I), the Corporation may, in lieu of such conversion, make
payment to the Trustee in cash in an amount equal to the Fair Market Value (as
defined in
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paragraph 9(F) hereof) of the shares of Common Stock into which such share of
Series B Preferred Stock would be convertible pursuant to this paragraph 5(I).
SECTION 6. Redemption At the Option of the Corporation.
(A) The Series B Preferred Stock shall be redeemable, in whole or in part,
at the option of the Corporation at any time after the date of issuance, if
permitted by paragraph 6(C) or 6(E) hereof, at the following redemption prices
per share (or, if pursuant to paragraph 6(C) or 6(E) hereof, at the redemption
price per share set forth therein):
Redemption
Price Per
During the Twelve-Month Period Beginning December 15, Share
- ----------------------------------------------------------------- -------------
1997............................................................. 90.64
1998............................................................. 89.92
and thereafter at the Liquidation Preference per share, plus, in each case, an
amount equal to all accumulated and unpaid dividends (including dividends
declared and set aside) and accrued dividends thereon to the date fixed for
redemption. Payment of the redemption price shall be made by the Corporation
in cash or shares of Common Stock, or a combination thereof, as permitted by
paragraph 6(F) hereof. From and after the close of business on the date fixed
for redemption, unless the Corporation shall have defaulted in the payment or
setting aside in trust of moneys and/or shares of Common Stock at the time and
place specified for the payment of the full redemption price (as set forth in
this Section 6) pursuant to the redemption notice described in paragraph 6(B)
hereof, all dividends on shares of Series B Preferred Stock called for
redemption will cease to accrue, such shares will no longer be deemed to be
outstanding and will no longer be convertible and all rights in respect of
such shares of the Corporation shall cease, except the rights to receive such
full redemption price. If less than all of the outstanding shares of Series B
Preferred Stock are to be redeemed, the Corporation shall either redeem a
portion of the shares of each holder determined pro rata based on the number
of shares held by each holder or shall select the shares to be redeemed by
lot, as may be determined by the Board of Directors of the Corporation.
(B) Unless otherwise required by law, notice of any redemption effected
pursuant to this Section 6 shall be sent to the holders of Series B Preferred
Stock at the address shown on the books of the Corporation or any transfer
agent for the Series B Preferred Stock by first-class mail, postage prepaid,
mailed not less than thirty (30) calendar days nor more than sixty (60)
calendar days prior to the redemption date. Each such notice shall state: (i)
the paragraph or clause within a paragraph of this Resolution pursuant to
which the redemption is being effected, (ii) the redemption date; (iii) the
total number of shares of the Series B Preferred Stock to be redeemed and, if
fewer than all the shares held by such holder are to be redeemed, the number
of such shares to be redeemed from such holder; (iv) the redemption price; (v)
the place or places where certificates for such shares are to be surrendered
for payment of the redemption price; (vi) that dividends on the shares to be
redeemed will cease to accrue from and after the close of business on such
redemption date; and (vii) the conversion rights of the shares to be redeemed,
the period within which conversion rights may be exercised, and the Conversion
Price and number of shares of Common Stock issuable upon conversion of a share
of Series B Preferred Stock at the time. Upon surrender of the certificate for
any shares so called for redemption and not previously converted (properly
endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such shares shall
be redeemed by the Corporation at the date fixed for redemption and at the
redemption price set forth in this Section 6.
(C) In the event (i) of a change (whether or not then effective) in the
federal tax law of the United States of America which has or would have the
effect of precluding the Corporation from claiming any of the tax deductions
for dividends paid or payable on the Series B Preferred Stock when such
dividends are used as provided under Section 404(k)(2)(C) of the Internal
Revenue Code of 1986, as amended and in effect on the date shares of Series B
Preferred Stock are initially issued, (ii) that shares of Series B Preferred
Stock are held by an employee benefit plan intended to qualify as an employee
stock ownership plan within the meaning of Section 4975 of the Internal
Revenue Code of 1986, as amended, and such plan does not so qualify, or (iii)
that the voting and tender rights associated with the
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<PAGE> 13
Series B Preferred Stock and provided herein are not or cannot be directly or
indirectly exercised by all or substantially all of the participants in the
Plan (whether or not the shares thereof have been allocated under the Plan)
other than as a result of an unintended failure of administrative services
(such as postal services), then the Corporation may, in its sole discretion
and notwithstanding anything to the contrary in paragraph 6(A) hereof, call
for redemption any or all then outstanding shares of Series B Preferred Stock
for an amount per share equal to the redemption price per share which would be
applicable were the Corporation to redeem such shares of Series B Preferred
Stock pursuant to paragraph 6(A) hereof (without regard to whether such shares
of Series B Preferred Stock are redeemable thereunder), plus an amount equal
to all accumulated and unpaid dividends (including dividends declared and set
aside) and accrued dividends thereon to the date fixed for such redemption.
(D) [Intentionally omitted.]
(E) In the event that the Plan is terminated in accordance with its terms,
and notwithstanding anything to the contrary in paragraph 6(A) hereof, the
Corporation shall, as soon thereafter as practicable and permissible under
applicable state law and to the extent the Corporation shall have legally
available funds for such payment, call for redemption all then outstanding
shares of Series B Preferred Stock for an amount per share equal to the
redemption price per share which would be applicable were the Corporation to
redeem such shares of Series B Preferred Stock pursuant to paragraph 6(A)
hereof (without regard to whether such shares of Series B Preferred Stock are
then redeemable thereunder), plus an amount in cash equal to all accumulated
and unpaid dividends (including dividends declared and set aside) and accrued
dividends thereon to the date fixed for such redemption.
(F) Notwithstanding any provision hereof to the contrary, the Corporation,
at its option, may make payment of the redemption price or Liquidation
Preference, as the case may be, plus, in each case, any amount equal to all
accumulated and unpaid dividends (including dividends declared and set aside)
and accrued dividends thereon to the date of such redemption, required upon
redemption of shares of Series B Preferred Stock pursuant to Sections 6 and 7
hereof in cash or in shares of Common Stock (or fractional shares thereof), or
in a combination of such shares and cash, any such shares of Common Stock to
be valued for such purposes at their Fair Market Value (as defined in
paragraph 9(F) hereof). All shares of Common Stock to be delivered as full or
partial payment of the redemption price to be paid pursuant to this Section 6
or Section 7 hereof shall be validly and legally issued, fully paid and
nonassessable, and any shares of Common Stock delivered to make any such
payment shall, at the effective time of such redemption, be free and clear of
all liens and similar encumbrances.
SECTION 7. Other Redemption Rights.
On December 15, 2014 (the 'Mandatory Redemption Date'), to the extent the
Corporation shall have legally available funds for such payment, the
Corporation shall redeem, or shall set aside in trust for the holders of the
Series B Preferred Stock a sum in cash sufficient to redeem, all shares of the
Series B Preferred Stock outstanding on such Mandatory Redemption Date, at a
redemption price per share equal to the Liquidation Preference per share, plus
an amount in cash equal to all accumulated and unpaid dividends (including
dividends declared and set aside) and accrued dividends thereon to the
Mandatory Redemption Date. From and after the close of business on the
Mandatory Redemption Date, unless the Corporation shall have defaulted in the
payment or setting aside in trust of moneys and/or shares of Common Stock, all
dividends on shares of Series B Preferred Stock called for redemption will
cease to accrue, such shares will no longer be deemed to be outstanding and
will no longer be convertible and all rights in respect of such shares of the
Corporation shall cease, except the rights to receive in full such redemption
price per share, plus an amount in cash equal to all accumulated and unpaid
dividends (including dividends declared and set aside) and accrued dividends
thereon to the Mandatory Redemption Date. If, for any reason, the Corporation
shall fail to discharge its mandatory redemption obligation pursuant to this
Section 7, such mandatory redemption obligation shall be discharged as soon as
the Corporation is able to discharge such obligation, but the redemption price
shall be determined as of the date such redemption should have occurred. Until
such time after the Mandatory Redemption Date as the Corporation shall redeem,
or shall set aside in trust for the holders of the Series B Preferred Stock a
sum in cash sufficient to redeem, all shares of the Series B Preferred Stock
outstanding on such Mandatory Redemption Date in accordance with the
provisions of
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<PAGE> 14
this Section 7, the Corporation shall not declare or pay any cash dividend or
make any distributions in cash on, or, directly or indirectly, purchase,
redeem or otherwise acquire, any of its capital stock (including any warrants,
rights or options exercisable for or convertible into any capital stock of the
Corporation, but not including the Rights or any rights similar thereto) or
permit any of its subsidiaries or affiliates, to, directly or indirectly,
purchase or acquire any such capital stock. Until such time after the
Mandatory Redemption Date as the Corporation shall redeem, or shall set aside
in trust for the holders of the Series B Preferred Stock a sum in cash
sufficient to redeem, all shares of the Series B Preferred Stock outstanding
on such Mandatory Redemption Date in accordance with the provisions of this
Section 7, Preferred Dividends shall continue to accrue on any shares of
Series B Preferred Stock required to be redeemed by this Section 7 and not so
redeemed.
SECTION 8. Consolidation, Merger, etc.
(A) In the event that (i) the Corporation shall consummate any
consolidation or merger pursuant to which the outstanding shares of Common
Stock are exchanged solely for or changed, reclassified or converted solely
into stock of any successor or resulting corporation (including the
Corporation) that constitutes 'qualifying employer securities' with respect to
a holder of Series B Preferred Stock within the meaning of Section 4975(e)(8)
of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the
Employee Retirement Income Security Act of 1974, as amended, or any successor
provisions of law, and, if applicable, for a cash payment in lieu of
fractional shares, if any, or (ii) the Corporation shall consummate any sale
of all or substantially all of the Corporation's assets pursuant to which
consideration consisting solely of stock of any corporation that constitutes
such qualifying employer securities with respect to a holder of Series B
Preferred Stock is distributed to holders of Common Stock, together with, if
applicable, a cash payment in lieu of fractional shares, if any, then the
shares of Series B Preferred Stock of such holder shall, in connection with
such consolidation, merger or such sale of all or substantially all of the
Corporation's assets, be assumed by and shall become preferred stock of such
successor, resulting or other corporation, having in respect of such
corporation, insofar as possible, the same powers, preferences and relative,
optional or other special rights (including the redemption and other rights
provided by Sections 6, 7 and 8 hereof), and the qualifications, limitations
or restrictions thereon, that the Series B Preferred Stock had immediately
prior to such transaction, except that after such transaction each share of
the Series B Preferred Stock shall be convertible, otherwise on the terms and
conditions provided by Section 5 hereof, into the number and kind of
qualifying employer securities so receivable by a holder of the number of
shares of Common Stock into which such shares of Series B Preferred Stock
could have been converted immediately prior to such transaction; provided,
however, that if by virtue of the structure of such transaction, a holder of
Common Stock is required to make an election between two or more kinds of
qualifying employer securities, which election cannot practicably be made by
the holders of the Series B Preferred Stock, then the shares of Series B
Preferred Stock so assumed by, and becoming (as described above) preferred
stock of, such successor, resulting or other corporation shall be convertible,
otherwise on the terms and conditions provided by Section 5 hereof, into the
aggregate amount of the kind of qualifying employer securities receivable by a
holder of the number of shares of Common Stock into which such shares of
Series B Preferred Stock could have been converted immediately prior to such
transaction if such Holder of Common Stock failed to exercise any rights of
election as to the kind of qualifying employer securities receivable upon such
transaction (provided that, if the kind or amount of qualifying employer
securities receivable upon such transaction is not the same for each
non-electing share, then the kind and amount so receivable upon such
transaction for each non-electing share shall be the kind and amount so
receivable per share by the plurality of the non-electing shares). The rights
of the Series B Preferred Stock as preferred stock of such successor,
resulting or other corporation shall successively be subject to adjustments
pursuant to Section 9 hereof after any such transaction as nearly equivalent
as practicable to the adjustment provided for by such section prior to such
transaction. The Corporation shall not consummate any such consolidation,
merger or sale of all or substantially all of the Corporation's assets unless
all then outstanding shares of Series B Preferred Stock shall be assumed and
authorized by the successor, resulting or other corporation as aforesaid.
(B) In the event that (i) the Corporation shall consummate any
consolidation or merger pursuant to which the outstanding shares of Common
Stock are exchanged for or changed, reclassified or converted into stock or
securities or cash or any other property, or any combination thereof, which
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<PAGE> 15
consideration is not constituted solely of qualifying employer securities (as
referred to in paragraph 8(A) hereof) and cash payments, if applicable, in
lieu of fractional shares, or (ii) the Corporation shall consummate any sale
of all or substantially all of the Corporation's assets pursuant to which
consideration not consisting solely of stock constituting such qualifying
employer securities and cash payments, if applicable, in lieu of fractional
shares, is distributed, then outstanding shares of Series B Preferred Stock
shall, without any action on the part of the Corporation or any holder thereof
(but subject to paragraph 8(C) hereof), be automatically converted by virtue
of such consolidation, merger or such sale of all or substantially all of the
Corporation's assets immediately prior to such consummation into the number of
shares of Common Stock into which such shares of Series B Preferred Stock
could have been converted at such time so that each share of Series B
Preferred Stock shall, by virtue of such transaction and on the same terms as
apply to the holders of Common Stock, be exchanged for or changed,
reclassified or converted into, or shall entitle the holder thereof to
otherwise receive, the aggregate amount of stock, securities, cash or other
property (payable in like kind) receivable by a holder of the number of shares
of Common Stock into which such shares of Series B Preferred Stock could have
been converted immediately prior to such transaction; provided, however, that
if by virtue of the structure of such transaction, a holder of Common Stock is
required to make an election with respect to the nature and kind of
consideration to be received in such transaction, which election cannot
practicably be made by the holders of the Series B Preferred Stock, then the
shares of Series B Preferred Stock shall, by virtue of such transaction and on
the same terms as apply to the holders of Common Stock, be exchanged for or
changed, reclassified or converted into, or shall entitle the holder thereof
to otherwise receive, the aggregate amount of stock, securities, cash or other
property (payable in kind) receivable by a holder of the number of shares of
Common Stock into which such shares of Series B Preferred Stock could have
been converted immediately prior to such transaction if such holder of Common
Stock failed to exercise any rights of election as to the kind or amount of
stock, securities, cash or other property receivable upon such transaction
(provided that, if the kind or amount of stock, securities, cash or other
property receivable upon such transaction is not the same for each
non-electing share, then the kind and amount of stock, securities, cash or
other property receivable upon such transaction for each non-electing share
shall be the kind and amount so receivable per share by a plurality of the
non-electing shares).
(C) In the event the Corporation shall enter into any agreement providing
for any consolidation, merger or any sale of all or substantially all of the
Corporation's assets, in each case, described in paragraph 8(B) hereof, then
the Corporation shall as soon as practicable thereafter (and in any event at
least ten (10) Business Days before consummation of such transaction) give
notice of such agreement and the material terms thereof, and the earliest date
of consummation thereof, to each holder of Series B Preferred Stock, and if
the Trustee would be unable to hold the consideration receivable under
paragraph 8(B) hereof as a result of such transaction under the Employee
Retirement Income Security Act of 1974, as amended, or any successor statute,
then each such holder shall have the right to elect, by written notice to the
Corporation, to receive, upon consummation of such transaction (if and when
such transaction is consummated), from the Corporation or the successor of the
Corporation, in redemption and retirement of such Series B Preferred Stock, a
cash payment equal to the greater of (i) an amount per share equal to the
redemption price per share which would be applicable were the Corporation to
redeem such shares of Series B Preferred Stock pursuant to paragraph 6(A)
hereof (without regard to whether such shares of Series B Preferred Stock are
then redeemable thereunder), plus an amount equal to all accumulated and
unpaid dividends (including dividends declared and set aside) and accrued
dividends thereon to the date of the consummation of such transaction or (ii)
the Fair Market Value (as defined in paragraph 9(F) hereof) of the Common
Stock into which such Series B Preferred Stock could be converted pursuant to
paragraph 5(A) hereof on the date of consummation of such transaction. No such
notice of redemption shall be effective unless given to the Corporation prior
to the close of business on the third Business Day prior to consummation of
such transaction, unless the Corporation or the successor of the Corporation
shall waive such prior notice, but any notice of redemption so given prior to
such time may be withdrawn by notice of withdrawal given to the Corporation
prior to the close of business on the third Business Day prior to consummation
of such transaction.
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SECTION 9. Anti-dilution Adjustments.
(A) In the event the Corporation shall, at any time or from time to time
while any of the shares of the Series B Preferred Stock are outstanding, (i)
pay a dividend or make a distribution in respect of the Common Stock in shares
of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or
(iii) combine the outstanding shares of Common Stock into a smaller number of
shares, in each case whether by reclassification of shares, recapitalization
of the Corporation (including a recapitalization effected by a merger or
consolidation to which Section 8 hereof does not apply) or otherwise, then,
subject to the provisions of paragraphs 9(D) and 9(E) hereof, the Conversion
Price shall be adjusted by multiplying such Conversion Price by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately before such event, and the denominator of which is the number of
shares of Common Stock outstanding immediately after such event. An adjustment
made pursuant to this paragraph 9(A) shall be given effect, upon payment of
such a dividend or distribution, as of the record date for the determination
of stockholders entitled to receive such dividend or distribution (on a
retroactive basis) and in the case of a subdivision or combination shall
become effective immediately as of the effective date thereof.
(B) In the event that the Corporation shall, at any time or from time to
time while any of the shares of Series B Preferred Stock are outstanding,
issue to the holders of shares of Common Stock as a dividend or distribution,
including by way of a reclassification of shares or a recapitalization of the
Corporation, any right or warrant to purchase shares of Common Stock
(including without limitation any securities convertible into such Common
Stock or any right or warrant to purchase such convertible securities, but not
including as such a right or warrant any Rights (as defined in Section 5) or
any similar rights) at a purchase price per share less than the Fair Market
Value (as defined in paragraph 9(F) hereof) of a share of Common Stock on the
date of issuance of such right or warrant, then, subject to the provisions of
paragraphs 9(D) and 9(E) hereof, the Conversion Price shall be adjusted by
multiplying such Conversion Price by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately before such
issuance of rights or warrants plus the number of shares of Common Stock which
could be purchased at the Fair Market Value of a share of Common Stock on the
date of such issuance for the maximum aggregate consideration payable upon
exercise in full of all such rights or warrants, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately before
such issuance of rights or warrants plus the maximum number of shares of
Common Stock that could be acquired upon exercise in full of all such rights
and warrants. An adjustment made pursuant to this paragraph 9(B) shall be
given effect, upon issuance of such rights or warrants, as of the record date
for the determination of stockholders entitled to receive such rights or
warrants (on a retroactive basis); provided, that, to the extent shares of
Common Stock otherwise issuable upon exercise of such rights or warrants are
not delivered after the expiration of such rights or warrants, the Conversion
Price will be readjusted (but only with respect to shares of Series B
Preferred Stock converted after such expiration) to the Conversion Price which
would then be in effect had the adjustments made upon such issuance of such
rights or warrants been made upon the basis of delivery of only the number of
shares of Common Stock actually issued.
(C) In the event the Corporation shall, at any time or from time to time
while any of the shares of Series B Preferred Stock are outstanding, make an
Extraordinary Distribution (as hereinafter defined) in respect of the Common
Stock, whether by dividend, distribution, reclassification of shares or
recapitalization of the Corporation (including a recapitalization effected by
a merger or consolidation to which Section 8 hereof does not apply) or effect
a Pro Rata Repurchase (as hereinafter defined), the Conversion Price in effect
immediately prior to such Extraordinary Distribution or Pro Rata Repurchase
shall, subject to paragraphs 9(D) and 9(E) hereof, be adjusted by multiplying
such Conversion Price by a fraction the numerator of which is (i) the product
of (x) the number of shares of Common Stock outstanding immediately before
such Extraordinary Distribution or Pro Rata Repurchase multiplied by (y) the
Current Market Price of a share of Common Stock on the day before the
ex-dividend date with respect to an Extraordinary Distribution, or on the
applicable expiration date (including all extensions thereof) of any tender
offer which is a Pro Rata Repurchase, or on the date of purchase with respect
to any Pro Rata Repurchase which is not a tender offer, as the case may be,
minus (ii) the Fair Market Value of the Extraordinary Distribution or the
aggregate purchase price of the Pro Rata Repurchase, as the case may be, on
such date, and the denominator of which is the
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<PAGE> 17
product of (a) the number of shares of Common Stock outstanding immediately
before such Extraordinary Distribution or Pro Rata Repurchase minus, in the
case of a Pro Rata Repurchase, the number of shares of Common Stock
repurchased by the Corporation, multiplied by (b) the Current Market Price of
a share of Common Stock on the day before the ex-dividend date with respect to
an Extraordinary Distribution, or on the applicable expiration date (including
all extensions thereof) of any tender offer which is a Pro Rata Repurchase or
on the date of purchase with respect to any Pro Rata Repurchase which is not a
tender offer, as the case may be. The Corporation shall send each holder of
Series B Preferred Stock (i) notice of its intent to make any dividend or
distribution and (ii) notice of any offer by the Corporation to make a Pro
Rata Repurchase, in each case at the same time as, or as soon as practicable
after, such offer is first communicated (including by announcement of a record
date in accordance with the rules of any stock exchange on which the Common
Stock is listed or admitted to trading) to the holders of Common Stock. Such
notice shall indicate the intended record date, ex-dividend date, the
applicable expiration date, if any, the amount and nature of such dividend or
distribution, or the number of shares subject to such offer for a Pro Rata
Repurchase and the purchase price payable by the Corporation pursuant to such
offer, as well as the Conversion Price and the number of shares of Common
Stock into which a share of Series B Preferred Stock may be converted at such
time.
(D) Notwithstanding any other provisions of this Section 9, the
Corporation shall not be required to make any adjustment to the Conversion
Price unless such adjustment would require an increase or decrease of at least
one percent (1%) in the Conversion Price. Any lesser adjustment shall be
carried forward and shall be made no later than the time of, and together
with, the next subsequent adjustment which, together with any adjustment or
adjustments so carried forward, shall amount to an increase or decrease of at
least one percent (1%) in the Conversion Price.
(E) The Corporation shall be entitled to make such additional adjustments
in the Conversion Price, in addition to those required by the foregoing
provisions of this Section 9, as shall be necessary in order that any dividend
or distribution in shares of capital stock of the Corporation, subdivision,
reclassification or combination of shares of stock of the Corporation or any
recapitalization of the Corporation shall not be taxable to the holders of the
Common Stock.
(F) For purposes of this Resolution, the following definitions shall
apply:
'Business Day' shall mean each day that is not a Saturday, Sunday or a day
on which state or federally chartered banking institutions in New York, New
York are not required to be open.
'Extraordinary Distribution' shall mean any dividend or other distribution
to the holders of Common Stock (effected while any of the shares of Series B
Preferred Stock are outstanding) of (i) cash, where the aggregate amount of
such cash dividend or distribution together with the amount of all cash
dividends and distributions made during the preceding period of 12 months,
when combined with the aggregate amount of all Pro Rata Repurchases (for this
purpose, including only that portion of the aggregate purchase price of such
Pro Rata Repurchase which is in excess of the Fair Market Value of the Common
Stock repurchased as determined on the applicable expiration date (including
all extensions thereof) of any tender offer which is a Pro Rata Repurchase or
the date of purchase with respect to any other Pro Rata Repurchase which is
not a tender offer made during such period), exceeds twelve and one-half
percent (12 1/2%) of the aggregate Fair Market Value of all shares of Common
Stock outstanding on the day before the ex-dividend date with respect to such
Extraordinary Distribution and (ii) any shares of capital stock of the
Corporation (other than shares of Common Stock), other securities of the
Corporation (other than securities of the type referred to in this paragraph
9(B) and excluding the Rights and any similar rights), evidences of
indebtedness of the Corporation or any other person or any other property
(including shares of any subsidiary of the Corporation) or any combination
thereof. The Fair Market Value of an Extraordinary Distribution for purposes
of paragraph (C) of this Section 9 shall be equal to the sum of the Fair
Market Value of such Extraordinary Distribution plus the amount of any cash
dividends or distributions which are not Extraordinary Distributions made
during such 12-month period and not previously included in the calculation of
an adjustment pursuant to said paragraph (C).
'Fair Market Value' shall mean (a) as to cash, the amount of cash, and (b)
as to shares of Common Stock or any other class of capital stock or securities
of the Corporation or any other issuer which are
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<PAGE> 18
publicly traded, the average of the Current Market Prices of such shares or
securities for each day of the Adjustment Period. 'Current Market Price' of
publicly traded shares of Common Stock or any other class of capital stock or
other security of the Corporation or any other issuer for any day shall mean
the last reported sales price, regular way, or, in the event that no sale
takes place on such day, the average of the reported closing bid and asked
prices, regular way, in either case as reported on the New York Stock Exchange
Composite Tape or, if such security is not listed or admitted to trading on
the New York Stock Exchange, on the principal national securities exchange on
which such security is listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such security is not quoted on such National Market,
the average of the closing bid and asked prices on such day in the
over-the-counter market as reported by the Nasdaq Stock Market or, if bid and
asked prices for such security on such day shall not have been reported
through the Nasdaq Stock Market, the average of the bid and asked prices for
such day as furnished by any New York Stock Exchange member firm regularly
making a market in such security on each trading day during the Adjustment
Period, which firm shall be selected for such purpose by the Board of
Directors of the Corporation or a committee thereof. 'Adjustment Period' shall
mean the period of five (5) consecutive trading days preceding the date as of
which the Fair Market Value of a security is to be determined. The 'Fair
Market Value' of any security which is not publicly traded or of any other
property shall mean the fair value thereof as determined by an independent
investment banking or appraisal firm experienced in the valuation of such
securities or property selected in good faith by the Board of Directors of the
Corporation or a committee thereof, or, if no such investment banking or
appraisal firm is in the good faith judgment of the Board of Directors or such
committee available to make such determination, as determined in good faith by
the Board of Directors of the Corporation or such committee.
'Pro Rata Repurchase' shall mean any purchase of shares of Common Stock by
the Corporation or any subsidiary thereof whether for cash, shares of other
capital stock of the Corporation, other securities of the Corporation,
evidences of indebtedness of the Corporation or any other person or any other
property (including shares of a subsidiary of the Corporation) or any
combination thereof, effected while any of the shares of Series B Preferred
Stock are outstanding, pursuant to any tender offer subject to Section 13(e)
of the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), or
any successor provision of law, or pursuant to any other offer designed to be
available to all or substantially all of the holders of Common Stock;
provided, however, that no purchase of shares by the Corporation or any
subsidiary thereof made in open market or privately-negotiated transactions
shall be deemed a Pro Rata Repurchase, so long as in any such case offers to
effect such purchases shall not be made to all or substantially all of the
holders of Common Stock. For purposes of this paragraph 9(F), shares shall be
deemed to have been purchased by the Corporation or any subsidiary thereof 'in
open market transactions' if they have been purchased substantially in
accordance with the requirements of Rule 10b-18 as in effect under the
Exchange Act (or successor provision) on the date shares of Series B Preferred
Stock are initially issued by the Corporation or on such other terms and
conditions as the Board of Directors of the Corporation or a committee thereof
shall have determined are reasonably designed to prevent such purchases from
having a material effect on the trading market for the Common Stock.
(G) Whenever an adjustment to the Conversion Price and the related voting
rights of the Series B Preferred Stock is required pursuant to this
Resolution, the Corporation shall forthwith place on file with the transfer
agent for the Common Stock and the Series B Preferred Stock, and with the
Secretary of the Corporation, a statement signed by two officers of the
Corporation stating the adjusted Conversion Price determined as provided
herein and the resulting conversion ratio, and the voting rights (as
appropriately adjusted), of the Series B Preferred Stock. Such statement shall
set forth in reasonable detail such facts as shall be necessary to show the
reason and the manner of computing such adjustment, including the
determination of Fair Market Value involved in such computation. Promptly
after each adjustment to the Conversion Price and the related voting rights of
the Series B Preferred Stock, the Corporation shall mail a notice thereof and
of the then prevailing conversion ratio to each holder of shares of the Series
B Preferred Stock.
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<PAGE> 19
SECTION 10. Ranking; Attributable Capital and Adequacy of Surplus;
Retirement of Shares.
(A) The Series B Preferred Stock shall rank senior to the Series A Junior
Participating Preferred Stock and the Common Stock as to the payment of
dividends and the distribution of assets on liquidation in whole, dissolution
and winding-up of the Corporation, and, unless otherwise provided in the
Restated Certificate of Incorporation of the Corporation or a Certificate of
Designations relating to a subsequent series of Preferred Stock, par value
$1.00 per share, of the Corporation, the Series B Preferred Stock shall rank
junior to all series of the Corporation's Preferred Stock, par value $1.00 per
share, as to the payment of dividends and the distribution of assets on
liquidation in whole, dissolution or winding-up.
(B) In addition to any vote of stockholders required by law, the vote of
the holders of a majority of the outstanding shares of Series B Preferred
Stock shall be required to increase the par value of the Common Stock or
otherwise increase the capital of the Corporation allocable to the Common
Stock for the purpose of the DGCL if, as a result thereof, the surplus of the
Corporation for purposes of the DGCL would be less than the amount of
Preferred Dividends that would accrue on the then outstanding shares of Series
B Preferred Stock during the following three years.
(C) Any shares of Series B Preferred Stock acquired by the Corporation by
reason of the conversion or redemption of such shares as provided by this
Resolution, or otherwise so acquired, shall be retired as shares of Series B
Preferred Stock and restored to the status of authorized but unissued shares
of Preferred Stock, par value $1.00 per share, of the Corporation,
undesignated as to series, and may thereafter be reissued as part of a new
series of such Preferred Stock as permitted by law.
SECTION 11. Miscellaneous.
(A) All notices referred to herein shall be in writing, and all notices
hereunder shall be deemed to have been given upon the earlier of receipt
thereof or three (3) business days after the mailing thereof if sent by
registered mail (unless first-class mail shall be specifically permitted for
such notice under the terms of this Resolution) with postage prepaid,
addressed: (i) if to the Corporation, to its office at International Plaza,
P.O. Box 8000, Englewood Cliffs, New Jersey 07632 (Attention: Secretary) or to
the transfer agent for the Series B Preferred Stock, or other agent of the
Corporation designated as permitted by this Resolution or (ii) if to any
holder of the Series B Preferred Stock or Common Stock, as the case may be, to
such holder at the address of such holder as listed in the stock record books
of the Corporation (which may include the records of any transfer agent for
the Series B Preferred Stock or Common Stock, as the case may be) or (iii) to
such other address as the Corporation or any such holder, as the case may be,
shall have designated by notice similarly given.
(B) The term 'Common Stock' as used in this Resolution means the
Corporation's Common Stock, par value $.25 per share, as the same exists at
the date of filing of a Certificate of Designations relating to Series B
Preferred Stock or any other class of stock resulting from successive changes
or reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
In the event that, at any time as a result of an adjustment made pursuant to
Section 9 of this Resolution, the holder of any share of the Series B
Preferred Stock surrendering such shares for conversion, shall become entitled
to receive any shares or other securities of the Corporation other than shares
of Common Stock, the Conversion Price in respect of such other shares or
securities so receivable upon conversion of shares of Series B Preferred Stock
shall thereafter be adjusted, and shall be subject to further adjustment from
time to time, in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to Common Stock contained in Section 9 hereof, and
the provisions of Sections 1 through 8, 10 and 11 of this Resolution with
respect to the Common Stock shall apply on like or similar terms to any such
other shares or securities.
(C) The Corporation shall pay any and all stock transfer and documentary
stamp taxes that may be payable in respect of any issuance or delivery of
shares of Series B Preferred Stock or shares of Common Stock or other
securities issued on account of Series B Preferred Stock pursuant hereto or
certificates representing such shares or securities. The Corporation shall
not, however, be required to pay any such tax which may be payable in respect
of any transfer involved in the issuance or delivery of shares of Series B
Preferred Stock or Common Stock or other securities in a name other than that
in
19
<PAGE> 20
which the shares of Series B Preferred Stock with respect to which such shares
or other securities are issued or delivered were registered, or in respect of
any payment to any person with respect to any such shares or securities other
than a payment to the registered holder thereof, and shall not be required to
make any such issuance, delivery or payment unless and until the person
otherwise entitled to such issuance, delivery or payment has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid or is not payable.
(D) In the event that a holder of shares of Series B Preferred Stock shall
not by written notice designate the name in which shares of Common Stock to be
issued upon conversion of such shares should be registered or to whom payment
upon redemption of shares of Series B Preferred Stock should be made or the
address to which the certificate or certificates representing such shares, or
such payment, should be sent, the Corporation shall be entitled to register
such shares, and make such payment, in the name of the holder of such Series B
Preferred Stock as shown on the records of the Corporation and to send the
certificate or certificates representing such shares, or such payment, to the
address of such holder shown on the records of the Corporation.
(E) Unless otherwise provided in the Restated Certificate of Incorporation
of the Corporation, all payments in the form of dividends, distributions on
voluntary or involuntary liquidation in whole, dissolution or winding-up or
otherwise made upon the shares of Series B Preferred Stock and any other stock
ranking on a parity with the Series B Preferred Stock with respect to such
dividend or distribution shall be pro rata, so that amounts paid per share on
the Series B Preferred Stock and such other stock shall in all cases bear to
each other the same ratio that the required dividends, distributions or
payments, as the case may be, then payable per share on the shares of the
Series B Preferred Stock and such other stock bear to each other.
(F) The Corporation may appoint, and from time to time discharge and
change, a transfer agent for the Series B Preferred Stock. Upon any such
appointment or discharge of a transfer agent, the Corporation shall send
notice thereof by first-class mail, postage prepaid, to each holder of record
of Series B Preferred Stock.
FIFTH: The Board of Directors is expressly authorized and empowered to
adopt, amend and repeal By-laws, subject to the power of the stockholders to
amend or repeal any By-law made by the Board of Directors.
SIXTH: Unless and except to the extent that the By-laws shall so require,
the election of directors need not be by written ballot.
SEVENTH: From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed or permitted by
said laws; and all rights at any time conferred upon the stockholders of the
Corporation by this Certificate of Incorporation are granted subject to the
provisions of this Article SEVENTH.
EIGHTH: The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of not less than nine
nor more than twenty-one directors (exclusive of directors referred to in the
following paragraph), the exact number to be determined from time to time by
resolution adopted by affirmative vote of a majority of such directors then in
office. The directors shall be divided into three classes, designated Class I,
Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors determined by the
Board of Directors pursuant to this paragraph. At the 1986 annual meeting of
stockholders, Class I directors shall be elected for a one-year term, Class II
directors for a two-year term and Class III directors for a three-year term.
At each succeeding annual meeting of stockholders beginning in 1987,
successors to the directors in the class whose term expires at that annual
meeting shall be elected for a three-year term. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional director of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for the remaining term of
that class, but in no case will a decrease in the number of directors shorten
the term of any incumbent director. A director shall hold office until the
annual meeting for the year in which his term expires and until his successor
shall be elected and shall qualify, subject, however, to
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<PAGE> 21
prior death, resignation, retirement, disqualification or removal from office.
Any vacancy in the Board of Directors that results from an increase in the
number of directors may be filled by a majority of the directors then in
office, provided that a quorum is present, and any other vacancy may be filled
by a majority of the directors then in office, even if less than a quorum, or
by a sole remaining director. Any director elected to fill a vacancy not
resulting from an increase in the number of directors shall hold office for
the remaining term of his predecessor.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the number of such directors and the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the provisions of Article FOURTH of this
Certificate of Incorporation and any resolution or resolutions adopted by the
Board of Directors pursuant thereto, and such directors shall not be divided
into classes unless expressly so provided therein.
NINTH: No action required to be taken or which may be taken at any annual
or special meeting of stockholders of the Corporation may be taken without a
meeting, unless a consent in writing, setting forth the action so taken, shall
be signed by all the stockholders of the Corporation entitled to vote thereon.
TENTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for payment of an improper dividend, or for an
improper repurchase or redemption of the stock of the Corporation, in
violation of Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
IN WITNESS WHEREOF, this Certificate has been signed by the Chairman of
the Board of the Corporation, and the corporate seal of the Corporation has
been hereunto affixed and attested to by the Secretary of the Corporation, all
as of the 20th day of January, 1998.
BESTFOODS
By CHARLES R. SHOEMATE
------------------------------------
Charles R. Shoemate
Chairman of the Board
ATTEST:
HANES A. HELLER
- ------------------------------------
Hanes A. Heller
Secretary
21
<PAGE> 1
Exhibit 3(b)
BY-LAWS
OF
BESTFOODS
--------------
ARTICLE I
Offices
SECTION 1. The registered office of the Company in the State of Delaware
shall be in the City of Wilmington, County of New Castle, and the name of the
registered agent of the Company in said State is The Corporation Trust
Company. The Company may also have an office or offices other than said
registered office at such place or places either within or without the State
of Delaware as the Board of Directors may from time to time designate or as
the business of the Company may require.
ARTICLE II
Seal
SECTION 1. The seal of the Company shall be circular in form and shall
have the name of the Company and the words and numerals 'Corporate Seal 1959
Delaware.'
ARTICLE III
Meetings of Stockholders
SECTION 1. The annual meeting of stockholders of the Company shall be held
in each year on the fourth Thursday in April, or on such other date as the
Board of Directors may designate, and at such time and place as the Board of
Directors may designate, for the election of directors and for the transaction
of such other business as may properly come before the meeting.
SECTION 2. Special meetings of the stockholders may be called on the order
of the Chairman of the Board or the Board of Directors and shall be held at
such date, time and place as may be specified by such order.
SECTION 3. Written notice of all meetings of the stockholders shall be
mailed or delivered to each stockholder not less than twenty nor more than
sixty days before the meeting. The notice or an accompanying document shall
identify the business to be transacted at the meeting and, if directors are to
be elected, the candidates therefor, as determined by the Board of Directors.
Other business may be transacted and other candidates may be nominated at the
annual meeting, but only if the Secretary of the Company has received from the
sponsoring stockholder (a) not less than sixty nor more than ninety days
before the fourth Thursday in April (or, if the Board of Directors has
designated another date for the annual meeting pursuant to Section 1 of this
Article III, not less than sixty nor more than ninety days before such other
date or, if such other date has not been publicly disclosed at least
seventy-five days in advance, then not less than fifteen days after such
public disclosure) a written notice identifying such business or candidates,
and (b) not more than ten days after receipt by the sponsoring stockholder of
a written request from the Secretary, such additional information as the
Secretary may reasonably require.
SECTION 4. The holders of a majority of the issued and outstanding shares
of the capital stock of the Company entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum for the transaction
of business at all meetings of the stockholders except as may otherwise be
provided by law, by the Certificate of Incorporation or by these By-laws; but,
if there be less than a quorum, the holders of a majority of the stock so
present or represented may adjourn the meeting from time to time.
SECTION 5. Each stockholder shall, subject to the provisions of the
Certificate of Incorporation, at each meeting of the stockholders be entitled
to one vote in person or by proxy for each share of the
<PAGE> 2
stock of the Company which has voting power on the matter in question and
which shall have been held by him and registered in his name on the books of
the Company:
(a) on the date fixed pursuant to the provisions of Section 6 of
Article VIII of these By-laws as the record date for the determination of
stockholders who shall be entitled to notice of and to vote at such
meeting, or
(b) if no such record date shall have been so fixed, then at the close
of business on the day next preceding the day on which notice of the
meeting shall be given.
At all meetings of the stockholders all matters, except as otherwise provided
in the Certificate of Incorporation, in these By-laws, or by law, shall be
decided by the vote of the holders of a majority of the shares entitled to
vote thereat present in person or by proxy, a quorum being present. The vote
at any meeting of the stockholders on any question need not be by ballot,
unless so directed by the chairman of the meeting. The Board of Directors, or,
if the Board shall not have made the appointment, the chairman presiding at
any meeting of stockholders, shall have the power to appoint two or more
persons to act as inspectors, to receive, canvass and report the votes cast by
the stockholders at such meeting; but no candidate for the office of director
shall be appointed as an inspector at any meeting for the election of
directors.
SECTION 6. The Chairman of the Board or, in his absence, a director or
officer designated by the Board of Directors or the Chairman of the Board,
shall preside at all meetings of the stockholders.
SECTION 7. The Secretary of the Company shall act as secretary of all
meetings of the stockholders; and, in his absence, the chairman of the meeting
may appoint any person to act as secretary of the meeting.
ARTICLE IV
Board of Directors
SECTION 1. Regular meetings of the Board of Directors shall be held at
such time and at such place as may from time to time be fixed by resolution of
the Board of Directors. Unless otherwise provided by law or by these By-laws,
notice of regular meetings of the Board need not be given.
SECTION 2. Special meetings of the Board of Directors may be called by the
number of directors which would constitute a quorum of the Board of Directors
or by order of the Chairman of the Board. The Secretary shall give notice to
each director of the time, place and purpose or purposes of each special
meeting by mailing the same at least two days before the meeting, or by
delivering the same personally or by telephone or other electronic means not
later than the day before the day of the meeting.
SECTION 3. At meetings of the Board of Directors the Chairman of the Board
or, in his absence, a director designated by the Board of Directors, shall
preside.
SECTION 4. At meetings of the Board of Directors, a quorum for the
transaction of business shall be a majority of the total number of directors
determined from time to time by the Board of Directors pursuant to Article
EIGHTH of the Certificate of Incorporation. If less than a quorum shall be
present, a majority of those present may adjourn any meeting until a quorum
shall be present, whereupon the meeting may be held, as adjourned, without
further notice.
SECTION 5. The directors may participate in a meeting of the Board of
Directors by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each
other, and such participation shall constitute presence in person at such
meeting.
SECTION 6. Any action required or permitted to be taken at any meeting of
the Board of Directors may be taken without a meeting if all the directors
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors.
SECTION 7. The directors shall receive such compensation for their
services as may be prescribed by the Board of Directors and shall be
reimbursed by the Company for ordinary and reasonable expenses incurred in the
performance of their duties.
2
<PAGE> 3
ARTICLE V
Committees
SECTION 1. The Board of Directors may appoint from among its members such
committees as the Board may determine, which shall consist of such number of
directors and have such powers and authority as shall from time to time be
prescribed by the Board and permitted by subsection (2) of Section 141(c) of
the Delaware General Corporation Law.
SECTION 2. Regular meetings of committees shall be held at such time and
at such place as may from time to time be fixed by resolution of the Board of
Directors. Unless otherwise provided by law or by these By-laws, notice of
regular meetings of committees need not be given.
SECTION 3. Special meetings of committees may be called by order of the
chairman of the committee or the Chairman of the Board. The Secretary shall
give notice to each member of the time, place and purpose or purposes of each
special meeting by mailing the same at least two days before the meeting, or
by delivering the same personally or by telephone or other electronic means
not later than the day before the day of the meeting.
SECTION 4. At meetings of committees the chairman of the committee, or, in
his absence, a director designated by the members of the committee, shall
preside.
SECTION 5. A majority of the members of any committee shall constitute a
quorum for the transaction of business; provided, however, that in the absence
or disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in the place of any such absent or
disqualified member.
SECTION 6. The members of any committee may participate in a meeting of
the committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation shall constitute presence in person at such
meeting.
SECTION 7. Any action required or permitted to be taken at a meeting of
any committee may be taken without a meeting if all the members consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the committee.
ARTICLE VI
Officers
SECTION 1. The Board of Directors shall elect the officers of the Company,
which may include a Chairman of the Board, a President, one or more Vice
Presidents, a Comptroller, a Treasurer, a Secretary and a General Counsel. Any
Vice President may be given an additional designation of rank or function.
Each officer shall have such powers and duties as may be prescribed by these
By-laws and as may be assigned by the Board of Directors or the Chairman of
the Board.
SECTION 2. The Chairman of the Board shall be the chief executive officer
of the Company, and shall have such powers and duties as customarily pertain
to that office. He shall have general supervision over the property, business
and affairs of the Company and over its other officers. He may appoint and
remove assistant officers and other employees and agents. He may execute and
deliver in the name of the Company all powers of attorney, contracts and other
obligations and instruments.
SECTION 3. In case of the absence or disability of the Chairman of the
Board, an officer or officers designated by the Chairman of the Board or, in
the absence of such designation, by the Board of Directors, shall have the
powers and duties of the Chairman of the Board.
SECTION 4. The officers other than the Chairman of the Board may execute
and deliver in the name of the Company powers of attorney, contracts, and
other obligations and instruments pertaining to the regular course of their
respective duties.
SECTION 5. An officer or officers designated by the Board of Directors
shall be responsible to the Board of Directors for financial control and
internal audit of the Company and its subsidiaries.
SECTION 6. The Treasurer shall have general supervision over the funding
and currency management affairs of the Company.
3
<PAGE> 4
SECTION 7. The Secretary shall keep the minutes of all meetings of the
stockholders, of the Board of Directors, and of all committees appointed by
the Board.
SECTION 8. The General Counsel shall have general supervision over the
legal affairs of the Company.
SECTION 9. In case any office shall become vacant, the Board of Directors
shall have power to fill such vacancy. In case of the absence or disability of
any officer, the Board of Directors or the Chairman of the Board may assign
the powers and duties of such office to any other officer or officers. Any
officer shall be subject to removal at any time by vote of a majority of the
whole Board.
SECTION 10. The Chairman of the Board, or a Vice President thereunto duly
authorized by the Chairman of the Board, shall have full power and authority
on behalf of the Company to attend and to vote at any meeting of stockholders
of any corporation in which the Company may hold stock, and may exercise on
behalf of the Company any and all of the rights and powers incident to the
ownership of such stock at any such meeting, and shall have power and
authority to execute and deliver proxies and consents on behalf of the Company
in connection with the exercise by the Company of the rights and powers
incident to the ownership of such stock. The Board of Directors may confer
like powers upon any other person or persons.
ARTICLE VII
Indemnification
SECTION 1. Each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a 'proceeding'),
by reason of the fact that he, or a person for whom he is the legal
representative, is or was a director, officer or employee of the Company or is
or was serving at the request of the Company as a director, officer or
employee of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, shall be
indemnified by the Company to the fullest extent permitted by the Delaware
General Corporation Law, as the same exists or may hereafter be amended,
against all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes, penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection with
such service; provided, however, that the Company shall indemnify any such
person seeking indemnification in connection with a proceeding initiated by
him only if such proceeding was authorized by the Board of Directors, either
generally or in the specific instance. The right to indemnification shall
include the advancement of expenses incurred in defending any such proceeding
in advance of its final disposition in accordance with procedures established
from time to time by the Board of Directors; provided, however, that, if the
Delaware General Corporation Law so requires, the director, officer or
employee shall deliver to the Company an undertaking to repay all amounts so
advanced if it shall ultimately be determined that he is not entitled to be
indemnified under this Article or otherwise.
SECTION 2. The rights of indemnification provided in this Article shall be
in addition to any rights to which any person may otherwise be entitled by law
or under any By-law, agreement, vote of stockholders or disinterested
directors, or otherwise. Such rights shall continue as to any person who has
ceased to be a director, officer or employee and shall inure to the benefit of
his heirs, executors and administrators, and shall be applicable to
proceedings commenced after the adoption hereof, whether arising from acts or
omissions occurring before or after the adoption hereof.
SECTION 3. The Company may purchase and maintain insurance to protect any
person against any liability or expense asserted against or incurred by such
person in connection with any proceeding, whether or not the Company would
have the power to indemnify such person against such liability or expense by
law or under this Article or otherwise. The Company may create a trust fund,
grant a security interest or use other means (including, without limitation, a
letter of credit) to insure the payment of such sums as may become necessary
to effect indemnification as provided herein.
4
<PAGE> 5
ARTICLE VIII
Capital Stock
SECTION 1. The Board of Directors may authorize the issuance of stock
either in certificated or in uncertificated form. If shares are issued in
uncertificated form, each stockholder shall be entitled upon written request
to a stock certificate or certificates, representing and certifying the number
and kind of full shares held, signed by the Chairman of the Board or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary, which signatures may be facsimile.
SECTION 2. The Board of Directors shall have power to appoint one or more
Transfer Agents and Registrars for the transfer and registration of
certificates of stock of any class, and may require that stock certificates be
countersigned and registered by one or more of such Transfer Agents and
Registrars.
SECTION 3. Shares of capital stock of the Company shall be transferable on
the books of the Company only by the holder of record thereof in person or by
duly authorized attorney, upon surrender and cancellation of certificates for
a like number of shares.
SECTION 4. In case any certificate for the capital stock of the Company
shall be lost, stolen or destroyed, the Company may require such proof of the
fact and such indemnity to be given to it and to its Transfer Agent and
Registrar, if any, as shall be deemed necessary or advisable by it.
SECTION 5. The Company shall be entitled to treat the holder of record of
any share or shares of stock as the holder thereof in fact, and shall not be
bound to recognize any equitable or other claim to or interest in such shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise expressly provided by law.
SECTION 6. In order that the Company may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or other allotment of any rights, or entitled to exercise any
rights in respect of any other change, conversion or exchange of stock or for
the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. If in any case involving the determination of stockholders for
any purpose (other than notice of or voting at a meeting of stockholders) the
Board of Directors shall not fix such a record date, the record date for
determining stockholders for such purpose shall be the close of business on
the day on which the Board of Directors shall adopt the resolution relating
thereto. A determination of stockholders entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
ARTICLE IX
Miscellaneous
SECTION 1. The Board of Directors shall have power to fix, and from time
to time change, the fiscal year of the Company. Unless otherwise fixed by the
Board, the calendar year shall be the fiscal year.
SECTION 2. Whenever notice is required to be given by these By-laws or by
the Certificate of Incorporation or by law, a written waiver thereof, signed
by the person or persons entitled to said notice, whether before or after the
time stated therein, shall be deemed equivalent to notice.
5
<PAGE> 6
ARTICLE X
Amendment
SECTION 1. The Board of Directors shall have power, at any meeting of the
Board, to add any provision to or to amend or repeal any provision of these
By-laws by the vote of a majority of the total number of directors determined
from time to time by the Board of Directors pursuant to Article EIGHTH of the
Certificate of Incorporation, provided that a statement of the proposed action
shall have been included in a notice or waiver of notice of such meeting of
the Board. The stockholders may add any provision to or amend or repeal any
provision of these By-laws by the vote of a majority of the stockholders
present or represented at any meeting, provided that a statement of the
proposed action shall have been included in the notice of such meeting of
stockholders.
Revised 01/20/98
6
<PAGE> 1
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(In millions except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BASIC
-----
Income from continuing operations $ 428.8 $ 557.5 $ 377.5
Preferred stock dividends, net of taxes (11.3) (11.3) (11.1)
---------- ---------- --------
Income from continuing operations available to
common stockholders 417.5 546.2 366.4
Net income from discontinued operations 11.1 22.5 134.6
Loss on disposal of discontinued operations (82.6) -- --
Cumulative effect of change in accounting principle (13.2) -- --
---------- ---------- --------
Net income available to common stockholders $ 332.8 $ 568.7 $ 501.0
========== ========== ========
Weighted average shares outstanding 143.7 144.7 146.1
---------- ---------- --------
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 2.91 $ 3.78 $ 2.51
Income from discontinued operations 0.07 0.15 0.92
Loss on disposal of discontinued operations (0.57) -- --
Cumulative effect of change in accounting principle (0.09) -- --
---------- ---------- --------
Net income $ 2.32 $ 3.93 $ 3.43
========== ========== ========
DILUTED
-------
Income from continuing operations $ 428.8 $ 557.5 $ 377.5
Adjustments to net income:
Assumed additional cost if ESOP shares are fully
converted net of certain tax benefits (2.4) (2.7) (3.2)
---------- ---------- --------
Diluted income from continuing operations 426.4 554.8 $ 374.3
Net income from discontinued operations 11.1 22.5 134.6
Loss on disposal of discontinued operations (82.6) -- --
Cumulative effect of change in accounting principle (13.2) -- --
---------- ---------- --------
Diluted net income $ 341.7 $ 577.3 $ 508.9
========== ========== ========
Weighted average shares outstanding 143.7 144.7 146.1
Add incremental shares representing:
Shares issuable upon exercise of stock options based
on year-end market price 1.4 .8 .7
Performance incentive shares issuable based on
year-end market price .2 .1 .2
Shares issuable upon conversion of ESOP shares 4.0 4.2 4.3
---------- ---------- --------
Weighted average number of shares as adjusted 149.3 149.8 151.3
========== ========== ========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 2.85 $ 3.70 $ 2.47
Income from discontinued operations 0.07 0.15 0.89
Loss on disposal of discontinued operations (0.55) -- --
Cumulative effect of change in accounting principle (0.08) -- --
---------- ---------- --------
Net income $ 2.29 $ 3.85 $ 3.36
========== ========== ========
</TABLE>
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES: $ 704.2 $ 880.2 $ 654.9 $ 446.6 $ 624.4
-------- -------- -------- -------- --------
Add (subtract):
Portion of rents representative of
interest 32.2 33.4 25.6 24.6 20.2
Interest on bonds, mortgages &
similar debt 100.9 68.4 52.6 50.1 53.6
Other Interest 72.8 100.0 55.7 33.9 42.4
Interest expense included in cost of
plant construction (3.4) (4.8) (3.7) (4.2) (5.6)
Income of unconsolidated venture -- -- -- 3.9 --
-------- -------- -------- -------- --------
Income as adjusted $ 906.7 $1,077.2 $ 785.1 $ 554.9 $ 735.0
======== ======== ======== ======== ========
FIXED CHARGES:
Portion of rents representative of
interest $ 32.2 $ 33.4 $ 25.6 $ 24.6 $ 20.2
Interest on bonds, mortgages &
similar debt 100.9 68.4 52.6 50.1 53.6
Other Interest 72.8 100.0 55.7 33.9 42.4
-------- -------- -------- -------- --------
$ 205.9 $ 201.8 $ 133.9 $ 108.6 $ 116.2
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 4.4 5.3 5.9 5.1 6.3
======== ======== ======== ======== ========
</TABLE>
<PAGE> 1
Bestfoods
1997 Annual Report
[PHOTO OMITTED]
Satisfying A Global Appetite
<PAGE> 2
[GRAPHIC OMITTED]
<PAGE> 3
To Our Shareholders and Employees
[PHOTO OMITTED]
It is a pleasure to report to Bestfoods' charter group of shareholders on the
progress and prospects of our exciting new company.
Bestfoods officially began its new life as a 100% consumer foods company
on January 1, 1998, following the spin-off of its corn refining operations by
our predecessor, CPC International, at the end of 1997. On January 5, we
launched our new name; celebrated the opening of trading under our new stock
symbol, BFO, with a Pamplona-style running of the bulls on Wall Street; and said
farewell and Godspeed to our longtime corn refining colleagues.
o 1997 Earnings
Our company had a very good 1997. Bestfoods' earnings per share rose 5.6% in
1997, excluding special charges for the spin-off, restructuring, and a change in
accounting principles. This 5.6% E.P.S. gain was achieved in spite of the
strongly negative impact of unfavorable currency values, essentially all in
Europe.
Currency values aside, the basic strength of our global enterprise is
clearly evident in the volume growth of our core businesses around the world.
Volumes of savory products sold at retail rose 4.9% in 1997, dressings volumes
were up 7.3%, and foodservice volumes rose 10%.
All five divisions made solid profit gains. Operating income grew 8.1% in
North America consumer foods; 7.5% in Europe (or plus 17% in local currencies);
10.1% in Latin America; 7.6% in Asia; and 9% in Baking.
1
<PAGE> 4
Results in Brief
<TABLE>
<CAPTION>
$ Millions except per share amounts 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Net sales $8,400 $8,478
Operating income $ 866(a) $1,027
Income from continuing operations $ 429(b) $ 557
Per basic common share:
Income from continuing operations $ 2.91(b) $ 3.78
Dividends declared $ 1.72 $ 1.58
Stockholders' equity $ 7.23 $14.50
Depreciation and amortization $ 264 $ 288
Capital expenditures $ 321 $ 346
</TABLE>
(a) Includes restructuring charge of $242 million.
(b) Includes restructuring charge of $156 million after taxes or $1.08 per basic
common share.
o Return to Shareholders
We measure our company's performance the same way you do -- by total shareholder
return. Of course it is not possible to show a shareholder return history for
Bestfoods alone. Until now, its results have been combined with corn refining
results in the record of our predecessor, CPC International. So let me start
there.
Over the past 10 years, total return to shareholders of CPC International
(share price appreciation plus dividends) was 586%, compared to the average
return of 491% for our 15-company food industry peer group and 426% for the
Standard and Poor's index. In fact for that period, CPC was among the top four
food companies in our peer group in terms of the number of times we achieved top
quartile growth rates. In other words, we are superior performers not only in
terms of total return, but also in terms of consistency.
Shareholder return, of course, reflects earnings performance. By
separating out operating income generated by CPC's consumer foods business (now
Bestfoods), we can get a closer look at Bestfoods' past, as well as a strong
indication of its future prospects.
As you can see from the chart on page three, CPC's operating income from
consumer foods over the last 10 years grew at a compound annual rate of 10.6%,
excluding special items. This compares to 8.4% growth for total CPC over the
same period.
The separation itself gives investors good reason to expect growth at
least commensurate with this 10.6% rate. And beyond that, as a 100% consumer
foods company, we fully expect to step up our earnings performance and,
correspondingly, the value returned to our shareholders.
We are now free of the earnings volatility of the corn refining business
and totally focused on consumer foods. Added to that, we have a more dependable
cash flow and planning horizon, as we implement our strategies in one industry
instead of two. By leveraging these advantages, we believe that Bestfoods can
accelerate its rate of growth and continuously rank in the top quartile of the
food industry peer group in terms of total return to shareholders.
The market's confidence in this brighter future for Bestfoods was
expressed, we believe, in the 39% gain in our share price last year.
2
<PAGE> 5
<TABLE>
<CAPTION>
10-Year Performance
Compound Annual Growth
Operating Income: 10.6%*
88 89 90 91 92 93 94 95 96 97
-- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ Millions 446 492 564 637 679 701 732 851 1027 1108
</TABLE>
*excluding special items.
Of course, as in 1997, international currencies will always be a factor.
But let me make an important point. As long-time, experienced worldwide
competitors, we know that the effects of currency swings balance out over time,
helping in some years and hurting in others. So we don't become overly focused
on currency effects in any one year.
Much more important is the fact that we are well established in many
emerging markets, where sales, volumes, and profits can surge at rates
unmatchable in mature economies. This gives us excellent opportunities, not
available to many of our U.S. competitors, to achieve superior growth rates over
the long term.
Bestfoods' 1997 list of accomplishments clearly reflects our international
advantage. It also highlights our focus on our three worldwide core businesses
- -- savory products (chiefly Knorr), dressings (chiefly Hellmann's), and
foodservice -- and our increased ability to move quickly and decisively to seize
new opportunities.
o Acquisitions
Strategic acquisitions are a key element of our strategy for growth. The
purchase of the Starlux business added $160 million in sales, tripling the size
of our Spanish affiliate. With its portfolio of bouillons, soups, and nut
spreads, Starlux is a model acquisition -- close to our cores, reasonably large,
and significantly enhancing to the existing business in terms of product
offerings, manufacturing, and distribution.
Our 1995 baking acquisition continues to improve its market performance
and financial results, as we achieve additional synergies and build our business
with new, on-trend products. The reformulation and relaunch of our reduced fat
and fat free lines has dramatically slowed the decline in this product group.
o Innovation
A vigorous acceleration of our new product innovation rate throughout the
company continues to be a top strategic priority.
Bestfoods Europe, maximizing the innovative power of the great Knorr
brand, never runs out of ideas for new convenient, tasty, and volume-building
products. The best ideas are shared by our affiliates across borders. For
example, Germany's Knorr Die Schnelle Feine instant soup of several years ago
was translated by our Polish affiliate into the hugely successful Instant Mug
soup line. Versions of Germany's Knorr
3
<PAGE> 6
[PHOTO OMITTED] With assistance from one of Bestfoods' big brands,
Chairman C. R. Shoemate, along with K. Schlatter,
chairman of Corn Products International, rang the
opening bell at the NYSE on January 5, 1998, to
inaugurate trading in Bestfoods' stock.
Spaghetteria pasta dishes have now been launched in 17 European countries, as
well as in the U.S. and several countries of Latin America.
In North America, four new fat free varieties have extended the Hellmann's
and Best Foods pourable salad dressings line, launched in 1996, into the
"health" segment. Now more consumers than ever can "Bring out the Best" with
Bestfoods' dressings.
In baking, Entenmann's Soft Baked cookies, added in 1997, and Entenmann's
Multi-Grain cereal bars, launched in 1996 and rolled out nationally in 1997, are
innovative offerings that have added substantial volumes, sales, and profits.
The Entenmann's brand is celebrating its 100th birthday in 1998 -- a great
milestone. But more important, Entenmann's products are fully on track with the
trends that count today. That means more convenient products for younger,
on-the-go consumers.
Additional examples of new product successes, in Latin America and Asia as
well as Europe and North America, are described in the business review section
of this report.
o Geographic Expansion
Global aspirations are commonplace these days. Global effectiveness is not. When
we talk about building businesses in emerging markets, we're not just talking
about a toe in the water in a couple of countries.
We're talking, for example, about an aggressive Central and Eastern
European thrust that includes seven country operations, established between 1992
and 1995 and together producing annual sales of $234 million, up 20% from 1996.
Operating income from these affiliates leapt 45% in 1997 alone.
We're talking about Africa and the Middle East, where our eight operations
returned to double-digit operating income growth in 1997, as Israel's business
climate improved. In fact, one expression of our confidence in the potential of
the region was the 1997 increase in our ownership stake in our Israeli business,
from 51% to 85%.
We're talking about Asia, where we established a fourth Chinese venture in
1997 and also have fledgling businesses in Indonesia, Sri Lanka, and Viet Nam.
Of course the current economic problems in many of the Asian economies
will slow our short-term progress in the region. But difficult
4
<PAGE> 7
[PHOTO OMITTED] A herd of bulls and oversized Bestfoods' products
raced down Wall Street to publicize Bestfoods' new
name and great brands.
economies don't tie our hands. Our decades of experience with devaluations and
inflation in Latin America are highly applicable in Asia. The two regions are
not identical in their problems, but there are many similarities. And we have
learned to translate our management experience, just as we translate product
concepts and recipes, from one market to another around the world.
Current problems notwithstanding, however, we have great confidence in the
long-term future of Asia and are determined to be a major food industry
competitor in the region.
o Restructuring
Included in our 1997 results is a $242 million charge related to the
restructuring of Bestfoods' operations. We are not restructuring to rectify
mistakes or failures. This worldwide program encompasses specific actions to
take advantage of new opportunities. These actions include production
reconfiguration to maximize our opportunities in changing markets -- for
example, the consolidating European markets -- plant closures, and substantial
reorganization of management structures. Savings from restructuring are expected
to be $60 million in 1998 and $90 million in 1999 and thereafter.
o Running with the Bulls
We ran the bulls on Wall Street to convey a simple message: we're bullish on our
business. This is not just a clever slogan to fit the setting. Throughout
Bestfoods there is a new spirit, a new optimism and aggressiveness that come
from our confidence in the power of our global brands, our strategy, and our
global experience. It is confidence based on a solid record of growth over many
years. It reflects our expectation of the important benefits of focus, following
the corn refining spin-off. And it has everything to do with the excellent
capabilities, experience, and dedication of the more than 44,000 Bestfoods
people around the world.
I thank and honor all of our people for their efforts during 1997 and, in
advance, for the enthusiasm, hard work, and record of achievement that I know we
can expect in 1998.
/s/ C.R. Shoemate
C. R. Shoemate
Chairman and
Chief Executive Officer
February 17, 1998
5
<PAGE> 8
[PHOTO OMITTED]
Business Review
---------------
Bestfoods has three worldwide core businesses -- savory products, chiefly under
the Knorr brand; dressings, chiefly under the Hellmann's brand; and foodservice
- -- as well as several important regional businesses.
Volumes of Bestfoods products grew 2.4% in 1997, but sales declined
slightly to $8.4 billion, reflecting the strongly negative impact of unfavorable
European currency values.
o Worldwide Cores
Knorr and Related Savory Products
Worldwide volumes of soups, sauces, bouillons, mealmakers, and related savory
products increased 6.5%, but sales dropped 2.3% to $3 billion. Sales of these
products in Europe rose 2.9% in local currencies, but declined 5.7% to $2
billion when translated into dollars. European volumes of Knorr products,
however, grew 2.3%.
Successful innovation continues to be a key driver of growth in this
dynamic business. For example, Knorr Instant Mug soups in Poland tallied
first-year sales of more than 100 million units. Pot Noodle hot snacks in the
U.K. and Ireland inspired new cup product initiatives around Europe, including
Knorr Tastebreaks soups in the U.K. and Knorr Noodles in Austria, Germany, and
Switzerland. New cup products also entered the market in Israel under the Telma
brand.
Aggressive extension of new product winners is a top priority. Knorr
culinary cubes, which are now marketed in 17 countries, are a prime example.
In Latin America, the Knorr brand is a strong market leader in bouillons.
Building on this foundation, new products included Knorr pasta dishes and hearty
"Caseras" soups in Argentina and Uruguay; cubes for stir-fry cooking in Chile
and for preparing rice dishes in Colombia; aseptically-packaged cooking sauces
in Mexico; and rice dishes in Argentina, Chile, and Uruguay.
In North America, Bestfoods targeted mainstream eating habits. We
introduced Knorr Rice Mates rice seasoners and rolled out nationally Knorr
6
<PAGE> 9
Bestfoods 1997 Worldwide Business Results
Sales $8.4 billion, -0.9%; Volumes +2.4%; Operating Income $1.1 billion*, +7.9%
SALES BY
OPERATING DIVISION
($ Millions)
[GRAPHIC OMITTED]
o EUROPE $3.5 billion, -4.7%
Operations in 31 countries of Europe, Africa, and the Middle East. 58
manufacturing plants.
o NORTH AMERICA $1.8 billion, +2.4%
Operations in the United States, Canada, and the Caribbean. 16 manufacturing
plants.
o BAKING $1.6 billion, +2.6%
20 Bakeries.
o LATIN AMERICA $1.1 billion, +2.7%
Operations in 15 countries. 19 manufacturing plants.
o ASIA $382 million, -4.0% **
Operations in 11 countries, including joint ventures in seven countries.
Licensing agreement in Japan. 17 manufacturing plants.
**excluding the effect of the sale of the Korean business at the end of 1996,
sales increased 8.6%.
OPERATING INCOME*
BY OPERATING DIVISION
($ Millions)
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
<S> <C>
o Europe $457
o North America $307
o Latin America $233
o Baking $ 97
o Asia $ 53
</TABLE>
SALES BY
PRODUCT GROUP
($ Millions)
[GRAPHIC OMITTED]
o KNORR soups, sauces, bouillons, and related savory products
<TABLE>
<CAPTION>
Sales Change Volumes
------- ------- -------
<S> <C> <C> <C>
Total $ 3,024 -2.3% +6.5%
Europe $ 2,040 -5.7% +2.3%
North America $ 432 +2.6% +8.0%
Latin America $ 370 +5.9% +4.2%
Asia $ 182 + 13% + 36%
<CAPTION>
o DRESSINGS
Sales Change Volumes
------- ------- -------
<S> <C> <C> <C>
Total $ 1,930 +2.2% +3.9%
Europe $ 430 -0.9% +6.2%
North America $ 935 +4.4% +4.2%
Latin America $ 459 +9.5% + 12%
Asia $ 106 - 24% - 30%
</TABLE>
o BAKING
Sales $1.6 billion, +2.6%; Volumes +0.4%
o STARCHES (Basic Nutritious Foods)
Sales $577 million, -4.0%; Volumes -4.7%
o BREAD SPREADS
Sales $386 million, +5.4%; Volumes +9.2%
o DESSERTS
Sales $289 million, -6.6%; Volumes -3.1%
o ALL OTHER SALES $586 million
FOODSERVICE (Caterplan)
Sales in 1997 were approximately $1.3 billion, slightly lower than in 1996, and
are included in the appropriate product groups.
*excludes restructuring charge.
7
<PAGE> 10
[PHOTO OMITTED]
On the go:
New Knorr cup
varieties were
introduced in the U.S.
[PHOTO OMITTED]
Pouring it on:
Hellmann's ketchup
is marketed in
eight Latin countries.
[PHOTO OMITTED]
For family-size appetites:
Knorr Canjao soup in
Brazil comes in
six-serving packs.
pasta with sauce products. The brand extended its offerings to Hispanic
consumers with 20 new items, including rice mixes and refried beans imported
from Mexico.
In Asia, where bouillons are a key priority, sales of these products
increased 19%, fueled especially by Bestfoods' new businesses in China. In
India, another important emerging market for Bestfoods, we launched the Knorr
brand with a successful line of traditional Indian and Western-style soups.
Dressings
Sales of mayonnaise, other dressings, and oils were up 2.2% in 1997 to $1.9
billion. Volumes increased 3.9%.
Bestfoods markets dressings in 52 countries, chiefly under the Hellmann's
brand. Our largest business is in North America, where Hellmann's mayonnaise
east of the Rockies and the Best Foods brand in the West improved market share,
volume, and profitability in 1997.
Hellmann's and Best Foods fat free pourable salad dressings were added
during the year, and we completed the national roll out of regular pourables.
Hellmann's and Best Foods pourable dressings are well accepted by consumers and
Bestfoods' customers and are meeting their volume and market share targets.
New Hellmann's products in Europe include Deli Sandwich mayonnaise in the
U.K.; Supreme mayonnaise in Spain and Portugal (the first chilled mayonnaise on
the Iberian peninsula) and, in France, a homemade-style mayonnaise under the
Lesieur brand. In Hungary and Russia, we launched varieties of Hellmann's
mayonnaise for traditional salads. Our goal is to repeat the success of
Hellmann's Babuni (Granny) mayonnaise in Poland, where sales of our dressings
nearly doubled in 1997.
Hellmann's is the No. 1 brand of mayonnaise in Latin America and now a
leader in the ketchup category. Hellmann's ketchup has been extended to eight
markets in the past two years. At the same time, we launched Hellmann's pourable
dressings in all of Bestfoods' Latin American affiliates.
Worldwide volumes of corn oil and other oils increased in 1997, but sales
were slightly lower.
In the U.S., where Mazola is the No. 1 corn oil, the brand's market share
and volumes rose, especially reflecting increased sales to Hispanic consumers.
Mazola canola oil, which has half the saturated
8
<PAGE> 11
[GRAPHICS OMITTED]
<PAGE> 12
[GRAPHICS OMITTED]
Pots of Gold
Bestfoods has increased
volumes of Pot Noodle
products more than 20%
in the two years we've
owned the business.
Our affiliates worldwide
are now pursuing
cup initiatives.
Bouillon Boom
Knorr bouillon sales in
Asia are up over 1,000%
in 10 years. In 1997 we
sold enough cubes and
other bouillon products
to make 750 million liters
of bouillon.
Extending Our Umbrella
Once the Mazola brand meant corn oil only.
Today, we're broadening our growth
opportunities by extending the
brand into fast-growing
segments.
<PAGE> 13
[GRAPHICS OMITTED]
Real Asia, Real Easy
Bestfoods Foodservice in the U.S.
is launching six products in 1998,
imported from our Asian affiliates.
They're authentic, easy to use, and
give us a real competitive advantage.
Big Brand Power
Bestfoods has 17 brands
with $100+ million sales.
ALSA ARNOLD BEST FOODS BOBOLI
CATERPLAN ENTENMANN'S FREIHOFER'S
HELLMANN'S KNORR MAIZENA MAZOLA
MUELLER'S OROWEAT PFANNI
POT NOODLE SKIPPY THOMAS'
Turn Up the Volume
Our bread volumes
grew 17 times faster
than the market
in 1997.
Not Just Muffins
Thomas' is the nation's
No. 1 fresh packaged bagel.
Smart Cookies
In the first four
months in their
introductory
market, Soft Baked
cookies more than
doubled sales of
Entenmann's cookies.
<PAGE> 14
[PHOTO OMITTED]
Bringing out the best: Four
new fat free and two new
regular dressings flavors
were added in 1997.
[PHOTO OMITTED]
Value-added bouillons:
Knorr culinary cubes are
marketed in 17 countries.
[PHOTO OMITTED]
Local flavor: Bestfoods
now produces Knorr soy sauce
in Shanghai.
fat of blended vegetable oils, was launched during the year.
Two international affiliates extended their Mazola brand umbrellas in
1997. Canola oil was launched in Argentina and Basilico, a basil-flavored oil,
in Germany.
Foodservice
Bestfoods' foodservice business (known as Caterplan in most markets outside the
U.S.) leverages Bestfoods' major brands, products, and distinctive know-how in
the growing global market for food prepared away from home. Our customers, in 55
countries, are the operators of fine restaurants, cafeterias, and other places
where food is served.
Foodservice sales are included in the appropriate product categories in
this report.
In 1997 foodservice sales were approximately $1.3 billion. The slight drop
reflected the impact of unfavorable European currency values. Volumes rose 10%.
During 1997 Caterplan in Europe successfully test-marketed a number of
products that deliver added convenience to customers. These include frozen
prepared foods under the Caterfrost brand in Austria and frozen, ready-to-heat
soups, developed in the Netherlands with help from colleagues in the U.S.
In Bestfoods' fast-growing North American foodservice business, new
products included Hellmann's fat free pourable dressings, a Boboli bread product
created especially for a national restaurant chain, and new Knorr pasta sauces
and LeGout soups.
A successful new business development program -- unique in the North
American foodservice industry -- was expanded. It adapts proven best practices
developed by Caterplan in Europe.
In Latin America, Caterplan managers and their retail colleagues launched
Hellmann's pourable dressings to retail and foodservice customers
simultaneously.
In Asia, Caterplan sales are growing with our customers in the fast-food
industry, as they introduce consumers to new tastes, including dressings.
o Regional Businesses
Baking
Bestfoods Baking is the leading fresh premium baker in the United States. Sales
increased 2.6% to $1.6 billion in 1997 on slightly higher volumes.
Significant improvement in the sweet baked goods business was an important
highlight for the year. New hand-held items, such as
12
<PAGE> 15
[PHOTO OMITTED]
West Coast newcomer:
Oroweat bagels were
introduced in 1997.
[PHOTO OMITTED]
Hand-held and healthy:
Entenmann's Multi-Grain
cereal bars continued their
outstanding growth.
[PHOTO OMITTED]
On a roll: Potato varieties
are increasing sales.
Entenmann's Donut Dippers, Soft Iced cupcakes, Soft Baked cookies, and
Multi-Grain cereal bars, boosted sales of regular Entenmann's products. But the
continued decline in sales of reduced fat and fat free products lowered total
sales of sweet baked goods slightly. By the end of the year, however,
performance in this "health" segment was improving dramatically with the
successful launch of reformulated, Entenmann's Light products.
Sales of bread and rolls, the largest part of Bestfoods Baking, grew well
on higher volumes. Our biggest bread and roll brand is Oroweat, No. 1 in
California and, in 1997, also the Pacific Northwest. Both the Oroweat and
Brownberry brands grew strongly in 1997, fueled by Potato, Country White, and
other new wide-pan bread varieties. In the Northeast, Freihofer's bread and
rolls were extended to the Philadelphia area.
Bestfoods Baking's specialty bread sales increased on sharply higher
volumes, as Thomas' bagels (now the nation's No. 1 fresh packaged bagel),
Brownberry bagels, and, new in 1997, Oroweat bagels, all grew well.
The rapid growth of fresh bagels had a negative impact on the English
muffin category, where volumes of Thomas' English muffins declined modestly.
However, the brand maintained its No. 1 market share and added an Apple Cinnamon
variety in 1997.
Sales of Boboli pizza crusts, the market leader, were lower in 1997. New
Boboli products are planned for 1998.
Since the 1995 acquisition of the Entenmann's, Freihofer's, Oroweat, and
Boboli brand businesses, Bestfoods Baking has been combining these new
operations with our Thomas', Arnold, Sahara, and other baking businesses to
capture significant synergies. Production realignments allowed the shutdown of
three bakeries in 1997. Additional consolidation has been announced for 1998.
Starches
Sales of starches (basic nutritious foods) and syrups were $577 million, 4%
lower, on volumes that dropped 4.7%. Bestfoods' most important starch business
is in Latin America, where we market fortified Maizena corn starch and other
branded cereals and mixes for preparing porridges, breakfast drinks, and
13
<PAGE> 16
[PHOTO OMITTED]
Soy power: Sales
of AdeS beverages
surged in 1997.
[PHOTO OMITTED]
A great year: Sales,
volumes, and market share
for Skippy peanut butter all
increased.
[PHOTO OMITTED]
South of the border:
IDP extended its dessert
products into three new
countries.
other dishes. The newest part of this business is AdeS soy-based beverages,
which continues to grow.
Borrowing a page from our Latin American business, our affiliate in Kenya
launched Maizena Nutraplus porridge, fortified with seven vitamins, protein,
calcium, and iron.
Bread Spreads
Worldwide sales of peanut butter and other bread spreads were $386 million, up
5.4%, on sharply higher volumes.
1997 was a great year for Skippy peanut butter in the U.S. A more
"peanutty" taste, new package graphics, and aggressive marketing helped deliver
higher sales and volumes and added more than two points to market share.
Bestfoods' European bread spreads include Nocilla chocolate hazelnut
spread, acquired with the Starlux business and a market leader in Spain; Marmite
savory spread in the U.K., which is also exported to Canada and Asia; and
several jelly and jam brands, including Santa Rosa in Italy.
In Asia, where we market peanut butter in nine countries, a new venture in
China will produce Skippy peanut butter beginning in 1998.
Desserts
Desserts and baking aids sales were $289 million, down 6.6% on lower volumes.
Bestfoods' largest dessert businesses are in the U.K., where we market Ambrosia
custard, and France, where we added an innovative shelf-stable liquid batter for
baking cakes under the Alsa brand.
Bestfoods markets dessert mixes in Latin America through International
Dessert Partners (IDP), a joint venture with General Mills. Results are treated
on an equity basis and not included in the company's desserts category results.
In 1997 IDP entered three new markets, opened a plant in San Carlos, Uruguay,
and added a rice pudding mix to a product portfolio that already includes
ready-to-use frostings and mixes for preparing cakes, brownies, and creamy
chilled desserts.
14
<PAGE> 17
Market Positions Worldwide
<TABLE>
<CAPTION>
1 Leader in Market Share
2 Second in Market Share
o Present in the Market Potato
+ Licensing Agreement Soups* Sauces* Bouillons Mealmakers* Products Pasta Mayonnaise
<S> <C> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
NORTH AMERICA, CARRIBEAN
===================================================================================================================================
Canada 2 2 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
United States o o 2 o o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Dominican Republic 2 2 o
===================================================================================================================================
EUROPE, AFRICA/MIDDLE EAST
===================================================================================================================================
Austria 1 2 1 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Belgium 1 1 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Bulgaria o o o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Czech Republic o o o o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Denmark 1 1 1 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Finland 1 1 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
France 1 2 2 2
- -----------------------------------------------------------------------------------------------------------------------------------
Germany 2 2 2 2 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Greece 1 1 1 2 1
- -----------------------------------------------------------------------------------------------------------------------------------
Hungary 1 1 1 1 o 2
- -----------------------------------------------------------------------------------------------------------------------------------
Ireland 1 1 1 1 1 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Italy 1 o 2 o 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Netherlands 2 1 o 2 o
- -----------------------------------------------------------------------------------------------------------------------------------
Norway 2 2 o 2
- -----------------------------------------------------------------------------------------------------------------------------------
Poland 1 1 1 1 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Portugal 1 o 1 2 1
- -----------------------------------------------------------------------------------------------------------------------------------
Romania o o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Russia 1 1 2 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Slovak Republic o o o o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Spain 2 o 2 o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Sweden 1 2 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Switzerland 1 1 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
United Kingdom 2 2 2 o o 1
===================================================================================================================================
Israel 1 2 o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Jordan o o
- -----------------------------------------------------------------------------------------------------------------------------------
Kenya 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Morocco 1 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Saudi Arabia 2
- -----------------------------------------------------------------------------------------------------------------------------------
South Africa o o
- -----------------------------------------------------------------------------------------------------------------------------------
Tunisia 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Turkey 1 2
===================================================================================================================================
LATIN AMERICA
===================================================================================================================================
Argentina 1 1 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Bolivia o o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Brazil 2 o 1 2 1
- -----------------------------------------------------------------------------------------------------------------------------------
Chile o o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Colombia 2 2 2 2 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Costa Rica 2 1 2 1
- -----------------------------------------------------------------------------------------------------------------------------------
Ecuador 2 2 2 o
- -----------------------------------------------------------------------------------------------------------------------------------
Guatemala o o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Honduras o
- -----------------------------------------------------------------------------------------------------------------------------------
Mexico 1 o 1 1 o 2
- -----------------------------------------------------------------------------------------------------------------------------------
Panama o o
- -----------------------------------------------------------------------------------------------------------------------------------
Paraguay 1 1 2 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Peru 2 2 2 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Uruguay 1 1 2 1
- -----------------------------------------------------------------------------------------------------------------------------------
Venezuela 2 o 2 1 o
===================================================================================================================================
ASIA
===================================================================================================================================
China o 2 o
- -----------------------------------------------------------------------------------------------------------------------------------
Hong Kong o 1 o 2
- -----------------------------------------------------------------------------------------------------------------------------------
India 1
- -----------------------------------------------------------------------------------------------------------------------------------
Indonesia 1 o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Japan + 1 1 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Malaysia 1 2 1
- -----------------------------------------------------------------------------------------------------------------------------------
Pakistan 1 1 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Philippines 1 o 1 2 1
- -----------------------------------------------------------------------------------------------------------------------------------
Singapore 1 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Sri Lanka 2 2
- -----------------------------------------------------------------------------------------------------------------------------------
Taiwan 1 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Thailand 1 1 1 2 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Viet Nam o 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1 Leader in Market Share
2 Second in Market Share
o Present in the Market Pourable Peanut Desserts Premium
+ Licensing Agreement Dressings Corn Oil Foodservice** Butter Starches (Ambient) Baking
<S> <C> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
NORTH AMERICA, CARIBBEAN
===================================================================================================================================
Canada 1 o 2 1
- -----------------------------------------------------------------------------------------------------------------------------------
United States o 1 o 2 1 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Dominican Republic o o o
===================================================================================================================================
EUROPE, AFRICA/MIDDLE EAST
===================================================================================================================================
Austria 1 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Belgium o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Bulgaria
- -----------------------------------------------------------------------------------------------------------------------------------
Czech Republic o
- -----------------------------------------------------------------------------------------------------------------------------------
Denmark 2 o 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Finland o 2
- -----------------------------------------------------------------------------------------------------------------------------------
France 2 o 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Germany 1 o 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Greece 1 o 2 2
- -----------------------------------------------------------------------------------------------------------------------------------
Hungary o o
- -----------------------------------------------------------------------------------------------------------------------------------
Ireland 2 o o 2 o
- -----------------------------------------------------------------------------------------------------------------------------------
Italy o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Netherlands o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Norway o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Poland o o
- -----------------------------------------------------------------------------------------------------------------------------------
Portugal 2 o 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Romania o
- -----------------------------------------------------------------------------------------------------------------------------------
Russia o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Slovak Republic o
- -----------------------------------------------------------------------------------------------------------------------------------
Spain o o 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Sweden o 1 o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Switzerland o o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
United Kingdom o 1 o 1 1 o
===================================================================================================================================
Israel 1 o 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Jordan o
- -----------------------------------------------------------------------------------------------------------------------------------
Kenya o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Morocco o 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Saudi Arabia 2 o o o
- -----------------------------------------------------------------------------------------------------------------------------------
South Africa o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Tunisia o o
- -----------------------------------------------------------------------------------------------------------------------------------
Turkey o 1 o
===================================================================================================================================
LATIN AMERICA
===================================================================================================================================
Argentina 1 1 o 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Bolivia 1
- -----------------------------------------------------------------------------------------------------------------------------------
Brazil 2 1 o 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Chile o o o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Colombia o o o o 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Costa Rica 1 1 o o 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Ecuador 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Guatemala o 1 o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Honduras 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Mexico o 2 o 2 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Panama 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Paraguay o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Peru o o o 2 o
- -----------------------------------------------------------------------------------------------------------------------------------
Uruguay 1 2 o 1 o
- -----------------------------------------------------------------------------------------------------------------------------------
Venezuela o o 1 o
===================================================================================================================================
ASIA
===================================================================================================================================
China o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Hong Kong o o 1 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
India 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Indonesia o o o o
- -----------------------------------------------------------------------------------------------------------------------------------
Japan + 2 1 o o
- -----------------------------------------------------------------------------------------------------------------------------------
Malaysia 2 1 o 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Pakistan 1 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Philippines o 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Singapore o o o 1 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Sri Lanka 1 o o
- -----------------------------------------------------------------------------------------------------------------------------------
Taiwan o o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Thailand 1 o 1
- -----------------------------------------------------------------------------------------------------------------------------------
Viet Nam o
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Dehydrated products only.
** Bestfoods foodservice (catering) products hold leading share positions in
many of the categories in which they compete.
15
<PAGE> 18
[PHOTO OMITTED]
Renato Simpao
Quality, Philippines
Our dressings plant at Cavite was
awarded ISO 9002 certification
after only one audit. That's a
world-class benchmark we can
point to with pride.
[PHOTO OMITTED]
Michael Smith
Corporate Treasury
While attending the University of
Pennsylvania, I interned at Bestfoods
through the Inroads program.
Now I've got a great education and a
great job.
[PHOTO OMITTED]
Alan Krutchkoff
Corporate Communications
Many of us at Bestfoods support
local charities. I've been supporting
the March of Dimes WalkAmerica
for three years. Walking keeps me fit
and it's good for my heart
in so many ways.
=============================
Bestfoods Values and Policies
High ethical standards and
best business practices work
hand in hand at Bestfoods.
=============================
Bestfoods is an international company comprising locally-managed operations in
more than 60 countries. Each business has significant freedom to make decisions
and act independently to further local and corporate business objectives.
All of our local businesses are also integral to a corporate organization
that provides strategic guidance and oversight, as well as constant
reinforcement of shared values and policies.
These values and policies call for the highest standards of moral and
ethical behavior in all business dealings, regardless of situation or geographic
location.
They express commitment to Bestfoods' people and their career and personal
development; to providing high-quality products that deliver value to our
consumers and customers; to being good citizens in our communities; to ensuring
safe workplaces and a clean environment; and to encouraging and rewarding
qualities in our people that help achieve our business objectives.
Bestfoods' values and policies have long been promoted, communicated, and
reinforced throughout the company. In 1996 we published a booklet containing an
expanded statement of Bestfoods' values and policies and translated it into the
24 languages spoken in our affiliates around the world. This booklet includes
specific Bestfoods corporate policies governing the full range of business
relationships and activities.
In 1997 a Values and Policies Office was created as an additional means of
encouraging the understanding of, and adherence to, the company's values and
policies. It also provides another avenue for employees to voice their concerns
and ideas to top management.
High ethical standards and best business practices work hand and hand at
Bestfoods. Our values and policies are good for our employees, our neighbors,
our consumers, our customers, and our bottom line. For example:
Quality
Bestfoods' Cavite dressings plant in the Philippines has received the
international ISO-9002 certification for its quality management system. The
plant's world-class quality program has increased product reliability and yield,
reduced
16
<PAGE> 19
complaints and costs, and is a benchmark for our other affiliates.
Safety
Bakeries in Riviera Beach, FL, and Hazelton, PA, have each operated for more
than 900 days (as of February 1998) without a lost-time accident. These
achievements exemplify the strides made by our baking division to improve its
safety programs. Such improvements helped lower workers' compensation costs
significantly in 1997.
Environment
In Europe, a Scandinavian packaging team eliminated the use of shrink wrap and
carton boxes for Knorr Quick soup, reducing costs and waste. This
environmentally friendly, cost-effective approach is now being considered for
other European packaging.
Health
In Latin America, Bestfoods adds nutritional supplements to many of its starch
products. The fortified products provide critical vitamins and minerals at an
affordable cost.
Our Community
As good corporate citizens, Bestfoods and its people participate in a variety of
projects and groups in the company's local and national communities. Financial
support is provided to many institutions and activities that enhance the quality
of community life. In 1997 Bestfoods made contributions of nearly $22 million in
cash and food products, mainly to educational institutions; health, welfare, and
community service organizations; and other cultural and charitable groups. A
significant part of Bestfoods' contributions is donated through the company's
Matching Gifts Program in the U.S., which matches $2 for every $1 employees
contribute to an organization.
Employee Development
Bestfoods is committed to the principles of equal employment opportunity and
fair employment practices and values the diversity of its employee family. As
stated in the company's diversity vision statement: "We will value, leverage,
and increase variety and differences in our workforce so that our diversity is
the perpetual stimulant of innovation, creativity, and effective
problem-solving."
We believe that diversity provides us with a sustainable competitive
advantage that helps reach the highest levels of quality, productivity, and
achievement in realizing Bestfoods' vision to become the best international food
company in the world.
[PHOTO OMITTED]
George Vartis
Packaging, Europe
Our packaging programs are
reducing waste and eliminating mate-
rials. This saves the company money
and helps save the planet, too.
[PHOTO OMITTED]
Cathryn Mattson
Values and Policies
Our Values and Policies Office was
created in 1997 to provide another
direct communications link for
employees to voice their concerns
and ideas to top management.
[PHOTO OMITTED]
Mario Rodenstein
R&D, Latin America
We're fortifying many of our starch
products with critical vitamins and
minerals. This provides low-income
consumers, particularly children,
with an affordable source of
essential nutrients.
17
<PAGE> 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Bestfoods and Subsidiaries
Overview of 1997 and Outlook for 1998
1997 was a watershed year for Bestfoods. We spun off our corn refining business
and became a 100% consumer foods company. The spin-off, a tax-free distribution
to U.S. shareholders, gives Bestfoods the focus, flexibility, and resources for
faster growth of volumes, sales, and profits.
Our business grew solidly in 1997, despite the impact of unfavorable
currency values and charges related to the spin-off. For 1998, our primary
objective is to improve returns through a more focused development of our
consumer foods business. The Company's strategy is to pursue volume, sales, and
profit growth in its three worldwide core businesses: savory products (chiefly
under the Knorr brand); dressings (chiefly under the Hellmann's brand); and
foodservice. In addition, Bestfoods will develop new growth opportunities for
its regional businesses, including baking, where the Company will also seek
continued operating efficiency gains in 1998.
In line with these strategies, during 1997 the Company focused on volume
growth; introduced many new products throughout the world; integrated an
acquisition in Europe with an existing operation in that region; expanded and
built production facilities; and closed several plants. The Company gained
significant efficiencies from previous years' restructuring activities.
The earnings growth resulting from these activities was very positive, as
all areas reported strong volume growth and profit margin improvement, which
more than compensated for unfavorable European and Asian currency values.
Our earnings expectations for 1998 are based on the assumption that
conditions relating to consumption, costs, currency values, competition, and
political and social environments in the economies and industries in which
Bestfoods operates will not change significantly overall. Our expectations are
also based on the assumption that economies in most areas of the world will
continue to progress at current, generally modest, rates of growth, including
more specifically:
o In the U.S., it is expected that economic growth will remain at a level
similar to 1997. It is likely that this will benefit the Company, together with
the easing of agricultural commodity prices. More aggressive new product
development and continued efficiency gains will also benefit 1998 results.
o Also in the U.S., the continued integration of baking operations should
result in further synergies during 1998 and beyond and is expected to contribute
to profits.
o In Europe, the economies are expected to continue their generally modest
growth. Currency values on average in 1998 are likely to be lower than in 1997.
The business climate of the European Union will remain highly competitive, as
the retail trade continues to seek efficiencies. This will have a moderating
effect on the division's volumes, sales, and profit growth. However, Bestfoods'
leading brands, wide geographic presence, new products and businesses, and
continuing efficiency gains are expected to provide the needed competitive
strength for growth.
o In Latin America, there is concern of a possible economic crisis linked
to the Asian turmoil. However, we believe that there will be no major disruption
of Latin America's economic progress and that confidence and stability will
return as the year progresses. Freer markets and open borders should benefit
personal income and consumption levels. Bestfoods, with its strong market
positions throughout the area, is expected to show continued progress in 1998.
o In Asia, despite year-end economic conditions that caused worldwide
concerns, our business is expected to make progress in 1998, as the initial
economic shock subsides. Bestfoods continues to see important opportunities for
growth in its businesses in Asia because the Company's products have relatively
low market penetration in emerging countries.
The last three years' financial results are discussed below as a single
business segment comprising Bestfoods' continuing operations. A general
description of operations appears on pages one through 17 of this report.
18
<PAGE> 21
Results of Operations.
Net sales in 1997 decreased nearly 1% to $8.4 billion, as improved volumes and
better prices were more than offset by unfavorable currency values, particularly
in Europe. Volumes overall were up 2.4%. The increase in volume from the
acquired Starlux business was matched by a reduction in sales from the disposal
of the Korean business, at the end of 1996.
In 1996, net sales increased 18%, with all divisions contributing to the
gain. The Baking division accounted for 70% of the increase, mainly as a result
of inclusion of a full year's sales from the baking acquisition of October 2,
1995. Volumes overall, which were up 18% including acquisitions, accounted for
the entire sales increase, as small price gains were offset by currency
declines.
An analysis of net sales by division follows:
<TABLE>
<CAPTION>
% Change
$ Millions 1997 1996 1995 97/96 96/95
=============================================================================
<S> <C> <C> <C> <C> <C>
North America $1,786 $1,744 $1,699 2.4 2.7
- -----------------------------------------------------------------------------
Europe 3,519 3,692 3,438 (4.7) 7.4
- -----------------------------------------------------------------------------
Latin America 1,105 1,076 1,023 2.7 5.2
- -----------------------------------------------------------------------------
Asia 382 398 364 (4.0) 9.3
- -----------------------------------------------------------------------------
Baking 1,608 1,568 675 2.6 NM
- -----------------------------------------------------------------------------
Total $8,400 $8,478 $7,199 (0.9) 17.8
=============================================================================
NM = Not Meaningful
</TABLE>
1997: North America sales increased 2.4% on volume improvements. In Europe, a
4.7% decrease in sales was the result of a 8.8% decline in currency values. This
was partially offset by a 2.6% volume gain, due in part to acquisitions, and
better prices. In Latin America, strong volume gains drove a sales gain of 2.7%
despite weaker prices. Sales in Asia declined 4%. However, excluding the effects
of the divestiture of the Korean business at the end of 1996, sales increased
8.6% as improvement in volumes and prices was partially offset by weaker
currency values. Baking sales increased 2.6% reaching $1.6 billion. Baking
volumes increased slightly and prices improved.
1996: North America sales increased 2.7% on volume gains and pricing
improvements. In Europe, a 7.4% increase in sales was the result of a 7.8%
volume gain, due in part to acquisitions, and better prices offset by weaker
currency values. Sales rose 5.2% in Latin America as strong volume gains
overcame weaker prices. Asian sales increased 9.3% on volume and price
improvements, partially offset by unfavorable currency values.
Cost of sales and operating expenses. In 1997, the Company's gross profit margin
rose to 44.6% from 43.1% in 1996 and 42.6% in 1995. Gains from improved pricing,
as well as new efficiencies achieved as a result of the restructuring programs,
contributed to the increases. Marketing expenses increased by 4.9% from 1996 to
1997, following an increase of 13% from 1995 to 1996, when the level of new
product launches was higher. Selling, general, and administrative expenses
decreased slightly in 1997, following a strong increase in 1996, as a result of
the baking acquisition.
Restructuring, integration, and other charges -- net.
In the second quarter of 1997, the Company recorded a pre-tax charge of $242
million for the restructuring of its worldwide businesses in connection with the
spin-off of its corn refining operations. The majority of the activities
included pertain to the European and North American operations and encompass the
sale of non-core businesses, plant closings, and the reorganization of
administrative functions. The Baking division restructuring includes continued
consolidation and reconfiguration of the manufacturing and distribution systems
and processes to improve overall business efficiency and effectiveness. In 1995,
the Company recorded a pre-tax charge of $95 million, comprising a $55 million
charge for the integration of its acquired Baking business and a charge of $60
million for restructuring of its worldwide businesses, partially offset by a
gain of $20 million for sale of a business in Latin America.
An analysis of operating income for 1997 and 1996 by division, income from
continuing operations, and earnings per share, excluding the 1997 restructuring
charge is set forth as follows:
19
<PAGE> 22
<TABLE>
<CAPTION>
$ Millions except
per share amounts 1997 1997 1997 1996 %
============================================================================
Excluding
Restruc- restruc- 1997*
Reported turing turing Reported vs
Operating Income results charge charge results 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
North America $ 259 $ (48) $ 307 $ 285 8.1
- ----------------------------------------------------------------------------
Europe 408 (49) 457 425 7.5
- ----------------------------------------------------------------------------
Latin America 211 (22) 233 211 10.1
- ----------------------------------------------------------------------------
Asia 45 (8) 53 49 7.6
- ----------------------------------------------------------------------------
Baking 11 (86) 97 89 9.0
- ----------------------------------------------------------------------------
Corporate (68) (29) (39) (32) --
- ----------------------------------------------------------------------------
Total $ 866 $ (242) $1,108 $1,027 7.9
- ----------------------------------------------------------------------------
Income from
continuing
operations $ 429 $ (156) $ 585 $ 557 4.9
- ----------------------------------------------------------------------------
Basic earnings
per share $2.91 $(1.08) $ 3.99 $ 3.78 5.6
- ----------------------------------------------------------------------------
Diluted earnings
per share $2.85 $(1.04) $ 3.89 $ 3.70 5.1
============================================================================
* excluding charge
</TABLE>
Operating Income for 1997 increased 7.9%, excluding the 1997 restructuring
charge. Volume gains in all divisions, particularly Latin America and Asia, and
improved margins everywhere, except Latin America, more than compensated for
lower currency values. The Baking division's operating income, excluding its
portion of the restructuring charge, increased 9% on both improved margins and
volumes.
An analysis of operating income for 1996 and 1995 by division, income from
continuing operations, and earnings per share, excluding the 1995 restructuring
charge, is set forth below:
<TABLE>
<CAPTION>
$ Millions except
per share amounts 1996 1995 1995 1995 %
============================================================================
Excluding
Restruc- restruc- 1996
Reported Reported turing turing vs
Operating Income results results charge charge 1995*
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
North America $ 285 $ 249 $ (17) $ 266 7.1
- ----------------------------------------------------------------------------
Europe 425 326 (29) 355 19.7
- ----------------------------------------------------------------------------
Latin America 211 178 6 172 22.7
- ----------------------------------------------------------------------------
Asia 49 47 -- 47 4.3
- ----------------------------------------------------------------------------
Baking 89 (14) (55) 41 NM
- ----------------------------------------------------------------------------
Corporate (32) (30) -- (30) --
- ----------------------------------------------------------------------------
Total $1,027 $ 756 $ (95) $ 851 20.7
- ----------------------------------------------------------------------------
Income from
continuing
operations $ 557 $ 377 $ (58) $ 435 28.0
- ----------------------------------------------------------------------------
Basic earnings
per share $ 3.78 $2.51 $(0.40) $2.91 29.9
- ----------------------------------------------------------------------------
Diluted earnings
per share $ 3.70 $2.47 $(0.38) $2.85 29.8
============================================================================
</TABLE>
* excluding charge NM = Not meaningful
Operating income in 1996 increased 21%, excluding special items in 1995. Strong
volume gains in all divisions and improved margins were slightly offset by
weaker currency values. The Baking division's operating income increased
substantially compared to 1995, mainly due to the inclusion of a full year's
results for the acquired business.
Financing costs of $162 million in 1997 were up 10.2% from 1996, due to higher
borrowings, mainly for acquisitions. The increase in costs also reflected a
reduction in interest income and a change in interest expense resulting from
lower allocations to the discontinued operation. In 1996, financing costs of
$147 million were up 44% from 1995, mainly due to interest expense related to
the full year's debt for businesses acquired during 1995. In addition, average
borrowings outstanding and interest rates increased marginally. Higher financing
costs were partially offset by lower foreign currency exchange losses.
Provision for income taxes. The effective tax rate in 1997 was 35.5% compared to
33.6% in 1996, when the resolution of several tax issues in various
jurisdictions benefited results. The effective tax rate in 1995 was 38.5%. The
lower rates in 1997 and 1996 reflected decreases in tax rates in certain foreign
jurisdictions and an increase in the proportion of income earned overseas. This
foreign income, on average, was taxed at a lower rate than domestic income in
1997 and 1996. The effective tax rate for 1998 is expected to remain at 35.5%.
Income and earnings per common share from continuing operations. Excluding the
effect of the 1997 restructuring charge, income from continuing operations
increased 4.9% to $585 million and basic earnings per share increased 5.6% to
$3.99. Diluted earnings per share, on the same basis, increased 5.1%. The
increase in earnings per share resulted from higher operating income, which more
than offset a higher effective tax rate and higher financing costs. In 1996,
income and basic earnings per share from continuing operations increased 28% and
30%, respectively, excluding the special items in 1995's results. Diluted
earnings per share also increased 30%. These increases resulted from higher
operating income and the benefit of a lower effective tax rate, which more than
compensated for higher financing
20
<PAGE> 23
costs. Fewer shares outstanding in both years also benefited earnings per common
share.
Income from discontinued operations net of income taxes in 1997 declined more
than 50% from $23 million to $11 million due to continuing high fructose corn
syrup overcapacity in the North American corn refining industry. In Latin
America, operating income was more than 40% ahead of 1996. Income from
discontinued operations in 1996 was significantly below 1995 due to a
combination of higher corn costs, industry overcapacity which limited price
increases, and a loss of $40 million on commodity futures contracts (recognized
in the fourth quarter) following a steep decline in corn prices.
Loss on disposal of discontinued operations of $83 million after taxes resulted
from the decision to spin off and restructure the corn refining business. The
spin-off portion included the direct cost of spinning off this business, such
as, legal, tax, and investment fees. The restructuring portion contained costs
of separating common facilities, mostly in Latin America.
Cumulative effect of a change in accounting principle. This fourth-quarter 1997
charge of $13 million after taxes resulted from a recently issued accounting
pronouncement put forth by the Emerging Issues Task Force (EITF) requiring that
certain process re-engineering costs previously capitalized be expensed.
Key balance sheet items
Total assets for continuing operations in 1997 declined slightly to $6.1 billion
from $6.2 billion as assets added through acquisitions of approximately $300
million were more than offset mostly by the effects of weaker currencies and a
reduction due to restructuring activities. Total assets declined $1.2 billion in
1997 to $6.1 billion from $7.3 billion in 1996, mostly as a result of the
spin-off, at December 31, 1997, of the net assets of $1 billion of the corn
refining business.
An analysis of total assets by operating division at December 31 is set
forth as follows:
<TABLE>
<CAPTION>
$ Millions 1997 1996 1995
=============================================================================
<S> <C> <C> <C>
North America $ 985 $1,038 $1,024
- -----------------------------------------------------------------------------
Europe 2,829 2,980 3,145
- -----------------------------------------------------------------------------
Latin America 596 581 520
- -----------------------------------------------------------------------------
Asia 245 299 263
- -----------------------------------------------------------------------------
Baking 1,242 1,241 1,223
- -----------------------------------------------------------------------------
Corporate 203 87 73
- -----------------------------------------------------------------------------
Continuing $ 6,100 $6,226 $6,248
- -----------------------------------------------------------------------------
Discontinued -- 1,025 600
- -----------------------------------------------------------------------------
Total $ 6,100 $7,251 $6,848
=============================================================================
</TABLE>
At year end 1996, total assets from continuing operations remained even
with 1995 as the increase from capital expenditures and trade working capital
was matched by the impact of lower currency values.
Net cash flows
Strong cash flows from continuing operations in 1997 continued to fund the
Company's working capital, capital expenditure programs, and dividends (which
were increased 9.8% to $.45 per common share during the year). The net cash
flows from continuing operations of $778 million was below 1996 because of
higher working capital and lower deferred taxes.
<TABLE>
<CAPTION>
$ Millions 1997 1996 1995
=============================================================================
<S> <C> <C> <C>
Net cash flows from
operating activities:
Continuing $ 778 $ 892 $ 719
Discontinued 137 (139) 163
- -----------------------------------------------------------------------------
Total $ 915 $ 753 $ 882
- -----------------------------------------------------------------------------
Net cash flows used
for investing activities:
Continuing $ (602) $ (354) $(1,499)
Discontinued (130) (251) (132)
- -----------------------------------------------------------------------------
Total $ (732) $ (605) $(1,631)
=============================================================================
</TABLE>
In 1996, cash flows from continuing operations was $892 million, an
increase of $173 million over 1995. This increase was mostly due to higher net
income from continuing operations in 1996 as well as lower working capital.
21
<PAGE> 24
<TABLE>
<CAPTION>
WORLDWIDE
OPERATING
INCOME*
($ MILLIONS)
95 96 97
-- -- --
<S> <C> <C> <C>
851 1,027 1,108
</TABLE>
<TABLE>
<CAPTION>
MARKETING
EXPENDITURES
($ MILLIONS)
95 96 97
-- -- --
<S> <C> <C> <C>
827 932 978
</TABLE>
*excluding special charges.
Investing activities in 1997 for continuing operations was $602 million
compared with $354 million in 1996 and $1.5 billion in 1995. The increases in
1997 and 1995 were due to the increase in acquisition activity. Capital
expenditures in 1997 of $321 million were down $25 million from 1996. In 1996,
capital expenditures increased $59 million over 1995.
The Company has access to various sources of funds at attractive rates
based on its strong financial condition. Bestfoods' long-term debt rating
remained at A+ with Standard & Poor's and Duff & Phelps, and A2 with Moody's.
Readiness for the Year 2000
The Year 2000 issue results from early computer programming that used two digits
rather than four to define the applicable year. If not properly corrected, this
defect could, as we move to the Year 2000, result in system failures or
miscalculations leading to disruptions in a company's operation. Bestfoods has
taken actions to address this potential problem. Each operating division and
corporate management have established teams with appropriate senior and
operating management support to identify and correct Year 2000 issues. Internal
software with non-compliant codes is expected to be either fixed or replaced
with software that is compliant with the Year 2000 requirements. A similar
effort is being undertaken at our manufacturing plants and building facilities.
Additionally, a review of our suppliers and customers is being made to assure
that they are working toward Year 2000 compliance.
The total amount that we estimate will be spent to remediate our Year 2000
issues is not expected to be material to our business, operations, or financial
condition.
Forward-looking statements
This Management's Discussion and Analysis of financial condition and results of
operations and other sections of this Annual Report, including the Chairman's
letter, contain forward-looking statements that are based on current
expectations, estimates, and projections about the businesses in which Bestfoods
operates. These statements are not guarantees of future performance and involve
certain risks, uncertainties, and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements, depending upon
currency values, competitive pricing, economic conditions in our countries of
operations, and other factors. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
New accounting pronouncements. FAS 130, "Reporting Comprehensive Income," was
issued in June 1997 and is effective for the Company commencing with the first
quarter of 1998. This statement requires separate financial statement disclosure
of comprehensive income, which encompasses changes in net assets values derived
from activity from both owner and non-owner sources. The Company will comply
with the requirements of this Statement.
Also in June 1997, FAS 131, "Disclosure about Segments of an Enterprise
and Related Information," was issued requiring certain information be reported
about operating segments of an enterprise. The Company has adopted the
requirements of this new statement.
22
<PAGE> 25
Consolidated Statements of Income
Bestfoods and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31
$ Millions except per share amounts 1997 1996 1995
=====================================================================================================================
<S> <C> <C> <C>
Net sales $8,400 $8,478 $7,199
- ---------------------------------------------------------------------------------------------------------------------
Cost of sales 4,655 4,826 4,135
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 3,745 3,652 3,064
- ---------------------------------------------------------------------------------------------------------------------
Marketing 978 932 827
Selling, general, and administrative 1,662 1,696 1,391
Restructuring, integration, and other charges-- net 242 -- 95
Equity in earnings of unconsolidated affiliates (3) (3) (5)
- ---------------------------------------------------------------------------------------------------------------------
Expenses and other income-- net 2,879 2,625 2,308
- ---------------------------------------------------------------------------------------------------------------------
Operating income 866 1,027 756
- ---------------------------------------------------------------------------------------------------------------------
Financing costs
Exchange losses 1 3 7
Interest expense-- net 161 144 95
- ---------------------------------------------------------------------------------------------------------------------
Total financing costs 162 147 102
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 704 880 654
Provision for income taxes 250 296 252
Minority stockholders' interest 25 27 25
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations 429 557 377
- ---------------------------------------------------------------------------------------------------------------------
Income from discontinued operations, net of income
taxes of $7 -1997; $12 -1996; $86 - 1995 11 23 135
Loss on disposal of discontinued operations, net of
income tax benefit of $26 (83) -- --
Cumulative effect of change in accounting principle,
net of income tax benefit of $7 (13) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income $344 $580 $512
=====================================================================================================================
Earnings (loss) per common share
Basic:
Continuing operations $2.91 $3.78 $2.51
Discontinued operations .07 .15 .92
Loss on disposal of discontinued operations (.57) -- --
Cumulative effect of change in accounting principle (.09) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income $2.32 $3.93 $3.43
=====================================================================================================================
Diluted:
Continuing operations $2.85 $3.70 $2.47
Discontinued operations .07 .15 .89
Loss on disposal of discontinued operations (.55) -- --
Cumulative effect of change in accounting principle (.08) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income $2.29 $3.85 $3.36
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 26
Consolidated Balance Sheets
Bestfoods and Subsidiaries
<TABLE>
<CAPTION>
December 31
$ Millions 1997 1996
================================================================================
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $39 $131
Notes and accounts receivable-- net 1,176 1,177
Inventories 818 890
Prepaid expenses 95 86
Deferred tax asset 60 47
- --------------------------------------------------------------------------------
Total current assets 2,188 2,331
- --------------------------------------------------------------------------------
Investments in unconsolidated affiliates 22 23
- --------------------------------------------------------------------------------
Plants and properties
Land 117 118
Buildings 789 780
Machinery and equipment 2,534 2,624
- --------------------------------------------------------------------------------
3,440 3,522
Less accumulated depreciation 1,499 1,499
- --------------------------------------------------------------------------------
Total plants and properties 1,941 2,023
- --------------------------------------------------------------------------------
Intangibles
Excess cost over net assets of businesses acquired 1,608 1,504
Other intangibles 405 401
- --------------------------------------------------------------------------------
2,013 1,905
Less accumulated amortization 271 245
- --------------------------------------------------------------------------------
Total intangibles 1,742 1,660
- --------------------------------------------------------------------------------
Net assets of discontinued operations -- 1,025
Other assets 207 189
- --------------------------------------------------------------------------------
Total assets $6,100 $7,251
================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 27
<TABLE>
<CAPTION>
$ Millions 1997 1996
================================================================================
<S> <C> <C>
LIABILITIES
Current liabilities
Notes payable $587 $823
Current portion of long-term debt 81 46
Accounts payable 609 690
Accrued liabilities 933 879
Income taxes payable 137 81
- --------------------------------------------------------------------------------
Total current liabilities 2,347 2,519
- --------------------------------------------------------------------------------
Noncurrent liabilities 780 767
- --------------------------------------------------------------------------------
Long-term debt 1,818 1,681
- --------------------------------------------------------------------------------
Deferred taxes on income -- 43
- --------------------------------------------------------------------------------
Minority stockholders' interest 113 157
- --------------------------------------------------------------------------------
EQUITY
Stockholders' equity
Preferred stock - authorized 25 million shares
$1 par value -- --
Designations:
Series B (Series A in 1996) ESOP Convertible
3 million shares designated 180 187
Series B (Series A in 1996) Junior Participating
600,000 shares designated -- --
Common stock - authorized 900 million shares
$.25 par value - issued 195,271,444 shares 49 49
Capital in excess of par value stock 207 187
Unearned ESOP compensation (96) (111)
Cumulative translation adjustment (386) (259)
Treasury stock, at cost (1,517) (1,499)
Retained earnings 2,605 3,530
- --------------------------------------------------------------------------------
Total stockholders' equity 1,042 2,084
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $6,100 $7,251
================================================================================
</TABLE>
25
<PAGE> 28
Consolidated Statements of Cash Flows
Bestfoods and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31
$ Millions 1997 1996 1995
=====================================================================================================================
<S> <C> <C> <C>
Cash flows from (used for) operating activities
Net income from continuing operations $416 $557 $377
Non-cash charges (credits) to net income
Depreciation and amortization 264 288 239
Deferred taxes (49) 82 66
Cumulative effect of change in accounting principle 13 -- --
Restructuring, integration, and other charges-- net 242 -- 95
Other--net 25 21 18
Changes in trade working capital
Notes and accounts receivable and prepaid expenses (20) (44) (102)
Inventories 40 (20) (75)
Accounts payable and accrued liabilities (153) 8 101
Net cash flows from discontinued operations 137 (139) 163
- ---------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 915 753 882
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from (used for) investing activities
Capital expenditures (321) (346) (287)
Proceeds from disposal of plants and properties 17 4 1
Proceeds from businesses sold -- -- 9
Businesses acquired (298) (12) (1,222)
Net investing activities of discontinued operations (130) (251) (132)
- ---------------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (732) (605) (1,631)
- ---------------------------------------------------------------------------------------------------------------------
Net cash flows after investments 183 148 (749)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from (used for) financing activities
Purchase of treasury stock (45) (209) (99)
New long-term debt 339 961 117
Repayment of long-term debt (99) (76) (32)
Net change in short-term debt (387) (681) 1,045
Dividends paid on common stock (241) (225) (213)
Dividends paid on preferred stock (15) (15) (15)
Common stock issued 26 27 13
Net financing activities of discontinued operations 110 -- --
Other liabilities 45 32 14
- ---------------------------------------------------------------------------------------------------------------------
Net cash flows (used for) provided by financing activities (267) (186) 830
- ---------------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash (8) (3) --
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (92) (41) 81
Cash and cash equivalents, beginning of year 131 172 91
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $39 $131 $172
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 29
<PAGE> 30
Consolidated Statements of Stockholders' Equity
Bestfoods and Subsidiaries
<TABLE>
<CAPTION>
Capital in Unearned Cumulative Treasury
Preferred Common excess of ESOP translation common Retained
$ Millions stock stock par value compensation adjustment stock earnings
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 194 $49 $155 $(141) $(181) $(1,231) $2,904
- -------------------------------------------------------------------------------------------------------------------------------
Net income 512
Cash dividends declared
($1.48 per share) (216)
Stock issued in connection with:
Stock options 3 6
Deferred compensation 9 7
Translation adjustment including the
effects of hedging, net of taxes 18
Series A ESOP preferred stock
dividend, net of taxes (11)
ESOP compensation earned 13
ESOP shares redeemed (4)
Treasury stock acquired (99)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 190 49 167 (128) (163) (1,317) 3,189
- -------------------------------------------------------------------------------------------------------------------------------
Net income 580
Cash dividends declared
($1.58 per share) (228)
Stock issued in connection with:
Stock options 9 17
Deferred compensation 12 10
Translation adjustment including the
effects of hedging, net of taxes (96)
Series A ESOP preferred stock
dividend, net of taxes (11)
ESOP compensation earned 17
ESOP shares redeemed (3) (1)
Treasury stock acquired (209)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 187 49 187 (111) (259) (1,499) 3,530
- -------------------------------------------------------------------------------------------------------------------------------
Net income 344
Net income from change in Corn Products'
international reporting period 10
Cash dividends declared
($1.72 per share) (247)
Spin-off of Corn Products International 35 (1,021)
Stock issued in connection with:
Stock options 15 18
Deferred compensation 10 8
Translation adjustment including the
effects of hedging, net of taxes (162)
Series B ESOP preferred stock
dividend, net of taxes (11)
ESOP compensation earned 15
ESOP shares redeemed (7) (5) 1
Treasury stock acquired (45)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $180 $49 $207 $ (96) $(386) $(1,517) $2,605
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 31
Notes to Consolidated Financial Statements
Bestfoods and Subsidiaries
Summary of accounting policies
Principles of consolidation -- Consolidated financial statements include the
accounts of the Company and its subsidiaries. The accounts of subsidiaries
outside of the U.S., except for those in Canada, are based on fiscal years
ending September 30.
Foreign currency translation -- Assets and liabilities of foreign subsidiaries
other than those in highly inflationary economies are translated at current
exchange rates with the related translation adjustments reported as a separate
component of stockholders' equity. Income statement accounts are translated at
the average exchange rate during the period. In highly inflationary economies
where the U.S. dollar is considered the functional currency, monetary assets and
liabilities are translated at current exchange rates with the related adjustment
included in net income. Non-monetary assets and liabilities are translated at
historical exchange rates.
Cash and cash equivalents -- Cash equivalents consist of all investments
purchased with an original maturity of three months or less, and which have
virtually no risk of loss in value. At December 31, 1997, and 1996, the Company
had cash equivalents of $5 million and $6 million, respectively.
Inventories are stated at the lower of cost or market. In the U.S., vegetable
oils are valued at cost on the last-in, first-out method. Other U.S. inventories
are valued at cost on the first-in, first-out method. Had the first-in,
first-out method been used for all U.S. inventories, the carrying value of these
inventories would have increased by $9 million and $8 million in 1997 and 1996,
respectively. Outside the U.S., inventories generally are valued at average
cost.
Plants and properties are stated at cost. Depreciation is generally computed on
the straight-line method over the estimated useful lives of depreciable assets
ranging from 2% to 10% for buildings and 5% to 20% for all other assets. Where
permitted by law, accelerated depreciation methods are used for tax purposes.
Long-lived assets are reviewed for impairment whenever the facts and
circumstances indicate that the carrying amount may not be recoverable.
Intangibles -- The Company amortizes, on a straight-line basis, the excess cost
of net assets over periods not exceeding 40 years. Other intangible assets,
including trademarks, licenses, and patents, are amortized over their economic
lives. Intangible assets are reviewed for impairment whenever the facts and
circumstances indicate that the carrying amount may not be recoverable.
Income taxes -- Deferred income taxes reflect the differences between the assets
and liabilities recognized for financial reporting purposes and amounts
recognized for tax purposes. Deferred taxes are based on tax laws as currently
enacted. The Company makes provisions for estimated U.S. and foreign income
taxes, less available tax credits and deductions, that may be incurred on the
remittance by the Company's subsidiaries of undistributed earnings, except those
deemed to be indefinitely reinvested.
Earnings per common share -- Effective December 31, 1997, FAS 128 "Earnings per
Share" requires a dual presentation of earnings per share - basic and diluted.
Basic earnings per common share has been computed by dividing net income, less
preferred stock dividends net of taxes of $11 million in 1997, 1996, and 1995,
by the weighted average number of common shares outstanding of 143.7 million in
1997, 144.7 million in 1996, and 146.1 million in 1995. Diluted earnings per
share has been computed by dividing net income, less the additional cost
incurred if preferred stock was converted, net of tax of $2 million in 1997 and
$3 million in 1996 and 1995, divided by the weighted average number of common
shares outstanding, including the dilutive effects of stock options and
conversion of the Company's preferred stock, of 149.3 million in 1997, 149.8
million in 1996, and 151.3 million in 1995.
Financial instruments -- The Company hedges its exposure in foreign currency
cash flows to cover planned dividends, fees and royalties, intercompany loans,
and other similar transactions. The Company also hedges certain transactions in
foreign operations such as cross-border sourcing of raw materials, packaging
supplies, and machinery/equipment with foreign exchange contracts. In addition,
the Company hedges certain net investments with borrowings denominated in the
particular foreign currency. As a matter of policy, the Company does not
speculate on foreign currencies. Gains and losses, both realized and unrealized,
on financial instruments that hedge operating activities and related cash flows,
flow through income in the same period as the items being hedged. Gains and
losses, both realized and unrealized, on financial instruments that hedge the
Company's investments in foreign
28
<PAGE> 32
operations are recognized as part of the cumulative translation adjustment in
stockholders' equity.
The company also hedges its exposure to commodities fluctuations with
commodity futures contracts for certain of its North American raw material
purchases. The Company's products are manufactured from a number of raw
materials, including soybean and other edible oils, peanuts, and wheat, all of
which are, and are expected to continue to be, in adequate supply. Such raw
materials may or may not be hedged at any given time based on management's
decisions as to the need to fix the cost of such raw materials to protect the
Company's profitability. Realized gains and losses arising from such hedging
transactions are considered an integral part of the cost of these commodities
and are included in the cost when purchased. At December 31, 1997, and 1996, the
outstanding commodity contracts were not material to the Company's financial
position or results of operations.
Risks and uncertainties -- The Company operates in more than 60 countries, and
in each country, the business is subject to varying degrees of risk and
uncertainty. It insures its business and assets in each country against
insurable risks in a manner that it deems appropriate. Because of its diversity
the Company believes that the risk of loss from non-insurable events in any one
business or country would not have material adverse affect on the Company's
operations as a whole. Additionally, the Company believes there is no
concentration of risk with any single customer or supplier, or small group of
customers or suppliers, whose failure or non-performance would materially affect
the Company's results.
Use of estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Segment Information -- The Company is in one business segment, the consumer
foods business, and follows the requirements of FAS 131, "Disclosures about
Segments of an Enterprise and Related Information."
Reclassifications -- Certain prior year amounts have been reclassified to
conform to the 1997 presentation.
Change in accounting principle
In November 1997, the Emerging Issues Task Force (EITF) issued Issue No. 97-13:
"Accounting for Business Process Reengineering Costs," which requires that
certain costs related to re-engineering business processes either done
separately or in conjunction with an information technology project be expensed
rather than capitalized. This requirement was effective in the fourth quarter of
1997 and required that any unamortized balance of previously capitalized costs
be expensed and treated as a change in accounting principle. Accordingly, the
Company has recorded a cumulative effect of a change in accounting principle of
$21 million before taxes, $13 million after taxes, or $.09 per common share.
Approximately $3 million after tax pertained to the Company's discontinued corn
refining operations with the remaining $10 million after tax relating to the
consumer foods business.
New accounting pronouncements
FAS 130, "Reporting Comprehensive Income," was issued in June 1997 and is
effective for the Company commencing with the first quarter of 1998. This
statement requires separate financial statement disclosure of comprehensive
income which encompasses changes in net asset values derived from activity from
both owner and nonowner sources. The Company will comply with the requirements
of this Statement.
Discontinued operations
In February 1997, the Company announced plans to spin off its corn refining
business to shareholders in a tax-free distribution. On November 18, 1997, the
Company's Board of Directors approved the spin-off effective December 31, 1997,
to shareholders of record as of December 15, 1997, through the issuance of
shares in a new legal entity, Corn Products International, Inc. Common shares
were distributed on a basis of one share of Corn Products International for
every four shares of the Company's common stock. Prior to the spin-off, Corn
Products International borrowed $350 million and transferred the proceeds to the
Company, which was used to pay down commercial paper obligations and other
indebtedness.
29
<PAGE> 33
The consolidated financial results of the Company have been restated to
reflect the divestiture of Corn Products International. Accordingly, the
revenues, costs and expenses, assets and liabilities, and cash flows of Corn
Products International have been excluded from their respective captions in the
Consolidated Statements of Income, Consolidated Balance Sheets, and Consolidated
Statements of Cash Flows. These items have been reported as "Income from
discontinued operations net of income taxes," "Net assets of discontinued
operations," "Net cash flows from discontinued operations," and "Net investing
and financing activities of discontinued operations" for all periods presented.
Summarized financial information for the discontinued operations is set
forth below:
<TABLE>
<CAPTION>
$ Millions except per share amounts 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Net sales $1,418 $1,524 $1,387
Income before income taxes 20 37 223
Net income 11 23 135
- --------------------------------------------------------------------------------
Basic earnings per share $ 0.07 $ 0.15 $ 0.92
- --------------------------------------------------------------------------------
Current assets $ 416 $ 434 $ 277
Current liabilities 489 287 246
Total assets 1,606 1,663 1,296
Total liabilities 620 638 696
- --------------------------------------------------------------------------------
Net assets of discontinued operations $986 $1,025 $ 600
================================================================================
</TABLE>
Concurrent with the spin-off, the fiscal year end of the international
corn refining affiliates was changed from September 30 to December 31, 1997. Net
earnings of $10 million for the period October 1 to December 31, 1997, were
credited to retained earnings.
During the second quarter, the Company recorded a pre-tax charge of $86
million ($65 million after taxes or $.45 per basic common share) related to the
spin-off/restructuring of its corn refining operations. The spin-off portion of
the charge includes direct costs of spinning off this business such as fees in
the legal, tax and investment banking areas. The restructuring portion contains
other costs for the separation of facilities that were used to produce both
consumer foods and corn-derived products including staffing reductions. These
restructuring actions are taking place mainly in the international operations of
the corn refining business.
During the third quarter of 1997, the Company recorded an additional
pre-tax charge of $23 million ($18 million after taxes or $.12 per basic common
share) related to finalization of plans regarding certain spin-off/restructuring
elements.
The spin-off/restructuring charges comprising the loss on disposal of
discontinued operations is summarized below:
<TABLE>
<CAPTION>
1997 Charges To be utilized
$ Millions Charge utilized in future periods
================================================================================
<S> <C> <C> <C>
Spin-off costs $ 15 $ 9 $ 6
- --------------------------------------------------------------------------------
Restructuring charge
Employee costs 54 38 16
Plant and
support facilities 23 15 8
Other 17 12 5
- --------------------------------------------------------------------------------
Restructuring charge $ 94 $65 $29
- --------------------------------------------------------------------------------
Total $109 $74 $35
================================================================================
</TABLE>
Acquisitions
During 1997, the Company purchased the Starlux business in Spain as well as
additional ownership interests in affiliates not wholly owned for a total cost
of $282 million. The Starlux business has annual sales of approximately $160
million and includes Starlux bouillions and meal dishes and Nocilla chocolate
hazelnut spread. Starlux products are marketed in both the retail and
foodservice sectors. The Starlux acquisition was accounted for under the
purchase method.
Consolidated statements of cash flows
Supplementary information for the consolidated statements of cash flows is set
forth below:
<TABLE>
<CAPTION>
$ Millions 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Cash paid during the year for:
Interest $173 $160 $ 108
Income taxes 242 168 269
- --------------------------------------------------------------------------------
Details of businesses acquired as follows:
Fair value of assets acquired $371 $ 12 $1,420
Liabilities assumed 73 -- 198
- --------------------------------------------------------------------------------
Cash paid for acquisitions $298 $ 12 $1,222
================================================================================
</TABLE>
30
<PAGE> 34
Financing arrangements -
Short-term
The Company uses the commercial paper market in the U.S. to supplement long-term
borrowings. Average quarterly commercial paper borrowings in 1997 and 1996 were
$.6 billion and $1.1 billion, respectively, with maximum borrowings in 1997 and
1996 of $1.1 billion and $1.3 billion, respectively, and a weighted average
interest rate in 1997 and 1996 of 5.6% and 5.4%, respectively.
For the international operations, the maximum quarter-end balance of bank
borrowings during 1997 and 1996 was $383 million and $544 million, respectively.
Average quarterly bank borrowings were $321 million for 1997 and $475 million
for 1996. The weighted average interest rate for bank borrowings in 1997 and
1996 was 12% and 11.8%, respectively.
The Company had unused lines of credit totaling $1.7 billion and $2.2
billion at December 31, 1997, and 1996, respectively.
Long-term
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
$ Millions 1997 1996
================================================================================
<S> <C> <C>
Payable in U.S. dollars
7.71% ESOP guaranteed notes due December 2004 $ 131 $ 147
Medium-term notes due 1998-2005 at various rates 200 200
5.6% notes due 2097 (effective rate 7.3%) 100 --
7.0% notes due 2017 150 --
6.15% notes due 2006 300 300
7.25% notes due 2026 300 300
5.625%-6.75% pollution control revenue bonds
due 2007-2016 15 15
Commercial paper supported by revolving credit
agreements at a weighted interest
rate of 5.4% in 1996 -- 150
Other notes and loans at various rates and due dates 48 48
- --------------------------------------------------------------------------------
Total 1,244 1,160
================================================================================
Payable in other currencies
5% Swiss franc debentures, due March 2045,
10-year variable interest rates 138 159
6.75% German mark bearer bonds due January 2001 114 131
2.3% Japanese yen term loan 24 --
Bank and other loans at prevailing interest rates with
various due dates:
- Secured 7 36
- Unsecured 372 241
- --------------------------------------------------------------------------------
Total 655 567
- --------------------------------------------------------------------------------
1,899 1,727
- --------------------------------------------------------------------------------
Less current maturities 81 46
- --------------------------------------------------------------------------------
Total long-term debt $1,818 $1,681
================================================================================
</TABLE>
The Company is required to apply toward retirement of the principal of the
indebtedness not less than the following amounts in the period 1998 through
2002: 1998 (included in current liabilities), $81 million; 1999, $79 million;
2000, $88 million; 2001, $208 million; and 2002, $117 million. At December 31,
1997, buildings, equipment, and certain other assets located outside the U.S.
totaling approximately $92 million, have been pledged as collateral for the
secured loans.
During 1997 the Company negotiated revolving credit agreements for $400
million, which now mature in 1998 and $800 million, which matures in 2002. These
facilities replace the $350 million facility which matured in 1997, and the
$1.25 billion maturing in 2001. The new revolving credit facilities, totaling
$1.2 billion, are with a group of U.S. and international banks and provide
back-up liquidity to the Company's commercial paper program. Covenants in these
agreements require the Company to maintain total debt to total capitalization at
no more than 70% until September 30, 1998; 65% thereafter until September 30,
1999; and 60% thereafter. The debt to capitalization ratio was 68.3% and 52.8%,
excluding deferred tax assets, at December 31, 1997, and 1996, respectively.
In August 1997, the Company filed a shelf registration incorporating a
$500 million medium-term note program with the Securities and Exchange
Commission. In October 1997, under this shelf registration, the Company issued
$150 million and $130 million (face value) of notes maturing in 2017 and 2097,
respectively.
In December 1995, the Company filed a shelf registration with the
Securities and Exchange Commission for borrowings of up to $700 million. Under
this shelf filing, the Company issued $300 million of 6.15% notes in January
1996, maturing in 2006; $100 million of 6.875% medium-term notes in October
1996, maturing in 2003; and $300 million of 7.25% notes in December 1996,
maturing in 2026. The notes issued during 1996 completed the authorization under
the shelf registration.
On April 15, 1996, the Company redeemed the 8.5% sinking fund debentures,
due 2016.
31
<PAGE> 35
Financial Instruments
Fair value of financial instruments -- The carrying values of cash equivalents,
accounts receivable, accounts payable, and short-term debt approximate fair
values. The fair value of long-term debt at December 31, 1997, and 1996, was
based on quotes obtained from brokers and is set forth below:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
$ Millions Amount Value Amount Value
================================================================================
<S> <C> <C> <C> <C>
Long-term debt
Fixed-rate debt $1,706 $1,734 $1,525 $1,521
Weighted average
interest rate 6.7% 6.8%
- --------------------------------------------------------------------------------
Floating rate debt $ 193 $ 193 $ 202 $ 202
Weighted average
interest rate 11.0% 6.2%
================================================================================
</TABLE>
Included in the above are $138 million Swiss franc and $114 million German
mark borrowings, which were designated as hedges of the Company's investments in
those countries. Accordingly, the gains and losses from translating those
amounts are included in the cumulative translation adjustment accounts along
with the corresponding, offsetting movement in the investments.
Foreign exchange contracts -- At December 31, 1997, the Company had forward
exchange contracts to deliver $237 million in foreign currencies comprising $51
million in Spanish pesetas, $45 million in French francs, $30 million in Dutch
guilders, $39 million in Italian lira, and $72 million in various other
currencies. The Company also had contracts to purchase $120 million in foreign
currencies consisting of $20 million in Italian lira, $21 million in Dutch
guilders, and the remaining balance in various other currencies.
At December 31, 1996, the Company had forward exchange contracts to
deliver $323 million in foreign currencies comprising $128 million in French
francs, $57 million in Dutch guilders, $44 million in Italian lira, $25 million
in German marks, $25 million in Swiss francs, and $44 million in various other
currencies. The Company also had contracts to purchase $94 million in foreign
currencies consisting of $45 million in French francs and the remaining balance
in various other currencies.
As discussed in the Summary of accounting policies footnote, the Company
does not, as a matter of policy, speculate in foreign currencies. Accordingly,
any unrealized gains or losses on foreign exchange contracts are matched by a
corresponding offsetting amount on the underlying item being hedged, thereby
eliminating any cash flow risk caused by currency movement.
Restructuring, integration, and other charges -- net
In 1997, the Company recorded a restructuring charge in the second quarter of
$242 million ($156 million after-tax or $1.08 per basic share). The majority of
this charge pertains to North American and European divisions and includes the
sale of non-core businesses, plant closings, and the reorganization of
administrative functions. The Baking division's restructuring charge includes
continued consolidation and reconfiguration of the manufacturing and
distribution systems to improve overall business efficiency and effectiveness.
The restructuring charge and its utilization are summarized as follows:
<TABLE>
<CAPTION>
1997 Utilized To be
$ Millions Charge 1997 Utilized
================================================================================
<S> <C> <C> <C>
Employee costs $ 114 $ 15 $ 99
Plant and support facilities 67 67 --
Other 61 22 39
- --------------------------------------------------------------------------------
Total $ 242 $ 104 $138
================================================================================
</TABLE>
In 1995 the Company recorded a $60 million charge to close a consumer
foods plant in the U.S. and realign production at several other facilities
worldwide. This charge was fully utilized by December 31, 1996. Also in 1995,
the Company recorded a gain of $20 million from the sale of a small insecticide
business in Brazil. This gain, combined with the 1995 charge mentioned above,
resulted in a net charge of $40 million, $24 million after taxes or $.17 per
basic share. In addition, the Company in 1995 recorded an integration charge of
$55 million, $34 million after taxes of $.23 per basic share for the cost of
combining its baking business with an acquired baking business. All activities
related to these charges have been completed.
32
<PAGE> 36
Pension plans
The Company and its subsidiaries have a number of noncontributory defined
benefit pension plans covering substantially all U.S. employees, including
certain employees in foreign countries. Plans for most salaried employees
provide pay related benefits based on years of service. Plans for hourly
employees generally provide benefits based on flat-dollar amounts and years of
service. The Company's general funding policy is to provide contributions within
the limits of deductibility under current tax regulations. Certain foreign
countries allow income tax deductions without regard to contribution levels, and
the Company's policy in those countries is to make the contribution required by
the terms of the plan. Domestic plan assets consist primarily of common stock,
real estate, corporate debt securities, and short-term investment funds.
Approximately $100 million (12%) of the domestic qualified plan assets are
invested in the Company's common stock.
The components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
U.S. Plans
================================================================================
$ Millions 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Service cost $ 19 $ 20 $ 15
Interest cost on projected
benefit obligation 37 36 36
Actual return on plan assets (200) (95) (106)
Net amortization and deferral 154 53 67
- --------------------------------------------------------------------------------
Net periodic pension cost $ 10 $ 14 $ 12
================================================================================
Non-U.S. Plans
================================================================================
$ Millions 1997 1996 1995
================================================================================
Service cost $ 17 $ 18 $ 16
Interest cost on projected
benefit obligation 41 42 41
Actual return on plan assets (48) (25) (28)
Net amortization and deferral 19 4 9
- --------------------------------------------------------------------------------
Net periodic pension cost $ 29 $ 39 $ 38
================================================================================
</TABLE>
The funded status for the Company's major pension plans is as follows:
<TABLE>
<CAPTION>
U.S. Plans
================================================================================
Assets exceed Accumulated
accumulated benefits benefits exceed assets
$ Millions 1997 1996 1997 1996
================================================================================
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested $(468) $(452) $(2) $(14)
Nonvested (10) (18) -- 4
- --------------------------------------------------------------------------------
Accumulated benefit
obligation (478) (470) (2) (10)
Effect of projected future
compensation levels (59) (61) -- (12)
- --------------------------------------------------------------------------------
Projected benefit obligation (537) (531) (2) (22)
Plan assets at fair value 803 645 -- 5
- --------------------------------------------------------------------------------
Plan assets in excess
of (less than) projected
benefit obligation 266 114 (2) (17)
Unrecognized net loss (gain) (255) (60) (1) --
Unrecognized prior
service cost 20 14 -- 11
Unrecognized net
transition obligation 3 8 -- (2)
Post September 30
contributions -- 1 -- --
- --------------------------------------------------------------------------------
(Accrued) prepaid pension
cost at December 31 $ 34 $ 77 $(3) $ (8)
================================================================================
</TABLE>
The 1997 balances reflect the reduction of $14.1 million for restructuring
activities and the net transfer of $11.5 million accrued pension costs to Corn
Products International.
33
<PAGE> 37
<TABLE>
<CAPTION>
Non-U.S. Plans
================================================================================
Assets exceed Accumulated
accumulated benefits benefits exceed assets
$ Millions 1997 1996 1997 1996
================================================================================
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested $(228) $(182) $(299) $(358)
Nonvested (13) (9) (15) (16)
- --------------------------------------------------------------------------------
Accumulated benefit obligation (241) (191) (314) (374)
Effect of projected future
compensation levels (43) (26) (19) (36)
- --------------------------------------------------------------------------------
Projected benefit obligation (284) (217) (333) (410)
Plan assets at fair value 389 267 110 119
- --------------------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation 105 50 (223) (291)
Unrecognized net loss (gain) (74) (46) 49 51
Unrecognized prior service
cost 11 8 2 4
Unrecognized net transition
obligation (4) (5) 9 12
Additional minimum liability -- -- (20) (36)
- --------------------------------------------------------------------------------
(Accrued) prepaid pension
cost at December 31 $ 38 $ 7 $(183) $(260)
================================================================================
</TABLE>
Assumptions used in accounting for the Company's defined-benefit pension
and retirement plans at December 31 are as follows:
<TABLE>
<CAPTION>
U.S. Plans
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rates 7.0% 7.0% 6.6%
Rate of increase in compensation levels 5.0% 5.5% 5.3%
Long-term rate of return on plan assets 10.0% 8.6% 9.7%
- --------------------------------------------------------------------------------
Non-U.S. Plans
- --------------------------------------------------------------------------------
Weighted average discount rates 7.5% 7.5% 7.4%
Rate of increase in compensation levels 4.7% 4.9% 4.8%
Long-term rate of return on plan assets 8.1% 8.0% 7.9%
- --------------------------------------------------------------------------------
</TABLE>
In addition, the Company sponsors defined-contribution pension plans
covering certain domestic and foreign employees. Contributions are determined by
matching a percentage of employee contributions. Expense recognized in 1997,
1996, and 1995 was $23 million, $27 million, and $23 million, respectively.
The Company also contributes to union-sponsored, defined-benefit,
multi-employer pension plans. Expense recognized in 1997, 1996, and 1995 was $24
million, $24 million, and $10 million, respectively.
Other postretirement and postemployment benefits
The Company provides health care and life insurance benefits for retired
employees in the United States and Canada. These employees become eligible for
benefits when and if they meet minimum age and service requirements and are
eligible for retirement benefits. The Company has the right to modify or
terminate these benefits.
The following table sets forth the status of the Company's postretirement
benefit obligations as of December 31, 1997, and 1996:
<TABLE>
<CAPTION>
$ Millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(175) $(149)
Fully eligible active plan participants (36) (33)
Other active plan participants (55) (54)
- --------------------------------------------------------------------------------
Total (266) (236)
- --------------------------------------------------------------------------------
Unrecognized prior service cost (2) (9)
Unrecognized net gain (55) (48)
Post September 30 claims -- 5
- --------------------------------------------------------------------------------
(Accrued) postretirement benefit cost at
December 31 $(323) $(288)
- --------------------------------------------------------------------------------
</TABLE>
The 1997 accrual reflects the transfer of $19 million to Corn Products
International for their accumulated post retirement benefit obligation.
Net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
$ Millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 7 $ 7 $ 4
Interest cost on the accumulated
postretirement benefit obligation 20 15 17
Net amortization and deferral (3) (1) (1)
- --------------------------------------------------------------------------------
Net periodic postretirement benefit $24 $21 $20
- --------------------------------------------------------------------------------
</TABLE>
Annual increases in per capita cost of health care benefits of 9.5%
pre-age-65 and 7.5% post-age-65 were assumed for 1997 to 1998. Rates were
assumed to decrease by 1% annually thereafter until reaching 5%. Increasing the
assumed health care cost trend rate by 1% increases the APBO at December 31,
1997, by $37.9 million, with a corresponding effect on the service and interest
cost components of the net periodic postretirement benefit cost for the year
then ended of $4.2 million. The discount rate used to determine the APBO for
1997 and 1996 is 7.5% and 7.0%, respectively.
34
<PAGE> 38
Stockholders' Equity --
Preferred stock
The Company has authorized 25 million shares of $1 par value preferred stock of
which 3 million shares were designated for the Company's ESOP and 600,000 shares
of Series A Junior Participating shares were designated for the shareholder
rights plan. At December 31, 1997, 1996, and 1995, there were 2.0 million, 2.1
million, and 2.1 million ESOP shares outstanding, respectively. In November 1997
the Series A ESOP shares were exchanged for an equal number of designated Series
B ESOP Preferred shares. No Series B Junior Participating shares were issued.
Employee Stock Ownership Plan (ESOP) - The Company has an Employee Stock
Ownership Plan (ESOP) as part of its Savings/Retirement Plan covering
substantially all U.S. salaried employees. (Coverage for salaried employees who
joined the Company through the baking acquisition began January 1, 1997.
Effective with the spin-off, all balances in the ESOP for employees of Corn
Products International were transferred to individual accounts in a Corn
Products International savings plan in the form of Bestfoods common stock.) The
ESOP is designed to provide employees with increased ownership of the Company's
stock and to satisfy the Company's commitment to match employees' contributions
to the Savings/Retirement Plan on a $1 for $1 basis.
In 1989, the ESOP borrowed $200 million in a public offering and used the
proceeds to purchase approximately 2.2 million shares of the Company's Series A
ESOP convertible preferred stock. Since the notes were guaranteed by the
Company, they are reflected in the consolidated balance sheet as short-term and
long-term debt with an offsetting amount included in stockholders' equity as
unearned ESOP compensation. The preferred stock is convertible into
approximately 4.4 million shares of the Company's common stock. The preferred
stock pays a dividend of $7.14 per share which is used by the ESOP, together
with Company contributions, to make debt service payments on the ESOP notes. The
notes have a 15-year maturity and an original fixed interest rate of 7.78%,
which was reduced to 7.71% in 1993, in accordance with the agreement. Also
beginning in 1993, a portion of the notes was refinanced on each payment date.
The weighted average interest rate was 7% and 7.2% in 1997 and 1996,
respectively.
The number of shares allocated to participants is based on the semi-annual
payments of principal and interest due on the ESOP notes. In 1997 and 1996,
172,060 shares and 170,115 shares of preferred stock valued at $15.4 million and
$15.2 million, respectively, were allocated to participants. The ESOP had
937,217 shares allocated to participants and 1,079,101 suspense shares at
December 31, 1997.
Compensation cost included in the consolidated statement of income was
$11.0 million, $11.7 million and $12.1 million in 1997, 1996, and 1995,
respectively.
Shareholder rights plan - Under the Company's shareholder rights plan,
each share of the Company's common stock carries with it one-half of a preferred
stock purchase right. The rights will at no time have voting power or pay
dividends. The rights will become exercisable if a person or group acquires 15%
or more of the Company's common stock, or announces a tender or exchange offer
that could result in the acquisition of 15% or more thereof. When exercisable,
each full right entitles a holder to buy one two-hundredths of a share of Series
B Junior Participating Preferred Stock at a price of $325. If the Company is
involved in a merger or other business combination with a 15% or more
stockholder, each full right will entitle a holder to buy a number of the
acquiring company's shares having a value of twice the exercise price of the
right.
Alternatively, if a 15% stockholder engages in certain self-dealing
transactions or acquires the Company in such a manner that the Company and its
common stock survive, or if any person acquires 15% or more of the common stock,
except pursuant to an offer for all shares at a fair price, each full right not
owned by a 15% or more stockholder may be exercised for common stock of the
Company (or, in certain circumstances, other consideration) having a market
value of twice the exercise price of the right. The Company may redeem the
rights for one cent each at any time before an acquisition of 15% or more of its
voting securities and for at least 10 business days thereafter. Unless redeemed
earlier, the rights will expire on March 19, 2001.
35
<PAGE> 39
Treasury stock
The Company had common stock in treasury at the end of 1997, 1996, and 1995
totaling 51.3 million, 51.6 million, and 49.7 million shares, respectively.
On January 17, 1995, the Board of Directors approved a 5-million-share
buyback program, which was continued throughout 1996 and 1997 and will be
completed in 1998. At December 31, 1997, the Company had .9 million shares left
to be repurchased under this program.
Stock and performance plan
The Company has a stock and performance plan, (the 1993 Plan) that provides for
grants of stock options, restricted stock awards, and performance units. A
committee of nonemployee members of the Board of Directors administers the 1993
Plan. Seven and one-half million shares were reserved for issuance under this
Plan, including those shares remaining under prior plans. Under the 1993 Plan,
stock options are granted at 100% of market value at the date of grant, fully
vest after one year and expire not more than 10 years from the date of grant.
Under the provisions of FAS 123, the Company accounts for stock-based
compensation using the intrinsic value method prescribed by APB 25. The pro
forma information required by FAS 123 is set forth below. For purposes of this
pro forma disclosure, the estimated fair value of the awards is amortized to
expense over the awards' vesting period.
<TABLE>
<CAPTION>
$ Millions except per share amounts 1997 1996
================================================================================
<S> <C> <C>
Pro forma income from continuing operations $ 419 $ 549
Pro forma income from discontinued operations 10 21
Pro forma net income 429 570
================================================================================
Pro forma basic earnings per share:
Income from continuing operations $2.84 $3.71
Income from discontinued operations 0.07 0.15
Net income 2.91 3.86
Pro forma diluted earnings per share:
Income from continuing operations $2.79 $3.64
Income from discontinued operations 0.07 0.15
Net income 2.86 3.79
================================================================================
</TABLE>
The fair value of the awards was estimated at the grant date using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996, respectively: risk-free interest rates of 6.3%
and 6.2%; dividend yields of 2.1% and 2.3%; volatility factors of 16.6% and
16.4%; and a weighted averaged expected life of the awards of 5 years.
The Black-Scholes model requires the input of highly subjective
assumptions and does not necessarily provide a reliable measure of fair value.
The following table summarizes the activity of the Company's stock and
performance plan:
<TABLE>
<CAPTION>
1997 1996 1995
================================================================================
<S> <C> <C> <C>
Number of options
Outstanding beginning of year 2,963,768 2,319,844 2,101,126
Granted 1,440,300 1,337,349 688,685
Exercised (350,428) (565,712) (196,973)
Canceled (208,963) (127,713) (272,994)
- --------------------------------------------------------------------------------
Outstanding end of year 3,844,677 2,963,768 2,319,844
- --------------------------------------------------------------------------------
Exercisable at year-end 1,878,512 1,182,778 1,311,208
- --------------------------------------------------------------------------------
Available for future
grants of options 2,378,617 3,975,529 5,608,411
Weighted average fair
value of options granted $ 13.49 $ 12.34 $ 11.37
Weighted average exercise price
Outstanding beginning of year $ 59.46 $ 48.32 $ 43.84
Granted 90.94 70.41 58.17
Exercised 54.41 41.49 38.82
Canceled 63.53 51.52 45.22
Outstanding end of year $ 71.46 $ 59.46 $ 48.32
================================================================================
</TABLE>
The following table summarizes information about stock and performance
plan awards outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
===============================================================================================
Weighted Weighted Weighted
Range of Exercise Number Average Average Number Average
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$23.72-$48.82 629,676 5.0 $45.04 548,473 $44.64
$49.06-$56.00 493,261 6.8 53.06 339,155 52.74
$65.94-$69.94 530,561 7.3 68.08 524,374 68.08
$70.00-$77.06 773,079 6.7 71.24 466,510 72.01
$81.25-$82.13 644,700 9.1 81.99 -- --
$98.50-$98.50 773,400 9.5 98.50 -- --
- -----------------------------------------------------------------------------------------------
$23.72-$98.50 3,844,677 7.5 $71.47 1,878,512 $59.44
===============================================================================================
</TABLE>
In addition to stock options, 128,850 shares were awarded to employees in
1997 under the restricted stock award provisions of the 1993 plan. The cost of
these awards is being amortized over the restriction period.
36
<PAGE> 40
Supplementary Balance Sheet and Income Statement information
Supplementary Balance Sheet and Income Statement information is set forth below:
<TABLE>
<CAPTION>
$ Millions 1997 1996
================================================================================
<S> <C> <C>
Notes and accounts receivable -- net
Notes and accounts receivable -- trade $ 1,097 $ 1,089
Notes and accounts receivable -- other 126 129
Allowance for doubtful accounts (47) (41)
- --------------------------------------------------------------------------------
Total notes and accounts receivable -- net 1,176 1,177
- --------------------------------------------------------------------------------
Inventories
Finished and in process 510 559
Raw materials 202 206
Manufacturing supplies 106 125
- --------------------------------------------------------------------------------
Total inventories 818 890
- --------------------------------------------------------------------------------
Accrued liabilities
Marketing expenses 70 89
Compensation expenses 170 184
Restructuring provision / integration 132 26
Taxes payable other than taxes on income 48 43
Dividends payable 65 59
Other 448 478
- --------------------------------------------------------------------------------
Total accrued liabilities 933 879
- --------------------------------------------------------------------------------
Noncurrent liabilities
Employees' pension, indemnity,
retirement, and related provisions 491 464
Environmental liabilities 100 104
Other noncurrent liabilities 189 199
- --------------------------------------------------------------------------------
Total noncurrent liabilities $ 780 $ 767
================================================================================
</TABLE>
<TABLE>
<CAPTION>
$ Millions 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Depreciation expense $209 $237 $203
Amortization expense 55 51 36
Research and development cost 66 71 66
- --------------------------------------------------------------------------------
Interest expense -- net
Interest expense 175 169 109
Interest expense capitalized (3) (5) (4)
Interest income (11) (20) (10)
- --------------------------------------------------------------------------------
Interest expense-- net $161 $144 $ 95
================================================================================
</TABLE>
Operations by geographic area
Information concerning operations by geographic area are as follows:
<TABLE>
<CAPTION>
$ Millions 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Sales to unaffiliated customers
United States $ 3,234 $ 3,145 $ 2,242
Canada 140 139 132
- --------------------------------------------------------------------------------
North America 3,374 3,284 2,374
Europe 3,539 3,720 3,438
Latin America 1,105 1,076 1,023
Asia 382 398 364
- --------------------------------------------------------------------------------
8,400 8,478 7,199
================================================================================
Sales interarea
United States 37 63 31
Canada 13 8 3
- --------------------------------------------------------------------------------
North America 50 71 34
Europe 7 7 9
Latin America 10 8 11
Asia 2 1 2
- --------------------------------------------------------------------------------
69 87 56
================================================================================
Operating income
United States 265(1) 363 218
Canada 10 17 16
- --------------------------------------------------------------------------------
North America 275 380 234(2,3)
Europe 404(1) 418 327(2)
Latin America 211(1) 212 178(2)
Asia 45(1) 49 47
Corporate expenses (69)(1) (32) (30)
- --------------------------------------------------------------------------------
866 1,027 756
================================================================================
Assets at December 31
United States 2,128 2,163 2,149
Canada 69 87 98
- --------------------------------------------------------------------------------
North America 2,197 2,250 2,247
Europe 2,859 3,009 3,145
Latin America 596 581 520
Asia 245 299 263
Corporate 203 87 73
- --------------------------------------------------------------------------------
$ 6,100 $ 6,226 $ 6,248
================================================================================
</TABLE>
Interarea sales are priced with reference to prevailing market prices.
(1) Includes restructuring charge of $134 million for U.S.; $49 million for
Europe; $22 million for Latin America; $8 million for Asia; and $29
million for corporate.
(2) Includes restructuring charges of $17 million for U.S.; $29 million for
Europe; $14 million for Latin America, which was offset by a gain of $20
million for Latin America.
(3) Includes integration charge of $55 million for U.S.
37
<PAGE> 41
Income taxes
Income before income taxes and the components of the provision for income taxes
are shown below:
<TABLE>
<CAPTION>
$ Millions 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Income before income taxes:
United States $169 $294 $213
Outside the United States 535 586 441
- --------------------------------------------------------------------------------
Total $704 $880 $654
- --------------------------------------------------------------------------------
Provision for income taxes:
Current tax expense
U.S. Federal $ 99 $ 1 $ 84
State and local 12 14 15
Foreign 188 199 87
- --------------------------------------------------------------------------------
Total current 299 214 186
- --------------------------------------------------------------------------------
Deferred tax expense (benefit)
U.S. Federal (33) 80 --
State and local (8) 7 1
Foreign (8) (5) 65
- --------------------------------------------------------------------------------
Total deferred (49) 82 66
Total provision $250 $296 $252
================================================================================
</TABLE>
The tax effects of significant temporary differences, which comprise the
deferred tax liabilities and assets at December 31, 1997, and 1996, are as
follows:
<TABLE>
<CAPTION>
$ Millions 1997 1996
================================================================================
<S> <C> <C>
Plants and properties $ 169 $148
Inventory 14 15
Pensions 38 46
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 221 209
- --------------------------------------------------------------------------------
Restructuring reserves 67 --
Environmental reserves 42 43
Employee benefit reserves 135 109
Unrealized exchange losses 34 49
Other 55 13
- --------------------------------------------------------------------------------
Gross deferred tax assets 333 214
- --------------------------------------------------------------------------------
Valuation allowance 1 (1)
- --------------------------------------------------------------------------------
Net deferred tax assets* $ 113 $ 4
================================================================================
</TABLE>
* $53 million of long-term deferred tax assets are included in other assets
in the Consolidated Balance Sheets in 1997.
Total net deferred tax liabilities and assets shown above includes current and
noncurrent elements.
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
================================================================================
<S> <C> <C> <C>
Provision for tax at
U.S. statutory rate 35.0% 35.0% 35.0%
Taxes related to foreign
income 0.6 (1.3) 2.7
State and local taxes -- net 0.4 1.6 1.6
Other items -- net (0.5) (1.7) (0.8)
- --------------------------------------------------------------------------------
Provision at effective tax rate 35.5% 33.6% 38.5%
================================================================================
</TABLE>
The effective tax rate in 1997 was higher than in 1996 when lower foreign tax
rates and the resolution of several tax issues in various jurisdictions
benefited results. In 1997 the effective tax rate of 35.5% is lower than the sum
of the statutory U.S. federal and state tax rates. This reflects the large
proportion of foreign income which, on average, was taxed in 1997 at lower
statutory rates than domestic income.
Taxes that would result from dividend distributions by foreign
subsidiaries to the U.S. are provided to the extent dividends are anticipated.
Retained earnings of the Company included, as of December 31, 1997,
approximately $613 million of retained earnings of foreign subsidiaries which
are indefinitely retained by the subsidiaries for capital and operating
requirements.
38
<PAGE> 42
Report of Management
The management of Bestfoods is responsible for the financial and operating
information contained in the Annual Report including the financial statements
covered by the independent auditors' report. These statements were prepared in
conformity with United States generally accepted accounting principles and
include, where necessary, informed estimates and judgments.
The Company maintains systems of accounting and internal control designed
to provide reasonable assurance that assets are safeguarded against loss, and
that transactions are executed and recorded properly so as to ensure that the
financial records are reliable for preparing financial statements.
Elements of these control systems are the establishment and communication
of accounting and administrative policies and procedures, the selection and
training of qualified personnel, and continuous programs of internal audits.
The Company's financial statements are reviewed by its Audit Committee,
which is composed entirely of outside Directors. This Committee meets
periodically with the independent auditors, management, and the corporate
general auditor to review the scope and results of the annual audit, interim
reviews, internal controls, internal auditing, and financial reporting matters.
The independent auditors and the corporate general auditor have direct access to
the Audit Committee.
/s/ Bernard H. Kastory
Bernard H. Kastory
Senior Vice President, Finance and Administration
February 10, 1998
Independent Auditors' Report
[LOGO] KPMG Peat Marwick LLP
The Board of Directors and Stockholders Bestfoods:
We have audited the accompanying consolidated balance sheets of Bestfoods and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bestfoods
and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in the Notes to the Consolidated Financial Statements, the
Company changed its method of accounting for business process reengineering
costs in 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
February 10, 1998
39
<PAGE> 43
Ten-Year Financial Highlights
Bestfoods and Subsidiaries
<TABLE>
<CAPTION>
$ Millions except per share amounts 1997 1996 1995 1994
==================================================================================================================
<S> <C> <C> <C> <C>
Summary of Operations
- ------------------------------------------------------------------------------------------------------------------
Net sales $ 8,400 $ 8,478 $ 7,199 $ 6,203
- ------------------------------------------------------------------------------------------------------------------
Net income 429(1) 557 377(2) 245(3)
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per common share 2.91(1) 3.78 2.51(2) 1.58(3)
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share 2.85(1) 3.70 2.47(2) 1.58(3)
- ------------------------------------------------------------------------------------------------------------------
Average number of basic common shares outstanding 144 145 146 148
- ------------------------------------------------------------------------------------------------------------------
Average number of diluted common shares outstanding 149 150 151 153
- ------------------------------------------------------------------------------------------------------------------
Dividends declared per common share 1.72 1.58 1.48 1.38
==================================================================================================================
Balance Sheet Data
- ------------------------------------------------------------------------------------------------------------------
Working capital $ (159) $ (188) $ (520) $ 2
- ------------------------------------------------------------------------------------------------------------------
Plants and properties-- net 1,941 2,023 1,978 1,470
- ------------------------------------------------------------------------------------------------------------------
Total assets 6,100 7,251 6,848 5,023
- ------------------------------------------------------------------------------------------------------------------
Long-term debt 1,818 1,681 1,071 609
- ------------------------------------------------------------------------------------------------------------------
Short-term debt 668 869 1,298 640
-------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------
Total debt 2,486 2,550 2,369 1,249
- ------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment (386) (259) (163) (181)
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity 1,042 2,084 1,987 1,749
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity per share 7.23 14.50 13.65 11.92
- ------------------------------------------------------------------------------------------------------------------
Shares outstanding, year end 144 144 146 147
==================================================================================================================
Statistical Data
- ------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 321 $ 346 $ 287 $ 248
- ------------------------------------------------------------------------------------------------------------------
Maintenance and repairs 232 227 182 154
- ------------------------------------------------------------------------------------------------------------------
Advertising expense 689 699 563 500
- ------------------------------------------------------------------------------------------------------------------
Rental expense for operating leases 96 100 77 73
- ------------------------------------------------------------------------------------------------------------------
Total employee costs 1,809 1,858 1,452 1,240
==================================================================================================================
<CAPTION>
$ Millions except per share amounts 1993 1992 1991 1990 1989 1988
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Summary of Operations
- --------------------------------------------------------------------------------------------------------------------------
Net sales $ 5,636 $ 5,502 $ 5,118 $ 4,695 $ 4,049 $ 3,807
- --------------------------------------------------------------------------------------------------------------------------
Net income 355 130(4,5) 289(6) 277 247 227
- --------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share 2.30 0.80(4,5) 1.84(6) 1.77 1.59 1.45
- --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share 2.27 0.80(4,5) 1.83(6) 1.75 1.58 1.44
- --------------------------------------------------------------------------------------------------------------------------
Average number of basic common shares outstanding 150 151 151 151 155 157
- --------------------------------------------------------------------------------------------------------------------------
Average number of diluted common shares outstanding 157 156 157 156 156 158
- --------------------------------------------------------------------------------------------------------------------------
Dividends declared per common share 1.28 1.20 1.10 1.00 .87 .76
==========================================================================================================================
Balance Sheet Data
- --------------------------------------------------------------------------------------------------------------------------
Working capital $ 355 $ 314 $ 369 $ 169 $ 213 $ 55
- --------------------------------------------------------------------------------------------------------------------------
Plants and properties-- net 1,329 1,366 1,115 1,107 936 882
- --------------------------------------------------------------------------------------------------------------------------
Total assets 4,450 4,582 3,971 3,911 3,164 2,764
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt 674 934 993 961 835 589
- --------------------------------------------------------------------------------------------------------------------------
Short-term debt 328 440 332 482 274 275
------- ------- ------- ------- ------- -------
- --------------------------------------------------------------------------------------------------------------------------
Total debt 1,002 1,374 1,325 1,443 1,109 864
- --------------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment (173) (56) (80) (42) (69) (80)
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 1,769 1,662 1,631 1,453 1,218 1,195
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity per share 11.81 11.03 10.78 9.63 8.05 7.63
- --------------------------------------------------------------------------------------------------------------------------
Shares outstanding, year end 150 151 151 151 151 157
==========================================================================================================================
Statistical Data
- --------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 248 $ 240 $ 211 $ 182 $ 143 $ 166
- --------------------------------------------------------------------------------------------------------------------------
Maintenance and repairs 139 136 117 102 90 94
- --------------------------------------------------------------------------------------------------------------------------
Advertising expense 463 483 453 418 366 315
- --------------------------------------------------------------------------------------------------------------------------
Rental expense for operating leases 60 61 57 44 39 38
- --------------------------------------------------------------------------------------------------------------------------
Total employee costs 1,103 1,059 967 877 756 728
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Quarterly Financial Data
=================================================================================================
(Unaudited)
$ Millions except per share amounts 1st Q 2nd Q 3rd Q 4th Q
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Market price range of common stock
High $ 86 1/8 $ 92 11/16 $ 103 1/4 $ 108 1/16
Low 75 3/4 79 1/8 88 1/4 93 1/8
Close 82 92 5/16 92 5/8 108
- -------------------------------------------------------------------------------------------------
Dividends declared per common share $ .41 $ .41 $ .45 $ .45
- -------------------------------------------------------------------------------------------------
Quarterly results
Net sales $2,149 $2,105 $2,024 $2,122
Gross profit 939 933 901 972
Net income 118 (5) 147 169
Basic earnings per common share $ .79 $ (.04) $ 1.00 $ 1.16
Diluted earnings per common share(7) $ .78 $ (.04) $ .98 $ 1.12
=================================================================================================
<CAPTION>
=============================================================================================
(Unaudited)
$ Millions except per share amounts 1st Q 2nd Q 3rd Q 4th Q
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Market price range of common stock
High $ 75 1/2 $ 72 1/8 $ 75 3/4 $ 84 1/4
Low 67 5/8 65 5/8 64 7/8 74 3/8
Close 69 3/8 72 74 7/8 77 1/2
- ---------------------------------------------------------------------------------------------
Dividends declared per common share $ .38 $ .38 $ .41 $ .41
- ---------------------------------------------------------------------------------------------
Quarterly results
Net sales $ 2,099 $2,162 $2,034 $2,183
Gross profit 893 924 883 952
Net income 108 140 140 169
Basic earnings per common share $ .72 $ .94 $ .95 $ 1.17
Diluted earnings per common share(7) $ .70 $ .92 $ .93 $ 1.13
=============================================================================================
</TABLE>
See notes to consolidated financial statements.
(1) Includes restructuring charge of $156 million after taxes or $1.08 per
basic ($1.04 diluted) common share recorded in the second quarter.
(2) Includes a fourth-quarter integration charge of $34 million after taxes or
$.23 per basic ($.22 diluted) common share; and other charges -- net of
$24 million after taxes or $.17 per basic ($.16 diluted) common share
recorded in the third quarter.
(3) Includes restructuring charge of $126 million after taxes or $.85 per
basic ($.82 diluted) common share recorded in the second quarter.
(4) Includes the cumulative effect to January 1, 1992, of changes in
accounting principles of $160 million after taxes or $1.06 per basic
($1.02 diluted) common share, and the effects of these changes in 1992 of
$10 million, $6 million after taxes or $.05 per basic ($.04 diluted)
common share.
(5) Includes an environmental charge related to discontinued operations of $47
million after taxes or $.31 per basic ($.30 diluted) common share.
(6) Includes an environmental charge related to discontinued operations of $32
million after taxes or $.21 per basic ($.20 diluted) common share.
(7) Does not total due to individual quarterly calculations.
40 & 41
<PAGE> 44
Board of Directors
[PHOTO OF BOARD OF DIRECTORS OMITTED]
Theodore H. Black (1,3)
Former Chairman and
Chief Executive Officer,
Ingersoll-Rand Company
Clateo Castellini (1,3)
Chairman, President and
Chief Executive Officer,
Becton Dickinson and Company
Alfred C. DeCrane, Jr. (2,4*)
Former Chairman and
Chief Executive Officer,
Texaco Inc.
William C. Ferguson (1,4)
Former Chairman and
Chief Executive Officer,
NYNEX Corporation
Robert J. Gillespie (3)
Executive Vice President,
Bestfoods
Ellen R. Gordon (2,3)
President and Chief
Operating Officer,
Tootsie Roll Industries, Inc.
George V. Grune (2,3)
Chairman and Chief Executive Officer,
The Reader's Digest Association, Inc.
Leo I. Higdon, Jr. (1*,4)
President, Babson College
Richard G. Holder (1,4)
Former Chairman and
Chief Executive Officer,
Reynolds Metals Company
Eileen S. Kraus (2,3*)
Chairman, Fleet National Bank
(Connecticut)
Alain Labergere (4)
Executive Vice President,
Bestfoods, President,
Bestfoods Europe
William S. Norman (2*,3)
President and
Chief Executive Officer,
Travel Industry Association
of America
Henrique de Campos (1,4)
Meirelles
President and
Chief Operating Officer,
BankBoston Corporation
C. R. Shoemate
Chairman, President, and
Chief Executive Officer,
Bestfoods
(1) Audit Committee
(2) Compensation and Nominating Committee
(3) Corporate Affairs Committee
(4) Finance Committee
*denotes chairman
- --------------------
James W. McKee, Jr.
Honorary Chairman
of the Board
Corporate Officers
C. R. Shoemate
Chairman, President, and
Chief Executive Officer
Robert J. Gillespie
Executive Vice President,
Strategic Planning and
Business Development
Alain Labergere
Executive Vice President
and President,
Bestfoods Europe
Richard P. Bergeman
Senior Vice President,
Human Resources
Bernard H. Kastory
Senior Vice President,
Finance and Administration
Axel C. A. Krauss
Senior Vice President and
President, Bestfoods
North America
Vice Presidents
Michael J. Bevilacqua
President, Bestfoods Foodservice
Charles Feldberg
Health, Safety, and Quality
Assurance
Robert S. Gluck
Treasurer
Gale L. Griffin
Corporate Communications
Heribert H. Grunert
President, Bestfoods Asia
Hanes A. Heller
General Counsel and Secretary
Nina Henderson
President, Bestfoods Grocery
John J. Langdon
President, Bestfoods Baking
Rainer H. Mimberg
Finance and Comptroller
Luis Schuchinski
Taxes
Anthony J. Simon
Core Businesses
Mohammed Wahby
President, Bestfoods
Africa/Middle East
42
<PAGE> 45
[PHOTO OMITTED]
Investor Information
Corporate Headquarters
Bestfoods
700 Sylvan Avenue
International Plaza
Englewood Cliffs, NJ 07632-9976
Annual Meeting
Thursday, April 23, 1998
Tamcrest Country Club
Route 9W, Montammy Drive
Alpine, New Jersey
Annual Report, Form 10-K
Copies are available via the
Company's Internet site
@www.bestfoods.com;
by writing Corporate
Communications,
Bestfoods; or by
calling (201) 894-2825
Investor Inquiries
Security analysts and investors
seeking information about Bestfoods
may contact Mr. Bernard H. Kastory,
Senior Vice President, Finance and
Administration, at the Bestfoods address
shown or by calling (201) 894-2837
Stockholder Records,
Dividend Reinvestment
Inquiries relating to stockholder records, stock transfer, change of address,
and Bestfoods Dividend Reinvestment Plan should be directed to registrar,
transfer, and dividend disbursing agent:
First Chicago Trust Company
of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
(201) 324-0498
(800) 519-3111
or via the Internet
@www.fctc.com
Independent Auditors
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
(212) 758-9700
Stock Exchange Listings
New York, Chicago, Pacific,
Frankfurt, London, Paris, Swiss
Ticker Symbol
The New York Stock Exchange
ticker symbol for the Company is BFO.
Bestfoods Internet Site
www.bestfoods.com
Bestfoods' businesses are operated and administered with a high degree of
autonomy under the Company's decentralized organization. References in this
Annual Report to Bestfoods or "the Company" refer to the U.S. parent and its
consolidated subsidiaries, except where the context indicates otherwise.
The brand names shown in distinctive type in this report are trademarks of
Bestfoods and its affiliates.
Design: Leonard Wolfe and Scott Robichaud
Leonard Wolfe Design/Westport, CT
<PAGE> 46
[LOGO] BESTFOODS
700
700 Sylvan Avenue
International Plaza
Englewood Cliffs, NJ 07632-9976
www.bestfoods.com
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Following is a list of the Registrant's subsidiaries and their subsidiaries
showing the percentage of voting securities owned, or other bases of control,
by the immediate parent of each.
<TABLE>
<CAPTION>
Percentage of
voting securities
owned by its
immediate parent
-----------------
<S> <C> <C>
Bestfoods
(a) Subsidiaries included in the Company's
consolidated financial statements
United States
-------------
Arnold Foods Company, Inc. -Delaware 100.00
Best Foods - Caribbean, Inc. -Delaware 100.00
Bestfoods Europe (Group) Ltd. -Delaware 100.00
Entenmann's Inc. (Owned by Bestfoods
Baking Co. Inc., a holding company of
Bestfoods) -Delaware 100.00
Henri's Food Products Co. Inc. -Wisconsin 100.00
Canada
------
Canada Starch Company Inc. 100.00
Europe (1)
----------
C.H. Knorr Nahrungsmittelfabrik Ges.mbH -Austria 100.00
CPC Monda N.V./S.A. -Belgium 99.90
CPC Foods A.S. -Czech Republic 98.50
CPC Foods A/S -Denmark 100.00
CPC Foods OY -Finland 100.00
CPC France S.A. -France 99.85
CPC Mazena GmbH -Germany 100.00
CPC Hellas A.B.E.E. -Greece 100.00
CPC Benelux B.V. -Holland 100.00
CPC Hungary RT -Hungary 100.00
CPC Foods (Ireland) Ltd. -Ireland 100.00
CPC Italia S.P.A. -Italy 100.00
CPC Foods A/S -Norway 100.00
CPC Amino Sp. zo.o -Poland 99.98
Knorr Portuguesa-Produtos Alimentares S.A. -Portugal 100.00
Bestfoods Espana, S.A. -Spain 100.00
CPC Foods AB -Sweden 100.00
CPC Knorr Holdings AG -Switzerland 100.00
CPC (United Kingdon) Ltd. -United Kingdom 100.00
Africa and Middle East (1)
--------------------------
Israel Edible Products Ltd. "TAMI" -Israel 85.30
CPC Kenya Ltd. -Kenya 100.00
CPC Maghreb, S.A. -Morocco 100.00
CPC Tongaat Foods (Pty) Ltd. -South Africa 50.00 (2)
</TABLE>
15
<PAGE> 2
<TABLE>
<S> <C> <C>
Latin America
-------------
Refinerias de Maiz S.A.I.C. -Argentina 100.00
Refinacoes de Milho, Brasil Ltda. -Brazil 100.00
Industrias de Maiz y Alimentos S.A. -Chile 100.00
DISA S.A. -Colombia 100.00
Maizena de Costa Rica S.A. -Costa Rica 100.00
Productos de Maiz y Alimentos S.A. -Guatemala 100.00
Productos de Maiz, S.A. de C.V. -Mexico 100.00
Alimentos y Productos de Maiz, S.A. -Peru 99.90
Industrializadora de Maiz, S.A. -Uruguay 100.00
Aliven S.A. -Venezuela 100.00
Asia
----
CPC (Guangzhou) Foods Ltd. (Owned by
Bestfoods Asia Investments Ltd. a holding
company of Bestfoods) -China 80.00
CPC/AJI (Hong Kong) Ltd. -Hong Kong 50.00 (2)
P.T. Knorr Indonesia -Indonesia 100.00
CPC/AJI (Malaysia) Sdn. Berhad -Malaysia 50.00 (2)
CPC Rafhan Limited -Pakistan 51.00 (1)
California Manufacturing Co., Inc. -Philippines 50.00 (2)
CPC/AJI (Singapore) Pte. Ltd. -Singapore 50.00 (2)
CPC/AJI (Taiwan) Ltd. -Taiwan 50.00 (2)
CPC/AJI (Thailand) Ltd. -Thailand 50.00 (2)
</TABLE>
The names of thirty-five (35) domestic subsidiaries and one hundred thirty (130)
international subsidiaries have been omitted since these unnamed subsidiaries
considered in the aggregate as a single entity do not constitute a significant
subsidiary.
(b) Domestic subsidiary not consolidated:
One (1) wholly owned subsidiary which has minor real estate holdings.
(c) International subsidiaries not consolidated:
Five (5) international subsidiaries of which all or a majority of the
share capital is owned by the Registrant.
(d) Domestic 50% owned companies:
Two (2) joint ventures in which the Registrant owns 50% interest with 50%
being owned by single other interests.
- --------------------------
(1) Owned by Bestfoods Europe (Group) Ltd., or its wholly owned
subsidiaries.
(2) Owned fractionally more than 50% and fully consolidated for accounting
purposes.
If the companies included (b), (c) and (d) were considered in the aggregate as a
single entity, they would not constitute a significant subsidiary since: (1) the
assets of the subsidiaries, or the investments in and advances to the
subsidiaries by its parent and the parent's other subsidiaries, if any, did not
exceed 10 percent of the assets of the parent and its subsidiaries on a
consolidated basis, and (2) the sales and operating revenues of the parent and
its subsidiaries on a consolidated basis, and the Company's equity in their
income before income taxes and extraordinary items did not exceed 10% of the
income of the parent and its subsidiaries on a consolidated basis.
16
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of
Bestfoods:
We consent to incorporation by reference in the Registration Statements on Forms
S-8 (No. 2-48849, 2-92248 and 33-49847) and on Forms S-3 (No. 33-30813,
33-28989, 33-40759, 33-52213, 33-65171 and 333-32971) of Bestfoods of our report
dated February 10, 1998, relating to the consolidated balance sheets of
Bestfoods and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three year period ended December 31, 1997 which report
appears in the December 31, 1997 annual report on Form 10-K of Bestfoods.
/S/ KPMG Peat Marwick LLP
----------------------------
(KPMG Peat Marwick LLP)
New York, New York
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 39 131 172
<SECURITIES> 0 0 0
<RECEIVABLES> 1,223 1,218 1,214
<ALLOWANCES> 47 41 42
<INVENTORY> 818 890 898
<CURRENT-ASSETS> 2,188 2,331 2,342
<PP&E> 3,440 3,522 3,484
<DEPRECIATION> 1,499 1,499 1,506
<TOTAL-ASSETS> 6,100 7,251 6,848
<CURRENT-LIABILITIES> 2,347 2,519 2,862
<BONDS> 1,818 1,681 1,071
0 0 0
180 187 190
<COMMON> 49 49 49
<OTHER-SE> 813 1,848 1,748
<TOTAL-LIABILITY-AND-EQUITY> 6,100 7,251 6,848
<SALES> 8,400 8,478 7,199
<TOTAL-REVENUES> 0 0 0
<CGS> 4,655 4,826 4,135
<TOTAL-COSTS> 7,534 7,451 6,443
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 162 147 102
<INCOME-PRETAX> 704 880 654
<INCOME-TAX> 250 296 252
<INCOME-CONTINUING> 429 557 377
<DISCONTINUED> 11 23 135
<EXTRAORDINARY> 0 0 0
<CHANGES> (13) 0 0
<NET-INCOME> 344 580 512
<EPS-PRIMARY> 2.32<F1> 3.93<F1> 3.43<F1>
<EPS-DILUTED> 2.29<F1> 3.85<F1> 3.36<F1>
<FN>
<F1>Note: The amounts presented for earnings per share data comply with the
requirements of SFAS No. 128, "Earnings Per Share."
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 171 156 153
<SECURITIES> 0 0 0
<RECEIVABLES> 1,353 1,214 1,115
<ALLOWANCES> 0 0 0
<INVENTORY> 1,092 937 956
<CURRENT-ASSETS> 2,713 2,413 2,328
<PP&E> 5,488 3,537 3,533
<DEPRECIATION> 2,573 1,594 1,590
<TOTAL-ASSETS> 7,627 7,067 7,148
<CURRENT-LIABILITIES> 3,166 2,995 2,990
<BONDS> 1,418 1,206 1,249
0 0 0
189 188 187
<COMMON> 49 49 49
<OTHER-SE> 1,730 1,756 1,775
<TOTAL-LIABILITY-AND-EQUITY> 7,627 7,067 7,148
<SALES> 2,099 4,261 6,295
<TOTAL-REVENUES> 0 0 0
<CGS> 1,206 2,444 3,595
<TOTAL-COSTS> 1,881 3,778 5,543
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 37 74 110
<INCOME-PRETAX> 181 409 642
<INCOME-TAX> 67 151 238
<INCOME-CONTINUING> 108 247 388
<DISCONTINUED> 14 29 36
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 122 276 424
<EPS-PRIMARY> .82<F1> 1.86<F1> 2.86<F1>
<EPS-DILUTED> .80<F1> 1.82<F1> 2.81<F1>
<FN>
<F1>Note: The amounts presented for earnings per share data comply with the
requirements of SFAS No. 128, "Earnings Per share."
</FN>
</TABLE>
