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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JUNE 29, 1997 TO JANUARY 3,
1998
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COMMISSION FILE NUMBER 1-9787
FLOWERS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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GEORGIA 58-0244940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1919 FLOWERS CIRCLE
THOMASVILLE, GEORGIA 31757
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (912) 226-9110
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.625 PAR VALUE,
TOGETHER WITH PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
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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 [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing sales price on the New York
Stock Exchange on March 23, 1998: $2,137,422,400
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
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TITLE OF EACH CLASS OUTSTANDING AT MARCH 23, 1998
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COMMON STOCK, $.625 PAR VALUE 90,809,227
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DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 OF KEEBLER FOODS COMPANY, A DELAWARE
CORPORATION.
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 this
Form 10-K. [ ]
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FORM 10-K TRANSITION REPORT
TABLE OF CONTENTS
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SEQUENTIAL
PAGE
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PART I
ITEM NO.
1. Business.................................................... 1
2. Properties.................................................. 12
3. Legal Proceedings........................................... 13
4. Submission of Matters to a Vote of Security Holders......... 13
PART II
ITEM NO.
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 13
6. Selected Financial Data..................................... 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
8. Financial Statements and Supplementary Data................. 21
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 21
PART III
ITEM NO.
10. Directors and Executive Officers of the Registrant.......... 22
11. Executive Compensation...................................... 25
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 30
13. Certain Relationships and Related Transactions.............. 32
PART IV
ITEM NO.
14. Exhibits, Financial Statement Schedules, and Report on Form
8-K......................................................... 32
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(i)
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The registrant incorporates by reference into this Transition Report on
Form 10-K for the transition period ended January 3, 1998, certain portions of
the Annual Report on Form 10-K of Keebler Foods Company for its fiscal year
ended January 3, 1998, filed with the Securities and Exchange Commission on
March 20, 1998 (File No. 001-13705) (the "Keebler Form 10-K"), as follows:
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ITEM OF FLOWERS TRANSITION
ITEM OF KEEBLER ANNUAL REPORT REPORT ON FORM 10-K INTO
ON FORM 10-K BEING WHICH INFORMATION IS BEING
INCORPORATED BY REFERENCE INCORPORATED BY REFERENCE
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PART I PART I
Item 1. Business.................. Item 1. Business
Item 2. Properties................ Item 2. Properties
PART II PART II
Item 6. Selected Financial Data... Item 6. Selected Financial Data
Item 7. Management's Discussion Item 7. Management's Discussion
and Analysis of Financial and Analysis of Financial
Condition and Results of Condition and Results of
Operations................ Operations
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(ii)
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PART I
ITEM 1. BUSINESS
As used herein, unless the context otherwise indicates, (i) "Flowers" means
Flowers Industries, Inc., a Georgia corporation and its consolidated
subsidiaries, excluding Keebler Foods Company, a Delaware corporation, and its
consolidated subsidiaries ("Keebler"); and (ii) the "Company" means Flowers and
Keebler, collectively. Unless stated otherwise, figures provided for market
share percentages and rank in any market are based on retail sales (measured in
dollars) in 1997 as reported by Information Resources, Inc. ("IRI"), which
tracks retail sales through scanner data in United States grocery stores with
annual revenue greater than $2.0 million. The IRI data excludes sales through
other channels in which the Company operates and, therefore, may overstate or
understate the Company's share of particular product lines in the baked foods
market. See "Business -- Products." In January 1998, the Company changed its
fiscal year end from the Saturday nearest June 30 to the Saturday nearest
December 31. Unless stated otherwise, all references to (i) "fiscal year 1997"
shall mean Flowers' full fiscal year ended June 28, 1997, (ii) "fiscal year
1998" shall mean Flowers' full fiscal year ending January 2, 1999, and (iii)
"transition period 1998" shall mean Flowers' 27 week transition period from June
29, 1997 through January 3, 1998.
THE COMPANY
The Company is the largest nationally branded producer and marketer of a
full line of baked foods in the United States, with products which include
Flowers Bakeries' fresh breads and rolls, Mrs. Smith's Bakeries' fresh and
frozen baked desserts, snacks, breads and rolls, as well as Keebler's cookies
and crackers. Since its founding in 1919 in Thomasville, Georgia, the Company
has dramatically expanded the diversity and geographic scope of its operations
and is now a leader in the market for baked foods throughout the United States.
The Company's core strategy is to be the country's leading low-cost
producer and marketer of a full line of branded fresh and frozen baked products
on a national and super-regional basis, serving all possible customers, through
all channels of distribution. This strategy is focused on responding to current
market trends for the Company's products and changing consumer preferences,
which now increasingly favor purchases of ready-made convenience food products
as opposed to traditional home-prepared foods. To assist in accomplishing this
core strategy, the Company has aggressively invested capital to modernize and
expand its plant and equipment capacity and has acquired nationally branded
businesses which complement its traditional strengths. It has also continually
improved its distribution systems and has established a presence in all
distribution channels where baked foods are sold, including restaurants,
fast-food chains, food wholesalers, institutions and vending machines, as well
as grocery stores.
In the fresh baked product line (Flowers Bakeries), the Company focuses on
the production and marketing of baked foods to customers in the super-regional
19 state area in and surrounding the southeastern United States. In this effort,
the Company has devoted significant resources to modernizing production
facilities and improving its distribution capabilities, as well as actively
marketing well-recognized brands such as Nature's Own and Cobblestone Mill
bread. Since 1980, the Company has acquired 24 local bakery operations which are
generally within or contiguous to its existing region and which can be served
with its extensive direct-to-store sales and distribution system (a "DSD
system"). The Company's strategy is to use acquisitions to better serve new and
existing customers, principally by increasing the productivity and efficiency of
newly acquired plants, establishing reciprocal baking arrangements among its
bakeries, and by extending its DSD system. Flowers Bakeries' DSD system utilizes
approximately 3,100 independent distributors who own the right to sell the
Company's fresh baked products within their respective territories.
The Company's frozen baked foods operations (Mrs. Smith's Bakeries) began
in the mid-1970s with the acquisition of the Stilwell business, with frozen
products initially marketed to customers in the southeastern and southwestern
United States. In 1989, the Company entered the frozen bread and dough market in
the southeastern United States with its acquisition of the bakery operations of
Winn-Dixie, Inc. In 1991, the
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Company undertook its first significant entry into the national market for
frozen baked dessert products with the acquisition of Pies, Inc., a
midwest-based producer of premium pies for the restaurant and foodservice
markets, and further expanded its national presence by acquiring the Oregon
Farms branded frozen carrot cake line. In May 1996, the Company obtained a
leading presence in the frozen baked dessert category with the acquisition of
the business of Mrs. Smith's Inc., which is the leading national brand of frozen
pies sold at retail. In January 1998, the Company launched "Operation 365," a
strategy aimed at significantly expanding year-round sales in the frozen dessert
baked product category through product line extensions designed to take
advantage of nationwide consumer recognition of the Mrs. Smith's brand name.
Examples of significant product line extensions that are underway include Mrs.
Smith's retail frozen fruit cobblers and Mrs. Smith's "Restaurant Classics"
retail frozen pies.
The Company entered the cookies and crackers marketplace in January 1996 by
acquiring for $62.5 million an approximate 45% stake in Keebler, the number two
producer and marketer of cookies and crackers in the United States with net
sales of approximately $2.1 billion for the fiscal year ended January 3, 1998.
In June 1996, Keebler acquired Sunshine Biscuits, Inc. ("Sunshine"), the third
largest cookie and cracker producer in the United States. By the end of 1996,
Keebler completed its planned integration of Sunshine's operations, achieving
efficiencies in administration, purchasing, production, marketing, sales and
distribution. Under the control of Flowers and its co-investors, Keebler's
results of operations have improved from a net loss of $158.3 million for its
fiscal year ended December 30, 1995, to a net income of $57.0 million for its
fiscal year ended January 3, 1998. On February 3, 1998, Keebler completed its
initial public offering in which Flowers' co-investors sold a portion of their
shares to the public. Concurrent with that offering, Flowers purchased an
additional 11% of Keebler from its co-investors for approximately $309 million,
thereby increasing its ownership to approximately 55% of the total Keebler
shares outstanding (the "Keebler Acquisition").
The Company has a leading presence in each of the major product categories
in which it competes. Flowers Bakeries' fresh baked branded bread and roll sales
rank first in ten of its 15 major metropolitan markets and second in its
remaining five such markets, and its Nature's Own brand is the number one volume
brand of wheat/variety bread in the country despite being marketed solely in the
super-regional 19 state area in and surrounding the southeastern United States.
Mrs. Smith's Bakeries is one of the leading frozen baked dessert producers and
marketers in the United States, and its Mrs. Smith's pies are the leading
national brand of frozen pies sold at retail. Keebler is the number two producer
and marketer of branded cookies and crackers, the number one producer and
marketer of private label cookies and the number one producer and marketer of
cookies and crackers for the foodservice market. The Company's major branded
products include, among others, the following:
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FLOWERS BAKERIES MRS. SMITH'S BAKERIES KEEBLER
FRESH BAKED PRODUCTS FRESH AND FROZEN BAKED PRODUCTS COOKIES AND CRACKERS
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Flowers Mrs. Smith's Keebler Brands:
Nature's Own Mrs. Smith's Restaurant Classics - Chips Deluxe
Whitewheat Mrs. Smith's Special Recipe - Pecan Sandies
Cobblestone Mill Mrs. Freshley's - Fudge Shoppe
Dandee Oregon Farms - Town House
Evangeline Maid European Bakers, Ltd. - Club
Betsy Ross Stilwell - Graham Selects
ButterKrust Our Special Touch - Wheatables
BlueBird Danish Kitchen - Zesta
Licensed Brands: Pour-A-Quiche Cheez-It
- - Sunbeam Carr's
- - Roman Meal Vienna Fingers
- - Country Hearth Hydrox
- - Bunny Sunshine Krispy
- - Holsum Hi-Ho
Ready Crust
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The Company is committed to being the low cost producer in all of its
operations and has made significant capital investments in recent years to
modernize, automate and expand its production and
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distribution capabilities. Flowers has invested approximately $377 million over
the past six years, of which approximately $227 million was used to expand and
modernize existing production facilities for Flowers Bakeries, including the
addition of twelve new highly-automated production lines in nine facilities. The
remaining approximately $150 million was used primarily to build a
state-of-the-art distribution facility, and to add 13 highly-automated
production lines in nine facilities for Mrs. Smith's Bakeries. Since Flowers'
initial investment in Keebler in January 1996, Keebler has invested
approximately $78 million to streamline and rationalize its production
operations in order to better support its national DSD system.
In order to provide prompt and responsive service to its consumers, the
Company tailors its distribution systems to the marketing and production aspects
of its major product lines. Flowers Bakeries distributes its fresh baked foods
through an extensive DSD system of approximately 3,100 independent distributors
who, as owners of their territories, are motivated to maintain and build shelf
space and to monitor product freshness, which is essential in the marketing of
short shelf life products such as fresh bread, rolls and buns. These
distributors make an aggregate of approximately 70,000 stops per day. Mrs.
Smith's Bakeries' frozen foods are distributed through its two
strategically-located frozen distribution facilities, as well as through
additional commercial frozen warehouse space throughout the United States, in
order to accommodate inventory growth in seasonal products and to provide
staging to expedite distribution throughout the year. Keebler's cookies and
crackers are distributed through a DSD system designed to maximize customer
service and Keebler's control over the availability and presentation of
products. Keebler's DSD system employees distribute products to approximately
30,000 retail locations, principally supermarkets. Keebler is one of only two
cookie and cracker companies that own and operate a national DSD system.
INDUSTRY OVERVIEW
The United States baked foods industry is comprised of a number of distinct
product lines, including fresh baked foods (fresh breads, rolls and buns),
refrigerated and frozen baked foods (desserts, snacks, breads and doughs) and
cookies and crackers. Changes in consumer preferences have shifted food
purchases away from the traditional grocery store aisles for home preparation
and consumption, and toward home meal replacement purchases, either in
supermarkets' in-store deli/bakeries or in non-supermarket channels, such as
mass merchandisers, convenience stores, club stores, restaurants and other
convenience channels. Non-supermarket channels of distribution are becoming
increasingly important throughout the baked foods industry.
Fresh Baked Foods
In 1997, retail bread sales in the United States were approximately $5
billion, according to IRI, which tracks retail sales through scanner data in
United States grocery stores with annual revenue greater than $2.0 million. In
the last decade, retail sales of fresh breads have experienced modest growth,
with expansion occurring primarily in a variety of premium and specialty breads.
In addition to Flowers Bakeries, several large baking and diversified food
companies market fresh baked foods in the United States. Competitors in this
category include Interstate Bakeries Corporation ("Interstate"), The Earthgrains
Company ("Earthgrains"), Bestfoods, formerly CPC International Inc.
("Bestfoods") and Pepperidge Farm Inc. ("Pepperidge Farm"). There are also a
number of smaller, regional baking companies. The Company believes that the
larger companies enjoy several competitive advantages over smaller operations,
due principally to economies of scale in areas such as purchasing, production,
advertising, marketing and distribution, as well as through greater brand
awareness.
A significant trend in the fresh baked foods industry over the last several
years has been the consolidation of smaller bakeries into larger baking
businesses. Consolidation, which has reduced industry capacity, continues to be
driven by factors such as capital constraints on smaller bakeries, which limit
their ability to avoid technological obsolescence, to increase productivity or
to develop new products, generational changes at family-owned businesses, and
the need to serve super-regional grocery store chains. The Company believes that
the consolidation trend in the fresh baked foods industry will continue to
present opportunities for strategic acquisitions that complement its existing
businesses and that extend its regional presence.
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Frozen Baked Foods
The United States frozen and refrigerated baked foods industry, including
desserts, breads, rolls and doughs, had 1997 sales of approximately $7 billion,
according to estimates compiled for the February 1998 edition of Refrigerated
and Frozen Foods, an industry trade publication. While retail sales of frozen
baked desserts have declined by approximately 9% since 1992, sales of frozen
baked foods to other distribution channels, including restaurants and other
foodservice institutions, have grown significantly over the same period,
including a cumulative 23% increase in sales of foodservice desserts and a 50%
increase in sales at in-store deli/bakeries. Primary competitors in the frozen
baked desserts category include The Pillsbury Co. ("Pillsbury"), Sara Lee Bakery
("Sara Lee"), Rich Products Corp. ("Rich Products"), Edwards Baking Co.
("Edwards") and Pepperidge Farm.
Cookies and Crackers
The United States cookie and cracker industry had 1997 retail sales of
approximately $8.3 billion. Since 1992, consumption per person of cookies and
crackers in the United States has remained stable. The cookie and cracker
industry is comprised of distinct product segments. Cookie segments include,
among others, sandwich cookies, chocolate chip cookies and fudge-covered
cookies. Cracker segments include among others, saltine crackers, graham
crackers and snack crackers.
Supermarkets accounted for approximately 78% of 1996 retail sales in the
cookie and cracker industry with mass merchandisers, convenience stores, and
drug stores accounting for most of the balance. Since 1992, United States annual
dollar supermarket sales of cookies and crackers have increased an average of
1.5% per year.
Keebler and Nabisco, Inc. ("Nabisco") are the two largest national
participants in the cookie and cracker industry. Keebler and Nabisco have a
combined market share of approximately 58%, with Keebler having approximately
24% and Nabisco having approximately 34%. Other participants in the industry
generally operate only in certain regions of the United States or only
participate in a limited number of segments of the industry.
BUSINESS STRATEGY
The Company's strategy is to be the country's leading low-cost producer and
marketer of a full-line of branded fresh and frozen baked foods products on a
national and super-regional basis serving all possible customers through all
channels of distribution. Flowers Bakeries, Mrs. Smith's Bakeries and Keebler
each develop separate strategies based on the production, distribution and
marketing requirements of its particular baked foods category. The Company
employs the following five overall strategies:
- Strong Brand Recognition. The Company intends to capitalize on the
success of its well-recognized brand names, which communicate product
consistency and high quality, through extending those brand names to
additional products and categories. Among other strategies, the Company
will continue to extend the Mrs. Smith's brand to additional frozen baked
products, expand the use of the Cheez-It brand name and develop new
products under the Keebler brand name. Many of the Company's products,
including its Nature's Own bread, Mrs. Smith's retail frozen baked pies
and Cheez-It snack crackers, are the top-selling brands in their
categories. Flowers Bakeries' fresh baked branded bread and roll sales
rank first in ten of its 15 major metropolitan markets and second in its
remaining five such markets. Keebler brand cookies rank second overall in
the United States, with eight of the 25 best-selling cookies and ten of
the 25 best-selling crackers in the United States based on dollar sales.
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- State-of-the-Art Production and Distribution Facilities. The Company
intends to maintain a continuing level of capital improvements that will
permit it to fulfill its commitment to remain among the most modern and
efficient baked foods producers in the United States. Toward this goal,
Flowers has invested approximately $377 million in Flowers Bakeries and
Mrs. Smith's Bakeries in the six-year period ended June 28, 1997 to build
several modern and highly efficient production facilities and a
state-of-the-art distribution facility, as well as to automate and
modernize its existing facilities. Since Flowers' initial investment in
Keebler in January 1996, Keebler has spent approximately $78 million to
keep its operations modern and efficient and has lowered its operating
costs by closing plants, consolidating production and reducing overhead.
- Efficient and Customer Service-Oriented Distribution. The Company
intends to expand and refine its distribution systems to allow it to
respond quickly and efficiently to changing customer service needs,
consumer preferences and seasonal demands. In the last decade, the Company
has developed distribution systems that are tailored to the nature of each
of its three baked food product categories and are designed to provide the
highest levels of service to retail and foodservice customers. Flowers
Bakeries has developed a DSD network of approximately 3,100 independent
distributors for its fresh baked products, who make an aggregate of
approximately 70,000 stops per day. Mrs. Smith's Bakeries operates a
network of strategically located storage and distribution facilities for
its frozen baked products and a centralized distribution facility for its
fresh baked snack products. Keebler operates its own national DSD system
for its cookie and cracker products, enabling it to provide frequent
service to over 30,000 retail customers.
- Broad Range of Products and Sales Channels. In recognition that
consumers are increasingly seeking home meal replacements and other
convenience food products, the Company intends to continue to emphasize
expansion of its product lines and sales channels to meet those
preferences. The Company's product lines now include virtually every
category of baked foods, including fresh and frozen bread, buns, rolls,
pies, cakes, and other baked snacks and desserts, as well as cookies and
crackers. The Company's products generally can be found in all baked food
distribution channels, including traditional supermarkets and their
in-store deli/bakeries, convenience stores, mass merchandisers, club
stores, wholesalers, restaurants, fast food outlets, schools, hospitals
and vending machines. The Company intends to continue to increase its
focus on non-supermarket channels, such as restaurants, mass merchandisers
and convenience stores.
- Strategic Acquisitions. The Company intends to continue to pursue growth
through strategic acquisitions and investments that will complement and
expand its existing markets, product lines and product categories. The
Company has consistently pursued growth in sales, geographic markets and
products through strategic acquisitions and has completed over 75
acquisitions in 30 years. Most recently, Flowers continued its regional
expansion in fresh baked foods with its January 1998 acquisition of
Franklin Baking Company, a regional bakery based in North Carolina. The
Company expanded its frozen baked foods product line with the 1996
acquisition of Mrs. Smith's, Inc. and the well-recognized Mrs. Smith's
national brand. In February 1998, the Company obtained a controlling
interest in Keebler, the second largest cookie and cracker producer and
marketer in the United States.
PRODUCTS
The Company produces baked foods in three product lines: fresh baked foods,
frozen baked foods and cookies and crackers.
Fresh Baked Foods -- Flowers Bakeries
In 1997, Flowers Bakeries was the leading producer of fresh baked foods in
ten of its major markets and second in five of its major markets and was
developing its presence in the other markets it has recently entered. The
Company's fresh baked foods market includes 19 states in the eastern,
southeastern and south central United States.
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The Company markets its fresh soft variety and white breads under numerous
brand names, including Flowers, Nature's Own, Whitewheat, Cobblestone Mill,
Dandee, Evangeline Maid, Betsy Ross, ButterKrust and Purity, among others.
Within licensed geographic territories, the Company also markets fresh bread
under the Sunbeam, Roman Meal, Country Hearth, Bunny and Holsum trademarks.
Nature's Own is the best selling brand by volume of soft variety bread in the
United States, despite being marketed solely in the 19 state super-region in and
surrounding the southeastern United States. Rolls and buns are marketed under
the Cobblestone Mill, European Bakers, Ltd., Breads International and other
brand names. Flowers Bakeries has used its strong brand recognition to expand to
new product lines, such as the successful introduction of Cobblestone Mill
Breakfast Breads. Fresh baked snack cakes, doughnuts, pastries and other sweet
snacks are sold primarily under the BlueBird brand, as well as ButterKrust,
Sunbeam, and Holsum.
In addition to its branded products, Flowers Bakeries also packages baked
foods under private labels for such retailers as Winn-Dixie. While private label
products carry lower margins than its branded products, Flowers Bakeries is able
to use its private label offerings to expand its total shelf space and to
effectively maximize capacity utilization.
The Company also supplies numerous restaurants, institutions and
foodservice companies with fresh bread products, including Burger King, Krystal,
Arby's, Outback Steakhouse, Olive Garden, Dairy Queen and Chili's. In May 1995,
the Company became a preferred supplier to Burger King and currently supplies
baked products to approximately 1,700 Burger King restaurants in the Southeast.
The Company also sells fresh baked products to wholesale distributors for
ultimate sale to a wide variety of food outlets.
Frozen Baked Foods -- Mrs. Smith's Bakeries
Mrs. Smith's Bakeries and Sara Lee each have an approximately 25% market
share of the frozen baked dessert market, representing the two largest shares of
that market. Mrs. Smith's frozen baked pies were the number one retail frozen
brand pies in the U.S. for 1997 with an approximate 53% market share, according
to IRI. The Company's frozen baked foods are marketed throughout the United
States, and, based on consumer surveys commissioned by the Company, Mrs. Smith's
enjoys a 94% brand awareness in United States households.
The Company's frozen pies, cakes, cobblers and other baked desserts are
sold under the Mrs. Smith's, Mrs. Smith's Restaurant Classics, Mrs. Smith's
Special Recipe, Oregon Farms and Stilwell brand names in the frozen foods
sections of supermarkets, as are the Company's frozen pie shells, mixed fruits
and quiche fillings. The Company has also introduced a line of frozen baked
desserts and cobblers that feature low fat crusts and no-sugar-added fruit
fillings. The Company's frozen baked products also include specialty baked and
parbaked (partially baked) breads, buns, and rolls marketed under the European
Bakers, Ltd. and Our Special Touch brands, which are sold at retail. The Company
also co-packs these and other fresh bakery snack food products on behalf of
other industry participants who sell these products under their own proprietary
brand names.
The Company produces frozen pies, cakes and desserts as well as bread,
rolls and buns for sale to foodservice customers, wholesalers, such as Sysco,
and markets fresh and frozen hearth-baked specialty bread, breadsticks and rolls
to chain restaurants such as Outback Steakhouse and Olive Garden.
Traditionally, frozen pie sales are heavily concentrated throughout the
year-end holiday season. The Company has recently launched "Operation 365," a
strategy aimed at significantly expanding non-seasonal sales in the frozen baked
product line by introducing new products under the Mrs. Smith's brand, thereby
extending the well-recognized Mrs. Smith's brand name to existing and related
products. The Company's newest introduction is Mrs. Smith's Restaurant Classics,
which are frozen premium, restaurant-quality cream pies sold at retail.
Mrs. Smith's Bakeries also produces fresh baked snack products under the
Mrs. Freshley's brand, such as donuts, honeybuns, cream horns, pecan spins,
jelly rolls and cinnamon buns for sale as single packs in vending machines and
in multi-packs marketed through grocery stores and mass merchandisers as center
aisle promotions. In addition, Mrs. Smith's Bakeries sells these same products
to Flowers, which distributes them
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under its BlueBird brand. Mrs. Smith's Bakeries produces fresh baked snack foods
at some of its production facilities in order to maximize the use of capacity.
Cookies and Crackers -- Keebler
Keebler is the second largest cookie and cracker producer in the United
States with annual net sales of approximately $2.0 billion and an approximate
24% share of the United States cookie and cracker market. In the United States,
Keebler is the number two producer and marketer of branded cookies and crackers,
the number one producer of private label cookies and the number one producer of
cookies and crackers for the foodservice market. Keebler produces eight of the
25 best-selling cookies and ten of the 25 best-selling crackers in the United
States based on dollar sales. Keebler's branded cookie and cracker products
include, among others, Chips Deluxe cookies, Pecan Sandies cookies, Fudge Shoppe
cookies, Town House crackers, Club crackers, Graham Selects crackers, Wheatables
crackers, Zesta crackers, Cheez-It crackers, Cheez-It party mix, Nacho Cheez-It
crackers, Carr's biscuits, Vienna Fingers cookies, Hydrox cookies, Sunshine
Krispy crackers and Hi-Ho crackers. In addition, Keebler is the number one
producer and marketer of retail branded ice cream cones in the United States,
and a major producer of retail branded pie crusts. Keebler also produces
custom-baked products, such as Nutri-Grain breakfast bars, for other marketers
of branded food products, and private label cookies and crackers to be sold by
retailers under their own brands.
MANUFACTURING AND DISTRIBUTION
The Company designs its production facilities and distribution systems to
meet the marketing and production demands of its major product lines. Through a
significant program of capital improvements and careful planning of plant
locations, which, among other things, allows the Company to establish reciprocal
baking arrangements among its bakeries, the Company seeks to remain the
country's leading low cost producer and marketer of branded fresh and frozen
baked products on a national and super-regional basis and to provide the highest
quality customer service. In addition to the independent distributor system for
its fresh baked products and the DSD system used for Keebler, the Company also
uses both owned and public warehouses and distribution centers in central
locations for the distribution of certain of its frozen and other shelf stable
products.
Fresh Baked Foods -- Flowers Bakeries
Flowers owns and operates 27 fresh bread and bun bakeries in 10 states.
Flowers has invested approximately $227 million over the past six years,
primarily to build new state-of-the-art baking facilities and to significantly
upgrade existing facilities. During this period, Flowers has added twelve new
highly-automated production lines in nine of its facilities. The Company
believes that these investments, undertaken at a time when many competitors were
minimizing capital improvements due to leverage or earnings pressure, have made
Flowers the most efficient major producer of fresh baked foods in the United
States. Flowers believes that its capital investment yields long-term benefits
in the form of more consistent product quality, highly sanitary processes, and
greater production volume at a lower cost per unit. While its major capital
improvement program is largely complete, Flowers intends to continue to invest
in its plant and equipment to maintain the highest levels of efficiency.
Distribution of fresh baked foods involves determining appropriate order
levels, delivering the product from the plant to the customer, stocking the
product on the shelves, visiting the customer one to three times daily to ensure
that inventory levels remain adequate, and removing stale goods. In 1986,
Flowers Bakeries began converting its bakery sales routes from employees
operating company-owned vehicles to a DSD system of exclusive independent
distributors. The Company effected this change by selling its sales routes
primarily to its sales employees. The Company initially financed these purchases
over ten years, which obligations were sold to a financial institution in 1996.
Currently, all distributor purchase arrangements are made directly with a
financial institution, and, pursuant to an agreement, the Company manages and
services these arrangements.
The distributors lease hand-held computers from the Company, which contain
software proprietary to the Company. The software permits distributors to track
and communicate inventory data to the production
7
<PAGE> 11
facilities and to calculate recommended order levels based on historical sales
data and recent trends. These orders are electronically transmitted to the
appropriate production facility on a nightly basis. This system, which
management believes is more sophisticated than comparable tracking programs
currently used in the industry, is designed to ensure that adequate product, and
the right mix of products, are available to meet the retail and foodservice
customer's immediate needs. Management believes the system minimizes returns of
unsold goods. In addition to the hand-held distributor units, the Company's main
computer system permits tracking of sales, product returns and profitability by
customer location, plant, day and other bases. Managers receive sales and
profitability reports on a weekly basis, allowing prompt operational adjustments
when appropriate.
Management believes that the Company's independent distributor system is
unique in the industry as to its size, with approximately 3,100 distributors,
and with respect to its super-regional scope. In Flowers Bakeries' DSD System,
an aggregate of over 70,000 stops are made each day. The program is designed to
provide the Company's retailers with superior service because distributors,
highly motivated by route ownership, strive to increase sales by maximizing
service. In turn, distributors have the opportunity to benefit directly from the
enhanced value of their routes resulting from higher sales volume.
Frozen Baked Foods -- Mrs. Smith's Bakeries
Mrs. Smith's Bakeries operates 13 production facilities with 67 production
lines for its pies, cakes, breads, rolls and snack foods. The Company maintains
maximum operating efficiency by producing high volume fresh snack products on
long runs to complement its branded frozen baked products, sales of which are
seasonal in nature. In the past six years, the Company has invested
approximately $150 million to upgrade its frozen baked foods production and
distribution facilities, primarily by adding 13 highly-automated production
lines in nine facilities and to construct its 225,000 square foot
highly-automated frozen distribution facility in Suwanee, Georgia. In addition,
Mrs. Smith's Bakeries is nearing completion of installation of the SAP/R3
operating system, which the Company believes will provide it with competitive
advantages in inventory tracking and distribution. The Company plans to invest
approximately $40 million over fiscal 1998 and 1999 in renovations to improve
efficiencies at several of its frozen food bakeries.
Mrs. Smith's Bakeries' distribution facilities are strategically located
near its production facilities to simplify distribution logistics and shorten
delivery times. The plant in Stilwell, Oklahoma is an efficient facility which
serves as a principal point of distribution for the Company's products
throughout the central, southwestern and western United States. The
state-of-the-art Suwanee distribution facility is located on a major interstate
corridor near four of Mrs. Smith's Bakeries' frozen dessert production
facilities. This facility opened in 1995 and contains such innovations as five
78-foot tall, laser-guided cranes specifically designed for the facility, a six
million cubic foot freezer, and computer-controlled bar-coding and inventorying.
The automation of this facility enables Mrs. Smith's Bakeries to move extremely
large volumes of product without a significant labor component and enables the
facility to operate with extremely cold temperatures that preserve high product
quality. In addition to cost efficiencies, these features allow the Suwanee
facility to better serve customers by processing customer orders much more
quickly than conventional freezer facilities. This facility's frozen storage
capacity will be expanded in 1998 and production capacity is intended to be
added on-site to expand Mrs. Smith's Bakeries' production capacity and to
enhance operating efficiencies by having contiguous production and frozen
storage.
In addition to Mrs. Smith's Bakeries' two strategically-located freezer and
distribution facilities in Suwanee and Stilwell, the Company leases additional
freezer and distribution facilities on the West Coast to facilitate distribution
of its products nationwide. These owned and leased facilities allow the Company
to build and store necessary inventory in seasonal products, and to expedite the
national distribution of both its seasonal and non-seasonal products.
Mrs. Smith's Bakeries distributes its fresh baked snack products from a
centralized distribution facility located near Knoxville, Tennessee. Centralized
distribution allows the Company to achieve both production and distributing
efficiencies. The production facilities are able to operate longer, more
efficient production runs
8
<PAGE> 12
of a single product, which are then shipped to the centralized distribution
facility. Products coming from different production facilities are then
cross-docked and shipped directly to customer warehouses.
Cookies and Crackers -- Keebler
Keebler attempts to meet the changing demands of its customers by planning
appropriate stock levels and optimal delivery times. To achieve these
objectives, Keebler has developed a network of modern and efficient production
facilities with contiguous or strategically located shipping centers and
distribution warehouses. Keebler owns and operates eleven production facilities
located throughout the United States. Keebler also owns and operates a dairy in
Fremont, Ohio that produces cheese under a proprietary formula which is used as
an ingredient in Cheez-It crackers. Keebler's distribution facilities consist of
eleven shipping centers attached to the production facilities, nine separate
shipping centers (two owned and seven leased) and 67 distribution centers
(twelve owned and 55 leased, 14 of which are idle or subleased) throughout the
United States. Keebler also leases 30 warehouses and 17 depots that are located
throughout the United States and are utilized by the sales force in the
distribution of Keebler's products.
Keebler directly services approximately 30,000 retail customers through its
DSD distribution system, which system employs more than 3,200 persons. Keebler's
DSD distribution system distributes its retail branded cookie and cracker
products directly to the retail location, where these products are then
merchandised by Keebler's own sales force. Members of Keebler's sales force
visit retail outlets an average of 2.8 times per week per store, meeting
directly with and taking orders from store managers and arranging for extra in-
store display space. Keebler's trucks then deliver the orders directly to such
retail outlets, where members of Keebler's sales force, rather than store
employees, stock and arrange its products on the retailers' shelves and build
end-aisle and free standing displays within the stores. While strengthening
relationships with retailers, the frequent store presence of Keebler's sales
force also allows it to oversee and execute Keebler's in-store promotional
programs. In addition, it provides Keebler with the ability to monitor
competitors' in-store product promotions.
Keebler uses its DSD distribution system exclusively to serve supermarkets
and mass merchandisers. In the case of club stores and foodservice distributors,
Keebler uses a dedicated sales force and ships its products directly to the
customers' warehouses. Convenience stores and vending distributors are served
using a network of independent distributors.
CUSTOMERS
Fresh Baked Foods -- Flowers Bakeries
The Company's fresh baked foods have a highly diversified customer base,
which includes grocery retailers, restaurants, fast-food chains, food
wholesalers, institutions, and vending companies. Flowers Bakeries also sells
returned and surplus product through a system of independently operated thrift
outlets.
The Company also supplies numerous restaurants, institutions and
foodservice companies with fresh bread products, including buns for fast-food
outlets such as Burger King, Krystal, Arby's, Outback Steakhouse, Olive Garden,
Dairy Queen and Chili's. In May 1995, the Company became a preferred supplier to
Burger King and currently supplies baked products to approximately 1,700 Burger
King restaurants in the Southeast. The Company also sells fresh baked products
to wholesale distributors such as Sysco for ultimate sale to a wide variety of
food outlets. Winn-Dixie is Flowers Bakeries' largest customer for fresh baked
foods.
Frozen Baked Foods -- Mrs. Smith's Bakeries
The Company's frozen baked foods are marketed to traditional retail
outlets, such as grocery stores, as well as non-traditional outlets, ranging
from club stores and mass merchandisers to wholesalers, foodservice distributors
and restaurants. Mrs. Smith's Bakeries' branded frozen baked desserts are sold
primarily through grocery retailers. Its non-branded frozen baked desserts and
specialty breads and rolls are sold to foodservice distributors, such as Sysco,
institutions, retail in-store bakeries and restaurants, including Olive Garden
and Outback Steakhouse. Its fresh baked snack products under the Mrs. Freshley's
brand are sold primarily
9
<PAGE> 13
through vending outlets. Mrs. Smith's Bakeries is in the second year of a
long-term exclusive contract with a major food wholesaler to supply non-branded
frozen premium pies.
To fully utilize capacity in its facilities, Mrs. Smith's Bakeries produces
fresh baked snack products for its own distribution under the Mrs. Freshley's
brand and for Flowers Bakeries, which markets these products under its BlueBird
brand. The Company, in certain circumstances, enters into co-packing
arrangements with some of its competitors. Through co-packing, the Company
produces and packages baked foods for popular brands such as Weight Watchers,
Stouffer, Lance, Pepperidge Farm and Little Debbie.
Cookies and Crackers -- Keebler
Keebler sells its retail branded cookies and crackers through supermarkets,
mass merchandisers, convenience stores, drug stores and club stores to over
30,000 retail customers and manufactures private label products to be sold by
retailers under their own brands. In addition, Keebler supplies cookies and
crackers and ice cream cones for foodservice markets and produces ice cream
cones for various restaurants and ice cream retailers, such as McDonald's and
TCBY. Keebler also produces a variety of custom-baked products for other
marketers of branded food products, such as Kellogg, Oscar Mayer, Starkist,
Kraft, Gerber and McDonald's. No single customer accounted for more than 5% of
Keebler's net sales.
COMPETITION
Fresh Baked Foods -- Flowers Bakeries
The United States fresh baked foods segment is intensely competitive and is
comprised of large food companies, large independent bakeries with national
distribution, and smaller regional and local bakeries. Primary national
competitors include Interstate, Earthgrains, Bestfoods and Pepperidge Farm.
Competition is based on product quality, brand loyalty, price effective
promotions and the ability to target changing consumer preferences. Customer
service, including frequent delivery and well-stocked shelves, is an
increasingly important competitive factor. While the Company experiences price
pressure from time to time, primarily as a result of competitors' promotional
efforts, the Company believes that its status as the low cost producer and
consumer brand loyalty, as well as the Company's diversity within its region in
terms of geographic markets, products, and sales channels, limit the effects of
such competition. Recent consolidation in the baked foods industry has reduced
prior excess capacity and has further enhanced the ability of the larger firms
to compete with small regional bakeries. The Company believes that it enjoys
significant competitive advantages over smaller regional bakeries due to
economies of scale in areas such as purchasing, production, advertising,
marketing and distribution, and its lower production costs.
Frozen Baked Foods -- Mrs. Smith's Bakeries
According to Refrigerated and Frozen Foods, an industry trade publication,
the frozen baked foods industry is led by Pillsbury, Sara Lee, and Mrs. Smith's
Bakeries, which together account for approximately 46% of sales volume in the
broad category. Other significant competitors in the frozen baked dessert
category include Rich Products, Edwards and Pepperidge Farm. According to IRI,
Mrs. Smith's Bakeries had a 53% market share, the number one position, for
retail branded frozen pies in 1997. Competitors for the Mrs. Freshley's brand
products produced by Mrs. Smith's Bakeries include Interstate (Hostess) and
McKee (Little Debbie). Mrs. Freshley's is the country's number three fresh
pastry brand sold through vending machines.
Competition for branded frozen baked products depends primarily on brand
recognition and loyalty, perceived product quality, effective promotions and, to
a lesser extent, price. Based on consumer surveys obtained by the Company, Mrs.
Smith's has an approximate 94% brand awareness in United States households. For
the nonbranded products manufactured by Mrs. Smith's Bakeries, competition is
based upon high-quality products requested by foodservice customers, excellent
service and price.
10
<PAGE> 14
Cookies and Crackers -- Keebler
The United States branded cookie and cracker industry is led by Keebler and
Nabisco, which together account for approximately 58% of total sales volume.
Keebler has an approximate 24% share of the retail cookie and cracker market,
while Nabisco, the largest manufacturer in the United States cookie and cracker
industry, has an approximate 34% share. The remaining industry participants
primarily target certain segments of the industry or focus on certain regions of
the United States. Smaller competitors include numerous national, regional and
local manufacturers of both branded and private label products. Competition in
Keebler's markets takes many forms including establishing favorable brand
recognition, developing products sought by consumers, implementing appropriate
pricing, providing strong marketing support and obtaining access to retail
outlets and sufficient shelf space.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks and trade names, as well as certain
patents and licenses. Flowers Bakeries' principal brand names include Flowers,
Nature's Own, Whitewheat, Cobblestone Mill, Dandee, Evangeline Maid, Betsy Ross,
ButterKrust, Purity, and BlueBird, among others, and its licensed trademarks
include Sunbeam, Roman Meal, Country Hearth, Bunny and Holsum. Mrs. Smith's
Bakeries' principal brand names are Mrs. Smith's, Mrs. Smith's Restaurant
Classics, Mrs. Smith's Special Recipe, Stilwell, Oregon Farms, European Bakers,
Ltd., Our Special Touch, Mrs. Freshley's, Danish Kitchen and Pour-a-Quiche.
Keebler's principal trademarks and trade names include Keebler, Ernie the
Keebler Elf, the Hollow Tree logo, Cheez-It, Chips Deluxe, Club, Fudge Shoppe,
Graham Selects, Hi-Ho, Hydrox, Sunshine Krispy, Munch'ems, Ready Crust, Pecan
Sandies, Soft Batch, Sunshine, Toasteds, Town House, Vienna Fingers, Wheatables,
and Zesta. Keebler is the exclusive licensee of the Carr's crackers brand name
in the United States. Such trademarks and trade names are considered to be
important to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. Management is
not aware of any fact that would negatively impact the continuing use of any of
its trademarks, trade names, patents or licenses.
RAW MATERIALS
The Company's primary baking ingredients are flour, sugar, shortening and
fruit. The Company also uses paper products, such as corrugated cardboard,
aluminum products, such as pie plates, and films and plastics to package its
baked foods. In addition, the Company is also dependent upon natural gas and
propane as a fuel for firing ovens. On average, baking ingredients constitute
approximately 10% to 15%, and packaging represents approximately 1% to 5%, of
the wholesale selling price of the Company's baked foods. The Company maintains
diversified sources for all of its baking ingredients and packaging products.
Commodities, such as the Company's baking ingredients, periodically
experience price fluctuations and, for that reason, the market for these
commodities is continuously monitored. From time to time, the Company enters
into forward purchase agreements and derivative financial instruments to reduce
the impact of volatility in raw materials prices.
REGULATION
As a producer and marketer of food items, the Company's operations are
subject to regulation by various federal governmental agencies, including the
Food and Drug Administration, the Department of Agriculture, the Federal Trade
Commission (the "FTC"), the Environmental Protection Agency, and the Department
of Commerce, as well as various state agencies, with respect to production
processes, product quality, packaging, labeling, storage and distribution. Under
various statutes and regulations, such agencies prescribe requirements and
establish standards for quality, purity, and labeling. The finding of a failure
to comply with one or more regulatory requirements can result in a variety of
sanctions, including monetary fines or compulsory withdrawal of products from
store shelves.
11
<PAGE> 15
In addition, advertising of the Company's businesses is subject to
regulation by the FTC, and the Company is subject to certain health and safety
regulations, including those issued under the Occupational Safety and Health
Act.
The operations of the Company, like those of similar businesses, are
subject to various Federal, state, and local laws and regulations with respect
to environmental matters, including air and water quality, underground fuel
storage tanks, and other regulations intended to protect public health and the
environment. The operations and the products of the Company's businesses also
are subject to state and local regulation through such measures as licensing of
plants, enforcement by state health agencies of various state standards and
inspection of the facilities. The Company believes that it is currently in
material compliance with applicable laws and regulations.
EMPLOYEES
Flowers employs approximately 7,200 persons, approximately 1,000 of whom
are covered by collective bargaining agreements. Keebler employs approximately
9,700 persons, of whom approximately 5,300 are covered by collective bargaining
agreements. The Company believes that it has good relations with its employees.
EXECUTIVE OFFICES
The address and telephone number of the principal executive offices of the
Company are 1919 Flowers Circle, Thomasville, Georgia 31757, (912) 226-9110.
ITEM 2. PROPERTIES
Thirty-seven of the Company's production and distribution facilities are
owned, two facilities are leased and three facilities are owned by local
industrial development authorities under terms of Industrial Revenue Bond (IRB)
financing agreements. The leased properties are leased for terms of ten to
fifteen years with certain renewal options. Under the terms of the IRB financing
agreements, title to these properties passes to the Company at maturity for
little or no consideration. The Company's production plant locations are:
Montgomery, Alabama
Opelika, Alabama
Tuscaloosa, Alabama
Ft. Smith, Arkansas
Pine Bluff, Arkansas
Texarkana, Arkansas
Bradenton, Florida
Jacksonville, Florida
Miami, Florida
Atlanta, Georgia(2)
Chamblee, Georgia
Forest Park, Georgia
Suwanee, Georgia
Thomasville, Georgia
Tucker, Georgia (Leased)
Villa Rica, Georgia (IRB financed)
London, Kentucky
Baton Rouge, Louisiana
Lafayette, Louisiana
New Orleans, Louisiana
Chaska, Minnesota (IRB financed)
Goldsboro, North Carolina
Jamestown, North Carolina
Kinston, North Carolina
Pembroke, North Carolina
Stilwell, Oklahoma
Pottstown, Pennsylvania (Leased)
Fountain Inn, South Carolina
Spartanburg, South Carolina
(IRB financed)
Andersonville, Tennessee
Crossville, Tennessee
Morristown, Tennessee
El Paso, Texas
Houston, Texas
San Antonio, Texas
Tyler, Texas
Lynchburg, Virginia
Norfolk, Virginia
Bluefield, West Virginia
Charleston, West Virginia
Parkersburg, West Virginia
Management considers that its properties are well maintained and sufficient
for its present operations.
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<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to those proceedings will not be material to the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the
period ended December 13, 1997 is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
MARKET PRICE CASH DIVIDENDS PAID PER
---------------------------------------------------- COMMON SHARE
TRANSITION -------------------------------
PERIOD 1998 FY 1997 FY 1996
---------------- ---------------- ---------------- TRANSITION
QUARTER HIGH LOW HIGH LOW HIGH LOW PERIOD 1998 FY 1997 FY 1996
- ------- ---- --- ------- ------- ------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First.................................. 20 11/16 16 1/2 13 1/4 10 5/8 9 5/8 8 1/8 .1100 .1000 .0933
Second................................. 21 1/2 16 5/8 15 7/8 12 5/8 10 1/4 8 1/4 .1125 .1017 .0950
Third.................................. -- -- 16 1/8 13 1/4 10 8 1/4 -- .1033 .0967
Fourth................................. -- -- 18 15 12 8 1/2 -- .1075 .0983
Total......................... .2225 .4125 .3833
</TABLE>
EQUITY SECURITY HOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHAREHOLDERS OF
TITLE OF CLASS RECORD AT MARCH 23, 1998
- -------------- -------------------------
<S> <C>
Common Stock, $.625 par value, together with Preferred Share
Purchase Rights 8,027
</TABLE>
The preceding table presents the high and low market price and cash
dividend information for each fiscal quarter as it relates to the Company's
common stock, $.625 par value. The Company's common stock is traded on the New
York Stock Exchange (NYSE). Cash dividends have been paid on these shares every
quarter since December 1971.
On March 25, 1998, the last reported sale price of the Common Stock on the
NYSE was $23 1/8 per share.
The declaration of dividends is at the discretion of the Board of Directors
of the Company. While the Company intends to continue to pay quarterly cash
dividends on its Common Stock, the declaration and payment of future dividends
and the amount thereof will be dependent upon the Company's financial condition,
results of operations, cash requirements for its business, future prospects and
other factors deemed relevant by the Board of Directors. In addition, the
existing debt agreements of Keebler contain covenants which limit Keebler's
ability to, among other things, pay dividends.
13
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated historical financial data presented below as of
and for the fiscal years 1993, 1994, 1995, 1996 and 1997, and for transition
period 1998, have been derived from the consolidated financial statements of
Flowers which have been audited by Price Waterhouse LLP, independent
accountants. The selected consolidated historical financial data for the 27
weeks ended January 4, 1997 have been derived from the unaudited financial
statements of Flowers. The results of operations presented below are not
necessarily indicative of results to be expected for any future period. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes thereto incorporated by
reference or included elsewhere herein.
<TABLE>
<CAPTION>
52 WEEKS ENDED 27 WEEKS ENDED
---------------------------------------------------------- ------------------------
JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 28, JANUARY 4, JANUARY 3,
1993 1994 1995 1996 1997 1997 1998
-------- -------- ---------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales..................................... $962,132 $989,782 $1,129,203 $1,238,564 $1,437,713 $774,767 $784,097
Other income.............................. 4,395 4,690 10,751 12,020 46,784 41,347 2,442
Materials, supplies, labor and other
production costs........................ 493,997 525,731 599,416 674,762 787,799 440,149 418,926
Selling, delivery and administrative
expenses................................ 375,360 383,073 428,833 468,695 537,825 289,152 303,868
Depreciation and amortization............. 33,137 34,110 36,604 40,848 45,970 22,542 26,930
Interest.................................. 4,001 4,318 7,086 13,004 25,109 13,936 11,796
Accrual for litigation settlement......... -- -- -- 4,935 -- -- --
Income before income taxes................ 60,032 47,240 68,015 48,340 87,794 50,335 25,019
Federal and state income taxes............ 20,871 17,744 25,714 18,185 33,191 19,027 9,632
Income (loss) from investment in
unconsolidated affiliate................ -- -- -- 613 7,721 (195) 18,061
Income before cumulative effect of changes
in accounting principles................ 39,161 29,496 42,301 30,768 62,324 31,113 33,448
Cumulative effect of changes in accounting
principles, net of tax benefit.......... -- -- -- -- -- -- (9,888)
Net income................................ 39,161 29,496 42,301 30,768 62,324 31,113 23,560
EARNINGS PER COMMON SHARE -- BASIC:
Income before cumulative effect of
changes in accounting principles...... $ .47 $ .35 $ .49 $ .35 $ .71 $ .35 $ .38
Cumulative effect of changes in
accounting principles................. -- -- -- -- -- -- (.11)
Net income per common share............. .47 .35 .49 .35 .71 .35 .27
Weighted average shares outstanding..... 83,222 84,521 86,229 86,933 88,000 87,892 88,368
EARNINGS PER COMMON SHARE -- DILUTED:
Income before cumulative effect of
changes in accounting principles...... $ .47 $ .35 $ .49 $ .35 $ .71 $ .35 $ .38
Cumulative effect of changes in
accounting principles................. -- -- -- -- -- -- (.11)
Net income per common share............. .47 .35 .49 .35 .71 .35 .27
Weighted average shares outstanding 83,648 84,784 86,438 87,211 88,401 88,285 88,773
OTHER DATA:
EBITDA(1)............................... 97,170 85,668 111,705 102,192 158,873 86,813 63,745
Ratio of earnings to fixed charges(2)... 6.23 5.10 6.08 3.59 3.65 3.50 2.45
Cash dividends paid per common share.... $ .327 $ .344 $ .362 $ .383 $ .413 $ .2017 $ .223
</TABLE>
<TABLE>
<CAPTION>
AS OF
------------------------------------------------------------------------------------
JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 28, JANUARY 3,
1993 1994 1995 1996 1997 1998
-------- -------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................... $490,948 $559,682 $ 655,921 $ 849,443 $ 898,187 $899,381
Long-term notes payable.................... 22,307 77,422 99,251 254,355 259,884 259,249
Stockholders' equity....................... 280,154 275,731 303,981 305,324 340,012 348,567
</TABLE>
- ---------------
(1) EBITDA is defined as income before interest, taxes, depreciation and
amortization, income from investment in unconsolidated affiliate and
cumulative effect of changes in accounting principles. EBITDA is presented
because the Company believes it to be a useful indicator of a company's
ability to meet debt service and capital expenditure requirements. It is
not, however, intended as an alternative measure of operating results or
cash flow from operations (as determined in accordance with generally
accepted accounting principles).
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and income
from investment in unconsolidated affiliate plus fixed charges. Fixed
charges consist of interest expense and interest portion of rent expense.
14
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" included herein and the consolidated financial statements and
the related notes thereto of the Company incorporated by reference or included
herein. The following information contains forward-looking statements which
involve certain risks and uncertainties. See "Forward-Looking Statements."
OVERVIEW
General
The Company produces and markets fresh baked breads, rolls and snack foods,
frozen baked breads, desserts and snack foods, and cookies and crackers. Sales
are principally affected by pricing, quality, brand recognition, new product
introductions and product line extensions, marketing and service. The Company
manages these factors to achieve a sales mix favoring its higher margin branded
products while using high volume products to control costs and maximize use of
capacity.
The principal elements comprising the Company's production costs are
ingredients, packaging materials, labor and overhead. The major ingredients used
in the production of the Company's products are flour, sugar, shortening and
fruit. The Company also uses paper products, such as corrugated cardboard,
aluminum products, such as pie plates, and plastic to package its products. The
prices of these materials are subject to significant volatility. The Company has
mitigated the effects of such price volatility in the past through its hedging
programs, but may not be successful in protecting itself from fluctuations in
the future. In addition to the foregoing factors, production costs are affected
by the efficiency of production methods and capacity utilization.
The Company's selling, delivery and administrative expenses are comprised
mainly of distribution, logistics and advertising expenses. Distribution and
logistics costs represent the largest component of the Company's cost structure,
other than production costs, and are principally influenced by changes in sales
volume.
Depreciation and amortization expenses for the Company is comprised of
depreciation of property, plant and equipment and amortization of costs in
excess of net tangible assets associated with acquisitions. The Company's
interest expenses are primarily associated with the Company's Revolving Credit
Facility, senior notes outstanding in the aggregate principal amount of $125
million and the Company's commercial paper program. See "-- Liquidity and
Capital Resources."
Matters Affecting Analysis
The Keebler Acquisition closed on February 3, 1998. Accordingly, the
results of operations of Flowers are not consolidated with those of Keebler for
the transition period 1998 or for any prior fiscal year. From January 26, 1996,
the date of the Company's initial investment in Keebler, through February 3,
1998, the Company accounted for its investment in Keebler using the equity
method of accounting. For reporting periods ending after February 3, 1998, the
Company will consolidate Keebler for financial reporting purposes.
As a result of the Company's change in fiscal year end, the Company's
quarterly reporting periods for fiscal year 1998 shall be as follows: first
quarter ending April 25, 1998, second quarter ending July 18, 1998, third
quarter ending October 10, 1998, and fourth quarter and fiscal year ending
January 2, 1999 (the Saturday nearest December 31).
15
<PAGE> 19
The Company's results of operations, expressed as a percentage of sales,
for the 27 week transition period ended January 3, 1998, the corresponding 27
week period ended January 4, 1997, and for the 52 week periods ended June 28,
1997, June 29, 1996 and July 1, 1995 are set forth below:
<TABLE>
<CAPTION>
52 WEEKS ENDED 27 WEEKS ENDED
----------------------------- -----------------------
JULY 1, JUNE 29, JUNE 28, JANUARY 4, JANUARY 3,
1995 1996 1997 1997 1998
------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales..................................... 100.00% 100.00% 100.00% 100.00% 100.00%
Other income.............................. .95 .97 3.26 5.34 .31
------ ------ ------ ------ ------
100.95 100.97 103.26 105.34 100.31
------ ------ ------ ------ ------
Materials, supplies, labor and other
production costs........................ 53.08 54.48 54.80 56.81 53.43
Selling, delivery and administrative
expenses................................ 37.98 38.24 37.41 37.32 38.75
Depreciation and amortization............. 3.24 3.30 3.20 2.91 3.43
Interest.................................. .63 1.05 1.75 1.80 1.50
------ ------ ------ ------ ------
Income before income taxes................ 6.02 3.90 6.10 6.50 3.20
Federal and state income taxes............ 2.28 1.47 2.31 2.46 1.23
Income (loss) from investment in
unconsolidated affiliate................ -- .05 .54 (.03) 2.30
Income before cumulative effect of changes
in accounting principles................ 3.74 2.48 4.33 4.01 4.27
Cumulative effect of changes in accounting
principles, net of tax benefit.......... -- -- -- -- (1.26)
------ ------ ------ ------ ------
Net income................................ 3.74% 2.48% 4.33% 4.01% 3.01%
====== ====== ====== ====== ======
</TABLE>
TWENTY-SEVEN WEEKS ENDED JANUARY 3, 1998 COMPARED TO TWENTY-SEVEN WEEKS ENDED
JANUARY 4, 1997
Sales. For the 27 weeks ended January 3, 1998, sales were $784.1 million,
or 1% higher than sales for the comparable period in the prior year, which were
$774.8 million. Sales from businesses acquired in 1997 contributed most of the
increase, and were offset somewhat by lost sales attributable to businesses
divested by Flowers Bakeries in 1997. The Company's sales for the current period
also were favorably impacted by a change in promotional practices at Mrs.
Smith's Bakeries implemented in 1997.
Other Income. For the 27 weeks ended January 4, 1997, the Company
recognized approximately $43 million in income attributable to the gain on the
sale of the Company's distributor notes receivable, which occurred in September
1996. The sale of these notes was necessitated by the Company's decision to
settle claims by the United States Internal Revenue Service ("IRS") that the
notes constituted current rather than deferred income. Other income for the
period was offset by approximately $5 million attributable to the write-down of
certain idle facilities.
Materials, Supplies, Labor and Other Production Costs. The Company's
production costs for the 27 weeks ended January 3, 1998, were $418.9 million, or
5% lower than its costs of $440.1 million for the prior year's period. The
improvement is attributable to decreased ingredient costs, primarily flour, and
continued emphasis on cost controls and operating efficiencies.
Selling, Delivery and Administrative Expenses. Selling, delivery and
administrative expenses were $303.9 million, or 5% higher for the 27 weeks ended
January 3, 1998, compared to $289.2 million for the same period in the prior
year. For the 27 weeks ended January 3, 1998, the Company experienced higher
advertising and promotional expenses to support new product introductions,
primarily for Mrs. Smith's Bakeries, than in the prior year, as well as
increased logistics expenses at Mrs. Smith's Bakeries to service increased sales
volume. In addition, the Company accrued administrative and other expenses
associated with the change in its fiscal year.
Depreciation and Amortization. Depreciation and amortization expense was
$26.9 million, or 20% higher for the 27 weeks ended January 3, 1998, than for
the comparable period in the prior year, which was
16
<PAGE> 20
$22.5 million. The increase was due primarily to the effect of depreciation
attributable to capital improvements implemented in 1997.
Interest. Interest expense for the 27 weeks ended January 3, 1998 was
$11.8 million, or 15% lower than interest expense of $13.9 million for the same
period in 1997, due primarily to interest of $2.5 million paid pursuant to the
IRS settlement discussed above during the 27 weeks ended January 4, 1997.
Income Before Income Taxes. Income before income taxes for the 27 weeks
ended January 3, 1998 was $25.0 million. The decrease from the prior year's
corresponding period is primarily attributable to the one-time gain in the prior
period that was generated by the sale of the Company's distributor notes
receivable, discussed above.
Federal and State Income Taxes. Income taxes for the 27 weeks ended
January 3, 1998 were $9.6 million, a decrease from the corresponding period in
the prior year, due primarily to the difference in pre-tax income for such
periods.
Net Income from Keebler Investment. In the 27 weeks ended January 3, 1998,
the Company recorded net income from its investment in Keebler of $18.1 million,
compared to a net loss of $.2 million for the comparable period for the prior
year. The increase in net income from Keebler is primarily attributable to sales
volume increases associated with certain of Keebler's branded cookie and cracker
products, the inclusion of the business of Sunshine following its acquisition in
June 1996 by Keebler, improved gross margins and a more efficient fixed cost
structure at Keebler.
Net Income. Net income of $23.6 million for the 27 weeks ended January 3,
1998 was 24% lower than the $31.1 million net income for the comparable prior
year's period. In addition to the factors described above, the difference in net
earnings was primarily attributable to the effect of one-time charges of $9.9
million for the cumulative effect (net of tax benefit) of changes in accounting
principles taken in the more recent period, expenses accrued by the Company for
administrative and other costs associated with the change in its fiscal year, as
compared to the impact in 1996 of the Company's recognition of the gain on the
sale of its distributor notes receivable.
FISCAL YEAR ENDED JUNE 28, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 29, 1996
Sales. Sales for fiscal year 1997 were $1.438 billion, or 16% higher than
sales of $1.239 billion for fiscal year 1996. The increase in sales was
primarily attributable to sales from businesses acquired during the fourth
quarter of fiscal year 1996 and in fiscal year 1997. The Company also
experienced increased sales volume in the Company's existing businesses,
primarily in Mrs. Smith's Bakeries.
Other Income. In fiscal year 1997, the Company recognized a gain of
approximately $43.2 million on the sale of the Company's distributor notes, as
discussed above.
Materials, Supplies, Labor and Other Production Costs. The Company's
production costs for fiscal year 1997 were $787.8 million, or 17% higher than
costs of $674.8 million for fiscal year 1996. The increase in such costs was due
primarily to increased sales volume, and was offset by decreased ingredient and
packaging costs during the fourth quarter of fiscal 1997.
Selling, Delivery and Administrative Expenses. Selling, delivery and
administrative expenses increased by 15% to $537.8 million for fiscal year 1997
from $468.7 million for fiscal year 1996. The increase was due primarily to
increased sales volume and increased advertising and promotional expenditures,
particularly for Mrs. Smith's Bakeries. Selling, delivery and administrative
expenses as a percentage of sales remained relatively constant with the prior
fiscal year as a result of increased volume and a more efficient cost structure,
particularly in selling and distribution at Flowers Bakeries.
Depreciation and Amortization. Depreciation and amortization expense
increased by 13% to $46.0 million for fiscal year 1997 from $40.8 million for
fiscal year 1996, due primarily to increased capital spending and the
amortization of the Mrs. Smith's trademarks and costs in excess of net tangible
assets.
Interest. Interest expense for fiscal year 1997 increased by 93% to $25.1
million from $13.0 million for fiscal year 1996. The increase was attributable
to higher overall borrowings to partially fund fiscal year 1997 capital
spending, to finance frozen inventory at Mrs. Smith's Bakeries, and to finance
the Company's initial
17
<PAGE> 21
investment in Keebler. Interest expense for fiscal year 1997 also reflects the
payment of $2.5 million on the IRS settlement as described above and a higher
average interest rate as compared to the prior year.
Income Before Income Taxes. Fiscal year 1997 income before income taxes
increased by 82% to $87.8 million from $48.3 million for fiscal year 1996, due
primarily to the gain on the sale of the Company's distributor notes receivable.
Federal and State Income Taxes. Federal and state income taxes for fiscal
year 1997 increased to $33.2 million from $18.2 million for fiscal year 1996 due
to increased pre-tax income for fiscal year 1997. The effective income tax rate
for the Company was 37.8% in fiscal year 1997 and 37.6% for fiscal year 1996.
Net Income from Keebler Investment. For fiscal year 1997, the Company
reported net income from its investment in Keebler of $7.7 million, as compared
to $.6 million for fiscal 1996. The increase was due primarily to the Company's
investment in Keebler extending over the full fiscal year 1997, as opposed to
fiscal year 1996, when the Company made its initial investment in Keebler in the
third fiscal quarter. In addition, Keebler's net income for the time period
covered in the Company's fiscal year 1997 increased substantially due to volume
increases, the inclusion of the Sunshine business and improved cost controls at
Keebler.
Net Income. For fiscal year 1997, the Company's net income increased by
102% to $62.3 million from $30.8 million for fiscal year 1996. The increase in
net income was due primarily to the inclusion of the Company's after-tax income
from its investment in Keebler, as well as the gain on the sale of the
distributor notes receivable and the other factors described above.
FISCAL YEAR ENDED JUNE 29, 1996 COMPARED TO FISCAL YEAR ENDED JULY 1, 1995
Sales. Sales for fiscal year 1996 were $1.239 billion, or 10% higher than
sales of $1.129 billion for fiscal year 1996. Approximately one-half of the
increase in sales was attributable to sales from businesses acquired during
fiscal year 1995 and early in fiscal year 1996. The Company also experienced
increased sales volume in the Company's existing businesses, as well as
increased selling prices and the addition of 160 new DSD routes at Flowers
Bakeries.
Other Income. The Company experienced a decrease of 26% in other income
for fiscal year 1996 compared to fiscal year 1995, due to a gain of
approximately $12 million on the sale of certain fixed assets in fiscal year
1995.
Materials, Supplies, Labor and Other Production Costs. The Company's
production costs for fiscal year 1996 were $674.8 million, or 13% higher than
costs of $599.4 million for fiscal year 1995. The increase in such costs was due
primarily to increased ingredient costs, particularly flour, which was at a 21
year high during the year.
Selling, Delivery and Administrative Expenses. Selling, delivery and
administrative expenses increased by 9% to $468.7 million for fiscal year 1996
from $428.8 million for fiscal year 1995. The increase was due primarily to
increased sales volume, as well as start-up costs associated with the addition
of 160 new DSD routes at Flowers Bakeries. Additionally, winter weather in the
eastern United States negatively impacted sales and distribution costs.
Depreciation and Amortization. Depreciation and amortization expense
increased by 12% to $40.8 million for fiscal year 1996 from $36.6 million for
fiscal year 1995, due primarily to increased capital spending.
Interest. Interest expense for fiscal year 1996 increased by 84% to $13.0
million from $7.1 million for fiscal year 1995. The increase was attributable to
higher overall borrowings to finance the Company's initial investment in
Keebler.
Income Before Income Taxes. Fiscal year 1996 income before income taxes
decreased by 29% to $48.3 million from $68.0 million for fiscal year 1995, due
primarily to the factors described above, as well as the impact of a reserve of
$4.9 million recorded to reflect the estimated costs of a final settlement of
litigation involving subsidiary operations in Texas. Income was favorably
impacted by the recognition of a gain of $4.1
18
<PAGE> 22
million on the sale of Keebler stock to certain former shareholders of Sunshine
in connection with Keebler's acquisition of Sunshine.
Federal and State Income Taxes. Federal and state income taxes for fiscal
year 1996 decreased to $18.2 million from $25.7 million for fiscal year 1995 due
to decreased pre-tax income for fiscal year 1996. The effective income tax rate
for the Company was 37.6% in fiscal year 1996 and 37.8% for fiscal year 1995.
Net Income from Keebler Investment. For fiscal year 1996, the Company
reported net income from its investment in Keebler of $.6 million. The Company
made its initial investment in Keebler in fiscal year 1996.
Net Income. For fiscal year 1996, the Company's net income decreased by
27% to $30.8 million from $42.3 million for fiscal year 1995 due to the factors
described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash to fund its liquidity needs is net
cash provided by operating activities and availability under its revolving
credit facility.
During the transition period 1998, the Company's working capital decreased
$8.8 million to $20.3 million, with cash and cash equivalents decreasing to $3.9
million from $31.1 million at the end of fiscal year 1997. The working capital
decrease and the decrease in cash and cash equivalents in the 27 weeks ended
January 3, 1998 were primarily due to cash expended for capital improvements
throughout the Company.
Cash and cash equivalents increased during fiscal year 1997 from $25.0
million to $31.1 million, and working capital decreased during that fiscal year
from $48.5 million to $29.1 million. The decrease in working capital is
primarily due to the recording of purchase accounting reserves of $35.5 million
relating to acquisitions consummated during fiscal years 1996 and 1997. Cash
flows from operating activities increased in fiscal year 1997 to $79.5 million
from $59.4 million. This increase was the net result of increased profits and
decreased working capital.
During fiscal year 1997 and the 27 weeks ended January 3, 1998, the Company
spent approximately $78 million and $33 million, respectively, for capital
expenditures to expand production facilities and increase efficiencies in both
production and distribution. Since 1992, expenditures have totaled approximately
$377 million with an additional $41 million of expenditures attributable to
acquisitions during that period. Capital expenditures for fiscal year 1998 are
expected to be approximately $40 million for Flowers Bakeries and Mrs. Smith's
Bakeries combined and to be approximately $50 million for Keebler. These
expenditures are targeted to further improve the efficiency of the Company's
production and distribution capabilities.
At January 3, 1998, the Company had borrowed a total of $122 million under
a five year $300 million syndicated loan facility. On January 30, 1998, the
Company entered into a revolving credit facility, which, among other changes,
amended the loan facility to increase available funds to $500 million (the
"Revolving Credit Facility"). In connection with the Keebler Acquisition, the
Company borrowed an additional $309 million and the Company separately repaid
$10 million, so that amounts outstanding under the Revolving Credit Facility as
of March 26, 1998 aggregated $422 million. Also currently outstanding are $125
million of long-term senior notes issued through a private placement completed
during fiscal year 1996. The Company has in place a $75 million commercial paper
program to finance inventory. Borrowings outstanding under this program at
January 3, 1998 were $53.5 million. The Company also has a $50 million ten-year
master lease agreement to finance the automated production lines at certain of
its facilities. At January 3, 1998, $38.7 million had been used under this
agreement. Certain of the Company's credit facilities contain covenants and
restrictions on actions by the Company and its subsidiaries, other than Keebler,
requirements that the Company comply with a minimum cash flow test, a maximum
leverage ratio, a fixed charges coverage ratio and a minimum consolidated net
worth test. As of January 3, 1998, the Company was in compliance with respect to
all covenants under its credit facilities.
Cash dividends have grown at a compound annual rate of 6% since 1992,
increasing from an annual payout of $.309 in calendar 1992 to $.433 in calendar
1997.
19
<PAGE> 23
The Company owns a majority of the outstanding stock of Keebler and,
commencing with all reporting periods ending subsequent to February 3, 1998, the
Company will consolidate Keebler for financial reporting purposes. The Company
is limited in its ability to access the cash flows of Keebler to support the
Company's other operations due to the fact that Keebler is not wholly-owned by
the Company and due to restrictions on the payment of dividends in Keebler's
existing credit facilities.
The Company believes that cash flow from operations, and funds available
under the Company's existing credit facilities, will be sufficient to fund its
operating expenses, working capital, capital expenditures and debt service
requirements through fiscal year 1998.
The Company from time to time reviews and will continue to review
acquisition and joint venture opportunities as well as changes in the capital
markets. If the Company were to consummate a significant acquisition or elect to
take advantage of favorable opportunities in the capital markets, the Company
may supplement availability or revise the terms under its credit facilities or
complete public or private offerings of equity or debt securities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for the
Company's fiscal year 1998. This new statement revises standards for public
companies to report information about segments of their business and also
requires disclosure of selected segment information in quarterly financial
reports. The statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company has not
yet determined the impact this new statement may have on disclosures in the
consolidated financial statements.
The FASB also issued certain other disclosure-related accounting
pronouncements during 1997. While these new statements are effective for future
reporting periods, the Company does not anticipate they will have any
significant impact on the consolidated financial statements.
SEASONALITY
The Company's sales, net income and cash flows are affected by the timing
of new product introductions, promotional activities, price increases, and a
seasonal sales bias toward the second half of the calendar year due to events
such as back-to-school, and the Thanksgiving and Christmas holidays. Sales for
Mrs. Smith's Bakeries are highly seasonal since, historically, pie sales have
been concentrated in the year-end holiday season. In January 1998, the Company
commenced a program entitled Operation 365 to promote increased pie consumption
during the remainder of the year.
YEAR 2000 CONVERSION
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists concerning the
potential effects associated with such compliance. The Company is currently
analyzing the Year 2000 computer systems issue and has completed the conversion
of certain of its computerized operations. There can be no assurance that the
Company's software contains or will contain all necessary date code changes. The
Company, its customers and its suppliers may be affected by Year 2000 issues.
The Company has plans to communicate with significant customers, vendors and
other third parties with whom it does significant business to determine their
Year 2000 compliance readiness. However, there can be no guarantee that the
systems of other entities will be timely converted, or that their failure to
convert, or a conversion that is incompatible with the Company's system, will
not have an adverse effect on the Company's business, financial condition and
results of operations.
20
<PAGE> 24
On November 20, 1997, the Emerging Issues Task Force ("EITF"), a
subcommittee of FASB, issued EITF 97-13, which requires the cost of business
process reengineering activities that are part of an information systems
development project, including Year 2000 compliance, be expensed as those costs
are incurred. Any unamortized costs that were previously capitalized are
required to be written off as a cumulative adjustment in the quarter that
included November 20, 1997. During the twenty-seven week period ended January 3,
1998, the Company recorded a cumulative after-tax charge of $8.8 million, or
$.10 per share, as a result of its adoption of this pronouncement. These costs
were attributable to a state-of-the-art management information system, which is
being implemented at Mrs. Smith's Bakeries.
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made herein under the
captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere herein are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and are subject to the safe harbor provisions of that Act. Such
forward-looking statements include, without limitation, the future availability
and prices of raw materials, the availability of capital on acceptable terms,
the competitive conditions in the baked foods industry, potential regulatory
obligations, the Company's strategies and other statements contained herein that
are not historical facts. Because such forward-looking statements involve risks
and uncertainties, there are important factors that could cause actual results
to differ materially from those expressed or implied by such forward-looking
statements, including, but not limited to, changes in general economic and
business conditions (including in the baked foods markets), the Company's
ability to recover its raw material costs in the pricing of its products, the
availability of capital on acceptable terms, actions of competitors, the extent
to which the Company is able to develop new products and markets for its
products, the time required for such development, the level of demand for such
products, changes in the Company's business strategies and other factors
discussed herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index to Financial Statements and Financial Statement
Schedules for the required information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
21
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals are the Directors and Executive Officers of the
Company:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Amos R. McMullian.................................... Chairman of the Board and Chief
Executive Officer
Robert P. Crozer..................................... Vice Chairman of the Board
C. Martin Wood III................................... Senior Vice President, Chief Financial
Officer and Director
G. Anthony Campbell.................................. Secretary, General Counsel and
Director
Edward L. Baker...................................... Director
Joe E. Beverly....................................... Director
Franklin L. Burke.................................... Director
Langdon S. Flowers................................... Director
Joseph L. Lanier, Jr................................. Director
J.V. Shields, Jr..................................... Director
Heeth Varnedoe III................................... Director
George E. Deese...................................... President and Chief Operating Officer,
Flowers Bakeries, Inc.
Gary L. Harrison..................................... President and Chief Operating Officer,
Mrs. Smith's Bakeries, Inc.
Jimmy M. Woodward.................................... Treasurer and Chief Accounting Officer
Marta Jones Turner................................... Vice President of Public Affairs
</TABLE>
Amos R. McMullian, age 60, has served as Chairman of the Board of Directors
of the Company since January 1985, Chairman of the Executive Committee since
January 1984, and Chief Executive Officer of the Company since April 1981. He
served as Vice Chairman of the Board of Directors of the Company from 1984 to
1985 and Co-Chairman of the Executive Committee from 1983 to 1984. Mr. McMullian
served as President and Chief Operating Officer of the Company from 1976 to
1984. Mr. McMullian has been a Director of the Company since 1975. He joined the
Company's predecessor corporation in 1963. Mr. McMullian has served as a
director of Keebler since January 1996.
Robert P. Crozer, age 51, has served as Vice Chairman of the Board of
Directors of the Company since 1989. Mr. Crozer served as Vice
President -- Marketing from 1985 to 1989, as President and Chief Operating
Officer, Convenience Products Group from 1979 to 1989 and as Corporate Director
of Marketing Planning from 1979 to 1985. Mr. Crozer has been a Director of the
Company since 1979. He joined the Company in 1973. Mr. Crozer has served as a
director of Keebler since January 1996 and has served as Chairman of the Board
of Directors of Keebler since February 1998.
C. Martin Wood III, age 54, has served as Senior Vice President and Chief
Financial Officer of the Company since September 1978. Mr. Wood served as Vice
President -- Finance of the Company from 1976 to 1978. Mr. Wood has been a
Director of the Company since 1975. He joined the Company in 1970. Mr. Wood has
served as a director of Keebler since January 1996.
G. Anthony Campbell, age 45, has served as Secretary and General Counsel of
the Company since January 1985. Mr. Campbell served as Assistant General Counsel
of the Company from 1983 to 1985. Mr. Campbell has been a Director of the
Company since 1991. He joined the Company in 1983. Mr. Campbell has served as a
director of Keebler since February 1998.
Edward L. Baker, age 62, is Chairman of the Board of Florida Rock
Industries, Inc. (AMEX), a construction materials company based in Jacksonville,
Florida, which produces and markets sand, gravel, crushed stone, concrete blocks
and other building materials throughout the Southeast. He is also a Director of
American Heritage Life Insurance Company, the principal subsidiary of American
Heritage Life Investment
22
<PAGE> 26
Corporation (NYSE), Regency Realty Corporation (NYSE), and FRP Properties (OTC).
He has been a Director of the Company since 1992.
Joe E. Beverly, age 56, is Chairman of the Board of Commercial Bank in
Thomasville, Georgia, a wholly-owned subsidiary of Synovus Financial Corp.
(NYSE) and is the former Vice Chairman of the Board of Synovus Financial Corp.
He was President and a Director of Commercial Bank from 1973 to 1989. Mr.
Beverly has been a Director of the Company since 1996.
Franklin L. Burke, age 56, a private investor since 1991, is the former
Senior Executive Vice President and Chief Operating Officer of Bank South Corp.
(OTC), Atlanta, Georgia, and the former Chairman and Chief Executive Officer of
Bank South, N.A., the principal subsidiary of Bank South Corp. From June 1993
through February 1994, Mr. Burke was employed as an advisor by the J. B. Fuqua
Foundation, Inc. He has been a Director of the Company since 1994. Mr. Burke has
served as a director of Keebler since February 1998.
Langdon S. Flowers, age 75, retired as Chairman of the Board of Directors
of the Company in 1985. He has been a Director of the Company since 1968. Mr.
Flowers also is a Director of American Heritage Life Insurance Company, the
principal subsidiary of American Heritage Life Investment Corporation (NYSE).
Joseph L. Lanier, Jr., age 66, has been Chairman of the Board of Directors
and Chief Executive Officer of Dan River Inc. (NYSE), Danville, Virginia, a
textile company, since 1989. He is also a Director of Dimon, Inc. (NYSE),
SunTrust Banks, Inc. (NYSE), Torchmark Corp. (NYSE) and Waddell & Reed
Financial, Inc. (NYSE). Mr. Lanier has been a Director of the Company since
1977.
J.V. Shields, Jr., age 59, is Managing Director and Chairman of the Board
of Directors of Shields & Company, New York, New York, a diversified financial
services company and member of the New York Stock Exchange, Inc. Mr. Shields
also is the Chairman of the Board of Capital Management Associates, Inc., a
registered investment advisor, and the Chairman of the Board of Trustees of The
59 Wall Street Trust, the Brown Brothers Harriman mutual funds group. He has
been a Director of the Company since 1989.
Heeth Varnedoe III, age 60, who joined the Company's predecessor
corporation in 1960, retired from the office of President and Chief Operating
Officer on June 28, 1997. Mr. Varnedoe is currently employed as a consultant by
the Company and serves on the Company's Board of Directors, to which he was
first elected in 1980. Mr. Varnedoe also is a Director of Integrity Music, Inc.
(OTC).
George E. Deese, age 51, has served as President and Chief Operating
Officer of Flowers Bakeries, Inc. since January 1997. Prior to that time, Mr.
Deese served as President and Chief Operating Officer of the Baked Products
Group of the Company from 1983 to January 1997. He served as Regional Vice
President of the Baked Products Group from 1981 to 1983. Mr. Deese was President
of Atlanta Baking Company from 1980 to 1981. He joined the Company in 1964.
Gary L. Harrison, age 60, has served as President and Chief Operating
Officer of Mrs. Smith's Bakeries, Inc., since January 1997. Prior to that time,
Mr. Harrison served as President and Chief Operating Officer of the Specialty
Foods Group of the Company from 1989 to January 1997, served as Executive Vice
President of the Baked Products Group from 1987 to 1989, served as Regional Vice
President of the Baked Products Group from 1977 to 1987, and served as President
of Flowers Baking Company of Thomasville from 1976 to 1977. He joined the
Company in 1954.
Jimmy M. Woodward, age 37, has served as Treasurer and Chief Accounting
Officer of the Company since October 1997. Mr. Woodward served as Assistant
Treasurer of the Company for more than five years prior to that time. Mr.
Woodward has served as a director of Keebler since February 1998.
Marta Jones Turner, age 44, has served as Vice President of Public Affairs
of the Company since September 1997. She served as the Director of Public
Affairs of the Company for more than five years prior to that time.
Heeth Varnedoe III is a nephew of Langdon S. Flowers. Robert P. Crozer,
J.V. Shields, Jr. and C. Martin Wood III are brothers-in-law, and their spouses
are nieces of Langdon S. Flowers.
23
<PAGE> 27
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established certain standing committees, which
include the Audit, Nominating, and Compensation Committees.
The Board of Directors met three times during the twenty-seven week
transition period ended January 3, 1998. Its Audit Committee met once, and its
Nominating Committee and Compensation Committee did not meet. Each incumbent
Director attended at least 75 percent of the aggregate number of meetings of the
Board of Directors and all committees on which he served during his respective
period of service.
The members of the Audit Committee are Edward L. Baker, Chairman, Joe E.
Beverly and Franklin L. Burke; and the functions of the Audit Committee are: (a)
recommending to the Board of Directors and shareholders the engagement or
discharge of independent auditors; (b) reviewing investigations into matters
relating to audit functions; (c) reviewing with independent auditors the plan
for and results of the audit engagement; (d) reviewing the scope and results of
internal auditing procedures; (e) reviewing the independence of the auditors;
(f) considering the range of audit and non-audit fees; (g) reviewing the
adequacy of the Company's system of internal accounting controls; and (h)
reviewing related party transactions.
The members of the Nominating Committee are Robert P. Crozer, Chairman,
Edward L. Baker, Joseph L. Lanier, Jr. and Amos R. McMullian; and the functions
of the Nominating Committee are: (a) selecting, or recommending to the Board of
Directors nominees for election as Directors; and (b) considering the
performance of incumbent Directors in determining whether to nominate them for
reelection. The Nominating Committee will consider nominations for the next
annual meeting which are submitted by shareholders in writing to the Committee
at the Company's principal office by May 15, 1998.
The members of the Compensation Committee are Joseph L. Lanier, Jr.,
Chairman, Edward L. Baker and Franklin L. Burke. The functions of the
Compensation Committee are: (a) approving, or recommending to the Board of
Directors approval of, compensation plans for officers and Directors; (b)
approving, or recommending to the Board of Directors approval of, remuneration
arrangements for Directors and senior management; and (c) granting benefits
under compensation plans.
DIRECTORS' FEES
Each nonemployee member of the Board of Directors receives payments
pursuant to a standard arrangement. For the twenty-seven week transition period
ended January 3, 1998, such Directors received: (i) $1,000 for each meeting of
the Board or committee of the Board attended, with each chairman of a Board
committee receiving an additional $200 per committee meeting; (ii) reimbursement
for travel expenses; and (iii) $1,800 per month. In lieu of the $1,800 per
month, nonemployee members of the Board of Directors may elect under the
Nonemployee Directors' Equity Plan to invest all or a portion of the $1,800 per
month in options to purchase the Company's common stock. The value of such
options is determined by the Black-Scholes option pricing model. During the
transition period 1998 certain nonemployee directors elected to receive said
options under the plan.
During the twenty-seven week transition period ended January 3, 1998, W. H.
Flowers, Chairman Emeritus of the Board of Directors of the Company, and L. S.
Flowers, a Director of the Company and a retired Chairman of the Board, received
payments totaling $93,426 and $30,901, respectively, for consulting services
provided to the Company pursuant to written contracts between the Company and
each individual. The contracts provide that during their term each of Messrs.
Flowers will not compete, directly or indirectly, with the Company.
Heeth Varnedoe III, who retired as President and Chief Operating Officer on
June 28, 1997, is currently employed as a consultant with the Company pursuant
to a consulting agreement dated the date of his retirement. Pursuant to that
agreement, Mr. Varnedoe will be paid compensation at the annual rate of $389,235
through February 7, 1998, and $194,618 through February 10, 1999. The consulting
agreement also provides for Mr. Varnedoe's continued participation in the
Company's employee benefit plans through
24
<PAGE> 28
February 10, 1999. The agreement provides that, thereafter, in consideration of
a payment of $45,000 per year, Mr. Varnedoe will not compete, directly, or
indirectly, with the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides summary information concerning compensation of
the Company's Chief Executive Officer and each of the four other most highly
compensated Executive Officers of the Company for the periods indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------- -----------------------------------------------
RESTRICTED LONG TERM ALL
OTHER STOCK OPTION INCENTIVE OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS AWARDS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR $ $ $ $ # $ $
- ------------------ ------ -------- -------- ------------ ---------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amos R. McMullian............ 1998(1) 313,096 187,858 0 498,593 0 0 0
Chairman of the Board and 1997 505,680 505,680 0 0 0 0 0
Chief Executive Officer 1996 481,600 0 0 410,737 225,000 0 0
1995 436,800 299,295 0 0 0 0 0
Robert P. Crozer............. 1998(1) 211,327 105,663 0 190,698 0 0 0
Vice Chairman of the Board 1997 389,235 311,388 0 0 0 0 0
1996 370,700 0 0 277,239 135,000 0 0
1995 324,480 177,867 0 0 0 0 0
George E. Deese.............. 1998(1) 162,623 73,180 0 131,215 0 0 0
President and Chief 1997 268,695 188,087 0 0 0 0 0
Operating Officer 1996 255,900 0 0 187,297 90,000 0 0
Flowers Bakeries, Inc. 1995 235,900 113,147 0 0 0 0 0
Gary L. Harrison............. 1998(1) 162,623 73,180 0 131,215 0 0 0
President and Chief 1997 268,695 263,087 0 0 0 0 0
Operating Officer 1996 255,900 0 0 187,297 90,000 0 0
Mrs. Smith's Bakeries, Inc. 1995 235,900 188,147 0 0 0 0 0
C. Martin Wood III........... 1998(1) 125,135 50,054 0 85,024 0 0 0
Senior Vice President and 1997 210,000 147,000 0 0 0 0 0
Chief Financial Officer 1996 200,000 0 0 164,281 56,250 0 0
1995 187,715 90,036 0 0 0 0 0
</TABLE>
- ---------------
(1) Represents the twenty-seven week transition period ended January 3, 1998.
The individuals set forth in the table above held the following Equity
Incentive Award and June 1997 Restricted Stock Award shares granted under the
1989 Executive Stock Incentive Plan, subject to the restrictions of each grant,
and valued at the January 2, 1998 closing market price ($20.4375), less the
price required to be paid by the individual at the time the restrictions lapse:
Messrs. McMullian 110,554 shares, $1,487,102; Crozer 76,034 shares, $1,086,081;
Wood 41,857 shares, $606,193; Deese 51,639 shares, $736,911; Harrison 51,639
shares, $736,911. The shares earn the common stock dividend.
25
<PAGE> 29
The following table provides information on option exercises during the
twenty-seven week transition period ended January 3, 1998, by the named
executive officer and the value, at the January 2, 1998 closing price
($20.4375), of unexercised options.
AGGREGATE OPTION EXERCISES IN THE TRANSITION PERIOD AND PERIOD END
OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
PERIOD END PERIOD END
------------- ---------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ------------- ---------------
<S> <C> <C> <C> <C>
Amos R. McMullian.................. 0 $0 225,000/NONE $2,699,438/NONE
Robert P. Crozer................... 0 0 269,294/NONE $3,600,479/NONE
George E. Deese.................... 0 0 90,000/NONE $1,079,775/NONE
Gary L. Harrison................... 0 0 145,544/NONE $1,884,264/NONE
C. Martin Wood III................. 0 0 56,250/NONE $ 674,859/NONE
</TABLE>
SEVERANCE POLICY
The Company's Severance Policy (the "Policy") would pay one year's
compensation to any employee who is actually or constructively terminated, other
than for good cause, following a Change in Control, as defined in the Company's
ESIP. The Policy reduces the amount payable to any individual who would be
subject to the "golden parachute" excise tax imposed by the Internal Revenue
Code of 1986, as amended, if, and only to the extent that, the net amount after
taxes received by the individual would be greater than if there had been no
reduction.
SEPARATION AGREEMENTS
The Company has authorized separation agreements with all executive
officers and certain other key employees. These agreements serve as memoranda of
the Change in Control provisions which have been authorized by the Company in
its compensation plans, and provide additional benefits, including relocation
benefits and certain welfare benefits in the event of termination of employment
following a Change in Control, except that these benefits are to be reduced to
the extent benefits are received under the Severance Policy described above. The
Compensation Committee may select, in its sole discretion, any additional
executives to be offered such separation agreements.
RETIREMENT PLAN
The Flowers Industries, Inc. Retirement Plan No. 1 (the "Retirement Plan")
provides a pension upon retirement on or after age 65 to employees of the
Company and its adopting subsidiaries. The pension is the sum of annual credits
earned during employment. Currently, each annual credit is 1.35 percent of the
first $10,000 of W-2 earnings, subject to certain exclusions, for each year of
service and 2 percent of W-2 earnings, subject to certain exclusions, in excess
of $10,000 each year for each year of service. The table below includes the
estimated amounts which would be payable to the persons indicated upon their
retirement at age 65 under the provisions of the Retirement Plan as supplemented
by the Company's Supplemental Executive Retirement Plan described immediately
below and assuming that payment is made in the form of a 50% joint and survivor
annuity.
26
<PAGE> 30
DISCLOSURE FOR CERTAIN INDIVIDUALS
<TABLE>
<CAPTION>
CREDITED PROJECTED
YEARS ANNUAL
OF SERVICE BENEFIT
---------- ---------
<S> <C> <C>
Amos R. McMullian........................................... 34 $284,883
Robert P. Crozer............................................ 24 $242,924
George E. Deese............................................. 33 $162,252
Gary L. Harrison............................................ 41 $124,428
C. Martin Wood III.......................................... 27 $135,185
</TABLE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company's 1990 Supplemental Executive Retirement Plan provides a
supplemental retirement income benefit for any executive who is a participant in
the Retirement Plan, if his Retirement Plan benefit is subject to certain
restrictions which apply to tax-qualified plans. The supplemental benefit is
equal to the excess of (i) the benefit he would have received according to the
Retirement Plan formula had he not been subject to limitations on maximum
benefits or pensionable compensation which may be provided by tax-qualified
plans over (ii) the amount he will receive from the Retirement Plan as so
limited. The 1990 Supplemental Executive Retirement Plan is not tax-qualified.
The purpose of the Plan is to ensure that each participating executive's total
retirement income benefits will equal the amounts that would have been payable
to him under the Retirement Plan absent said limitations. Payments pursuant to
this Plan will be calculated in the form of a life only annuity, and the
actuarial equivalent thereof will be paid in the form which the participating
executive has elected for purposes of the Retirement Plan. Payments will be made
from the Company's general assets. Payments will be made at the same time as the
participant's distributions from the Retirement Plan, except in the event of a
Change in Control, in which event the actuarial equivalent of anticipated
payments will be paid immediately in a lump sum. Accruals under this Plan during
the twenty-seven week period ended January 3, 1998 amounted to $321,296 and no
distributions were made from the Plan during the twenty-seven week transition
period ended January 3, 1998.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The executive compensation program of the Company is administered by the
Compensation Committee of the Board of Directors (the "Committee"), which is
comprised of three nonemployee Directors. The Committee periodically evaluates
the executive compensation program to assure that it is reasonable, equitable
and competitive. The Committee considers the recommendations of outside,
independent compensation specialists in evaluating compensation levels, plan
design, and administration.
Compensation Philosophy
The Committee administers each aspect of the executive compensation program
in a manner that emphasizes the Company's primary long-term goals, which are the
creation of consistent earnings growth and the enhancement of shareholder value
in the Company's Common Stock. The Committee considers these goals to be
attainable by maintaining continuity within an experienced, professional and
technically proficient executive group. The compensation program is therefore
designed (a) to be competitive with other similarly situated companies, (b) to
be equitable by offering a reasonable level of base compensation and (c) to
align the interests of the executives with those of the shareholders. The
primary compensation arrangements, tailored to fulfill this philosophy and
utilized by the Committee in various combinations, are as follows:
Base Salary
Each year, the Committee reviews the contribution made to the Company's
performance by each senior executive and approves the executive's base salary.
The base salary represents the Company's ongoing compensation commitment and
forms the foundation for the executive compensation program. The Committee
ensures that a competitive base salary is maintained for each executive by
periodically reviewing the results
27
<PAGE> 31
of independent national survey data for comparable positions in companies with a
dollar sales volume similar to Flowers.
Bonus Plan
The Company's Bonus Plan provides for an annual incentive bonus, which is
expressed as a percentage of base salary, varying by position with the Company.
A bonus is awarded upon the Company's attainment of a specified earnings per
share goal. In addition, the Bonus Plan is designed to provide the executive an
increased award, limited to an amount determined as twice the bonus percentage
established for the executive's position multiplied by the executive's base
salary, if actual earnings per share significantly exceed the goal.
Correspondingly, the Bonus Plan is designed to provide the executive a lesser
award if actual earnings per share fall below the goal, and no award if actual
earnings per share fall below eighty percent of the goal. This mechanism
provides motivation for the executive to continue to strive for improved
earnings per share in any given year, regardless of the fact that the goal may,
or may not, be obtained.
Stock Incentive Plans
In keeping with the Committee's philosophy that the element of stockholder
risk is an essential compensation tool, stock based incentives comprise the
largest portion of the compensation program for the persons listed in the
Summary Compensation Table. The Committee believes that continuation of stock
based incentives is fundamental to the enhancement of shareholder value.
In years prior to fiscal 1993, the Committee granted stock options under
the Company's 1982 Incentive Stock Option Plan (the "1982 Plan"). The 1982 Plan
expired on October 15, 1992, and therefore no additional grants will be made
under the 1982 Plan, although the individuals in the executive group have
available currently exercisable options with expiration dates up to the year
2001.
The 1989 Executive Stock Incentive Plan (the "ESIP") is the Company's
ongoing intermediate and long-term incentive plan. The ESIP provides the
Committee an opportunity to make a variety of stock based awards while selecting
the form that is the most appropriate for the Company and the executive group.
The three types described below contain elements which focus the executive's
attention on one of the Company's primary goals, the enhancement of stockholder
value.
NON-QUALIFIED STOCK OPTIONS: During fiscal 1996, the Committee granted
non-qualified stock options under the ESIP (the "1996 Options"). The 1996
Options are exercisable at any time, commencing on the first anniversary of the
grant date, until the year 2005. The executives are required to pay the market
value of the shares, determined as of the grant date, which was $8.44 (the
"Option Price"). The executives have no rights as shareholders with respect to
the common shares subject to the 1996 Options until payment of the Option Price.
The 1996 Options are subject to forfeiture in the event of termination of
employment, other than for retirement, disability, death, termination without
cause, or termination for any reason which the Committee determines should not
result in forfeiture.
EQUITY INCENTIVE AWARDS: During fiscal 1992, the Committee granted an
award under the ESIP referred to as the Equity Incentive Award (the "1992
Award"). The executives were required to pay one half of the market value of the
shares, determined as of the award date, no later than the termination of the
last restrictions on the 1992 Award. The restrictions on the shares under the
1992 Award terminated ratably over the five-year period ended November 15, 1996.
The unvested shares were subject to forfeiture in the event of termination of
employment, other than for retirement, disability, death, termination without
cause, or termination for any reason that the Committee determined should not
result in forfeiture, prior to November 15, 1996. The executives were entitled
to vote the shares and receive the Common Stock dividend during the period in
which the shares were subject to forfeiture. These shares fully vested in fiscal
1997 and all shares were purchased by the executives.
Consistent with the Committee's philosophy of aligning executive
compensation with the shareholders' market appreciation goal, the 1992 Award
provided that in the event the per share market value of the Common Stock
reached or exceeded targeted per share market values of $8.00 and $10.22 prior
to the
28
<PAGE> 32
expiration of the 1992 Award on November 15, 1996, the recipient would receive
additional shares. During fiscal 1993, the Common Stock targeted market value of
$8.00 per share was attained and additional shares equal to one-half of the 1992
Award were granted, subject to the same terms and conditions as the 1992 Award
but with a three year ratable period during which the restrictions lapsed and at
a purchase price of $4.00 per share. These additional shares fully vested in
fiscal 1996 and all shares were purchased by executives. During fiscal 1996, the
Common Stock targeted market value of $10.22 per share was attained and
additional shares equal to one-half of the 1992 Award were granted, subject to
the same terms and conditions as the 1992 Award but with a three year ratable
period during which the restrictions will lapse and at a purchase price of $5.11
per share.
RESTRICTED STOCK AWARDS: During the twenty-seven weeks ended January 3,
1998, the Committee granted an award under the ESIP referred to as the June 1997
Restricted Stock Award (the "June 1997 Award"). The executives are required to
pay one half of the market value of the shares, determined as of the grant date.
The restrictions on the shares under the June 1997 Award lapse on June 15, 2001.
The unvested shares are subject to forfeiture in the event of termination of
employment, other than for retirement, disability, death, termination without
cause, or termination for any reason that the Committee determines should not
result in forfeiture, prior to June 15, 2001. The executives are entitled to
vote the shares and receive the Common Stock dividend during the period in which
the shares are subject to forfeiture.
Compensation of Chief Executive Officer
For the twenty-seven week transition period ended January 3, 1998, Mr.
McMullian received a base salary of $313,096, which amount was determined by the
Committee to be appropriate in consideration of the Company's performance, Mr.
McMullian's leadership and contribution to the Company's performance and market
conditions. Mr. McMullian was awarded a bonus of $187,858 for the twenty-seven
week transition period ended January 3, 1998.
During the twenty-seven week transition period ended January 3, 1998, Mr.
McMullian was granted the right to purchase 56,982 shares of the Company's
common stock under the terms of the June 1997 Award.
Deductibility of Compensation Expenses
The Company is not allowed a federal income tax deduction for compensation
paid to certain executive officers in excess of $1 million, except to the extent
such compensation constitutes "performance based compensation" as defined by the
Internal Revenue Code. The Committee believes that the provisions of the Bonus
Plan and the additional grant feature of Restricted Stock Awards made under the
ESIP will result in performance based compensation and the Company will not lose
any federal income tax deduction for compensation paid under these compensation
programs. The Committee will consider this deduction limitation during future
deliberations and will continue to act in the best interests of the Company.
Summary
The Committee believes the base salary and the Bonus Plan provide an
efficient and effective mechanism to reward the executive group for the daily
leadership required to maximize the Company's current performance. Additionally,
the stock-based awards granted under the ESIP serve to align the long term
interests of the executives with those of the shareholders generally so that
decisions are made as owners of the Company.
The Compensation Committee
of the Board of Directors
Joseph L. Lanier, Jr., Chairman
Edward L. Baker
Franklin L. Burke
29
<PAGE> 33
TOTAL SHAREHOLDER RETURNS
<TABLE>
<CAPTION>
MEASUREMENT PERIOD FLOWERS INDUSTRIES,
(FISCAL YEAR COVERED) INC. S&P FOODS-500 S&P 500 INDEX
<S> <C> <C> <C>
JUN92 100 100 100
JUN93 97.42 99.74 113.63
JUN94 112.31 99.87 115.23
JUN95 125.65 129.05 145.27
JUN96 162.69 151.81 183.04
JUN97 262.80 212.28 246.55
3JAN98 322.07 250.63 273.92
</TABLE>
Companies in the S&P Foods-500 Index are weighted by market capitalization
indexed to $100 at June 30, 1992. All dividends are deemed reinvested over the
reported period.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of common stock as of March 23, 1998 by (i) the only persons or groups
known by the Company to own beneficially more than five percent of the Company's
outstanding Common Stock, (ii) each Director of the Company, (iii) the Chief
Executive Officer and each of the other Named Executive Officers, and (iv) all
Directors and Executive Officers as a group. The determination of "beneficial
ownership" is made pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "1934 Act"). Such Rule provides that shares shall be
deemed "beneficially owned" where a person or group has, either solely or in
conjunction with others, the power to vote or to direct the voting of shares
and/or the power to dispose, or to direct the disposition of shares; or where a
person or group has the right to acquire any such power within 60 days after the
date such "beneficial ownership" is determined. Each individual has beneficial
ownership of the shares which are subject to any unexercised vested options held
by him; and, except as indicated by footnote, each individual has sole voting
power and sole investment power with respect to the number of shares
beneficially owned by him. Directors and Executive Officers are required to file
reports of their holdings and transactions in the Common Stock of the Company
with the SEC under federal securities laws. Based solely on its review of the
copies of such forms received by it, the Company believes that, for the
twenty-seven weeks ended January 3, 1998, the Section 16(a) filing requirements
were complied with by all Executive Officers and Directors during the period,
except that a Form 4 report for Mr. Edward C. Baker was filed four months late
and the Form 3 report for Mr. Jimmy M. Woodward was filed 16 days late.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNERSHIP OUTSTANDING STOCK
------------------------ --------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER VOTING DISPOSITIVE VOTING DISPOSITIVE
- ------------------------------------ --------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Wellington Management Company............... 3,965,506(a) 8,684,735(a) less than 5% 9.82%
75 State Street
Boston, MA 02109
</TABLE>
30
<PAGE> 34
- ---------------
(a) Shared voting and shared dispositive power only. According to a Schedule 13G
filed with the SEC on February 10, 1998 by Wellington Management Company
("WMC"), as of December 31, 1997, shares of the Company's Common Stock were
beneficially owned by numerous investment advisory clients of WMC, none of
which were known to have a beneficial interest with respect to more than 5%
of the Company's outstanding Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNERSHIP OF CLASS
- ---- ----------------------- --------
<S> <C> <C>
Edward L. Baker............................................. 49,542(1) *
Joe E. Beverly.............................................. 41,000(2) *
Franklin L. Burke........................................... 7,404(3) *
G. Anthony Campbell......................................... 406,803(4) *
Robert P. Crozer............................................ 1,684,796(5) 1.85%
L. S. Flowers............................................... 390,096(6) *
Joseph L. Lanier, Jr........................................ 52,192(7) *
Amos R. McMullian........................................... 1,105,146(8) 1.21%
J. V. Shields, Jr........................................... 11,250(9) *
Heeth Varnedoe III.......................................... 297,973(10) *
C. Martin Wood III.......................................... 598,323(11) *
George E. Deese............................................. 307,888(12) *
Gary L. Harrison............................................ 410,947(13) *
All Directors and Executive Officers as a group (15
persons).................................................. 5,392,246(14) 5.84%
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 16,800 shares owned by a family trust for which Mr. Baker is a
co-trustee.
(2) Does not include 45,982 shares owned by the spouse of Mr. Beverly and
11,164 shares owned by a trust for which his spouse is co-trustee, as to
which shares Mr. Beverly disclaims any beneficial ownership.
(3) Includes 3,750 shares owned by the spouse of Mr. Burke, over which shares
Mr. Burke has investment authority.
(4) Includes restricted stock awards of 51,574 shares, of which 40,861 shares
are subject to forfeiture.
(5) Includes: (i) unexercised stock options for 269,294 shares; (ii) restricted
stock awards of 97,828 shares, of which 79,748 shares are subject to
forfeiture; and (iii) 982,780 shares held by limited partnerships in which
Mr. Crozer and his spouse are the general partners. Does not include the
following shares as to which Mr. Crozer disclaims any beneficial ownership:
(i) 7,593 shares held by Mr. Crozer and his spouse as custodians for their
minor son; (ii) 206,710 shares held by trusts for the benefit of Mr.
Crozer's minor children; and (iii) 2,006,580 shares owned by the spouse of
Mr. Crozer.
(6) Does not include 430,875 shares owned by the spouse of Mr. Flowers, as to
which Mr. Flowers disclaims any beneficial ownership.
(7) Does not include 23,890 shares owned by the spouse of Mr. Lanier, as to
which Mr. Lanier disclaims any beneficial ownership.
(8) Includes unexercised stock options for 225,000 shares. Also includes
restricted stock awards of 167,536 shares, all of which are subject to
forfeiture.
(9) Does not include 3,241,503 shares owned by the spouse of Mr. Shields, as to
which Mr. Shields disclaims any beneficial ownership.
(10) Includes unexercised stock options for 150,000 shares. Also includes
restricted stock awards of 36,160 shares, all of which are subject to
forfeiture.
(11) Includes: (i) unexercised stock options for 56,250 shares; (ii) restricted
stock awards of 51,574 shares, of which 40,861 shares are subject to
forfeiture; and (iii) 51,300 shares held by a trust of which Mr. Wood is
co-trustee with shared voting and investment power. Does not include the
following shares, as to which Mr. Wood disclaims any beneficial ownership:
2,904,009 shares owned by the spouse of Mr. Wood and 25,650 shares held by
Mr. Wood as custodian for a nephew.
31
<PAGE> 35
(12) Includes (i) unexercised stock options for 90,000 shares, (ii) restricted
stock awards of 66,635 shares, of which 54,421 shares are subject to
forfeiture, and (iii) 628 shares held by Mr. Deese as custodian for his
minor grandchildren. Does not include 22,708 shares owned by the spouse of
Mr. Deese, as to which Mr. Deese disclaims any beneficial ownership.
(13) Includes unexercised stock options for 145,544 shares and restricted stock
awards of 66,635 shares, of which 54,421 shares are subject to forfeiture.
(14) Includes unexercised stock options for 976,964 shares. Also includes
restricted stock awards of 559,296 shares, of which 474,007 shares are
subject to forfeiture. Does not include the shares with respect to which
beneficial ownership is disclaimed as indicated in the preceding footnotes.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
A. LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
<TABLE>
<C> <S> <C>
1. A. FINANCIAL STATEMENTS OF THE REGISTRANT
Report of independent accountants
Consolidated balance sheet at January 3, 1998, June 28, 1997
and June 29, 1996
Consolidated statement of income for the twenty-seven week
transition period ended January 3, 1998, the fifty-two weeks
ended June 28, 1997, June 29, 1996 and July 1, 1995
Consolidated statement of changes in stockholders' equity
for the twenty-seven week transition period ended January 3,
1998, the fifty-two weeks ended June 28, 1997, June 29, 1996
and July 1, 1995
Consolidated statement of cash flows for the twenty-seven
week transition period ended January 3, 1998, the fifty-two
weeks ended June 28, 1997, June 29, 1996 and July 1, 1995
Notes to consolidated financial statements
1. B. FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY AND UB
INVESTMENTS US INC. AND SUBSIDIARIES (INCLUDED AS EXHIBIT
99.1 HERETO)
Report of Independent Accountants
Consolidated Balance Sheets at January 3, 1998 and December
28, 1996
Consolidated Statements of Operations for the year ended
January 3, 1998, the forty-eight weeks ended December 28,
1996, the four weeks ended January 26, 1996, and the year
ended December 30, 1995
Consolidated Statements of Shareholders' Equity (Deficit)
for the year ended January 3, 1998, the forty-eight weeks
ended December 28, 1996, the four weeks ended January 26,
1996, and the year ended December 30, 1995
Consolidated Statements of Cash Flows for the year ended
January 3, 1998, the forty-eight weeks ended December 28,
1996, the four weeks ended January 26, 1996, and the year
ended December 30, 1995
Notes to Consolidated Financial Statements
2. A. FINANCIAL STATEMENT SCHEDULES OF THE REGISTRANT
Report of Independent Accountants on Financial Statement
Schedule
Schedule II Valuation and Qualifying Accounts -- for the
fiscal years ended January 3, 1998, June 28, 1997, June 29,
1996 and July 1, 1995
</TABLE>
32
<PAGE> 36
<TABLE>
<C> <S> <C>
2. B. FINANCIAL STATEMENT SCHEDULES OF KEEBLER FOODS COMPANY
(INCLUDED AS EXHIBIT 99.2 HERETO)
3. Report of Independent Accountants on Financial Statement
Schedule
Schedule II -- Valuation and Qualifying Accounts for the
year ended January 3, 1998, the forty-eight weeks ended
December 28, 1996, the four weeks ended January 26, 1996,
and the year ended December 30, 1995
EXHIBITS
2 Stock Purchase and Stockholder's Agreement dated as of
January 28, 1998 by and among Flowers, Bermore, Ltd, Artal
Luxembourg, S.A. and Keebler (Incorporated by reference to
the Company's Report on Form 8-K dated February 18, 1998,
File No. 1-9787)
3 (a) Second Restated Articles of Incorporation (as amended)
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended December 13,
1997, File No. 1-9787)
3 (b) Restated By-Laws, as of October 20, 1989 (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 27, 1992, File No. 1-9787)
4 (a) Rights Agreement dated as of March 17, 1989 between the
Company and the Rights Agent (Incorporated by reference to
the Company's Registration Statement on Form 8-A filed March
21, 1989, as amended, File No. 1-9787)
4 (a)(1) First Addendum to Rights Agreement dated as of June 6, 1992
(Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 1992, File No.
1-9787).
10 (a)(1) Flowers Industries, Inc. Annual Executive Bonus Plan dated
August 4, 1995 (Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended July 1,
1995, File No. 1-9787)*
10 (a)(2) First Amendment to the Flowers Industries, Inc. Annual
Executive Bonus Plan*++
10 (b) Flowers Industries, Inc. 401(k) Retirement Savings Plan
(Incorporated by reference to the Company's Registration
Statement on Form S-8 filed April 13, 1995, File No.
33-91198)*
10 (c) Severance Policy (Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended July 1,
1989, File No. 1-9787)*
10 (d) 1982 Incentive Stock Option Plan, as amended (Incorporated
by reference to the Company's Registration Statement on Form
S-3/S-8 filed May 18, 1990, File No. 33-34855)*
10 (e) 1989 Executive Stock Incentive Plan (Incorporated by
reference to the Company's Registration Statement on Form
S-3/S-8 filed May 18, 1990, File No.33-34855)*
10 (e)(1) Amendment to the 1989 Executive Stock Incentive Plan, dated
as of August 4, 1995 (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended July 1, 1995, File No. 1-9787)*
10 (e)(2) Second Amendment to Flowers Industries, Inc. 1989 Executive
Stock Incentive Plan*++
10 (f) Flowers Industries, Inc. 1990 Supplemental Executive
Retirement Plan (Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended June
30, 1990, File No. 1-9787)*
10 (g) Flowers Industries, Inc. Nonemployee Directors' Equity
Plan*++
10 (h) Stock Purchase Agreement dated as of November 5, 1995,
between INFLO Holdings Corporation and UB Investments
(Netherlands) BV, as amended by agreement dated January 26,
1996 (Incorporated by reference to the Company's Report on
Form 8-K(A) dated April 10, 1996, File No. 1-9787)
10 (h) Note Purchase Agreement dated as of December 20, 1995, among
Flowers and the Purchasers named therein, as amended by
First Amendment effective as of January 23, 1998, as further
amended by Second Amendment effective as of March 12, 1998++
10 (i) Acquisition Agreement dated as of May 1, 1996, among Flowers
Industries, Inc., Mrs. Smith's Bakeries, a wholly-owned
subsidiary of Flowers Industries, Inc., The J. M. Smucker
Company, and Mrs. Smith's, Inc., a wholly-owned subsidiary
of The J. M. Smucker Company (Incorporated by reference to
the Company's Report on Form 8-K dated June 13, 1996, File
No. 1-9787)
</TABLE>
33
<PAGE> 37
<TABLE>
<C> <S> <C>
10 (i) $500,000,000 Amended and Restated Credit Agreement dated as
of January 30, 1998, among Flowers, certain Banks listed
therein, Wachovia Bank, N.A., as Agent, The Bank of Nova
Scotia, as Documentation Agent and NationsBank, N.A. as
Syndicating Agent (Incorporated by reference to the
Company's Report on Form 8-K dated February 18, 1998, File
No. 1-9787)
10 (j) Agreement dated as of May 5, 1997, between the Company and
Heeth Varnedoe III (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 28, 1997, File No. 1-9787.)*
11 Statement re computation of per share earnings++
21 Subsidiaries of the Registrant++
23 (a) Consent of Price Waterhouse, LLP, Independent Accountants++
Consent of Coopers & Lybrand, L.L.P., Independent
23 (b) Accountants++
27 Financial Data Schedule++
99.1 Financial Statements of Keebler Foods Company and UB
Investments US Inc. and Subsidiaries++
99.2 Financial Statement Schedules of Keebler Foods Company++
99.3 Portions of the Annual Report on Form 10-K for the fiscal
year ended January 3, 1998 of Keebler Foods Company++
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto pursuant to Item 14(c) of Form 10-K.
++ Filed herewith.
B. REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on February 18, 1998, as amended by
the Form 8-K/A filed on March 13, 1998 to report the Company's acquisition of a
majority interest in Keebler Foods Company, a Delaware corporation, and the
change in the Company's fiscal year.
34
<PAGE> 38
For purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-3/S-8, File No.
33-34855; and on Form S-8, File No. 33-91198 and File No. 333-23351.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
35
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Flowers Industries, Inc. has duly caused this Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized as of
March 27, 1998.
FLOWERS INDUSTRIES, INC.
<TABLE>
<S> <C> <C> <C>
/s/ AMOS R. MCMULLIAN /s/ ROBERT P. CROZER /s/ C. MARTIN WOOD III
----------------------------- ----------------------------- -----------------------------
Amos R. McMullian Robert P. Crozer C. Martin Wood III
Chairman of the Board and Vice Chairman of the Board Senior Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ AMOS R. MCMULLIAN Chairman of the Board, March 24, 1998
- ----------------------------------------------------- Chairman of the Executive
Amos R. McMullian Committee and Chief
Executive Officer
/s/ ROBERT P. CROZER Vice Chairman of the Board and March 27, 1998
- ----------------------------------------------------- a Director
Robert P. Crozer
/s/ C. MARTIN WOOD III Senior Vice President, Chief March 27, 1998
- ----------------------------------------------------- Financial Officer and a
C. Martin Wood III Director
/s/ EDWARD L. BAKER Director March 24, 1998
- -----------------------------------------------------
Edward L. Baker
/s/ JOE E. BEVERLY Director March 27, 1998
- -----------------------------------------------------
Joe E. Beverly
/s/ FRANKLIN L. BURKE Director March 27, 1998
- -----------------------------------------------------
Franklin L. Burke
/s/ G. ANTHONY CAMPBELL General Counsel, Secretary and March 27, 1998
- ----------------------------------------------------- a Director
G. Anthony Campbell
/s/ LANGDON S. FLOWERS Director March 24, 1998
- -----------------------------------------------------
Langdon S. Flowers
/s/ JOSEPH L. LANIER, JR. Director March 27, 1998
- -----------------------------------------------------
Joseph L. Lanier, Jr.
/s/ J. V. SHIELDS, JR. Director March 27, 1998
- -----------------------------------------------------
J. V. Shields, Jr.
/s/ HEETH VARNEDOE III Director March 27, 1998
- -----------------------------------------------------
Heeth Varnedoe III
/s/ JIMMY M. WOODWARD Treasurer and Chief March 27, 1998
- ----------------------------------------------------- Accounting Officer
Jimmy M. Woodward
</TABLE>
36
<PAGE> 40
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent accountants........................... F-2
Consolidated balance sheet at January 3, 1998, June 28, 1997
and June 29, 1996......................................... F-3
Consolidated statement of income for the twenty-seven weeks
ended January 3, 1998, and the fifty-two weeks ended June
28, 1997, June 29, 1996 and July 1, 1995.................. F-4
Consolidated statement of changes in stockholders' equity
for the twenty-seven weeks ended January 3, 1998, and the
fifty-two weeks ended June 28, 1997, June 29, 1996 and
July 1, 1995.............................................. F-5
Consolidated statement of cash flows for the twenty-seven
weeks ended January 3, 1998, and the fifty-two weeks ended
June 28, 1997, June 29, 1996 and July 1, 1995............. F-7
Notes to consolidated financial statements.................. F-9
</TABLE>
F-1
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Flowers Industries, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Flowers Industries, Inc. and its subsidiaries at January 3, 1998, June 28, 1997
and June 29, 1996, and the results of their operations and their cash flows for
the twenty-seven week transition period ended January 3, 1998 and for each of
the three fiscal years in the period ended June 28, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As more fully discussed in Note 1 of the Notes to Consolidated Financial
Statements, during the twenty-seven week transition period ended January 3,
1998, the Company changed its method of accounting for business process
reengineering costs incurred in connection with an information technology
project, pursuant to Emerging Issues Task Force Consensus No. 97-13, "Accounting
for Costs Incurred in Connection with a Consulting Contract or an Internal
Project that Combines Business Process Reengineering and Information Technology
Transformation." In addition, as more fully discussed in Note 1 of the Notes to
Consolidated Financial Statements, during the twenty-seven week transition
period ended January 3, 1998, the Company changed the measurement date used in
its accounting for pensions.
/s/ PRICE WATERHOUSE LLP
Atlanta, Georgia
March 23, 1998
F-2
<PAGE> 42
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 3, JUNE 28, JUNE 29,
1998 1997 1996
---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 3,866 $ 31,080 $ 25,039
Accounts receivable....................................... 118,147 113,628 120,301
Inventories............................................... 105,431 104,577 68,576
Prepaid expenses.......................................... 9,421 7,825 5,319
Deferred income taxes..................................... 16,024 14,421 10,992
--------- --------- ---------
252,889 271,531 230,227
--------- --------- ---------
Property, Plant and Equipment:
Land...................................................... 20,388 20,692 23,386
Buildings................................................. 208,179 206,469 183,502
Machinery and equipment................................... 443,739 446,016 393,319
Furniture, fixtures and transportation equipment.......... 28,095 24,774 21,365
Construction in progress.................................. 46,262 49,062 63,005
--------- --------- ---------
746,663 747,013 684,577
Less: accumulated depreciation............................ (308,342) (299,014) (264,107)
--------- --------- ---------
438,321 447,999 420,470
--------- --------- ---------
Other Assets:
Investment in unconsolidated affiliate.................... 100,663 77,071 68,326
Notes receivable from distributors........................ 61,236
Other long-term assets.................................... 32,620 33,133 24,567
--------- --------- ---------
133,283 110,204 154,129
--------- --------- ---------
Cost in Excess of Net Tangible Assets....................... 78,368 70,939 45,962
Less: accumulated amortization............................ (3,480) (2,486) (1,345)
--------- --------- ---------
74,888 68,453 44,617
--------- --------- ---------
$ 899,381 $ 898,187 $ 849,443
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Commercial paper outstanding.............................. $ 53,506 $ 40,792 $
Current portion of long-term debt......................... 1,581 6,625 6,593
Obligations under capital leases.......................... 2,651 2,608 1,988
Accounts payable.......................................... 72,311 78,451 98,796
Accrued taxes other than income taxes..................... 5,230 6,276 5,369
Income taxes.............................................. 220 1,264
Other accrued liabilities................................. 97,333 107,497 67,738
--------- --------- ---------
232,612 242,469 181,748
--------- --------- ---------
Long-Term Notes Payable..................................... 259,249 259,884 254,355
--------- --------- ---------
Obligations Under Capital Leases............................ 4,012 2,413 2,573
--------- --------- ---------
Industrial Revenue Bonds.................................... 12,950 12,950 17,770
--------- --------- ---------
Deferred Income Taxes....................................... 39,686 38,886 47,270
--------- --------- ---------
Deferred Compensation....................................... 2,305 1,573
--------- --------- ---------
Deferred Income............................................. 40,403
--------- --------- ---------
Commitments and Contingencies...............................
--------- --------- ---------
Stockholders' Equity:
Preferred stock -- $100 par value, authorized 10,467
shares and none issued..................................
Preferred stock -- $100 par value, authorized 249,533
shares and none issued..................................
Common stock -- $.625 par value, authorized 350,000,000
shares, issued 88,636,089 shares........................ 55,398 55,398 55,398
Capital in excess of par value............................ 45,200 43,147 40,317
Retained earnings......................................... 266,734 260,094 234,069
Less: Common stock in treasury, 207,670, 563,076 and
761,010 shares, respectively............................ (2,452) (6,567) (6,493)
Restricted Stock Award and Equity Incentive Award.... (16,313) (12,060) (17,967)
--------- --------- ---------
348,567 340,012 305,324
--------- --------- ---------
$ 899,381 $ 898,187 $ 849,443
========= ========= =========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-3
<PAGE> 43
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE 27
WEEKS
ENDED FOR THE 52 WEEKS ENDED
---------- ------------------------------------
JANUARY 3, JUNE 28, JUNE 29, JULY 1,
1998 1997 1996 1995
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales............................................ $784,097 $1,437,713 $1,238,564 $1,129,203
Gain on sale of distributor notes receivable..... 43,244
Other income..................................... 2,442 3,540 7,909 10,751
Gain on issuance of additional stock of
unconsolidated affiliate....................... 4,111
-------- ---------- ---------- ----------
786,539 1,484,497 1,250,584 1,139,954
-------- ---------- ---------- ----------
Materials, supplies, labor and other production
costs.......................................... 418,926 787,799 674,762 599,416
Selling, delivery and administrative expenses.... 303,868 537,825 468,695 428,833
Depreciation and amortization.................... 26,930 45,970 40,848 36,604
Interest......................................... 11,796 25,109 13,004 7,086
Accrual for litigation settlement................ 4,935
-------- ---------- ---------- ----------
761,520 1,396,703 1,202,244 1,071,939
-------- ---------- ---------- ----------
Income before income taxes....................... 25,019 87,794 48,340 68,015
Federal and state income taxes................... 9,632 33,191 18,185 25,714
Income from investment in unconsolidated
affiliate...................................... 18,061 7,721 613
-------- ---------- ---------- ----------
Income before cumulative effect of changes in
accounting principles.......................... 33,448 62,324 30,768 42,301
Cumulative effect of changes in accounting
principles, net of tax benefit of $6,146....... (9,888)
-------- ---------- ---------- ----------
Net income....................................... $ 23,560 $ 62,324 $ 30,768 $ 42,301
======== ========== ========== ==========
Earnings Per Common Share -- Basic
Income before cumulative effect of changes in
accounting principles....................... $ .38 $ .71 $ .35 $ .49
Cumulative effect of changes in accounting
principles, net of tax...................... (.11)
-------- ---------- ---------- ----------
Net income per common share.................... $ .27 $ .71 $ .35 $ .49
======== ========== ========== ==========
Weighted average shares outstanding............ 88,368 88,000 86,933 86,229
======== ========== ========== ==========
Earnings Per Common Share -- Diluted
Income before cumulative effect of changes in
accounting principles....................... $ .38 $ .71 $ .35 $ .49
Cumulative effect of changes in accounting
principles, net of tax...................... (.11)
-------- ---------- ---------- ----------
Net income per common share.................... $ .27 $ .71 $ .35 $ .49
======== ========== ========== ==========
Weighted average shares outstanding............ 88,773 88,401 87,211 86,438
======== ========== ========== ==========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-4
<PAGE> 44
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RESTRICTED
---------------------- TREASURY STOCK STOCK AWARD
NUMBER OF CAPITAL IN ----------------------- AND EQUITY
SHARES EXCESS OF RETAINED NUMBER OF INCENTIVE
ISSUED PAR VALUE PAR VALUE EARNINGS SHARES COST AWARD
---------- --------- ---------- --------- ----------- --------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at July 2,
1994................. 86,269,670 $53,919 $ 21,083 $ 225,601 (1,893,522) $ (15,200) $ (9,672)
Stock issued for
acquisitions......... 2,366,419 1,479 15,872 198,598 1,594
Exercise of employee
stock options........ (178) 104,449 841
Purchase of treasury
stock................ (554,745) (4,426)
Net income for the
year................. 42,301
Exercise of Restricted
Stock Award.......... 63 (74,634) (572) 708
Amortization of
Restricted Stock
Award and Equity
Incentive Award...... 1,825
Dividends
paid -- $.3622 per
common share......... (31,257)
---------- ------- --------- --------- ----------- --------- --------
Balances at July 1,
1995................. 88,636,089 55,398 36,840 236,645 (2,219,854) (17,763) (7,139)
Stock issued for
acquisitions......... 180 137,003 1,119
Exercise of employee
stock options........ (764) 285,366 2,337
Purchase of treasury
stock................ (144,840) (1,303)
Net income for the
year................. 30,768
Exercise of Restricted
Stock Award.......... 769 (187,596) (1,650) 1,526
Exercise of Equity
Incentive Award...... 301 (169,931) (1,830) 1,434
Stock issued into
escrow in connection
with Restricted Stock
Award................ 2,286 1,180,295 9,640 (11,918)
Stock issued into
escrow in connection
with Equity Incentive
Award................ 705 358,547 2,957 (3,662)
Amortization of
Restricted Stock
Award and Equity
Incentive Award...... 1,792
Dividends
paid -- $.3833 per
common share......... (33,344)
---------- ------- --------- --------- ----------- --------- --------
Balances at June 29,
1996................. 88,636,089 55,398 40,317 234,069 (761,010) (6,493) (17,967)
</TABLE>
F-5
<PAGE> 45
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK RESTRICTED
---------------------- TREASURY STOCK STOCK AWARD
NUMBER OF CAPITAL IN ----------------------- AND EQUITY
SHARES EXCESS OF RETAINED NUMBER OF INCENTIVE
ISSUED PAR VALUE PAR VALUE EARNINGS SHARES COST AWARD
---------- --------- ---------- --------- ----------- --------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Stock issued for
acquisition.......... 1,025 322,233 2,975
Exercise of employee
stock options........ (1,017) 400,853 3,988
Purchase of treasury
stock................ (19,335) (289)
Net income for the
year................. 62,324
Exercise of Restricted
Stock Award.......... 1,072 (78,106) (1,362) 1,169
Exercise of Equity
Incentive Award...... 1,854 (151,469) (2,365) 1,738
Restricted Stock Award
Reversions........... (104) (56,430) (456) 557
Amortization of
Restricted Stock
Award and Equity
Incentive Award...... 2,443
Stock received from
escrow............... (219,812) (2,565)
Dividends
paid -- $.4125 per
common share......... (36,299)
---------- ------- --------- --------- ----------- --------- --------
Balances at June 28,
1997................. 88,636,089 55,398 43,147 260,094 (563,076) (6,567) (12,060)
Exercise of employee
stock options........ 45,000 524
Purchase of treasury
stock................ (6,227) (117)
Net income for the 27
weeks ended January
3, 1998.............. 23,560
Equity from investment
in unconsolidated
affiliate............ 2,700
Stock issued into
escrow in connection
with Restricted Stock
Award................ 2,118 347,609 3,965 (6,083)
Restricted Stock Award
Reversions........... (65) (30,976) (257) 435
Amortization of
Restricted Stock
Award and Equity
Incentive Award...... 1,395
Dividends
paid -- $.2225 per
common share......... (19,620)
---------- ------- --------- --------- ----------- --------- --------
Balances at January 3,
1998................. 88,636,089 $55,398 $ 45,200 $ 266,734 207,670 $ (2,452) $(16,313)
========== ======= ========= ========= =========== ========= ========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-6
<PAGE> 46
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE 27
WEEKS ENDED FOR THE 52 WEEKS ENDED
----------- ------------------------------------
JANUARY 3, JUNE 28, JUNE 29, JULY 1,
1998 1997 1996 1995
----------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers................. $ 779,029 $1,438,870 $1,232,963 $1,117,262
Interest received............................ 325 824 7,741 7,159
Sale of distributor notes receivable......... 65,954
Other........................................ 3,055 6,080 5,416 5,890
--------- ---------- ---------- ----------
Cash provided by operating activities.......... 782,409 1,511,728 1,246,120 1,130,311
--------- ---------- ---------- ----------
Cash paid to suppliers and employees......... 739,575 1,373,583 1,161,431 1,009,931
Interest paid................................ 11,878 25,955 8,582 6,465
Income taxes paid............................ 10,867 32,729 16,748 20,379
--------- ---------- ---------- ----------
Cash disbursed for operating activities........ 762,320 1,432,267 1,186,761 1,036,775
--------- ---------- ---------- ----------
Net cash provided by operating activities (See
Schedule 1).................................. 20,089 79,461 59,359 93,536
--------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment.... (32,857) (77,510) (75,542) (73,466)
Acquisition of businesses.................... (7,931) (28,118) (17,018)
Divestiture of businesses.................... 200 1,061 22,679
Decrease in divestiture receivables.......... 2,399 417 173
Investment in unconsolidated affiliate....... (61,352)
Escrow funds................................. 4,835
Other........................................ 2,145 63 (6,485) (1,845)
--------- ---------- ---------- ----------
Net cash disbursed for investing activities.... (36,244) (76,830) (170,263) (64,815)
--------- ---------- ---------- ----------
Cash flows from financing activities:
Dividends paid............................... (19,620) (36,299) (33,344) (31,257)
Purchase of treasury stock................... (117) (289) (1,303) (4,426)
Increase in short-term notes payable......... 7,713 40,792
Increase in long-term notes payable.......... 356,000 524,400 356,625 151,391
Payments of long-term notes payable.......... (355,035) (525,194) (217,871) (132,351)
--------- ---------- ---------- ----------
Net cash (disbursed for) provided by financing
activities................................... (11,059) 3,410 104,107 (16,643)
--------- ---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents.................................. $ (27,214) $ 6,041 $ (6,797) $ 12,078
========= ========== ========== ==========
</TABLE>
F-7
<PAGE> 47
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE 27
WEEKS ENDED FOR THE 52 WEEKS ENDED
----------- ------------------------------------
JANUARY 3, JUNE 28, JUNE 29, JULY 1,
1998 1997 1996 1995
----------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
SCHEDULE 1.
Schedule Reconciling Earnings to Net Cash
Provided by Operating Activities:
Net income................................ $ 23,560 $ 62,324 $ 30,768 $ 42,301
Noncash expenses, revenues, losses and
gains included in income:
Depreciation and amortization........... 26,930 45,970 40,848 36,604
Gain on sale of distributor notes
receivable........................... (43,244)
Deferred income taxes................... (803) 1,506 3,494 2,847
Cumulative effect of changes in
accounting principles................ 9,888
Gain on issuance of additional stock of
unconsolidated affiliate............. (4,111)
Net income from investment in
unconsolidated affiliate............. (18,061) (7,721) (613)
Changes in assets and liabilities, net of
acquisitions and divestitures:
(Increase) decrease in accounts
receivable........................... (2,282) 7,863 (17,742) (5,510)
Increase in inventories................. (413) (36,144) (12,821) (4,651)
Increase in prepaid expenses............ (1,495) (2,242) (1,650) (86)
Decrease in distributor notes
receivable........................... 65,954
(Decrease) increase in accounts
payable.............................. (6,685) (21,082) 28,029 5,859
(Decrease) increase in accrued taxes and
other liabilities.................... (10,550) 6,277 (6,843) 16,172
--------- ---------- ---------- ----------
$ 20,089 $ 79,461 $ 59,359 $ 93,536
========= ========== ========== ==========
SCHEDULE 2.
Schedule of Noncash Investing and Financing
Activities:
Common stock issued in connection with the
exercise of employee stock options........ $ 272 $ 2,971 $ 1,573 $ 663
Stock issued and held in escrow in connection
with Restricted Stock Award and Equity
Incentive Award........................... 6,083 15,580
Stock issued for acquisitions................ 4,000 1,299 18,945
Note payable issued in acquisition of
business.................................. 15,000
Exercise of Restricted Stock Award and Equity
Incentive Award........................... 3,727 3,480 572
Stock released from escrow................... 2,565
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-8
<PAGE> 48
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN FISCAL YEAR
In January 1998, the Company changed its fiscal year-end from the Saturday
nearest June 30 to the Saturday nearest December 31. As a result, the Company is
reporting a twenty-seven week transition period of June 29, 1997 through January
3, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Flowers
Industries, Inc. and its wholly owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation. The Company's 45% investment
interest in Keebler Foods Company is accounted for under the equity method.
Equity accounting for this investment is discussed in Note 13 to the
consolidated financial statements.
REVENUE RECOGNITION
Revenue from sale of products is recognized at the time of shipment. Sales
to a single customer were approximately $84,000,000, or 10.7% of sales during
the twenty-seven weeks transition period ended January 3, 1998, $163,000,000, or
11% of sales during fiscal 1997, $150,000,000, or 12% of sales during fiscal
1996 and $142,000,000, or 13% of sales during fiscal 1995.
CASH AND CASH EQUIVALENTS
The Company considers deposits in banks, certificates of deposits and
short-term investments with original maturities of three months or less as cash
and cash equivalents for the purposes of the statement of cash flows.
The major components of cash and cash equivalents are as follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996
--------------- ------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash............................................ $ $11,010 $10,484
Time deposits................................... 3,866 20,070 14,555
------ ------- -------
Total................................. $3,866 $31,080 $25,039
====== ======= =======
</TABLE>
ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables, current portion of
distributor notes receivable and miscellaneous receivables. As the Company has
historically experienced an insignificant amount of uncollectible accounts, when
a receivable balance is determined to be uncollectible, it is charged directly
to expense.
CONCENTRATION OF CREDIT RISK
The Company grants credit to its distributors and customers, who are
primarily in the grocery, foodservice, restaurant and fast-food markets.
INVENTORY
Inventories are carried at the lower of cost (primarily first-in,
first-out) or market.
HEDGING TRANSACTIONS -- RAW MATERIAL COSTS
The Company's primary raw materials are flour, sugar, shortening and fruit.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. The
F-9
<PAGE> 49
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company enters into various forward purchase agreements and other derivative
financial instruments to reduce the impact of volatility in ingredients prices.
Amounts payable or receivable under the agreements which qualify as hedges are
recognized as deferred gains or losses and are included in other assets or other
liabilities. These deferred amounts are charged or credited to cost of sales as
the related raw materials costs used in production. Gains and losses on
agreements which do not qualify as hedges are recognized immediately as other
income or expense. At January 3, 1998, the Company had no material commitments
outstanding relating to derivative financial instruments.
During June 1997, the Company entered into an arrangement that allows for
the Company to engage in commodity price agreements based on fixed and floating
prices of an agreed type of commodity. At January 3, 1998, no material amounts
were outstanding under this agreement.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
The Company provides depreciation for financial reporting purposes over the
estimated useful lives of fixed assets using the straight-line method. Upon
retirement or sale of fixed assets, the book value is removed from the accounts
and the difference between such net book value and salvage value received is
recorded in income. Expenditures for maintenance and repairs are charged to
expense; renovations and improvements are capitalized.
The approximate annual rates of depreciation are 3% to 5% for buildings, 8%
for machinery and equipment and 10% to 25% for furniture, fixtures and
transportation equipment. Depreciation expense for the twenty-seven weeks ended
January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $25,936,000,
$44,829,000, $40,559,000 and $35,874,000, respectively.
INTERNALLY DEVELOPED SOFTWARE
The Company capitalizes certain costs, primarily hardware, software, and
installation costs, associated with internally developed software projects. Such
amounts are depreciated over periods not to exceed seven years. The Company does
not anticipate that Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed, or Obtained for Internal Use," will have a material
impact on the Company's results of operations or financial condition. As further
discussed below, during the twenty-seven week period ended January 3, 1998, the
Company recorded a cumulative after-tax charge of $8,842,000, to write off
business process reengineering costs that had been incurred as part of an
information systems development project.
ADVERTISING AND CONSUMER PROMOTION
Advertising and consumer promotion costs are generally expensed as incurred
or no later than when the advertisement appears or the event is run. Advertising
and consumer promotion expense was approximately $16,998,000 for the
twenty-seven weeks ended January 3, 1998, $19,063,000 for fiscal 1997,
$15,081,000 for fiscal 1996 and $15,875,000 for fiscal 1995. There are no
deferred advertising costs at January 3, 1998, June 28, 1997 or June 29, 1996.
NOTES RECEIVABLE AND DEFERRED INCOME
The Company sells its territories to independent distributors. The income
from these sales is recognized as the cash payments are received. The sales of
the territories were previously financed by the Company with ten year notes. In
September 1996, the Company sold these notes, which totaled approximately
$66,000,000, to a financial institution. The proceeds were used to repay debt
outstanding at that time. Of the notes sold, approximately $44,000,000 were
initially without recourse to the Company with approximately $22,000,000 having
limited recourse. Concurrently, approximately $43,000,000 of deferred pre-tax
income was recognized
F-10
<PAGE> 50
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by the Company during fiscal 1997. Subsequent to September 1996, all distributor
purchase arrangements are made directly between the distributor and a financial
institution and, pursuant to an agreement, the Company acts as the servicing
agent for the financial institution and receives a fee for these services. Such
fees aggregated $2,317,000 and $5,029,000 during the twenty-seven weeks ended
January 3, 1998 and fiscal 1997, respectively.
AMORTIZATION OF INTANGIBLE ASSETS
Costs in excess of the net tangible assets acquired are, in the opinion of
management, attributable to long-lived intangibles having continuing value.
Excess amounts related to the purchases of businesses are amortized over forty
years from the acquisition date using the straight-line method. Costs of
purchased trademark rights are amortized over the period of expected future
benefit, which is approximately ten to forty years. At each balance sheet date,
the Company assesses whether there has been an impairment of long-lived assets
and the related unamortized goodwill, based on whether certain indicators of
impairment are present. If such indicators are present, the Company evaluates
whether an impairment exists by comparing the gross, undiscounted cash flows to
the carrying value of the related asset. Amortization expense for the
twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal
1995 was $994,000, $1,141,000, $289,000 and $730,000, respectively.
TREASURY STOCK
The Company records acquisitions of its common stock for treasury at cost.
Differences between proceeds for reissuances of treasury stock and average cost
are credited to capital in excess of par value or charged to capital in excess
of par value to the extent of prior credits and thereafter to retained earnings.
PENSION PLANS
The Company accounts for pensions in accordance with Statement of Financial
Accounting Standards No. 87 -- "Employers' Accounting for Pensions." Pension
accounting information is disclosed in Note 8 to the consolidated financial
statements.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 -- "Accounting for Income Taxes" (SFAS 109). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates. Income
tax accounting information is disclosed in Note 9 to the consolidated financial
statements.
NET INCOME PER COMMON SHARE
The Company computes net income per common share in accordance with
Statement of Financial Accounting Standards No. 128 -- "Earnings Per Share"
(SFAS 128). Basic earnings per share in computed by dividing net income by
weighted average common shares outstanding for the period. Diluted earnings per
share is computed by dividing net income by weighted average common and common
equivalent shares outstanding for the period. Common stock equivalents consist
of the incremental shares associated with the Company's stock option plans, as
determined under the treasury stock method. Earnings per share information for
years prior to the twenty-seven weeks ended January 3, 1998, has been restated
in accordance with SFAS 128.
F-11
<PAGE> 51
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHANGES IN ACCOUNTING PRINCIPLES
On November 20, 1997, the Emerging Issues Task Force (EITF), a subcommittee
of the Financial Accounting Standards Board, issued EITF 97-13, which requires
the cost of business process reengineering activities that are part of an
information systems development project be expensed as those costs are incurred.
Any unamortized costs that were previously capitalized were required to be
written off as a cumulative adjustment in the quarter that included November 20,
1997. During the twenty-seven week period ended January 3, 1998, the Company
recorded a cumulative after-tax charge of $8,842,000, or $.10 per share, as a
result of its adoption of this pronouncement. These costs were attributable to a
state-of-the-art management information system at the Company's Mrs. Smith's
Bakeries locations.
The Company measures its pension plan assets three months prior to the
beginning of its fiscal year. As a result of the Company's changing its fiscal
year, the measurement date has changed from March 31 to September 30. This
change resulted in a cumulative adjustment, net of tax, of $1,046,000, or $.01
per share, for the twenty-seven week period ended January 3, 1998.
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 and
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 those estimates.
BUSINESS SEGMENTS
The Company's only business is to provide quality fresh and frozen baked
food products to grocery, foodservice, restaurant and fast-food markets.
NOTE 2. INVENTORIES
The major components of inventories are as follows:
<TABLE>
<CAPTION>
JANUARY 3, JUNE 28, JUNE 29,
1998 1997 1996
---------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Ingredients and raw materials........................... $ 27,310 $ 25,479 $14,951
Packaging materials..................................... 13,149 12,500 10,988
Finished goods.......................................... 44,650 47,314 25,527
Supplies................................................ 20,322 19,284 17,110
-------- -------- -------
Total......................................... $105,431 $104,577 $68,576
======== ======== =======
</TABLE>
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 -- "Disclosure about
Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value.
The carrying value of cash and cash equivalents, notes receivable from
distributors, other notes receivable, industrial revenue bonds and long-term
debt payable to financial institutions approximates fair value at January 3,
1998, June 28, 1997 and June 29, 1996.
F-12
<PAGE> 52
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT
In July 1996, the Company entered into a five-year $300,000,000 syndicated
loan facility, of which, $122,000,000 was outstanding at January 3, 1998.
Amounts are borrowed under this facility for periods not to exceed 180 days and
can be reborrowed as necessary during the term of the facility. Interest under
the syndicated loan facility is generally payable monthly and is variable based
on a performance grid using a choice of LIBOR plus .375% or money market rates.
Subsequent to fiscal year-end, on January 30, 1998, this facility was amended to
become a five-year $500,000,000 syndicated loan facility. Interest under the
amended facility is generally payable monthly and is variable based on a
performance grid using a choice of LIBOR plus .475% or money market rates.
Subsequent to period end, the Company borrowed $422 million under the amended
facility. Such proceeds were primarily used to finance the acquisition of a
controlling interest in Keebler.
In October 1997, the Company amended its short-term commercial paper
program to increase the limit from $50,000,000 to $75,000,000 for use in
financing inventory. Borrowings under this program at January 3, 1998 were
$53,506,000.
In January 1996, the Company completed a private placement of $125,000,000
of long-term Senior Notes. These notes are due in three tranches: $100,000,000
due in semi-annual instalments from January 5, 2004 through January 5, 2008
which bears interest at 6.80% per annum; $20,000,000 due January 5, 2011 which
bears interest at 6.99% per annum; and $5,000,000 due January 5, 2016 which
bears interest at 7.08% per annum. Interest on the Senior Notes is payable
semiannually. A portion of the proceeds were used to pay off $114,150,000 of
debt that was outstanding at that time, with the remaining proceeds being used
for working capital and for other general corporate purposes.
The Company also has a $10,000,000 revolving-term loan agreement entered
into in March of 1993, of which no amounts were outstanding at January 3, 1998.
Several loan agreements of the Company contain restrictions which, among
other things, require maintenance of certain financial ratios and restrict
encumbrance of assets and creation of indebtedness. At January 3, 1998, the
Company was in compliance with these financial ratio requirements.
F-13
<PAGE> 53
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total debt consists of:
<TABLE>
<CAPTION>
JANUARY 3, JUNE 28, JUNE 29,
1998 1997 1996
---------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Private placement long-term Senior Notes with interest
from 6.80% to 7.08% payable in instalments from 2004
through 2016........................................ $125,000 $125,000 $125,000
Borrowings under syndicated loan facility with
interest from 5.98% to 6.45%........................ 122,000 117,000
Commercial paper program with interest from 5.65% to
6.25%............................................... 53,506 40,792
Borrowings under revolving-term loan agreements....... 103,375
Various industrial revenue bonds with interest from
4.20% to 6.00% payable in instalments through 2017
secured by property................................. 13,170 13,170 18,170
Borrowings scheduled to mature in equal instalments
over the next two years with interest from 5.64% to
6.49%............................................... 10,000 15,000
Various unsecured notes payable with interest of
approximately 7.5%, payable in instalments through
2004................................................ 13,610 14,289 17,173
-------- -------- --------
327,286 320,251 278,718
Due within one year................................... 55,087 47,417 6,593
-------- -------- --------
Due after one year.................................... $272,199 $272,834 $272,125
======== ======== ========
</TABLE>
Annual maturities of long-term debt for each of the six years following
January 3, 1998 are $1,581,000 (excludes $53,506,000 for commercial paper),
$5,819,000, $1,362,000, $1,467,000, $1,579,000 and $1,701,000, respectively.
NOTE 5. COMMITMENTS AND CONTINGENCIES
DESCRIPTION OF OPERATING LEASE ARRANGEMENTS
The Company leases certain property and equipment under operating leases
which expire over the next twenty years. Most of these operating leases provide
the Company with the option, after the initial lease term, either to purchase
the property at the then fair value or renew its lease at the then fair rental
value for periods of one month to ten years. Generally, management expects that
leases will be renewed or replaced by other leases in the normal course of
business.
The Company has in place a $50,000,000 ten-year master lease agreement to
finance the automated production lines at certain of its facilities. At January
3, 1998, approximately $38,693,000 had been used under this agreement.
F-14
<PAGE> 54
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum payments for operating leases having initial or remaining
noncancelable terms in excess of one year are as follows:
<TABLE>
<CAPTION>
(AMOUNTS
IN
FISCAL YEAR(S) THOUSANDS)
- -------------- ----------
<S> <C>
1998........................................................ $15,979
1999........................................................ 13,948
2000........................................................ 11,897
2001........................................................ 9,326
2002........................................................ 8,233
2003 to termination (aggregate)............................. 29,730
-------
Total minimum lease payments...................... $89,113
=======
</TABLE>
Total rent expense for all operating leases amounted to $16,225,000 for the
twenty-seven weeks ended January 3, 1998, $24,151,000 for fiscal 1997,
$16,936,000 for fiscal 1996 and $18,897,000 for fiscal 1995.
OTHER COMMITMENTS
The Company's various commodity purchase agreements effectively commit the
Company to purchase raw materials in amounts totaling approximately $55,656,000,
at January 3, 1998, which will be used in production in future periods.
NOTE 6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of:
<TABLE>
<CAPTION>
JANUARY 3, JUNE 28, JUNE 29,
1998 1997 1996
---------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Compensation............................................. $ 8,344 $ 13,707 $ 7,518
Vacation cost............................................ 9,779 10,277 10,030
Pension cost............................................. 12,217 12,438 8,729
Workers' compensation insurance.......................... 8,945 9,009 10,881
Other insurance.......................................... 4,484 4,799 5,013
Interest................................................. 5,113 5,195 6,041
Purchase accounting reserves............................. 34,953 35,530
Other.................................................... 13,498 16,542 19,526
------- -------- -------
Total.......................................... $97,333 $107,497 $67,738
======= ======== =======
</TABLE>
NOTE 7. STOCKHOLDERS' EQUITY
The Company's Articles provide that the authorized capital of the Company
consists of 350,000,000 shares of Common Stock of $.625 par value per share,
10,467 shares of preferred stock, par value $100 per share convertible into
Common Stock, and 249,533 shares of preferred stock, par value $100 per share
that, at the discretion of the Board of Directors, may be either convertible or
nonconvertible, of which 100,000 shares has been designated by the Board of
Directors as Series A Junior Participating Preferred Stock ("Series A Preferred
Stock").
F-15
<PAGE> 55
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Subject to
preferential rights of any issued and outstanding preferred stock, including the
Series A Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors of
the Company out of funds legally available therefor. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share ratably in all assets of the Company, if any, remaining
after payment of liabilities and the liquidation preferences of any issued and
outstanding preferred stock, including the Series A Preferred Stock. Holders of
Common Stock have no preemptive rights, no cumulative voting rights and no
rights to convert their shares of Common Stock into any other securities of the
Company or any other person. The Common Stock is not subject to redemption or
sinking fund redemption.
PREFERRED STOCK
The Board of Directors of the Company has the authority to issue up to
249,533 shares of preferred stock in one or more series and to fix the
designations, relative powers, preferences, rights, qualifications, limitations
and restrictions of all shares of each such series, including without
limitation, dividend rates, conversion rights, voting rights, redemption and
sinking fund provisions, liquidation preferences and the number of shares
constituting each such series, without any further vote or action by the holders
of Common Stock. Pursuant to such authority, the Board of Directors has
designated 100,000 shares of preferred stock as Series A Preferred Stock in
connection with the adoption of the Company's Shareholders' Rights Plan. The
issuance of one or more series of preferred stock will likely decrease the
amount of earnings and assets available for distribution to holders of Common
Stock as dividends or upon liquidation, respectively, and may adversely affect
the rights and powers, including voting rights, of the holders of Common Stock.
The issuance of preferred stock also could have the effect of delaying,
deterring or preventing a change in control of the Company.
SHAREHOLDER RIGHTS PLAN
On March 17, 1989, the Company's Board of Directors declared a dividend of
one preferred share purchase right (collectively, the "Rights") for each share
of Common Stock held of record on April 3, 1989. Under certain circumstances, a
Right may be exercised to purchase one one-thousandth of a share of Series A
Junior Participating Preferred Stock (the "Preferred Stock") at an exercise
price of $33.33.
The Rights become exercisable 10 days after (i) a person or group acquires
10% or more of the Company's outstanding Common Stock, or (ii) an announcement
of a tender offer for 30% or more of the Company's outstanding Common Stock.
If the Rights become exercisable, each Right will entitle the holder
thereof to purchase one-thousandth of a share of the Preferred Stock. If a
person or group acquires 10% or more of the outstanding Common Stock of the
Company, the holder of each Right not owned by the 10% or more shareholder would
be entitled to purchase for $33.33 (the exercise price of the Right) Common
Stock of the Company having market value equal to $66.66. If the Company is a
party to certain mergers or business combination transactions or transfers 50%
or more of its assets or earning power, each Right will entitle its holder to
buy a number of shares of Common Stock of the acquiring or surviving entity (or
of the Company in certain instances) having a market value of twice the exercise
price of the Right, or $66.66. If the Rights are fully exercised, the shares
issued thereby would have a dilutive effect on the shares previously
outstanding.
The Rights expire April 2, 1999, and may be redeemed by the Company for
$.01 per Right at any time prior to the close of business on the tenth day after
a public announcement of an acquisition of 10% or more of the Common Stock of
the Company.
F-16
<PAGE> 56
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal terms of the Rights are set forth in a registration statement
on Form 8-A filed with the Securities and Exchange Commission and dated as of
March 20, 1989.
STOCK INCENTIVE PLANS
The Company has 12,050,000 shares of Common Stock authorized for issuance
to eligible employees under the Executive Stock Incentive Plan (ESIP). The ESIP
authorizes the Compensation Committee of the Board of Directors to grant to
eligible participants of the Company and its subsidiaries, through October 1999,
stock options, stock appreciation rights, restricted or deferred stock awards,
stock purchase rights and other stock-based awards.
During the twenty-seven weeks ended January 3, 1998 and fiscal 1996,
347,609 and 1,180,295 shares, respectively, of the Company's Common Stock were
granted as restricted stock awards (RSA). These shares are held in escrow by the
Company and will be released to the grantee upon the grantee's satisfaction of
continued employment at the same or a higher level during the restriction
periods, which end June 15, 2001, June 15, 1999, May 20, 2000 and June 18, 2000,
and upon payment of the purchase price of $8.75, $4.22, $5.11, and $5.89 per
share, respectively. The purchase price is fifty percent of the mean of the high
and low market value of the Company's Common Stock at the date of grant. The
difference between the market price at the date of grant and the purchase price
to be paid by the grantee is recognized ratably by the Company as compensation
expense over the restriction period. This expense for the twenty-seven weeks
ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $1,066,000,
$1,661,000, $1,299,000 and $901,000, respectively.
With respect to the grant issued during the twenty-seven week period ended
January 3, 1998, if the mean of the high and low market value for the Company's
Common Stock equals or exceeds $25.63 during the restriction period an
additional 347,609 shares at a purchase price of $12.82 per share will be
granted. Subsequent to year end, on February 26, 1998, the stated market value
was attained and the additional shares were granted. The restriction period for
this grant ends February 26, 2000.
During fiscal 1996, 358,547 shares of the Company's Common Stock were
granted as equity incentive awards (EIA). These shares are held in escrow by the
Company and may be released ratably to the grantee upon the grantee's
satisfaction of continued employment at the same or a higher level during the
restriction periods which end May 20, 1999, and upon payment of the purchase
price of $5.11 per share. The purchase price is fifty percent of the mean of the
high and low market value of the Company's Common Stock at the date of grant.
The difference between the market value at the date of grant and the purchase
price to be paid by the grantee is recognized ratably by the Company as
compensation expense over the restriction period. This expense for the
twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal
1995 was $329,000, $782,000, $493,000 and $924,000, respectively.
During fiscal 1996, 843,750 shares of the Company's Common Stock were
granted as non-qualified stock options (NQSO's). The NQSO's are exercisable at
any time, commencing on the first anniversary of the grant date, until the year
2005. The optionees are required to pay the market value of the shares,
determined as of the grant date, which was $8.45. As of fiscal year end January
3, 1998, June 28, 1997, and June 29, 1996, there were 787,500, 787,500 and
843,750, NQSO's outstanding, respectively. In addition to the ESIP, the Company
has 377,778 shares of Common Stock authorized for issuance to key employees
under the Company's Stock Option Plan. Option prices must be 100% of the market
value of the Common Stock at the time of the grant. The Plan expired on October
15, 1992, therefore no additional grants will be made pursuant to this Plan.
The Company has a Nonemployee Directors' Equity Plan (the "Directors'
Plan") pursuant to which an aggregate 300,000 shares of Common Stock, may be
issued and as to which grants or awards of stock options may be made.
F-17
<PAGE> 57
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All individuals who are nonemployee Directors on the first day of the
Company's fiscal year (a "Plan Year") are eligible to participate in the
Directors' Plan. Under the Directors' Plan, the nonemployee Director may
designate the amount of annual compensation payable without regard to the number
of Board or committee meetings attended or committee positions held (the
"Retainer") which can be invested in stock options (an "Option") under the
Directors' Plan. A Director shall be permitted to invest in an Option under the
Directors' Plan only if the total amount invested by that Director is equal to
at least twenty-five percent (25%) of the Retainer. To the extent a Director
elects to invest all or a portion of the Retainer for a Plan Year, an Option
shall be granted on the first day of such Plan Year for that number of shares of
Common Stock ("Shares") equal to 150% of the amount of the Retainer invested
divided by the value of an Option for one Share on the Valuation Date. For this
purpose, value shall be determined by the Black-Scholes option pricing model, as
applied by the Committee.
Subject to the expiration or earlier termination of the Option, 100% of the
Option shall become exercisable on the first anniversary of the date of grant.
An Option shall expire ten years from the date the Option is granted and shall
be subject to earlier termination as hereinafter provided. Once an Option
becomes exercisable, it may thereafter be exercised, wholly or in part, at any
time prior to its expiration or termination. In the event of the Director's
termination from service on the Board, an outstanding Option may be exercised
only to the extent it was exercisable on the date of such termination and shall
expire two years after such termination, or on its stated expiration date,
whichever occurs first. Notwithstanding the above, in the event of a termination
for cause as determined by the Committee, all unexercised Options shall be
forfeited.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," (APB 25) and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for options granted under the Company's Stock Option Plan or the
ESIP.
Had compensation expense for the options and restricted stock awards under
the ESIP been determined based on the fair value at the grant dates for the
awards consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123 -- "Accounting for Stock-Based Compensation", the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE 27
WEEKS ENDED FOR THE 52 WEEKS ENDED
--------------- --------------------------------------------
JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 JULY 1, 1995
--------------- ------------- ------------- ------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
As Reported:
Net income......................... $23,560 $62,324 $30,768 $42,301
Net income per common share:
Basic........................... .27 .71 .35 .49
Diluted......................... .27 .71 .35 .49
Pro forma:
Net income......................... $22,735 $61,716 $29,694 $42,301
Net income per common share:
Basic........................... .26 .70 .34 .49
Diluted......................... .26 .70 .34 .49
</TABLE>
The fair values of the awards granted were estimated as of the date of
grant using the Black-Scholes option-pricing model based on the following
weighted-average assumptions used for grants during the twenty-seven weeks ended
January 3, 1998: no expected dividend yield; expected volatility of 26.8
percent; risk-free interest rate of 6.31 percent; and expected lives of four
years; and for grants during fiscal 1996: dividend yield of 3.43 percent;
expected volatility of 24.7 percent; risk-free interest rate of 6.23 percent;
and expected lives of five years.
F-18
<PAGE> 58
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the twenty-seven weeks ended January 3, 1998,
fiscal 1997, fiscal 1996 and fiscal 1995 is set forth below:
<TABLE>
<CAPTION>
FOR THE 27
WEEKS ENDED FOR THE 52 WEEKS ENDED
------------------ ------------------------------------------------------------
JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 JULY 1, 1995
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- -------- ------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year..................... 1,211 $7.52 1,664 $7.11 1,114 $5.70 1,222 $5.67
Granted.................... 844 $8.44
Exercised.................. (46) $6.06 (453) $6.03 (294) $5.59 (108) $5.40
----- ----- ------ -----
Outstanding at end of
year..................... 1,165 $7.57 1,211 $7.52 1,664 $7.11 1,114 $5.70
===== ===== ====== =====
Exercisable at end of
year..................... 1,165 1,211 820 1,114
===== ===== ====== =====
Weighted average fair value
of options granted during
the year................. $ 2.91
======
</TABLE>
All stock options outstanding at January 3, 1998, are exercisable. The
weighted average exercise price is $7.57 and the weighted average remaining
contractual life is 6.39 years.
NOTE 8. PENSION PLANS
The Company has noncontributory defined benefit pension plans covering
certain employees who have completed prescribed service requirements. The
benefits are based on years of service and the employee's career earnings. The
Company also has a supplemental defined benefit pension plan covering certain
Company employees which provides benefits to participants commencing at
retirement calculated according to the formula contained in the Company's
tax-qualified retirement plan, but without regard to statutory limitations on
the maximum amount of compensation which may be taken into account by, nor the
maximum benefits which may be paid from, such plans. Benefits provided by this
supplemental plan are reduced by benefits provided by the defined benefit
pension plans. Pension expense was $2,111,000, $4,860,000, $5,660,000 and
$5,003,000 in the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal
1996 and fiscal 1995, respectively. Pension plans are funded at amounts
deductible for income tax purposes but not less than the minimum funding
required by the Employee Retirement Income Security Act of 1974. As of January
3, 1998, June 28, 1997 and June 29, 1996, the assets of the plans include
certificates of deposit, marketable equity securities, mutual funds, corporate
and government debt securities and annuity contracts. The marketable equity
securities include 506,250 shares of Common Stock of the Company with a fair
value of approximately $10,346,000, $8,543,000 and $5,442,000 at January 3,
1998, June 28, 1997 and June 29, 1996, respectively.
During the second quarter of fiscal 1995, the Company recognized an
after-tax curtailment gain of $912,000 or $.01 per share, in accordance with
Statement of Financial Accounting Standards No. 88 -- "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." The gain arose from the sale of a portion of the
Company's territories to independent distributors and the termination of
participation in the Flowers Industries, Inc. Retirement Plans of certain
employees.
F-19
<PAGE> 59
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension costs of these plans for each of the respective
periods includes the following components:
<TABLE>
<CAPTION>
FOR THE 27
WEEKS ENDED FOR THE 52 WEEKS ENDED
----------- -----------------------------
JANUARY 3, JUNE 29, JUNE 29, JULY 1,
1998 1997 1996 1995
----------- -------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost-benefit earned during the
period...................................... $ 2,846 $ 5,603 $ 5,765 $ 5,538
Interest cost on projected benefit
obligation.................................. 5,207 10,311 9,341 8,261
Reduction of pension costs due to actual
return on plan assets....................... (26,113) (10,415) (9,073) (8,593)
Net amortization and deferral................. 20,171 (639) (373) (203)
-------- -------- ------- -------
$ 2,111 $ 4,860 $ 5,660 $ 5,003
======== ======== ======= =======
</TABLE>
Assumptions used to determine net periodic pension cost for these plans at
each of the respective period ends are as follows:
<TABLE>
<CAPTION>
JANUARY 3, JUNE 28, JUNE 29, JULY 1,
1998 1997 1996 1995
---------- -------- -------- -------
<S> <C> <C> <C> <C>
Discount rate....................................... 8.00% 8.00% 7.75% 8.25%
Rate of increase in compensation levels............. 5.50 5.50 5.25 5.75
Expected long-term rate of return on assets......... 9.00 9.00 9.00 9.00
</TABLE>
Flowers Industries, Inc. Retirement Plans No. 01 and 02 have assets that
exceed the accumulated benefit obligation. There are certain plans, however,
with accumulated benefit obligations which exceed plan assets. The following
table summarizes the funded status of the Company's pension plans and the
related amounts that are recognized in the Company's balance sheet at January 3,
1998, June 28, 1997 and June 29, 1996:
<TABLE>
<CAPTION>
PLANS FOR PLANS FOR PLANS FOR PLANS FOR
WHICH WHICH WHICH WHICH
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- --------------- --------------- ---------------
JANUARY 3, 1998 JANUARY 3, 1998 JUNE 28, 1997 JUNE 28, 1997
--------------- --------------- --------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit
obligations:
Vested................... $(118,783) $(4,810) $(112,419) $(4,696)
Nonvested................ (2,604) (143) (2,387) (137)
--------- ------- --------- -------
$(121,387) $(4,953) $(114,806) $(4,833)
========= ======= ========= =======
Plan assets at fair value.... $ 152,748 $ 2,080 $ 135,810 $ 2,009
Projected benefit
obligations................ (139,244) (7,693) (132,122) (7,473)
--------- ------- --------- -------
Plan assets in excess of
(less than) projected
benefit obligations........ 13,504 (5,613) 3,688 (5,464)
Items not yet recognized in
earnings:
Unrecognized net asset at
transition............... (4,154) (4,366)
Unrecognized prior service
cost..................... 528 88 562 33
Unrecognized net (gain)
loss..................... (18,847) 2,277 (9,308) 2,417
--------- ------- --------- -------
Contribution payable......... $ (8,969) $(3,248) $ (9,424) $(3,014)
========= ======= ========= =======
<CAPTION>
PLANS FOR PLANS FOR
WHICH WHICH
ACCUMULATED ACCUMULATED
BENEFITS EXCEED BENEFITS EXCEED
ASSETS ASSETS
--------------- ---------------
JUNE 29, 1996 JUNE 29, 1996
--------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit
obligations:
Vested................... $ (98,543) $(4,615)
Nonvested................ (1,937) (136)
--------- -------
$(100,480) $(4,751)
========= =======
Plan assets at fair value.... $ 114,508 $ 2,047
Projected benefit
obligations................ (117,730) (6,932)
--------- -------
Plan assets in excess of
(less than) projected
benefit obligations........ (3,222) (4,885)
Items not yet recognized in
earnings:
Unrecognized net asset at
transition............... (5,207)
Unrecognized prior service
cost..................... (110) 348
Unrecognized net (gain)
loss..................... 2,929 1,417
--------- -------
Contribution payable......... $ (5,610) $(3,120)
========= =======
</TABLE>
F-20
<PAGE> 60
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company made contributions of approximately $526,000 in the
twenty-seven weeks ended January 3, 1998, $371,000 in fiscal 1997, $271,000 in
fiscal 1996 and $441,000 in fiscal 1995 to collectively bargained, multiemployer
pension plans based on specific rates per hour worked by participating
employees.
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE 27
WEEKS ENDED FOR THE 52 WEEKS ENDED
----------- -----------------------------
JANUARY 3, JUNE 28, JUNE 29, JULY 1,
1998 1997 1996 1995
----------- -------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current taxes:
Federal...................................... $5,686 $26,910 $13,915 $21,886
State........................................ 2,395 5,557 2,621 2,723
------ ------- ------- -------
8,081 32,467 16,536 24,609
------ ------- ------- -------
Deferred taxes:
Federal...................................... 2,395 1,587 1,636 1,358
State........................................ (319) 347 347 854
------ ------- ------- -------
2,076 1,934 1,983 2,212
------ ------- ------- -------
Benefit of operating loss carryforwards........ (525) (1,210) (334) (1,107)
------ ------- ------- -------
Provision for income taxes..................... $9,632 $33,191 $18,185 $25,714
====== ======= ======= =======
</TABLE>
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
FOR THE 27 FOR THE 52 WEEKS
WEEKS ENDED ENDED
----------- -------------------
JANUARY 3, JUNE 28, JUNE 29,
1998 1997 1996
----------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Depreciation......................................... $ 52,936 $ 51,275 $ 47,999
Other................................................ 13,871 8,673 7,902
-------- -------- --------
Gross deferred tax liabilities..................... 66,807 59,948 55,901
-------- -------- --------
Self-insurance accrual............................... (5,228) (5,274) (5,926)
Vacation accrual..................................... (2,080) (2,275) (2,554)
Pension accrual...................................... (3,246) (2,481) (2,547)
Purchase accounting reserves......................... (13,921) (14,483) --
Loss carryforwards................................... (4,739) (4,117) (3,805)
Other................................................ (16,050) (9,093) (7,565)
-------- -------- --------
Gross deferred tax assets.......................... (45,264) (37,723) (22,397)
Deferred tax assets valuation allowance.............. 2,119 2,240 2,774
-------- -------- --------
$ 23,662 $ 24,465 $ 36,278
======== ======== ========
</TABLE>
The net change in the valuation allowance for deferred tax assets was a
decrease of $121,000, related to operating loss carryforwards.
F-21
<PAGE> 61
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes on income differs from the amount computed
by applying the U.S. federal income tax rate (35%) because of the effect of the
following items:
<TABLE>
<CAPTION>
FOR THE 27
WEEKS ENDED FOR THE 52 WEEKS ENDED
----------- -----------------------------
JANUARY 3, JUNE 28, JUNE 29, JULY 1,
1998 1997 1996 1995
----------- -------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tax at U.S. federal income tax rate............ $8,757 $30,728 $16,919 $23,805
State income taxes, net of U.S. federal income
tax benefit.................................. 1,390 3,837 1,929 2,325
Benefit of operating loss carryforwards........ (525) (1,210) (334) (1,107)
Other.......................................... 10 (164) (329) 691
------ ------- ------- -------
Provision for income taxes................... $9,632 $33,191 $18,185 $25,714
====== ======= ======= =======
</TABLE>
The amount of federal operating loss carryforwards generated by certain
subsidiaries prior to their acquisition is $2,825,000 with expiration dates
through the fiscal year 2009. The use of pre-acquisition operating losses and
tax credit carryforwards is subject to limitations imposed by the Internal
Revenue Code. The Company does not anticipate that these limitations will affect
utilization of the carryforwards prior to their expiration. Various subsidiaries
have state operating loss carryforwards of $63,579,000 with expiration dates
through the fiscal year 2013.
During fiscal 1997, the Internal Revenue Service ("IRS") completed an
examination of the Company's federal income tax returns for fiscal years 1993
through 1995. During the examination, the IRS asserted that the Company's
independent distributor program generated ordinary income upon the initial sale
of the territories. As a result, the Company paid for certain claims by the IRS
relating primarily to the Company's independent distributor program.
NOTE 10. OTHER EMPLOYEE BENEFIT PLANS
Under the Company's Bonus Plan, approved annually by the Compensation
Committee, certain key employees may receive bonus compensation based on
attainment of specified income goals. Total compensation under the Bonus Plan
was approximately $3,405,000, $6,969,000, $877,000 and $6,157,000 for the
twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal
1995, respectively.
The Flowers Industries, Inc. 401(k) Retirement Savings Plan covers
substantially all employees who have completed certain service requirements.
Generally the cost and contributions for employees who participate in the
defined benefit pension plan is 25% of the first $400 contributed by the
employee. The costs and contributions for employees who do not participate in
the defined benefit pension plan is 2% of compensation and 25% of the employees
contributions up to 6% of compensation. During the twenty-seven weeks ended
January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995, the total cost and
contributions was $646,000, $1,367,000, $1,268,000 and $265,000, respectively.
NOTE 11. LEGAL MATTERS AND CONTINGENCIES
The Company is engaged in various legal proceedings which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to those proceedings will not be material to the
Company's financial position or results of operations. A reserve of $4,935,000
was recorded during fiscal 1996 and paid during fiscal 1997 representing final
settlement of certain litigation involving subsidiary operations in Texas.
F-22
<PAGE> 62
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. ACQUISITIONS
On May 31, 1996, the Company acquired certain assets of Mrs. Smith's, Inc.,
a manufacturer and marketer of frozen pies, including its brand name and
trademarks from the J. M. Smucker Company. Under the terms of the acquisition
agreement, Flowers paid $30,000,000, consisting of $15,000,000 in cash at
closing and a $15,000,000 note payable. In addition, the Company entered into
ten-year leases for the property, plant and equipment used in the business. The
acquisition has been accounted for as a purchase, and, accordingly, the results
of operations of the acquired business are included in the consolidated
statement of income from the date of acquisition.
The following unaudited condensed combined pro forma results of operations
assume the acquisition occurred as of the beginning of each fiscal year:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------
JUNE 29, 1996 JULY 1, 1995
------------- ------------
(AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
Sales....................................................... $1,351,769 $1,249,461
Net income.................................................. 33,056 45,057
Earnings per share -- basic................................. .38 .52
Earnings per share -- diluted............................... .38 .52
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of the beginning of the fiscal year, nor are they necessarily indicative of
future operating results.
In addition, the Company acquired certain other businesses during fiscal
1996, fiscal 1997 and the twenty-seven weeks ended January 3, 1998 which have
been accounted for as purchases. These acquisitions are immaterial to the
results of operations and financial condition of the Company.
During fiscal 1997, the Company recorded $22,653,000, net of tax of
$14,483,000, in additional goodwill related to liabilities anticipated to be
incurred for planned activities for certain acquisitions made during fiscal 1996
and fiscal 1997. A reserve of $34,953,000 and $35,530,000 relating to these
transactions is included in other accrued liabilities at January 3, 1998 and
June 28, 1997, respectively.
NOTE 13. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In January 1996, the Company acquired, for $62,500,000, a 49.6% interest in
INFLO Holdings Corporation (INFLO), a newly formed corporation jointly owned by
the Company and Artal Luxembourg S.A. On January 26, 1996, INFLO acquired 100%
of Keebler Corporation for an aggregate consideration of $454,900,000 from
United Biscuits (Holdings) plc. Keebler is the second largest cookie and cracker
manufacturer in the United States. The acquisition of Keebler Corporation was
financed through the equity of INFLO and bank borrowings. The Company accounts
for its investment in INFLO using the equity method of accounting.
On June 4, 1996, Keebler Corporation acquired 100% of Sunshine Biscuits
from G. F. Industries, Inc. (GFI) for an aggregate purchase price of
$171,600,000. The acquisition was funded by Keebler Corporation's working
capital, bank financing and the issuance to GFI of $23,600,000 of INFLO common
stock and warrants. In fiscal 1996, the Company recognized a pre-tax gain on the
shares issued to GFI of $4,111,000. As a result of this transaction, the
Company's interest in INFLO was reduced to 45.2%.
F-23
<PAGE> 63
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed financial information of INFLO is as follows:
<TABLE>
<CAPTION>
APRIL 19, 1997 APRIL 20, 1996
-------------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 332,782 $252,791
Total assets................................................ 1,081,984 867,429
Current liabilities......................................... 347,647 384,635
Total liabilities........................................... 911,997 741,174
Common stockholders' equity................................. 169,987 126,255
Total liabilities and common stockholders' equity........... 1,081,984 867,429
</TABLE>
<TABLE>
<CAPTION>
APRIL 21, 1996 -- APRIL 19, 1997 JANUARY 26, 1996 -- APRIL 20, 1996
-------------------------------- ----------------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Sales.......................... $1,907,307 $345,600
Gross profit................... 1,030,539 177,900
Net income..................... 19,411 1,255
</TABLE>
On November 20, 1997, INFLO was merged into Keebler Corporation and
subsequently changed its name to Keebler Foods Company ("Keebler"). Condensed
financial information of Keebler for the period included in the Company's
results for the twenty-seven weeks ended January 3, 1998 are as follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 301,646
Total assets................................................ 1,042,851
Current liabilities......................................... 368,185
Total liabilities........................................... 820,800
Common stockholders' equity................................. 222,051
Total liabilities and common stockholders' equity........... 1,042,851
</TABLE>
<TABLE>
<CAPTION>
JUNE 29, 1997 - JANUARY 3, 1998
-------------------------------
(AMOUNTS IN THOUSANDS)
<S> <C>
Sales................................................. $1,164,224
Gross profit.......................................... 668,529
Net income............................................ 45,372
</TABLE>
As presented above, the Company's net income from its investment in Keebler
for the twenty-seven weeks ended January 3, 1998, includes twenty-seven weeks of
Keebler's operating results. The increase in retained earnings reflected as
equity from investment in unconsolidated affiliate of $2,700,000 was
necessitated by the Company's change in fiscal year end and represents the
elimination of the lag of approximately two months in its recognition of
Keebler's results.
Currently, Keebler's existing credit agreement places certain restrictions
on its ability to pay dividends. As of January 3, 1998, the Company had
recognized aggregate equity of $29 million from its investment in Keebler.
F-24
<PAGE> 64
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Results of operations for each of the two quarters of the twenty
seven-weeks ended January 3, 1998 and for each of the four quarters of the
fiscal years ended June 28, 1997 and June 29, 1996 follow (each quarter
represents a period of twelve weeks except the fourth quarter, which includes
sixteen weeks and the second quarter of 1998, which includes fifteen weeks):
<TABLE>
<CAPTION>
QUARTER FIRST SECOND THIRD FOURTH
------- --------- --------- --------- ---------
1998 1998
1997 1997 1997 1997
1996 1996 1996 1996
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales...................................... $308,387 $475,710(1) $ -- $ --
322,710 381,290 301,392 432,321
269,674 290,538 275,013 403,339
Gross Profit............................... 142,911 222,260(1) -- --
140,438 164,756 142,278 202,442
125,893 130,676 125,398 181,835
Income before income taxes................. 15,364 9,655(1) -- --
32,925 19,175 9,912 25,782
12,696 12,749 9,135 13,760
Net (loss) income from investment in
unconsolidated affiliate................. 5,157 12,904(1) -- --
(531) 336 6,005 1,911
-- -- -- 613
Net income................................. 14,529 9,031(1) -- --
19,948 12,263 12,170 17,943
7,897 7,930 5,682 9,259
Basic net income per common share.......... .16 .10(1) -- --
.23 .14 .14 .20
.09 .09 .07 .11
Diluted net income per common share........ .16 .10(1) -- --
.23 .14 .14 .20
.09 .09 .07 .11
</TABLE>
- ---------------
(1) Amounts relate to a fifteen week period ended January 3, 1998 and, as such,
do not correspond to the amounts reported in the Company's Second Quarter
Form 10-Q for the twelve week period ended December 13, 1997.
F-25
<PAGE> 65
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. NET INCOME PER SHARE
Earnings per share is calculated using the weighted average number of
common and common equivalent shares outstanding during each period. The common
stock equivalents consist of the incremental shares associated with the
Company's stock option plans, as determined under the treasury stock method.
The following table sets forth the computation of basic and diluted net
income per shares:
<TABLE>
<CAPTION>
27 WEEKS 52 WEEKS ENDED
ENDED --------------------------------------------
JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 JULY 1, 1995
--------------- ------------- ------------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Numerator:
Income before cumulative effect of changes
in accounting principles, net of tax... $33,448 $62,324 $30,768 $42,301
Cumulative effect of changes in accounting
principles, net of tax................. (9,888)
------- ------- ------- -------
Net income................................ $23,560 $62,324 $30,768 $42,301
======= ======= ======= =======
Denominator:
Basic weighted average shares............. 88,368 88,000 86,933 86,229
Effect of dilutive securities:
Stock options.......................... 405 401 278 209
------- ------- ------- -------
Diluted weighted average shares........... 88,773 88,401 87,211 86,438
======= ======= ======= =======
</TABLE>
NOTE 16. UNAUDITED OPERATING RESULTS FOR THE TWENTY-SEVEN WEEKS ENDED JANUARY
4, 1997
The unaudited condensed results of operations for the twenty-seven weeks
ended January 4, 1997 are presented below. In the opinion of the Company, the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
results of operations.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
<S> <C>
Sales....................................................... $774,767
Income before income taxes.................................. 50,335
Income taxes................................................ 19,027
Net loss from investment in unconsolidated affiliate........ (195)
Net income.................................................. 31,113
Earnings per share -- basic................................. .35
Earnings per share -- diluted............................... .35
</TABLE>
F-26
<PAGE> 66
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. SUBSEQUENT EVENT
On February 3, 1998, the Company acquired an additional 11.5% of the common
stock of Keebler, giving the Company a controlling ownership position in Keebler
of approximately 55%. Under the terms of the acquisition agreement, the Company
paid $308,624,000 in cash at closing. The acquisition was financed through
borrowings under the $500,000,000 syndicated loan facility.
The following unaudited condensed combined pro forma results of operations
assume the acquisition occurred as of the beginning of each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
TWENTY-SEVEN WEEKS FIFTY-TWO WEEKS
ENDED ENDED
JANUARY 3, 1998 JUNE 28, 1997
------------------ ---------------
(AMOUNTS IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
Sales....................................................... $1,792,419 $3,421,082
Net income.................................................. 27,915 56,765
Earnings per share -- basic................................. .32 .65
Earnings per share -- diluted............................... .31 .64
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of the beginning of the period, nor are they necessarily indicative of future
operating results.
F-27
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Flowers Industries, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 23, 1998 of this Transition Report on Form 10-K also included
an audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
Atlanta, Georgia
March 23, 1998
<PAGE> 68
VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE II)
<TABLE>
<CAPTION>
BALANCE
AT BALANCE
BEGINNING ADDITIONS AT END
CLASSIFICATION OF PERIOD AT COST DEDUCTIONS OF PERIOD
- -------------- --------- --------- ---------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Twenty-seven Weeks Ended January 3, 1998
Cost in Excess of Net Tangible Assets................. $68,453 $ 7,429 $ (994) $74,888
======= ======= ======= =======
Year Ended June 28, 1997
Cost in Excess of Net Tangible Assets................. $44,617 $24,977 $(1,141) $68,453
======= ======= ======= =======
Year Ended June 29, 1996
Cost in Excess of Net Tangible Assets................. $ 9,281 $35,625 $ (289) $44,617
======= ======= ======= =======
Year Ended July 1, 1995
Cost in Excess of Net Tangible Assets................. $ 9,618 $ 393 $ (730) $ 9,281
======= ======= ======= =======
</TABLE>
See Note 1 of Notes to Consolidated Financial Statements for accounting policy
for capitalization and amortization of intangible assets.
<PAGE> 1
EXHIBIT 10(a)(2)
FIRST AMENDMENT
TO THE
FLOWERS INDUSTRIES, INC.
ANNUAL EXECUTIVE BONUS PLAN
THIS AMENDMENT to the Flowers Industries, Inc. Annual Executive Bonus
Plan (the "Plan") is made as of the 29th day of June, 1997, to be effective on
said date.
Pursuant to Section 9 of the Plan, the Compensation Committee hereby
amends the Plan as follows, subject to the approval of said amendment by a
majority of the Company's shareholders present or represented at the next annual
meeting thereof.
I.
Section 2(c) of the Plan is hereby amended by inserting the following
provision before the last sentence thereof:
"Notwithstanding the foregoing, the Compensation Committee may
determine that a goal other than EPS is appropriate for certain
executives whose responsibilities pertain more specifically to discrete
elements of the Company's business; in such cases, the Committee may
prescribe a goal based on the performance of a product group, division,
subsidiary or other management reporting unit, or any combination of
the above."
II.
Section 2(c) of the Plan is further amended by changing the amount
"$750,000" to "$1,500,000," in the last line of said section.
III.
Section 3 of the Plan is amended by deleting the first sentence thereof
and replacing it with the following sentence:
"The Bonus shall be paid to all Participants no later than 90 days
after the close of the Plan Year, in cash, unless the Participant has
made a valid election to defer said Bonus pursuant to the terms of any
applicable deferred compensation plan maintained by the Company."
<PAGE> 2
IV.
Section 5 of the Plan is amended by adding the phrase "without approval
of the Company's shareholders" to the end of the third sentence of said section.
IN WITNESS WHEREOF, the Company has caused the Plan to be amended as
provided above.
FLOWERS INDUSTRIES, INC.
2
<PAGE> 1
EXHIBIT 10(e)(2)
SECOND AMENDMENT TO FLOWERS INDUSTRIES, INC.
1989 EXECUTIVE STOCK INCENTIVE PLAN
THIS AMENDMENT, made this 17th day of October, 1997, to the Flowers
Industries, Inc. 1989 Executive Stock Incentive Plan,
WITNESSETH:
WHEREAS, the Company has previously adopted and amended the Flowers
Industries, Inc. 1989 Executive Stock Incentive Plan (the "Plan") and,
WHEREAS, pursuant to Section 12 of the Plan, the Board of Directors of
the Company may amend the provisions of the Plan, subject to the approval of the
Company's stockholders in certain circumstances; and
WHEREAS, the Company wishes to amend the provisions of the Plan as
reflected below, which amendment has been authorized by the Company's Board of
Directors and which is further conditioned upon the approval of a majority of
the Company's stockholders present and entitled to vote at a meeting duly called
and held prior to December 31, 1997;
NOW, THEREFORE, the Plan is hereby amended as follows:
I.
Paragraph 3 of the Plan is hereby amended to read as follows
SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 12,050,000 shares, subject to adjustment as
hereinafter provided in this Section 3. Such shares may consist, in whole or in
part, of authorized and unissued shares or treasury shares.
Subject to Section 6(b)(iv) below, if any shares of Stock that
have been optioned cease to be subject to a Stock
<PAGE> 2
Option, or if any such shares of Stock that are subject to any Restricted Stock
or Deferred Stock award, Stock Purchase Right or Other Stock-Based Award granted
hereunder are forfeited or any such award otherwise terminates without a payment
being made to the participant in the form of Stock, such shares shall again be
available for distribution in connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, Stock dividend, Stock split or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted under
the Plan, in the number and purchase price of shares subject to outstanding
Stock Purchase Rights under the Plan, and in the number of shares subject to
other outstanding awards granted under the Plan as may be determined to be
appropriate by the Committee, in its sole discretion, provided that the number
of shares subject to any award shall always be a whole number. Such adjusted
option price shall also be used to determine the amount payable by the Company
upon the exercise of any Stock Appreciation Right associated with any Stock
Option.
Subject to adjustment as provided in the preceding paragraph,
the aggregate number of shares of Stock actually issued or transferred by the
Company upon the exercise of Incentive Stock Options shall not exceed 12,050,000
shares of Stock.
Notwithstanding any other provision of this Plan to the
contrary, no participant shall be granted stock options or stock appreciation
rights with respect to more than 250,000 shares of stock during any fiscal year,
subject to adjustment in the manner described above in the event of any merger,
reorganization, consolidation, recapitalization, Stock dividend, Stock split or
other change in corporate structure affecting the Stock.
II.
Section 14 of the Plan is hereby amended by adding Section
14(g), which shall read in its entirety as follows:
Any award may specify management objectives associated with
the award. Any award that specifies management objectives
2
<PAGE> 3
shall specify a minimum acceptable level of achievement in respect of the
specified management objective below which no payment will be made or no benefit
will be conferred. Management objectives may be described in terms of
Company-wide objectives or objectives that are related to the performance of the
individual participant, product group, division, subsidiary or other management
reporting unit in which the participant is employed. The management objectives
may be relative to the performance of other companies or entities. If any
individual is, or is determined by the Committee to be reasonably likely to
become, a covered employee within the meaning of Section 162(m) of the Code,
then awards to that individual that specify management objectives shall be based
on specified levels of, or growth in, one or more of the following criteria: (i)
share price, (ii) earnings, (iii) earnings per share, (iv) revenues, and (v)
total stockholder return. Notwithstanding any other provision of this Plan to
the contrary, in no event shall any participant be granted, in any period of one
fiscal year, awards that specify management objectives having an aggregate value
as of their respective dates of grant in excess of $1,500,000. Except as may be
permitted under Section 162(m) of the Code, the Committee may not adjust
management objectives after the grant of any award that specifies management
objectives.
III.
Paragraph 16 of the Plan is hereby amended to read as follows:
SECTION 16. Term of Plan.
No Stock Option, Stock Appreciation Right, Restricted Stock
award, Deferred Stock award, Stock Purchase Right or Other Stock Based Award
shall be granted pursuant to the Plan on or after the tenth anniversary of the
date of shareholder approval of the 1997 Amendments to the Plan, but awards
granted prior to such tenth anniversary may extend beyond that date.
IN WITNESS WHEREOF, the Company has executed this Second Amendment to
the Plan, to be effective this 17th day of October, 1997.
FLOWERS INDUSTRIES, INC.
/s/
3
<PAGE> 1
EXHIBIT 10(g)
FLOWERS INDUSTRIES, INC. NONEMPLOYEE
DIRECTORS' EQUITY PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. DEFINITIONS......................................................... 1
ARTICLE II. PURPOSE............................................................ 2
ARTICLE III. ELECTION TO PARTICIPATE........................................... 2
3.1. Eligibility................................................... 2
3.2. Election to Participate....................................... 2
3.3. Amount of Participation....................................... 3
3.4. Minimum Level of Participation For Investment
in Options.................................................... 3
ARTICLE IV. OPTIONS............................................................ 3
4.1. Grant of Options.............................................. 3
4.2. Written Agreement............................................. 3
4.3. Exercisability of Options..................................... 3
4.4. Term.......................................................... 3
4.5. Early Vesting................................................. 3
4.6. Exercise Price................................................ 4
4.7. Payment....................................................... 4
4.8. Option Nontransferable........................................ 4
ARTICLE V. CHANGE IN CONTROL................................................... 4
ARTICLE VI. ADMINISTRATION, AMENDMENT AND TERMINATION.......................... 6
6.1. Administration................................................ 6
6.2. Amendment and Termination..................................... 6
6.3. Amendment of Options.......................................... 6
ARTICLE VII. SHARES SUBJECT TO PLAN............................................ 7
7.1. Shares Subject to Plan........................................ 7
7.2. Adjustments................................................... 7
ARTICLE VIII. GENERAL PROVISIONS............................................... 8
8.1. Governing Law................................................. 8
8.2. Miscellaneous................................................. 8
</TABLE>
i
<PAGE> 3
FLOWERS INDUSTRIES, INC. NONEMPLOYEE
DIRECTORS' EQUITY PLAN
The Flowers Industries, Inc. Nonemployee Directors' Equity
Plan ("Plan") is effective as of June 29, 1997, subject to approval of
shareholders at the 1997 annual meeting.
ARTICLE I. DEFINITIONS
Whenever the following terms are used in this Plan they shall
have the meanings specified below unless the context clearly indicates to the
contrary:
(a) "Administrator": The Compensation Committee of the Board
or any successor committee designated by the Board.
(b) "Board": The Board of Directors of the Company.
(c) "Change of Control": The meaning set forth in Article V.
(d) "Code": The Internal Revenue Code of 1986, as amended.
(e) "Company": Flowers Industries, Inc. or any successor or
successors thereto.
(f) "Director": An individual duly elected or chosen as a
Director of the Company who is not also an employee of the Company or
any of its subsidiaries.
(g) "Fair Market Value": With respect to a Share, as of any
given date, unless otherwise determined by the Administrator in good
faith, the mean between the highest and lowest quoted selling price,
regular way, of a Share on the New York Stock Exchange, or if no such
sale of Shares occurs on the New York Stock Exchange on such date, the
fair market value of the Shares as determined by the Administrator in
good faith.
(h) "Option": An option to purchase Shares granted pursuant to
Section 4.1.
<PAGE> 4
(i) "Participation Agreement": The agreement submitted by a
Director to the Administrator in which a Director may specify his or
her election to invest all or a portion of his or her Retainer in
Options.
(j) "Plan": The Plan set forth in this instrument as it may
from time to time be amended.
(k) "Plan Year": The fiscal year of the Company.
(l) "Retainer": The portion of a Director's annual
compensation that is payable without regard to number of Board or
committee meetings attended or committee positions.
(m) "Shares": The Company's fully paid, non-assessable common
stock. Shares may be shares of original issuance or treasury shares or
a combination of the foregoing.
(n) "Valuation Date": The date of the meeting of the
Compensation Committee of the Board first preceding the first day of a
Plan Year.
ARTICLE II. PURPOSE
The purpose of this Plan is to provide Directors with
opportunities to invest amounts of their Retainer in Options in order to further
align the interests of Directors with the shareholders of the Company and
thereby promote the long-term success and growth of the Company.
ARTICLE III. ELECTION TO PARTICIPATE
3.1. Eligibility. All individuals who are Directors as of the
first day of a Plan Year may participate in the Plan for such Plan Year. A
Director may elect to participate for any Plan Year in accordance with Section
3.2 of this Article. A Director's entitlement to participate as to future
investments shall cease with respect to the Plan Year following the Plan Year in
which he or she ceases to be a Director.
3.2. Election to Participate. A Director who desires to
participate in this Plan with respect to the Retainer payable
2
<PAGE> 5
for such Plan Year must complete and deliver a Participation Agreement to the
Administrator before the first day of the Plan Year for which such Retainer
would otherwise be paid. A Participation Agreement that is timely delivered
shall be effective for the succeeding Plan Year and in addition, except as
otherwise specified by a Director in his or her Participation Agreement, shall
continue to be effective from Plan Year to Plan Year until revoked or modified
by written notice to the Administrator or until terminated automatically upon
the termination of the Plan. In order to be effective to revoke or modify a
Participation Agreement with respect to the Retainer for a Plan Year, a
revocation or modification must be delivered prior to the first day of the Plan
Year for which such Retainer is payable.
3.3. Amount of Participation. A Director shall designate on
the Participation Agreement the dollar amount of his or her Retainer that he or
she has elected to invest in Options under this Plan.
3.4. Minimum Level of Participation For Investment in Options.
A Director shall be permitted to invest in Options under this Plan only if for
the Plan Year involved the total amount of the Retainer for the Director that is
invested in Options for the Plan Year equals at least twenty-five (25) percent
of the Retainer of the Director for such Plan Year.
ARTICLE IV. OPTIONS
4.1. Grant of Options. To the extent a Director elects to
invest all or a portion of his or her Retainer for a Plan Year in Options, an
Option shall be granted on the first day of such Plan Year for that number of
Shares equal to 150% of the amount of the Retainer invested divided by the value
of an Option for one Share on the Valuation Date. For this purpose, value shall
be determined by the Black-Scholes option pricing model, as applied by the
Administrator. To the extent that the application of the foregoing formula would
result in an Option covering a fractional Share, the number of Shares covered by
the Option shall be rounded up.
4.2. Written Agreement. Each grant of Options shall be
evidenced by a written agreement in such form as approved by
3
<PAGE> 6
the Administrator and shall be subject to the additional terms and conditions
set forth in this Article IV.
4.3. Exercisability of Options. Subject to the expiration or
earlier termination of the Option, 100% of the Option shall become exercisable
on the first anniversary of the date of grant.
4.4. Term. An Option shall expire ten years from the date the
Option is granted and shall be subject to earlier termination as hereinafter
provided. Once an Option becomes exercisable, it may thereafter be exercised,
wholly or in part, at any time prior to its expiration or termination. In the
event of the Director's termination from service on the Board, other than as
provided in Section 4.5, an outstanding Option may be exercised only to the
extent it was exercisable on the date of such termination and shall expire two
years after such termination, or on its stated expiration date, whichever occurs
first. Notwithstanding the above, in the event of a termination for cause as
determined by the Administrator, all unexercised Options shall be forfeited.
4.5. Early Vesting. Upon the occurrence of any of the
following events, the Option shall become immediately and fully exercisable: the
death of the Director, the disability of the Director, or a Change in Control.
The Option shall expire two years after such event, or on its stated expiration
date, whichever occurs first.
4.6. Exercise Price. The exercise price of an Option
granted to a Director shall be equal to the Fair Market Value per
Share on the date of grant.
4.7. Payment. An Option may be exercised by a Director only
upon payment to the Company in full of the exercise price of the Option
corresponding to the portion of the Option to be exercised. Such payment shall
be made in cash or in Shares previously owned by the Director for more than six
months, or in a combination of cash and such Shares.
4.8. Option Nontransferable. Unless otherwise determined by
the Administrator, the Option shall be neither transferable nor assignable by
the Director other than by will or by the laws of descent and distribution and
may be exercised, during the lifetime of the Director, only by the Director, or
in the event of his or her legal incapacity, by his or her guardian or legal
representative acting on behalf of the Director in a fiduciary capacity under
the state law and court supervision.
4
<PAGE> 7
ARTICLE V. CHANGE IN CONTROL
For purposes of this Plan, a "Change in Control" means the
first to occur of the following events:
(1) The Company enters into an agreement which provides for
the Company becoming a subsidiary of another
corporation or entity or being merged with or
consolidated into another corporation or entity (other
than a corporation wholly owned by the Company) or the
sale of substantially all of the assets of the Company
to another corporation or entity;
(2) Any person, corporation, partnership or other entity, either
alone or in conjunction with its "affiliates" as that term is
defined in Rule 405 of the General Rules and Regulations under
the Securities Act of 1933, as amended (the "Act"), or any
other group of persons, corporations, partnerships or other
entities who are not "affiliates" as defined but who are
acting in concert, are determined to own of record or
beneficially securities of the Company which represent
twenty-five percent (25%) or more of the combined voting power
of the Company's then outstanding securities entitled to vote
for the election of Directors, if such ownership was not
approved in advance by a vote of at least three-quarters of
the Continuing Directors as defined below; provided, however,
that for purposes of determining the ownership of any group as
described above or any member thereof, no such group or member
shall be deemed to be the beneficial owner of Shares:
a. which were beneficially owned by a member on
March 17, 1989 and continue to be beneficially
owned by any member or any affiliate or associate
thereof as of the date of the formation of the
group;
5
<PAGE> 8
b. initially acquired by a member or an affiliate or
associate thereof after March 17, 1989 by bona fide
gift, inheritance, or as a result of a stock
dividend, split or in a similar transaction in
which no consideration was exchanged;
c. initially acquired by a member or an affiliate or
associate thereof after March 17, 1989 pursuant to
the exercise of any options, rights or warrants
granted to such person by the Company; or
d. beneficially owned by a member or an affiliate or
associate thereof pursuant to any employee
benefit plan of the Company or any subsidiary of
the Company.
(3) The first to occur of (x) the Board's actual knowledge
of, or (y) the reporting to the Commission of, the
tender, pursuant to a tender offer or exchange offer
other than by the Company, of shares representing
twenty-five percent (25%) or more of the Company's then
outstanding securities entitled to vote for the
election of Directors, whether or not such percentage
of tendered securities is subsequently reduced;
(4) The Board adopts a resolution approving the liquidation or
dissolution of the Company;
(5) Continuing Directors at any time fail to constitute a
majority of the Board, and the term "Continuing
Directors" shall mean the then current members of the
Board who were also members of the Board on December 7,
1987, plus any new directors whose nominations were
approved by at least three-quarters of the Continuing
Directors in office at the time of the election of any
such new directors, other than a nomination of an
individual whose initial assumption of office is in
connection with an actual or threatened solicitation
with respect to the "election or removal of the Board
of Directors," as such terms are used in Rule 14a-11 of
the Exchange Act; or
(6) Any other event that a majority of the Continuing Directors
determines would be required to be reported in response to
Item 6(e) [Voting Securities and Principal Holders Thereof -
change in control] of Schedule 14A of Regulation 14A
promulgated under Exchange Act, or any successor provision
thereof.
6
<PAGE> 9
ARTICLE VI. ADMINISTRATION, AMENDMENT AND TERMINATION
6.1. Administration. The Plan shall be administered by the
Administrator. The Administrator shall have such powers as may be necessary to
discharge its duties hereunder. The Administrator may, from time to time,
employ, appoint or delegate to an agent or agents (who may be an officer or
officers of the Company) and delegate to them such administrative duties as it
sees fit, and may from time to time consult with legal counsel who may be
counsel to the Company. The Administrator shall have no power to add to,
subtract from or modify any of the terms of the Plan, or to change or add to any
benefits provided under the Plan, or to waive or fail to apply any requirements
of eligibility for a benefit under the Plan. No member of the Administrator
shall act in respect of his or her own Retainer. All decisions and
determinations by the Administrator shall be final and binding on all parties.
No member of the Administrator shall be liable for any such action taken or
determination made in good faith. All decisions of the Administrator shall be
made by the vote of the majority, including actions and writing taken without a
meeting. All elections, notices and directions under the Plan by a Director
shall be made on such forms as the Administrator shall prescribe.
6.2. Amendment and Termination. The Board may alter or amend
this Plan from time to time or may terminate it in its entirety; provided,
however, that no such action, except for an acceleration of benefits, shall,
without the consent of a Director, impair the rights in any Shares issued or to
be issued to such Director, as a result of a grant of Options under the Plan;
and further provided, that any amendment that must be approved by the
shareholders of the Company in order to comply with applicable law or the rules
of the principal national securities exchange upon which the Shares are traded
or quoted shall not be effective unless and until such approval has been
obtained in compliance with such applicable law or rules. Presentation of this
Plan or any amendment hereof for shareholder approval shall not be construed to
limit the Company's authority to offer similar or dissimilar benefits through
plans that are not subject to shareholder approval.
7
<PAGE> 10
6.3. Amendment of Options. The Administrator shall not,
without the further approval of the shareholders of the Company, authorize the
amendment of any outstanding Option to reduce the exercise price of the Option.
Furthermore, no Option shall be cancelled and replaced with awards having a
lower exercise price without further approval of the shareholders of the
Company. This Section 6.3 is intended to prohibit the repricing of "underwater"
Options and shall not be construed to prohibit the adjustments provided for in
Section 7.2 of this Plan.
ARTICLE VII. SHARES SUBJECT TO PLAN
7.1. Shares Subject to Plan. Subject to adjustment as provided
in this Plan, the total number of Shares which may be issued under this Plan
shall be three hundred thousand (300,000).
7.2. Adjustments. The Administrator may make or provide for
such adjustments in the (a) number of Shares covered by outstanding Options
granted or awarded hereunder, (b) prices per share applicable to such Options,
and (c) kind of shares covered thereby, as the Administrator in its sole
discretion may in good faith determine to be equitably required in order to
prevent dilution or enlargement of the rights of Directors that otherwise would
result from (x) any stock dividend, stock split, combination of shares,
recapitalization or other change in the capital structure of the Company, (y)
any merger, consolidation, spin-off, spin-out, split-off, split-up,
reorganization, partial or complete liquidation of the Company or other
distribution of assets, issuance of rights or warrants to purchase securities of
the Company, or (z) any other corporate transaction or event having an effect
similar to any of the foregoing. In the event of any such transaction or event,
the Administrator may provide in substitution for any or all outstanding grants
or awards under this Plan such alternative consideration as it may in good faith
determine to be equitable under the circumstances and may require in connection
therewith the surrender of all awards so replaced. Moreover, the Administrator
may on or after the date of grant provide in the agreement evidencing any grant
or award under this Plan that the holder of the grant or award may elect to
receive an equivalent grant or award in respect of securities of the
8
<PAGE> 11
surviving entity of any merger, consolidation or other transaction or event
having a similar effect, or the Administrator may provide that the holder will
automatically be entitled to receive such an equivalent grant or award. The
Administrator may also make or provide for such adjustments in the number of
shares specified in Section 7.1 of this Plan as the Administrator in its sole
discretion may in good faith determine to be appropriate in order to reflect any
transaction or event described in this Section 7.2. This Section 7.2 shall not
be construed to permit the re-pricing of any Options in the absence of any of
the circumstances described above in contravention of Section 6.3 of this Plan.
ARTICLE VIII. GENERAL PROVISIONS
8.1. Governing Law. The provisions of this Plan shall be
governed by and construed in accordance with the laws of the State of Georgia.
8.2. Miscellaneous. Headings are given to the sections of this
Plan solely as a convenience to facilitate reference. Such headings, numbering
and paragraphing shall not in any case be deemed in any way material or relevant
to the construction of this Plan or any provisions thereof. The use of the
singular shall also include within its meaning the plural, and vice versa.
9
<PAGE> 1
EXHIBIT 10(h)
================================================================================
FLOWERS INDUSTRIES, INC.
$100,000,000
6.80% Senior Notes due January 5, 2008
$20,000,000
6.99% Senior Notes due January 5, 2011
$5,000,000
7.08% Senior Notes due January 5, 2016
---------
NOTE PURCHASE AGREEMENT
---------
Dated December 20, 1995
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1. AUTHORIZATION OF NOTES................................................................................. 1
2. SALE AND PURCHASE OF NOTES............................................................................. 2
3. CLOSING................................................................................................ 2
4. CONDITIONS TO CLOSING.................................................................................. 2
4.1. Representations and Warranties.............................................................. 2
4.2. Performance; No Default..................................................................... 3
4.3. Compliance Certificates..................................................................... 3
4.4. Opinions of Counsel......................................................................... 3
4.5. Purchase Permitted By Applicable Law, etc................................................... 3
4.6. Sale of Other Notes......................................................................... 4
4.7. Payment of Special Counsel Fees............................................................. 4
4.8. Private Placement Number.................................................................... 4
4.9. Changes in Corporate Structure.............................................................. 4
4.10. Proceedings and Documents................................................................... 4
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................... 4
5.1. Organization; Power and Authority........................................................... 5
5.2. Authorization, etc.......................................................................... 5
5.3. Disclosure.................................................................................. 5
5.4. Organization and Ownership of Shares of Subsidiaries........................................ 5
5.5. Financial Statements........................................................................ 6
5.6. Compliance with Laws, Other Instruments, etc................................................ 6
5.7. Governmental Authorizations, etc............................................................ 6
5.8. Litigation; Observance of Statutes and Orders............................................... 7
5.9. Taxes....................................................................................... 7
5.10. Title to Property; Leases................................................................... 7
5.11. Licenses, Permits, etc...................................................................... 7
5.12. Compliance with ERISA....................................................................... 8
5.13. Private Offering by the Company............................................................. 8
5.14. Use of Proceeds; Margin Regulations......................................................... 9
5.15. Existing Indebtedness....................................................................... 9
5.16. Foreign Assets Control Regulations, etc..................................................... 9
5.17. Status under Certain Statutes............................................................... 10
5.18. Restrictive Agreements...................................................................... 10
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
6. REPRESENTATIONS OF THE PURCHASER....................................................................... 10
6.1. Purchase for Investment..................................................................... 10
6.2. Source of Funds............................................................................. 10
7. INFORMATION AS TO COMPANY.............................................................................. 12
7.1. Financial and Business Information.......................................................... 12
7.2. Officer's Certificate....................................................................... 15
7.3. Inspection.................................................................................. 15
8. PREPAYMENT OF THE NOTES................................................................................ 16
8.1. Required Prepayments........................................................................ 16
8.2. Optional Prepayments with Make-Whole Amount................................................. 16
8.3. Allocation of Partial Prepayments........................................................... 17
8.4. Maturity; Surrender, etc.................................................................... 17
8.5. Purchase of Notes........................................................................... 17
8.6. Make-Whole Amount........................................................................... 17
9. AFFIRMATIVE COVENANTS.................................................................................. 19
9.1. Compliance with Law......................................................................... 19
9.2. Insurance................................................................................... 19
9.3. Maintenance of Properties................................................................... 19
9.4. Payment of Taxes............................................................................ 20
9.5. Corporate Existence, etc.................................................................... 20
10. NEGATIVE COVENANTS..................................................................................... 20
10.1. Transactions with Affiliates................................................................ 20
10.2. Merger, Consolidation, etc.................................................................. 20
10.3. Consolidated Total Debt..................................................................... 21
10.4. Restricted Payments......................................................................... 21
10.5. Subsidiary Borrowings....................................................................... 21
10.6. Mortgages and Liens......................................................................... 22
10.7. Sale of Assets.............................................................................. 23
10.8. Nature of Business.......................................................................... 23
10.9 Restrictive Agreements...................................................................... 23
11. EVENTS OF DEFAULT...................................................................................... 24
12. REMEDIES ON DEFAULT, ETC............................................................................... 26
12.1. Acceleration................................................................................ 26
12.2. Other Remedies.............................................................................. 26
12.3. Rescission.................................................................................. 27
12.4. No Waivers or Election of Remedies, Expenses, etc........................................... 27
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.......................................................... 27
13.1. Registration of Notes....................................................................... 27
13.2. Transfer and Exchange of Notes.............................................................. 28
13.3. Replacement of Notes........................................................................ 28
14. PAYMENTS ON NOTES...................................................................................... 29
14.1. Place of Payment............................................................................ 29
14.2. Home Office Payment......................................................................... 29
15. EXPENSES, ETC.......................................................................................... 29
15.1. Transaction Expenses........................................................................ 29
15.2. Survival.................................................................................... 30
16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
AGREEMENT.............................................................................................. 30
17. AMENDMENT AND WAIVER................................................................................... 30
17.1. Requirements................................................................................ 30
17.2. Solicitation of Holders of Notes............................................................ 30
17.3. Binding Effect, etc......................................................................... 31
17.4. Notes held by Company, etc.................................................................. 31
18. NOTICES................................................................................................ 31
19. REPRODUCTION OF DOCUMENTS.............................................................................. 32
20. CONFIDENTIAL INFORMATION............................................................................... 32
21. SUBSTITUTION OF PURCHASER.............................................................................. 33
22. MISCELLANEOUS.......................................................................................... 34
22.1. Successors and Assigns...................................................................... 34
22.2. Payments Due on Non-Business Days........................................................... 34
22.3. Severability................................................................................ 34
22.4. Construction................................................................................ 34
22.5. Counterparts................................................................................ 34
22.6. Governing Law............................................................................... 35
</TABLE>
SCHEDULE A -- INFORMATION RELATING TO PURCHASERS OF NOTES
DUE JANUARY 5, 2008
SCHEDULE B -- INFORMATION RELATING TO PURCHASERS OF NOTES
DUE JANUARY 5, 2011
<PAGE> 5
SCHEDULE C -- INFORMATION RELATING TO PURCHASERS OF
NOTES DUE JANUARY 5, 2016
SCHEDULE D -- DEFINED TERMS
SCHEDULE 4.9 -- Changes in Corporate Structure
SCHEDULE 5.3 -- Disclosure Materials
SCHEDULE 5.4 -- Subsidiaries of the Company and
Ownership of Subsidiary Stock
SCHEDULE 5.5 -- Financial Statements
SCHEDULE 5.8 -- Certain Litigation
SCHEDULE 5.11 -- Patents, etc.
SCHEDULE 5.14 -- Use of Proceeds
SCHEDULE 5.15 -- Existing Indebtedness
EXHIBIT 1(A) -- Form of 6.80% Senior Note due January 5, 2008
EXHIBIT 1(B) -- Form of 6.99% Senior Note due January 5, 2011
EXHIBIT 1(C) -- Form of 7.08% Senior Note due January 5, 2016
EXHIBIT 4.4(a) -- Form of Opinion of General Counsel of the Company
EXHIBIT 4.4(b) -- Form of Opinion of Special Counsel to the Company
EXHIBIT 4.4(c) -- Form of Opinion of Special Counsel
for the Purchasers
<PAGE> 6
6.80% Senior Notes due January 5, 2008
6.99% Senior Notes due January 5, 2011
7.08% Senior Notes due January 5, 2016
December 20, 1995
TO EACH OF THE PURCHASERS LISTED IN
THE ATTACHED SCHEDULE A, SCHEDULE B
AND SCHEDULE C:
Ladies and Gentlemen:
FLOWERS INDUSTRIES, INC., a Georgia corporation (the
"COMPANY"), agrees with you as follows:
1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $100,000,000
aggregate principal amount of its 6.80% Senior Notes due January 5, 2008,
$20,000,000 aggregate principal amount of its 6.99% Senior Notes due January 5,
2011 and $5,000,000 aggregate principal amount of its 7.08% Senior Notes due
January 5, 2016 (collectively, the "NOTES", such term to include any such notes
issued in substitution therefor pursuant to Section 13 of this Agreement). The
Notes shall be substantially in the form set out in Exhibits 1(A), 1(B) and
1(C), with such changes therefrom, if any, as may be approved by you and the
Company. Certain capitalized terms used in this Agreement are defined in
Schedule D; references to a "Schedule" or an "Exhibit" are, unless otherwise
specified, to a Schedule or an Exhibit attached to this Agreement.
<PAGE> 7
2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the
Company will issue and sell to you and each of the other purchasers named in
Schedule A, Schedule B and Schedule C (the "OTHER PURCHASERS") and you and the
Other Purchasers will purchase from the Company, at the Closing provided for in
Section 3, Notes in the principal amount specified opposite your name and the
names of the respective Other Purchasers in Schedule A, Schedule B and/or
Schedule C at the purchase price of 100% of the principal amount thereof. The
obligations of you and the Other Purchasers hereunder are several and not joint
obligations and you shall have no obligation and no liability to any Person for
the performance or non-performance by any Other Purchaser hereunder.
3. CLOSING.
The sale and purchase of the Notes to be purchased by you and
the Other Purchasers shall occur at the offices of Jones, Day, Reavis & Pogue,
3500 SunTrust Plaza, 303 Peachtree Street, N.E., Atlanta, Georgia 30308, at
10:00 a.m., Eastern Standard Time, at a closing on either December 20, 1995 or
January 5, 1996 as specified opposite your name and the name of each Other
Purchaser in Schedule A, Schedule B and Schedule C (as so set forth with respect
to each Note Purchaser, the "Closing"). At the Closing the Company will deliver
to you the Notes to be purchased by you in the form of a single Note (or such
greater number of Notes in denominations of at least $500,000 as you may
request) dated the date of the Closing and regis tered in your name (or in the
name of your nominee), against delivery by you to the Company or its order of
immediately available funds in the amount of the purchase price therefor by wire
transfer of immediately available funds for the account of the Company to
account number 6890-066623 at Wachovia Bank of North Carolina, N.A.,
Winston-Salem, North Carolina, ABA Routing #0531-0049-4, for further credit to
Flowers Industries, Inc., Attn: Gay Winters. If at the Closing the Company shall
fail to tender such Notes to you as provided above in this Section 3, or any of
the conditions specified in Section 4 shall not have been fulfilled to your
satisfaction, you shall, at your election, be relieved of all further
obligations under this Agreement, without thereby waiving any rights you may
have by reason of such failure or such nonfulfillment.
4. CONDITIONS TO CLOSING.
Your obligation to purchase and pay for the Notes to be sold
to you at the Closing is subject to the fulfillment to your satisfaction, prior
to or at the Closing, of the following conditions:
4.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company in this
Agreement shall be correct when made and at the time of the Closing.
2
<PAGE> 8
4.2. PERFORMANCE; NO DEFAULT.
The Company shall have performed and complied with all
agreements and conditions contained in this Agreement required to be performed
or complied with by it prior to or at the Closing and after giving effect to the
issue and sale of the Notes (and the application of the proceeds thereof as
contemplated by Schedule 5.14) no Default or Event of Default shall have
occurred and be continuing.
4.3. COMPLIANCE CERTIFICATES.
(a) Officer's Certificate. The Company shall have delivered to
you an Officer's Certificate, dated the date of the Closing, certifying that the
conditions specified in Sections 4.1, 4.2, 4.7, 4.8 and 4.9 have been fulfilled
and certifying as to the sale of the Notes pursuant to Section 4.6 which on or
prior to such date have been sold by the Company pursuant to the terms hereof.
(b) Secretary's Certificate. The Company shall have delivered
to you a certificate certifying as to the resolutions attached thereto and other
corporate proceedings relating to the authorization, execution and delivery of
the Notes and the Agreements.
4.4. OPINIONS OF COUNSEL.
You shall have received opinions in form and substance
satisfactory to you, dated the date of the Closing (a) from Stephen R. Avera,
Assistant General Counsel for the Company, covering the matters set forth in
Exhibit 4.4(a) and covering such other matters incident to the transactions
contemplated hereby as you or your counsel may reasonably request; (b) from
Jones, Day, Reavis & Pogue, special counsel to the Company, covering the matters
set forth in Exhibit 4.4(b) (and the Company hereby instructs its counsel to
deliver such opinion to you); and (c) from Alston & Bird, your special counsel
in connection with such transactions, substantially in the form set forth in
Exhibit 4.4(c) and covering such other matters incident to such transactions as
you may reasonably request.
4.5. PURCHASE PERMITTED BY APPLICABLE LAW, ETC.
On the date of the Closing your purchase of Notes shall (i) be
permitted by the laws and regulations of each jurisdiction to which you are
subject, without recourse to provisions (such as Section 1405(a)(8) of the New
York Insurance Law) permitting limited investments by insur ance companies
without restriction as to the character of the particular investment, (ii) not
violate any applicable law or regulation (including, without limitation,
Regulation G, T or X of the Board of Governors of the Federal Reserve System)
and (iii) not subject you to any tax, penalty or liability under or pursuant to
any applicable law or regulation, which law or regulation was not in effect on
the date hereof. If requested by you, you shall have received an Officer's
Certificate certifying as to such matters of fact as you may reasonably specify
to enable you to determine whether such purchase is so permitted.
3
<PAGE> 9
4.6. SALE OF OTHER NOTES.
The Company shall sell to the Other Purchasers and the Other
Purchasers shall purchase the Notes to be purchased by them at the Closing as
specified in Schedule A, Schedule B and Schedule C.
4.7. PAYMENT OF SPECIAL COUNSEL FEES.
Without limiting the provisions of Section 15.1, the Company
shall have paid on or before the Closing the reasonable fees, charges and
disbursements actually incurred by you in relation to your special counsel
referred to in Section 4.4, to the extent reflected in a statement of such
counsel rendered to the Company at least one Business Day prior to the Closing.
4.8. PRIVATE PLACEMENT NUMBER.
A Private Placement number issued by Standard & Poor's CUSIP
Service Bureau (in cooperation with the Securities Valuation Office of the
National Association of Insurance Commissioners) shall have been obtained for
the Notes.
4.9. CHANGES IN CORPORATE STRUCTURE.
Except as specified in Schedule 4.9, the Company shall not
have changed its jurisdiction of incorporation or been a party to any merger or
consolidation and shall not have succeeded to all or any substantial part of the
liabilities of any other entity, at any time following the date of the most
recent financial statements referred to in Schedule 5.5.
4.10. PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the
transactions contemplated by this Agreement and all documents and instruments
incident to such transactions shall be satisfactory to you and your special
counsel, and you and your special counsel shall have received all such
counterpart originals or certified or other copies of such documents as you or
they may reasonably request.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to you that:
4
<PAGE> 10
5.1. ORGANIZATION; POWER AND AUTHORITY.
The Company is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation, and is
duly qualified as a foreign corporation and is in good standing in each
jurisdiction in which such qualification is required by law, other than those
jurisdictions as to which the failure to be so qualified or in good standing
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect. The Company has the corporate power and authority to
own or hold under lease the properties it pur ports to own or hold under lease,
to transact the business it transacts and proposes to transact, to execute and
deliver this Agreement and the Notes and to perform the provisions hereof and
thereof.
5.2. AUTHORIZATION, ETC.
This Agreement and the Notes have been duly authorized by all
necessary corporate action on the part of the Company, and this Agreement
constitutes, and upon execution and delivery thereof each Note will constitute,
a legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except as such enforceability may be
limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally and
(ii) general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
5.3. DISCLOSURE.
The Company, through its agent, SunTrust Capital Markets, has
delivered to you and each Other Purchaser a copy of a Private Placement Offering
Memorandum, dated November 6, 1995, (the "MEMORANDUM"), relating to the
transactions contemplated hereby. Except as dis closed in Schedule 5.3, this
Agreement, the Memorandum, the documents, certificates or other writings
identified in Schedule 5.3 and the financial statements listed in Schedule 5.5,
taken as a whole, do not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were made. Except as
disclosed in the Memorandum or as expressly described in Schedule 5.3, or in one
of the documents, certificates or other writings identified therein, or in the
financial statements listed in Schedule 5.5, since July 1, 1995, there has been
no change in the financial condition, operations, business or properties of the
Company or any of its Subsidiaries except changes that individually or in the
aggregate would not reasonably be expected to have a Material Adverse Effect.
5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES.
(a) Schedule 5.4 is (except as noted therein) a complete and
correct list of the Company's Subsidiaries, showing, as to each Subsidiary, the
correct name thereof, the jurisdiction of its organization, and the percentage
of shares of each class of its capital stock or similar equity interests
outstanding owned by the Company and each other Subsidiary.
5
<PAGE> 11
(b) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the
Company and its Subsidiaries have been validly issued, are fully paid and
nonassessable and are owned by the Company or another Sub sidiary free and clear
of any Lien (except as otherwise disclosed in Schedule 5.4).
(c) Each Subsidiary identified in Schedule 5.4 is a
corporation or other legal entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, and is duly
qualified as a foreign corporation or other legal entity and is in good standing
in each jurisdiction in which such qualification is required by law, other than
those jurisdictions as to which the failure to be so qualified or in good
standing would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect. Each such Sub sidiary has the corporate or other
power and authority to own or hold under lease the properties it purports to own
or hold under lease and to transact the business it transacts and proposes to
transact.
5.5. FINANCIAL STATEMENTS.
The Company has delivered to each Purchaser copies of the
financial statements of the Company and its Subsidiaries listed on Schedule 5.5.
All of said financial statements (including in each case the related schedules
and notes) fairly present in all material respects the consolidated financial
position of the Company and its Subsidiaries as of the respective dates
specified in such Schedule and the consolidated results of their operations and
cash flows for the respective periods so specified and have been prepared in
accordance with GAAP consistently applied throughout the periods involved except
as set forth in the notes thereto (subject, in the case of any interim financial
statements, to normal year-end adjustments).
5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.
The execution, delivery and performance by the Company of this
Agreement and the Notes will not (i) contravene, result in any breach of, or
constitute a default under, or result in the creation of any Lien in respect of
any property of the Company or any Subsidiary under, any indenture, mortgage,
deed of trust, loan, purchase or credit agreement, lease, corporate charter or
by-laws, or any other Material agreement or instrument to which the Company or
any Subsidiary is bound or by which the Company or any Subsidiary or any of
their respective properties may be bound or affected, (ii) conflict with or
result in a breach of any of the terms, conditions or provisions of any order,
judgment, decree, or ruling of any court, arbitrator or Governmental Authority
applicable to the Company or any Subsidiary or (iii) violate any provision of
any statute or other rule or regulation of any Governmental Authority applicable
to the Company or any Subsidiary.
5.7. GOVERNMENTAL AUTHORIZATIONS, ETC.
No consent, approval or authorization of, or registration,
filing or declaration with, any Governmental Authority is required in connection
with the execution, delivery or performance by the Company of this Agreement or
the Notes.
6
<PAGE> 12
5.8. LITIGATION; OBSERVANCE OF STATUTES AND ORDERS.
(a) Except as disclosed in Schedule 5.8, there are no actions,
suits or proceedings pending or, to the knowledge of the Company, threatened
against or affecting the Company or any Subsidiary or any property of the
Company or any Subsidiary in any court or before any arbitrator of any kind or
before or by any Governmental Authority that, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect.
(b) Neither the Company nor any Subsidiary is in default under
any order, judg ment, decree or ruling of any court, arbitrator or Governmental
Authority or is in violation of any applicable law, ordinance, rule or
regulation (including without limitation Environmental Laws) of any Governmental
Authority, which default or violation, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect.
5.9. TAXES.
The Company and its Subsidiaries have filed all income tax
returns that are required to have been filed in any jurisdiction, and have paid
all taxes shown to be due and payable on such returns and all other taxes and
assessments payable by them, to the extent such taxes and assess ments have
become due and payable and before they have become delinquent, except for any
taxes and assessments (i) the amount of which is not individually or in the
aggregate Material or (ii) the amount, applicability or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which the Company or a Subsidiary, as the case may be, has
established adequate reserves in accordance with GAAP. The Federal income tax
liabilities of the Company and its Subsidiaries have been determined by the
Internal Revenue Service and paid for all fiscal years up to and including the
fiscal year ended June 30, 1990.
5.10. TITLE TO PROPERTY; LEASES.
The Company and its Subsidiaries have good and sufficient
title to their respective Material properties, including all such properties
reflected in the most recent audited balance sheet referred to in Section 5.5 or
purported to have been acquired by the Company or any Subsidiary after said date
(except as sold or otherwise disposed of in the ordinary course of business), in
each case free and clear of Liens prohibited by this Agreement, except for those
defects in title and Liens that, individually or in the aggregate, would not
have a Material Adverse Effect. All Material leases are valid and subsisting and
are in full force and effect in all material respects.
5.11. LICENSES, PERMITS, ETC.
Except as disclosed in Schedule 5.11, the Company and its
Subsidiaries own or possess all licenses, permits, franchises, authorizations,
patents, copyrights, service marks, trademarks and trade names, or rights
thereto, that are Material, without known conflict with the rights of others,
except for those conflicts that, individually or in the aggregate, would not
have a Material Adverse Effect.
7
<PAGE> 13
5.12. COMPLIANCE WITH ERISA.
(a) The Company and each ERISA Affiliate have operated and
administered each Plan in compliance with all applicable laws except for such
instances of noncompliance as have not resulted in and could not reasonably be
expected to result in a Material Adverse Effect. Neither the Company nor any
ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or
the penalty or excise tax provisions of the Code relating to employee benefit
plans (as defined in Section 3 of ERISA) which remains unpaid as of the date of
this Agreement, and no event, transaction or condition has occurred or exists
that would reasonably be expected to result in the incurrence of any such
liability by the Company or any ERISA Affiliate, or in the imposition of any
Lien on any of the rights, properties or assets of the Company or any ERISA
Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty
or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than
such liabilities or Liens as would not be individually or in the aggregate
Material.
(b) The present value of the aggregate benefit liabilities
under each of the Plans (other than Multiemployer Plans), determined as of the
end of such Plan's most recently ended plan year on the basis of the actuarial
assumptions specified for funding purposes in such Plan's most recent actuarial
valuation report, did not exceed the aggregate current value of the assets of
such Plan allocable to such benefit liabilities by more than $600,000 in the
case of any single Plan and by more than $1,000,000 in the aggregate for all
Plans. The term "BENEFIT LIABILITIES" has the meaning specified in section 4001
of ERISA and the terms "CURRENT VALUE" and "PRESENT VALUE" have the meaning
specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred
withdrawal liabilities (and are not subject to contingent withdrawal
liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer
Plans that individually or in the aggregate are Material.
(d) The expected postretirement benefit obligation (determined
as of the last day of the Company's most recently ended fiscal year in
accordance with Financial Accounting Standards Board Statement No. 106, without
regard to liabilities attributable to continuation coverage mandated by section
4980B of the Code) of the Company and its Subsidiaries is not Material.
(e) The execution and delivery of this Agreement and the
issuance and sale of the Notes hereunder will not involve any transaction that
is subject to the prohibitions of section 406 of ERISA or in connection with
which a tax could be imposed pursuant to section 4975(c)(1)(A)- (D) of the Code.
The representation by the Company in the first sentence of this Section 5.12(e)
is made in reliance upon and subject to the accuracy of your representation in
Section 6.2 as to the sources of the funds to be used to pay the purchase price
of the Notes to be purchased by you.
5.13. PRIVATE OFFERING BY THE COMPANY.
Neither the Company nor anyone acting on its behalf has
offered the Notes or any similar securities for sale to, or solicited any offer
to buy any of the same from, or otherwise
8
<PAGE> 14
approached or negotiated in respect thereof with, any person other than you, the
Other Purchasers and not more than 50 other Institutional Investors, each of
which has been offered the Notes at a private sale for investment. Neither the
Company nor anyone acting on its behalf has taken, or will take, any action that
would subject the issuance or sale of the Notes to the registration requirements
of Section 5 of the Securities Act.
5.14. USE OF PROCEEDS; MARGIN REGULATIONS.
The Company will apply the proceeds of the sale of the Notes
as set forth in Schedule 5.14. No part of the proceeds from the sale of the
Notes hereunder will be used, directly or indirectly, for the purpose of buying
or carrying any margin stock within the meaning of Regulation G of the Board of
Governors of the Federal Reserve System (12 CFR 207), or for the purpose of
buying or carrying or trading in any securities under such circumstances as to
involve the Company in a violation of Regulation X of said Board (12 CFR 224) or
to involve any broker or dealer in a violation of Regulation T of said Board (12
CFR 220). Margin stock does not constitute more than 3% of the value of the
consolidated assets of the Company and its Subsidiaries and the Company does not
have any present intention that margin stock will constitute more than 3% of the
value of such assets. As used in this Section, the terms "MARGIN STOCK" and
"PURPOSE OF BUYING OR CARRYING" shall have the meanings assigned to them in said
Regulation G.
5.15. EXISTING INDEBTEDNESS.
Except as described therein, Schedule 5.15 sets forth a
complete and correct list of all outstanding Indebtedness of the Company and its
Subsidiaries as of September 23, 1995, and all outstanding Indebtedness in
excess of $1,000,000 in the aggregate, of the Company and its Subsidiaries
incurred from September 23, 1995 to the date hereof, excluding any Indebtedness
relating to borrowings or re-borrowings under any revolving line of credit
disclosed on Schedule 5.15. Since September 23, 1995 there has been no Material
change in the amounts, interest rates, sinking funds, instalment payments or
maturities of the Indebtedness of the Company or its Subsidiaries. Neither the
Company nor any Subsidiary is in default and no waiver of default is currently
in effect, in the payment of any principal or interest on any Indebtedness of
the Company or such Subsidiary, and no event or condition exists with respect to
any Indebtedness of the Company or any Subsidiary the outstanding principal
amount of which exceeds $2,000,000 that would permit (or that with notice or the
lapse of time, or both, would permit) one or more Persons to cause such
Indebtedness to become due and payable before its stated maturity or before its
regularly scheduled dates of payment.
5.16. FOREIGN ASSETS CONTROL REGULATIONS, ETC.
Neither the sale of the Notes by the Company hereunder nor its
use of the proceeds thereof will violate the Trading with the Enemy Act, as
amended, or any of the foreign assets control regulations of the United States
Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto.
9
<PAGE> 15
5.17. STATUS UNDER CERTAIN STATUTES.
Neither the Company nor any Subsidiary is subject to
regulation under the Investment Company Act of 1940, as amended, the Public
Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as
amended, or the Federal Power Act, as amended.
5.18. RESTRICTIVE AGREEMENTS.
The Company is not a party to any agreement, indenture, lease
or other document or instrument which, in any way, prohibits or restricts the
right or ability of the Company to amend, supplement or otherwise modify the
terms and provisions of this Agreement or any of the Notes.
6. REPRESENTATIONS OF THE PURCHASER.
6.1. PURCHASE FOR INVESTMENT.
You represent that you are purchasing the Notes for your own
account or for one or more separate accounts maintained by you or for the
account of one or more pension or trust funds and not with a view to the
distribution thereof, provided that the disposition of your or their property
shall at all times be within your or their control. You understand that the
Notes have not been registered under the Securities Act and may be resold only
if registered pursuant to the provi sions of the Securities Act or if an
exemption from registration is available, except under circumstances where
neither such registration nor such an exemption is required by law, and that the
Company is not required to register the Notes.
6.2. SOURCE OF FUNDS.
You represent that at least one of the following statements is
an accurate representation as to each source of funds (a "Source") to be used by
you to pay the purchase price of the Notes to be purchased by you hereunder:
(a) if you are an insurance company and if the Source includes
assets allocated to any separate account maintained by you, the Source
does not include assets allocated to any separate account maintained by
you in which any employee benefit plan (or its related trust) has any
interest, other than a separate account that is maintained solely in
connection with your fixed contractual obligations under which the
amounts payable, or credited, to such plan and to any participant or
beneficiary of such plan (including any annuitant) are not affected in
any manner by the investment performance of the separate account; or
(b) the Source is either (i) an insurance company pooled
separate account, within the meaning of Prohibited Transaction
Exemption ("PTE") 90-1 (issued January 29, 1990), or (ii) a bank
collective investment fund, within the meaning of the PTE 91-38 (issued
July 12, 1991) and, except as you have disclosed to the Company in
writing pursuant to this
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paragraph (b), no employee benefit plan or group of plans maintained by
the same employer or employee organization beneficially owns more than
10% of all assets allocated to such pooled separate account or
collective investment fund; or
(c) the Source constitutes assets of an "investment fund"
(within the meaning of Part V of the QPAM Exemption) managed by a
"qualified professional asset manager" or "QPAM" (within the meaning of
Part V of the QPAM Exemption), no employee benefit plan's assets that
are included in such investment fund, when combined with the assets of
all other employee benefit plans established or maintained by the same
employer or by an affiliate (within the meaning of Section V(c)(1) of
the QPAM Exemption) of such employer or by the same employee
organization and managed by such QPAM, exceed 20% of the total client
assets managed by such QPAM, the conditions of Part I(c) and (g) of the
QPAM Exemption are satisfied, neither the QPAM nor a person controlling
or controlled by the QPAM (applying the definition of "control" in
Section V(e) of the QPAM Exemption) owns a 5% or more interest in the
Company and (i) the identity of such QPAM and (ii) the names of all
employee benefit plans whose assets are included in such in vestment
fund have been disclosed to the Company in writing pursuant to this
paragraph (c); or
(d) the Source is a governmental plan; or
(e) the Source is one or more employee benefit plans, or a
separate account or trust fund comprised of one or more employee
benefit plans, each of which has been identified to the Company in
writing pursuant to this paragraph (e); or
(f) the Source does not include assets of any employee benefit
plan, other than a plan exempt from the coverage of ERISA; or
(g) the Source consists of funds from your "insurance company
general account" as defined in Department of Labor Prohibited
Transaction Exemption 95-60 (60 FR 35925, July 12, 1995) provided that
there is no "employee benefit plan" (as defined in Section 3(3) of
ERISA and Section 4975(e)(1) of the Code, treating as a single plan all
plans maintained by the same employer or employee organization) with
respect to which the amount of the general account reserves and
liabilities of all contracts held by or on behalf of such plan exceed
ten percent (10%) of the total reserves and liabilities of such general
account (exclusive of separate account liabilities) plus surplus, as
set forth in the National Association of Insurance Commissioners Annual
Statement filed with your state of domicile, provided further that you
are relying on the Company's representations set forth in Section
5.12(e) above in making such representation.
As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL
PLAN", "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
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7. INFORMATION AS TO COMPANY.
7.1. FINANCIAL AND BUSINESS INFORMATION.
The Company shall deliver to each holder of Notes that is an
Institutional Investor:
(a) Quarterly Statements -- within 60 days after the end of
each quarterly fiscal period in each fiscal year of the Company (other
than the last quarterly fiscal period of each such fiscal year),
duplicate copies of,
(i) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such quarter, and
(ii) consolidated statements of income, changes in
shareholders' equity and cash flows of the Company and its
Subsidiaries, for such quarter and (in the case of the second
and third quarters) for the portion of the fiscal year ending
with such quarter,
setting forth in each case in comparative form the figures for the
corresponding periods in the previous fiscal year, all in reasonable
detail, prepared in accordance with GAAP applicable to quarterly
financial statements generally, and certified by a Senior Financial
Officer as fairly presenting, in all material respects, the financial
position of the companies being reported on and their results of
operations and cash flows, subject to changes resulting from year-end
adjustments, provided that delivery within the time period specified
above of copies of the Company's Quarterly Report on Form 10-Q prepared
in compliance with the requirements therefor and filed with the
Securities and Exchange Commission shall be deemed to satisfy the
requirements of this Section 7.1(a);
(b) Annual Statements -- within 105 days after the end of each
fiscal year of the Company, duplicate copies of,
(i) a consolidated balance sheet of the Company and its
Subsidiaries, as at the end of such year, and
(ii) consolidated statements of income, changes in
shareholders' equity and cash flows of the Company and its
Subsidiaries, for such year,
setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail, prepared in accordance
with GAAP, and accompanied by an opinion thereon of independent
certified public accountants of recognized national standing, which
opinion shall state that such financial statements present fairly, in
all material respects, the financial position of the companies being
reported upon and their results of operations and cash flows and have
been prepared in conformity with GAAP, and that the examination of such
accountants in connection with such financial statements has been made
in accordance with generally accepted auditing standards, and that such
audit provides a reasonable basis
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for such opinion in the circumstances, provided that the delivery
within the time period specified above of the Company's Annual Report
on Form 10-K for such fiscal year (together with the Company's annual
report to shareholders, if any, prepared pursuant to Rule 14a-3 under
the Exchange Act) prepared in accordance with the requirements therefor
and filed with the Securities and Exchange Commission shall be deemed
to satisfy the requirements of this Section 7.1(b);
(c) SEC and Other Reports -- promptly upon their becoming
available, one copy of (i) each financial statement, report, notice or
proxy statement sent by the Company or any Subsidiary to public
securities holders generally, and (ii) each regular or periodic report,
each registration statement (other than registration statements on Form
S-8 or its equivalent) that shall have become effective (without
exhibits except as expressly requested by such holder), and each final
prospectus and all amendments thereto (other than in connection with
any employee benefit plan) filed by the Company or any Subsidiary with
the Securities and Exchange Commission;
(d) Notice of Default or Event of Default -- promptly, and in
any event within five days after a Responsible Officer becoming aware
of the existence of any Default or Event of Default, a written notice
specifying the nature and period of existence thereof and what action
the Company is taking or proposes to take with respect thereto;
(e) ERISA Matters -- promptly, and in any event within five
days after a Responsible Officer becoming aware of any of the
following, a written notice setting forth the nature thereof and the
action, if any, that the Company or an ERISA Affiliate proposes to take
with respect thereto:
(i) with respect to any Plan, any reportable event, as
defined in sec tion 4043(b) of ERISA and the regulations
thereunder, for which notice thereof has not been waived
pursuant to such regulations as in effect on the date hereof;
or
(ii) the taking by the PBGC of steps to institute, or the
receipt of written notice by the PBGC of its intention to
institute proceedings under section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer,
any Plan, or the receipt by the Company or any ERISA Affiliate
of a notice from a Multiemployer Plan that such action has
been taken by the PBGC with respect to such Multiemployer
Plan; or
(iii) any event, transaction or condition that could
result in the incurrence of any liability by the Company or
any ERISA Affiliate pursuant to Title I or IV of ERISA or the
penalty or excise tax provisions of the Code relating to
employee benefit plans, or in the imposition of any Lien on
any of the rights, properties or assets of the Company or any
ERISA Affiliate pursuant to Title I or IV of ERISA or such
penalty or excise tax provisions, if such liability or Lien,
taken together with any other such liabilities or Liens then
existing, would reasonably be expected to have a Material
Adverse Effect; and
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(f) Requested Information -- with reasonable promptness, such
other data and information relating to the business, operations,
affairs, financial condition, assets or properties of the Company or
any of its Subsidiaries or relating to the ability of the Company to
perform its obligations hereunder and under the Notes as from time to
time may be reasonably requested by any such holder of Notes.
(g) Promptly after obtaining knowledge of any of the
following, the Company will provide each Purchaser with written notice
in reasonable detail of:
(i) any pending or threatened action against the Company
or any of its Subsidiaries or any real property owned or
operated by the Company or any of its Subsidiaries under any
Environmental Law, if such pending or threatened action would
result in a Material Adverse Effect;
(ii) any condition or occurrence on any real property
owned or operated by the Company or any of its Subsidiaries
that (x) results in noncompliance by the Company or any of its
Subsidiaries with any Environmental Law or (y) could
reasonably be anticipated to form the basis of a claim under
any Environmental Law against the Company or any of its
Subsidiaries or any such real property, if such condition or
occurrence results in a Material Adverse Effect;
(iii) any condition or occurrence on any real property
owned or operated by the Company or any of its Subsidiaries
that could reasonably be anticipated to cause such real
property to be subject to any restrictions on the ownership,
occupancy, use or transferability by the Company or its
Subsidiary, as the case may be, of its interest in such real
property under any Environmental Law, if such condition or
occurrence results in a Material Adverse Effect; and
(iv) the taking of any removal or remedial action in
response to the actual or alleged presence of any Hazardous
Material on any real property owned or operated by the Company
or any of its Subsidiaries, if such taking results in a
Material Adverse Effect.
(h) The Company will promptly (and in any event within five
Business Day's after a Responsible Officer has knowledge thereof) give
notice to each Purchaser of:
(i) any Material litigation or any proceeding before or
by a Government Authority of the type described in Section
5.8; and
(ii) any circumstance that has had or reasonably
threatens a Material Adverse Effect;
provided however, that in the case of both (i) and (ii)
above such litigation or proceeding or circumstance shall have
been reasonably determined by the Company in and of itself to
require public disclosure.
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7.2. OFFICER'S CERTIFICATE.
Each set of financial statements delivered to a holder of
Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied
by a certificate of a Senior Financial Officer setting forth:
(a) Covenant Compliance -- (i) the information (including
detailed calculations) required in order to establish whether the
Company was in compliance with the requirements of Section 10.3 through
Section 10.5, inclusive, during the quarterly or annual period covered
by the statements then being furnished (including with respect to each
such Section, where applicable, the calculations of the maximum or
minimum amount, ratio or percentage, as the case may be, permissible
under the terms of such Sections, and the calculation of the amount,
ratio or percentage then in existence); (ii) a statement that the
Company was in compliance with the requirements of Sections 10.6 and
10.7 during the quarterly or annual period covered by the statements
then being furnished; and (iii) information relating to any sale,
lease, transfer or other disposition of assets covered by the
provisions of Section 10.7 hereof but only if such transaction requires
the filing of Form 8-K with the Securities and Exchange Commission and
in that case sending the holders of the Notes a copy of such Form 8-K
contemporaneously with filing shall be deemed satisfactory notice as to
Section 10.7; and
(b) Event of Default -- a statement that such officer has
reviewed the relevant terms hereof and has made, or caused to be made,
under his or her supervision, a review of the transactions and
conditions of the Company and its Subsidiaries from the beginning of
the quarterly or annual period covered by the statements then being
furnished to the date of the certificate and that such review shall not
have disclosed the existence during such period of any condition or
event that constitutes a Default or an Event of Default or, if any such
condition or event existed or exists specifying the nature and period
of existence thereof and what action the Company shall have taken or
proposes to take with respect thereto.
7.3. INSPECTION.
The Company shall permit the representatives of each holder of
Notes that is an Institutional Investor:
(a) No Default -- if no Default or Event of Default then
exists, at the expense of such holder and upon reasonable prior notice
to the Company, to visit the principal executive office of the Company,
to discuss the affairs, finances and accounts of the Company and its
Subsidiaries with the Company's officers, and, with the consent of the
Company (which consent will not be unreasonably withheld) to visit the
other offices and properties of the Company and each Subsidiary, all at
such reasonable times and as often as may be reasonably requested in
writing; and
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<PAGE> 21
(b) Default -- if a Default or Event of Default then exists, at
the expense of the Company to visit and inspect any of the offices or
properties of the Company or any Subsidiary, to examine all their
respective books of account, records, reports and other papers, to make
copies and extracts therefrom, and to discuss their respective affairs,
finances and accounts with their respective officers and independent
public accountants (and by this provision the Company authorizes said
accountants to discuss the affairs, finances and accounts of the
Company and its Subsidiaries), all at such times and as often as may be
requested.
8. PREPAYMENT OF THE NOTES.
8.1. REQUIRED PREPAYMENTS.
(a) On January 5, 2004 and on each July 5 and January 5 thereafter to
and including July 5, 2007, the Company will prepay $11,111,100 principal amount
of the Notes due January 5, 2008, and on January 5, 2008 shall make a final
payment of the total amount then outstanding; (b) on January 5, 2011, the
Company will pay $20,000,000 of principal amount of the Notes due on such
maturity date (or such lesser principal amount as shall then be outstanding);
and (c) on January 5, 2016, the Company will pay $5,000,000 of principal amount
of the Notes due on such maturity date (or such lesser principal amount as shall
then be outstanding), each at par and without payment of the Make-Whole Amount
or any premium, provided that upon any partial prepayment of the Notes pursuant
to Section 8.2 or purchase of the Notes permitted by Section 8.5, the principal
amount of each required prepayment of the Notes becoming due under this Section
8.1 on and after the date of such prepayment or purchase shall be reduced in the
same proportion as the aggregate unpaid principal amount of the Notes is reduced
as a result of such prepayment or purchase.
8.2. OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT.
The Company may, at its option, upon notice as provided below,
prepay at any time all, or from time to time any part of, the Notes, in an
amount not less than $5,000,000, at 100% of the principal amount so prepaid,
plus the Make-Whole Amount determined for the prepayment date with respect to
such principal amount. The Company will give each holder of Notes written notice
of each optional prepayment under this Section 8.2 not less than 30 days and not
more than 60 days prior to the date fixed for such prepayment which date shall
be a Business Day. Each such notice shall specify such date, the aggregate
principal amount of the Notes to be prepaid on such date, the principal amount
of each Note held by such holder to be prepaid (determined in accordance with
Section 8.3), and the interest to be due and payable on the prepayment date with
respect to such principal amount being prepaid, and shall be accompanied by a
certificate of a Senior Financial Officer as to the estimated Make-Whole Amount
due in connection with such prepayment (calculated as if the date of such notice
were the date of the prepayment), setting forth the details of such computation.
Two Business Days prior to such prepayment, the Company shall deliver to each
holder of Notes a certificate of a Senior Financial Officer specifying the
calculation of such Make-Whole Amount as of the specified prepayment date.
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8.3. ALLOCATION OF PARTIAL PREPAYMENTS.
In the case of each partial prepayment of the Notes, the
principal amount of the Notes to be prepaid shall be allocated among all of the
Notes at the time outstanding in proportion, as nearly as practicable, to the
respective unpaid principal amounts thereof not theretofore called for
prepayment.
8.4. MATURITY; SURRENDER, ETC.
In the case of each prepayment of Notes pursuant to this
Section 8, the principal amount to be prepaid on each Note shall mature and
become due and payable on the date fixed for such prepayment, together with
interest on such principal amount accrued to such date and the applicable
Make-Whole Amount, if any. From and after such date, unless the Company shall
fail to pay such principal amount when so due and payable, together with the
interest and Make-Whole Amount, if any, as aforesaid, interest on such principal
amount shall cease to accrue. Any Note paid or prepaid in full shall be
surrendered to the Company and cancelled and shall not be reissued, and no Note
shall be issued in lieu of any prepaid principal amount of any Note.
8.5. PURCHASE OF NOTES.
The Company will not and will not permit any Affiliate to
purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of
the outstanding Notes except (a) upon the payment or prepayment of the Notes in
accordance with the terms of this Agreement and the Notes or (b) pursuant to an
offer to purchase made by the Company or an Affiliate pro rata to the holders of
all Notes at the time outstanding upon the same terms and conditions. Any such
offer shall provide each holder with sufficient information to enable it to make
an informed decision with respect to such offer, and shall remain open for at
least 30 Business Days. If the holders of more than 66 2/3% of the principal
amount of the Notes then outstanding accept such offer, the Company shall
promptly notify the remaining holders of such fact and the expiration date for
the acceptance by holders of Notes of such offer shall be extended by the number
of days necessary to give each such remaining holder at least 15 Business Days
from its receipt of such notice to accept such offer. At the expiration of such
period, any holder not accepting such offer shall retain all Notes then held by
it, and the terms of such retained Notes, including the scheduled amortization
thereof, shall be unaffected by the declined offer. The Company will promptly
cancel all Notes acquired by it or any Affiliate pursuant to any payment,
prepayment or purchase of Notes pursuant to any provision of this Agreement and
no Notes may be issued in substitution or exchange for any such Notes.
8.6. MAKE-WHOLE AMOUNT.
The term "MAKE-WHOLE AMOUNT" means, with respect to any Note,
an amount equal to the excess, if any, of the Discounted Value of the Remaining
Scheduled Payments with respect to the Called Principal of such Note over the
amount of such Called Principal, provided that the Make-Whole Amount may in no
event be less than zero. For the purposes of determining the Make-Whole Amount,
the following terms have the following meanings:
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"CALLED PRINCIPAL" means, with respect to any Note, the
principal of such Note that is to be prepaid pursuant to Section 8.2 or
has become or is declared to be immediately due and payable pursuant to
Section 12.1, as the context requires.
"DISCOUNTED VALUE" means, with respect to the Called Principal
of any Note, the amount obtained by discounting all Remaining Scheduled
Payments with respect to such Called Principal from their respective
scheduled due dates to the Settlement Date with respect to such Called
Principal, in accordance with accepted financial practice and at a
discount factor (applied on the same periodic basis as that on which
interest on the Notes is payable) equal to the Reinvestment Yield with
respect to such Called Principal.
"REINVESTMENT YIELD" means, with respect to the Called
Principal of any Note, 0.5% over the yield to maturity implied by (i)
the yields reported, as of 10:00 A.M. (New York City time) on the
second Business Day preceding the Settlement Date with respect to such
Called Principal, on the display designated as "Page 678" on the
Telerate Access Service (or such other display as may replace Page 678
on Telerate Access Service) for ac tively traded U.S. Treasury
securities having a maturity equal to the Remaining Average Life of
such Called Principal as of such Settlement Date, or (ii) if such
yields are not reported as of such time or the yields reported as of
such time are not ascertainable, the Treasury Constant Maturity Series
Yields reported, for the latest day for which such yields have been so
reported as of the second Business Day preceding the Settlement Date
with respect to such Called Principal, in Federal Reserve Statistical
Release H.15 (519) (or any comparable successor publication) for
actively traded U.S. Treasury securities having a constant maturity
equal to the Remaining Average Life of such Called Principal as of such
Settlement Date. Such implied yield will be determined, if necessary,
with respect to (i) or (ii), as the case may be, by (a) converting U.S.
Treasury bill quotations to bond-equiva lent yields in accordance with
accepted financial practice and (b) interpolating linearly between (1)
the actively traded U.S. Treasury security with the maturity closest to
and greater than the Remaining Average Life and (2) the actively traded
U.S. Treasury security with the maturity closest to and less than the
Remaining Average Life.
"REMAINING AVERAGE LIFE" means, with respect to any Called
Principal, the number of years (calculated to the nearest one-twelfth
year) obtained by dividing (i) such Called Principal into (ii) the sum
of the products obtained by multiplying (a) the principal component of
each Remaining Scheduled Payment with respect to such Called Principal
by (b) the number of years (calculated to the nearest one-twelfth year)
that will elapse between the Settlement Date with respect to such
Called Principal and the scheduled due date of such Remaining Scheduled
Payment.
"REMAINING SCHEDULED PAYMENTS" means, with respect to the
Called Principal of any Note, all payments of such Called Principal and
interest thereon that would be due after the Settlement Date with
respect to such Called Principal if no payment of such Called Principal
were made prior to its scheduled due date, provided that if such
Settlement Date is not a date on which interest payments are due to be
made under the terms of the Notes, then the amount of the next
succeeding scheduled interest payment will be reduced
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<PAGE> 24
by the amount of interest accrued to such Settlement Date and required
to be paid on such Settlement Date pursuant to Section 8.2 or 12.1.
"SETTLEMENT DATE" means, with respect to the Called Principal
of any Note, the date on which such Called Principal is to be prepaid
pursuant to Section 8.2 or has become or is declared to be immediately
due and payable pursuant to Section 12.1, as the context requires.
9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are
outstanding:
9.1. COMPLIANCE WITH LAW.
The Company will and will cause each of its Subsidiaries to
comply with all laws, ordinances or governmental rules or regulations to which
each of them is subject, including, without limitation, Environmental Laws, and
will obtain and maintain in effect all licenses, certifi cates, permits,
franchises and other governmental authorizations necessary to the ownership of
their respective properties or to the conduct of their respective businesses, in
each case to the extent necessary to ensure that non-compliance with such laws,
ordinances or governmental rules or regulations or failures to obtain or
maintain in effect such licenses, certificates, permits, franchises and other
governmental authorizations would not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect.
9.2. INSURANCE.
The Company will and will cause each of its Subsidiaries to
maintain insurance with respect to their respective properties and businesses
against such casualties and contingencies, of such types, on such terms and in
such amounts (including deductibles, co-insurance and self-insurance, if
adequate reserves are maintained with respect thereto) as is customary in the
case of entities of established reputations engaged in the same or a similar
business and similarly situated.
9.3. MAINTENANCE OF PROPERTIES.
The Company will and will cause each of its Subsidiaries to
maintain and keep, or cause to be maintained and kept, their respective
properties in good repair, working order and condition (other than ordinary wear
and tear), so that the business carried on in connection therewith may be
properly conducted at all times, provided that this Section shall not prevent
the Company or any Subsidiary from discontinuing the operation and the
maintenance of any of its properties if such discontinuance is desirable in the
conduct of its business and the Company has concluded that such discontinuance
would not, individually or in the aggregate, have a Material Adverse Effect.
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9.4. PAYMENT OF TAXES.
The Company will and will cause each of its Subsidiaries to
file all income tax or similar tax returns required to be filed in any
jurisdiction and to pay and discharge all taxes shown to be due and payable on
such returns and all other taxes, assessments, governmental charges, or levies
payable by any of them, to the extent such taxes and assessments have become due
and payable and before they have become delinquent, provided that neither the
Company nor any Subsidiary need pay any such tax or assessment if (i) the
amount, applicability or validity thereof is contested by the Company or such
Subsidiary on a timely basis in good faith and in appropriate proceedings, and
the Company or a Subsidiary has established adequate reserves therefor in accor
dance with GAAP on the books of the Company or such Subsidiary or (ii) the
nonpayment of all such taxes and assessments in the aggregate would not
reasonably be expected to have a Material Adverse Effect.
9.5. CORPORATE EXISTENCE, ETC.
The Company will at all times preserve and keep in full force
and effect its corporate existence. Subject to Sections 10.2 and 10.7, the
Company will at all times preserve and keep in full force and effect the
corporate existence of each of its Subsidiaries (unless merged into the Company
or a Subsidiary) and all rights and franchises of the Company and its
Subsidiaries unless, in the good faith judgment of the Company, the termination
of or failure to preserve and keep in full force and effect such corporate
existence, right or franchise would not, individually or in the aggregate, have
a Material Adverse Effect.
10. NEGATIVE COVENANTS.
The Company covenants that so long as any of the Notes are
outstanding:
10.1. TRANSACTIONS WITH AFFILIATES.
The Company will not and will not permit any Subsidiary to
enter into directly or indirectly any Material transaction or Material group of
related transactions (including without limitation the purchase, lease, sale or
exchange of properties of any kind or the rendering of any service) with any
Affiliate (other than the Company or another Subsidiary), except upon fair and
reasonable terms no less favorable to the Company or such Subsidiary than would
be obtainable in a comparable arm's-length transaction with a Person not an
Affiliate.
10.2. MERGER, CONSOLIDATION, ETC.
The Company shall not consolidate with or merge with any other
corporation or convey, transfer or lease substantially all of its assets in a
single transaction or series of transactions to any Person unless:
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(a) the successor formed by such consolidation or the survivor
of such merger or the Person that acquires by conveyance, transfer or
lease substantially all of the assets of the Company as an entirety, as
the case may be, shall be a solvent corporation organized and existing
under the laws of the United States or any State thereof (including the
District of Columbia), and, if the Company is not such successor
corporation, (i) the Board of Directors of the Company shall have
approved such consolidation, merger, conveyance, transfer or lease, and
(ii) such corporation shall have executed and delivered to each holder
of any Notes its assumption of the due and punctual performance and
observance of each covenant and condition of this Agreement, and the
Notes; and
(b) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing.
No such conveyance, transfer or lease of substantially all of the assets of the
Company shall have the effect of releasing the Company or any successor
corporation that shall theretofore have become such in the manner prescribed in
this Section 10.2 from its liability under this Agreement or the Notes. This
Section 10.2 shall not in any way be deemed to apply to any consolidation or
merger, or conveyance, transfer or lease of substantially all the assets of, any
Subsidiary of the Company with or into the Company (providing the Company is the
survivor of such consolidation or merger, or the grantee or lessee of such
conveyance, transfer or lease) or any other Subsidiary of the Company.
10.3. CONSOLIDATED TOTAL DEBT.
The Company shall not allow at any time Consolidated Total
Debt to exceed 65% of Total Capitalization.
10.4. RESTRICTED PAYMENTS.
The Company shall not and shall not permit any Subsidiary to
make a Restricted Payment unless the aggregate amount of such payments made
after July 1, 1995 would not exceed the sum of (i) $140,000,000 plus (ii) 75% of
cumulative Consolidated Net Income since July 1, 1995 (less 100% of Consolidated
Net Income for such period if Consolidated Net Income is a loss) plus (iii) the
net cash proceeds received by the Company from the issuance or sale of capital
stock other than redeemable capital stock after the closing date and provided
that no Default or Event of Default currently exists or no such payment would
trigger a Default or Event of Default.
10.5. SUBSIDIARY BORROWINGS.
The Company shall not permit any Subsidiary to become liable
for any Indebtedness, whether secured or unsecured, except (a) such of the
foregoing as is owed to the Company or another wholly-owned Subsidiary, (b)
Indebtedness or obligations secured by Liens permitted by Section 10.6 hereof,
(c) Indebtedness or obligations of a Subsidiary outstanding at the time such
Subsidiary becomes a Subsidiary, provided that (i) such Indebtedness shall not
have been incurred in contemplation of such Subsidiary becoming a Subsidiary,
and (ii) immediately
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after such Subsidiary becomes a Subsidiary, no Default or Event of Default shall
exist, and provided further that such Indebtedness may not be extended, renewed,
or refunded except as otherwise permitted by this Agreement, and (d) other
Indebtedness not to exceed, when combined with the total of the Indebtedness
secured by all Liens permitted by Section 10.6(j), without duplication, 30% of
Consolidated Net Worth.
10.6. MORTGAGES AND LIENS.
The Company shall not, without equally and ratably securing
the Notes thereby, and shall not permit any Subsidiary to, create, assume or
incur any Lien, except for:
(a) Liens existing as of the date hereof and listed on
Schedule 10.6;
(b) any Lien on any real or personal property acquired,
constructed, renovated or improved by the Company after the date hereof
to secure or provide for all or a portion of the purchase price of such
property or a portion of the Indebtedness incurred in connection with
such construction, renovation or improvement on such property,
including principal and accrued or capitalized interest computed in
accordance with GAAP, which Lien attaches concurrently with or within
12 months after such acquisition or the completion of such
construction, renovation or improvement; provided, however, in no event
may the amount of the Indebtedness secured by such Lien exceed the
purchase price of such property or the cost of such construction,
renovation or improvement (including accrued or capitalized interest
thereon through the date of completion) computed in accordance with
GAAP;
(c) Liens securing Indebtedness of the Company to any
wholly-owned Subsidiary or of any wholly-owned Subsidiary to the
Company or to any other wholly-owned Subsidiary;
(d) any Lien on any property of a Subsidiary existing at the
time it becomes a Subsidiary or at the time it is merged or
consolidated with or into the Company or a Subsidiary;
(e) Liens for taxes, assessments or governmental charges not
then due and delinquent or the validity of which is being contested in
good faith and for which an adequate reserve has been established in
accordance with GAAP;
(f) Liens arising in connection with court proceedings
securing a principal amount not in excess of 15% of the Total Assets of
the Company and its Subsidiaries on a consolidated basis, provided the
execution of such Liens is effectively stayed and such Liens are
contested in good faith;
(g) Liens, pledges or deposits in connection with workers
compensation, unemployment insurance, ERISA or social security
requirements;
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(h) Liens arising in or incidental to the ordinary course of
its business, including (i) statutory liens of landlords, carriers,
warehousemen, mechanics, materialmen or suppliers, (ii) zoning
restrictions and easements, rights of way, licenses, covenants and
other restrictions affecting the use of real property which do not
materially impair the use or value of such real property, and (iii)
deposits and/or liens to secure performance of bids, trade contracts,
leases and statutory obligations;
(i) grants of security and rights of setoff in deposit or
credit accounts, including demand, savings, passbook, share draft or
like accounts, certificates of deposit, money market accounts, items
held for collection or deposit, commercial paper, negotiable
instruments and similar accounts and instruments held at banks or
financial institutions to secure the payment or reimbursement under
overdraft, acceptance and similar facilities and rights of setoff,
banker's lien and other similar rights arising solely by operation of
law;
(j) Liens incurred in connection with the borrowing of money
not permitted by (b) through (i) above, provided that immediately
thereafter the Indebtedness secured by Liens incurred pursuant to this
subsection, when combined with the total of the Indebtedness permitted
by Section 10.5(d), without duplication, would not exceed 30% of
Consolidated Net Worth; and
(k) any Lien resulting from renewing, extending or refunding
any Indebtedness or obligation permitted hereunder or any Lien
permitted by Section 10.5, provided that the principal amount of the
Indebtedness or other obligation secured thereby is not increased and
the Lien is not extended to any other property.
10.7. SALE OF ASSETS.
Neither the Company nor any of its Subsidiaries shall sell,
lease, transfer or otherwise dispose of any assets during any single fiscal year
having an aggregate book value greater than 15% of Total Assets of the Company
and its Subsidiaries taken as a whole, measured as of the immediately preceding
fiscal year end. Nothing in this Section shall be interpreted to restrict the
Company's ability to dispose of (i) vehicles, (ii) delivery routes, (iii) assets
obtained through acquisitions of businesses or assets on or after the date
hereof, provided that proceeds of any such disposition shall be reinvested in
the Company by reducing Indebtedness or by investing in operating assets, and
(iv) obsolete, under-performing or non-core assets, disposition of which, in
management's judgment, would enhance the Company's operations and profitability.
10.8. NATURE OF BUSINESS.
Neither the Company nor any Subsidiary shall engage in any
business if, as a result, the general nature of the business then engaged in by
the Company and its Subsidiaries, taken as a whole, would be materially changed.
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10.9 RESTRICTIVE AGREEMENTS.
The Company will not enter into any agreement, indenture,
lease or other document or instrument which, in any way, prohibits or
restricts the right or ability of the Company to amend, supplement or
otherwise modify the terms and provisions of this Agreement or any of
the Notes.
11. EVENTS OF DEFAULT.
An "EVENT OF DEFAULT" shall exist if any of the following
conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or
Make-Whole Amount, if any, on any Note when the same becomes due and
payable, whether at maturity or at a date fixed for prepayment or by
declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any
Note for more than five Business Days after the same becomes due and
payable; or
(c) the Company defaults in the performance of or compliance
with any term contained in Section 10.2, 10.3, 10.4, 10.5, 10.7, 10.8
or 7.1(d); or
(d) the Company defaults in the performance of or compliance
with any term contained herein (other than those referred to in
paragraphs (a), (b) and (c) of this Section 11) and such default is not
remedied within 30 days after the earlier of (i) a Responsible Officer
obtaining actual knowledge of such default and (ii) the Company
receiving written notice of such default from any holder of a Note (any
such written notice to be identified as a "notice of default" and to
refer specifically to this paragraph (d) of Section 11); or
(e) any representation or warranty made in writing by or on
behalf of the Company or by any officer of the Company in this
Agreement or in any writing furnished in connection with the
transactions contemplated hereby proves to have been false or incorrect
in any material respect on the date as of which made; or
(f) (i) the Company or any Significant Subsidiary is in
default (as principal or as guarantor or other surety) in the payment
of any principal of or premium or Make-Whole Amount or interest on any
Indebtedness in an aggregate principal amount of at least $10,000,000
beyond any period of grace provided with respect thereto, or (ii) the
Company or any Significant Subsidiary is in default in the performance
of or compliance with any term of any document evidencing or relating
to any Indebtedness in an aggregate principal amount of at least
$10,000,000 or of any mortgage, indenture or other agreement relating
thereto or any other condition exists, and as a consequence of such
default or condition such Indebtedness has become, or has been declared
due and payable before its stated maturity or before its regularly
scheduled dates of payment; or
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(g) the Company or any Significant Subsidiary (i) is generally
not paying, or admits in writing its inability to pay, its debts as
they become due, (ii) files, or consents by answer or otherwise to the
filing against it of, a petition for relief or reorganization or
arrangement or any other petition in bankruptcy, for liquidation or to
take advantage of any bankruptcy, insolvency, reorganization,
moratorium or other similar law of any jurisdic tion, (iii) makes an
assignment for the benefit of its creditors, (iv) consents to the ap
pointment of a custodian, receiver, trustee or other officer with
similar powers with respect to it or with respect to any substantial
part of its property, (v) is adjudicated as insolvent or to be
liquidated, or (vi) takes corporate action for the purpose of any of
the foregoing; or
(h) a court or governmental authority of competent
jurisdiction enters an order appointing, without consent by the Company
or any of its Significant Subsidiaries, a custodian, receiver, trustee
or other officer with similar powers with respect to it or with respect
to any substantial part of its property, or constituting an order for
relief or approv ing a petition for relief or reorganization or any
other petition in bankruptcy or for liquida tion or to take advantage
of any bankruptcy or insolvency law of any jurisdiction, or ordering
the dissolution, winding-up or liquidation of the Company or any of its
Significant Subsidiaries, or any such petition shall be filed against
the Company or any of its Significant Subsidiaries and such petition
shall not be dismissed within 60 days; or
(i) a final judgment or judgments for the payment of money
aggregating in excess of $20,000,000 are rendered against one or more
of the Company and its Significant Subsidiaries and which judgments are
not, within 60 days after entry thereof, bonded, dis charged or stayed
pending appeal, or are not discharged within 60 days after the
expiration of such stay; or
(j) if (i) any Plan shall fail to satisfy the minimum funding
standards of ERISA or the Code for any plan year or part thereof or a
waiver of such standards or extension of any amortization period is
sought or granted under section 412 of the Code, (ii) a notice of
intent to terminate any Plan shall have been or is reasonably expected
to be filed with the PBGC or the PBGC shall have instituted proceedings
under ERISA section 4042 to terminate or appoint a trustee to
administer any Plan or the PBGC shall have notified the Company or any
ERISA Affiliate that a Plan may become a subject of any such
proceedings, (iii) the aggregate "amount of unfunded benefit
liabilities" (within the meaning of section 4001(a)(18) of ERISA) under
all Plans, determined in accordance with Title IV of ERISA, shall
exceed $10,000,000, (iv) the Company or any ERISA Affiliate shall have
incurred or is reasonably expected to incur any liability pursuant to
Title I or IV of ERISA or the penalty or excise tax provisions of the
Code relating to employee benefit plans, (v) the Company or any ERISA
Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or
any Subsidiary establishes or amends any employee welfare benefit plan
that provides post-employment welfare benefits in a manner that would
increase the liability of the Company or any Subsidiary thereunder; and
any such event or events described in clauses (i) through (vi) above,
either individually or together with any
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other such event or events, would reasonably be expected to have a
Materially Adverse Effect.
As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE
WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms
in Section 3 of ERISA.
12. REMEDIES ON DEFAULT, ETC.
12.1. ACCELERATION.
(a) If an Event of Default with respect to the Company
described in paragraph (g) or (h) of Section 11 (other than an Event of Default
described in clause (i) of paragraph (g) or described in clause (vi) of
paragraph (g) by virtue of the fact that such clause encompasses clause (i) of
paragraph (g)) has occurred, all the Notes then outstanding shall automatically
become immediately due and payable.
(b) If any Event of Default described in paragraph (a) or (b)
of Section 11 has occurred and is continuing, any holder or holders of Notes at
the time outstanding affected by such Event of Default may at any time, at its
or their option, by notice or notices to the Company, declare all the Notes held
by it or them to be immediately due and payable.
(c) If any other Event of Default has occurred and is
continuing, any holder or holders of more than 66 2/3% in principal amount of
the Notes at the time outstanding may at any time at its or their option, by
notice or notices to the Company, declare all the Notes then out standing to be
immediately due and payable.
Upon any Notes becoming due and payable under this Section
12.1, whether automatically or by declaration, such Notes will forthwith mature
and the entire unpaid principal amount of such Notes, plus (x) all accrued and
unpaid interest thereon and (y) any Make-Whole Amount determined in respect of
such principal amount (to the full extent permitted by applicable law), shall
all be immediately due and payable, in each and every case without presentment,
demand, protest or further notice, all of which are hereby waived. The Company
acknowledges, and the parties hereto agree, that each holder of a Note has the
right to maintain its investment in the Notes free from repayment by the Company
(except as herein specifically provided for) and that the provision for payment
of a Make-Whole Amount by the Company in the event that the Notes are prepaid or
are accelerated as a result of an Event of Default, is intended to provide com
pensation for the deprivation of such right under such circumstances.
12.2. OTHER REMEDIES.
If any Default or Event of Default has occurred and is
continuing, and irrespective of whether any Notes have become or have been
declared immediately due and payable under Section 12.1, the holder of any Note
at the time outstanding may proceed to protect and enforce the rights of such
holder by an action at law, suit in equity or other appropriate proceeding,
whether for the specific performance of any agreement contained herein or in any
Note, or for an
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injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise.
12.3. RESCISSION.
At any time after any Notes have been declared due and payable
pursuant to clause (b) or (c) of Section 12.1, the holders of not less than 66
2/3% in principal amount of the Notes then outstanding, by written notice to the
Company, may rescind and annul any such declaration and its consequences if (a)
the Company has paid all overdue interest on the Notes, all principal of and
Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid
other than by reason of such declaration, and all interest on such overdue
principal and Make-Whole Amount, if any, and (to the extent permitted by
applicable law) any overdue interest in respect of the Notes, at the Default
Rate, (b) all Events of Default and Defaults, other than non-payment of amounts
that have become due solely by reason of such declaration, have been cured or
have been waived pursuant to Section 17, and (c) no judgment or decree has been
entered for the payment of any monies due pursuant hereto or to the Notes. No
rescission and annulment under this Section 12.3 will extend to or affect any
subsequent Event of Default or Default or impair any right consequent thereon.
12.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC.
No course of dealing and no delay on the part of any holder of
any Note in exercising any right, power or remedy shall operate as a waiver
thereof or otherwise prejudice such holder's rights, powers or remedies. No
right, power or remedy conferred by this Agreement or by any Note upon any
holder thereof shall be exclusive of any other right, power or remedy referred
to herein or therein or now or hereafter available at law, in equity, by statute
or otherwise. Without limiting the obligations of the Company under Section 15,
the Company will pay to the holder of each Note on demand such further amount as
shall be sufficient to cover all costs and expenses of such holder incurred in
any enforcement or collection under this Section 12, including, without
limitation, reasonable attorneys' fees, expenses and disbursements.
13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
13.1. REGISTRATION OF NOTES.
The Company shall keep at its principal executive office a
register for the registration and registration of transfers of Notes. The name
and address of each holder of one or more Notes, each transfer thereof and the
name and address of each transferee of one or more Notes shall be registered in
such register. Prior to due presentment for registration of transfer, the Person
in whose name any Note shall be registered shall be deemed and treated as the
owner and holder thereof for all purposes hereof, and the Company shall not be
affected by any notice or knowledge to the contrary. The Company shall give to
any holder of a Note that is an Institutional Investor promptly upon request
therefor, a complete and correct copy of the names and addresses of all
registered holders of Notes.
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13.2. TRANSFER AND EXCHANGE OF NOTES.
Upon surrender of any Note at the principal executive office
of the Company for registration of transfer or exchange (and in the case of a
surrender for registration of transfer, duly endorsed or accompanied by a
written instrument of transfer duly executed by the registered holder of such
Note or his attorney duly authorized in writing and accompanied by the address
for notices of each transferee of such Note or part thereof), the Company shall
execute and deliver, at the Company's expense (except as provided below), one or
more new Notes (as requested by the holder thereof) in exchange therefor, in an
aggregate principal amount equal to the unpaid principal amount of the
surrendered Note. Each such new Note shall be payable to such Person as such
holder may request and shall be substantially in the form of Exhibit 1(A),
Exhibit 1(B) or Exhibit 1(C). Each such new Note shall be dated and bear
interest from the date to which interest shall have been paid on the surrendered
Note or dated the date of the surrendered Note if no interest shall have been
paid thereon. The Company may require payment of a sum sufficient to cover any
stamp tax or governmental charge imposed in respect of any such transfer of
Notes. Notes shall not be transferred in denominations of less than $500,000,
provided that if necessary to enable the registration of transfer by a holder of
its entire holding of Notes, one Note may be in a denomination of less than
$500,000. Any transferee, by its acceptance of a Note registered in its name (or
the name of its nominee), shall be deemed to have made the representations set
forth in Sections 6.1 and 6.2.
13.3. REPLACEMENT OF NOTES.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of any Note (which evidence shall be, in the case of an Institutional
Investor, notice from such Institutional Investor of such ownership and such
loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it (provided that if the holder of such Note
is, or is a nominee for, an original Purchaser or another holder of a
Note with a minimum Net Worth of at least $5,000,000, such Person's own
unsecured agreement of indemnity shall be deemed to be satisfactory),
or
(b) in the case of mutilation, upon surrender and cancellation
thereof,
the Company at its own expense shall execute and deliver, in lieu thereof, a new
Note, dated and bearing interest from the date to which interest shall have been
paid on such lost, stolen, destroyed or mutilated Note or dated the date of such
lost, stolen, destroyed or mutilated Note if no interest shall have been paid
thereon.
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14. PAYMENTS ON NOTES.
14.1. PLACE OF PAYMENT.
Subject to Section 14.2, payments of principal, Make-Whole
Amount, if any, and interest becoming due and payable on the Notes shall be made
to you and the Other Purchasers at your respective principal offices. The holder
of a Note may at any time, by written notice to the Company as provided in
Section 18, change the place of payment of its Note(s).
14.2. HOME OFFICE PAYMENT.
So long as you or your nominee shall be the holder of any
Note, and not withstanding anything contained in Section 14.1 or in such Note to
the contrary, the Company will pay all sums becoming due on such Note for
principal, Make-Whole Amount, if any, and interest by the method and at the
address specified for such purpose below your name in Schedule A, Schedule B or
Schedule C, or by such other method or at such other address as you shall have
from time to time specified to the Company in writing for such purpose, without
the presentation or surrender of such Note or the making of any notation
thereon, except that upon written request of the Company made concurrently with
or reasonably promptly after payment or prepayment in full of any Note, you
shall surrender such Note for cancellation, reasonably promptly after any such
request, to the Company at its principal executive office or at the place of
payment most re cently designated by the Company pursuant to Section 14.1. Prior
to any sale or other disposition of any Note held by you or your nominee you
will, at your election, either endorse thereon the amount of principal paid
thereon and the last date to which interest has been paid thereon or sur render
such Note to the Company in exchange for a new Note or Notes pursuant to Section
13.2. The Company will afford the benefits of this Section 14.2 to any
Institutional Investor that is the direct or indirect transferee of any Note
purchased by you under this Agreement and that has made the same agreement
relating to such Note as you have made in this Section 14.2.
15. EXPENSES, ETC.
15.1. TRANSACTION EXPENSES.
Whether or not the transactions contemplated hereby are
consummated, the Company will pay all reasonable costs and expenses (including
reasonable attorneys' fees of a special outside counsel and, if reasonably
required, local or other counsel) actually incurred by you and each Other
Purchaser or holder of a Note in connection with such transactions and in con
nection with any amendments, waivers or consents under or in respect of this
Agreement or the Notes (whether or not such amendment, waiver or consent becomes
effective), including, without limitation: (a) the costs and expenses incurred
in enforcing or defending (or determining whether or how to enforce or defend)
any rights under this Agreement or the Notes or in responding to any subpoena or
other legal process or informal investigative demand issued in connection with
this Agreement or the Notes, or by reason of being a holder of any Note, and (b)
the costs and expenses, including financial advisors' fees, incurred in
connection with the insolvency or bankruptcy of the Company or any Subsidiary or
in connection with any work-out or restructuring
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of the transactions contemplated hereby and by the Notes. The Company will pay,
and will save you and each other holder of a Note harmless from, all claims in
respect of any fees, costs or expenses if any, of brokers and finders (other
than those retained by you).
15.2. SURVIVAL.
The obligations of the Company under this Section 15 will
survive the payment or transfer of any Note, the enforcement, amendment or
waiver of any provision of this Agreement or the Notes, and the termination of
this Agreement.
16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall
survive the execution and delivery of this Agreement and the Notes, the purchase
or transfer by you of any Note or portion thereof or interest therein and the
payment of any Note, and may be relied upon by any subsequent holder of a Note,
regardless of any investigation made at any time by or on behalf of you or any
other holder of a Note. All statements contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant to this Agreement
shall be deemed representations and warranties of the Company under this
Agreement. Subject to the preceding sentence, this Agree ment and the Notes
embody the entire agreement and understanding between you and the Company and
supersede all prior agreements and understandings relating to the subject matter
hereof.
17. AMENDMENT AND WAIVER.
17.1. REQUIREMENTS.
This Agreement and the Notes may be amended, and the
observance of any term hereof or of the Notes may be waived (either
retroactively or prospectively), with (and only with) the written consent of the
Company and the Required Holders, except that (a) no amendment or waiver of any
of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term
(as it is used therein), will be effective as to you unless consented to by you
in writing and (b) no such amendment or waiver may, without the written consent
of the Company and the holder of each Note at the time outstanding affected
thereby, (i) subject to the provisions of Section 12 relating to acceleration or
rescission, change the amount or time of any prepayment or payment of princi pal
of, or reduce the rate or change the time of payment or method of computation of
interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage
of the principal amount of the Notes the holders of which are required to
consent to any such amendment or waiver, or (iii) a mend any of Sections 8,
11(a), 11(b), 12, 17 or 20.
17.2. SOLICITATION OF HOLDERS OF NOTES.
(a) Solicitation. The Company will provide each holder of the
Notes (irre spective of the amount of Notes then owned by it) with sufficient
information, sufficiently far in advance of the date a decision is required, to
enable such holder to make an informed and
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considered decision with respect to any proposed amendment, waiver or consent in
respect of any of the provisions hereof or of the Notes. The Company will
deliver executed or true and correct copies of each amendment, waiver or consent
effected pursuant to the provisions of this Section 17 to each holder of
outstanding Notes promptly following the date on which it is executed and
delivered by, or receives the consent or approval of, the requisite holders of
Notes.
(b) Payment. The Company will not directly or indirectly pay
or cause to be paid any remuneration, whether by way of supplemental or
additional interest, fee or otherwise, or grant any security, to any holder of
Notes as consideration for or as an inducement to the entering into by any
holder of Notes or any waiver or amendment of any of the terms and provisions
hereof unless such remuneration is concurrently paid, or security or inducement
is concurrently granted, on the same terms, ratably to each holder of Notes then
outstanding even if such holder did not consent to such waiver or amendment.
17.3. BINDING EFFECT, ETC.
Any amendment or waiver consented to as provided in this
Section 17 applies equally to all holders of Notes and is binding upon them and
upon each future holder of any Note and upon the Company without regard to
whether such Note has been marked to indicate such amendment or waiver. No such
amendment or waiver will extend to or affect any obligation, covenant,
agreement, Default or Event of Default not expressly amended or waived or impair
any right consequent thereon. No course of dealing between the Company and the
holder of any Note nor any delay in exercising any rights hereunder or under any
Note shall operate as a waiver of any rights of any holder of such Note. As used
herein, the term "THIS AGREEMENT" and references thereto shall mean this
Agreement as it may from time to time be amended or supplemented.
17.4. NOTES HELD BY COMPANY, ETC.
Solely for the purpose of determining whether the holders of
the requisite percentage of the aggregate principal amount of Notes then
outstanding approved or consented to any amendment, waiver or consent to be
given under this Agreement or the Notes, or have directed the taking of any
action provided herein or in the Notes to be taken upon the direction of the
holders of a specified percentage of the aggregate principal amount of Notes
then outstanding, Notes directly or indirectly owned by the Company or any of
its Affiliates shall be deemed not to be outstanding.
18. NOTICES.
All notices and communications provided for hereunder shall be
in writing and sent (a) by telecopy if the sender on the same day sends a
confirming copy of such notice by a recog nized overnight delivery service
(charges prepaid), or (b) by registered or certified mail with re turn receipt
requested (postage prepaid), or (c) by a recognized overnight delivery service
(with charges prepaid). Any such notice must be sent:
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(i) if to you or your nominee, to you or it at the address
specified for such communications in Schedule A, Schedule B or
Schedule C, or at such other address as you or it shall have specified
to the Company in writing,
(ii) if to any other holder of any Note, to such holder at
the address specified for such communications in Schedule A, Schedule B
or Schedule C or at such address as such other holder shall have
specified to the Company in writing, or
(iii) if to the Company, to the Company at its address set
forth at the beginning hereof to the attention of C. Martin Wood III,
Senior Vice President and Chief Financial Officer, or at such other
address as the Company shall have specified to the holder of each Note
in writing.
Notices under this Section 18 will be deemed given only when actually received.
19. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including,
without limitation, (a) consents, waivers and modifications that may hereafter
be executed, (b) documents received by you at the Closing (except the Notes
themselves), and (c) financial statements, certificates and other information
previously or hereafter furnished to you, may be reproduced by you by any
photographic, photostatic, microfilm, microcard, miniature photographic or other
similar process and you may destroy any original document so reproduced. The
Company agrees and stipulates that, to the extent permitted by applicable law,
any such reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by you in the regular
course of business) and any enlargement, facsimile or further reproduction of
such reproduction shall likewise be admissible in evidence. This Section 19
shall not prohibit the Company or any other holder of Notes from contesting any
such reproduction to the same extent that it could contest the original, or from
introducing evidence to demonstrate the inaccuracy of any such reproduction.
20. CONFIDENTIAL INFORMATION.
For the purposes of this Section 20, "CONFIDENTIAL
INFORMATION" means information delivered to you by or on behalf of the Company
or any Subsidiary in connection with the transactions contemplated by or
otherwise pursuant to this Agreement that is proprietary in nature and that was
clearly marked or labeled or otherwise adequately identified when received by
you as being confidential information of the Company or such Subsidiary,
provided that such term does not include information that (a) was publicly known
or otherwise known to you prior to the time of such disclosure, (b) subsequently
becomes publicly known through no act or omission by you or any person acting on
your behalf, (c) otherwise becomes known to you other than through disclosure by
the Company or any Subsidiary or (d) constitutes financial statements delivered
to you under Section 7.1 that are otherwise publicly available. You will
maintain the confidentiality of such Confidential Information in accordance with
procedures adopted by you in good faith to
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protect confidential information of third parties delivered to you, provided
that you may deliver or disclose Confidential Information to (i) your directors,
officers, employees, agents, attorneys and affiliates, (to the extent such
disclosure reasonably relates to the administration of the invest ment
represented by your Notes), (ii) your financial advisors and other professional
advisors who agree to hold confidential the Confidential Information
substantially in accordance with the terms of this Section 20, (iii) any other
holder of any Note, (iv) any Institutional Investor to which you sell or offer
to sell such Note or any part thereof or any participation therein (if such
Person has agreed in writing prior to its receipt of such Confidential
Information to be bound by the provisions of this Section 20), (v) any Person
from which you offer to purchase any security of the Company (if such Person has
agreed in writing prior to its receipt of such Confidential Information to be
bound by the provisions of this Section 20), (vi) any federal or state
regulatory authority having jurisdiction over you, (vii) the National
Association of Insurance Commissioners or any similar organization, or any
nationally recognized rating agency that requires access to information about
your investment portfolio, or (viii) any other Person to which such delivery or
disclosure may be necessary or appropriate (w) to effect compliance with any
law, rule, regulation or order applicable to you, (x) in response to any
subpoena or other legal process, (y) in connection with any litigation to which
you are a party or (z) if an Event of Default has occurred and is continuing, to
the extent you may reasonably determine such delivery and disclosure to be
necessary or appropriate in the enforcement or for the protection of the rights
and remedies under your Notes and this Agreement. Each holder of a Note, by its
acceptance of a Note, will be deemed to have agreed to be bound by and to be
entitled to the benefits of this Section 20 as though it were a party to this
Agreement. On reasonable request by the Company in connection with the delivery
to any holder of a Note of information required to be delivered to such holder
under this Agreement or requested by such holder (other than a holder that is a
party to this Agreement or its nominee), such holder will enter into an
agreement with the Company embodying the provisions of this Section 20.
21. SUBSTITUTION OF PURCHASER.
You shall have the right to substitute any one of your
Affiliates as the purchaser of the Notes that you have agreed to purchase
hereunder, by written notice to the Company, which notice shall be signed by
both you and such Affiliate, shall contain such Affiliate's agreement to be
bound by this Agreement and shall contain a confirmation by such Affiliate of
the accuracy with respect to it of the representations set forth in Section 6.
Upon receipt of such notice, wherever the word "you" is used in this Agreement
(other than in this Section 21), such word shall be deemed to refer to such
Affiliate in lieu of you. In the event that such Affiliate is so substituted as
a purchaser hereunder and such Affiliate thereafter transfers to you all of the
Notes then held by such Affiliate, upon receipt by the Company of notice of such
transfer, wherever the word "you" is used in this Agreement (other than in this
Section 21), such word shall no longer be deemed to refer to such Affiliate, but
shall refer to you, and you shall have all the rights of an original holder of
the Notes under this Agreement.
33
<PAGE> 39
22. MISCELLANEOUS.
22.1. SUCCESSORS AND ASSIGNS.
All covenants and other agreements contained in this Agreement
by or on behalf of any of the parties hereto bind and inure to the benefit of
their respective successors and assigns (including, without limitation, any
subsequent holder of a Note) whether so expressed or not.
22.2. PAYMENTS DUE ON NON-BUSINESS DAYS.
Anything in this Agreement or the Notes to the contrary
notwithstanding, any payment of principal of or Make-whole Amount or interest on
any Note that is due on a date other than a Business Day shall be made on the
next succeeding Business Day without including the additional days elapsed in
the computation of the interest payable on such next succeeding Business Day.
22.3. SEVERABILITY.
Any provision of this Agreement that is prohibited or
unenforceable in any jurisdic tion shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall (to the full extent permitted by law)
not invalidate or render unenforceable such provision in any other jurisdiction.
22.4. CONSTRUCTION.
Each covenant contained herein shall be construed (absent
express provision to the contrary) as being independent of each other covenant
contained herein, so that compliance with any one covenant shall not (absent
such an express contrary provision) be deemed to excuse compliance with any
other covenant. Where any provision herein refers to action to be taken by any
Person, or which such Person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such Person.
22.5. COUNTERPARTS.
This Agreement may be executed in any number of counterparts,
each of which shall be an original but all of which together shall constitute
one instrument. Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.
34
<PAGE> 40
22.6. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance
with, and the rights of the parties shall be governed by, the law of the State
of Georgia excluding choice-of-law principles of the law of such State that
would require the application of the laws of a jurisdiction other than such
State.
* * * * *
If you are in agreement with the foregoing, please sign the
form of agreement on the accompanying counterpart of this Agreement and return
it to the Company, whereupon the foregoing shall become a binding agreement
between you and the Company.
Very truly yours,
FLOWERS INDUSTRIES, INC.
By:/s/ C. Martin Wood III
-----------------------------------
C. Martin Wood III
Senior Vice President and
Chief Financial Officer
35
<PAGE> 41
The foregoing is hereby
agreed to as of the
date thereof.
ALLIED LIFE INSURANCE COMPANY
By: Lincoln Investment Management, Inc., its
Attorney-In-Fact
By: /s/ David C. Patch
-------------------------------------------
Name: David C. Patch
Title: Vice President
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: Lincoln Investment Management, Inc., its
Attorney-in-fact
By: /s/ David C. Patch
-------------------------------------------
Name: David C. Patch
Title: Vice President
LINCOLN-SECURITY LIFE INSURANCE COMPANY
By: Lincoln Investment Management, Inc., its
Attorney-in-Fact
By: /s/ David C. Patch
-------------------------------------------
Name: David C. Patch
Title: Vice President
SECURITY-CONNECTICUT LIFE INSURANCE
COMPANY
By: Lincoln Investment Management, Inc.,
its Attorney-in-Fact
By: /s/ David C. Patch
-------------------------------------------
Name: David C. Patch
Title: Vice President
36
<PAGE> 42
AMERICAN GENERAL LIFE INSURANCE COMPANY
By:/s/ Julia S. Tucker
-------------------------------------------
Name: Julia S. Tucker
Title: Investment Officer
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By:/s/ Julia S. Tucker
-------------------------------------------
Name: Julia S. Tucker
Title: Investment Officer
CUNA MUTUAL INSURANCE SOCIETY
By: Century Investment Management Co.
By:/s/ Donald Heltner
-------------------------------------------
Name: Donald Heltner
Title: Vice President
EMPLOYERS LIFE INSURANCE COMPANY
OF WAUSAU
By:/s/ James W. Pruden
-------------------------------------------
Name: James W. Pruden
Title: Attorney-in-fact
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By:/s/ Bruce E. Gaudette
-------------------------------------------
Name: Bruce E. Gaudette
Title: Vice President
37
<PAGE> 43
METROPOLITAN LIFE INSURANCE COMPANY
By:/s/ Michael J. Koeg
-------------------------------------------------
Name: Michael J. Koeg
Title:
METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY
By:
-------------------------------------------------
Name: Bill Megevick
Title:
NATIONWIDE LIFE INSURANCE COMPANY
By:/s/ Michael D. Groseclose
-------------------------------------------------
Name: Michael D. Groseclose
Title: Associate Vice President
Corporate Fixed-Income Securities
NATIONWIDE LIFE INSURANCE COMPANY
SEPARATE ACCOUNT OH
By:/s/ Michael D. Groseclose
-------------------------------------------------
Name: Michael D. Groseclose
Title: Associate Vice President
Corporate Fixed-Income Securities
UNITED OF OMAHA LIFE INSURANCE
COMPANY
By:/s/ Marvin D. Andersen
-------------------------------------------------
Name: Marvin D. Andersen
Title: First Vice President
38
<PAGE> 44
SCHEDULE A-1
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
ALLIED LIFE INSURANCE COMPANY "A" $1,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
Harris Trust & Savings, Chicago, IL
ABA #1: 071 000 288
Attention: Trust Collections
DDA Account #: 109-211-3
Further credit: Allied Life "A"
Account No.: 23-97588
with sufficient information to identify
the source and application of such funds
(2) All notices of payments and
written confirmations of such
wire transfers:
Harris Trust & Savings
111 W. Monroe Street; Chicago, IL 60690
Attn: Private Placements
For Acct: See above account name
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry St.; Renaissance Square
Fort Wayne, IN 46802
Attn: Investments/Private Placements
</TABLE>
Schedule A-1
<PAGE> 45
SCHEDULE A-2
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
ALLIED LIFE INSURANCE COMPANY "B" $1,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
Harris Trust & Savings, Chicago, IL
ABA #1: 071 000 288
Attention: Trust Collections
DDA Account #: 109-211-3
Further credit: Allied Life "B"
Account No.: 23-97589
with sufficient information to identify
the source and application of such funds
(2) All notices of payments and written confirmations of such wire
transfers:
Harris Trust & Savings
111 W. Monroe Street; Chicago, IL 60690
Attn: Private Placements
For Acct: See above account name
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry St.; Renaissance Square
Fort Wayne, IN 46802
Attn: Investments/Private Placements
(4) Nominee: Harny & Co
</TABLE>
Schedule A-2
<PAGE> 46
SCHEDULE A-3
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Closing Principal Amount of
Name and Address of Purchaser Notes to be Purchased
- ----------------------------- ---------------------
Date
-----
<S> <C>
CUNA MUTUAL INSURANCE SOCIETY $5,000,000
1/5/96
(1) All payments by wire trans-
fer of immediately available
funds to:
The Chase Manhattan Bank, NA
ABA 021000021
A/C = 900-9-002206
A/C = 473-63300
BNF = Funds Pending-DNI/ABS
BBK = Chase Manhattan Bank/SSTO
with sufficient information
to identify the source and
application of such funds.
(2) All notices of payments and written
confirmations of such wire transfers:
CUNA Mutual Group
Attn: Investment Accounting, GG-12
P.O. Box 391, Madison, WI 53701
(3) All other communications:
CUNA Mutual Group, Securities Mgmt. Dept.
5910 Mineral Point Road, Madison WI 53705
Attn: Private Placements
Fax # (608) 238-2316
(4) Nominee: Atwell & Co.
</TABLE>
Schedule A-3
<PAGE> 47
SCHEDULE A-4
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
EMPLOYERS LIFE INSURANCE COMPANY
OF WAUSAU $5,000,000 1/5/96
(1) All payments by wire trans-
fer of immediately available
funds to:
Morgan Guaranty Trust Company of NY
ABA #021-000-238 JOURNAL #999-99-024
F/A/O Employers Life Custody A/C #50135
Attn: Custody Service Dept.
PPN# 343496 A@ 4
Security Descrip: 6.80% Senior Notes
due January 5, 2008
(2) All notices of payments and
written confirmations of such
wire transfers:
Employers Life Insurance Company of Wausau
2000 Westwood Drive, Wausau WI 54401
(3) All other communications:
Employers Life Insurance Company of Wausau
One Nationwide Plaza (1-33-07)
Columbus, OH 43215-2220
Attn: Corporate Fixed-Income Securities
</TABLE>
Schedule A-4
<PAGE> 48
SCHEDULE A-5
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY (GAN) $1,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
Bankers Trust Company, New York, NY
ABA # 021001033
Private Placement Processing
Account #: 99-911-145
Further credit: The Lincoln National
Life Insurance Company (GAN)
Custody Account No.: 98152
(On Wire Ref: Sec Name/Rate/Mat/
PPN/P=S / I=S)
(2) All notices of payments and
written confirmations of such
wire transfers:
Bankers Trust Company
Attn: Private Placement Unit
P. O. Box 998; Bowling Green Station
New York, NY 10274
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry Street; Renaissance Square
Fort Wayne, IN 46802
Attention: Investments/Private Placements
</TABLE>
Schedule A-5
<PAGE> 49
SCHEDULE A-6
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY (IOB) $1,000,000 12/20/95
(1) All payments by wire transfer of
immediately available funds to:
Bankers Trust Company, New York, NY
ABA # 021001033
Private Placement Processing
Account #: 99-911-145
Further credit: The Lincoln National
Life Insurance Company (IOB)
Custody Account No.: 98201
(On Wire Ref: Sec Name/Rate/Mat/
PPN/P=S / I=S)
(2) All notices of payments and
written confirmations of such
wire transfers:
Bankers Trust Company
Attn: Private Placement Unit
P. O. Box 998; Bowling Green Station
New York, NY 10274
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry Street; Renaissance Square
Fort Wayne, IN 46802
Attention: Investments/Private Placements
</TABLE>
Schedule A-6
<PAGE> 50
SCHEDULE A-7
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY (CRP) $1,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
Bankers Trust Company, New York, NY
ABA # 021001033
Private Placement Processing
Account #: 99-911-145
Further credit: The Lincoln National
Life Insurance Company (CRP)
Custody Account No.: 98231
(On Wire Ref: Sec Name/Rate/Mat/
PPN/P=S / I=S)
(2) All notices of payments and
written confirmations of such
wire transfers:
Bankers Trust Company
Attn: Private Placement Unit
P. O. Box 998; Bowling Green Station
New York, NY 10274
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry Street; Renaissance Square
Fort Wayne, IN 46802
Attention: Investments/Private Placements
</TABLE>
Schedule A-7
<PAGE> 51
SCHEDULE A-8
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY (IND) $3,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
Bankers Trust Company, New York, NY
ABA # 021001033
Private Placement Processing
Account #: 99-911-145
Further credit: The Lincoln National
Life Insurance Company (IND)
Custody Account No.: 98126
(On Wire Ref: Sec Name/Rate/Mat/
PPN/P=S / I=S)
(2) All notices of payments and
written confirmations of such
wire transfers:
Bankers Trust Company
Attn: Private Placement Unit
P. O. Box 998; Bowling Green Station
New York, NY 10274
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry Street; Renaissance Square
Fort Wayne, IN 46802
Attention: Investments/Private Placements
</TABLE>
Schedule A-8
<PAGE> 52
SCHEDULE A-9
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- ----
<S> <C> <C>
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY (IDP) $3,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
Bankers Trust Company, New York, NY
ABA # 021001033
Private Placement Processing
Account #: 99-911-145
Further credit: The Lincoln National
Life Insurance Company (IDP)
Custody Account No.: 98131
(On Wire Ref: Sec Name/Rate/Mat/
PPN/P=S / I=S)
(2) All notices of payments and
written confirmations of such
wire transfers:
Bankers Trust Company
Attn: Private Placement Unit
P. O. Box 998; Bowling Green Station
New York, NY 10274
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry Street; Renaissance Square
Fort Wayne, IN 46802
Attention: Investments/Private Placements
</TABLE>
Schedule A-9
<PAGE> 53
SCHEDULE A-10
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY (IAL) $7,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
Bankers Trust Company, New York, NY
ABA # 021001033
Private Placement Processing
Account #: 99-911-145
Further credit: The Lincoln National
Life Insurance Company (IAL)
Account No.: 98194
(On Wire Ref: Sec Name/Rate/Mat/
PPN/P=S / I=S)
(2) All notices of payments and
written confirmations of such
wire transfers:
Bankers Trust Company
Attn: Private Placement Unit
P. O. Box 998; Bowling Green Station
New York, NY 10274
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry Street; Renaissance Square
Fort Wayne, IN 46802
Attention: Investments/Private Placements
</TABLE>
Schedule A-10
<PAGE> 54
SCHEDULE A-11
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
LINCOLN-SECURITY LIFE INSURANCE
COMPANY $1,000,000 12/20/95
(1) All payments by wire transfer
of immediately available funds to:
Chase Manhattan Bank, N.A., New York, NY
ABA #: 021000021
Lincoln-Security Life
Ins. Co. (New York) (Universal)
For Account No.:G04847
(Ref: Sec. Name/Rate/Maturity/
PPN/P=S/I=S)
(2) All notices of payments and written
confirmations of such wire transfers:
Lincoln-Security Life Insurance
Company (New York)
c/o Security-Connecticut Life
Insurance Company
20 Security Drive
Avon, CT 06002
Att: Jodi Dean
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry Street: Renaissance Square
Fort Wayne, IN 46802
Att: Investments/Private Placements
</TABLE>
Schedule A-11
<PAGE> 55
SCHEDULE A-12
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY $7,000,000 12/20/95
(1) All payments by wire transfer of
immediately available funds to:
Chase Manhattan Bank, N.A.
4 Chase MetroTech Center
New York, NY 10081
ABA # 021000021
For MassMutual IFM Traditional
Account No. 910-1388131
Re: 6.80% Senior Notes due Jan. 5, 2008
with sufficient information
to identify the source and
application of such funds.
(2) All notices of payments and written
confirmations of such wire transfers:
Massachusetts Mutual Life Insurance Company
Securities Custody and Collection Dept.
(413) 744-3878
(3) All other communications:
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
Attn: Securities Investment Division (General)
Securities Custody and Collection
Department, F381 (Payment and Corporate
Action Notices)
</TABLE>
Schedule A-12
<PAGE> 56
SCHEDULE A-13
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY $3,000,000 12/20/95
(1) All payments by wire transfer of
immediately available funds to:
Chase Manhattan Bank, N.A.
4 Chase MetroTech Center
New York, NY 10081
ABA # 021000021
For IFM Non-Traditional
Account No. 910-2509073
Re: 6.80% Senior Notes due Jan. 5, 2008
with sufficient information
to identify the source and
application of such funds.
(2) All notices of payments and written
confirmations of such wire transfers:
Massachusetts Mutual Life Insurance Company
Securities Custody and Collection Dept.
(413) 744-3878
(3) All other communications:
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
Attn: Securities Investment Division (General)
Securities Custody and Collection
Department, F381 (Payment and Corporate
Action Notices)
</TABLE>
Schedule A-13
<PAGE> 57
SCHEDULE A-14
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
METROPOLITAN LIFE INSURANCE
COMPANY $20,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
The Chase Manhattan Bank, N.A.
Metropolitan Branch
33 East 23rd Street, New York, NY 10010
ABA #.: 021000021
Account No.: 002-2-410591
with sufficient information
to identify the source and
application of such funds and PPN.
(2) All notices of payments and
written confirmations of such
wire transfers:
Metropolitan Life Insurance Company
One Madison Avenue
New York, NY 10021
Attn: Treasurer
Telecopy No. 212-578-3910
(3) All other communications:
Metropolitan Life Insurance Company
One Madison Avenue
New York, NY 10021
Att: Treasurer
</TABLE>
Schedule A-14
<PAGE> 58
SCHEDULE A-15
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
METROPOLITAN PROPERTY AND
CASUALTY INSURANCE COMPANY $10,000,000 12/20/95
(1) All payments by wire transfer of
immediately available funds to:
The Chase Manhattan Bank, N.A.
Metropolitan Branch
33 East 23rd Street, New York, NY 10010
ABA No.: 021000021
Account #: 002-1-025432
with sufficient information to identify
the source and application of such funds and PPN.
(2) All notices of payments and written
confirmations of such wire transfers:
Metropolitan Property and Casualty
Insurance Company
700 Quaker Lane
Warwick, Rhode Island 02886
Attn: Treasurer
(3) All other communications:
Metropolitan Property and Casualty
Insurance Company
700 Quaker Lane, Warwick, Rhode Island 02886
Attn: Treasurer
Telecopy No.: 212-578-3910
(c/o Metropolitan Life Insurance Company
with a copy to:
Metropolitan Life Insurance Company
One Madison Avenue
New York, NY 10021
</TABLE>
Schedule A-15
<PAGE> 59
SCHEDULE A-16
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
NATIONWIDE LIFE INSURANCE
COMPANY $19,000,000 1/5/96
(1) All payments by wire trans-
fer of immediately available
funds to:
Morgan Guaranty Trust Company of New York
ABA #021-000-238
Journal #999-99-024
F/A/O Nationwide Life Insurance
Company Custody A/C #71615
Attn: Custody Service Dept.
PPN #313496 A@ 4
Security Descrip: 6.80% Senior Notes
due January 5, 2008
(2) All notices of payments and
written confirmations of such
wire transfers:
Nationwide Life Insurance Company
One Nationwide Plaza (1-32-09)
Columbus, Ohio 43215-2220
Att: Corporate Money Management
(3) All other communications:
Nationwide Life Insurance Company
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43215-2220
Att: Corporate Fixed-Income Securities
</TABLE>
Schedule A-16
<PAGE> 60
SCHEDULE A-17
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
NATIONWIDE LIFE INSURANCE
COMPANY SEPARATE ACCOUNT OH $1,000,000 1/5/96
(1) All payments by wire transfer of
immediately available funds to:
Morgan Guaranty Trust Company of New York
ABA #021-000-238
Journal #999-99-024
F/A/O Nationwide Life Insurance Company
Separate Acct. OH Custody A/C #74605
Attn: Custody Service Dept.
PPN# 343496
6.80% Senior Note Due January 5, 2008 with
sufficient information to identify the source
and application of such funds.
(2) All notices of payments and written
confirmations of such wire transfers:
Nationwide Life Insurance Company
Separate Account OH
One Nationwide Plaza (1-32-09)
Columbus, Ohio 43115-2220
Att: Corporate Money Management
(3) All other communications:
Nationwide Life Insurance Company
Separate Account OH
One Nationwide Plaze (1-33-07)
Columbus, Ohio 43215-2220
Att: Corporate Fixed-Income Securities
</TABLE>
Schedule A-17
<PAGE> 61
SCHEDULE A-18
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
SECURITY-CONNECTICUT LIFE
INSURANCE COMPANY $1,000,000 12/20/95
(1) All payments by wire trans-
fer of immediately available
funds to:
Shawmut Bank Connecticut, N.A.
777 Main Street, Hartford, CT 06115
ABA Routing #: 011900445
For Acct of: Sec-Conn Life (Univ Life)
Account #: 0156196
(Ref: Security/Rate/Maturity/PPN/P=S/I=S)
(2) All notices of payments and written
confirmations of such wire transfers:
Security-Connecticut Life Insurance Company
20 Security Drive
Avon, CT 06001
Att: Jodi Dean
(3) All other communications:
Lincoln Investment Management, Inc.
200 East Berry Street, Renaissance Square
Fort Wayne, IN 46802
Att: Investment/Private Placements
</TABLE>
Schedule A-18
<PAGE> 62
SCHEDULE A-19
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2008
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
THE VARIABLE ANNUITY LIFE
INSURANCE COMPANY $10,000,000 1/5/96
(1) All payments by wire transfer of immediately
available funds to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA 02101
Re: The Variable Annuity Life
Insurance Company
AC-0125-821-9
OBI=PPN # and description of payment, Fund Number
PA 54 with sufficient information to identify the
source and application of such funds.
(2) All notices of payments and written
confirmations of such wire transfers:
The Variable Annuity Life Insurance
Company and PA 54
c/o State Street Bank and Trust Company
Insurance Services Custody (AH2)
1776 Heritage Drive
North Quincy, MA 02171
Facsimile Number: (6;17) 985-4923
(3) All other communications:
The Variable Annuity Life Insurance Company
c/o American General Corporation
Att: Investment Research Dept., A37-01
P. O. Box 3247
Houston, Texas 77253-3247
Overnight Mail Address: 2929 Allen Parkway
Houston, TX 77019-2155
Facsimile No. (713) 831-1366
</TABLE>
Schedule A-19
<PAGE> 63
SCHEDULE B-1
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2011
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
AMERICAN GENERAL LIFE INSURANCE
COMPANY $2,000,000 1/5/96
(1) All payments by wire transfer of
immediately available funds to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA 02101
Re: American General Life Insurance
Company AC-0125-880-5
OBI=PPN # and description of payment Fund
Number PA40 with sufficient information
to identify the source and application of
such funds.
(2) All notices of payments and written
confirmations of such wire transfers:
American General Life Insurance
Company and PA 40
c/o State Street Bank and Trust Company
Insurance Services Custody (AH2)
1776 Heritage Drive
North Quincy, MA 02171
Facsimile Number: (617) 985-4923
(3) All other communications:
American General Life Insurance Company
c/o American General Corporation
Attn: Investment Research Dept. A37-01
P. O. Box 3247, Houston, Texas 77253-3247
Overnight Mail Address:2929 Allen Parkway
Houston, TX 77019-2155
Facsimile Number: (713) 831-1366
</TABLE>
Schedule B-1
<PAGE> 64
SCHEDULE B-2
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2011
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
THE VARIABLE ANNUITY LIFE
INSURANCE COMPANY $18,000,000 1/5/96
(1) All payments by wire transfer of
immediately available funds to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA 02101
Re: The Variable Annuity Life Insurancy Company
AC-0125-821-9
OBI=PPN # and description of payment Fund Number
PA 54 with sufficient information to identify the
source and application of such funds.
(2) All notices of payments and written
confirmations of such wire transfers:
The Variable Annuity Life Insurance
Company and PA 54
c/o State Street Bank and Trust Company
Insurance Services Custody (AH2)
1776 Heritage Drive
North Quincy, MA 02171
Facsimile Number: (617) 985-4923
(3) All other communications:
The Variable Annuity Life Insurance Company
c/o American General Corporation
Attn: Investment Research Dept. A37-01
P. O. Box 3247, Houston, Texas 72253-3247
Overnight Mail Address: 2929 Allen Parkway
Houston, TX 77019-2155
Facsimile No.: (713) 831-1366
</TABLE>
Schedule B-2
<PAGE> 65
SCHEDULE C-1
INFORMATION RELATING TO PURCHASERS
OF NOTES DUE JANUARY 5, 2016
<TABLE>
<CAPTION>
Principal Amount of Closing
Name and Address of Purchaser Notes to be Purchased Date
- ----------------------------- --------------------- -------
<S> <C> <C>
UNITED OF OMAHA LIFE
INSURANCE COMPANY $5,000,000 12/20/95
(1) All payments by wire transfer of
immediately available funds to:
FirsTier Bank - Omaha
17th & Farnam Street
Omaha, NE 68102
ABA # 1040-00029
Account # 144-7-076
with sufficient information
to identify the source and
application of such funds.
(2) All notices of payments and written
confirmations of such wire transfers:
United of Omaha Life Insurance Company
Att: Investment Division/
Securities Accounting
Mutual of Omaha Plaza
Omaha, NE 68175-0001
(3) All other communications:
United of Omaha Life Insurance Company
Att: Investment Division/
Securities Accounting
Mutual of Omaha Plaza
Omaha, NE 68175-0001
(4) Nominee: Harny & Co
</TABLE>
Schedule C-1
<PAGE> 66
SCHEDULE D
DEFINED TERMS
As used herein, the following terms have the respective
meanings set forth below or set forth in the Section hereof following such term:
"AFFILIATE" means, at any time, and with respect to any
Person, any other Person that at such time directly or indirectly through one or
more intermediaries Controls, or is Controlled by, or is under common Control
with, such first Person. As used in this definition, "CONTROL" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise. Unless the context
otherwise clearly requires, any reference to an "Affiliate" is a reference to an
Affiliate of the Company.
"BUSINESS DAY" means (a) for the purposes of Section 8.6 only,
any day other than a Saturday, a Sunday or a day on which commercial banks in
New York City are required or authorized to be closed, and (b) for the purposes
of any other provision of this Agreement, any day other than a Saturday, a
Sunday or a day on which commercial banks in Atlanta, Georgia are required or
authorized to be closed.
"CAPITALIZED LEASE" means any lease which is required to be
capitalized on the balance sheet of the lessee pursuant to GAAP but shall
exclude any lease which at the time of its incurrence was an operating lease for
purposes of GAAP as in effect at such time.
"CLOSING" is defined in Section 3.
"CODE" means the Internal Revenue Code of 1986, as amended
from time to time, and the rules and regulations promulgated thereunder from
time to time.
"COMPANY" means Flowers Industries, Inc., a Georgia
corporation.
"CONFIDENTIAL INFORMATION" is defined in Section 20.
"CONSOLIDATED NET INCOME" shall mean the net income and net
losses of the Company and its Subsidiaries on a consolidated basis as defined
according to GAAP after excluding the sum of (i) any undistributed net income of
a Subsidiary to the extent that a distribution is prohibited by agreement,
judgment or regulation, (ii) extraordinary gains or losses,
1
Schedule D
<PAGE> 67
SCHEDULE D
and (iii) the earnings (or losses) of any Person acquired prior to the date of
its consolidation into the Company.
"CONSOLIDATED NET WORTH" means the Net Worth of the Company
and its Subsidiaries determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED TOTAL DEBT" means the aggregate of all
Indebtedness of the Company and its Subsidiaries determined on a consolidated
basis in accordance with GAAP, excluding, however, any Convertible Redeemable
Capital Stock or Convertible Subordinated Debt if the current market value of an
equity security into which such Convertible Redeemable Capital Stock or
Convertible Subordinated Debt is convertible is greater than the conversion
price for such security.
"CONVERTIBLE REDEEMABLE CAPITAL STOCK" shall mean any capital
stock that by its terms (or by the terms of any agreement by which or equity
security into which it is convertible or for which it is exchangeable or any
other agreement) or upon the happening of any event matures or is or will become
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, or is
exchangeable for or convertible into an equity security of the Company.
"CONVERTIBLE SUBORDINATED DEBT" means any Indebtedness of the
Company (i) which is and remains subordinated in right of payment to the
obligations of the Company on the Notes and (ii) which by its terms is
exchangeable for or convertible into an equity security of the Company.
"DEFAULT" means an event or condition the occurrence or
existence of which would, with the lapse of time or the giving of notice or
both, become an Event of Default.
"DEFAULT RATE" means that rate of interest that is the greater
of (i) 2% per annum above the rate of interest stated in clause (a) of the first
paragraph of the Notes or (ii) 2% over the rate of interest publicly announced
by The Chase Manhattan Bank, N.A. in New York, New York as its "base" or "prime"
rate.
"ENVIRONMENTAL LAWS" means any and all Federal, state, local,
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
governmental restrictions relating to pollution and the protection of the
environment or the release of any materials into the environment, including but
2
Schedule D
<PAGE> 68
SCHEDULE D
not limited to those related to hazardous substances or wastes, air emissions
and discharges to waste or public systems.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the rules and regulations promulgated
thereunder from time to time in effect.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) that is treated as a single employer together with the Company
under section 414 of the Code.
"EVENT OF DEFAULT" is defined in Section 11.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States of America.
"GOVERNMENTAL AUTHORITY" means
(a) the government of
(i) the United States of America or any State or
other political subdivision thereof, or
(ii) any jurisdiction in which the Company or any
Subsidiary conducts all or any part of its business, or which
asserts jurisdiction over any properties of the Company or any
Subsidiary, or
(b) any entity exercising executive, legislative,
judicial, regulatory or adminis trative functions of, or pertaining
to, any such government.
"GUARANTY" means, with respect to any Person, any obligation
(except the endorsement in the ordinary course of business of negotiable
instruments for deposit or collection) of such Person guaranteeing or in effect
guaranteeing any Indebtedness, dividend or other obligation of any other Person
in any manner, whether directly or indirectly, including (without limitation)
obligations incurred through an agreement, contingent or otherwise, by such
Person:
3
Schedule D
<PAGE> 69
SCHEDULE D
(a) to purchase such Indebtedness or obligation or any
property constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment
of such Indebt edness or obligation, or (ii) to maintain any working
capital or other balance sheet condition or any income statement
condition of any other Person or otherwise to advance or make available
funds for the purchase or payment of such Indebtedness or obligation;
(c) to lease properties or to purchase properties or services
primarily for the purpose of assuring the owner of such Indebtedness or
obligation of the ability of any other Person to make payment of the
Indebtedness or obligation; or
(d) otherwise to assure the owner of such Indebtedness or
obligation against loss in respect thereof.
In any computation of the Indebtedness or other liabilities of the obligor under
any Guaranty, the Indebtedness or other obligations that are the subject of such
Guaranty shall be assumed to be direct obligations of such obligor.
"HAZARDOUS MATERIALS" shall mean, collectively, any
polychlorinated biphenyls, petroleum or petroleum derived substance, friable
asbestos, and any toxic or otherwise hazardous waste, material or substance,
including, without limitation, all substances with respect to which liability or
standards of conduct may be imposed pursuant to any Environmental Law.
"HOLDER" means, with respect to any Note, the Person in whose
name such Note is registered in the register maintained by the Company pursuant
to Section 13.1.
"INDEBTEDNESS" with respect to any Person means, at any time,
without duplication,
(a) its liabilities for borrowed money and its redemption
obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of
property acquired by such Person (excluding accounts payable arising in
the ordinary course of business but including all liabilities created
or arising under any conditional sale or other title retention
agreement with respect to any such property);
4
Schedule D
<PAGE> 70
SCHEDULE D
(c) all liabilities appearing on its balance sheet in
accordance with GAAP in respect of Capitalized Leases;
(d) all liabilities for borrowed money secured by any Lien
with respect to any property owned by such Person (whether or not it
has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or
instruments serving a similar function issued or accepted for its
account by banks and other financial institutions (whether or not
representing obligations for borrowed money);
(f) Swaps of such Person; and
(g) any Guaranty of such Person with respect to liabilities of
a type described in any of clauses (a) through (f) hereof.
"INSTITUTIONAL INVESTOR" means (a) any original purchaser of a
Note, (b) any holder of a Note holding more than 5% of the aggregate principal
amount of the Notes then outstanding, and (c) any bank, trust company, savings
and loan association or other financial institution, any pension plan, any
investment company, any insurance company, any broker or dealer, or any other
similar financial institution or entity, regardless of legal form.
"LIEN" means, with respect to any Person, any mortgage, lien,
pledge, charge, security interest or other encumbrance, or any interest or title
of any vendor, lessor, lender or other secured party to or of such Person under
any conditional sale or other title retention agreement or Capitalized Lease,
upon or with respect to any property or asset of such Person (including in the
case of stock, stockholder agreements, voting trust agreements and all similar
arrangements).
"MAKE-WHOLE AMOUNT" is defined in Section 8.6.
"MATERIAL" means material in relation to the business,
operations, affairs, financial condition, assets, or properties of the Company
and its Subsidiaries taken as a whole.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on
(a) the business, operations, affairs, financial condition, assets or properties
of the Company and its Subsidiaries
5
Schedule D
<PAGE> 71
SCHEDULE D
taken as a whole, or (b) the ability of the Company to perform its obligations
under this Agreement and the Notes, or (c) the validity or enforceability of
this Agreement or the Notes.
"MEMORANDUM" is defined in Section 5.3.
"MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer
plan" (as such term is defined in section 4001(a)(3) of ERISA).
"NET WORTH" of any Person means the Total Assets of such
Person less all liabilities of such Person which would be shown as liabilities
on a balance sheet of such Person as of such time prepared in accordance with
GAAP.
"NOTES" is defined in Section 1.
"OFFICER'S CERTIFICATE" means a certificate of a Senior
Financial Officer or of any other officer of the Company whose responsibilities
extend to the subject matter of such certificate.
"OTHER PURCHASERS" is defined in Section 2.
"PBGC" means the Pension Benefit Guaranty Corporation referred
to and defined in ERISA or any successor thereto.
"PERSON" means an individual, corporation, limited liability
company, association, partnership, trust, joint venture, unincorporated
organization, or a government or agency or political subdivision thereof.
"PLAN" means an "employee benefit plan" (as defined in section
3(3) of ERISA) that is or, within the preceding five years, has been established
or maintained, or to which contributions are or, within the preceding five
years, have been made or were required to be made, by the Company or any ERISA
Affiliate or with respect to which the Company or any ERISA Affiliate may have
any liability.
"PREFERRED STOCK" means any class of capital stock of a
corporation that is preferred over any other class of capital stock of such
corporation as to the payment of dividends or the payment of any amount upon
liquidation or dissolution of such corporation.
6
Schedule D
<PAGE> 72
SCHEDULE D
"PROPERTY" or "PROPERTIES" means, unless otherwise
specifically limited, real or personal property of any kind, tangible or
intangible, choate or inchoate.
"QPAM EXEMPTION" means Prohibited Transaction Class Exemption
84-14 issued by the United States Department of Labor.
"REQUIRED HOLDERS" means, at any time, the holders of at least
66 2/3% in principal amount of the Notes at the time outstanding (exclusive of
Notes then owned by the Com pany or any of its Affiliates).
"RESPONSIBLE OFFICER" means any Senior Financial Officer and
any other officer of the Company with responsibility for the administration of
the relevant portion of this agreement.
"RESTRICTED PAYMENT" means any dividend, distribution or
payment in respect of the capital stock of the Company or any Subsidiary,
whether in cash or property (other than of capital stock or other equity
interests of a Subsidiary owned legally and beneficially by the Company or
another Subsidiary), including, without limitation, any distribution resulting
in the acquisition by the Company of securities which would constitute treasury
stock. If a Restricted Payment is made with property other than cash, such
property shall be valued at the greater of its book value or its fair market
value, in either case determined as of the time such payment is made.
"SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time.
"SENIOR FINANCIAL OFFICER" means the chief financial officer,
principal accounting officer, treasurer or comptroller of the Company.
"SIGNIFICANT SUBSIDIARY" means at any time any Subsidiary that
would at such time constitute a "significant subsidiary" (as such term is
defined in Regulation S-X of the Securities and Exchange Commission as in effect
on the date of the Closing) of the Company.
"SUBSIDIARY" means, as to any Person, any corporation,
association or other business entity in which such Person or one or more of its
Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient
equity or voting interests to enable it or them (as a group) ordinarily, in the
absence of contingencies, to elect a majority of the directors (or Persons
performing similar functions) of such entity, and any partnership or joint
venture if more than a 50% interest in the profits or capital thereof is owned
by such Person or one or more of its Subsidiaries or such Person and one or more
of its Subsidiaries (unless such partnership can and
7
Schedule D
<PAGE> 73
SCHEDULE D
does ordinarily take major business actions without the prior approval of such
Person or one or more of its Subsidiaries). Unless the context otherwise clearly
requires, any reference to a "Sub sidiary" is a reference to a Subsidiary of the
Company.
"SWAPS" means, with respect to any Person, payment obligations
with respect to interest rate swaps, currency swaps and similar obligations
obligating such Person to make payments, whether periodically or upon the
happening of a contingency. For the purposes of this Agreement, the amount of
the obligation under any Swap shall be the amount determined in respect thereof
as of the end of the then most recently ended fiscal quarter of such Person,
based on the assumption that such Swap had terminated at the end of such fiscal
quarter, and in making such determination, if any agreement relating to such
Swap provides for the netting of amounts payable by and to such Person
thereunder or if any such agreement provides for the simultaneous payment of
amounts by and to such Person, then in each such case, the amount of such
obligation shall be the net amount so determined.
"TOTAL ASSETS" means, with respect to any Person at any time,
the total assets of such Person as set forth or reflected on the most recent
consolidated balance sheet of such Person, prepared in accordance with GAAP.
"TOTAL CAPITALIZATION" means the sum of (i) Consolidated Total
Debt and (ii) Consolidated Net Worth.
"WHOLLY-OWNED SUBSIDIARY" means, at any time, any Subsidiary
one hundred percent (100%) of all of the equity interests (except directors'
qualifying shares) and voting interests of which are owned by any one or more of
the Company and the Company's other Wholly-Owned Subsidiaries at such time.
8
Schedule D
<PAGE> 74
EXHIBIT 1(A)
[FORM OF NOTE]
FLOWERS INDUSTRIES, INC.
6.80% SENIOR NOTE DUE JANUARY 5, 2008
No. [_____] [Date]
$[_______] PPN 343496
FOR VALUE RECEIVED, the undersigned, FLOWERS INDUSTRIES, INC.
(herein called the "Company"), a corporation organized and existing under the
laws of the State of Georgia, hereby promises to pay to[______________________],
or registered assigns, the principal sum of[___________________________] DOLLARS
on January 5, 2008, with interest (computed on the basis of a 360-day year of
twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.80% per
annum from the date hereof, payable semiannually, on the 5th day of January and
July in each year, commencing with the earlier to occur of the January 5 or the
July 5 next succeeding the date hereof, until the principal hereof shall have
become due and payable, and (b) to the extent permitted by law on any overdue
payment (including any overdue prepayment) of principal, any overdue payment of
interest and any overdue payment of any Make-Whole Amount (as defined in the
Note Purchase Agreements referred to below), payable semiannually as aforesaid
(or, at the option of the registered holder hereof, on demand), at a rate per
annum from time to time equal to the greater of (i) 8.80% or (ii) 2% over the
rate of interest publicly announced by The Chase Manhattan Bank, N.A. from time
to time in New York, New York as its "base" or "prime" rate.
Payments of principal of, interest on and any Make-Whole
Amount with respect to this Note are to be made in lawful money of the United
States of America at the principal office of the holder of this Note, at the
address for payment indicated on Schedule A attached to the Note Purchase
Agreement referred to below, or at such other place as the holder of this Note
shall have designated by written notice to the Company as provided in the Note
Purchase Agreement referred to below.
This Note is one of a series of Senior Notes (herein called
the "Notes") issued pursuant to that certain Note Purchase Agreement, dated
December 20, 1995 (as from time to time amended, the "Note Purchase Agreement"),
by and among the Company and the respective
1
Exhibit 1(A)
<PAGE> 75
Purchasers named therein and is entitled to the benefits thereof. Each holder of
this Note will be deemed, by its acceptance hereof, (i) to have agreed to the
confidentiality provisions set forth in Section 20 of the Note Purchase
Agreement and (ii) to have made the representation set forth in Section 6.2 of
the Note Purchase Agreement.
This Note is a registered Note and, as provided in the Note
Purchase Agreement, upon surrender of this Note for registration of transfer,
duly endorsed, or accompanied by a written instrument of transfer duly executed,
by the registered holder hereof or such holder's attorney duly authorized in
writing, a new Note for a like principal amount will be issued to, and
registered in the name of, the transferee. Prior to due presentment for
registration of transfer, the Company may treat the person in whose name this
Note is registered as the owner hereof for the purpose of receiving payment and
for all other purposes, and the Company will not be affected by any notice to
the contrary.
The Company will make required prepayments of principal on the
dates and in the amounts specified in the Note Purchase Agreement. This Note is
also subject to optional pre payment, in whole or from time to time in part, at
the times and on the terms specified in the Note Purchase Agreement, but not
otherwise.
If an Event of Default, as defined in the Note Purchase
Agreement, occurs and is continuing, the principal of this Note may be declared
or otherwise become due and payable in the manner, at the price (including any
applicable Make-Whole Amount) and with the effect provided in the Note Purchase
Agreement.
This Note shall be construed and enforced in accordance with,
and the rights of the parties shall be governed by, the law of the State of
Georgia.
FLOWERS INDUSTRIES, INC.
By
-------------------------
C. Martin Wood III
Senior Vice President and
Chief Financial Officer
2
Exhibit 1(A)
<PAGE> 76
EXHIBIT 1(B)
[FORM OF NOTE]
FLOWERS INDUSTRIES, INC.
6.99% SENIOR NOTE DUE JANUARY 5, 2011
No. [_____] [Date]
$[_______] PPN 343496
FOR VALUE RECEIVED, the undersigned, FLOWERS INDUSTRIES, INC.
(herein called the "Company"), a corporation organized and existing under the
laws of the State of Georgia, hereby promises to pay to[______________________],
or registered assigns, the principal sum of [__________________________] DOLLARS
on January 5, 2011, with interest (computed on the basis of a 360-day year of
twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.99% per
annum from the date hereof, payable semiannually on the 5th day of January and
July in each year, commencing with the earlier to occur of the January 5 or the
July 5 next succeeding the date hereof, until the principal hereof shall have
become due and payable, and (b) to the extent permitted by law on any overdue
payment (including any overdue prepayment) of principal, any overdue payment of
interest and any overdue payment of any Make- Whole Amount (as defined in the
Note Purchase Agreements referred to below), payable semiannually as aforesaid
(or, at the option of the registered holder hereof, on demand), at a rate per
annum from time to time equal to the greater of (i) 8.99% or (ii) 2% over the
rate of interest publicly announced by The Chase Manhattan Bank, N.A. from time
to time in New York, New York as its "base" or "prime" rate.
Payments of principal of, interest on and any Make-Whole
Amount with respect to this Note are to be made in lawful money of the United
States of America at the principal office of the holder of this Note, at the
address for payment indicated on Schedule B attached to the Note Purchase
Agreement referred to below, or at such other place as the holder of this Note
shall have designated by written notice to the Company as provided in the Note
Purchase Agreement referred to below.
This Note is one of a series of Senior Notes (herein called
the "Notes") issued pursuant to that certain Note Purchase Agreements, dated
December 20, 1995 (as from time to time amended, the "Note Purchase Agreement"),
by and among the Company and the respective
1
Exhibit 1(B)
<PAGE> 77
Purchasers named therein and is entitled to the benefits thereof. Each holder of
this Note will be deemed, by its acceptance hereof, (i) to have agreed to the
confidentiality provisions set forth in Section 20 of the Note Purchase
Agreement and (ii) to have made the representation set forth in Section 6.2 of
the Note Purchase Agreement.
This Note is a registered Note and, as provided in the Note
Purchase Agreement, upon surrender of this Note for registration of transfer,
duly endorsed, or accompanied by a written instrument of transfer duly executed,
by the registered holder hereof or such holder's attorney duly authorized in
writing, a new Note for a like principal amount will be issued to, and
registered in the name of, the transferee. Prior to due presentment for
registration of transfer, the Company may treat the person in whose name this
Note is registered as the owner hereof for the purpose of receiving payment and
for all other purposes, and the Company will not be affected by any notice to
the contrary.
The Company will make required prepayments of principal on the
dates and in the amounts specified in the Note Purchase Agreement. This Note is
also subject to optional pre payment, in whole or from time to time in part, at
the times and on the terms specified in the Note Purchase Agreement, but not
otherwise.
If an Event of Default, as defined in the Note Purchase
Agreement, occurs and is continuing, the principal of this Note may be declared
or otherwise become due and payable in the manner, at the price (including any
applicable Make-Whole Amount) and with the effect provided in the Note Purchase
Agreement.
This Note shall be construed and enforced in accordance with,
and the rights of the parties shall be governed by, the law of the State of
Georgia.
FLOWERS INDUSTRIES, INC.
By
-------------------------
C. Martin Wood III
Senior Vice President and
Chief Financial Officer
2
Exhibit 1(B)
<PAGE> 78
EXHIBIT 1(C)
[FORM OF NOTE]
FLOWERS INDUSTRIES, INC.
7.08% SENIOR NOTE DUE JANUARY 5, 2016
No. [_____] [Date]
$[_______] PPN 343496
FOR VALUE RECEIVED, the undersigned, FLOWERS INDUSTRIES, INC.
(herein called the "Company"), a corporation organized and existing under the
laws of the State of Georgia, hereby promises to pay to [_____________________],
or registered assigns, the principal sum of [__________________________] DOLLARS
on January 5, 2016, with interest (computed on the basis of a 360-day year of
twelve 30-day months) (a) on the unpaid balance thereof at the rate of 7.08% per
annum from the date hereof, payable semiannually on the 5th day of January and
July in each year, commencing with the earlier to occur of the January 5 or the
July 5 next succeeding the date hereof, until the principal hereof shall have
become due and payable, and (b) to the extent permitted by law on any overdue
payment (including any overdue prepayment) of principal, any overdue payment of
interest and any overdue payment of any Make- Whole Amount (as defined in the
Note Purchase Agreements referred to below), payable semiannually as aforesaid
(or, at the option of the registered holder hereof, on demand), at a rate per
annum from time to time equal to the greater of (i) 9.08% or (ii) 2% over the
rate of interest publicly announced by The Chase Manhattan Bank from time to
time in New York, New York as its "base" or "prime" rate.
Payments of principal of, interest on and any Make-Whole
Amount with respect to this Note are to be made in lawful money of the United
States of America at the principal office of the holder of this Note at the
address for payment indicated on Schedule C attached to the Note Purchase
Agreement referred to below, or at such other place as the holder of this note
shall have designated by written notice to the Company as provided in the Note
Purchase Agreement referred to below.
This Note is one of a series of Senior Notes (herein called
the "Notes") issued pursuant that certain Note Purchase Agreement, dated as of
December 20, 1995 (as from time to time amended, the "Note Purchase Agreement"),
the Company and the respective Purchasers
1
Exhibit 1(C)
<PAGE> 79
named therein and is entitled to the benefits thereof. Each holder of this Note
will be deemed, by its acceptance hereof, (i) to have agreed to the
confidentiality provisions set forth in Section 20 of the Note Purchase
Agreement and (ii) to have made the representation set forth in Section 6.2 of
the Note Purchase Agreement.
This Note is a registered Note and, as provided in the Note
Purchase Agreement, upon surrender of this Note for registration of transfer,
duly endorsed, or accompanied by a written instrument of transfer duly executed,
by the registered holder hereof or such holder's attorney duly authorized in
writing, a new Note for a like principal amount will be issued to, and
registered in the name of, the transferee. Prior to due presentment for
registration of transfer, the Company may treat the person in whose name this
Note is registered as the owner hereof for the purpose of receiving payment and
for all other purposes, and the Company will not be affected by any notice to
the contrary.
The Company will make required prepayments of principal on the
dates and in the amounts specified in the Note Purchase Agreement. This Note is
also subject to optional pre payment, in whole or from time to time in part, at
the times and on the terms specified in the Note Purchase Agreement, but not
otherwise.
If an Event of Default, as defined in the Note Purchase
Agreement, occurs and is continuing, the principal of this Note may be declared
or otherwise become due and payable in the manner, at the price (including any
applicable Make-Whole Amount) and with the effect provided in the Note Purchase
Agreement.
This Note shall be construed and enforced in accordance with,
and the rights of the parties shall be governed by, the law of the State of
Georgia.
FLOWERS INDUSTRIES, INC.
By
-------------------------
C. Martin Wood III
Senior Vice President and
Chief Financial Officer
2
Exhibit 1(C)
<PAGE> 80
EXHIBIT 4.4(a)
FORM OF OPINION OF ASSISTANT GENERAL COUNSEL OF THE COMPANY
Matters To Be Covered In
Opinion of Assistant General Counsel To the Company
1. Each of the Company and its Significant Subsidiaries being duly
incorpo rated, validly existing and in good standing and having requisite
corporate power and authority to issue and sell the Notes and to execute and
deliver the documents.
2. Each of the Company and its Significant Subsidiaries being duly
qualified and in good standing as a foreign corporation in appropriate
jurisdictions.
3. Due authorization and execution of the documents and such
documents being legal, valid, binding and enforceable.
4. No conflicts with charter documents, laws or other material
agreements.
5. All consents required to issue and sell the Notes and to execute
and deliver the documents having been obtained.
6. No litigation questioning validity of documents.
Exhibit 4.4(a)
<PAGE> 81
EXHIBIT 4.4(b)
FORM OF OPINION OF SPECIAL COUNSEL OF THE COMPANY
Matters To Be Covered In
Opinion of Special Counsel To the Company
1. Based upon certain representations, the Notes not requiring
registration under the Securities Act of 1933, as amended; no need to qualify an
indenture under the Trust Indenture Act of 1939, as amended.
2. No violation of Regulations G, T or X of the Federal Reserve
Board.
3. Company not an "investment company", or a company "controlled" by
an "investment company", under the Investment Company Act of 1940, as amended.
4. Enforceability of all documents.
Exhibit 4.4(b)
<PAGE> 82
EXHIBIT 4.4(c)
FORM OF OPINION OF SPECIAL COUNSEL
TO THE PURCHASERS
[TO BE PROVIDED ON A CASE BY CASE BASIS]
Exhibit 4.4(c)
<PAGE> 83
SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT made this 12th day of
March, 1998, by and among Flowers Industries, Inc., a Georgia corporation (the
"Company") and each of the holders (the "Holders") of the Notes (as defined in
that certain Note Purchase Agreement dated December 20, 1995 by and among the
Company and each of the Purchasers (the "Note Purchase Agreement"). Capitalized
terms not otherwise defined in this Second Amendment to Note Purchase Agreement
shall have the meaning given them in the Note Purchase Agreement;
W I T N E S S E T H:
WHEREAS, the Company and the Holders have entered into the Note
Purchase Agreement;
WHEREAS, the parties hereto amended the Note Purchase Agreement to
amend the ratio of Consolidated Total Debt to Total Capitalization;
WHEREAS, the parties hereto desire to amend the Note Purchase Agreement
to (i) exclude Keebler Foods Company, a Delaware corporation, and its
subsidiaries ("Keebler") from the definition of Subsidiary, (ii) define the
nature of permitted investments in Keebler and (iii) define the minimum
consolidated net worth of the Company;
WHEREAS, pursuant to Section 17.1 of the Note Purchase Agreement, the
Note Purchase Agreement may be amended with the written consent of the Company
and the Required Holders;
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises, agreements, representations, warranties and covenants hereinafter set
forth, and the sum of ten dollars and other good and valuable consideration, the
receipt and sufficiency of which is hereby specifically agreed to and
acknowledged, the Note Purchase Agreement is hereby amended as follows:
1. Section 10.1 of the Note Purchase Agreement is hereby amended by
adding at the end of said section a new sentence, reading as follows:
"Solely for the purposes of this Section 10.1 and notwithstanding
any contrary provision in this Agreement, Keebler shall be deemed to be a
Subsidiary of the Company."
<PAGE> 84
2. The Note Purchase Agreement is hereby amended by adding a new
section 10.10 immediately following Section 10.9 of the Note Purchase Agreement,
reading as follows:
"10.10 INVESTMENT IN KEEBLER.
Neither the Company nor any of its Subsidiaries shall make any
Investment in Keebler except for Permitted Keebler Investments."
3. The Note Purchase Agreement is hereby amended by adding a new
section 10.11 immediately following Section 10.10 of the Note Purchase
Agreement, reading as follows:
"10.11 MINIMUM CONSOLIDATED NET WORTH
The Consolidated Net Worth of the Company will at no time be less than:
(A) prior to the date of the first public issuance of capital stock of
the Company (other than in connection with any employee benefit plan) occurring
after the date hereof (the "Next Public Offering"), the greater of (i) 85% of
Consolidated Net Worth as of the end of the fiscal quarter of the Company ending
September 20, 1997, plus the sum of (x) 50% of the cumulative net proceeds of
capital stock received during any period after the date hereof, plus (y) 50% of
any equity resulting from a conversion of Indebtedness during any period after
the date hereof, less (z) any amount of equity repurchased during any period
after the date hereof, calculated quarterly at the end of each fiscal quarter of
the Company; and (ii) $200,000,000; and
(B) from and after the date of the Next Public Offering, the greater of
(i) 85% of Consolidated Net Worth as of the end of the fiscal quarter of the
Company most recently ended, adjusted to give effect on a proforma basis to the
Next Public Offering, plus the sum of (x) 50% of the cumulative net proceeds of
capital stock received during any period after the Next Public Offering, plus
(y) 50% of any equity resulting from a conversion of Indebtedness during any
period after the Next Public Offering, less (z) any amount of equity repurchased
during any period after the Next Public Offering, calculated quarterly at the
end of each fiscal quarter of the Company; and (ii) $450,000,000.
4. Section 11(c) of the Note Purchase Agreement is hereby amended by
replacing the phrase "10.8 or 7.1(d)" with the phrase "10.8, 10.10, 10.11 or
7.1(d)".
5. Schedule D of the Note Purchase Agreement is hereby amended by
adding a new definition of Investment immediately following the definition of
Institutional Investor, reading as follows:
"Investment" means any investment in any Person, whether by means of
purchase or acquisition of obligations or securities of such Person,
capital contribution to such Person, loan or advance to such Person,
making of a time deposit with such Person, guaranty or assumption of
any obligation of such Person or otherwise."
2
<PAGE> 85
6. Schedule D of the Note Purchase Agreement is hereby amended by
adding a new definition of Permitted Keebler Investments immediately following
the definition of PBGC, reading as follows:
"Permitted Keebler Investments" means: (i) the Keebler Acquisition;
and (ii) provided that the Keebler Acquisition has been consummated,
additional shares of common capital stock in Keebler Foods Company, a
Delaware corporation ("Keebler") acquired from time to time (a) from
third parties in the open market, (b) from Bermore, Limited and Artal
Luxembourg S.A. in private transactions, (c) from management of Keebler
in private transactions and/or (d) from Keebler as part of an offering
of stock by Keebler (whether public or private), but in the case of
this clause (d), only to the extent necessary for the Company to
maintain ownership of at least 51% of the common capital stock of
Keebler, on a fully diluted basis."
7. The definition of "Subsidiary" in Schedule D of the Note Purchase
Agreement is hereby amended by adding at the end of said definition a new
sentence, reading as follows:
"Notwithstanding any provision (other than Section 10.1) in this
Agreement to the contrary, Subsidiary shall not include an Unrestricted
Subsidiary."
8. Schedule D of the Note Purchase Agreement is hereby amended by
adding a new definition of Unrestricted Subsidiary immediately following the
definition of Total Capitalization, reading as follows:
""Unrestricted Subsidiary" means Keebler and its subsidiaries,
immediately following the acquisition by the Company from Artal
Luxembourg S.A. and Bermore Limited a sufficient number of shares of
common capital stock of Keebler, such that the Company will own
approximately 51% of the common capital stock of Keebler, on a fully
diluted basis (the "Keebler Acquisition"), and thereafter for so long
as Keebler is a Subsidiary and "Unrestricted Subsidiaries" means,
collectively, Keebler and its Subsidiaries."
9. Except to the extent expressly amended herein, all terms and
conditions of the Note Purchase Agreement are hereby affirmed and shall remain
in full force and effect.
10. The Company hereby represents to the Holders that as of the date
hereof no Default or Event of Default exists under the Note Purchase Agreement.
11. This Second Amendment to Note Purchase Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
3
<PAGE> 86
IN WITNESS WHEREOF, each party hereto has executed or caused this
Second Amendment to Note Purchase Agreement to be executed on its behalf, all on
the day and year first above written.
FLOWERS INDUSTRIES, INC.
"Company"
By: /s/ C.M. Wood III
-------------------------------------
Name: C.M. Wood III
Title: Senior Vice President
4
<PAGE> 87
SCHEDULE OF HOLDERS
ALLIED LIFE INSURANCE COMPANY
By: Lincoln Investment Management, Inc.,
Its Attorney-In-Fact
By: /s/ J. Steven Staggs
------------------------------------
Name: J. Steven Staggs
Title: Vice President
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: Lincoln Investment Management, Inc., its
Attorney-in-fact
By: /s/ J. Steven Staggs
------------------------------------
Name: J. Steven Staggs
Title: Vice President
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK successor by merger to
LINCOLN-SECURITY LIFE INSURANCE COMPANY
By: /s/ James V. Wittich
------------------------------------
Name: James V. Wittich
Title: Vice President, Investments
SECURITY-CONNECTICUT LIFE INSURANCE
COMPANY
By: /s/ James V. Wittich
------------------------------------
Name: James V. Wittich
Title: Assistant Treasurer
5
<PAGE> 88
AMERICAN GENERAL LIFE INSURANCE
COMPANY and THE VARIABLE ANNUITY
LIFE INSURANCE COMPANY
By: /s/ Peter V. Tuters
-----------------------------------------
Name: Peter V. Tuters
Title: Vice President and
Chief Investment Officer
CUNA MUTUAL INSURANCE SOCIETY
By: CIMCO Inc.
By: /s/ Mark Prusha
----------------------------------
Name: Mark Prusha
Title: Senior Investment Officer
EMPLOYERS LIFE INSURANCE COMPANY
OF WAUSAU
By: /s/ Charles S. Bath
-----------------------------------------
Name: Charles S. Bath
Title: Attorney-in-Fact
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By: /s/ Lawrence D. Stillman
-----------------------------------------
Name: Lawrence D. Stillman
Title: Managing Director
6
<PAGE> 89
METROPOLITAN LIFE INSURANCE COMPANY
By: /s/ Gerald P. Marcus
-----------------------------------
Name: Gerald P. Marcus
Title: Director
METROPOLITAN PROPERTY AND CASUALTY
INSURANCE COMPANY
By: /s/ James A. Wiviott
-----------------------------------
Name: James A. Wiviott
Title: Authorized Signatory
NATIONWIDE LIFE INSURANCE COMPANY
By: /s/ Charles S. Bath
-----------------------------------
Name: Charles S. Bath
Title: Vice President
Equity Securities
NATIONWIDE LIFE INSURANCE COMPANY
SEPARATE ACCOUNT OH
By: /s/ Charles S. Bath
-----------------------------------
Name: Charles S. Bath
Title: Vice President
Equity Services
UNITED OF OMAHA LIFE INSURANCE
COMPANY
By: /s/ Curtis R. Caldwell
-----------------------------------
Name: Curtis R. Caldwell
Title: First Vice President
7
<PAGE> 90
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT made this 23rd day of
January, 1998, by and among Flowers Industries, Inc., a Georgia corporation (the
"Company") and each of the holders (the "Holders") of the Notes (as defined in
that certain Note Purchase Agreement dated December 20, 1995 by and among the
Company and each of the Purchasers (the "Note Purchase Agreement"). Capitalized
terms not otherwise defined in this First Amendment to Note Purchase Agreement
shall have the meaning given them in the Note Purchase Agreement;
W I T N E S S E T H:
WHEREAS, the Company and the Holders have entered into the Note
Purchase Agreement;
WHEREAS, the parties hereto desire to amend the Note Purchase Agreement
to amend the ratio of Consolidated Total Debt to Total Capitalization;
WHEREAS, pursuant to Section 17.1 of the Note Purchase Agreement, the
Note Purchase Agreement may be amended with the written consent of the Company
and the Required Holders;
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises, agreements, representations, warranties and covenants hereinafter set
forth, and the sum of ten dollars and other good and valuable consideration, the
receipt and sufficiency of which is hereby specifically agreed to and
acknowledged, the Note Purchase Agreement is hereby amended as follows:
1. Section 10.3 of the Note Purchase Agreement is hereby amended by
deleting from such Section "65%" and substituting in lieu thereof "75%".
2. The foregoing amendment shall remain in effect until the earlier of
(i) the closing of a public offering of common stock by the Company or (ii)
December 31, 1998.
3. Except to the extent expressly amended herein, all terms and
conditions of the Note Purchase Agreement are hereby affirmed and shall remain
in full force and effect.
4. The Company hereby represents to the Holders that as of the date
hereof no Default or Event of Default exists under the Note Purchase Agreement;
5. This First Amendment to Note Purchase Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
<PAGE> 91
IN WITNESS WHEREOF, each party hereto has executed or caused this First
Amendment to Note Purchase Agreement to be executed on its behalf, all on the
day and year first above written.
FLOWERS INDUSTRIES, INC.
"Company"
By: /s/ C. M. Wood III
------------------------------------
Name: C. M. Wood III
Title: Senior Vice President
2
<PAGE> 92
SCHEDULE OF HOLDERS
ALLIED LIFE INSURANCE COMPANY
By: Lincoln Investment Management, Inc.,
Its Attorney-In-Fact
By: /s/ J. Steven Staggs
----------------------------------
Name: J. Steven Staggs
Title: Vice President
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: Lincoln Investment Management, Inc., its
Attorney-in-fact
By: /s/ J. Steven Staggs
----------------------------------
Name: J. Steven Staggs
Title: Vice President
LINCOLN-SECURITY LIFE INSURANCE COMPANY
By: Lincoln Investment Management, Inc., its
Attorney-in-Fact
By: /s/ James V. Wittich
----------------------------------
Name: James V. Wittich
Title: Vice President, Investments
SECURITY-CONNECTICUT LIFE INSURANCE
COMPANY
By: Lincoln Investment Management, Inc.,
its Attorney-in-Fact
By: /s/ James V. Wittich
----------------------------------
Name: James V. Wittich
Title: Assistant Treasurer
3
<PAGE> 93
AMERICAN GENERAL LIFE INSURANCE
COMPANY and THE VARIABLE ANNUITY
LIFE INSURANCE COMPANY
By: /s/ Julia S. Tucker
----------------------------------------------------
Name: Julia S. Tucker
Title: Investment Officer
CUNA MUTUAL INSURANCE SOCIETY
By: CIMCO INC.
By: /s/ Donald Heltner
---------------------------------------------
Name: Donald Heltner
Title: Vice President
EMPLOYERS LIFE INSURANCE COMPANY
OF WAUSAU
By: /s/ Edwin P. McCausland, Jr.
----------------------------------------------------
Name: Edwin P. McCausland, Jr.
Title: Vice President, Fixed-Income Securities
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By: /s/ Walter T. Dwyer
----------------------------------------------------
Name: Walter T. Dwyer
Title: Managing Director
4
<PAGE> 94
METROPOLITAN LIFE INSURANCE COMPANY
By: /s/ Gerald P. Marcus
----------------------------------------------------
Name: Gerald P. Marcus
Title: Director
METROPOLITAN PROPERTY AND CASUALTY
INSURANCE COMPANY
By: /s/ James A. Wiviott
----------------------------------------------------
Name: James A. Wiviott
Title: Authorized Signatory
NATIONWIDE LIFE INSURANCE COMPANY
By: /s/ Edwin P. McCausland, Jr.
----------------------------------------------------
Name: Edwin P. McCausland, Jr.
Title: Vice President, Fixed-Income Securities
NATIONWIDE LIFE INSURANCE COMPANY
SEPARATE ACCOUNT OH
By: /s/ Edwin P. McCausland, Jr.
----------------------------------------------------
Name: Edwin P. McCausland, Jr.
Title: Vice President, Fixed-Income Securities
UNITED OF OMAHA LIFE INSURANCE
COMPANY
By: /s/ Curtis R. Caldwell
----------------------------------------------------
Name: Curtis R. Caldwell
Title: First Vice President
5
<PAGE> 1
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
(Amounts in Thousands except Share Date)
<TABLE>
<CAPTION>
For the 27
Weeks Ended For the 52 Weeks Ended
----------- ---------------------------------------------
January 3, June 28, June 29, July 1,
1998 1997 1996 1995
----------- ---------------------------------------------
<S> <C> <C> <C> <C>
Computation of net income
Basic:
Income before cumulative effect of changes
in accounting principles $ 33,448 $ 62,324 $ 30,768 $ 42,301
Cumulative effect of changes in accounting
principles, net of tax (9,888)
--------- --------- --------- ---------
Net income for basic earnings per common share $ 23,560 $ 62,324 $ 30,768 $ 42,301
========= ========= ========= ==========
Diluted:
Income before cumulative effect of changes
in accounting principles $ 33,448 $ 62,324 $ 30,768 $ 42,301
Cumulative effect of changes in accounting
principles, net of tax (9,888)
--------- --------- --------- ---------
Net income for diluted earnings per common share $ 23,560 $ 62,324 $ 30,768 $ 42,301
========= ========= ========= ==========
Number of shares used in calculation of per
common share data:
Weighted average number of common shares
outstanding during the year used for basic
earnings per share 88,368 88,000 86,933 86,229
Shares issuable upon exercise of employee
stock options based on average market price 405 401 278 209
--------- --------- --------- ---------
Weighted average number of shares used for
diluted earnings per common share 88,773 88,401 87,211 86,438
========= ========= ========= =========
Net income per common share:
Basic:
Income before cumulative effect of changes
in accounting principles $ .38 $ .71 $ .35 $ .49
Cumulative effect of changes in accounting
principles, net of tax (.11)
--------- --------- --------- ---------
Net income per common share $ .27 $ .71 $ .35 $ .49
========= ========= ========= =========
Diluted:
Income before cumulative effect of changes
in accounting principles $ .38 $ .71 $ .35 $ .49
Cumulative effect of changes in accounting
principles, net of tax (.11)
--------- --------- --------- ---------
Net income per common share $ .27 $ .71 $ .35 $ .49
========= ========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
There is no parent of the Registrant. The Registrant owns 100% of the
voting securities of each subsidiary listed below, except that each subsidiary
marked with an asterisk owns 100% of the voting securities of the subsidiary or
subsidiaries indented immediately below such marked subsidiary. All subsidiaries
listed below are included in the consolidated financial statements of the
Registrant.
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY INCORPORATION
- ---------- ---------------
<S> <C>
*Flowers Bakeries, Inc. .................................... Delaware
*Flowers Baking Co. of Alabama, Inc. .................. Alabama
Flowers Baking Company of Birmingham, Inc. .......... Alabama
Flowers Baking Co. of Opelika, Inc. ................. Alabama
Hardin's Bakery, Incorporated........................ Alabama
Flowers Specialty Foods of Montgomery, Inc. ......... Alabama
Midtown Bakery, Inc. ................................ Alabama
*Flowers Baking Co. of Arkansas, Inc. ................. Arkansas
Flowers Baking Co. of Texarkana, Inc. ............... Arkansas
Holsum Baking Company................................ Arkansas
Shipley Baking Company............................... Arkansas
Flowers Baking Co. of Chattanooga, Inc. ............... Tennessee
*Flowers Baking Co. of Florida, Inc. .................. Florida
Flowers Baking Co. of Bradenton, Inc. ............... Florida
Flowers Baking Co. of Jacksonville, Inc. ............ Florida
Flowers Baking Co. of Miami, Inc. ................... Florida
*Flowers Baking Co. of Georgia, Inc. .................. Georgia
European Bakers, Ltd. ............................... Georgia
Dan-Co Bakery, Inc. ................................. Georgia
Flowers Baking Co. of Thomasville, Inc. ............. Georgia
Mrs. Smith's Bakeries, Inc. ......................... Georgia
Table Pride, Inc. ................................... Georgia
*Flowers Baking Co. of Villa Rica, Inc. ............. Georgia
Flowers Baking Co. of Gadsden, Inc. .............. Alabama
Flowers Specialty of Suwanee, Inc. .................... Georgia
Flowers Frozen Bakery Distributors, Inc. .............. Georgia
Aunt Fanny's Bakery, Inc. ............................. Georgia
*Flowers Baking Co. of North Carolina, Inc. ........... North Carolina
Flowers Baking Co. of Jamestown, Inc. ............... North Carolina
Daniels Home Bakery of North Carolina, Inc. ......... North Carolina
Franklin Baking Company..................................... North Carolina
*Flowers Holding Co. of S. C., Inc. ................... South Carolina
Flowers Baking Co. of Fountain Inn, Inc. ............ South Carolina
Flowers Baking Company of South Carolina, Inc. ...... South Carolina
South Carolina Baking Co., Inc. ..................... South Carolina
*Flowers Baking Co. of Tennessee, Inc. ................ Tennessee
Flowers Baking Co. of Morristown, Inc. .............. Tennessee
Flowers Fresh Bakery Distributors, Inc. ............. Tennessee
*Flowers Baking Co. of Texas, Inc. .................... Texas
El Paso Baking Co., Inc. ............................ Texas
Flowers Baking Co. of Tyler, Inc. ................... Georgia
San Antonio Baking Co., Inc. ........................ Texas
</TABLE>
2
<PAGE> 2
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY INCORPORATION
- ---------- ---------------
<S> <C>
Austin Baking Co., Inc. ............................. Texas
Corpus Christi Baking Co., Inc. ..................... Texas
Butterkrust Bakery, Inc. ............................ Texas
San Angelo Distributing Co., Inc. ................... Texas
*Flowers Baking Co. of Virginia, Inc. ................. Virginia
Flowers Baking Co. of Lynchburg, Inc. ............... Virginia
Flowers Baking Co. of Norfolk, Inc. ................. Virginia
Flowers Baking Co. of West Virginia, Inc. ............. West Virginia
Storck Baking Company.................................. West Virginia
Aunt Fanny's Bakery of Pennsylvania, Inc. ............. Pennsylvania
Mrs. Smith's Bakeries of London, Inc. ................. Kentucky
*Huval Bakery, Incorporated............................ Louisiana
*Bunny Bread, Inc. .................................. Louisiana
Flowers Baking Co. of Baton Rouge, Inc. .......... Louisiana
Schott's Bakery, Inc. ............................... Texas
Pies, Inc. .......................................... Minnesota
*Stilwell Foods, Inc. .................................... Oklahoma
*Mrs. Smith's Bakeries of Pennsylvania, Inc. ............. Georgia
</TABLE>
3
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 and Form S-3 (No.
33-34855) for the Flowers Industries, Inc. 1982 Incentive Stock Option Plan and
the Flowers Industries, Inc. 1989 Executive Stock Incentive Plan dated May 18,
1990 and of the Registration Statements on Form S-8 (No. 33-91198 and
No. 333-23351) for the Flowers Industries, Inc. 401(k) Retirement Savings Plan,
of our report dated March 23, 1998, appearing in this Transition Report on Form
10-K. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule which appears in this Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Atlanta, Georgia
March 27, 1998
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Prospectus constituting part
of the Registration Statement on Form S-8 and Form S-3 (No. 33-34855) for the
Flowers Industries, Inc. 1982 Incentive Stock Option Plan and the Flowers
Industries, Inc. 1989 Executive Stock Incentive Plan dated May 18, 1990 and of
the Registration Statements on Form S-8 (No. 33-91198 and No. 333-23351) for the
Flowers Industries, Inc. 401(k) Retirement Savings Plan, of our reports dated
February 18, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Keebler Foods Company which reports are included
in this Transition Report on Form 10-K of Flowers Industries, Inc.
/s/ Coopers & Lybrand, L.L.P.
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FLOWERS
INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE TWENTY-SEVEN WEEKS
ENDED JANUARY 3, 1998 AND THE FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE
SHEET AT JANUARY 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JAN-03-1998
<CASH> 3,866
<SECURITIES> 0
<RECEIVABLES> 118,147
<ALLOWANCES> 0
<INVENTORY> 105,431
<CURRENT-ASSETS> 252,889
<PP&E> 746,663
<DEPRECIATION> 308,342
<TOTAL-ASSETS> 899,381
<CURRENT-LIABILITIES> 232,612
<BONDS> 0
0
0
<COMMON> 55,398
<OTHER-SE> 293,169
<TOTAL-LIABILITY-AND-EQUITY> 899,381
<SALES> 784,097
<TOTAL-REVENUES> 786,539
<CGS> 418,926
<TOTAL-COSTS> 761,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,796
<INCOME-PRETAX> 25,019
<INCOME-TAX> 9,632
<INCOME-CONTINUING> 33,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (9,888)
<NET-INCOME> 23,560
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Keebler Foods Company and UB Investments US Inc. and Subsidiaries
<TABLE>
<S> <C>
FINANCIAL STATEMENTS: Page
Report of Independent Accountants........................................................................
Consolidated Balance Sheets at January 3, 1998 and December 28, 1996.....................................
Consolidated Statements of Operations for the year ended January 3, 1998, the
forty-eight weeks ended December 28, 1996, the four weeks ended January 26,
1996, and the year ended December 30, 1995...............................................................
Consolidated Statements of Shareholders' Equity (Deficit) for the year ended
January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks
ended January 26, 1996, and the year ended December 30, 1995.............................................
Consolidated Statements of Cash Flows for the year ended January 3, 1998, the
forty-eight weeks ended December 28, 1996, the four weeks ended January 26,
1996, and the year ended December 30, 1995...............................................................
Notes to Consolidated Financial Statements...............................................................
FINANCIAL STATEMENT SCHEDULE:
Report of Independent Accountants........................................................................
Schedule II - Valuation and Qualifying Accounts..........................................................
</TABLE>
Note: The consolidated financial statements of the Company listed in the
above index for Keebler include the financial statements of the
successor company for the year ended January 3, 1998 and the forty-
eight weeks ended December 28, 1996, and the predecessor company
for the four weeks ended January 26, 1996, the date on which UB
Investments US Inc., the "predecessor company," was acquired by INFLO
Holdings Corporation, and the year ended December 30, 1995. The
distinction between the successor company's and the predecessor
company's consolidated financial statements has been made by inserting
a double line between such consolidated financial statements.
2
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY
We have audited the accompanying consolidated balance sheets of Keebler Foods
Company and Subsidiaries as of January 3, 1998 and December 28, 1996 and the
related consolidated statement of operations, shareholders' equity, and cash
flows for the year and forty-eight week period then ended. We have also audited
the consolidated statements of operations, shareholders' equity, and cash flows
of UB Investments US Inc. and Subsidiaries for the four-week period ended
January 26, 1996 and the year ended December 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Keebler Foods
Company and Subsidiaries as of January 3, 1998 and December 28, 1996 and the
consolidated results of operations and cash flows of Keebler Foods Company and
Subsidiaries for the year ended January 3, 1998 and the forty-eight weeks then
ended December 28, 1996 and the consolidated results of operations and cash
flows of UB Investments US Inc. and Subsidiaries for the four week period ended
January 26, 1996 and the year ended December 30, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 18, 1998
<PAGE> 3
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 3, December 28,
1998 1996
------------ --------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 27,188 $ 11,954
Trade accounts and notes receivable, net 98,963 137,150
Inventories, net:
Raw materials 25,543 25,296
Package materials 7,306 9,842
Finished goods 78,131 76,054
Other 1,482 1,473
------------- -------------
112,462 112,665
Deferred income taxes 42,730 55,929
Other 20,303 19,337
------------- -------------
Total current assets 301,646 337,035
PROPERTY, PLANT, AND EQUIPMENT, NET 478,121 486,080
TRADEMARKS AND TRADE NAMES, NET 154,146 158,033
GOODWILL, NET 47,059 48,280
PREPAID PENSION 43,060 43,359
ASSETS HELD FOR SALE 3,742 6,785
OTHER ASSETS 15,077 22,502
------------- -------------
Total assets $ 1,042,851 $ 1,102,074
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
6
<PAGE> 4
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 3, December 28,
1998 1996
------------------ -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 26,365 $ 18,570
Trade accounts payable 126,213 96,754
Other liabilities and accruals 194,923 186,893
Income taxes payable 13,784 -
Plant and facility closing costs and severance 6,900 19,860
------------------ -------------------
Total current liabilities 368,185 322,077
LONG-TERM DEBT 272,390 439,369
OTHER LIABILITIES:
Deferred income taxes 69,417 64,068
Postretirement/postemployment obligations 60,605 56,382
Plant and facility closing costs and severance 15,578 16,124
Deferred compensation 18,669 18,205
Other 15,956 20,708
------------------ -------------------
Total other liabilities 180,225 175,487
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 100,000,000 shares authorized and
none issued) - -
Common stock ($.01 par value; 500,000,000 shares authorized and
77,595,213 and 77,638,206 shares issued, respectively) 776 776
Additional paid-in capital 148,538 148,613
Retained earnings 72,737 15,752
------------------ -------------------
Total shareholders' equity 222,051 165,141
------------------ -------------------
Total liabilities and shareholders' equity $ 1,042,851 $ 1,102,074
================== ===================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
7
<PAGE> 5
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
KEEBLER FOODS COMPANY UBIUS
---------------------------------- ||----------------------------------
Forty-Eight || Four
YEAR ENDED Weeks Ended || Weeks Ended Year Ended
JANUARY 3,1998 December 28,1996|| January 26,1996 December 30,1995
----------------- ----------------|| --------------- ----------------
<S> <C> <C> || <C> <C>
NET SALES $ 2,065,184 $ 1,645,532 || $ 101,656 $ 1,578,601
||
COSTS AND EXPENSES: ||
Cost of sales 888,031 774,198 || 54,870 746,754
Selling, marketing, and administrative ||
expenses 1,026,245 794,837 || 71,427 884,591
Loss on impairment of Salty Snacks ||
business - - || - 86,516
Other 9,511 6,347 || 857 (1,363)
----------------- ---------------- ||---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 141,397 70,150 || (25,498) (137,897)
||
Interest (income) from affiliates - - || (875) (11,376)
Interest (income) (1,191) (450) || (3) (151)
Interest expense to affiliates - - || 664 11,802
Interest expense 35,038 38,921 || 98 27,976
----------------- ---------------- ||---------------- ----------------
INTEREST EXPENSE (INCOME), NET 33,847 38,471 || (116) 28,251
----------------- ---------------- ||---------------- ----------------
||
INCOME (LOSS) FROM CONTINUING OPERATIONS ||
BEFORE INCOME TAX EXPENSE (BENEFIT) 107,550 31,679 || (25,382) (166,148)
Income tax expense (benefit) 45,169 14,002 || - (459)
----------------- ---------------- ||---------------- ----------------
||
INCOME (LOSS) FROM CONTINUING OPERATIONS ||
BEFORE EXTRAORDINARY ITEM 62,381 17,677 || (25,382) (165,689)
||
DISCONTINUED OPERATIONS: ||
Income from operations of discontinued ||
Frozen Food businesses, net of tax - - || - 7,344
Gain on disposal of Frozen Food ||
businesses, net of tax - - || 18,910 -
----------------- ---------------- ||---------------- ----------------
||
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 62,381 17,677 || (6,472) (158,345)
EXTRAORDINARY ITEM: ||
Loss on early extinguishment of debt, ||
net of tax 5,396 1,925 || - -
----------------- ---------------- ||---------------- ----------------
||
NET INCOME (LOSS) $ 56,985 $ 15,752 || $ (6,472) $ (158,345)
================= ================ ||================ ================
||
BASIC NET INCOME PER SHARE: ||
Income from continuing operations ||
before extraordinary item $ 0.80 $ 0.24 ||
Extraordinary item 0.07 0.03 ||
--------- --------- ||
Net income $ 0.73 $ 0.21 ||
========= ========= ||
WEIGHTED AVERAGE SHARES OUTSTANDING 77,604 75,244 ||
========= ========= ||
||
DILUTED NET INCOME PER SHARE: ||
Income from continuing operations ||
before extraordinary item $ 0.77 $ 0.23 ||
Extraordinary item 0.07 0.02 ||
--------- --------- ||
Net income $ 0.70 $ 0.21 ||
========= ========= ||
WEIGHTED AVERAGE SHARES OUTSTANDING 80,562 76,076 ||
========= ========= ||
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
8
<PAGE> 6
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 (UBIUS) 1,000 $ 1,000 $ 300,000 $ (535,898) $(234,898)
Net loss - - - (158,345) (158,345)
Capital contribution from UB Investments
(Netherlands) B.V. - - 445,000 - 445,000
------------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 30, 1995 (UBIUS) 1,000 1,000 745,000 (694,243) 51,757
Net loss for the four weeks - - - (6,472) (6,472)
------------- ------------ ------------ ------------ ------------
BALANCE AT JANUARY 26, 1996 (UBIUS) 1,000 1,000 745,000 (700,715) 45,285
Write-off of predecessor company equity (1,000) (1,000) (745,000) 700,715 (45,285)
Purchase of the Company by INFLO Holdings
Corporation effective January 26, 1996 71,656 717 124,284 - 125,001
Management investment 306 2 786 - 788
Issuance of common stock and warrants to Bermore, Limited 5,676 57 23,543 - 23,600
Net income for the forty-eight weeks - - - 15,752 15,752
------------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 28, 1996 (KEEBLER FOODS COMPANY) 77,638 776 148,613 15,752 165,141
Purchase of treasury shares (43) - (75) - (75)
Net income - - - 56,985 56,985
------------- ------------ ------------ ------------ ------------
BALANCE AT JANUARY 3, 1998 (KEEBLER FOODS COMPANY) 77,595 $ 776 $ 148,538 $ 72,737 $ 222,051
============= ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
9
<PAGE> 7
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEEBLER FOODS COMPANY || UBIUS
--------------------------------- || ---------------------------------
Forty-Eight || Four
YEAR ENDED Weeks Ended || Weeks Ended Year Ended
JANUARY 3,1998 December 28,1996 || January 26,1996 December 30,1995
---------------- ---------------- || ---------------- ----------------
<S> <C> <C> || <C> <C>
CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES ||
Net income (loss) $ 56,985 $ 15,752 || $ (6,472) $ (158,345)
Adjustments to reconcile net income (loss) to cash from ||
operating activities: ||
Depreciation and amortization 60,708 49,461 || 1,973 47,361
Deferred income taxes 18,548 12,254 || - (1,985)
Accretion on Seller Note 2,376 2,246 || - -
Loss on early extinguishment of debt, net of tax 3,761 1,925 || - -
(Gain) loss on sale of property, plant, and equipment (358) (328) || 33 159
Loss on impairment of the Salty Snacks business, net of tax - - || - 86,516
Gain on the disposal of the Frozen Food businesses, ||
net of tax - - || (18,910) -
Changes in assets and liabilities: ||
Trade accounts and notes receivable, net 38,187 3,842 || 22,068 (11,716)
Accounts receivable/payable from affiliates, net - - || (1,941) (4,737)
Inventories, net 203 (9,809) || 4,353 6,605
Recoverable income taxes and income taxes payable 16,113 - || 25 (1,304)
Other current assets (966) 1,644 || 1,192 3,772
Deferred debt issue costs (1,344) (8,032) || - -
Trade accounts payable and other current liabilities 36,806 26,105 || 11,550 (13,304)
Plant and facility closing costs and severance (13,715) (41,279) || - -
Restructuring reserves - - || (14,469) (24,122)
Other, net 1,044 (553) || 246 9,702
---------------- ---------------- || ---------------- ----------------
Cash provided from (used by) operating activities 218,348 53,228 || (352) (61,398)
||
CASH FLOWS (USED BY) PROVIDED FROM INVESTING ACTIVITIES ||
Capital expenditures (48,429) (29,352) || (3,228) (55,386)
Proceeds from property disposals 6,950 9,236 || 644 2,797
Working capital adjustment paid by UB Investment ||
(Netherlands) B.V. - 32,609 || - -
Purchase of Sunshine Biscuits, Inc., net of cash acquired - (142,670) || - -
Disposition of the Frozen Food businesses - - || 67,749 -
---------------- ---------------- || ---------------- ----------------
Cash (used by) provided from investing activities (41,479) (130,177) || 65,165 (52,589)
||
CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES ||
Purchase of treasury shares/capital contributions (75) 788 || - 445,000
Reduction of notes payable to affiliate - - || - (445,000)
Long-term debt borrowings 109,750 220,000 || - -
Long-term debt repayments (271,310) (134,000) || (2,377) (30,078)
Commercial paper and Revolving Loan facilities, net - - || (63,300) 134,500
---------------- ---------------- || ---------------- ----------------
Cash (used by) provided from financing activities (161,635) 86,788 || (65,677) 104,422
---------------- ---------------- || ---------------- ----------------
Increase (decrease) in cash and cash equivalents 15,234 9,839 || (864) (9,565)
Cash and cash equivalents at beginning of period 11,954 2,115 || 2,978 12,543
---------------- ---------------- || ---------------- ----------------
Cash and cash equivalents at end of period $ 27,188 $ 11,954 || $ 2,114 $ 2,978
================ ================ || ================ ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
10
<PAGE> 8
KEEBLER FOODS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THE CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY (THE
"COMPANY", "KEEBLER", OR "SUCCESSOR COMPANY") INCLUDE THE FINANCIAL STATEMENTS
OF THE SUCCESSOR COMPANY FOR THE YEAR ENDED JANUARY 3, 1998 AND THE FORTY-EIGHT
WEEK PERIOD ENDED DECEMBER 28, 1996, AND UB INVESTMENTS US INC. ("UBIUS" OR
"PREDECESSOR COMPANY") FOR THE FOUR WEEK PERIOD ENDED JANUARY 26, 1996, THE DATE
ON WHICH UBIUS WAS ACQUIRED BY INFLO, AND THE YEAR ENDED DECEMBER 30, 1995. THE
DISTINCTION BETWEEN THE CONSOLIDATED FINANCIAL STATEMENTS OF THE SUCCESSOR
COMPANY AND PREDECESSOR COMPANY HAS BEEN MADE BY INSERTING A DOUBLE LINE BETWEEN
SUCH CONSOLIDATED FINANCIAL STATEMENTS AND RELATED FOOTNOTES.
1. BASIS OF PRESENTATION
BUSINESS AND OWNERSHIP
Keebler Foods Company, a manufacturer and distributor of food products, was
acquired by INFLO Holdings Corporation ("INFLO") on January 26, 1996. INFLO was
owned by Artal Luxembourg S. A. ("Artal"), a private investment company, Flowers
Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company, Bermore,
Limited ("Bermore"), a privately held corporation and the parent of G.F.
Industries, Inc. ("GFI"), and certain members of the Company's current
management. On November 20, 1997, INFLO was merged into Keebler Corporation (the
"Merger"), and subsequently changed its name to Keebler Foods Company. The
financial statements as of and for all periods subsequent to January 26, 1996
have been restated to reflect the Merger as if it had been effective January 26,
1996. INFLO was legally established as of November 2, 1995, but did not have any
operating activity, assets, or liabilities until the Keebler acquisition on
January 26, 1996. The Company is comprised of primarily the following
wholly-owned subsidiaries: Keebler Company, Bake-Line Products, Inc., Johnston's
Ready Crust Company, Sunshine Biscuits, Inc. ("Sunshine"), Keebler Leasing
Corp., Hollow Tree Company, L.L.C., Hollow Tree Financial Company, L.L.C., and
Elfin Equity Company, L.L.C.
The Company, formerly UBIUS, had previously been owned by UB Investments
(Netherlands) B.V., a Dutch company (See Note 4). UB Investments (Netherlands)
B.V. is a member of the worldwide group of affiliated companies owned by United
Biscuits (Holdings) plc., a publicly held company in the United Kingdom.
FISCAL YEAR
The Company's fiscal year consists of thirteen four week periods (fifty-two
or fifty-three weeks) and ends on the Saturday nearest December 31. The 1997
fiscal year consists of fifty-three weeks. As a result of the Keebler
acquisition, which closed on the last day of the first four week period of 1996,
the fiscal year for 1996 consisted of the forty-eight weeks ended December 28,
1996. The 1995 fiscal year of the predecessor company was comprised of fifty-two
weeks.
PRINCIPLES OF CONSOLIDATION
All subsidiaries are wholly-owned and included in the consolidated financial
statements of the Company. Intercompany accounts and transactions have been
eliminated.
GUARANTEES OF NOTES
The subsidiaries of the Company that are not Guarantors of the Senior
Subordinated Notes are inconsequential (which means that the total assets,
revenues, income, or equity of such non-guarantors, both individually and on a
combined basis, is less than 3% of the Company's consolidated assets, revenues,
income, or equity), individually and in the aggregate, to the consolidated
financial statements of the Company. The Guarantees are full, unconditional, and
joint and several. Separate financial statements of the Guarantors are not
presented because management has determined that they would not be material to
investors in the Senior Subordinated Notes.
11
<PAGE> 9
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to conform
with the current year reporting.
2. ACQUISITION OF KEEBLER FOODS COMPANY BY INFLO HOLDINGS CORPORATION
On January 26, 1996, UB Investments (Netherlands) B.V. sold all the stock of
UBIUS to INFLO. Subsequent to the acquisition, UBIUS changed its name to Keebler
Corporation. On November 20, 1997, INFLO was merged into Keebler Corporation and
subsequently changed its name to Keebler Foods Company. The sale specifically
excluded the stock of the Frozen Food businesses as well as the Salty Snacks
business conducted by Keebler Company and other subsidiaries of UBIUS, as well
as the UBIUS finance companies of U.B.H.C., Inc. and U.B.F.C., Inc., also
wholly-owned subsidiaries (See Note 4).
The aggregate gross purchase price of $487.5 million (excluding fees and
expenses paid at closing of approximately $15.3 million) was financed by $125.0
million in equity from INFLO, $200.0 million in Senior Term Notes, $125.0
million in Increasing Rate Notes, the assumption of $20.3 million in existing
senior indebtedness of the Company, and a note payable ("Seller Note") by INFLO
to UB Investments (Netherlands) B.V. for $32.5 million. The Seller Note does not
bear interest until January 26, 1999, and has been accounted for at a discounted
value of $24.4 million. In addition, the Company, subsequent to the purchase by
INFLO, received a working capital adjustment of $32.6 million from United
Biscuits (Netherlands) B.V. pursuant to the terms of the stock purchase
agreement between INFLO and United Biscuits (Netherlands) B.V.
The Keebler acquisition has been accounted for as a purchase. The total
purchase price and the fair value of liabilities assumed have been allocated to
the tangible and intangible assets of the Company based on the respective fair
values.
The following provides an allocation of the purchase price:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Purchase Price.................................................................................. $ 487.5
Less: Net book value of assets acquired......................................................... 329.5
Less: Asset purchase price allocation
- Working capital receivable from UB (Netherlands) B.V........................................ $ 32.6
- Inventories................................................................................. 4.4
- Deferred income taxes....................................................................... 11.4
- Property, plant, and equipment.............................................................. 45.7
- Prepaid pension............................................................................. 33.1
- Other assets................................................................................ (14.2)
- Trademarks and trade names.................................................................. 104.0 217.0
--------
Plus: Liability purchase price allocation
- Other current liabilities and accruals...................................................... 1.1
- Plant and facility closing costs and severance.............................................. 55.3
- Deferred income taxes....................................................................... 13.8
- Postretirement/postemployment obligations................................................... (17.5)
- Other....................................................................................... 6.3 59.0
-------- --------
Unallocated excess purchase price over fair value of net
assets acquired............................................................................... $ 0.0
========
</TABLE>
See Note 3 for the unaudited pro forma consolidated results of operations
of the Keebler acquisition.
12
<PAGE> 10
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF SUNSHINE BISCUITS, INC.
On June 4, 1996, the Company acquired Sunshine from GFI for an aggregate
consideration of $171.7 million (excluding related fees and expenses paid at
closing of approximately $2.2 million). The Sunshine acquisition was funded by
$150.3 million in cash, of which $36.3 million was provided by the Company's
existing cash sources and $114.0 million in borrowings under the Amended and
Restated Credit Agreement (See Note 9). In addition, approximately $23.6 million
of common stock and warrants were issued to GFI and was accounted for as a
capital contribution. Subsequent to the Merger, the stock and warrants held by
GFI were transferred to Bermore and reissued for the same value in the name of
the Company. These shares and warrants represented 13.1% of the Company's common
stock on a fully diluted basis.
The Sunshine acquisition by the Company has been accounted for as a
purchase. The total purchase price and the fair value of liabilities assumed
have been allocated to the tangible and intangible assets of Sunshine based on
the respective fair values. The acquisition resulted in goodwill of $48.8
million, which is being amortized over a forty year period.
The following provides an allocation of the purchase price:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Purchase Price.................................................................................... $171.7
Less: Net book value of assets acquired........................................................... 92.8
Less: Asset purchase price allocation
- Trade accounts receivable..................................................................... $ 0.3
- Inventories................................................................................... 3.6
- Deferred income taxes......................................................................... 8.4
- Property, plant, and equipment................................................................ 9.5
- Other assets.................................................................................. (3.8)
- Trademarks and trade names.................................................................... 57.0 75.0
-------
Plus: Liability purchase price allocation
- Other current liabilities and accruals........................................................ 8.4
- Plant and facility closing costs and severance................................................ 22.1
- Deferred income taxes......................................................................... (8.3)
- Pension obligation............................................................................ 5.0
- Postretirement/postemployment obligations..................................................... 17.8
- Other......................................................................................... (0.1) 44.9
------- -------
Unallocated excess purchase price over fair value of net assets acquired.......................... $ 48.8
=======
</TABLE>
Results of operations for Sunshine from June 4, 1996 to December 28, 1996
have been included in the consolidated statements of operations. The following
unaudited pro forma information has been prepared assuming the acquisition had
taken place at January 1, 1995. The unaudited pro forma information includes
adjustments for interest expense that would have been incurred to finance the
purchase, additional depreciation of the property, plant, and equipment
acquired, and amortization of the trademarks, trade names, and goodwill arising
from the acquisition. The unaudited pro forma consolidated results of operations
are not necessarily indicative of the results that would have been had the
Keebler and Sunshine acquisitions been effected on the assumed date.
<TABLE>
<CAPTION>
-----------------------------------
Unaudited
For The Year Ended
-----------------------------------
December 28, December 30,
1996 1995
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Net sales....................................................................... $ 1,979,105 $ 2,213,574
Loss from continuing operations before income taxes............................. $ (10,894) $ (241,323)
Net loss........................................................................ $ (6,793) $ (253,924)
</TABLE>
13
<PAGE> 11
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PREDECESSOR COMPANY
UBIUS, the predecessor company to Keebler Foods Company, was formed in 1992
as a result of the legal restructuring of United Biscuit (Holdings) plc.'s
operations in the United States. UBIUS received the stock of the subsidiaries in
exchange for the $850 million in debt with UB Investments (Netherlands) B.V. as
well as all of the capital stock of UBIUS.
On May 20, 1995, the predecessor company adopted plans to sell the Salty
Snacks business. On January 24, 1996, the predecessor company sold to Kelly Food
Products, Inc. selected assets of the Salty Snacks business including the
production plant in Bluffton, Indiana, trademarks and other intangibles related
to the business, inventory, and property, plant, and equipment, including
selected assets related to the convenience sales division.
During July 1995, the predecessor company adopted plans to discontinue the
operations of its Frozen Food businesses. On January 9, 1996, UB Investments
(Netherlands) B.V. sold the assets and stock of Bernardi Italian Foods Co., The
Original Chili Bowl, Inc., Chinese Food Processing Corporation (wholly-owned
subsidiaries collectively known as the Frozen Food businesses), and certain
assets of Keebler Company to Windsor Food Company Ltd. The sale was effective as
of December 31, 1995.
On December 5, 1995, Shaffer, Clarke & Co., Inc. ("Shaffer, Clarke"),
formerly a wholly-owned subsidiary, sold certain assets related to Shaffer,
Clarke's KA-ME business to Liberty Richter, Inc. for a gain of $2.6 million.
These assets included inventory, contractual rights, and other intellectual
property.
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
All highly liquid instruments purchased with an original maturity of three
months or less are classified as cash equivalents. The carrying amount of cash
equivalents approximates fair value due to the relatively short maturity of
these investments.
TRADE ACCOUNTS RECEIVABLE
Substantially all of the Company's trade accounts receivable are from retail
dealers and wholesale distributors. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. Trade accounts receivable, as shown on the consolidated balance
sheets, were net of allowances of $5.0 million as of January 3, 1998 and $5.4
million as of December 28, 1996.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
principally by the last-in, first-out ("LIFO") method. Inventories stated under
the LIFO method represent approximately 88% of total inventories at January 3,
1998 and 91% of total inventories at December 28, 1996. Because the Company has
adopted a natural business unit single pool approach to determining LIFO
inventory cost, classification of the LIFO reserve by inventory component is
impractical. The excess of the current production cost of inventories over LIFO
cost was approximately $2.2 million at January 3, 1998. There was no reserve
required at December 28, 1996 to state inventory on a LIFO basis.
At January 3, 1998 and December 28, 1996, inventories are shown net of an
allowance for slow-moving and aged inventory of $6.8 million and $5.5 million,
respectively.
14
<PAGE> 12
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Depreciation expense is
computed using the straight-line method based on the estimated useful lives of
the depreciable assets. Certain facilities and equipment held under capital
leases are classified as property, plant, and equipment and amortized using the
straight-line method over the lease terms, and the related obligations are
recorded as liabilities. Lease amortization is included in depreciation expense.
TRADEMARKS AND TRADE NAMES
Trademarks and trade names are stated at cost and are amortized on a
straight-line basis over a period of forty years. Accumulated amortization of
trademarks and trade names was $7.1 million and $3.1 million at January 3, 1998
and December 28, 1996, respectively.
GOODWILL
Goodwill shown in the consolidated financial statements at January 3, 1998
and December 28, 1996 is related to the excess cost over the fair value of the
tangible net assets acquired from the Sunshine purchase (See Note 3). Goodwill
is amortized on a straight-line basis over a period of forty years. Accumulated
amortization of goodwill was $1.8 million and $0.5 million at January 3, 1998
and December 28, 1996, respectively.
RESEARCH AND DEVELOPMENT
Activities related to new product development and major improvements to
existing products and processes are expensed as incurred and were $10.2 million
for the year ended January 3, 1998, $4.3 million for the forty-eight weeks ended
December 28, 1996, $0.6 million for the four weeks ended January 26, 1996, and
$14.5 million for the year ended December 30, 1995.
ADVERTISING AND CONSUMER PROMOTION
Advertising and consumer production costs are generally expensed when
incurred or no later than when the advertisement appears or the event is run.
Advertising and consumer promotion expense was $67.6 million for the year ended
January 3, 1998, $33.3 million for the forty-eight weeks ended December 28,
1996, $5.1 million for the four weeks ended January 26, 1996, and $87.9 million
for the year ended December 30, 1995. There were no deferred advertising costs
at January 3, 1998 and December 28, 1996.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into derivative financial transactions to hedge existing
or future exposures to changes in commodity prices. The Company does not enter
into derivative transactions for speculative purposes. Gains and losses on
commodity futures and options transactions are deferred in inventory until the
contracts are liquidated (See Note 20).
INCOME TAXES
The consolidated financial statements reflect the application of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income
Taxes". The Company files a consolidated federal income tax return.
15
<PAGE> 13
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share". The consolidated financial statements reflect the
application of SFAS No. 128 which replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options and warrants.
Diluted earnings per share is similar to fully diluted earnings per share.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
determines whether there has been an impairment of long-lived assets and the
related unamortized goodwill, based on whether certain indicators of impairment
are present. In the event that facts and circumstances indicate that the cost of
any long-lived assets and the related unamortized goodwill may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is required.
6. PROPERTY, PLANT, AND EQUIPMENT
A summary of property, plant, and equipment, including related accumulated
depreciation follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
---------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
Land.............................................................. $ 16,487 $ 16,344
Buildings......................................................... 130,241 126,824
Machinery and equipment........................................... 328,473 301,588
Office furniture and fixtures..................................... 56,559 54,985
Delivery equipment................................................ 6,946 6,785
Construction in progress.......................................... 38,080 23,980
---------------------- ----------------------
576,786 530,506
Accumulated depreciation.......................................... (98,665) (44,426)
---------------------- ----------------------
$ 478,121 $ 486,080
====================== ======================
</TABLE>
16
<PAGE> 14
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY, PLANT, AND EQUIPMENT (CONTINUED)
Property, plant, and equipment is depreciated on a straight-line basis over
the estimated useful lives of the depreciable assets. Buildings are depreciated
over a useful life of ten to forty years. Machinery and equipment is depreciated
over a useful life of five to twenty-five years. Office furniture and fixtures
are depreciated over a useful life of three to fifteen years. Delivery equipment
is depreciated over a useful life of two to twelve years.
7. ASSETS HELD FOR SALE
In 1996, as part of the Keebler and Sunshine acquisitions, management
executed a strategic plan to reduce inefficiencies and excess capacity by
closing the manufacturing facilities in Atlanta, Georgia and Santa Fe Springs,
California. In 1997, a distribution center in Kensington, Connecticut was also
held for sale. The Santa Fe Springs, California facility was subsequently sold
on March 27, 1997 with no gain or loss recognized. Disposition of the Atlanta,
Georgia manufacturing facility and the Kensington distribution center is
expected to occur before the end of 1998 without a significant gain or loss.
8. OTHER CURRENT LIABILITIES AND ACCRUALS
Other current liabilities and accruals consisted of the following at January
3, 1998 and December 28, 1996:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
---------------------- ------------------------
(IN THOUSANDS)
<S> <C> <C>
Self insurance reserves........................................... $ 55,185 $ 58,527
Employee compensation............................................. 55,724 42,555
Marketing and consumer promotions................................. 52,838 45,892
Other............................................................. 31,176 39,919
---------------------- ------------------------
$ 194,923 $ 186,893
====================== ========================
</TABLE>
The Company obtains insurance to manage potential losses and liabilities
related to workers' compensation, health and welfare claims, and general product
and vehicle liability. The Company has elected to retain a significant portion
of the expected losses through the use of deductibles and stop-loss limitations.
Provisions for losses expected under these programs are recorded based on the
Company's estimates of aggregate liability for claims incurred. These estimates
utilize the Company's prior experience and actuarial assumptions provided by the
Company's insurance carrier. The total estimated liability for these losses at
January 3, 1998 and December 28, 1996 was $55.2 million and $58.5 million,
respectively, and is included in other current liabilities and accruals. The
Company has collateralized its liability for potential self-insurance losses in
several states by obtaining standby letters of credit which aggregate to
approximately $17.0 million.
17
<PAGE> 15
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT AND LEASE COMMITMENTS
Long-term debt consisted of the following at January 3, 1998 and December
28, 1996:
<TABLE>
<CAPTION>
Interest Rate Final Maturity JANUARY 3, 1998 December 28, 1996
---------------- ------------------ ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Term-A Loans................... 6.683% April 7, 2003 $ 156,000 $ 132,875
Term-B Loans................... 7.880-8.375% July 31, 2003 -- 89,400
Term-C Loans................... 8.130-8.625% July 31, 2004 -- 64,575
Senior Subordinated Notes...... 10.750% July 1, 2006 125,000 125,000
Seller Note.................... 10.000% January 26, 2007 -- 26,664
Other Senior Debt.............. various 2001-2005 12,645 14,290
Capital Lease Obligations...... various 2004-2005 5,110 5,135
------------------- -------------------
298,755 457,939
Less: Current maturities....... 26,365 18,570
------------------- -------------------
$ 272,390 $ 439,369
=================== ===================
</TABLE>
At January 3, 1998, the Company's primary credit financing was provided by a
$380.0 million Second Amended and Restated Credit Agreement ("Credit Agreement")
consisting of a $140.0 million Revolving Loan facility and a $240.0 million Term
Loan of which the current outstanding balance was $156.0 million with quarterly
scheduled principal payments through the final maturity in April 2003. The
amendment to the Credit Agreement was entered into on April 8, 1997 in order to
obtain more favorable terms, fees, and interest rates.
The available balance on the Revolving Loan facility as of January 3, 1998,
was $140.0 million. Actual available borrowings under the Revolving Loan
facility can be reduced by the level of qualifying working capital as defined in
the Credit Agreement. This gross available balance is further reduced by certain
letters of credit totaling $9.9 million and outstanding borrowings. There were
no amounts outstanding under this facility as of January 3, 1998. Any unused
borrowings under the Revolving Loan facility are subject to a commitment fee,
which will vary from 0.125%-0.375% based on the relationship of debt to adjusted
earnings.
Interest on the Revolving Loan facility and Term Loan is calculated based on
a base rate plus applicable margin. The base rate can, at the Company's option,
be 1) the higher of the base domestic lending rate as established by the
Administrative Agent for the Lenders under the Credit Agreement, or the Federal
Funds Rate plus one-half of one-percent, or 2) a reserve percentage adjusted
LIBO Rate as offered by the Administrative Agent's office in London. Base rate
loan interest rates fluctuate immediately based upon a change in the established
base rate by the Administrative Agent. The Credit Agreement requires the Company
to meet certain financial covenants including net worth; earnings before
interest, taxes, depreciation, and amortization; and cash flow and interest
coverage ratios.
During the fourth quarter of 1997, using existing cash resources, the
Company pre-paid $70.0 million of principal on the Term Loan; $30.0 million on
December 8, 1997 and $40.0 million on November 10, 1997. The pre-payments
resulted in the recognition of a $1.1 million after-tax extraordinary charge
related to the expensing of certain unamortized bank fees which were incurred at
the time the Term Loan was issued.
On November 21, 1997, the Company settled the Seller Note with a payment of
$31.7 million funded through working capital. The Company assumed the $32.5
million Seller Note, previously held by INFLO, as a result of the Merger. The
Seller Note did not bear interest until January 26, 1999 and was recorded at a
discounted value of $24.4 million on January 26, 1996. The discount was being
amortized over three years at an effective interest rate of 10.0%. The Company
recorded a before-tax extraordinary charge of $2.6 million on the early
extinguishment of debt. The related after-tax charge was $1.6 million.
18
<PAGE> 16
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT AND LEASE COMMITMENTS (CONTINUED)
In conjunction with the amendment to the Credit Agreement on April 8, 1997,
Term Loans B and C were extinguished using $40.0 million of borrowings under the
Revolving Loan facility, $109.8 million of increased borrowings against Term
Loan A, and $3.8 million from cash resources. The Company recorded a before-tax
extraordinary charge of $4.6 million related primarily to expensing certain
unamortized bank fees which were incurred at the time Term Loans B and C were
issued. The related after-tax charge was $2.7 million.
On October 23, 1996, pursuant to an exchange and registration rights
agreement, the Company registered its 10.75% Senior Subordinated Notes due 2006
(the "Notes") under the Securities Act of 1933 in exchange for previously held
Increasing Rate Notes. The Notes were issued under an indenture dated June 15,
1996 between the Company, the Company's Restricted Subsidiaries (as defined in
the indenture), and the U.S. Trust Company of New York, as trustee. The Notes
are unsecured, senior subordinated obligations of the Company guaranteed by the
Restricted Subsidiaries. Interest on the Notes is paid semi-annually on January
1 and July 1 of each year, commencing January 1, 1997. At the Company's option,
up to 35.0% of the aggregate original principal of the Notes can be redeemed at
a redemption price of 110.0% on or prior to July 1, 1999 following a public
equity offering. In addition, the Company's ability to pay dividends or make
other distributions on its common stock is limited by the terms of the indenture
governing the Notes to an amount equal to 50% of the consolidated net income of
the Company for the relevant period, subject to other limitations.
The Increasing Rate Notes, issued to finance the Keebler acquisition, were
repaid in June 1996 with the proceeds from a private placement offering for the
10.75% Senior Subordinated Notes due in 2006. The Company recorded a before-tax
extraordinary loss of $3.2 million on the early extinguishment of the Increasing
Rate Notes. The loss consisted primarily of bank fees incurred at the time the
Increasing Rate Notes were issued. The after-tax loss was $1.9 million.
On January 30, 1996, the Company entered into a swap transaction with the
Bank of Nova Scotia, who also serves as the Administrative Agent for the Lenders
under the Credit Agreement. The swap transaction had the effect of converting
the base rate on $170.0 million of the Term Loans to a fixed rate obligation of
5.0185% plus applicable margin through February 1, 1999. The maturity date on
the swap transaction can be extended to February 1, 2001 at the option of the
Bank of Nova Scotia on January 28, 1999.
Interest of $39.0 million, $25.2 million, $3.8 million, and $37.6 million
was paid on debt for the year ended January 3, 1998, the forty-eight weeks ended
December 28, 1996, the four weeks ended January 26, 1996, and the year ended
December 30, 1995, respectively.
Aggregate scheduled annual maturities of long-term debt as of January 3,
1998 are as follows:
<TABLE>
(IN THOUSANDS)
<S> <C>
1998............................................... $ 26,365
1999............................................... 32,575
2000............................................... 32,990
2001............................................... 34,455
2002............................................... 34,225
2003 and thereafter................................ 138,145
------------
$ 298,755
============
</TABLE>
19
<PAGE> 17
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT AND LEASE COMMITMENTS (CONTINUED)
Assets recorded under capitalized lease agreements included in property,
plant, and equipment consist of the following:
<TABLE>
<S> <C> <C>
JANUARY 3, December 28,
1998 1996
------------ ------------
(IN THOUSANDS)
Land..................................... $ 1,209 $ 1,209
Buildings................................ 2,165 2,881
Machinery and equipment.................. 1,740 6,361
Other leased assets...................... -- 259
------------ ------------
5,114 10,710
Accumulated amortization................. (527) (1,000)
------------ ------------
$ 4,587 $ 9,710
============ ============
</TABLE>
Future minimum lease payments under scheduled capital and operating leases
that have initial or remaining noncancellable terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1998......................................... $ 243 $ 29,128
1999......................................... 263 24,330
2000......................................... 333 21,654
2001......................................... 351 17,603
2002......................................... 393 14,497
2003 and thereafter.......................... 5,401 33,071
------------ -------------
Total minimum payments....................... 6,984 $ 140,283
=============
Amount representing interest................. (1,874)
------------
Obligations under capital lease.............. 5,110
Obligations due within one year.............. (25)
------------
Long-term obligations under capital leases... $ 5,085
============
</TABLE>
Rent expense for all operating leases was $36.1 million, $30.1 million, $2.7
million, and $37.4 million for the year ended January 3, 1998, the forty-eight
weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the
year ended December 30, 1995, respectively.
10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE
As part of acquiring Keebler and Sunshine, management adopted and began
executing a plan to reduce costs and inefficiencies. Certain exit costs totaling
$77.4 million were provided for in the allocation of the purchase price of both
the Keebler and Sunshine acquisitions. Management's plan included company-wide
staff reductions, the closure of manufacturing, distribution, and sales force
facilities, and information system exit costs.
20
<PAGE> 18
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)
Severance, outplacement, and other related costs associated with staff
reductions were estimated at $30.7 million. Costs incurred related to the
closing of manufacturing, distribution, and sales force facilities, which
include primarily severance and lease termination and carrying costs, were
expected to total $39.9 million. In addition, the Company expects to incur $6.8
million in lease costs related to exiting legacy information systems. Spending
against the reserves established for the year ended January 3, 1998 and the
forty-eight weeks ended December 28, 1996 totaled $16.2 million and $41.4
million, respectively. During the year ended January 3, 1998, the Company also
provided an additional $2.7 million principally for anticipated costs related to
the closure of distribution facilities not included in the original plan to
reduce costs and inefficiencies. No additional provisions were made during the
forty-eight weeks ended December 28, 1996. At January 3, 1998 and December 28,
1996, the plant and facility closing costs and severance reserve balance was
$22.5 million and $36.0 million, respectively.
The plans initiated by management are expected to be completed prior to the
end of 1998. Only noncancellable lease obligations are expected to extend beyond
1998, to be paid out over the next seven years concluding in 2004.
11. EMPLOYEE BENEFIT PLANS
The Retirement Plan for Salaried and Certain Hourly-Paid Employees of
Keebler Company (the "pension plan") is a trusteed, noncontributory,
defined-benefit, pension plan. The pension plan covers certain salaried and
hourly-paid employees. Assets held by the pension plan consist primarily of
common stocks, collective trust funds, government securities, bonds, and
guaranteed insurance contracts. Benefits provided under the pension plan are
primarily based on years of service and the employee's final level of
compensation. The Company's funding policy is to contribute annually not less
than the ERISA minimum funding requirements. Effective January 1, 1997, the
pension plans of Sunshine Biscuits, Inc., Athens Packaging, Bake-Line Products,
Inc., and Emerald Industries were merged with the Company's pension plan.
Pension expense included the following components:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
--------------- ----------------- || --------------- ----------------
(IN THOUSANDS)
||
||
<S> <C> <C> || <C> <C>
Service cost............................... $ 8,560 $ 7,711 || $ 599 $ 6,611
Interest cost.............................. 29,673 21,338 || 1,133 13,877
Actual return on plan assets............... (63,745) (12,752) || (1,693) (43,661)
Net amortization of transition obligation.. -- -- || 47 616
Deferral of gains (losses)................. 25,810 (15,495) || -- 24,468
Prior service cost......................... -- -- || (12) (155)
Net gain................................... -- -- || -- (437)
--------------- ----------------- || ---------------- ----------------
Pension expense............................ $ 298 $ 802 || $ 74 $ 1,319
=============== ================= || ================ ================
</TABLE>
21
<PAGE> 19
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of the Company's pension plan and amounts recognized in
the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested.............................................................. $ (392,512) $ (366,253)
Nonvested........................................................... (20,983) (7,255)
------------------- ---------------------
$ (413,495) $ (373,508)
=================== =====================
Projected benefit obligation.......................................... $ (437,334) $ (408,060)
Plan assets at fair value............................................. 499,379 464,433
------------------- ---------------------
Plan assets greater than projected benefit obligation................. 62,045 56,373
Unrecognized transition obligation.................................... -- --
Unrecognized prior service............................................ 5,044 --
Unrecognized net gain................................................. (24,029) (13,014)
------------------- ---------------------
Prepaid pension....................................................... $ 43,060 $ 43,359
=================== =====================
</TABLE>
Assumptions used in accounting for the pension plan at each of the
respective period-ends are as follows:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
-------------- ---------------- || --------------- ---------------
||
<S> <C> <C> || <C> <C>
Discount rate..................................... 7.3% 7.5% || 7.5% 7.5%
Rate of compensation level increases.............. 4.0 4.0 || 4.0 4.0-6.0
Expected long-term rate of return on plan assets.. 9.0 8.6 || 10.0 8.0-9.0
</TABLE>
The plan assets, as of January 3, 1998 and December 28, 1996, include a real
estate investment of $3.1 million in a distribution center which is under an
operating lease to the Company.
The Company, in addition to the pension plan, also maintains an unfunded
supplemental retirement plan for certain highly compensated former executives.
Benefits provided are based on years of service. Vesting is graduated depending
on termination after age 55.
The supplemental retirement plan expense includes the following components:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
------------ ------------ || ------------ ------------
(IN THOUSANDS)
||
<S> <C> <C> || <C> <C>
Service cost............................... $ -- $ -- || $ 35 $ 452
Interest cost.............................. 732 637 || 66 854
Net amortization of transition obligation.. -- -- || 8 111
Prior service cost......................... -- -- || 13 170
------------ ------------ || ------------ ------------
Plan expense............................... $ 732 $ 637 || $ 122 $ 1,587
============ ============ || ============ ============
</TABLE>
22
<PAGE> 20
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The unfunded status of the supplemental retirement plan and the amounts
recognized in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 3, December 28,
1998 1996
--------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested..................................................................... $ (10,303) $ (10,028)
Nonvested.................................................................. -- --
--------------- -----------------
$ (10,303) $ (10,028)
=============== =================
Projected benefit obligation................................................. $ (10,097) $ (9,890)
Plan assets at fair value.................................................... -- --
--------------- -----------------
Projected benefit obligation in excess of plan assets........................ (10,097) (9,890)
Unrecognized transition obligation........................................... -- --
Unrecognized prior service cost.............................................. -- --
Unrecognized net (gain) loss................................................. (458) (754)
--------------- -----------------
Plan obligation included in other liabilities................................ $ (10,555) $ (10,644)
=============== =================
</TABLE>
Assumptions used in accounting for the supplemental retirement plan at each
of the respective period-ends are as follows:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
-------------- ---------------- || --------------- ---------------
<S> <C> <C> || <C> <C>
Discount rate............................. 7.3% 7.5% || 7.5% 7.5%
Rate of compensation level increase....... N/A N/A || 4.0 4.0
</TABLE>
Contributions are also made by the Company to a retirement program for
Grand Rapids union employees. Benefits provided under the plan are based
on a flat monthly amount for each year of service and are unrelated to
compensation. Contributions are made based on a negotiated hourly rate. For the
year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the
four weeks ended January 26, 1996, and the year ended December 30, 1995, the
Company expensed contributions of $2.6 million, $2.3 million, $0.2 million, and
$2.5 million, respectively.
The Company contributes to various multiemployer union administered
defined-benefit and defined-contribution pension plans. Benefits provided under
the multiemployer pension plans are generally based on years of service and
employee age. Expense under these plans was $10.5 million, $7.8 million, $0.9
million, and $9.6 million for the year ended January 3, 1998, the forty-eight
weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the
year ended December 30, 1995, respectively.
The Company also offers certain employees participation in the Keebler
Company Salaried Savings Plan, a defined-contribution plan. Prior to July 1,
1995, certain nonunion employees who met length-of-service requirements could
elect to participate in the plan. Currently, participation in the plan can be
elected immediately. Contributions made by participants are based on an elected
percentage of the participants' compensation within a specified range. Beginning
in 1997, a matching program was established whereby the Company makes a
contribution ranging from zero to fifty cents, depending on Company performance,
for every before-tax dollar contributed by the employee, up to 6% of the
employees' eligible pay. The Company's matching contribution was $3.1 million
for 1997. There
23
<PAGE> 21
was no Company matching contribution prior to 1997. Expenses incurred by the
Company to administer the plan were nominal.
24
<PAGE> 22
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
During 1996, the Company matched a portion of employee contributions to a
defined contribution savings plan for qualified salaried employees of Sunshine.
Contributions made by the Company were not to exceed 6% of gross wages. The
Company also provided a savings plan for certain hourly employees of Sunshine
which provided no matching company contributions. Expenses in 1996 for the plans
were nominal. Effective January 1, 1997, all Sunshine employees became eligible
for the Keebler Company Salaried Savings Plan, thus terminating the Sunshine
plans.
A Voluntary Employee Beneficiary Association ("VEBA") provided health and
welfare benefits for certain Sunshine employees. Payments were made by the
Company to the VEBA to fund employee health and welfare claims. The Company
funded $6.6 million and $10.0 million during the year ended January 3, 1998 and
the forty-eight weeks ended December 28, 1996, respectively. In July 1997, the
Company integrated all Sunshine employees into the existing Keebler Welfare
Benefit Plan and no further VEBA payments were made.
Prior to 1997, Bake-Line Products, Inc. administered a money purchase
pension plan for certain hourly and salaried employees. Contributions were based
on 4% of employees' annual salary. Effective January 1, 1997, the Bake-Line
money purchase pension plan was merged into the Company's pension plan. Expenses
paid to administer the Bake-Line money purchase pension plan were nominal.
12. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides certain medical and life insurance benefits for
eligible retired employees. The medical plan, which covers nonunion employees
with ten or more years of service, is a comprehensive indemnity-type plan. The
plan incorporates an up-front deductible, coinsurance payments, and employee
contributions which are based on length of service. The life insurance plan
offers a small amount of coverage versus the amount the employees had while
employed. The Company does not fund the plan.
The net periodic postretirement benefit expense includes the following
components:
<TABLE>
<CAPTION>
Forty-Eight || Four
YEAR ENDED Weeks Ended || Weeks Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
------------- -------------- || ------------- ---------------
(IN THOUSANDS)
||
<S> <C> <C> || <C> <C>
Service cost.................................. $ 2,242 $ 2,142 || $ 123 $ 1,598
Interest cost................................. 3,888 2,729 || 246 3,194
------------- -------------- || ------------- ---------------
Net periodic postretirement benefit expense... $ 6,130 $ 4,871 || $ 369 $ 4,792
============= ============== || ============= ===============
</TABLE>
The unfunded status of the plan reconciled to the postretirement obligation
in the Company's consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
---------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................................... $ (35,981) $ (33,054)
Fully eligible active participants............................ (7,154) (8,579)
Other active participants..................................... (12,941) (11,815)
---------------------- ----------------------
(56,076) (53,448)
Unrecognized prior service cost................................. (689) --
Unrecognized net gain........................................... (4,215) (3,857)
---------------------- ----------------------
Postretirement obligation....................................... $ (60,980) $ (57,305)
====================== ======================
</TABLE>
25
<PAGE> 23
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The accumulated postretirement benefit obligation was determined using a
weighted-average discount rate of 7.3% for the year ended January 3, 1998, and
7.5% for the forty-eight weeks ended December 28, 1996, the four weeks ended
January 26, 1996, and the year ended December 30, 1995.
The weighted-average annual assumed rate of increase in the cost of covered
benefits is 7.0% for 1997 declining gradually to an ultimate trend rate of 5.0%
by the year 1999. A 1% increase in the trend rate for health care costs would
have increased the accumulated benefit obligation as of January 3, 1998 by $2.4
million and the net periodic benefit cost by $0.5 million.
The Company also provides postemployment medical benefits to employees on
long-term disability. The plan is a comprehensive indemnity-type plan which
covers nonunion employees on long-term disability. There is no length of service
requirement. The plan incorporates coinsurance payments and deductibles. The
Company does not fund the plan. The postemployment obligation included in the
consolidated balance sheets at January 3, 1998 and December 28, 1996 was $4.7
million and $4.6 million, respectively.
13. INCOME TAXES
The components of income tax expense (benefit) were as shown below:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
--------------- ----------------|| --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> || <C> <C>
Current: ||
Federal....................................... $ 22,172 $ -- || $ -- $ 1,526
State......................................... 3,840 -- || -- --
--------------- ----------------|| --------------- ----------------
Current provision for income taxes.............. 26,012 -- || -- 1,526
Deferred: ||
Federal....................................... 17,203 11,524 || 6,490 (63,212)
State......................................... 1,954 2,478 || 843 (9,215)
Valuation allowance (federal and state)....... -- -- || (7,333) 70,442
--------------- ----------------|| --------------- ----------------
Deferred provision (benefit) for income taxes... 19,157 14,002 || -- (1,985)
--------------- ----------------|| --------------- ----------------
$ 45,169 $ 14,002 || $ -- $ (459)
=============== ================|| =============== ================
</TABLE>
26
<PAGE> 24
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The differences between the income tax expense (benefit) calculated at the
federal statutory income tax rate and the Company's consolidated income tax
expense (benefit) are as follows:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
-------------- -------------- || -------------- --------------
(IN THOUSANDS)
<S> <C> <C> || <C> <C>
U.S. federal statutory rate................ $ 37,643 $ 11,140 || $ -- $ (64,843)
State income taxes (net of federal benefit) 3,766 1,608 || -- (8,208)
Deferred tax asset valuation adjustment.... -- -- || -- 70,442
Intangible amortization.................... 1,836 1,268 || -- 828
Non-taxable items.......................... 1,076 (14) || -- 883
All others................................. 848 -- || -- 439
-------------- -------------- || -------------- --------------
$ 45,169 $ 14,002 || $ -- $ (459)
============== ============== || ============== ==============
</TABLE>
The deferred tax assets and deferred tax (liabilities) recorded on the
consolidated balance sheets consist of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
-------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Depreciation....................................................... $ (82,204) $ (91,860)
Prepaid pension.................................................... (16,164) (17,050)
Inventory valuation................................................ (5,257) (7,073)
Other.............................................................. (88) (144)
-------------------- --------------------
(103,713) (116,127)
-------------------- --------------------
Net operating loss carryforwards................................... 80,195 94,659
Postretirement/postemployment benefits............................. 25,123 24,997
Workers' compensation.............................................. 15,119 16,703
Plant and facility closing costs and severance..................... 10,996 14,232
Incentives and deferred compensation............................... 11,493 11,658
Charitable contributions........................................... 8,425 10,067
Employee benefits.................................................. 9,583 8,251
Other current assets............................................... -- 3,121
Other.............................................................. 442 8,650
-------------------- --------------------
161,376 192,338
Valuation allowance................................................ (84,350) (84,350)
-------------------- --------------------
$ (26,687) $ (8,139)
==================== ====================
</TABLE>
Net operating loss carryforwards total approximately $203.2 million through
1997 and expire in 2008 through 2011. Pursuant to the terms of the Keebler
acquisition, the predecessor company retained the right to use the net operating
losses for potential carrybacks. Any unused operating losses are then available
to Keebler, but are significantly restricted under current tax law. Therefore,
all net operating loss carryforwards have been fully reserved due to the
uncertainty of their realization.
Income taxes paid, net of refunds, were approximately $9.9 million, $1.6
million, and $2.3 million for the year ended January 3, 1998, the forty-eight
weeks ended December 28, 1996, and the year ended December 30, 1995,
respectively. There were no taxes paid or refunded during the four weeks ended
January 26, 1996.
27
<PAGE> 25
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHAREHOLDERS' EQUITY
There were no cash dividends declared for the year ended January 3, 1998,
the forty-eight weeks ended December 28, 1996, the four weeks ended January 26,
1996, and the year ended December 30, 1995. The Company's ability to pay cash
dividends is limited by the Credit Agreement and the Senior Subordinated Notes.
The most restrictive dividend restriction exists under the terms of the Credit
Agreement which limits dividends to $25.0 million.
On July 29, 1997, the Board of Directors of the Company approved a 1-for-10
reverse stock split of the Company's common stock. In addition, on January 22,
1998, the Board of Directors approved a 57.325-for-1 stock split of the common
stock. All per share and related amounts contained in these financial statements
and notes have been adjusted to reflect the stock splits as if they had been
effective January 26, 1996.
As a result of the Sunshine acquisition in 1996, the Company issued GFI
5,675,633 shares of the Company's common stock and a warrant to purchase
6,135,781 shares of the Company's common stock. The shares of $.01 par value
stock were valued at $3.23 per share. The warrant is exercisable at $3.23 per
share over a seven year period, beginning June 4, 1996 and expiring June 4,
2003. The total value of the stock and warrant held by GFI was $23.6 million at
December 28, 1996. Subsequent to the Merger, the stock and warrant held by GFI
were transferred to Bermore and reissued for the same value in the name of the
Company. At January 3, 1998, the warrant had not been exercised.
During the forty-eight weeks ended December 28, 1996, management invested
$3.7 million in exchange for 1,963,361 shares of the Company's common stock. The
Company repurchased 1,657,036 shares of the common stock to be sold to
management from Flowers and Artal for $2.9 million. The additional 306,325
shares of common stock were issued and sold to management for $0.8 million.
15. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for employee stock options. Under the Company's
1996 Stock Option Plan 9,673,594 shares of the Company's stock were authorized
for future grant. There were 7,031,198 options granted in 1996. In 1997, there
were an additional 49,873 options granted to management personnel and no
forfeitures of the Company's stock options. All options granted have ten year
terms and vest at the end of nine years. Vesting can be accelerated on a pro
rata basis over the first five years after grant if certain Company performance
measures are achieved.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Forty-Eight Weeks Ended
YEAR ENDED JANUARY 3, 1998 December 28, 1996
--------------------------------- --------------------------------
WEIGHTED Weighted
AVERAGE Average
OPTIONS EXERCISE PRICE Options Exercise Price
-------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the period... 6,802,471 $ 1.98 -- $ --
Granted...................................... 49,873 5.23 7,031,198 1.98
Exercised.................................... -- -- -- --
Forfeited.................................... -- -- 228,727 1.74
Expired...................................... -- -- -- --
-------------- -------------
Outstanding at the end of the period......... 6,852,344 $ 2.01 6,802,471 $ 1.98
============== =============
Exercisable at the period end................ 1,587,243 -- -- --
============== =============
</TABLE>
28
<PAGE> 26
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION PLAN (CONTINUED)
Exercise prices as of January 3, 1998 for options outstanding arising from
the July 1997 grant (49,873 options), the December 1996 grant (1,114,398
options), and the May 1996 grant (5,688,073 options) were $5.23, $3.23, and
$1.74, respectively. The weighted average fair value for options granted in 1997
was $5.23. The weighted average remaining contractual life of the options is
approximately eight years.
Pro forma information regarding net income is required by the SFAS No. 123,
"Accounting for Stock-Based Compensation", and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair value for the options was estimated at the date of
grant using a present value approach with the following weighted-average
assumptions: risk-free interest rate of 6.0%; no expected dividend yield;
volatility of zero; and a weighted-average expected life of the option of five
years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income and basic earnings per share would have been approximately
$55.0 million and $0.71 per share for the year ended January 3, 1998 and $14.0
million and $0.19 per share for the forty-eight weeks ended December 28, 1996,
respectively.
16. RESTRUCTURING CHARGE
In 1993, the predecessor company had recorded an operating charge of $122.7
million to restructure operations. During the first four weeks of 1996, there
was no spending against the restructuring reserves. The restructuring reserve
balance was $38.2 million at January 26, 1996, and was not a cost assumed as
part of the Keebler acquisition. There were no restructuring reserves at January
3, 1998 and December 28, 1996.
17. DISCONTINUED OPERATIONS
During July 1995, the predecessor company adopted plans to discontinue the
operations of the Frozen Food businesses. On January 9, 1996, UB Investments
(Netherlands) B.V. sold the Frozen Food businesses to the Windsor Food Company
Ltd. for $70.0 million. A gain on sale of $18.9 million was recorded during the
four weeks ended January 26, 1996. Income tax expense was not recognized on the
gain on the sale of the Frozen Food businesses as the predecessor company did
not provide for any income taxes during the four weeks ended January 26, 1996.
Net sales from these operations were $70.9 million for the year ended
December 30, 1995. Expenses charged against discontinued operations include
expenses associated with the costs of production, marketing, and specific
administrative expenses. Expenses do not include an allocation of shared
selling, distribution, and general administrative costs. Income from
discontinued operations relating to the Frozen Food businesses was $7.3 million
for the year ended December 30, 1995. Income tax expense was not recognized for
discontinued operations in 1995 due to the Company having a net loss on a
consolidated basis. There were no operating activities for the Frozen Food
businesses during the four weeks ended January 26, 1996 as the sale was
effective as of December 31, 1995. The net assets of the Frozen Food businesses
as of December 30, 1995 were $47.7 million. Included in the net assets were
primarily inventory, other current assets, property, plant, and equipment, and
certain current liabilities and accruals.
29
<PAGE> 27
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. AFFILIATE TRANSACTIONS
On December 29, 1995, the predecessor company transferred certain assets and
the stock of the Frozen Food businesses to U.B. Investments (Netherlands) B.V.
for promissory notes that aggregated $70.0 million. On January 9, 1996, U.B.
Investments (Netherlands) B.V. sold both these assets and stock to Windsor Food
Company Ltd. for $70.0 million, effective December 31, 1995. The aggregate
carrying value of these businesses and assets reflected in the December 30, 1995
consolidated balance sheet is $47.7 million, consisting primarily of goodwill of
$22.0 million, property, plant, and equipment of $21.2 million, and inventory of
$7.6 million, which resulted in a pre-tax realized gain, net of a $3.4 million
charge for severance arising from the sale, of $18.9 million for UBIUS.
On December 29, 1995, the predecessor company sold the stock of both
U.B.F.C., Inc. and U.B.H.C., Inc. to U.B. Investments plc. for $100 each which
resulted in no significant gain or loss.
Near the end of 1995, and in consideration of completing various pending
stock and asset purchase agreements, as described in Note 4, the predecessor
company entered into several transactions with affiliated companies within
United Biscuits (Holdings) plc. The accompanying consolidated financial
statements have not been adjusted to reflect these transactions which are
summarized below, as it is the Company's policy to only give effect to
dispositions resulting in a gain on the completion of the transaction with the
ultimate third party acquirer.
On November 30, 1995, Keebler Company sold to UB Group Ltd., ultimately
United Biscuits (Holdings) plc., for a $5.0 million affiliate receivable, the
entire rights, titles and interests in certain logos, trade names, trademarks,
and service marks registered or pending registration by Keebler Company in
Australia, New Zealand, Asia, and Europe. The proceeds of this transaction were
offset by certain legal fees and registration and licensing costs aggregating
$0.5 million. The net gain on the sale of these trademarks is included in other
costs and expenses for the year ended December 30, 1995.
In 1995, the predecessor company conducted business with various affiliated
companies that ultimately were under the control of United Biscuits (Holdings)
plc. Transactions with related parties included working capital financing and
the purchase of product for resale in the United States. Purchases of product
from affiliated companies for resale in the United States were $11.3 million for
the year ended December 30, 1995.
19. NET INCOME PER SHARE
Earnings per share is calculated using the weighted average number of common
and common equivalent shares outstanding during each period. The common
equivalent shares relate to the 1996 Stock Option Plan and the warrant issued in
connection with the Sunshine acquisition and are calculated using the treasury
stock method.
30
<PAGE> 28
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. NET INCOME PER SHARE (CONTINUED)
The following table sets for the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Forty-Eight
YEAR ENDED Weeks Ended
JANUARY 3, 1998 December 28, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
NUMERATOR:
Income from operations before extraordinary item..................... $ 62,381 $ 17,677
Extraordinary item, net of tax....................................... 5,396 1,925
----------------- -----------------
Net income........................................................... $ 56,985 $ 15,752
================= =================
DENOMINATOR:
Denominator for Basic Earnings Per Share
Weighted average shares......................................... 77,604 75,244
Effect of Dilutive Securities:
Stock options................................................... 2,168 832
Warrants........................................................ 790 --
----------------- -----------------
Diluted potential common shares................................. 2,958 832
----------------- -----------------
Denominator for Diluted Earnings Per Share........................... 80,562 76,076
================= =================
</TABLE>
Options to purchase 56,216 shares of common stock at $3.23 per share were
outstanding at December 28, 1996, but were excluded from the computation of
diluted net income per share as the exercise price of the options exceeded the
average market price of common shares; and therefore, the effect would have been
antidilutive.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair market value of financial instruments, which includes short and
long-term borrowings, was estimated using discounted cash flow analyses based on
current interest rates which would be obtained for similar financial
instruments. The carrying amounts of these financial instruments approximate
fair value.
The Company often enters into exchange traded commodity futures and options
contracts to protect the Company against a portion of adverse raw material price
movements. Gains or losses realized from the liquidation or expiration of the
contracts are recognized as part of the cost of raw materials. Gains or losses
are deferred in inventory until realized. Cost of sales was increased by losses
on futures and options transactions of $3.8 million in 1997, and reduced by
gains on futures and options transactions of $0.8 million for the forty-eight
weeks ended December 28, 1996, and $3.4 million in 1995. Operations for the four
weeks ended January 26, 1996, was unaffected by gains or losses on futures and
options as the $0.5 million loss was recorded as an adjustment to the opening
balance sheet. As of January 3, 1998, $4.9 million in unrealized futures and
options contract losses have been deferred in inventory. The notional amount of
open futures and options contracts at January 3, 1998 was $58.1 million and $0.7
million, respectively. The open contracts will expire between March 1998 and
November 1998.
31
<PAGE> 29
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. UNAUDITED QUARTERLY FINANCIAL DATA
Results of operations for each of the four quarters of the fiscal years
ended January 3, 1998 and December 28, 1996 follow. Each quarter represents a
period of twelve weeks except the first quarter which includes sixteen weeks. In
1996, earnings per share amounts have been restated to comply with SFAS No. 128,
"Earnings per Share" (See Note 19).
<TABLE>
<CAPTION>
Quarter 1 Quarter 2 Quarter 3 Quarter 4
------------------- ------------------- ------------------- -------------------
1997 1996* 1997 1996 1997 1996 1997** 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $597.0 $335.3 $459.8 $383.8 $485.3 $452.3 $523.1 $474.1
Gross profit.......................... 337.0 177.8 259.7 197.9 277.0 235.0 303.5 260.6
Income before extraordinary item...... 7.6 1.3 13.0 0.5 18.5 0.8 23.3 15.1
Extraordinary item.................... 2.7 -- -- 1.9 -- -- 2.7 --
Net income (loss)..................... 4.9 1.3 13.0 (1.4) 18.5 0.8 20.6 15.1
Basic net income (loss) per share:
Income before extraordinary item... $ 0.10 $ 0.02 $ 0.16 $ 0.01 $ 0.24 $ 0.01 $ 0.30 $ 0.20
Extraordinary item................. 0.04 -- -- 0.03 -- -- 0.03 --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................. $ 0.06 $ 0.02 $ 0.16 $(0.02) $ 0.24 $ 0.01 $ 0.27 $ 0.20
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares............... 77.6 71.7 77.6 74.4 77.6 77.5 77.6 77.5
========= ========= ========= ========= ========= ========= ========= =========
Diluted net income (loss) per share:
Income before extraordinary item... $ 0.10 $ 0.02 $ 0.16 $ 0.01 $ 0.23 $ 0.01 $ 0.28 $ 0.19
Extraordinary item................. 0.04 -- -- 0.02 -- -- 0.03 --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................. $ 0.06 $ 0.02 $ 0.16 $(0.01) $ 0.23 $ 0.01 $ 0.25 $ 0.19
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares............... 79.2 71.7 79.2 75.2 81.3 79.1 81.7 79.1
========= ========= ========= ========= ========= ========= ========= =========
- ----------
* Quarter 1, 1996 excludes the financial data of the predecessor company for the
four weeks ended January 26, 1996. ** Quarter 4, 1997 includes thirteen weeks as
fiscal 1997 is a fifty-three week year.
</TABLE>
</FN>
22. SUBSEQUENT EVENTS
The consolidated financial statements reflect the Company's declaration of a
57.325-for-1 stock split of common stock ("Stock Split") effective January 22,
1998. The Stock Split was effected in the form of a stock dividend. Accordingly,
all references in the consolidated financial statements to number of shares,
options, warrants, and the related prices, as well as per share amounts and the
average number of shares outstanding, have been restated to reflect these
changes.
On January 29, 1998, the Company made a public offering of 13,386,661 shares
of common stock (the "Offering"). Concurrent with the Offering, Bermore
exercised a warrant to purchase 6,135,781 shares of common stock. The exercise
of the warrant resulted in the Company receiving $19.8 million of cash proceeds.
All of the shares in the Offering were sold by Artal and Bermore, with no
proceeds from the Offering going to the Company. As part of the transaction,
Flowers acquired additional shares of common stock from Artal and Bermore so
that its ownership of outstanding common stock increased from approximately 45%
to 55%. Sales of shares and the exercise of the warrant resulted in Artal's
ownership decreasing from approximately 45% to 21%, and Bermore's ownership
decreasing from approximately 7% to 6% of outstanding common stock. Management's
ownership remained at approximately 2%, with the balance of the outstanding
common stock being sold to non-affiliates.
32
<PAGE> 1
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY:
Our report on the consolidated financial statements of Keebler Foods Company and
Subsidiaries and UB Investments US Inc. and Subsidiaries is included in the Form
10-K. In connection with our audits of such financial statements, have also
audited the related financial statement schedule listed in the index of the Form
10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 18, 1998
S-1
<PAGE> 2
ITEM 14 (D). FINANCIAL STATEMENT SCHEDULE SCHEDULE II
KEEBLER FOODS COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (NOTE 1)
FOR THE YEAR ENDED JANUARY 3, 1998, THE FORTY-EIGHT WEEKS
ENDED DECEMBER 28, 1996, THE FOUR WEEKS ENDED JANUARY 26,
1996, AND THE YEAR ENDED DECEMBER 30, 1995
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS/ OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------------------------- ---------- ---------- ---------- -------------- ----------
Those valuation and qualifying accounts
which are deducted in the balance sheet
from the assets to which they apply:
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 3, 1998
For discounts and doubtful accounts $ 5,390 $ 18,970 $ - $ (19,395)(1) $ 4,965
========= ========= ========= ========= =========
For deferred taxes $ 84,350 $ - $ - $ - $ 84,350
========= ========= ========= ========= =========
For inventory reserves $ 5,508 $ 9,716 $ - $ (8,442)(2) $ 6,782
========= ========= ========= ========= =========
FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996
For discounts and doubtful accounts $ 4,181 $ 14,399 $ 907 (3) $ (14,097)(1) $ 5,390
========= ========= ========= ========= =========
For deferred taxes $ 109,484 $ - $ - $ (25,134)(4) $ 84,350
========= ========= ========= ========= =========
For inventory reserves $ 9,578 (5) $ 3,370 $ - $ (7,440)(6) $ 5,508
========= ========= ========= ========= =========
========================================================================================================================
FOUR WEEKS ENDED JANUARY 26, 1996
For discounts and doubtful accounts $ 3,558 $ 1,577 $ - $ (954)(1) $ 4,181
========= ========= ========= ========= ==========
For deferred taxes $ 116,817 $ (7,333) $ - $ - $ 109,484
========= ========= ========= ========= ==========
For inventory reserves $ 637 $ 378 $ - $ - $ 1,015
========= ========= ========= ========= ==========
YEAR ENDED DECEMBER 30, 1995
For discounts and doubtful accounts $ 1,747 $ 13,801 $ - $ (11,990)(1) $ 3,558
========= ========= ========= ========= ==========
For deferred taxes $ 46,375 $ 70,442 $ - $ - $ 116,817
========= ========= ========= ========= ==========
For inventory reserves $ 1,136 $ - $ - $ (499)(2) $ 637
========= ========= ========= ========= ==========
Note 1: Schedule II - Valuation and Qualifying Accounts includes certain
financial data of Keebler Foods Company ("the Company") for the year
ended January 3, 1998 and for the forty-eight weeks ended December 28,
1996, as well as certain financial data of UB Investments US, Inc.
("UBIUS"), the predecessor company, for the four weeks ended January 26,
1996, the date on which UBIUS was acquired by INFLO Holdings Corporation
("INFLO"), and the year ended December 30, 1995. The distinction between
the Company's and the predecessor company's financial data has been made
by inserting a double line.
(1) Primarily charges against reserves, net of recoveries.
(2) Inventory write-offs.
(3) Amount acquired in the acquisition of Sunshine Biscuits, Inc.
(4) Adjustment to reduce the valuation allowance as a result of the acquisition
of the Company.
(5) Includes inventory reserves established in the acquisition of the Company.
(6) Adjustment to reduce reserve.
</TABLE>
S-2
34
<PAGE> 1
EXHIBIT 99.3
PORTIONS OF THE ANNUAL REPORT OF FORM 10-K FOR THE FISCAL YEAR ENDED
JANUARY 3, 1998 OF KEEBLER FOODS COMPANY.
ITEM 1. BUSINESS
Keebler Foods Company and its subsidiaries (the "Company" or "Keebler") is
the second largest cookie and cracker manufacturer in the United States ("U.S.")
with annual net sales of $2.1 billion and a 24.4% share of the U.S. cookie and
cracker market as reported by Information Resources, Inc. ("IRI"), based on
sales to supermarkets which have annual sales of $2.0 million or more, measured
in pounds sold. The Company, primarily through its Keebler Company and Sunshine
Biscuits, Inc. ("Sunshine") subsidiaries, produces and distributes a broad line
of cookie and cracker products, as well as other consumer food products.
RECENT HISTORY
The Company was organized under the laws of the State of Delaware as UB
Investments US Inc. ("UBIUS" or "predecessor company") on July 14, 1992. The
Company was acquired from UB Investments (Netherlands) B.V. on January 26, 1996
(the "Keebler acquisition") by INFLO Holdings Corporation ("INFLO"), a
corporation which was jointly owned by Artal Luxembourg S.A. ("Artal"), a
private investment company, and Flowers Industries, Inc. ("Flowers"), a New York
Stock Exchange-listed company and one of the country's largest manufacturers and
marketers of fresh and frozen baked foods. Immediately after the Keebler
acquisition, the Company was renamed Keebler Corporation. In conjunction with
the Keebler acquisition, INFLO sold 2.5% of the outstanding shares of $0.01 par
value common stock to certain members of management. On June 4, 1996, the
Company acquired Sunshine (the "Sunshine acquisition") from G.F. Industries,
Inc. ("GFI"). As part of consideration paid in the sale of Sunshine, GFI was
issued common stock and a warrant to purchase 6,135,781 shares of common stock.
On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger")
and subsequently changed its name to Keebler Foods Company. After the Merger,
the stock and warrant held by GFI were transferred to Bermore, Limited
("Bermore"), a privately held corporation and the parent of GFI, and reissued
for the same value in the name of the Company. On February 3, 1998, the Company
completed an initial public offering (the "Offering") of 13,386,661 shares of
common stock. Concurrent with the Offering, Bermore exercised the warrant in
exchange for 6,135,781 shares of common stock. The exercise of the warrant
resulted in the Company receiving $19.8 million of cash proceeds. All of the
shares in the Offering were sold by Artal and Bermore, with no proceeds from the
Offering going to the Company. As part of the transaction, Flowers acquired
additional shares of common stock from Artal and Bermore which increased its
ownership from approximately 45% to 55%. Artal, having sold shares to both
Flowers and the public, retained ownership of approximately 21%. Bermore
exercised the warrant, sold shares to both Flowers and the public, and retained
ownership of approximately 6%.
GENERAL BUSINESS DESCRIPTION
The Company competes in the U.S. retail cookie and cracker market which in
1997 generated sales of approximately $8.3 billion measured in retail sales to
consumers. The U.S. cookie and cracker market, which is relatively stable, has
experienced slow but steady growth over the past twenty years. Supermarkets
accounted for 77.1% of 1997 retail sales in the cookie and cracker industry,
with mass merchandisers, convenience stores, and drug stores accounting for the
balance. Since 1992, U.S. annual dollar supermarket sales of cookies and
crackers have increased by an average of 1.6% per year. The Company believes the
non-supermarket channels of distribution are becoming increasingly more
important.
The Company produces a number of well recognized brands under the Keebler
and Sunshine labels. Major brands include: CHEEZ-IT, CHIPS DELUXE, CLUB, FUDGE
SHOPPE, HYDROX, SUNSHINE KRISPY, MUNCH'EMS, SANDIES, TOWN HOUSE, VIENNA FINGERS,
WHEATABLES, and ZESTA. The Company also imports and distributes CARR'S crackers
in the U.S. under an exclusive long-term licensing and distribution agreement
with United Biscuits. CARR'S crackers are the best-selling specialty cracker in
the U.S.
1
<PAGE> 2
In addition to retail branded products, the Company also produces private
label cookies and crackers, which are sold by retailers under their own brands.
Keebler is also the number one manufacturer of cookies and crackers for the
foodservice market, as reported by the International Foodservice Manufacturers
Association ("IFMATRAC"). The Company is the top manufacturer of retail branded
ice cream cones in the U.S., as well as the leader of preformed retail branded
pie crusts which are sold under the KEEBLER READY CRUST brand name. Keebler also
produces custom-baked products for other marketers of branded food products.
Following the Keebler acquisition in January 1996, the Company's new
management began implementing a business strategy designed to capitalize on the
Company's competitive strengths, which include strong national brands and a
national direct store door sales and distribution system ("DSD system"). The key
elements of the Company's strategy include (i) building brand strength in new
and existing product lines, (ii) increasing sales in non-supermarket channels,
(iii) increasing the efficiency of operations, and (iv) pursuing acquisitions
that complement or provide further opportunities to use existing brands, product
lines, or distribution systems.
The Company completed the planned integration of Sunshine's operations into
those of Keebler by the end of 1996. The combination of Keebler and Sunshine
allowed the Company to achieve efficiencies in administration, purchasing,
production, marketing, sales, and distribution. In particular, the sales and
distribution of Sunshine retail branded products were incorporated into
Keebler's DSD distribution system which had excess capacity. Filling excess
capacity with Sunshine products made Keebler's DSD distribution system more
efficient and allowed the Company to focus sales and marketing efforts on more
profitable retail branded products.
The Company has focused on new product introductions and line extensions
within its core segments, such as KEEBLER CHOCOLATE CHEWY CHIPS DELUXE cookies
and Nacho CHEEZ-IT crackers, as well as introductions into new or less
competitive segments, such as KEEBLER COOKIE STIX cookies and KEEBLER SNACKIN'
GRAHAMS crackers. The Company has also developed new sizes of its leading
products to enable it to expand into non-supermarket channels.
The Company recognizes that the mass distribution of consumer food products
is an important element in maintaining sales growth and providing service to
customers. The Company attempts to meet the changing demands of customers by
planning appropriate stock levels and reasonable delivery times consistent with
achieving optimal economics of distribution. In order to achieve these
objectives, Keebler has developed a network of manufacturing plants, shipping
centers, and distribution warehouses strategically located throughout the
continental U.S. to provide high national in-store presence. The Company uses a
combination of Keebler-owned, public, and contract carriers to deliver products
from its distribution points to customers.
The Company distributes retail branded cookie and cracker products through
its DSD distribution system, which services substantially all supermarkets in
the U.S., as measured by IRI. The Company believes its DSD distribution system
provides certain competitive advantages. Members of Keebler's sales force,
rather than store employees, stock and arrange the Company's products on store
shelves and build end-aisle and free-standing product displays. Frequent store
presence of Keebler's sales force employees provides the Company with a high
level of control over the availability and presentation of its products. The
Company believes this control allows it to maintain shelf space, more
effectively introduce new products, and permits better execution of in-store
promotions. In addition, store presence allows the Company to monitor
competitors' in-store product promotions. Keebler believes in-store promotions
are important because purchases of cookies and crackers are often impulse
driven.
In addition to Keebler's DSD system, the Company uses a network of
independent distributors and brokers to serve convenience stores and vending
distributors. In the case of club stores and foodservice distribution, Keebler
uses a dedicated sales force and ships its products directly to the customers'
warehouses. The Company uses a warehouse sales and distribution system to sell
and distribute KEEBLER READY CRUST pie crusts and private label cookies and
crackers to its customers, including retail outlets otherwise served by
Keebler's DSD distribution system. CARR'S crackers are sold through a network of
independent specialty distributors.
2
<PAGE> 3
COMPETITION
The U.S. branded cookie and cracker industry is led by Keebler and Nabisco,
Inc. ("Nabisco"), which together account for 58.5% of sales volume, as reported
by IRI. Smaller competitors include numerous national, regional, and local
manufacturers of both branded and private label products. Competition in
Keebler's target markets takes many forms including (i) establishing favorable
brand recognition, (ii) developing products sought by consumers, (iii)
implementing appropriate pricing, (iv) providing strong marketing support, and
(v) obtaining access to retail outlets and sufficient shelf space.
Nabisco is the largest manufacturer in the U.S. cookie and cracker industry.
Keebler has a 24.4% share of the retail cookie and cracker market, while Nabisco
has a 34.1% share, as measured by IRI. The remaining industry participants
primarily target certain segments of the industry or focus on certain
geographical regions of the U.S. Keebler and Nabisco are also the only cookie
and cracker producers that have national wholly-owned DSD distribution systems,
although Pepperidge Farms operates a national DSD distribution system through
independent distributors.
SEASONALITY
The Company's net sales, net income, and cash flows are affected by the
timing of new product introductions, promotional activities, price increases,
and a seasonal sales bias toward the second half of the year due to events such
as back-to-school, Thanksgiving, and Christmas. The relative mix between cookie
and cracker sales varies throughout the year with stronger cracker sales in the
last quarter of the calendar year.
CUSTOMERS
The Company's top ten customers in 1997 accounted for 27.7% of Keebler's net
sales. No single customer accounted for more than 4.6% of net sales.
RAW MATERIALS
The principal raw materials used in the Company's food products consist of
flour, sugar, chocolate, shortening, and milk. Keebler also uses paper products,
such as corrugated cardboard, as well as films and plastics to package its
products. Raw materials and packaging supplies are readily available from
various suppliers. There is no significant reliance on any one supplier. The
Company uses hedging techniques to minimize the impact of price fluctuations in
raw materials but not for speculative or trading purposes. The hedging
techniques, however, may not result in a reduction in the Company's raw material
costs or protect the Company from sharp increases in certain raw material costs,
which the Company has experienced in the past.
INTELLECTUAL PROPERTY
The Company owns a number of patents, licenses, trademarks, and trade names.
Principal trademarks and trade names include KEEBLER, Ernie the Keebler Elf, the
Hollow Tree logo, CHEEZ-IT, CHIPS DELUXE, CLUB, FUDGE SHOPPE, HI-HO, HYDROX,
SUNSHINE KRISPY, MUNCH'EMS, READY CRUST, SANDIES, SOFT BATCH, SUNSHINE,
TOASTEDS, TOWN HOUSE, VIENNA FINGERS, WHEATABLES, and ZESTA. The Company is the
exclusive licensee of the CARR'S brand name in the U.S. Such trademarks and
trade names are considered to be of material importance to the business of the
Company since they have the effect of developing brand identification and
maintaining consumer loyalty. Management is not aware of any fact that would
negatively impact the continuing use of any patents, licenses, trademarks, or
trade names.
3
<PAGE> 4
RESEARCH AND DEVELOPMENT
The Company engages in research activities, which principally involve
development of new products, improvement of the quality of existing products,
and improvement and modernization of production processes. The Company also
carries out development and evaluation of new processing techniques for both
current and proposed product lines. Identifiable research and development costs
are set forth on page F-12 of the Company's consolidated financial statements.
REGULATION
As a manufacturer and marketer of food items, the Company's operations are
subject to regulation by various federal government agencies, including the Food
and Drug Administration, the Department of Agriculture, the Federal Trade
Commission (the "FTC"), the Environmental Protection Agency, and the Department
of Commerce, as well as various state agencies, with respect to production
processes, product quality, packaging, labeling, storage, and distribution.
Under various statutes and regulations, such agencies prescribe requirements and
establish standards for quality, purity, and labeling. The finding of a failure
to comply with one or more regulatory requirements can result in a variety of
sanctions, including monetary fines or compulsory withdrawal of products from
store shelves. In addition, the Company is subject to certain health and safety
regulations issued under the Occupational Safety and Health Act, as well as
regulation by the FTC of advertising performed by the Company.
ENVIRONMENTAL
The Company's operations and properties are subject to federal, state, and
local laws and regulations relating to the storage, handling, emission, and
discharge of materials and wastes into the environment. The primary
environmental laws affecting Keebler's operations are the Federal Clean Air Act
and Clean Water Act. The Company may be required to spend significant sums in
order to maintain compliance with environmental laws, particularly with respect
to emission control equipment, replacement of chlorofluorocarbons (i.e.
ozone-depleting substances) in cooling equipment, and asbestos abatement
projects. Although it is difficult to estimate the cost of complying with
environmental laws, the Company does not believe that compliance with, or
liability under, any environmental laws individually or in the aggregate will
have a material adverse effect on its results of operations or financial
condition.
EMPLOYEES
The Company employs approximately 9,500 persons, of which approximately
5,200 are represented by unions. Keebler believes its relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company operates eleven manufacturing facilities in the U.S. of which
ten are owned and one is leased. The manufacturing facilities are located in
Athens, Georgia; Chicago, Illinois; Cincinnati, Ohio; Columbus, Georgia; Denver,
Colorado; Des Plaines, Illinois; Florence, Kentucky; Grand Rapids, Michigan;
Kansas City, Kansas; Macon, Georgia; and Sayreville, New Jersey. Keebler also
owns and operates a dairy in Fremont, Ohio that produces cheese under a
proprietary formula that is used as an ingredient in CHEEZ-IT crackers. In
addition, the Company owns one idle manufacturing facility located in Atlanta,
Georgia that is held for sale. As a result of capital expenditures made over the
past decade, management believes the manufacturing facilities are modern and
efficient. Management also believes manufacturing capacity is sufficient to meet
foreseeable needs.
4
<PAGE> 5
Distribution facilities consist of eleven shipping centers attached to the
manufacturing facilities, ten stand-alone shipping centers (two owned and eight
leased; of which one is idle), and sixty-six distribution centers (eleven owned
and fifty-five leased) throughout the U.S. Of the sixty-six distribution
centers, seven were subleased and seven were idle. These seven idle facilities
have been accrued for in the plant and facility closing costs. In addition, one
of the owned, but idle, distribution facilities is held for sale. The Company
also leases thirty-two warehouses and eighteen depots that are located
throughout the U.S. and are utilized by the sales force in the distribution of
the Company's products. Management believes there is sufficient distribution
capacity to meet foreseeable needs.
In addition to manufacturing and distribution facilities, the Company owns
two office buildings and leases two others as part of its corporate office
facility. The Company also leases numerous sales offices throughout the country.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for the
year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the
four weeks ended January 26, 1996, and the year ended December 30, 1995 have
been derived from, and should be read in conjunction with the historical
consolidated financial statements of the Company and UBIUS, the predecessor
company, including the respective notes thereto, included elsewhere. The
selected historical financial data presented below as of and for the fiscal
years ended December 31, 1994 and January 1, 1994 have been derived from the
consolidated financial statements of the predecessor company that are not
included herein. The distinction between the Company's and the predecessor
company's selected financial data, as shown below, has been made by inserting a
double line. The results of operations presented below are not necessarily
indicative of results to be expected for any future period. The information set
forth below should be read in conjunction with "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and respective notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
Keebler Foods Company || UBIUS
------------------------|| -----------------------------------------------
Forty-Eight || Four Year Ended
Year Ended Weeks Ended || Weeks Ended -----------------------------------
January 3, December 28,|| January 26, December 30,December 31, January 1,
1998 1996 (a) || 1996 1995 1994 1994
----------- ------------|| ----------- ----------- ----------- -----------
(In Millions Except || (In Millions)
Per Share Data) ||
<S> <C> <C> || <C> <C> <C> <C>
OPERATING DATA: ||
Net sales ....................................... $2,065.2 $1,645.5 || $101.7 $1,578.6 $1,599.7 $1,650.1
Gross profit .................................... 1,177.2 871.3 || 46.8 831.8 894.2 931.5
Restructuring charges ........................... - - || - - - 120.1
Loss on impairment of Salty Snacks business ..... - - || - 86.5 - -
Income (loss) from continuing operations ........ 141.4 70.1 || (25.5) (137.9) 46.4 (67.6)
Income tax expense (benefit) .................... 45.2 14.0 || - (0.5) (1.1) (22.3)
Discontinued operations: ||
Income from operations of discontinued Frozen ||
Food businesses, net of tax ................ - - || - 7.4 3.4 0.6
Gain on disposal of Frozen Food businesses, ||
net of tax ................................. - - || 18.9 - - -
Extraordinary item: ||
Loss on early extinguishment of debt, ||
net of tax ................................. 5.4 1.9 || - - - -
Net income (loss) ............................... $ 57.0 $ 15.8 || $ (6.5) $ (158.3) $ (23.0) $ (147.2)
||
Basic Net Income per Share: ||
Income from continuing operations ||
before extraordinary item .................. $ 0.80 $ 0.24 ||
Extraordinary item .......................... 0.07 0.03 ||
-------- -------- ||
Net income .................................. $ 0.73 $ 0.21 ||
======== ======== ||
Weighted Average Shares Outstanding ............. 77.6 75.2 ||
======== ======== ||
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
Keebler Foods Company || UBIUS
------------------------|| -----------------------------------------------
Forty-Eight || Four Year Ended
Year Ended Weeks Ended || Weeks Ended -----------------------------------
January 3, December 28,|| January 26, December 30,December 31, January 1,
1998 1996 (a) || 1996 1995 1994 1994
----------- ------------|| ----------- ----------- ----------- -----------
(In Millions Except || (In Millions)
Per Share Data) ||
<S> <C> <C> || <C> <C> <C> <C>
OTHER DATA: ||
EBITDA, as adjusted (b) ......................... $ 202.1 $ 119.6 || $ (23.5) $ (93.3) $ 89.5 $ 98.4
Depreciation and amortization (excluding items ||
related to discontinued operations) ......... 60.7 49.5 || 2.0 44.6 43.1 45.9
Capital expenditures (excluding expenditures ||
related to discontinued operations) ......... 48.4 29.4 || 3.2 54.2 54.6 30.6
||
CASH FLOW DATA: ||
Cash Provided from (Used by) ||
Operating activities ........................ $ 218.3 $ 53.2 || $ (0.4) $ (61.4) $ (17.4) $ 22.0
Investing activities ........................ (41.5) (130.1) || 65.2 (52.6) (45.9) (92.1)
Financing activities ........................ (161.6) 86.8 || (65.7) 104.4 69.4 58.3
--------- --------- || --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents $ 15.2 $ 9.9 || $ (0.9) $ (9.6) $ 6.1 $ (11.8)
========= ========= || ========= ========= ========= =========
</TABLE>
- ---------------------------------------------
(a) Includes the operating results of Sunshine from acquisition date of June 4,
1996 through December 28, 1996. Other matters affecting comparability are
detailed in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(b) EBITDA, as adjusted, is defined as income (loss) from continuing operations
before interest, taxes, depreciation, amortization, and restructuring
charges (gains).
<TABLE>
<CAPTION>
As of || As of
------------------------|| --------------------------------------------------
January 3, December 28,|| January 26, December 30, December 31, January 1,
1998 1996 || 1996 1995 1994 1994
----------- ------------|| ----------- ----------- ----------- -----------
(In Millions) || (In Millions)
<S> <C> <C> || <C> <C> <C> <C>
BALANCE SHEET DATA: ||
Cash and cash equivalents ....................... $ 27.2 $ 12.0 || $ 2.1 $ 3.0 $ 12.5 $ 6.4
Total assets .................................... 1,042.9 1,102.1 || 849.1 926.9 1,001.2 1,043.0
Due to affiliate ................................ -- -- || 105.0 108.0 551.6 872.7
Total debt (including capital leases) ........... 298.8 457.9 || 371.4 437.6 333.2 263.8
Shareholders' equity (deficit) .................. 222.0 165.1 || 45.3 51.8 (234.9) (511.9)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SET FORTH BELOW IS A DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER
30, 1995. THE YEAR ENDED DECEMBER 28, 1996 INCLUDES BOTH THE FORTY-EIGHT WEEKS
OF KEEBLER FOODS COMPANY UNDER CURRENT MANAGEMENT AND THE FOUR WEEKS OF UBIUS
UNDER FORMER MANAGEMENT. THE 1995 FINANCIAL RESULTS INCLUDE FINANCIAL
INFORMATION RELATING TO THE SALTY SNACKS BUSINESS AND PRESENTS THE FROZEN FOODS
BUSINESSES AS A DISCONTINUED OPERATION (BOTH DEFINED ON PAGE F-11 OF THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS), BOTH OF WHICH WERE SOLD OR
LIQUIDATED BY UBIUS PRIOR TO THE ACQUISITION OF UBIUS BY INFLO. THE FOLLOWING
DISCUSSION OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES SHOULD
BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER
FOODS COMPANY AND THE RELATED NOTES THERETO APPEARING ELSEWHERE.
6
<PAGE> 7
RESULTS OF OPERATIONS
MATTERS AFFECTING COMPARABILITY
The Company's fiscal year consists of thirteen four week periods (fifty-two
or fifty-three weeks) and ends on the Saturday nearest December 31. The 1997
fiscal year consists of fifty-three weeks. As a result of the Keebler
acquisition, which closed on the last day of the first four week period of 1996,
the fiscal year for 1996 consisted of the forty-eight weeks ended December 28,
1996. The 1995 fiscal year of the predecessor company was comprised of fifty-two
weeks.
The Company's operating results for the forty-eight weeks ended December 28,
1996 have been combined with the operating results of the predecessor company
for the four weeks ended January 26, 1996 to compare the year ended December 28,
1996 to the years ended January 3, 1998 and December 30, 1995. The Company's
operating results for the year ended December 28, 1996 include the operating
results of Sunshine from the acquisition date of June 4, 1996, whereas the year
ended January 3, 1998 includes the operating results of Sunshine for the entire
year. Additionally, the Company's operating results have been restated to
reflect the Merger as if it had been effective January 26, 1996.
For the year ended December 30, 1995, the financial results of the
predecessor company include the operating results of the Salty Snacks business.
The Salty Snacks business was liquidated by prior management in connection with
the Keebler acquisition. The 1995 results of operations include net sales of
$135.7 million and a loss from operations of $25.6 million related to the Salty
Snacks business. The 1995 operating results for the Salty Snacks business
excluded an allocation of the fixed portion of selling, distribution, and
general administrative expenses. In addition, the December 30, 1995 financial
results of the predecessor company also include the results of operations of the
Frozen Food businesses presented as a discontinued operation.
The Company's results of operations, expressed as a percentage of net sales,
for the last three years ended January 3, 1998, December 28, 1996, and December
30, 1995 are set forth below:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES ....................................................... 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of sales................................................. 43.0 47.5 47.3
Selling, marketing, and administrative expenses............... 49.7 49.6 56.0
Loss on impairment of Salty Snacks business .................. -- -- 5.5
Other......................................................... 0.5 0.4 (0.1)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................ 6.8 2.5 (8.7)
INTEREST EXPENSE, NET........................................... 1.6 2.2 1.8
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
EXPENSE...................................................... 5.2 0.3 (10.5)
Income tax expense............................................ 2.2 0.8 --
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM ........................................................ 3.0 (0.5) (10.5)
DISCONTINUED OPERATIONS:
Income from operations of discontinued Frozen Food businesses,
net of tax.................................................. -- -- 0.5
Gain on disposal of discontinued Frozen Food businesses,
net of tax ................................................. -- 1.1 --
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........................ 3.0 0.6 (10.0)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of tax.............. 0.3 0.1 --
----------- ----------- -----------
NET INCOME (LOSS)............................................... 2.7% 0.5% (10.0)%
=========== =========== ===========
</TABLE>
7
<PAGE> 8
COMPARISON OF FISCAL 1997 TO 1996
NET SALES. Net sales of $2,065.2 million in 1997 were $318.0 million, or
18.2%, higher than net sales of $1,747.2 million in 1996. The growth in net
sales for 1997 was achieved through incremental sales from both the Sunshine
acquisition and increased volumes. Sunshine results for 1996 were only included
from the acquisition date of June 4, 1996. In 1996, net sales of Sunshine for
the twenty-two weeks ended June 4, 1996 were $229.8 million. Sunshine net sales,
in a full year-on-year comparison, were 27.3% and 29.6% of total Company net
sales in 1997 and 1996, respectively. In addition to the incremental revenue
associated with the Sunshine acquisition, increased volumes in 1997 provided
4.5% growth in net sales over the prior year. The volume growth was achieved
through emphasis on more profitable cookie and cracker products, while
discontinuing or repositioning less strategic products, and the introduction of
new products and line extensions.
GROSS PROFIT. Gross profit in 1997 of $1,177.2 million was $259.0 million
higher than the prior year and 4.5 percentage points better as a percent of net
sales. The increase in gross profit in 1997 was due to higher sales, lower
commodity and package material prices, and the implementation of cost reduction
and productivity programs. Of the total improvement, approximately 64.5% was
attributed to incremental sales associated with both the Sunshine acquisition
and increased volume. The balance of the improvement was achieved through a more
profitable sales mix and cost savings and productivity improvements achieved
mainly through further automation of the manufacturing facilities and higher
capacity utilization attributed to streamlining the manufacturing facilities.
The shift toward higher margin brands benefited gross profit by $11.8 million
compared to the prior year. Also contributing to the increase in gross profit in
1997 were lower prices paid for raw materials, particularly for flour and
soybean oil, and lower prices paid for package materials, primarily for cartons,
corrugated cardboard, and flexible film.
SELLING, MARKETING, AND ADMINISTRATIVE EXPENSES. Selling, marketing, and
administrative expenses for 1997 of $1,026.2 million, or 49.7% of net sales,
increased $160.0 million from 1996, but remained relatively stable as a percent
of net sales. Spending rose in 1997 due to both the impact of higher sales and
increased marketing expense. The impact of higher sales contributed $126.9
million to the increase in selling, marketing, and administrative expenses.
Marketing expense represented 23.8% of net sales in 1997 compared to 22.2% in
1996. The higher spending rate in 1997 was due to increased brand-building
national advertising and consumer promotions which were up $29.2 million over
the prior year. The increased spending as a result of these factors, along with
inflation, was offset by the impact of higher volumes in a more efficient,
relatively fixed cost, selling and distribution network. Therefore, selling,
marketing, and administrative expenses as a percent of net sales remained
comparable to the prior year.
OTHER. Other expense for 1997 was $2.3 million, or 32.0%, higher than 1996
due to higher bank fees and amortization of intangibles. Bank fees in 1997 were
higher than the prior year due to several amendments to the Company's financing
agreement. Other expense for 1997 included a full year of amortization of
trademarks and goodwill recorded as part of the Sunshine acquisition compared to
only twenty-eight weeks in 1996.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations
of $141.4 million was $96.7 million higher than 1996. The improvement was
attributed to a 18.2% increase in net sales driven by volume growth compounded
by enhanced gross margins resulting from a more profitable mix, cost reductions,
and improved productivity. Total benefits realized more than offset incremental
marketing and amortization expense.
INTEREST EXPENSE. Interest expense of $33.8 million for 1997 was $4.5
million lower than in 1996, primarily due to a lower average debt balance in
1997. The decrease in the average debt balance was the result of principal
pre-payments of $113.8 million on the term loans and a $29.0 million pre-payment
of the Seller Note. In addition, the weighted average interest rate for 1997 was
0.28 percentage points lower than the 1996 weighted average rate.
INCOME TAXES. Income taxes for the year were provided at an effective tax
rate of 42%. The effective tax rate exceeded the statutory rate due to
nondeductible expenses, principally amortization of intangibles, including
trademarks, trade names, and goodwill. In 1996, the effective tax rate for the
forty-eight weeks ended December 28, 1996 was 44.2% and was higher than the 1997
rate due to a preliminary estimate of nondeductible expenses. Income tax expense
was not provided for during the first four weeks of 1996. As part of the Keebler
acquisition, the
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Company adjusted the valuation allowance on deferred taxes by $25.1 million to
reflect the elimination of certain deferred tax assets revalued in the purchase
price allocation. The Company carried a deferred tax valuation allowance of
$84.4 million at January 3, 1998 and December 28, 1996 to provide for the
uncertainty in realizing the deductibility of deferred tax assets recognized.
Pursuant to the terms of the Keebler acquisition, the predecessor company
retained the right to use the net operating losses for potential carrybacks. Any
unused operating losses are then available to Keebler, but are significantly
restricted under current tax law. Therefore, all net operating loss
carryforwards have been fully reserved due to the uncertainty of their
realization.
DISCONTINUED OPERATIONS. In 1995, the predecessor company adopted plans to
discontinue the operations of the Frozen Food businesses, and in the first four
weeks of 1996, a gain of $18.9 million, net of income taxes, was recognized on
the disposal of the Frozen Food businesses.
EXTRAORDINARY ITEM NET OF INCOME TAXES. In 1997 and 1996, Keebler recorded
extraordinary charges net of tax of $5.4 million and $1.9 million, respectively.
In 1997, $3.8 million of the extraordinary charges, net of tax, related to the
write-off of debt issuance costs associated with the early retirement of the
term loans. An additional $1.6 million net of tax extraordinary charge was
recorded due to a loss on the early extinguishment of the Seller Note entered
into at the time of the Keebler acquisition. In 1996, the $1.9 million
extraordinary charge, net of tax, related to the write-off of debt issuance
costs associated with the $125.0 million early extinguishment of increasing rate
notes.
NET INCOME (LOSS). Net income of $57.0 million in 1997 was $47.7 million
higher than net income of $9.3 million for 1996. The substantial growth in net
income was the result of increased volume, the inclusion of the Sunshine
business for the entire year, improved gross margins, and savings achieved by
leveraging the fixed cost structure of the sales and distribution network.
COMPARISON OF FISCAL 1996 TO 1995
NET SALES. Net sales in 1996 increased $168.6 million, or 10.7%, over 1995.
The 1996 net sales included Sunshine revenues of $291.2 million, while net sales
in 1995 included sales of the Salty Snacks business of $135.7 million. After
adjusting for these changes in the Company's business, the year-on-year sales
increase was up $13.1 million. Along with achieving this growth, the Company
also shifted its sales focus to more profitable products. The new focus was
accomplished through selected price increases on Keebler branded cookie and
cracker products, a more targeted marketing emphasis, new products, and the
discontinuation of weaker products. While volumes in 1996 were relatively flat
compared to volumes in 1995, higher revenues were achieved through these changes
in product mix and selected price increases. Temporary volume decreases in sales
to convenience stores, associated with a change in the selling organization and
product discontinuations, were offset by volume gains from new products and
broadened distribution.
GROSS PROFIT. Gross profit as a percentage of net sales for 1996 was 52.6%
compared to 52.7% in 1995. While gross margins were down slightly year-on-year,
this belies the significant improvements that were achieved. The change in sales
mix noted above, resulted in an emphasis on more profitable volume. However, the
value-added products emphasized as part of the 1996 sales strategy carried
higher production costs than the products sold in 1995. The impact on gross
profit of this change in sales mix along with higher flour prices contributed to
higher cost of sales in 1996 versus 1995. Gross profit margins in 1996 also
reflect the inclusion of Sunshine products, which historically carried a lower
gross margin than Keebler products. The impact of higher costs was more than
fully offset by increasing capacity utilization, cost reductions at the
bakeries, as well as lowering scrap levels and achieving a more balanced
production. In addition, reductions in bakery overhead staffing and a more
efficient balancing of internal and co-packing arrangements achieved a lower
cost of production.
SELLING, MARKETING, AND ADMINISTRATIVE EXPENSES. Selling, marketing, and
administrative expenses decreased $18.3 million and improved by 6.4 percentage
points as a percent of net sales in 1996 compared to 1995. Included in 1996
expenses were selling, marketing, and administrative expenses of $131.9 million
directly attributable to the Sunshine business; while 1995 included expenses of
$87.4 million directly associated with the Salty Snacks business (excluding
allocation of the fixed portions of selling, distribution, and administrative
expenses). Excluding these influences, selling, marketing, and administrative
expenses decreased in 1996 compared to 1995 by $62.8
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<PAGE> 10
million. The improvement was principally accomplished through a targeted
marketing plan behind Keebler products and Keebler's cost reduction program to
rationalize the selling and administrative cost structure. In 1996, the
Company's focus on spending for trade promotions at the store level resulted in
higher trade allowances which were more than offset by the $49.5 million
decrease in national advertising and consumer promotions. The cost reductions in
the selling and administrative structures were achieved primarily through
headcount reductions of approximately 1,740 and changing from a relatively
higher cost step-van selling organization to independent distributors to serve
the convenience store channel. A decrease in research and development costs of
$9.6 million was primarily attributed to headcount reductions, more focused new
product programs in 1996, and lower project activity due in part to the
liquidation of the Salty Snacks business prior to the Keebler acquisition. The
cost reductions more than offset increased administrative expenses of management
incentives and increased depreciation as a result of the Keebler and Sunshine
acquisitions.
OTHER. Other income and expense for 1996 was $7.2 million compared to $1.4
million of income for 1995. Other expense in 1996 consisted of $5.2 million of
amortization resulting from both the Keebler and Sunshine acquisitions and bank
service charges. In 1995, other income and expense consisted of $1.7 million of
amortization expense, $1.4 million of miscellaneous expenses and bank service
charges, and other income of $4.5 million representing the gain on the sale of
interests in certain logos, trade names, trademarks, and service marks
registered or pending registration in Australia, New Zealand, Asia, and Europe.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations
was $44.7 million in 1996, an improvement of $182.5 million over the loss from
continuing operations for 1995. After adjusting the 1995 net operating loss of
$137.9 million for the $25.6 million loss in the Salty Snacks business and the
impairment write down of $86.5 million associated with that business, the
earnings improvement in 1996 over 1995 was $70.5 million. The turnaround
resulted from improved gross margins on Keebler brands, more efficient marketing
expenditures, and cost savings achieved in sales and distribution and corporate
overhead. The cumulative savings from these initiatives more than offset
incremental depreciation and amortization expense totaling $9.7 million recorded
as a result of the Keebler and Sunshine acquisitions.
INTEREST EXPENSE. For 1996, net interest expense was $38.4 million compared
to $28.3 million in 1995. The increase was due to the amortization of debt
issuance costs and higher overall borrowings carrying a higher average interest
rate as compared to the prior year.
INCOME TAXES. The Company provided for income taxes at an effective tax rate
of 44.2% for the forty-eight weeks ended December 28, 1996. The predecessor
company did not provide for any income tax expense for the four weeks ended
January 26, 1996. The effective tax rate was higher than the statutory rate
because of nondeductible expenses (principally, amortization of intangibles,
including trademarks, trade names, and goodwill). In 1995, there was no current
provision for income taxes due to operating losses incurred and the inability to
carryback the losses to recover taxes paid in prior years. As part of the
Keebler acquisition, the Company adjusted the valuation allowance on deferred
taxes by $25.1 million to reflect the elimination of certain deferred tax assets
revalued in the purchase price allocation. The deferred tax valuation allowance
of $84.4 million at December 28, 1996 provided for the uncertainty in realizing
the deductibility of deferred tax assets recognized. The predecessor company,
pursuant to the terms of the Keebler acquisition, retained the right to use the
net operating losses for potential carrybacks. Any unused operating losses are
then available to Keebler, but are significantly restricted under current tax
law. Therefore, all net operating loss carryforwards have been fully reserved
due to the uncertainty of their realization.
DISCONTINUED OPERATIONS. During 1995, the predecessor company decided to
dispose of the Frozen Food businesses and, therefore, presented the operations
of those businesses as a discontinued item in the statement of operations. In
the first four weeks of 1996, a gain of $18.9 million net of income taxes on the
disposal of the Frozen Food businesses was recognized.
EXTRAORDINARY ITEM NET OF INCOME TAXES. A before-tax extraordinary loss of
$3.2 million on the early extinguishment of debt was recorded in the second
quarter of 1996. The loss consisted primarily of the write-off of unamortized
bank fees incurred when the Company replaced the Keebler acquisition bridge loan
with the Notes. The tax benefit on the extraordinary loss was $1.3 million
resulting in an after-tax loss of $1.9 million.
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NET INCOME (LOSS). Net income of $9.3 million for 1996 represented a
substantial improvement over the $158.3 million net loss for the prior year. The
improvement was attributable to operating improvements, the divestiture of the
unprofitable Salty Snacks business, and the recognized gain of $18.9 million on
the disposition of the Frozen Food businesses.
LIQUIDITY AND CAPITAL RESOURCES
A condensed cash flow statement of the Company follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
-------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED FROM (USED BY)
Operating activities........................... $ 218.3 $ 52.8 $ (61.4)
Investing activities........................... (41.5) (64.9) (52.6)
Financing activities........................... (161.6) 21.1 104.4
--------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. $ 15.2 $ 9.0 $ (9.6)
========== ======== ========
</TABLE>
CASH FLOW FOR 1997
During 1997, cash provided from operating activities was $218.3 million. The
primary contributors to the positive cash flow for the year were net earnings of
$57.0 million, a lower investment in trade accounts receivable, and reduced
funding of current liabilities and income taxes. Improved accounts receivable
collection procedures provided $38.2 million of working capital. The reduced
funding of current liabilities was attributable primarily to the timing of
payments, while the increase in income taxes payable was attributable to a $47.7
million increase in earnings over the prior year. Partially offsetting these
benefits was spending on plant and facility closing costs and severance and the
payment of an arbitration award. Spending on plant and facility closing costs
and severance relating to exit costs associated with the Keebler and Sunshine
acquisitions, although down from the prior year, accounted for $13.7 million of
cash used by operations for the year ended January 3, 1998. Spending on plant
and facility closing costs and severance is expected to conclude by the end of
1998, with the exception of noncancellable lease obligations which are expected
to continue until 2004. In addition, the Company paid an arbitration award
regarding a contract production arrangement, which was entered into by the
predecessor company, in the amount of $6.8 million plus legal fees.
Cash used by investing activities of $41.5 million for 1997 was primarily
used to fund capital expenditures. Capital spending of $48.4 million was made
principally to enhance, update or realign the existing production lines, provide
distribution and production efficiencies, and to achieve near-term cost savings.
Proceeds received from asset disposals of $7.0 million partially offset capital
expenditures. The sale of the Santa Fe Springs plant accounted for $3.6 million
of the year-to-date proceeds, with the remainder of the proceeds provided mainly
from the sale of trucks and machinery and equipment. The Company continues to
carry the Atlanta, Georgia manufacturing facility as an asset held for sale and
expects the disposition to occur before the end of 1998 without a significant
gain or loss.
Cash used by financing activities in 1997 was $161.6 million. In 1997, the
Company entered into an amendment and restatement of the Credit Agreement,
proceeds from which were used to extinguish existing term loans under the Credit
Agreement of $153.6 million. The extinguishment was funded primarily by a draw
down on the revolving loan facility and $109.8 million under a new term loan, in
each case under the Credit Agreement. During 1997, the draw down on the
revolving loan facility was completely repaid. Additionally, in the fourth
quarter of 1997, the Company extinguished $29.0 million of debt related to the
Seller Note and made $70.0 million in principal pre-payments on the term loan
under the Credit Agreement using existing cash resources. Scheduled principal
payments of $18.7 million were made during the year on the term loan and other
debt.
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CASH FLOW FOR 1996 AND 1995
Cash provided from operating activities increased $114.2 million in 1996
over the cash used in operations in 1995. The significant increase reflects the
net earnings improvement along with improved working capital management.
Adjusting the 1995 net loss of $158.3 million by both the $86.5 million loss
recorded on the impairment of the Salty Snacks business and the Salty Snacks
business operating loss of $25.6 million, yields a 1995 net loss of $46.2
million compared to 1996 net income of $9.3 million. The net earnings
improvement of $55.5 million was achieved through increased revenues attributed
to price increases, a more profitable sales mix, and cost reductions. Lower
costs resulted from lower fixed overhead, reduced selling, distribution, and
administrative expense resulting from headcount reductions, and more effective
marketing spending. The improved cash provided by working capital resulted from
a sustained improvement in cash collections of accounts receivable and higher
accounts payable. The additional cash provided from working capital more than
funded the combined $41.3 million of spending on plant and facility closing
costs and severance, as a result of actions in connection with the Keebler and
Sunshine acquisitions. Keebler believes that spending on plant and facility
closing costs and severance should be substantially completed over the next two
years. Only noncancellable lease obligations are expected to exceed such
two-year time frame.
Cash used by investing activities was $64.9 million in 1996 compared to
$52.6 million in 1995. The cash used in 1996 was directly attributable to the
$142.7 million used to finance the Sunshine acquisition. Offsetting this use of
cash was the receipt of $32.6 million working capital adjustment paid by UB
Investments (Netherlands) B.V. in connection with the Keebler acquisition and a
$67.7 million source of cash received by the predecessor company resulting from
the disposition of the Frozen Food businesses. Capital expenditures were $32.6
million and $55.4 million in 1996 and 1995, respectively. In 1996 under current
management, capital projects were mostly designed to generate near-term cost
savings and to complete the investment in improved management information
systems. Capital expenditures in 1996 were down from the prior years reflecting
the near completion of the installation of the Company's SAP R/3 management
information system and tighter restrictions on additional capital expenditures.
The Company believes that the capital expenditure program will continue at a
level sufficient to support its strategies and operating needs.
Cash flow provided from financing activities decreased $83.3 million in 1996
from 1995. In 1996, the $21.1 million cash provided from financing activities
was comprised of $220.0 million in long-term debt borrowings of which $95.0
million was used to finance the Sunshine acquisition. An additional $125.0
million of borrowings represents the issuance of the Notes which was done to
refinance the bridge loan used to finance the Keebler acquisition. Draw downs
and repayments on the revolving loan facility were $37.2 million of which $19.0
million was used to finance a portion of the Sunshine acquisition. The remaining
$18.2 million was used to finance working capital requirements. Offsetting these
sources was $63.3 million paid by the predecessor company to settle commercial
paper and revolving credit obligations and $2.4 million of principal payments on
equipment obligations. The cash provided from financing activities of $104.4
million in 1995 was through commercial paper borrowings used to finance
operating losses, capital expenditures, and cash spent on restructuring
initiatives.
LIQUIDITY
The Company's liquidity in 1997 and 1996 was provided from a revolving loan
facility. In 1996 available borrowings under the revolving loan facility were
$155.0 million which was reduced to $140.0 million in 1997. Borrowings under the
revolving loan facility in 1997 and 1996 were $32.8 million and $37.2 million,
respectively, all of which had been repaid as of January 3, 1998 and December
28, 1996. In 1995, borrowings for the predecessor company were provided by a
$200.0 million commercial paper program and a revolving credit agreement. Both
the commercial paper program and revolving credit agreement were no longer
available after the Keebler acquisition.
Capital expenditures for 1998 are expected to be approximately $50.0
million, up nearly $2.0 million from 1997. The majority of capital spending in
1998 will be used to increase the automation in production and distribution
facilities to obtain cost savings. The Company anticipates that capital
expenditures will be funded from cash provided by working capital.
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The Company historically has not paid dividends, currently does not
anticipate paying dividends, and intends to retain all future earnings to fund
the development and growth of the business. The existing Credit Agreement and
the Notes place limitations on the Company's ability to pay dividends or make
other distributions on its common stock. Additionally, the Credit Agreement
requires the Company to meet certain financial covenants including net worth;
earnings before interest, taxes, depreciation, and amortization; and cash flow
and interest coverage ratios. In 1997 and 1996, the Company met all financial
covenants in all of its financing agreements. Total debt was $298.8 million,
$457.9 million, and $437.6 million as of January 3, 1998, December 28, 1996, and
December 30, 1995, respectively. Current maturities on the total debt
outstanding were $26.4 million, $18.6 million, and $286.5 million as of such
respective dates. Cash and cash equivalents on January 3, 1998, December 28,
1996, and December 30, 1995 were $27.2 million, $12.0 million, and $3.0 million,
respectively.
Concurrent with the Offering, Bermore exercised a warrant in exchange for
6,135,781 shares of common stock. The exercise of the warrant resulted in the
Company receiving $19.8 million of cash proceeds on February 3, 1998. At the
time of the Offering, the Company was also required to make an offer to the
holders of the Notes to purchase the Notes at 101% of the principal amount. None
of the holders sold into the change of control offer on the Notes. The Company
believes that available cash, as well as existing credit facilities, are
sufficient to meet the Company's normal operating requirements for the
foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective in fiscal year 1998. The new statement
establishes standards for reporting and the display of comprehensive income and
its components (revenues, expenses, gains, and losses) in the financial
statements. The statement requires all items recognized under accounting
standards as components of comprehensive income be reported in a financial
statement displayed with the same prominence as other financial statements. The
Company has not yet determined the impact the new statement may have on
disclosures in the consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective in fiscal year
1999. The new statement revises standards for public companies to report
information about segments of the business and also requires disclosure of
selected segment information in quarterly financial reports. The statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has not yet determined the
impact the new statement may have on disclosures in the consolidated financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective in fiscal
year 1998. The new statement improves disclosures about pensions and other
postretirement benefits to provide information to analyze: the benefit
obligation, the fair value of the plan assets, and changes to the obligation and
fair value of plan assets, including unrecognized gains and losses. In addition,
the statement provides information on the quality of earnings, including
recognized and unrecognized amounts used when projecting benefit costs and
earnings of future periods. The Company has not yet determined the impact the
new statement may have on disclosures in the consolidated financial statements.
The FASB also issued certain other disclosure-related accounting
pronouncements during 1997. While these new statements are effective for future
reporting periods, the Company does not anticipate they will have any
significant impact on the consolidated financial statements.
SEASONALITY
The Company's net sales, net income, and cash flows are affected by the
timing of new product introductions, promotional activities, price increases,
and a seasonal sales bias toward the second half of the year due to events such
as back-to-school, Thanksgiving, and Christmas. The relative mix between cookie
and cracker sales varies throughout the year with stronger cracker sales in the
last quarter of the calendar year.
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SELF INSURANCE
The Company purchases insurance coverage for worker's compensation, general,
product, and vehicle liability maintaining certain levels of retained risk
(self-insured portion). Potential losses relating to claims under the
self-insured portion of the policies are accrued in accordance with the
requirements of SFAS No. 5, "Accounting for Contingencies." There are no
unasserted claims that require a reserve or disclosure in accordance with SFAS
No. 5.
FORWARD-LOOKING STATEMENTS
When used in this discussion, the words "believes" and "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, over which the Company has no
control, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligations to republish revised forward-looking statements to
reflect events or circumstances after the date thereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company, in this report, as
well as the Company's periodic reports filed with the Securities and Exchange
Commission.
14
