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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)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NO. 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 No.)
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 ON WHICH
TITLE OF EACH CLASS REGISTERED
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COMMON STOCK, $.625 PAR VALUE, TOGETHER WITH NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS
7.15% DEBENTURES DUE 2028 NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act: None
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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 26, 1999: $2,343,363,083
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 26, 1999
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COMMON STOCK, $.625 PAR VALUE 100,001,659
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DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 OF KEEBLER FOODS COMPANY, A
DELAWARE CORPORATION, AND PORTIONS OF THE COMPANY'S DEFINITIVE PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS ON MAY 28, 1999 IN PART III.
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 REPORT
TABLE OF CONTENTS
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PAGE
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PART I
ITEM NO. 1. BUSINESS.................................................... 1
2. PROPERTIES.................................................. 10
3. LEGAL PROCEEDINGS........................................... 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 10
PART II
ITEM NO. 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 11
6. SELECTED FINANCIAL DATA..................................... 12
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.......................... 13
7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 21
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...................................... 22
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 22
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 22
PART IV
ITEM NO. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 22
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Registrant incorporates by reference into this Annual Report on Form
10-K for the fiscal year ended January 2, 1999, certain portions of the Annual
Report on Form 10-K of Keebler Foods Company for its fiscal year ended January
2, 1999, filed with the Securities and Exchange Commission on March 22, 1999
(File No. 001-13705) (the "Keebler Form 10-K"), as follows:
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ITEM OF FLOWERS ANNUAL
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 II PART II
Item 6. Selected Financial Data........ Item 6. Selected Financial Data
Item 7. Management's Discussion and Item 7. Management's Discussion and
Analysis of Financial Condition Analysis of Results of
and Results of Operations...... Operations and Financial
Condition
Item 7a. Quantitative and Qualitative Item 7a. Quantitative and Qualitative
Disclosures About Market Disclosures About Market Risk
Risk...........................
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PART I
ITEM 1. BUSINESS
As used herein, unless the context otherwise indicates, (i) "FII" means
Flowers Industries, Inc., the publicly traded holding company, which owns all of
the outstanding common stock of Flowers Bakeries, Inc. ("Flowers Bakeries") and
Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a majority of
the outstanding common stock of Keebler Foods Company; (ii) "Keebler" means
Keebler Foods Company and its consolidated subsidiaries; (iii) "Flowers" means
FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs. Smith's
Bakeries, and their respective subsidiaries, excluding Keebler, and (iv) the
"Company" means Flowers and its consolidated, majority-owned subsidiary,
Keebler, collectively.
THE COMPANY
The Company is the largest nationally branded producer and marketer of a
full line of baked foods in the United States. The products of the Company's
three segments 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.
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
16 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 25 local bakery operations which are
generally within or contiguous to its existing region and which can be served
with its extensive direct store door delivery ("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 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 desserts for the restaurant and
foodservice markets, and further expanded its national presence by acquiring the
Oregon Farms brand of retail frozen desserts. In 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 markets the leading national brand of
frozen pies sold at retail. In 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 frozen fruit cobblers and Mrs. Smith's Restaurant Classics frozen pies
for retail and foodservice distribution.
In a series of transactions from 1996 through 1998, the Company entered the
cookies and crackers marketplace by acquiring Keebler, the number two producer
and marketer of cookies and crackers in the United States. On February 3, 1998,
Keebler completed its initial public offering in which Flowers' co-investors
sold a portion of their shares to the public. Concurrently with that offering,
Flowers purchased an additional 11.5% of Keebler from its co-investors for
approximately $309 million in cash, thereby increasing its ownership to
approximately 55% of the total Keebler shares outstanding. Under the control of
Flowers and its
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co-investors, Keebler's results of operations have improved from a net loss of
$158.3 million for fiscal year ended December 30, 1995, to net income of $94.9
million for fiscal year ended January 2, 1999. In September, 1998, Keebler
purchased all of the outstanding common stock of President International, Inc.
("President"). President is the fifth largest cookie marketer in the United
States and the leading supplier of Girl Scout cookies. Its key brands include
Famous Amos, Plantation and Murray.
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 11 of its 19 major metropolitan markets and second in its
remaining eight such markets, and its Nature's Own brand is the number one
volume brand of wheat/variety bread in the country despite being marketed in
only 40% of the 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 crackers for the foodservice market.
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 distribution capabilities.
Flowers has invested approximately $382 million over the past six years, of
which approximately $239 million was used to expand and modernize existing
production facilities for Flowers Bakeries, including the addition of 12 new
highly-automated production lines in nine facilities. The remaining
approximately $143 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 $145 million to
streamline and rationalize its production operations in order to better support
its national DSD system.
PRODUCTS
The Company produces baked foods in three segments: Flowers Bakeries (fresh
baked foods), Mrs. Smith's Bakeries (frozen baked foods) and Keebler (cookies
and crackers).
Flowers Bakeries -- Fresh Baked Foods
In 1998, Flowers Bakeries was the leading producer of fresh baked foods in
11 of its major markets and second in eight of its major markets and was
developing its presence in the other markets it has recently entered. Flowers
Bakeries' market includes 16 states in the eastern, southeastern and south
central United States.
Flowers Bakeries 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, Flowers Bakeries also markets fresh
bread under the Sunbeam, Roman Meal, Country Hearth and Bunny trademarks.
Nature's Own is the best selling brand by volume of soft variety bread in the
United States, despite being marketed in only 40% of the United States. Rolls
and buns are marketed under the Cobblestone Mill, 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, donuts, pastries and other sweet
snacks are sold primarily under the BlueBird brand, as well as ButterKrust and
Sunbeam.
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 branded products, Flowers Bakeries is able to
use private label offerings to expand total shelf space and to effectively
maximize capacity utilization.
Flowers Bakeries 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, Flowers Bakeries became a preferred supplier to Burger King and
currently supplies
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baked products to approximately 2,100 Burger King restaurants in the Southeast.
Flowers Bakeries also sells fresh baked products to wholesale distributors for
ultimate sale to a wide variety of food outlets.
Mrs. Smith's Bakeries -- Frozen Baked Foods
Mrs. Smith's Bakeries and Sara Lee have the two largest shares of the
frozen baked dessert market. Mrs. Smith's Bakeries' frozen baked pies were the
number one retail frozen brand pies in the United States for 1998. Mrs. Smith's
Bakeries' frozen baked foods are marketed throughout the United States, and,
based on consumer surveys, Mrs. Smith's enjoys a 94% brand awareness in United
States households.
Mrs. Smith's Bakeries' 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, Stilwell, Pet-Ritz, Banquet and Oronoque
Orchard brand names in the frozen foods sections of supermarkets, as are Mrs.
Smith's Bakeries' frozen pie shells, mixed fruits and quiche fillings. Mrs.
Smith's Bakeries has also introduced a line of frozen baked desserts and
cobblers that feature low fat crusts and no-sugar-added fruit fillings. Mrs.
Smith's Bakeries' 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. Mrs.
Smith's Bakeries 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.
Mrs. Smith's Bakeries produces frozen pies, cakes and desserts as well as
bread, rolls and buns for sale to foodservice customers and 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. In 1998, Mrs. Smith's Bakeries 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. Mrs. Smith's Bakeries' newest introduction is Mrs. Smith's
Restaurant Classics, which are frozen premium, restaurant-quality cream pies
sold for retail and foodservice distribution.
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 Bakeries, which distributes them 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.
Keebler -- Cookies and Crackers
Keebler is the second largest cookie and cracker producer in the United
States with annualized net sales of over $2.5 billion and a 25.7% 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 crackers for
the foodservice market. Keebler produces cookies and crackers under
well-recognized brands including, among others, Chips Deluxe, Sandies, Fudge
Shoppe, Vienna Fingers, Droxies, Famous Amos, Olde New England, Murray, Carr's,
Town House, Club, Wheatables, Zesta, Cheez-It, Sunshine Krispy, Munch'ems and
Ready Crust. The relative mix between cookie and cracker sales varies throughout
the year with stronger cracker sales in the last quarter of the calendar year.
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 for other
marketers of branded food products, including Kellogg Pop Tarts, Kellogg
Nutri-Grain bars, McDonaldland cookies and Gerber Biter biscuits, as well as
crackers for Oscar Mayer Lunchables, Starkist Charlie Tuna snack kits and Kraft
Handi-Snacks.
With the acquisition of President, Keebler became the leading licensed
supplier of cookies for the Girl Scouts of America. Keebler exclusively supplies
more than one-half of the approximately 320 Girl Scout
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Councils in the United States and is one of only three cookie manufacturers
licensed by the Girl Scouts of America to manufacture Girl Scout cookies.
Keebler employs dedicated marketing personnel to assist the various Girl Scout
Councils with sales, marketing and public relations. Historically, President's
net sales, net income and cash flow have been higher in the first quarter than
any other fiscal quarter because substantially all sales of Girl Scout cookies
have occurred in that quarter.
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 Flowers Bakeries and
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.
Flowers Bakeries -- Fresh Baked Foods
Flowers Bakeries owns and operates 24 fresh bread and bun bakeries in 10
states. Flowers Bakeries has invested approximately $239 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 Bakeries
has added 12 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 Bakeries the most efficient major producer of fresh
baked foods in the United States. Flowers Bakeries 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 Bakeries 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.
Flowers Bakeries effected this change by selling its sales routes, primarily to
its sales employees. Flowers Bakeries 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, Flowers Bakeries manages
and services these arrangements.
Management believes that Flowers Bakeries' 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 Flowers Bakeries' 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.
Mrs. Smith's Bakeries -- Frozen Baked Foods
Mrs. Smith's Bakeries operates 11 production facilities with 54 production
lines for its pies, cakes, breads, rolls and snack foods. Mrs. Smith's Bakeries
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, Mrs. Smith's Bakeries has
invested approximately $143 million to upgrade its frozen baked foods production
and distribution facilities, primarily by adding 13 highly-automated
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production lines in nine facilities and constructing 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 R/3
operating system, which Mrs. Smith's Bakeries believes will provide it with
competitive advantages in inventory tracking and distribution. Mrs. Smith's
Bakeries plans to invest approximately $100 million over fiscal 1999 and 2000 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 Mrs. Smith's Bakeries' 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. 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 Mrs. Smith's
Bakeries 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 Mrs. Smith's Bakeries to achieve both production and
distribution efficiencies. The production facilities are able to operate longer,
more efficient production runs 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.
Keebler -- Cookies and Crackers
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 operates 19 manufacturing facilities located
throughout the United States, of which 16 are owned and three are leased.
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 19 shipping centers attached to its
manufacturing facilities, eight stand-alone shipping centers (two owned and six
leased) and 62 distribution centers (10 owned and 52 leased) throughout the
United States. Of the 62 distribution centers, nine were subleased and two were
idle. Keebler also leases 77 warehouses and 18 depots that are located
throughout the United States and are utilized by the sales force in the
distribution of Keebler's products. Following the President acquisition, Keebler
owns one idle warehouse that is held for sale.
Keebler distributes its retail branded cookie and cracker products through
its DSD distribution system, which services substantially all supermarkets in
the United States, as measured by Information Resources, Inc. ("IRI"). Members
of Keebler's sales force, rather than store employees, stock and arrange
Keebler's products on store shelves and build end-aisle and free-standing
product displays. Frequent presence of Keebler's sales force employees provides
Keebler with a high level of control over the availability and presentation of
its products. Keebler believes that this control allows it to maintain shelf
space, better execute in-store promotions and more effectively introduce new
products.
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With the acquisition of President, Keebler acquired its franchised DSD
system, which principally distributes products east of the Mississippi River.
President's distribution system, which services both supermarkets and
non-supermarket channels, is comprised of independent franchisees who purchase
and resell President products.
In addition to the Keebler and President DSD systems, Keebler uses a
network of independent distributors and brokers to serve convenience stores and
vending distributors. In the case of club stores, Keebler uses a dedicated sales
force and ships products directly to the customers' warehouses. Keebler also
uses a warehouse sales and distribution system to sell and distribute Keebler
Ready Crust pie crusts. Carr's crackers are sold through a network of
independent speciality distributors.
CUSTOMERS
The Company's top ten customers in 1998 accounted for 26% of sales. No
single customer accounted for more than 10% of the Company's sales.
COMPETITION
Flowers Bakeries -- Fresh Baked Foods
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 Flowers Bakeries experiences
price pressure from time to time, primarily as a result of competitors'
promotional efforts, Flowers Bakeries believes that its status as the low cost
producer and consumer brand loyalty, as well as Flowers Bakeries' 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. Flowers Bakeries
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.
Mrs. Smith's Bakeries -- Frozen Baked Foods
The frozen baked foods industry is led by Pillsbury, Sara Lee and Mrs.
Smith's Bakeries. Other significant competitors in the frozen baked dessert
category include Rich Products, Edwards and Pepperidge Farm. 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, 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.
Keebler -- Cookies and Crackers
The United States branded cookie and cracker industry is led by Keebler and
Nabisco, which together accounted for approximately 59.4% of total sales volume
in 1998. Keebler has an approximate 25.7% share of the retail cookie and cracker
market, while Nabisco, the largest manufacturer in the United States cookie and
cracker industry, has an approximate 33.7% 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
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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 and Bunny. Mrs. Smith's Bakeries'
principal brand names include Mrs. Smith's, Mrs. Smith's Restaurant Classics,
Mrs. Smith's Special Recipe, Stilwell, Oregon Farms, Pet-Ritz, Banquet, Oronoque
Orchard, 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, Famous Amos, Fudge Shoppe, Hi-Ho, Hydrox, Sunshine Krispy,
Munch'ems, Murray, Olde New England, Ready Crust, Sandies, Soft Batch, Sunshine,
Toasteds, Town House, Vienna Fingers, Wheatables and Zesta. Keebler is the
exclusive licensee of the Carr's 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,
fruit and dairy products. 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.
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.
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.
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.
7
<PAGE> 11
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 6,300 persons, approximately 500 of whom are
covered by collective bargaining agreements. Keebler employs approximately
12,200 persons, of whom approximately 5,800 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.
8
<PAGE> 12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the Company's
Executive Officers, together with all offices held with the Company by such
Executive Officers.
<TABLE>
<CAPTION>
NAME, AGE AND OFFICE BUSINESS EXPERIENCE
-------------------- -------------------
<S> <C>
AMOS R. McMULLIAN Chairman of the Board of Directors of the Company since
Age 61 January 1985; Chairman of the Executive Committee since
Chairman of the Board and January 1984; Chief Executive Officer of the Company
Chief Executive Officer since April 1981; Vice Chairman of the Board of
Directors (1984 - 1985); Co-Chairman of the Executive
Committee (1983 - 1984); President and Chief Operating
Officer (1976 - 1984); Director of the Company since
1975; joined the Company in 1963; Director of Keebler
since January 1996.
ROBERT P. CROZER Vice Chairman of the Board of Directors of the Company
Age 52 since 1989; Vice President -- Marketing (1985 - 1989);
Vice Chairman of the Board President and Chief Operating Officer, Convenience
Products Group (1979 - 1989); Corporate Director of
Marketing Planning (1979 - 1985); Director of the
Company since 1979; joined the Company in 1973; Director
of Keebler since January 1996 and Chairman of the Board
of Directors of Keebler since February 1998.
C. MARTIN WOOD III Senior Vice President and Chief Financial Officer of the
Age 55 Company since September 1978; Vice President -- Finance
Senior Vice President and Chief (1976 - 1978); Director of the Company since 1975;
Financial Officer joined the Company in 1970; Director of Keebler since
January 1996.
G. ANTHONY CAMPBELL Secretary and General Counsel of the Company since
Age 46 January 1985; Assistant General Counsel (1983 - 1985);
Secretary and General Counsel joined the Company in 1983; Director of the Company
since 1991; Director of Keebler since February 1998.
GEORGE E. DEESE President and Chief Operating Officer of Flowers
Age 52 Bakeries, Inc. since January 1997; President and Chief
President and Chief Operating Operating Officer, Baked Products Group (1983 - 1997);
Officer, Flowers Bakeries, Inc. Regional Vice President, Baked Products Group
(1981 - 1983); President of Atlanta Baking Company
(1980 - 1981); joined the Company in 1964.
GARY L. HARRISON President and Chief Operating Officer of Mrs. Smith's
Age 61 Bakeries, Inc., since January 1997; President and Chief
President and Chief Operating Operating Officer, Specialty Foods Group (1989 - 1997);
Officer, Mrs. Smith's Bakeries, Inc. Executive Vice President, Baked Products Group
(1987 - 1989); Regional Vice President, Baked Products
Group (1977 - 1987); President of Flowers Baking Company
of Thomasville (1976 - 1977); joined the Company in
1954.
JIMMY M. WOODWARD Treasurer and Chief Accounting Officer of the Company
Age 38 since October 1997; Assistant Treasurer, for more than
Treasurer and Chief Accounting five years prior to that time; joined the Company in
Officer 1985; Director of Keebler since February 1998.
MARTA JONES TURNER Vice President of Public Affairs of the Company since
Age 45 September 1997; Director of Public Affairs, for more
Vice President of Public Affairs than five years prior to that time; joined the Company
in 1978.
</TABLE>
All Executive Officers are elected by the Board of Directors for one year
terms with the exception of the positions of President, Flowers Bakeries, Inc.
and President, Mrs. Smith's Bakeries, Inc., which are appointed offices.
9
<PAGE> 13
ITEM 2. PROPERTIES
Forty-nine of the Company's production facilities are owned, four
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:
FLOWERS BAKERIES
- -----------------
Opelika, Alabama
Tuscaloosa, Alabama
Ft. Smith, Arkansas
Pine Bluff, Arkansas
Texarkana, Arkansas
Bradenton, Florida
Jacksonville, Florida
Miami, Florida
Atlanta, Georgia
Thomasville, Georgia
Villa Rica, Georgia
Baton Rouge, Louisiana
Lafayette, Louisiana
New Orleans, Louisiana
Goldsboro, North Carolina
Jamestown, North Carolina
Kinston, North Carolina
Morristown, Tennessee
El Paso, Texas
Houston, Texas
San Antonio, Texas
Tyler, Texas
Lynchburg, Virginia
Bluefield, West Virginia
Charleston, West Virginia
MRS. SMITH'S BAKERIES
- -----------------------
Montgomery, Alabama
Atlanta, Georgia
Chamblee, Georgia
Forest Park, Georgia
Suwannee, Georgia
Tucker, Georgia
London, Kentucky
Chaska, Minnesota
Pembroke, North Carolina
Stilwell, Oklahoma
Spartanburg, South Carolina
Crossville, Tennessee
KEEBLER
- --------
Birmingham, Alabama
North Little Rock, Arkansas
Denver, Colorado
Athens, Georgia
Augusta, Georgia
Columbus, Georgia
Macon, Georgia
Chicago, Illinois
Des Plaines, Illinois
Lake Bluff, Illinois
Kansas City, Kansas
Florence, Kentucky
Louisville, Kentucky
Grand Rapids, Michigan
Sayreville, New Jersey
Charlotte, North Carolina
Cincinnati, Ohio
Marietta, Oklahoma
Cleveland, Tennessee
Management considers that its properties are well maintained and sufficient
for its present operations.
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
Not applicable.
10
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
CASH DIVIDENDS PAID
MARKET PRICE PER COMMON SHARE
----------------------------------------- ------------------------------
TRANSITION
FY 1998 PERIOD 1998 FY 1997 TRANSITION
----------- ----------- ----------- PERIOD
QUARTER HIGH LOW HIGH LOW HIGH LOW FY 1998 1998 FY 1997
- ------- ---- --- ---- --- ---- --- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First......................... 26 5/16 20 1/8 20 11/16 16 1/2 13 1/4 10 5/8 .1150 .1100 .1000
Second........................ 23 7/8 19 3/8 21 1/2 16 5/8 15 7/8 12 5/8 .1175 .1125 .1017
Third......................... 22 7/16 16 1/2 -- -- 16 1/8 13 1/4 .1200 -- .1033
Fourth........................ 24 3/4 18 1/2 -- -- 18 15 .1225 -- .1075
Total..................... .4750 .2225 .4125
</TABLE>
EQUITY SECURITY HOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHAREHOLDERS OF
TITLE OF CLASS RECORD AT MARCH 26, 1999
- -------------- -------------------------
<S> <C>
Common Stock, $.625 Par Value, Together with Preferred Share
Purchase Rights........................................... 8,679
--------
</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. Cash dividends have been paid on these shares every quarter
since December 1971.
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.
11
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated historical financial data presented below as of
and for the fiscal years 1998, transition period 1998, 1997, 1996, 1995 and
1994, have been derived from the consolidated financial statements of the
Company which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The results of operations presented below are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
FOR THE 27
FOR THE 52 WEEKS ENDED FOR THE 52 WEEKS ENDED
WEEKS ENDED JANUARY 3, -----------------------------------------------------------
JANUARY 2, 1999 1998 JUNE 28, 1997 JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
--------------- -------------- ------------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales............................ $3,776,461 $786,539 $1,441,253 $1,250,584 $1,139,954 $994,472
Gain on sale of distributor notes
receivable 43,244
Materials, supplies, labor and
other production costs......... 1,702,581 418,926 787,799 674,762 599,416 525,731
Selling, marketing and
administrative expenses........ 1,644,413 303,868 537,825 473,630 428,833 383,073
Depreciation and amortization.... 128,765 26,930 45,970 40,848 36,604 34,110
Non-recurring charge............. 68,313 -- -- -- -- --
Interest expense, net............ 68,725 11,796 25,109 13,004 7,086 4,318
Income before income taxes,
investment in unconsolidated
affiliate, minority interest,
extraordinary loss and
cumulative effect of changes in
accounting principles.......... 163,664 25,019 87,794 48,340 68,015 47,240
Income taxes..................... 74,391 9,632 33,191 18,185 25,714 17,744
Income from investment in
unconsolidated affiliate....... -- 18,061 7,721 613 -- --
Income before minority interest,
extraordinary loss and
cumulative effect of changes in
accounting principles.......... 89,273 33,448 62,324 30,768 42,301 29,496
Minority interest................ (43,305) -- -- -- -- --
Income before extraordinary loss
and cumulative effect of
changes in accounting
principles..................... 45,968 33,448 62,324 30,768 42,301 29,496
Extraordinary loss due to early
extinguishment of debt, net of
tax benefit and minority
interest....................... (938) -- -- -- -- --
Cumulative effect of changes in
accounting principles, net of
tax benefit.................... (3,131) (9,888) -- -- -- --
Net income....................... $ 41,899 $ 23,560 $ 62,324 $ 30,768 $ 42,301 $ 29,496
NET INCOME PER COMMON SHARE:
Basic:
Income before extraordinary
loss and cumulative effect of
changes in accounting
principles................... $ .47 $ .38 $ .71 $ .35 $ .49 $ .35
Extraordinary loss due to early
extinguishment of debt, net
of tax benefit and minority
interest..................... (.01) -- -- -- -- --
Cumulative effect of changes in
accounting principles, net of
tax benefit.................. (.03) (.11) -- -- -- --
Net income per common share.... $ .43 $ .27 $ .71 $ .35 $ .49 $ .35
Weighted average shares
outstanding.................. 96,393 88,368 88,000 86,933 86,229 84,521
Diluted:
Income before extraordinary
loss and cumulative effect of
changes in accounting
principles................... $ .47 $ .38 $ .71 $ .35 $ .49 $ .35
Extraordinary loss due to early
extinguishment of debt, net
of tax benefit and minority
interest..................... (.01) -- -- -- -- --
Cumulative effect of changes in
accounting principles, net of
tax benefit.................. (.03) (.11) -- -- -- --
Net income per common share.... $ .43 $ .27 $ .71 $ .35 $ .49 $ .35
Weighted average shares
outstanding.................. 96,801 88,773 88,401 87,211 86,438 84,784
BALANCE SHEET DATA:
Total assets................... $2,860,900 $898,880 $ 898,187 $ 849,443 $ 655,921 $559,682
Long-term debt................. 1,038,998 276,211 275,247 274,698 120,944 92,886
Stockholders' equity........... 572,961 348,567 340,012 305,324 303,981 275,731
</TABLE>
12
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with "Selected
Consolidated Historical Financial Data" included herein and the consolidated
financial statements and the related notes thereto of the Company incorporated
by reference or included elsewhere. 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, fruits
and dairy products. 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, marketing 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 are 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 expense related to its outstanding debt is discussed in Note 4 of Notes
to Consolidated Financial Statements.
Matters Affecting Analysis
As used herein, unless the context otherwise indicates, (i) "FII" means
Flowers Industries, Inc., the publicly traded holding company, which owns all
the outstanding common stock of Flowers Bakeries, Inc. ("Flowers Bakeries") and
Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a majority of
the outstanding common stock of Keebler Foods Company; (ii) "Keebler" means
Keebler Foods Company and its consolidated subsidiaries; (iii) "Flowers" means
FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs. Smith's
Bakeries, and their respective subsidiaries, excluding Keebler, and (iv) the
"Company" means Flowers and its consolidated, majority-owned subsidiary,
Keebler, collectively.
On February 3, 1998, FII completed its purchase of additional shares of
Keebler to increase its ownership from approximately 45% to 55% ("Keebler
Acquisition"). Accordingly, the results of operations of Keebler are
consolidated with those of Flowers for the fiscal year ended January 2, 1999.
From January 26, 1996, the date of FII's initial investment in Keebler, through
February 3, 1998, FII accounted for its investment in Keebler using the equity
method of accounting.
As a result of Flowers' change in fiscal year end, the Company's quarterly
reporting periods for fiscal 1998 were as follows: first quarter ended April 25,
1998, second quarter ended July 18, 1998, third quarter ended October 10, 1998,
and fourth quarter and fiscal year ended January 2, 1999 (the Saturday nearest
December 31). Unless stated otherwise, all references to (i) "fiscal 1996" shall
mean Flowers' full fiscal year ended June 29, 1996; (ii) "fiscal 1997" shall
mean Flowers' full fiscal year ended June 28, 1997; (iii) "twenty-
13
<PAGE> 17
seven week transition period ended January 3, 1998" shall mean Flowers'
twenty-seven week transition period from June 29, 1997 through January 3, 1998;
and (iv) "fiscal 1998" shall mean Flowers' full fiscal year ended January 2,
1999. For purposes of this analysis and in light of the change in fiscal year
end discussed above, the Company has compared fiscal 1998 with the corresponding
financial information for the fifty-two weeks ended January 3, 1998 which has
been developed solely for comparative purposes, and has compared fiscal 1997
with fiscal 1996.
During the fourth quarter of fiscal 1998, the Board of Directors of the
Company approved a plan to realign production and distribution at Flowers
Bakeries and Mrs. Smith's Bakeries in order to enhance efficiency. The Company
recorded a pre-tax non-recurring charge of $68.3 million ($32.2 million, $32.3
million and $3.8 million for Flowers Bakeries, Mrs. Smith's Bakeries and
Keebler, respectively), or $.45 per share after-tax. The charge includes $57.5
million of noncash asset impairments, $4.7 million of severance costs and $6.1
million of other related exit costs. The plan involves closing six less
efficient facilities of Flowers Bakeries and Mrs. Smith's Bakeries and shifting
their production and distribution to highly automated facilities.
As a direct result of management's decision to implement production line
rationalizations, asset impairments were recorded to write-down the closed
facilities to net realizable value, less cost to sell, based on management's
estimate of fair value, and the related cost in excess of net tangible assets.
Also, as part of this plan, asset impairments were recorded to write-off certain
duplicate machinery and equipment to be disposed of. Severance costs provide for
the reduction of 695 employees, and, as of January 2, 1999, 405 employees had
been severed. Ongoing costs, including, but not limited to, guard service,
utilities and property taxes, of the closed facilities until time of disposal,
primarily represent the other exit costs. Management anticipates that all
significant actions related to the plan will be completed as of the end of
fiscal 1999.
Additionally, the Company recorded an extraordinary loss of $.9 million,
net of tax benefit and minority interest, related to the early extinguishment of
debt, and $3.1 million, net of tax benefit, for a cumulative effect of a change
in accounting principle related to the early adoption of Statement of Position
98-5 -- "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
The effect of the above charges on fiscal 1998 net income was $.49 per
share. Excluding the unusual charges, net income for fiscal 1998 was $.92 per
share. Management anticipates the charges will result in operating savings of
approximately $40.0 million over the next five years, partially offset by an
expected increase in the Company's effective tax rate.
The Company's results of operations, expressed as a percentage of sales,
are set forth below:
<TABLE>
<CAPTION>
FOR THE 52 WEEKS ENDED
----------------------------------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
---------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales........................................ 100.00% 100.00% 100.00% 100.00%
Gross margin................................. 54.92 47.61 48.34 46.04
Selling, marketing and administrative
expenses................................... 43.54 38.26 37.31 37.48
Depreciation and amortization................ 3.41 3.42 3.19 3.27
Non-recurring charge......................... 1.81
Interest expense, net........................ 1.82 1.60 1.74 1.04
Income before income taxes, investment in
unconsolidated affiliate, minority
interest, extraordinary loss and cumulative
effect of changes in accounting
principles................................. 4.34 4.34 6.09 3.86
Income taxes................................. 1.97 1.65 2.30 1.45
Net income................................... 1.12% 3.72% 4.32% 2.46%
</TABLE>
14
<PAGE> 18
FIFTY-TWO WEEKS ENDED JANUARY 2, 1999 COMPARED TO FIFTY-TWO WEEKS ENDED JANUARY
3, 1998
Sales. For fiscal 1998, sales were $3,776.5 million or 162% higher than
sales for the comparable period in the prior year, which were $1,440.1 million.
A majority of the increase was due to the consolidation of Keebler's sales,
following the Keebler Acquisition, in the amount of $2,226.5 million. Sales at
Flowers Bakeries and Mrs. Smith's Bakeries increased $46.6 million, or 5%, and
$63.1 million, or 12%, respectively, for the comparable period in the prior
year. Of the increase at Flowers Bakeries, 3%, 1% and 1% were due to an
acquisition, increased volume, and pricing and product mix, respectively. Of the
increase at Mrs. Smith's Bakeries, 8%, 3% and 1% were due to the acquisition of
two businesses, increased volume, and pricing and product mix, respectively.
Gross Margin. Gross margin for fiscal 1998 was $2,073.9 million, or 202%
higher than the gross margin for the comparable period in the prior year, which
was $685.6 million. The Company's gross margin for fiscal 1998 includes gross
margin of $1,319.0 million attributable to Keebler, a factor not present in the
prior year. Flowers Bakeries' gross margin improved to 54% of sales in fiscal
1998 as compared to 52% of sales for the comparable period in the prior year.
Improved volume, production efficiencies and lower ingredient costs led to the
increase. Mrs. Smith's Bakeries' gross margin improved to 41% of sales in fiscal
1998 as compared to 37% of sales for the comparable period in the prior year.
This increase was due primarily to increased volume, cost control and greater
plant efficiencies.
Selling, Marketing and Administrative Expenses. For fiscal 1998, selling,
marketing and administrative expenses were $1,644.4 million, or 198% higher than
its expenses of $551.0 million for the comparable period in the prior year. The
increase is due primarily to the inclusion of $1,053.8 million of such expenses
attributable to Keebler. Selling, marketing and administrative expenses
increased at Flowers Bakeries primarily due to increased sales volume and
expenses related to a project to improve its information systems. Mrs. Smith's
Bakeries' selling, marketing and administrative expenses increased primarily due
to increased sales volume and logistics costs related to the closing of its
production facility in Pottstown, Pennsylvania and the shifting of its
production to other Mrs. Smith's Bakeries' facilities.
Depreciation and Amortization. Depreciation and amortization expense was
$128.8 million for fiscal 1998, an increase of 162% over the corresponding
period in the prior year, which was $49.2 million. The increase was primarily a
result of the consolidation of Keebler, increased goodwill amortization relating
to the Keebler Acquisition and increased depreciation associated with capital
improvements.
Non-Recurring Charge. See discussion under the heading "Matters Affecting
Analysis" above.
Interest Expense. For fiscal 1998, interest expense was $68.7 million, an
increase of 199% over the corresponding period in the prior year, which was
$23.0 million. Approximately $26.5 million in interest expense was attributable
to the consolidation of Keebler, with the remaining increase due to borrowings
used to fund the Keebler Acquisition.
Income Before Income Taxes. Income before income taxes was $163.7 million
for fiscal 1998, an increase of 162% over the $62.5 million reported for the
comparable period in the prior year. Approximately $169.5 million of the
increase was the result of the consolidation of Keebler, which was partially
offset by the $68.3 million non-recurring charge, increased goodwill and
interest expense, all of which are discussed above.
Income Taxes. Income taxes for fiscal 1998 were $74.4 million, an increase
of 213% over the comparable period in the prior year, which were $23.8 million.
This increase is due primarily to the inclusion of $73.0 million of income taxes
attributable to the consolidation of Keebler, partially offset by a reduction of
income tax expense related to the non-recurring charge. Additionally, the
effective tax rate increased to 45% from 38% due primarily to increased
nondeductible goodwill amortization.
Net Income. Net income for fiscal 1998 was $41.9 million, a decrease of
22%, as compared to $53.6 million reported in the prior year. The decrease was
attributable to the non-recurring charge, an extraordinary loss due to early
extinguishment of debt and a cumulative effect of a change in accounting
principle relating to the Company's adoption of SOP 98-5. These decreases were
partially offset by the consolidation of Keebler, which contributed $52.4
million, net of minority interest.
15
<PAGE> 19
FIFTY-TWO WEEKS ENDED JUNE 28, 1997 COMPARED TO FIFTY-TWO WEEKS ENDED JUNE 29,
1996
Sales. Sales for fiscal 1997 were $1,441.3 million, or 15% higher than
sales of $1,250.6 million for fiscal 1996. Sales at Flowers Bakeries increased
8% to $904.6 million from $841.2 million, primarily as a result of an
acquisition during the second quarter of fiscal 1997 and increased volume. Sales
at Mrs. Smith's Bakeries increased 32% to $536.7 million from $405.3 million as
a result of the acquisition of Mrs. Smith's Inc. in Pottstown, Pennsylvania
during the fourth quarter of fiscal 1996 and increased volume at its existing
production facilities.
Gross Margin. Gross margin for fiscal 1997 was $696.7 million, an increase
of 21% over $575.8 million reported during fiscal 1996. This increase was
primarily due to a $43.2 million gain on the sale of Flowers Bakeries'
distributor notes receivable, which occurred during the first quarter of fiscal
1997, increased sales as discussed above and decreased ingredient and packaging
costs during the fourth quarter of fiscal 1997.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses increased by 15% to $537.8 million for fiscal 1997 from
$468.7 million for fiscal 1996. The increase was due primarily to increased
sales volume and increased advertising and promotional expenditures,
particularly at Mrs. Smith's Bakeries. Expenses as a percentage of sales
remained relatively constant with the prior 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 1997 from $40.8 million for fiscal
1996. This increase is primarily due to increased capital spending at both
Flowers Bakeries and Mrs. Smith's Bakeries and the amortization of trademarks
and goodwill at Mrs. Smith's Bakeries.
Interest Expense. Interest expense for fiscal 1997 increased by 93% to
$25.1 million from $13.0 million in fiscal 1996. The increase was attributable
to higher overall borrowings to partially fund capital spending, to finance
frozen inventory at Mrs. Smith's Bakeries and to finance FII's initial
investment in Keebler. Interest expense for fiscal 1997 also reflects the
payment of $2.5 million for an Internal Revenue Service settlement and a higher
average interest rate as compared to the prior year.
Income Before Income Taxes. Fiscal 1997 income before income taxes and
investment in unconsolidated affiliate increased by 82% to $87.8 million from
$48.3 million for fiscal 1996. This increase was due primarily to the gain on
the sale of Flowers Bakeries' distributor notes receivable.
Income Taxes. Income taxes for fiscal 1997 increased to $33.2 million from
$18.2 million for fiscal 1996 due to increased pre-tax income in fiscal 1997.
The effective tax rate was 37.8% in fiscal 1997 as compared to 37.6% in fiscal
1996.
Net Income. For fiscal 1997, net income increased by 102% to $62.3 million
from $30.8 million for fiscal 1996. This increase was due primarily to the
inclusion of the after-tax income from FII's initial investment in Keebler of
$7.7 million in fiscal 1997 as compared to $.6 million in fiscal 1996, as well
as the gain on the sale of Flowers Bakeries' distributor notes receivable and
the other factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for fiscal 1998 was $200.6
million. Positive net cash flow of $84.4 million was provided from net income
for the year. Net cash flows provided by operations were negatively impacted by
the build-up of inventory at Mrs. Smith's Bakeries as a result of the production
transition from its Pottstown, Pennsylvania facility, which was closed during
the fourth quarter of fiscal 1998, to other Mrs. Smith's Bakeries' facilities.
An increase in trade accounts receivable due to the just-completed high-selling
holiday period, also had a negative impact. The timing of payments of other
liabilities had a positive impact on cash flows.
Net cash disbursed for investing activities for fiscal 1998 of $897.9
million primarily consisted of $285.2 million for the Keebler Acquisition,
$444.8 million for the acquisition of President by Keebler and capital
expenditures of $140.3 million. The capital expenditures, primarily consisting
of $38.6 million at Flowers
16
<PAGE> 20
Bakeries, $34.7 million at Mrs. Smith's Bakeries and $66.8 million at Keebler,
were made principally to update and enhance production and distribution
facilities.
For fiscal 1998, net cash provided by financing activities of $750.5
million resulted from FII's issuance of $200.0 million of 7.15% debentures due
April 15, 2028 and the issuance of 9,000,000 shares of common stock in a public
offering at $22 per share. These transactions were consummated on April 27,
1998. Debt incurred by Keebler to finance the acquisition of President and the
exercise of Keebler warrants by a former shareholder, concurrent with Keebler's
initial public offering on February 3, 1998, also contributed to net cash
provided by financing activities. Dividends paid of $46.1 million partially
offset these cash inflows.
At January 2, 1999, cash and cash equivalents were $57.0 million. As
described in Note 4 of Notes to Consolidated Financial Statements, long-term
debt was $1,039.0 million and current maturities of long-term debt were $195.3
million at January 2, 1999. In connection with the consolidation of Keebler, the
Company has recorded Keebler's indebtedness of $654.5 million as of January 2,
1999; however, Flowers has not guaranteed such indebtedness and it is to be
repaid solely from the cash flows of Keebler. The Company believes that, in
light of its current cash position, its cash flow from operating activities and
its credit arrangements, it can adequately meet presently foreseeable financing
requirements.
Cash dividends have grown at a compounded annual rate of 6% since 1993,
increasing from an annual payout of $.3356 in calendar 1993 to $.4750 in
calendar 1998.
FII owns a majority of the outstanding stock of Keebler, and therefore is
consolidating Keebler for financial reporting purposes. FII is limited in its
ability to access the cash flows of Keebler to support its other operations due
to the fact that Keebler is not wholly owned by FII and due to restrictions on
the payment of dividends in Keebler's existing credit facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 -- "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new rules for
accounting for derivative instruments and hedging activities. The statement
requires that all derivatives be recognized as either assets or liabilities in
the balance sheet and that the instruments be measured at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. This standard is effective
for the Company's fiscal year 2000. The Company is currently assessing the
effects SFAS 133 will have on its financial position and results of operations.
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 first quarter and second half of the calendar
year. The sales bias towards the first quarter is due primarily to Keebler being
the leading supplier of Girl Scout cookies and the sales bias toward the second
half of the year is primarily 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 1998, Mrs. Smith's Bakeries commenced a program entitled
"Operation 365" to promote increased pie consumption during the remainder of the
year.
YEAR 2000 CONVERSION
The Company utilizes a number of computer software programs and operating
systems throughout its organization, including applications used in order
processing, shipping and receiving, accounts payable and receivable processing,
financial reporting and in various other administrative functions. The Company
recognizes the need to make every effort to ensure that its operations will not
be adversely impacted by applications and processing issues related to the
upcoming calendar year 2000 (the "Year 2000 Issue"). The Year 2000 Issue is the
result of computer programs that have been written to recognize two-digit,
rather than
17
<PAGE> 21
four-digit, date codes to define the applicable year. To the extent that the
Company's software applications contain source codes that are unable to
appropriately interpret a code using "00" as the upcoming year 2000 rather than
1900, the Company could experience system failures or miscalculations that could
disrupt operations and cause a temporary inability to process transactions, send
and process invoices or engage in similar normal business activities.
Based on its ongoing assessment of its systems, the Company has determined
that it will be required to modify or replace significant portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company presently believes that with
modifications to its existing software and certain conversions to new software,
the Year 2000 Issue will not present significant operational problems for its
computer systems. In addition, the Company's systems and operations are
dependent, in part, on interaction with systems operated or provided by vendors,
customers or other third parties, and the Company is currently surveying those
parties about their progress in identifying and addressing problems that their
computer systems may face in connection with the Year 2000 Issue. The Company
believes that it has little or no exposure for contingencies related to the Year
2000 Issue for the products it has sold.
The Company's plan to resolve the Year 2000 Issue (the "Plan") identifies
exposure with respect to the Company's three operating segments, Flowers
Bakeries, Mrs. Smith's Bakeries and Keebler, in three different areas:
information technology, operating equipment with embedded chips or software and
third-party vendors. In addition, the Plan involves the following four phases
for each of the potential exposure items: assessment, remediation, testing and
implementation. The discussion set forth below will present a current assessment
of these areas for each of the Company's operating segments.
Flowers Bakeries
With respect to information technology, Flowers Bakeries has completed its
assessment of this risk area. This assessment indicated that most of Flowers
Bakeries' significant information technology systems could be affected,
particularly the general ledger, billing, payables, inventory and ordering
systems. As of February 1999, Flowers Bakeries is 100% complete on the
remediation phase of its critical systems. Flowers Bakeries has begun the
testing and implementation phases. These phases run concurrently for different
systems. As of February 1999, Flowers Bakeries has completed 50% of its testing.
Completion of the testing phase for all significant systems is expected by June
1999, with all remediation and implementation of systems expected to be fully
tested and operational by August 1999.
Flowers Bakeries has also engaged a consultant (the "Consultant") to
inventory and assess all of its critical computer hardware. The inventory is
expected to be completed by April 1999 and non-compliant systems will either be
remediated or replaced. The assessment of the operating equipment with embedded
chips or software is 75% complete as of February 1999. Flowers Bakeries has
contracted with the Consultant for the purposes of conducting the inventory and
providing assistance with the remediation effort. The expected completion date
of remediation is June 1999. Testing of this equipment is more difficult than
the testing of information technology systems; as a result, Flowers Bakeries has
completed approximately 2% of the testing of remediation of its operating
equipment. Once testing is complete, the operating equipment should be
compliant. Testing and implementation of affected equipment is expected to be
complete by August 1999.
The assessment of third-party vendors or customers and their exposure to
the Year 2000 Issue is 50% complete for systems that directly interface with
Flowers Bakeries as of February 1999. Flowers Bakeries expects to complete
surveying all third parties by August 1999. Flowers Bakeries expects to complete
the testing phase for systems interface work by August 1999. Flowers Bakeries
has queried its significant suppliers that do not share information systems with
Flowers Bakeries (external agents). To date, Flowers Bakeries is not aware of
any external agent with a Year 2000 Issue that would materially impact its
results of operations, liquidity or capital resources. However, Flowers Bakeries
has no means of ensuring that external agents will be Year 2000 compliant. The
inability of external agents to complete their Year 2000 resolution processing
in a timely fashion could materially impact Flowers Bakeries. The effect of
noncompliance by external agents is
18
<PAGE> 22
not determinable by Flowers Bakeries. Detailed contingency plans are being put
in place in an effort to ensure Flowers Bakeries is prepared to handle any
possible interruptions to production processing.
In addition to the assessments discussed above, a different consulting firm
is reviewing the adequacy, completeness and feasibility of Flowers Bakeries'
programs to address the Year 2000 Issue. The consulting firm continues to
provide recommendations that Flowers Bakeries is constantly assessing regarding
improvements to its program and monitors Flowers Bakeries' execution of
remediation efforts.
Mrs. Smith's Bakeries
With respect to information technology, Mrs. Smith's Bakeries has completed
its assessment of this risk area. This assessment indicated that most of Mrs.
Smith's Bakeries' significant information technology systems would not be
affected. Mrs. Smith's Bakeries has recently completed a four-year project of
installing a new enterprise-wide information technology system. This system is
Year 2000 compliant and is responsible for running over 90% of the company's
business processes.
The assessment and remediation of the operating equipment with embedded
chips or software is 90% complete. The expected completion date of remediation
is April 1999. Mrs. Smith's Bakeries has completed approximately 75% of the
testing of remediation of its operating equipment. Once testing is complete, the
operating equipment should be compliant. Testing and implementation of affected
equipment is expected to be complete by April 1999.
The assessment of third-party vendors or customers and their exposure to
the Year 2000 Issue is 50% complete for systems that directly interface with
Mrs. Smith's Bakeries and 80% complete for all other material exposure. Mrs.
Smith's Bakeries completed surveying all third parties in January 1999. Mrs.
Smith's Bakeries has completed remediation efforts on the systems and is 50%
complete with the testing and implementation phases. Mrs. Smith's Bakeries
expects to complete the testing phase for systems interface work by March 1999.
Mrs. Smith's Bakeries has queried its significant suppliers that do not share
information systems with Mrs. Smith's Bakeries (external agents). To date, Mrs.
Smith's Bakeries is not aware of any external agent with a Year 2000 Issue that
would materially impact its results of operations, liquidity or capital
resources. However, Mrs. Smith's Bakeries has no means of ensuring that external
agents will be Year 2000 compliant. The inability of external agents to complete
their Year 2000 resolution processing in a timely fashion could materially
impact Mrs. Smith's Bakeries. The effect of noncompliance by external agents is
not determinable by Mrs. Smith's Bakeries.
Keebler
Keebler has completed a comprehensive review of its computer systems and
non-information technology systems to identify potential Year 2000 issues. As
Keebler has implemented the SAP R/3 management information system and
Manugistics software, both of which were developed/purchased as Year 2000
compliant, management does not anticipate that the impact of Year 2000 issues on
its business will be material. Additionally, secondary information systems,
which are not material to Keebler's ability to forecast, manufacture or deliver
product, have been reviewed and Year 2000 issues identified. Currently, Keebler
is in the process of correcting or upgrading these systems and intends to be
Year 2000 compliant on all critical systems by mid-1999.
Keebler has submitted a comprehensive questionnaire to its material vendors
and suppliers in an effort to verify that they will be Year 2000 compliant and
to identify any problem areas with these groups. Although the results of the
questionnaire indicated that material vendors and suppliers intend to be Year
2000 compliant before the end of 1999, they were not able to provide any
assurances. Currently, Keebler is in the process of developing a contingency
plan to address any potential Year 2000 failures caused by a third party. While
there is no assurance that third parties will convert their systems in a timely
manner and that they will be compatible with Keebler's systems, management
believes these risks will be minimized due to the procedures related to third
parties discussed above and the development of a contingency plan.
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<PAGE> 23
Keebler completed a comprehensive review of President's computer systems
and non-information technology systems to identify potential Year 2000 issues
for this subsidiary. Many of the Year 2000 risks at President will be mitigated
through the implementation of the SAP R/3 management information system,
Manugistics software and Keebler's warehouse management system at the President
facilities. Management expects this implementation to be completed during fiscal
1999.
Based on the progress made to date in assessing its Year 2000 issues and
its compliance with Year 2000 issues related to primary business information
systems, Keebler does not foresee significant risks associated with its Year
2000 compliance at this time. As the plan is to address any significant risks
associated with Year 2000 issues prior to being affected by them, a
comprehensive contingency plan has not been developed, however, if a significant
risk related to Year 2000 compliance or a delay in the anticipated timeline for
compliance occurs, one will be developed as deemed necessary at that time.
The information presented above sets forth the steps Keebler has taken to
address Year 2000 issues. Keebler does not expect compliance with Year 2000
issues or the most reasonable likely worst case scenario and related contingency
plan to have a material impact on its business, results of operations or
financial condition.
Summary
The Company is utilizing both internal and external resources to reprogram,
or replace, and test its software for Year 2000 modifications. The total cost of
the Plan is estimated at $6 to $7 million and is being funded through operating
cash flow and expensed as incurred. To date, the Company has incurred
approximately $2.3 million in expenses related to the assessment of, and
preliminary efforts on, its Year 2000 modification projects, the development of
the plan for the purchase of new systems and system modifications.
The costs of the Plan and the time frame in which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. Specific factors that might result in
additional costs or time delays include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties. Based upon
the Company's current estimates, the Company does not anticipate that the cost
of compliance with the Year 2000 Issue will be material to its business,
financial condition or results of operations; however, there can be no assurance
that the Company's systems, or those of its vendors, customers or other third
parties, will be made Year 2000 compliant in a timely manner or that the impact
of the failure to achieve such compliance will not have a material adverse
effect on the Company's business, financial condition or results of operations.
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's compliance with the Year 2000 Issue on its primary
business information systems, the Company does not foresee significant risks
associated with its Year 2000 compliance at this time. As the Company plans to
address any significant Year 2000 issues prior to being affected by them, a
comprehensive contingency plan has not been developed. However, if a significant
risk related to Year 2000 compliance or a delay in the anticipated schedule for
compliance occurs, the Company will develop contingency plans as deemed
necessary at that time.
The discussion of the Company's efforts and management's expectations
relating to Year 2000 compliance are forward-looking statements. Readers are
cautioned that forward-looking statements contained herein should be read in
conjunction with the Company's disclosures under the heading "Forward-Looking
Statements" set forth elsewhere herein.
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made herein under the
captions "Business" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition," and elsewhere herein are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
20
<PAGE> 24
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to commodity price
and interest rate risks, primarily related to the purchase of raw materials and
packaging supplies and changes in interest rates. The Company manages its
exposure to these risks through the use of various financial instruments, none
of which are entered into for trading purposes. The Company has established
policies and procedures governing the use of financial instruments, specifically
as it relates to the type and volume of financial instruments entered into.
Financial instruments can only be used to hedge an economic exposure, and
speculation is prohibited. The Company's accounting policy related to financial
instruments is further described in Note 1 of Notes to Consolidated Financial
Statements.
Commodity Price Risk
The Company enters into commodity future and option contracts and swap
agreements for wheat and, to a lesser extent, other commodities in order to
provide a predictable and consistent commodity price, reducing the impact of
volatility in its raw material and packaging prices. A sensitivity analysis has
been prepared to estimate the Company's exposure to commodity price risk. Based
on the Company's derivative portfolio as of January 2, 1999, a hypothetical ten
percent adverse change in commodity prices under normal market conditions could
potentially have a $11.6 million effect on the fair value of the derivative
portfolio. The analysis disregards changes in the exposures inherent in the
underlying hedged item; however, the Company expects that any loss in fair value
of the portfolio would be substantially offset by increases in the fair value of
those hedged items.
Interest Rate Risk
The Company manages its exposure to interest rate risk primarily through
the use of a combination of fixed to floating rate debt, as well as interest
rate swap agreements, in order to reduce overall interest costs. Keebler has
entered into interest rate swap agreements on both its fixed and floating rate
debt. A sensitivity analysis has been prepared to estimate the Company's
exposure to interest rate risk. Based on the Company's outstanding debt and
related interest rate swap agreements as of January 2, 1999, a hypothetical ten
percent adverse change in interest rates under normal market conditions could
potentially result in a reduction of $7.6 million in the fair value. The
analysis disregards changes in the exposures inherent in the underlying hedged
item; however, the Company expects that any loss in fair value of the interest
rate swap agreements would be substantially offset by increases in the value of
those hedged items.
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
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<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers of the Registrant is incorporated herein
by reference from the Company's definitive proxy statement for the annual
meeting of shareholders on May 28, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation is incorporated herein by reference from the
Company's definitive proxy statement for the annual meeting of shareholders on
May 28, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management is
incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of shareholders on May 28, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions is incorporated herein by
reference from the Company's definitive proxy statement for the annual meeting
of shareholders on May 28, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
a. List of documents filed as part of this report
1. Financial Statements of the Registrant
Report of independent accountants
Consolidated statement of income for the fifty-two weeks ended January 2,
1999, the twenty-seven weeks ended January 3, 1998 and the fifty-two
weeks ended June 28, 1997 and June 29, 1996
Consolidated balance sheet at January 2, 1999, January 3, 1998 and June
28, 1997
Consolidated statement of changes in stockholders' equity for the
fifty-two weeks ended January 2, 1999, the twenty-seven weeks ended
January 3, 1998, and the fifty-two weeks ended June 28, 1997 and June
29, 1996
Consolidated statement of cash flows for the fifty-two weeks ended
January 2, 1999, the twenty-seven weeks ended January 3, 1998, and the
fifty-two weeks ended June 28, 1997 and June 29, 1996
Notes to consolidated financial statements
2. Financial Statement Schedules of the Registrant
Report of independent accountants on financial statement schedule
Schedule II Valuation and Qualifying Accounts -- for the fiscal year
ended January 2, 1999, the twenty-seven weeks ended January 3, 1998, and
fiscal years ended June 28, 1997 and June 29, 1996
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
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)
3.1 -- Third Restated Articles of Incorporation++
3.2 -- 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)
</TABLE>
22
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
4.1 -- Rights Agreement dated as of April 2, 1999 between Flowers
Industries, Inc. and First Union National Bank, as Rights
Agent (Incorporated by reference to the Company's
Registration Statement on Form 8-A filed April 2, 1999, File
No. 1-9787)
10.1 -- 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)*
10.2 -- First Amendment to the Flowers Industries, Inc. Annual
Executive Bonus Plan (Incorporated by reference to the
Company's Transition Report on Form 10-K for the fiscal year
ended January 3, 1998, File No. 1-9787)*
10.3 -- 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)*
10.4 -- 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)*
10.5 -- 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)*
10.6 -- 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)*
10.7 -- 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)*
10.8 -- Second Amendment to Flowers Industries, Inc. 1989 Executive
Stock Incentive Plan (Incorporated by reference to the
Company's Transition Report on Form 10-K for the fiscal year
ended January 3, 1998, File No. 1-9787)*
10.9 -- 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)*
10.10 -- Flowers Industries, Inc. Nonemployee Directors' Equity Plan
(Incorporated by reference to the Company's Transition
Report on Form 10-K for the fiscal year ended January 3,
1998, File
No. 1-9787)*
10.11 -- Form of Separation Agreement between the Company and certain
members of management of the Company*++
10.12 -- 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)
10.13 -- 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
(Incorporated by reference to the Company's Transition
Report on Form 10-K for the fiscal year ended January 3,
1998, File
No. 1-9787)
10.14 -- 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>
23
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
10.15 -- $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)
10.16 -- Indenture between Flowers Industries, Inc. and SunTrust
Bank, Atlanta, as Trustee++
10.17 -- 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 -- Consent of PricewaterhouseCoopers LLP, Independent
Accountants++
27 -- Financial Data Schedule++
99.1 -- Portions of the Annual Report on Form 10-K for the fiscal
year ended January 2, 1999 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 April 2, 1999, to report the
declaration of a dividend of one right per share of Common Stock to the
shareholders of record on April 2, 1999.
24
<PAGE> 28
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.
25
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 and 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 on this
26th day of March, 1999.
FLOWERS INDUSTRIES, INC.
<TABLE>
<S> <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, Vice Chairman of the Board Senior Vice President
Chairman of the Executive Committee and Chief Financial Officer
and Chief Executive 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 26, 1999
- -------------------------------------------------------- Chairman of the Executive
Amos R. McMullian Committee and Chief
Executive Officer
/s/ ROBERT P. CROZER Vice Chairman of the Board March 26, 1999
- --------------------------------------------------------
Robert P. Crozer
/s/ C. MARTIN WOOD III Senior Vice President and March 26, 1999
- -------------------------------------------------------- Chief Financial Officer and
C. Martin Wood III a Director
/s/ EDWARD L. BAKER Director March 26, 1999
- --------------------------------------------------------
Edward L. Baker
/s/ JOE E. BEVERLY Director March 26, 1999
- --------------------------------------------------------
Joe E. Beverly
/s/ FRANKLIN L. BURKE Director March 26, 1999
- --------------------------------------------------------
Franklin L. Burke
/s/ G. ANTHONY CAMPBELL General Counsel, Secretary March 26, 1999
- -------------------------------------------------------- and a Director
G. Anthony Campbell
Director
- --------------------------------------------------------
Langdon S. Flowers
/s/ JOSEPH L. LANIER, JR. Director March 26, 1999
- --------------------------------------------------------
Joseph L. Lanier, Jr.
/s/ J.V. SHIELDS, JR. Director March 26, 1999
- --------------------------------------------------------
J. V. Shields, Jr.
</TABLE>
26
<PAGE> 30
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Director
- --------------------------------------------------------
Heeth Varnedoe III
/s/ JIMMY M. WOODWARD Treasurer and Chief March 26, 1999
- -------------------------------------------------------- Accounting Officer
Jimmy M. Woodward
</TABLE>
27
<PAGE> 31
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent accountants........................... F-2
Consolidated statement of income for the fifty-two weeks
ended January 2, 1999, the twenty-seven weeks ended
January 3, 1998, and the fifty-two weeks ended June 28,
1997 and June 29, 1996.................................... F-3
Consolidated balance sheet at January 2, 1999, January 3,
1998 and June 28, 1997.................................... F-4
Consolidated statement of changes in stockholders' equity
for the fifty-two weeks ended January 2, 1999, the
twenty-seven weeks ended January 3, 1998, and the
fifty-two weeks ended June 28, 1997 and June 29, 1996..... F-5
Consolidated statement of cash flows for the fifty-two weeks
ended January 2, 1999, the twenty-seven weeks ended
January 3, 1998, and the fifty-two weeks ended June 28,
1997 and June 29, 1996.................................... F-6
Notes to consolidated financial statements.................. F-8
</TABLE>
F-1
<PAGE> 32
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 (the "Company") at January 2,
1999, January 3, 1998, and June 28, 1997, and the results of their operations
and their cash flows for the year ended January 2, 1999, for the twenty-seven
week period ended January 3, 1998, and for each of the two 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 discussed in Note 1 of the Notes to Consolidated Financial Statements,
during the year ended January 2, 1999, the Company changed its method of
accounting for start-up costs and organizational costs. In addition, during the
twenty-seven week period ended January 3, 1998, the Company changed its method
of accounting for business process reengineering costs and the measurement date
used in its accounting for pensions.
/s/ PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
February 2, 1999
F-2
<PAGE> 33
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED -----------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
----------- ----------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales.................................................. $3,776,461 $786,539 $1,441,253 $1,250,584
Gain on sale of distributor notes receivable........... 43,244
---------- -------- ---------- ----------
3,776,461 786,539 1,484,497 1,250,584
---------- -------- ---------- ----------
Materials, supplies, labor and other production
costs................................................ 1,702,581 418,926 787,799 674,762
Selling, marketing and administrative expenses......... 1,644,413 303,868 537,825 468,695
Depreciation and amortization.......................... 128,765 26,930 45,970 40,848
Non-recurring charge................................... 68,313
---------- -------- ---------- ----------
Income from operations................................. 232,389 36,815 112,903 66,279
Interest expense, net.................................. 68,725 11,796 25,109 13,004
Accrual for litigation settlement...................... 4,935
---------- -------- ---------- ----------
Income before income taxes, income from investment in
unconsolidated affiliate, minority interest,
extraordinary loss and cumulative effect of changes
in accounting principles............................. 163,664 25,019 87,794 48,340
Income taxes........................................... 74,391 9,632 33,191 18,185
Income from investment in unconsolidated affiliate..... 18,061 7,721 613
---------- -------- ---------- ----------
Income before minority interest, extraordinary loss and
cumulative effect of changes in accounting
principles........................................... 89,273 33,448 62,324 30,768
Minority interest...................................... (43,305)
---------- -------- ---------- ----------
Income before extraordinary loss and cumulative effect
of changes in accounting principles.................. 45,968 33,448 62,324 30,768
Extraordinary loss due to early extinguishment of debt,
net of tax benefit and minority interest............. (938)
Cumulative effect of changes in accounting principles,
net of tax benefit................................... (3,131) (9,888)
---------- -------- ---------- ----------
Net income.................................... $ 41,899 $ 23,560 $ 62,324 $ 30,768
========== ======== ========== ==========
Net Income Per Common Share:
Basic --
Income before extraordinary loss and cumulative
effect of changes in accounting principles....... $ .47 $ .38 $ .71 $ .35
Extraordinary loss due to early extinguishment of
debt, net of tax benefit and minority interest... (.01)
Cumulative effect of changes in accounting
principles, net of tax benefit................... (.03) (.11)
---------- -------- ---------- ----------
Net income per common share........................ $ .43 $ .27 $ .71 $ .35
========== ======== ========== ==========
Weighted average shares outstanding................ 96,393 88,368 88,000 86,933
========== ======== ========== ==========
Diluted --
Income before extraordinary loss and cumulative
effect of changes in accounting principles....... $ .47 $ .38 $ .71 $ .35
Extraordinary loss due to early extinguishment of
debt, net of tax benefit and minority interest... (.01)
Cumulative effect of changes in accounting
principles, net of tax benefit................... (.03) (.11)
---------- -------- ---------- ----------
Net income per common share........................ $ .43 $ .27 $ .71 $ .35
========== ======== ========== ==========
Weighted average shares outstanding................ 96,801 88,773 88,401 87,211
========== ======== ========== ==========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-3
<PAGE> 34
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997
--------------- --------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 56,965 $ 3,866 $ 31,080
Accounts and notes receivable, net......................... 268,084 118,147 113,628
Inventories, net:
Raw materials............................................ 54,739 27,310 25,479
Packaging materials...................................... 27,056 12,648 12,500
Finished goods........................................... 207,620 44,650 47,314
Other.................................................... 8,178 4,731 3,310
---------- --------- ---------
297,593 89,339 88,603
---------- --------- ---------
Deferred income taxes...................................... 76,327 16,024 14,421
Other...................................................... 84,276 37,886 35,123
---------- --------- ---------
783,245 265,262 282,855
---------- --------- ---------
Property, Plant and Equipment:
Land....................................................... 39,149 20,388 20,692
Buildings.................................................. 350,067 208,179 206,469
Machinery and equipment.................................... 816,495 443,739 446,016
Furniture, fixtures and transportation equipment........... 116,219 28,095 24,774
Construction in progress................................... 96,288 46,262 49,062
---------- --------- ---------
1,418,218 746,663 747,013
Less: accumulated depreciation............................. (430,516) (308,342) (299,014)
---------- --------- ---------
987,702 438,321 447,999
---------- --------- ---------
Other Assets:
Investment in unconsolidated affiliate..................... 100,663 77,071
Other...................................................... 86,510 17,917 21,809
---------- --------- ---------
86,510 118,580 98,880
---------- --------- ---------
Cost in Excess of Net Tangible Assets:
Cost in excess of net tangible assets...................... 1,033,632 80,586 70,939
Less: accumulated amortization............................. (30,189) (3,869) (2,486)
---------- --------- ---------
1,003,443 76,717 68,453
---------- --------- ---------
$2,860,900 $ 898,880 $ 898,187
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Commercial paper........................................... $ 74,870 $ 53,506 $ 40,792
Current maturities of long-term debt....................... 120,479 4,232 9,233
Accounts payable........................................... 227,749 72,311 78,451
Income taxes............................................... 220
Facility closing costs and severance....................... 23,670 4,812 577
Other accrued liabilities.................................. 314,270 67,109 78,243
---------- --------- ---------
761,038 201,970 207,516
---------- --------- ---------
Long-Term Debt.............................................. 1,038,998 276,211 275,247
---------- --------- ---------
Other Liabilities:
Deferred income taxes...................................... 182,244 39,686 38,886
Postretirement/postemployment obligations.................. 63,754
Facility closing costs and severance....................... 41,331 30,141 34,953
Other...................................................... 52,915 2,305 1,573
---------- --------- ---------
340,244 72,132 75,412
---------- --------- ---------
Commitments and Contingencies...............................
---------- --------- ---------
Minority Interest........................................... 147,659
---------- --------- ---------
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 100,202,414, 88,636,089 and 88,636,089
shares, respectively..................................... 62,627 55,398 55,398
Capital in excess of par value............................. 274,255 45,200 43,147
Retained earnings.......................................... 262,531 266,734 260,094
Common stock in treasury, 381,366, 207,670 and 563,076
shares, respectively..................................... (6,762) (2,452) (6,567)
Stock compensation related adjustments..................... (19,690) (16,313) (12,060)
---------- --------- ---------
572,961 348,567 340,012
---------- --------- ---------
$2,860,900 $ 898,880 $ 898,187
========== ========= =========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-4
<PAGE> 35
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- TREASURY STOCK STOCK
NUMBER OF CAPITAL IN ---------------------- COMPENSATION
SHARES EXCESS OF RETAINED NUMBER OF RELATED
ISSUED PAR VALUE PAR VALUE EARNINGS SHARES COST ADJUSTMENTS
----------- --------- ---------- -------- ----------- -------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Stock issued for acquisitions......... 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 year............... 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)
Common stock offering................. 9,000,000 5,625 182,305
Stock issued for acquisition.......... 2,000,000 1,250 38,750
Exercise of employee stock options.... 225,000 141 2,797 (61,424) (2,419)
Exercise of Equity Incentive Award.... 452 (44,263) (982) 524
Purchase of treasury stock............ (24,414) (532)
Net income for the year............... 41,899
Adjustment for Keebler treasury stock
transactions........................ (3,677)
Stock issued into escrow in connection
with Restricted Stock Award......... 345,973 216 8,653 (8,869)
Restricted Stock Award Reversions..... (4,648) (3) (225) (43,595) (377) 513
Amortization of Restricted Stock Award
and Equity Incentive Award.......... 4,455
Dividends paid -- $.4750 per common
share............................... (46,102)
----------- ------- -------- -------- ----------- -------- --------
Balances at January 2, 1999........... 100,202,414 $62,627 $274,255 $262,531 (381,366) $ (6,762) $(19,690)
=========== ======= ======== ======== =========== ======== ========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-5
<PAGE> 36
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED ----------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
----------- ----------- --------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows provided by operating activities:
Net income....................................... $ 41,899 $ 23,560 $ 62,324 $ 30,768
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest.............................. 42,537
Income from investment in unconsolidated
affiliate................................... (18,061) (7,721) (613)
Depreciation and amortization.................. 128,765 26,930 45,970 40,848
Deferred income taxes.......................... (1,504) (803) 1,506 3,494
Gain on sale of distributor notes receivable... (43,244)
Non-recurring charge........................... 68,313
Loss due to early extinguishment of debt....... 1,706
Cumulative effect of changes in accounting
principles.................................. 3,131 9,888
Other.......................................... (1,486) (4,111)
Changes in assets and liabilities, net of
acquisitions:
Accounts and notes receivable, net............. (10,773) (2,282) 7,863 (17,742)
Inventories, net............................... (35,828) (413) (36,144) (12,821)
Other assets................................... (53,486) (1,495) (2,242) (1,650)
Distributor notes receivable................... 65,954
Accounts payable and other accrued
liabilities................................. 27,076 (16,658) (13,199) 21,186
Facility closing costs and severance........... (9,798) (577) (1,606)
--------- -------- -------- ---------
Net cash provided by operating activities........ 200,552 20,089 79,461 59,359
--------- -------- -------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment...... (140,275) (32,857) (77,510) (75,542)
Investment in unconsolidated affiliate......... (61,352)
Acquisition of majority interest in Keebler.... (285,203)
Acquisition of President by Keebler............ (444,818)
Acquisition of other businesses, net of
divestitures................................ (28,992) (5,532) 617 (26,884)
Other.......................................... 1,378 2,145 63 (6,485)
--------- -------- -------- ---------
Net cash disbursed for investing activities...... (897,910) (36,244) (76,830) (170,263)
--------- -------- -------- ---------
Cash flows from financing activities:
Common stock offering proceeds, net of
underwriters discount and offering costs.... 187,930
Dividends paid................................. (46,102) (19,620) (36,299) (33,344)
Treasury stock purchases....................... (8,059) (117) (289) (1,303)
Stock compensation and warrants exercised...... 20,744
Debentures proceeds............................ 199,417
Debentures issuance costs...................... (1,750)
Increase in commercial paper................... 21,364 7,713 40,792
Increase in long-term debt..................... 376,913 965 (794) 138,754
--------- -------- -------- ---------
Net cash provided by (disbursed for) financing
activities..................................... 750,457 (11,059) 3,410 104,107
--------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... 53,099 (27,214) 6,041 (6,797)
Cash and cash equivalents at beginning of
period......................................... 3,866 31,080 25,039 31,836
--------- -------- -------- ---------
Cash and cash equivalents at end of period....... $ 56,965 $ 3,866 $ 31,080 $ 25,039
========= ======== ======== =========
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-6
<PAGE> 37
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED ----------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
----------- ----------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Schedule of noncash investing and financing
activities:
Stock compensation transactions................. $20,431 $ 6,355 $ 9,263 $20,633
Stock issued for acquisition.................... 40,000 4,000 1,299
Note payable issued in acquisition of
business..................................... 15,000
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized......... $62,982 $11,878 $25,955 $ 8,582
Income taxes................................. 87,063 10,867 32,729 16,748
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
F-7
<PAGE> 38
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEFINITIONS
As used in this filing, unless the context otherwise indicates, (i) "FII"
means Flowers Industries, Inc., the publicly traded holding company, which owns
all of the outstanding common stock of Flowers Bakeries, Inc. ("Flowers
Bakeries") and Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a
majority of the outstanding common stock of Keebler Foods Company; (ii)
"Keebler" means Keebler Foods Company and its consolidated subsidiaries; (iii)
"Flowers" means FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs.
Smith's Bakeries, and their respective subsidiaries, excluding Keebler, and (iv)
the "Company" means Flowers and its consolidated, majority-owned subsidiary,
Keebler, collectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company.
As further described in Note 2, FII purchased an additional 11.5% of the common
stock of Keebler on February 3, 1998 giving FII a majority ownership position in
Keebler of approximately 55%. As a result, all amounts included herein as of
January 2, 1999 and for the fifty-two weeks then ended, present Keebler with
Flowers on a consolidated basis. All amounts included herein related to prior
periods present FII's investment in Keebler under the equity method.
Intercompany accounts and transactions are eliminated in consolidation.
CHANGE IN FISCAL YEAR END
In January 1998, Flowers 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 1996" shall mean Flowers' full fiscal year ended
June 29, 1996; (ii) "fiscal 1997" shall mean Flowers' full fiscal year ended
June 28, 1997; (iii) "twenty-seven week transition period ended January 3, 1998"
shall mean Flowers' twenty-seven week transition period from June 29, 1997
through January 3, 1998, and (iv) "fiscal 1998" shall mean the Company's full
fiscal year ended January 2, 1999. As a result, the Company has presented its
financial position as of January 2, 1999, January 3, 1998 and June 28, 1997 and
has presented its results of operations, cash flow and changes in stockholders'
equity for fiscal 1998, the twenty-seven week transition period ended January 3,
1998, fiscal 1997 and fiscal 1996. For comparative purposes the Company has
included unaudited condensed consolidated financial information of Flowers in
Note 15 for the fifty-two weeks ended January 3, 1998 and the twenty-seven weeks
ended January 4, 1997.
RECLASSIFICATIONS
During fiscal 1998, the Company changed its method of presenting the
statement of cash flows from the direct method to the indirect method. This and
certain other reclassifications of prior year information have been made to
conform with the current year presentation.
REVENUE RECOGNITION
Revenue from sale of product at Flowers Bakeries is recognized at the time
of shipment to its independent distributors, with a discount given the
distributor recorded as an expense in selling, marketing and administrative
expenses. Revenue from sale of product at Mrs. Smith's Bakeries is recognized at
the time of shipment to the customer, recorded net of customer discounts.
Revenue from sale of product at Keebler is recognized at the time of shipment to
the customer or independent distributor, recorded net of customer and
distributor discounts. Information regarding sales to significant customers is
described in Note 12.
F-8
<PAGE> 39
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables, current portion of notes
receivable and miscellaneous receivables. At January 2, 1999, allowances of $7.8
million were recorded.
CONCENTRATION OF CREDIT RISK
The Company grants credit to its customers and independent distributors,
who are primarily in the grocery and foodservice markets.
INVENTORIES
Inventories are carried at the lower of cost or market. Approximately 47%,
100% and 100% of inventories at January 2, 1999, January 3, 1998 and June 28,
1997, respectively, are valued using the first-in-first-out method, with
Keebler's finished goods inventory valued primarily under the last-in-first-out
("LIFO") method. There was no reserve required at January 2, 1999 to state the
inventory on a LIFO basis. At January 2, 1999, inventories are shown net of
allowances for slow-moving and aged inventory of $9.6 million.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into forward purchase commitments and derivative
financial instruments in order to manage its exposure to commodity price and
interest rate risk, and does not use them for trading purposes. As of January 2,
1999, the Company had entered into various arrangements that allow the Company
to engage in commodity price and interest rate agreements based on fixed and
floating commodity prices and interest rates, respectively.
The Company's primary raw materials are flour, sugar, shortening, fruits
and dairy products. Amounts payable or receivable under the commodity agreements
which qualify as hedges are recognized as deferred gains or losses when the
positions are closed, and are charged or credited to cost of sales as the
related raw materials are used in production. For fiscal 1998, the twenty-seven
week transition period ended January 3, 1998 and fiscal 1997, losses of $7.9
million, $.6 million and $1.9 million, respectively, were recorded. For fiscal
1996, a gain of $10.2 million was recorded. Gains and losses described above
were substantially offset by opposite movements in the cost of the underlying
hedged items. Gains and losses on agreements which do not qualify as hedges are
marked to market and recognized immediately as other income or expense. For
fiscal 1998, a gain of $1.1 million was recorded and for the twenty-seven week
transition period ended January 3, 1998, a loss of $.8 million was recorded. As
of January 2, 1999, deferred losses on closed contracts accounted for as hedges
were $3.8 million. At January 2, 1999, the Company had approximately $116.6
million of commitments outstanding related to commodity derivative financial
instruments.
Keebler uses interest rate swap agreements to effectively convert certain
fixed rate debt to a floating rate instrument and certain floating rate debt to
a fixed rate instrument. Amounts payable or receivable under the interest rate
swap agreements, calculated as the difference between the fixed and floating
rates multiplied by the notional amount, is recorded as an adjustment to
interest expense, in accordance with hedge accounting. Keebler's interest rate
swap agreements are further discussed in Note 4.
F-9
<PAGE> 40
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Buildings are depreciated over ten to forty years, machinery and equipment
over three to twenty-five years, and furniture, fixtures and transportation
equipment over three to fifteen years. Depreciation expense for fiscal 1998, for
the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and
fiscal 1996 was $108.5 million, $25.9 million, $44.8 million and $40.6 million,
respectively.
RESEARCH AND DEVELOPMENT
Activities related to new product development and major improvements to
existing products and processes are expensed as incurred. Amounts were $11.4
million for fiscal 1998, $.7 million for the twenty-seven week transition period
ended January 3, 1998, $1.0 million for fiscal 1997 and $.8 million for fiscal
1996.
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 $108.4 million for fiscal 1998,
$17.0 million for the twenty-seven week transition period ended January 3, 1998,
$19.1 million for fiscal 1997 and $15.1 million for fiscal 1996. There were no
deferred advertising costs at January 2, 1999, January 3, 1998 or June 28, 1997.
NOTES RECEIVABLE AND DEFERRED INCOME
Prior to September 1996, Flowers Bakeries sold its territories to
independent distributors and financed such sales with ten year notes. In
September 1996, Flowers Bakeries sold these notes, which totaled approximately
$66.0 million, to a financial institution. The proceeds were used to repay debt
outstanding at that time. Concurrently, approximately $43.2 million of deferred
pre-tax income was recognized by Flowers Bakeries during fiscal 1997. Subsequent
to September 1996, all distributor arrangements are made directly between the
distributor and a financial institution and, pursuant to an agreement, Flowers
Bakeries acts as the servicing agent for the financial institution and receives
a fee for these services.
COST IN EXCESS OF NET TANGIBLE ASSETS
<TABLE>
<CAPTION>
JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997
--------------- --------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Goodwill, net......................................... $ 748,456 $46,100 $39,261
Trademarks and trade names, net....................... 254,987 30,617 29,192
---------- ------- -------
$1,003,443 $76,717 $68,453
========== ======= =======
</TABLE>
Costs in excess of the net tangible assets acquired are, in the opinion of
management, attributable to long-lived intangibles having continuing value.
Goodwill related to the purchases of businesses are amortized over forty years
from the acquisition date using the straight-line method. Costs of purchased
trademark and trade name rights are amortized over the period of expected future
benefit, which is approximately ten to forty years. Amortization expense for
fiscal 1998, the twenty-seven week transition period ended January 3, 1998,
fiscal 1997 and fiscal 1996 was $19.6 million, $1.0 million, $1.1 million and
$.3 million, respectively.
F-10
<PAGE> 41
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TREASURY STOCK
FII records acquisitions of its common stock for treasury at cost.
Differences between proceeds for reissuances of treasury stock and average cost
are credited or charged to capital in excess of par value to the extent of prior
credits and thereafter to retained earnings.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No.
25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its plans. 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 vesting period.
NET INCOME PER COMMON SHARE
The Company computes net income per common share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128 -- "Earnings Per
Share." Basic net income per share is computed by dividing net income by
weighted average common shares outstanding for the period. Diluted net income
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.
CHANGES IN ACCOUNTING PRINCIPLES
On April 3, 1998, the Accounting Standards Executive Committee, a
subcommittee of the American Institute of Certified Public Accountants, issued
Statement of Position 98-5 -- "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organizational
costs to be expensed as incurred. As a result of adopting SOP 98-5, the Company
recorded a cumulative after-tax charge of $3.1 million, or $.03 per share.
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 transition period ended
January 3, 1998, Flowers recorded a cumulative after-tax charge of $8.8 million,
or $.10 per share, as a result of its adoption of this pronouncement.
The Company measures its pension plan assets three months prior to the
beginning of its fiscal year. As a result of Flowers changing its fiscal year,
the measurement date has changed from March 31 to September 30 for
Flowers-sponsored defined benefit plans. This change resulted in a cumulative
adjustment, net of tax, of $1.0 million, or $.01 per share, for the twenty-seven
week transition period ended January 3, 1998.
COMPREHENSIVE INCOME
As of January 4, 1998, the Company adopted SFAS No. 130 -- "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
statement had no impact on the Company's net earnings or stockholders' equity.
During fiscal 1998 and the prior periods presented, total comprehensive income
substantially equaled net income.
F-11
<PAGE> 42
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 gross, undiscounted cash flows associated with the asset
would be compared to the asset's carrying amount to determine if a write-down is
required.
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.
NOTE 2. ACQUISITIONS
ACQUISITION OF KEEBLER
On January 26, 1996, FII acquired, for $62.5 million, a 49.6% interest in
INFLO Holdings Corporation ("INFLO"), a newly formed corporation jointly owned
by FII and Artal Luxembourg Corporation S.A. On January 26, 1996, INFLO acquired
100% of Keebler Corporation for an aggregate consideration of $454.9 million
from United Biscuits (Holdings) plc. The acquisition of Keebler Corporation was
financed through the equity of INFLO and bank borrowings. FII accounted for its
investment in INFLO using the equity method of accounting from January 26, 1996
up until the time of the control purchase as further described below.
On June 4, 1996, Keebler Corporation acquired 100% of Sunshine Biscuits,
Inc. ("Sunshine") from G.F. Industries, Inc. ("GFI") for an aggregate purchase
price of $171.6 million. The acquisition was funded by Keebler Corporation's
working capital, bank financing and the issuance to GFI of $23.6 million of
INFLO common stock and warrants. As a result of this transaction, FII's interest
in INFLO was reduced to 45.2%.
On November 20, 1997, INFLO was merged into Keebler Corporation and
subsequently changed its name to Keebler Foods Company.
On February 3, 1998, FII acquired an additional 11.5% of the common stock
of Keebler, concurrent with Keebler's initial public offering, giving FII a
majority ownership position in Keebler of approximately 55% (the "Keebler
Acquisition"). The aggregate purchase price of the additional interest in
Keebler was approximately $312.4 million, including transaction expenses. The
Keebler Acquisition was initially financed through borrowings under FII's $500.0
million Syndicated Loan Facility. The acquisition of the additional interest in
Keebler was accounted for using the purchase method of accounting, and
accordingly, Keebler's assets and liabilities are included in the consolidated
balance sheet as of January 2, 1999. The acquisition of the majority interest
resulted in FII consolidating Keebler's operating results effective January 4,
1998. Keebler's operating results for the period January 4, 1998 through
February 3, 1998, the date FII acquired the majority interest, were not
materially different had the investment in Keebler been accounted for under the
equity method, the method by which FII previously accounted for its investment
in Keebler. The excess of the purchase price over the fair value of the net
assets underlying the additional interest acquired, approximately $264.2
million, has been recorded as goodwill and is being amortized over forty years.
F-12
<PAGE> 43
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price has been allocated to the assets acquired and
liabilities assumed based on the respective fair values at the date of purchase,
as summarized below (amounts in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 46,989
Accounts receivable......................................... 98,963
Inventory................................................... 112,462
Other current assets........................................ 63,033
Property, plant and equipment............................... 478,121
Cost in excess of net tangible assets....................... 201,205
Other assets................................................ 61,879
Current liabilities......................................... 368,185
Long-term debt.............................................. 272,390
Deferred income taxes....................................... 69,417
Postretirement/postemployment obligations................... 60,605
Other noncurrent liabilities................................ 50,203
Minority interest........................................... 108,833
</TABLE>
The following unaudited condensed combined pro forma results of operations
assume the Keebler Acquisition occurred as of the beginning of the period.
Additionally, the pro forma results for the year ended January 3, 1998 give
effect to (i) FII selling 9,000,000 shares of its common stock in a public
offering at $22 per share on April 27, 1998 and (ii) FII selling $200.0 million
of 7.15% debentures on April 27, 1998, due April 15, 2028, as if such
transactions had occurred at the beginning of the period (amounts in thousands,
except per share data):
<TABLE>
<CAPTION>
FOR THE 53 WEEKS ENDED
JANUARY 3, 1998
----------------------
<S> <C>
Sales....................................................... $3,505,263
Income before extraordinary loss and cumulative effect of
changes in accounting principles.......................... 61,777
Net income.................................................. 48,255
Diluted Net Income Per Common Share:
Income before extraordinary loss and cumulative effect of
changes in accounting principles....................... .63
Net income................................................ .49
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the transactions been consummated
as of the beginning of the period, nor are they necessarily indicative of future
operating results.
ACQUISITION OF MRS. SMITH'S INC.
On May 31, 1996, Flowers acquired certain assets of Mrs. Smith's Inc., a
producer and marketer of frozen pies, from the J.M. Smucker Company. Under the
terms of the acquisition agreement, Flowers paid $30.0 million, which consisted
of $15.0 million in cash at closing and a $15.0 million note payable. In
addition, Flowers 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
have been included in the consolidated statement of income from the date of
acquisition. As further discussed in Note 7, during fiscal 1997, Flowers
recorded $22.7 million, net of tax of $14.5 million, in additional goodwill
related to the Mrs. Smith's Inc. acquisition.
F-13
<PAGE> 44
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITION OF PRESIDENT INTERNATIONAL, INC.
On September 28, 1998, Keebler acquired President International, Inc.
("President") from President International Trade and Investment Corporation for
an aggregate purchase price of $450.6 million, including transaction expenses
paid at closing. The President acquisition was funded by Keebler, with
approximately $75.0 million from existing resources and the remainder from
borrowings under the $700.0 million Senior Credit Facility Agreement ("Credit
Facility") and a $125.0 million Bridge Facility, both dated as of September 28,
1998.
The acquisition of President has been accounted for as a purchase. The
purchase price has been allocated to the net tangible and intangible assets of
President based on a preliminary assessment of fair values. The excess of the
purchase price over the fair value of net assets acquired is approximately
$329.2 million, of which $12.8 million represents costs pursuant to a plan to
exit certain activities and operations of President, as further discussed in
Note 7. The unallocated excess purchase price is being amortized straight-line
over forty years.
Results of operations for President from the date of acquisition have been
included in the consolidated statement of income. The following unaudited
condensed combined pro forma results of operations of the Company assume the
President acquisition, the Keebler Acquisition and FII's equity and debt
offerings discussed above occurred as of the beginning of each period presented
(amounts in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE 52 WEEKS ENDED FOR THE 53 WEEKS ENDED
JANUARY 2, 1999 JANUARY 3, 1998
---------------------- ----------------------
<S> <C> <C>
Sales........................................ $4,133,481 $3,952,547
Income before extraordinary loss and
cumulative effect of changes in accounting
principles................................. 50,449 56,793
Net income................................... 46,380 42,835
Diluted Net Income Per Common Share:
Income before extraordinary loss and
cumulative effect of changes in
accounting principles................... .52 .58
Net income................................. .48 .44
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the transactions been consummated
as of the beginning of each period presented, nor are they necessarily
indicative of future operating results.
OTHER ACQUISITIONS
On January 30, 1998, Flowers Bakeries acquired the outstanding common stock
of Franklin Baking Company ("Franklin") in Goldsboro, North Carolina. Franklin
is a producer and marketer of fresh bakery products primarily to supermarkets.
On May 1, 1998, Mrs. Smith's Bakeries acquired the Pet-Ritz and Oronoque Orchard
frozen dessert brands from Van de Kamp's, Inc. Both transactions have been
accounted for as purchases, and accordingly, the results of operations are
included in the consolidated statement of income from the date of acquisition.
The Company does not consider the effects of either of the acquisitions
significant for pro forma disclosure purposes. Additionally, Flowers acquired
certain other businesses during fiscal 1996, fiscal 1997, the twenty-seven week
transition period ended January 3, 1998 and fiscal 1998 which have been
accounted for as purchases. These acquisitions are immaterial to the results of
operations and financial condition of the Company.
F-14
<PAGE> 45
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, JUNE 28,
1999 1998 1997
---------- ---------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Employee compensation.................................... $ 93,942 $18,123 $23,984
Pension.................................................. 19,511 12,217 12,438
Insurance................................................ 63,551 13,429 13,808
Marketing and consumer promotions........................ 65,075 12,592 7,119
Other.................................................... 72,191 10,748 20,894
-------- ------- -------
Total.......................................... $314,270 $67,109 $78,243
======== ======= =======
</TABLE>
FII does not guarantee Keebler's other accrued liabilities of $232.1
million, which are included in the consolidated amount at January 2, 1999.
NOTE 4. DEBT
Total debt consists of the following:
<TABLE>
<CAPTION>
INTEREST FINAL JANUARY 2, JANUARY 3, JUNE 28,
RATE MATURITY 1999 1998 1997
----------- --------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Flowers:
Syndicated Loan Facility.... 6.11% 2003 $ 150,000 $122,000 $117,000
Senior Notes................ 6.80%-7.08% 2016 125,000 125,000 125,000
Debentures.................. 7.15% 2028 200,000
Commercial Paper............ 5.87% Various 74,870 53,506 40,792
Other....................... Various 2004-2017 29,982 33,443 42,480
---------- -------- --------
579,852 333,949 325,272
---------- -------- --------
Keebler:
Bridge Facility............. 6.26% 1999 75,000
Revolving Facility.......... 6.07% 2004 85,000
Term Facility............... 5.94% 2004 350,000
Senior Subordinated Notes... 10.75% 2006 124,400
Other....................... Various 2001-2042 20,095
---------- -------- --------
654,495
---------- -------- --------
Consolidated Debt............. 1,234,347 333,949 325,272
Due within one year......... 195,349 57,738 50,025
---------- -------- --------
Due after one year.......... $1,038,998 $276,211 $275,247
========== ======== ========
</TABLE>
FLOWERS
On July 10, 1996, FII entered into a five year $300.0 million Syndicated
Loan Facility. The facility was amended in January 1998, increasing the limit to
$500.0 million, and extending the term to January 30, 2003. The facility was
amended primarily to provide financing for the purchase of the majority interest
in Keebler on February 3, 1998. At January 2, 1999, $150.0 million was
outstanding. 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 facility is generally payable monthly and is variable based
on a performance grid using a choice of LIBOR plus .38% or money market rates.
F-15
<PAGE> 46
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 5, 1996, FII completed a private placement of $125.0 million of
Senior Notes. These notes are due in three tranches: $100.0 million due in
semiannual installments from January 5, 2004 through January 5, 2008 which bears
interest at 6.80% per annum; $20.0 million due January 5, 2011 which bears
interest at 6.99% per annum; and $5.0 million due January 5, 2016 which bears
interest at 7.08% per annum. Interest is payable semiannually.
On April 27, 1998, FII sold $200.0 million of 7.15% debentures due April
15, 2028, priced at 99.47%. Interest on the debentures is payable semiannually.
Net proceeds from the offering were used to reduce borrowings under the $500.0
million Syndicated Loan Facility.
On July 28, 1998, FII amended its short-term Commercial Paper Agreement to
increase the limit from $75.0 million to $100.0 million. Borrowings under this
Agreement are used to finance inventory at Mrs. Smith's Bakeries, and at January
2, 1999 were $74.9 million.
FII also has a $10.0 million revolving-term loan agreement entered into in
March 1993, of which no amounts were outstanding at January 2, 1999.
KEEBLER
At January 2, 1999, Keebler's primary credit financing was provided by a
$700.0 million Credit Facility and a $125.0 million Bridge Facility. Keebler
entered into new debt facilities in order to finance the acquisition of
President on September 28, 1998. The new debt structure provides for borrowings
of $825.0 million, consisting of $350.0 million under the Revolving Facility,
$350.0 million under the Term Facility and an additional $125.0 million under
the Bridge Facility.
The current outstanding balance on the Term Facility was $350.0 million
with quarterly scheduled principal payments through the final maturity of
September 4, 2004. The Revolving Facility, with a current outstanding balance of
$85.0 million and available balance of $265.0 million at January 2, 1999, has a
final maturity of September 2004 with no scheduled principal payments. Certain
letters of credit totaling $42.2 million reduce the available balance on the
Revolving Facility. Any unused borrowings under the Revolving Facility are
subject to a commitment fee. The current commitment fee will vary from .1250%
- -.30% based on the relationship of debt to adjusted earnings with a minimum
commitment fee of .20% required through March 28, 1999. The Bridge Facility,
which is anticipated to be refinanced with a receivable facility, has a final
maturity of September 1999 with no scheduled principal payments. The current
outstanding balance on the Bridge Facility was $75.0 million with an additional
$50.0 million in available borrowings.
Interest on the Credit Facility is calculated based on base rate plus
applicable margin. The base rate can, at Keebler's option, be: (i) the higher of
the base domestic lending rate as established by the administrative agent for
the lender of the Credit Facility, or the Federal Funds Rate plus one-half of
one percent; or (ii) a reserve percentage adjusted LIBOR as offered by the
administrative agent. The Credit Facility requires Keebler to meet certain
financial covenants including debt to earnings before interest, taxes,
depreciation and amortization ratio and cash flow coverage ratios. Interest on
the Bridge Facility is calculated using the same components as the Credit
Facility and also is restricted by the same financial covenants.
In conjunction with the President acquisition on September 28, 1998, a term
loan was extinguished by using $145.0 million of borrowings under the new Credit
Facility. Keebler recorded a pre-tax extraordinary charge of $2.8 million
related primarily to expensing certain bank fees which were being amortized and
which were incurred at the time the term loan was issued. The related after-tax
charge, net of tax benefit and minority interest, was $.9 million.
On October 23, 1996, pursuant to an exchange and registration rights
agreement, Keebler 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 Keebler, Keebler'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 Keebler guaranteed by the
Restricted Subsidiaries. Interest on the Notes is paid semiannually on January 1
and July 1 of each year,
F-16
<PAGE> 47
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commencing January 1, 1997. At Keebler'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,
Keebler's ability to pay dividends or make other distributions on its common
stock is limited by the terms of the indenture governing the Notes.
At January 2, 1999, Keebler had interest rate swap agreements with a
notional amount of $403.3 million, with expiration dates from 2001 through 2004,
used to hedge its floating rate debt and had a swap agreement with a notional
amount of $124.0 million, expiring in 2001, used to hedge its fixed rate debt.
These interest rate swap agreements are with the Bank of Nova Scotia.
In connection with the consolidation of Keebler, FII has recorded Keebler's
indebtedness of $654.5 million as of January 2, 1999, however, FII has not
guaranteed such indebtedness and it is to be repaid solely from the cash flows
of Keebler.
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 2, 1999, the
Company was in compliance with these financial ratio requirements.
Annual maturities of long-term debt for each of the five years following
January 2, 1999 and thereafter are as follows:
<TABLE>
<CAPTION>
FLOWERS KEEBLER CONSOLIDATED
-------- -------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
1999.................................................. $ 82,619 $112,730 $ 195,349
2000.................................................. 4,214 27,814 32,028
2001.................................................. 1,467 51,151 52,618
2002.................................................. 1,579 68,871 70,450
2003.................................................. 1,701 105,929 107,630
Thereafter............................................ 488,272 288,000 776,272
-------- -------- ----------
Total....................................... $579,852 $654,495 $1,234,347
======== ======== ==========
</TABLE>
The total amount due for FII during fiscal 1999 includes $74.9 million of
short-term commercial paper, which FII intends to refinance under its Commercial
Paper Agreement.
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-six 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.
The Company has entered into certain operating lease obligations requiring
the Company to purchase or guarantee the residual value to the lessor of
approximately $29.0 million at the termination of the lease.
F-17
<PAGE> 48
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum payments for the Company's operating leases, exclusive of the
amount discussed above, having initial or remaining noncancelable terms in
excess of one year, are as follows (amounts in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 47,132
2000........................................................ 42,058
2001........................................................ 36,725
2002........................................................ 32,045
2003........................................................ 30,414
Thereafter.................................................. 59,854
--------
Total............................................. $248,228
========
</TABLE>
Rent expense for all operating leases amounted to $61.3 million for fiscal
1998, $16.2 million for the twenty-seven week transition period ended January 3,
1998, $24.2 million for fiscal 1997 and $16.9 million for fiscal 1996. FII does
not guarantee Keebler's lease obligations of $135.7 million which are included
in the consolidated amount above.
OTHER COMMITMENTS
The Company's various commodity purchase agreements effectively commit the
Company to purchase raw materials in amounts approximating $150.0 million at
January 2, 1999, which will be used in production in future periods.
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, notes receivable and
long-term debt approximates fair value at January 2, 1999, January 3, 1998 and
June 28, 1997. The fair value of the Company's outstanding commodity derivative
financial instruments, based on the stated market value as of January 2, 1999,
was $113.8 million. The fair value of Keebler's interest rate swap agreements, a
net receivable of $1.1 million, was obtained from the Bank of Nova Scotia and
was estimated based on market prices as of January 2, 1999.
NOTE 7. FACILITY CLOSING COSTS AND SEVERANCE
NON-RECURRING CHARGE
During the fourth quarter of fiscal 1998, the Board of Directors of the
Company approved a plan to realign production and distribution at Flowers
Bakeries and Mrs. Smith's Bakeries in order to enhance efficiency. The Company
recorded a pre-tax non-recurring charge of $68.3 million ($32.2 million, $32.3
million and $3.8 million for Flowers Bakeries, Mrs. Smith's Bakeries and
Keebler, respectively), or $.45 per share after-tax. The charge includes $57.5
million of noncash asset impairments, $4.7 million of severance costs and $6.1
million of other related exit costs. The plan involves closing six less
efficient facilities of Flowers Bakeries and Mrs. Smith's Bakeries and shifting
their production and distribution to highly automated facilities.
As a direct result of management's decision to implement production line
rationalizations, asset impairments were recorded to write-down the closed
facilities to net realizable value, less cost to sell, based on management's
estimate of fair value, and the related cost in excess of net tangible assets.
Also, as part of this plan, asset impairments were recorded to write-off certain
duplicate machinery and equipment to be disposed of. Severance costs provide for
the reduction of 695 employees, and, as of January 2, 1999, 405 employees had
been severed. Ongoing costs, including, but not limited to, guard service,
utilities and property taxes, of the closed facilities until time of disposal
primarily represent the other exit costs. Management anticipates that all
significant actions related to the plan will be completed as of the end of
fiscal 1999.
F-18
<PAGE> 49
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASE ACCOUNTING RESERVES
As part of accounting for the acquisition of President, Keebler recognized
costs pursuant to a plan to exit certain activities and operations of the
acquired company. These exit costs, for which there is no future economic
benefit, were provided for in the allocation of the purchase price and totaled
$12.8 million. Company-wide staff reductions were estimated at $6.7 million,
with the balance of the reserves allocated to costs associated with
manufacturing, sales and distribution facility closings, which principally
include lease termination and carrying costs. Spending against the reserves
established related to the President acquisition for the year ended January 2,
1999 totaled $.1 million. Management's plan is expected to be substantially
complete before the end of 1999 with only noncancelable lease obligations
exceeding the one-year time frame.
As part of Flowers' acquisition of Mrs. Smith's Inc., a purchase accounting
reserve of $37.1 million was recorded as an increase to cost in excess of net
tangible assets, related to planned realignments at Mrs. Smith's Bakeries,
resulting in the closure of its Pottstown, Pennsylvania production facility. The
reserve primarily relates to noncancelable lease obligations and severance
costs. This plan, with the exception of noncancelable lease payments that
continue through fiscal 2006, is scheduled for completion during fiscal 1999.
Spending against the reserve totaled $4.1 million, $.6 million and $1.6 million
in fiscal 1998, the twenty-seven week transition period ended January 3, 1998
and fiscal 1997, respectively.
As part of INFLO's acquisition of Keebler and Keebler's subsequent
acquisition of Sunshine, Keebler's management team 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 production, distribution and sales force facilities
and information system exit costs.
Severance costs were estimated at $30.7 million. Costs incurred related to
the closing of production, distribution and sales force facilities, which
include primarily severance and lease termination and carrying costs, were
expected to total $39.9 million. An additional $6.8 million was anticipated for
lease costs related to exiting legacy information systems. Spending against the
reserves established for fiscal 1998 totaled $7.7 million. In addition, during
fiscal 1998, Keebler expensed an additional $2.8 million, principally for costs
related to the closure of distribution facilities not included in the original
plan. Also during fiscal 1998, Keebler adjusted accruals previously established
in the accounting for prior acquisitions by reducing goodwill and other
intangibles by $3.7 million to recognize exit costs that are now expected to be
less than initially anticipated. The exit plan is expected to be complete as of
the end of fiscal 1999, with the exception of noncancelable lease obligations
that continue through fiscal 2006.
Activity with respect to the non-recurring charge and purchase accounting
reserves was as follows (amounts in thousands):
Non-Recurring Charge:
<TABLE>
<S> <C>
Provision, fiscal 1998...................................... $68,313
Noncash asset impairments................................... (57,489)
Severance costs............................................. (3,217)
Other exit costs............................................ (94)
-------
Balance at January 2, 1999........................ $ 7,513
=======
</TABLE>
F-19
<PAGE> 50
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Accounting Reserves:
<TABLE>
<S> <C>
Provision, fiscal 1997...................................... $37,136
Severance costs............................................. (67)
Other exit costs............................................ (1,539)
-------
Balance at June 28, 1997.......................... 35,530
Severance costs............................................. (316)
Other exit costs............................................ (261)
-------
Balance at January 3, 1998........................ 34,953
Keebler Acquisition......................................... 22,500
Provision, fiscal 1998...................................... 12,800
Severance costs............................................. (766)
Other exit costs............................................ (11,099)
Net reserve adjustments..................................... (900)
-------
Balance at January 2, 1999........................ $57,488
=======
</TABLE>
At January 2, 1999, January 3, 1998 and June 28, 1997, the facility closing
costs and severance liability, which includes the non-recurring charge and
purchase accounting reserves, totaled $65.0 million, $35.0 million and $35.5
million, respectively.
NOTE 8. STOCKHOLDERS' EQUITY
FII
FII's Articles of Incorporation provide that the authorized capital of FII
consists of 350,000,000 shares of common stock of $.625 par value per share (the
"Common Stock"), 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 non-convertible, of which 100,000 shares has been designated by
the Board of Directors as Series A Junior Participating Preferred Stock ("Series
A Preferred Stock").
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
FII out of funds legally available therefor. In the event of a liquidation,
dissolution or winding-up of FII, holders of Common Stock are entitled to share
ratably in all assets of FII, 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 FII or any other person. The
Common Stock is not subject to redemption or sinking fund redemption.
On April 27, 1998, FII sold 9,000,000 shares of its Common Stock in a
public offering at $22 per share. Net proceeds from the offering were used to
reduce borrowings under the $500.0 million Syndicated Loan Facility which were
primarily incurred to purchase the majority interest in Keebler.
F-20
<PAGE> 51
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
The Board of Directors of FII 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 FII's Shareholder's 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 FII.
Treasury Stock
In October 1990, FII's board of directors approved a program authorizing
FII to repurchase up to 15% of the total shares of its outstanding Common Stock.
The stock will be repurchased at times when securities are available at prices
FII considers attractive.
KEEBLER
Common Stock
On January 29, 1998, Keebler made an initial public offering of 13,386,661
shares of common stock. All the shares in the offering were sold by certain
existing shareholders, with no proceeds from the offering going to Keebler.
Concurrent with this public offering, FII acquired an additional 11.5% interest
in Keebler increasing its ownership position to approximately 55%. Keebler
declared no cash dividends for the year ended January 2, 1999. Keebler's ability
to pay cash dividends is limited by the Credit Agreement and the Senior
Subordinated Notes. The most limiting dividend restriction exists under the
Senior Subordinated Notes, which limits dividend payments to the sum of: (i) 50%
of consolidated cumulative net income; (ii) net cash proceeds received from the
issuance of capital stock; (iii) net cash proceeds received from the exercise of
stock options and warrants; (iv) net cash received from the conversion of
indebtedness into capital stock; and (v) the net reduction in investments made
by Keebler.
Treasury Stock
In March 1998, Keebler's board of directors authorized the repurchase, at
management's discretion, of up to $30.0 million of Keebler's common stock. Such
repurchases are to offset dilution from the issuance of shares related to
employee stock option exercises.
Keebler's equity is eliminated in consolidation and the approximate 45%
minority interest that results represents shares owned other than by FII.
FII SHAREHOLDER'S RIGHTS PLAN
Subsequent to year end, on March 19, 1999, the Company's board of directors
declared a dividend of one preferred share purchase right ( a "Right" or
collectively, the "Rights") for each share of Common Stock held of record on the
close of business on April 2, 1999. Under certain circumstances, a Right may be
exercised to purchase one ten-thousandth of a share of Series A Junior
Participating Preferred Stock (the "Preferred Stock") at an exercise price of
$90.00.
F-21
<PAGE> 52
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Rights become exercisable upon the earlier to occur of: (i) the tenth
calendar day after a person or group acquires 15% or more of the Company's
outstanding Common Stock or (ii) the tenth business day after the commencement
of a tender offer for 15% or more of the Company's outstanding Common Stock. If
the Rights become exercisable, each Right will entitle the holder thereof to
purchase one ten-thousandth of a share of Preferred Stock. If a person or group
acquires 15% or more of the outstanding Common Stock of the Company, the holder
of each Right not owned by the 15% or more shareholder would be entitled to
purchase for $90.00 (the exercise price of the Right) Common Stock of the
Company having market value equal to $180.00. If the Company is a party to
certain mergers or business combination transactions or transfers 50% or more of
its assets or earning power to another party, each Right will entitle its holder
to buy a number of shares of Common Stock of the acquiring or surviving company
having a market value of twice the exercise price of the Rights, or $180.00. If
the Rights are fully exercised, the shares issued thereby would cause a
substantial dilution to the shareholders of the acquiring or surviving company.
The Company may also, under certain circumstances, exchange the Rights not owned
by the 15% or more shareholder at an exchange ratio of one share of Common Stock
per Right.
The Rights expire April 2, 2009, and may be redeemed by the Company for
$.01 per Right at any time prior to the close of business on the later of: (i)
the tenth calendar day after a person or group acquires 15% or more of the
Company's outstanding Common Stock or (ii) the tenth business day after the
commencement of a tender offer for 15% or more of the Company's outstanding
Common Stock.
FII STOCK INCENTIVE PLANS
FII has two stock incentive plans that authorize the Compensation Committee
of the Board of Directors to grant to eligible employees stock options, stock
appreciation rights, restricted or deferred stock awards, stock purchase rights
and other stock-based awards. The Executive Stock Incentive Plan ("ESIP"), the
only plan with shares available for grant, is authorized to grant to eligible
employees up to 12,050,000 shares of Common Stock, through October 17, 2007. The
FII Stock Option Plan expired on October 15, 1992, therefore no additional
grants will be made pursuant to this Plan.
During fiscal 1998, the twenty-seven week transition period ended January
3, 1998 and fiscal 1996, 345,972, 347,609 and 1,180,295 shares, respectively, of
FII's Common Stock were issued as Restricted Stock Awards ("RSA"). These shares
are held in escrow by FII 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 and payment of the purchase price. The restriction periods
end at various dates through June 2001. The purchase price is 50% of the mean of
the high and low market value of FII's Common Stock at the date of grant. The
purchase price of the shares issued ranges from $4.22 to $12.82 per share.
Compensation expense for fiscal 1998, the twenty-seven week transition period
ended January 3, 1998, fiscal 1997 and fiscal 1996 was $3.8 million, $1.1
million, $1.7 million and $1.3 million, respectively.
During fiscal 1996, 358,547 shares of FII's Common Stock were issued as
Equity Incentive Awards ("EIA"). These shares are held in escrow by FII 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 period which
ends May 20, 1999, and upon payment of the purchase price of $5.11 per share.
The purchase price is 50% of the mean of the high and low market value of FII's
Common Stock on the date of grant. Compensation expense for fiscal 1998, the
twenty-seven week transition period ended January 3, 1998, fiscal 1997 and
fiscal 1996 was $.7 million, $.3 million, $.8 million and $.5 million,
respectively.
During fiscal 1998 and fiscal 1996, 1,128,600 and 843,750 shares,
respectively, of FII's Common Stock were granted as non-qualified stock options
("NQSOs"). The NQSOs vest over a one or four year period and expire ten years
after the date of grant. The optionees are required to pay the market value of
the shares, determined as of the grant date, which was $21.00 during fiscal 1998
and $8.45 during fiscal 1996. As of
F-22
<PAGE> 53
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 2, 1999, January 3, 1998 and June 28, 1997, there were 1,926,000,
1,165,000 and 1,211,000 NQSOs outstanding, respectively.
Stock option activity for FII's stock incentive plans for fiscal 1998, the
twenty-seven week transition period ended January 3, 1998, fiscal 1997 and
fiscal 1996 is set forth below:
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED ---------------------------------------
JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996
------------------ ------------------ ------------------ ------------------
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...................... 1,165 $ 7.57 1,211 $7.52 1,664 $7.11 1,114 $5.70
Granted..................... 1,129 $21.00 844 $8.44
Exercised................... (368) $ 8.10 (46) $6.06 (453) $6.03 (294) $5.59
------ ------ ------ ------
Outstanding at end of
year...................... 1,926 $15.34 1,165 $7.57 1,211 $7.52 1,664 $7.11
====== ====== ====== ======
Exercisable at end of
year...................... 798 1,165 1,211 820
====== ====== ====== ======
Weighted average fair value
of options granted during
the year.................. $ 4.37 $ 2.91
====== ======
</TABLE>
At January 2, 1999, 798,000 of the options are exercisable with a weighted
average price of $7.33. The weighted average remaining contractual life of FII's
options outstanding at January 2, 1999 is approximately 7.6 years.
Keebler's 1996 Stock Option Plan has 9,673,594 shares of Keebler's common
stock authorized for future grant. All options granted have ten year terms and,
due to acceleration resulting from the achievement of certain performance
measures, vest by 2001. Under this plan, at January 2, 1999, options for
6,456,280 shares were outstanding, of which 4,433,774 are exercisable. Keebler's
1998 Omnibus Stock Incentive Plan has 2,850,200 shares of Keebler's common stock
authorized for future grant. All options granted generally have ten year terms
and vest at the end of five years. Vesting can be accelerated if certain stock
price performance measures are met. Under this plan, at January 2, 1999, options
for 2,715,636 shares were outstanding, of which none are exercisable.
As the Company applies APB 25 in accounting for its plans, and the option
price is the market price at date of grant, no compensation expense has been
recognized for options granted under the Company's plans.
F-23
<PAGE> 54
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation expense for the options and Restricted Stock Awards under
the Company's plans, inclusive of Keebler's options, been determined based on
the fair value at the grant dates for the awards consistent with the methodology
prescribed under SFAS 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 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED -----------------------------
JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996
--------------- --------------- ------------- -------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
As Reported:
Net income....................... $41,899 $23,560 $62,324 $30,768
Net Income Per Common Share:
Basic......................... .43 .27 .71 .35
Diluted....................... .43 .27 .71 .35
Pro Forma:
Net income....................... $38,989 $22,735 $61,716 $29,694
Net Income Per Common Share:
Basic......................... .40 .26 .70 .34
Diluted....................... .40 .26 .70 .34
</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 fiscal 1998: expected
dividend yield of 3.64%, expected volatility of 23.9%, risk-free interest rate
of 5.60% and expected lives of five years; during the twenty-seven week
transition period ended January 3, 1998: no expected dividend yield, expected
volatility of 26.8%, risk-free interest rate of 6.31% and expected lives of four
years; and for grants during fiscal 1996: dividend yield of 3.43%, expected
volatility of 24.7%, risk-free interest rate of 6.23% and expected lives of five
years. The weighted average assumptions used for Keebler's grants during fiscal
1998 were as follows: no expected dividend yield, expected volatility of 27.2%,
risk-free interest rate of 5.04% and expected lives of five years.
NOTE 9. RETIREMENT PLANS
DEFINED BENEFIT PLANS
Flowers
Flowers has noncontributory defined benefit pension plans covering certain
employees. The benefits are based on years of service and the employee's career
earnings. Flowers also has a supplemental defined benefit pension plan covering
certain Flowers' 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. The 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 ("ERISA"). As of January 2, 1999, January
3, 1998 and June 28, 1997, 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 FII's Common Stock with a fair value of approximately $12.1
million, $10.3 million and $8.5 million at January 2, 1999, January 3, 1998 and
June 28, 1997, respectively.
F-24
<PAGE> 55
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Keebler
Keebler has a trusteed, noncontributory defined benefit pension plan
covering certain employees. Benefits provided under the plan are primarily based
on years of service and the employee's final level of compensation. Keebler
contributes annually not less than the ERISA minimum funding requirements. As of
January 2, 1999, assets held by the plan consist primarily of common stocks,
government securities, bonds and a real estate investment of $3.1 million in a
distribution center which is under an operating lease to Keebler.
In addition to the pension plan, Keebler 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 net periodic pension cost for the Company's plans that are not fully
funded includes the following components:
<TABLE>
<CAPTION>
FOR THE 52 WEEKS
FOR THE 52 FOR THE 27 ENDED
WEEKS ENDED WEEKS ENDED -------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
----------- ----------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost............................... $ 6,268 $ 2,846 $ 5,603 $ 5,887
Interest cost.............................. 11,904 5,207 10,311 9,368
Expected return on plan assets............. (13,635) (5,585) (10,415) (9,104)
Amortization of transition asset........... (841) (422) (841) (841)
Prior service cost......................... 59 30 84 72
Recognized net actuarial (gain) loss....... (177) 35 118 396
Purchase accounting adjustment............. (118)
-------- ------- -------- -------
Net periodic pension cost.................. $ 3,578 $ 2,111 $ 4,860 $ 5,660
======== ======= ======== =======
</TABLE>
F-25
<PAGE> 56
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funding status and the amounts recognized in the consolidated balance
sheet for the Company's plans that are not fully funded are as follows:
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52
WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 2, JANUARY 3, JUNE 28,
1999 1998 1997
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year........ $(146,937) $(139,594) $(124,662)
Acquisitions................................... (10,303) (1,389)
Service cost................................... (6,268) (2,846) (5,603)
Interest cost.................................. (11,904) (5,207) (10,311)
Amendments..................................... 29
Actuarial loss................................. (23,964) (9,744) (3,564)
Adjustment for change in measurement date...... 7,266
Benefits paid.................................. 7,727 3,188 5,906
--------- --------- ---------
Benefit obligation at end of year.............. (191,649) (146,937) (139,594)
--------- --------- ---------
Change in plan assets:
Fair value of plan assets at beginning of
year........................................ 154,828 137,819 116,556
Actual return on plan assets................... (2,199) 26,113 25,008
Employer contribution.......................... 1,141 3,333 788
Acquisitions................................... $ $ $ 1,373
Adjustment for change in measurement date...... (9,249)
Benefits paid.................................. (6,977) (3,188) (5,906)
--------- --------- ---------
Fair value of plan assets at end of year....... 146,793 154,828 137,819
--------- --------- ---------
Funded status.................................. (44,856) 7,891 (1,775)
Unrecognized net actuarial (gain) loss......... 22,749 (16,900) (6,891)
Contribution between measurement date and
fiscal year end............................. 185 330
Unrecognized prior service cost................ 557 616 596
Unrecognized net transition asset.............. (3,313) (4,154) (4,368)
--------- --------- ---------
Net amount recognized at end of year........... $ (24,678) $ (12,217) $ (12,438)
========= ========= =========
</TABLE>
The net amount recognized at the end of the year includes $19.5 million
which is recorded in other accrued liabilities (see Note 3) and the remainder is
included in other long-term liabilities.
F-26
<PAGE> 57
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumptions used in accounting for the Company's plans that are not fully
funded at each of the respective period-ends are as follows:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Weighted average assumptions:
Measurement date........................... 9/30/98 9/30/97 3/31/97 3/31/96
Discount rate.............................. 6.50%-7.50% 8.00% 8.00% 7.75%
Expected return on plan assets............. 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase.............. 4.00%-5.00% 5.50% 5.50% 5.25%
</TABLE>
The net periodic pension cost for the Company's fully funded plan includes
the following components:
<TABLE>
<CAPTION>
FOR THE 52
WEEKS ENDED
JANUARY 2, 1999
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C>
Service cost................................................ $ 9,040
Interest cost............................................... 31,080
Expected return on plan assets.............................. (39,352)
Prior service cost.......................................... 689
--------
Net periodic pension cost................................... $ 1,457
========
</TABLE>
F-27
<PAGE> 58
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status and the amounts recognized in the consolidated balance
sheet for the Company's fully funded plan is as follows:
<TABLE>
<CAPTION>
FOR THE 52
WEEKS ENDED
JANUARY 2, 1999
---------------
(AMOUNTS IN
THOUSANDS)
<S> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................... $ --
Acquisitions.............................................. (460,139)
Service cost.............................................. (9,040)
Interest cost............................................. (31,080)
Amendments................................................ (4,874)
Actuarial loss............................................ (45,871)
Benefits paid............................................. 30,692
---------
Benefit obligation at end of year......................... (520,312)
---------
Change in plan assets:
Fair value of plan assets at beginning of year............ --
Acquisitions.............................................. 515,290
Actual return on plan assets.............................. 77,731
Employer contribution..................................... 19,292
Benefits paid............................................. (30,692)
---------
Fair value of plan assets at end of year.................. 581,621
---------
Funded status............................................. 61,309
Unrecognized net actuarial gain........................... (16,538)
Contribution between measurement date and fiscal year
end.................................................... 115
Unrecognized prior service cost........................... 9,230
---------
Net amount recognized at end of year...................... $ 54,116
=========
</TABLE>
Assumptions used in accounting for the Company's fully funded plan for
fiscal 1998 are as follows:
<TABLE>
<CAPTION>
JANUARY 2, 1999
---------------
<S> <C>
Weighted average assumptions:
Measurement date.......................................... 9/30/98
Discount rate............................................. 6.50%
Expected return on plan assets............................ 9.00%
Rate of compensation increase............................. 4.00%
</TABLE>
F-28
<PAGE> 59
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER PLANS
Flowers
Flowers 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 $.3 million for fiscal 1998, $.5 million for
the twenty-seven week transition period ended January 3, 1998, $.4 million for
fiscal 1997 and $.3 million for fiscal 1996, respectively.
The Flowers Industries, Inc. 401(k) Retirement Savings Plan covers
substantially all Flowers 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 fiscal
1998, the twenty-seven week transition period ended January 3, 1998, fiscal 1997
and fiscal 1996, the total cost and contributions were $1.3 million, $.6
million, $1.4 million and $1.3 million, respectively.
Keebler
Contributions are also made by Keebler 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 fiscal 1998,
Keebler expensed contributions of $2.3 million.
Keebler 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 $8.9 million for fiscal 1998.
NOTE 10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Keebler provides certain medical and life insurance benefits for eligible
retired employees of Keebler. 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. Keebler does not fund the plan.
The net periodic postretirement benefit expense includes the following
components:
<TABLE>
<CAPTION>
FOR THE 52
WEEKS ENDED
JANUARY 2, 1999
---------------
(AMOUNTS IN
THOUSANDS)
<S> <C>
Service cost................................................ $2,045
Interest cost............................................... 3,961
Amortization of prior service cost.......................... (115)
------
Net periodic postretirement benefit cost.................... $5,891
======
</TABLE>
F-29
<PAGE> 60
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unfunded status and the amounts recognized in the consolidated balance
sheet for Keebler's postretirement obligation are as follows:
<TABLE>
<CAPTION>
FOR THE 52
WEEKS ENDED
JANUARY 2, 1999
---------------
(AMOUNTS IN
THOUSANDS)
<S> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................... $ --
Acquisitions.............................................. (58,288)
Service cost.............................................. (2,045)
Interest cost............................................. (3,961)
Actuarial gain............................................ 3,641
Benefits paid............................................. 4,384
--------
Benefit obligation at end of year...................... $(56,269)
Unrecognized actuarial gain............................ (7,856)
Unrecognized prior service cost........................ (574)
Benefit payments subsequent to measurement date........ 978
--------
Accrued benefit obligation............................. $(63,721)
========
</TABLE>
The accumulated postretirement benefit obligation was determined using a
weighted average discount rate of 6.5% for fiscal 1998. The weighted average
annual assumed rate of increase in the cost of covered benefits is 6.0% for
fiscal 1998, declining gradually to an ultimate trend rate of 5.0% for fiscal
1999. A one percent increase in the trend rate for health care costs would have
increased the accumulated benefit obligation as of January 2, 1999 by $2.6
million and the net periodic benefit cost by $.3 million. A one percent decrease
in the trend rate for health care costs would have decreased the accumulated
benefit obligation and net periodic benefit cost by $2.7 million and $.3
million, respectively, as of January 2, 1999.
Additionally, Keebler provides post employment 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. Keebler does not fund the plan. The postemployment obligation
included in the consolidated balance sheet at January 2, 1999 was $4.7 million.
F-30
<PAGE> 61
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. INCOME TAXES
The Company's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE 52
FOR THE 52 FOR THE 27 WEEKS ENDED
WEEKS ENDED WEEKS ENDED -------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
----------- ----------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Taxes:
Federal................................... $72,121 $5,686 $26,910 $13,915
State..................................... 6,010 2,395 5,557 2,621
------- ------ ------- -------
78,131 8,081 32,467 16,536
------- ------ ------- -------
Deferred Taxes:
Federal................................... (3,346) 2,395 1,587 1,636
State..................................... (394) (319) 347 347
------- ------ ------- -------
(3,740) 2,076 1,934 1,983
------- ------ ------- -------
Benefit of operating loss carryforwards..... (525) (1,210) (334)
------- ------ ------- -------
Provision for income taxes.................. $74,391 $9,632 $33,191 $18,185
======= ====== ======= =======
</TABLE>
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52
WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 2, JANUARY 3, JUNE 28,
1999 1998 1997
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Depreciation..................................... $ 173,610 $ 52,936 $ 51,275
Trademarks, trade names and intangibles.......... 49,348
Prepaid pension.................................. 14,283
Inventory valuation.............................. 6,779
Other............................................ 13,816 13,871 8,673
--------- -------- --------
Gross deferred tax liabilities......... 257,836 66,807 59,948
--------- -------- --------
Workers compensation............................. (19,891) (5,228) (5,274)
Postretirement/postemployment benefits........... (26,171)
Employee benefits................................ (33,806) (5,326) (4,756)
Facility closing costs and severance............. (56,805) (13,921) (14,483)
Loss carryforwards............................... (84,447) (4,739) (4,117)
Other............................................ (17,109) (16,050) (9,093)
--------- -------- --------
Gross deferred tax assets.............. (238,229) (45,264) (37,723)
Deferred tax assets valuation allowance.......... 86,310 2,119 2,240
--------- -------- --------
$ 105,917 $ 23,662 $ 24,465
========= ======== ========
</TABLE>
The net change in the valuation allowance for deferred tax assets was an
increase of $84.1 million, related to operating loss carryforwards. The increase
was primarily attributable to the consolidation of Keebler.
F-31
<PAGE> 62
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes 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 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED ----------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
----------- ----------- ----------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tax at U.S. federal income tax rate...... $57,283 $8,757 $30,728 $16,919
State income taxes, net of U.S. federal
income tax benefit..................... 5,298 1,390 3,837 1,929
Benefit of operating loss
carryforwards.......................... (525) (1,210) (334)
Intangible amortization.................. 6,910 174 122 77
Other.................................... 4,900 (164) (286) (406)
------- ------ ------- -------
Provision for income taxes..... $74,391 $9,632 $33,191 $18,185
======= ====== ======= =======
</TABLE>
The amount of federal operating loss carryforwards generated by certain
subsidiaries of FII prior to their acquisition is $2.8 million 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. FII does not anticipate that these limitations will affect
utilization of the carryforwards prior to their expiration. Various subsidiaries
have state operating loss carryforwards of $56.1 million with expiration dates
through fiscal 2013.
Keebler has net operating loss carryforwards totaling approximately $203.2
million through 1998 and expiring in 2008 through 2011. Pursuant to the terms of
INFLO's purchase of Keebler, 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. In the event the net
operating loss carryforwards become realizable, the valuation allowance would be
reversed against trademarks, trade names and other intangibles.
During fiscal 1997, the Internal Revenue Service ("IRS") completed an
examination of Flowers' federal income tax returns for fiscal years 1993 through
1995. During the examination, the IRS asserted that Flowers' independent
distributor program generated ordinary income upon the initial sale of the
territories. As a result, Flowers paid for certain claims by the IRS relating
primarily to Flowers' independent distributor program. Currently, Flowers is
under audit by the IRS for fiscal 1997 and fiscal 1996.
NOTE 12. SEGMENT REPORTING
In fiscal 1998, the Company adopted SFAS No. 131 -- "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). This statement
establishes new standards for the manner in which companies report operating
segment information, as well as disclosures about products and services and
major customers. As required by SFAS 131, the Company has restated prior years
for comparability.
The Company has three reportable segments: Flowers Bakeries, Mrs. Smith's
Bakeries and Keebler. Flowers Bakeries produces fresh breads and rolls, Mrs.
Smith's Bakeries produces fresh and frozen baked desserts, snacks, breads and
rolls, and Keebler produces a full line of cookies and crackers. The segments
are managed as strategic business units due to their distinct production
processes and marketing strategies.
F-32
<PAGE> 63
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounting policies of the segments are substantially the same as those
described in Note 1. The Company evaluates each segment's performance based on
income or loss before interest and income taxes, excluding corporate and other
unallocated expenses and non-recurring charges. Information regarding the
operations in these reportable segments is as follows:
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED ------------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
----------- ----------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales:
Flowers Bakeries................... $ 949,870 $460,245 $ 904,585 $ 841,181
Mrs. Smith's Bakeries.............. 672,821 369,262 615,637 474,932
Keebler............................ 2,226,480
Eliminations and Other (1)......... (72,710) (42,968) (78,969) (65,529)
---------- -------- ---------- ----------
$3,776,461 $786,539 $1,441,253 $1,250,584
========== ======== ========== ==========
Depreciation and Amortization:
Flowers Bakeries................... $ 33,487 $ 16,505 $ 28,533 $ 25,601
Mrs. Smith's Bakeries.............. 18,676 9,427 15,830 13,877
Keebler............................ 69,125
Other.............................. 7,477 998 1,607 1,370
---------- -------- ---------- ----------
$ 128,765 $ 26,930 $ 45,970 $ 40,848
========== ======== ========== ==========
Income Before Interest and Taxes:
Flowers Bakeries................... $ 75,779 $ 31,388 $ 89,433(2) $ 47,045
Mrs. Smith's Bakeries.............. 45,855 20,153 40,186 21,603
Keebler............................ 199,891
Unallocated General Expenses....... (20,823) (14,726) (16,716) (2,369)
Non-Recurring Charge............... (68,313)
---------- -------- ---------- ----------
$ 232,389 $ 36,815 $ 112,903 $ 66,279
========== ======== ========== ==========
Non-Recurring Charge:
Flowers Bakeries................... $ 32,161
Mrs. Smith's Bakeries.............. 32,300
Keebler............................ 3,852
---------- -------- ---------- ----------
$ 68,313
========== ======== ========== ==========
Interest Expense, Net................ $ 68,725 $ 11,796 $ 25,109 $ 13,004
========== ======== ========== ==========
</TABLE>
F-33
<PAGE> 64
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED ------------------------
JANUARY 2, JANUARY 3, JUNE 28, JUNE 29,
1999 1998 1997 1996
----------- ----------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Income Before Income Taxes,
Investment in Unconsolidated
Affiliate, Minority Interest,
Extraordinary Loss and Cumulative
Effect of Changes in Accounting
Principles......................... $ 163,664 $ 25,019 $ 87,794 $ 48,340
========== ======== ========== ==========
Capital Expenditures:
Flowers Bakeries................... $ 38,573 $ 22,710 $ 48,334 $ 55,730
Mrs. Smith's Bakeries.............. 34,711 9,817 28,577 18,919
Keebler............................ 66,798
Other.............................. 193 330 599 893
---------- -------- ---------- ----------
$ 140,275 $ 32,857 $ 77,510 $ 75,542
========== ======== ========== ==========
Assets:
Flowers Bakeries................... $ 458,966 $401,787 $ 408,815 $ 441,856
Mrs. Smith's Bakeries.............. 459,652 366,602 361,575 281,610
Keebler............................ 1,655,780
Other.............................. 286,502 130,491 127,797 125,977
---------- -------- ---------- ----------
$2,860,900 $898,880 $ 898,187 $ 849,443
========== ======== ========== ==========
</TABLE>
- ---------------
(1) Primarily represents elimination of intersegment sales from Mrs. Smith's
Bakeries to Flowers Bakeries which are transferred at standard costs.
(2) Includes a $43.2 million gain on the sale of Flowers Bakeries' distributor
notes receivable as discussed in Note 1.
Sales to a single customer were approximately $84.0 million, or 11% of
sales during the twenty-seven week transition period ended January 3, 1998,
$163.0 million, or 11% of sales during fiscal 1997, and $150.0 million, or 12%
of sales during fiscal 1996. During fiscal 1998, no sales to a single customer
accounted for more than 10% of sales.
F-34
<PAGE> 65
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. NET INCOME PER SHARE
Net income 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 FII'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 share:
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED -----------------------------
JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996
--------------- --------------- ------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary loss and
cumulative effect of changes in accounting
principles................................ $45,968 $33,448 $62,324 $30,768
Extraordinary loss due to early
extinguishment of debt, net of tax benefit
and minority interest..................... (938)
Cumulative effect of changes in accounting
principles, net of tax benefit............ (3,131) (9,888)
------- ------- ------- -------
Net income................................... $41,899 $23,560 $62,324 $30,768
======= ======= ======= =======
Denominator:
Basic weighted average shares................ 96,393 88,368 88,000 86,933
Effect of dilutive securities:
Stock options............................. 408 405 401 278
------- ------- ------- -------
Diluted weighted average shares.............. 96,801 88,773 88,401 87,211
======= ======= ======= =======
Net Income Per Common Share:
Basic --
Income before extraordinary loss and
cumulative effect of changes in
accounting principles................... $ .47 $ .38 $ .71 $ .35
Extraordinary loss due to early
extinguishment of debt, net of tax
benefit and minority interest........... (.01)
Cumulative effect of changes in accounting
principles, net of tax benefit.......... (.03) (.11)
------- ------- ------- -------
Net income per common share............... $ .43 $ .27 $ .71 $ .35
======= ======= ======= =======
Diluted --
Income before extraordinary loss and
cumulative effect of changes in
accounting principles................... $ .47 $ .38 $ .71 $ .35
Extraordinary loss due to early
extinguishment of debt, net of tax
benefit and minority interest........... (.01)
Cumulative effect of changes in accounting
principles, net of tax benefit.......... (.03) (.11)
------- ------- ------- -------
Net income per common share............... $ .43 $ .27 $ .71 $ .35
======= ======= ======= =======
</TABLE>
F-35
<PAGE> 66
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Results of operations for each of the four quarters in the respective
fiscal years is as follows (each quarter represents a period of twelve weeks,
except the first quarter of fiscal 1998 and the fourth quarter of fiscal 1997,
both of which include sixteen weeks):
<TABLE>
<CAPTION>
QUARTER FIRST SECOND THIRD FOURTH
- ------- ---------- ---------- ---------- ----------
1998 1998 1998 1998
1998(T) 1998(T) 1998(T) 1998(T)
1997 1997 1997 1997
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales............................. $1,077,034 $ 836,424 $ 862,784 $1,000,219
310,063 476,476(1) -- --
318,957 383,146 303,950 435,200
Gross margin...................... 590,744 461,372 480,578 541,186
144,587 223,026(1) -- --
179,929 166,612 144,836 205,321
Income (loss) before extraordinary
loss and cumulative effect of
changes in accounting
principles...................... 15,028 18,467 25,555 (13,082)
14,529 18,919(1) -- --
19,948 12,263 12,170 17,943
Extraordinary loss due to early
extinguishment of debt, net of
tax benefit and minority
interest........................ -- -- (938) --
-- -- -- --
-- -- -- --
Cumulative effect of changes in
accounting principles, net of
tax benefit..................... (3,131)(2) -- -- --
-- (9,888)(1) -- --
-- -- -- --
Net income (loss)................. 11,897 18,467 24,617 (13,082)
14,529 9,031(1) -- --
19,948 12,263 12,170 17,943
Basic net income (loss) per common
share........................... .13 .19 .25 (.13)
.16 .10(1) -- --
.23 .14 .14 .20
Diluted net income (loss) per
common share.................... .13 .19 .25 (.13)
.16 .10(1) -- --
.23 .14 .14 .20
</TABLE>
- ---------------
(T) Twenty-seven week transition period ended January 3, 1998.
(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.
(2) During the fourth quarter of fiscal 1998, the Company adopted SOP 98-5. The
cumulative effect of this change in accounting was retroactive to the first
quarter of fiscal 1998 and does not correspond with the amounts reported in
the Company's first quarter Form 10-Q for the sixteen weeks ended April 25,
1998.
F-36
<PAGE> 67
FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. UNAUDITED OPERATING RESULTS
The unaudited condensed consolidated results of operations of Flowers for
the fifty-two weeks ended January 3, 1998 and the twenty-seven weeks ended
January 4, 1997 are presented below. In the opinion of management, the
accompanying unaudited condensed consolidated results of operations contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the results of operations:
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27
WEEKS ENDED WEEKS ENDED
JANUARY 3, 1998 JANUARY 4, 1997
--------------- ---------------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Sales..................................................... $1,440,079 $774,767
Income before income taxes and cumulative effect of
changes in accounting principles........................ 62,478 50,335
Income taxes.............................................. 23,796 19,027
Income (loss) from investment in unconsolidated
affiliate............................................... 24,813 (195)
Income before cumulative effect of changes in accounting
principles.............................................. 63,495 31,113
Cumulative effect of changes in accounting principles..... (9,888)
Net income................................................ 53,607 31,113
Net Income Per Common Share:
Income per share before cumulative effect -- basic...... .72 .35
Income per share before cumulative effect -- diluted.... .72 .35
Net income per share -- basic........................... .61 .35
Net income per share -- diluted......................... .61 .35
</TABLE>
NOTE 16. SUBSEQUENT EVENTS
On January 29, 1999, Keebler entered into a Receivable Purchase Agreement
("Agreement") to replace the Bridge Facility existing at January 2, 1999. This
Agreement allows funds to be borrowed at a lower cost to Keebler and is
collateralized by the accounts receivable of Keebler.
On January 21, 1999, certain stockholders of Keebler sold 16,200,000 shares
of Keebler's common stock in a secondary public offering, reducing their
ownership percentage to 7%, collectively. Keebler received no proceeds from the
sale, and the ownership percentages of FII and the management of Keebler
remained at approximately 55% and 2%, respectively.
On March 19, 1999, the Board of Directors of the Company declared a
dividend of one right per share of common stock outstanding on April 2, 1999,
pursuant to the terms of the Rights Agreement effective as of April 2, 1999,
between the Company and First Union National Bank, as Rights Agent.
F-37
<PAGE> 68
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 February 2, 1999 of this 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/ PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
February 2, 1999
<PAGE> 69
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<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>
Year Ended January 2, 1999
Cost in Excess of Net Tangible Assets.............. $76,717 $950,545 $(23,819) $1,003,443
======= ======== ======== ==========
Twenty-Seven Weeks Ended January 3, 1998
Cost in Excess of Net Tangible Assets.............. $68,453 $ 9,258 $ (994) $ 76,717
======= ======== ======== ==========
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
======= ======== ======== ==========
</TABLE>
- ---------------
See Note 1 of Notes to Consolidated Financial Statements for accounting
policy for capitalization and amortization of intangible assets.
S-1
<PAGE> 1
EXHIBIT 3.1
FLOWERS INDUSTRIES, INC.
THIRD RESTATED ARTICLES OF INCORPORATION
On March 19, 1999, the Board of Directors of Flowers Industries, Inc.
approved and adopted the following Third Restated Articles of Incorporation
pursuant to Second 14-2-1007 of the Georgia Business Corporation Code:
FIRST. The name of the corporation is FLOWERS INDUSTRIES, INC.
SECOND. The total number of shares of stock which the corporation shall
have the authority to issue is Three Hundred Fifty Million Two Hundred Sixty
Thousand (350,260,000) shares; of which stock Ten Thousand Four Hundred
Sixty-Seven (10,467) shares of the par value of One Hundred Dollars ($100.00)
each, amounting in the aggregate to One Million Forty-Six Thousand Seven Hundred
Dollars ($1,046,700), shall be preferred stock convertible into common stock;
and of which Two Hundred Forty-Nine Thousand Five Hundred Thirty-Three (249,533)
shares of the par value of One Hundred Dollars ($100.00) each, amounting in the
aggregate to Twenty-Four Million Nine Hundred Fifty-Three Thousand Three Hundred
Dollars ($24,953,300), shall be preferred stock which may be made convertible or
non-convertible in the discretion of the Board of Directors when such preferred
stock is issued; and of which Three Hundred Fifty Million (350,000,000) shares
of the par value of Sixty-Two and One-Half Cents ($.625) each, amounting in the
aggregate to Two Hundred Eighteen Million Seven Hundred Fifty Thousand Dollars
($218,750,000) shall be common stock. Each share of common stock shall be
entitled to one (1) vote.
No holder of shares of any class of the stock of the corporation shall
have preemptive rights, and the corporation shall have the right to issue and to
sell to any person or persons any shares of its stock or any option rights or
any securities having conversion or option rights, without first offering such
shares, rights or securities to any holders of shares of any class of stock of
the corporation.
Further designations and powers, preferences and rights and
qualifications, limitations or restrictions shall be determined by the Board of
Directors as follows:
It is expressly granted to the Board of Directors of the corporation,
pursuant to the authority vested in it hereby, in this, the corporation's Third
Restated Articles of Incorporation, to issue the above-described preferred stock
in classes and in one or more series within each class, which classes or series
may receive dividends or no dividends and have such designations, preferences
and relative, participating, option, or other special rights and qualifications,
limitations or restrictions thereof as shall be stated in the resolution or
resolutions providing for the issue of such stock adopted by the Board of
Directors from time to time. The preferred stock shall have such voting powers,
full or limited, or no voting powers, as the Board of Directors may determine.
The Board of Directors may determine, in their discretion, whether or not the
Two Hundred Forty-Nine Thousand Five Hundred Thirty-Three (249,533) shares of
preferred stock, which is not presently designated as convertible, shall be
convertible into common stock or into any other securities of the corporation.
The Board of Directors, in resolutions providing
<PAGE> 2
for the issuance of said stock, shall have all of the powers authorized by the
Georgia Business Corporation Code.
As to any such resolution or resolutions adopted by the Board of
Directors pursuant to the authority hereby expressly vested in it, a statement
setting forth a copy of such resolution or resolutions and the number of shares
of such class or series shall be filed with the Secretary of State in accordance
with the Georgia Business Corporation Code.
Pursuant to the authority conferred upon the Board of Directors by the
Restated Articles of Incorporation, as amended, of the Company, the Board of
Directors on adopted the following resolution amending and restating the terms
of the series of One Hundred Thousand (100,000) shares of Preferred Stock
designated as Series A Junior Participating Preferred Stock:
1. Designation and Amount. The shares of such series shall be
designated an "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting such series shall be
100,000.
2. Dividends and Distributions.
(i) The holders of shares of Series A Preferred Stock, in
preference to the holders of Common Stock and of any other junior stock, shall
be entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, quarterly dividends payable in cash
on the payment date of any quarterly dividend for the Common Stock, or if there
should be no such payment date, then on the 45th day after the end of each
fiscal quarter (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (a) $50 or (b) subject to the provision for adjustment hereinafter set forth,
10,000 times the aggregate per share amount of all cash dividends, and 10,000
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common Stock
of the Company or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event the Company shall
at any time after the date hereof declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under clause (b) of the preceding
sentence shall be automatically adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(ii) The Company shall declare a dividend or distribution on
the Series A Preferred Stock as provided in subparagraph (i) of this paragraph 2
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of
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Common Stock); provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $50 per share on the Series A Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
(iii) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
A Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(i) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 10,000 votes on all matters submitted to a vote of the shareholders of the
Company. In the event the Company shall at any time after the date hereof
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise) into a greater or
lesser number of shares of Common Stock, then in each such case the number of
votes per share to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be automatically adjusted by
multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(ii) Except as otherwise provided herein or by law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the Company having general voting
rights shall vote together as one voting group on all matters submitted to a
vote of shareholders of the Company.
(iii) Except as set forth herein, holders of Series A
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock and any other capital stock of the Company having general voting
rights as set forth herein) for taking any corporate action.
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<PAGE> 4
4. Certain Restrictions.
(i) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Company shall not:
(a) declare or pay dividends on, or make any other
distributions on, any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock;
(b) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(c) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, provided that the Company may at any time
redeem, purchase or otherwise acquire shares of any such junior stock
in exchange for shares of any stock of the Company ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Preferred Stock; or
(d) purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking
on a parity with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(ii) The Company shall not permit any subsidiary of the
Company to purchase or otherwise acquire for consideration any shares of stock
of the Company unless the Company could, under subsection (i) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares. Any shares of Series A Preferred Stock purchased
or otherwise acquired by the Company in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Company, no distribution shall be made (a) to
the holders of shares of stock ranking
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junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock unless, prior thereto, the holders of shares of
Series A Preferred Stock shall have received $10,000 per share, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
10,000 times the aggregate amount to be distributed per share to holders of
Common Stock, or (b) to the holders of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Company shall at any time after the
date hereof declare or pay any dividend on Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under the proviso in clause (a) of the
preceding sentence shall be automatically adjusted by multiplying such amount by
a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
7. Consolidation, Merger etc. In case the Company shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case the shares of Series A
Preferred Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 10,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Company
shall at any time after the date hereof declare or pay any dividend on Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
8. No Redemption. The shares of Series A Preferred Stock shall not be
redeemable.
9. Rank. The Series A Preferred Stock shall rank junior with respect to
payment of dividends and on liquidation to all other series of the Company's
preferred stock outstanding on the date hereof and to all such other series that
specifically provide that they shall rank senior to the Series A Preferred
Stock.
10. Amendment. The Articles of Incorporation of the Company shall not
be amended in any manner that would materially alter or change the powers,
preferences or special rights of the
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Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single class.
THIRD. A Director shall not be personally liable to the corporation or
its shareholders for monetary damages for breach of duty of care or other duty
as a director, except for liability:
(i) For any appropriation, in violation of his duties, of any
business opportunity of the corporation;
(ii) For acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(iii) For the types of liability set forth in ss. 14-2-831 of
the Georgia Business Corporation Code; or
(iv) For any transaction from which the director derived an
improper personal benefit.
FOURTH. The Board of Directors shall be divided into three classes,
each of which shall be as nearly equal in number as possible. At the annual
shareholders' meeting in 1989, one class, consisting of five directors shall be
elected for a one-year term, one class, consisting of four directors for a
two-year term and one class, consisting of four directors for a three-year term.
Commencing with the annual shareholders' meeting in 1990 and at each succeeding
annual shareholders' meeting, successors to the class of directors whose term
expires at such annual shareholders' meeting shall be elected for a three year
term. If the number of directors shall be changed, any such increase or decrease
shall be apportioned among the classes so as to maintain the number of directors
comprising each class as nearly equal as possible. Directors may be removed by
the shareholders only for cause. This Article may not be repealed or amended
unless such repeal or amendment is approved by the affirmative vote of holders
of at least 66-2/3% of the outstanding shares of stock of the corporation
entitled to vote generally in the election of directors.
FIFTH. Any action required or permitted to be taken at any annual or
special meeting of the shareholders of the corporation may be taken without a
meeting only if a consent in writing, setting forth the action so taken, shall
be signed by the holders of all of the outstanding shares of the corporation
entitled to vote on such action. This Article may not be repealed or amended
unless such repeal or amendment is approved by the affirmative vote of holders
of at least 66-2/3% of the outstanding shares of stock of the corporation
entitled to vote generally in the election of directors.
SIXTH. The Board of Directors shall consist of not less than ten (10)
or more than sixteen (16) members. The exact number of directors shall be as
fixed by resolution of the Board of Directors and may be changed from time to
time within the maximum and minimum provided above, by resolution of the Board
of Directors. This Article may not be repealed or amended unless such repeal or
amendment is approved by the affirmative vote of holders of at least 66-2/3% of
the outstanding shares of stock of the corporation entitled to vote generally in
the election of directors.
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SEVENTH. Special meetings of the shareholders may be called at any time
by the Chairman of the Board, Vice Chairman of the Board, the President or by a
majority of the Board of Directors. Special meetings of the shareholders shall
be called by the President or the Secretary at the written demand of the holder
or holders of not less than 66-2/3% of the outstanding shares of stock of the
corporation entitled to vote generally in the election of directors. Written
demands delivered pursuant to this Article must be signed, dated and delivered
to the Secretary, and must describe the purpose or purposes of the special
meeting. No action shall be taken, whether by amendment to the Articles or
otherwise, to reduce the percentage of shareholders required to join in a
shareholder demand for a special meeting as provided in this Article, unless
such action is approved by the affirmative vote of the holders of at least
66-2/3% of the outstanding shares of stock of the corporation entitled to vote
generally in the election of directors.
EIGHTH. In addition to the requirements of law, the affirmative vote of
the holders of at least 66-2/3% of the outstanding shares of stock of the
corporation entitled to vote generally in the election of directors (whether or
not the holders of such shares are present or represented at any meeting) shall
be required for the following transactions:
(A) Any plan of merger, share exchange or consolidation of the
corporation with another corporation, with respect to which a shareholder vote
is required by law;
(B) Any sale, lease, transfer, exchange or other disposition of all or
substantially all of the property and assets of the corporation, with respect to
which a shareholder vote is required by law;
(C) Any dissolution of the corporation;
(D) Shareholder adoption of any amendment to, repeal of or
establishment of, a by-law; or
(E) Any amendment to, or repeal of, all or any portion of this Article
Eighth;
provided, however, that if: (i) the Continuing Directors of the corporation
shall, by majority vote of the Continuing Directors then in office, have adopted
a resolution approving one of the enumerated matters and have determined to
recommend it for approval by the holders of voting stock of the corporation; and
(ii) at the time of adoption of such resolution, Continuing Directors shall have
comprised at least a majority of the Board of Directors, then the vote required
shall be the affirmative vote of the holders of at least a majority of the
outstanding shares of stock of the corporation entitled to vote generally in the
election of directors. For purposes of this Article Eighth, "Continuing
Director" shall mean the then current members of the Board of Directors who were
also members of the Board of Directors 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 Securities Exchange Act of 1934, as amended.
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NINTH. All shares of stock previously or hereafter reacquired by the
corporation pursuant to the power of the corporation to purchase its own shares
of stock conferred generally by law shall continue to be or become treasury
shares of the corporation, and shall remain such unless and until resold or
canceled by action of the Board of Directors.
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IN WITNESS WHEREOF, Flowers Industries, Inc. has caused these Third
Restated Articles of Incorporation to be executed, its corporate seal affixed
and the foregoing to be attested, all by duly authorized officers on the 19th
day of March, 1999.
[CORPORATE SEAL]
By: /s/ Amos R. McMullian
----------------------------
Amos R. McMullian
ATTEST: /s/ G. Anthony Campbell Chairman of the Board and Chief
----------------------------- Executive Officer
G. Anthony Campbell
Secretary and General Counsel
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<PAGE> 1
EXHIBIT 10.11
SEPARATION AGREEMENT
AGREEMENT between Flowers Industries, Inc., a Georgia corporation (the
"Company"), and _______________ (the "Employee"), dated as of the 8th day of
March, 1999.
WHEREAS, the Company, on behalf of itself and its shareholders, wishes
to continue to attract and retain well-qualified executive and key personnel who
are an integral part of the management of the Company or of one or more of its
Subsidiaries, such as Employee, and to assure itself of continuity of management
in the event of any prospective or actual Change in Control (as defined in
Section 2 of this Agreement) of the Company; and
WHEREAS, the Company wishes to provide the Employee with appropriate
protection with respect to the Employee's continued employment in the event of a
prospective or actual Change in Control, in exchange for the Employee agreeing
to continue to serve as an executive employee of the Company or a Subsidiary in
the event of a prospective or actual Change in Control; and
WHEREAS, the Employee agrees to continue to serve as an executive
employee of the Company or a Subsidiary in the event of a prospective or actual
Change in Control as consideration for the employment rights set forth herein;
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants and conditions set forth herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and the Employee hereby agree as follows:
1. Operation of Agreement.
(a) The "Effective Date" shall be February 12, 1999.
(b) Certain capitalized terms shall have the meaning
indicated in Appendix I. In addition, the term "Employer" shall mean the Company
or a Subsidiary, as applicable.
(c) The "Coverage Period" is the period commencing on the
Effective Date and ending on the second anniversary of such date; provided,
however, that commencing on the date one year after the Effective Date (the
"Renewal Date"), and on each anniversary of the Renewal Date, the Coverage
Period shall be automatically extended so as to terminate two years from such
Renewal Date or Renewal Date anniversary, as the case may be, unless at least 60
days prior to the Renewal Date or Renewal Date anniversary, as the case may be,
either party shall give the other party written notice that the Coverage period
shall not be so extended. Notwithstanding the foregoing, in the event a Change
in Control (as defined below) occurs during the Coverage Period, the Coverage
period shall be automatically extended to terminate on the second anniversary of
the Change in Control.
<PAGE> 2
2. Change in Control. For the purpose of this Agreement, a "Change in Control"
shall be deemed to have occurred upon the first to occur of any of the following
events:
(a) the Company enters into an agreement which provides
(i) for the Company becoming a subsidiary of, or
being merged with or consolidated into, another corporation or entity
(other than (A) a corporation at least 80% of which is owned by the
Company or (B) Keebler Foods Company or any successor to Keebler Foods
Company so long as it is owned at least 50% by the Company (any of
which are referred to hereafter as a "Keebler Entity")) or
(ii) for substantially all of the assets of the
Company to be sold to another corporation or entity (other than (A) a
corporation at least 80% of which is owned by the Company or (B) a
Keebler Entity;
(b) any person, corporation, partnership or other entity,
either alone or in conjunction with its Affiliates, or any other group of
persons, corporations, partnerships or other entities who are not Affiliates but
who are acting in concert, are determined to own of record or beneficially
securities of the Company which represent fifteen percent (15%) 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 in Section 2(e) hereof; 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 of
Common Stock:
(i) which were beneficially owned by a member on
February 12, 1999, 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;
(ii) initially acquired by a member or an
Affiliate or Associate thereof after February 12, 1999, 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;
(iii) initially acquired by a member or an
Affiliate or Associate thereof after February 12, 1999 pursuant to the
exercise of any options, rights or warrants granted to such person by
the Company; or
(iv) 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;
(c) the first to occur of (x) the Board of Directors'
actual knowledge of, or (y) the reporting to the Securities and Exchange
Commission of, the tender, pursuant to a tender offer or exchange offer other
than by the Company, of shares representing fifteen percent (15%) 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;
(d) the Board of Directors of the Company adopts a
resolution approving the liquidation or dissolution of the Company;
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(e) Continuing Directors at any time fail to constitute a
majority of the Board of Directors of the Company or of any resulting company
into which the Employer was merged or to which substantially all of its assets
were transferred as described in paragraph 2(a) above (even though said merger
or transfer is made with or to an 80% owned subsidiary or a Keebler Entity), and
the term "Continuing Directors" shall mean the then current members of the Board
of Directors who were also members of the Board of Directors on February 12,
1999 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 Securities Exchange Act of 1934, as amended
(the "Exchange Act");
(f) an event described in (a) above occurs with respect
to the Employer, if it is not also the Company; or
(g) 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 the Exchange Act, or any
successor provision thereof.
3. Employment Period. Subject to the provisions of Sections 6 and
7 of this Agreement, and provided (i) that the Employee is still employed by the
Employer immediately preceding the occurrence of a Change in Control, and (ii)
that this Agreement is in effect as provided in Section 1 above, the Employer
hereby agrees to continue the Employee in its employ, and the Employee hereby
agrees to remain in the employ of the Employer for the period commencing on the
effective date of such Change in Control (the "Commencement Date") and ending on
the second anniversary of the Commencement Date (the "Employment Period"). The
Employee also agrees to remain in the employ of the Employer in the event of any
anticipated Change in Control, so long as this Agreement is in effect as
provided in Section 1.
4. Position and Duties.
(a) During the Employment Period, the Employee's position
(including status, offices, titles and reporting requirements, authority, duties
and responsibilities) shall be at least commensurate in all material respects
with those held, exercised and assigned at any time during the 90-day period
immediately preceding the Commencement Date, and the Employee's principle place
of business shall be located within a 30 mile radius of the location of said
principle place of business immediately preceding the Commencement Date.
(b) Excluding periods of vacation and sick leave to which
the Employee is entitled, the Employee agrees during the Employment Period to
devote substantially all of his attention and time during normal business hours
to the business and affairs of the Employer and, to the extent necessary to
discharge the responsibilities assigned to the Employee hereunder, to use
reasonable best efforts to perform faithfully and efficiently such
responsibilities. The Employee may (i) serve on corporate, civic or charitable
boards or committees, (ii) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (iii) manage personal investments, so long
as such activities do not interfere with the performance of the Employee's
responsibilities to the
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<PAGE> 4
Employer. It is expressly understood and agreed that to the extent that any such
activities have been conducted by the Employee prior to the Commencement Date,
such prior conduct of activities, and any subsequent conduct of activities
similar in nature and scope, shall not thereafter be deemed to interfere with
the performance of the Employee's responsibilities to the Employer.
5. Compensation. The following provisions apply during such time
as the Employee is employed during the Employment Period:
(a) Base Salary. During the Employment Period, the
Employee shall receive a base salary as increased hereunder from time to time
("Base Salary") at a rate at least equal to the salary paid to the Employee by
the Employer, together with any of its Affiliates, immediately prior to the
Commencement Date. The Base Salary shall be reviewed periodically and may be
increased (but not decreased) in the course of each such review to reflect
increases in the cost of living and such other increases as shall be consistent
with increases in base salary awarded in the ordinary course of business to
other key executives. Under no circumstances shall any increase in the Base
Salary (i) limit or reduce any other obligation to the Employee under this
Agreement, or (ii) be later reduced or eliminated, once effective.
(b) Annual Bonus and Long-Term Incentive Compensation.
(i) In addition to the Base Salary, the Employee
shall be paid, for each fiscal year ending during the Employment
Period, an annual bonus (an "Annual Bonus") pursuant to the Company's
Annual Executive Bonus Plan, or a comparable successor plan, in cash,
the amount of which Annual Bonus shall be based on substantially the
same performance criteria and goals as were in effect in connection
with the Bonus Plan or a comparable successor plan to said Bonus Plan
immediately prior to the Commencement Date. In no event, however, shall
the Employee's Annual Bonus be reduced to a level which is less than
the average bonus paid by the Employer with respect to the Employee
under the Bonus Plan (or a comparable successor plan to the Bonus Plan)
for the three fiscal years of the Employer in which were paid the
highest bonuses during the five said years immediately preceding the
Commencement Date. Each such Annual Bonus shall be payable within three
months after the end of the fiscal year for which the Annual Bonus is
awarded, unless the Employee shall otherwise timely elect to defer the
receipt of such Annual Bonus under any deferred compensation plan of
the Employer then in effect.
(ii) For each fiscal year during the Employment
Period, the Employee shall also receive any long-term incentive
compensation to which he is entitled pursuant to the terms of
Restricted Stock Awards or Options or other stock-based awards granted
under the Company's Executive Stock Incentive Plan, and shall
furthermore continue to receive grants of said types of awards (other
than an extraordinary award) consistent with the prior practices of the
Company as determined in the two fiscal years of the Company ending
immediately prior to the Change in Control.
(c) Incentive Savings and Retirement Plans. In addition
to the Base Salary and Annual Bonus and Long-Term Incentive Compensation payable
as hereinabove provided, the Employee shall be entitled to participate, during
the Employment period, in all incentive, savings and retirement plans and
programs applicable to other key executives of the Employer in comparable
positions, but in no event shall such plans and programs, in the aggregate,
provide the Employee
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<PAGE> 5
with compensation, benefits and reward opportunities less favorable than those
provided by the Employer under such plans and programs as in effect with respect
to the Employee at any time during the 90-day period immediately preceding the
Commencement Date.
(d) Welfare Benefit Plans. During the Employment Period,
the Employee and/or the Employee's dependents as the case may be, shall be
eligible to participate in and shall receive all benefits under each welfare
benefit plan of the Employer, including, without limitation, all medical,
dental, disability, group life, accidental death and travel accident insurance
plans and programs of the Employer, as in effect with respect to the Employee
and his dependents at any time during the 90-day period immediately preceding
the Commencement Date or, if more favorable to the Employee, as in effect at any
time thereafter with respect to other key executives of the Employer in
comparable positions.
(e) Expenses. During the Employment Period, the Employee
shall be entitled to receive prompt reimbursement for all reasonable
business-related expenses incurred by the Employee in accordance with the
policies and procedures of the Employer as in effect with respect to the
Employee at any time during the 90-day period immediately preceding the
Commencement Date or, if more favorable to the Employee, as in effect at any
time thereafter with respect to other key executives of the Employer in
comparable positions.
(f) Fringe Benefits. During the Employment Period, the
Employee shall be entitled to fringe benefits and perquisites in accordance with
the policies of the Employer as in effect with respect to the Employee at any
time during the 90-day period immediately preceding the Commencement Date or, if
more favorable to the Employee, as in effect at any time thereafter with respect
to other key executives of the Employer in comparable positions.
(g) Office and Support Staff. During the Employment
Period, the Employee shall be entitled to an office or offices of a size and
with furnishings and other appointments, and to secretarial and other
assistance, at least equal to those provided to the Employee at any time during
the 90-day period immediately preceding the Commencement Date or, if more
favorable to the Employee, as provided at any time thereafter with respect to
other key executives of the Employer in comparable positions.
(h) Vacation. During the Employment Period, the Employee
shall be entitled to paid vacation in accordance with the policies of the
Employer as in effect with respect to the Employee at any time during the 90-day
period immediately preceding the Commencement Date or, if more favorable to the
Employee, as in effect at any time thereafter with respect to other key
executives of the Employer in comparable positions.
6. Termination. Prior to the Commencement Date, the employment of
the Employee may be terminated at any time by the Employee or the Employer, with
or without cause of any nature, in accordance with the Employer's usual policies
and practices, at which time this Agreement shall automatically terminate. The
following provisions relate solely to termination of the Employee's employment
during the Employment Period:
(a) Death or Disability.
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<PAGE> 6
(i) Subject to Section 7 below, this Agreement
shall terminate automatically upon the Employee's death.
(ii) Subject to Section 7 below, the Company may
terminate this Agreement after having established the Employee's
Disability (pursuant to the definition of "Disability" set forth
below), by giving to the Employee written notice of its intention to
terminate the Employee's employment. In such a case, the Employee's
employment with the Employer shall terminate effective on the 90th day
after receipt of such notice (the "Disability Effective Date"), unless
within 90 days after such receipt, the Employee shall have returned to
the full-time performance of the Employee's duties. For purposes of
this Agreement, "Disability" means disability which, after the
expiration of more than 26 weeks after its commencement, is determined
to be total and permanent by a physician selected by the Company or its
insurers and acceptable to the Employee or the Employee's legal
representative (such agreement as to acceptability not to be withheld
unreasonably).
(b) Cause. The Employer may terminate the Employee's
employment for "Cause." For purposes of this Agreement, "Cause" means (i) an act
or acts of dishonesty, moral turpitude or willful misconduct taken by the
Employee and intended to result in substantial personal enrichment of the
Employee at the expense of the Company or any Subsidiary or which have a
material adverse impact on the business or reputation of the Company or any
Subsidiary of the Company, or (ii) repeated violations by the Employee of the
Employee's obligations under Section 4 of this Agreement which are demonstrably
willful and deliberate on the Employee's part and which have a material adverse
impact on the business or reputation of the Company or any Subsidiary of the
Company, but specifically excluding alleged violations which are due to
disability or for "Good Reason" as defined below.
(c) Good Reason. The Employee's employment may be
terminated by the Employee for Good Reason. For purposes of this Agreement,
"Good Reason" means:
(i) (A) the Assignment to the Employee of any
duties inconsistent in any material respect with the Employee's
position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as contemplated by
Section 4 of this Agreement or (B) any other action by the Employer
which results in a material diminishment in such position, authority,
duties or responsibilities, other than action or inaction which is
remedied by the Employer within 30 days after receipt of written notice
thereof given by the Employee;
(ii) any failure by the Company to comply with
any of the provisions of Section 5 of this Agreement, other than any
failure which is remedied by the Company within 30 days after receipt
of written notice thereof given by the Employee;
(iii) the Employer's requiring the Employee to be
based at any office or location more than 30 miles away from that at
which the Employee is based at the Commencement Date, except for travel
reasonably required consistent with past practices, in the performance
of the Employee's responsibilities;
(iv) any purported termination by the Employer of
the Employee's employment otherwise than as permitted by this
Agreement; or
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<PAGE> 7
(v) any failure by the Company to comply with
and satisfy Section 12(c) of this Agreement.
(d) Notice of Termination. Any termination by the
Employer for Cause or by the Employee for Good Reason shall be communicated by
Notice of Termination to the other party hereto given in accordance with Section
14(b) of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Employee's employment under the provision so indicated, and (iii) if the
termination date is other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than 15 days after the giving of
such notice).
(e) Date of Termination. "Date of Termination" means the
date of receipt of the Notice of Termination or any later date specified
therein, as the case may be. If the Employee's employment is terminated by the
Employer in breach of this Agreement, the Date of Termination shall be the date
on which the Employer notifies the Employee of such termination.
7. Obligations of the Company Upon Termination. The following
provisions apply only in the event the Employee is terminated during the
Employment Period:
(a) Death. If the Employee's employment is terminated by
reason of the Employee's death, this Agreement shall terminate without further
obligation to the Employee's legal representatives under this Agreement other
than those payment amounts accrued and payable hereunder at the date of the
Employee's death. Anything in this Agreement to the contrary notwithstanding,
the Employee's family shall be entitled to receive benefits at least equal to
those provided by the Employer to surviving families of executives of the
Employer in the same or comparable positions under such plans, programs and
policies relating to family death benefits, if any, as in effect at any time
during the 90-day period immediately preceding the Commencement Date or, if more
favorable to the Employee and/or the Employee's family, as in effect at the time
of Employee's death with respect to other key executives of the Employer in
comparable positions and their families.
(b) Disability. If the Employee's employment is
terminated by reason of the Employee's Disability, the Employee shall be
entitled after the Disability Effective Date to receive any amounts then accrued
and payable hereunder and to receive disability and other benefits at least
equal to those provided by the Employer to disabled employees and/or their
families in accordance with such plans, programs and policies relating to
disability, if any, as in effect with respect to executives of the Employer in
the same or comparable positions at any time during the 90-day period
immediately preceding the Commencement Date or, if more favorable to the
Employee and/or the Employee's family, as in effect at the time of the
disability termination with respect to other key executives of the Employer in
comparable positions and their families.
(c) Cause. If the Employee's employment shall be
terminated for Cause, the Employer shall pay the Employee his full Base Salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given and shall provide the Employee, through the Date of
Termination, such welfare benefits, fringe benefits, and other perquisites as
were provided to the
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<PAGE> 8
Employee immediately prior to delivery to Employee of the Notice of Termination.
Subject to Section 8 below, the Company shall have no further obligation to the
Employee under this Agreement.
(d) Good-Reason; Other Than for Cause or Disability. If
the Employer shall terminate the Employee's employment with the Employer other
than for Cause or Disability, or the employment of the Employee with the
Employer shall be terminated by the Employee for Good Reason,
(i) the Employer shall pay to the Employee in a
lump sum in cash within 30 days after the Date of Termination the
aggregate of the following amounts:
(A) if not theretofore paid, the
Employee's Base salary through the Date of Termination at the
rate in effect on the Date of Termination or, if higher, at
the rate in effect immediately prior to the Commencement Date;
and
(B) _____ times the sum of (x) the
Employee's annual Base Salary at the rate in effect at the
time Notice of Termination was given or, if higher, the rate
in effect immediately prior to the Commencement Date and (y) a
bonus equivalent equal to the Base Salary as determined in (x)
above multiplied by the Target Bonus Percentage most recently
applied to him for said purpose; and
(C) in the case of vested compensation
previously deferred by the Employee, all amounts, if any, of
such compensation previously deferred and not yet paid by the
Company;
(ii) the Employer shall, promptly upon submission
by the Employee of supporting documentation, pay or reimburse to the
Employee any business-related costs and expenses (including already
accrued moving and relocation expenses) paid or incurred by the
Employee on or before the Date of Termination or within 30 days after
the Date of Termination which would have been payable under Section
5(e) if the Employee's employment had not terminated;
(iii) until the first anniversary of the
Employee's Date of Termination (such number of months remaining until
such first anniversary is hereinafter sometimes referred to as the
"Unexpired Term"), the Employer shall continue benefits (or equivalent
coverage) to the Employee and/or the Employee's family at least equal
to those which would have been provided to them in accordance with the
plans, programs and policies described in Sections 5(d) and 5(f) of
this Agreement if the Employee's employment had not been terminated, if
and as in effect at any time during the 90-day period immediately
preceding the Commencement Date or, if more favorable to the Employee,
as in effect from time to time during the Unexpired Term with respect
to other key executives of the Employer in comparable positions and
their families; and
(iv) upon request by the Employee at any time
within one year following the Date of Termination, the Employer shall
pay any reasonable expenses incurred by the Employee in relocating
Employee and his dependents to any chosen location within the 48
contiguous United States which is more than 30 miles from the
Employee's residence on the
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<PAGE> 9
Date of Termination, except to the extent (if any) that the expenses of
such relocation have been or will be reimbursed by a new employer of
Employee. Relocation expenses which shall be reimbursed pursuant to
this paragraph include (1) all closing costs and brokerage or
commission fees incurred by the Employee in connection with the sale of
his home, and (2) all costs of moving household goods and personal
effects to the new location (including costs of packing and unpacking,
and insurance for up to $100,000 coverage). In addition, upon the
written request of the Employee, the Employer shall make an offer to
purchase the Employee's home for cash in an amount equal to the greater
of (A) the reasonably estimated value of Employee's home six months
prior to the occurrence of the Change in Control or (B) the reasonably
estimated value on the Date of Termination (the greater of such values
is hereinafter referred to as the "Established Value"). For purposes of
determining the Established Value, the Employer and the Employee shall
each, at the Employer's expense, engage real estate appraisers who are
certified to evaluate professionally the reasonably estimated values of
the home as set forth above. The Established Value shall include the
land, buildings, improvements, and designated items of personal
property (limited to carpeting and draperies) which the Employee plans
to leave behind when he or s/he moves. Upon completion of the two
appraisals the two will be averaged to determine the Established Value.
If, however, the lower of the two appraisals varies by more than 10%
from the higher appraisal, a third appraisal will be made at the
Employer's expense by an appraiser to be chosen mutually by the first
two appraisers, and the average of all three appraisals will constitute
the Established Value. The Employer will then offer in writing to
purchase the home at the Established Value. The Employee will have 60
days from the date of the offer within which to accept the offer. The
Employee will have, at his option, up to 60 days from his acceptance of
the offer within which to close the sale and vacate the property.
Additionally, the Employer shall pay the Employee such additional
amount as is necessary in order to compensate the Employee for any
taxes which become payable with respect to the expenses reimbursed as
described in this subparagraph (iv), so that the covered relocation
expenses are fully reimbursed on an after-tax basis.
8. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Employee's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the Employer for
which the Employee may qualify, nor shall anything herein limit or otherwise
affect such rights as the Employee may have under any other agreements with the
Company or any of its Subsidiaries. Amounts which are vested benefits or which
the Employee is otherwise entitled to receive under any plan or program of the
Company or any of its Subsidiaries at or subsequent to the date of Termination
shall be in accordance with such plan or program.
9. Full Settlement. The Company's obligation to make the payment
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances including, without
limitation, any set-off, counter-claim, recoupment, defense (except as provided
in this Agreement) or other right which the Company or Employer may have against
the Employee or others. In no event shall the Employee be obligated to seek
other employment by way of mitigation of the amounts payable to the Employee
under any of the provisions of this Agreement, nor shall re-employment of the
Employee elsewhere in any way affect or offset the amounts payable pursuant to
this Agreement.
The Company agrees to pay, to the full extent permitted by law, all
legal fees and expenses which the Employee may incur as a result of any contest,
in which the Employee is successful in
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<PAGE> 10
whole or in part, by the Company or others of the validity or enforceability of,
or liability under, any provision of this Agreement or any guarantee of
performance thereof or as a result of any contest by the Employee, which is
successful in whole or in part, against the amount of any reduction pursuant to
Section 10 of this Agreement, plus in each case interest on the total unpaid
amount determined to be payable under this Agreement, payable at rates of
interest equal to the Standard & Poors' Corporate Composite AA Weekly Bond Yield
Index averaged over the period during which said amounts remained unpaid.
10. Tax Gross-Up for Payments by the Company.
(a) If a Change in Control of the Company occurs, and any
payment or benefit provided by the Company or any of its Subsidiaries to or for
the benefit of the Employee, whether paid or payable or provided or to be
provided pursuant to the terms of this Agreement or otherwise pursuant to or by
reason of any other agreement, policy, plan, program or arrangement, including
without limitation any stock option, performance share, performance unit, stock
appreciation right, restricted stock award, executive incentive award, or
similar right, or the lapse or termination of any restriction on, or the vesting
or exercisability of, any of the foregoing (a "Payment"), would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision) by reason of being considered
"contingent on a change in ownership or control" of the Company, within the
meaning of Section 280G of the Code (or any successor provision) or to any
similar excise or penalty tax imposed by state or local law, or any interest or
penalties with respect to that tax (that tax or those taxes, together with any
interest and penalties, may be referred to as the "Excise Tax"), then, if the
Employee complies with the requirements of the policy contained in this Section
10, the Employee will be entitled to receive an additional payment or payments
(collectively, a "Gross-Up Payment"); provided, however, that no Gross-Up
Payment will be made with respect to the Excise Tax, if any, attributable to (i)
any incentive stock option, as defined by Section 422 of the Code ("ISO")
granted prior to February 12, 1999 or (ii) any stock appreciation or similar
right, whether or not limited, granted in tandem with any ISO described in
clause (i). The Gross-Up Payment will be in an amount such that, after payment
by the Employee of all taxes (including any interest or penalties imposed with
respect to those taxes), including any Excise Tax imposed upon the Gross-Up
Payment, the Employee retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payment.
(b) Subject to the provisions of subparagraph (f) below,
all determinations required to be made under this policy, including whether an
Excise Tax is payable by the Employee and the amount of that Excise Tax and
whether a Gross-Up Payment is required to be paid by the Company to the Employee
and the amount of that Gross-Up Payment, if any, will be made by a nationally
recognized accounting firm (the "Accounting Firm") selected by the Employee in
his sole discretion. The Employee will direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Employee within thirty (30) calendar days after the Employee's receipt of the
first Payment upon or following the Change in Control, and any other time or
times as may be requested by the Company or the Employee. If the Accounting Firm
determines that any Excise Tax is payable by the Employee, the Company will pay
the required Gross-Up Payment to the Employee within five (5) business days
after receipt of the determination and calculations with respect to any Payment
to the Employee. If the Accounting Firm determines that no Excise Tax is payable
by the Employee, it will, at the same time as it makes that determination,
furnish the Company and the Employee an opinion that the Employee has
substantial authority not to report any Excise Tax on his federal, state or
local income or other tax return. As
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<PAGE> 11
a result of the uncertainty in the application of Section 4999 of the Code (or
any successor provision) and the possibility of similar uncertainty regarding
applicable state or local tax law at the time of any determination by the
Accounting Firm, it is possible that Gross-Up Payments which will not have been
made by the Company should have been made (an "Underpayment"), consistent with
the calculations required to be made under this policy. If the Company exhausts
or fails to pursue its remedies pursuant to subparagraph (f) and the Employee
subsequently is required to make a payment of any Excise Tax, the Employee will
direct the Accounting Firm to determine the amount of the Underpayment that has
occurred and to submit its determination and detailed supporting calculations to
both the Company and the Employee as promptly as possible. Any such Underpayment
will be promptly paid by the Company to, or for the benefit of, the Employee
within five (5) business days after receipt of the determination and
calculations.
(c) The Company and the Employee will each provide the
Accounting Firm access to and copies of any books, records and documents in the
possession of the Company or the Employee, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the Accounting
Firm in connection with the preparation and issuance of the determinations and
calculations contemplated by subparagraph (b). Any determination by the
Accounting Firm as to the amount of the Gross-Up Payment will be binding upon
the Company and the Employee.
(d) The federal, state and local income or other tax
returns filed by the Employee will be prepared and filed on a consistent basis
with the determination of the Accounting Firm with respect to the Excise Tax
payable by the Employee. The Employee will make proper payment of the amount of
any Excise Payment, and at the request of the Company, provide to the Company
true and correct copies (with any amendments) of his federal income tax return
as filed with the Internal Revenue Service and corresponding state and local tax
returns, if relevant, as filed with the applicable taxing authority, and those
other documents reasonably requested by the Company, evidencing that payment. If
prior to the filing of the Employee's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting firm
determines that the amount of the Gross-Up Payment should be reduced, the
Employee shall within five (5) business days pay to the Company the amount of
that reduction.
(e) The reasonable fees and expenses of the Accounting
Firm for its services in connection with the determinations and calculations
contemplated by subparagraph (b) will be borne by the Company to the extent they
are reasonable by industry standards. If those fees and expenses are initially
paid by the Employee, the Company will reimburse the Employee the full amount of
those fees and expenses within five (5) business days after receipt from the
Employee of a statement for them and reasonable evidence of his payment of them.
(f) The Employee will notify the Company in writing of
any claim by the Internal Revenue Service or any other taxing authority that, if
successful, would require the payment by the Company of a Gross-Up Payment. That
notification will be given as promptly as practicable but no later than ten (10)
business days after the Employee actually receives notice of that claim and the
Employee will further apprize the Company of the nature of that claim and the
date on which that claim is requested to be paid (in each case, to the extent
known by the Employee). The Employee will not pay that claim prior to the
earlier of (i) the expiration of the thirty (30) calendar-day period following
the date on which he gives that notice to the Company and (ii) the date that any
payment
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<PAGE> 12
of an amount with respect to that claim is due. If the Company notifies the
Employee in writing prior to the expiration of that period that it desires to
contest the claim, the Employee will:
(i) provide the Company with any written records
or documents in his possession relating to that claim reasonably
requested by the Company;
(ii) take that action in connection with
contesting the claim as the Company reasonably requests in writing from
time to time, including without limitation accepting legal
representation with respect to that claim by an attorney competent in
respect of the subject matter and reasonably selected by the Company;
(iii) cooperate with the Company in good faith in
order effectively to contest that claim; and
(iv) permit the Company to participate in any
proceedings related to that claim;
provided, however, that the Company will bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with that
contest and will indemnify and hold harmless the Employee, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect to the Excise Tax, imposed as a result of that
representation and payment of costs and expenses. Without limiting the foregoing
provisions of this subparagraph (f), the Company will control all proceedings
taken in connection with the contest of any claim contemplated by this
subparagraph (f) and, as its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of that claim (provided, however, that the Employee may
participate in them at his own cost and expense) and may, at its option, either
direct the Employee to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Employee will prosecute that contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company will determine;
provided, however, that if the Company directs the Employee to pay the tax
claimed and sue for a refund, the Company will advance the amount of that
payment to the Employee on an interest-free basis and will indemnify and hold
harmless the Employee, on an after-tax basis, from any Excise Tax or income or
other tax, including interest or penalties with respect to the Excise Tax,
imposed with respect to that advance; and provided further, however, that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of the Employee with respect to which the contested amount is
claimed to be due is limited solely to that contested amount. Furthermore, the
Company's control of any contested claim will be limited to issues with respect
to which a Gross-Up Payment would be payable pursuant to this policy and the
Employee will be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
11. Confidential Information. The Employee shall hold in a
fiduciary capacity for the benefit of the Company any and all secret or
confidential information, knowledge or data relating to the Company or any of
its Affiliates and their respective businesses, which (i) was obtained by the
Employee during the Employment Period or during the Employee's prior employment
by the Company or any of its Affiliates and (ii) is not public knowledge (other
than by acts by the Employee or his representatives in violation of this
Agreement). After termination of the Employee's employment with the Company, the
Employee shall not, without the prior written
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consent of the Company, communicate or divulge any such information, knowledge
or data to anyone other than the Company and those designated by it, unless
required by legal process.
12. Successors.
(a) This Agreement is personal to the Employee and
without the prior written consent of the Company the benefits accrued and
payable hereunder shall not be assignable by the Employee otherwise than by will
or the laws of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Employee's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors.
(c) In the event of a Change in Control of the Company,
any Parent Company or Successor (as such terms are defined in Appendix I hereof)
shall (i) in the case of a Successor, by an agreement in form and substance
reasonably satisfactory to the Employee, expressly assume and agree to perform
this Agreement and (ii) in the case of a Parent Company, by an agreement in form
and substance reasonably satisfactory to the Employee, guarantee and agree to
cause the performance of this Agreement, in each case, in the same manner and to
the same extent as the Company would be required to perform if no Change in
Control had taken place.
13. Coordination of Benefits. Notwithstanding any contrary
provision of this Agreement, any amounts paid to Employee pursuant to the
Company's Severance Policy shall reduce pro tanto the amounts payable to
Employee pursuant to this Agreement.
14. Indemnification. During the Coverage Period, and thereafter
with respect to any act occurring within said Coverage Period, the Company
agrees to continue in force any indemnification agreements or obligations which
are in effect as of the Effective Date, and which would provide indemnification
to Employee, including any such provisions of the Company's Articles of
Incorporation or By-laws.
15. Miscellaneous.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall
be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Employee:
---------------------------------
---------------------------------
---------------------------------
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If to the Company:
Flowers Industries, Inc.
1919 Flowers Circle
Thomasville, Georgia 31757
Attention: Secretary
with additional copy to the
General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) This Agreement contains the entire understanding of
the Company and the Employee with respect to the subject matter hereof.
(f) The Employee and the Company and any other Employer
acknowledge that the employment of the Employee by the Employer is "at will,"
and, prior to the Commencement Date, may be terminated by either the Employee or
the Employer at any time with or without cause of any nature.
(g) The Company may, without the consent of Employee,
amend at any time the definition of "Change in Control" set forth in Section 2,
above, by resolution adopted by the Compensation Committee of the Company's
Board of Directors, unless a Change in Control has previously occurred.
(h) The terms "Affiliate," "Associate," "Parent Company,"
"Subsidiary," and "Successor" are defined in Appendix I hereto, which is
incorporated by reference herein.
IN WITNESS WHEREOF, the Employee has hereunto set his hand,
and the Company has caused these presents to be executed in its name on its
behalf, all as of the day and year first above written.
FLOWERS INDUSTRIES, INC.
EMPLOYEE By:
-----------------------------------------
Title:
- ------------------------------ -----------------------------------
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APPENDIX I
DEFINITIONS OF CERTAIN TERMS
(1) The term "Affiliate," used to indicate a relationship to a
specified person, shall mean a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, such specified person. For purposes of this term control means
50%.
(2) The term "Associate," used to indicate a relationship with a
specified person, shall mean (i) any corporation, partnership, or other
organization of which such specified person is an officer or partner, (ii) any
trust or other estate in which such specified person has a substantial
beneficial interest or as to which such specified person serves as trustee or in
a similar fiduciary capacity, (iii) any relative or spouse who has the same home
as such specified person, or who is a director or officer of the Company or any
of its parents or subsidiaries, and (iv) any person who is a director, officer,
or partner of such specified person or of any corporation (other than the
Company or any wholly-owned subsidiary of the Company), partnership or other
entity which is an Affiliate of such specified person.
(3) The term "Parent Company" shall mean a corporation or
corporations of which the Company becomes a direct or indirect subsidiary, or a
corporation or corporations, or unincorporated entity or entities, which
indirectly control the Company by controlling the greatest amount of equity (by
vote) of the Company.
(4) The term "Subsidiary" shall mean a corporation or other
business entity at least 50% of whose stock (or other applicable capital
interest) is owned directly or indirectly by the Company.
(5) The term "Successor" shall mean another corporation or
unincorporated entity or group of corporations or unincorporated entities which
acquires all or substantially all of the assets of the Company.
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EXHIBIT 10.16
- --------------------------------------------------------------------------------
FLOWERS INDUSTRIES, INC.
TO
SUNTRUST BANK, ATLANTA
Trustee
INDENTURE
Dated as of April 27, 1998
7.15% Debentures due 2028
- --------------------------------------------------------------------------------
<PAGE> 2
FLOWERS INDUSTRIES, INC.
Reconciliation and Tie Between the Trust Indenture Act of 1939 and Indenture
dated as of April 27, 1998.
<TABLE>
<CAPTION>
TRUST INDENTURE ACT SECTION INDENTURE SECTION
--------------------------- -----------------
<S> <C>
Section 310(a)(1).............................. 7.9
.......................................... 7.10
.......................................... 7.11
(a)(2).................................... 7.9
.......................................... 7.10
.......................................... 7.11
(a)(3).................................... Not Applicable
(a)(4).................................... Not Applicable
(a)(5).................................... 7.9
(b)....................................... 7.8
.......................................... 7.10
.......................................... 7.11
Section 311(a)................................. 7.13
(b)....................................... 7.13
(c)....................................... 7.13
Section 312(a)................................. 5.1
.......................................... 5.2(a)
(b)....................................... 5.2(b)
(c)....................................... 5.2(c)
Section 313(a)................................. 5.3(a)
(b)....................................... 5.3(a)
(c)....................................... 5.3(a)
(d)....................................... 5.3(b)
Section 314(a)................................. 14.7
(b)....................................... Not Applicable
(c)(1).................................... 14.5
(c)(2).................................... 14.5
(c)(3).................................... Not Applicable
(d)....................................... Not Applicable
(e)....................................... 14.5
Section 315(a)................................. 7.1
(b)....................................... 6.9
(c)....................................... 7.1
(d)....................................... 7.1
(d)(1).................................... 7.1(a)
(d)(2).................................... 7.1(b)
(d)(3).................................... 7.1(c)
(e)....................................... 6.10
Section 316(a)................................. 6.7
(a)(1)(A)................................. 6.7
(a)(1)(B)................................. 6.7
(a)(2).................................... Not Applicable
(b)....................................... 6.4
Section 317(a)(1).............................. 6.5
(a)(2).................................... 6.5
(b)....................................... 4.4
Section 318(a)................................. 14.7
</TABLE>
Debenture: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS.................................................................................1
SECTION 1.1. Definitions.................................................................................1
ARTICLE II ISSUE, DESCRIPTION, EXECUTION,
REGISTRATION AND EXCHANGE OF DEBENTURES.....................................................7
SECTION 2.1. Designation Amount and Issue of Debentures..................................................7
SECTION 2.2. Form of Debentures..........................................................................7
SECTION 2.3. Date and Denomination of Debentures; Payments of Interest...................................7
SECTION 2.4. Execution of Debentures.....................................................................9
SECTION 2.5. Exchange and Registration of Transfer of Debentures:
Restrictions on Transfer Depositary.........................................................9
SECTION 2.6. Mutilated, Destroyed, Lost or Stolen Debentures............................................12
SECTION 2.7. Temporary Debentures.......................................................................13
SECTION 2.8. Cancellation of Debentures Paid, Etc.......................................................13
SECTION 2.9. Cusip Numbers..............................................................................13
ARTICLE III REDEMPTION OF DEBENTURES...................................................................14
SECTION 3.1. Redemption.................................................................................14
SECTION 3.2. Notice of Trustee..........................................................................14
SECTION 3.3. Notice of Redemption; Selection of Debentures..............................................14
SECTION 3.4. Payment of Debentures Called for Redemption................................................15
SECTION 3.5. No Sinking Fund............................................................................15
ARTICLE IV PARTICULAR COVENANTS OF THE COMPANY........................................................15
SECTION 4.1. Payment of Principal, Interest and Redemption Price........................................15
SECTION 4.2. Maintenance of Office or Agency............................................................16
SECTION 4.3. Appointments to Fill Vacancies in Trustee's Office.........................................16
SECTION 4.4. Provisions as to Paying Agent..............................................................16
SECTION 4.5. Corporate Existence........................................................................17
SECTION 4.6. Stay, Extension and Usury Laws.............................................................17
SECTION 4.7. Limitations on Liens.......................................................................17
SECTION 4.8. Limitation on Sale and Leaseback Transactions..............................................18
SECTION 4.9. Limitation on Consolidation, Merger and Sale of Assets.....................................18
ARTICLE V HOLDERS' LISTS AND REPORTS BY
THE COMPANY AND THE TRUSTEE................................................................19
SECTION 5.1. Holders' Lists.............................................................................19
SECTION 5.2. Preservation and Disclosure of Lists.......................................................19
SECTION 5.3. Reports by Trustee.........................................................................19
SECTION 5.4. Reports by Company.........................................................................19
ARTICLE VI REMEDIES OF THE TRUSTEE AND
HOLDERS ON AN EVENT OF DEFAULT.............................................................20
SECTION 6.1. Events of Default..........................................................................20
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 6.2. Payments of Debentures on Default; Suit Therefor...........................................22
SECTION 6.3. Application of Monies Collected by Trustee.................................................23
SECTION 6.4. Proceedings by Holder......................................................................24
SECTION 6.5. Proceedings by Trustee.....................................................................24
SECTION 6.6. Remedies Cumulative and Continuing.........................................................24
SECTION 6.7. Direction of Proceedings and Waiver of Defaults by Majority of Holders.....................25
SECTION 6.8. Statement by Officers as to Default........................................................25
SECTION 6.9. Notice of Defaults.........................................................................25
SECTION 6.10. Undertaking to Pay Costs...................................................................25
ARTICLE VII CONCERNING THE TRUSTEE.....................................................................26
SECTION 7.1. Duties and Responsibilities of Trustee.....................................................26
SECTION 7.2. Reliance on Documents, Opinions, Etc.......................................................27
SECTION 7.3. No Responsibility for Recitals, Etc........................................................28
SECTION 7.4. Trustee, Paying Agents or Registrar May Own Debentures.....................................28
SECTION 7.5. Monies to Be Held in Trust.................................................................28
SECTION 7.6. Compensation and Expenses of Trustee.......................................................28
SECTION 7.7. Officers Certificate as Evidence...........................................................29
SECTION 7.8. Conflicting Interests of Trustee...........................................................29
SECTION 7.9. Eligibility of Trustee.....................................................................29
SECTION 7.10. Resignation or Removal of Trustee..........................................................29
SECTION 7.11. Acceptance by Successor Trustee............................................................30
SECTION 7.12. Succession by Merger, Etc..................................................................31
SECTION 7.13. Limitation on Rights of Trustee as Creditor................................................31
ARTICLE VIII CONCERNING THE HOLDERS.....................................................................31
SECTION 8.1. Action by Holders..........................................................................31
SECTION 8.2. Proof of Execution by Holders..............................................................32
SECTION 8.3. Who Are Deemed Absolute Owners.............................................................32
SECTION 8.4. Company-Owned Debentures Disregarded.......................................................32
SECTION 8.5. Revocation of Consents; Future Holders Bound...............................................32
ARTICLE IX HOLDERS' MEETINGS..........................................................................33
SECTION 9.1. Purposes of Meetings.......................................................................33
SECTION 9.2. Call of Meetings by Trustee................................................................33
SECTION 9.3. Call of Meetings by Company or Holders.....................................................33
SECTION 9.4. Qualifications for Voting..................................................................34
SECTION 9.5. Regulations................................................................................34
SECTION 9.6. Voting.....................................................................................34
SECTION 9.7. No Delay of Rights by Meeting..............................................................35
ARTICLE X SUPPLEMENTAL INDENTURES....................................................................35
SECTION 10.1. Supplemental Indentures Without Consent of Holders.........................................35
SECTION 10.2. Supplemental Indentures with Consent of Holders............................................36
SECTION 10.3. Effect of Supplemental Indenture...........................................................36
SECTION 10.4. Notation on Debentures.....................................................................37
SECTION 10.5. Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee...................37
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE..........................................37
SECTION 11.1. Company May Consolidate Etc. on Certain Terms..............................................37
SECTION 11.2. Successor Corporation to Be Substituted....................................................37
SECTION 11.3. Opinion of Counsel to Be Given Trustee.....................................................38
ARTICLE XII SATISFACTION, DISCHARGE AND DEFEASANCE OF INDENTURE........................................38
SECTION 12.1. Discharge of Indenture.....................................................................38
SECTION 12.2. Applicability of Defeasance Provisions;
Company's Option to Effect Defeasance or Covenant Defeasance...............................39
SECTION 12.3. Defeasance.................................................................................39
SECTION 12.4. Covenant Defeasance........................................................................39
SECTION 12.5. Conditions to Defeasance or Covenant Defeasance............................................40
SECTION 12.6. Indemnity for Government Obligations.......................................................41
SECTION 12.7. Deposited Monies to Be Held in Trust by Trustee............................................41
SECTION 12.8. Paying Agent to Repay Monies Held..........................................................41
SECTION 12.9. Return of Unclaimed Monies.................................................................41
SECTION 12.10. Reinstatement..............................................................................41
ARTICLE XIII IMMUNITY OF INCORPORATORS,
SHAREHOLDERS, OFFICERS AND DIRECTORS.......................................................42
SECTION 13.1. Indenture and Debentures Solely Corporate Obligations......................................42
ARTICLE XIV MISCELLANEOUS PROVISIONS...................................................................42
SECTION 14.1. Provisions Binding on Company's Successors.................................................42
SECTION 14.2. Official Acts by Successor Corporation.....................................................42
SECTION 14.3. Addresses for Notices, Etc.................................................................42
SECTION 14.4. Governing Law..............................................................................43
SECTION 14.5. Evidence of Compliance with Conditions Precedent; Certificates to Trustee..................43
SECTION 14.6. Legal Holidays.............................................................................43
SECTION 14.7. Trust Indenture Act........................................................................43
SECTION 14.8. No Security Interest Created...............................................................44
SECTION 14.9. Benefits of Indenture......................................................................44
SECTION 14.10. Table of Contents, Headings, Etc...........................................................44
SECTION 14.11. Authenticating Agent.......................................................................44
SECTION 14.12. Execution in Counterparts..................................................................45
</TABLE>
(iii)
<PAGE> 6
INDENTURE dated as of April 27, 1998, between Flowers Industries, Inc.,
a Georgia corporation (hereinafter sometimes called the "Company," as more fully
set forth in Section 1.1), and SunTrust Bank, Atlanta, a Georgia banking
corporation, as trustee hereunder (hereinafter sometimes called the "Trustee,"
as more fully set forth in Section 1.1).
WITNESSETH:
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized the issue of its 7.15% Debentures due 2028 (hereinafter sometimes
called the "Debentures"), in an aggregate principal amount not to exceed
$200,000,000 and, to provide the terms and conditions upon which the Debentures
are to be authenticated, issued and delivered, the Company has duly authorized
the execution and delivery of this Indenture; and
WHEREAS, all acts and things necessary to make the Debentures, when
executed by the Company and authenticated and made available for delivery by the
Trustee or a duly authorized authenticating agent in the manner provided in this
Indenture, the valid, binding and legal obligations of the Company, and to
constitute these presents a valid agreement according to its terms, have been
done and performed, and the execution of this Indenture and the issue hereunder
of the Debentures have in all respects been duly authorized.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the
Debentures are, and are to be, authenticated, issued and made available for
delivery, and in consideration of the premises and of the purchase and
acceptance of the Debentures by the holders thereof, the Company covenants and
agrees with the Trustee for the equal and proportionate benefit of the
respective holders from time to time of the Debentures (except as otherwise
provided below), as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. The terms defined in this Section 1.1 (except
as herein otherwise expressly provided or unless the context otherwise requires)
for all purposes of this Indenture and of any indenture supplements hereto shall
have the respective meanings specified in this Section 1.1. All other terms used
in this Indenture that are defined in the Trust Indenture Act or which are by
reference therein defined in the Securities Act (except as herein otherwise
expressly provided or unless the context otherwise requires) shall have the
meanings assigned to such terms in said Trust Indenture Act and in said
Securities Act as in force at the date of the execution of this Indenture. The
words "herein," "hereof," "hereunder,"and words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
Subdivision. The terms defined in this Article include the plural as well as the
singular.
"Affiliate" of any specified Person shall mean any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control,"when used with respect to any specified Person means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the
1
<PAGE> 7
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Attributable Debt" when used in connection with a Sale and Leaseback
Transaction involving a Principal Property shall mean, at the time of
determination, the present value of the total net amount of rent required to be
paid under such lease during the remaining term thereof (including any renewal
term or period for which such lease has been extended), discounted at the rate
of interest set forth or implicit in the terms of such lease or, if not
practicable to determine such rate, the weighted average interest rate per annum
borne by the Debentures pursuant to the Indenture compounded semi-annually. For
purposes of the foregoing definition, rent shall not include amounts required to
be paid by the lessee on account of insurance, taxes, assessments, utility,
operating and labor costs and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of a penalty, such net amount shall
also include the amount of the penalty, but no rent shall be considered as
required to be paid under such lease subsequent to the first date upon which it
may be so terminated.
"Board of Directors" shall mean the Board of Directors of the Company
or a committee of such Board duly authorized to act for it hereunder.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which the banking institutions in The City of New
York or the city in which the Corporate Trust Office is located are authorized
or obligated by law or executive order to close or be closed.
"Commission" shall mean the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act or, if at any time
after the execution of this Indenture such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Company" shall mean Flowers Industries, Inc., a Georgia corporation,
and, subject to the provisions of Article XI, shall include its successors and
assigns.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Independent Investment Banker as having a maturity comparable to
the remaining term of the Debentures to be redeemed that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
remaining term of the Debentures.
"Comparable Treasury Price" means, with respect to any Redemption Date
of the Debentures, (i) the average of five Reference Treasury Dealer Quotations
for such Redemption Date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or (ii) if the Trustee obtains fewer than five such
Reference Treasury Dealer Quotations, the average of all such quotations.
"Consolidated Net Tangible Assets" shall mean the total of all the
assets appearing on the consolidated balance sheet of the Company and its
Subsidiaries, less the following: (a) current liabilities and (b) intangible
assets, including, but without limitation, such items as goodwill, trademarks,
trade names, patents and unamortized debt discount and expense carried as an
asset on said balance sheet. Consolidated Net Tangible Assets shall be
determined in accordance with generally accepted accounting principles applied
on a consistent basis and shall be determined by reference to the most recent
publicly available quarterly or annual, as the case may be, consolidated balance
sheet of the Company.
2
<PAGE> 8
"Corporate Trust Office" or other similar term, shall mean the
principal office of the Trustee at which at any particular time its corporate
trust business shall be principally administered, which office is, at the date
as of which this Indenture is dated, located at 58 Edgewood Avenue, Atlanta,
Georgia, 30302.
"Custodian" shall mean SunTrust Bank, Atlanta, as custodian with
respect to the Debentures in global form, or any successor entity thereto.
"Debenture" or "Debentures" shall mean any Debenture or Debentures, as
the case may be, authenticated and delivered under this Indenture, including any
Global Debenture.
"Debenture register" shall have the meaning specified in Section 2.5.
"Debenture registrar" shall have the meaning specified in Section 2.5.
"Debt" of a Person shall mean all indebtedness of such Person which is
for money borrowed.
"Default" and "default" shall mean any event that is, or after notice
or passage of time, or both, would be, an Event of Default.
"Depositary" means, with respect to the Debentures issuable or issued
in whole or in part in global form, DTC until a successor shall have been
appointed and become such pursuant to the applicable provisions of this
Indenture, and thereafter "Depositary" shall mean or include such successor.
"DTC" shall mean The Depositary Trust Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, as in effect from
time to time.
"Event of Default" shall mean any event specified in Section 6.1.
"Funded Debt" shall mean Debt which by its terms matures at, or can be
extended or renewed at the option of the obligor to, a date more than twelve
months after the date of the Debt's creation, including, but not limited to,
outstanding revolving credit loans.
"Global Debenture" shall mean any Debenture evidenced in global form as
described in Section 2.5(b).
"Government Obligations" shall mean, unless otherwise specified
pursuant to this Indenture, securities which are (i) direct obligations of the
United States government for which its full faith and credit is pledged or (ii)
obligations of a person controlled or supervised by, or acting as an agency or
instrumentality of, the United States government, the payment of which
obligations is unconditionally guaranteed by the United States government, and
which, in either case, are full faith and credit obligations of the United
States government, and which are not callable or redeemable at the option of the
issuer thereof prior to their stated maturity.
"Holder" or "holder" as applied to any Debenture, or other similar
terms (but excluding the term "beneficial holder"), shall mean any person in
whose name at the time a particular Debenture is registered on the Debenture
register.
3
<PAGE> 9
"Incur" shall mean to issue, incur, assume, guarantee, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
the payment of, any Debt.
"Indenture" shall mean this instrument as originally executed or, if
amended or supplemented as herein provided, as so amended or supplemented and
shall include the form and terms of the Debentures established as contemplated
hereunder.
"Independent Investment Banker" means Morgan Stanley & Co. Incorporated
or, if such firm is unwilling or unable to select the Comparable Treasury Issue,
an independent investment banking institution of national standing appointed by
the Trustee after consultation with the Company.
"Lien" shall mean any mortgage or deed of trust, pledge, assignment,
security interest, lien, charge, or other encumbrance or preferential
arrangement (including, without limitation, any conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).
"NASD" means the National Association of Securities Dealers, Inc.
"Officers' Certificate", when used with respect to the Company, shall
mean a certificate signed by both (a) the Chairman, Vice Chairman, President,
the Chief Executive Officer or Senior Vice President or any Vice President
(whether or not designated by a number or numbers or word or words added before
or after the title "Vice President") and (b) by the Treasurer or any Assistant
Treasurer or Secretary or any Assistant Secretary of the Company.
"Opinion of Counsel" shall mean a written opinion from the general
counsel of the Company, who may be an employee of or counsel to the Company, or
other legal counsel reasonably acceptable to the Trustee.
"Outstanding", when used with reference to Debentures, shall, subject
to the provisions of Section 8.4, mean, as of any particular time, all
Debentures authenticated and made available for delivery by the Trustee under
this Indenture, except:
(a) Debentures theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(b) Debentures, or portions thereof, for the redemption of which monies
in the necessary amount shall have been deposited in trust with the Trustee or
with any paying agent (other than the Company) or shall have been set aside and
segregated in trust by the Company (if the Company shall act as its own paying
agent); provided, that if such Debentures are to be redeemed, notice of such
redemption shall have been given as provided in Article III, or provision
satisfactory to the Trustee shall have been made for giving such notice;
(c) Debentures, except to the extent provided in Sections 12.4 and
12.5, with respect to which the Company has effected defeasance and/or covenant
defeasance as provided in Article XII;
(d) Debentures in lieu of which, or in substitution for which, other
Debentures shall have been authenticated and delivered pursuant to the terms of
Section 2.6 unless proof satisfactory to the Trustee is presented that any such
Debentures are held by bona fide holders in due course; and
(e) Debentures deemed not outstanding pursuant to Article III.
4
<PAGE> 10
"Person" shall mean a corporation, an association, a partnership, an
individual, a joint venture, a joint stock company, a limited liability company,
a company, a trust, an unincorporated organization or a government or an agency
or a political subdivision thereof.
"Predecessor Debenture" of any particular Debenture shall mean every
previous Debenture evidencing all or a portion of the same debt as that
evidenced by such particular Debenture; and, for the purposes of this
definition, any Debenture authenticated and delivered under Section 2.6 in lieu
of a lost, destroyed or stolen Debenture shall be deemed to evidence the same
debt as the lost, destroyed or stolen Debenture that is replaces.
"Principal Property" shall mean land, land improvement, buildings and
associated factory and laboratory equipment used by the Company or any
Subsidiary primarily for processing, producing, packaging or storing its
products, raw materials, inventories or other materials or supplies, in any case
owned or leased pursuant to a capital lease by the Company or any Subsidiary, or
any interest of the Company or any Subsidiary in such property (in each case
including the real estate related thereto) located within the United States of
America.
"Redemption Date" means any date fixed for the redemption of the
Debentures or any portion thereof.
"Redemption Price" mean , as of any Redemption Date, an amount equal to
the greater of (i) 100% of the principal amount of the Debentures to be redeemed
and (ii) the sum of the present values of the remaining scheduled payments of
principal and interest thereon (exclusive of interest accrued to the Redemption
Date) discounted to such Redemption Date on a semi-annual basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Rate, plus 20
basis points, plus, in either case, accrued and unpaid interest on the principal
amount being redeemed to such Redemption Date.
"Reference Treasury Dealer" means (i) Morgan Stanley & Co. Incorporated
and its successors; provided, however, that if the foregoing shall cease to be a
primary U.S. Government securities dealer in New York City (a "Primary Treasury
Dealer"), the Company will substitute therefor another Primary Treasury Dealer,
and (ii) any other Primary Treasury Dealer selected by the Independent
Investment Banker after consultation with the Company.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any Redemption Date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third Business Day preceding such Redemption Date.
"Responsible Officer", when used with respect to the Trustee, shall
mean an officer of the Trustee in the Corporate Trust Office assigned and duly
authorized by the Trustee to administer its corporate trust matters.
"Restricted Securities" has the meaning specified in Section 2.5.
"Sale and Leaseback Transaction" of any Person shall mean an
arrangement with any lender or investor or to which such lender or investor is a
party providing for the leasing by such person of any property or asset of such
Person which has been or is being sold or transferred by such Person more than
one
5
<PAGE> 11
year after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any person to
whom funds have been or are to be advanced by such lender or investor on the
security of such property or asset. The stated maturity of such arrangement
shall be the date of the last payment of rent or any other similar amount due
under such arrangement prior to the first date on which such arrangement may be
terminated by the lessee without payment of a penalty.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"Subsidiary" shall mean any corporation, association, partnership or
other business entity of which more than 50% of the total voting power of the
outstanding capital stock (or other interests entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, general
partners, managers, managing members, managing partners or trustees thereof or,
if such persons are not elected, to vote on any matter that is submitted to the
vote of all persons holding ownership interests in such entity) is at the time
owned or controlled, directly or indirectly, by (i) the Company, (ii) the
Company and one or more Subsidiaries or (iii) one or more Subsidiaries;
provided, however, that the term Subsidiary does not include (a) Keebler Foods
Company and its subsidiaries or (b) any other corporation, association,
partnership or other business entity (1) of which the Company owns or controls
directly or indirectly less than 80% of such total voting power of the
outstanding capital stock and (2) which has outstanding securities that have
been registered under the Securities Act or the Exchange Act.
"Treasury Rate" means, with respect to any Redemption Date for the
Debentures, (i) the yield, under the heading which represents the average for
the immediately preceding week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Board of Governors of the Federal Reserve System and
which establishes yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption "Treasury Constant Maturities"
for the maturity corresponding to the Comparable Treasury Issue (if no maturity
is within three months before or after the maturity date of the Debentures,
yields for the two published maturities most closely corresponding to the
Comparable Treasury Issue shall be determined and the Treasury Rate shall be
interpolated or extrapolated from such yields on a straight line basis, rounding
to the nearest month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not contain
such yields, the rate per annum equal to the semi-annual equivalent yield to
maturity of the Comparable Treasury Issue, calculated using a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such Redemption Date. The Treasury
Rate shall be calculated on the third Business Day preceding the Redemption
Date.
"Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as
amended, as it was in force at the date of execution of this Indenture, except
as provided in Section 10.3; provided, however, that in the event the Trust
Indenture Act of 1939 is amended after the date hereof, the term "Trust
Indenture Act" shall mean, to the extent required by such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trustee" shall mean SunTrust Bank, Atlanta and its successors and any
corporation resulting from or surviving any consolidation or merger to which it
or its successors may be a party and any successor trustee at the time serving
as successor trustee hereunder.
The definitions of certain other terms are as specified in Sections 2.5
and 3.5.
6
<PAGE> 12
ARTICLE II
ISSUE, DESCRIPTION, EXECUTION,
REGISTRATION AND EXCHANGE OF DEBENTURES
SECTION 2.1. Designation Amount and Issue of Debentures. The Debentures
shall be designated as "7.15% Debentures due 2028." Debentures not to exceed the
aggregate principal amount of $200,000,000 upon the execution of this Indenture,
or from time to time thereafter, may be executed by the Company and delivered to
the Trustee for authentication, and the Trustee shall thereupon authenticate and
make available for delivery said Debentures to or upon the written order of the
Company, signed by its (a) Chairman, Vice Chairman, President, Executive or
Senior Vice President or any Vice President (whether or not designated by a
number or numbers or word or words added before or after the title "Vice
President") and (b) Treasurer or Assistant Treasurer or its Secretary or any
Assistant Secretary, without any further action by the Company hereunder.
SECTION 2.2. Form of Debentures. The Debentures and the Trustee's
certificate of authentication to be borne by such Debentures shall be
substantially in the form set forth in Exhibit A, which is incorporated in and
made a part of this Indenture.
Any of the Debentures may have such letters, numbers or other marks of
identification and such notations, legends and endorsements as the officers
executing the same may approve (execution thereof to be conclusive evidence of
such approval) and as are not inconsistent with the provisions of this
Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any
securities exchange or automated quotation system on which the Debentures may be
listed, or to conform to usage.
Any Debenture in global form shall represent such of the outstanding
Debentures as shall be specified therein and shall provide that it shall
represent the aggregate amount of outstanding Debentures from time to time
endorsed thereon and that the aggregate amount of outstanding Debentures
represented thereby may from time to time be increased or reduced to reflect
transfers or exchanges permitted hereby. Any endorsement of a Debenture in
global form to reflect the amount of any increase or decrease in the amount of
outstanding Debentures represented thereby shall be made by the Trustee or the
Custodian, at the direction of the Trustee, in such manner and upon instructions
given by the holder of such Debentures in accordance with this Indenture.
Payment of any principal of, interest on and Redemption Price in
respect of any Debenture in global form shall be made to the holder of such
Debenture.
The terms and provisions contained in the form of Debenture attached as
Exhibit A hereto shall constitute, and are hereby expressly made a part of, this
Indenture and, to the extent applicable, the Company and the Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.
SECTION 2.3. Date and Denomination of Debentures; Payments of Interest.
The Debentures shall be issuable in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof. Every
Debenture shall be dated the date of its authentication and shall bear interest
from the applicable date in each case as specified on the face of the form of
Debenture attached as Exhibit A
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hereto. Interest on the Debentures shall be computed on the basis of a 360-day
year comprised of twelve 30-day months.
The person in whose name any Debenture (or its Predecessor Debenture)
is registered at the close of business on any record date with respect to any
interest payment date shall be entitled to receive the interest payable on such
interest payment date, except (i) that the interest payable upon redemption
(unless the date of redemption is an interest payment date) will be payable to
the person to whom principal is payable and (ii) as set forth in the next
succeeding sentence. Interest may, at the option of the Company, be paid either
(i) by check mailed to the address of the person entitled thereto as it appears
in the Debenture register or (ii) by transfer to an account maintained by such
person located in the United States; provided, however, that payments to the
Depositary will be made by wire transfer of immediately available funds to the
account of the Depositary or its nominee. The term"record date" with respect to
any interest payment date shall mean the April 1 or October 1 preceding said
April 15 or October 15, respectively.
Any interest on any Debenture which is payable, but is not punctually
paid or duly provided for, on any said April 15 or October 15 (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant record date by virtue of his having been such Holder; and such
Defaulted Interest shall be paid by the Company, at its election in each case,
as provided in clause (1) or (2) below;
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Debentures (or their
respective Predecessor Debentures) are registered at the close of
business on a special record date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company
shall notify the Trustee in writing of the amount of Defaulted Interest
to be paid on each Debenture and the date of the payment (which shall
be not less than twenty-five (25) days after the receipt by the Trustee
of such notice, unless the Trustee shall consent to an earlier date),
and at the same time the Company shall deposit with the Trustee an
amount of money equal to the aggregate amount to be paid in respect of
such Defaulted Interest or shall make arrangements satisfactory to the
Trustee for such deposit prior to the date of the proposed payment,
such money when deposited to be held in trust for the benefit of the
Persons entitled to such Defaulted Interest as in this clause provided.
Thereupon the Trustee shall fix a special record date for the payment
of such Defaulted Interest which shall be not more than fifteen (15)
days and not less than ten (10) days prior to the date of the proposed
payment and not less than ten (10) days after the receipt by the
Trustee of the notice payment. The Trustee shall promptly notify the
Company at the expense of the Company, shall cause notice of the
proposed payment of such Defaulted Interest and the special record date
therefor to be mailed, first-class postage prepaid, to each Holder at
this address as it appears in the Debenture register, not less than ten
(10) days prior to such special record date. Notice of the proposed
payment of such Defaulted Interest and the special record date therefor
having been so mailed, such Defaulted Interest shall be paid to the
Persons in whose names the Debentures (or their respective Predecessor
Debentures) were registered at the close of business on such special
record date and shall no longer be payable pursuant to the following
clause (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange and automated quotation system on which the
Debentures may be listed or designated for issuance, and upon such
notice as may be required by such exchange and automated quotation
system, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this clause, such manner of payment shall
be deemed practicable by the Trustee.
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SECTION 2.4. Execution of Debentures. The Debentures shall be signed in
the name and on behalf of the Company by the manual or facsimile signature of
its Chairman, Vice Chairman, President, any Executive or Senior Vice President
or any Vice President (whether or not designated by a number or numbers or word
or words added before or after the title "Vice President") and attested by the
manual or facsimile signature of its Treasurer, Secretary or any of its
Assistant Treasurers or Assistant Secretaries (which may be printed, engraved or
otherwise reproduced thereon, by facsimile or otherwise). Only such Debentures
as shall bear thereon a certificate of authentication substantially in the form
set forth on the form of Debenture attached as Exhibit A hereto, manually
executed by the Trustee (or an authenticating agent appointed by the Trustee as
provided by Section 14.11), shall be entitled to the benefits of this Indenture
or be valid or obligatory for any purpose. Such certificate by the Trustee (or
such an authenticating agent) upon any Debenture executed by the Company shall
be conclusive evidence that the Debenture so authenticated has been duly
authenticated and delivered hereunder and that the holder is entitled to the
benefits of this Indenture.
In case any officer of the Company who shall have signed any of the
Debentures shall cease to be such officer before the Debentures so signed shall
have been authenticated and delivered by the Trustee, or disposed of by the
Company, such Debentures nevertheless may be authenticated and delivered or
disposed of as though the person who signed such Debentures had not ceased to be
such officer of the Company; and any Debenture may be signed on behalf of the
Company by such persons as, at the actual date of the execution of such
Debenture, shall be the proper officers of the Company, although at the date of
the execution of this Indenture any such person was not such an officer.
SECTION 2.5. Exchange and Registration of Transfer of Debentures:
Restrictions on Transfer Depositary.
(a) The Company shall cause to be kept at the Corporate Trust Office a
register (the register maintained in such office and in any other office or
agency of the Company designated pursuant to Section 4.2 being herein sometimes
collectively referred to as the "Debenture register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Debentures and of transfers of Debentures. The Debenture
register shall be in written form or in any form capable of being converted into
written form within a reasonably prompt period of time. The Trustee is hereby
appointed "Debenture registrar" for the purpose of registering Debentures and
transfers of Debentures as herein provided. The Company may appoint one or more
co-registrars in accordance with Section 4.2.
Upon surrender for registration of transfer of any Debenture to the
Debenture registrar or any co-registrar, and satisfaction of the requirements
for such transfer set further in this Section 2.5, the Company shall execute,
and the Trustee shall authenticate and make available for delivery, in the name
of the designated transferee or transferees, one or more new Debentures of any
authorized denominations and of a like aggregate principal amount and bearing
such restrictive legends as may be required by this Indenture.
Debentures may be exchanged for other Debentures of any authorized
denominations and of a like aggregate principal amount, upon surrender the
Debentures to be exchanged at any such office or agency maintained by the
Company pursuant to Section 4.2. Whenever any Debentures are so surrendered for
exchange, the Company shall execute, and the Trustee shall authenticate and make
available for delivery, the Debentures which the Holder making the exchange is
entitled to receive bearing registration numbers not contemporaneously
outstanding.
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All Debentures issued upon any registration of transfer or exchange of
Debentures shall be the valid obligations of the Company, evidencing the same
Debt and entitled to the same benefits under this Indenture, as the Debentures
surrendered upon such registration of transfer or exchange.
All Debentures presented or surrendered for registration of transfer or
for exchange or redemption shall (if so required by the Company or the Debenture
registrar) be duly endorsed, or be accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company, and the Debentures
shall be duly executed by the Holder thereof or his attorney duly authorized in
writing.
No service charge shall be made for any registration of transfer or
exchange of Debentures, but the Company may require payment of a sum sufficient
to cover any tax, assessment or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Debentures.
Neither the Company nor the Trustee nor any Debenture registrar or any
Company registrar shall be required to exchange or register a transfer of (a)
any Debentures for a period of fifteen (15) days next preceding any selection of
Debentures to be redeemed or (b) any Debentures or portions thereof called for
redemption pursuant to Article III.
(b) Subject to Section 2.5(d) below, all Debentures shall be
represented by one or more Debentures in global form (each, a "Global
Debenture") registered in the name of the Depositary or the nominee of the
Depositary, except as otherwise specified below. The transfer and exchange of
beneficial interests in any such Global Debenture shall be effected through the
Depositary in accordance with this Indenture and the procedures of the
Depositary therefor.
Transfers of interests in the Debentures between any Global Debenture
and any other Debenture will be made in accordance with the standing
instructions and procedures of the Depositary and its participants. The Trustee
shall make appropriate endorsements to reflect increases or decreases in the
principal amounts of such Global Debentures as set forth on the face of the
Debenture to reflect any such transfers.
So long as the Depository or its nominee is the registered owner of the
Global Debentures, the Depository shall be considered the sole Holder of any
Debentures evidenced by the Global Debenture. Beneficial owners of a Global
Debenture will not be considered the owners or Holders for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. Beneficial owners of a Global Debenture
shall not be entitled to have certificates registered in their names, will not
receive or be entitled to receive physical delivery of certificates in
definitive form and will not be considered Holders of such Debentures. Neither
the Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depository or for maintaining, supervising or
reviewing any records of the Depository relating to the Debentures.
All payments on the Global Debentures registered in the name of the
Depositary's nominee will be made by the Company through the paying agent to the
Depositary's nominee as the registered owner of the Global Debentures. Under the
terms of the Indenture, the Company and the Trustee will treat the persons in
whose names the Debentures are registered as the owners of such Debentures for
the purpose of receiving payment of principal and interest on such Debentures
and for all other purposes whatsoever. Therefore, neither the Company, the
Trustee nor any paying agent has any direct responsibility or liability for the
payment of principal or interest on the Debentures to owners of beneficial
interests in the Global Debentures. Payments by the Depository or any of its
direct or indirect participants to owners of beneficial interests in the Global
Debentures will be governed by standing instructions and customary practices, as
is the case with
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securities held for the accounts of customers in bearer form or registered in
"street name" and will be the responsibility of such participants or indirect
participants.
Any Debenture in global form may be endorsed with or have incorporated
in the text thereof such legends or recitals or changes not inconsistent with
the provisions of this Indenture as may be required by the Custodian, the
Depositary or by the National Association of Securities Dealers, Inc. in order
for the Debentures to be tradeable on the Nasdaq National Market or as may be
required for the Debentures to be tradeable on any other market developed for
trading of such securities or required to comply with any applicable law or any
regulation thereunder or with the rules and regulations of any securities
exchange or automated quotation system upon which the Debentures may be listed
or traded or to conform with any usage with respect thereto, or to indicated any
special limitations or restrictions to which any particular Debentures are
subject.
(c) As used in this Section 2.5(c) the term "transfer" encompasses any
sale, pledge, transfer or other disposition whatsoever of any Debenture.
Notwithstanding any other provisions of this Indenture (other than the
provisions set forth in the second paragraph of Section 2.5(b) and in this
Section 2.5(c)), a Debenture in global form may not be transferred as a whole or
in part except by the Depositary to a nominee of the Depositary or by a nominee
of the Depositary to the Depositary or another nominee of the Depositary or by
the Depositary or any such nominee to a successor Depositary or a nominee of
such successor Depositary.
The Depositary shall be a clearing agency registered under the Exchange
Act. The Company initially appoints DTC to act as Depositary with respect to the
Debentures in global form. Initially, any Global Debenture shall be issued to
the Depositary, registered in the name of Cede & Co., as the nominee of the
Depositary, and deposited with the Custodian for Cede & Co.
If at any time the Depositary for a Global Debenture notifies the
Company that it is unwilling or unable to continue as Depositary for such
Debenture, the Company may appoint a successor Depositary with respect to such
Debenture. If a successor Depositary is not appointed by the Company within
ninety (90) days after the Company receives such notice, the Company will
execute, and the Trustee, upon receipt of an Officers' Certificate for the
authentication and delivery of Debentures, will authenticate and make available
for delivery, Debentures in certificated form, in aggregate principal amount
equal to the principal amount of such Debenture in global form, in exchange for
such Debenture in global form, pursuant to Section 2.5(d) below.
If a Debenture in certificated form is issued in exchange for any
portion of a Global Debenture after the close of business at the office or
agency where such exchange occurs on any record date and before the opening of
business at such office or agency on the next succeeding interest payment date,
interest will not be payable on such interest payment date in respect of such
Debenture, but will be payable on such interest payment date, subject to the
provisions of Section 2.3, only to the person to whom interest in respect of
such portion of such Global Debenture is payable in accordance with the
provisions of this Indenture.
Debentures in certificated form issued in exchange for all or a part of
a Debenture in global form pursuant to this Section 2.5 shall be registered in
such names and in such authorized denominations as the Depositary, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. Upon execution and authentication, the Trustee shall make
available for delivery such Debentures in certificated form to the persons in
whose names such Debentures in certificated form are so registered.
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At such time as all interests in a Debenture in global form have been
redeemed, canceled, exchanged for Debentures in certificated form, or
transferred to a transferee who receives Debentures in certificated form
thereof, such Debenture in global form shall, upon receipt thereof, be canceled
by the Trustee in accordance with standing procedures and instructions existing
between the Depositary and the Custodian. At any time prior to such
cancellation, if any interest in a Global Debenture is exchanged for Debentures
in certificated form, redeemed, repurchased, canceled or exchanged for
Debentures in certificated form or transferred to a transferee who receives
Debentures in certificated form therefor or any Debenture in certificated form
is exchanged or transferred for part of a Debenture in global form, the
principal amount of such Debenture in global form shall, in accordance with the
standing procedures and instructions existing between the Depositary and the
Custodian, be appropriately reduced or increased, as the case may be, and an
endorsement shall be made on such Global Debenture, by the Trustee or the
Custodian, at the direction of the Trustee, to reflect such reduction or
increase.
(d) The Company will issue Debentures in definitive form in exchange
for the Global Debentures if, and only if, either (1) the Depositary is at any
time unwilling or unable to continue as depositary and a successor depositary is
not appointed by the Company within 90 days, (2) an Event of Default has
occurred and is continuing and the Trustee has received a request from the
Depositary to issue Debentures in definitive form in lieu of all or a portion of
the Global Debentures (in which case the Company shall execute within 30 days of
such request, and the Trustee, upon receipt of an Officers' Certificate, shall
promptly authenticate and make available for delivery Debentures in definitive
form), or (3) the Company determines not to have Debentures represented by a
Global Debenture. In any such instance, an owner of a beneficial interest in the
Global Debenture will be entitled to have Debentures equal in principal amount
to such beneficial interest registered in its name and will be entitled to
physical delivery of such Debentures in physical form. Debentures so issued in
definitive form will be issued in denominations of $1,000 and whole multiples
thereof and will be issued in registered form only, without coupons.
SECTION 2.6. Mutilated, Destroyed, Lost or Stolen Debentures. In case
any Debenture shall become mutilated or be destroyed, lost or stolen, the
Company in its discretion may execute, and upon its request the Trustee or an
authenticating agent appointed by the Trustee shall authenticate and make
available for delivery, a new Debenture, bearing a number not contemporaneously
outstanding, in exchange and substitution for the mutilated Debenture, or in
lieu of and in substitution for the Debenture so destroyed, lost or stolen. In
every case, the applicant for a substituted Debenture shall furnish to the
Company, to the Trustee and, if applicable, to such authenticating agent such
security or indemnity as may be required by them to save each of them harmless
for any loss, liability, cost or expense caused by or connected with such
substitution, and, in every case of destruction, loss or theft, the applicant
shall also furnish to the Company, to the Trustee and, if applicable, to such
authenticating agent evidence to their satisfaction of the destruction, loss or
theft of such Debenture and of the ownership thereof.
The Trustee or such authenticating agent may authenticate any such
substituted Debenture and deliver the same upon the receipt of such security or
indemnity as the Trustee, the Company and, if applicable, such authenticating
agent may require. Upon the issuance of any substituted Debenture, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses connected therewith. In case any Debenture which has matured or is
about to mature or has been called for redemption shall become mutilated or be
destroyed, lost or stolen, the Company may, instead of issuing a substitute
Debenture, pay or authorize the payment of the same (without surrender thereof
except in the case of a mutilated Debenture), as the case may be, if the
applicant for such payment shall furnish to the Company, to the Trustee and, if
applicable, to such authenticating agent such security or indemnity as may be
required by them to save each of them harmless
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for any loss, liability, cost or expense caused by or connected with such
substitution, and, in case of destruction, loss or theft, evidence satisfactory
to the Company, the Trustee and, if applicable, any paying agent of the
destruction, loss or theft or such Debenture and of the ownership thereof.
Every substituted Debenture issued pursuant to the provisions of this
Section 2.6 by virtue of the fact that any Debenture is destroyed, lost or
stolen shall constitute an additional contractual obligation of the Company,
whether or not the destroyed, lost or stolen Debenture shall be found at any
time, and shall be entitled to all the benefits of (but shall be subject to all
the limitations set forth in) this Indenture equally and proportionately with
any and all other Debentures duly issued hereunder. To the extent permitted by
law, all Debentures shall be held and owned upon the express condition that the
foregoing provisions are exclusive with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Debentures and shall preclude any and all
other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement or payment of
negotiable instruments or other securities without their surrender.
SECTION 2.7. Temporary Debentures. Pending the preparation of
Debentures in certificated forms, the Company may execute and the Trustee or an
authenticating agent appointed by the Trustee shall, upon the written request of
the Company, authenticate and make available for delivery temporary Debentures
(printed or lithographed). Temporary Debentures shall be issuable in any
authorized denomination, and substantially in the form of the Debentures in
certificated form, but with such omissions, insertions and variations as may be
appropriate for temporary Debentures, all as may be determined by the Company.
Every such temporary Debenture shall be executed by the Company and
authenticated by the Trustee or such authenticating agent upon the same
conditions and in substantially the same manner, and with the same effect, as
the Debentures in certificated form. Without unreasonable delay the Company will
execute and deliver to the Trustee or such authenticating agent Debentures in
certificated form (other than in the case of Debentures in global form) and
thereupon any or all temporary Debentures (other than any such Debenture in
global form) may be surrendered in exchange therefor, at each office or agency
maintained by the Company pursuant to Section 4.2 and the Trustee or such
authenticating agent shall authenticate and deliver in exchange for such
temporary Debentures an equal aggregate principal amount of Debentures in
certificated form. Such exchange shall be made by the Company at its own expense
and without any charge therefor. Until so exchanged, the temporary Debentures
shall in all respects be entitled to the same benefits and subject to the same
limitations under this Indenture as Debentures in certificated form
authenticated and made available for delivery hereunder.
SECTION 2.8. Cancellation of Debentures Paid, Etc. All Debentures
surrendered for the purpose of payment, redemption, exchange or registration of
transfer, shall, if surrendered to the Company or any paying agent or any
Debenture registrar, be surrendered to the Trustee and promptly canceled by it,
or, if surrendered to the Trustee, shall be promptly canceled by it, and no
Debentures shall be issued in lieu thereof except as expressly permitted by any
of the provisions of this Indenture. After such cancellation, the Trustee shall,
if requested by the Company, deliver such canceled Debentures to the Company. If
the Company shall acquire any of the Debentures, such acquisition shall not
operate as a redemption or satisfaction of the indebtedness represented by such
Debentures unless and until the same are delivered to the Trustee for
cancellation.
SECTION 2.9. Cusip Numbers. The Company in issuing the Debentures may
use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall
use CUSIP numbers in notices of redemption as a convenience to Holders;
provided, that any such notice may state that no representation is made as to
the correctness of such numbers either as printed on the Debentures or as
contained in any notice of a
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redemption and that reliance may be placed only on the other identification
numbers printed on the Debentures, and any such redemption shall not be affected
by any defect in or omission of such numbers. The Company will promptly notify
the Trustee of any change in the CUSIP numbers.
ARTICLE III
REDEMPTION OF DEBENTURES
SECTION 3.1. Redemption. The Debentures will be redeemable, in whole or
from time to time in part, at the option of the Company on any Redemption Date,
upon notice as set forth in Section 3.3, and at the applicable Redemption Price
together with accrued interest to, but excluding, the Redemption Date; provided
that installments of interest on Debentures which are due and payable on the
April 15 or October 15 falling on or prior to the relevant Redemption Date shall
be payable to the Holders registered as such at the close of business on the
relevant record date according to their terms and the provisions of this
Indenture.
SECTION 3.2. Notice of Trustee. If the Company elects to redeem
Debentures pursuant to Section 3.1, it shall notify the Trustee in writing of
the redemption date and the principal amount of Debentures to be redeemed, as
least 45 days before the Redemption Date (unless a shorter period shall be
satisfactory to the Trustee).
SECTION 3.3. Notice of Redemption; Selection of Debentures. In case the
Company shall desire to exercise the right to redeem all or, as the case may be,
any part of the Debentures pursuant to Section 3.1 for redemption, it or, at its
request, the Trustee in the name of and at the expense of the Company, shall
mail or cause to be mailed a notice of such redemption at least 30 and not more
than 60 days before the Redemption Date to each Holder to be redeemed. Such
mailing shall be by first class mail to the addresses of the Holders as the same
appear on the Debenture register. The notice, if mailed in the manner herein
provided, shall be conclusively presumed to have been duly given, whether or not
the Holder receives such notice. In any case, failure to give such notice by
mail or any defect in the notice to the Holder designated for redemption as a
whole or in part shall not affect the validity of the proceedings for the
redemption of any other Debenture.
Each such notice of redemption shall identify the Debentures to be
redeemed (including CUSIP number), specify the principal amount of each
Debenture to be redeemed, the Redemption Date, the Redemption Price at which
Debentures are to be redeemed, the place or places of payment, that payment will
be made upon presentation and surrender of such Debentures, that interest
accrued to the Redemption Date will be paid as specified in said notice, and
that on and after said date interest thereon or on the portions thereof to be
redeemed will cease to accrue, unless the Company defaults in the payment of the
Redemption Price. If fewer than all the Debentures are to be redeemed, the
notice of redemption shall identify the Debentures to be redeemed. In case any
Debenture is to be redeemed in part only, the notice of redemption shall state
the portion of the principal amount thereof to be redeemed and shall state that
on and after the Redemption Date, upon surrender of such Debenture, a new
Debenture or Debentures in principal amount equal to the unredeemed portion
thereof will be issued.
No later than the Business Day prior to the redemption date specified
in the notice of redemption given as provided in this Section, the Company will
deposit with the Trustee or with one or more Paying Agents (or, if the Company
is acting as its own Paying Agent, set aside, segregate and hold in trust as
provided in Section 4.4) an amount of money sufficient to redeem on the
Redemption Date all the
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<PAGE> 20
Debentures so called for redemption at the appropriate Redemption Price,
together with accrued interest to the Redemption Date.
If fewer than all the Debentures are to be redeemed, the Trustee shall
select, by lot, pro rata or in such other manner as the Trustee shall deem fair
and appropriate, the Debentures or portions thereof (in integral multiples of
$1,000 principal amount) to be redeemed.
SECTION 3.4. Payment of Debentures Called for Redemption. If notice of
redemption has been given as above provided, the Debentures or portions of
Debentures with respect to which such notice has been given shall become due and
payable on the date and at the place or places stated in such notice at the
applicable Redemption Price, together with interest accrued to the Redemption
Date, and on and after said date (unless the Company shall default in the
payment of such Debentures at the Redemption Price, together with interest
accrued to said date) any interest on the Debentures or portions of Debentures
so called for redemption shall cease to accrue and, except as provided in
Sections 7.5 and 12.4, to be entitled to any benefit or security under this
Indenture, and the holders thereof shall have no right in respect of such
Debentures except the right to receive the Redemption Price thereof and unpaid
interest to the Redemption Date. On presentation and surrender of such
Debentures at a place of payment in said notice specified, the said Debentures
or the specified portions thereof shall be paid and redeemed by the Company at
the applicable Redemption Price, together with interest accrued thereon to the
Redemption Date; provided that any semi-annual payment of interest becoming due
on the Redemption Date shall be payable to the holders of such Debentures
registered as such on the relevant record date subject to the terms and
provisions of Section 2.2 hereof.
Upon presentation of any Debenture redeemed in part only, the Company
shall execute and the Trustee shall authenticate and deliver to the holder
thereof, at the expense of the Company, a new Debenture or Debentures, of
authorized denominations, in principal amount equal to the unredeemed portion of
the Debenture so presented.
Notwithstanding the foregoing, the Trustee shall not redeem any
Debentures or mail any notice of optional redemption during the continuance of a
default in payment of the principal of, interest on or Redemption Price in
respect of the Debentures or of any Event of Default. If any Debenture called
for redemption shall not be so paid upon surrender thereof for redemption, the
Redemption Price and, to the extent legally permitted, interest, if any, in
respect thereof shall, until paid or duly provided for, bear interest from the
Redemption Date at the rate borne by the Debenture.
SECTION 3.5. No Sinking Fund. The Debentures shall not be entitled to
the benefit of any sinking fund.
ARTICLE IV
PARTICULAR COVENANTS OF THE COMPANY
SECTION 4.1. Payment of Principal, Interest and Redemption Price. The
Company covenants and agrees that it will duly and punctually pay or cause to be
paid the principal of, interest on and Redemption Price, if applicable, in
respect of each of the Debentures at the places, at the respective times and in
the manner provided herein and in the Debentures. Each installment of interest
on the Debentures due on any semi-annual interest payment date may be paid
either (i) by check mailed to the address of the person entitled
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thereto as it appears in the Debenture register or (ii) by transfer to an
account maintained by such person located in the United States; provided,
however, that payments to the Depositary will be made by wire transfer of
immediately available funds to the account of the Depositary or its nominee.
SECTION 4.2. Maintenance of Office or Agency. The Company will maintain
in the City of Atlanta, Georgia, an office or agency where the Debentures may be
surrendered for registration of transfer or exchange or for presentation for
payment or for redemption and where notices and demands to or upon the Company
in respect of the Debentures and this Indenture may be served. The Company will
give prompt written notice to the Trustee of the location, and any change in the
location, of such office or agency not designated or appointed by the Trustee.
If at any time the Company shall fail to maintain any such required office or
agency or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office or the office or agency of the Trustee in the City of
Atlanta, Georgia.
The Company may also from time to time designate one or more other
offices or agencies where the Debentures may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in the City of
Atlanta, Georgia, for such purposes. The Company will give prompt written notice
of any such designation or rescission and of any change in the location of any
such other office or agency.
The Company hereby initially designates the Trustee as paying agent,
Debenture registrar, and Custodian, and each of the Corporate Trust Office of
the Trustee and the office of the Trustee in the City of Atlanta, Georgia (which
shall initially be 58 Edgewood Avenue, Atlanta, Georgia 30302).
So long as the Trustee is the Debenture registrar, the Trustee agrees
to mail, or cause to be mailed, the notices set forth in Section 7.10(a) and the
third paragraph of Section 7.11.
SECTION 4.3. Appointments to Fill Vacancies in Trustee's Office. The
Company, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in Section 7.10, a Trustee, so that there
shall at all times be a Trustee hereunder.
SECTION 4.4. Provisions as to Paying Agent.
(a) If the Company shall appoint a paying agent other than the
Trustee, or if the Trustee shall appoint such a paying agent, it will cause such
paying agent to execute and deliver to the Trustee an instrument in which such
agent shall agree with the Trustee, subject to the provisions of this Section
4.4:
(1) that it will hold all sums held by it as such agent for
the payment of the principal of, interest on or Redemption Price in
respect of, the Debentures (whether such sums have been paid to it by
the Company or by any other obligor on the Debentures) in trust for the
benefit of the holders of the Debentures;
(2) that it will give the Trustee notice of any failure by the
Company (or by any other obligor on the Debentures) to make any payment
of the principal of, interest on or Redemption Price in respect of the
Debentures when the same shall be due and payable; and
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(3) that at any time during the continuance of an Event of
Default, upon request of the Trustee, it will forthwith pay to the
Trustee all sums so held in trust.
The Company shall, on or before each due date of the principal of,
interest on or Redemption Price in respect of the Debentures, deposit with the
paying agent a sum sufficient to pay such amounts, and (unless such paying agent
is the Trustee) the Company will promptly notify the Trustee of any failure to
take such action; provided, that if such deposit is made on the due date, such
deposit shall be received by the paying agent by 10:00 a.m. New York City time,
on such date.
(b) If the Company shall act as its own paying agent, it will, on
or before each due date of the principal of, interest on or Redemption Price in
respect of the Debentures, set aside, segregate and hold in trust for the
benefit of the holders of the Debentures a sum sufficient to pay such amounts so
becoming due and will notify the Trustee of any failure to take such action and
of any failure by the Company (or any other obligor under the Debentures) to
make any payment of the principal of, interest on or Redemption Price in respect
of the Debentures when the same shall become due and payable.
(c) Anything in this Section 4.4 to the contrary notwithstanding,
the Company may, at any time, for the purpose of obtaining a satisfaction and
discharge of this Indenture, or for any other reason, pay or cause to be paid to
the Trustee all sums held in trust by the Company or any paying agent hereunder
as required by this Section 4.4, such sums to be held by the Trustee upon the
trusts herein contained and upon such payment by the Company or any paying agent
to the Trustee, the Company or such paying agent shall be released from all
further liability with respect to such sums.
(d) Anything in this Section 4.4 to the contrary notwithstanding,
the agreement to hold sums in trust as provided in this Section 4.4 is subject
to Sections 12.3 and 12.4.
SECTION 4.5. Corporate Existence. Subject to Article XI, the Company
will do or cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence.
SECTION 4.6. Stay, Extension and Usury Laws. The Company covenants (to
the extent that it may lawfully do so) that it shall not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law or other law which would prohibit or
forgive the Company from paying all or any portion of the principal of or
interest on the Debentures as contemplated herein, wherever enacted, now or at
any time hereafter in force, or which may affect the covenants or the
performance of this Indenture and the Company (to the extent it may lawfully do
so) hereby expressly waives all benefit or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impede
the execution of any power herein granted to the Trustee, but will suffer and
permit the execution of every such power as though no such law has been enacted.
SECTION 4.7. Limitations on Liens.
(a) The Company will not, and will not permit any Subsidiary to,
Incur any Debt secured by a Lien on any Principal Property or on any shares of
stock or indebtedness of any Subsidiary, without making effective provision for
securing the Debentures equally and ratably with such Debt.
(b) The foregoing restrictions will not apply to: (i) Liens on any
Principal Property acquired, constructed or improved after the date of the
Indenture, which Liens are created within 180 days of such acquisition,
construction or improvement, to secure Debt Incurred for the payment of all or
any part of the
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purchase price or the cost of construction or improvement of the Principal
Property in an aggregate principal amount not to exceed the fair market value of
such property, construction or improvements; (ii) Liens on any Principal
Property, shares of stock or indebtedness of a Person existing prior to the time
(A) such Person becomes a Subsidiary of the Company, (B) such Person merges into
or consolidates with the Company or a Subsidiary of the Company or (C) a
Subsidiary of the Company merges into or consolidates with such Person (in a
transaction in which such Person becomes a Subsidiary of the Company); (iii)
Liens on Principal Property securing Debt owed by a Subsidiary to the Company or
any other Subsidiary; (iv) Liens on Principal Property in existence on the date
of this Indenture; (v) Liens on any unimproved real Principal Property
constructed or improved after the date of this Indenture to secure the payment
of all or part of the cost of such construction or improvement; (vi) Liens on
any Principal Property of the Company or any Subsidiary in favor of governmental
bodies; (vii) Liens created by pledges or deposits required in connection with
workers' compensation, unemployment insurance and other social security
legislation and deposits securing obligations to insurance carriers under
insurance policies or self-insurance arrangements of the Company or a
Subsidiary; (viii) Liens to secure taxes not yet due or which are being
contested in good faith by the Company or a Subsidiary; and (ix) Liens to secure
any extension, renewal, refinancing or refunding (or successive extensions,
renewals, refinancings or refundings), in whole or in part, of any Debt secured
by Liens referred to in the foregoing clauses (i) through (viii), so long as
such Lien does not extend to any other property and the Debt so secured is not
increased.
(c) Notwithstanding the foregoing, the Company or any Subsidiary
may Incur Debt secured by Liens which otherwise would be subject to the
foregoing restrictions, in an aggregate amount which, together with all other
such Debt outstanding secured by Liens and all Attributable Debt outstanding in
respect of Sale and Leaseback Transactions (other than as permitted by clause
(i) under the "Limitation on Sale and Leaseback Transactions" covenant in
Section 4.8), does not exceed 10% of Consolidated Net Tangible Assets.
SECTION 4.8. Limitation on Sale and Leaseback Transactions. The Company
will not, and will not permit any Subsidiary to, enter into any Sale and
Leaseback Transaction on any Principal Property (except transactions between the
Company and any Subsidiary and transactions for a period not exceeding three
years) unless: (i) the Company or such Subsidiary would be entitled to incur a
Lien to secure Debt by reason of the provisions described in clauses (i) through
(ix) of Section 4.7(b) in an amount equal to the Attributable Debt of such Sale
and Leaseback Transaction without equally and ratably securing the Debentures or
(ii) the Company or such Subsidiary applies within 120 days an amount equal to,
in the case of a sale or transfer for cash, the net proceeds (not exceeding the
net book value), and, otherwise, an amount equal to the fair value (as
determined by its Board of Directors), of the property so leased to (A) the
retirement of Debentures or other Funded Debt of the Company or such Subsidiary
or (B) the acquisition of property which constitutes a Principal Property.
SECTION 4.9. Limitation on Consolidation, Merger and Sale of Assets.
The Company will not consolidate with, or sell, convey or lease all or
substantially all of its assets to, or merge with or into, any other
corporation, unless (i) either the Company is the continuing corporation, or the
successor corporation is a domestic corporation and expressly assumes the due
and punctual payment of the principal of and interest on the Debentures
outstanding under this Indenture according to their tenor and the due and
punctual performance and observance of all of the covenants and conditions of
this Indenture to be performed or observed by the Company and (ii) immediately
after such merger or consolidation, or such sale, conveyance or lease, no Event
of Default, and no event which, after notice or lapse of time or both, would
become an Event of Default, shall have occurred and be continuing.
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ARTICLE V
HOLDERS' LISTS AND REPORTS BY
THE COMPANY AND THE TRUSTEE
SECTION 5.1. Holders' Lists. The Company covenants and agrees that it
will furnish or cause to be furnished to the Trustee, semiannually, not more
than fifteen (15) days after each April 1 and October 1 in each six-month
period beginning with the period ending October 15, 1998, and at such other
times as the Trustee may request in writing, within thirty (30) days after
receipt by the Company of any such request (or such lesser time as the Trustee
may reasonably request in order to enable it to timely provide any notice to be
provided by it hereunder), a list in such form as the Trustee may reasonably
require of the names and addresses of the holders of Debentures as of a date not
more than fifteen (15) days (or such other date as the Trustee may reasonably
request in order to so provide any such notices) prior to the time such
information is furnished, except that no such list need be furnished so long as
the Trustee is acting as Debenture registrar.
SECTION 5.2. Preservation and Disclosure of Lists.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, all information as to the names and addresses of the holders of
Debentures contained in the most recent list furnished to it as provided in
Section 5.1 or maintained by the Trustee in its capacity as Debenture registrar,
if so acting. The Trustee may destroy any list furnished to it as provided in
Section 5.1 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other holders of
Debentures with respect to their rights under this Indenture or under the
Debentures, and the corresponding rights and duties of the Trustee, shall be as
provided by the Trust Indenture Act.
(c) Every Holder, by receiving and holding the same, agrees with the
Company and the Trustee that neither the Company nor the Trustee nor any agent
of either of them shall be held accountable by reason of any disclosure of
information as to names and addresses of holders of Debentures made pursuant to
the Trust Indenture Act.
SECTION 5.3. Reports by Trustee.
(a) Within sixty (60) days after May 15 of each year commencing with
the year 1998, the Trustee shall transmit to holders of Debentures such reports
dated as of May 15 of the year in which such reports are made concerning the
Trustee and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act at the times and in the manner provided pursuant thereto.
(b) A copy of such report shall, at the time of such transmission to
holders of Debentures, be filed by the Trustee with each stock exchange and
automated quotation system upon which the Debentures are listed and with the
Company. The Company will notify the Trustee within a reasonable time when the
Debentures are listed on any stock exchange and automated quotation system.
SECTION 5.4. Reports by Company.
(a) The Company shall file with the Trustee (and the Commission if at
any time after this Indenture becomes qualified under the Trust Indenture Act),
and transmit to holders of Debentures, such
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information, documents and other reports and such summaries thereof, as may be
required pursuant to the Trust Indenture Act at the times and in the manner
provided pursuant to such Act; provided, that any such information, documents or
reports required to be filed with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act will be filed with the Trustee within fifteen (15)days after
the same is so required to be filed with the Commission.
Delivery of such information, documents and reports to the Trustee is
for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
(b) The Company will deliver to the Trustee annually, commencing April
15, 1999, a certificate, from its principal executive officer, principal
financial officer or principal accounting officer, stating whether or not to the
knowledge of the signer thereof the Company is in compliance (without regard to
periods of grace or notice requirements) with all conditions and covenants under
this Indenture, and if the Company shall not be in compliance, specifying such
non-compliance and the nature and status thereof of which such signer may have
knowledge.
ARTICLE VI
REMEDIES OF THE TRUSTEE AND
HOLDERS ON AN EVENT OF DEFAULT
SECTION 6.1. Events of Default. In case one or more of the following
Events of Default (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body) shall have occurred and be
continuing:
(a) default in the payment of any installment of interest upon any of
the Debentures as and when the same shall become due and payable, and
continuance of such default for a period of thirty (30) days; or
(b) default in the payment of all or any portion of the principal and,
if applicable, the Redemption Price, in respect of any of the Debentures as and
when the same shall become due and payable, either at maturity, in connection
with any redemption pursuant to Article III, by acceleration or otherwise; or
(c) failure on the part of the Company duly to observe or perform any
other of the covenants or agreements on the part of the Company in the
Debentures or in this Indenture (other than a covenant or agreement a default in
whose performance or whose breach is elsewhere in this Section 6.1 specifically
dealt with) continued for a period of sixty (60) days (or such other period
specified in the Indenture) after the date on which written notice of such
failure shall have been given to the Company by the Trustee, or to the Company
and a Responsible Officer of the Trustee by the holders of at least 25% in
aggregate principal amount of the Debentures at the time outstanding determined
in accordance with Section 8.4; or
(d) default in the performance, or breach, of any covenant which
results in the acceleration of Debt of the Company or any Subsidiary in excess
of $10 million and failure of such acceleration to be rescinded or such Debt to
be discharged within ten (10) days; or
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(e) failure to pay any amount due and payable in respect of any Debt of
the Company or any Subsidiary in excess of $10 million and the failure of such
default to be rescinded or such Debt to be discharged within ten (10) days; or
(f) the Company shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, or shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due; or
(g) an involuntary case or other proceeding shall be commenced against
the Company seeking liquidation, reorganization or other relief with respect to
it or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of sixty (60) consecutive days;
then, and in each and every such case (other than an Event of Default specified
in Section 6.1(f) or (g)), unless the principal of all of the Debentures shall
have already become due and payable, either the Trustee or the holders of not
less than 25% in aggregate principal amount of the Debentures then outstanding
hereunder determined in accordance with Section 8.4, by notice in writing to the
Company (and to the Trustee if given by Holders), may declare the principal of,
and accrued and unpaid interest on, the Debentures, to be due and payable
immediately, and upon any such declaration the same shall become and shall be
immediately due and payable, anything in this Indenture or in the Debentures to
the contrary notwithstanding. If an Event of Default specified in Section 6.1(f)
or (g) occurs, the principal amount of, accrued and unpaid interest on and any
Redemption Price in respect of, the Debentures, shall ipso facto become due and
payable immediately and automatically without any declaration or other act on
the part of the Trustee or any Holder.
This provision, however, is subject to the conditions that if, at any
time after the principal of the Debentures shall have been so declared due and
payable, and before any judgment or decree for the payment of the monies due
shall have been obtained or entered as hereinafter provided, the Company shall
pay or shall deposit with the Trustee a sum sufficient to pay all matured
installments of interest upon all Debentures and the principal of, interest on
and any Redemption Price in respect of any and all Debentures which shall have
become due otherwise than by acceleration (with interest on overdue installments
of interest (to the extent that payment of such interest is enforceable under
applicable law) and on such principal amount and any Redemption Price at the
rate borne by the Debentures, to the date of such payment or deposit) and
amounts due to the Trustee pursuant to Section 7.6, and if any and all defaults
under this Indenture, other than the nonpayment of the principal amount, any
declaration or other act on the part of the Trustee or any Holder, and accrued
interest thereon which shall have become due by acceleration, shall have been
cured or waived pursuant to Section 6.7, then and in every such case the holders
of a majority in aggregate principal amount of the Debentures then outstanding,
by written notice to the Company and to the Trustee, may waive all defaults or
Events of Default and rescind and annul such declaration and its consequences;
but no such waiver or rescission and annulment shall extend to or shall affect
any subsequent default or Event of Default, or shall impair any right consequent
thereon. The Company shall notify a Responsible Officer of the Trustee, promptly
upon becoming aware thereof, of any Event of Default.
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In case the Trustee shall have proceeded to enforce any right under
this Indenture and such proceedings shall have been discontinued or abandoned
because of such waiver or rescission and annulment or for any other reason or
shall have been determined adversely to the Trustee, then and in every such case
the Company, the Holders and the Trustee shall be restored respectively to their
several positions and rights hereunder, and all rights, remedies and powers of
the Company, the Holders and the Trustee shall continue as though no such
proceeding had been taken.
SECTION 6.2. Payments of Debentures on Default; Suit Therefor. The
Company covenants that (a) in case default shall be made in the payment of any
installment of interest upon any of the Debentures as and when the same shall
become due and payment, and such default shall have continued for a period of
thirty (30) days, or (b) in case default shall be made in the payment of the
principal of, interest on and any Redemption Price in respect of any Debenture
as and when the same shall have become due and payable, whether at maturity of
the Debentures or in connection with any redemption, by or under this Indenture
declaration or otherwise, then, upon demand of the Trustee, the Company will pay
to the Trustee, for the benefit of the Holders, the whole amount that then shall
have become due and payable on all such Debentures for principal amount or
interest, or both, as the case may be, with interest upon the overdue principal
amount and (to the extent that payment of such interest is enforceable under
applicable law) upon the overdue installments of interest at the rate borne by
the Debentures; and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including reasonable
compensation to the Trustee, its agents, attorneys and counsel, and any
reasonable expenses or liabilities incurred by the Trustee hereunder other than
through its negligence or bad faith. Until such demand by the Trustee, the
Company may pay the principal of, interest on and any Redemption Price in
respect of the Debentures to the registered holders, whether or not the
Debentures are overdue.
In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any actions or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or final decree, and may enforce any such
judgment or final decree against the Company or any other obligor on the
Debentures and collect in the manner provided by law out of the property of the
Company or any other obligor on the Debentures wherever situated the monies
adjudged or decreed to be payable.
In case there shall be pending proceedings for the bankruptcy or for
the reorganization of the Company or any other obligor on the Debentures under
Title 11 of the United States Code, or any other applicable law, or in case a
receiver, assignee or trustee in bankruptcy or reorganization, liquidator,
sequestrator or similar official shall have been appointed for or taken
possession of the Company or such other obligor, the property of the Company or
such other obligor, or in case of any other judicial proceedings relative to the
Company or such other obligor upon the Debentures, or to the creditors or
property of the Company or such other obligor, the Trustee, irrespective of
whether the principal or any Redemption Price of the Debentures shall then be
due and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee shall have made any demand pursuant to the
provisions of this Section 6.2, shall be entitled and empowered, by intervention
in such proceedings or otherwise, to file and prove a claim or claims for the
whole amount of principal, premium, if any, and interest owing and unpaid in
respect of the Debentures, and, in case of any judicial proceedings, to file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and of the Holders allowed
in such judicial proceedings relative to the Company or any other obligor on the
Debentures, its or their creditors, or its or their property, and to collect and
receive any monies or other property payable or deliverable on any such claims,
and to distribute the same after the deduction of any amounts due the Trustee
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under Section 7.6; and any receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, custodian or similar official is hereby authorized
by each of the Holders to make such payments to the Trustee, and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for reasonable compensation,
expenses, advances and disbursements, including reasonable counsel fees incurred
by it up to the date of such distribution. To the extent that such payment of
reasonable compensation, expenses, advances and disbursements out of the estate
in any such proceedings shall be denied for any reason, payment of the same
shall be secured by a lien on, and shall be paid out of, any and all
distributions, dividends, monies, securities and other property which the
holders of the Debentures may be entitled to receive in such proceedings,
whether in liquidation or under any plan of reorganization or arrangement or
otherwise.
All rights of action and of asserting claims under this Indenture, or
under any of the Debentures, may be enforced by the Trustee without the
possession of any of the Debentures, or the production thereof at any trial or
other proceeding relative thereto, and any such suit or proceeding instituted by
the Trustee shall be brought in its own name as trustee of an express trust, and
any recovery of judgment shall, after provision for the payment of the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, be for the ratable benefit of the Holders of the
Debentures.
In any proceedings brought by the Trustee (and in any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party) the Trustee shall be held to represent all the Holders
of the Debentures, and it shall not be necessary to make any Holders of the
Debentures parties to any such proceedings.
SECTION 6.3. Application of Monies Collected by Trustee. Any monies
collected by the Trustee pursuant to this Article VI shall be applied in the
order following, at the date or dates fixed by the Trustee for the distribution
of such monies, upon presentation of the several Debentures, and stamping
thereon the payment, if only partially paid, and upon surrender thereof, if
fully paid:
First: To the payment of all amounts due the Trustee under Section 7.6;
Second: In case the principal of the outstanding Debentures shall not
have become due and be unpaid, to the payment of interest on the Debentures in
default in the order of the maturity of the installments of such interest, with
interest (to the extent that such interest has been collected by the Trustee)
upon the overdue installments of interest at the rate borne by the Debentures,
such payments to be made ratably to the persons entitled thereto;
Third: In case the principal of the outstanding Debentures shall have
become due, by declaration or otherwise, and be unpaid, to the payment of the
whole amount then owing and unpaid upon the Debentures for principal and
premium, if any, and interest, with interest on the overdue principal and
premium, if any, and (to the extent that such interest has been collected by the
Trustee) upon overdue installments of interest at the rate borne by the
Debentures; and in case such monies shall be insufficient to pay in full the
whole amounts so due and unpaid upon the Debentures, then to the payment of such
principal and premium, if any, and interest without preference or priority of
principal and premium, if any, over interest, or of interest over principal and
premium, if any, or of any installment of interest over any other installment of
interest, or of any Debenture over any other Debenture, ratably to the aggregate
of such principal and premium, if any, and accrued and unpaid interest; and
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Fourth: To the payment of the remainder, if any, to the Company or any
other person lawfully entitled thereto.
SECTION 6.4. Proceedings by Holder. No Holder shall have any right by
virtue of or by availing of any provision of this Indenture to institute any
proceeding at law or in equity upon or under or with respect to this Indenture,
or for the appointment of a receiver, trustee, liquidator, custodian or other
similar official, or for any other remedy hereunder, unless such Holder
previously shall have given to the Trustee written notice of an Event of Default
and of the continuance thereof, as hereinbefore provided, and unless also the
Holders of not less than 25% in aggregate principal amount of the Debentures
then outstanding shall have made written request upon the Trustee to institute
such proceeding in its own name as Trustee hereunder and shall have offered to
the Trustee such reasonable security or indemnity as it may require against the
costs, expenses and liabilities to be incurred therein or thereby, and the
Trustee for sixty (60) days after its receipt of such notice, request and offer
of security or indemnity, shall have neglected or refused to institute any such
action, suit or proceeding and no direction inconsistent with such written
request shall have been given to the Trustee pursuant to Section 6.7; it being
understood and intended, and being expressly covenanted, by the taker and Holder
of every Debenture with every other taker and Holder and the Trustee, that no
one or more Holders of Debentures shall have any right in any manner whatever by
virtue of or by availing of any provision of this Indenture to affect, disturb
or prejudice the rights of any other Holder of Debentures, or to obtain or seek
to obtain priority over or preference to any other such Holder, or to enforce
any right under this Indenture, except in the manner herein provided and for the
equal, ratable and common benefit of all Holders of Debentures (except as
otherwise provided herein). For the protection and enforcement of this Section
6.4, each and every Holder and the Trustee shall be entitled to such relief as
can be given either at law or in equity.
Notwithstanding any other provision of this Indenture and any provision
of any Debenture, the right of any Holder of any Debenture to receive payment of
the principal of and any interest on such Debenture on or after the respective
due dates expressed in such Debenture, or to institute suit for the enforcement
of any such payment on or after such respective dates against the Company, shall
not be impaired or affected without the consent of such Holder.
SECTION 6.5. Proceedings by Trustee. In case of an Event of Default the
Trustee may in its discretion proceed to protect and enforce the rights vested
in it by this Indenture by such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any of such rights, either by
suit in equity or by action at law or by proceeding in bankruptcy or otherwise,
whether for the specific enforcement of any covenant or agreement contained in
this Indenture or in aid of the exercise of any power granted in this Indenture,
or to enforce any other legal or equitable right vested in the Trustee by this
Indenture or by law.
SECTION 6.6. Remedies Cumulative and Continuing. Except as provided in
Section 2.6, all powers and remedies given by this Article VI to the Trustee or
to the Holders shall, to the extent permitted by law, be deemed cumulative and
not exclusive of any thereof or of any other powers and remedies available to
the Trustee or the holders of the Debentures, by judicial proceedings or
otherwise, to enforce the performance or observance of the covenants and
agreements contained in this Indenture, and no delay or omission of the Trustee
or of any holder of any of the Debentures to exercise any right or power
accruing upon any Default or Event of Default occurring and continuing as
aforesaid shall impair any such right or power, or shall be construed to be a
waiver of any such Default or any acquiescence therein; and, subject to the
provisions of Section 6.4, every power and remedy given by this Article VI or by
law to the Trustee or to the Holders may be exercised from time to time, and as
often as shall be deemed expedient, by the Trustee or by the Holders.
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SECTION 6.7. Direction of Proceedings and Waiver of Defaults by
Majority of Holders. The Holders of a majority in aggregate principal amount of
the Debentures at the time outstanding determined in accordance with Section 8.4
shall have the right to direct the time, method, and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee; provided, however, that (a) such direction shall
not be in conflict with any rule of law or with this Indenture, and (b) the
Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction. The Holders of a majority in aggregate
principal amount of the Debentures at the time outstanding determined in
accordance with Section 8.4 may, on behalf of the Holders of all of the
Debentures, waive any past default or Event of Default hereunder and its
consequences except (i) a default in the payment of interest or premium, if any,
on, or the principal of, the Debentures, (ii) a default in the payment of
Redemption Price pursuant to Article III or (iii) a default in respect of a
covenant or provisions hereof which under Article X cannot be modified or
amended without the consent of the Holders of all Debentures then outstanding.
Upon any such waiver the Company, the Trustee and the Holders shall be restored
to their former positions and rights hereunder; but no such waiver shall extend
to any subsequent or other default or Event of Default or impair any right
consequent thereon. Whenever any default or Event of Default hereunder shall
have been waived as permitted by this Section 6.7, said default or Event of
Default shall for all purposes of the Debentures and this Indenture be deemed to
have been cured and to be not continuing; but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon.
SECTION 6.8. Statement by Officers as to Default. The Company shall
deliver to the Trustee, as soon as possible and in any event within five (5)
days after the Company becomes aware of the occurrence of any Event of Default
or an event which, with notice or the lapse of time or both, would constitute an
Event of Default, an Officers' Certificate setting forth the details of such
Event of Default or default and the action which the Company proposes to take
with respect thereto.
SECTION 6.9. Notice of Defaults. The Trustee shall, within ninety (90)
days after it has knowledge of the occurrence of a default, mail to all Holders,
as the names and addresses of such holders appear upon the Debenture register,
notice of all defaults known to a Responsible Officer, unless such defaults
shall have been cured or waived before the giving of such notice; and provided,
that, except in the case of default in the payment of the principal of or
interest on any of the Debentures, the Trustee shall be protected in withholding
such notice if and so long as the Trustee in good faith determines that the
withholding of such notice is in the interests of the Holders.
SECTION 6.10. Undertaking to Pay Costs. All parties to this Indenture
agree, and each holder of any Debenture by such holder's acceptance thereof
shall be deemed to have agreed, that any court may, in its discretion, require,
in any suit for the enforcement of any right or remedy under this Indenture, or
in any suit against the Trustee for any action taken or omitted by it as
Trustee, the filing by any party litigant in such suit of an undertaking to pay
the costs of such suit and that such court may in its discretion assess
reasonable costs, including reasonable attorneys' fees, against any party
litigant in such suit, having due regard to the merits and good faith of the
claims or defenses made by such party litigant; provided that the provisions of
this Section 6.10 (to the extent permitted by law) shall not apply to any suit
instituted by the Trustee, to any suit instituted by any Holder, or group of
Holders, holding in the aggregate more than ten percent (10%) in principal
amount of the Debentures at the time outstanding determined in accordance with
Section 8.4, or to any suit instituted by any Holder for the enforcement of the
payment of the principal of or premium, if any, or interest on any Debenture on
or after the due date expressed in such Debenture.
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ARTICLE VII
CONCERNING THE TRUSTEE
SECTION 7.1. Duties and Responsibilities of Trustee. The Trustee, prior
to the occurrence of an Event of Default and after the curing of all Events of
Default which may have occurred, undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture. In case an Event of
Default has occurred (which has not been cured or waived) the Trustee shall
exercise such of the rights and powers vested in it by this Indenture, and use
the same degree of care and skill in their exercise, as a prudent Person would
exercise or use under the circumstances in the conduct of such Person's own
affairs.
No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that:
(a) prior to the occurrence of an Event of Default and after the
curing or waiving of all Events of Default which may have occurred:
(1) the duties and obligations of the Trustee shall be
determined solely by the express provisions of this Indenture and the
Trust Indenture Act, and the Trustee shall not be liable except for the
performance of such duties and obligations as are specifically set
forth in this Indenture and no implied covenants or obligations shall
be read into this Indenture and the Trust Indenture Act against the
Trustee; and
(2) in the absence of bad faith and willful misconduct on the
part of the Trustee, the Trustee may conclusively rely, as to the truth
of the statements and the correctness of the opinions expressed
therein, upon any certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture; but, in the case of
any such certificates or opinions which by any provisions hereof are
specifically required to be furnished to the Trustee, the Trustee shall
be under a duty to examine the same to determine whether or not they
conform to the requirements of this Indenture (but need not confirm or
investigate the accuracy of mathematical calculations or other facts
stated therein);
(b) the Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer or Officers of the Trustee, unless the
Trustee was negligent in ascertaining the pertinent facts;
(c) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the holders of not less than a majority in principal amount of the
Debentures at the time outstanding determined as provided in Section 8.4
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred upon
the Trustee, under this Indenture; and
(d) whether or not therein provided, every provision of this
Indenture relating to the conduct or affecting the liability of, or affording
protection to, the Trustee shall be subject to the provisions of this Section.
None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise
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of any of its rights or powers, if there is reasonable ground for believing that
the repayment of such funds or adequate indemnity against such risk or liability
is not reasonably assured to it.
SECTION 7.2. Reliance on Documents, Opinions, Etc. Except as otherwise
provided in Section 7.1:
(a) the Trustee may rely and shall be protected in acting upon any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, debenture, Debenture, coupon or other paper or
document believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties;
(b) any request, direction, order or demand of the Company mentioned
herein shall be sufficiently evidenced by an Officers' Certificate (unless other
evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Trustee by a copy
thereof certified by the Secretary or an Assistant Secretary of the Company;
(c) the Trustee may consult with counsel of its selection and any
advice or Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or omitted by it hereunder in good
faith and in accordance with such advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders pursuant to the provisions of this Indenture,
unless such Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby;
(e) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture or
other paper or document, but the Trustee, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney; provided, however, that if
the payment within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation is,
in the opinion of the Trustee, not reasonably assured to the Trustee by the
security afforded to it by the terms of this Indenture, the Trustee may require
reasonable indemnity against such expenses or liability as a condition to so
proceeding; the reasonable expenses of every such examination shall be paid by
the Company or, if paid by the Trustee or any predecessor Trustee, shall be
repaid by the Company upon demand;
(f) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed by it with due care
hereunder;
(g) the Trustee shall not be deemed to have notice of any Event of
Default unless a Responsible Officer of the Trustee has actual knowledge thereof
or unless written notice of any event which is in fact such a default is
received by the Trustee at the Corporate Trust Office of the Trustee, and such
notice references the Debentures and this Indenture;
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(h) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
conclusively rely upon an Officers' Certificate; and
(i) The Trustee, any authenticating agent, any paying agent, any
Debenture registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of the Debentures, may otherwise
deal with the Company with the same rights it would have if it were not Trustee,
authenticating agent, paying agent, Debenture registrar or such other agent.
SECTION 7.3. No Responsibility for Recitals, Etc. The recitals
contained herein and in the Debentures (except in the Trustee's certificate of
authentication) shall be taken as the statements of the Company, and the Trustee
assumes no responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Debentures. The Trustee shall not be accountable for the use or application by
the Company of any Debentures or the proceeds of any Debentures authenticated
and delivered by the Trustee in conformity with the provisions of this
Indenture.
SECTION 7.4. Trustee, Paying Agents or Registrar May Own Debentures.
The Trustee, any paying agent or Debenture registrar, in its individual or any
other capacity, may become the owner or pledgee of Debentures with the same
rights it would have if it were not Trustee, paying agent or Debenture
registrar.
SECTION 7.5. Monies to Be Held in Trust. Subject to the provisions of
Section 12.4, all monies received by the Trustee shall, until used or applied as
herein provided, be held in trust for the purposes for which they were received.
Money held by the Trustee in trust hereunder need not be segregated from other
funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as may be
agreed from time to time by the Company and the Trustee.
SECTION 7.6. Compensation and Expenses of Trustee. The Company
covenants and agrees to pay to the Trustee from time to time, and the Trustee
shall be entitled to, such compensation as shall be agreed to in writing by the
Company and the Trustee for all services rendered by it hereunder in any
capacity (which shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust), and the Company will pay or
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances reasonably incurred or made by the Trustee in
accordance with any of the provisions of this Indenture (including the
reasonable compensation and expenses and disbursements of its counsel and of all
persons not regularly in its employ) except any such expense, disbursement or
advance as may arise from its negligence, willful misconduct, recklessness or
bad faith. The Company also covenants to indemnify the Trustee in any capacity
under this Indenture and its agents and any authenticating agent for, and to
hold them harmless against, any loss, liability or expense, including taxes
(other than taxes based upon, measured by or determined by the income of the
Trustee) incurred without negligence, willful misconduct, recklessness, or bad
faith on the part of the Trustee or such agent or authenticating agent, as the
case may be, and arising out of or in connection with the acceptance or
administration of this trust or in any other capacity hereunder, including the
costs and reasonable expenses of defending themselves against any claim of
liability in the premises. The obligations of the Company under this Section 7.6
to compensate or indemnify the Trustee and to pay or reimburse the Trustee for
expenses, disbursements and advances shall be secured by a lien prior to that of
the Debentures upon all property and funds held or collected by the Trustee as
such. The obligation of the Company under this Section shall survive the
satisfaction and discharge of this Indenture.
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When the Trustee and its agents and any authenticating agent incur
expenses or render services after an Event of Default specified in Section
6.1(d) or (e) occurs, the expenses and the compensation for the services are
intended to constitute expenses of administration under any bankruptcy,
insolvency or similar laws.
SECTION 7.7. Officers' Certificate as Evidence. Except as otherwise
provided in Section 7.1, whenever in the administration of the provisions of
this Indenture the Trustee shall deem it necessary or desirable that a matter be
proved or established prior to taking or omitting any action hereunder, such
matter (unless other evidence in respect thereof be herein specifically
prescribed) may, in the absence of negligence, willful misconduct, recklessness,
or bad faith on the part of the Trustee, be deemed to be conclusively proved and
established by an Officers' Certificate delivered to the Trustee.
SECTION 7.8. Conflicting Interests of Trustee. If the Trustee has or
shall acquire a conflicting interest within the meaning of the Trust Indenture
Act, the Trustee shall either eliminate such interest or resign, to the extent
and in the manner provided by, and subject to the provisions of, the Trust
Indenture Act and this Indenture.
SECTION 7.9. Eligibility of Trustee. There shall at all times be a
Trustee hereunder which shall be a Person that is eligible pursuant to the Trust
Indenture Act to act as such and has a combined capital and surplus of at least
$50,000,000. If such person publishes reports of condition at least annually,
pursuant to law or to the requirements of any supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such person shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time
the Trustee shall cease to be eligible in accordance with the provisions of this
Section, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article VII.
SECTION 7.10. Resignation or Removal of Trustee.
(a) The Trustee may at any time resign by giving written notice of
such resignation to the Company and to the holders of Debentures. Upon receiving
such notice of resignation, the Company shall promptly appoint a successor
trustee by written instrument, in duplicate, executed by order of the Board of
Directors, one copy of which instrument shall be delivered to the resigning
Trustee and one copy to the successor trustee. If no successor trustee shall
have been so appointed and have accepted appointment thirty (30) days after the
mailing of such notice of resignation to the Holders, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
trustee, or any Holder who has been a bona fide holder of a Debenture or
Debentures for at least six (6) months may, subject to the provisions of Section
6.9, on behalf of himself and all others similarly situated, petition any such
court for the appointment of a successor trustee. Such court may thereupon,
after such notice, if any, as it may deem proper and prescribe, appoint a
successor trustee.
(b) In case at any time any of the following shall occur:
(1) the Trustee shall fail to comply with Section 7.8 after
written request therefor by the Company or by any Holder who has been a
bona fide holder of a Debenture or Debentures for at least six (6)
months; or
(2) the Trustee shall cease to be eligible in accordance with
the provisions of Section 7.9 and shall fail to resign after written
request therefor by the Company or by any such Holder; or
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(3) the Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of
its property shall be appointed, or any public officer shall take
charge or control of the Trustee or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation;
then, in any such case, the Company may remove the Trustee and appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors, one copy of which instrument shall be delivered to the
Trustee so removed and one copy to the successor trustee, or, subject to the
provisions of Section 6.9, any Holder who has been a bona fide holder of a
Debenture or Debentures for at least six (6) months may, on behalf of himself
and all others similarly situated, petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor trustee. If no
successor trustee shall have been so appointed and have accepted appointment
thirty (30) days after the mailing of such notice of removal to the Trustee, the
removed Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee. In either case, such court may thereupon,
after such notice, if any, as it may deem proper and prescribe, remove the
Trustee and appoint a successor trustee.
(c) The holders of a majority in aggregate principal amount of the
Debentures at the time outstanding may at any time remove the Trustee and
nominate a successor trustee which shall be deemed appointed as successor
trustee unless within ten (10) days after notice to the Company of such
nomination the Company objects thereto, in which case the Trustee so removed or
any Holder, upon the terms and conditions and otherwise as in Section 7.10(a)
provided, may petition any court of competent jurisdiction for an appointment of
a successor trustee.
(d) Any resignation or removal of the Trustee and appointment of a
successor trustee pursuant to any of the provisions of this Section 7.10 shall
become effective upon acceptance of appointment by the successor trustee as
provided in Section 7.11.
SECTION 7.11. Acceptance by Successor Trustee. Any successor trustee
appointed as provided in Section 7.10 shall execute, acknowledge and deliver to
the Company and to its predecessor trustee an instrument accepting such
appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, duties and obligations of its predecessor hereunder, with like effect as
if originally named as trustee herein; but, nevertheless, on the written request
of the Company or of the successor trustee, the trustee ceasing to act shall,
upon payment of any amounts then due it pursuant to the provisions of Section
7.6, execute and deliver an instrument transferring to such successor trustee
all the rights and powers of the trustee so ceasing to act. Upon request of any
such successor trustee, the Company shall execute any and all instruments in
writing for more fully and certainly vesting in and confirming to such successor
trustee all such rights and powers. Any Trustee ceasing to act shall,
nevertheless, retain a lien upon all property and funds held or collected by
such Trustee as such, except for funds held in trust for the benefit of holders
of particular Debentures, to secure any amounts then due it pursuant to the
provisions of Section 7.6.
No successor trustee shall accept appointment as provided in this
Section 7.11 unless at the time of such acceptance such successor trustee shall
be qualified under the provisions of Section 7.8 and be eligible under the
provisions of Section 7.9.
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Upon acceptance of appointment by a successor trustee as provided in
this Section 7.11, the Company (or the former trustee, at the written direction
of the Company) shall mail or cause to be mailed notice of the succession of
such trustee hereunder to the holders of Debentures at their addresses as they
shall appear on the Debenture register. If the Company fails to mail such notice
within ten (10) days after acceptance of appointment by the successor trustee,
the successor trustee shall cause such notice to be mailed at the expense of the
Company.
SECTION 7.12. Succession by Merger, Etc. Any corporation into which the
Trustee may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any corporation succeeding to all or substantially
all of the corporate trust business of the Trustee (including any trust created
by this Indenture), shall be the successor to the Trustee hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided, that in the case of any corporation succeeding to all
or substantially all of the corporate trust business of the Trustee such
corporation shall be qualified under the provisions of Section 7.8 and eligible
under the provisions of Section 7.9.
In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture, any of the Debentures shall have been
authenticated but not delivered, any such successor to the Trustee may adopt the
certificate of authentication of any predecessor trustee or authenticating agent
appointed by such predecessor trustee, and deliver such Debentures so
authenticated; and in case at that time any of the Debentures shall not have
been authenticated, any successor to the Trustee or an authenticating agent
appointed by such successor trustee may authenticate such Debentures either in
the name of any predecessor trustee hereunder or in the name of the successor
trustee; and in all such cases such certificates shall have the full force which
it is anywhere in the Debentures or in this Indenture provided that the
certificate of the Trustee shall have; provided, however, that the right to
adopt the certificate of authentication of any predecessor Trustee or
authenticate Debentures in the name of any predecessor Trustee shall apply only
to its successor or successors by merger, conversion or consolidation.
SECTION 7.13. Limitation on Rights of Trustee as Creditor. If and when
the Trustee shall be or become a creditor of the Company (or any other obligor
upon the Debentures), the Trustee shall be subject to the provisions of the
Trust Indenture Act regarding the collection of the claims against the Company
(or any such other obligor).
ARTICLE VIII
CONCERNING THE HOLDERS
SECTION 8.1. Action by Holders. Whenever in this Indenture it is
provided that the holders of a specified percentage in aggregate principal
amount of the Debentures may take any action (including the making of any demand
or request, the giving of any notice, consent or waiver or the taking of any
other action), the fact that at the time of taking any such action, the holders
of such specified percentage have joined therein may be evidenced (a) by any
instrument or any number of instruments of similar tenor executed by Holders in
person or by agent or proxy appointed in writing, or (b) by the record of the
holders of Debentures voting in favor thereof at any meeting of Holders duly
called and held in accordance with the provisions of Article IX, or (c) by a
combination of such instrument or instruments and any such record of such a
meeting of Holders. Whenever the Company or the Trustee solicits the taking of
any action by the holders of the Debentures, the Company or the Trustee may fix
in advance of such solicitation, a date as the
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record date for determining holders entitled to take such action. The record
date shall be not more than fifteen (15) days prior to the date of commencement
of solicitation of such action.
SECTION 8.2. Proof of Execution by Holders. Subject to the provisions
of Section 7.1, 7.2 and 9.5, proof of the execution of any instrument by a
Holder or his agent or proxy shall be sufficient if made in accordance with such
reasonable rules and regulations as may be prescribed by the Trustee or in such
manner as shall be reasonably satisfactory to the Trustee. The holding of
Debentures shall be proved by the registry of such Debentures or by a
certificate of the Debenture registrar.
The record of any Holders' meeting shall be proved in the manner
provided in Section 9.6.
SECTION 8.3. Who Are Deemed Absolute Owners. The Company, the Trustee,
any paying agent and any Debenture registrar may deem the person in whose name
such Debenture shall be registered upon the Debenture register to be, and may
treat him as, the absolute owner of such Debenture (whether or not such
Debenture shall be overdue and notwithstanding any notation of ownership or
other writing thereon) for the purpose of receiving payment of or on account of
the principal of, interest on and Redemption Price in respect of such Debenture
and for all other purposes; and neither the Company nor the Trustee nor any
paying agent nor any Debenture registrar shall be affected by any notice to the
contrary. All such payments so made to any holder for the time being, or upon
his order, shall be valid, and, to the extent of the sum or sums so paid,
effectual to satisfy and discharge the liability for monies payable upon any
such Debenture.
SECTION 8.4. Company-Owned Debentures Disregarded. In determining
whether the holders of the requisite aggregate principal amount of Debentures
have concurred in any direction, consent, waiver or other action under this
Indenture, Debentures which are owned by the Company or any other obligor on the
Debentures or by any person directly or indirectly controlling or controlled by
or under direct or indirect common control with the Company or any other obligor
on the Debentures shall be disregarded and deemed not to be outstanding for the
purpose of any such determination; provided, that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, consent, waiver or other action only Debentures which a Responsible
Officer knows are so owned shall be so disregarded. Debentures so owned which
have been pledged in good faith may be regarded as outstanding for the purposes
of this Section 8.4 if the pledgee shall establish to the satisfaction of the
Trustee the pledgee's right to vote such Debentures and that the pledgee is not
the Company, any other obligor on the Debentures or a person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company or any such other obligor. In the case of a dispute as
to such right, any decision by the Trustee taken upon the advice of counsel
shall be full protection to the Trustee. Upon request of the Trustee, the
Company shall furnish to the Trustee promptly an Officers' Certificate listing
and identifying all Debentures, if any, known by the Company to be owned or held
by or for the account of any of the above described persons; and, subject to
Section 7.1, the Trustee shall be entitled to accept such Officers' Certificate
as conclusive evidence of the facts therein set forth and of the fact that all
Debentures not listed therein are outstanding for the purposes of any such
determination.
SECTION 8.5. Revocation of Consents; Future Holders Bound. At any time
prior to (but not after) the evidencing to the Trustee, as provided in Section
8.1, of the taking of any action by the holders of the percentage in aggregate
principal amount of the Debentures specified in this Indenture in connection
with such action, any holder of a Debenture which is shown by the evidence to be
included in the Debentures the holders of which have consented to such action
may, by filing written notice with the Trustee at its Corporate Trust Office and
upon proof of holding as provided in Section 8.2, revoke such action so far as
concerns such Debenture. Except as aforesaid, any such action taken by the
holder of any Debenture shall be conclusive
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and binding upon such holder and upon all future holders and owners of such
Debenture and of any Debentures issued in exchange or substitution therefor,
irrespective of whether any notation in regard thereto is made upon such
Debenture or any Debenture issued in exchange or substitution therefor.
ARTICLE IX
HOLDERS' MEETINGS
SECTION 9.1. Purposes of Meetings. A meeting of Holders may be called
at any time and from time to time pursuant to the provisions of this Article IX
for any of the following purposes:
(1) to give any notice to the Company or to the Trustee or to
give any directions to the Trustee permitted under this Indenture, or
to consent to the waiving of any default or Event of Default hereunder
and its consequences, or to take any other action authorized to be
taken by Holders pursuant to any of the provisions of Article VI;
(2) to remove the Trustee and nominate a successor trustee
pursuant to the provisions of Article VII.
(3) to consent to the execution of an indenture or indentures
supplemental hereto pursuant to the provisions of Section 10.2; or
(4) to take any other action authorized to be taken by or on
behalf of the holders of any specified aggregate principal amount of
the Debentures under any other provision of this Indenture or under
applicable law.
SECTION 9.2. Call of Meetings by Trustee. The Trustee may at any time
call a meeting of Holders to take any action specified in Section 9.1, to be
held at such time and at such place at a location within 10 miles of the
Corporate Trust Office or The City of Atlanta, Georgia, as the Trustee shall
determine. Notice of every meeting of the Holders, setting forth the time and
the place of such meeting and in general terms the action proposed to be taken
at such meeting and the establishment of any record date pursuant to Section
8.1, shall be mailed to holders of Debentures at their addresses as they shall
appear on the Debenture register. Such notice shall also be mailed to the
Company. Such notices shall be mailed not less than twenty (20) nor more than
ninety (90) days prior to the date fixed for the meeting.
Any meeting of Holders shall be valid without notice if the holders of
all Debentures then outstanding are present in person or by proxy or if notice
is waived before or after the meeting by the holders of all Debentures
outstanding, and if the Company and the Trustee are either present by duly
authorized representatives or have, before or after the meeting, waived notice.
SECTION 9.3. Call of Meetings by Company or Holders. In case at any
time the Company, pursuant to a resolution of its Board of Directors, or the
holders of at least ten percent (10%) in aggregate principal amount of the
Debentures then outstanding, shall have requested the Trustee to call a meeting
of Holders, by written request setting forth in reasonable detail the action
proposed to be taken at the meeting, and the Trustee shall not have mailed the
notice of such meeting within twenty (20) days after receipt of such request,
then the Company or such Holders may determine the time and the place at any
location within 10
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miles of the Corporate Trust Office or The City of Atlanta, Georgia for such
meeting and may call such meeting to take any action authorized in Section 9.1,
by mailing notice thereof as provided in Section 9.2.
SECTION 9.4. Qualifications for Voting. To be entitled to vote at any
meeting of Holders a person shall (a) be a holder of one or more Debentures on
the record date pertaining to such meeting or (b) be a person appointed by an
instrument in writing as proxy by a holder of one or more Debentures. The only
persons who shall be entitled to be present or to speak at any meeting of
Holders shall be the persons entitled to vote at such meeting and their counsel
and any representatives of the Trustee and its counsel and any representatives
of the Company and its counsel.
SECTION 9.5. Regulations. Notwithstanding any other provisions of this
Indenture, the Trustee may make such reasonable regulations as it may deem
advisable for any meeting of Holders, in regard to proof of the holding of
Debentures and of the appointment of proxies, and in regard to the appointment
and duties of inspectors of votes, the submission and examination of proxies,
certificates and other evidence of the right to vote, and such other matters
concerning the conduct of the meeting as it shall think fit.
The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by Holders as provided in Section 9.3, in which case the Company or
the Holders calling the meeting, as the case may be, shall in like manner
appoint a temporary chairman. A permanent chairman and a permanent secretary of
the meeting shall be elected by vote of the holders of a majority in principal
amount of the Debentures represented at the meeting and entitled to vote at the
meeting.
Subject to the provisions of Section 8.4, at any meeting each Holder or
proxy holder shall be entitled to one vote for each $1,000 principal amount of
Debentures held or represented by him; provided, however, that no vote shall be
cast or counted at any meeting in respect of any Debenture challenged as not
outstanding and ruled by the chairman of the meeting to be not outstanding. The
chairman of the meeting shall have no right to vote other than by virtue of
Debentures held by him or instruments in writing as aforesaid duly designating
him as the proxy to vote on behalf of other Holders. Any meeting of Holders duly
called pursuant to the provisions of Section 9.2 or 9.3 may be adjourned from
time to time by the holders of a majority of the aggregate principal amount of
Debentures represented at the meeting, whether or not constituting a quorum, and
the meeting may be held as so adjourned without further notice.
SECTION 9.6. Voting. The vote upon any resolution submitted to any
meeting of Holders shall be by written ballot on which shall be subscribed the
signatures of the holders of Debentures or of their representatives by proxy and
the principal amount of the Debentures held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record in duplicate of
the proceedings of each meeting of Holders shall be prepared by the secretary of
the meeting and there shall be attached to said record the original reports of
the inspectors of votes on any vote by ballot taken thereat and affidavits by
one or more persons having knowledge of the facts setting forth a copy of the
notice of the meeting and showing that said notice was mailed as provided in
Section 9.2. The record shall show the principal amount of the Debentures voting
in favor of or against any resolution. The record shall be signed and verified
by the affidavits of the permanent chairman and secretary of the meeting and one
of the duplicates shall be delivered to the Company and the other to the Trustee
to be preserved by the Trustee, the latter to have attached thereto the ballots
voted at the meeting.
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Any record so signed and verified shall be conclusive evidence of the
matters therein stated.
SECTION 9.7. No Delay of Rights by Meeting. Nothing in this Article IX
contained shall be deemed or construed to authorize or permit, by reason of any
call of a meeting of Holders or any rights expressly or impliedly conferred
hereunder to make such call, any hindrance or delay in the exercise of any right
or rights conferred upon or reserved to the Trustee or to the Holders under any
of the provisions of this Indenture or of the Debentures.
ARTICLE X
SUPPLEMENTAL INDENTURES
SECTION 10.1. Supplemental Indentures Without Consent of Holders. The
Company, when authorized by the resolutions of the Board of Directors, and the
Trustee may from time to time and at any time enter into an indenture or
indentures supplemental hereto for one or more of the following purposes:
(a) to convey, transfer, assign, mortgage or pledge to the Trustee as
security for the Debentures, any property or assets;
(b) to evidence the succession of another corporation to the Company,
or successive successions, and the assumption by the successor corporation of
the covenants, agreements and obligations of the Company pursuant to Article XI;
(c) to add to the covenants of the Company such further covenants,
restrictions or conditions as the Board of Directors and the Trustee shall
consider to be for the benefit of the holders of Debentures, and to make the
occurrence, or the occurrence and continuance, of a default in any such
additional covenants, restrictions or conditions a default or an Event of
Default permitting the enforcement of all or any of the several remedies
provided in this Indenture as herein set forth; provided, however, that in
respect of any such additional covenant, restriction or condition such
supplemental indenture may provide for a particular period of grace after
default (which period may be shorter or longer than that allowed in the case of
other defaults) or may provide for an immediate enforcement upon such default or
may limit the remedies available to the Trustee upon such default;
(d) to provide for the issuance under this Indenture of Debentures in
coupon form (including Debentures registrable as to principal only) and to
provide for exchangeability of such Debentures with the Debentures issued
hereunder in fully registered form and to make all appropriate changes for such
purpose;
(e) to cure any ambiguity or to correct or supplement any provision
contained herein or in any supplemental indenture which may be defective or
inconsistent with any other provision contained herein or in any supplemental
indenture, or to make such other provisions in regard to matters or questions
arising under this Indenture which shall not materially adversely affect the
interests of the holders of the Debentures;
(f) to evidence and provide for the acceptance of appointment hereunder
by a successor Trustee with respect to the Debentures; or
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(g) to modify, eliminate or add to the provisions of this Indenture to
such extent as shall be necessary to effect or maintain the qualifications of
this Indenture under the Trust Indenture Act, or under any similar federal
statute hereafter enacted.
The Trustee is hereby authorized to join with the Company in the
execution of any such supplemental indenture, to make any further appropriate
agreements and stipulations which may be therein contained and to accept the
conveyance, transfer and assignment of any property thereunder, but the Trustee
shall not be obligated to, but may in its discretion, enter into any
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this Section
10.1 may be executed by the Company and the Trustee without the consent of the
holders of any of the Debentures at the time outstanding, notwithstanding any of
the provisions of Section 10.2.
SECTION 10.2. Supplemental Indentures with Consent of Holders. With the
consent (evidenced as provided in Article VIII) of the holders of not less than
a majority in aggregate principal amount of the Debentures at the time
outstanding, the Company, when authorized by the resolutions of the Board of
Directors, and the Trustee may from time to time and at any time enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions of
this Indenture or any supplemental indenture with respect to the Debentures or
of modifying in any manner the rights of the holders of, the Debentures;
provided, however, that no such supplemental indenture shall (i) extend the
stated maturity of any Debenture or reduce the principal amount thereof, or
reduce the rate or extend the time of payment of interest thereon, or impair or
affect the right of any Holder to institute suit for the payment thereof, or any
right of repayment at the option of the Holders, without the consent of the
holder of each Debenture so affected, or (ii) reduce the aforesaid percentage of
Debentures, the holders of which are required to consent to any such
supplemental indenture, without the consent of the holders of all Debentures
then outstanding.
Upon the request of the Company, accompanied by a copy of the
resolutions of the Board of Directors certified by its Secretary or Assistant
Secretary authorizing the execution of any such supplemental indenture, and upon
the filing with the Trustee of evidence of the consent of Holders as aforesaid,
the Trustee shall join with the Company in the execution of such supplemental
indenture unless such supplemental indenture affects the Trustee's own rights,
duties or immunities under this Indenture or otherwise, in which case the
Trustee may in its discretion, but shall not be obligated to, enter into such
supplemental indenture.
It shall not be necessary for the consent of the Holders under this
Section 10.2 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.
SECTION 10.3. Effect of Supplemental Indenture. Any supplemental
indenture executed pursuant to the provisions of this Article X shall comply
with the Trust Indenture Act, as then in effect; provided, that this Section
10.3 shall not require such supplemental indenture or the Trustee to be
qualified under the Trust Indenture Act prior to the time such qualification is
in fact required under the terms of the Trust Indenture Act or the Indenture has
been qualified under the Trust Indenture Act, nor shall it constitute any
admission or acknowledgment by any party to such supplemental indenture that any
such qualification is required prior to the time such qualification is in fact
required under the terms of the Trust Indenture Act or the Indenture has been
qualified under the Trust Indenture Act. Upon the execution of any supplemental
indenture pursuant to the provisions of this Article X, this Indenture shall be
and be deemed to be modified and
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amended in accordance therewith and the respective rights, limitation of rights,
obligations, duties and immunities under this Indenture of the Trustee, the
Company and the holders of Debentures shall thereafter be determined, exercised
and enforced hereunder subject in all respects to such modifications and
amendments and all the terms and conditions of any such supplemental indenture
shall be and be deemed to be part of the terms and conditions of this Indenture
for any and all purposes.
SECTION 10.4. Notation on Debentures. Debentures authenticated and
delivered after the execution of any supplemental indenture pursuant to the
provisions of this Article X may bear a notation in form approved by the Trustee
as to any matter provided for in such supplemental indenture. If the Company or
the Trustee shall so determine, new Debentures so modified as to conform, in the
opinion of the Trustee and the Board of Directors, to any modification of this
Indenture contained in any such supplemental indenture may, at the Company's
expense, be prepared and executed by the Company, authenticated by the Trustee
(or an authenticating agent duly appointed by the Trustee pursuant to Section
14.11) and delivered in exchange for the Debentures then outstanding, upon
surrender of such Debentures then outstanding.
SECTION 10.5. Evidence of Compliance of Supplemental Indenture to Be
Furnished Trustee. The Trustee, subject to the provisions of Sections 7.1 and
7.2, may receive an Officers' Certificate and an Opinion of Counsel as
conclusive evidence that any supplemental indenture executed pursuant hereto
complies with the requirements of this Article X.
ARTICLE XI
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
SECTION 11.1. Company May Consolidate Etc. on Certain Terms. Subject to
the provisions of Section 11.2, nothing contained in this Indenture or in any of
the Debentures shall prevent any consolidation or merger of the Company with or
into any other corporation or corporations (whether or not affiliated with the
Company), or successive consolidations or mergers in which the Company or its
successor or successors shall be a party or parties, or shall prevent any sale,
conveyance or lease (or successive sales, conveyances or leases) of all or
substantially all of the property of the Company, to any other corporation
(whether or not affiliated with the Company), authorized to acquire and operate
the same and which shall be organized under the laws of the United States of
America, any state thereof or the District of Columbia; provided, that upon any
such consolidation, merger, sale, conveyance or lease, the due and punctual
payment of the principal of, interest on and Redemption Price in respect of all
of the Debentures, according to their tenor, and the due and punctual
performance and observance of all of the covenants and conditions of this
Indenture to be performed by the Company, shall be expressly assumed, by
supplemental indenture satisfactory in form to the Trustee, executed and
delivered to the Trustee by the corporation (if other than the Company) formed
by such consolidation, or into which the Company shall have been merged, or by
the corporation which shall be acquired or shall have leased such property.
SECTION 11.2. Successor Corporation to be Substituted. In case of any
such consolidation, merger, sale, conveyance or lease and upon the assumption by
the successor corporation, by supplemental indenture, executed and delivered to
the Trustee and satisfactory in form to the Trustee, of the due and punctual
payment of the principal of, interest on and Redemption Price in respect of all
of the Debentures and due and punctual performance of all of the covenants and
conditions of this Indenture to be performed by the Company, such successor
corporation shall succeed to and be substituted for the Company, with the same
effect as if it had been named herein as the party of the first part. Such
successor corporation thereupon may
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cause to be signed, and may issue either in its own name or in the name of
Flowers Industries, Inc. any or all of the Debentures issuable hereunder which
theretofore shall not have been signed by the Company and delivered to the
Trustee; and, upon the order of such successor corporation instead of the
Company and subject to all the terms, conditions and limitations in this
Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause
to be authenticated and delivered, any Debentures which previously shall have
been signed and delivered by the officers of the Company to the Trustee for
authentication, and any Debentures which such successor corporation thereafter
shall cause to be signed and delivered to the Trustee for that purpose. All the
Debentures so issued shall in all respects have the same legal rank and benefit
under this Indenture as the Debentures theretofore or thereafter issued in
accordance with the terms of this Indenture as though all of such Debentures had
been issued at the date of the execution hereof. In the event of any such
consolidation, merger, sale, conveyance or lease, the person named as the
"Company" in the first paragraph of this Indenture or any successor which shall
thereafter have become such in the manner prescribed in this Article XI may be
dissolved, wound up and liquidated at any time thereafter and such person shall
be released from its liabilities as obligor and maker of the Debentures and from
its obligations under this Indenture.
In case of any such consolidation, merger, sale, conveyance or lease,
such changes in phraseology and form (but not in substance) may be made in the
Debentures thereafter to be issued as may be appropriate.
SECTION 11.3. Opinion of Counsel to Be Given Trustee. The Trustee,
subject to Sections 7.1 and 7.2, shall receive an Officers' Certificate and an
Opinion of Counsel as conclusive evidence that any such consolidation, merger,
sale, conveyance or lease and any such assumption complies with the provisions
of this Article XI.
ARTICLE XII
SATISFACTION, DISCHARGE AND DEFEASANCE OF INDENTURE
SECTION 12.1. Discharge of Indenture. When (a) the Company shall
deliver to the Trustee for cancellation all Debentures theretofore authenticated
(other than any Debentures which have been destroyed, lost or stolen and in lieu
of or in substitution for which other Debentures shall have been authenticated
and delivered) and not theretofore canceled, or (b) all the Debentures not
theretofore canceled or delivered to the Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, and the
Company shall deposit with the Trustee, in trust, funds sufficient to pay at
maturity or upon redemption of all the Debentures (other than any Debentures
which shall have been mutilated, destroyed, lost or stolen and in lieu of or in
substitution for which other Debentures shall have been authenticated and
delivered) not theretofore canceled or delivered to the Trustee for
cancellation, including principal of, interest on and Redemption Price in
respect of and interest due or to become due to such date of maturity or
redemption date, as the case may be, and if in either case the Company shall
also pay or cause to be paid all other sums payable hereunder by the Company,
then this Indenture shall cease to be of further effect (except as to (i)
remaining rights of registration of transfer, substitution and exchange of
Debentures, (ii) rights hereunder of Holders to receive payments of principal
of, interest on and Redemption Price in respect of the Debentures and the other
rights, duties and obligations of Holders, as beneficiaries hereof with respect
to the amounts, if any, so deposited with the Trustee and (iii) the rights,
obligations and immunities of the Trustee hereunder), and the Trustee, on demand
of the Company accompanied by an Officers' Certificate and an Opinion of Counsel
as required by Section 14.5
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and at the cost and expense of the Company, shall execute proper instruments
acknowledging satisfaction of and discharging this Indenture; the Company,
however, hereby agreeing to reimburse the Trustee for any costs or expenses
thereafter reasonably and properly incurred by the Trustee and to compensate the
Trustee for any services thereafter reasonably and properly rendered by the
Trustee in connection with this Indenture or the Debentures.
SECTION 12.2. Applicability of Defeasance Provisions; Company's Option
to Effect Defeasance or Covenant Defeasance. Unless pursuant to Section 3.1
either or both of (i) defeasance of the Debentures under Section 12.3 or (ii)
covenant defeasance of the Debentures under Section 12.4 shall not be applicable
with respect to the Debentures, then the provisions of such Section or Sections,
as the case may be, together with the provisions of Sections 12.5 through 12.11
inclusive, with such modifications thereto as may be specified pursuant to
Section 3.1 with respect to such Debentures, shall be applicable to such
Debentures, and the Company may at its option by Board Resolution, at any time,
with respect to such Debentures, elect to have Section 12.3 or Section 12.4
(unless such Section 12.3 or Section 12.4, as the case may be, shall not be
applicable to the Debentures) be applied to such Outstanding Debentures upon
compliance with the conditions set forth below in this Article. Unless otherwise
specified pursuant to Section 3.1, the Company's right, if any, to effect
defeasance pursuant to Section 12.3 or covenant defeasance pursuant to Section
12.4 may only be exercised with respect to all of the Outstanding Debentures.
SECTION 12.3. Defeasance. Upon the Company's exercise of the option
specified in Section 12.2 applicable to this Section with respect to the
Debentures, the Company shall be deemed to have been discharged from its
obligations with respect to such Debentures (except as specified below) on the
date the conditions set forth in Section 12.5 are satisfied (hereinafter
"defeasance"). For this purpose, such defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by such
Debentures and interest thereon which shall thereafter be deemed to be
"Outstanding" only for the purposes of Section 12.8 and the other Sections of
this Indenture referred to in clause (ii) of this Section, and to have satisfied
all its other obligations under such Debentures and this Indenture insofar as
such Debentures are concerned (and the Trustee, at the expense of the Company,
shall on Company Order execute proper instruments acknowledging the same),
except the following which shall survive until otherwise terminated or
discharged hereunder: (i) the rights of Holders of such Debentures and any
coupons appertaining thereto to receive, solely from the trust funds described
in Section 12.5(a) and as more fully set forth in such Section and in Section
12.8, payments in respect of the principal of and interest, if any, on such
Debentures when such payments are due; (ii) the Company's obligations with
respect to such Debentures under Sections 2.5, 2.6, 4.1, 4.2 and 7.6; (iii) the
rights, powers, trusts, duties and immunities of the Trustee hereunder and (iv)
this Article XII. Subject to compliance with this Article XII, the Company may
exercise its option under this Section notwithstanding the prior exercise of its
option under Section 12.4 with respect to such Debentures. Following a
defeasance, payment of such Debentures may not be accelerated because of an
Event of Default.
SECTION 12.4. Covenant Defeasance. Upon the Company's exercise of the
option specified in Section 12.2 applicable to this Section with respect to any
Debentures, the Company shall be released from its obligations under Sections
4.7, 4.8 and 4.9 with respect to such Debentures on and after the date the
conditions set forth in Section 12.5 are satisfied (hereinafter, "covenant
defeasance"), and such Debentures shall thereafter be deemed to be not
"Outstanding" for the purposes of any direction, waiver, consent or declaration
or act of Holders (and the consequences of any thereof) in connection with
Sections 4.7, 4.8 and 4.9, but shall continue to be deemed "Outstanding" for all
other purposes hereunder. For this purpose, such covenant defeasance means that,
with respect to such Debentures, the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such Section or such
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other covenant, whether directly or indirectly, by reason of any reference
elsewhere herein to any such Section or such other covenant or by reason of
reference in any such Section or such other covenant to any other provision
herein or in any other document and such omission to comply shall not constitute
a Default or an Event of Default under Section 6.1(c) or otherwise, as the case
may be, but, except as specified above, the remainder of this Indenture and such
Debentures shall be unaffected thereby.
SECTION 12.5. Conditions to Defeasance or Covenant Defeasance. The
following shall be the conditions to application of Section 12.3 or Section 12.4
to any Debentures:
(a) The Company shall have irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose of making the
payments of principal of and interest, if any, on the Debentures on the
scheduled due dates therefor or on the applicable Redemption Date, as the case
may be, specifically pledged as security for, and dedicated solely to, the
benefit of the Holders of such Debentures, with instructions to the Trustee as
to the application thereof, (A) money in an amount or (B) if the Debentures are
not subject to repayment or repurchase at the option of Holders, Government
Obligations which through the payment of interest and principal in respect
thereof in accordance with their terms will provide (without consideration of
any reinvestment of such principal and interest), not later than one day before
the scheduled due dates of any payment of principal of and interest, if any, on
the Debentures or on the applicable Redemption Date, as the case may be, money
in an amount or (C) a combination thereof, in an amount sufficient (in the
opinion of a nationally recognized firm of independent certified public
accountants expressed in a written certification thereof delivered to the
Trustee) to pay and discharge, and which shall be applied by the Trustee to pay
and discharge, the principal of and interest, if any, on such Debentures on the
scheduled due dates therefor or on the applicable Redemption Date, as the case
may be.
(b) Such defeasance or covenant defeasance shall not result in a breach
or violation of, or constitute a Default or Event of Default under, this
Indenture or result in a breach or violation of, or constitute a default under,
any other material agreement or instrument to which the Company is a party or by
which it is bound.
(c) In the case of an election under Section 12.3, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that (i) the
Company has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of this Indenture, there has been a
change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion shall confirm that, the Holders of such
Debentures will not recognize income, gain or loss for U.S. federal income tax
purposes as a result of such defeasance and will be subject to U.S. federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance had not occurred.
(d) In the case of an election under Section 12.4, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of such Debentures will not recognize income, gain or loss for U.S.
federal income tax purposes as a result of such covenant defeasance and will be
subject to U.S. federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such covenant defeasance had
not occurred.
(e) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance under Section 12.3 or the covenant defeasance under
Section 12.4 (as the case may be) have been complied with.
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(f) No Event of Default or Default with respect to such Debentures
shall have occurred and be continuing on the date of such deposit, or, insofar
as Defaults or Events of Default under Sections 6.1(f) and 6.1(g) are concerned,
at any time during the period ending on the 91st day after the date of such
deposit (it being understood that this condition shall not be deemed satisfied
until the expiration of such period).
(g) If the monies or Government Obligations or combination thereof, as
the case may be, deposited under Section 12.5(a) above are sufficient to pay the
principal of, and interest, if any, on such Debentures provided such Debentures
are redeemed on a particular Redemption Date, the Company shall have given the
Trustee irrevocable instructions to redeem such Debentures on such date and to
provide notice of such redemption to Holders as provided in or pursuant to this
Indenture.
SECTION 12.6. Indemnity for Government Obligations. The Company shall
pay, and shall indemnify the Trustee against, any tax, fee or other charge
imposed on or assessed against Government Obligations deposited pursuant to this
Article or the principal and interest received on such Government Obligations.
SECTION 12.7. Deposited Monies to Be Held in Trust by Trustee. Subject
to Section 12.9, all monies and Government Obligations (including proceeds)
deposited with the Trustee pursuant to Section 12.1 and Section 12.5 shall be
held in trust for the sole benefit of the Holders and shall be applied by the
Trustee, in accordance with the provision of this Indenture and the Debentures,
to the payment, either directly or through any paying agent (other than the
Company if acting as its own paying agent), to the Holders of the Debentures of
all sums due and to become due thereon in respect of principal of, interest on
and Redemption Price in respect of the Debentures, but such money need not be
segregated from other funds except to the extent required by law.
SECTION 12.8. Paying Agent to Repay Monies Held. Upon the satisfaction
and discharge of this Indenture, all monies then held by any paying agent of the
Debentures (other than the Trustee) shall, upon written request of the Company,
be repaid to it or paid to the Trustee, and thereupon such paying agent shall be
released from all further liability with respect to such monies.
SECTION 12.9. Return of Unclaimed Monies. Subject to the requirements
of applicable law, any monies deposited with or paid to the Trustee for payment
of the principal of, interest on and Redemption Price in respect of Debentures
and not applied but remaining unclaimed by the holders of Debentures for two
years after the date upon which such amount in respect of such Debentures, as
the case may be, shall have become due and payable, shall be repaid to the
Company by the Trustee on demand and all liability of the Trustee shall
thereupon cease with respect to such monies; and the holder of any of the
Debentures shall thereafter look only to the Company for any payment which such
holder may be entitled to collect unless an applicable abandoned property law
designates another Person.
SECTION 12.10. Reinstatement. If the Trustee or the paying agent is
unable to apply any money in accordance with Section 12.7 by reason of any order
or judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Debentures shall be revived and reinstated as though no
deposit had occurred pursuant to Section 12.1, 12.3 or 12.4, as the case may be,
until such time as the Trustee or the paying agent is permitted to apply all
such money in accordance with Section 12.7; provided, however, that if the
Company makes any payment of principal of, interest on and Redemption Price in
respect of any Debenture following the reinstatement of its obligations, the
Company shall be subrogated to the rights of the holders of such Debentures to
receive such payment from the money held by the Trustee or paying agent.
41
<PAGE> 47
ARTICLE XIII
IMMUNITY OF INCORPORATORS,
SHAREHOLDERS, OFFICERS AND DIRECTORS
SECTION 13.1. Indenture and Debentures Solely Corporate Obligations. No
recourse for the payment of the principal of, interest on or Redemption Price in
respect of any Debenture, or for any claim based thereon or otherwise in respect
thereof, and no recourse under or upon any obligation, covenant or agreement of
the Company in this Indenture or in any supplemental indenture or in any
Debenture, or because of the creation of any indebtedness represented thereby,
shall be had against any incorporator, shareholder, employee, agent, officer, or
director or subsidiary, as such, past, present or future, of the Company or of
any successor corporation, either directly or through the Company or any
successor corporation, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise; it being
expressly understood that all such liability is hereby expressly waived and
released as a condition of, and as a consideration for, the execution of this
Indenture and the issue of the Debentures.
ARTICLE XIV
MISCELLANEOUS PROVISIONS
SECTION 14.1. Provisions Binding on Company's Successors. All the
covenants, stipulations, promises and agreements by the Company contained in
this Indenture shall bind its successors and assigns whether so expressed or
not.
SECTION 14.2. Official Acts by Successor Corporation. Any act or
proceeding by any provision of this Indenture authorized or required to be done
or performed by any board, committee or officer of the Company shall and may be
done and performed with like force and effect by the like board, committee or
officer of any corporation that shall at the time be the lawful sole successor
of the Company.
SECTION 14.3. Addresses for Notices, Etc. Any notice or demand which by
any Indenture is required or permitted to be given or served by the Trustee or
by the holders of Debentures on the Company shall be deemed to have been
sufficiently given or made, for all purposes, if given or served by being
deposited postage prepaid by registered or certified mail in a post office
letter box addressed (until another address is filed by the Company with the
Trustee) to Flowers Industries, Inc., 1919 Flowers Circle, Thomasville, Georgia
31757, Attention: General Counsel and Secretary. Any notice, direction, request
or demand hereunder to or upon the Trustee shall be deemed to have been
sufficiently given or made, for all purposes, if given or served by being
deposited postage prepaid by registered or certified mail in a post office
letter box addressed to the Corporate Trust Office, which post office letter box
is, at the date as of which this Indenture is effective, P.O. Box 105036,
Atlanta, Georgia 30348-5036.
The Trustee, by notice to the Company, may designate additional or
different addresses for subsequent notices or communications.
42
<PAGE> 48
Any notice or communication mailed to a Holder shall be mailed to him
by first class mail, postage prepaid, at his address as it appears on the
Debenture register and shall be sufficiently given to him if so mailed within
the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above, it is duly given,
whether or not the addressee receives it.
SECTION 14.4. Governing Law. This Indenture and each Debenture shall be
deemed to be a contract made under the laws of New York, and for all purposes
shall be construed in accordance with the laws of New York, without regard to
principles of conflicts of laws.
SECTION 14.5. Evidence of Compliance with Conditions Precedent;
Certificates to Trustee. Upon any application or demand by the Company to the
Trustee to take any action under any of the provisions of this Indenture, the
Company shall furnish to the Trustee an Officers' Certificate stating that all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with, and an Opinion of Counsel stating that,
in the opinion of such counsel, all such conditions precedent have been complied
with.
Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or covenant
provided for in this Indenture shall include (1) a statement that the person
making such certificate or opinion has read such covenant or condition; (2) a
brief statement as to the nature and scope of the examination or investigation
upon which the statement or opinion contained in such certificate or opinion is
based; (3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and (4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
SECTION 14.6. Legal Holidays. In any case where the date of maturity of
interest on or principal of the Debentures or the Redemption Date of any
Debenture will not be a Business Day, then payment of such interest on or
principal of the Debentures need not be made on such date, but may be made on
the next succeeding Business Day with the same force and effect as if made on
the date of maturity or the Redemption Date, and no interest shall accrue for
the period from and after such date.
SECTION 14.7. Trust Indenture Act. This Indenture is hereby made
subject to, and shall be governed by, the provisions of the Trust Indenture Act
required to be part of and to govern indentures qualified under the Trust
Indenture Act; provided, however, that, unless otherwise required by law,
notwithstanding the foregoing, this Indenture and the Debentures issued
hereunder shall not be subject to the provisions of subsections (a)(1), (a)(2),
and (a)(3) of Section 314 of the Trust Indenture Act as now in effect or as
hereafter amended or modified; provided, further, that this Section 14.7 shall
not require this Indenture or the Trustee to be qualified under the Trust
Indenture Act prior to the time such qualification is in fact required under the
terms of the Trust Indenture Act, nor shall it constitute any admission or
acknowledgment by any party to such supplemental indenture that any such
qualification is required prior to the time such qualification is in fact
required under the terms of the Trust Indenture Act. If any provision hereof
limits, qualifies or conflicts with another provision hereof which is required
to be included in an indenture qualified under the Trust Indenture Act, such
required provision shall control.
43
<PAGE> 49
SECTION 14.8. No Security Interest Created. Nothing in this Indenture
or in the Debentures, expressed or implied, shall be construed to constitute a
security interest under the Uniform Commercial Code or similar legislation, as
now or hereafter enacted and in effect, in any jurisdiction where property of
the Company or its subsidiaries is located.
SECTION 14.9. Benefits of Indenture. Nothing in this Indenture or in
the Debentures, expressed or implied, shall give to any Person, other than the
parties hereto, any paying agent, any authenticating agent, any Debenture
registrar and their successors hereunder, and the holders of Debentures, any
benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 14.10. Table of Contents, Headings, Etc. The table of contents
and the titles and headings of the articles and sections of this Indenture have
been inserted for convenience of reference only, are not to be considered a part
hereof, and shall in no way modify or restrict any of the terms or provisions
hereof.
SECTION 14.11. Authenticating Agent. The Trustee may appoint an
authenticating agent which shall be authorized to act on its behalf and subject
to its direction in the authentication and delivery of Debentures in connection
with the original issuance thereof and transfers and exchanges of Debentures
hereunder, including under Sections 2.4, 2.5, 2.6, 2.7, 3.3 and 3.5, as fully to
all intents and purposes as though the authenticating agent had been expressly
authorized by this Indenture and those Sections to authenticate and deliver
Debentures. For all purposes of this Indenture, the authentication and delivery
of Debentures by the authenticating agent shall be deemed to be authentication
and delivery of such Debentures "by the Trustee" and a certificate of
authentication executed on behalf of the Trustee by an authenticating agent
shall be deemed to satisfy any requirement hereunder or in the Debentures for
the Trustee's certificate of authentication. Such authenticating agent shall at
all times be a person eligible to serve as trustee hereunder pursuant to Section
7.9.
Any corporation into which any authenticating agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, consolidation or conversion to which any authenticating agent
shall be a party, or any corporation succeeding to the corporate trust business
of any authenticating agent, shall be the successor of the authenticating agent
hereunder, if such successor corporation is otherwise eligible under this
Section 14.11, without the execution or filing of any paper or any further act
on the part of the parties hereto or the authenticating agent or such successor
corporation.
Any authenticating agent may at any time resign by giving written
notice of resignation to the Trustee and to the Company. The Trustee may at any
time terminate the agency of any authenticating agent by giving written notice
of termination to such authenticating agent and to the Company. Upon receiving
such a notice of resignation or upon such a termination, or in case at any time
any authenticating agent shall cease to be eligible under this Section, the
Trustee shall either promptly appoint a successor authenticating agent or itself
assume the duties and obligations of the former authenticating agent under this
Indenture, and upon such appointment of a successor authenticating agent, if
made, shall give written notice of such appointment of a successor
authenticating agent to the Company and shall mail notice of such appointment of
a successor authenticating agent to all holders of Debentures as the names and
addresses of such holders appear on the Debenture register.
The Trustee agrees to pay to the authenticating agent from time to time
reasonable compensation for its services (to the extent pre-approved by the
Company in writing), and the Trustee shall be entitled to be reimbursed for such
pre-approved payments, subject to Section 7.6.
44
<PAGE> 50
The provisions of Sections 7.2, 7.3, 7.4, 9.3 and this Section 14.11
shall be applicable to any authenticating agent.
SECTION 14.12. Execution in Counterparts. This Indenture may be
executed in any number of counterparts, each of which shall be an original, but
such counterparts shall together constitute but one and the same instrument.
SunTrust Bank, Atlanta hereby accepts the trusts in this Indenture
declared and provided, upon the terms and conditions hereinabove set forth.
45
<PAGE> 51
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly signed, and their respective corporate seals to be hereunto affixed and
attested, all as of the date first written above.
FLOWERS INDUSTRIES, INC.
By: /s/ C. M. Wood III
---------------------------------
Name: C. M. Wood III
Title: Senior Vice President
SUNTRUST BANK, ATLANTA, as Trustee
By: /s/ Doma L. Williams
---------------------------------
Name: Doma L. Williams
Title: Assistant Vice President
By: /s/ David M. Kaye
---------------------------------
Name: David M. Kaye
Title: Group Vice President
46
<PAGE> 52
EXHIBIT A
{For Global Debenture only: UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH
AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.}
FLOWERS INDUSTRIES, INC.
7.15% DEBENTURE DUE 2028
No. ______ CUSIP
FLOWERS INDUSTRIES, INC., a corporation duly organized and validly
existing under the laws of the State of Georgia (herein called the "Company"),
which term includes any successor corporation under the Indenture referred to on
the reverse hereof, for value received hereby promises to pay to CEDE & CO. or
registered assigns, the principal sum of _________ ($_____) on _______, 2028, at
the office or agency of the Company maintained for that purpose in The City of
Atlanta, Georgia, or, at the option of the holder of this Debenture, at the
Corporate Trust Office, in such coin or currency of the United States of America
as at the time of payment shall be legal tender for the payment of public and
private debts, and to pay interest, semi-annually on April 15 and October 15 of
each year, commencing October 15, 1998, on said principal sum at said office or
agency, in like coin or currency, at the rate per annum of 7.15%, from April 15
or October 15, as the case may be, next preceding the date of this Debenture to
which interest has been paid or duly provided for, unless the date hereof is a
date to which interest has been paid or duly provided for, in which case from
the date of this Debenture, or unless no interest has been paid or duly provided
for on the Debentures, in which case from April 15, 1998, until payment of said
principal sum has been made or duly provided for. The interest payable on the
Debenture pursuant to the Indenture on any April 15 or October 15, will be paid
to the person entitled thereto as it appears in the Debenture register at the
close of business on the record date, which shall be the April 1 or October 1
(whether or not a Business Day) next preceding such April 15 or October 15, as
provided in the Indenture; provided, that any such interest not punctually paid
or duly provided for shall be payable as provided in the Indenture. Interest
may, at the option of the Company, be paid by check mailed to the registered
address of such person.
Reference is made to the further provisions of this Debenture set forth
on the reverse hereof, and such further provisions shall for all purposes have
the same effect as though fully set forth at this place.
This Debenture shall be deemed to be a contract made under the laws of
New York, and for all purposes shall be construed in accordance with and
governed by the laws of New York, without regard to principles of conflicts of
laws.
47
<PAGE> 53
This Debenture shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been manually signed
by the Trustee or a duly authorized authenticating agent under the Indenture.
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed under its corporate seal.
Dated: April 27, 1998
FLOWERS INDUSTRIES, INC.
By:
---------------------------------
Name:
Title:
Attest:
--------------------------
48
<PAGE> 54
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Debentures described in the within-named Indenture.
Dated: April 27, 1998
SunTrust Bank, Atlanta, as Trustee
By:
--------------------------------------
Authorized Signatory
49
<PAGE> 55
{FORM OF REVERSE OF DEBENTURE}
FLOWERS INDUSTRIES, INC.
7.15% DEBENTURE DUE 2028
This Debenture is one of a duly authorized issue of Debentures of the
Company, designated as its 7.15% Debentures due 2028 (herein called the
"Debentures"), limited to the aggregate principal amount of $200,000,000 all
issued or to be issued under and pursuant to an indenture dated as of April 27,
1998 (herein called the "Indenture"), between the Company and SunTrust Bank,
Atlanta, as trustee (herein called the "Trustee"), to which Indenture and all
indentures supplemental thereto reference is hereby made for a description of
the rights, limitations of rights, obligations, duties and immunities thereunder
of the Trustee, the Company and the holders of the Debentures.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal amount of all Debentures and accrued
interest, if any, through the date of declaration on all Debentures may be
declared, or may automatically become, due and payable, in the manner, with the
effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Debentures at the time outstanding, evidenced
as in the Indenture provided, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of any supplemental indenture or modifying in any manner the
rights of the holders of the Debentures; provided, however, that as provided in
the Indenture, no such supplemental indenture shall (i) extend the fixed
maturity of any Debenture, or reduce the rate or extend the time of payment of
interest thereon, or reduce the principal amount thereof, or reduce any amount
payable on redemption or repurchase thereof, or impair the right of any Holder
to institute suit for the payment thereof, or make the principal amount thereof
or Redemption Price, or interest thereon payable in any coin or currency other
than that provided in the Debenture, without the consent of the holder of each
Debenture so affected or (ii) reduce the aforesaid percentage of Debentures, the
holders of which are required to consent to any such supplemental indenture,
without the consent of the holders of all Debentures then outstanding. It is
also provided in the Indenture that, prior to any declaration accelerating the
maturity of the Debentures, the holders of a majority in aggregate principal
amount of the Debentures at the time outstanding may on behalf of the holders of
all of the Debentures waive any past Default or Event of Default under the
Indenture and its consequences except a default in the payment of principal of,
interest on and Redemption Price in respect of any of the Debentures. Any such
consent or waiver by the holder of this Debenture (unless revoked as provided in
the Indenture) shall be conclusive and binding upon such holder and upon all
future holders and owners of this Debenture and any Debentures which may be
issued in exchange or substitute hereof, irrespective of whether or not any
notation thereof is made upon this Debenture or such other Debentures.
No reference herein to the Indenture and no provision of this Debenture
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and interest on this
Debenture at the place, at the respective times, at the rate and in the coin or
currency herein prescribed.
Interest on the Debentures shall be computed on the basis of a year of
a 360-day year or twelve 30- day months.
50
<PAGE> 56
The Debentures are issuable in registered form without coupons in
denominations of $1,000 principal amount and any integral multiple thereof. At
the office or agency of the Company referred to on the face hereof, and in the
manner and subject to the limitations provided in the Indenture, but without
payment of any service charge (but with payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection with any
registration or exchange of Debentures), Debentures may be exchanged for a like
aggregate principal amount of Debentures of other authorized denominations.
Prior to maturity, the Debentures may be redeemed at the option of the
Company at any time as a whole, or from time to time in part, upon mailing a
notice of such redemption not less than 30 days and not more than 60 days before
the Redemption Date to the holders of Debentures at their last registered
addresses, all as provided in the Indenture, at the following Redemption Prices
per $1,000 principal amount, together in each case with accrued interest to the
Redemption Date.
Notwithstanding the foregoing, if the Redemption Date is an April 15 or
October 15, then the interest payable on such date shall be paid to the holder
of record on the next preceding April 1 or October 1.
The Debentures are not subject to redemption through the operation of
any sinking fund.
Upon due presentment for registration of transfer of this Debenture at
the office or agency of the Company in the City of Atlanta, Georgia, or at the
option of the holder of this Debenture, at the Corporate Trust Office, a new
Debenture or Debentures of authorized denominations for an equal aggregate
principal amount will be issued to the transferee in exchange thereof, subject
to the limitations provided in the Indenture, without charge except for any tax
or other governmental charge imposed in connection therewith.
The Company, the Trustee, any authenticating agent, any paying agent
and any Debenture registrar may deem and treat the registered holder hereof as
the absolute owner of this Debenture (whether or not this Debenture shall be
overdue and notwithstanding any notation of ownership or other writing hereon
made by anyone other than the Company or any Debenture registrar), for the
purpose of receiving payment hereof, or on account hereof and for all other
purposes, and neither the Company nor the Trustee nor any other authenticating
agent nor any paying agent nor any Debenture registrar shall be affected by any
notice to the contrary. All payments made to or upon the order of such
registered holder shall, to the extent of the sum or sums paid, satisfy and
discharge liability for monies payable on this Debenture.
No recourse for the payment of the principal of or any interest on this
Debenture, or for any claim based hereon or otherwise in respect hereof, and no
recourse under or upon any obligation, covenant or agreement of the Company in
the Indenture or any indenture supplemental thereto or in any Debenture, or
because of the creation of any indebtedness represented thereby, shall be had
against any incorporator, stockholder, employee, agent, officer or director or
subsidiary, as such, past, present or future, of the Company or of any successor
corporation, either directly or through the Company or any successor
corporation, whether by virtue of any constitution, statute or rule of law or by
the enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.
This Debenture shall be deemed to be a contract made under the laws of
New York, and for all purposes shall be construed in accordance with the laws of
New York, without regard to principles of conflicts of laws.
Terms used in this Debenture and defined in the Indenture are used
herein as therein defined.
51
<PAGE> 57
ABBREVIATIONS
The following abbreviations, when used in the inscription of the face
of this Debenture, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT --
TEN ENT -- as tenants by the entireties _________________ Custodian
(Cust)
JT TEN -- as joint tenants with right of ____________________ under
survivorship and not as tenants in common (Minor)
Uniform Gifts to Minors Act
____________________(State)
Additional abbreviations may also be used though not in the above list.
52
<PAGE> 58
ASSIGNMENT
For value received ____________________ hereby sell(s), assign(s) and
transfer(s) unto ______________________ (Please insert social security or other
Taxpayer Identification Number of assignee) the within Debenture, and hereby
irrevocably constitutes and appoints ____________________ attorney to transfer
the said Debenture on the books of the Company, with full power of substitution
in the premises.
53
<PAGE> 1
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 27 FOR THE 52 WEEKS ENDED
WEEKS ENDED WEEKS ENDED -----------------------------
JANUARY 2, 1999 JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Computation of Net Income:
Basic and Diluted:
Income before extraordinary loss and
cumulative effect of changes in
accounting principles............... $45,968 $33,448 $62,324 $30,768
Extraordinary loss due to early
extinguishment of debt, net of tax
benefit and minority interest....... (938)
Cumulative effect of changes in
accounting principles, net of tax
benefit............................. (3,131) (9,888)
------- ------- ------- -------
Net income............................ $41,899 $23,560 $62,324 $30,768
======= ======= ======= =======
Number of Shares Used in Calculation of Per
Common Share Data:
Basic weighted average shares............ 96,393 88,368 88,000 86,933
Effect of Dilutive Securities:
Stock options............................ 408 405 401 278
------- ------- ------- -------
Diluted weighted average shares.......... 96,801 88,773 88,401 87,211
======= ======= ======= =======
Net Income Per Common Share:
Basic:
Income before extraordinary loss and
cumulative effect of changes in
accounting principles............... $ .47 $ .38 $ .71 $ .35
Extraordinary loss due to early
extinguishment of debt, net of tax
benefit and minority interest....... (.01)
Cumulative effect of changes in
accounting principles, net of tax
benefit............................. (.03) (.11)
------- ------- ------- -------
Net income per common share........... $ .43 $ .27 $ .71 $ .35
======= ======= ======= =======
Diluted:
Income before extraordinary loss and
cumulative effect of changes in
accounting principles............... $ .47 $ .38 $ .71 $ .35
Extraordinary loss due to early
extinguishment of debt, net of tax
benefit and minority interest....... (.01)
Cumulative effect of changes in
accounting principles, net of tax
benefit............................. (.03) (.11)
------- ------- ------- -------
Net income per common share........... $ .43 $ .27 $ .71 $ .35
======= ======= ======= =======
</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, with the exception of Keebler
Foods Company, of which the Registrant owns 55%, 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>
<S> <C>
Flowers Industries, Inc. .................................. Georgia
Flowers Investments, Inc. ............................... Georgia
*Flowers Bakeries Brands, Inc. ........................... South Carolina
*Flowers Bakeries, Inc. ............................... Georgia
*Flowers Baking Company of Florida, Inc. ............ Florida
Flowers Baking Company of Miami, Inc. ........... Florida
Flowers Baking Company of Jacksonville, Inc. .... Florida
Flowers Baking Company of Bradenton, Inc. ....... Florida
Flowers Baking Company of Thomasville, Inc. ........ Georgia
*Flowers Baking Company of Villa Rica, Inc. ......... Georgia
Flowers Baking Company of Gadsden, Inc. ......... Alabama
Flowers Baking Company of Opelika, Inc. ............ Alabama
Hardin's Bakery, Inc. .............................. Alabama
Midtown Bakery, Inc................................. Alabama
*Huval Bakery, Inc................................... Louisiana
*Bunny Bread, Inc................................. Louisiana
Flowers Baking Company of Baton Rouge, Inc..... Louisiana
Flowers Baking Company of Jamestown, Inc............ North Carolina
Flowers Baking Company of Lynchburg, Inc............ Virginia
Flowers Baking Company of Norfolk, Inc.............. Virginia
Flowers Baking Company of Morristown, Inc........... Tennessee
Schott's Bakery, Inc................................ Texas
Flowers Baking Company of West Virginia, Inc........ West Virginia
*Flowers Baking Company of Texas, Inc................ Texas
*Flowers Baking Company of Tyler, Inc............. Georgia
Butterkrust Bakery, Inc........................ Texas
El Paso Baking Company, Inc...................... Texas
Flowers Baking Company of Texarkana................. Arkansas
Holsum Baking Company............................... Arkansas
Shipley Baking Company.............................. Arkansas
Franklin Baking Company.................................. North Carolina
*Mrs. Smith's Brands, Inc................................. South Carolina
*Mrs. Smith's Bakeries, Inc............................ Georgia
*European Bakers, Ltd................................ Georgia
Aunt Fanny's Bakery, Inc......................... Georgia
*Dan-co Bakery, Inc.................................. Georgia
Daniels Home Bakery of North Carolina, Inc....... North Carolina
Table Pride, Inc.................................... Georgia
*Mrs. Smith's Sales Support Group, Inc............... Georgia
Mrs. Smith's Foil Company, Inc................... Georgia
Flowers Specialty of Suwanee, Inc................... Georgia
*Mrs. Smith's Frozen Bakery Distributors, Inc........ Georgia
Mrs. Smith's Bakeries of Pennsylvania, Inc....... Georgia
Flowers Specialty Foods of Montgomery, Inc.......... Alabama
Flowers Baking Company of South Carolina, Inc....... South Carolina
Flowers Baking Company of Fountain Inn, Inc......... South Carolina
Flowers Baking Company of Chattanooga, Inc.......... Tennessee
Flowers Fresh Bakery Distributors, Inc.............. Tennessee
Mrs. Smith's Bakeries of London, Inc................ Kentucky
Pies, Inc........................................... Minnesota
Stilwell Foods, Inc................................. Oklahoma
*Keebler Foods Company.................................... Delaware
*Keebler Company..................................... Delaware
Steamboat Corporation............................ Georgia
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Illinois Baking Corporation...................... Delaware
Keebler Cookie & Cracker Company................. Nevada
Hollow Tree Company, L.L.C....................... Delaware
Keebler Co./Puerto Rico, Inc..................... Delaware
Keebler H.C., Inc................................ Illinois
Keebler-Georgia, Inc............................. Georgia
Keebler Foreign Sales Corporation................ Virgin Islands
Hollow Tree Financial Company, L.L.C............. Delaware
Godfrey Transport, Inc........................... Delaware
Bishop Baking Company, Inc....................... Delaware
Famous Amos Chocolate Chip Cookie Company,
L.L.C............................................ Delaware
Mother's Cookie Company, L.L.C................... Delaware
Murray Biscuit Company, L.L.C.................... Delaware
Barbara Dee Cookie Company, L.L.C................ Delaware
Little Brownie Bakers, L.L.C..................... Delaware
President Baking Company, L.L.C.................. Delaware
Sunny Cookie Company, L.L.C...................... Delaware
Sunshine Biscuits, L.L.C......................... Delaware
Elfin Equity Co., L.L.C.(1)...................... Delaware
Keebler Assets Company(2)........................ Delaware
Keebler Leasing Corp...................................... Delaware
Shaffer, Clarke & Co., Inc................................ Delaware
Johnston's Ready-Crust Company............................ Delaware
Bake-Line Products, Inc................................... Illinois
</TABLE>
- ---------------
(1) 64.6% owned by Keebler Company and 35.4% owned by Sunshine Biscuits, Inc.
(2) 34% owned by Keebler Company, 33% owned by Keebler-Georgia, Inc. and 33%
owned by Keebler Leasing Corp.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-34855, No. 33-91198 and No. 333-23351) and in the
Prospectus constituting part of the Registration Statement on Form S-3 (No.
33-34855) of our report dated February 2, 1999 of this Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule of this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FLOWERS
INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE FIFTY-TWO WEEKS ENDED
JANUARY 2, 1999, AND THE FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AT
JANUARY 2, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 56,965
<SECURITIES> 0
<RECEIVABLES> 275,884
<ALLOWANCES> 7,800
<INVENTORY> 297,593
<CURRENT-ASSETS> 783,245
<PP&E> 1,418,218
<DEPRECIATION> 430,516
<TOTAL-ASSETS> 2,860,900
<CURRENT-LIABILITIES> 761,038
<BONDS> 0
0
0
<COMMON> 62,627
<OTHER-SE> 510,334
<TOTAL-LIABILITY-AND-EQUITY> 2,860,900
<SALES> 3,776,461
<TOTAL-REVENUES> 3,776,461
<CGS> 1,702,581
<TOTAL-COSTS> 3,544,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,725
<INCOME-PRETAX> 163,664
<INCOME-TAX> 74,391
<INCOME-CONTINUING> 45,968
<DISCONTINUED> 0
<EXTRAORDINARY> (938)
<CHANGES> (3,131)
<NET-INCOME> 41,899
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
<PAGE> 1
EXHIBIT 99.1
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for the
year ended January 2, 1999, the year ended January 3, 1998, the forty-eight
weeks ended December 28, 1996 and the four weeks ended January 26, 1996, have
been derived from, and should be read in conjunction with the historical
consolidated financial statements of Keebler 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 30, 1995 and December 31, 1994 have been derived from the consolidated
financial statements of the predecessor company that are not included herein.
The distinction between Keebler 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 "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 Weeks Year Ended
Year Ended Year Ended Weeks Ended || Ended -------------------------
January 2, January 3, December 28,|| January 26, December 30, December 31,
1999 (a) 1998 1996 (b) || 1996 1995 1994
------------ ------------ ------------|| ------------ ------------ ------------
(In Millions Except Per Share Data) || (In Millions)
<S> <C> <C> <C> || <C> <C> <C>
||
OPERATING DATA: ||
Net sales............................... $ 2,226.5 $ 2,065.2 $ 1,645.5 || $ 101.7 $ 1,578.6 $ 1,599.7
Gross profit............................ 1,287.6 1,177.2 871.3 || 46.8 831.8 894.2
Loss on impairment of Salty Snacks ||
business.............................. - - - || - 86.5 -
Income (loss) from continuing operations 196.1 141.4 70.1 || (25.5) (137.9) 46.4
Income tax expense (benefit)............ 73.0 45.2 14.0 || - (0.5) (1.1)
Discontinued operations: ||
Income from operations of discontinued ||
Frozen Food businesses, net of tax.. - - - || - 7.4 3.4
Gain on disposal of Frozen Food ||
businesses, net of tax.............. - - - || 18.9 - -
Extraordinary item: ||
Loss on early extinguishment of debt, ||
net of tax.......................... 1.7 5.4 1.9 || - - -
Net income (loss)....................... $ 94.9 $ 57.0 $ 15.8 || $ (6.5) $ (158.3) $ (23.0)
||
Diluted net income per share: ||
Income from continuing operations ||
before extraordinary item........... $ 1.10 $ 0.77 $ 0.23 ||
Extraordinary item.................... 0.02 0.07 0.02 ||
------------ ------------ ------------||
Net income............................ $ 1.08 $ 0.70 $ 0.21 ||
============ ============ ============||
||
Weighted Average Shares Outstanding..... 87.5 80.6 76.1 ||
============ ============ ============||
OTHER DATA: ||
EBITDA, as adjusted (c)................. $ 265.2 $ 202.1 $ 119.6 || $ (23.5) $ (93.3) $ 89.5
Depreciation and amortization (excluding ||
items related to discontinued ||
operations)........................... 69.1 60.7 49.5 || 2.0 44.6 43.1
Capital expenditures (excluding ||
expenditures related to discontinued ||
operations)........................... 66.8 48.4 29.4 || 3.2 54.2 54.6
||
CASH FLOW DATA: ||
Cash Provided from (Used by) ||
Operating activities.................. $ 142.7 $ 218.3 $ 53.2 || $ (0.4) $ (61.4) $ (17.4)
Investing activities.................. (510.7) (41.5) (130.1)|| 65.2 (52.6) (45.9)
Financing activities.................. 364.3 (161.6) 86.8 || (65.7) 104.4 69.4
------------ ------------ ------------|| ------------ ------------ ------------
(Decrease) increase in cash and cash ||
equivalents........................... $ (3.7) $ 15.2 $ 9.9 || $ (0.9) $ (9.6) $ 6.1
============ ============ ============|| ============ ============ ============
- ----------------------------------------------------------------
(a) Includes the operating results of President from the acquisition date of September 28, 1998 through January 2,
1999. Other matters affecting comparability are detailed in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(b) Includes the operating results of Sunshine from the 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.
(c) EBITDA, as adjusted, is defined as income (loss) from continuing operations before interest, taxes, depreciation,
amortization and restructuring charges (gains).
</TABLE>
9
<PAGE> 2
<TABLE>
<CAPTION>
Keebler Foods Company || UBIUS
--------------------------------------|| --------------------------------------
As of || As of
--------------------------------------|| --------------------------------------
January 2, January 3, December 28,|| January 26, December 30, December 31,
1999 1998 1996 || 1996 1995 1994
------------ ------------ ------------|| ------------ ------------ ------------
(In Millions) || (In Millions)
<S> <C> <C> <C> || <C> <C> <C>
||
BALANCE SHEET DATA: ||
Cash and cash equivalents............... $ 23.5 $ 27.2 $ 12.0 || $ 2.1 $ 3.0 $ 12.5
Total assets............................ 1,655.8 1,042.9 1,102.1 || 849.1 926.9 1,001.2
Due to affiliate........................ - - - || 105.0 108.0 551.6
Total debt (including capital leases)... 654.5 298.8 457.9 || 371.4 437.6 333.2
Shareholders' equity (deficit).......... 329.3 222.0 165.1 || 45.3 51.8 (234.9)
</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 2, 1999, JANUARY 3, 1998 AND DECEMBER 28,
1996. 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 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.
OVERVIEW
GENERAL
We sell cookies and crackers, custom-baked products to other manufacturers
of branded food products, pie crusts and ice cream cones. Our net sales are
principally affected by product pricing and quality, brand recognition, new
product introductions, product line extensions, marketing and service. We manage
these factors to achieve a sales mix favoring our higher margin products while
driving volume through our national DSD distribution system.
The principal elements comprising our cost of sales are raw and packaging
materials, labor and manufacturing overhead. The major raw materials that we use
in the manufacture of our products are flour, sugar, chocolate, shortening and
milk. We also use paper products, such as corrugated cardboard, as well as films
and plastics to package our products. The prices of these raw materials have
been subject to significant volatility. We have mitigated the effect of such
volatility in the past through our hedging programs, but may not be successful
in protecting our business from price increases in the future. In addition to
the foregoing factors, our cost of sales are affected by the efficiency of
production methods and manufacturing capacity utilization.
Our selling, marketing and administrative expenses are comprised mainly of
labor and lease costs associated with our national DSD distribution system,
trade and consumer promotion costs, other advertising costs and the cost of our
corporate offices. While costs associated with our national DSD distribution
system and the cost of our corporate offices are generally fixed, promotion and
other advertising costs are more variable. Promotion and other advertising costs
represent the largest component of our cost structure other than cost of sales
and are principally influenced by changes in net sales.
We are in the process of integrating President into our operations. In
connection with this integration, we are currently undertaking a complete
analysis of our system-wide manufacturing and distribution operations as we
assess opportunities to improve our operational efficiencies in 1999 and beyond.
We currently anticipate that we will take a restructuring charge during 1999
when our analysis and related plans are finalized.
10
<PAGE> 3
MATTERS AFFECTING COMPARABILITY
Keebler's fiscal year consists of thirteen four week periods (fifty-two or
fifty-three weeks) and ends on the Saturday nearest December 31. The 1998 fiscal
year consists of fifty-two weeks and 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.
Keebler'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 2, 1999 and January 3, 1998. Keebler's operating
results for the year ended January 2, 1999 include the operating results of
President from the acquisition date of September 28, 1998. Keebler'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 subsequent years
include the operating results of Sunshine for the entire year. Additionally,
Keebler's operating results have been restated to reflect the Merger with INFLO
as if it had been effective January 26, 1996.
RESULTS OF OPERATIONS
Keebler's results of operations, expressed as a percentage of net sales, for
the last three years ended January 2, 1999, January 3, 1998 and December 28,
1996 are set forth below:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------
January 2, January 3, December 28,
1999 1998 1996
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES....................................................... 100.0% 100.0% 100.0%
Cost of sales................................................... 42.2 43.0 47.5
Selling, marketing and administrative expenses.................. 48.5 49.7 49.6
INCOME FROM CONTINUING OPERATIONS............................... 8.8 6.8 2.5
Interest Expense, Net........................................... 1.2 1.6 2.2
Loss on early extinguishment of debt, net of tax................ - 0.3 0.1
NET INCOME...................................................... 4.3% 2.7% 0.5%
</TABLE>
Keebler's reportable segments are Branded and Specialty, which were
determined using Keebler's method of internal reporting, which divides and
analyzes the business by sales channel. The reportable segments represent an
aggregation of similar sales channels. We evaluate the performance of the
reportable segments and allocate resources based on the segment's profit
contribution, defined as earnings before certain functional support costs,
amortization, interest and income taxes. While the accounting policies for each
reportable segment are the same as for the total company, the cost of sales used
to determine a segment's profit contribution is calculated using standard costs
for each product, whereas actual cost of sales is used to determine consolidated
operating income (loss).
BRANDED SEGMENT
The Branded segment sells a number of well-recognized products, primarily to
retail outlets such as supermarkets, mass merchandisers, warehouse club stores,
convenience stores and drug stores. This segment also imports and distributes
CARR'S crackers in the U.S. under an exclusive long-term licensing and
distribution agreement with United Biscuits.
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------------------
January 2, 1999 January 3, 1998 December 28, 1996
------------------------ ------------------------ ------------------------
$ % $ % $ %
------------- ---------- ------------- ---------- ------------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 1,726.7 $ 1,566.7 $ 1,247.9
PROFIT CONTRIBUTION $ 282.6 16.4% $ 226.9 14.5% $ 154.0 12.3%
</TABLE> 11
<PAGE> 4
Net sales in the Branded segment increased 10.2% in 1998 to $1,726.7
million. The acquisition of President contributed $78.9 million in incremental
revenue. Adjusting to an equal number of selling days and before including the
acquisition growth, branded revenues grew 6.7% over the prior year. The primary
drivers of the increase were higher sales of products under both the KEEBLER and
CHEEZ-IT brands. The KEEBLER brand name was used to leverage new product
introductions through line extensions such as the KEEBLER PEANUT BUTTER FUDGE
STICKS. The growth in CHEEZ-IT sales was partly attributed to new products such
as CHEEZ-IT HEADS AND TAILS, CHEEZ-IT sandwich crackers and CHEEZ-IT snack mix.
Additionally, we redirected marketing support into brand-building advertising
and consumer promotions. For example, with this support, sales of KEEBLER FUDGE
SHOPPE cookies and CHEEZ-IT products grew in 1998, with CHEEZ-IT products
increasing 22.1% over 1997. A favorable sales mix of KEEBLER branded products,
combined with selected price increases, also generated higher revenues. Further
contributing to the improvement was continued revenue growth outside
supermarkets, such as in mass merchandisers, convenience and club stores. Net
sales in 1997 were 25.6% higher compared to 1996. Revenue growth in 1997 was
achieved by incremental sales associated with the Sunshine acquisition as well
as increased volumes. In 1996, sales of Sunshine products by the Branded segment
were approximately $216.0 million from the acquisition date until year end
compared to approximately $486.0 million for all of 1997. Successful new product
introductions and growth in the retail businesses outside supermarkets also
propelled increased volume.
The Branded segment had a 1998 profit contribution of $282.6 million or
16.4% of net sales. After removing the impact of President, profit contribution
was 16.8% of net sales, which represented a 2.3 percentage point increase over
1997. A higher gross profit and lower distribution expenses drove the
improvement. The benefit noted in gross profit was attributed to improved sales
mix, selected price increases and continued productivity gains in our bakeries.
Lower distribution expenses were due to more fully utilizing available trailer
capacity and productivity and cost savings programs designed to minimize
inventory losses. The 1997 profit contribution of $226.9 million was 14.5% of
net sales compared to the 1996 profit contribution of 12.3% of net sales. A
higher gross profit was also the main contributor to the 2.2 percentage point
improvement in the 1997 profit contribution. After discontinuing several less
profitable products in 1996, the 1997 sales mix consisted of higher margin
products. Additionally, the 1997 profit contribution reflected lower prices on
certain raw materials and lower production costs due to the implementation of
several productivity programs in our manufacturing facilities. Selling and
distribution expenses also decreased as a percent of net sales due to increased
volume coupled with the benefit of cost reduction initiatives. Somewhat
offsetting these improvements were higher marketing expenses primarily spent on
brand-building, national advertising.
SPECIALTY SEGMENT
The Specialty segment produces cookies and crackers for the foodservice
market, the Girl Scouts of America and private label retailers. In addition, we
also produce custom-baked products for other marketers of branded food products.
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------------------
January 2, 1999 January 3, 1998 December 28, 1996
------------------------ ------------------------ ------------------------
$ % $ % $ %
------------- ---------- ------------- ---------- ------------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 499.8 $ 498.5 $ 499.3
PROFIT CONTRIBUTION $ 85.9 17.2% $ 80.3 16.1% $ 58.2 11.7%
</TABLE>
Net revenues in the Specialty segment in 1998 were flat compared to 1997.
The acquisition of President contributed $16.2 million of incremental sales.
Adjusting to an equal number of selling days and before including the
acquisition growth, net sales in the Specialty segment were $9.0 million, or
1.8%, below 1997. Net sales in 1997 were also flat compared to 1996. While an
improved sales mix benefited each year, the overall decrease in net sales for
each year-on-year comparison was principally associated with lower margin
products that were either discontinued or re-positioned at higher price levels.
Volume declines in custom-baked products in 1997 also served to offset gains
received from selected price increases.
12
<PAGE> 5
The Specialty segment's profit contribution of $85.9 million was 1.1
percentage point above the prior year, as a percent of net sales. Before
considering the impact of President, profit contribution was 17.3% of net sales
in 1998 compared to 16.1% in 1997. The improvement in profit contribution was
primarily achieved by a more profitable sales mix, selected price increases and
productivity gains received through bakery automation projects and supply chain
initiatives in distribution and inventory management. Profit contribution was
$80.3 million in 1997 which resulted in a 4.4 percentage point increase in
profit contribution over 1996 that was principally driven by a more favorable
sales mix in 1997 coupled with growth in sales of private label products. Lower
raw material costs in 1997 also contributed to the profit contribution
improvement.
COST OF SALES
Cost of sales was $938.9 million in 1998 which included an additional $61.3
million related to cost of sales for President that was not included in prior
years. Excluding the impact of President, cost of sales, as a percent of net
sales, was 41.2% for 1998 compared to 43.0% in 1997 and 47.5% in 1996. The
improvements made in each year were principally achieved from initiatives
implemented to increase automation and productivity at our manufacturing
facilities along with other cost reduction programs. The streamlining of our
manufacturing facilities, creating increased capacity utilization, also
contributed to a lower cost of sales. Additionally, the cost of certain raw and
packaging materials has declined from previous years.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES
Selling, marketing and administrative expenses were $53.8 million higher
compared to 1997, however, 1.2 percentage points better as a percent of net
sales. After removing $27.2 million of additional expense attributable to
President, selling, marketing and administrative expenses were $26.6 million
above the prior year. Higher marketing expenses related to our continued focus
on building brand equity through advertising and consumer promotions was the
primary driver of the increased spending. Partially offsetting these higher
marketing expenses were savings achieved in distribution costs due to improved
inventory handling and deployment. In 1997, selling, marketing and
administrative spending increased $160.0 million compared to 1996, yet remained
consistent as a percentage of net sales. Increased spending was driven by higher
volume captured through both internal growth and the Sunshine acquisition. In
1997, we began spending more on advertising and other consumer promotions to
create increased brand and consumer awareness. Selling, marketing and
administrative expenses remained comparable as a percent of net sales in 1997
and 1996 due to higher volumes passing through a more efficient, fixed cost,
selling and distribution network.
INTEREST EXPENSE
Interest expense was $26.5 million in 1998, $33.8 million in 1997 and $38.4
million in 1996. The steady decline was primarily due to both a continuing
overall lower average debt balance and more favorable interest rates. Interest
expense declined from 1997, despite the $530.0 million of additional debt
incurred from the acquisition of President, due to lower interest rates, fees
and favorable terms. In conjunction with the President acquisition, the $145.0
million outstanding balance on the term note was extinguished, also contributing
to the reduction in interest expense. The 1997 decrease in the average debt
balance from 1996 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 1998 weighted average interest rate was 0.62 percentage points lower than
the previous year while the 1997 weighted average rate was 0.28 percentage
points lower than 1996.
INCOME TAXES
Income taxes were provided at an effective tax rate of 43% in 1998, 42% in
1997 and 44.2% in 1996. In each year, the effective tax rate exceeded the
statutory rate due to nondeductible expenses, principally amortization of
intangibles, including trademarks, trade names, other intangibles and goodwill.
The 1.0 percentage point increase in the effective tax rate from 1997 to 1998
was due primarily to the increase in nondeductible expenses, principally the
amortization of intangibles, resulting from the President acquisition. The
effective tax rate declined in 1997, compared to 1996, as earnings were
significantly higher in 1997, thereby reducing the impact of nondeductible
expenses, such as amortization of intangibles, on the calculation of the
effective tax rate. Income tax expense was
13
<PAGE> 6
not provided for during the first four weeks of 1996. As part of the Keebler
acquisition, the valuation allowance on deferred taxes was adjusted by $25.1
million to reflect the elimination of certain deferred tax assets revalued in
the purchase price allocation. We carried a deferred tax valuation allowance of
$84.4 million at January 2, 1999, 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 us, 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 the latter part of 1998, an after-tax extraordinary charge of $1.7
million was recorded for the write-off of unamortized bank fees related to the
early extinguishment of the term note. Similarly, in 1997 and 1996, we also
recorded extraordinary charges, net of income taxes, of $5.4 million and $1.9
million, respectively. In 1997, $3.8 million of the extraordinary charges, net
of tax, also related to the write-off of debt issuance costs associated with the
early retirement of term loans. An additional $1.6 million, net of income taxes,
extraordinary charge was recorded due to a loss on the early extinguishment of
the seller note which was entered into at the time of the Keebler acquisition.
The 1996 extraordinary charge of $1.9 million, net of income taxes, related to
the write-off of debt issuance costs made in connection with the $125.0 million
early extinguishment of increasing rate notes.
NET INCOME
In 1998, net income of $94.9 million was 66.5% higher than the prior year
and net income of $57.0 million for 1997 was $47.7 million above 1996. The
substantial growth in net earnings in year-over-year comparisons was achieved
through revenue gains combined with lower operating expenses resulting from
productivity and cost savings programs. Revenue growth in both 1998 and 1997 was
achieved through volume increases, higher prices and an improved sales mix.
Compared to 1996, 1997 also benefited from increased revenue due to the
inclusion of the Sunshine business for the entire fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
A condensed cash flow statement of Keebler follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------------
January 2, January 3, December 28,
1999 1998 1996
----------------- ------------------ -----------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED FROM (USED BY)
Operating activities........................... $ 142.7 $ 218.3 $ 52.8
Investing activities........................... (510.7) (41.5) (64.9)
Financing activities........................... 364.3 (161.6) 21.1
----------------- ------------------ -----------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................... $ (3.7) $ 15.2 $ 9.0
================= ================== =================
</TABLE> 14
<PAGE> 7
CASH FLOW FOR 1998
Operating activities provided $142.7 million of cash during 1998. Net
earnings of $94.9 million coupled with the deferral of additional income taxes
were the primary drivers of the favorable cash flow. Partially offsetting these
sources of cash was an increased investment in inventories and trade accounts
receivable of $13.8 million and $5.1 million, respectively. A build in finished
goods, principally associated with the upcoming Girl Scout cookie season,
accounted for the larger investment in inventory. The increase in trade accounts
receivable was due principally to the addition of the President's trade accounts
receivable subsequent to the acquisition. Also offsetting these cash sources was
$5.4 million of current year net spending for plant and facility closing costs
and severance related to the exit costs associated with the Keebler, Sunshine
and President acquisitions. Spending on plant and facility closing costs and
severance is expected to be substantially completed by the end of 1999, except
for noncancelable lease obligations which are expected to continue until 2006.
Higher income tax payments attributable to a $62.0 million increase in pre-tax
income over the prior year also offset the positive cash flow.
Cash used by investing activities was $510.7 million, of which $444.8
million, net of cash acquired, was attributable to the acquisition of President
in September 1998. An additional $66.8 million of capital spending was made for
modifications related to new products, to update and enhance production
facilities and to achieve near-term cost savings and efficiencies in the
manufacturing, sales and distribution process. At year end, we held the idle
Atlanta, Georgia manufacturing facility, a distribution center in Kensington,
Connecticut and a warehouse in Houston, Texas for sale and expect the
disposition of these facilities to be completed before the end of 1999.
Financing activities generated $364.3 million of cash for the year
principally from proceeds of long-term debt borrowings under $825.0 million of
available new debt facilities used to finance the acquisition of President. We
also received $19.8 million of cash proceeds resulting from Bermore exercising a
warrant in exchange for 6,135,781 shares of common stock at the time of our
initial public offering. Employee stock options exercised during the year
provided another $0.8 million of cash. These cash sources were partially offset
by the pre-payment of the $145.0 million outstanding term note balance and a
$20.0 million repayment on the revolving facility. In addition, cash totaling
$8.6 million was used to repurchase common stock into treasury under the stock
repurchase program.
CASH FLOW FOR 1997 AND 1996
Cash provided from operating activities was $218.3 million in 1997 which was
an increase of $165.5 million over the cash provided from operations in 1996.
The primary contributors to the positive cash flow for 1997 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 1996. 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 1996, accounted for $13.7 million of cash used by operations
for the year ended January 3, 1998. Exit cost spending associated with these
acquisitions was substantially complete at the end of 1998, with the exception
of noncancelable lease obligations, which are expected to continue until 2004.
In addition, we paid an arbitration award in 1997 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 was $41.5 million in 1997 compared to
$64.9 million in 1996. The cash used in 1997 was primarily used to fund capital
expenditures. Capital expenditures were $48.4 million and $32.6 million in 1997
and 1996, respectively. In 1997, capital spending 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 in 1997 accounted for $3.6
million of the proceeds, with the remainder provided mainly from the sale of
trucks and machinery and equipment.
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Cash used by financing activities in 1997 was $161.6 million. In 1997, we
entered into an amendment and restatement of our prior senior credit agreement,
proceeds from which were used to extinguish existing term loans 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. During 1997, the draw
down on the revolving loan facility was completely repaid. Additionally, in the
fourth quarter of 1997, we extinguished $29.0 million of debt related to the
seller note and made $70.0 million in principal pre-payments on the term loan
using existing cash resources. Scheduled principal payments of $18.7 million
were made on the term loan and other debt during the year.
CAPITAL RESOURCES
In 1998 and 1997, our capital resources were provided under two separate
credit arrangements. In order to consummate the acquisition of President in
September 1998, we entered into a new Credit Facility consisting of a $350.0
million revolving facility and a $350.0 million term facility. In addition, we
also entered into a $125.0 million bridge facility that was subsequently
refinanced with a receivables facility on January 29, 1999. These new debt
facilities replaced the available $140.0 million revolving loan facility and an
existing term loan which were outstanding in 1997 and 1998 until the time of the
President acquisition. Available borrowings under the revolving facility and the
previous revolving loan facility were $265.0 million and $140.0 million in 1998
and 1997, respectively. Borrowings under the $350.0 million revolving facility
in 1998 were $105.0 million, with $20.0 million repaid as of January 2, 1999.
There were no borrowings under the $140.0 million revolving loan facility in
1998, however, there were $32.8 million of borrowings in 1997, which was all
repaid as of January 3, 1998.
Capital expenditures for 1999 are expected to be approximately $90.0
million, up nearly $23.2 million from 1998. The majority of capital spending in
1999 will be used to increase the automation in production and distribution
facilities in order to obtain additional productivity and cost savings. We
anticipate that capital expenditures will be funded from cash provided by
operations and will continue at a level sufficient to support our strategies and
operating needs.
Historically, we have not paid dividends, and at this time do not anticipate
paying any cash dividends. The existing Credit Facility and Notes place
limitations on our ability to pay dividends or make other distributions on our
common stock. Additionally, the Credit Facility requires us to meet certain
financial covenants including a debt to earnings before interest, taxes,
depreciation and amortization ratio and cash flow coverage ratios. In addition
to these ratios, the credit agreement also requires us to meet net worth and
interest coverage ratios. In 1998 and 1997, we met all financial covenants in
each of our financing agreements. Total debt was $654.5 million, $298.8 million
and $457.9 million as of January 2, 1999, January 3, 1998 and December 28, 1996,
respectively. Current maturities on the total debt outstanding were $112.7
million, $26.4 million and $18.6 million as of such respective dates. Cash and
cash equivalents on January 2, 1999, January 3, 1998 and December 28, 1996 were
$23.5 million, $27.2 million and $12.0 million, respectively. We believe that
available cash, as well as amounts available under our new debt facilities, will
be sufficient to meet normal operating requirements for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The new statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The statement requires that all derivatives be recognized as either
assets or liabilities in the statement of financial position and that the
instruments be measured at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. We have not yet determined the impact the new statement
may have on the consolidated financial statements.
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SEASONALITY
Our net sales, net income and cash flow are affected by the timing of new
product introductions, promotional activities, price increases and a seasonal
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. President's net sales, net income and cash flow historically
has been higher in the first quarter than in any other fiscal quarter because
substantially all sales of Girl Scout cookies have occurred in that quarter. For
this reason, going forward, we expect to realize proportionately higher net
sales, net income and cash flow during the first quarter of our fiscal year than
we historically have experienced.
SELF INSURANCE
We purchase insurance coverage for worker's compensation as well as 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.
YEAR 2000 ISSUE
The Year 2000 issue arose because many existing computer programs use only
the last two digits to refer to a year. As a result, computer programs may not
properly recognize a year that begins with "20" instead of the familiar "19." If
not corrected, many businesses are at risk for possible computer application
miscalculations or systems failures causing disruptions in business operations.
These risks are commonly referred to as the "Y2K issues."
We utilize software and related technologies that will be affected by the
date change in the year 2000. We have completed a comprehensive review of our
computer systems and non-information technology systems to identify potential
Y2K issues. Since we have implemented the SAP R/3 management information system
and Manugistics software, both of which were developed/purchased as Y2K
compliant, we do not anticipate that the impact of Y2K issues on our business
will be material. Additionally, secondary information systems, which are not
material to our ability to forecast, manufacture or deliver product, have been
reviewed and Y2K issues identified. We are currently in the process of
correcting or upgrading these systems. We intend to be Y2K compliant on all
critical systems by the middle of 1999.
We have undertaken efforts to verify that all of our material vendors and
suppliers will be Y2K compliant. Specifically, we sent a comprehensive
questionnaire to all of our significant suppliers and vendors regarding their
Y2K compliance in an attempt to identify any problem areas with respect to these
groups. Although the results of the questionnaire indicated that our material
vendors and suppliers intend to be Y2K compliant before the end of 1999, they
were not able to provide us any assurances. We are currently in the process of
developing a contingency plan to address any potential Y2K failures caused by a
third party. While we cannot assure that third parties will convert their
systems in a timely manner and in a way compatible with our systems, we believe
that our actions with third parties detailed above, along with the development
of a contingency plan, will minimize these risks.
We currently estimate that the incremental costs for becoming Y2K compliant
are approximately $2.0 - $3.0 million, which will be funded from cash provided
by operations and expensed as incurred. Spending of $1.0 million against this
estimate has occurred to date. This estimate is exclusive of Y2K issues
regarding the President acquisition. We have completed a comprehensive review of
President's computer systems and non-information technology systems to identify
potential Y2K issues. Many of the Y2K risks at President will be mitigated
through our implementation of the SAP R/3 management information system,
Manugistics software and our warehouse management system at the President
facilities. We expect this implementation to be completed during 1999. We
estimate additional costs of approximately $0.3 million will be necessary to
correct or upgrade President's secondary information systems in order to make
them Y2K compliant.
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Based on the progress we have made in addressing our Y2K issues and our
compliance with Y2K issues on our primary business information systems, we do
not foresee significant risks associated with our Y2K compliance at this time.
As our plan is to address any significant risks associated with our Y2K issues
prior to being affected by them, a comprehensive contingency plan has not been
developed. However, if a significant risk related to our Y2K compliance or a
delay in the anticipated timeline for compliance occurs, we will develop
contingency plans as deemed necessary at that time.
The information presented above sets forth the steps we have taken to
address the Y2K issues. We do not expect compliance with Y2K issues or the most
reasonably likely worst case scenario and related contingency plan to have a
material impact on our business, results of operations or financial condition.
The above discussion of our efforts and expectations relating to Y2K
compliance is forward-looking. Readers are cautioned that forward-looking
statements contained in this discussion should be read in conjunction with our
disclosure under the heading "FORWARD-LOOKING STATEMENTS" that follows below.
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this discussion are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject
to the safe harbor provisions of the Reform Act. Such forward-looking statements
include, without limitation, statements about:
o the competitiveness of the cookie and cracker industry;
o the future availability and prices of raw and packaging materials;
o potential regulatory obligations; o our strategies and
o other statements that are not historical facts.
When used in this discussion, the words "anticipate," "believe," "estimate"
and similar expressions are generally intended to identify forward-looking
statements. 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:
o changes in general economic or business conditions (including in the
cookie and cracker industry); o actions of competitors;
o our ability to recover material costs in the pricing of our products;
o the extent to which we are able to develop new products and markets for
our products; o the time required for such development;
o the level of demand for such products and
o changes in our business strategies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we are exposed that may adversely affect
results of operations and financial position include changes in future interest
rates and raw material prices. We seek to minimize or manage these market risks
through normal operating and financing activities and through the use of
interest rate swap agreements and commodity futures and options contracts. The
use of these instruments is limited to hedging activities and they are not
entered for trading or speculative purposes. These agreements and contracts are
entered into at a corporate level and as such, any income or expense associated
with these transactions is not allocated to our reportable segments.
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Our exposure to market risk for changes in interest rates relates primarily
to long-term debt obligations. Our current debt structure consists of both fixed
and floating rate debt. Interest rate swap agreements are used to effectively
manage changes in interest rates related to the majority of our borrowings with
the objective of reducing overall interest costs. Sensitivity analysis was used
to assess the impact that changes in market prices have on the fair value of
interest rate swap agreements. Assuming a ten percent increase in market price,
the fair value of the interest rate swap agreements at January 2, 1999, with a
notional amount of $527.3 million, would increase the net receivable to $3.1
million, while the impact of a ten percent decrease in market price would result
in a net payable of $4.4 million.
We enter into commodity futures and options contracts to neutralize the
impact of price increases on raw material purchases that are not likely to be
recovered through higher prices on our products. We also used sensitivity
analysis to assess the potential impact on the fair value of commodity futures
and options contracts. Assuming a ten percent increase or decrease in market
price, the fair value of open contracts with a notional amount of $61.7 million
at January 2, 1999 would be impacted by $5.8 million.
