UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(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 3, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: NO. 001-13705
KEEBLER FOODS COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 36-1894790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
677 LARCH AVE., ELMHURST, IL 60126
(Address of principal executive offices) (Zip Code)
630-833-2900
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
$125,000,000 OF ITS 10 3/4% SENIOR SUBORDINATED NOTES
DUE 2006 WHICH ARE FULLY AND UNCONDITIONALLY
GUARANTEED BY RESTRICTED SUBSIDIARIES
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO | |
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. YES |X| NO | |
THE AGGREGATE MARKET VALUE OF ALL STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT
AS OF MARCH 17, 1998, BASED UPON THE CLOSING PRICE OF THE COMMON STOCK AS
REPORTED ON THE NEW YORK STOCK EXCHANGE ON SUCH DATE, WAS APPROXIMATELY
$582,400,000.
NUMBER OF SHARES OF COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF THE CLOSE
OF BUSINESS ON MARCH 17, 1998: 83,799,316.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
<PAGE>
PART I
ITEM 1. BUSINESS
Keebler Foods Company and its subsidiaries (the "Company" or "Keebler") is
the second largest cookie and cracker manufacturer in the United States ("U.S.")
with annual net sales of $2.1 billion and a 24.4% share of the U.S. cookie and
cracker market as reported by Information Resources, Inc. ("IRI"), based on
sales to supermarkets which have annual sales of $2.0 million or more, measured
in pounds sold. The Company, primarily through its Keebler Company and Sunshine
Biscuits, Inc. ("Sunshine") subsidiaries, produces and distributes a broad line
of cookie and cracker products, as well as other consumer food products.
RECENT HISTORY
The Company was organized under the laws of the State of Delaware as UB
Investments US Inc. ("UBIUS" or "predecessor company") on July 14, 1992. The
Company was acquired from UB Investments (Netherlands) B.V. on January 26, 1996
(the "Keebler acquisition") by INFLO Holdings Corporation ("INFLO"), a
corporation which was jointly owned by Artal Luxembourg S.A. ("Artal"), a
private investment company, and Flowers Industries, Inc. ("Flowers"), a New York
Stock Exchange-listed company and one of the country's largest manufacturers and
marketers of fresh and frozen baked foods. Immediately after the Keebler
acquisition, the Company was renamed Keebler Corporation. In conjunction with
the Keebler acquisition, INFLO sold 2.5% of the outstanding shares of $0.01 par
value common stock to certain members of management. On June 4, 1996, the
Company acquired Sunshine (the "Sunshine acquisition") from G.F. Industries,
Inc. ("GFI"). As part of consideration paid in the sale of Sunshine, GFI was
issued common stock and a warrant to purchase 6,135,781 shares of common stock.
On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger")
and subsequently changed its name to Keebler Foods Company. After the Merger,
the stock and warrant held by GFI were transferred to Bermore, Limited
("Bermore"), a privately held corporation and the parent of GFI, and reissued
for the same value in the name of the Company. On February 3, 1998, the Company
completed an initial public offering (the "Offering") of 13,386,661 shares of
common stock. Concurrent with the Offering, Bermore exercised the warrant in
exchange for 6,135,781 shares of common stock. The exercise of the warrant
resulted in the Company receiving $19.8 million of cash proceeds. All of the
shares in the Offering were sold by Artal and Bermore, with no proceeds from the
Offering going to the Company. As part of the transaction, Flowers acquired
additional shares of common stock from Artal and Bermore which increased its
ownership from approximately 45% to 55%. Artal, having sold shares to both
Flowers and the public, retained ownership of approximately 21%. Bermore
exercised the warrant, sold shares to both Flowers and the public, and retained
ownership of approximately 6%.
GENERAL BUSINESS DESCRIPTION
The Company competes in the U.S. retail cookie and cracker market which in
1997 generated sales of approximately $8.3 billion measured in retail sales to
consumers. The U.S. cookie and cracker market, which is relatively stable, has
experienced slow but steady growth over the past twenty years. Supermarkets
accounted for 77.1% of 1997 retail sales in the cookie and cracker industry,
with mass merchandisers, convenience stores, and drug stores accounting for the
balance. Since 1992, U.S. annual dollar supermarket sales of cookies and
crackers have increased by an average of 1.6% per year. The Company believes the
non-supermarket channels of distribution are becoming increasingly more
important.
The Company produces a number of well recognized brands under the Keebler
and Sunshine labels. Major brands include: CHEEZ-IT, CHIPS DELUXE, CLUB, FUDGE
SHOPPE, HYDROX, SUNSHINE KRISPY, MUNCH'EMS, SANDIES, TOWN HOUSE, VIENNA FINGERS,
WHEATABLES, and ZESTA. The Company also imports and distributes CARR'S crackers
in the U.S. under an exclusive long-term licensing and distribution agreement
with United Biscuits. CARR'S crackers are the best-selling specialty cracker in
the U.S.
1
<PAGE>
In addition to retail branded products, the Company also produces private
label cookies and crackers, which are sold by retailers under their own brands.
Keebler is also the number one manufacturer of cookies and crackers for the
foodservice market, as reported by the International Foodservice Manufacturers
Association ("IFMATRAC"). The Company is the top manufacturer of retail branded
ice cream cones in the U.S., as well as the leader of preformed retail branded
pie crusts which are sold under the KEEBLER READY CRUST brand name. Keebler also
produces custom-baked products for other marketers of branded food products.
Following the Keebler acquisition in January 1996, the Company's new
management began implementing a business strategy designed to capitalize on the
Company's competitive strengths, which include strong national brands and a
national direct store door sales and distribution system ("DSD system"). The key
elements of the Company's strategy include (i) building brand strength in new
and existing product lines, (ii) increasing sales in non-supermarket channels,
(iii) increasing the efficiency of operations, and (iv) pursuing acquisitions
that complement or provide further opportunities to use existing brands, product
lines, or distribution systems.
The Company completed the planned integration of Sunshine's operations into
those of Keebler by the end of 1996. The combination of Keebler and Sunshine
allowed the Company to achieve efficiencies in administration, purchasing,
production, marketing, sales, and distribution. In particular, the sales and
distribution of Sunshine retail branded products were incorporated into
Keebler's DSD distribution system which had excess capacity. Filling excess
capacity with Sunshine products made Keebler's DSD distribution system more
efficient and allowed the Company to focus sales and marketing efforts on more
profitable retail branded products.
The Company has focused on new product introductions and line extensions
within its core segments, such as KEEBLER CHOCOLATE CHEWY CHIPS DELUXE cookies
and Nacho CHEEZ-IT crackers, as well as introductions into new or less
competitive segments, such as KEEBLER COOKIE STIX cookies and KEEBLER SNACKIN'
GRAHAMS crackers. The Company has also developed new sizes of its leading
products to enable it to expand into non-supermarket channels.
The Company recognizes that the mass distribution of consumer food products
is an important element in maintaining sales growth and providing service to
customers. The Company attempts to meet the changing demands of customers by
planning appropriate stock levels and reasonable delivery times consistent with
achieving optimal economics of distribution. In order to achieve these
objectives, Keebler has developed a network of manufacturing plants, shipping
centers, and distribution warehouses strategically located throughout the
continental U.S. to provide high national in-store presence. The Company uses a
combination of Keebler-owned, public, and contract carriers to deliver products
from its distribution points to customers.
The Company distributes retail branded cookie and cracker products through
its DSD distribution system, which services substantially all supermarkets in
the U.S., as measured by IRI. The Company believes its DSD distribution system
provides certain competitive advantages. Members of Keebler's sales force,
rather than store employees, stock and arrange the Company's products on store
shelves and build end-aisle and free-standing product displays. Frequent store
presence of Keebler's sales force employees provides the Company with a high
level of control over the availability and presentation of its products. The
Company believes this control allows it to maintain shelf space, more
effectively introduce new products, and permits better execution of in-store
promotions. In addition, store presence allows the Company to monitor
competitors' in-store product promotions. Keebler believes in-store promotions
are important because purchases of cookies and crackers are often impulse
driven.
In addition to Keebler's DSD system, the Company uses a network of
independent distributors and brokers to serve convenience stores and vending
distributors. In the case of club stores and foodservice distribution, Keebler
uses a dedicated sales force and ships its products directly to the customers'
warehouses. The Company uses a warehouse sales and distribution system to sell
and distribute KEEBLER READY CRUST pie crusts and private label cookies and
crackers to its customers, including retail outlets otherwise served by
Keebler's DSD distribution system. CARR'S crackers are sold through a network of
independent specialty distributors.
2
<PAGE>
COMPETITION
The U.S. branded cookie and cracker industry is led by Keebler and Nabisco,
Inc. ("Nabisco"), which together account for 58.5% of sales volume, as reported
by IRI. Smaller competitors include numerous national, regional, and local
manufacturers of both branded and private label products. Competition in
Keebler's target markets takes many forms including (i) establishing favorable
brand recognition, (ii) developing products sought by consumers, (iii)
implementing appropriate pricing, (iv) providing strong marketing support, and
(v) obtaining access to retail outlets and sufficient shelf space.
Nabisco is the largest manufacturer in the U.S. cookie and cracker industry.
Keebler has a 24.4% share of the retail cookie and cracker market, while Nabisco
has a 34.1% share, as measured by IRI. The remaining industry participants
primarily target certain segments of the industry or focus on certain
geographical regions of the U.S. Keebler and Nabisco are also the only cookie
and cracker producers that have national wholly-owned DSD distribution systems,
although Pepperidge Farms operates a national DSD distribution system through
independent distributors.
SEASONALITY
The Company's net sales, net income, and cash flows are affected by the
timing of new product introductions, promotional activities, price increases,
and a seasonal sales bias toward the second half of the year due to events such
as back-to-school, Thanksgiving, and Christmas. The relative mix between cookie
and cracker sales varies throughout the year with stronger cracker sales in the
last quarter of the calendar year.
CUSTOMERS
The Company's top ten customers in 1997 accounted for 27.7% of Keebler's net
sales. No single customer accounted for more than 4.6% of net sales.
RAW MATERIALS
The principal raw materials used in the Company's food products consist of
flour, sugar, chocolate, shortening, and milk. Keebler also uses paper products,
such as corrugated cardboard, as well as films and plastics to package its
products. Raw materials and packaging supplies are readily available from
various suppliers. There is no significant reliance on any one supplier. The
Company uses hedging techniques to minimize the impact of price fluctuations in
raw materials but not for speculative or trading purposes. The hedging
techniques, however, may not result in a reduction in the Company's raw material
costs or protect the Company from sharp increases in certain raw material costs,
which the Company has experienced in the past.
INTELLECTUAL PROPERTY
The Company owns a number of patents, licenses, trademarks, and trade names.
Principal trademarks and trade names include KEEBLER, Ernie the Keebler Elf, the
Hollow Tree logo, CHEEZ-IT, CHIPS DELUXE, CLUB, FUDGE SHOPPE, HI-HO, HYDROX,
SUNSHINE KRISPY, MUNCH'EMS, READY CRUST, SANDIES, SOFT BATCH, SUNSHINE,
TOASTEDS, TOWN HOUSE, VIENNA FINGERS, WHEATABLES, and ZESTA. The Company is the
exclusive licensee of the CARR'S brand name in the U.S. Such trademarks and
trade names are considered to be of material importance to the business of the
Company since they have the effect of developing brand identification and
maintaining consumer loyalty. Management is not aware of any fact that would
negatively impact the continuing use of any patents, licenses, trademarks, or
trade names.
3
<PAGE>
RESEARCH AND DEVELOPMENT
The Company engages in research activities, which principally involve
development of new products, improvement of the quality of existing products,
and improvement and modernization of production processes. The Company also
carries out development and evaluation of new processing techniques for both
current and proposed product lines. Identifiable research and development costs
are set forth on page F-12 of the Company's consolidated financial statements.
REGULATION
As a manufacturer and marketer of food items, the Company's operations are
subject to regulation by various federal government agencies, including the Food
and Drug Administration, the Department of Agriculture, the Federal Trade
Commission (the "FTC"), the Environmental Protection Agency, and the Department
of Commerce, as well as various state agencies, with respect to production
processes, product quality, packaging, labeling, storage, and distribution.
Under various statutes and regulations, such agencies prescribe requirements and
establish standards for quality, purity, and labeling. The finding of a failure
to comply with one or more regulatory requirements can result in a variety of
sanctions, including monetary fines or compulsory withdrawal of products from
store shelves. In addition, the Company is subject to certain health and safety
regulations issued under the Occupational Safety and Health Act, as well as
regulation by the FTC of advertising performed by the Company.
ENVIRONMENTAL
The Company's operations and properties are subject to federal, state, and
local laws and regulations relating to the storage, handling, emission, and
discharge of materials and wastes into the environment. The primary
environmental laws affecting Keebler's operations are the Federal Clean Air Act
and Clean Water Act. The Company may be required to spend significant sums in
order to maintain compliance with environmental laws, particularly with respect
to emission control equipment, replacement of chlorofluorocarbons (i.e.
ozone-depleting substances) in cooling equipment, and asbestos abatement
projects. Although it is difficult to estimate the cost of complying with
environmental laws, the Company does not believe that compliance with, or
liability under, any environmental laws individually or in the aggregate will
have a material adverse effect on its results of operations or financial
condition.
EMPLOYEES
The Company employs approximately 9,500 persons, of which approximately
5,200 are represented by unions. Keebler believes its relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company operates eleven manufacturing facilities in the U.S. of which
ten are owned and one is leased. The manufacturing facilities are located in
Athens, Georgia; Chicago, Illinois; Cincinnati, Ohio; Columbus, Georgia; Denver,
Colorado; Des Plaines, Illinois; Florence, Kentucky; Grand Rapids, Michigan;
Kansas City, Kansas; Macon, Georgia; and Sayreville, New Jersey. Keebler also
owns and operates a dairy in Fremont, Ohio that produces cheese under a
proprietary formula that is used as an ingredient in CHEEZ-IT crackers. In
addition, the Company owns one idle manufacturing facility located in Atlanta,
Georgia that is held for sale. As a result of capital expenditures made over the
past decade, management believes the manufacturing facilities are modern and
efficient. Management also believes manufacturing capacity is sufficient to meet
foreseeable needs.
4
<PAGE>
Distribution facilities consist of eleven shipping centers attached to the
manufacturing facilities, ten stand-alone shipping centers (two owned and eight
leased; of which one is idle), and sixty-six distribution centers (eleven owned
and fifty-five leased) throughout the U.S. Of the sixty-six distribution
centers, seven were subleased and seven were idle. These seven idle facilities
have been accrued for in the plant and facility closing costs. In addition, one
of the owned, but idle, distribution facilities is held for sale. The Company
also leases thirty-two warehouses and eighteen depots that are located
throughout the U.S. and are utilized by the sales force in the distribution of
the Company's products. Management believes there is sufficient distribution
capacity to meet foreseeable needs.
In addition to manufacturing and distribution facilities, the Company owns
two office buildings and leases two others as part of its corporate office
facility. The Company also leases numerous sales offices throughout the country.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 6, 1997, the majority of the shareholders of the Company, by
written consent without a meeting, re-elected the previous members of the Board
of Directors in its entirety.
On November 20, 1997, the majority of the shareholders of the Company, by
written consent without a meeting, approved a merger of INFLO Holdings
Corporation with and into the Company.
On December 11, 1997, the majority of the shareholders of the Company, by
written consent without a meeting, approved changing the name of the Company
from Keebler Corporation to Keebler Foods Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHARE OWNER
MATTERS
MARKET INFORMATION FOR COMMON STOCK
The New York Stock Exchange (the "Exchange") is the principal market on
which the Company's common stock is traded. The common stock was first traded on
the Exchange on January 29, 1998, concurrent with the underwritten initial
public offering of 13,386,661 shares of the Company's common stock at an initial
price to the public of $24.00 per share. Prior to the Offering, there was no
established public trading market for the Company's shares.
HOLDERS
The approximate number of holders of record of common stock as of March 17,
1998 was 300. This number does not include beneficial owners of the Company's
securities held in the name of nominees.
5
<PAGE>
DIVIDENDS
No dividends were declared on the Company's common stock in 1997 or 1996.
Historically, the Company has not paid dividends on its common stock and
currently intends to retain all future earnings to fund the development and
growth of the business. Therefore, the Company does not currently anticipate
paying any cash dividends. Additionally, the existing Second Amended and
Restated Credit Agreement ("Credit Agreement") and the Senior Subordinated Notes
(the "Notes") place limitations on the Company's ability to pay dividends or
make other distributions on its common stock. Any future determination as to
payment of dividends will be subject to such limitations, will be at the
discretion of the Board of Directors, and will depend on the Company's results
of operations, financial condition, capital requirements, and other factors
deemed relevant by the Board of Directors. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for the
year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the
four weeks ended January 26, 1996, and the year ended December 30, 1995 have
been derived from, and should be read in conjunction with the historical
consolidated financial statements of the Company and UBIUS, the predecessor
company, including the respective notes thereto, included elsewhere. The
selected historical financial data presented below as of and for the fiscal
years ended December 31, 1994 and January 1, 1994 have been derived from the
consolidated financial statements of the predecessor company that are not
included herein. The distinction between the Company's and the predecessor
company's selected financial data, as shown below, has been made by inserting a
double line. The results of operations presented below are not necessarily
indicative of results to be expected for any future period. The information set
forth below should be read in conjunction with "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and respective notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
Keebler Foods Company || UBIUS
------------------------|| -----------------------------------------------
Forty-Eight || Four Year Ended
Year Ended Weeks Ended || Weeks Ended -----------------------------------
January 3, December 28,|| January 26, December 30,December 31, January 1,
1998 1996 (a) || 1996 1995 1994 1994
----------- ------------|| ----------- ----------- ----------- -----------
(In Millions Except || (In Millions)
Per Share Data) ||
<S> <C> <C> || <C> <C> <C> <C>
OPERATING DATA: ||
Net sales ....................................... $2,065.2 $1,645.5 || $101.7 $1,578.6 $1,599.7 $1,650.1
Gross profit .................................... 1,177.2 871.3 || 46.8 831.8 894.2 931.5
Restructuring charges ........................... - - || - - - 120.1
Loss on impairment of Salty Snacks business ..... - - || - 86.5 - -
Income (loss) from continuing operations ........ 141.4 70.1 || (25.5) (137.9) 46.4 (67.6)
Income tax expense (benefit) .................... 45.2 14.0 || - (0.5) (1.1) (22.3)
Discontinued operations: ||
Income from operations of discontinued Frozen ||
Food businesses, net of tax ................ - - || - 7.4 3.4 0.6
Gain on disposal of Frozen Food businesses, ||
net of tax ................................. - - || 18.9 - - -
Extraordinary item: ||
Loss on early extinguishment of debt, ||
net of tax ................................. 5.4 1.9 || - - - -
Net income (loss) ............................... $ 57.0 $ 15.8 || $ (6.5) $ (158.3) $ (23.0) $ (147.2)
||
Basic Net Income per Share: ||
Income from continuing operations ||
before extraordinary item .................. $ 0.80 $ 0.24 ||
Extraordinary item .......................... 0.07 0.03 ||
--------- --------- ||
Net income .................................. $ 0.73 $ 0.21 ||
========= ========= ||
Weighted Average Shares Outstanding ............. 77.6 75.2 ||
========= ========= ||
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Keebler Foods Company || UBIUS
------------------------|| -----------------------------------------------
Forty-Eight || Four Year Ended
Year Ended Weeks Ended || Weeks Ended -----------------------------------
January 3, December 28,|| January 26, December 30,December 31, January 1,
1998 1996 (a) || 1996 1995 1994 1994
----------- ------------|| ----------- ----------- ----------- -----------
(In Millions Except || (In Millions)
Per Share Data) ||
<S> <C> <C> || <C> <C> <C> <C>
OTHER DATA: ||
EBITDA, as adjusted (b) ......................... $ 202.1 $ 119.6 || $ (23.5) $ (93.3) $ 89.5 $ 98.4
Depreciation and amortization (excluding items ||
related to discontinued operations) ......... 60.7 49.5 || 2.0 44.6 43.1 45.9
Capital expenditures (excluding expenditures ||
related to discontinued operations) ......... 48.4 29.4 || 3.2 54.2 54.6 30.6
||
CASH FLOW DATA: ||
Cash Provided from (Used by) ||
Operating activities ........................ $ 218.3 $ 53.2 || $ (0.4) $ (61.4) $ (17.4) $ 22.0
Investing activities ........................ (41.5) (130.1) || 65.2 (52.6) (45.9) (92.1)
Financing activities ........................ (161.6) 86.8 || (65.7) 104.4 69.4 58.3
--------- --------- || --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents $ 15.2 $ 9.9 || $ (0.9) $ (9.6) $ 6.1 $ (11.8)
========= ========= || ========= ========= ========= =========
- ---------------------------------------------
<FN>
(a) Includes the operating results of Sunshine from acquisition date of June 4, 1996 through December 28, 1996. Other matters
affecting comparability are detailed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(b) EBITDA, as adjusted, is defined as income (loss) from continuing operations before interest, taxes, depreciation, amortization,
and restructuring charges (gains).
</FN>
</TABLE>
<TABLE>
<CAPTION>
As of || As of
------------------------|| --------------------------------------------------
January 3, December 28,|| January 26, December 30, December 31, January 1,
1998 1996 || 1996 1995 1994 1994
----------- ------------|| ----------- ----------- ----------- -----------
(In Millions) || (In Millions)
<S> <C> <C> || <C> <C> <C> <C>
BALANCE SHEET DATA: ||
Cash and cash equivalents ....................... $ 27.2 $ 12.0 || $ 2.1 $ 3.0 $ 12.5 $ 6.4
Total assets .................................... 1,042.9 1,102.1 || 849.1 926.9 1,001.2 1,043.0
Due to affiliate ................................ -- -- || 105.0 108.0 551.6 872.7
Total debt (including capital leases) ........... 298.8 457.9 || 371.4 437.6 333.2 263.8
Shareholders' equity (deficit) .................. 222.0 165.1 || 45.3 51.8 (234.9) (511.9)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SET FORTH BELOW IS A DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER
30, 1995. THE YEAR ENDED DECEMBER 28, 1996 INCLUDES BOTH THE FORTY-EIGHT WEEKS
OF KEEBLER FOODS COMPANY UNDER CURRENT MANAGEMENT AND THE FOUR WEEKS OF UBIUS
UNDER FORMER MANAGEMENT. THE 1995 FINANCIAL RESULTS INCLUDE FINANCIAL
INFORMATION RELATING TO THE SALTY SNACKS BUSINESS AND PRESENTS THE FROZEN FOODS
BUSINESSES AS A DISCONTINUED OPERATION (BOTH DEFINED ON PAGE F-11 OF THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS), BOTH OF WHICH WERE SOLD OR
LIQUIDATED BY UBIUS PRIOR TO THE ACQUISITION OF UBIUS BY INFLO. THE FOLLOWING
DISCUSSION OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES SHOULD
BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER
FOODS COMPANY AND THE RELATED NOTES THERETO APPEARING ELSEWHERE.
7
<PAGE>
RESULTS OF OPERATIONS
MATTERS AFFECTING COMPARABILITY
The Company's fiscal year consists of thirteen four week periods (fifty-two
or fifty-three weeks) and ends on the Saturday nearest December 31. The 1997
fiscal year consists of fifty-three weeks. As a result of the Keebler
acquisition, which closed on the last day of the first four week period of 1996,
the fiscal year for 1996 consisted of the forty-eight weeks ended December 28,
1996. The 1995 fiscal year of the predecessor company was comprised of fifty-two
weeks.
The Company's operating results for the forty-eight weeks ended December 28,
1996 have been combined with the operating results of the predecessor company
for the four weeks ended January 26, 1996 to compare the year ended December 28,
1996 to the years ended January 3, 1998 and December 30, 1995. The Company's
operating results for the year ended December 28, 1996 include the operating
results of Sunshine from the acquisition date of June 4, 1996, whereas the year
ended January 3, 1998 includes the operating results of Sunshine for the entire
year. Additionally, the Company's operating results have been restated to
reflect the Merger as if it had been effective January 26, 1996.
For the year ended December 30, 1995, the financial results of the
predecessor company include the operating results of the Salty Snacks business.
The Salty Snacks business was liquidated by prior management in connection with
the Keebler acquisition. The 1995 results of operations include net sales of
$135.7 million and a loss from operations of $25.6 million related to the Salty
Snacks business. The 1995 operating results for the Salty Snacks business
excluded an allocation of the fixed portion of selling, distribution, and
general administrative expenses. In addition, the December 30, 1995 financial
results of the predecessor company also include the results of operations of the
Frozen Food businesses presented as a discontinued operation.
The Company's results of operations, expressed as a percentage of net sales,
for the last three years ended January 3, 1998, December 28, 1996, and December
30, 1995 are set forth below:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES ....................................................... 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of sales................................................. 43.0 47.5 47.3
Selling, marketing, and administrative expenses............... 49.7 49.6 56.0
Loss on impairment of Salty Snacks business .................. -- -- 5.5
Other......................................................... 0.5 0.4 (0.1)
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................ 6.8 2.5 (8.7)
INTEREST EXPENSE, NET........................................... 1.6 2.2 1.8
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
EXPENSE...................................................... 5.2 0.3 (10.5)
Income tax expense............................................ 2.2 0.8 --
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM ........................................................ 3.0 (0.5) (10.5)
DISCONTINUED OPERATIONS:
Income from operations of discontinued Frozen Food businesses,
net of tax.................................................. -- -- 0.5
Gain on disposal of discontinued Frozen Food businesses,
net of tax ................................................. -- 1.1 --
-------------- -------------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........................ 3.0 0.6 (10.0)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of tax.............. 0.3 0.1 --
-------------- -------------- --------------
NET INCOME (LOSS)............................................... 2.7% 0.5% (10.0)%
============== ============== ==============
</TABLE>
8
<PAGE>
COMPARISON OF FISCAL 1997 TO 1996
NET SALES. Net sales of $2,065.2 million in 1997 were $318.0 million, or
18.2%, higher than net sales of $1,747.2 million in 1996. The growth in net
sales for 1997 was achieved through incremental sales from both the Sunshine
acquisition and increased volumes. Sunshine results for 1996 were only included
from the acquisition date of June 4, 1996. In 1996, net sales of Sunshine for
the twenty-two weeks ended June 4, 1996 were $229.8 million. Sunshine net sales,
in a full year-on-year comparison, were 27.3% and 29.6% of total Company net
sales in 1997 and 1996, respectively. In addition to the incremental revenue
associated with the Sunshine acquisition, increased volumes in 1997 provided
4.5% growth in net sales over the prior year. The volume growth was achieved
through emphasis on more profitable cookie and cracker products, while
discontinuing or repositioning less strategic products, and the introduction of
new products and line extensions.
GROSS PROFIT. Gross profit in 1997 of $1,177.2 million was $259.0 million
higher than the prior year and 4.5 percentage points better as a percent of net
sales. The increase in gross profit in 1997 was due to higher sales, lower
commodity and package material prices, and the implementation of cost reduction
and productivity programs. Of the total improvement, approximately 64.5% was
attributed to incremental sales associated with both the Sunshine acquisition
and increased volume. The balance of the improvement was achieved through a more
profitable sales mix and cost savings and productivity improvements achieved
mainly through further automation of the manufacturing facilities and higher
capacity utilization attributed to streamlining the manufacturing facilities.
The shift toward higher margin brands benefited gross profit by $11.8 million
compared to the prior year. Also contributing to the increase in gross profit in
1997 were lower prices paid for raw materials, particularly for flour and
soybean oil, and lower prices paid for package materials, primarily for cartons,
corrugated cardboard, and flexible film.
SELLING, MARKETING, AND ADMINISTRATIVE EXPENSES. Selling, marketing, and
administrative expenses for 1997 of $1,026.2 million, or 49.7% of net sales,
increased $160.0 million from 1996, but remained relatively stable as a percent
of net sales. Spending rose in 1997 due to both the impact of higher sales and
increased marketing expense. The impact of higher sales contributed $126.9
million to the increase in selling, marketing, and administrative expenses.
Marketing expense represented 23.8% of net sales in 1997 compared to 22.2% in
1996. The higher spending rate in 1997 was due to increased brand-building
national advertising and consumer promotions which were up $29.2 million over
the prior year. The increased spending as a result of these factors, along with
inflation, was offset by the impact of higher volumes in a more efficient,
relatively fixed cost, selling and distribution network. Therefore, selling,
marketing, and administrative expenses as a percent of net sales remained
comparable to the prior year.
OTHER. Other expense for 1997 was $2.3 million, or 32.0%, higher than 1996
due to higher bank fees and amortization of intangibles. Bank fees in 1997 were
higher than the prior year due to several amendments to the Company's financing
agreement. Other expense for 1997 included a full year of amortization of
trademarks and goodwill recorded as part of the Sunshine acquisition compared to
only twenty-eight weeks in 1996.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations
of $141.4 million was $96.7 million higher than 1996. The improvement was
attributed to a 18.2% increase in net sales driven by volume growth compounded
by enhanced gross margins resulting from a more profitable mix, cost reductions,
and improved productivity. Total benefits realized more than offset incremental
marketing and amortization expense.
INTEREST EXPENSE. Interest expense of $33.8 million for 1997 was $4.5
million lower than in 1996, primarily due to a lower average debt balance in
1997. The decrease in the average debt balance was the result of principal
pre-payments of $113.8 million on the term loans and a $29.0 million pre-payment
of the Seller Note. In addition, the weighted average interest rate for 1997 was
0.28 percentage points lower than the 1996 weighted average rate.
INCOME TAXES. Income taxes for the year were provided at an effective tax
rate of 42%. The effective tax rate exceeded the statutory rate due to
nondeductible expenses, principally amortization of intangibles, including
trademarks, trade names, and goodwill. In 1996, the effective tax rate for the
forty-eight weeks ended December 28, 1996 was 44.2% and was higher than the 1997
rate due to a preliminary estimate of nondeductible expenses. Income tax expense
was not provided for during the first four weeks of 1996. As part of the Keebler
acquisition, the
9
<PAGE>
Company adjusted the valuation allowance on deferred taxes by $25.1 million to
reflect the elimination of certain deferred tax assets revalued in the purchase
price allocation. The Company carried a deferred tax valuation allowance of
$84.4 million at January 3, 1998 and December 28, 1996 to provide for the
uncertainty in realizing the deductibility of deferred tax assets recognized.
Pursuant to the terms of the Keebler acquisition, the predecessor company
retained the right to use the net operating losses for potential carrybacks. Any
unused operating losses are then available to Keebler, but are significantly
restricted under current tax law. Therefore, all net operating loss
carryforwards have been fully reserved due to the uncertainty of their
realization.
DISCONTINUED OPERATIONS. In 1995, the predecessor company adopted plans to
discontinue the operations of the Frozen Food businesses, and in the first four
weeks of 1996, a gain of $18.9 million, net of income taxes, was recognized on
the disposal of the Frozen Food businesses.
EXTRAORDINARY ITEM NET OF INCOME TAXES. In 1997 and 1996, Keebler recorded
extraordinary charges net of tax of $5.4 million and $1.9 million, respectively.
In 1997, $3.8 million of the extraordinary charges, net of tax, related to the
write-off of debt issuance costs associated with the early retirement of the
term loans. An additional $1.6 million net of tax extraordinary charge was
recorded due to a loss on the early extinguishment of the Seller Note entered
into at the time of the Keebler acquisition. In 1996, the $1.9 million
extraordinary charge, net of tax, related to the write-off of debt issuance
costs associated with the $125.0 million early extinguishment of increasing rate
notes.
NET INCOME (LOSS). Net income of $57.0 million in 1997 was $47.7 million
higher than net income of $9.3 million for 1996. The substantial growth in net
income was the result of increased volume, the inclusion of the Sunshine
business for the entire year, improved gross margins, and savings achieved by
leveraging the fixed cost structure of the sales and distribution network.
COMPARISON OF FISCAL 1996 TO 1995
NET SALES. Net sales in 1996 increased $168.6 million, or 10.7%, over 1995.
The 1996 net sales included Sunshine revenues of $291.2 million, while net sales
in 1995 included sales of the Salty Snacks business of $135.7 million. After
adjusting for these changes in the Company's business, the year-on-year sales
increase was up $13.1 million. Along with achieving this growth, the Company
also shifted its sales focus to more profitable products. The new focus was
accomplished through selected price increases on Keebler branded cookie and
cracker products, a more targeted marketing emphasis, new products, and the
discontinuation of weaker products. While volumes in 1996 were relatively flat
compared to volumes in 1995, higher revenues were achieved through these changes
in product mix and selected price increases. Temporary volume decreases in sales
to convenience stores, associated with a change in the selling organization and
product discontinuations, were offset by volume gains from new products and
broadened distribution.
GROSS PROFIT. Gross profit as a percentage of net sales for 1996 was 52.6%
compared to 52.7% in 1995. While gross margins were down slightly year-on-year,
this belies the significant improvements that were achieved. The change in sales
mix noted above, resulted in an emphasis on more profitable volume. However, the
value-added products emphasized as part of the 1996 sales strategy carried
higher production costs than the products sold in 1995. The impact on gross
profit of this change in sales mix along with higher flour prices contributed to
higher cost of sales in 1996 versus 1995. Gross profit margins in 1996 also
reflect the inclusion of Sunshine products, which historically carried a lower
gross margin than Keebler products. The impact of higher costs was more than
fully offset by increasing capacity utilization, cost reductions at the
bakeries, as well as lowering scrap levels and achieving a more balanced
production. In addition, reductions in bakery overhead staffing and a more
efficient balancing of internal and co-packing arrangements achieved a lower
cost of production.
SELLING, MARKETING, AND ADMINISTRATIVE EXPENSES. Selling, marketing, and
administrative expenses decreased $18.3 million and improved by 6.4 percentage
points as a percent of net sales in 1996 compared to 1995. Included in 1996
expenses were selling, marketing, and administrative expenses of $131.9 million
directly attributable to the Sunshine business; while 1995 included expenses of
$87.4 million directly associated with the Salty Snacks business (excluding
allocation of the fixed portions of selling, distribution, and administrative
expenses). Excluding these influences, selling, marketing, and administrative
expenses decreased in 1996 compared to 1995 by $62.8
10
<PAGE>
million. The improvement was principally accomplished through a targeted
marketing plan behind Keebler products and Keebler's cost reduction program to
rationalize the selling and administrative cost structure. In 1996, the
Company's focus on spending for trade promotions at the store level resulted in
higher trade allowances which were more than offset by the $49.5 million
decrease in national advertising and consumer promotions. The cost reductions in
the selling and administrative structures were achieved primarily through
headcount reductions of approximately 1,740 and changing from a relatively
higher cost step-van selling organization to independent distributors to serve
the convenience store channel. A decrease in research and development costs of
$9.6 million was primarily attributed to headcount reductions, more focused new
product programs in 1996, and lower project activity due in part to the
liquidation of the Salty Snacks business prior to the Keebler acquisition. The
cost reductions more than offset increased administrative expenses of management
incentives and increased depreciation as a result of the Keebler and Sunshine
acquisitions.
OTHER. Other income and expense for 1996 was $7.2 million compared to $1.4
million of income for 1995. Other expense in 1996 consisted of $5.2 million of
amortization resulting from both the Keebler and Sunshine acquisitions and bank
service charges. In 1995, other income and expense consisted of $1.7 million of
amortization expense, $1.4 million of miscellaneous expenses and bank service
charges, and other income of $4.5 million representing the gain on the sale of
interests in certain logos, trade names, trademarks, and service marks
registered or pending registration in Australia, New Zealand, Asia, and Europe.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations
was $44.7 million in 1996, an improvement of $182.5 million over the loss from
continuing operations for 1995. After adjusting the 1995 net operating loss of
$137.9 million for the $25.6 million loss in the Salty Snacks business and the
impairment write down of $86.5 million associated with that business, the
earnings improvement in 1996 over 1995 was $70.5 million. The turnaround
resulted from improved gross margins on Keebler brands, more efficient marketing
expenditures, and cost savings achieved in sales and distribution and corporate
overhead. The cumulative savings from these initiatives more than offset
incremental depreciation and amortization expense totaling $9.7 million recorded
as a result of the Keebler and Sunshine acquisitions.
INTEREST EXPENSE. For 1996, net interest expense was $38.4 million compared
to $28.3 million in 1995. The increase was due to the amortization of debt
issuance costs and higher overall borrowings carrying a higher average interest
rate as compared to the prior year.
INCOME TAXES. The Company provided for income taxes at an effective tax rate
of 44.2% for the forty-eight weeks ended December 28, 1996. The predecessor
company did not provide for any income tax expense for the four weeks ended
January 26, 1996. The effective tax rate was higher than the statutory rate
because of nondeductible expenses (principally, amortization of intangibles,
including trademarks, trade names, and goodwill). In 1995, there was no current
provision for income taxes due to operating losses incurred and the inability to
carryback the losses to recover taxes paid in prior years. As part of the
Keebler acquisition, the Company adjusted the valuation allowance on deferred
taxes by $25.1 million to reflect the elimination of certain deferred tax assets
revalued in the purchase price allocation. The deferred tax valuation allowance
of $84.4 million at December 28, 1996 provided for the uncertainty in realizing
the deductibility of deferred tax assets recognized. The predecessor company,
pursuant to the terms of the Keebler acquisition, retained the right to use the
net operating losses for potential carrybacks. Any unused operating losses are
then available to Keebler, but are significantly restricted under current tax
law. Therefore, all net operating loss carryforwards have been fully reserved
due to the uncertainty of their realization.
DISCONTINUED OPERATIONS. During 1995, the predecessor company decided to
dispose of the Frozen Food businesses and, therefore, presented the operations
of those businesses as a discontinued item in the statement of operations. In
the first four weeks of 1996, a gain of $18.9 million net of income taxes on the
disposal of the Frozen Food businesses was recognized.
EXTRAORDINARY ITEM NET OF INCOME TAXES. A before-tax extraordinary loss of
$3.2 million on the early extinguishment of debt was recorded in the second
quarter of 1996. The loss consisted primarily of the write-off of unamortized
bank fees incurred when the Company replaced the Keebler acquisition bridge loan
with the Notes. The tax benefit on the extraordinary loss was $1.3 million
resulting in an after-tax loss of $1.9 million.
11
<PAGE>
NET INCOME (LOSS). Net income of $9.3 million for 1996 represented a
substantial improvement over the $158.3 million net loss for the prior year. The
improvement was attributable to operating improvements, the divestiture of the
unprofitable Salty Snacks business, and the recognized gain of $18.9 million on
the disposition of the Frozen Food businesses.
LIQUIDITY AND CAPITAL RESOURCES
A condensed cash flow statement of the Company follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
-------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED FROM (USED BY)
Operating activities........................... $ 218.3 $ 52.8 $ (61.4)
Investing activities........................... (41.5) (64.9) (52.6)
Financing activities........................... (161.6) 21.1 104.4
-------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. $ 15.2 $ 9.0 $ (9.6)
============== ============= =============
</TABLE>
CASH FLOW FOR 1997
During 1997, cash provided from operating activities was $218.3 million. The
primary contributors to the positive cash flow for the year were net earnings of
$57.0 million, a lower investment in trade accounts receivable, and reduced
funding of current liabilities and income taxes. Improved accounts receivable
collection procedures provided $38.2 million of working capital. The reduced
funding of current liabilities was attributable primarily to the timing of
payments, while the increase in income taxes payable was attributable to a $47.7
million increase in earnings over the prior year. Partially offsetting these
benefits was spending on plant and facility closing costs and severance and the
payment of an arbitration award. Spending on plant and facility closing costs
and severance relating to exit costs associated with the Keebler and Sunshine
acquisitions, although down from the prior year, accounted for $13.7 million of
cash used by operations for the year ended January 3, 1998. Spending on plant
and facility closing costs and severance is expected to conclude by the end of
1998, with the exception of noncancellable lease obligations which are expected
to continue until 2004. In addition, the Company paid an arbitration award
regarding a contract production arrangement, which was entered into by the
predecessor company, in the amount of $6.8 million plus legal fees.
Cash used by investing activities of $41.5 million for 1997 was primarily
used to fund capital expenditures. Capital spending of $48.4 million was made
principally to enhance, update or realign the existing production lines, provide
distribution and production efficiencies, and to achieve near-term cost savings.
Proceeds received from asset disposals of $7.0 million partially offset capital
expenditures. The sale of the Santa Fe Springs plant accounted for $3.6 million
of the year-to-date proceeds, with the remainder of the proceeds provided mainly
from the sale of trucks and machinery and equipment. The Company continues to
carry the Atlanta, Georgia manufacturing facility as an asset held for sale and
expects the disposition to occur before the end of 1998 without a significant
gain or loss.
Cash used by financing activities in 1997 was $161.6 million. In 1997, the
Company entered into an amendment and restatement of the Credit Agreement,
proceeds from which were used to extinguish existing term loans under the Credit
Agreement of $153.6 million. The extinguishment was funded primarily by a draw
down on the revolving loan facility and $109.8 million under a new term loan, in
each case under the Credit Agreement. During 1997, the draw down on the
revolving loan facility was completely repaid. Additionally, in the fourth
quarter of 1997, the Company extinguished $29.0 million of debt related to the
Seller Note and made $70.0 million in principal pre-payments on the term loan
under the Credit Agreement using existing cash resources. Scheduled principal
payments of $18.7 million were made during the year on the term loan and other
debt.
12
<PAGE>
CASH FLOW FOR 1996 AND 1995
Cash provided from operating activities increased $114.2 million in 1996
over the cash used in operations in 1995. The significant increase reflects the
net earnings improvement along with improved working capital management.
Adjusting the 1995 net loss of $158.3 million by both the $86.5 million loss
recorded on the impairment of the Salty Snacks business and the Salty Snacks
business operating loss of $25.6 million, yields a 1995 net loss of $46.2
million compared to 1996 net income of $9.3 million. The net earnings
improvement of $55.5 million was achieved through increased revenues attributed
to price increases, a more profitable sales mix, and cost reductions. Lower
costs resulted from lower fixed overhead, reduced selling, distribution, and
administrative expense resulting from headcount reductions, and more effective
marketing spending. The improved cash provided by working capital resulted from
a sustained improvement in cash collections of accounts receivable and higher
accounts payable. The additional cash provided from working capital more than
funded the combined $41.3 million of spending on plant and facility closing
costs and severance, as a result of actions in connection with the Keebler and
Sunshine acquisitions. Keebler believes that spending on plant and facility
closing costs and severance should be substantially completed over the next two
years. Only noncancellable lease obligations are expected to exceed such
two-year time frame.
Cash used by investing activities was $64.9 million in 1996 compared to
$52.6 million in 1995. The cash used in 1996 was directly attributable to the
$142.7 million used to finance the Sunshine acquisition. Offsetting this use of
cash was the receipt of $32.6 million working capital adjustment paid by UB
Investments (Netherlands) B.V. in connection with the Keebler acquisition and a
$67.7 million source of cash received by the predecessor company resulting from
the disposition of the Frozen Food businesses. Capital expenditures were $32.6
million and $55.4 million in 1996 and 1995, respectively. In 1996 under current
management, capital projects were mostly designed to generate near-term cost
savings and to complete the investment in improved management information
systems. Capital expenditures in 1996 were down from the prior years reflecting
the near completion of the installation of the Company's SAP R/3 management
information system and tighter restrictions on additional capital expenditures.
The Company believes that the capital expenditure program will continue at a
level sufficient to support its strategies and operating needs.
Cash flow provided from financing activities decreased $83.3 million in 1996
from 1995. In 1996, the $21.1 million cash provided from financing activities
was comprised of $220.0 million in long-term debt borrowings of which $95.0
million was used to finance the Sunshine acquisition. An additional $125.0
million of borrowings represents the issuance of the Notes which was done to
refinance the bridge loan used to finance the Keebler acquisition. Draw downs
and repayments on the revolving loan facility were $37.2 million of which $19.0
million was used to finance a portion of the Sunshine acquisition. The remaining
$18.2 million was used to finance working capital requirements. Offsetting these
sources was $63.3 million paid by the predecessor company to settle commercial
paper and revolving credit obligations and $2.4 million of principal payments on
equipment obligations. The cash provided from financing activities of $104.4
million in 1995 was through commercial paper borrowings used to finance
operating losses, capital expenditures, and cash spent on restructuring
initiatives.
LIQUIDITY
The Company's liquidity in 1997 and 1996 was provided from a revolving loan
facility. In 1996 available borrowings under the revolving loan facility were
$155.0 million which was reduced to $140.0 million in 1997. Borrowings under the
revolving loan facility in 1997 and 1996 were $32.8 million and $37.2 million,
respectively, all of which had been repaid as of January 3, 1998 and December
28, 1996. In 1995, borrowings for the predecessor company were provided by a
$200.0 million commercial paper program and a revolving credit agreement. Both
the commercial paper program and revolving credit agreement were no longer
available after the Keebler acquisition.
Capital expenditures for 1998 are expected to be approximately $50.0
million, up nearly $2.0 million from 1997. The majority of capital spending in
1998 will be used to increase the automation in production and distribution
facilities to obtain cost savings. The Company anticipates that capital
expenditures will be funded from cash provided by working capital.
13
<PAGE>
The Company historically has not paid dividends, currently does not
anticipate paying dividends, and intends to retain all future earnings to fund
the development and growth of the business. The existing Credit Agreement and
the Notes place limitations on the Company's ability to pay dividends or make
other distributions on its common stock. Additionally, the Credit Agreement
requires the Company to meet certain financial covenants including net worth;
earnings before interest, taxes, depreciation, and amortization; and cash flow
and interest coverage ratios. In 1997 and 1996, the Company met all financial
covenants in all of its financing agreements. Total debt was $298.8 million,
$457.9 million, and $437.6 million as of January 3, 1998, December 28, 1996, and
December 30, 1995, respectively. Current maturities on the total debt
outstanding were $26.4 million, $18.6 million, and $286.5 million as of such
respective dates. Cash and cash equivalents on January 3, 1998, December 28,
1996, and December 30, 1995 were $27.2 million, $12.0 million, and $3.0 million,
respectively.
Concurrent with the Offering, Bermore exercised a warrant in exchange for
6,135,781 shares of common stock. The exercise of the warrant resulted in the
Company receiving $19.8 million of cash proceeds on February 3, 1998. At the
time of the Offering, the Company was also required to make an offer to the
holders of the Notes to purchase the Notes at 101% of the principal amount. None
of the holders sold into the change of control offer on the Notes. The Company
believes that available cash, as well as existing credit facilities, are
sufficient to meet the Company's normal operating requirements for the
foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective in fiscal year 1998. The new statement
establishes standards for reporting and the display of comprehensive income and
its components (revenues, expenses, gains, and losses) in the financial
statements. The statement requires all items recognized under accounting
standards as components of comprehensive income be reported in a financial
statement displayed with the same prominence as other financial statements. The
Company has not yet determined the impact the new statement may have on
disclosures in the consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective in fiscal year
1999. The new statement revises standards for public companies to report
information about segments of the business and also requires disclosure of
selected segment information in quarterly financial reports. The statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has not yet determined the
impact the new statement may have on disclosures in the consolidated financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective in fiscal
year 1998. The new statement improves disclosures about pensions and other
postretirement benefits to provide information to analyze: the benefit
obligation, the fair value of the plan assets, and changes to the obligation and
fair value of plan assets, including unrecognized gains and losses. In addition,
the statement provides information on the quality of earnings, including
recognized and unrecognized amounts used when projecting benefit costs and
earnings of future periods. The Company has not yet determined the impact the
new statement may have on disclosures in the consolidated financial statements.
The FASB also issued certain other disclosure-related accounting
pronouncements during 1997. While these new statements are effective for future
reporting periods, the Company does not anticipate they will have any
significant impact on the consolidated financial statements.
SEASONALITY
The Company's net sales, net income, and cash flows are affected by the
timing of new product introductions, promotional activities, price increases,
and a seasonal sales bias toward the second half of the year due to events such
as back-to-school, Thanksgiving, and Christmas. The relative mix between cookie
and cracker sales varies throughout the year with stronger cracker sales in the
last quarter of the calendar year.
14
<PAGE>
SELF INSURANCE
The Company purchases insurance coverage for worker's compensation, general,
product, and vehicle liability maintaining certain levels of retained risk
(self-insured portion). Potential losses relating to claims under the
self-insured portion of the policies are accrued in accordance with the
requirements of SFAS No. 5, "Accounting for Contingencies." There are no
unasserted claims that require a reserve or disclosure in accordance with SFAS
No. 5.
FORWARD-LOOKING STATEMENTS
When used in this discussion, the words "believes" and "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, over which the Company has no
control, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligations to republish revised forward-looking statements to
reflect events or circumstances after the date thereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company, in this report, as
well as the Company's periodic reports filed with the Securities and Exchange
Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index to Financial Statements and Financial Statement Schedule
on F-1 for the required information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company:
SAM K. REED, 51. Mr. Reed has been the President, Chief Executive Officer,
and Director of the Company since the Keebler acquisition in January 1996. Mr.
Reed has twenty-four years of experience in the snack and baking industries.
From January 1994 to January 1995 he served as Chief Executive Officer of
Specialty Foods Corporation's $450 million Western Bakery Group division. Prior
to that, he was President and Chief Executive Officer of Mother's Cake and
Cookie Co. from 1991 to 1994, and held Executive Vice President positions at
Wyndham Bakery Products from 1988 to 1990 and Murray Bakery Products from 1985
to 1988. Mr. Reed managed a natural foods company from 1984 to 1985, which later
became The Quaker Oats Company's rice cake division. He started his career in
1974 with Oroweat Foods Company where he spent ten years in finance,
manufacturing, and general management. Mr. Reed received a B.A. from Rice
University and an M.B.A. from Stanford University.
DAVID B. VERMYLEN, 47. Mr. Vermylen has been the President-Keebler Brands
since the Keebler acquisition in January 1996. Mr. Vermylen manages Keebler's
branded biscuits, pie crust, and imported products sector. He has twenty-three
years experience in marketing consumer packaged goods including cookies,
cereals, beverages, and convenience foods. In 1995, he served as Chairman,
President, and Chief Executive Officer of Brothers Gourmet Coffee, a publicly
traded specialty beverage manufacturer and retailer. He served as President and
Chief Operating Officer from 1994 to 1995 and Vice President-Marketing from 1991
to 1993 at Mother's Cake and Cookie Co. Mr.
15
<PAGE>
Vermylen spent fourteen years in product management at General Foods from 1974
to 1988 managing a variety of businesses, including serving as Vice President of
Marketing for Post Cereals. Mr. Vermylen was also a founding partner of a
consulting firm specializing in food marketing and grocery distribution. He
holds a B.A. in economics from Georgetown University and an M.B.A. from New York
University.
E. NICHOL MCCULLY, 43. Mr. McCully has been the Chief Financial Officer and
Senior Vice President Finance of the Company since the Keebler acquisition in
January 1996. Mr. McCully has over ten years experience as a senior financial
executive in the food industry, most recently as group Chief Financial Officer
for the Western Bakery Group division of Specialty Foods Corporation from 1993
to 1995. Mr. McCully was Vice President-Finance for Mother's Cake and Cookie Co.
from 1991 until its acquisition by Specialty Foods Corporation in 1993. From
1990 to 1991, he was Vice President-Finance, and from 1988 to 1990, he was
Controller for Spreckels Sugar Co. Prior to entering the food industry, Mr.
McCully held financial management positions with Triad Systems Corporation and
Wells Fargo Leasing Corporation, and he has auditing experience with Arthur
Andersen & Co. Mr. McCully received a B.A. from the University of California at
Berkeley and an M.B.A. from the University of California at Los Angeles. Mr.
McCully is also a Certified Public Accountant.
JACK M. LOTKER, 54. Mr. Lotker has been President-Specialty Products of the
Company since the Keebler acquisition in January 1996. Mr. Lotker has worked in
the food industry for twenty-three years, most recently at Homeland Stores of
Oklahoma from 1988 to 1995. His experience in the baking industry and with DSD
distribution systems includes two years at CPC International as Vice President
and General Manager of Dry Products from 1986 to 1988 and eight years at Arnold
Food Company as Vice President and Group Executive from 1978 to 1986. Mr. Lotker
headed the American Bakers Association Industrial Relations Committee from 1983
to 1986 and has an extensive knowledge of the interaction among food retailing,
wholesale bakery distribution, and unionized bakery operations. Mr. Lotker
received his B.A. from Queens College and his M.B.A. from Long Island
University.
JAMES T. WILLARD, 57. Mr. Willard has been Senior Vice President-Operations
of the Company since July 1996. With thirty-three years experience in the food
industry, Mr. Willard most recently was Senior Vice President at Nabisco Biscuit
Co. from 1993 to 1996, and Senior Vice President-Operations and Technical
Services at Nabisco Specialty Products Division from 1991 to 1993. From 1988 to
1991, Mr. Willard was Senior Vice President-Operations at ALPO Pet Foods, Inc.,
and Mr. Willard was Senior Vice President-North American Operations at Cadbury
Schweppes, Inc. from 1986 to 1988. Prior to those assignments, Mr. Willard held
various positions at Nestle Foods Corporation from 1964 to 1986. These positions
were Vice President-U.S. Chocolate Manufacturing (1983 to 1986), General
Manager-Chocolate Manufacturing (1980 to 1983 and 1975 to 1978), General
Manager-Fruits, Tomatoes & Meats (1978 to 1980), Division Manager-Manufacturing
(1971 to 1975), Assistant Manager-Quality Control (1970 to 1972), and
Microbiologist and Chemist-Regional Laboratory (1964 to 1970). Mr. Willard
received a B.S. from Capital University and an M.S. from Ohio State University.
THOMAS E. O'NEILL, 43. Mr. O'Neill has been Vice President, Secretary, and
General Counsel of the Company since December 1996. Mr. O'Neill has spent more
than twelve years in the food industry, most recently serving as Vice President
and Division Counsel for the Worldwide Beverage Division of The Quaker Oats
Company from December 1994 to December 1996. In that position, Mr. O'Neill was
responsible for all legal matters in both domestic and international markets
concerning the $2 billion division. Mr. O'Neill was Vice President and Division
Counsel of the Gatorade Worldwide Division of The Quaker Oats Company from 1991
through 1994. Prior to joining Quaker Oats in 1985, Mr. O'Neill spent three
years with Winston & Strawn, a law firm based in Chicago. Mr. O'Neill received
both his B.A. and J.D. from the University of Notre Dame. He also completed
additional work in the executive management program at Harvard University's
Graduate School of Business.
JAMES T. SPEAR, 43. Mr. Spear has been Vice President Finance and Corporate
Controller of the Company since July 1995. He originally joined Keebler in
February 1992 as Corporate Controller. Before starting with the Company, Mr.
Spear was Chief Financial Officer of Kirkland & Ellis from 1989 to 1991. From
1979 to 1989, he was with Price Waterhouse as both an auditor and consultant,
mainly with clients in the food industry. Mr. Spear holds a B.A. from Miami
University and an M.B.A. from Indiana University Graduate School of Business.
Mr. Spear is also a Certified Public Accountant.
16
<PAGE>
HARRY J. WALSH, 42. Mr. Walsh has been Vice President-Corporate Planning and
Development of the Company since January 1997, and was the Chief Operating
Officer of Sunshine from June 1996 to January 1997. Mr. Walsh has sixteen years
of experience with baking and snack food companies with DSD systems, most
recently as Vice President for G.F. Industries, Inc. from 1995 to 1996. From
1994 to 1995, he was President and Chief Operating Officer, and from 1993 to
1994, Chief Financial Officer for Granny Goose Foods, Inc. Mr. Walsh served as
Vice President-Operations for Bell Carter Distributing Company from 1992 to
1993, Chief Financial Officer for San Francisco French Bread Co. from 1991 to
1992 and Vice President-Finance for Mother's Cake and Cookie Co. from 1985 to
1991. From 1983 to 1985, he was Vice President-Finance, and from 1981 to 1983,
Controller for Salerno Megowen Biscuit Company. Prior to entering the food
industry, Mr. Walsh was an auditor with Arthur Andersen & Co. Mr. Walsh received
a B.A. from the University of Notre Dame and is a Certified Public Accountant.
All executive officers serve at the pleasure of the Board of Directors.
There is no family relationship between any of the executive officers of the
Company.
The following sets forth the names, ages, other positions and offices held,
and a brief account of the business experience of each of the Company's
directors. Members of the Board of Directors with a term expiring on the date of
the 1999 annual meeting of the shareholders of the Company are Messrs. G.
Anthony Campbell, Amos R. McMullian, Wayne H. Pace, and Sam K. Reed. Members of
the Board of Directors with a term expiring on the date of the 2000 annual
meeting of the shareholders of the Company are Messrs. Franklin L. Burke, C.
Martin Wood III, and Jimmy M. Woodward. Members of the Board of Directors with a
term expiring on the date of the 2001 annual meeting of the shareholders of the
Company are Messrs. Johnston C. Adams, Jr., Robert P. Crozer, Raymond Debbane,
and Sacha Lainovic. Directors can be removed from office only by an affirmative
vote of a majority of holders of common stock. Unless otherwise noted, no
director of the Company serves as a director of any other company whose
securities are registered under the Securities Exchange Act of 1934.
ROBERT P. CROZER, 51. Mr. Crozer was elected Chairman of the Board of
Directors of Keebler in February 1998. Mr. Crozer has been a Director of Keebler
since March 1996. Mr. Crozer has served as Vice Chairman of the Board of
Directors of Flowers since 1989. He joined Flowers in 1973 and has been a
director of Flowers since 1979. Mr. Crozer served as Vice President-Marketing of
Flowers from 1985 to 1989, Corporate Director of Marketing Planning of Flowers
from 1979 to 1985, as well as President and Chief Operating Officer, Convenience
Products Group of Flowers from 1979 to 1989.
SAM K. REED, 51. See "Executive Officers," above.
JOHNSTON C. ADAMS, JR., 49. Mr. Adams was elected Director of Keebler in
February 1998. Mr. Adams has served as Chairman and Chief Executive Officer of
AutoZone, Inc. ("AutoZone") since March 1997. He has been a Director of AutoZone
since 1996. Mr. Adams had been President and Chief Executive Officer of AutoZone
since December 1996, and Vice Chairman and Chief Operating Officer of AutoZone
since March 1996. Previously, in 1995, he was Executive Vice
President-Distribution. From 1990 to 1994, Mr. Adams was a co-owner of Nicotiana
Enterprises, Inc., a company primarily engaged in food distribution. From 1983
to 1990, Mr. Adams was President of the Miami Division of Malone & Hyde, Inc.,
the former parent company of AutoZone.
FRANKLIN L. BURKE, 56. Mr. Burke was elected Director of Keebler in February
1998. Mr. Burke has been a Director of Flowers since 1994 and a private investor
since 1991. Mr. Burke is also a Director of William Bird & Co. He is the former
Senior Executive Vice President and Chief Operating Officer of Bank South Corp.
(OTC), Atlanta, Georgia, and the former Chairman and Chief Executive Officer of
Bank South, N.A., the principal subsidiary of Bank South Corp. From 1993 through
1994, Mr. Burke was employed as an advisor by the J.B. Fuqua Foundation, Inc.
G. ANTHONY CAMPBELL, 45. Mr. Campbell was elected Director of Keebler in
February 1998. Mr. Campbell has been General Counsel and Secretary of Flowers
since January 1985. He has been a Director of Flowers since 1991. Mr. Campbell
joined Flowers in 1983 as Assistant General Counsel.
17
<PAGE>
RAYMOND DEBBANE, 43. Mr. Debbane has been a Director of Keebler since May
1996. Mr. Debbane has served as the President of The Invus Group, Ltd.
("INVUS"), the U.S. investment advisor for Artal, since 1985. From 1982 to 1985,
Mr. Debbane was a Manager in the Paris office of The Boston Consulting Group,
where he was employed since 1979. Since May 1997, Mr. Debbane has been a
director of Artal Group S.A., a privately-held Luxembourg company and the parent
company of Artal.
SACHA LAINOVIC, 41. Mr. Lainovic has been a Director of Keebler since March
1996. Mr. Lainovic has served as an Executive Vice President of INVUS since
1985. Mr. Lainovic was a Manager in the Paris office of The Boston Consulting
Group from 1984 to 1985, where he was employed since 1981.
AMOS R. MCMULLIAN, 60. Mr. McMullian has been a Director of Keebler since
March 1996. Mr. McMullian has served as Chief Executive Officer of Flowers since
April 1981 and Chairman of the Board of Directors of Flowers since January 1985.
Since joining Flowers in 1963, Mr. McMullian has also served as assistant
controller, data processing coordinator, assistant plant manager, plant manager,
plant president, regional vice president, and President of the Bakery and Snack
Groups. In 1976, he was appointed President and Chief Operating Officer of
Flowers and was elected to the Board of Directors of Flowers. He served as Vice
Chairman of the Board of Directors of Flowers from 1984 to 1985.
WAYNE H. PACE, 51. Mr. Pace was elected Director of Keebler in February
1998. Mr. Pace has served as Executive Vice President-Chief Financial and
Administrative Officer of Turner Broadcasting Systems, Inc. ("TBS") since
October 1996. From July 1993 until October 1996, Mr. Pace served as Vice
President-Finance and Chief Financial Officer of TBS. Mr. Pace was a partner at
Price Waterhouse from 1981 until he joined TBS in July 1993.
C. MARTIN WOOD III, 54. Mr. Wood has been a Director of Keebler since March
1996. Mr. Wood has served as Senior Vice President and Chief Financial Officer
of Flowers since September 1978. Mr. Wood joined Flowers in 1970 as Director of
New Product Development. He was appointed Director of Marketing Services of
Flowers the following year, Director of Finance in 1973, and Vice
President-Finance in 1976. Mr. Wood has been a Director of Flowers since 1975.
JIMMY M. WOODWARD, 37. Mr. Woodward was elected Director of Keebler in
February 1998. Mr. Woodward has served as Treasurer of Flowers since 1997. He
was promoted to Assistant Treasurer in 1990 after joining Flowers as a Tax
Manager in 1985. Prior to his employment at Flowers, Mr. Woodward worked as a
Tax Supervisor at Coopers & Lybrand. Mr. Woodward is also a Certified Public
Accountant.
Messrs. Robert P. Crozer and C. Martin Wood III are brothers-in-law. Messrs.
Raymond Debbane and Sacha Lainovic were elected to the Board of Directors
pursuant to a contractual agreement between Artal and Flowers.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee is responsible for reviewing the Company's accounting
controls and recommending to the Board of Directors the engagement of the
Company's outside auditors. The members of the Audit Committee as of the end of
1997 were Messrs. Robert P. Crozer and Christopher J. Sobecki. In connection
with the Offering, Mr. Sobecki tendered his resignation from the Board of
Directors of the Company. Subsequent to the Offering, the members of the Audit
Committee are Messrs. Johnston C. Adams, Jr. and Wayne H. Pace.
The Compensation Committee is responsible for reviewing and approving the
amount and type of consideration to be paid to senior management. As of the end
of 1997, the members of the Compensation Committee were Messrs. Robert P.
Crozer, Raymond Debbane, and Sam K. Reed. In connection with the Offering, the
Company's Compensation Committee was reconstituted to include Messrs. Johnston
C. Adams, Jr., Franklin L. Burke, Raymond Debbane, and Wayne H. Pace.
The Executive Committee of the Company is empowered to take certain actions
on behalf of the Board of Directors pursuant to powers granted to it by the
Company's By-Laws or by direction of the Board of Directors as authorized from
time to time. The members of the Company's Executive Committee are Messrs. G.
Anthony Campbell, Robert P. Crozer, Raymond Debbane, Amos R. McMullian, and Sam
K. Reed.
18
<PAGE>
The Nominating Committee evaluates and recommends to the Board of Directors
candidates for directors. The members of the Nominating Committee are Messrs.
Franklin L. Burke, Robert P. Crozer, Sacha Lainovic, and C. Martin Wood III.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation that was paid to the
top five executive officers of the Company in 1997 and 1996 (the "Named
Executive Officers") and the number of shares of the common stock underlying
options to purchase shares of the common stock issued pursuant to the 1996 Stock
Purchase and Option Plan for Key Employees of INFLO Holdings Corporation and
Subsidiaries, as amended (the "1996 Stock Option Plan"), that have been granted
to date for services in all capacities to be rendered to the Company. Keebler
paid no remuneration to its current executive officers prior to the Keebler
acquisition.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION AWARDS
------------------------------------------- -------------
SECURITIES
OTHER UNDERLYING
NAME AND SALARY ($) ANNUAL OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR (1) BONUS($) COMPENSATION ($) SARS(#) COMPENSATION($)
------------------ ---- ---------- ------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Sam K. Reed............ 1997 $650,000 $1,098,500 (2) -- $ 4,750 (4)
President and Chief 1996 $650,000 $ 845,000 $167,818 (3) 1,289,813 --
Executive Officer
David B. Vermylen...... 1997 $341,302 $ 355,000 (2) -- $ 4,750 (4)
President - Keebler 1996 $325,000 $ 300,000 $ 66,545 (3) 300,956 --
Brands
E. Nichol McCully...... 1997 $270,010 $ 280,800 (2) -- $ 4,750 (4)
Senior Vice President 1996 $240,000 $ 250,000 $ 77,029 (3) 300,956 --
Finance and Chief
Financial Officer
Jack M. Lotker......... 1997 $260,000 $ 187,200 (2) -- $ 4,750 (4)
President - Specialty 1996 $240,000 $ 211,200 $ 87,650 (3) 300,956 --
Products
James T. Willard....... 1997 $294,008 $ 211,700 (2) -- $ 4,750 (4)
Senior Vice 1996 $280,000 $ 271,581 $121,565 (3) 300,956 --
President - Operations
- ------------
<FN>
(1) Amounts listed for the Named Executive Officers are annual base salaries, including amounts to be deferred in accordance with
any deferred salary option plan of the Company.
(2) Perquisites and other personal benefits, securities, and property in the aggregate do not exceed the threshold reporting level
of the lesser of $50,000 or 10% of total salary and bonus reported for the Named Executive Officers.
(3) Includes amounts reimbursed during the fiscal year for the payment of taxes related to relocation reimbursements. For 1996 the
amounts are: Mr. Reed, $140,515; Mr. Vermylen, $42,330; Mr. McCully, $53,604; Mr. Lotker, $63,496; and Mr. Willard, $95,964.
(4) Represents company matching contributions to the Named Executive Officers' accounts in the Keebler Foods Company Salaried
Savings Plan. Vesting occurs 20% per year over five years, based on years of service.
</FN>
</TABLE>
19
<PAGE>
The table below sets forth certain information with respect to the value of
unexercised options held by the Named Executive Officers at the 1997 fiscal year
end. No options were granted to or exercised by the Named Executive Officers in
fiscal 1997.
<TABLE>
OPTION VALUES AT JANUARY 3, 1998
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-------------------------------------------------- ------------------------------ ------------------------------
<S> <C> <C>
Sam K. Reed....................................... 300,957 / 988,856 6,699,303 / 22,011,934
David B. Vermylen................................. 70,223 / 230,733 1,563,164 / 5,136,117
E. Nichol McCully................................. 70,223 / 230,733 1,563,164 / 5,136,117
Jack M. Lotker.................................... 70,223 / 230,733 1,563,164 / 5,136,117
James T. Willard.................................. 70,223 / 230,733 1,563,164 / 5,136,117
</TABLE>
The Company's principal non-contributory defined benefit plan covers
qualifying salaried and certain hourly-paid employees who have completed twelve
months of service. The Named Executive Officers participate in this plan on the
same basis as do approximately 14,300 other eligible participants. Benefit
amounts are based on years of service and average monthly compensation for the
five highest consecutive years out of the last fifteen years of employment for
salaried employees and some hourly employees. Certain hourly groups can have
different benefit schedules than salaried participants. The following table
illustrates the estimated annual benefits to be paid upon normal retirement at
age 65 to individuals in specified compensation and years of service
classifications. The table does not reflect benefit limitations contained in the
Internal Revenue Code. Pursuant to a separate plan (the "Excess Plan"),
supplemental payments in excess of those limitations will be made to
participants in order to maintain benefits upon retirement at the levels
provided under the defined benefit plan's formula. In addition to the plans
noted above, the Company also maintains an unfunded supplemental retirement plan
for certain former executives. No current Named Executive Officers are covered
by the supplemental plan.
<TABLE>
PENSION PLAN TABLE
<CAPTION>
ESTIMATED ANNUAL NORMAL RETIREMENT BENEFITS
----------------------------------------------------------------------------------
YEARS OF SERVICE AT NORMAL RETIREMENT(1)
COMPENSATION(2) 10 15 20 25 30 35 40
- --------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 400,000........... $ 58,000 $ 87,000 $116,000 $145,000 $174,000 $203,000 $ 232,000
600,000........... 88,000 132,000 176,000 220,000 264,000 308,000 352,000
800,000........... 118,000 177,000 236,000 295,000 354,000 413,000 472,000
1,000,000........... 148,000 222,000 296,000 370,000 444,000 518,000 592,000
1,200,000........... 178,000 267,000 356,000 445,000 534,000 623,000 712,000
1,400,000........... 208,000 312,000 416,000 520,000 624,000 728,000 832,000
1,600,000........... 238,000 357,000 476,000 595,000 714,000 833,000 952,000
1,800,000........... 268,000 402,000 536,000 670,000 804,000 938,000 1,072,000
- ------------
<FN>
(1) Years of service as of January 3, 1998 for the Named Executive Officers were as follows: Mr. Reed, Mr. Vermylen, Mr. McCully,
and Mr. Lotker, approximately 2.0 years, and Mr. Willard, approximately 1.5 years. In addition, a separate agreement between Mr.
Willard and Keebler provides a minimum level of benefit to Mr. Willard based on what he could have been entitled to under his
previous employ.
(2) Compensation includes all amounts shown under the columns entitled "Annual Compensation" in the Summary Compensation Table.
</FN>
</TABLE>
20
<PAGE>
COMPENSATION OF DIRECTORS
As of the end of 1997, directors of the Company received no remuneration for
serving as director. Beginning with fiscal year 1998, no director of the Company
who is also an employee of Keebler or of Flowers, or who is nominated by Artal,
will receive remuneration for serving as a director. The remaining directors,
Messrs. Johnston C. Adams, Jr., Franklin L. Burke, and Wayne H. Pace are
compensated as follows:
A $24,000 annual retainer is paid, together with an attendance fee of $1,000
for each Board of Directors meeting and committee meeting. Committee Chairmen
receive an additional $3,000 annual payment.
In connection with the Non-Employee Director Stock Plan, each of the
non-employee directors was granted 7,500 fully vested options at an exercise
price of $27.44 on February 10, 1998.
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
The Company entered into an employment agreement with Mr. Sam K. Reed on
February 3, 1998 which provides for Mr. Reed's continued employment as the
Company's President and Chief Executive Officer, and continued service as a
director. Mr. Reed's employment agreement has severance terms identical to those
for the other executive officers set forth below. Additionally, the agreement
provides that Mr. Reed's cash compensation and future participation in
management incentive and option plans is to be set by the Compensation Committee
of the Board of Directors, and is based on the compensation of other chief
executive officers of branded food companies comparable to Keebler. The
Compensation Committee is charged with creating or maintaining a package for Mr.
Reed which ranks in the third quartile for chief executives of such companies,
but in no event will his cash compensation be less than its level prior to
entering the Employment and Severance Agreement. Mr. Reed's employment agreement
terminates according to the provisions for termination of the Employment and
Severance Agreements in general, as set forth below.
The other executive officers of the Company (excluding Mr. Reed) have
entered into a termination of employment and change of control agreement (the
"Employment and Severance Agreements") effective February 3, 1998. Each such
Employment and Severance Agreement provides for the continuing employment of the
executive for three years on terms and conditions no less favorable than those
in effect before entering the Employment and Severance Agreement. If the Company
terminates the executive's employment without "cause" or if the executive
terminates his own employment for "good reason" (each as defined in the
Employment and Severance Agreements), at any time during the term, the executive
is entitled to receive continued benefits equal to such employee's annual
compensation (including bonus) and continuation of certain benefits for the
remainder of the term of the Employment and Severance Agreement, but in no event
less than twelve months or, if such termination occurs within two years after a
"change of control" (as defined in the Employment and Severance Agreements), in
no event less than twenty-four months. In addition, amendments to their 1996
Option Agreements also provides that in the event of (i) the death, normal
retirement, or disability of the participant or (ii) termination of the
executive's employment with the Company without "cause" or for "good reason"
(each as defined in the Employment and Severance Agreements), all remaining
unvested options under the 1996 Stock Option Plan will immediately vest with the
employee. Each Employment and Severance Agreement also provide that at the
option of the Company, under certain circumstances, the employee may not compete
for a period of up to one year following termination. Except for the Company's
obligations to make payments to the executive upon a change of control, all
obligations under the Employment and Severance Agreements will terminate after
three years, including the non-competition agreement of the executive.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's on-going Compensation Committee was appointed on February 10,
1998 and is comprised of Messrs. Johnston C. Adams, Jr., Franklin L. Burke,
Raymond Debbane, and Wayne H. Pace. Mr. Debbane was elected to the Company's
Compensation Committee pursuant to a contractual agreement between Flowers and
Artal. Mr. Burke is a member of the Company's Compensation Committee as well as
a Director of Flowers.
21
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
In 1997, the Compensation Committee of the Board of Directors established
salary and bonus levels for the executive officers of the Company, including the
President and Chief Executive Officer, based on a combination of financial
performance and subjective criteria. With respect to salary levels, such levels
were set subsequent to the Committee's determination of the executive officers'
contribution, progress, and development. Bonuses were based on attaining
pre-established levels of earnings before interest, taxes, depreciation, and
amortization and subjective criteria.
Robert P. Crozer, MEMBER
Raymond Debbane, MEMBER
Sam K. Reed, MEMBER AND CHIEF EXECUTIVE OFFICER OF THE COMPANY
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of common stock as of March 17, 1998 by (i) all persons known by the
Company to own beneficially 5% or more of the common stock, (ii) each director
of Company who is a shareholder, (iii) the Chief Executive Officer and each of
the other Named Executive Officers, and (iv) all directors and executive
officers as a group. Unless otherwise indicated, each of the shareholders has
sole voting and investment power with respect to the shares of common stock
beneficially owned by such shareholders.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES (1) COMMON STOCK (1)
- ---------------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Flowers Industries, Inc. (2)............................................. 46,197,466 55.2%
1919 Flowers Circle
Thomasville, Georgia 31757
Artal Luxembourg S.A. (3)................................................ 17,228,729 20.6%
39 Boulevard Royal
Luxembourg City, Luxembourg 2449
Bermore, Limited (4)..................................................... 4,997,770 6.0%
c/o G.F. Industries, Inc.
999 Baker Way, Suite 200
San Mateo, California 94404
Sam K. Reed (5).......................................................... 1,476,119 1.7%
David B. Vermylen (6) ................................................... 310,987 0.4%
E. Nichol McCully (6) ................................................... 310,987 0.4%
Jack M. Lotker (6) ...................................................... 310,987 0.4%
James T. Willard (6)..................................................... 310,987 0.4%
Johnston C. Adams, Jr. (7)............................................... 8,900 --
Franklin L. Burke (7).................................................... 7,500 --
G. Anthony Campbell...................................................... 1,000 --
Robert P. Crozer......................................................... 10,000 --
Wayne H. Pace (7)........................................................ 8,500 --
Jimmy M. Woodward........................................................ 2,000 --
All directors and executive officers as a group
(consisting of 18 persons) (8).......................................... 3,158,207 3.7%
</TABLE>
- ------------
(1) Shares beneficially owned and percentage of ownership are based on
83,730,994 shares of common stock outstanding and exercisable stock options.
(2) Flowers is currently subject to the periodic reporting and other information
requirements of the Securities and Exchange Act of 1934 (the "Exchange
Act"). Flowers' common stock is listed on the New York Stock Exchange.
22
<PAGE>
(3) The parent entity of Artal is Artal Group. The address of Artal Group is the
same as the address of Artal. INVUS serves as Artal's U.S. investment
advisor and receives compensation from Artal that is based in part on the
performance of Artal's U.S. investments. Since 1985, Artal has completed
more than twenty-five acquisitions in the U.S. with INVUS' advice.
(4) Bermore is a privately held Bermuda limited company and the parent of GFI.
(5) Includes 902,869 shares subject to stock options that are currently
exercisable; excludes 386,944 shares subject to stock options that are not
exercisable.
(6) Includes 210,669 shares subject to stock options that are currently
exercisable; excludes 90,287 shares subject to stock options that are not
exercisable.
(7) Includes 7,500 shares subject to stock options that are currently
exercisable.
(8) Includes 2,038,906 shares subject to stock options that are currently
exercisable; excludes 864,174 shares subject to stock options that are not
exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The financial statements listed in the accompanying Index to
Financial Statements and Financial Statement Schedule are filed as
part of this report on pages F-2 to F-28.
2. The financial statement schedule listed in the accompanying Index to
Financial Statements and Financial Statement Schedule is filed as
part of this report on page S-2.
3. The exhibits listed in the accompanying Index to Exhibits are filed
as part of this Form 10-K unless noted otherwise.
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated as of November 20, 1997 related to
the merger of Keebler Corporation with INFLO Holdings Corporation,
with Keebler Foods Company being the surviving corporation.
(c) Exhibits
See Exhibit Index at page i.
(d) Financial Statement Schedule
See Index to Financial Statements and Financial Statement Schedule on
page F-1.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KEEBLER FOODS COMPANY
(Registrant)
/s/ SAM K. REED
----------------------------------------
Sam K. Reed
President and Chief Executive Officer
Date: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 20, 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ SAM K. REED /s/ RAYMOND DEBBANE
- ---------------------------------------------------------- --------------------------------------------------------
Sam K. Reed Raymond Debbane
President, Chief Executive Officer, and Director (Director)
(Principal Executive Officer)
/s/ E. NICHOL MCCULLY /s/ SACHA LAINOVIC
- ---------------------------------------------------------- --------------------------------------------------------
E. Nichol McCully Sacha Lainovic
Senior Vice President and Chief Financial Officer (Director)
(Principal Financial Officer)
/s/ JAMES T. SPEAR /s/ AMOS R. MCMULLIAN
- ---------------------------------------------------------- --------------------------------------------------------
James T. Spear Amos R. McMullian
Vice President Finance and Corporate Controller (Director)
(Chief Accounting Officer)
/s/ JOHNSTON C. ADAMS, JR. /s/ WAYNE H. PACE
- ---------------------------------------------------------- --------------------------------------------------------
Johnston C. Adams, Jr. Wayne H. Pace
(Director) (Director)
/s/ FRANKLIN L. BURKE /s/ C. MARTIN WOOD III
- ---------------------------------------------------------- --------------------------------------------------------
Franklin L. Burke C. Martin Wood III
(Director) (Director)
/s/ G. ANTHONY CAMPBELL /s/ JIMMY M. WOODWARD
- ---------------------------------------------------------- --------------------------------------------------------
G. Anthony Campbell Jimmy M. Woodward
(Director) (Director)
/s/ ROBERT P. CROZER
- ----------------------------------------------------------
Robert P. Crozer
(Director)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Keebler Foods Company and UB Investments US Inc. and Subsidiaries
<S> <C>
FINANCIAL STATEMENTS: Page
----
Report of Independent Accountants....................................................................... F-2
Consolidated Balance Sheets at January 3, 1998 and December 28, 1996.................................... F-3
Consolidated Statements of Operations for the year ended January 3, 1998, the forty-eight weeks
ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30,
1995.................................................................................................. F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the year ended January 3, 1998, the
forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year
ended December 30, 1995............................................................................... F-6
Consolidated Statements of Cash Flows for the year ended January 3, 1998, the forty-eight weeks
ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30,
1995.................................................................................................. F-7
Notes to Consolidated Financial Statements.............................................................. F-8
FINANCIAL STATEMENT SCHEDULE:
Report of Independent Accountants.................................................................... S-1
Schedule II - Valuation and Qualifying Accounts...................................................... S-2
</TABLE>
Note: The consolidated financial statements of the Company listed in the
above index for Keebler Foods Company include the financial
statements of the successor company for the year ended January 3,
1998 and the forty-eight weeks ended December 28, 1996, and the
predecessor company for the four weeks ended January 26, 1996, the
date on which UBIUS was acquired by INFLO, and the year ended
December 30, 1995. The distinction between the successor company's
and the predecessor company's consolidated financial statements has
been made by inserting a double line between such consolidated
financial statements.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY
We have audited the accompanying consolidated balance sheets of Keebler Foods
Company and Subsidiaries as of January 3, 1998 and December 28, 1996 and the
related consolidated statement of operations, shareholders' equity, and cash
flows for the year and forty-eight week period then ended. We have also audited
the consolidated statements of operations, shareholders' equity, and cash flows
of UB Investments US Inc. and Subsidiaries for the four-week period ended
January 26, 1996 and the year ended December 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Keebler Foods
Company and Subsidiaries as of January 3, 1998 and December 28, 1996 and the
consolidated results of operations and cash flows of Keebler Foods Company and
Subsidiaries for the year ended January 3, 1998 and the forty-eight weeks then
ended December 28, 1996 and the consolidated results of operations and cash
flows of UB Investments US Inc. and Subsidiaries for the four week period ended
January 26, 1996 and the year ended December 30, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 18, 1998
F-2
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
JANUARY 3, December 28,
1998 1996
------------------ -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,188 $ 11,954
Trade accounts and notes receivable, net 98,963 137,150
Inventories, net:
Raw materials 25,543 25,296
Package materials 7,306 9,842
Finished goods 78,131 76,054
Other 1,482 1,473
------------------ -------------------
112,462 112,665
Deferred income taxes 42,730 55,929
Other 20,303 19,337
------------------ -------------------
Total current assets 301,646 337,035
PROPERTY, PLANT, AND EQUIPMENT, NET 478,121 486,080
TRADEMARKS AND TRADE NAMES, NET 154,146 158,033
GOODWILL, NET 47,059 48,280
PREPAID PENSION 43,060 43,359
ASSETS HELD FOR SALE 3,742 6,785
OTHER ASSETS 15,077 22,502
------------------ -------------------
Total assets $ 1,042,851 $ 1,102,074
================== ===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
</TABLE>
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
JANUARY 3, December 28,
1998 1996
------------------ -------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 26,365 $ 18,570
Trade accounts payable 126,213 96,754
Other liabilities and accruals 194,923 186,893
Income taxes payable 13,784 -
Plant and facility closing costs and severance 6,900 19,860
------------------ -------------------
Total current liabilities 368,185 322,077
LONG-TERM DEBT 272,390 439,369
OTHER LIABILITIES:
Deferred income taxes 69,417 64,068
Postretirement/postemployment obligations 60,605 56,382
Plant and facility closing costs and severance 15,578 16,124
Deferred compensation 18,669 18,205
Other 15,956 20,708
------------------ -------------------
Total other liabilities 180,225 175,487
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 100,000,000 shares authorized and
none issued) - -
Common stock ($.01 par value; 500,000,000 shares authorized and
77,595,213 and 77,638,206 shares issued, respectively) 776 776
Additional paid-in capital 148,538 148,613
Retained earnings 72,737 15,752
------------------ -------------------
Total shareholders' equity 222,051 165,141
------------------ -------------------
Total liabilities and shareholders' equity $ 1,042,851 $ 1,102,074
================== ===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
</TABLE>
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
KEEBLER FOODS COMPANY || UBIUS
----------------------------------||----------------------------------
Forty-Eight || Four
YEAR ENDED Weeks Ended || Weeks Ended Year Ended
JANUARY 3,1998 December 28,1996||January 26,1996 December 30,1995
----------------- ----------------||----------------- ----------------
<S> <C> <C> ||<C> <C>
||
NET SALES $ 2,065,184 $ 1,645,532 || $ 101,656 $ 1,578,601
||
COSTS AND EXPENSES: ||
Cost of sales 888,031 774,198 || 54,870 746,754
Selling, marketing, and administrative ||
expenses 1,026,245 794,837 || 71,427 884,591
Loss on impairment of Salty Snacks ||
business - - || - 86,516
Other 9,511 6,347 || 857 (1,363)
----------------- ----------------||----------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 141,397 70,150 || (25,498) (137,897)
||
Interest (income) from affiliates - - || (875) (11,376)
Interest (income) (1,191) (450)|| (3) (151)
Interest expense to affiliates - - || 664 11,802
Interest expense 35,038 38,921 || 98 27,976
----------------- ----------------||----------------- ----------------
INTEREST EXPENSE (INCOME), NET 33,847 38,471 || (116) 28,251
----------------- ----------------||----------------- ----------------
||
INCOME (LOSS) FROM CONTINUING OPERATIONS ||
BEFORE INCOME TAX EXPENSE (BENEFIT) 107,550 31,679 || (25,382) (166,148)
Income tax expense (benefit) 45,169 14,002 || - (459)
----------------- ----------------||----------------- ----------------
||
INCOME (LOSS) FROM CONTINUING OPERATIONS ||
BEFORE EXTRAORDINARY ITEM 62,381 17,677 || (25,382) (165,689)
||
DISCONTINUED OPERATIONS: ||
Income from operations of discontinued ||
Frozen Food businesses, net of tax - - || - 7,344
Gain on disposal of Frozen Food ||
businesses, net of tax - - || 18,910 -
----------------- ----------------||----------------- ----------------
||
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 62,381 17,677 || (6,472) (158,345)
EXTRAORDINARY ITEM: ||
Loss on early extinguishment of debt, ||
net of tax 5,396 1,925 || - -
----------------- ----------------||----------------- ----------------
||
NET INCOME (LOSS) $ 56,985 $ 15,752 || $ (6,472) $ (158,345)
================= ================||================= ================
||
BASIC NET INCOME PER SHARE: ||
Income from continuing operations ||
before extraordinary item $ 0.80 $ 0.24 ||
Extraordinary item 0.07 0.03 ||
--------- ---------||
Net income $ 0.73 $ 0.21 ||
========= =========||
WEIGHTED AVERAGE SHARES OUTSTANDING 77,604 75,244 ||
========= =========||
||
DILUTED NET INCOME PER SHARE: ||
Income from continuing operations ||
before extraordinary item $ 0.77 $ 0.23 ||
Extraordinary item 0.07 0.02 ||
--------- ---------||
Net income $ 0.70 $ 0.21 ||
========= =========||
WEIGHTED AVERAGE SHARES OUTSTANDING 80,562 76,076 ||
========= =========||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
</TABLE>
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 (UBIUS) 1,000 $ 1,000 $ 300,000 $ (535,898) $(234,898)
Net loss - - - (158,345) (158,345)
Capital contribution from UB Investments
(Netherlands) B.V. - - 445,000 - 445,000
------------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 30, 1995 (UBIUS) 1,000 1,000 745,000 (694,243) 51,757
Net loss for the four weeks - - - (6,472) (6,472)
------------- ------------ ------------ ------------ ------------
BALANCE AT JANUARY 26, 1996 (UBIUS) 1,000 1,000 745,000 (700,715) 45,285
Write-off of predecessor company equity (1,000) (1,000) (745,000) 700,715 (45,285)
Purchase of the Company by INFLO Holdings
Corporation effective January 26, 1996 71,656 717 124,284 - 125,001
Management investment 306 2 786 - 788
Issuance of common stock and warrants to Bermore 5,676 57 23,543 - 23,600
Net income for the forty-eight weeks - - - 15,752 15,752
------------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 28, 1996 (KEEBLER FOODS COMPANY) 77,638 776 148,613 15,752 165,141
Purchase of treasury shares (43) - (75) - (75)
Net income - - - 56,985 56,985
------------- ------------ ------------ ------------ ------------
BALANCE AT JANUARY 3, 1998 (KEEBLER FOODS COMPANY) 77,595 $ 776 $ 148,538 $ 72,737 $ 222,051
============= ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
</TABLE>
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
KEEBLER FOODS COMPANY || UBIUS
---------------------------------|| ---------------------------------
Forty-Eight || Four
YEAR ENDED Weeks Ended || Weeks Ended Year Ended
JANUARY 3,1998 December 28,1996|| January 26,1996 December 30,1995
---------------- ----------------|| ---------------- ----------------
<S> <C> <C> || <C> <C>
CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES ||
Net income (loss) $ 56,985 $ 15,752 || $ (6,472) $ (158,345)
Adjustments to reconcile net income (loss) to cash from ||
operating activities: ||
Depreciation and amortization 60,708 49,461 || 1,973 47,361
Deferred income taxes 18,548 12,254 || - (1,985)
Accretion on Seller Note 2,376 2,246 || - -
Loss on early extinguishment of debt, net of tax 3,761 1,925 || - -
(Gain) loss on sale of property, plant, and equipment (358) (328)|| 33 159
Loss on impairment of the Salty Snacks business, net of tax - - || - 86,516
Gain on the disposal of the Frozen Food businesses, ||
net of tax - - || (18,910) -
Changes in assets and liabilities: ||
Trade accounts and notes receivable, net 38,187 3,842 || 22,068 (11,716)
Accounts receivable/payable from affiliates, net - - || (1,941) (4,737)
Inventories, net 203 (9,809)|| 4,353 6,605
Recoverable income taxes and income taxes payable 16,113 - || 25 (1,304)
Other current assets (966) 1,644 || 1,192 3,772
Deferred debt issue costs (1,344) (8,032)|| - -
Trade accounts payable and other current liabilities 36,806 26,105 || 11,550 (13,304)
Plant and facility closing costs and severance (13,715) (41,279)|| - -
Restructuring reserves - - || (14,469) (24,122)
Other, net 1,044 (553)|| 246 9,702
---------------- ----------------|| ---------------- ----------------
Cash provided from (used by) operating activities 218,348 53,228 || (352) (61,398)
||
CASH FLOWS (USED BY) PROVIDED FROM INVESTING ACTIVITIES ||
Capital expenditures (48,429) (29,352)|| (3,228) (55,386)
Proceeds from property disposals 6,950 9,236 || 644 2,797
Working capital adjustment paid by UB Investment ||
(Netherlands) B.V. - 32,609 || - -
Purchase of Sunshine Biscuits, Inc., net of cash acquired - (142,670)|| - -
Disposition of the Frozen Food businesses - - || 67,749 -
---------------- ----------------|| ---------------- ----------------
Cash (used by) provided from investing activities (41,479) (130,177)|| 65,165 (52,589)
||
CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES ||
Purchase of treasury shares/capital contributions (75) 788 || - 445,000
Reduction of notes payable to affiliate - - || - (445,000)
Long-term debt borrowings 109,750 220,000 || - -
Long-term debt repayments (271,310) (134,000)|| (2,377) (30,078)
Commercial paper and Revolving Loan facilities, net - - || (63,300) 134,500
---------------- ----------------|| ---------------- ----------------
Cash (used by) provided from financing activities (161,635) 86,788 || (65,677) 104,422
---------------- ----------------|| ---------------- ----------------
Increase (decrease) in cash and cash equivalents 15,234 9,839 || (864) (9,565)
Cash and cash equivalents at beginning of period 11,954 2,115 || 2,978 12,543
---------------- ----------------|| ---------------- ----------------
Cash and cash equivalents at end of period $ 27,188 $ 11,954 || $ 2,114 $ 2,978
================ ================|| ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-7
</TABLE>
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THE CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY (THE
"COMPANY", "KEEBLER", OR "SUCCESSOR COMPANY") INCLUDE THE FINANCIAL STATEMENTS
OF THE SUCCESSOR COMPANY FOR THE YEAR ENDED JANUARY 3, 1998 AND THE FORTY-EIGHT
WEEK PERIOD ENDED DECEMBER 28, 1996, AND UB INVESTMENTS US INC. ("UBIUS" OR
"PREDECESSOR COMPANY") FOR THE FOUR WEEK PERIOD ENDED JANUARY 26, 1996, THE DATE
ON WHICH UBIUS WAS ACQUIRED BY INFLO, AND THE YEAR ENDED DECEMBER 30, 1995. THE
DISTINCTION BETWEEN THE CONSOLIDATED FINANCIAL STATEMENTS OF THE SUCCESSOR
COMPANY AND PREDECESSOR COMPANY HAS BEEN MADE BY INSERTING A DOUBLE LINE BETWEEN
SUCH CONSOLIDATED FINANCIAL STATEMENTS AND RELATED FOOTNOTES.
1. BASIS OF PRESENTATION
BUSINESS AND OWNERSHIP
Keebler Foods Company, a manufacturer and distributor of food products, was
acquired by INFLO Holdings Corporation ("INFLO") on January 26, 1996. INFLO was
owned by Artal Luxembourg S. A. ("Artal"), a private investment company, Flowers
Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company, Bermore,
Limited ("Bermore"), a privately held corporation and the parent of G.F.
Industries, Inc. ("GFI"), and certain members of the Company's current
management. On November 20, 1997, INFLO was merged into Keebler Corporation (the
"Merger"), and subsequently changed its name to Keebler Foods Company. The
financial statements as of and for all periods subsequent to January 26, 1996
have been restated to reflect the Merger as if it had been effective January 26,
1996. INFLO was legally established as of November 2, 1995, but did not have any
operating activity, assets, or liabilities until the Keebler acquisition on
January 26, 1996. The Company is comprised of primarily the following
wholly-owned subsidiaries: Keebler Company, Bake-Line Products, Inc., Johnston's
Ready Crust Company, Sunshine Biscuits, Inc. ("Sunshine"), Keebler Leasing
Corp., Hollow Tree Company, L.L.C., Hollow Tree Financial Company, L.L.C., and
Elfin Equity Company, L.L.C.
The Company, formerly UBIUS, had previously been owned by UB Investments
(Netherlands) B.V., a Dutch company (See Note 4). UB Investments (Netherlands)
B.V. is a member of the worldwide group of affiliated companies owned by United
Biscuits (Holdings) plc., a publicly held company in the United Kingdom.
FISCAL YEAR
The Company's fiscal year consists of thirteen four week periods (fifty-two
or fifty-three weeks) and ends on the Saturday nearest December 31. The 1997
fiscal year consists of fifty-three weeks. As a result of the Keebler
acquisition, which closed on the last day of the first four week period of 1996,
the fiscal year for 1996 consisted of the forty-eight weeks ended December 28,
1996. The 1995 fiscal year of the predecessor company was comprised of fifty-two
weeks.
PRINCIPLES OF CONSOLIDATION
All subsidiaries are wholly-owned and included in the consolidated financial
statements of the Company. Intercompany accounts and transactions have been
eliminated.
GUARANTEES OF NOTES
The subsidiaries of the Company that are not Guarantors of the Senior
Subordinated Notes are inconsequential (which means that the total assets,
revenues, income, or equity of such non-guarantors, both individually and on a
combined basis, is less than 3% of the Company's consolidated assets, revenues,
income, or equity), individually and in the aggregate, to the consolidated
financial statements of the Company. The Guarantees are full, unconditional, and
joint and several. Separate financial statements of the Guarantors are not
presented because management has determined that they would not be material to
investors in the Senior Subordinated Notes.
F-8
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to conform
with the current year reporting.
2. ACQUISITION OF KEEBLER FOODS COMPANY BY INFLO HOLDINGS CORPORATION
On January 26, 1996, UB Investments (Netherlands) B.V. sold all the stock of
UBIUS to INFLO. Subsequent to the acquisition, UBIUS changed its name to Keebler
Corporation. On November 20, 1997, INFLO was merged into Keebler Corporation and
subsequently changed its name to Keebler Foods Company. The sale specifically
excluded the stock of the Frozen Food businesses as well as the Salty Snacks
business conducted by Keebler Company and other subsidiaries of UBIUS, as well
as the UBIUS finance companies of U.B.H.C., Inc. and U.B.F.C., Inc., also
wholly-owned subsidiaries (See Note 4).
The aggregate gross purchase price of $487.5 million (excluding fees and
expenses paid at closing of approximately $15.3 million) was financed by $125.0
million in equity from INFLO, $200.0 million in Senior Term Notes, $125.0
million in Increasing Rate Notes, the assumption of $20.3 million in existing
senior indebtedness of the Company, and a note payable ("Seller Note") by INFLO
to UB Investments (Netherlands) B.V. for $32.5 million. The Seller Note does not
bear interest until January 26, 1999, and has been accounted for at a discounted
value of $24.4 million. In addition, the Company, subsequent to the purchase by
INFLO, received a working capital adjustment of $32.6 million from United
Biscuits (Netherlands) B.V. pursuant to the terms of the stock purchase
agreement between INFLO and United Biscuits (Netherlands) B.V.
The Keebler acquisition has been accounted for as a purchase. The total
purchase price and the fair value of liabilities assumed have been allocated to
the tangible and intangible assets of the Company based on the respective fair
values.
The following provides an allocation of the purchase price:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Purchase Price.................................................................................. $ 487.5
Less: Net book value of assets acquired......................................................... 329.5
Less: Asset purchase price allocation
- Working capital receivable from UB (Netherlands) B.V........................................ $ 32.6
- Inventories................................................................................. 4.4
- Deferred income taxes....................................................................... 11.4
- Property, plant, and equipment.............................................................. 45.7
- Prepaid pension............................................................................. 33.1
- Other assets................................................................................ (14.2)
- Trademarks and trade names.................................................................. 104.0 217.0
--------
Plus: Liability purchase price allocation
- Other current liabilities and accruals...................................................... 1.1
- Plant and facility closing costs and severance.............................................. 55.3
- Deferred income taxes....................................................................... 13.8
- Postretirement/postemployment obligations................................................... (17.5)
- Other....................................................................................... 6.3 59.0
-------- --------
Unallocated excess purchase price over fair value of net
assets acquired............................................................................... $ 0.0
========
</TABLE>
See Note 3 for the unaudited pro forma consolidated results of operations
of the Keebler acquisition.
F-9
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF SUNSHINE BISCUITS, INC.
On June 4, 1996, the Company acquired Sunshine from GFI for an aggregate
consideration of $171.7 million (excluding related fees and expenses paid at
closing of approximately $2.2 million). The Sunshine acquisition was funded by
$150.3 million in cash, of which $36.3 million was provided by the Company's
existing cash sources and $114.0 million in borrowings under the Amended and
Restated Credit Agreement (See Note 9). In addition, approximately $23.6 million
of common stock and warrants were issued to GFI and was accounted for as a
capital contribution. Subsequent to the Merger, the stock and warrants held by
GFI were transferred to Bermore and reissued for the same value in the name of
the Company. These shares and warrants represented 13.1% of the Company's common
stock on a fully diluted basis.
The Sunshine acquisition by the Company has been accounted for as a
purchase. The total purchase price and the fair value of liabilities assumed
have been allocated to the tangible and intangible assets of Sunshine based on
the respective fair values. The acquisition resulted in goodwill of $48.8
million, which is being amortized over a forty year period.
The following provides an allocation of the purchase price:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Purchase Price.................................................................................... $171.7
Less: Net book value of assets acquired........................................................... 92.8
Less: Asset purchase price allocation
- Trade accounts receivable..................................................................... $ 0.3
- Inventories................................................................................... 3.6
- Deferred income taxes......................................................................... 8.4
- Property, plant, and equipment................................................................ 9.5
- Other assets.................................................................................. (3.8)
- Trademarks and trade names.................................................................... 57.0 75.0
-------
Plus: Liability purchase price allocation
- Other current liabilities and accruals........................................................ 8.4
- Plant and facility closing costs and severance................................................ 22.1
- Deferred income taxes......................................................................... (8.3)
- Pension obligation............................................................................ 5.0
- Postretirement/postemployment obligations..................................................... 17.8
- Other......................................................................................... (0.1) 44.9
------- -------
Unallocated excess purchase price over fair value of net assets acquired.......................... $ 48.8
=======
</TABLE>
Results of operations for Sunshine from June 4, 1996 to December 28, 1996
have been included in the consolidated statements of operations. The following
unaudited pro forma information has been prepared assuming the acquisition had
taken place at January 1, 1995. The unaudited pro forma information includes
adjustments for interest expense that would have been incurred to finance the
purchase, additional depreciation of the property, plant, and equipment
acquired, and amortization of the trademarks, trade names, and goodwill arising
from the acquisition. The unaudited pro forma consolidated results of operations
are not necessarily indicative of the results that would have been had the
Keebler and Sunshine acquisitions been effected on the assumed date.
<TABLE>
<CAPTION>
-----------------------------------
Unaudited
For The Year Ended
-----------------------------------
December 28, December 30,
1996 1995
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Net sales....................................................................... $ 1,979,105 $ 2,213,574
Loss from continuing operations before income taxes............................. $ (10,894) $ (241,323)
Net loss........................................................................ $ (6,793) $ (253,924)
</TABLE>
F-10
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PREDECESSOR COMPANY
UBIUS, the predecessor company to Keebler Foods Company, was formed in 1992
as a result of the legal restructuring of United Biscuit (Holdings) plc.'s
operations in the United States. UBIUS received the stock of the subsidiaries in
exchange for the $850 million in debt with UB Investments (Netherlands) B.V. as
well as all of the capital stock of UBIUS.
On May 20, 1995, the predecessor company adopted plans to sell the Salty
Snacks business. On January 24, 1996, the predecessor company sold to Kelly Food
Products, Inc. selected assets of the Salty Snacks business including the
production plant in Bluffton, Indiana, trademarks and other intangibles related
to the business, inventory, and property, plant, and equipment, including
selected assets related to the convenience sales division.
During July 1995, the predecessor company adopted plans to discontinue the
operations of its Frozen Food businesses. On January 9, 1996, UB Investments
(Netherlands) B.V. sold the assets and stock of Bernardi Italian Foods Co., The
Original Chili Bowl, Inc., Chinese Food Processing Corporation (wholly-owned
subsidiaries collectively known as the Frozen Food businesses), and certain
assets of Keebler Company to Windsor Food Company Ltd. The sale was effective as
of December 31, 1995.
On December 5, 1995, Shaffer, Clarke & Co., Inc. ("Shaffer, Clarke"),
formerly a wholly-owned subsidiary, sold certain assets related to Shaffer,
Clarke's KA-ME business to Liberty Richter, Inc. for a gain of $2.6 million.
These assets included inventory, contractual rights, and other intellectual
property.
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
All highly liquid instruments purchased with an original maturity of three
months or less are classified as cash equivalents. The carrying amount of cash
equivalents approximates fair value due to the relatively short maturity of
these investments.
TRADE ACCOUNTS RECEIVABLE
Substantially all of the Company's trade accounts receivable are from retail
dealers and wholesale distributors. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. Trade accounts receivable, as shown on the consolidated balance
sheets, were net of allowances of $5.0 million as of January 3, 1998 and $5.4
million as of December 28, 1996.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
principally by the last-in, first-out ("LIFO") method. Inventories stated under
the LIFO method represent approximately 88% of total inventories at January 3,
1998 and 91% of total inventories at December 28, 1996. Because the Company has
adopted a natural business unit single pool approach to determining LIFO
inventory cost, classification of the LIFO reserve by inventory component is
impractical. The excess of the current production cost of inventories over LIFO
cost was approximately $2.2 million at January 3, 1998. There was no reserve
required at December 28, 1996 to state inventory on a LIFO basis.
At January 3, 1998 and December 28, 1996, inventories are shown net of an
allowance for slow-moving and aged inventory of $6.8 million and $5.5 million,
respectively.
F-11
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Depreciation expense is
computed using the straight-line method based on the estimated useful lives of
the depreciable assets. Certain facilities and equipment held under capital
leases are classified as property, plant, and equipment and amortized using the
straight-line method over the lease terms, and the related obligations are
recorded as liabilities. Lease amortization is included in depreciation expense.
TRADEMARKS AND TRADE NAMES
Trademarks and trade names are stated at cost and are amortized on a
straight-line basis over a period of forty years. Accumulated amortization of
trademarks and trade names was $7.1 million and $3.1 million at January 3, 1998
and December 28, 1996, respectively.
GOODWILL
Goodwill shown in the consolidated financial statements at January 3, 1998
and December 28, 1996 is related to the excess cost over the fair value of the
tangible net assets acquired from the Sunshine purchase (See Note 3). Goodwill
is amortized on a straight-line basis over a period of forty years. Accumulated
amortization of goodwill was $1.8 million and $0.5 million at January 3, 1998
and December 28, 1996, respectively.
RESEARCH AND DEVELOPMENT
Activities related to new product development and major improvements to
existing products and processes are expensed as incurred and were $10.2 million
for the year ended January 3, 1998, $4.3 million for the forty-eight weeks ended
December 28, 1996, $0.6 million for the four weeks ended January 26, 1996, and
$14.5 million for the year ended December 30, 1995.
ADVERTISING AND CONSUMER PROMOTION
Advertising and consumer production costs are generally expensed when
incurred or no later than when the advertisement appears or the event is run.
Advertising and consumer promotion expense was $67.6 million for the year ended
January 3, 1998, $33.3 million for the forty-eight weeks ended December 28,
1996, $5.1 million for the four weeks ended January 26, 1996, and $87.9 million
for the year ended December 30, 1995. There were no deferred advertising costs
at January 3, 1998 and December 28, 1996.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into derivative financial transactions to hedge existing
or future exposures to changes in commodity prices. The Company does not enter
into derivative transactions for speculative purposes. Gains and losses on
commodity futures and options transactions are deferred in inventory until the
contracts are liquidated (See Note 20).
INCOME TAXES
The consolidated financial statements reflect the application of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income
Taxes". The Company files a consolidated federal income tax return.
F-12
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share". The consolidated financial statements reflect the
application of SFAS No. 128 which replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options and warrants.
Diluted earnings per share is similar to fully diluted earnings per share.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
determines whether there has been an impairment of long-lived assets and the
related unamortized goodwill, based on whether certain indicators of impairment
are present. In the event that facts and circumstances indicate that the cost of
any long-lived assets and the related unamortized goodwill may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is required.
6. PROPERTY, PLANT, AND EQUIPMENT
A summary of property, plant, and equipment, including related accumulated
depreciation follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
---------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
Land.............................................................. $ 16,487 $ 16,344
Buildings......................................................... 130,241 126,824
Machinery and equipment........................................... 328,473 301,588
Office furniture and fixtures..................................... 56,559 54,985
Delivery equipment................................................ 6,946 6,785
Construction in progress.......................................... 38,080 23,980
---------------------- ----------------------
576,786 530,506
Accumulated depreciation.......................................... (98,665) (44,426)
---------------------- ----------------------
$ 478,121 $ 486,080
====================== ======================
</TABLE>
F-13
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY, PLANT, AND EQUIPMENT (CONTINUED)
Property, plant, and equipment is depreciated on a straight-line basis over
the estimated useful lives of the depreciable assets. Buildings are depreciated
over a useful life of ten to forty years. Machinery and equipment is depreciated
over a useful life of five to twenty-five years. Office furniture and fixtures
are depreciated over a useful life of three to fifteen years. Delivery equipment
is depreciated over a useful life of two to twelve years.
7. ASSETS HELD FOR SALE
In 1996, as part of the Keebler and Sunshine acquisitions, management
executed a strategic plan to reduce inefficiencies and excess capacity by
closing the manufacturing facilities in Atlanta, Georgia and Santa Fe Springs,
California. In 1997, a distribution center in Kensington, Connecticut was also
held for sale. The Santa Fe Springs, California facility was subsequently sold
on March 27, 1997 with no gain or loss recognized. Disposition of the Atlanta,
Georgia manufacturing facility and the Kensington distribution center is
expected to occur before the end of 1998 without a significant gain or loss.
8. OTHER CURRENT LIABILITIES AND ACCRUALS
Other current liabilities and accruals consisted of the following at January
3, 1998 and December 28, 1996:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
---------------------- ------------------------
(IN THOUSANDS)
<S> <C> <C>
Self insurance reserves........................................... $ 55,185 $ 58,527
Employee compensation............................................. 55,724 42,555
Marketing and consumer promotions................................. 52,838 45,892
Other............................................................. 31,176 39,919
---------------------- ------------------------
$ 194,923 $ 186,893
====================== ========================
</TABLE>
The Company obtains insurance to manage potential losses and liabilities
related to workers' compensation, health and welfare claims, and general product
and vehicle liability. The Company has elected to retain a significant portion
of the expected losses through the use of deductibles and stop-loss limitations.
Provisions for losses expected under these programs are recorded based on the
Company's estimates of aggregate liability for claims incurred. These estimates
utilize the Company's prior experience and actuarial assumptions provided by the
Company's insurance carrier. The total estimated liability for these losses at
January 3, 1998 and December 28, 1996 was $55.2 million and $58.5 million,
respectively, and is included in other current liabilities and accruals. The
Company has collateralized its liability for potential self-insurance losses in
several states by obtaining standby letters of credit which aggregate to
approximately $17.0 million.
F-14
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT AND LEASE COMMITMENTS
Long-term debt consisted of the following at January 3, 1998 and December
28, 1996:
<TABLE>
<CAPTION>
Interest Rate Final Maturity JANUARY 3, 1998 December 28, 1996
---------------- ------------------ ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Term-A Loans................... 6.683% April 7, 2003 $ 156,000 $ 132,875
Term-B Loans................... 7.880-8.375% July 31, 2003 -- 89,400
Term-C Loans................... 8.130-8.625% July 31, 2004 -- 64,575
Senior Subordinated Notes...... 10.750% July 1, 2006 125,000 125,000
Seller Note.................... 10.000% January 26, 2007 -- 26,664
Other Senior Debt.............. various 2001-2005 12,645 14,290
Capital Lease Obligations...... various 2004-2005 5,110 5,135
------------------- -------------------
298,755 457,939
Less: Current maturities....... 26,365 18,570
------------------- -------------------
$ 272,390 $ 439,369
=================== ===================
</TABLE>
At January 3, 1998, the Company's primary credit financing was provided by a
$380.0 million Second Amended and Restated Credit Agreement ("Credit Agreement")
consisting of a $140.0 million Revolving Loan facility and a $240.0 million Term
Loan of which the current outstanding balance was $156.0 million with quarterly
scheduled principal payments through the final maturity in April 2003. The
amendment to the Credit Agreement was entered into on April 8, 1997 in order to
obtain more favorable terms, fees, and interest rates.
The available balance on the Revolving Loan facility as of January 3, 1998,
was $140.0 million. Actual available borrowings under the Revolving Loan
facility can be reduced by the level of qualifying working capital as defined in
the Credit Agreement. This gross available balance is further reduced by certain
letters of credit totaling $9.9 million and outstanding borrowings. There were
no amounts outstanding under this facility as of January 3, 1998. Any unused
borrowings under the Revolving Loan facility are subject to a commitment fee,
which will vary from 0.125%-0.375% based on the relationship of debt to adjusted
earnings.
Interest on the Revolving Loan facility and Term Loan is calculated based on
a base rate plus applicable margin. The base rate can, at the Company's option,
be 1) the higher of the base domestic lending rate as established by the
Administrative Agent for the Lenders under the Credit Agreement, or the Federal
Funds Rate plus one-half of one-percent, or 2) a reserve percentage adjusted
LIBO Rate as offered by the Administrative Agent's office in London. Base rate
loan interest rates fluctuate immediately based upon a change in the established
base rate by the Administrative Agent. The Credit Agreement requires the Company
to meet certain financial covenants including net worth; earnings before
interest, taxes, depreciation, and amortization; and cash flow and interest
coverage ratios.
During the fourth quarter of 1997, using existing cash resources, the
Company pre-paid $70.0 million of principal on the Term Loan; $30.0 million on
December 8, 1997 and $40.0 million on November 10, 1997. The pre-payments
resulted in the recognition of a $1.1 million after-tax extraordinary charge
related to the expensing of certain unamortized bank fees which were incurred at
the time the Term Loan was issued.
On November 21, 1997, the Company settled the Seller Note with a payment of
$31.7 million funded through working capital. The Company assumed the $32.5
million Seller Note, previously held by INFLO, as a result of the Merger. The
Seller Note did not bear interest until January 26, 1999 and was recorded at a
discounted value of $24.4 million on January 26, 1996. The discount was being
amortized over three years at an effective interest rate of 10.0%. The Company
recorded a before-tax extraordinary charge of $2.6 million on the early
extinguishment of debt. The related after-tax charge was $1.6 million.
F-15
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT AND LEASE COMMITMENTS (CONTINUED)
In conjunction with the amendment to the Credit Agreement on April 8, 1997,
Term Loans B and C were extinguished using $40.0 million of borrowings under the
Revolving Loan facility, $109.8 million of increased borrowings against Term
Loan A, and $3.8 million from cash resources. The Company recorded a before-tax
extraordinary charge of $4.6 million related primarily to expensing certain
unamortized bank fees which were incurred at the time Term Loans B and C were
issued. The related after-tax charge was $2.7 million.
On October 23, 1996, pursuant to an exchange and registration rights
agreement, the Company registered its 10.75% Senior Subordinated Notes due 2006
(the "Notes") under the Securities Act of 1933 in exchange for previously held
Increasing Rate Notes. The Notes were issued under an indenture dated June 15,
1996 between the Company, the Company's Restricted Subsidiaries (as defined in
the indenture), and the U.S. Trust Company of New York, as trustee. The Notes
are unsecured, senior subordinated obligations of the Company guaranteed by the
Restricted Subsidiaries. Interest on the Notes is paid semi-annually on January
1 and July 1 of each year, commencing January 1, 1997. At the Company's option,
up to 35.0% of the aggregate original principal of the Notes can be redeemed at
a redemption price of 110.0% on or prior to July 1, 1999 following a public
equity offering. In addition, the Company's ability to pay dividends or make
other distributions on its common stock is limited by the terms of the indenture
governing the Notes to an amount equal to 50% of the consolidated net income of
the Company for the relevant period, subject to other limitations.
The Increasing Rate Notes, issued to finance the Keebler acquisition, were
repaid in June 1996 with the proceeds from a private placement offering for the
10.75% Senior Subordinated Notes due in 2006. The Company recorded a before-tax
extraordinary loss of $3.2 million on the early extinguishment of the Increasing
Rate Notes. The loss consisted primarily of bank fees incurred at the time the
Increasing Rate Notes were issued. The after-tax loss was $1.9 million.
On January 30, 1996, the Company entered into a swap transaction with the
Bank of Nova Scotia, who also serves as the Administrative Agent for the Lenders
under the Credit Agreement. The swap transaction had the effect of converting
the base rate on $170.0 million of the Term Loans to a fixed rate obligation of
5.0185% plus applicable margin through February 1, 1999. The maturity date on
the swap transaction can be extended to February 1, 2001 at the option of the
Bank of Nova Scotia on January 28, 1999.
Interest of $39.0 million, $25.2 million, $3.8 million, and $37.6 million
was paid on debt for the year ended January 3, 1998, the forty-eight weeks ended
December 28, 1996, the four weeks ended January 26, 1996, and the year ended
December 30, 1995, respectively.
Aggregate scheduled annual maturities of long-term debt as of January 3,
1998 are as follows:
(IN THOUSANDS)
1998............................................... $ 26,365
1999............................................... 32,575
2000............................................... 32,990
2001............................................... 34,455
2002............................................... 34,225
2003 and thereafter................................ 138,145
------------
$ 298,755
============
F-16
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT AND LEASE COMMITMENTS (CONTINUED)
Assets recorded under capitalized lease agreements included in property,
plant, and equipment consist of the following:
JANUARY 3, December 28,
1998 1996
------------ ------------
(IN THOUSANDS)
Land..................................... $ 1,209 $ 1,209
Buildings................................ 2,165 2,881
Machinery and equipment.................. 1,740 6,361
Other leased assets...................... -- 259
------------ ------------
5,114 10,710
Accumulated amortization................. (527) (1,000)
------------ ------------
$ 4,587 $ 9,710
============ ============
Future minimum lease payments under scheduled capital and operating leases
that have initial or remaining noncancellable terms in excess of one year are as
follows:
Capital Operating
Leases Leases
------------ -------------
(IN THOUSANDS)
1998......................................... $ 243 $ 29,128
1999......................................... 263 24,330
2000......................................... 333 21,654
2001......................................... 351 17,603
2002......................................... 393 14,497
2003 and thereafter.......................... 5,401 33,071
------------ -------------
Total minimum payments....................... 6,984 $ 140,283
=============
Amount representing interest................. (1,874)
------------
Obligations under capital lease.............. 5,110
Obligations due within one year.............. (25)
------------
Long-term obligations under capital leases... $ 5,085
============
Rent expense for all operating leases was $36.1 million, $30.1 million, $2.7
million, and $37.4 million for the year ended January 3, 1998, the forty-eight
weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the
year ended December 30, 1995, respectively.
10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE
As part of acquiring Keebler and Sunshine, management adopted and began
executing a plan to reduce costs and inefficiencies. Certain exit costs totaling
$77.4 million were provided for in the allocation of the purchase price of both
the Keebler and Sunshine acquisitions. Management's plan included company-wide
staff reductions, the closure of manufacturing, distribution, and sales force
facilities, and information system exit costs.
F-17
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)
Severance, outplacement, and other related costs associated with staff
reductions were estimated at $30.7 million. Costs incurred related to the
closing of manufacturing, distribution, and sales force facilities, which
include primarily severance and lease termination and carrying costs, were
expected to total $39.9 million. In addition, the Company expects to incur $6.8
million in lease costs related to exiting legacy information systems. Spending
against the reserves established for the year ended January 3, 1998 and the
forty-eight weeks ended December 28, 1996 totaled $16.2 million and $41.4
million, respectively. During the year ended January 3, 1998, the Company also
provided an additional $2.7 million principally for anticipated costs related to
the closure of distribution facilities not included in the original plan to
reduce costs and inefficiencies. No additional provisions were made during the
forty-eight weeks ended December 28, 1996. At January 3, 1998 and December 28,
1996, the plant and facility closing costs and severance reserve balance was
$22.5 million and $36.0 million, respectively.
The plans initiated by management are expected to be completed prior to the
end of 1998. Only noncancellable lease obligations are expected to extend beyond
1998, to be paid out over the next seven years concluding in 2004.
11. EMPLOYEE BENEFIT PLANS
The Retirement Plan for Salaried and Certain Hourly-Paid Employees of
Keebler Company (the "pension plan") is a trusteed, noncontributory,
defined-benefit, pension plan. The pension plan covers certain salaried and
hourly-paid employees. Assets held by the pension plan consist primarily of
common stocks, collective trust funds, government securities, bonds, and
guaranteed insurance contracts. Benefits provided under the pension plan are
primarily based on years of service and the employee's final level of
compensation. The Company's funding policy is to contribute annually not less
than the ERISA minimum funding requirements. Effective January 1, 1997, the
pension plans of Sunshine Biscuits, Inc., Athens Packaging, Bake-Line Products,
Inc., and Emerald Industries were merged with the Company's pension plan.
Pension expense included the following components:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
--------------- ----------------- || --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> || <C> <C>
||
Service cost............................... $ 8,560 $ 7,711 || $ 599 $ 6,611
Interest cost.............................. 29,673 21,338 || 1,133 13,877
Actual return on plan assets............... (63,745) (12,752) || (1,693) (43,661)
Net amortization of transition obligation.. -- -- || 47 616
Deferral of gains (losses)................. 25,810 (15,495) || -- 24,468
Prior service cost......................... -- -- || (12) (155)
Net gain................................... -- -- || -- (437)
--------------- ----------------- || --------------- ----------------
Pension expense............................ $ 298 $ 802 || $ 74 $ 1,319
=============== ================= || =============== ================
</TABLE>
F-18
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of the Company's pension plan and amounts recognized in
the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested.............................................................. $ (392,512) $ (366,253)
Nonvested........................................................... (20,983) (7,255)
------------------- ---------------------
$ (413,495) $ (373,508)
=================== =====================
Projected benefit obligation.......................................... $ (437,334) $ (408,060)
Plan assets at fair value............................................. 499,379 464,433
------------------- ---------------------
Plan assets greater than projected benefit obligation................. 62,045 56,373
Unrecognized transition obligation.................................... -- --
Unrecognized prior service............................................ 5,044 --
Unrecognized net gain................................................. (24,029) (13,014)
------------------- ---------------------
Prepaid pension....................................................... $ 43,060 $ 43,359
=================== =====================
</TABLE>
Assumptions used in accounting for the pension plan at each of the
respective period-ends are as follows:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
-------------- ---------------- || --------------- ---------------
<S> <C> <C> || <C> <C>
Discount rate..................................... 7.3% 7.5% || 7.5% 7.5%
Rate of compensation level increases.............. 4.0 4.0 || 4.0 4.0-6.0
Expected long-term rate of return on plan assets.. 9.0 8.6 || 10.0 8.0-9.0
</TABLE>
The plan assets, as of January 3, 1998 and December 28, 1996, include a real
estate investment of $3.1 million in a distribution center which is under an
operating lease to the Company.
The Company, in addition to the pension plan, also maintains an unfunded
supplemental retirement plan for certain highly compensated former executives.
Benefits provided are based on years of service. Vesting is graduated depending
on termination after age 55.
The supplemental retirement plan expense includes the following components:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
------------ ------------ || ------------ ------------
(IN THOUSANDS)
<S> <C> <C> || <C> <C>
Service cost............................... $ -- $ -- || $ 35 $ 452
Interest cost.............................. 732 637 || 66 854
Net amortization of transition obligation.. -- -- || 8 111
Prior service cost......................... -- -- || 13 170
------------ ------------ || ------------ ------------
Plan expense............................... $ 732 $ 637 || $ 122 $ 1,587
============ ============ || ============ ============
</TABLE>
F-19
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The unfunded status of the supplemental retirement plan and the amounts
recognized in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 3, December 28,
1998 1996
--------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested..................................................................... $ (10,303) $ (10,028)
Nonvested.................................................................. -- --
--------------- -----------------
$ (10,303) $ (10,028)
=============== =================
Projected benefit obligation................................................. $ (10,097) $ (9,890)
Plan assets at fair value.................................................... -- --
--------------- -----------------
Projected benefit obligation in excess of plan assets........................ (10,097) (9,890)
Unrecognized transition obligation........................................... -- --
Unrecognized prior service cost.............................................. -- --
Unrecognized net (gain) loss................................................. (458) (754)
--------------- -----------------
Plan obligation included in other liabilities................................ $ (10,555) $ (10,644)
=============== =================
</TABLE>
Assumptions used in accounting for the supplemental retirement plan at each
of the respective period-ends are as follows:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
-------------- ---------------- || --------------- ---------------
<S> <C> <C> || <C> <C>
Discount rate............................. 7.3% 7.5% || 7.5% 7.5%
Rate of compensation level increase....... N/A N/A || 4.0 4.0
</TABLE>
Contributions are also made by the Company to a retirement program for Grand
Rapids union employees. Benefits provided under the plan are based on a flat
monthly amount for each year of service and are unrelated to compensation.
Contributions are made based on a negotiated hourly rate. For the year ended
January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks
ended January 26, 1996, and the year ended December 30, 1995, the Company
expensed contributions of $2.6 million, $2.3 million, $0.2 million, and $2.5
million, respectively.
The Company contributes to various multiemployer union administered
defined-benefit and defined-contribution pension plans. Benefits provided under
the multiemployer pension plans are generally based on years of service and
employee age. Expense under these plans was $10.5 million, $7.8 million, $0.9
million, and $9.6 million for the year ended January 3, 1998, the forty-eight
weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the
year ended December 30, 1995, respectively.
The Company also offers certain employees participation in the Keebler
Company Salaried Savings Plan, a defined-contribution plan. Prior to July 1,
1995, certain nonunion employees who met length-of-service requirements could
elect to participate in the plan. Currently, participation in the plan can be
elected immediately. Contributions made by participants are based on an elected
percentage of the participants' compensation within a specified range. Beginning
in 1997, a matching program was established whereby the Company makes a
contribution ranging from zero to fifty cents, depending on Company performance,
for every before-tax dollar contributed by the employee, up to 6% of the
employees' eligible pay. The Company's matching contribution was $3.1 million
for 1997. There was no Company matching contribution prior to 1997. Expenses
incurred by the Company to administer the plan were nominal.
F-20
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
During 1996, the Company matched a portion of employee contributions to a
defined contribution savings plan for qualified salaried employees of Sunshine.
Contributions made by the Company were not to exceed 6% of gross wages. The
Company also provided a savings plan for certain hourly employees of Sunshine
which provided no matching company contributions. Expenses in 1996 for the plans
were nominal. Effective January 1, 1997, all Sunshine employees became eligible
for the Keebler Company Salaried Savings Plan, thus terminating the Sunshine
plans.
A Voluntary Employee Beneficiary Association ("VEBA") provided health and
welfare benefits for certain Sunshine employees. Payments were made by the
Company to the VEBA to fund employee health and welfare claims. The Company
funded $6.6 million and $10.0 million during the year ended January 3, 1998 and
the forty-eight weeks ended December 28, 1996, respectively. In July 1997, the
Company integrated all Sunshine employees into the existing Keebler Welfare
Benefit Plan and no further VEBA payments were made.
Prior to 1997, Bake-Line Products, Inc. administered a money purchase
pension plan for certain hourly and salaried employees. Contributions were based
on 4% of employees' annual salary. Effective January 1, 1997, the Bake-Line
money purchase pension plan was merged into the Company's pension plan. Expenses
paid to administer the Bake-Line money purchase pension plan were nominal.
12. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides certain medical and life insurance benefits for
eligible retired employees. The medical plan, which covers nonunion employees
with ten or more years of service, is a comprehensive indemnity-type plan. The
plan incorporates an up-front deductible, coinsurance payments, and employee
contributions which are based on length of service. The life insurance plan
offers a small amount of coverage versus the amount the employees had while
employed. The Company does not fund the plan.
The net periodic postretirement benefit expense includes the following
components:
<TABLE>
<CAPTION>
Forty-Eight || Four
YEAR ENDED Weeks Ended || Weeks Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
------------- -------------- || -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> || <C> <C>
Service cost.................................. $ 2,242 $ 2,142 || $ 123 $ 1,598
Interest cost................................. 3,888 2,729 || 246 3,194
------------- -------------- || -------------- ---------------
Net periodic postretirement benefit expense... $ 6,130 $ 4,871 || $ 369 $ 4,792
============= ============== || ============== ===============
</TABLE>
The unfunded status of the plan reconciled to the postretirement obligation
in the Company's consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
---------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................................... $ (35,981) $ (33,054)
Fully eligible active participants............................ (7,154) (8,579)
Other active participants..................................... (12,941) (11,815)
---------------------- ----------------------
(56,076) (53,448)
Unrecognized prior service cost................................. (689) --
Unrecognized net gain........................................... (4,215) (3,857)
---------------------- ----------------------
Postretirement obligation....................................... $ (60,980) $ (57,305)
====================== ======================
</TABLE>
F-21
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The accumulated postretirement benefit obligation was determined using a
weighted-average discount rate of 7.3% for the year ended January 3, 1998, and
7.5% for the forty-eight weeks ended December 28, 1996, the four weeks ended
January 26, 1996, and the year ended December 30, 1995.
The weighted-average annual assumed rate of increase in the cost of covered
benefits is 7.0% for 1997 declining gradually to an ultimate trend rate of 5.0%
by the year 1999. A 1% increase in the trend rate for health care costs would
have increased the accumulated benefit obligation as of January 3, 1998 by $2.4
million and the net periodic benefit cost by $0.5 million.
The Company also provides postemployment medical benefits to employees on
long-term disability. The plan is a comprehensive indemnity-type plan which
covers nonunion employees on long-term disability. There is no length of service
requirement. The plan incorporates coinsurance payments and deductibles. The
Company does not fund the plan. The postemployment obligation included in the
consolidated balance sheets at January 3, 1998 and December 28, 1996 was $4.7
million and $4.6 million, respectively.
13. INCOME TAXES
The components of income tax expense (benefit) were as shown below:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
--------------- ---------------- ||--------------- ----------------
(IN THOUSANDS)
<S> <C> <C> ||<C> <C>
Current: ||
Federal....................................... $ 22,172 $ -- || $ -- $ 1,526
State......................................... 3,840 -- || -- --
--------------- ---------------- ||--------------- ----------------
Current provision for income taxes.............. 26,012 -- || -- 1,526
Deferred: ||
Federal....................................... 17,203 11,524 || 6,490 (63,212)
State......................................... 1,954 2,478 || 843 (9,215)
Valuation allowance (federal and state)....... -- -- || (7,333) 70,442
--------------- ---------------- ||--------------- ----------------
Deferred provision (benefit) for income taxes... 19,157 14,002 || -- (1,985)
--------------- ---------------- ||--------------- ----------------
$ 45,169 $ 14,002 || $ -- $ (459)
=============== ================ ||=============== ================
</TABLE>
F-22
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The differences between the income tax expense (benefit) calculated at the
federal statutory income tax rate and the Company's consolidated income tax
expense (benefit) are as follows:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Weeks Ended || Ended Year Ended
JANUARY 3, December 28, || January 26, December 30,
1998 1996 || 1996 1995
-------------- -------------- || -------------- --------------
(IN THOUSANDS)
<S> <C> <C> || <C> <C>
U.S. federal statutory rate................ $ 37,643 $ 11,140 || $ -- $ (64,843)
State income taxes (net of federal benefit) 3,766 1,608 || -- (8,208)
Deferred tax asset valuation adjustment.... -- -- || -- 70,442
Intangible amortization.................... 1,836 1,268 || -- 828
Non-taxable items.......................... 1,076 (14) || -- 883
All others................................. 848 -- || -- 439
-------------- -------------- || -------------- --------------
$ 45,169 $ 14,002 || $ -- $ (459)
============== ============== || ============== ==============
</TABLE>
The deferred tax assets and deferred tax (liabilities) recorded on the
consolidated balance sheets consist of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
-------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Depreciation....................................................... $ (82,204) $ (91,860)
Prepaid pension.................................................... (16,164) (17,050)
Inventory valuation................................................ (5,257) (7,073)
Other.............................................................. (88) (144)
-------------------- --------------------
(103,713) (116,127)
-------------------- --------------------
Net operating loss carryforwards................................... 80,195 94,659
Postretirement/postemployment benefits............................. 25,123 24,997
Workers' compensation.............................................. 15,119 16,703
Plant and facility closing costs and severance..................... 10,996 14,232
Incentives and deferred compensation............................... 11,493 11,658
Charitable contributions........................................... 8,425 10,067
Employee benefits.................................................. 9,583 8,251
Other current assets............................................... -- 3,121
Other.............................................................. 442 8,650
-------------------- --------------------
161,376 192,338
Valuation allowance................................................ (84,350) (84,350)
-------------------- --------------------
$ (26,687) $ (8,139)
==================== ====================
</TABLE>
Net operating loss carryforwards total approximately $203.2 million through
1997 and expire in 2008 through 2011. Pursuant to the terms of the Keebler
acquisition, the predecessor company retained the right to use the net operating
losses for potential carrybacks. Any unused operating losses are then available
to Keebler, but are significantly restricted under current tax law. Therefore,
all net operating loss carryforwards have been fully reserved due to the
uncertainty of their realization.
Income taxes paid, net of refunds, were approximately $9.9 million, $1.6
million, and $2.3 million for the year ended January 3, 1998, the forty-eight
weeks ended December 28, 1996, and the year ended December 30, 1995,
respectively. There were no taxes paid or refunded during the four weeks ended
January 26, 1996.
F-23
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHAREHOLDERS' EQUITY
There were no cash dividends declared for the year ended January 3, 1998,
the forty-eight weeks ended December 28, 1996, the four weeks ended January 26,
1996, and the year ended December 30, 1995. The Company's ability to pay cash
dividends is limited by the Credit Agreement and the Senior Subordinated Notes.
The most restrictive dividend restriction exists under the terms of the Credit
Agreement which limits dividends to $25.0 million.
On July 29, 1997, the Board of Directors of the Company approved a 1-for-10
reverse stock split of the Company's common stock. In addition, on January 22,
1998, the Board of Directors approved a 57.325-for-1 stock split of the common
stock. All per share and related amounts contained in these financial statements
and notes have been adjusted to reflect the stock splits as if they had been
effective January 26, 1996.
As a result of the Sunshine acquisition in 1996, the Company issued GFI
5,675,633 shares of the Company's common stock and a warrant to purchase
6,135,781 shares of the Company's common stock. The shares of $.01 par value
stock were valued at $3.23 per share. The warrant is exercisable at $3.23 per
share over a seven year period, beginning June 4, 1996 and expiring June 4,
2003. The total value of the stock and warrant held by GFI was $23.6 million at
December 28, 1996. Subsequent to the Merger, the stock and warrant held by GFI
were transferred to Bermore and reissued for the same value in the name of the
Company. At January 3, 1998, the warrant had not been exercised.
During the forty-eight weeks ended December 28, 1996, management invested
$3.7 million in exchange for 1,963,361 shares of the Company's common stock. The
Company repurchased 1,657,036 shares of the common stock to be sold to
management from Flowers and Artal for $2.9 million. The additional 306,325
shares of common stock were issued and sold to management for $0.8 million.
15. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for employee stock options. Under the Company's
1996 Stock Option Plan 9,673,594 shares of the Company's stock were authorized
for future grant. There were 7,031,198 options granted in 1996. In 1997, there
were an additional 49,873 options granted to management personnel and no
forfeitures of the Company's stock options. All options granted have ten year
terms and vest at the end of nine years. Vesting can be accelerated on a pro
rata basis over the first five years after grant if certain Company performance
measures are achieved.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Forty-Eight Weeks Ended
YEAR ENDED JANUARY 3, 1998 December 28, 1996
--------------------------------- ----------------------------------
WEIGHTED Weighted
AVERAGE Average
OPTIONS EXERCISE PRICE Options Exercise Price
-------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the period... 6,802,471 $ 1.98 -- $ --
Granted...................................... 49,873 5.23 7,031,198 1.98
Exercised.................................... -- -- -- --
Forfeited.................................... -- -- 228,727 1.74
Expired...................................... -- -- -- --
-------------- -------------
Outstanding at the end of the period......... 6,852,344 $ 2.01 6,802,471 $ 1.98
============== =============
Exercisable at the period end................ 1,587,243 -- -- --
============== =============
</TABLE>
F-24
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION PLAN (CONTINUED)
Exercise prices as of January 3, 1998 for options outstanding arising from
the July 1997 grant (49,873 options), the December 1996 grant (1,114,398
options), and the May 1996 grant (5,688,073 options) were $5.23, $3.23, and
$1.74, respectively. The weighted average fair value for options granted in 1997
was $5.23. The weighted average remaining contractual life of the options is
approximately eight years.
Pro forma information regarding net income is required by the SFAS No. 123,
"Accounting for Stock-Based Compensation", and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair value for the options was estimated at the date of
grant using a present value approach with the following weighted-average
assumptions: risk-free interest rate of 6.0%; no expected dividend yield;
volatility of zero; and a weighted-average expected life of the option of five
years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income and basic earnings per share would have been approximately
$55.0 million and $0.71 per share for the year ended January 3, 1998 and $14.0
million and $0.19 per share for the forty-eight weeks ended December 28, 1996,
respectively.
16. RESTRUCTURING CHARGE
In 1993, the predecessor company had recorded an operating charge of $122.7
million to restructure operations. During the first four weeks of 1996, there
was no spending against the restructuring reserves. The restructuring reserve
balance was $38.2 million at January 26, 1996, and was not a cost assumed as
part of the Keebler acquisition. There were no restructuring reserves at January
3, 1998 and December 28, 1996.
17. DISCONTINUED OPERATIONS
During July 1995, the predecessor company adopted plans to discontinue the
operations of the Frozen Food businesses. On January 9, 1996, UB Investments
(Netherlands) B.V. sold the Frozen Food businesses to the Windsor Food Company
Ltd. for $70.0 million. A gain on sale of $18.9 million was recorded during the
four weeks ended January 26, 1996. Income tax expense was not recognized on the
gain on the sale of the Frozen Food businesses as the predecessor company did
not provide for any income taxes during the four weeks ended January 26, 1996.
Net sales from these operations were $70.9 million for the year ended
December 30, 1995. Expenses charged against discontinued operations include
expenses associated with the costs of production, marketing, and specific
administrative expenses. Expenses do not include an allocation of shared
selling, distribution, and general administrative costs. Income from
discontinued operations relating to the Frozen Food businesses was $7.3 million
for the year ended December 30, 1995. Income tax expense was not recognized for
discontinued operations in 1995 due to the Company having a net loss on a
consolidated basis. There were no operating activities for the Frozen Food
businesses during the four weeks ended January 26, 1996 as the sale was
effective as of December 31, 1995. The net assets of the Frozen Food businesses
as of December 30, 1995 were $47.7 million. Included in the net assets were
primarily inventory, other current assets, property, plant, and equipment, and
certain current liabilities and accruals.
F-25
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. AFFILIATE TRANSACTIONS
On December 29, 1995, the predecessor company transferred certain assets and
the stock of the Frozen Food businesses to U.B. Investments (Netherlands) B.V.
for promissory notes that aggregated $70.0 million. On January 9, 1996, U.B.
Investments (Netherlands) B.V. sold both these assets and stock to Windsor Food
Company Ltd. for $70.0 million, effective December 31, 1995. The aggregate
carrying value of these businesses and assets reflected in the December 30, 1995
consolidated balance sheet is $47.7 million, consisting primarily of goodwill of
$22.0 million, property, plant, and equipment of $21.2 million, and inventory of
$7.6 million, which resulted in a pre-tax realized gain, net of a $3.4 million
charge for severance arising from the sale, of $18.9 million for UBIUS.
On December 29, 1995, the predecessor company sold the stock of both
U.B.F.C., Inc. and U.B.H.C., Inc. to U.B. Investments plc. for $100 each which
resulted in no significant gain or loss.
Near the end of 1995, and in consideration of completing various pending
stock and asset purchase agreements, as described in Note 4, the predecessor
company entered into several transactions with affiliated companies within
United Biscuits (Holdings) plc. The accompanying consolidated financial
statements have not been adjusted to reflect these transactions which are
summarized below, as it is the Company's policy to only give effect to
dispositions resulting in a gain on the completion of the transaction with the
ultimate third party acquirer.
On November 30, 1995, Keebler Company sold to UB Group Ltd., ultimately
United Biscuits (Holdings) plc., for a $5.0 million affiliate receivable, the
entire rights, titles and interests in certain logos, trade names, trademarks,
and service marks registered or pending registration by Keebler Company in
Australia, New Zealand, Asia, and Europe. The proceeds of this transaction were
offset by certain legal fees and registration and licensing costs aggregating
$0.5 million. The net gain on the sale of these trademarks is included in other
costs and expenses for the year ended December 30, 1995.
In 1995, the predecessor company conducted business with various affiliated
companies that ultimately were under the control of United Biscuits (Holdings)
plc. Transactions with related parties included working capital financing and
the purchase of product for resale in the United States. Purchases of product
from affiliated companies for resale in the United States were $11.3 million for
the year ended December 30, 1995.
19. NET INCOME PER SHARE
Earnings per share is calculated using the weighted average number of common
and common equivalent shares outstanding during each period. The common
equivalent shares relate to the 1996 Stock Option Plan and the warrant issued in
connection with the Sunshine acquisition and are calculated using the treasury
stock method.
F-26
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. NET INCOME PER SHARE (CONTINUED)
The following table sets for the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Forty-Eight
YEAR ENDED Weeks Ended
JANUARY 3, 1998 December 28, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
NUMERATOR:
Income from operations before extraordinary item..................... $ 62,381 $ 17,677
Extraordinary item, net of tax....................................... 5,396 1,925
----------------- -----------------
Net income........................................................... $ 56,985 $ 15,752
================= =================
DENOMINATOR:
Denominator for Basic Earnings Per Share
Weighted average shares......................................... 77,604 75,244
Effect of Dilutive Securities:
Stock options................................................... 2,168 832
Warrants........................................................ 790 --
----------------- -----------------
Diluted potential common shares................................. 2,958 832
----------------- -----------------
Denominator for Diluted Earnings Per Share........................... 80,562 76,076
================= =================
</TABLE>
Options to purchase 56,216 shares of common stock at $3.23 per share were
outstanding at December 28, 1996, but were excluded from the computation of
diluted net income per share as the exercise price of the options exceeded the
average market price of common shares; and therefore, the effect would have been
antidilutive.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair market value of financial instruments, which includes short and
long-term borrowings, was estimated using discounted cash flow analyses based on
current interest rates which would be obtained for similar financial
instruments. The carrying amounts of these financial instruments approximate
fair value.
The Company often enters into exchange traded commodity futures and options
contracts to protect the Company against a portion of adverse raw material price
movements. Gains or losses realized from the liquidation or expiration of the
contracts are recognized as part of the cost of raw materials. Gains or losses
are deferred in inventory until realized. Cost of sales was increased by losses
on futures and options transactions of $3.8 million in 1997, and reduced by
gains on futures and options transactions of $0.8 million for the forty-eight
weeks ended December 28, 1996, and $3.4 million in 1995. Operations for the four
weeks ended January 26, 1996, was unaffected by gains or losses on futures and
options as the $0.5 million loss was recorded as an adjustment to the opening
balance sheet. As of January 3, 1998, $4.9 million in unrealized futures and
options contract losses have been deferred in inventory. The notional amount of
open futures and options contracts at January 3, 1998 was $58.1 million and $0.7
million, respectively. The open contracts will expire between March 1998 and
November 1998.
F-27
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. UNAUDITED QUARTERLY FINANCIAL DATA
Results of operations for each of the four quarters of the fiscal years
ended January 3, 1998 and December 28, 1996 follow. Each quarter represents a
period of twelve weeks except the first quarter which includes sixteen weeks. In
1996, earnings per share amounts have been restated to comply with SFAS No. 128,
"Earnings per Share" (See Note 19).
<TABLE>
<CAPTION>
Quarter 1 Quarter 2 Quarter 3 Quarter 4
------------------- ------------------- ------------------- -------------------
1997 1996* 1997 1996 1997 1996 1997** 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $597.0 $335.3 $459.8 $383.8 $485.3 $452.3 $523.1 $474.1
Gross profit.......................... 337.0 177.8 259.7 197.9 277.0 235.0 303.5 260.6
Income before extraordinary item...... 7.6 1.3 13.0 0.5 18.5 0.8 23.3 15.1
Extraordinary item.................... 2.7 -- -- 1.9 -- -- 2.7 --
Net income (loss)..................... 4.9 1.3 13.0 (1.4) 18.5 0.8 20.6 15.1
Basic net income (loss) per share:
Income before extraordinary item... $0.10 $0.02 $0.16 $ 0.01 $0.24 $0.01 $0.30 $0.20
Extraordinary item................. 0.04 -- -- 0.03 -- -- 0.03 --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................. $0.06 $0.02 $0.16 $(0.02) $0.24 $0.01 $0.27 $0.20
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares............... 77.6 71.7 77.6 74.4 77.6 77.5 77.6 77.5
========= ========= ========= ========= ========= ========= ========= =========
Diluted net income (loss) per share:
Income before extraordinary item... $0.10 $0.02 $0.16 $ 0.01 $0.23 $0.01 $0.28 $0.19
Extraordinary item................. 0.04 -- -- 0.02 -- -- 0.03 --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................. $0.06 $0.02 $0.16 $(0.01) $0.23 $0.01 $0.25 $0.19
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares............... 79.2 71.7 79.2 75.2 81.3 79.1 81.7 79.1
========= ========= ========= ========= ========= ========= ========= =========
- ----------
<FN>
* Quarter 1, 1996 excludes the financial data of the predecessor company for the four weeks ended January 26, 1996.
** Quarter 4, 1997 includes thirteen weeks as fiscal 1997 is a fifty-three week year.
</FN>
</TABLE>
22. SUBSEQUENT EVENTS
The consolidated financial statements reflect the Company's declaration of a
57.325-for-1 stock split of common stock ("Stock Split") effective January 22,
1998. The Stock Split was effected in the form of a stock dividend. Accordingly,
all references in the consolidated financial statements to number of shares,
options, warrants, and the related prices, as well as per share amounts and the
average number of shares outstanding, have been restated to reflect these
changes.
On January 29, 1998, the Company made a public offering of 13,386,661 shares
of common stock (the "Offering"). Concurrent with the Offering, Bermore
exercised a warrant to purchase 6,135,781 shares of common stock. The exercise
of the warrant resulted in the Company receiving $19.8 million of cash proceeds.
All of the shares in the Offering were sold by Artal and Bermore, with no
proceeds from the Offering going to the Company. As part of the transaction,
Flowers acquired additional shares of common stock from Artal and Bermore so
that its ownership of outstanding common stock increased from approximately 45%
to 55%. Sales of shares and the exercise of the warrant resulted in Artal's
ownership decreasing from approximately 45% to 21%, and Bermore's ownership
decreasing from approximately 7% to 6% of outstanding common stock. Management's
ownership remained at approximately 2%, with the balance of the outstanding
common stock being sold to non-affiliates.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY
Our report on the consolidated financial statements of Keebler Foods Company and
Subsidiaries and UB Investments US Inc. and Subsidiaries is included on page F-2
of the Form 10-K. In connection with our audits of such financial statements, we
have also audited the related financial statement schedule listed in the index
on page F-1 of the Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 18, 1998
S-1
<PAGE>
<TABLE>
ITEM 14 (D). FINANCIAL STATEMENT SCHEDULE SCHEDULE II
KEEBLER FOODS COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (NOTE 1)
FOR THE YEAR ENDED JANUARY 3, 1998, THE FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996,
THE FOUR WEEKS ENDED JANUARY 26, 1996, AND THE YEAR ENDED DECEMBER 30, 1995
(IN THOUSANDS)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS/ OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------------------------- ---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Those valuation and qualifying accounts
which are deducted in the balance sheet
from the assets to which they apply:
YEAR ENDED JANUARY 3, 1998
For discounts and doubtful accounts $ 5,390 $ 18,970 $ - $ (19,395)(1) $ 4,965
========== ========== ========== ========== ==========
For deferred taxes $ 84,350 $ - $ - $ - $ 84,350
========== ========== ========== ========== ==========
For inventory reserves $ 5,508 $ 9,716 $ - $ (8,442)(2) $ 6,782
========== ========== ========== ========== ==========
FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996
For discounts and doubtful accounts $ 4,181 $ 14,399 $ 907 (3) $ (14,097)(1) $ 5,390
========== ========== ========== ========== ==========
For deferred taxes $ 109,484 $ - $ - $ (25,134)(4) $ 84,350
========== ========== ========== ========== ==========
For inventory reserves $ 9,578 (5) $ 3,370 $ - $ (7,440)(6) $ 5,508
========== ========== ========== ========== ==========
========================================================================================================================
FOUR WEEKS ENDED JANUARY 26, 1996
For discounts and doubtful accounts $ 3,558 $ 1,577 $ - $ (954)(1) $ 4,181
========== ========== ========== ========== ==========
For deferred taxes $ 116,817 $ (7,333) $ - $ - $ 109,484
========== ========== ========== ========== ==========
For inventory reserves $ 637 $ 378 $ - $ - $ 1,015
========== ========== ========== ========== ==========
YEAR ENDED DECEMBER 30, 1995
For discounts and doubtful accounts $ 1,747 $ 13,801 $ - $ (11,990)(1) $ 3,558
========== ========== ========== ========== ==========
For deferred taxes $ 46,375 $ 70,442 $ - $ - $ 116,817
========== ========== ========== ========== ==========
For inventory reserves $ 1,136 $ - $ - $ (499)(2) $ 637
========== ========== ========== ========== ==========
<FN>
Note 1: Schedule II - Valuation and Qualifying Accounts includes certain financial data of Keebler Foods Company ("the Company") for
the year ended January 3, 1998 and for the forty-eight weeks ended December 28, 1996, as well as certain financial data of
UB Investments US, Inc. ("UBIUS"), the predecessor company, for the four weeks ended January 26, 1996, the date on which
UBIUS was acquired by INFLO Holdings Corporation ("INFLO"), and the year ended December 30, 1995. The distinction between
the Company's and the predecessor company's financial data has been made by inserting a double line.
(1) Primarily charges against reserves, net of recoveries.
(2) Inventory write-offs.
(3) Amount acquired in the acquisition of Sunshine Biscuits, Inc.
(4) Adjustment to reduce the valuation allowance as a result of the acquisition of the Company.
(5) Includes inventory reserves established in the acquisition of the Company.
(6) Adjustment to reduce reserve.
</FN>
S-2
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------
2.1 Plan and Agreement of Merger dated November 20, 1997 between
Keebler Foods Company ("Keebler") and INFLO Holdings Corporation
("INFLO") (incorporated herein by reference to Exhibit 2.1 of
Keebler's Registration Statement on Form S-1 previously filed with
the Securities and Exchange Commission (the "Commission") (File
No. 333-42075) (the "1998 Registration Statement"))
3.1 Amended and Restated Certificate of Incorporation of Keebler
(incorporated herein by reference to Exhibit 3.1 of the 1998
Registration Statement)
3.2 Amended and Restated By-Laws of Keebler (incorporated herein
by reference to Exhibit 3.2 of the 1998 Registration Statement)
4.1 Indenture dated as of June 15, 1996 among Keebler, the guarantors
named therein, and The U.S. Trust Company of New York ("Trustee")
(incorporated herein by reference to Exhibit 4.1 of Keebler's
Registration Statement on Form S-4 previously filed with the
Commission (File No. 333-8379)(the "1996 Registration Statement"))
4.2 The 10 3/4% Senior Subordinated Note due 2006 (included in Exhibit
4.1) (incorporated herein by reference to Exhibit 4.2 of the 1996
Registration Statement)
10.1 Stockholders' Agreement dated as of January 26, 1996 among INFLO,
Artal Luxembourg S.A. ("Artal"), and Flowers Industries, Inc.
("Flowers") (incorporated herein by reference to Exhibit 10.1 of
the 1996 Registration Statement)
10.2 Stock Purchase Agreement dated November 5, 1995 between INFLO and
UB Investments (Netherlands) B.V. ("UB Investments") (incorporated
herein by reference to Exhibit 10.2 of the 1996 Registration
Statement)
10.3 Amendment Agreement dated as of January 26, 1996 between INFLO and
UB Investments (incorporated herein by reference to Exhibit 10.3
of the 1996 Registration Statement)
10.4 Distribution Agreement dated as of January 26, 1996 between United
Biscuits (UK) Limited ("UBL") and Shaffer, Clarke & Co., Inc.
("Shaffer") (incorporated herein by reference to Exhibit 10.5 of
the 1996 Registration Statement)
10.5 Trademark License Agreement dated as of January 26, 1996 between
UBL and Shaffer (incorporated herein by reference to Exhibit 10.6
of the 1996 Registration Statement)
10.6 Borrower Pledge Agreement dated as of January 26, 1996 made by
Keebler in favor of The Bank of Nova Scotia (the "Bank")
(incorporated herein by reference to Exhibit 10.7(e) of the 1996
Registration Statement)
10.7 Acknowledgment and Supplement to Borrower Pledge Agreement dated
June 4, 1996 made by Keebler in favor of the Bank (incorporated
herein by reference to Exhibit 10.7(f) of the 1996 Registration
Statement)
10.8 Subsidiary Pledge Agreement dated as of January 26, 1996 made by
each of the Keebler's subsidiaries listed as parties thereto in
favor of the Bank (incorporated herein by reference to Exhibit
10.7(g) of the 1996 Registration Statement)
10.8(a) First Amendment and Supplement to Subsidiary Pledge Agreement
by certain subsidiaries of Keebler dated November 25, 1997 in
favor of the Bank (incorporated herein by reference to Exhibit
10.8(a) of the 1998 Registration Statement)
i
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------
10.9 Management Stockholder's Agreement between INFLO and Key Employees
of INFLO (incorporated herein by reference to Exhibit 10.8 of the
1996 Registration Statement)
10.10 Non-Qualified Stock Option Agreement between INFLO and Key
Employees of INFLO (incorporated herein by reference to Exhibit
10.9 of the 1996 Registration Statement)
10.11 1996 Stock Purchase and Option Plan for Key Employees of INFLO
(incorporated herein by reference to Exhibit 10.10 of the 1996
Registration Statement)
10.12 Sale Participation Agreement among Artal, Flowers, and Key
Employees of INFLO (incorporated herein by reference to Exhibit
10.11 of the 1996 Registration Statement)
10.13 Stock Purchase Agreement dated June 4, 1996 among INFLO, Keebler,
and G.F. Industries, Inc. ("GFI")(incorporated herein by reference
to Exhibit 10.12 of the 1996 Registration Statement)
10.14 GFI Stockholder's Agreement dated June 4, 1996 among INFLO, GFI,
Artal, and Flowers (incorporated herein by reference to Exhibit
10.13 of the 1996 Registration Statement)
10.15 Warrant to Purchase Shares of Common Stock of INFLO (incorporated
herein by reference to Exhibit 10.14 of the 1996 Registration
Statement)
10.16 Second Amended and Restated Credit Agreement dated April 8, 1997
among Keebler, the Bank, and the other parties thereto (the
"Credit Agreement") (incorporated herein by reference to Exhibit
10.15 of Keebler's Quarterly Report on Form 10-Q previously filed
with the Commission on November 10, 1997 (the "Quarterly Report"))
10.17 First Amendment to the Credit Agreement dated October 3, 1997
among Keebler, the Bank, and the other parties thereto
(incorporated herein by reference to Exhibit 10.15(a) of the
Quarterly Report)
10.18 Second Amendment to the Credit Agreement dated November 17, 1997
between Keebler, the Bank, and other parties thereto (incorporated
by reference to Exhibit 10.19 of the 1998 Registration Statement)
10.19 Third Amendment and Waiver to the Second Amended and Restated
Credit Agreement dated January 5, 1998 between Keebler, the Bank,
and the other parties thereto (incorporated herein by reference to
Exhibit 10.20 of the 1998 Registration Statement)
10.20 Stock Appreciation Rights Plan of Keebler for Certain Management
Employees dated March 4, 1997 (incorporated herein by reference to
Exhibit 10.16 of the Quarterly Report)
10.21 Artal Stock Purchase Agreement among Artal, Flowers, and Keebler
(incorporated by reference to Exhibit 10.22 of the 1998
Registration Statement)
10.22 Bermore Stock Purchase Agreement among Artal, Flowers, Bermore,
and Keebler (incorporated by reference to Exhibit 10.23 of the
1998 Registration Statement)
10.23 Employment and Severance Agreement between Keebler and Sam K. Reed
(incorporated by reference to Exhibit 10.24 of the 1998
Registration Statement)
10.24 Employment and Severance Agreement between Keebler and certain
executive officers (incorporated by reference to Exhibit 10.25 of
the 1998 Registration Statement)
ii
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------
10.25 1998 Omnibus Stock Incentive Plan of Keebler (incorporated by
reference to Exhibit 10.26 of the 1998 Registration Statement)
10.26 Non-Employee Director Stock Plan of Keebler (incorporated by
reference to Exhibit 10.27 of the 1998 Registration Statement)
10.27 Amendments to the 1996 Non-Qualified Option Agreements
(incorporated by reference to Exhibit 10.28 of the 1998
Registration Statement)
10.28 Supplement to Subsidiary Guaranty (Hollow Tree) (incorporated
by reference to Exhibit 10.29 of the 1998 Registration Statement)
10.29 Supplement to Subsidiary Guaranty (Elfin Equity) (incorporated
by reference to Exhibit 10.30 of the 1998 Registration Statement)
10.30 Amendment No. 1 to Management Stockholder's Agreement (Non-
Executives) (incorporated by reference to Exhibit 10.31.1 of the
1998 Registration Statement)
10.31 Amendment No. 1 to Management Stockholder's Agreement (Executives
other than O'Neill, Walsh, and Spear) (incorporated by reference
to Exhibit 10.31.2 of the 1998 Registration Statement)
10.32 Amendment No. 1 to Management Stockholder's Agreement (O'Neill,
Walsh, and Spear) (incorporated by reference to Exhibit 10.31.3 of
the 1998 Registration Statement)
21 Subsidiaries of Keebler (incorporated herein by reference to
Exhibit 21 of the 1998 Registration Statement)
27 Financial Data Schedule
iii
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Keebler
Foods Company Consolidated Balance Sheet at January 3, 1998 and the Consolidated
Statement of Operations for the year ended January 3, 1998 found on pages F-3
through F-5 of the Company's Form 10-K and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 27,188
<SECURITIES> 0
<RECEIVABLES> 103,928
<ALLOWANCES> 4,965
<INVENTORY> 112,462
<CURRENT-ASSETS> 301,646
<PP&E> 576,786
<DEPRECIATION> 98,665
<TOTAL-ASSETS> 1,042,851
<CURRENT-LIABILITIES> 368,185
<BONDS> 272,390
0
0
<COMMON> 776
<OTHER-SE> 221,275
<TOTAL-LIABILITY-AND-EQUITY> 1,042,851
<SALES> 2,065,184
<TOTAL-REVENUES> 2,065,184
<CGS> 888,031
<TOTAL-COSTS> 1,914,276
<OTHER-EXPENSES> 9,511
<LOSS-PROVISION> 18,970
<INTEREST-EXPENSE> 33,847
<INCOME-PRETAX> 107,550
<INCOME-TAX> 45,169
<INCOME-CONTINUING> 62,381
<DISCONTINUED> 0
<EXTRAORDINARY> (5,396)
<CHANGES> 0
<NET-INCOME> 56,985
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.70
</TABLE>
