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 2, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: NO. 001-13705
KEEBLER FOODS COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3839556
(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 OF ITS 10 3/4% SENIOR SUBORDINATED NOTES DUE 2006 WHICH ARE
FULLY AND UNCONDITIONALLY GUARANTEED BY THE 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. | |
THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD BY
NON-AFFILIATES OF THE REGISTRANT AS OF MARCH 15, 1999, BASED UPON THE CLOSING
PRICE OF THE COMMON STOCK AS REPORTED ON THE NEW YORK STOCK EXCHANGE ON SUCH
DATE, WAS APPROXIMATELY $1,358,000,000.
NUMBER OF SHARES OF COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF THE CLOSE
OF BUSINESS ON MARCH 15, 1999: 84,303,958.
DOCUMENTS INCORPORATED BY REFERENCE:
PROXY STATEMENT TO BE FILED ON OR BEFORE APRIL 25, 1999 FOR
THE ANNUAL MEETING TO BE HELD ON MAY 25, 1999..................... PART III
<PAGE>
FORM 10-K REPORT
TABLE OF CONTENTS
PART I: PAGE
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 7
Item 3. Legal Proceedings................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.............. 8
PART II:
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters......................................................... 8
Item 6. Selected Financial Data.......................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation............................................ 10
Item 7a. Quantitative and Qualitative Disclosures About Market Risk....... 18
Item 8. Financial Statements and Supplementary Data...................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 19
PART III:
Item 10. Directors and Executive Officers of the Registrant............... 19
Item 11. Executive Compensation........................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management... 19
Item 13. Certain Relationships and Related Transactions................... 20
PART IV:
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 20
<PAGE>
PART I
ITEM 1. BUSINESS
Unless stated otherwise, market share data included in this Annual Report on
Form 10-K are based on supermarket, mass merchandiser and drug store sales,
measured in pounds sold, for the fifty-two week period ended January 3, 1999 as
reported by Information Resources, Inc. ("IRI"). Sales to club stores and
vending distributors are not included in this data. With respect to the
foodservice industry, market share data included herein are based on sales,
measured in pounds sold, for the twelve-month period ended December 31, 1998 as
reported by the International Foodservice Manufacturers Association
("IFMATRAC").
Keebler Foods Company and its subsidiaries ("Keebler" or "the Company") is
the second largest cookie and cracker manufacturer in the United States ("U.S.")
with annualized net sales of over $2.5 billion and a 25.7% share of the U.S.
cookie and cracker market. We market a majority of our products under
well-recognized brands such as KEEBLER, CHEEZ-IT, CARR'S and FAMOUS AMOS. In the
U.S., we are the number two manufacturer of branded cookies and crackers, the
leading licensed supplier of Girl Scout cookies and the number one manufacturer
of private label cookies and the number one manufacturer of crackers for the
foodservice market. We are also the number one manufacturer of retail branded
ice cream cones in the U.S. and a major producer of retail branded pie crusts.
In addition, we produce custom-baked products for other marketers of branded
food products.
RECENT HISTORY
Keebler was originally organized under the laws of the State of Delaware as
UB Investments US Inc. ("UBIUS" or "predecessor company") on July 14, 1992.
Keebler 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, Keebler
acquired Sunshine Biscuits, Inc. ("Sunshine" or 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 Keebler. On February 3, 1998, Keebler
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 Keebler receiving $19.8 million of cash proceeds. Artal and Bermore
sold all of the shares in the Offering, with no proceeds from the Offering going
to Keebler. 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%. During 1998, Bermore, through a series of transactions,
transferred its shares held to Claremont Enterprises, Limited ("Claremont"), a
privately held Bahamian limited company. On September 28, 1998, Keebler acquired
President International, Inc. ("President") from President International Trade
and Investment Corporation, a company limited by shares under the International
Business Companies Ordinance of the British Virgin Islands. On January 21, 1999,
Keebler registered 16,200,000 shares of the Company common stock in connection
with a secondary public offering. Artal and Claremont owned all of the shares
sold in the secondary offering, with no proceeds going to Keebler. As a result,
Artal's ownership percentage decreased from approximately 21% to 2% and
Claremont's ownership percentage was reduced from approximately 6% to 5% of the
outstanding common stock. Management's ownership remained at approximately 2%
and Flowers' ownership remained at approximately 55%.
1
<PAGE>
GENERAL BUSINESS DESCRIPTION
Keebler competes in the U.S. retail cookie and cracker industry which in
1998 generated sales of approximately $8.5 billion measured in retail sales to
consumers. The U.S. cookie and cracker industry, which is relatively stable, has
experienced slow, but steady growth over the past twenty years. The cookie and
cracker industry is comprised of distinct types of products. Cookie product
types include, among others, sandwich cookies, chocolate chip cookies and
fudge-covered cookies. Cracker product types include, among others, saltine
crackers, graham crackers and snack crackers. Supermarkets accounted for 76.9%
of 1998 sales in the cookie and cracker industry, with mass merchandisers (such
as Wal-Mart), 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 1.5% per year. We believe that non-supermarket
channels of distribution are becoming increasingly important.
Since the acquisition of the Keebler business in January 1996, we have
employed a business strategy designed to capitalize on our competitive
strengths, which include strong national brands and a national direct to store
door sales and distribution system, which is known as a "DSD distribution
system." The acquisitions of Sunshine and President have enabled us to further
develop this business strategy. The key elements of this strategy include:
o building on the KEEBLER brand and taking advantage of its strength
across product types;
o expanding the CHEEZ-IT brand;
o increasing sales in non-supermarket channels;
o increasing the efficiency of operations and
o pursuing acquisitions that complement or provide further opportunities
to use existing brands, product lines or distribution systems.
Keebler operates its business through the use of two reportable segments.
The mass distribution of consumer food products in both the Branded and
Specialty segments is an important element in maintaining sales growth and
providing service to customers. We attempt 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, we have 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. We use a
combination of Keebler-owned, public and contract carriers to deliver products
from distribution points to customers.
BRANDED SEGMENT
The Branded segment produces a number of well-recognized brands including:
CHEEZ-IT, CHIPS DELUXE, CLUB, DROXIES, FAMOUS AMOS, FUDGE SHOPPE, SUNSHINE
KRISPY, MUNCH'EMS, MURRAY, OLDE NEW ENGLAND, READY CRUST, SANDIES, TOWN HOUSE,
VIENNA FINGERS, WHEATABLES and ZESTA. We also import and distribute 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
crackers in the U.S. In addition, we are the top manufacturer of retail branded
ice cream cones in the U.S., as well as the leading manufacturer of preformed
retail branded pie crusts which are sold under the KEEBLER READY CRUST brand
name. All of our branded products are sold in supermarkets, mass merchandisers,
club stores, convenience stores and drug stores, among others.
Keebler distributes retail branded cookie and cracker products through our
DSD distribution system, which services substantially all supermarkets in the
U.S., as measured by IRI. We believe our national DSD distribution system
provides us with certain competitive advantages. Members of Keebler's sales
force, rather than store employees, stock and arrange our products on store
shelves and build end-aisle and free-standing product displays. Frequent
presence of our sales force employees provides us with a high level of control
over the availability and presentation of our products. We believe that this
control allows us to maintain shelf space, better execute in-store promotions
and more effectively introduce new products. In-store promotions are important
because we believe that purchases of cookies and crackers are often impulse
driven.
2
<PAGE>
With the acquisition of President, we acquired their franchised DSD
distribution system, which principally distributes products east of the
Mississippi River. The President DSD distribution system, which services both
supermarkets and certain non-supermarket channels, is comprised of independent
franchisees who purchase and resell certain President products.
In addition to the Keebler and President DSD distribution systems, we use a
network of independent distributors and brokers to serve convenience stores and
vending distributors. In the case of club stores, Keebler uses a dedicated sales
force and ships products directly to the customers' warehouses. We also use a
warehouse sales and distribution system to sell and distribute KEEBLER READY
CRUST pie crusts. CARR'S crackers are sold through a network of independent
specialty distributors.
Keebler has focused on new product introductions and line extensions within
our core product types, such as CHEEZ-IT HEADS AND TAILS, CHEEZ-IT snack mix,
CHEEZ-IT HOT & SPICY crackers, KEEBLER PEANUT BUTTER FUDGE STICKS, LEMON CREME
VIENNA FINGER cookies and HOMESTYLE SOFT BATCH cookies. We have previously
introduced innovative product types such as KEEBLER COOKIE STIX. We also
developed new sizes of our leading products to enable us to expand in
non-supermarket channels and introduced innovative new packaging, such as
holographic holiday packaging and resealable stand-up packages for our CHEEZ-IT
snack mix and FAMOUS AMOS cookies.
The planned integration of Sunshine's operations into those of Keebler was
completed by the end of 1996. The combination of Keebler and Sunshine allowed us
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 our DSD distribution system which
had excess capacity. Filling excess capacity with Sunshine products made
Keebler's DSD distribution system more efficient and allowed us to focus sales
and marketing efforts on more profitable retail branded products.
Net sales, net income and cash flow of the Branded segment are affected by
the timing of new product introductions, promotional activities, price increases
and a seasonal bias toward the second half of the year due to events such as
back-to-school, Thanksgiving and Christmas. The relative mix between cookie and
cracker sales varies throughout the year with stronger cracker sales in the last
quarter of the calendar year.
SPECIALTY SEGMENT
The Specialty segment produces cookies, crackers and custom-baked products
for several markets. We are the number one manufacturer of crackers for the
foodservice market, as reported by IFMATRAC. Our foodservice products are sold
by a national sales force dedicated solely to the foodservice market, with the
assistance of independent brokers. These products are shipped directly to
customers' warehouses and in the foodservice market, we generally sell to large
distributors who sell our products to restaurants and institutions.
With the acquisition of President, we are now also the leading licensed
supplier of cookies for the Girl Scouts of America. We exclusively supply more
than one-half of the approximately 320 Girl Scout Councils in the U.S. and are
one of only three cookie manufacturers licensed by the Girl Scouts of America to
manufacture Girl Scout cookies. Keebler employs dedicated marketing personnel to
assist the various Girl Scout Councils with sales, marketing and public
relations. A team of nine salespersons is employed, in addition to independent
brokers, which market to U.S. Girl Scout Councils.
In addition, Keebler manufactures private label products to be sold by
retailers under their own brands. We believe we are the leading manufacturer of
private label cookie products in the U.S. We serve leading supermarkets in the
U.S. with a variety of private label products ranging from value-oriented
standard products to premium items that compete with branded alternatives. Our
Bake-Line Products, Inc. plant located in Des Plaines, Illinois, is dedicated to
producing private label cookies, and is capable of producing a wide variety of
products with numerous packaging options to meet the wide-ranging demands of our
private label customers. Our private label cookies and crackers are shipped via
common carrier directly to customer warehouses.
3
<PAGE>
We also manufacture a variety of custom-baked products for other marketers
of branded food products including: Kellogg POP TARTS, Kellogg NUTRIGRAIN bars,
MCDONALDLAND cookies and Gerber BITER biscuits, as well as crackers for Oscar
Mayer LUNCHABLES, Starkist CHARLIE TUNA snack kits and Kraft HANDI-SNACKS. Our
custom-baked products are packaged under customers' labels and shipped from
Keebler plants to the customers' regional warehouses or distribution centers via
common carrier.
Historically, President's net sales, net income and cash flow have been
higher in the first quarter than any other fiscal quarter because substantially
all sales of Girl Scout cookies have occurred in that quarter. As such, we
expect to realize proportionately higher net sales, net income and cash flow
during the first quarter than we historically have experienced.
COMPETITION
The U.S. branded cookie and cracker industry is led by Keebler and Nabisco,
Inc. ("Nabisco"), which together account for 59.4% of sales volume. Smaller
competitors include numerous national, regional and local manufacturers of both
branded and private label products. Competition in our markets takes many forms
including:
o establishing favorable brand recognition;
o developing products sought by consumers;
o implementing appropriate pricing;
o providing strong marketing support and
o obtaining access to retail outlets and sufficient shelf space.
Nabisco is the largest manufacturer in the U.S. cookie and cracker industry.
We have a 25.7% share of the retail cookie and cracker market, while Nabisco has
a 33.7% share. The remaining industry participants primarily target certain
portions 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 Farm
operates a national DSD distribution system through independent distributors.
CUSTOMERS
Keebler's top ten customers in 1998 accounted for 29.6% of our net sales. No
single customer accounted for more than 4.3% of net sales.
RAW MATERIALS
The principal raw materials used in our food products consist of flour,
sugar, chocolate, shortening and milk. We also use paper products such as
corrugated cardboard, as well as films and plastics to package its products. Raw
materials and packaging materials are readily available from various suppliers.
There is no significant reliance on any one supplier. We use hedging techniques
to minimize the impact of price fluctuations in raw materials and not for
speculative or trading purposes. The hedging techniques, however, may not result
in a reduction in our raw material costs or protect us from sharp increases in
certain raw material costs, which we have experienced in the past.
INTELLECTUAL PROPERTY
We own 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, FAMOUS AMOS, FUDGE SHOPPE, HI-HO,
HYDROX, SUNSHINE KRISPY, MUNCH'EMS, MURRAY, OLDE NEW ENGLAND, READY CRUST,
SANDIES, SOFT BATCH, SUNSHINE, TOASTEDS, TOWN HOUSE, VIENNA FINGERS, WHEATABLES
and ZESTA. We are also 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 our business since they have the effect of developing brand identification
and maintaining consumer loyalty. We are not aware of any fact that would
negatively impact the continuing use of any material patents, licenses,
trademarks or trade names.
4
<PAGE>
RESEARCH AND DEVELOPMENT
Keebler 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. We also carry 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-11 of our consolidated financial statements.
REGULATION
As a manufacturer and marketer of food items, our 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. These agencies regulate various aspects of our
business, including production processes, product quality, packaging, labeling,
storage and distribution. Under various statutes and regulations, such agencies
prescribe requirements and establish standards for quality, purity and labeling.
The finding of a failure to comply with one or more regulatory requirements can
result in a variety of sanctions, including monetary fines or compulsory
withdrawal of products from store shelves. In addition, advertising of our
businesses is subject to regulation by the FTC, and we are subject to certain
health and safety regulations, including those issued under the Occupational
Safety and Health Act.
ENVIRONMENTAL
Our 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 our operations are the Federal Clean Air Act and Clean Water Act. We
may be required to spend significant sums in order to maintain our 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, we do not believe
that compliance with, or liability under, any environmental laws individually or
in the aggregate will have a material adverse effect on our operations or
financial condition.
EMPLOYEES
We employ approximately 12,200 persons, of which approximately 5,800 are
represented by unions. We believe relations with our employees to be good.
<TABLE>
EXECUTIVE OFFICERS OF KEEBLER
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Robert P. Crozer 52 Chairman of the Board and Director
Sam K. Reed 52 Chief Executive Officer, President and Director
E. Nichol McCully 44 Chief Financial Officer and Senior Vice President - Finance
David B. Vermylen 48 President - Keebler Brands
Jack M. Lotker 55 President - Specialty Products
James T. Willard 58 Senior Vice President - Operations
Thomas E. O'Neill 44 Vice President, Secretary and General Counsel
James T. Spear 44 Vice President - Finance and Corporate Controller
</TABLE>
5
<PAGE>
ROBERT P. CROZER. 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 1989. 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. Mr. Crozer received both a B.A. and an M.B.A. from
the University of Virginia.
SAM K. REED. Mr. Reed has been the Chief Executive Officer, President and a
Director of Keebler since the Keebler acquisition in January 1996. Mr. Reed has
twenty-five 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.
E. NICHOL MCCULLY. Mr. McCully has been the Chief Financial Officer and
Senior Vice President-Finance of Keebler since the Keebler acquisition in
January 1996. Mr. McCully has over eleven years of 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.
DAVID B. VERMYLEN. 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-four 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. 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.
JACK M. LOTKER. Mr. Lotker has been President-Specialty Products of Keebler
since the Keebler acquisition in January 1996. Mr. Lotker has worked in the food
industry for twenty-four 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. Mr. Willard has been Senior Vice President-Operations of
Keebler since July 1996. With thirty-four 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
6
<PAGE>
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. Mr. O'Neill has been Vice President, Secretary and
General Counsel of Keebler since December 1996. Mr. O'Neill has spent more than
thirteen 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 a 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. Mr. Spear has been Vice President Finance and Corporate
Controller of Keebler since July 1995. He originally joined Keebler in February
1992 as Corporate Controller. Before starting with Keebler, 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.
All executive officers serve at the pleasure of the Board of Directors.
There is no family relationship between any of the executive officers of
Keebler.
ITEM 2. PROPERTIES
We operate nineteen manufacturing facilities in the U.S. of which sixteen
are owned and three are leased. The manufacturing facilities are located in
Athens, Georgia; Augusta, Georgia; Birmingham, Alabama; Charlotte, North
Carolina; Chicago, Illinois; Cincinnati, Ohio; Cleveland, Tennessee; Columbus,
Georgia; Denver, Colorado; Des Plaines, Illinois; Florence, Kentucky; Grand
Rapids, Michigan; Kansas City, Kansas; Lake Bluff, Illinois; Louisville,
Kentucky; Macon, Georgia; Marietta, Oklahoma; North Little Rock, Arkansas and
Sayreville, New Jersey. We also own and operate a dairy in Fremont, Ohio that
produces cheese under a proprietary formula that is used as an ingredient in
CHEEZ-IT crackers. In addition, we own one idle manufacturing facility located
in Atlanta, Georgia that is held for sale. As a result of capital expenditures
made over the past decade, we believe the manufacturing facilities are modern
and efficient. Additional investment may be necessary to improve the facilities
recently acquired in conjunction with the President acquisition. We also believe
manufacturing capacity is sufficient to meet foreseeable needs.
Distribution facilities consist of nineteen shipping centers attached to the
manufacturing facilities, eight stand-alone shipping centers (two owned and six
leased; of which two are idle) and sixty-two distribution centers (ten owned and
fifty-two leased) throughout the U.S. Of the sixty-two distribution centers,
nine were subleased and two were idle. The four idle facilities have been
accrued for in the plant and facility closing costs. We also lease seventy-seven
warehouses and eighteen depots that are located throughout the U.S. and are
utilized by the sales force in the distribution of our products. Following the
President acquisition, we own one idle warehouse that is held for sale. We
believe there is sufficient distribution capacity to meet foreseeable needs.
In addition to manufacturing and distribution facilities, we own two office
buildings and leases two others as part of our corporate office facility.
Keebler also leases numerous sales offices throughout the country.
All of our manufacturing, distribution and corporate office facilities are
used by both the Branded and Specialty segments of our business.
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION FOR COMMON STOCK
The New York Stock Exchange (the "Exchange") is the principal market on
which Keebler'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 Keebler'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 Keebler's shares. Quarterly market price data for 1998
is as shown below:
<TABLE>
<CAPTION>
Market Price per share
-------------------------------
High Low
-------------- -------------
<S> <C> <C>
1998:
Quarter 1............................................ $ 31.75 $ 25.88
Quarter 2............................................ $ 30.13 $ 24.69
Quarter 3............................................ $ 29.00 $ 23.88
Quarter 4............................................ $ 37.81 $ 26.19
</TABLE>
HOLDERS
The approximate number of holders of record of common stock as of March 15,
1999 was 523. This number does not include beneficial owners of Keebler's
securities held in the name of nominees.
DIVIDENDS
No dividends were declared on Keebler's common stock in 1998 or 1997.
Historically, we have not paid dividends on our common stock and do not
currently anticipate paying any cash dividends. Additionally, the existing
$700.0 million Senior Credit Facility Agreement ("Credit Facility") and the
Senior Subordinated Notes ("Notes") place limitations on our ability to pay
dividends or make other distributions on our common stock. The most limiting
dividend restriction exists under the Notes, which limits dividend payments to
the sum of: (i) 50% of consolidated cumulative net income, (ii) net cash
proceeds received from the issuance of capital stock, (iii) net cash proceeds
received from the exercise of stock options and warrants, (iv) net cash proceeds
received from the conversion of indebtedness into capital stock and (v) the net
reduction in investments made by Keebler. Any future determination as to the
payment of dividends will be subject to such limitations, will be at the
discretion of the Board of Directors and will depend on our results of
operations, financial condition, capital requirements and other factors deemed
relevant by the Board of Directors.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for the
year ended January 2, 1999, the year ended January 3, 1998, the forty-eight
weeks ended December 28, 1996 and the four weeks ended January 26, 1996, have
been derived from, and should be read in conjunction with the historical
consolidated financial statements of Keebler and UBIUS, the predecessor company,
including the respective notes thereto, included elsewhere. The selected
historical financial data presented below as of and for the fiscal years ended
December 30, 1995 and December 31, 1994 have been derived from the consolidated
financial statements of the predecessor company that are not included herein.
The distinction between Keebler and the predecessor company's selected financial
data, as shown below, has been made by inserting a double line. The results of
operations presented below are not necessarily indicative of results to be
expected for any future period. The information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
respective notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
Keebler Foods Company || UBIUS
--------------------------------------|| --------------------------------------
Forty-Eight || Four Weeks Year Ended
Year Ended Year Ended Weeks Ended || Ended -------------------------
January 2, January 3, December 28,|| January 26, December 30, December 31,
1999 (a) 1998 1996 (b) || 1996 1995 1994
------------ ------------ ------------|| ------------ ------------ ------------
(In Millions Except Per Share Data) || (In Millions)
<S> <C> <C> <C> || <C> <C> <C>
||
OPERATING DATA: ||
Net sales............................... $ 2,226.5 $ 2,065.2 $ 1,645.5 || $ 101.7 $ 1,578.6 $ 1,599.7
Gross profit............................ 1,287.6 1,177.2 871.3 || 46.8 831.8 894.2
Loss on impairment of Salty Snacks ||
business.............................. - - - || - 86.5 -
Income (loss) from continuing operations 196.1 141.4 70.1 || (25.5) (137.9) 46.4
Income tax expense (benefit)............ 73.0 45.2 14.0 || - (0.5) (1.1)
Discontinued operations: ||
Income from operations of discontinued ||
Frozen Food businesses, net of tax.. - - - || - 7.4 3.4
Gain on disposal of Frozen Food ||
businesses, net of tax.............. - - - || 18.9 - -
Extraordinary item: ||
Loss on early extinguishment of debt, ||
net of tax.......................... 1.7 5.4 1.9 || - - -
Net income (loss)....................... $ 94.9 $ 57.0 $ 15.8 || $ (6.5) $ (158.3) $ (23.0)
||
Diluted net income per share: ||
Income from continuing operations ||
before extraordinary item........... $ 1.10 $ 0.77 $ 0.23 ||
Extraordinary item.................... 0.02 0.07 0.02 ||
------------ ------------ ------------||
Net income............................ $ 1.08 $ 0.70 $ 0.21 ||
============ ============ ============||
||
Weighted Average Shares Outstanding..... 87.5 80.6 76.1 ||
============ ============ ============||
OTHER DATA: ||
EBITDA, as adjusted (c)................. $ 265.2 $ 202.1 $ 119.6 || $ (23.5) $ (93.3) $ 89.5
Depreciation and amortization (excluding ||
items related to discontinued ||
operations)........................... 69.1 60.7 49.5 || 2.0 44.6 43.1
Capital expenditures (excluding ||
expenditures related to discontinued ||
operations)........................... 66.8 48.4 29.4 || 3.2 54.2 54.6
||
CASH FLOW DATA: ||
Cash Provided from (Used by) ||
Operating activities.................. $ 142.7 $ 218.3 $ 53.2 || $ (0.4) $ (61.4) $ (17.4)
Investing activities.................. (510.7) (41.5) (130.1)|| 65.2 (52.6) (45.9)
Financing activities.................. 364.3 (161.6) 86.8 || (65.7) 104.4 69.4
------------ ------------ ------------|| ------------ ------------ ------------
(Decrease) increase in cash and cash ||
equivalents........................... $ (3.7) $ 15.2 $ 9.9 || $ (0.9) $ (9.6) $ 6.1
============ ============ ============|| ============ ============ ============
- ---------------------------------------------------------------
(a) Includes the operating results of President from the acquisition date of September 28, 1998 through January 2,
1999. Other matters affecting comparability are detailed in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(b) Includes the operating results of Sunshine from the acquisition date of June 4, 1996 through December 28, 1996. Other
matters affecting comparability are detailed in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(c) EBITDA, as adjusted, is defined as income (loss) from continuing operations before interest, taxes, depreciation,
amortization and restructuring charges (gains).
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Keebler Foods Company || UBIUS
--------------------------------------|| --------------------------------------
As of || As of
--------------------------------------|| --------------------------------------
January 2, January 3, December 28,|| January 26, December 30, December 31,
1999 1998 1996 || 1996 1995 1994
------------ ------------ ------------|| ------------ ------------ ------------
(In Millions) || (In Millions)
<S> <C> <C> <C> || <C> <C> <C>
||
BALANCE SHEET DATA: ||
Cash and cash equivalents............... $ 23.5 $ 27.2 $ 12.0 || $ 2.1 $ 3.0 $ 12.5
Total assets............................ 1,655.8 1,042.9 1,102.1 || 849.1 926.9 1,001.2
Due to affiliate........................ - - - || 105.0 108.0 551.6
Total debt (including capital leases)... 654.5 298.8 457.9 || 371.4 437.6 333.2
Shareholders' equity (deficit).......... 329.3 222.0 165.1 || 45.3 51.8 (234.9)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SET FORTH BELOW IS A DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28,
1996. THE YEAR ENDED DECEMBER 28, 1996 INCLUDES BOTH THE FORTY-EIGHT WEEKS OF
KEEBLER FOODS COMPANY UNDER CURRENT MANAGEMENT AND THE FOUR WEEKS OF UBIUS UNDER
FORMER MANAGEMENT. THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY AND THE RELATED NOTES
THERETO APPEARING ELSEWHERE.
OVERVIEW
GENERAL
We sell cookies and crackers, custom-baked products to other manufacturers
of branded food products, pie crusts and ice cream cones. Our net sales are
principally affected by product pricing and quality, brand recognition, new
product introductions, product line extensions, marketing and service. We manage
these factors to achieve a sales mix favoring our higher margin products while
driving volume through our national DSD distribution system.
The principal elements comprising our cost of sales are raw and packaging
materials, labor and manufacturing overhead. The major raw materials that we use
in the manufacture of our products are flour, sugar, chocolate, shortening and
milk. We also use paper products, such as corrugated cardboard, as well as films
and plastics to package our products. The prices of these raw materials have
been subject to significant volatility. We have mitigated the effect of such
volatility in the past through our hedging programs, but may not be successful
in protecting our business from price increases in the future. In addition to
the foregoing factors, our cost of sales are affected by the efficiency of
production methods and manufacturing capacity utilization.
Our selling, marketing and administrative expenses are comprised mainly of
labor and lease costs associated with our national DSD distribution system,
trade and consumer promotion costs, other advertising costs and the cost of our
corporate offices. While costs associated with our national DSD distribution
system and the cost of our corporate offices are generally fixed, promotion and
other advertising costs are more variable. Promotion and other advertising costs
represent the largest component of our cost structure other than cost of sales
and are principally influenced by changes in net sales.
We are in the process of integrating President into our operations. In
connection with this integration, we are currently undertaking a complete
analysis of our system-wide manufacturing and distribution operations as we
assess opportunities to improve our operational efficiencies in 1999 and beyond.
We currently anticipate that we will take a restructuring charge during 1999
when our analysis and related plans are finalized.
10
<PAGE>
MATTERS AFFECTING COMPARABILITY
Keebler's fiscal year consists of thirteen four week periods (fifty-two or
fifty-three weeks) and ends on the Saturday nearest December 31. The 1998 fiscal
year consists of fifty-two weeks and the 1997 fiscal year consists of
fifty-three weeks. As a result of the Keebler acquisition, which closed on the
last day of the first four week period of 1996, the fiscal year for 1996
consisted of the forty-eight weeks ended December 28, 1996.
Keebler's operating results for the forty-eight weeks ended December 28,
1996 have been combined with the operating results of the predecessor company
for the four weeks ended January 26, 1996 to compare the year ended December 28,
1996 to the years ended January 2, 1999 and January 3, 1998. Keebler's operating
results for the year ended January 2, 1999 include the operating results of
President from the acquisition date of September 28, 1998. Keebler's operating
results for the year ended December 28, 1996 include the operating results of
Sunshine from the acquisition date of June 4, 1996, whereas the subsequent years
include the operating results of Sunshine for the entire year. Additionally,
Keebler's operating results have been restated to reflect the Merger with INFLO
as if it had been effective January 26, 1996.
RESULTS OF OPERATIONS
Keebler's results of operations, expressed as a percentage of net sales, for
the last three years ended January 2, 1999, January 3, 1998 and December 28,
1996 are set forth below:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------
January 2, January 3, December 28,
1999 1998 1996
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES....................................................... 100.0% 100.0% 100.0%
Cost of sales................................................... 42.2 43.0 47.5
Selling, marketing and administrative expenses.................. 48.5 49.7 49.6
INCOME FROM CONTINUING OPERATIONS............................... 8.8 6.8 2.5
Interest Expense, Net........................................... 1.2 1.6 2.2
Loss on early extinguishment of debt, net of tax................ - 0.3 0.1
NET INCOME...................................................... 4.3% 2.7% 0.5%
</TABLE>
Keebler's reportable segments are Branded and Specialty, which were
determined using Keebler's method of internal reporting, which divides and
analyzes the business by sales channel. The reportable segments represent an
aggregation of similar sales channels. We evaluate the performance of the
reportable segments and allocate resources based on the segment's profit
contribution, defined as earnings before certain functional support costs,
amortization, interest and income taxes. While the accounting policies for each
reportable segment are the same as for the total company, the cost of sales used
to determine a segment's profit contribution is calculated using standard costs
for each product, whereas actual cost of sales is used to determine consolidated
operating income (loss).
BRANDED SEGMENT
The Branded segment sells a number of well-recognized products, primarily to
retail outlets such as supermarkets, mass merchandisers, warehouse club stores,
convenience stores and drug stores. This segment also imports and distributes
CARR'S crackers in the U.S. under an exclusive long-term licensing and
distribution agreement with United Biscuits.
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------------------
January 2, 1999 January 3, 1998 December 28, 1996
------------------------ ------------------------ ------------------------
$ % $ % $ %
------------- ---------- ------------- ---------- ------------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 1,726.7 $ 1,566.7 $ 1,247.9
PROFIT CONTRIBUTION $ 282.6 16.4% $ 226.9 14.5% $ 154.0 12.3%
</TABLE>
11
<PAGE>
Net sales in the Branded segment increased 10.2% in 1998 to $1,726.7
million. The acquisition of President contributed $78.9 million in incremental
revenue. Adjusting to an equal number of selling days and before including the
acquisition growth, branded revenues grew 6.7% over the prior year. The primary
drivers of the increase were higher sales of products under both the KEEBLER and
CHEEZ-IT brands. The KEEBLER brand name was used to leverage new product
introductions through line extensions such as the KEEBLER PEANUT BUTTER FUDGE
STICKS. The growth in CHEEZ-IT sales was partly attributed to new products such
as CHEEZ-IT HEADS AND TAILS, CHEEZ-IT sandwich crackers and CHEEZ-IT snack mix.
Additionally, we redirected marketing support into brand-building advertising
and consumer promotions. For example, with this support, sales of KEEBLER FUDGE
SHOPPE cookies and CHEEZ-IT products grew in 1998, with CHEEZ-IT products
increasing 22.1% over 1997. A favorable sales mix of KEEBLER branded products,
combined with selected price increases, also generated higher revenues. Further
contributing to the improvement was continued revenue growth outside
supermarkets, such as in mass merchandisers, convenience and club stores. Net
sales in 1997 were 25.6% higher compared to 1996. Revenue growth in 1997 was
achieved by incremental sales associated with the Sunshine acquisition as well
as increased volumes. In 1996, sales of Sunshine products by the Branded segment
were approximately $216.0 million from the acquisition date until year end
compared to approximately $486.0 million for all of 1997. Successful new product
introductions and growth in the retail businesses outside supermarkets also
propelled increased volume.
The Branded segment had a 1998 profit contribution of $282.6 million or
16.4% of net sales. After removing the impact of President, profit contribution
was 16.8% of net sales, which represented a 2.3 percentage point increase over
1997. A higher gross profit and lower distribution expenses drove the
improvement. The benefit noted in gross profit was attributed to improved sales
mix, selected price increases and continued productivity gains in our bakeries.
Lower distribution expenses were due to more fully utilizing available trailer
capacity and productivity and cost savings programs designed to minimize
inventory losses. The 1997 profit contribution of $226.9 million was 14.5% of
net sales compared to the 1996 profit contribution of 12.3% of net sales. A
higher gross profit was also the main contributor to the 2.2 percentage point
improvement in the 1997 profit contribution. After discontinuing several less
profitable products in 1996, the 1997 sales mix consisted of higher margin
products. Additionally, the 1997 profit contribution reflected lower prices on
certain raw materials and lower production costs due to the implementation of
several productivity programs in our manufacturing facilities. Selling and
distribution expenses also decreased as a percent of net sales due to increased
volume coupled with the benefit of cost reduction initiatives. Somewhat
offsetting these improvements were higher marketing expenses primarily spent on
brand-building, national advertising.
SPECIALTY SEGMENT
The Specialty segment produces cookies and crackers for the foodservice
market, the Girl Scouts of America and private label retailers. In addition, we
also produce custom-baked products for other marketers of branded food products.
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------------------
January 2, 1999 January 3, 1998 December 28, 1996
------------------------ ------------------------ ------------------------
$ % $ % $ %
------------- ---------- ------------- ---------- ------------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 499.8 $ 498.5 $ 499.3
PROFIT CONTRIBUTION $ 85.9 17.2% $ 80.3 16.1% $ 58.2 11.7%
</TABLE>
Net revenues in the Specialty segment in 1998 were flat compared to 1997.
The acquisition of President contributed $16.2 million of incremental sales.
Adjusting to an equal number of selling days and before including the
acquisition growth, net sales in the Specialty segment were $9.0 million, or
1.8%, below 1997. Net sales in 1997 were also flat compared to 1996. While an
improved sales mix benefited each year, the overall decrease in net sales for
each year-on-year comparison was principally associated with lower margin
products that were either discontinued or re-positioned at higher price levels.
Volume declines in custom-baked products in 1997 also served to offset gains
received from selected price increases.
12
<PAGE>
The Specialty segment's profit contribution of $85.9 million was 1.1
percentage point above the prior year, as a percent of net sales. Before
considering the impact of President, profit contribution was 17.3% of net sales
in 1998 compared to 16.1% in 1997. The improvement in profit contribution was
primarily achieved by a more profitable sales mix, selected price increases and
productivity gains received through bakery automation projects and supply chain
initiatives in distribution and inventory management. Profit contribution was
$80.3 million in 1997 which resulted in a 4.4 percentage point increase in
profit contribution over 1996 that was principally driven by a more favorable
sales mix in 1997 coupled with growth in sales of private label products. Lower
raw material costs in 1997 also contributed to the profit contribution
improvement.
COST OF SALES
Cost of sales was $938.9 million in 1998 which included an additional $61.3
million related to cost of sales for President that was not included in prior
years. Excluding the impact of President, cost of sales, as a percent of net
sales, was 41.2% for 1998 compared to 43.0% in 1997 and 47.5% in 1996. The
improvements made in each year were principally achieved from initiatives
implemented to increase automation and productivity at our manufacturing
facilities along with other cost reduction programs. The streamlining of our
manufacturing facilities, creating increased capacity utilization, also
contributed to a lower cost of sales. Additionally, the cost of certain raw and
packaging materials has declined from previous years.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES
Selling, marketing and administrative expenses were $53.8 million higher
compared to 1997, however, 1.2 percentage points better as a percent of net
sales. After removing $27.2 million of additional expense attributable to
President, selling, marketing and administrative expenses were $26.6 million
above the prior year. Higher marketing expenses related to our continued focus
on building brand equity through advertising and consumer promotions was the
primary driver of the increased spending. Partially offsetting these higher
marketing expenses were savings achieved in distribution costs due to improved
inventory handling and deployment. In 1997, selling, marketing and
administrative spending increased $160.0 million compared to 1996, yet remained
consistent as a percentage of net sales. Increased spending was driven by higher
volume captured through both internal growth and the Sunshine acquisition. In
1997, we began spending more on advertising and other consumer promotions to
create increased brand and consumer awareness. Selling, marketing and
administrative expenses remained comparable as a percent of net sales in 1997
and 1996 due to higher volumes passing through a more efficient, fixed cost,
selling and distribution network.
INTEREST EXPENSE
Interest expense was $26.5 million in 1998, $33.8 million in 1997 and $38.4
million in 1996. The steady decline was primarily due to both a continuing
overall lower average debt balance and more favorable interest rates. Interest
expense declined from 1997, despite the $530.0 million of additional debt
incurred from the acquisition of President, due to lower interest rates, fees
and favorable terms. In conjunction with the President acquisition, the $145.0
million outstanding balance on the term note was extinguished, also contributing
to the reduction in interest expense. The 1997 decrease in the average debt
balance from 1996 was the result of principal pre-payments of $113.8 million on
the term loans and a $29.0 million pre-payment of the seller note. In addition,
the 1998 weighted average interest rate was 0.62 percentage points lower than
the previous year while the 1997 weighted average rate was 0.28 percentage
points lower than 1996.
INCOME TAXES
Income taxes were provided at an effective tax rate of 43% in 1998, 42% in
1997 and 44.2% in 1996. In each year, the effective tax rate exceeded the
statutory rate due to nondeductible expenses, principally amortization of
intangibles, including trademarks, trade names, other intangibles and goodwill.
The 1.0 percentage point increase in the effective tax rate from 1997 to 1998
was due primarily to the increase in nondeductible expenses, principally the
amortization of intangibles, resulting from the President acquisition. The
effective tax rate declined in 1997, compared to 1996, as earnings were
significantly higher in 1997, thereby reducing the impact of nondeductible
expenses, such as amortization of intangibles, on the calculation of the
effective tax rate. Income tax expense was
13
<PAGE>
not provided for during the first four weeks of 1996. As part of the Keebler
acquisition, the valuation allowance on deferred taxes was adjusted by $25.1
million to reflect the elimination of certain deferred tax assets revalued in
the purchase price allocation. We carried a deferred tax valuation allowance of
$84.4 million at January 2, 1999, January 3, 1998 and December 28, 1996 to
provide for the uncertainty in realizing the deductibility of deferred tax
assets recognized. Pursuant to the terms of the Keebler acquisition, the
predecessor company retained the right to use the net operating losses for
potential carrybacks. Any unused operating losses are then available to us, but
are significantly restricted under current tax law. Therefore, all net operating
loss carryforwards have been fully reserved due to the uncertainty of their
realization.
DISCONTINUED OPERATIONS
In 1995, the predecessor company adopted plans to discontinue the operations
of the Frozen Food businesses, and in the first four weeks of 1996, a gain of
$18.9 million, net of income taxes, was recognized on the disposal of the Frozen
Food businesses.
EXTRAORDINARY ITEM NET OF INCOME TAXES
In the latter part of 1998, an after-tax extraordinary charge of $1.7
million was recorded for the write-off of unamortized bank fees related to the
early extinguishment of the term note. Similarly, in 1997 and 1996, we also
recorded extraordinary charges, net of income taxes, of $5.4 million and $1.9
million, respectively. In 1997, $3.8 million of the extraordinary charges, net
of tax, also related to the write-off of debt issuance costs associated with the
early retirement of term loans. An additional $1.6 million, net of income taxes,
extraordinary charge was recorded due to a loss on the early extinguishment of
the seller note which was entered into at the time of the Keebler acquisition.
The 1996 extraordinary charge of $1.9 million, net of income taxes, related to
the write-off of debt issuance costs made in connection with the $125.0 million
early extinguishment of increasing rate notes.
NET INCOME
In 1998, net income of $94.9 million was 66.5% higher than the prior year
and net income of $57.0 million for 1997 was $47.7 million above 1996. The
substantial growth in net earnings in year-over-year comparisons was achieved
through revenue gains combined with lower operating expenses resulting from
productivity and cost savings programs. Revenue growth in both 1998 and 1997 was
achieved through volume increases, higher prices and an improved sales mix.
Compared to 1996, 1997 also benefited from increased revenue due to the
inclusion of the Sunshine business for the entire fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
A condensed cash flow statement of Keebler follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------------
January 2, January 3, December 28,
1999 1998 1996
----------------- ------------------ -----------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED FROM (USED BY)
Operating activities........................... $ 142.7 $ 218.3 $ 52.8
Investing activities........................... (510.7) (41.5) (64.9)
Financing activities........................... 364.3 (161.6) 21.1
----------------- ------------------ -----------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................... $ (3.7) $ 15.2 $ 9.0
================= ================== =================
</TABLE>
14
<PAGE>
CASH FLOW FOR 1998
Operating activities provided $142.7 million of cash during 1998. Net
earnings of $94.9 million coupled with the deferral of additional income taxes
were the primary drivers of the favorable cash flow. Partially offsetting these
sources of cash was an increased investment in inventories and trade accounts
receivable of $13.8 million and $5.1 million, respectively. A build in finished
goods, principally associated with the upcoming Girl Scout cookie season,
accounted for the larger investment in inventory. The increase in trade accounts
receivable was due principally to the addition of the President's trade accounts
receivable subsequent to the acquisition. Also offsetting these cash sources was
$5.4 million of current year net spending for plant and facility closing costs
and severance related to the exit costs associated with the Keebler, Sunshine
and President acquisitions. Spending on plant and facility closing costs and
severance is expected to be substantially completed by the end of 1999, except
for noncancelable lease obligations which are expected to continue until 2006.
Higher income tax payments attributable to a $62.0 million increase in pre-tax
income over the prior year also offset the positive cash flow.
Cash used by investing activities was $510.7 million, of which $444.8
million, net of cash acquired, was attributable to the acquisition of President
in September 1998. An additional $66.8 million of capital spending was made for
modifications related to new products, to update and enhance production
facilities and to achieve near-term cost savings and efficiencies in the
manufacturing, sales and distribution process. At year end, we held the idle
Atlanta, Georgia manufacturing facility, a distribution center in Kensington,
Connecticut and a warehouse in Houston, Texas for sale and expect the
disposition of these facilities to be completed before the end of 1999.
Financing activities generated $364.3 million of cash for the year
principally from proceeds of long-term debt borrowings under $825.0 million of
available new debt facilities used to finance the acquisition of President. We
also received $19.8 million of cash proceeds resulting from Bermore exercising a
warrant in exchange for 6,135,781 shares of common stock at the time of our
initial public offering. Employee stock options exercised during the year
provided another $0.8 million of cash. These cash sources were partially offset
by the pre-payment of the $145.0 million outstanding term note balance and a
$20.0 million repayment on the revolving facility. In addition, cash totaling
$8.6 million was used to repurchase common stock into treasury under the stock
repurchase program.
CASH FLOW FOR 1997 AND 1996
Cash provided from operating activities was $218.3 million in 1997 which was
an increase of $165.5 million over the cash provided from operations in 1996.
The primary contributors to the positive cash flow for 1997 were net earnings of
$57.0 million, a lower investment in trade accounts receivable and reduced
funding of current liabilities and income taxes. Improved accounts receivable
collection procedures provided $38.2 million of working capital. The reduced
funding of current liabilities was attributable primarily to the timing of
payments, while the increase in income taxes payable was attributable to a $47.7
million increase in earnings over 1996. Partially offsetting these benefits was
spending on plant and facility closing costs and severance and the payment of an
arbitration award. Spending on plant and facility closing costs and severance
relating to exit costs associated with the Keebler and Sunshine acquisitions,
although down from 1996, accounted for $13.7 million of cash used by operations
for the year ended January 3, 1998. Exit cost spending associated with these
acquisitions was substantially complete at the end of 1998, with the exception
of noncancelable lease obligations, which are expected to continue until 2004.
In addition, we paid an arbitration award in 1997 regarding a contract
production arrangement, which was entered into by the predecessor company, in
the amount of $6.8 million plus legal fees.
Cash used by investing activities was $41.5 million in 1997 compared to
$64.9 million in 1996. The cash used in 1997 was primarily used to fund capital
expenditures. Capital expenditures were $48.4 million and $32.6 million in 1997
and 1996, respectively. In 1997, capital spending was made principally to
enhance, update or realign the existing production lines, provide distribution
and production efficiencies and to achieve near-term cost savings. Proceeds
received from asset disposals of $7.0 million partially offset capital
expenditures. The sale of the Santa Fe Springs plant in 1997 accounted for $3.6
million of the proceeds, with the remainder provided mainly from the sale of
trucks and machinery and equipment.
15
<PAGE>
Cash used by financing activities in 1997 was $161.6 million. In 1997, we
entered into an amendment and restatement of our prior senior credit agreement,
proceeds from which were used to extinguish existing term loans of $153.6
million. The extinguishment was funded primarily by a draw down on the revolving
loan facility and $109.8 million under a new term loan. During 1997, the draw
down on the revolving loan facility was completely repaid. Additionally, in the
fourth quarter of 1997, we extinguished $29.0 million of debt related to the
seller note and made $70.0 million in principal pre-payments on the term loan
using existing cash resources. Scheduled principal payments of $18.7 million
were made on the term loan and other debt during the year.
CAPITAL RESOURCES
In 1998 and 1997, our capital resources were provided under two separate
credit arrangements. In order to consummate the acquisition of President in
September 1998, we entered into a new Credit Facility consisting of a $350.0
million revolving facility and a $350.0 million term facility. In addition, we
also entered into a $125.0 million bridge facility that was subsequently
refinanced with a receivables facility on January 29, 1999. These new debt
facilities replaced the available $140.0 million revolving loan facility and an
existing term loan which were outstanding in 1997 and 1998 until the time of the
President acquisition. Available borrowings under the revolving facility and the
previous revolving loan facility were $265.0 million and $140.0 million in 1998
and 1997, respectively. Borrowings under the $350.0 million revolving facility
in 1998 were $105.0 million, with $20.0 million repaid as of January 2, 1999.
There were no borrowings under the $140.0 million revolving loan facility in
1998, however, there were $32.8 million of borrowings in 1997, which was all
repaid as of January 3, 1998.
Capital expenditures for 1999 are expected to be approximately $90.0
million, up nearly $23.2 million from 1998. The majority of capital spending in
1999 will be used to increase the automation in production and distribution
facilities in order to obtain additional productivity and cost savings. We
anticipate that capital expenditures will be funded from cash provided by
operations and will continue at a level sufficient to support our strategies and
operating needs.
Historically, we have not paid dividends, and at this time do not anticipate
paying any cash dividends. The existing Credit Facility and Notes place
limitations on our ability to pay dividends or make other distributions on our
common stock. Additionally, the Credit Facility requires us to meet certain
financial covenants including a debt to earnings before interest, taxes,
depreciation and amortization ratio and cash flow coverage ratios. In addition
to these ratios, the credit agreement also requires us to meet net worth and
interest coverage ratios. In 1998 and 1997, we met all financial covenants in
each of our financing agreements. Total debt was $654.5 million, $298.8 million
and $457.9 million as of January 2, 1999, January 3, 1998 and December 28, 1996,
respectively. Current maturities on the total debt outstanding were $112.7
million, $26.4 million and $18.6 million as of such respective dates. Cash and
cash equivalents on January 2, 1999, January 3, 1998 and December 28, 1996 were
$23.5 million, $27.2 million and $12.0 million, respectively. We believe that
available cash, as well as amounts available under our new debt facilities, will
be sufficient to meet normal operating requirements for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The new statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The statement requires that all derivatives be recognized as either
assets or liabilities in the statement of financial position and that the
instruments be measured at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. We have not yet determined the impact the new statement
may have on the consolidated financial statements.
16
<PAGE>
SEASONALITY
Our net sales, net income and cash flow are affected by the timing of new
product introductions, promotional activities, price increases and a seasonal
bias toward the second half of the year due to events such as back-to-school,
Thanksgiving and Christmas. The relative mix between cookie and cracker sales
varies throughout the year with stronger cracker sales in the last quarter of
the calendar year. President's net sales, net income and cash flow historically
has been higher in the first quarter than in any other fiscal quarter because
substantially all sales of Girl Scout cookies have occurred in that quarter. For
this reason, going forward, we expect to realize proportionately higher net
sales, net income and cash flow during the first quarter of our fiscal year than
we historically have experienced.
SELF INSURANCE
We purchase insurance coverage for worker's compensation as well as general,
product and vehicle liability maintaining certain levels of retained risk
(self-insured portion). Potential losses relating to claims under the
self-insured portion of the policies are accrued in accordance with the
requirements of SFAS No. 5, "Accounting for Contingencies." There are no
unasserted claims that require a reserve or disclosure in accordance with SFAS
No. 5.
YEAR 2000 ISSUE
The Year 2000 issue arose because many existing computer programs use only
the last two digits to refer to a year. As a result, computer programs may not
properly recognize a year that begins with "20" instead of the familiar "19." If
not corrected, many businesses are at risk for possible computer application
miscalculations or systems failures causing disruptions in business operations.
These risks are commonly referred to as the "Y2K issues."
We utilize software and related technologies that will be affected by the
date change in the year 2000. We have completed a comprehensive review of our
computer systems and non-information technology systems to identify potential
Y2K issues. Since we have implemented the SAP R/3 management information system
and Manugistics software, both of which were developed/purchased as Y2K
compliant, we do not anticipate that the impact of Y2K issues on our business
will be material. Additionally, secondary information systems, which are not
material to our ability to forecast, manufacture or deliver product, have been
reviewed and Y2K issues identified. We are currently in the process of
correcting or upgrading these systems. We intend to be Y2K compliant on all
critical systems by the middle of 1999.
We have undertaken efforts to verify that all of our material vendors and
suppliers will be Y2K compliant. Specifically, we sent a comprehensive
questionnaire to all of our significant suppliers and vendors regarding their
Y2K compliance in an attempt to identify any problem areas with respect to these
groups. Although the results of the questionnaire indicated that our material
vendors and suppliers intend to be Y2K compliant before the end of 1999, they
were not able to provide us any assurances. We are currently in the process of
developing a contingency plan to address any potential Y2K failures caused by a
third party. While we cannot assure that third parties will convert their
systems in a timely manner and in a way compatible with our systems, we believe
that our actions with third parties detailed above, along with the development
of a contingency plan, will minimize these risks.
We currently estimate that the incremental costs for becoming Y2K compliant
are approximately $2.0 - $3.0 million, which will be funded from cash provided
by operations and expensed as incurred. Spending of $1.0 million against this
estimate has occurred to date. This estimate is exclusive of Y2K issues
regarding the President acquisition. We have completed a comprehensive review of
President's computer systems and non-information technology systems to identify
potential Y2K issues. Many of the Y2K risks at President will be mitigated
through our implementation of the SAP R/3 management information system,
Manugistics software and our warehouse management system at the President
facilities. We expect this implementation to be completed during 1999. We
estimate additional costs of approximately $0.3 million will be necessary to
correct or upgrade President's secondary information systems in order to make
them Y2K compliant.
17
<PAGE>
Based on the progress we have made in addressing our Y2K issues and our
compliance with Y2K issues on our primary business information systems, we do
not foresee significant risks associated with our Y2K compliance at this time.
As our plan is to address any significant risks associated with our Y2K issues
prior to being affected by them, a comprehensive contingency plan has not been
developed. However, if a significant risk related to our Y2K compliance or a
delay in the anticipated timeline for compliance occurs, we will develop
contingency plans as deemed necessary at that time.
The information presented above sets forth the steps we have taken to
address the Y2K issues. We do not expect compliance with Y2K issues or the most
reasonably likely worst case scenario and related contingency plan to have a
material impact on our business, results of operations or financial condition.
The above discussion of our efforts and expectations relating to Y2K
compliance is forward-looking. Readers are cautioned that forward-looking
statements contained in this discussion should be read in conjunction with our
disclosure under the heading "FORWARD-LOOKING STATEMENTS" that follows below.
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this discussion are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject
to the safe harbor provisions of the Reform Act. Such forward-looking statements
include, without limitation, statements about:
o the competitiveness of the cookie and cracker industry;
o the future availability and prices of raw and packaging materials;
o potential regulatory obligations;
o our strategies and
o other statements that are not historical facts.
When used in this discussion, the words "anticipate," "believe," "estimate"
and similar expressions are generally intended to identify forward-looking
statements. Because such forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by such forward-looking
statements, including but not limited to:
o changes in general economic or business conditions (including in the
cookie and cracker industry);
o actions of competitors;
o our ability to recover material costs in the pricing of our products;
o the extent to which we are able to develop new products and markets for
our products;
o the time required for such development;
o the level of demand for such products and
o changes in our business strategies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we are exposed that may adversely affect
results of operations and financial position include changes in future interest
rates and raw material prices. We seek to minimize or manage these market risks
through normal operating and financing activities and through the use of
interest rate swap agreements and commodity futures and options contracts. The
use of these instruments is limited to hedging activities and they are not
entered for trading or speculative purposes. These agreements and contracts are
entered into at a corporate level and as such, any income or expense associated
with these transactions is not allocated to our reportable segments.
18
<PAGE>
Our exposure to market risk for changes in interest rates relates primarily
to long-term debt obligations. Our current debt structure consists of both fixed
and floating rate debt. Interest rate swap agreements are used to effectively
manage changes in interest rates related to the majority of our borrowings with
the objective of reducing overall interest costs. Sensitivity analysis was used
to assess the impact that changes in market prices have on the fair value of
interest rate swap agreements. Assuming a ten percent increase in market price,
the fair value of the interest rate swap agreements at January 2, 1999, with a
notional amount of $527.3 million, would increase the net receivable to $3.1
million, while the impact of a ten percent decrease in market price would result
in a net payable of $4.4 million.
We enter into commodity futures and options contracts to neutralize the
impact of price increases on raw material purchases that are not likely to be
recovered through higher prices on our products. We also used sensitivity
analysis to assess the potential impact on the fair value of commodity futures
and options contracts. Assuming a ten percent increase or decrease in market
price, the fair value of open contracts with a notional amount of $61.7 million
at January 2, 1999 would be impacted by $5.8 million.
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
Information regarding our Directors is incorporated by reference to
Keebler's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with our 1999 annual meeting.
Information regarding our Executive Officers can be found in Part I of this
Annual Report on Form 10-K on pages 5 through 7.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to Keebler's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 1999 annual meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to Keebler's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 1999 annual meeting.
19
<PAGE>
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-30.
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/A dated December 10, 1998 related to the
acquisition of President International, Inc. by Keebler Foods
Company on September 28, 1998.
(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.
20
<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, Chief Executive Officer and Director
Date: March 22, 1999
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 22, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ SAM K. REED /s/ ROBERT P. CROZER
- ---------------------------------------------------------- --------------------------------------------------------
Sam K. Reed Robert P. Crozer
President, Chief Executive Officer and Director (Director)
(Principal Executive Officer)
/s/ E. NICHOL MCCULLY /s/ AMOS R. MCMULLIAN
- ---------------------------------------------------------- --------------------------------------------------------
E. Nichol McCully Amos R. McMullian
Senior Vice President and Chief Financial Officer (Director)
(Principal Financial Officer)
/s/ JAMES T. SPEAR /s/ WAYNE H. PACE
- ---------------------------------------------------------- --------------------------------------------------------
James T. Spear Wayne H. Pace
Vice President Finance and Corporate Controller (Director)
(Chief Accounting Officer)
/s/ JOHNSTON C. ADAMS, JR. /s/ C. MARTIN WOOD III
- ---------------------------------------------------------- --------------------------------------------------------
Johnston C. Adams, Jr. C. Martin Wood III
(Director) (Director)
/s/ FRANKLIN L. BURKE /s/ JIMMY M. WOODWARD
- ---------------------------------------------------------- --------------------------------------------------------
Franklin L. Burke Jimmy M. Woodward
(Director) (Director)
/s/ G. ANTHONY CAMPBELL
- ----------------------------------------------------------
G. Anthony Campbell
(Director)
21
</TABLE>
<PAGE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Keebler Foods Company and UB Investments US Inc. and Subsidiaries
<CAPTION>
<S> <C>
FINANCIAL STATEMENTS: PAGE
Report of Independent Accountants....................................................................... F-2
Consolidated Balance Sheets at January 2, 1999 and January 3, 1998...................................... F-3
Consolidated Statements of Operations for the year ended January 2, 1999, the year ended January 3,
1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996........ F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the year ended January 2, 1999, the
year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks
ended January 26, 1996................................................................................ F-6
Consolidated Statements of Cash Flows for the year ended January 2, 1999, the year ended January 3,
1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996........ 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
Note: The consolidated financial statements listed in the above index for Keebler Foods Company include the
financial statements of the successor company for the year ended January 2, 1999, 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. 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
</TABLE>
<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 2, 1999 and January 3, 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended, and the forty-eight week period ended December
28, 1996. 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. 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 2, 1999 and January 3, 1998, and the
consolidated results of operations and cash flows of Keebler Foods Company and
Subsidiaries for the years ended January 2, 1999 and January 3, 1998, and the
forty-eight weeks 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 in conformity with generally accepted
accounting principles.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 2, 1999
F-2
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
JANUARY 2, January 3,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,515 $ 27,188
Trade accounts and notes receivable, net 141,077 98,963
Inventories, net:
Raw materials 31,722 25,543
Package materials 13,081 7,306
Finished goods 120,550 78,131
Other 1,024 1,482
-------------- --------------
166,377 112,462
Deferred income taxes 57,713 42,730
Other 26,636 20,303
-------------- --------------
Total current assets 415,318 301,646
PROPERTY, PLANT AND EQUIPMENT, NET 564,524 478,121
GOODWILL, NET 391,449 47,059
TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 226,084 154,146
PREPAID PENSION 38,205 43,060
ASSETS HELD FOR SALE 2,972 3,742
OTHER ASSETS 17,228 15,077
-------------- --------------
Total assets $ 1,655,780 $ 1,042,851
============== ==============
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 2, January 3,
1999 1998
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 112,730 $ 26,365
Trade accounts payable 143,572 126,213
Other liabilities and accruals 232,087 194,923
Income taxes payable 10,779 13,784
Plant and facility closing costs and severance 11,018 6,900
-------------- --------------
Total current liabilities 510,186 368,185
LONG-TERM DEBT 541,765 272,390
OTHER LIABILITIES:
Deferred income taxes 147,098 69,417
Postretirement/postemployment obligations 63,754 60,605
Plant and facility closing costs and severance 15,563 15,578
Deferred compensation 19,368 18,669
Other 28,745 15,956
-------------- --------------
Total other liabilities 274,528 180,225
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
84,125,164 and 77,638,206 shares issued, respectively) 841 776
Additional paid-in capital 169,532 148,613
Retained earnings 167,608 72,737
Treasury stock (8,680) (75)
-------------- --------------
Total shareholders' equity 329,301 222,051
-------------- --------------
Total liabilities and shareholders' equity $ 1,655,780 $ 1,042,851
============== ==============
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 Year Ended Weeks Ended || Weeks Ended
JANUARY 2, 1999 January 3, 1998 December 28, 1996 || January 26, 1996
------------------ ------------------ ------------------|| ------------------
<S> <C> <C> <C> || <C>
NET SALES $ 2,226,480 $ 2,065,184 $ 1,645,532 || $ 101,656
||
COSTS AND EXPENSES: ||
Cost of sales 938,896 888,031 774,198 || 54,870
Selling, marketing and administrative ||
expenses 1,080,044 1,026,245 794,837 || 71,427
Other 11,501 9,511 6,347 || 857
------------------ ------------------ ------------------|| ------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 196,039 141,397 70,150 || (25,498)
||
Interest (income) from affiliates - - - || (875)
Interest (income) (3,763) (1,191) (450)|| (3)
Interest expense to affiliates - - - || 664
Interest expense 30,263 35,038 38,921 || 98
------------------ ------------------ ------------------|| ------------------
INTEREST EXPENSE (INCOME), NET 26,500 33,847 38,471 || (116)
------------------ ------------------ ------------------|| ------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS ||
BEFORE INCOME TAX EXPENSE 169,539 107,550 31,679 || (25,382)
Income tax expense 72,962 45,169 14,002 || -
------------------ ------------------ ------------------|| ------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS ||
BEFORE EXTRAORDINARY ITEM 96,577 62,381 17,677 || (25,382)
||
DISCONTINUED OPERATIONS: ||
Gain on disposal of Frozen Food ||
businesses, net of tax - - - || 18,910
------------------ ------------------ ------------------|| ------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 96,577 62,381 17,677 || (6,472)
EXTRAORDINARY ITEM: ||
Loss on early extinguishment of debt, ||
net of tax 1,706 5,396 1,925 || -
------------------ ------------------ ------------------|| ------------------
NET INCOME (LOSS) $ 94,871 $ 56,985 $ 15,752 || $ (6,472)
================== ================== ==================|| ==================
BASIC NET INCOME PER SHARE: ||
Income from continuing operations ||
before extraordinary item $ 1.16 $ 0.80 $ 0.24 ||
Extraordinary item 0.02 0.07 0.03 ||
================== ================== ==================||
Net income $ 1.14 $ 0.73 $ 0.21 ||
================== ================== ==================||
WEIGHTED AVERAGE SHARES OUTSTANDING 83,254 77,604 75,244 ||
================== ================== ==================||
DILUTED NET INCOME PER SHARE: ||
Income from continuing operations ||
before extraordinary item $ 1.10 $ 0.77 $ 0.23 ||
Extraordinary item 0.02 0.07 0.02 ||
================== ================== ==================||
Net income $ 1.08 $ 0.70 $ 0.21 ||
================== ================== ==================||
WEIGHTED AVERAGE SHARES OUTSTANDING 87,486 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 TREASURY STOCK
---------------------- PAID-IN EARNINGS ---------------------
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT TOTAL
----------- ---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 5,676 57 23,543 - - - 23,600
to Bermore
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) 77,638 776 148,613 72,737 (43) (75) 222,051
Exercise of Bermore warrant 6,136 61 19,740 - - - 19,801
Purchase of treasury shares - - - - (292) (8,605) (8,605)
Exercise of employee stock options 351 4 1,179 - - - 1,183
Net income - - - 94,871 - - 94,871
----------- ---------- ----------- ----------- ---------- ---------- -----------
BALANCE AT JANUARY 2, 1999
(KEEBLER FOODS COMPANY) 84,125 $ 841 $ 169,532 $ 167,608 (335) $ (8,680) $ 329,301
=========== ========== =========== =========== ========== ========== ===========
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 Year Ended Weeks Ended || Weeks Ended
JANUARY 2, 1999 January 3, 1998 December 28,1996|| January 26, 1996
---------------- ---------------- ----------------|| ----------------
<S> <C> <C> <C> || <C>
CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES ||
Net income (loss) $ 94,871 $ 56,985 $ 15,752 || $ (6,472)
Adjustments to reconcile net income (loss) to cash from ||
operating activities: ||
Depreciation and amortization 69,125 60,708 49,461 || 1,973
Deferred income taxes 10,075 18,548 12,254 || -
Accretion on Seller Note - 2,376 2,246 || -
Loss on early extinguishment of debt, net of tax 1,706 3,761 1,925 || -
Loss (gain) on sale of property, plant and equipment 424 (358) (328)|| 33
Gain on the disposal of the Frozen Food businesses, ||
net of tax - - - || (18,910)
Other 1,460 - - || -
Changes in assets and liabilities: ||
Trade accounts and notes receivable, net (5,082) 38,187 3,842 || 22,068
Accounts receivable/payable from affiliates, net - - - || (1,941)
Inventories, net (13,830) 203 (9,809)|| 4,353
Recoverable income taxes and income taxes payable (4,556) 16,113 - || 25
Other current assets (2,845) (966) 1,644 || 1,192
Deferred debt issue costs (1,845) (1,344) (8,032)|| -
Trade accounts payable and other current liabilities 869 36,806 26,105 || 11,550
Plant and facility closing costs and severance (5,373) (13,715) (41,279)|| -
Restructuring reserves - - - || (14,469)
Other, net (2,319) 1,044 (553)|| 246
---------------- ---------------- ----------------|| ----------------
Cash provided from (used by) operating activities 142,680 218,348 53,228 || (352)
||
CASH FLOWS (USED BY) PROVIDED FROM INVESTING ACTIVITIES ||
Capital expenditures (66,798) (48,429) (29,352)|| (3,228)
Proceeds from property disposals 917 6,950 9,236 || 644
Working capital adjustment paid by UB Investment ||
(Netherlands) B.V. - - 32,609 || -
Purchase of President International, Inc., net of cash ||
acquired (444,818) - - || -
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 (510,699) (41,479) (130,177)|| 65,165
||
CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES ||
||
Purchase of treasury stock/capital contributions (8,605) (75) 788 || -
Exercise of options and warrant 20,577 - - || -
Long-term debt borrowings 425,000 109,750 220,000 || -
Long-term debt repayments (157,626) (271,310) (134,000)|| (2,377)
Commercial paper and Revolving Loan facilities, net 85,000 - - || (63,300)
---------------- ---------------- ----------------|| ----------------
Cash provided from (used by) financing activities 364,346 (161,635) 86,788 || (65,677)
---------------- ---------------- ----------------|| ----------------
(Decrease) increase in cash and cash equivalents (3,673) 15,234 9,839 || (864)
Cash and cash equivalents at beginning of period 27,188 11,954 2,115 || 2,978
---------------- ---------------- ----------------|| ----------------
Cash and cash equivalents at end of period $ 23,515 $ 27,188 $ 11,954 || $ 2,114
================ ================ ================|| ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-7
</TABLE>
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE 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 2, 1999, 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 HOLDINGS
CORPORATION ("INFLO"). 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 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 Keebler'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. On January 29,
1998, Keebler made an initial public offering of 13,386,661 shares of common
stock ("the Offering"). As part of the transaction, Flowers acquired additional
shares of common stock from Artal and Bermore so that its ownership of
outstanding stock increased to approximately 55%. In addition, during 1998,
Bermore, through a series of transactions, transferred its shares held to
Claremont Enterprises, Limited ("Claremont"), a privately held Bahamian limited
company. Keebler is comprised of primarily the following wholly-owned
subsidiaries: Keebler Company, Bake-Line Products, Inc. ("Bake-Line"), Sunshine
Biscuits, Inc. ("Sunshine"), President International, Inc. ("President"),
Keebler Leasing Corp. and Johnston's Ready Crust Company.
The Company, formerly UBIUS, had previously been owned by UB Investments
(Netherlands) B.V., a Dutch company (See Note 3). 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
Keebler's fiscal year consists of thirteen four week periods (fifty-two or
fifty-three weeks) and ends on the Saturday nearest December 31. The 1998 fiscal
year consisted of fifty-two weeks and the 1997 fiscal year consisted 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 1996 fiscal year consisted
of the forty-eight weeks ended December 28, 1996.
PRINCIPLES OF CONSOLIDATION
All subsidiaries are wholly-owned and included in the consolidated financial
statements of Keebler. Intercompany accounts and transactions have been
eliminated.
GUARANTEES OF NOTES
The subsidiaries of Keebler 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 Keebler's consolidated assets, revenues,
income or equity), individually and in the aggregate, to the consolidated
financial statements of Keebler. 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 PRESIDENT INTERNATIONAL, INC.
On September 28, 1998, Keebler acquired President International, Inc. from
President International Trade and Investment Corporation, a company limited by
shares under the International Business Companies Ordinance of the British
Virgin Islands, for an aggregate purchase price of $446.1 million, excluding
related fees and expenses paid of $4.5 million. The acquisition of President was
a cash transaction funded with approximately $75.0 million from existing
resources and the remainder from borrowings under the $700.0 million Senior
Credit Facility Agreement ("Credit Facility") and a $125.0 million Bridge
Facility, both dated as of September 28, 1998.
The acquisition of President by Keebler 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 President based on
respective fair values. The acquisition has resulted in an unallocated excess
purchase price over fair value of net assets acquired of $329.2 million, which
is being amortized on a straight-line basis over a forty year period.
Results of operations for President from September 28, 1998 to January 2,
1999 have been included in the consolidated statements of operations. The
following unaudited pro forma information has been prepared assuming the
acquisition had taken place at the beginning of fiscal year 1997. The unaudited
pro forma information includes adjustments for interest expense that would have
been incurred related to financing the purchase, additional depreciation of the
property, plant and equipment acquired and amortization of the trademarks, trade
names, other intangibles and goodwill arising from the acquisition. The
unaudited pro forma consolidated results of operations are not necessarily
indicative of the results that would have been reported had the President
acquisition been effected on the assumed date.
Unaudited
For the Year Ended
-------------------------
January 2, January 3,
1999 1998
----------- -----------
(IN THOUSANDS)
Net sales..............................................$ 2,583.5 $ 2,501.5
Income before extraordinary item.......................$ 104.7 $ 56.7
Net income.............................................$ 102.7 $ 49.3
Diluted net income per share:
Income before extraordinary item...................$ 1.20 $ 0.70
Net income.........................................$ 1.18 $ 0.61
3. 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 $850.0 million in debt with UB Investments (Netherlands) B.V.,
as well as all of the capital stock of UBIUS.
F-9
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PREDECESSOR COMPANY (CONTINUED)
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. for $70.0 million. 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.
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.
4. 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 Keebler's trade accounts receivable are from retail
dealers and wholesale distributors. Keebler 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 $7.8 million as of January 2, 1999 and $5.0 million as of
January 3, 1998.
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 94% of total inventories at January 2,
1999 and 88% of total inventories at January 3, 1998. Because Keebler has
adopted a natural business unit single pool approach to determining LIFO
inventory cost, classification of the LIFO reserve by inventory component is
impractical. There was no reserve required at January 2, 1999 to state the
inventory on a LIFO basis. The excess of the current production cost of
inventories over LIFO cost was $2.2 million at January 3, 1998.
At January 2, 1999 and January 3, 1998, inventories are shown net of an
allowance for slow-moving and aged inventory of $9.6 million and $6.8 million,
respectively.
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.
F-10
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES
Trademarks, trade names and other intangibles are stated at cost and are
amortized on a straight-line basis over a period of twenty to forty years.
Accumulated amortization of trademarks, trade names and other intangibles was
$11.8 million and $7.1 million at January 2, 1999 and January 3, 1998,
respectively.
GOODWILL
Goodwill represents the excess cost over the fair value of the tangible and
identifiable intangible net assets of acquired businesses. Goodwill is amortized
on a straight-line basis over a period of forty years. Accumulated amortization
of goodwill was $4.9 million and $1.8 million at January 2, 1999 and January 3,
1998, respectively.
REVENUE RECOGNITION
Revenue from the sale of products is recognized at the time of the shipment
to customers.
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 2, 1999, $10.2 million for the year ended January 3,
1998, $4.3 million for the forty-eight weeks ended December 28, 1996 and $0.6
million for the four weeks ended January 26, 1996.
ADVERTISING AND CONSUMER PROMOTION
Advertising and consumer promotion 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 $87.2 million for the year ended
January 2, 1999, $67.6 million for the year ended January 3, 1998, $33.3 million
for the forty-eight weeks ended December 28, 1996 and $5.1 million for the four
weeks ended January 26, 1996. There were no deferred advertising costs at
January 2, 1999 and January 3, 1998.
DERIVATIVE FINANCIAL INSTRUMENTS
Keebler uses derivative financial instruments as part of an overall strategy
to manage market risk. Keebler uses forward commodity futures and options
contracts to hedge existing or future exposures to changes in commodity prices.
Interest rate swap agreements are used to reduce the impact of changes in
interest rates. Keebler does not enter into these derivative financial
instruments for trading or speculative purposes (See Note 16).
INCOME TAXES
The consolidated financial statements reflect the application of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income
Taxes." Keebler files a consolidated federal income tax return.
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
determination as to whether there has been an impairment of long-lived assets
and the related unamortized goodwill, is 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
were 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.
F-11
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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.
SEGMENTS
In 1998, Keebler adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization used by management to make
operating decisions and to assess performance as the source in identifying and
reporting segment information. In addition, SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or
financial position, but did affect the disclosure of segment information (See
Note 17).
PENSION PLANS AND POSTRETIREMENT BENEFITS
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The consolidated financial
statements and related footnotes reflect the application of SFAS No. 132 (See
Notes 10 and 11).
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.
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment, including related accumulated
depreciation follows:
<TABLE>
<CAPTION>
JANUARY 2, 1999 January 3, 1998
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Land.............................................................. $ 18,374 $ 16,487
Buildings......................................................... 140,907 130,241
Machinery and equipment........................................... 424,574 328,473
Office furniture and fixtures..................................... 76,447 56,559
Delivery equipment................................................ 7,208 6,946
Construction in progress.......................................... 51,717 38,080
----------------- -----------------
719,227 576,786
Accumulated depreciation.......................................... (154,703) (98,665)
----------------- -----------------
$ 564,524 $ 478,121
================= =================
</TABLE>
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 three 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.
F-12
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ASSETS HELD FOR SALE
In 1998, a warehouse located in Houston, Texas, acquired as part of the
President acquisition, was placed for sale. In addition, Keebler continued to
hold an idle manufacturing facility in Atlanta, Georgia and a distribution
center in Kensington, Connecticut for sale. During 1998, Keebler recognized an
impairment charge of $0.9 million in order to reflect the manufacturing facility
at fair value. Disposition of all assets held for sale is expected to occur
before the end of 1999 without a significant gain or loss.
7. OTHER CURRENT LIABILITIES AND ACCRUALS
Other current liabilities and accruals consisted of the following at January
2, 1999 and January 3, 1998:
<TABLE>
<CAPTION>
JANUARY 2, 1999 January 3, 1998
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Self insurance reserves........................................... $ 52,202 $ 55,185
Employee compensation............................................. 73,017 55,724
Marketing and consumer promotions................................. 53,027 52,838
Other............................................................. 53,841 31,176
----------------- -----------------
$ 232,087 $ 194,923
================= =================
</TABLE>
Keebler obtains insurance to manage potential losses and liabilities related
to workers' compensation, health and welfare claims and general, product and
vehicle liability. Keebler 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
Keebler's estimates of aggregate liability for claims incurred. These estimates
utilize Keebler's prior experience and actuarial assumptions provided by the
Company's insurance carrier. The total estimated liability for these losses at
January 2, 1999 and January 3, 1998 was $52.2 million and $55.2 million,
respectively, and is included in other current liabilities and accruals. Keebler
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.
8. DEBT AND LEASE COMMITMENTS
Long-term debt consisted of the following at January 2, 1999 and January 3,
1998:
<TABLE>
<CAPTION>
Interest Rate Final Maturity JANUARY 2, 1999 January 3, 1998
----------------- --------------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Bridge Facility................ 6.263% September 26, 1999 $ 75,000 $ -
Revolving Facility............. 6.073% September 28, 2004 85,000 -
Term Facility.................. 5.944% September 28, 2004 350,000 -
Term-A Loans................... 6.144% April 7, 2003 - 156,000
Senior Subordinated Notes...... 10.750% July 1, 2006 124,400 125,000
Other Senior Debt.............. Various 2001-2005 11,805 12,645
Capital Lease Obligations...... Various 2002-2042 8,290 5,110
----------------- -----------------
654,495 298,755
Less: Current maturities....... 112,730 26,365
----------------- -----------------
$ 541,765 $ 272,390
================= =================
</TABLE>
At January 2, 1999, Keebler's primary credit financing was provided by a
$700.0 million Credit Facility and a $125.0 million Bridge Facility. Keebler
entered into new debt facilities in order to finance the acquisition of
President on September 28, 1998. The new debt structure specifically provides
for available borrowings of $825.0 million consisting of $350.0 million under
the Revolving Facility, $350.0 million under the Term Facility and an additional
$125.0 million under the Bridge Facility.
F-13
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
The current outstanding balance on the Term Facility at January 2, 1999 was
$350.0 million with quarterly scheduled principal payments through the final
maturity of September 2004. The Revolving Facility, with a current outstanding
balance of $85.0 million and available balance of $265.0 million at January 2,
1999, has a final maturity of September 2004, with no scheduled principal
payments. Certain letters of credit totaling $42.2 million reduce the available
balance on the Revolving Facility. Any unused borrowings under the Revolving
Facility are subject to a commitment fee. The current commitment fee will vary
from 0.1250% - 0.30% based on the relationship of debt to adjusted earnings with
a minimum commitment fee of 0.20% required through March 28, 1999. The Bridge
Facility, which is anticipated to be refinanced with a receivables facility (See
Note 19), has a final maturity of September 1999, with no scheduled principal
payments. At January 2, 1999, the current outstanding balance on the Bridge
Facility was $75.0 million with an additional $50.0 million in available
borrowings.
Interest on the Credit Facility is calculated based on base rate plus
applicable margin. The base rate can, at Keebler's option, be: i) the higher of
the base domestic lending rate as established by the administrative agent for
the lender of the Credit Facility, or the Federal Funds Rate plus one-half of
one percent or ii) a reserve percentage adjusted LIBO Rate as offered by the
administrative agent. The Credit Facility requires Keebler to meet certain
financial covenants including debt to earnings before interest, taxes,
depreciation and amortization ratio and cash flow coverage ratios. Interest on
the Bridge Facility is calculated in the same manner as the Credit Facility and
also is restricted by the same financial covenants.
In conjunction with the President acquisition on September 28, 1998, Term
Loan A was extinguished by using $145.0 million of borrowings under the new
Credit Facility. Keebler recorded a before-tax extraordinary charge of $2.8
million related primarily to expensing certain bank fees which were being
amortized and which were incurred at the time Term Loan A was issued. The
related after-tax charge was $1.7 million.
At January 3, 1998, Keebler'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 outstanding balance at January 3, 1998 was $156.0 million. The
amendment to the Credit Agreement was entered into on April 8, 1997 to obtain
more favorable terms, fees and interest rates. The interest expense, including
commitment fee, on the Credit Agreement was calculated in substantially the same
manner as is done under the current Credit Facility.
During the fourth quarter of 1997, using existing cash resources, Keebler
pre-paid $70.0 million of principal on Term Loan A; $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 Term
Loan A was issued.
On November 21, 1997, Keebler settled the Seller Note with a payment of
$31.7 million funded through working capital. Keebler 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%. Keebler
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.
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. Keebler 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.
F-14
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
On October 23, 1996, pursuant to an exchange and registration rights
agreement, Keebler registered its 10.75% Senior Subordinated Notes due 2006 (the
"Notes") under the Securities Act of 1933 in exchange for previously held
Increasing Rate Notes. The Notes were issued under an indenture dated June 15,
1996 between Keebler, Keebler's Restricted Subsidiaries (as defined in the
indenture) and the U.S. Trust Company of New York, as trustee. The Notes are
unsecured, senior subordinated obligations of Keebler guaranteed by the
Restricted Subsidiaries. Interest on the Notes is paid semi-annually on January
1 and July 1 of each year, commencing January 1, 1997. At Keebler's option, up
to 35.0% of the aggregate original principal of the Notes can be redeemed at a
redemption price of 110.0% on or prior to July 1, 1999 following a public equity
offering. In addition, Keebler's ability to pay dividends or make other
distributions on its common stock is limited by the terms of the indenture
governing the Notes.
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. Keebler 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 July 1, 1998, Keebler entered into a swap transaction with the Bank of
Nova Scotia, who also serves as the administrative agent for the lenders under
the Credit Facility, which matures on July 1, 2001. The swap transaction had the
effect of converting the fixed rate of 10.75% on $124.0 million of the Notes to
a rate of 10.26% through January 1, 1999 and 10.32% through July 1, 1999. In
addition, on September 30, 1998 and October 5, 1998, Keebler entered into two
swap transactions with the Bank of Nova Scotia both maturing on September 30,
2004. Each swap transaction converts the base rate on $116.7 million of the
Credit Facility to fixed rate debt of 5.084% and 4.89%, respectively. Keebler
also continues to maintain the swap transaction entered into with the Bank of
Nova Scotia on January 30, 1996 which converts the base rate on $170.0 million
of the Credit Facility to a fixed rate obligation of 5.0185% through February 1,
1999. The maturity date on the $170.0 million swap transaction was extended to
February 1, 2001 by the Bank of Nova Scotia on January 28, 1999.
Interest of $24.0 million, $39.0 million, $25.2 million and $3.8 million was
paid on debt for the year ended January 2, 1999, the year ended January 3, 1998,
the forty-eight weeks ended December 28, 1996 and the four weeks ended January
26, 1996, respectively.
Aggregate scheduled annual maturities of long-term debt as of January 2,
1999 are as follows:
(IN THOUSANDS)
1999............................................................ $ 112,730
2000............................................................ 27,814
2001............................................................ 51,151
2002............................................................ 68,871
2003............................................................ 105,929
2004 and thereafter............................................. 288,000
---------------
$ 654,495
===============
F-15
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
Assets recorded under capitalized lease agreements included in property,
plant and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, January 3,
1999 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Land............................................. $ 980 $ 980
Buildings........................................ 2,894 51
Machinery and equipment.......................... 2,853 212
Other leased assets.............................. 1 1
-------------- --------------
6,728 1,244
Accumulated depreciation......................... (242) (105)
-------------- --------------
$ 6,486 $ 1,139
============== ==============
</TABLE>
Future minimum lease payments under scheduled capital and operating leases
that have initial or remaining noncancelable terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
1999............................................. $ 986 $ 29,488
2000............................................. 1,018 25,450
2001............................................. 1,073 21,454
2002............................................. 1,481 17,614
2003............................................. 460 16,186
2004 and thereafter.............................. 6,170 25,530
-------------- --------------
Total minimum payments........................... 11,188 $ 135,722
==============
Amount representing interest..................... (2,898)
--------------
Obligations under capital lease.................. 8,290
Obligations due within one year.................. (680)
--------------
Long-term obligations under capital leases....... $ 7,610
==============
</TABLE>
Rent expense for all operating leases was $38.7 million, $36.1 million,
$30.1 million and $2.7 million, for the year ended January 2, 1999, the year
ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the
four weeks ended January 26, 1996, respectively.
9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE
As part of accounting for the acquisition of President, Keebler recognized
costs pursuant to a plan to exit certain activities and operations of the
acquired company. These exit costs, for which there is no future economic
benefit, were provided for in the allocation of the purchase price and totaled
$12.8 million. Company-wide staff reductions were estimated at $6.7 million,
with the balance of the reserves allocated to costs associated with
manufacturing, sales and distribution facility closings, which principally
include lease termination and carrying costs. Spending against the reserves
established related to the President acquisition for the year ended January 2,
1999 totaled $0.1 million. Management's plan is expected to be substantially
complete before the end of 1999 with only noncancelable lease obligations
exceeding the one year time frame.
As part of 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-16
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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. An additional $6.8 million was anticipated for lease costs
related to exiting legacy information systems. Spending against the reserves
established for the year ended January 2, 1999, the year ended January 3, 1998
and the forty-eight weeks ended December 28, 1996 totaled $7.7 million, $16.2
million and $41.4 million, respectively. In addition, during the years ended
January 2, 1999 and January 3, 1998, Keebler expensed an additional $2.8 million
and $2.7 million, respectively, principally for costs related to the closure of
distribution facilities not included in the original plan. No additional
provisions were made during the forty-eight weeks ended December 28, 1996. Also
during the year ended January 2, 1999, Keebler adjusted accruals previously
established in the accounting for prior acquisitions by reducing goodwill and
other intangibles by $3.7 million to recognize exit costs that are now expected
to be less than initially anticipated.
At January 2, 1999 and January 3, 1998, the total plant and facility closing
costs and severance reserve balance was $26.6 million and $22.5 million,
respectively. Only noncancelable lease obligations are anticipated to extend
beyond 1999, to be paid out over the next eight years concluding in 2006.
10. 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, government securities and bonds. Benefits provided under the
pension plan are primarily based on years of service and the employee's final
level of compensation. Keebler's funding policy is to contribute annually not
less than the ERISA minimum funding requirements. Effective December 31, 1998,
the pension plans of President were merged with Keebler's pension plan. The
pension plans of Sunshine, Athens Packaging, Bake-Line and Emerald Industries
were merged with Keebler's pension plan effective January 1, 1997.
Pension expense included the following components:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Year Ended Weeks Ended || Ended
JANUARY 2, January 3, December 28, || January 26,
1999 1998 1996 || 1996
--------------- --------------- -------------- || ---------------
(IN THOUSANDS)
<S> <C> <C> <C> || <C>
Service cost............................... $ 9,040 $ 8,560 $ 7,711 || $ 599
Interest cost.............................. 31,080 29,673 21,338 || 1,133
Expected return on plan assets............. (39,352) (37,935) (28,247) || (1,693)
Amortization of transition obligation...... - - - || 47
Amortization of prior service cost......... 689 - - || (12)
--------------- --------------- --------------- || ---------------
Pension expense............................ $ 1,457 $ 298 $ 802 || $ 74
=============== =============== =============== || ===============
</TABLE>
F-17
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of Keebler's pension plan and amounts recognized in the
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 2, 1999 January 3, 1998
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year............................. $ (437,334) $ (408,060)
Service cost........................................................ (9,040) (8,560)
Interest cost....................................................... (31,080) (29,673)
Amendments.......................................................... (4,874) (5,045)
Actuarial loss...................................................... (45,871) (14,795)
Acquisition......................................................... (22,805) -
Benefits and expenses paid.......................................... 30,692 28,799
----------------- -----------------
Benefit obligation at year end...................................... (520,312) (437,334)
----------------- -----------------
Change in plan assets:
Fair value of plan assets at beginning of year...................... 499,379 464,433
Actual return on plan assets........................................ 77,731 63,745
Acquisition......................................................... 19,292 -
Benefits and expenses paid.......................................... (30,692) (28,799)
----------------- -----------------
Fair value of plan assets at year end............................... 565,710 499,379
----------------- -----------------
Funded status....................................................... 45,398 62,045
Unrecognized actuarial gain......................................... (16,538) (24,029)
Unrecognized prior service cost..................................... 9,230 5,044
Contributions subsequent to measurement date........................ 115 -
----------------- -----------------
Prepaid pension..................................................... $ 38,205 $ 43,060
================= =================
</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 Year Ended Weeks Ended || Ended
JANUARY 2, January 3, December 28, || January 26,
1999 1998 1996 || 1996
-------------- -------------- ---------------- || ---------------
<S> <C> <C> <C> || <C>
Discount rate..................................... 6.5% 7.3% 7.5% || 7.5%
Rate of compensation level increases.............. 4.0 4.0 4.0 || 4.0
Expected long-term rate of return on plan assets.. 9.0 9.0 8.6 || 10.0
</TABLE>
The plan assets, as of January 2, 1999 and January 3, 1998, include a real
estate investment of $3.1 million in a distribution center which is under an
operating lease to Keebler.
In addition to the pension plan, Keebler also maintains an unfunded
supplemental retirement plan for certain highly compensated former executives.
Benefits provided are based on years of service. Vesting is graduated depending
on termination after age 55.
F-18
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The supplemental retirement plan expense includes the following components:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Year Ended Weeks Ended || Ended
JANUARY 2, January 3, December 28, || January 26,
1999 1998 1996 || 1996
--------------- --------------- --------------- || ---------------
(IN THOUSANDS)
<S> <C> <C> <C> || <C>
Service cost............................... $ - $ - $ - || $ 35
Interest cost.............................. 722 732 637 || 66
Amortization of transition obligation...... - - - || 8
Amortization of prior service cost......... - - - || 13
--------------- --------------- --------------- || ---------------
Plan expense............................... $ 722 $ 732 $ 637 || $ 122
=============== =============== =============== || ===============
</TABLE>
The unfunded status of the supplemental retirement plan and the amounts
recognized in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 2, 1999 January 3, 1998
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year............................. $ (10,303) $ (10,028)
Interest cost....................................................... (722) (732)
Actuarial loss...................................................... (844) (296)
Benefits and expenses paid.......................................... 750 753
------------------- -------------------
Benefit obligation at year end...................................... (11,119) (10,303)
Fair value of plan assets........................................... - -
------------------- -------------------
Funded status....................................................... (11,119) (10,303)
Unrecognized actuarial loss (gain).................................. 387 (458)
Benefit payments subsequent to measurement date..................... 109 206
------------------- -------------------
Accrued obligation.................................................. $ (10,623) $ (10,555)
=================== ===================
</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 Year Ended Weeks Ended || Ended
JANUARY 2, January 3, December 28, || January 26,
1999 1998 1996 || 1996
-------------- -------------- -------------- || --------------
<S> <C> <C> <C> || <C>
Discount rate............................. 6.5% 7.3% 7.5% || 7.5%
Rate of compensation level increase....... 4.0 N/A N/A || 4.0
</TABLE>
Contributions are also made by Keebler to a retirement program for Grand
Rapids union employees. Benefits provided under the plan are based on a flat
monthly amount for each year of service and are unrelated to compensation.
Contributions are made based on a negotiated hourly rate. For the year ended
January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended
December 28, 1996 and the four weeks ended January 26, 1996, Keebler expensed
contributions of $2.3 million, $2.6 million, $2.3 million and $0.2 million,
respectively.
Keebler contributes to various multiemployer union administered
defined-benefit and defined-contribution pension plans. Benefits provided under
the multiemployer pension plans are generally based on years of service and
employee age. Expense under these plans was $8.9 million, $10.5 million, $7.8
million and $0.9 million for the year ended January 2, 1999, the year ended
January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four
weeks ended January 26, 1996, respectively.
F-19
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
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 Keebler's pension plan. Expenses
paid to administer the Bake-Line money purchase pension plan were nominal.
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Keebler 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. Keebler does not fund the plan.
The net periodic postretirement benefit expense includes the following
components:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Year Ended Weeks Ended || Ended
JANUARY 2, January 3, December 28, || January 26,
1999 1998 1996 || 1996
-------------- -------------- -------------- || -------------
(IN THOUSANDS)
<S> <C> <C> <C> || <C>
Service cost...................................... $ 2,045 $ 2,242 $ 2,142 || $ 123
Interest cost..................................... 3,961 3,888 2,729 || 246
Amortization of prior service cost................ (115) - - || -
-------------- -------------- -------------- || -------------
Net periodic postretirement benefit expense....... $ 5,891 $ 6,130 $ 4,871 || $ 369
============== ============== ============== || =============
</TABLE>
The unfunded status of the plan reconciled to the postretirement obligation
in Keebler's consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 2, 1999 January 3, 1998
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Change in accumluated postretirement benefit obligation:
Benefit obligation at beginning of year............................. $ (56,690) $ (54,324)
Service cost........................................................ (2,045) (2,242)
Interest cost....................................................... (3,961) (3,888)
Amendments.......................................................... - 689
Actuarial gain...................................................... 3,641 357
Acquisition......................................................... (1,598) -
Benefits and expenses paid.......................................... 4,384 2,718
----------------- -----------------
Benefit obligation at year end...................................... (56,269) (56,690)
Fair value of plan assets........................................... - -
----------------- -----------------
Funded status....................................................... (56,269) (56,690)
Unrecognized actuarial gain......................................... (7,856) (4,215)
Unrecognized prior service cost..................................... (574) (689)
Benefit payments subsequent to measurement date..................... 978 614
----------------- -----------------
Postretirement obligation........................................... $ (63,721) $ (60,980)
================= =================
</TABLE>
F-20
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The accumulated postretirement benefit obligation was determined using a
weighted average discount rate of 6.5% for the year ended January 2, 1999, 7.3%
for the year ended January 3, 1998 and 7.5% for both the forty-eight weeks ended
December 28, 1996 and the four weeks ended January 26, 1996.
The weighted average annual assumed rate of increase in the cost of covered
benefits is 6.0% for 1998 declining to an ultimate trend rate of 5.0% in 1999. A
1% increase in the trend rate for health care costs would have increased the
accumulated benefit obligation as of January 2, 1999 by $2.6 million and the net
periodic benefit cost by $0.3 million. A 1% decrease in the trend rate for
health care costs would have decreased the accumulated benefit obligation and
net periodic benefit cost by $2.7 million and $0.3 million, respectively, as of
January 2, 1999.
Keebler 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. Keebler
does not fund the plan. The postemployment obligation included in the
consolidated balance sheets at both January 2, 1999 and January 3, 1998 was $4.7
million.
12. INCOME TAXES
The components of income tax expense were as shown below:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Year Ended Weeks Ended || Ended
JANUARY 2, January 3, December 28, || January 26,
1999 1998 1996 || 1996
-------------- -------------- -------------- || --------------
(IN THOUSANDS)
<S> <C> <C> <C> || <C>
Current: ||
Federal....................................... $ 58,269 $ 22,172 $ - || $ -
State......................................... 4,618 3,840 - || -
-------------- -------------- -------------- || --------------
Current provision for income taxes.............. 62,887 26,012 - || -
Deferred: ||
Federal....................................... 8,494 17,203 11,524 || 6,490
State......................................... 1,581 1,954 2,478 || 843
Valuation allowance (federal and state)....... - - - || (7,333)
-------------- -------------- -------------- || --------------
Deferred provision for income taxes............. 10,075 19,157 14,002 || -
-------------- -------------- -------------- || --------------
$ 72,962 $ 45,169 $ 14,002 || $ -
============== ============== ============== || ==============
</TABLE>
The differences between the income tax expense calculated at the federal
statutory income tax rate and Keebler's consolidated income tax expense are as
follows:
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Year Ended Weeks Ended || Ended
JANUARY 2, January 3, December 28, || January 26,
1999 1998 1996 || 1996
-------------- -------------- -------------- || --------------
(IN THOUSANDS)
<S> <C> <C> <C> || <C>
U.S. federal statutory rate..................... $ 59,339 $ 37,643 $ 11,140 || $ -
State income taxes (net of federal benefit)..... 5,813 3,766 1,608 || -
Intangible amortization......................... 3,160 1,836 1,268 || -
All others...................................... 4,650 1,924 (14) || -
-------------- -------------- -------------- || --------------
$ 72,962 $ 45,169 $ 14,002 || $ -
============== ============== ============== || ==============
</TABLE>
F-21
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The deferred tax assets and deferred tax (liabilities) recorded on the
consolidated balance sheets consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, 1999 January 3, 1998
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Depreciation....................................................... $ (108,866) $ (82,204)
Trademarks, trade names and intangibles............................ (49,348) (88)
Prepaid pension.................................................... (14,283) (16,164)
Inventory valuation................................................ (6,779) (5,257)
----------------- -----------------
(179,276) (103,713)
----------------- -----------------
Net operating loss carryforwards................................... 80,195 80,195
Postretirement/postemployment benefits............................. 26,171 25,123
Plant and facility closing costs and severance..................... 23,728 10,996
Workers' compensation.............................................. 14,769 15,119
Incentives and deferred compensation............................... 12,063 11,493
Employee benefits.................................................. 10,879 9,583
Charitable contributions........................................... 3,425 8,425
Other.............................................................. 3,011 442
----------------- -----------------
174,241 161,376
Valuation allowance................................................ (84,350) (84,350)
----------------- -----------------
$ (89,385) $ (26,687)
================= =================
</TABLE>
Net operating loss carryforwards total approximately $203.2 million through
1998 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. In the event the net operating loss
carryforwards become realizable, the valuation allowance would be reversed
against trademarks, trade names and other intangibles.
Income taxes paid, net of refunds, were approximately $67.1 million, $9.9
million and $1.6 million for the year ended January 2, 1999, the year ended
January 3, 1998 and the forty-eight weeks ended December 28, 1996, respectively.
There were no taxes paid or refunded during the four weeks ended January 26,
1996.
13. SHAREHOLDERS' EQUITY
COMMON STOCK
There were no cash dividends declared for the year ended January 2, 1999,
the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 or
the four weeks ended January 26, 1996. Keebler's ability to pay cash dividends
is limited by the Credit Facility and the Senior Subordinated Notes. The most
limiting dividend restriction exists under the Senior Subordinated Notes, which
limits dividend payments to the sum of: (i) 50% of consolidated cumulative net
income, (ii) net cash proceeds received from the issuance of capital stock,
(iii) net cash proceeds received from the exercise of stock options and
warrants, (iv) net cash proceeds received from the conversion of indebtedness
into capital stock and (v) the net reduction in investments made by Keebler.
On January 29, 1998, Keebler made an initial public offering of 13,386,661
shares of common stock. Concurrent with the Offering, Bermore exercised a
warrant to purchase 6,135,781 shares of common stock that had been issued in
conjunction with the Sunshine acquisition. The exercise of the warrant resulted
in Keebler receiving $19.8 million of cash proceeds. Artal and Bermore sold all
of the shares in the Offering, with none of the proceeds going to Keebler.
F-22
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SHAREHOLDERS' EQUITY (CONTINUED)
The consolidated financial statements reflect Keebler's declaration of a
57.325-for-1 stock split of common stock (the "Stock Split") effective January
22, 1998. The Stock Split was effected in the form of a stock dividend. On July
29, 1997, the Board of Directors of Keebler also approved a 1-for-10 reverse
stock split of Keebler's common stock. 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 the stock splits as if they had been
effective January 26, 1996.
TREASURY STOCK
In March 1998, Keebler's Board of Directors authorized the repurchase, at
management's discretion, of up to $30.0 million of shares of the Company's
common stock. The share repurchase program was primarily instituted to offset
dilution which may result from the exercise and sale of shares related to
employee stock options. The repurchases of shares of common stock are recorded
as treasury stock using the cost method and result in a reduction of
shareholders' equity. Should the treasury shares be reissued, Keebler intends to
use a first-in, first-out method of reissuance.
14. STOCK OPTION PLAN
Keebler 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 APB 25, no
compensation expense is recognized when the exercise price of options equals the
fair value (market value) of the underlying stock options at the date of grant.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined
as if Keebler had accounted for its employee stock options under the fair value
method of that Statement. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The four weeks ended January 26, 1996 are not included in the pro forma
disclosures, as it was prior to the Keebler acquisition and the adoption of any
stock option plan. The following table summarizes the pro forma disclosures
regarding net income and earnings per share for the year ended January 2, 1999,
the year ended January 3, 1998 and the forty-eight weeks ended December 28,1996:
<TABLE>
<CAPTION>
Forty-Eight
Weeks Ended
YEAR ENDED Year Ended December 28,
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) JANUARY 2, 1999 January 3, 1998 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net income:
As reported..................................... $ 94,871 $ 56,985 $ 15,752
Pro forma....................................... $ 91,032 $ 55,032 $ 14,027
Basic net income per share:
As reported..................................... $ 1.14 $ 0.73 $ 0.21
Pro forma....................................... $ 1.09 $ 0.71 $ 0.19
Diluted net income per share:
As reported..................................... $ 1.08 $ 0.70 $ 0.21
Pro forma....................................... $ 1.04 $ 0.68 $ 0.18
Weighted average grant date fair value of options
granted during the year......................... $ 8.53 $ 8.09 $ 1.87
</TABLE>
F-23
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
These pro forma amounts may not be representative of future disclosures
because the estimated fair value of stock options is amortized to expense over
the vesting period, which is variable, and additional options may be granted in
future years. In 1998, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
input assumptions including the expected stock price volatility. Because
Keebler's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options. For purposes of the pro forma disclosures for 1997
and 1996, the fair value for the options was estimated at the date of grant
using a present value approach as Keebler was not a public company.
For options granted, the following weighted average assumptions were used to
determine the fair value:
<TABLE>
<CAPTION>
Forty-Eight
Weeks Ended
YEAR ENDED Year Ended December 28,
JANUARY 2, 1999* January 3, 1998 1996
---------------- ---------------- --------------
<S> <C> <C> <C>
Dividend yield............................ 0.0% 0.0% 0.0%
Expected volatility....................... 27.2% 0.0% **
Risk-free interest rate................... 5.04% 6.00% 6.00%
Expected option life (years).............. 5 5 5
</TABLE>
* Utilized the Black-Scholes option pricing model.
** Volatility accounted for with a discount rate of 20% applied to the
valuation of Keebler's stock based upon the present value of future cash
flows discounted at the weighted average cost of capital of 19% after tax.
Under Keebler's 1996 Stock Option Plan, 9,673,594 shares of Keebler's stock
were authorized for future grant. All options granted have ten year terms and,
due to acceleration resulting from the achievement of certain performance
measures, vest by 2001.
The following table summarizes the 1996 Stock Option Plan activity:
<TABLE>
<CAPTION>
Forty-Eight Weeks Ended
December 28, 1996
--------------------------------------
Weighted Average
Options Exercise Price
------------------ ------------------
<S> <C> <C>
Outstanding at the beginning of the period.................................... - $ -
Granted....................................................................... 7,031,198 1.98
Exercised..................................................................... - -
Forfeited..................................................................... 228,727 1.74
Expired....................................................................... - -
------------------
Outstanding at the end of the period.......................................... 6,802,471 $ 1.98
==================
Exercisable at the period end................................................. - -
==================
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
Year Ended January 3, 1998
--------------------------------------
Weighted Average
Options Exercise Price
------------------ ------------------
<S> <C> <C>
Outstanding at the beginning of the period.................................... 6,802,471 $ 1.98
Granted....................................................................... 49,873 5.23
Exercised..................................................................... - -
Forfeited..................................................................... - -
Expired....................................................................... - -
------------------
Outstanding at the end of the period.......................................... 6,852,344 $ 2.01
==================
Exercisable at the period end................................................. 1,587,243 $ 1.98
==================
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1999
--------------------------------------
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------------ ------------------
<S> <C> <C>
Outstanding at the beginning of the period.................................... 6,852,344 $ 2.01
Granted....................................................................... - -
Exercised..................................................................... 351,177 2.21
Forfeited..................................................................... 44,887 3.23
Expired....................................................................... - -
------------------
Outstanding at the end of the period.......................................... 6,456,280 $ 1.99
==================
Exercisable at the period end................................................. 4,433,774 $ 1.98
==================
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices as of January 2, 1999 for options outstanding under the 1996
Stock Option Plan range from $1.74 to $5.23. The weighted average remaining
contractual life of these options is approximately seven and one-half years.
Under Keebler's 1998 Omnibus Stock Incentive Plan, 2,850,200 shares of
Keebler's stock were authorized for future grant. All options granted generally
have ten year terms and vest at the end of five years. Vesting can be
accelerated if certain stock price performance measures are met.
The following table summarizes the 1998 Omnibus Stock Incentive Plan
activity:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1999
--------------------------------------
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------------ ------------------
<S> <C> <C>
Outstanding at the beginning of the period.................................... - $ -
Granted....................................................................... 2,737,836 25.03
Exercised..................................................................... - -
Forfeited..................................................................... 22,200 27.31
Expired....................................................................... - -
------------------
Outstanding at the end of the period.......................................... 2,715,636 $ 25.01
==================
Exercisable at the period end................................................. - -
==================
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices as of January 2, 1999 for options outstanding under the 1998
Omnibus Stock Incentive Plan range from $24.00 to $32.13. The weighted average
remaining contractual life of these options is approximately nine years.
Under Keebler's Non-Employee Director Stock Plan, 22,500 shares of Keebler's
stock were authorized for future grant, all of which have been granted. All
options granted have ten year terms and vest automatically upon grant.
F-25
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
The following table summarizes the Non-Employee Director Stock Plan
activity:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1999
--------------------------------------
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------------ ------------------
<S> <C> <C>
Outstanding at the beginning of the period.................................... - $ -
Granted....................................................................... 22,500 27.44
Exercised..................................................................... - -
Forfeited..................................................................... - -
Expired....................................................................... - -
------------------
Outstanding at the end of the period.......................................... 22,500 $ 27.44
==================
Exercisable at the period end................................................. 22,500 $ 27.44
==================
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of January 2, 1999, the exercise price for options outstanding under the
Non-Employee Director Stock Plan was $27.44. The weighted average remaining
contractual life of these options is approximately nine years.
15. NET INCOME PER SHARE
Basic net income per share is calculated using the weighted average number
of common shares outstanding during each period. Diluted net income per share is
calculated using the weighted average number of common and potentially dilutive
common shares outstanding during each period. The common equivalent shares arise
from the 1996 Stock Option Plan, the 1998 Omnibus Stock Incentive Plan, the
Non-Employee Director Stock Plan and the warrant issued in connection with the
Sunshine acquisition and are calculated using the treasury stock method.
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Forty-Eight
YEAR ENDED Year Ended Weeks Ended
JANUARY 2, 1999 January 3, 1998 December 28, 1996
------------------- ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
NUMERATOR:
Income before extraordinary item................. $ 96,577 $ 62,381 $ 17,677
Extraordinary item, net of tax................... 1,706 5,396 1,925
------------------- ------------------- -------------------
Net income....................................... $ 94,871 $ 56,985 $ 15,752
=================== =================== ===================
DENOMINATOR:
Denominator for Basic Net Income Per Share
Weighted average shares..................... 83,254 77,604 75,244
Effect of Dilutive Securities:
Stock options............................... 3,992 2,168 832
Warrants.................................... 240 790 -
------------------- ------------------- -------------------
Diluted potential common shares............. 4,232 2,958 832
------------------- ------------------- -------------------
Denominator for Diluted Net Income Per Share..... 87,486 80,562 76,076
=================== =================== ===================
</TABLE>
For the year ended January 2, 1999, there were weighted average options to
purchase 96,478 shares of common stock at an exercise price ranging from $28.88
to $32.13, which 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. There
were no antidilutive securities for the year ended January 3, 1998. For the
forty-eight weeks ended December 28, 1996, there were weighted average options
to purchase 56,216 shares of common stock at $3.23 per share and the weighted
average warrant to purchase 3,768,863 shares of common stock at $3.23 per share
which 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.
F-26
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. 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 disclosed in
Note 8 approximate fair value.
Keebler uses interest-rate swap agreements to effectively convert certain
fixed rate debt to a floating rate instrument and certain floating rate debt to
a fixed rate instrument. The interest rate swap agreements result in Keebler
paying or receiving the difference between the fixed and floating rates at
specified intervals calculated based on the notional amounts. The interest rate
differential to be paid or received is accrued as interest rates change and is
recorded as interest expense. The fair values of the swap agreements were
obtained from the Bank of Nova Scotia and were estimated using market prices at
each respective year-end. The fair values of the swap agreements are not
recognized in the financial statements as Keebler accounts for the agreements as
hedges. In 1998, Keebler had entered into four swap transactions expiring
between 2001 and 2004. At January 2, 1999, interest rate swap agreements with a
notional amount of $403.3 million were used to hedge interest rate fluctuations
on floating rate debt and a swap agreement with a notional amount of $124.0
million used to hedge interest rate fluctuations on fixed rate debt. The
estimated fair value of the swap agreements at January 2, 1999 was a net
receivable of $1.1 million. At January 3, 1998, there were two outstanding swap
agreements, both maturing in 2001. A swap agreement with a notional amount of
$170.0 million was used to hedge interest rate fluctuations on floating rate
debt and another swap agreement with a notional amount of $81.3 million was used
to hedge interest rate fluctuations on fixed rate debt. The estimated fair value
of the swap agreements at January 3, 1998 was a net receivable of $1.6 million.
Keebler often enters into exchange traded commodity futures and options
contracts to protect or hedge against adverse raw material price movements
related to anticipated inventory purchases. Realized gains or losses on
contracts are determined based on the stated market value at the time the
contracts are liquidated or expire and are deferred in inventory until the
underlying raw material is purchased. Gains or losses realized from the
liquidation or expiration of the contracts are recognized as part of the cost of
raw materials. Cost of sales was increased by losses on futures and options
transactions of $7.1 million and $3.8 million in the years ended January 2, 1999
and January 3, 1998, respectively, and reduced by gains on futures and options
transactions of $0.8 million for the forty-eight weeks ended December 28, 1996.
Operations for the four weeks ended January 26, 1996, were 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. The notional amount of open futures and
options contracts at January 2, 1999 and January 3, 1998 were $61.7 million and
$58.7 million, respectively. The fair values of the open futures and options
contracts at January 2, 1999 and January 3, 1998, based on the stated market
value at those dates, were $57.9 million and $53.8 million, respectively. The
open contracts at January 2, 1999 will expire between January 1999 and July
1999.
17. SEGMENT INFORMATION
In 1998, Keebler adopted SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information." Keebler's reportable segments are Branded
and Specialty. The reportable segments were determined using Keebler's method of
internal reporting, which divides and analyzes the business by sales channel.
The nature of the customers, products and method of distribution can vary by
sales channel. The reportable segments represent an aggregation of similar sales
channels. The Branded segment is comprised of sales channels that principally
market brand name cookie and cracker products to retail outlets. Products in the
Branded segment are sold by either a Keebler sales employee or a distributor.
The sale channels in the Specialty segment primarily sell cookie and cracker
products that are manufactured on a made-to-order basis or that are produced in
individual packs to be used in various institutions (i.e., restaurants,
hospitals, etc.). Many of the products sold by the Specialty segment are done so
through the use of brokers.
F-27
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED)
Keebler evaluates the performance of the reportable segments and allocates
resources based on the segment's profit contribution, defined as earnings before
certain functional support costs, amortization, interest and income taxes. The
accounting policies for each reportable segment are the same as those described
in Note 4 "Summary of Significant Accounting Policies." The cost of sales,
however, used to determine a segment's profit contribution is calculated using
standard costs for each product, while actual cost of sales is used to determine
consolidated operating income (loss).
There are no intersegment transactions that result in revenue or profit
(loss). Asset information by reportable segment is not presented, as Keebler
does not report or generate such information internally. However, depreciation
expense included in the determination of a segment's profit contribution has
been presented. The depreciation expense for each reportable segment reflects
the amount absorbed in the standard cost of products sold as well as the
depreciation that relates to assets used entirely by the respective segment. The
following table presents certain information included in the profit contribution
of each segment for the year ended January 2, 1999, the year ended January 3,
1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended
January 26, 1996.
<TABLE>
<CAPTION>
Branded Specialty
Segment Segment Other (1) Total
--------------- -------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED JANUARY 2, 1999:
NET SALES TO EXTERNAL CUSTOMERS.............. $ 1,726,668 $ 499,812 $ - $ 2,226,480
DEPRECIATION EXPENSE......................... 31,087 7,934 20,382 59,403
PROFIT CONTRIBUTION.......................... 282,639 85,898 - 368,537
YEAR ENDED JANUARY 3, 1998:
Net sales to external customers.............. $ 1,566,702 $ 498,482 $ - $ 2,065,184
Depreciation expense......................... 19,650 6,750 27,331 53,731
Profit contribution.......................... 226,911 80,321 - 307,232
FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996:
Net sales to external customers.............. $ 1,178,023 $ 467,509 $ - $ 1,645,532
Depreciation expense......................... 15,919 6,174 22,251 44,344
Profit contribution.......................... 145,311 53,908 - 199,219
==========================================================================================================================
FOUR WEEKS ENDED JANUARY 26, 1996:
Net sales to external customers.............. $ 69,842 $ 31,814 $ - $ 101,656
Depreciation expense......................... 1,121 502 223 1,846
Profit contribution.......................... 8,660 4,295 - 12,955
(1) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments.
</TABLE>
The net sales to external customers from the reportable segments equal the
consolidated net sales of Keebler. A reconciliation of segment profit
contribution to total consolidated income from continuing operations before
income tax expense (benefit) for the year ended January 2, 1999, the year ended
January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four
weeks ended January 26, 1996 is as follows:
F-28
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Forty-Eight || Four Weeks
YEAR ENDED Year Ended Weeks Ended || Ended
JANUARY 2, January 3, December 28, || January 26,
1999 1998 1996 || 1996
--------------- --------------- --------------- || ---------------
(IN THOUSANDS)
<S> <C> <C> <C> || <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS ||
BEFORE INCOME TAX EXPENSE (BENEFIT): ||
Reportable segments profit contribution......... $ 368,537 $ 307,232 $ 199,219 || $ 12,955
Unallocated functional support costs (1)........ 172,498 165,835 129,069 || 38,453
Interest expense (income), net.................. 26,500 33,847 38,471 || (116)
--------------- --------------- --------------- || ---------------
Income (Loss) from Continuing Operations ||
before Income Tax Expense (Benefit)......... $ 169,539 $ 107,550 $ 31,679 || $ (25,382)
=============== =============== =============== || ===============
(1) Includes support costs such as distribution, research and development, corporate administration and other (income)
expense, which are not allocated internally to reportable segments.
</TABLE>
Net sales to external customers consist of cookies, crackers and other baked
goods for all periods presented. All long-lived assets at January 2, 1999 and
January 3, 1998 are located in the United States. Net sales to external
customers made outside the United States, as well as to any single customer, are
not material to consolidated net sales for the year ended January 2, 1999, the
year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and
the four weeks ended January 26, 1996.
18. UNAUDITED QUARTERLY FINANCIAL DATA
Results of operations for each of the four quarters of the fiscal years
ended January 2, 1999 and January 3, 1998 follow. Each quarter represents a
period of twelve weeks except the first quarter which includes sixteen weeks.
<TABLE>
<CAPTION>
Quarter 1 Quarter 2 Quarter 3 Quarter 4
------------------- ------------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997 1998* 1997**
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $636.8 $597.0 $490.0 $459.8 $499.9 $485.3 $599.8 $523.1
Gross profit.......................... 372.7 337.0 281.3 259.7 294.4 277.0 339.2 303.5
Income before extraordinary item...... 14.1 7.6 19.4 13.0 29.0 18.5 34.1 23.3
Extraordinary item.................... - 2.7 - - 1.7 - - 2.7
Net income............................ 14.1 4.9 19.4 13.0 27.3 18.5 34.1 20.6
Basic net income per share:
Income before extraordinary item... $0.17 $0.10 $0.23 $0.16 $0.35 $0.24 $0.41 $0.30
Extraordinary item................. - 0.04 - - 0.02 - - 0.03
--------- --------- --------- --------- --------- --------- --------- ---------
Net income......................... $0.17 $0.06 $0.23 $0.16 $0.33 $0.24 $0.41 $0.27
========= ========= ========= ========= ========= ========= ========= =========
Diluted net income per share:
Income before extraordinary item... $0.16 $0.10 $0.22 $0.16 $0.33 $0.23 $0.39 $0.28
Extraordinary item................. - 0.04 - - 0.02 - - 0.03
--------- --------- --------- --------- --------- --------- --------- ---------
Net income......................... $0.16 $0.06 $0.22 $0.16 $0.31 $0.23 $0.39 $0.25
========= ========= ========= ========= ========= ========= ========= =========
- ----------
* Quarter 4, 1998 includes the operating results of President from the acquisition date of September 28, 1998
through January 2, 1999.
** Quarter 4, 1997 includes thirteen weeks as fiscal 1997 was a fifty-three week year.
</TABLE>
F-29
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUBSEQUENT EVENTS
On January 29, 1999 Keebler entered into a Receivables Purchase Agreement
("Agreement") to replace the Bridge Facility existing at January 2, 1999. This
Agreement allows funds to be borrowed at a lower cost to the Company and is
collateralized by the accounts receivable of Keebler.
On January 21, 1999, Keebler made a secondary public offering of 16,200,000
shares of common stock. Artal and Claremont sold all of the shares, with no
proceeds going to Keebler. As a result, Artal's ownership percentage decreased
from approximately 21% to 2% and Claremont's ownership percentage was reduced
from approximately 6% to 5% of the outstanding common stock. Management's
ownership remained at approximately 2% and Flowers' ownership remained at
approximately 55%.
On January 4, 1999, Keebler engaged in a series of corporate-entity
transactions that resulted in Sunshine and President being merged into Keebler
Company. Consequently, these former subsidiaries of Keebler Foods Company are
currently wholly-owned subsidiaries of Keebler Company.
F-30
<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.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 2, 1999
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 2, 1999, THE YEAR ENDED JANUARY 3, 1998,
THE FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996 AND THE FOUR WEEKS ENDED JANUARY 26, 1996
(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 2, 1999
For discounts and doubtful accounts $ 4,965 $ 20,148 $ 2,879 (1) $ (20,210)(2) $ 7,782
========== ========== ========== ========== ==========
For deferred taxes $ 84,350 $ - $ - $ - $ 84,350
========== ========== ========== ========== ==========
For inventory reserves $ 6,782 $ 7,484 $ 1,807 (1) $ (6,459)(3) $ 9,614
========== ========== ========== ========== ==========
YEAR ENDED JANUARY 3, 1998
For discounts and doubtful accounts $ 5,390 $ 18,970 $ - $ (19,395)(2) $ 4,965
========== ========== ========== ========== ==========
For deferred taxes $ 84,350 $ - $ - $ - $ 84,350
========== ========== ========== ========== ==========
For inventory reserves $ 5,508 $ 9,716 $ - $ (8,442)(3) $ 6,782
========== ========== ========== ========== ==========
FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996
For discounts and doubtful accounts $ 4,181 $ 14,399 $ 907 (4) $ (14,097)(2) $ 5,390
========== ========== ========== ========== ==========
For deferred taxes $ 109,484 $ - $ - $ (25,134)(5) $ 84,350
========== ========== ========== ========== ==========
For inventory reserves $ 9,578 (6) $ 3,370 $ - $ (7,440)(7) $ 5,508
========== ========== ========== ========== ==========
========================================================================================================================
FOUR WEEKS ENDED JANUARY 26, 1996
For discounts and doubtful accounts $ 3,558 $ 1,577 $ - $ (954)(2) $ 4,181
========== ========== ========== ========== ==========
For deferred taxes $ 116,817 $ (7,333) $ - $ - $ 109,484
========== ========== ========== ========== ==========
For inventory reserves $ 637 $ 378 $ - $ - $ 1,015
========== ========== ========== ========== ==========
Note 1: Schedule II - Valuation and Qualifying Accounts includes certain financial data of Keebler Foods Company
("Keebler") for the year ended January 2, 1999, the year ended January 3, 1998 and 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
Company ("INFLO"). The distinction between Keebler's and the predecessor company's financial data has been made
by inserting a double line.
(1) Amount acquired in the acquisition of President International, Inc.
(2) Primarily charges against reserves, net of recoveries.
(3) Inventory write-offs, net.
(4) Amount acquired in the acquisition of Sunshine Biscuits, Inc.
(5) Adjustment to reduce the valuation allowance as a result of the acquisition of Keebler.
(6) Includes inventory reserves established in the acquisition of Keebler.
(7) Adjustment to reduce reserve.
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"))
2.2 Stock Purchase Agreement dated as of August 24, 1998 between
Keebler and President International, Inc. (incorporated herein by
reference to Exhibit 2.2 of Keebler's Current Report on Form 8-K
previously filed with the Commission on October 9, 1998
(Commission File No. 001-13705) (the "October Report"))
3.1 Amended and Restated Certificate of Incorporation of Keebler
(incorporated herein by reference to Exhibit 3.1 of 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 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)
10.2 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)
10.3 Management Stockholder's Agreement between INFLO and Key Employees
of INFLO (incorporated herein by reference to Exhibit 10.8 of the
1996 Registration Statement)
10.3(a) Amendment No. 1 to Management Stockholder's Agreement
(Non-Executives) (incorporated herein by reference to Exhibit
10.31.1 of the 1998 Registration Statement)
10.3(b) Amendment No. 1 to Management Stockholder's Agreement (Executives
other than O'Neill, Walsh and Spear) (incorporated herein by
reference to Exhibit 10.31.2 of the 1998 Registration Statement)
10.3(c) Amendment No. 1 to Management Stockholder's Agreement (O'Neill,
Walsh and Spear) (incorporated herein by reference to Exhibit
10.31.3 of the 1998 Registration Statement)
10.4 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)
10.4(a) Amendments to the 1996 Non-Qualified Option Agreements
(incorporated herein by reference to Exhibit 10.28 of the 1998
Registration Statement)
10.5 1996 Stock Purchase and Option Plan for Key Employees of INFLO
(incorporated herein by reference to Exhibit 10.10 of the 1996
Registration Statement)
i
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------- ------------------------------------------------------------------
10.6 Sale Participation Agreement among Artal, Flowers, and Key
Employees of INFLO (incorporated herein by reference to Exhibit
10.11 of the 1996 Registration Statement)
10.7 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)
10.8 Artal Stock Purchase Agreement among Artal, Flowers and Keebler
(incorporated herein by reference to Exhibit 10.22 of the 1998
Registration Statement)
10.8(a) First Amendment to the Stock Purchase Agreement dated March 31,
1998 among Artal, Flowers and Keebler (incorporated herein by
reference to Exhibit 10.22(a) of Keebler's Quarterly Report on
Form 10-Q previously filed with the Commission on May 26, 1998
(Commission File No. 001-13705))
10.9 Bermore Stock Purchase Agreement among Artal, Flowers, Bermore and
Keebler (incorporated herein by reference to Exhibit 10.23 of the
1998 Registration Statement)
10.10 Employment and Severance Agreement between Keebler and Sam K. Reed
(incorporated herein by reference to Exhibit 10.24 of the 1998
Registration Statement)
10.11 Employment and Severance Agreement between Keebler and certain
executive officers (incorporated herein by reference to Exhibit
10.25 of the 1998 Registration Statement)
10.12 1998 Omnibus Stock Incentive Plan of Keebler (incorporated herein
by reference to Exhibit 10.26 of the 1998 Registration Statement)
10.12(a) 1998 Non-Qualified Stock Option Agreement for certain key
employees
10.13 Non-Employee Director Stock Plan of Keebler (incorporated herein
by reference to Exhibit 10.27 of the 1998 Registration Statement)
10.14 Supplement to Subsidiary Guaranty (Hollow Tree) (incorporated
herein by reference to Exhibit 10.29 of the 1998 Registration
Statement)
10.15 Supplement to Subsidiary Guaranty (Elfin Equity) (incorporated
herein by reference to Exhibit 10.30 of the 1998 Registration
Statement)
10.16 $700,000,000 Senior Credit Facility dated as of September 28, 1998
among Keebler, various financial institutions and the Bank, as
Lead Arranger and Administrative Agent, The First National Bank of
Chicago, as the Syndication Agent and the Bank of Montreal, as the
Managing Agent (incorporated herein by reference to Exhibit 10.33
of the October Report)
10.17 $125,000,000 Bridge Facility Credit Agreement dated as of
September 28, 1998 among Keebler, various financial institutions
and the Bank as the Arranger and the Administrative Agent
(incorporated herein by reference to Exhibit 10.34 of Keebler's
Quarterly Report on Form 10-Q previously filed with the Commission
on November 16, 1998 (Commission File No. 001-13705))
10.18 Keebler Company Deferred Compensation Plan for certain officers of
Keebler dated January 1, 1999
10.19 Keebler Foods Company Deferred Compensation Plan for Non-Affiliate
Directors dated March 10, 1999
ii
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------- ------------------------------------------------------------------
10.20 Receivables Purchase Agreement dated as of January 29, 1999 among
Keebler Funding Corporation, Keebler, Liberty Street Funding Corp.
and the Bank
21 Subsidiaries of Keebler
27 Financial Data Schedule
iii
<PAGE>
EXHIBIT 10.12(a)
KEEBLER FOODS COMPANY
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of ________________, ______, is made
by and between KEEBLER FOODS COMPANY, a Delaware corporation hereinafter
referred to as the "Company," and ______________________, an employee of the
Company or a Subsidiary (as defined below) of the Company, hereinafter referred
to as "Optionee."
WHEREAS, the Company wishes to afford the Optionee the
opportunity to purchase shares of its $.01 par value Common Shares ("Common
Stock");
WHEREAS, the Company wishes to issue the options described
herein in accordance with the Plan (as hereinafter defined), the terms of which
are hereby incorporated by reference and made a part of this Agreement; and
WHEREAS, the Committee (as hereinafter defined), appointed to
administer the Plan, has determined that it would be to the advantage and best
interest of the Company and its stockholders to grant the Non-Qualified Options
provided for herein to the Optionee as an incentive for increased efforts during
his term of office with the Company or its Subsidiaries and has advised the
Company hereof and instructed the undersigned officers to issue said Options;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 - CAUSE
"Cause" shall mean an act of or acts of dishonesty, moral
turpitude or willful misconduct, which act or acts were intended to result in
substantial personal enrichment at the expense of the Company or any of its
Subsidiaries or Affiliates which have a material adverse effect on the business
or reputation of the Company or any of its Subsidiaries or Affiliates.
SECTION 1.2 - CODE
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
SECTION 1.3 - COMMITTEE
"Committee" shall mean the Compensation Committee of the Board
of Directors of the Company.
<PAGE>
SECTION 1.4 - GOOD REASON
"Good Reason" shall mean:
(i) (A) the assignment to the Optionee of any duties inconsistent
in any material adverse respect with the Optionee's authority,
duties or responsibilities either as contemplated by any
Employment Agreement or as existing on the date hereof, or (B)
any other action by the Company which results in a material
diminishment in such authority, duties or responsibilities,
other than action or inaction which is remedied by the Company
within 15 days after receipt of written notice thereof given
by the Optionee;
(ii) any failure by the Company to comply with any of his duties
described in any Employment Agreement, other than any failure
which is remedied by the Company within 15 days after receipt
of written notice thereof given by the Optionee;
(iii) if any Employment Agreement exists, any purported termination
by the Company of the Optionee's employment otherwise than as
permitted by said Employment Agreement;
(iv) any reduction in the total potential annual compensation of
the Optionee, consisting of base salary or potential bonus
(but not including diminution in bonus as a consequence of
economic performance of the Company);
(v) an adverse change in employee benefits other than a change
which results from an amendment or alteration of the Company's
employee benefit plans which affect its salaried employees
generally.
SECTION 1.5 - GRANT DATE
"Grant Date" shall mean the date on which the Options provided
for in this Agreement were granted.
SECTION 1.6 - OPTIONS
"Options" shall mean the non-qualified options to purchase
Common Stock granted under this Agreement.
SECTION 1.7 - PERMANENT DISABILITY
The Optionee shall be deemed to have a "Permanent Disability"
if the Optionee is unable to engage in the activities required by the Optionee's
job by reason of any medically determined physical or mental impairment which
can be expected to result in death or which has lasted or can be expected to
last for a continuous period of not less than 12 months (in each case,
2
<PAGE>
as determined in good faith by a majority of the Board of Directors of the
Company, which determination shall be conclusive).
SECTION 1.8 - PERSON
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association, joint
venture, governmental authority or other entity of whatever nature.
SECTION 1.9 - PLAN
"Plan" shall mean the Keebler Foods Company 1998 Omnibus Stock
Incentive Plan.
SECTION 1.10 - PRONOUNS
The masculine pronoun shall include the feminine and neuter,
and the singular the plural, where the context so indicates.
SECTION 1.11 - RETIREMENT
"Retirement" shall mean retirement at age 65 or over (or such
other age as may be approved by the Board of Directors of the Company) after
having been employed by the Company or a Subsidiary for at least three years
after the date hereof.
SECTION 1.12 - SECRETARY
"Secretary" shall mean the Secretary of the Company.
Any other terms which are capitalized in this Agreement shall have the meaning
given to them in the Plan.
ARTICLE II
GRANT OF OPTIONS
SECTION 2.1 - GRANT OF OPTIONS
For good and valuable consideration, on and as of the date
hereof, the Company irrevocably grants to the Optionee an Option to purchase any
part or all of an aggregate of the number of shares set forth with respect to
such Option on the signature page hereof of its $.01 par value Common Stock upon
the terms and conditions set forth in this Agreement.
3
<PAGE>
SECTION 2.2 - EXERCISE PRICE
The exercise price of the shares of stock covered by the
Options shall be $______ per share without commission or other charge, which is
understood to be the fair market value of a share of the Company's stock as of
the Grant Date.
SECTION 2.3 - CONSIDERATION TO THE COMPANY
In consideration of the granting of these Options by the
Company, the Optionee agrees to render faithful and efficient services to the
Company or a Subsidiary with such duties and responsibilities as the Company
shall from time to time prescribe. Nothing in this Agreement or in the Plan
shall confer upon the Optionee any right to continue in the employ of the
Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and its Subsidiaries, which are hereby expressly reserved,
to terminate the employment of the Optionee at any time for any reason
whatsoever, with or without cause.
SECTION 2.4 - ADJUSTMENTS IN OPTIONS
Subject to Section 11 of the Plan, in the event that the
outstanding shares of the stock subject to an Option are, from time to time,
changed into or exchanged for a different number or kind of shares of the
Company or other securities of the Company by reason of an event or transaction
described in said Section 11, the Committee shall make an appropriate and
equitable adjustment in the number and kind of shares or other consideration as
to which such Option, or portions thereof then unexercised, shall be
exercisable. Any such adjustment made by the Committee shall be final and
binding upon the Optionee, the Company and all other interested persons.
ARTICLE III
SECTION 3.1 - COMMENCEMENT OF EXERCISABILITY
(a) All of the Options granted in this Agreement shall become
exercisable no later than the fifth anniversary of the Grant Date (the
"Automatic Vesting Date"). Said Options shall remain exercisable for a
period of thirty (30) days from the Automatic Vesting Date (provided,
however, that the 30-day exercise period shall not include any days
during which the Optionee is prohibited from selling Common Stock as a
result of Company policy or regulations promulgated under the
Securities Act of 1933, as amended, or the Exchange Act of 1934, as
amended), unless they previously became exercisable pursuant to the
provisions of subparagraph (b) below, in which event they shall
continue to be exercisable according to the provisions of said
paragraph.
(b) On the last day of any period of twenty (20) consecutive
trading days, after the Grant Date, during which the average of the
Market Value per Share of the Common Stock equals or exceeds the Target
Value indicated below, prior to the fifth anniversary of the Grant
Date, the corresponding percentage of the total Options granted under
this
4
<PAGE>
Agreement shall become immediately exercisable and shall continue to be
exercisable until the tenth anniversary of the Grant Date:
AGGREGATE PERCENTAGE OF
OPTIONS GRANTED HEREUNDER
TARGET VALUE WHICH ARE EXERCISABLE
$ 36.00 33 1/3%
$ 42.00 66 2/3%
$ 48.00 100%
(c) Notwithstanding the foregoing, no Option shall become
exercisable as to any additional shares of Common Stock following the
termination of employment of the Optionee by the Company and its
Subsidiaries for any reason other than a termination of employment
because of retirement (as described below) death or Permanent
Disability of the Optionee, and any Option (other than as provided in
the next succeeding sentence) which is non-exercisable as of the
Optionee's termination of employment shall be immediately canceled. In
the event of a Change in Control, or in the event of a termination of
employment because of such death or Permanent Disability, any such
Options shall become immediately exercisable.
In the event of termination of employment for normal or
delayed retirement pursuant to the terms of any tax-qualified defined
benefit retirement plan maintained by the Company in which the Optionee
participates (a "Pension Plan"), the Option will become exercisable as
to the same proportion of the then unexercisable shares as is
represented by the number of months which has elapsed since the Date of
Grant compared with sixty months. In the event the Optionee's
employment terminates (other than for reasons described above) after he
is eligible for early retirement under the provisions of a Pension
Plan, the Committee may determine whether any additional share will
become exercisable, but in the absence of such a determination, the
Option as to any such additional shares will be canceled upon said
termination of employment.
SECTION 3.2 - EXPIRATION OF OPTIONS
The Options may not be exercised to any extent by the Optionee
after the first to occur of the following events:
(a) The tenth anniversary of the Grant Date;
(b) The second anniversary of the date of the Optionee's
termination of employment by reason of normal, early or delayed
retirement pursuant to any Pension Plan benefit, or death or Permanent
Disability;
(c) The date of an Optionee's termination of employment by the
Company for Cause; or
5
<PAGE>
(d) The date of an Optionee's voluntary termination of
employment other than for Good Reason; or
(e) The date ninety (90) days after termination of the
Optionee's employment by the Company other than for Cause or by the
Optionee for Good Reason;
(f) To the extent practicable, at least ten (10) days prior to
the effective date of a Change in Control, the Committee shall give the
Optionee notice of such event if the Option has then neither been fully
exercised nor become unexercisable under this Section 3.2.
ARTICLE IV
EXERCISE OF OPTION
SECTION 4.1 - PERSON ELIGIBLE TO EXERCISE
During the lifetime of the Optionee, only (i) he, or (ii) a
member of his immediate or charitable organization Family to whom he has
transferred the Option in accordance with the provisions of Section 10(c) of the
Plan, may exercise an Option or any portion thereof. After the death of the
Optionee, any exercisable portion of an Option may, prior to the time when an
Option becomes unexercisable under Section 3.2, be exercised by his personal
representative or by any person empowered to do so under the Optionee's will or
under the then applicable laws of descent and distribution, or by the family
member or charitable organization to whom such a transfer may have been made as
permitted by the Plan.
SECTION 4.2 - PARTIAL EXERCISE
Any exercisable portion of an Option or the entire Option, if
then wholly exercisable, may be exercised in whole or in part at any time prior
to the time when the Option or portion thereof becomes unexercisable under
Section 3.2; provided, however, that any partial exercise shall be for whole
shares of Common Stock only.
SECTION 4.3 - MANNER OF EXERCISE
An Option, or any exercisable portion thereof, may be
exercised solely by delivering to the Secretary or his office all of the
following prior to the time when the Option or such portion becomes
unexercisable under Section 3.2:
(a) Notice in writing signed by the Optionee or the other
person then entitled to exercise the Option or portion thereof, stating
that the Option or portion thereof is thereby exercised, such notice
complying with all applicable rules established by the Committee;
(b) Full payment (in cash, by check, through the exchange of
previously acquired shares which have been owned by the Optionee for no
less than six (6) months,
6
<PAGE>
subject to the Committee's approval, or by a combination thereof) for
the shares with respect to which such Option or portion thereof is
exercised;
(c) A bona fide written representation and agreement, in a
form satisfactory to the Committee, signed by the Optionee or other
person then entitled to exercise such Option or portion thereof,
stating that the shares of stock are being acquired for his own
account, for investment and without any present intention of
distributing or reselling said shares or any of them exact as may be
permitted under the Securities Act of 1933, as amended (the "Act"), and
then applicable rules and regulations thereunder, and that the Optionee
or other person then entitled to exercise such Option or portion
thereof will indemnify the Company against and hold it free and
harmless from any loss, damage expense or liability resulting to the
Company if any sale or distribution of share by such person is contrary
to the representation and agreement referred to above; PROVIDED,
HOWEVER, that the Committee may, in its absolute discretion, take
whatever additional actions it deems appropriate to ensure the
observance and performance of such representation and agreement and to
effect compliance with the Act and any other federal or state
securities laws or regulations;
(d) Full payment to the Company of all amounts which, under
federal, state or local law, it is required to withhold upon exercise
of the Option, or other satisfactory arrangement, with respect thereto,
which may include relinquishment of a portion of the Option; and
(e) In the event the Option or portion thereof shall be
exercised pursuant to Section 4.1 by any person or persons other than
the Optionee, appropriate proof of the right of such person or persons
to exercise the option.
Without limiting the generality of the foregoing, the Committee may require an
option of counsel acceptable to it to the effect that any subsequent transfer of
shares acquired on exercise of an Option does not violate the Act, and may issue
stop-transfer orders covering such shares. Share certificates evidencing stock
issued on exercise of this Option shall bear an appropriate legend referring to
the provisions of subsection (c) above and the agreements herein. The written
representation and agreement referred to in subsection (c) above shall, however,
not be required if the shares to be issued pursuant to such exercise have been
registered under the Act, and such registration is then effective in respect to
such shares.
SECTION 4.4 - CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES
The shares of stock deliverable upon the exercise of an
Option, or any portion thereof, may be either previously authorized but unissued
shares or issued shares which have then been reacquired by the Company. Such
shares shall be fully paid and nonassessable. The Company shall not be required
to issue or deliver any certificate or certificates for shares of stock
purchased upon the exercise of an Option or portion thereof prior to fulfillment
of all of the following conditions:
(a) The obtaining of approval of other clearance from any
state or federal governmental agency which the Committee shall, in its
absolute discretion, determine to be necessary or advisable; and
7
<PAGE>
(b) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish
for reasons of administrative convenience.
SECTION 4.5 - RIGHTS AS STOCKHOLDER
The holder of an Option shall not be, nor have any of the
rights or privileges of, a stockholder of the Company in respect of any shares
purchasable upon the exercise of the Option or any portion thereof unless and
until certificate representing such shares have been issued by the Company to
such holder.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 - ADMINISTRATION
The Committee shall have the power to interpret the Plan and
this Agreement and to adopt such rules for the administration, interpretation
and application of the Plan as are consistent therewith and to interpret or
revoke any such rules. All actions taken and all interpretations and
determinations made by the Committee shall be final and binding upon the
Optionee, the Company and all other interested persons. No member of the
Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Options. In
its absolute discretion, the Board of Directors may at any time and from time to
time exercise any and all rights and duties of the Committee under the Plan and
this Agreement.
SECTION 5.2 - OPTIONS NOT TRANSFERABLE
Neither the Options nor any interest or right therein or part
thereof shall be liable for the debts, contracts or engagements of the Optionee
or his successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect; provided, however, that this Section 5.2
shall not prevent transfers by will or by the applicable laws of descent and
distribution, nor transfers which are permitted by Section 10(c) of the Plan.
8
<PAGE>
SECTION 5.3 - SHARES TO BE RESERVED
The Company shall at all times during the term of the Options
reserve and keep available such number of shares of stock as will be sufficient
to satisfy the requirements of this Agreement.
SECTION 5.4 - NOTICES
Any notice to be given under the terms of this Agreement to
the Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall, if
the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section 5.4. Any notice shall
have been deemed duly given when enclosed in a properly sealed envelope or
wrapper addressed as aforesaid, deposited (with postage prepaid) in a post
office or branch post office regularly maintained by the United States Postal
Service.
SECTION 5.5 - TITLES
Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of this Agreement.
SECTION 5.6 - APPLICABILITY OF PLAN
The Options and the shares of Common Stock issued to the
Optionee upon exercise of the Options shall be subject to all of the terms and
provisions of the Plan, to the extent applicable to the Options and such shares.
In the event of any conflict between this Agreement and the Plan, the terms of
the Plan shall control.
SECTION 5.7 - AMENDMENT
This Agreement may be amended only by a writing executed by
the parties hereto which specifically states that it is amending this Agreement.
SECTION 5.8 - GOVERNING LAW
The laws of the State of Delaware was govern the
interpretation, validity and performance of the terms of this Agreement,
regardless of the law that might be applied under principles of conflicts of
laws.
SECTION 5.9 - JURISDICTION
Any suit, action or proceeding against the Optionee with
respect to this Agreement, or any judgment entered by any court in respect of
any thereof, may be brought in any court of competent jurisdiction in the State
of Delaware as the Company may elect in its sole
9
<PAGE>
discretion, and the Optionee hereby submits to the non-exclusive jurisdiction of
such courts for the purpose of any such suit, action, proceeding or judgment.
The Optionee hereby irrevocably waives any objections which he may now or
hereafter have to the laying of the venue of any suit, action or proceeding
arising out of or relating to this Agreement brought in any court of competent
jurisdiction in the State of Delaware and hereby further irrevocably waives any
claim that any such suit, action or proceeding brought in any such court has
been brought in any inconvenient forum. No suit, action or proceeding against
the Company with respect to this Agreement may be brought in any court, domestic
or foreign, or before any similar domestic or foreign authority other than in a
court of competent jurisdiction in the State of Delaware and the Optionee hereby
irrevocably waives any right which he may otherwise have had to bring such an
action in any other court, domestic or foreign, or before any similar domestic
or foreign authority. The Company hereby submits to the jurisdiction of such
courts for the purpose of any such suit, action or proceeding.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.
KEEBLER FOODS COMPANY
By:
------------------------------
Its: VICE PRESIDENT
------------------------------
(Typed Name) Aggregate number of shares of
Common Stock for which the Option
granted hereunder is exercisable:
- -----------------------------------
Signature
- -----------------------------------
(Street Address)
- -----------------------------------
(City/State/ZIP Code)
Optionee's Social Security Number:
- -----------------------------------
10
EXHIBIT 10.18
KEEBLER COMPANY
DEFERRED COMPENSATION PLAN
EFFECTIVE - JANUARY 1, 1999
<PAGE>
<TABLE>
KEEBLER COMPANY
DEFERRED COMPENSATION PLAN
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I............................................................................................1
1.1 Statement of Purpose....................................................................1
ARTICLE II...........................................................................................2
DEFINITIONS..........................................................................................2
2.1 Account.................................................................................2
2.2 Base Salary.............................................................................2
2.3 Beneficiary.............................................................................2
2.4 Board...................................................................................2
2.5 Bonus...................................................................................2
2.6 Change in Control.......................................................................3
2.7 Code....................................................................................3
2.8 Committee...............................................................................3
2.9 Company.................................................................................3
2.10 Company Matching Account...............................................................4
2.11 Company Matching Amount................................................................4
2.12 Compensation...........................................................................4
2.13 Credited Service.......................................................................4
2.14 Deferral Account.......................................................................4
2.15 Deferral Benefit.......................................................................4
2.16 Deferral Election......................................................................4
2.17 Disability.............................................................................4
2.18 Early Retirement.......................................................................4
2.19 Eligible Employee......................................................................5
2.20 Employer...............................................................................5
2.21 ERISA..................................................................................5
2.22 Haircut Withdrawal.....................................................................5
2.23 Investment Return Rate.................................................................5
2.24 Participant............................................................................5
2.25 Participation Agreement................................................................5
2.26 Plan...................................................................................5
2.27 Plan Year..............................................................................5
2.28 Retirement.............................................................................6
2.29 Savings Plan...........................................................................6
2.30 Selected Affiliate.....................................................................6
2.31 Valuation Date.........................................................................6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE III..........................................................................................7
ELIGIBILITY AND PARTICIPATION........................................................................7
3.1 Eligibility.............................................................................7
3.2 Participation...........................................................................7
3.3 Ineligible Participant..................................................................7
3.4 Termination of Participation............................................................7
ARTICLE IV...........................................................................................8
DEFERRAL OF COMPENSATION.............................................................................8
4.1 Amount of Deferral......................................................................8
4.2 Change in Deferral Elections............................................................8
4.3 Crediting Deferred Compensation.........................................................9
4.4 Company Matching Amount.................................................................9
ARTICLE V............................................................................................10
BENEFIT ACCOUNTS.....................................................................................10
5.1 Valuation of Account....................................................................10
5.2 Crediting of Investment Return..........................................................10
5.3 Statement of Account....................................................................10
5.4 Vesting of Account......................................................................10
5.5 Investment Vehicles.....................................................................11
5.6 Transfers from Other Plan...............................................................11
ARTICLE VI...........................................................................................12
PAYMENT OF BENEFITS..................................................................................12
6.1 Payment of Deferral Benefit upon Death, Disability or Retirement........................12
6.2 Payment of Deferral Benefit upon Other Termination......................................12
6.3 Payments to Beneficiaries...............................................................12
6.4 Haircut Withdrawal......................................................................12
6.5 Form of Payment.........................................................................13
6.6 Commencement of Payments................................................................13
6.7 Small Benefit...........................................................................13
ARTICLE VII..........................................................................................14
BENEFICIARY DESIGNATION..............................................................................14
7.1 Beneficiary Designation.................................................................14
7.2 Change of Beneficiary Designation.......................................................14
7.3 No Designation..........................................................................14
7.4 Effect of Payment.......................................................................14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VIII.........................................................................................15
ADMINISTRATION.......................................................................................15
8.1 Committee...............................................................................15
8.2 Delegation..............................................................................15
8.3 Binding Effect of Decisions.............................................................15
8.4 Indemnification of Committee............................................................15
8.5 Election and Notice Procedures..........................................................16
ARTICLE IX...........................................................................................17
AMENDMENT AND TERMINATION OF PLAN....................................................................17
9.1 Amendment...............................................................................17
9.2 Termination.............................................................................17
ARTICLE X............................................................................................18
MISCELLANEOUS........................................................................................18
10.1 Funding................................................................................18
10.2 Nonassignability.......................................................................18
10.3 Legal Fees and Expenses................................................................19
10.4 Captions...............................................................................19
10.5 Governing Law..........................................................................19
10.6 Successors.............................................................................19
10.7 No Implied Rights......................................................................20
EXHIBIT A............................................................................................21
EXHIBIT B............................................................................................22
EXHIBIT C............................................................................................23
</TABLE>
<PAGE>
ARTICLE I
1.1 STATEMENT OF PURPOSE
Keebler Company establishes the Keebler Company Deferred Compensation Plan (the
"Plan"), a nonqualified deferred compensation plan for the benefit of certain
management or highly compensated employees of the Employers. The purpose of the
Plan is to provide management and highly compensated employees of the Employers
with the option to defer the receipt of portions of their compensation payable
for services rendered to the Employers and to provide such participating
employees with Employer contributions. It is intended that the Plan will assist
in attracting and retaining qualified individuals to serve as officers and
managers of the Employer. The Plan is intended to be subject to the tax-law
rules of Code Section 451(a), is intended to be treated as a "top hat" plan
within the meaning of ERISA Section 201(2), and is effective as of January 1,
1999.
1
<PAGE>
ARTICLE II
DEFINITIONS
When used in this Plan and initially capitalized, the following words and
phrases shall have the meanings indicated:
2.1 ACCOUNT.
"Account" means the sum of a Participant's Deferral Account and Company Matching
Account.
2.2 BASE SALARY.
"Base Salary" means a Participant's base earnings paid by an Employer to a
Participant without regard to any increases or decreases in base earnings as a
result of (i) an election to defer base earnings under this Plan or (ii) an
election between benefits or cash provided under a Plan of an Employer
maintained pursuant to Section 125 or 401(k) of the Code and as limited in
Exhibit B attached hereto.
2.3 BENEFICIARY.
"Beneficiary" means the person or persons designated or deemed to be designated
by the Participant pursuant to Article VII to receive benefits payable under the
Plan in the event of the Participant's death.
2.4 BOARD.
"Board" means the Board of Directors of the Company.
2.5 BONUS.
"Bonus" means a Participant's bonus or sales commission paid by the Employer to
a Participant under the plans listed in Exhibit B attached hereto and to the
degree limited in Exhibit B, as applicable, without regard to any decreases as a
result of (i) an election to defer all or any portion of a Bonus under this Plan
or (ii) an election between benefits or cash provided under a plan of the
Employer maintained pursuant to Section 401(k) of the Code (including the
Savings Plan).
2
<PAGE>
2.6 CHANGE IN CONTROL.
For purposes of this Plan, a "Change in Control" shall be deemed to occur on the
earliest of:
(i) The effective time of any purchase, sale, merger,
consolidation or other transaction after which any person,
corporation, partnership or other entity OTHER THAN Flower
Industries, Inc. ("Flowers") or its Affiliates, the then
current management of Keebler Foods Company or of Flowers or
any member of the immediate family of said management, or any
employee benefit plan of Keebler Foods Company or of Flowers
("Permitted Owners") shall own more than fifty percent (50%)
of the outstanding capital stock of Keebler Foods Company
which stock is entitled to vote for the election of directors.
(ii) If it occurs prior to February 3, 2001, the effective time of
any purchase, sale, merger, consolidation or other transaction
after which any person, corporation, partnership or entity
OTHER THAN the then current management of Keebler Foods
Company or Flowers or any member of the immediate family of
said management, or any employee benefit plan of Keebler Foods
Company or of Flowers ("Permitted Owners") shall own more than
fifty percent (50%) of the outstanding capital stock of
Flowers which stock is entitled to vote for the election of
directors.
(iii) The effective time of a transfer to an entity other than a
Permitted Owner of substantially all of the property of
Keebler Foods Company.
(iv) Continuing Directors at any time fail to constitute a majority
of the Board of Directors of Keebler Foods Company.
"Continuing Directors" shall mean the members of the Board of
Directors as of the date hereof, plus any new directors whose
nominations were approved by at least a majority of the
Continuing Directors in office at the time of the election of
any such new directors.
For the purposes of this Agreement, the term "Affiliate" shall be defined in
Rule 405 of the General Rules and Regulations under the Securities Act of 1933,
as amended.
2.7 CODE.
"Code" means the Internal Revenue Code of 1986, as amended.
2.8 COMMITTEE.
"Committee" has the meaning set forth in Section 8.1.
2.9 COMPANY.
"Company" means Keebler Company and any successor(s) thereto.
3
<PAGE>
2.10 COMPANY MATCHING ACCOUNT.
"Company Matching Account" means the account maintained on the books of the
Employer for the purpose of accounting for the Company Matching Amount and for
the amount of investment return credited thereto for each Participant pursuant
to Article V.
2.11 COMPANY MATCHING AMOUNT.
"Company Matching Amount" means the amount credited to a Participant's Company
Matching Account under Section 4.4.
2.12 COMPENSATION.
"Compensation" means the Base Salary and Bonus, payable with respect to an
Eligible Employee for each Plan Year.
2.13 CREDITED SERVICE.
"Credited Service" means the sum of all periods of a Participant's employment by
the Company or a Selected Affiliate for which service credit is given under the
Savings Plan.
2.14 DEFERRAL ACCOUNT.
"Deferral Account" means the account maintained on the books of the Employer for
the purpose of accounting for the amount of Compensation that a Participant
elects to defer under the Plan and for the amount of investment return credited
thereto for the Participant pursuant to Article V.
2.15 DEFERRAL BENEFIT.
"Deferral Benefit" means the benefit payable to a Participant or his or her
Beneficiary pursuant to Article VI.
2.16 DEFERRAL ELECTION.
"Deferral Election" means the written election made by a Participant to defer
Compensation pursuant to Article IV.
2.17 DISABILITY.
"Disability" means a Participant's Disability as defined under the Savings Plan.
2.18 EARLY RETIREMENT.
"Early Retirement" will be as granted by the Committee at its sole discretion.
4
<PAGE>
2.19 ELIGIBLE EMPLOYEE.
"Eligible Employee" means a highly compensated or management employee of the
Company who is designated by the Committee, by name or group or description, in
accordance with Section 3.1 as eligible to participate in the Plan.
2.20 EMPLOYER.
"Employer" means, with respect to a Participant, the Company or the Selected
Affiliate which is the employer of that Participant and pays such Participant's
Compensation.
2.21 ERISA.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
2.22 HAIRCUT WITHDRAWAL.
"Haircut Withdrawal" has the meaning set forth in Section 6.4.
2.23 INVESTMENT RETURN RATE.
"Investment Return Rate" means:
(a) In the case of an investment named in Exhibit C of a fixed income
nature, the interest deemed to be credited,
(b) In the case of an investment named in Exhibit C of an equity
investment nature, the increase and decrease in deemed value and
dividends deemed to be credited.
2.24 PARTICIPANT.
"Participant" means any Eligible Employee who elects to participate by filing a
Participation Agreement.
2.25 PARTICIPATION AGREEMENT.
"Participation Agreement" means the agreement filed by a Participant, in the
form prescribed by the Committee, pursuant to Section 3.2.
2.26 PLAN.
"Plan" means this Keebler Company Deferred Compensation Plan effective January
1, 1999, as amended from time to time.
2.27 PLAN YEAR.
"Plan Year" means a twelve-month period commencing January 1 and ending the
following December 31.
5
<PAGE>
2.28 RETIREMENT.
"Retirement" means the termination of employment of a Participant who has
reached age 65.
2.29 SAVINGS PLAN.
"Savings Plan" means the Keebler Company Salaried Savings Plan, as amended from
time to time, or its successor.
2.30 SELECTED AFFILIATE.
"Selected Affiliate" means (1) any company in an unbroken chain of companies
beginning with Keebler Foods Company, except for Keebler Foods Company itself,
if each of the companies other than the last company in the chain owns or
controls, directly or indirectly, stock possessing not less than 50 percent of
the total combined voting power of all classes of stock in one of the other
companies, or (2) any partnership or joint venture in which one or more of such
companies is a partner or venturer, each of which shall be selected by the
Committee.
2.31 VALUATION DATE.
"Valuation Date" means a date on which the amount of a Participant's Account is
valued as provided in Article V. The Valuation Date shall be the last day of
each calendar quarter and any other date specified by the Committee for this
purpose.
6
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 ELIGIBILITY.
Eligibility to participate in the Plan is limited to Eligible Employees. From
time to time and subject to Section 3.4, the Committee shall prepare, and attach
to the Plan as Exhibit A, a complete list of the Eligible Employees, by
individual name or by reference to an identifiable group of persons or by
descriptions of the components of compensation of an individual which would
qualify individuals who are eligible to participate. It is expressly intended
that the Eligible Employees will comprise a "select group of management or
highly compensated employees" within the meaning of ERISA Section 201(2). No
employee of the Company or a Selected Affiliate has a right to be selected as an
Eligible Employee under this Plan.
3.2 PARTICIPATION.
Participation in the Plan shall be limited to Eligible Employees who elect to
participate in the Plan by filing a Participation Agreement with the Committee.
An Eligible Employee shall commence participation in the Plan upon the first day
of his or her first payroll period following the receipt of his or her
Participation Agreement by the Committee.
3.3 INELIGIBLE PARTICIPANT.
Notwithstanding any other provisions of this Plan to the contrary, if the
Committee determines that any Participant may not qualify as a member of a
"select group of management or highly compensated employees" within the meaning
of ERISA Section 201(2), the Committee may determine, in its sole discretion,
that such Participant shall cease to be eligible to participate in this Plan.
Upon such determination, the Employer shall make a sum payment to the
Participant equal to the vested amount credited to his Account as soon as
administratively practicable. Upon such payment, no benefit shall thereafter be
payable under this Plan either to the Participant or any Beneficiary of the
Participant, and all of the Participant's elections as to the time and manner of
payment of his Account will be deemed to be canceled, until such time as the
Participant again is specified by the Committee as being eligible to participate
in the Plan.
3.4 TERMINATION OF PARTICIPATION.
A Participant may elect to terminate his or her active participation in the Plan
at any time by filing a written notice thereof with the Committee. Such
termination of active participation shall become effective as of the beginning
of the next full payroll period following receipt of such election by the
Committee. Amounts credited to the Participant's Account before the effective
date of such termination of active participation shall continue to be payable,
receive investment credits, and otherwise be governed in accordance with the
terms of the Plan as applied to all Participants. If such a Participant wishes
to resume his or her active participation in the Plan, provided that he or she
remains an Eligible Employee, the Committee shall determine if and when such
active participation shall resume.
7
<PAGE>
ARTICLE IV
DEFERRAL OF COMPENSATION
4.1 AMOUNT OF DEFERRAL.
With respect to each Plan Year, a Participant may elect to defer a specified
percentage of his or her Compensation up to the percentage of compensation
defined and the terms described in Exhibit B attached hereto, in accordance with
the following provisions:
(a) The deferral election under this Plan shall be made at the same
time, and in the same manner, as the deferral election made by the
Participant under the Savings Plan. However, with respect to the
Plan Year in which the Plan becomes effective or in which an
Eligible Employee is specified by the Committee as such, whichever
is later, the Eligible Employee may make his or her deferral
election under the Plan for that Plan Year within 30 days after
such effective date of the Plan or initial eligibility. Such
deferral election shall apply prospectively to payroll periods
beginning after the date on which the election is submitted to the
Committee.
(b) The amount of the deferral under this Section is the percentage of
Compensation specified by the Participant (within the guidelines
described in Exhibit B), reduced by the amount that is effectively
deferred under the Savings Plan for that Plan Year. Accordingly,
any amount that would have been returned to the Participant under
Section 5.2 of the Savings Plan due to the failure of the Savings
Plan to comply with the nondiscrimination rules of Code Section
401(k) (i.e., the "average deferral percentage" test also
described in Section 5.2 of the Savings Plan) shall automatically
be subject to the deferral election, and included in the amount
deferred, under this Plan.
(c) If a participant makes an election under subsection (a) that
applies to less than an entire Plan Year (i.e., because the Plan
became effective, or the Participant was named as an Eligible
Employee, after January 1 of that Plan Year), the Participant may
specify in the election that the deferral amount shall be
determined with respect to the entire amount of Compensation
received in that Plan Year. Notwithstanding the foregoing
calculation of the amount of the deferral, the deferral election
shall then be applied to Base Salary otherwise payable in payroll
periods beginning after the date on which the election is
submitted to the Committee. In other words, such a Participant may
make a full Plan Year deferral election, but such election shall
be applied prospectively to Base Salary in all subsequent payroll
periods.
4.2 CHANGE IN DEFERRAL ELECTIONS.
A Participant may change a previously elected percentage of deferral of Base
Salary at any time by filing a written notice thereof with the Committee.
Changes will only become effective as of the beginning of the next full payroll
period following receipt of the change in election by the Committee. A
Participant may change a previously elected percentage of deferral of Bonus, or
elect to terminate future Bonus deferrals, by filing a written notice thereof
with the Committee prior to December 31 of the year preceding the actual payment
or deferral date of the Bonus.
8
<PAGE>
4.3 CREDITING DEFERRED COMPENSATION.
The amount of Compensation that a Participant elects to defer under the Plan
shall be credited by the Employer to the Participant's Deferral Account
periodically, the frequency of which will be determined by the Committee. To the
extent that the Employer is required to withhold any taxes or other amounts from
a Participant's Deferred Compensation pursuant to any state, federal or local
law, such amounts shall be withheld only from the Participant's compensation
before such amounts are credited.
4.4 COMPANY MATCHING AMOUNT.
The Company Matching Amount with respect to each Participant shall be determined
generally in the same manner as the matching contribution made by the
Participant's employer under the Savings Plan for the same Plan Year. However,
such determination shall be subject to the following provisions:
(a) No Company Matching Amount shall be credited in or during the
1999 Plan Year.
(b) No Company Matching Amount shall be credited for a particular
Plan Year for a Participant whose employment terminated before
the last day of the Plan Year, unless such termination was due
to Retirement, Disability or death. The foregoing exceptions
shall be determined in the same manner for this Plan as under
the Savings Plan.
(c) The Company Matching Amount for a particular Plan Year shall
be determined by the Committee after the Plan Year has ended,
and shall be credited to eligible Participants for such Plan
Year at the time determined by the Committee in its
discretion.
(d) The Company Matching Amount with respect to a particular
Participant shall be determined on the basis of the
Participant's total salary deferrals under the Savings Plan
and this Plan, and shall be offset by the matching
contributions made on behalf of the Participant under the
Savings Plan.
9
<PAGE>
ARTICLE V
BENEFIT ACCOUNTS
5.1 VALUATION OF ACCOUNT.
As of each Valuation Date, a Participant's Account shall consist of the balance
of the Participant's Account as of the immediately preceding Valuation Date,
plus the Participant's Deferred Compensation and Company Matching Amount
credited pursuant to Section 4.4 since the immediately preceding Valuation Date,
plus investment return credited as of such Valuation Date pursuant to Section
5.2, minus the aggregate amount of distributions, if any, made from such Account
since the immediately preceding Valuation Date.
5.2 CREDITING OF INVESTMENT RETURN.
As of each Valuation Date, the account value of each Participant's Deferral
Account and Company Matching Account shall be increased by the amount of
investment return since the immediately preceding Valuation Date. Investment
return with respect to the portion of an Account invested on a deemed basis
(under Section 5.5) in a particular investment vehicle shall be credited at the
Investment Return Rate (for that investment vehicle) as of such Valuation Date
based on the average balance of the relevant portion of the Participant's
Deferral Account and Company Matching Account, respectively, since the
immediately preceding Valuation Date, but after such Accounts have been adjusted
for any contributions or distributions to be credited or deducted for such
period. Investment return for the period prior to the first Valuation Date
applicable to a Deferral Account or a Company Matching Account shall be deemed
earned ratably over such period. Until a Participant or his or her Beneficiary
receives his or her entire Account, the unpaid balance thereof shall be credited
with an investment return as provided in this Section 5.2.
5.3 STATEMENT OF ACCOUNT.
The Committee shall provide to each Participant, within 30 days after the close
of each calendar quarter, a statement setting forth the balance of such
Participant's Account as of the last day of the preceding calendar quarter and
showing all adjustments made thereto during such calendar quarter.
5.4 VESTING OF ACCOUNT.
A Participant shall be 100% vested in his or her Deferral Account at all times.
A Participant's interest in his or her Company Matching Account becomes 100%
vested as of a Change in Control, his or her death, Disability or Retirement.
Prior to this event, a Participant's interest in his or her Company Matching
Account shall vest at the same rate, and in accordance with the same rules, that
apply(ies) to the vesting of the matching contribution account under the Savings
Plan.
Any non-vested portion of a Participant's Company Matching Account shall be
forfeited at termination of Participant's employment with Company (provided that
the termination does not otherwise cause the acceleration of full vesting).
Forfeitures under the Plan shall be for the benefit of the Employer and shall
not be credited to other Participants.
10
<PAGE>
5.5 INVESTMENT VEHICLES.
The Company may select investment vehicles that will serve as the basis for
determining deemed investment credits to Participants' Accounts (i.e., for
determining the Investment Return Rate). If and when a trust is established and
funded in accordance with Section 10.1, the investment vehicle shares, units or
other evidences of ownership shall be considered assets of the trust and general
assets of the relevant Employers. The deemed investment vehicles are set forth
in Exhibit C, which the Company may amend from time to time in its sole
discretion.
A Participant may request the Company to make deemed investments of the credit
balance of his Account in one or more of such investment vehicles. A Participant
may change the deemed investment of his Account or change the deemed investment
of future credits to his Account, and the deemed investment of his existing
Account balance may differ from the deemed investment of future amounts credited
to the Account. Such changes shall be made in accordance with procedures as the
Committee may establish from time to time. Such procedures may regulate the
frequency of such changes and the form of notice required to make such election
or changes. The Committee may also establish a deemed investment which shall
apply if the Participant makes no election.
The effective date of any change shall be the date for which the appropriate
direction to the Company or its designee has been properly received in
accordance with the procedures established by the Committee. The Committee shall
have the right to refuse to honor any Participant direction related to
investments or withdrawals, including transfers among investment options, to the
extent reasonably necessary to assure compliance with applicable law including
U.S. and other securities laws. However, neither the Company nor the Committee
assumes any responsibility for compliance by officers or others with any such
laws, and any failure by the Company or the Committee to delay or dishonor any
such direction shall not be deemed to increase the Company's legal obligations
to the Participant or third parties.
5.6 TRANSFERS FROM OTHER PLAN.
The Plan may accept the transfer of amounts or assets deferred by a Participant
under any nonqualified deferred compensation plan or other deferral arrangement
sponsored by the Company, including without limitation, any shares of Company
Common Stock (whether or not restricted) which, but for such deferral, would be
vested and nonforfeitable. Any amount so transferred shall be credited to the
Participant's Deferred Account as of the date of the transfer. A transfer under
this Section may have significant legal and administrative consequences
(including but not limited to tax and securities law consequences) and,
accordingly, the determination as to whether the Plan may accept such a transfer
shall be made by the Committee in its sole discretion.
11
<PAGE>
ARTICLE VI
PAYMENT OF BENEFITS
6.1 PAYMENT OF DEFERRAL BENEFIT UPON DEATH, DISABILITY OR RETIREMENT.
Upon the death, Disability, Early Retirement, or Retirement of a Participant,
the Employer shall pay to the Participant or his Beneficiary a Deferral Benefit
equal to the balance of his or her vested Account determined pursuant to Article
V, less any amounts previously distributed, based on his or her written election
pursuant to Section 6.5.
6.2 PAYMENT OF DEFERRAL BENEFIT UPON OTHER TERMINATION.
Upon the termination of service of the Participant as an employee of the
Employer and all Selected Affiliates for reasons other than death, Disability,
or Retirement, the Employer shall pay to the Participant a Deferral Benefit in a
lump sum equal to the balance of his or her vested Account determined pursuant
to Article V, less any amounts previously distributed, as soon as
administratively practical.
6.3 PAYMENTS TO BENEFICIARIES.
In the event of the Participant's death prior to his or her receipt of all
elected annual installments, his or her Beneficiary will receive the remaining
annual installments at such times as such installments would have become
distributable to the Participant.
6.4 HAIRCUT WITHDRAWAL
Notwithstanding any other provision of the Plan, a Participant at any time shall
be entitled to receive, upon written request to the Committee, a lump sum
distribution equal to the entire vested amount owed to the Participant under the
Plan at that time, subject to penalties as set forth below:
(a) The lump-sum will be equal to 90% of the Participant's then
current vested Deferral Account and Matching Account balances,
and;
(b) The remaining balance shall be forfeited by the Participant,
and;
(c) The Participant will not be eligible to recommence income
deferrals until the first of the January following a one (1)
year period commencing on the date of withdrawal, and then
only if otherwise eligible to participate under the terms of
the Plan.
The amount payable under this section of the Plan shall be paid within sixty
(60) days following receipt of written notice by the Committee.
12
<PAGE>
6.5 FORM OF PAYMENT.
The Deferral Benefit payable pursuant to Section 6.1 shall be paid in one of the
following forms, as elected by the Participant in his or her Participant
Agreement on file as of one (1) year and one (1) day prior to the date of
Retirement, Death or Disability:
(a) Annual payments of a fixed amount which shall amortize the
vested Account balance as of the payment commencement date
over a period not to exceed three (3) years (together, in the
case of each unpaid annual payment, with deemed investment
earnings thereon credited after the payment commencement date
pursuant to Section 5.2).
(b) A lump sum as soon as administratively practical.
In the event a Participant fails to make a distribution election, his or her
vested Account Balance shall be distributed as a lump sum distribution as soon
as administratively practical after his or her Retirement, Death or Disability.
6.6 COMMENCEMENT OF PAYMENTS.
Commencement of payments under Section 6.1 of the Plan shall begin within 60
days following receipt of written notice by the Committee of an event which
entitles a Participant (or a Beneficiary) to payments in lump sum under the Plan
or in the January following the event for annual payment.
6.7 SMALL BENEFIT.
In the event the Committee determines that the balance of a Participant's
Account is less than $5,000 at the time of commencement of payments, or the
portion of the balance of the Participant's Account payable to any Beneficiary
is less than $5,000 at the time of commencement of payments, the Committee may
inform the Employer and the Employer, in its discretion, may choose to pay the
benefit in the form of a lump sum payment, notwithstanding any provision of the
Plan or a Participant election to the contrary. Such lump sum payment shall be
equal to the balance of the Participant's Account or the portion thereof payable
to a Beneficiary.
13
<PAGE>
ARTICLE VII
BENEFICIARY DESIGNATION
7.1 BENEFICIARY DESIGNATION.
Each Participant shall have the sole right, at any time, to designate any person
or persons as his Beneficiary to whom payment under the Plan shall be made in
the event of his or her death prior to complete distribution to the Participant
of his or her Account. Any Beneficiary designation shall be made in a written
instrument provided by the Committee. All Beneficiary designations must be filed
with the Committee and shall be effective only when received in writing by the
Committee.
7.2 CHANGE OF BENEFICIARY DESIGNATION.
Any Beneficiary designation may be changed by a Participant by the filing of a
new Beneficiary designation, which will cancel all Beneficiary designations
previously filed. The designation of a Beneficiary may be made or changed at any
time without the consent of any person.
7.3 NO DESIGNATION.
If a Participant fails to designate a Beneficiary as provided above, or if all
designated Beneficiaries predecease the Participant, then the Participant's
designated Beneficiary shall be deemed to be the Participant's estate.
7.4 EFFECT OF PAYMENT.
Payment to a Participant's Beneficiary (or, upon the death of a primary
Beneficiary, to the contingent Beneficiary or, if none, to the Participant's
estate) shall completely discharge the Employer's obligations under the Plan.
14
<PAGE>
ARTICLE VIII
ADMINISTRATION
8.1 COMMITTEE.
The administrative committee for the Plan (the "Committee") shall be the Keebler
Retirement Committee, as it is comprised from time to time. The Committee (a)
shall have complete discretion to supervise the administration and operation of
the Plan and to adopt rules and procedures governing the Plan from time to time,
and, (b) shall have authority to give interpretive rulings with respect to the
Plan. If and when any members of the Committee are also Participants, the
Committee shall adopt and adhere to a conflicts of interest policy designed to
prevent a Participant from acting in his or her own interest. If, due to the
application of such a conflicts of interest policy, the Committee is unable to
act on a particular matter under this Plan, the Committee shall bring such
matter to the Personnel and Compensation Committee of the Board for action or
approval.
8.2 DELEGATION.
The Committee may appoint one or more individuals, who may be an employee of the
Company, to be the Committee's agent with respect to the administration and
operation of the Plan. The Committee may delegate all or any portion of its
duties to such individual(s), provided that the Committee may cease such
delegation at any time and provided further that any individual to whom duties
are so delegated shall not be Participants. In addition, the Committee may, from
time to time, employ other agents and delegate to them such administrative
duties as it sees fit, and may from time to time consult with counsel who may be
counsel to the Company.
8.3 BINDING EFFECT OF DECISIONS.
Any decision or action of the Committee with respect to any question arising out
of or in connection with the administration, interpretation and application of
the Plan shall be final and binding upon all persons having any interest in the
Plan.
8.4 INDEMNIFICATION OF COMMITTEE.
The Company shall indemnify and hold harmless the members of the Committee and
their duly appointed agents under Section 8.2 (to the extent that such agents
are employees of the Company) against any and all claims, loss, damage, expense
or liability (including reasonable attorney fees) arising from any action or
failure to act with respect to the Plan, except in the case of gross negligence
or willful misconduct by any such member or agent of the Committee.
15
<PAGE>
8.5 ELECTION AND NOTICE PROCEDURES.
Except as otherwise expressly stated in the Plan or required by applicable law,
all elections and notices by Eligible Employees and Participants under the Plan
shall be made at the time and in the manner specified by the Committee in
accordance with its administrative procedures. The Committee may choose for this
purpose to use all or any of the administrative procedures that apply under the
Savings Plan.
16
<PAGE>
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
9.1 AMENDMENT.
The Board of Directors of the Company, on behalf of itself and of each Selected
Affiliate, may at any time amend, suspend or reinstate any or all of the
provisions of the Plan, except that no such amendment, suspension or
reinstatement may adversely affect any Participant's Account, as it existed as
of the day before the effective date of such amendment, suspension or
reinstatement, without such Participant's prior written consent. Written notice
of any amendment or other action with respect to the Plan shall be given to each
Participant.
9.2 TERMINATION.
The Board of Directors of the Company, on behalf of itself and of each Selected
Affiliate, in its sole discretion, may terminate this Plan at any time and for
any reason whatsoever. Upon termination of the Plan, the Committee shall take
those actions necessary to administer any Accounts existing prior to the
effective date of such termination; provided, however, that a termination of the
Plan shall not adversely affect the value of a Participant's Account, as it
existed as of the day before the effective date of such termination, or the
timing or method of distribution of a Participant's Account, without the
Participant's prior written consent. Notwithstanding the foregoing, a
termination of the Plan shall not give rise to accelerated or automatic vesting
of any Participant's Account.
17
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1 FUNDING.
Participants, their Beneficiaries, and their heirs, successors and assigns,
shall have no secured interest or claim in any property or assets of the
Employers. Each Employer's obligation under the Plan shall be merely that of an
unfunded and unsecured promise of the Employer to pay money in the future.
Notwithstanding the foregoing, the Company shall create a rabbi trust to hold
funds to be used in payment of the obligations of the Employers under the Plan,
which trust shall not be funded except as provided in the following sentence. In
the event of a Change in Control (or prior thereto in the sole discretion of the
Employers), the Employers shall fund such trust in an amount equal to not less
than the total value of the Participants' Accounts under the Plan as of the
Valuation Date immediately preceding the Change in Control, provided that any
funds contained therein shall remain liable for the claims of each respective
Employer's general creditors. In addition, upon a Change in Control, the trust
by its terms shall become irrevocable.
10.2 NONASSIGNABILITY.
No right or interest under the Plan of a Participant or his or her Beneficiary
(or any person claiming through or under any of them) shall be assignable or
transferable in any manner or be subject to alienation, anticipation, sale,
pledge, encumbrance or other legal process or in any manner be liable for or
subject to the debts or liabilities of any such Participant or Beneficiary. If
any Participant or Beneficiary shall attempt to or shall transfer, assign,
alienate, anticipate, sell, pledge or otherwise encumber his or her benefits
hereunder or any part thereof, or if by reason of his or her bankruptcy or other
event happening at any time such benefits would devolve upon anyone else or
would not be enjoyed by him or her, then the Committee, in its discretion, may
terminate his or her interest in any such benefit (including the Deferral
Account) to the extent the Committee considers necessary or advisable to prevent
or limit the effects of such occurrence. Termination shall be effected by the
delivery of a written "termination declaration" to the last known address of the
Participant or Beneficiary whose interest is adversely affected (the "terminated
participant").
18
<PAGE>
10.3 LEGAL FEES AND EXPENSES.
It is the intent of the Company and each Selected Affiliate that no Eligible
Employee or former Eligible Employee be required to incur the expenses
associated with the enforcement of his or her rights under this Plan by
litigation or other legal action because the cost and expense thereof would
substantially detract from the benefits intended to be extended to an Eligible
Employee hereunder. Accordingly, if after a Change in Control it should appear
that the Employer has failed to comply with any of its obligations under this
Plan or in the event that the Employer or any other person takes any action to
declare this Plan void or unenforceable, or institutes any litigation designed
to deny, or to recover from, the Eligible Employee the benefits intended to be
provided to such Eligible Employee hereunder (although such actions do not
include the valid exercise by the Company of its right to amend or terminate the
Plan under Article IX), the Employer irrevocably authorizes such Eligible
Employee from time to time to retain counsel of his or her choice, at the
expense of the Employer as hereafter provided, to represent such Eligible
Employee in connection with the initiation or defense of any litigation or other
legal action, whether by or against the Employer or any director, officer,
stockholder or other person affiliated with the Employer in any jurisdiction.
The Employer shall pay and be solely responsible for any and all reasonable
attorneys' and related fees and expenses incurred by such Eligible Employee as a
result of the Employer's failure to perform under this Plan or any provision
thereof; or as a result of the Employer or any person contesting the validity or
enforceability of this Plan or any provision thereof.
10.4 CAPTIONS.
The captions contained herein are for convenience only and shall not control or
affect the meaning or construction hereof.
10.5 GOVERNING LAW.
The provisions of the Plan shall be construed and interpreted according to the
laws of the state of Illinois (other than those conflict of law rules that could
lead to the application of another state's laws).
10.6 SUCCESSORS.
The provisions of the Plan shall bind and inure to the benefit of the Company,
its Selected Affiliates, and their respective successors and assigns. The term
successors as used herein shall include any corporate or other business entity
which shall, whether by merger, consolidation, purchase or otherwise, acquire
all or substantially all of the business and assets of the Company or a Selected
Affiliate and successors of any such Company or other business entity.
19
<PAGE>
10.7 NO IMPLIED RIGHTS.
Nothing contained herein shall be construed to confer upon any Eligible Employee
the right to continue to serve as an Eligible Employee of the Employer or in any
other capacity. In addition, nothing contained herein shall be construed to
limit either the right of the Employer to terminate the employment of any
Eligible Employee, or the right of an Eligible Employee to terminate employment.
Executed this 29th day of January, 1999.
KEEBLER COMPANY
By: /s/ SAM K. REED
--------------------------------
Sam K. Reed
Title: President and CEO
-----------------------------
20
<PAGE>
The following schedules to the Keebler Company Deferred Compensation Plan have
been omitted. Keebler hereby undertakes to furnish supplementally a copy of any
such omitted schedules to the Commission upon request.
SCHEDULE TITLE
Exhibit A Eligible Employees
Exhibit B Amount of Deferral
Exhibit C Investment Return Rate
EXHIBIT 10.19
KEEBLER FOODS COMPANY
DEFERRED COMPENSATION PLAN
FOR NON-AFFILIATE DIRECTORS
ARTICLE I
PURPOSE AND EFFECTIVE DATE
1.1. PURPOSE. The purpose of the Keebler Foods Company Deferred
Compensation Plan For Non-Affiliate Directors is to provide non-employee
directors of Keebler Company the opportunity to defer the receipt of retainer
and fees otherwise payable to such directors for services as a member of the
Company's Board of Directors. The Plan is designed to aid the Company in
attracting and retaining as members of its Board of Directors persons whose
abilities, experience and judgment can contribute to the well-being and
long-term success and growth of the Company.
1.2. EFFECTIVE DATE. The Plan shall be effective March 1, 1999 and
shall remain in effect until terminated in accordance with Article IX.
ARTICLE II
DEFINITIONS
When used in the Plan and initially capitalized, the following words
and phrases shall have the meanings indicated:
2.1. "ACCOUNT" shall mean the recordkeeping account established for
each Participant in the Plan to which the Compensation deferred under Article
IV shall be credited.
2.2. "ADMINISTRATOR" shall mean the Board or the individual or
committee appointed by the Board to administer the Plan.
2.3. "BOARD" shall mean the Board of Directors of the Company.
2.4. "CHANGE IN CONTROL" shall mean the earliest to occur of:
(a) The effective time of any purchase, sale, merger,
consolidation or other transaction after which any person,
corporation, partnership or other entity OTHER than Flowers
or its Affiliates, the then current management of Keebler
Foods Company or of Flowers or any member of the immediate
family of said management, or any employee benefit plan of
Keebler Foods Company or of Flowers ("Permitted Owners")
shall own more than fifty percent (50%) of the outstanding
capital stock of Keebler Foods Company which stock is
entitled to vote for the election of directors.
<PAGE>
(b) If it occurs prior to February 3, 2001, the effective time of
any purchase, sale, merger, consolidation or other
transaction after which any person, corporation, partnership
or entity OTHER THAN the then current management of Keebler
Foods Company or Flowers or any member of the immediate
family of said management, or any employee benefit plan of
Keebler Foods Company or of Flowers ("Permitted Owners")
shall own more than fifty percent (50%) of the outstanding
capital stock of Flowers which stock is entitled to vote for
the election of directors.
(c) The effective time of a transfer to an entity other than a
Permitted Owner of substantially all of the property of
Keebler Foods Company.
(d) Continuing Directors at any time fail to constitute a
majority of the Board of Directors of Keebler Foods Company.
"Continuing Directors" shall mean the members of the Board of
Directors as of the date hereof, plus any new directors whose
nominations were approved by at least a majority of the
Continuing Directors in office at the time of the election of
any such new directors.
For the purposes of this Plan, the term "Affiliate" shall be defined in Rule
405 of the General Rules and Regulations under the Securities Act of 1933, as
amended.
2.5. "COMPANY" shall mean Keebler Foods Company and any successor(s)
thereto.
2.6. "COMPENSATION" shall mean any annual retainer, attendance fees
or committee chairman fees payable to an Eligible Director for services as a
member of the Board during a Plan Year.
2.7. "DEFERRAL ELECTION" shall mean the written election made by an
Eligible Director to defer Compensation in accordance with Article IV.
2.8. "ELIGIBLE DIRECTOR" shall mean a member of the Board who is not
also an employee of the Company or Flowers or their Affiliates.
2.9. "FLOWERS" shall mean Flowers Industries, Inc.
2.10. "INTEREST RATE" shall mean an annual rate of 6.5%; provided,
however, prior to the beginning of any Plan Year the Administrator may
establish a different rate with respect to such Plan Year. Participants shall
be notified of any change in Interest Rate under this Section 2.10 no later
than 30 days prior to the beginning of the applicable Plan Year.
2.11. "PARTICIPANT" shall mean an Eligible Director who elects to
participate in the Plan by filing a Deferral Election in accordance with
Section 4.1.
2.12. "PLAN" shall mean this Keebler Foods Company Deferred
Compensation Plan For Non-Affiliate Directors, as amended from time to time.
2
<PAGE>
2.13. "PLAN YEAR" shall mean the twelve-month period beginning
January 1 and ending the following December 31; provided, however, the first
Plan Year shall be the period beginning March 1, 1999 and ending December 31,
1999.
2.14. "VALUATION DATE" shall mean the date on which the amount of a
Participant's Account is adjusted as provided in Section 5.1. The last day of
each calendar quarter shall be a Valuation Date and any other date specified
by the Administrator for this purpose.
ARTICLE III
PARTICIPATION
3.1. PARTICIPATION. Eligibility to participate in the Plan is
limited to Eligible Directors. An Eligible Director shall become a
Participant in the Plan by filing a Deferral Election with the Administrator
in accordance with Article IV.
3.2. TERMINATION OF PARTICIPATION. A Participant may elect to
terminate his or her active participation in the Plan at any time by filing a
written notice thereof with the Administrator. Such termination of active
participation shall become effective with respect to Compensation payable for
the Plan Year beginning after the date such election is received by the
Administrator. Such a Participant may resume participation in the Plan as of
the first day of any Plan Year beginning after such termination of active
participation by filing a new Deferral Election in accordance with Section
4.1(a). A Participant's Deferral Election shall automatically terminate on
the date he or she ceases to be an Eligible Director. Amounts credited to a
Participant's Account before the effective date of termination of active
participation shall continue to be governed in accordance with the terms of
the Plan as applied to all Participants.
ARTICLE IV
DEFERRAL OF COMPENSATION
4.1. AMOUNT OF DEFERRAL. An Eligible Director may elect to defer all
or a portion of his or her Compensation pursuant to the terms of a Deferral
Election. An Eligible Director's Deferral Election shall be subject to the
following:
(a) An individual who prior to the beginning of any Plan Year
satisfies the requirements of an Eligible Director shall be
eligible to file a Deferral Election with respect to all or a
portion of his or her Compensation for such Plan Year. Such
Deferral Election shall be filed during the period established
by the Administrator, but in no event later than the last day of
the preceding Plan Year.
3
<PAGE>
(b) Notwithstanding subsection (a) next above, if an individual has
not satisfied the requirements of an Eligible Director prior to
the beginning of a Plan Year but becomes an Eligible Director
during such Plan Year, such Eligible Director may file a
Deferral Election with the Administrator within 30 days of first
becoming an Eligible Director. Such Deferral Election shall be
effective with respect to Compensation payable for the first
month beginning after the Deferral Election is received by the
Administrator.
(c) A separate Deferral Election shall be made for each Plan Year.
(d) Deferral Elections shall be subject to the terms, conditions and
limitations established by the Administrator.
4.2. CHANGE IN DEFERRAL ELECTIONS. A Deferral Election may not be
modified on or after the first day of the Plan Year to which it relates.
4.3. CREDITING DEFERRED COMPENSATION. The amount of Compensation
that a Participant elects to defer under the Plan shall be credited by the
Company to the Participant's Account periodically, the frequency of which
shall be determined by the Administrator.
ARTICLE V
PLAN ACCOUNTS
5.1. VALUATION OF ACCOUNT. The Administrator shall establish an
Account for each Participant who has filed a Deferral Election. As of each
Valuation Date, the Participant's Account balance as of the immediately
preceding Valuation Date shall be adjusted upward or downward to reflect (i)
the Participant's Compensation deferrals, if any, credited pursuant to
Section 4.3 since the immediately preceding Valuation Date, (ii) the
investment return to be credited as of such Valuation Date pursuant to
Section 5.2, and (iii) the aggregate amount of distributions, if any, to be
debited to the Account as of that Valuation Date under Section 6.3.
5.2. INVESTMENT RETURN ADJUSTMENTS. As of each Valuation Date, a
Participant's Account balance shall be increased to reflect the interest that
would have been earned had such Account balance been invested at the Interest
Rate then in effect during the period since the last preceding Valuation
Date. Any distributions from the Plan as of such Valuation Date shall be
debited to the Participant's Account pursuant to Section 6.3 after the
Account has been adjusted for investment return under this Section 5.2.
4
<PAGE>
ARTICLE VI
PAYMENT OF BENEFITS
6.1. DISTRIBUTION OF ACCOUNT. Distribution of a Participant's
Account balance shall be made in cash, commencing as of the Valuation Date
coincident with or next following the Eligible Director's termination of
service on the Board for any reason, in one of the following forms elected by
the Participant:
(a) Substantially equal annual installments not to exceed three
years, or
(b) A lump sum.
Such payment shall be made as soon as administratively practicable
following the applicable Valuation Date. If an election with respect to the
form of payment has not been filed with the Administrator at least 12 months
prior to the date distribution is to commence, such election shall be
disregarded and payments shall be made in accordance with the Participant's
most recent election form that has been on file with the Administrator at
least 12 months, or if no such election has been filed, in the form
determined by the Administrator in its sole discretion. Notwithstanding the
foregoing provisions of this Section 6.1, if the Participant's Account
balance is less than $5,000 at the time payments are to commence under the
Plan, such Account balance shall be paid in a lump-sum payment.
6.2. PAYMENTS TO BENEFICIARIES. In the event of the Participant's
death prior to his or her commencement of benefits under the Plan, payment
shall be made to the Participant's Beneficiary based on the method of payment
elected by the Participant prior to death in accordance with Section 6.1 If
the Participant dies after commencement of payments under the Plan but prior
to the time his or her entire Account balance has been distributed, the
remainder of the Participant's Account balance shall be distributed to the
Beneficiary at the same times and in the same forms as such payments would
have been distributed to the Participant.
6.3. DEBITING OF DISTRIBUTIONS. The amount of any distribution under
this Article VI shall be debited to the Participant's Account as of the
Valuation Date for which it is made.
6.4 SPECIAL CIRCUMSTANCES. The Administrator shall have the power in
its absolute discretion to treat a Participant as if he or she had terminated
service on the Board within the meaning of Section 6.1 if the Participant in
the judgment of the Administrator experiences an extreme financial hardship
or rapidly failing health. The Administrator also shall have the power in its
absolute discretion to accelerate the distribution of a Participant's Account
balance to the extent that the Administrator deems appropriate under the
circumstances in the event that the Participant dies or, in the judgment of
the Administrator, experiences an extreme financial hardship or rapidly
failing health.
5
<PAGE>
6.5. EFFECT OF CHANGE IN CONTROL. Notwithstanding the foregoing
provisions of this Article VI, effective as of the date of a Change in
Control, the balance in each Participant's Account under the Plan shall be
distributed to the Participant (or Beneficiary, if applicable) in a single
lump sum cash payment.
ARTICLE VII
BENEFICIARY DESIGNATION
7.1. BENEFICIARY DESIGNATIONS. Each Participant shall have the sole
right, at any time, to designate any person or persons as his or her
Beneficiary to whom payment under the Plan shall be made in the event of the
Participant's death prior to complete distribution of his or her Account. Any
Beneficiary designation shall be made in a written instrument provided by the
Administrator. All Beneficiary designations must be filed with the
Administrator and shall be effective only when received in writing by the
Administrator.
7.2. CHANGE OF BENEFICIARY DESIGNATIONS. Any Beneficiary designation
may be changed by a Participant by the filing of a new Beneficiary
designation, which will cancel all Beneficiary designations previously filed.
The designation of a Beneficiary may be made or changed at any time without
the consent of any person.
7.3. NO DESIGNATION. If a Participant falls to designate a
Beneficiary as provided above, or if all designated Beneficiaries predecease
the Participant, the Participant's designated Beneficiary shall be deemed to
be the Participant's estate.
7.4. EFFECT OF PAYMENT. Payment to a Participant's Beneficiary (or,
upon the death of a primary Beneficiary, to the contingent Beneficiary or, if
none, to the Participant's estate) shall completely discharge the Company's
obligations under the Plan.
ARTICLE VIII
ADMINISTRATION
8.1. AUTHORITY OF ADMINISTRATOR. The Administrator (a) shall have
complete discretion to supervise the administration and operation of the Plan
and to adopt rules and procedures governing the Plan from time to time, and
(b) shall have authority to give interpretive rulings with respect to the
Plan. If the Administrator or, if the Administrator is committee, any members
of the Administrator are also Participants, the Administrator shall adopt and
adhere to a conflicts of interest policy designed to prevent a Participant
from acting in his or her own interest. If, due to the application of such a
conflicts of interest policy, the Administrator is unable to act on a
particular matter under this Plan, the Administrator shall bring such matter
to the Board for action or approval.
6
<PAGE>
8.2. DELEGATION. The Administrator may appoint one or more
individuals, who may be an employee of the Company, to be the Administrator's
agent with respect to the administration and operation of the Plan. The
Administrator may delegate all or any portion of its duties to such
individual(s), provided that the Administrator may cease such delegation at
any time and provided further that any individual to whom duties are so
delegated shall not be Participants. In addition, the Administrator may, from
time to time, employ other agents and delegate to them such administrative
duties as it sees fit, and may from time to time consult with counsel who may
be counsel to the Company.
8.3. BINDING EFFECT OF DECISIONS. Any decision or action of the
Administrator with respect to any question arising out of or in connection
with the administration, interpretation and application of the Plan shall be
final and binding upon all persons having any interest in the Plan.
8.4. INDEMNIFICATION OF ADMINISTRATOR. The Company shall indemnify
and hold harmless the Administrator and, if the Administrator is a committee,
the individual members thereof, their duly appointed agents under Section 8.2
(to the extent that such agents are employees of the Company) against any and
all claims, loss, damage, expense or liability (including reasonable attorney
fees) arising from any action , or failure to act with respect to the Plan,
except in the case of gross negligence or willful misconduct by any such
member or agent of the Administrator.
8.5. ELECTION AND NOTICE PROCEDURES. Except as otherwise expressly
stated in the Plan or required by applicable law, all elections and notices
by Eligible Directors and Participants under the Plan shall be made at the
time and in the manner specified by the Administrator, in accordance with its
administrative procedures.
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
9.1. AMENDMENT. The Board may at any time amend, suspend or
reinstate any or all of the provisions of the Plan, except that no such
amendment suspension or reinstatement may adversely affect any Participant's
Account, as it existed as of the day before the effective date of such
amendment, suspension or reinstatement, without such Participant's prior
written consent
9.2. TERMINATION. The Board in its sole discretion may terminate
this Plan at any time and for any reason whatsoever. Upon termination of the
Plan, the Administrator shall take those actions necessary to administer any
Accounts existing prior to the effective date of such termination; provided,
however, that a termination of the Plan shall not adversely affect the value
of a Participant's Account, as it existed as of the day before the effective
date of such termination, or the timing or method of distribution of a
Participant's Account without the Participant's prior written consent.
7
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1. FUNDING. Participants, their Beneficiaries, and their heirs,
successors and assigns, shall have no secured interest or claim in any
property or assets of the Company. The Company's obligation under the Plan
shall be merely that of an unfunded and unsecured promise of the Company to
pay money in the future.
10.2. NONASSIGNABILITY. No right or interest under the Plan of a
Participant or his or her Beneficiary (or any person claiming through or
under any of them) shall be assignable or transferable in any manner or be
subject to alienation, anticipation, sale, pledge, encumbrance or other legal
process or in any manner be liable for or subject to the debts or liabilities
of any such Participant or Beneficiary. If any Participant or Beneficiary
shall attempt to or shall transfer, assign, alienate, anticipate, sell,
pledge or otherwise encumber his or her benefits hereunder or any part
thereof, or if by reason of his or her bankruptcy or other event happening at
any time such benefits would devolve upon anyone else or would not be enjoyed
by him or her, then the Administrator, in its discretion, may terminate his
or her interest in any such benefit to the extent the Administrator considers
necessary or advisable to prevent or limit the effects of such occurrence.
Termination shall be effected by the delivery of a written "termination
declaration" to the last known address of the Participant or Beneficiary
whose interest is adversely affected.
10.3. LEGAL FEES AND EXPENSES. It is the intent of the Company that
no Eligible Director be required to incur the expenses associated with the
enforcement of his or her rights under this Plan by litigation or other legal
action because the cost and expense thereof would substantially detract from
the benefits intended to be extended to an Eligible Director hereunder.
Accordingly, if after a Change in Control it should appear that the Company
has failed to comply with any of its obligations under this Plan or in the
event that the Company or any other person takes any action to declare this
Plan void or unenforceable, or institutes any litigation designed to deny, or
to recover from, the Eligible Director the benefits intended to be provided
to such Eligible Director hereunder (although such actions do not include the
valid exercise by the Company of its right to amend or terminate the Plan
under Article IX), the Company irrevocably authorizes such Eligible Director
from time to time to retain counsel of his or her choice, at the expense of
the Company as hereafter provided, to represent such Eligible Director in
connection with the initiation or defense of any litigation or other legal
action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company in any jurisdiction.
The Company shall pay and be solely responsible for any and all reasonable
attorneys' and related fees and expenses incurred by such Eligible Director
as a result of the Company's failure to perform under this Plan or any
provision thereof, or as a result of the Company or any person contesting the
validity or enforceability of this Plan or any provision thereof.
8
<PAGE>
10.4. CAPTIONS. The captions contained herein are for convenience
only and shall not control or affect the meaning or construction hereof.
10.5. GOVERNING LAW. The provisions of the Plan shall be construed
and interpreted according to the laws of the State of Illinois (other than
those conflict of law rules that could lead to the application of another
state's laws).
10.6. SUCCESSORS. The provisions of the Plan shall bind and inure to
the benefit of the Company and its successors and assigns. The term
successors as used herein shall include any corporate or other business
entity which shall, whether by merger, consolidation, purchase or otherwise,
acquire all or substantially all of the business and assets of the Company
and successors of any such company or other business entity.
10.7. NO IMPLIED RIGHTS. Nothing contained herein shall be construed
to confer upon any Eligible Director the right to continue to serve as a
member of the Board or in any other capacity.
WHEREAS, the Company has caused this Plan to be executed this
10th day of March, 1999.
KEEBLER FOODS COMPANY
By: /s/ SAM K. REED
--------------------------------------------
Sam K. Reed
Title: President and CEO
-----------------------------------------
9
EXHIBIT 10.20
RECEIVABLES PURCHASE AGREEMENT
dated as of January 29, 1999
among
KEEBLER FUNDING CORPORATION
KEEBLER FOODS COMPANY
LIBERTY STREET FUNDING CORP.
and
THE BANK OF NOVA SCOTIA
<PAGE>
TABLE OF CONTENTS
ARTICLE I.
AMOUNTS AND TERMS OF THE PURCHASES
Section 1.1. Purchase Facility................................ 1
Section 1.2. Making Purchases................................. 2
Section 1.3. Purchased Interest Computation................... 4
Section 1.4. Settlement Procedures............................ 4
Section 1.5. Fees............................................. 10
Section 1.6. Payments and Computations, Etc................... 10
Section 1.7. Dividing or Combining Portions of the Capital
of the Purchased Interest........................ 10
Section 1.8. Increased Costs.................................. 11
Section 1.9. Requirements of Law.............................. 12
Section 1.10. Inability to Determine Eurodollar Rate........... 13
Section 1.11. Mitigation....................................... 14
ARTICLE II.
REPRESENTATIONS AND WARRANTIES; COVENANTS; TERMINATION EVENTS
Section 2.1. Repesentations and Warranties; Covenants......... 14
Section 2.2. Termination Events............................... 14
ARTICLE III.
INDEMNIFICATION
Section 3.1. Indemnities by the Seller........................ 15
Section 3.2. Indemnities by the Servicer...................... 17
Section 3.3. Defense of Claims................................ 18
ARTICLE IV.
ADMINISTRATION AND COLLECTIONS
Section 4.1. Appointment of the Servicer...................... 20
Section 4.2. Duties of the Servicer........................... 21
Section 4.3. Establishment and Use of Certain Accounts........ 22
Section 4.4. Enforcement Rights............................... 23
Section 4.5. Responsibilities of the Seller................... 24
Section 4.6. Servicing Fee.................................... 25
ARTICLE V.
MISCELLANEOUS
Section 5.1. Amendments, Etc.................................. 25
Section 5.2. Notices, Etc..................................... 26
Section 5.3. Assignability.................................... 26
Section 5.4. Costs, Expenses and Taxes........................ 27
i
<PAGE>
Section 5.5. No Proceedings; Limitation On Payments............ 28
Section 5.6. Confidentiality................................... 28
Section 5.7. GOVERNING LAW AND JURISDICTION.................... 29
Section 5.8. Execution in Counterparts......................... 29
Section 5.9. Survival of Termination........................... 30
Section 5.10. WAIVER OF JURY TRIAL.............................. 30
Section 5.11. Entire Agreement.................................. 30
Section 5.12. Headings.......................................... 30
Section 5.13. Issuer's Liabilities.............................. 30
Section 5.14. Tax Treatment..................................... 31
EXHIBIT I Definitions
EXHIBIT II Conditions of Purchases
EXHIBIT III Representations and Warranties
EXHIBIT IV Covenants
EXHIBIT V Termination Events
SCHEDULE I Credit and Collection Policy
SCHEDULE II Lock-box Banks and Lock-box Accounts
SCHEDULE III Trade Names
ANNEX A Form of Monthly Report
ANNEX B Form of Purchase Notice
ii
<PAGE>
This RECEIVABLES PURCHASE AGREEMENT (as amended, supplemented or otherwise
modified from time to time, this "Agreement") is entered into as of January 29,
1999, Among KEEBLER FUNDING CORPORATION, a Delaware corporation, as seller (the
"SELLER"),KEEBLER FOODS COMPANY, a Delaware corporation ("KEEBLER"), as initial
servicer (in such capacity, together with its successors and permitted assigns
in such capacity, the "SERVICER"), LIBERTY STREET FUNDING CORP., a Delaware
corporation (together with its successors and permitted assigns, the "ISSUER"),
and THE BANK OF NOVA SCOTIA, a Canadian chartered bank acting through its New
York Agency ("BNS"), as administrator (in such capacity, together with its
successors and assigns in such capacity, the "ADMINISTRATOR").
PRELIMINARY STATEMENTS. Certain terms that are capitalized and used
throughout this Agreement are defined in EXHIBIT I. References in the Exhibits
hereto to the "Agreement" refer to this Agreement, as amended, supplemented or
otherwise modified from time to time.
The Seller desires to sell, transfer and assign an undivided variable
percentage interest in a pool of receivables, and the Issuer desires to acquire
such undivided variable percentage interest, as such percentage interest shall
be adjusted from time to time based upon, in part, reinvestments made by the
Issuer.
In consideration of the mutual agreements, provisions and covenants
contained herein, the parties hereto agree as follows:
ARTICLE I.
AMOUNTS AND TERMS OF THE PURCHASES
Section 1.1 PURCHASE FACILITY. (a) On the terms and conditions hereinafter
set forth, the Issuer hereby agrees subject to the next sentence to purchase,
and make reinvestments in, undivided percentage ownership interests up to the
Purchase Limit with regard to the Purchased Interest from the Seller from time
to time from the date hereof to the Facility Termination Date. Under no
circumstances shall the Issuer make any such purchase or reinvestment if, after
giving effect to such purchase or reinvestment, the aggregate outstanding
Capital of the Purchased Interest would exceed the Purchase Limit.
(b) The Seller may, upon at least 15 days' written notice to the
Administrator, terminate in whole or reduce in part the unused portion of the
Purchase Limit; PROVIDED, that each partial reduction shall be in the amount of
at least $5,000,000, or an integral multiple of $1,000,000 in excess thereof,
and that, unless terminated in whole, the Purchase Limit shall in no event be
reduced below $50,000,000.
<PAGE>
Section 1.2 MAKING PURCHASES. (a) Each purchase (but not reinvestment) of
undivided percentage ownership interests with regard to the Purchased Interest
hereunder shall be made upon the Seller's irrevocable written notice in the form
of Annex B delivered to the Administrator in accordance with SECTION 5.2 (which
notice must be received by the Administrator before 11:00 a.m., New York City
time): (i) at least three Business Days before the requested purchase date, in
the case of a purchase to be funded at the Alternate Rate and based upon the
Eurodollar Rate, (ii) at least two Business Days before the requested purchase
date, in the case of a purchase to be funded at the Alternate Rate and based
upon the Base Rate, and (iii) at least one Business Day before the requested
purchase date, in the case of a purchase to be funded at the CP Rate, which
notice shall specify: (A) the amount requested to be paid to the Seller (such
amount, which shall not be less than $1,000,000, being the Capital relating to
the undivided percentage ownership interest then being purchased), (B) the date
of such purchase (which shall be a Business Day), and (C) the desired funding
basis for such purchase (which shall be based upon the Eurodollar Rate, the Base
Rate or the CP Rate). If the Seller has requested that the purchase be funded at
the CP Rate, the Administrator shall promptly thereafter notify the Seller
whether the Issuer has exercised its discretion not to fund such purchase with
the issuance of Notes because such purchase with the issuance of Notes would be
economically inadvisable to the Issuer or the Issuer is unable to or prohibited
from issuing Notes, the Administrator, the Seller or any other similarly
situated Person, or otherwise not permitted, in which case the Seller shall be
deemed to have requested that the purchase be funded at the Alternate Rate and
be based upon the Base Rate.
(b) On the date of each purchase (but not reinvestment) of undivided
percentage ownership interests with regard to the Purchased Interest hereunder,
the Issuer shall, upon satisfaction of the applicable conditions set forth in
EXHIBIT II, make available to the Seller in same day funds, at First National
Bank of Chicago, account number 5585600, ABA 071000013, an amount equal to the
Capital (as specified by the Seller pursuant to Section 1.2(a) above) relating
to the undivided percentage ownership interest then being purchased.
(c) Effective on the date of each purchase pursuant to this Section and
each reinvestment pursuant to SECTION 1.4, the Seller hereby sells and assigns
to the Issuer an undivided percentage ownership interest in: (i) each Pool
Receivable then existing, (ii) all Related Security with respect to such Pool
Receivables, and (iii) all Collections with respect to, and other proceeds of,
such Pool Receivables and Related Security.
(d) To secure all of the Seller's obligations (monetary or otherwise) under
this Agreement and the other Transaction Documents
2
<PAGE>
to which it is a party, whether now or hereafter existing or arising, due or to
become due, direct or indirect, absolute or contingent, the Seller hereby grants
to the Issuer a security interest in all of the Seller's right, title and
interest (including any undivided interest of the Seller) in, to and under all
of the following, whether now or hereafter owned, existing or arising: (i) all
Pool Receivables, (ii) all Related Security with respect to such Pool
Receivables, (iii) all Collections with respect to such Pool Receivables, (iv)
the Lock-Box Accounts and the Collection Account, and all amounts on deposit
therein, and all certificates and instruments, if any, from time to time
evidencing such Lock-Box Accounts and the Collection Account, and amounts on
deposit therein, (v) all rights (but none of the obligations) of the Seller
under the Purchase and Sale Agreement, and (vi) all proceeds of, and all amounts
received or receivable under any or all of, the foregoing (collectively, the
"Pool Assets"). The Issuer shall have, with respect to the Pool Assets, and in
addition to all the other rights and remedies available to the Issuer, all the
rights and remedies of a secured party under any applicable UCC.
Section 1.3. PURCHASED INTEREST COMPUTATION. The Purchased Interest shall
be initially computed on the date of the initial purchase hereunder. Thereafter,
until the Facility Termination Date, the Purchased Interest shall be
automatically recomputed (or deemed to be recomputed) on each Business Day other
than a Termination Day. The Purchased Interest as computed (or deemed
recomputed) as of the day before the Facility Termination Date shall thereafter
remain constant. The Purchased Interest shall become zero when the Capital
thereof and Discount thereon shall have been paid in full, all the amounts owed
by the Seller and the Servicer hereunder to the Issuer, the Administrator and
any other Indemnified Party or Affected Person are paid in full, and the
Servicer shall have received the accrued Servicing Fee thereon.
Section 1.4. SETTLEMENT PROCEDURES. (a) The collection of the Pool
Receivables shall be administered by the Servicer in accordance with this
Agreement. The Seller shall provide to the Servicer on a timely basis all
information needed for such administration, including notice of the occurrence
of any Termination Day and current computations of the Purchased Interest.
(b) The Servicer shall, on each Business Day on which Collections of Pool
Receivables are received by the Seller or Servicer or are deposited into the
Lock-Box Accounts, transfer such Collections therefrom and deposit such
Collections into the Collection Account. With respect to such Collections on
such day and with respect to any Collection transferred to the Collection
Account on such day pursuant to the last paragraph of Section 1.4(e), the
Servicer shall:
3
<PAGE>
(i) set aside and hold in the Collection Account for the benefit of
the Issuer, out of the percentage of such Collections represented by the
Purchased Interest, FIRST an amount equal to the Discount accrued through
such day for each Portion of Capital and not previously transferred,
SECOND, an amount equal to the fees set forth in the Fee Letter accrued
through such day for the Purchased Interest and not previously transferred,
and THIRD, to the extent funds are available therefor, an amount equal to
the Issuer's Share of the Servicing Fee accrued through such day and not
previously transferred; and
(ii) subject to SECTION 1.4 (f), if such day is not a Termination Day,
remit to the Seller, on behalf of the Issuer, the remainder of the
percentage of such Collections, represented by the Purchased Interest, to
the extent representing a return on the Capital; such Collections shall be
automatically reinvested in Pool Receivables, and in the Related Security
and Collections and other proceeds with respect thereto, and the Purchased
Interest shall be automatically recomputed pursuant to SECTION 1.3; IT
BEING UNDERSTOOD, that prior to remitting to the Seller the remainder of
such Collections by way of reinvestment in Pool Receivables, the Servicer
shall have calculated the Purchased Interest on such day, and if such
Purchased Interest shall exceed 100% on such day, such Collections shall
not be remitted to the Seller but shall be set aside and held in the
Collection Account for the benefit of the Issuer in accordance with
PARAGRAPH (iii) below;
(iii) if such day is a Termination Day (or if such day is a day on
which the Purchased Interest exceeds 100%), (A) set aside and hold in the
Collection Account for the benefit of the Issuer the entire remainder of
the percentage of the Collections represented by the Purchased Interest (or
such amount set forth in PARAGRAPH (ii) above); PROVIDED that so long as
the Facility Termination Date has not occurred if any amounts are so set
aside on any Termination Day and thereafter, the conditions set forth in
SECTION 2 of EXHIBIT II are satisfied or are waived by the Administrator,
such previously set aside amounts shall, to the extent representing a
return on the Capital, be reinvested in accordance with the preceding
PARAGRAPH (ii) on the day of such subsequent satisfaction or waiver of
conditions, and (B) set aside and hold in the Collection Account for the
benefit of the Issuer the entire remainder of the Collections in the
Collection Account represented by the Seller's Share of the Collections, if
any; PROVIDED that so long as the Facility Termination Date has not
occurred if any amounts are so set aside on any Termination Day and
thereafter, the conditions set forth in SECTION 2 of EXHIBIT II are
satisfied or are waived by the
4
<PAGE>
Administrator, such previously set aside amounts shall be distributed to
the Seller on the day of such subsequent satisfaction or waiver of
conditions; and
(iv) during the times when amounts are required to be reinvested in
accordance with the foregoing PARAGRAPH (ii) or the proviso to PARAGRAPH
(iii), release to the Seller (subject to SECTION 1.4(f)) for its own
account any Collections in excess of (x) such amounts, (y) the amounts that
are required to be set aside in the Collection Account pursuant to
PARAGRAPH (i) above and (z) in the event the Seller is not the Servicer,
all reasonable and appropriate out-of-pocket costs and expenses (including
the Servicing Fee to the extent such Servicing Fee has not already been
paid) of such Servicer of servicing, collecting and administering the Pool
Receivables.
(c) The Servicer shall deposit into the Administration Account (or such
other account designated by the Administrator), on each Settlement Date:
(i) Collections held on deposit in the Collection Account for the
benefit of the Issuer pursuant to SECTION 1.4(b)(i) in respect of accrued
Discount and accrued and unpaid Fees;
(ii) Collections held on deposit in the Collection Account for the
benefit of the Issuer pursuant to SECTION 1.4(f); and
(iii) the lesser of (x) the amount of Collections then held on deposit
in the Collection Account for the benefit of the Issuer pursuant to SECTION
1.4(b)(iii) and (y) the aggregate amount of Capital on such date.
The Servicer shall deposit to its own account from Collections held on deposit
in the Collection Account pursuant to SECTION 1.4(b)(i) in respect of the
accrued Servicing Fee, an amount equal to such accrued Servicing Fee.
(d) Upon receipt of funds deposited into the Administration Account
pursuant to CLAUSE (c), the Administrator shall cause such funds to be
distributed as follows:
(i) if such distribution occurs on a day that is not a Termination Day
and the Purchased Interest does not exceed 100%, FIRST to the Issuer in
payment in full of all accrued Discount with respect to each Portion of
Capital and accrued and unpaid Fees, and SECOND, if the Servicer has set
aside amounts in respect of the Servicing Fee pursuant to CLAUSE (b)(i) and
has not retained such amounts pursuant to CLAUSE (c), to the Servicer
(payable in arrears on each Settlement
5
<PAGE>
Date) in payment in full of the Issuer's Share of accrued Servicing Fees so
set aside, and
(ii) if such distribution occurs on a Termination Day or on a day when
the Purchased Interest exceeds 100%, FIRST to the Issuer in payment in full
of all accrued Discount with respect to each Portion of Capital and accrued
and unpaid Fees, SECOND to the Issuer in payment in full of Capital (or, if
such day is not a Termination Day, the amount necessary to reduce the
Purchased Interest to 100%), THIRD, if Keebler or an Affiliate thereof is
not the Servicer, to the Servicer in payment in full of all accrued
Servicing Fees, FOURTH, if the Capital and accrued Discount with respect to
each Portion of Capital have been reduced to zero, and all accrued
Servicing Fees payable to the Servicer (if other than Keebler or an
Affiliate thereof) have been paid in full, to the Issuer, the Administrator
and any other Indemnified Party or Affected Person in payment in full of
any other amounts owed thereto by the Seller under this Agreement and,
FIFTH, unless such amount has been retained by the Servicer pursuant to
CLAUSE (c), to the Servicer (if the Servicer is Keebler or an Affiliate
thereof) in payment in full of the Issuer's Share of all accrued Servicing
Fees.
After the Capital, Discount, and Fees with respect to the Purchased Interest,
Servicing Fees, and any other amounts payable by the Seller and the Servicer to
the Issuer, the Administrator or any other Indemnified Party or Affected Person
hereunder, have been paid in full, all additional Collections with respect to
the Purchased Interest shall be paid to the Seller for its own account.
(e) For the purposes of this SECTION 1.4:
(i) if on any day the Outstanding Balance of any Pool Receivable is
reduced or adjusted as a result of any defective, rejected, returned,
repossessed or foreclosed goods or services, or any revision, cancellation,
allowance, discount or other adjustment made by any Originator, Hollow
Tree, the Servicer, the Seller or any Affiliate of the Seller, or any
setoff or dispute between any Originator, Hollow Tree, the Seller or any
Affiliate of the Seller and an Obligor, the Seller shall be deemed to have
received on such day a Collection of such Pool Receivable in the amount of
such reduction or adjustment;
(ii) if on any day any of the representations or warranties in Section
1(g) or (m) of EXHIBIT III is not true with respect to any Pool Receivable,
the Seller shall be deemed to have received on such day a Collection of
such Pool Receivable in full (Collections deemed to have been received
6
<PAGE>
pursuant to CLAUSE (i) and (ii) of this paragraph (e) are hereinafter
sometimes referred to as "Deemed Collections");
(iii) except as otherwise required by applicable law or the relevant
Contract, all Collections received from an Obligor of any Receivable shall
be applied to the Receivables of such Obligor in the order of the age of
such Receivables, starting with the oldest such Receivable, unless such
Obligor designates in writing its payment for application to specific
Receivables; and
(iv) if and to the extent the Administrator or the Issuer shall be
required for any reason to pay over to an Obligor (or any trustee,
receiver, custodian or similar official pursuant to an Event of Bankruptcy)
any amount received by it hereunder, such amount shall be deemed not to
have been so received by the Administrator or the Issuer but rather to have
been retained by the Seller and, accordingly, the Administrator or the
Issuer, as the case may be, shall have a claim against the Seller for such
amount, payable when and to the extent that any distribution from or on
behalf of such Obligor is made in respect thereof.
On or before the last day of each Reporting Period that contains one or more
days on which Seller is deemed to have received a Collection pursuant to this
SECTION 1.4(e), Seller shall transfer an amount equal to the aggregate amount of
such Deemed Collections to the Collection Account and the Servicer shall
distribute such transferred amount in the manner set forth in SECTION 1.4(c), as
if such transferred amount actually had been received by Seller or Servicer on
the date of such transfer from the Obligors of such Pool Receivables and as if
such transferred amount actually had been deposited into a Lockbox Account on
the date of such transfer.
(f) If at any time the Seller shall wish to cause the reduction of Capital
of the Purchased Interest (but not to commence the liquidation, or reduction to
zero, of the entire Capital of the Purchased Interest), the Seller may do so as
follows:
(i) the Seller shall give the Administrator and the Servicer at least
two Business Days' prior written notice thereof (including the amount of
such proposed reduction and the proposed date on which such reduction will
commence);
(ii) on the proposed date of commencement of such reduction and on
each day thereafter, the Servicer shall cause Collections not to be
reinvested until the amount thereof not so reinvested shall equal the
desired amount of reduction; and
(iii) the Servicer shall hold such Collections in the Collection
Account for the benefit of the Issuer, for payment
7
<PAGE>
to the Administrator on the next Settlement Date immediately following the
current Settlement Period, and the Capital of the Purchased Interest shall
be deemed reduced in the amount to be paid to the Administrator only when
in fact finally so paid;
provided, that:
(A) the amount of any such reduction shall be not less than $5,000,000
and shall be an integral multiple of $1,000,000, and the entire Capital of
the Purchased Interest after giving effect to such reduction shall be not
less than $50,000,000 and shall be in an integral multiple of $1,000,000;
and
(B) the Seller shall choose a reduction amount, and the date of
commencement thereof, so that to the extent practicable such reduction
shall commence and conclude in the same Settlement Period.
Section 1.5. FEES. The Seller shall pay to the Administrator certain fees
in the amounts and on the dates set forth in a letter, dated the date hereof,
among the Servicer, the Seller and the Administrator (as such letter agreement
may be amended, supplemented or otherwise modified from time to time, the "Fee
Letter").
Section 1.6. PAYMENTS AND COMPUTATIONS, ETC. (a) All amounts to be paid or
deposited by the Seller or the Servicer hereunder shall be made without
reduction for offset or counterclaim and shall be paid or deposited no later
than noon (New York City time) on the day when due in same day funds to the
Administration Account. All amounts received after noon (New York City time)
will be deemed to have been received on the next Business Day.
(b) The Seller or the Servicer, as the case may be, shall, to the extent
permitted by law, pay interest on any amount not paid or deposited by the Seller
or the Servicer, as the case may be, when due hereunder, at an interest rate
equal to 1.0% per annum above the Base Rate, payable on demand.
(c) All computations of interest under CLAUSE (b) and all computations of
Discount, fees and other amounts hereunder shall be made on the basis of a year
of 360 (or 365 or 366, as applicable, with respect to Discount or other amounts
calculated by reference to the Base Rate) days for the actual number of days
elapsed. Whenever any payment or deposit to be made hereunder shall be due on a
day other than a Business Day, such payment or deposit shall be made on the next
Business Day and such extension of time shall be included in the computation of
such payment or deposit.
8
<PAGE>
Section 1.7. DIVIDING OR COMBINING PORTIONS OF THE CAPITAL OF THE PURCHASED
INTEREST. The Seller may, on the last day of any Settlement Period, pursuant to
written notice delivered to the Administrator in accordance with SECTION 5.2:
(a) at least three Business Days before such last day in the case of a Portion
of Capital to be funded based upon the Eurodollar Rate and (b) at least two
Business Days before such last day in all other cases, either: (i) divide the
Capital of the Purchased Interest into two or more portions (each a "PORTION OF
CAPITAL"), which Portions of Capital may accrue Discount by reference to
different rates, equal, in aggregate, to the Capital of the Purchased Interest;
PROVIDED, that after giving effect to such division the amount of each such
Portion of Capital shall be not less than $5,000,000 and shall be an integral
multiple of $1,000,000, or (ii) combine any two or more Portions of Capital
outstanding on such last day and having Settlement Periods ending on such last
day into a single Portion of Capital equal to the aggregate of the Capital of
the Purchased Interest.
Section 1.8. INCREASED COSTS. (a) If the Administrator, the Issuer, any
Purchaser, any other Program Support Provider or any of their respective
Affiliates (each an "Affected Person") reasonably determines that the existence
of or compliance with: (i) any law or regulation or any change therein or in the
interpretation or application thereof, in each case adopted, issued or occurring
after the date hereof, or (ii) any request, guideline or directive from any
central bank or other Governmental Authority (whether or not having the force of
law) issued or occurring after the date of this Agreement, affects or would
affect the amount of capital required or expected to be maintained by such
Affected Person, and such Affected Person determines that the amount of such
capital is increased by or based upon the existence of any commitment to make
purchases of (or otherwise to maintain the investment in) Pool Receivables
related to this Agreement or any related liquidity facility, credit enhancement
facility and other commitments of the same type, then, upon written demand by
such Affected Person (with a copy to the Administrator), the Seller shall
promptly pay to the Administrator, for the account of such Affected Person, from
time to time as specified by such Affected Person, additional amounts sufficient
to compensate such Affected Person. A certificate describing in reasonable
detail, such amounts and the basis for such Affected Person's demand for such
amounts submitted to the Seller and the Administrator by such Affected Person
shall be conclusive and binding for all purposes, absent manifest error.
(b) If, due to either: (i) the introduction of or any change in or in the
interpretation of any law or regulation occurring after the date hereof or (ii)
compliance with any guideline or request occurring after the date hereof from
any central bank or other Governmental Authority (whether or not having the
force of law), there shall be any increase in the cost to any Affected
9
<PAGE>
Person of agreeing to purchase or purchasing, or maintaining the ownership of,
the Purchased Interest in respect of which Discount is computed by reference to
the Eurodollar Rate, then, upon written demand by such Affected Person, the
Seller shall promptly pay to such Affected Person, from time to time as
specified by such Affected Person, additional amounts sufficient to compensate
such Affected Person for such increased costs. A certificate describing in
reasonable detail, such amounts and the basis for such Affected Person's demand
for such amounts submitted to the Seller and the Administrator by such Affected
Person shall be conclusive and binding for all purposes, absent manifest error.
(c) In determining the additional amounts necessary to compensate an
Affected Person pursuant to clause (a) or (b) above, such Affected Person may
use any method of averaging and attribution that it (in its sole and absolute
discretion) shall deem applicable.
Section 1.9. REQUIREMENTS OF LAW. If any Affected Person reasonably
determines that the existence of or compliance with: (a) any law or regulation
or any change therein or in the interpretation or application thereof, in each
case adopted, issued or occurring after the date hereof, or (b) any request,
guideline or directive from any central bank or other Governmental Authority
(whether or not having the force of law) issued or occurring after the date of
this Agreement:
(i) does or shall subject such Affected Person to any tax of any kind
whatsoever with respect to this Agreement, any increase in the Purchased
Interest or in the amount of Capital relating thereto, or does or shall
change the basis of taxation of payments to such Affected Person on account
of Collections, Discount or any other amounts payable hereunder (excluding
taxes imposed on the overall pre-tax net income of such Affected Person,
franchise taxes imposed on such Affected Person and any withholding taxes
imposed as a result of amounts paid or payable to such Affected Person
pursuant to this Agreement),
(ii) does or shall impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar requirement against assets held
by, or deposits or other liabilities in or for the account of, purchases,
advances or loans by, or other credit extended by, or any other acquisition
of funds by, any office of such Affected Person that are not otherwise
included in the determination of the Eurodollar Rate or the Base Rate
hereunder, or
(iii) does or shall impose on such Affected Person any other
condition,
10
<PAGE>
and the result of any of the foregoing is: (A) to increase the cost to such
Affected Person of acting as Administrator, or of agreeing to purchase or
purchasing or maintaining the ownership of undivided percentage ownership
interests with regard to the Purchased Interest (or interests therein) or any
Portion of Capital, or (B) to reduce any amount receivable hereunder (whether
directly or indirectly), then, in any such case, upon written demand by such
Affected Person, the Seller shall promptly pay to such Affected Person
additional amounts necessary to compensate such Affected Person for such
additional cost or reduced amount receivable. All such amounts shall be payable
as incurred. A certificate from such Affected Person to the Seller describing in
reasonable detail the amount and basis for the amount of such additional costs
or reduced amount receivable shall be conclusive and binding for all purposes,
absent manifest error.
Section 1.10. INABILITY TO DETERMINE EURODOLLAR RATE. If the Administrator
shall have determined before the first day of any Settlement Period (which
determination shall be conclusive and binding upon the parties hereto), by
reason of circumstances affecting the interbank Eurodollar market, either that:
(a) dollar deposits in the relevant amounts and for the relevant Settlement
Period are not available, (b) adequate and reasonable means do not exist for
ascertaining the Eurodollar Rate for such Settlement Period or (c) the
Eurodollar Rate determined pursuant hereto does not accurately reflect the cost
to the Issuer (as conclusively determined by the Administrator) of maintaining
any Portion of Capital during such Settlement Period, the Administrator shall
promptly give telephonic notice of such determination, confirmed in writing, to
the Seller before the first day of such Settlement Period. Upon delivery of such
notice: (i) no Portion of Capital shall be funded thereafter at the Alternate
Rate determined by reference to the Eurodollar Rate unless and until the
Administrator shall have given notice to the Seller that the circumstances
giving rise to such determination no longer exist, and (ii) with respect to any
outstanding Portions of Capital then funded at the Alternate Rate determined by
reference to the Eurodollar Rate, such Alternate Rate shall, on the immediately
succeeding Settlement Date, automatically be converted to the Alternate Rate
determined by reference to the Base Rate at the respective last days of the
then-current Settlement Periods relating to such Portions of Capital.
Section 1.11. MITIGATION. Each Affected Person agrees that if it makes any
demand for payment under SECTION 1.8 or 1.9, it will use reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions and
so long as such efforts would not be disadvantageous to it, as determined in its
sole discretion) to mitigate the effect upon such Affected Person of the capital
requirements, increased costs, tax or other matter described in SECTION 1.8 or
1.9, as applicable.
11
<PAGE>
ARTICLE II.
REPRESENTATIONS AND WARRANTIES; COVENANTS;
TERMINATION EVENTS
Section 2.1. REPRESENTATIONS AND WARRANTIES; COVENANTS. Each of the Seller
and the Servicer hereby makes the representations and warranties, and hereby
agrees to perform and observe the covenants, applicable to it set forth in
EXHIBITS III and IV, respectively.
Section 2.2. TERMINATION EVENTS. If any of the Termination Events set forth
in EXHIBIT V shall occur, the Administrator may, by notice to the Seller,
declare the Facility Termination Date to have occurred (in which case the
Facility Termination Date shall be deemed to have occurred); PROVIDED, that
automatically upon the occurrence of any event (without any requirement for the
passage of time or the giving of notice) described in paragraph (f) of EXHIBIT
V, the Facility Termination Date shall occur. Upon any such declaration,
occurrence or deemed occurrence of the Facility Termination Date, the Issuer and
the Administrator shall have, in addition to the rights and remedies that they
may have under this Agreement, all other rights and remedies provided after
default under the New York UCC and under other applicable law, which rights and
remedies shall be cumulative.
ARTICLE III.
INDEMNIFICATION
Section 3.1. INDEMNITIES BY THE SELLER. Without limiting any other rights
that the Administrator, the Issuer, any Program Support Provider or any of their
respective Affiliates, employees, officers, directors, agents, counsel,
successors, transferees or assigns (each, an "Indemnified Party" and
collectively, the "Parties") may have hereunder or under applicable law, the
Seller hereby agrees to indemnify each Indemnified Party from and against any
and all claims, damages, expenses, costs, losses and liabilities (including
Attorney Costs) (all of the foregoing being collectively referred to as
"Indemnified Amounts") arising out of or resulting from this Agreement (whether
directly or indirectly), the use of proceeds of purchases or reinvestments, the
ownership of the Purchased Interest, or any interest therein, or in respect of
any Receivable, Related Security or Contract, excluding, however: (a)
Indemnified Amounts to the extent resulting from gross negligence or willful
misconduct on the part of such Indemnified Party or its officers, directors,
agents (including any successor Servicer appointed by the Administrator pursuant
to SECTION 4.1(a)) or counsel, (b) recourse (except as otherwise specifically
provided in this Agreement) for uncollectible Receivables, or (c) any overall
net income taxes or franchise taxes imposed on such
12
<PAGE>
Indemnified Party and any withholding taxes imposed as a result of amounts paid
or payable to such Indemnified Party pursuant to this Agreement. Subject to the
exclusions set forth in the preceding sentence, but without otherwise limiting
or being limited by the foregoing, the Seller shall pay on demand to each
Indemnified Party any and all amounts necessary to indemnify such Indemnified
Party from and against any and all Indemnified Amounts relating to or resulting
from any of the following:
(i) the failure of any Receivable included in the calculation of the
Net Receivables Pool Balance as an Eligible Receivable to be an Eligible
Receivable, the failure of any information contained in an Monthly Report
to be true and correct, or the failure of any other information provided to
the Issuer or the Administrator with respect to Receivables or this
Agreement to be true and correct,
(ii) the failure of any representation, warranty or statement made or
deemed made by the Seller (or any of its officers) under or in connection
with this Agreement to have been true and correct as of the date made or
deemed made in all respects,
(iii) the failure by the Seller to comply with any applicable law,
rule or regulation with respect to any Pool Receivable or the related
Contract, or the failure of any Pool Receivable or the related Contract to
conform to any such applicable law, rule or regulation,
(iv) the failure to vest in the Issuer a valid and enforceable: (A)
perfected undivided percentage ownership interest, to the extent of the
Purchased Interest, in the Receivables in, or purporting to be in, the
Receivables Pool and the other Pool Assets, or (B) first priority perfected
security interest in the Pool Assets, in each case, free and clear of any
Adverse Claim,
(v) the failure to have filed, or any delay in filing, financing
statements or other similar instruments or documents under the UCC of any
applicable jurisdiction or other applicable laws with respect to any
Receivables in, or purporting to be in, the Receivables Pool and the other
Pool Assets, whether at the time of any purchase or reinvestment or at any
subsequent time,
(vi) any dispute, claim, offset or defense (other than discharge in
bankruptcy of the Obligor) of an Obligor to the payment of any Receivable
in, or purporting to be in, the Receivables Pool (including a defense based
on such Receivable or the related Contract not being a legal, valid and
binding obligation of such Obligor enforceable against it in
13
<PAGE>
accordance with its terms), or any other claim resulting from the sale of
the goods or services related to such Receivable or the furnishing or
failure to furnish such goods or services or relating to collection
activities with respect to such Receivable (if such collection activities
were performed by the Seller or any of its Affiliates acting as Servicer or
by any agent or independent contractor retained by the Seller or any of its
Affiliates),
(vii) any failure of the Seller (or any of its Affiliates acting as
the Servicer) to perform its duties or obligations in accordance with the
provisions hereof or under the Contracts,
(viii) any products liability or other claim, investigation,
litigation or proceeding arising out of or in connection with merchandise,
insurance or services that are the subject of any Contract,
(ix) the commingling of Collections at any time with other funds,
(x) the use of proceeds of purchases or reinvestments, or
(xi) any reduction in Capital as a result of the distribution of
Collections pursuant to SECTION 1.4(d), if all or a portion of such
distributions shall thereafter be rescinded or otherwise must be returned
for any reason.
Section 3.2. INDEMNITIES BY THE SERVICER. Without limiting any other rights
that the Administrator, the Issuer or any other Indemnified Party may have
hereunder or under applicable law, the Servicer hereby agrees to indemnify each
Indemnified Party from and against any and all Indemnified Amounts arising out
of or resulting from (whether directly or indirectly): (a) the failure of any
information contained in a Monthly Report to be true and correct, or the failure
of any other information provided to the Issuer or the Administrator by, or on
behalf of, the Servicer to be true and correct, (b) the failure of any
representation, warranty or statement made or deemed made by the Servicer (or
any of its officers) under or in connection with this Agreement to have been
true and correct in all respects as of the date made or deemed made, (c) the
failure by the Servicer to comply with any applicable law, rule or regulation
with respect to any Pool Receivable or the related Contract, (d) any dispute,
claim, offset or defense of the Obligor to the payment of any Receivable in, or
purporting to be in, the Receivables Pool resulting from or related to the
collection activities with respect to such Receivable, or (e) any failure of the
Servicer to perform its duties or obligations in accordance with the provisions
hereof.
14
<PAGE>
Section 3.3. DEFENSE OF CLAIMS. (a) Promptly after the receipt by an
Indemnified Party or Parties of a notice of the commencement of any action,
suit, proceeding, investigation or claim against such Indemnified Party or
Parties as to which it proposes to demand indemnification from the Seller or
Servicer (either or both such parties, as applicable, the "INDEMNIFYING PARTY"
or "PARTIES") pursuant to SECTION 3.1 or 3.2, as applicable, such Indemnified
Party or Parties shall notify the Indemnifying Party or Parties in writing of
the commencement thereof; but the failure so to notify the Indemnifying Party or
Parties will not relieve such Indemnifying Party or Parties from any liability
which such Indemnifying Party or Parties may have to such Indemnified Party or
Parties pursuant to SECTION 3.1 or 3.2 unless to the extent that such failure
results in a material impairment of the Indemnifying Party or Parties ability to
defend such action, suit, proceeding, investigation or claim in accordance with
the terms of this SECTION 3.3. After such notice, if (i) an Indemnifying Party
or Parties shall acknowledge (without prejudice to any exclusion of Indemnified
Amounts as a result of an Indemnified Party's gross negligence or willful
misconduct pursuant to SECTION 3.1 or 3.2) in writing to such Indemnified Party
or Parties that such Indemnifying Party or Parties shall be obligated to
indemnify such Indemnified Party or Parties for any Indemnified Amounts
described in SECTION 3.1 or 3.2, as applicable, with respect to such action,
suit, proceeding, investigation or claim, (ii) the defendants in, or targets of,
any such action, suit, proceeding, investigation or claim include both the
Indemnifying Party or Parties and any such Indemnified Party or Parties, and
(iii) no Termination Event of Unmatured Termination Event shall have occurred
and be continuing, the Indemnifying Party or Parties, to the extent that it or
they shall wish, jointly with such Indemnified Party or Parties, shall be
entitled to participate therein in defense of such action, suit, proceeding or
investigation, and the Indemnifying Party or Parties and such Indemnified Party
or Parties shall cooperate in the defense thereof and shall retain counsel
reasonably satisfactory to the Indemnifying Party or Parties and such
Indemnified Party or Parties to undertake the joint defense of such Indemnifying
Party or Parties and such Indemnified Party or Parties at such Indemnifying
Party's or Parties' cost, risk and expense. If (i) in the reasonable opinion of
such Indemnified Party or Parties, the engagement of such counsel would present
a conflict of interest that would prevent such counsel from effectively
undertaking such joint defense, (ii) such Indemnified Party or Parties
reasonably conclude that there may be legal defenses available to it or them
that are different from or in addition to those available to such Indemnifying
Party or Parties, (iii) such Indemnifying Party or Parties fail to employ
counsel reasonably satisfactory to such Indemnified Party or Parties in a timely
manner, or (iv) if a Termination Event or Unmatured Termination Event shall have
occurred and be continuing, then such Indemnified Party or Parties may employ
separate counsel to represent or defend it or them in
15
<PAGE>
any such action, suit, proceeding or investigation and such Indemnifying Party
or Parties shall pay all fees, expenses and disbursements of such counsel;
PROVIDED, HOWEVER, that in no event shall such Indemnifying Party or Parties be
liable for the fees, expenses and disbursements of more than one counsel
representing all Indemnified Parties that are parties to the same action, suit,
proceeding, investigation or claim.
(b) No Indemnifying Party shall (i) without the prior written consent of
the relevant Indemnified Party or Parties (which consent shall not be
unreasonably withheld or delayed) settle or compromise or consent to the entry
of any judgment with respect to any pending action, suit, proceeding,
investigation or claim in respect to which indemnification or contribution may
be sought hereunder (whether or not the relevant Indemnified Party or Parties
are actual or potential parties to such claim) unless such settlement,
compromise or consent includes an unconditional release of each relevant
Indemnified Party from all liability arising out of such action, suit,
proceeding, investigation or claim or (ii) be liable for any settlement of any
such action affected without its written consent (which consent shall not be
unreasonably withheld or delayed), but if settled with its written consent or if
there be a final judgment of the plaintiff in any action, the Indemnifying
Parties agree to indemnify and hold harmless any Indemnified Party from and
against any indemnified amounts (subject to the terms of SECTION 3.1 and 3.2)
relating thereto.
In the event of any dispute between any Indemnified Party or Parties, on
the one hand, and any Indemnifying Party, on the other hand, as to whether such
Indemnifying Party or Indemnified party is acting reasonably in objecting to any
proposed settlement, compromise or consent, such dispute shall be resolved
through binding arbitration in Chicago, Illinois in accordance with the
commercial arbitration rules of the American Arbitration Association. There
shall be a single arbitrator to be selected by mutual agreement of such
Indemnified Party or Parties and such Indemnifying Party or Parties (or if such
parties cannot agree on an arbitrator, by an arbitrator selected by a federal or
state court located in the City of Chicago). Any such arbitration must be
commenced not later than 30 days after the date such dispute arose.
ARTICLE IV.
ADMINISTRATION AND COLLECTIONS
Section 4.1. APPOINTMENT OF THE SERVICER. (a) The servicing, administering
and collection of the Pool Receivables shall be conducted by the Person so
designated from time to time as the
16
<PAGE>
Servicer in accordance with this Section. Until the Administrator gives notice
to Keebler (in accordance with this Section) of the designation of a new
Servicer, Keebler is hereby designated as, and hereby agrees to perform the
duties and obligations of, the Servicer pursuant to the terms hereof. Upon the
occurrence and during the continuation of a Termination Event, the Administrator
may designate as Servicer any Person (including itself) to succeed Keebler or
any successor Servicer, on the condition in each case that any such Person so
designated shall agree to perform the duties and obligations of the Servicer
pursuant to the terms hereof.
(b) Upon the designation of a successor Servicer as set forth in CLAUSE
(a), Keebler agrees that it will terminate its activities as Servicer hereunder
in a manner that the Administrator reasonably determines will facilitate the
transition of the performance of such activities to the new Servicer, and
Keebler shall cooperate with and assist such new Servicer. Such cooperation
shall include access to and transfer of related records and, to the extent
legally permissible, use by the new Servicer of all licenses, hardware or
software necessary or desirable to collect the Pool Receivables and the Related
Security.
(c) Keebler acknowledges that, in making their decision to execute and
deliver this Agreement, the Administrator and the Issuer have relied on
Keebler's agreement to act as Servicer hereunder. Accordingly, Keebler agrees
that it will not voluntarily resign as Servicer.
(d) The Servicer may with the prior written consent of the Administrator,
delegate its duties and obligations hereunder to any subservicer (each a
"Sub-Servicer"); PROVIDED, that, in each such delegation: (i) such Sub-Servicer
shall agree in writing to perform the duties and obligations of the Servicer
pursuant to the terms hereof, (ii) the Servicer shall remain primarily liable
for the performance of the duties and obligations so delegated, (iii) the
Seller, the Administrator and the Issuer shall have the right to look solely to
the Servicer for performance, and (iv) the terms of any agreement with any
Sub-Servicer shall provide that the Administrator may terminate such agreement
upon the termination of the Servicer hereunder by giving notice of its desire to
terminate such agreement to the Servicer (and the Servicer shall provide
appropriate notice to each such Sub-Servicer).
Section 4.2. DUTIES OF THE SERVICER. (a) The Servicer shall take or cause
to be taken all such action as may be necessary or advisable to administer and
collect each Pool Receivable from time to time, all in accordance with this
Agreement and all applicable laws, rules and regulations, with reasonable care
and diligence, and in accordance with the Credit and Collection Policy. The
Servicer shall set aside, for the accounts of the Seller and the
17
<PAGE>
Issuer, the amount of the Collections to which each is entitled in accordance
with ARTICLE I. The Servicer may, in accordance with the Credit and Collection
Policy, extend the maturity of any Pool Receivable (but not beyond 30 days) and
extend the maturity or adjust the Outstanding Balance of any Defaulted
Receivable as the Servicer may determine to be appropriate to maximize
Collections thereof; PROVIDED, HOWEVER, that: (i) such extension or adjustment
shall not alter the status of such Pool Receivable as a Delinquent Receivable or
a Defaulted Receivable or limit the rights of the Issuer or the Administrator
under this Agreement and (ii) if a Termination Event has occurred and Keebler or
an Affiliate thereof is serving as the Servicer, Keebler or such Affiliate may
make such extension or adjustment only upon the prior written approval of the
Administrator. The Seller shall deliver to the Servicer and the Servicer shall
hold for the benefit of the Seller and the Administrator (individually and for
the benefit of the Issuer), in accordance with their respective interests, all
records and documents (including computer tapes or disks) with respect to each
Pool Receivable. Notwithstanding anything to the contrary contained herein, the
Administrator may direct the Servicer (whether the Servicer is Keebler or any
other Person) to commence or settle any legal action to enforce collection of
any Pool Receivable which is a Defaulted Receivable or to foreclose upon or
repossess any Related Security.
(b) The Servicer shall, as soon as practicable following actual receipt of
collected funds, turn over to the Seller the collections of any indebtedness
that is not a Pool Receivable, less, if Keebler or an Affiliate thereof is not
the Servicer, all reasonable and appropriate out-of-pocket costs and expenses of
such Servicer of servicing, collecting and administering such collections. The
Servicer, if other than Keebler or an Affiliate thereof, shall, as soon as
practicable upon demand, deliver to the Seller all records in its possession
that evidence or relate to any indebtedness that is not a Pool Receivable, and
copies of records in its possession that evidence or relate to any indebtedness
that is a Pool Receivable.
(c) The Servicer's obligations hereunder shall terminate on the later of:
(i) the Facility Termination Date and (ii) the date on which all amounts
required to be paid to the Issuer, the Administrator and any other Indemnified
Party or Affected Person hereunder shall have been paid in full.
After such termination, if Keebler or an Affiliate thereof was not the
Servicer on the date of such termination, the Servicer shall promptly deliver to
the Seller all books, records and related materials that the Seller previously
provided to the Servicer, or that have been obtained by the Servicer, in
connection with this Agreement.
18
<PAGE>
Section 4.3. ESTABLISHMENT AND USE OF CERTAIN ACCOUNTS. (a) Prior to the
initial purchase hereunder, the Seller shall enter into Lock-Box Agreements
establishing the Lock-Box Accounts listed on SCHEDULE II with all of the
Lock-Box Banks, and deliver original counterparts thereof to the Administrator.
(b) The Servicer agrees to establish the Collection Account on or
before the date of the first purchase hereunder. The Collection Account shall be
used to accept the transfer of Collections of Pool Receivables from the Lock-Box
Accounts pursuant to SECTION 1.4(b) and for such other purposes described in the
Transaction Documents.
(c) Any amounts in the Collection Account may be invested by the
Collection Account Bank at the Servicer's direction, in Permitted Investments,
so long as Issuer's interest in such Permitted Investments is perfected and such
Permitted Investments are subject to no Adverse Claims other than those of the
Issuer provided hereunder.
(d) Upon the occurrence and during the continuation of a Termination
Event, the Administrator may at any time thereafter give notice to each Lock-Box
Bank and the Collection Account Bank that the Administrator is exercising its
rights under the Lock-Box Agreements and the Collection Account Agreement, as
applicable, to do any or all of the following: (i) to have the exclusive
ownership and control of the Lock-Box Accounts and the Collection Account
transferred to the Administrator and to exercise exclusive dominion and control
over the funds deposited therein, (ii) to have the proceeds that are sent to the
respective Lock-Box Accounts redirected pursuant to the Administrator's
instructions, and (iii) to take any or all other actions permitted under the
applicable Lock-Box Agreement and the Collection Account Agreement. The Seller
hereby agrees that if the Administrator at any time takes any action set forth
in the preceding sentence, the Administrator shall have exclusive control of the
proceeds (including Collections) of all Pool Receivables and the Seller hereby
further agrees to take any other action that the Administrator may reasonably
request to transfer such control. Any proceeds of Pool Receivables received by
the Seller or the Servicer thereafter shall be sent immediately to the
Administrator.
Section 4.4. ENFORCEMENT RIGHTS. (a) At any time following the occurrence
and during the continuation of a Termination Event:
(i) the Administrator may direct the Obligors that payment of all
amounts payable under any Pool Receivable is to be made directly to the
Administrator or its designee,
(ii) the Administrator may give notice of the Issuer's interest in
Pool Receivables to each Obligor, which notice
19
<PAGE>
shall direct that payments be made directly to the Administrator or its
designee, and
(iii) the Administrator may request the Servicer to, and upon such
request the Servicer shall: (A) assemble all of the records necessary or
desirable to collect the Pool Receivables and the Related Security, and to
the extent legally permissible transfer or license to a successor Servicer
the use of all software necessary or desirable to collect the Pool
Receivables and the Related Security, and make the same available to the
Administrator or its designee at a place selected by the Administrator, and
(B) segregate all cash, checks and other instruments received by it from
time to time constituting Collections in a manner acceptable to the
Administrator and, promptly upon receipt, remit all such cash, checks and
instruments, duly endorsed or with duly executed instruments of transfer,
to the Administrator or its designee.
(b) The Seller hereby authorizes the Administrator, and irrevocably
appoints the Administrator as its attorney-in-fact with full power of
substitution and with full authority in the place and stead of the Seller, which
appointment is coupled with an interest, to take any and all steps in the name
of the Seller and on behalf of the Seller necessary or desirable, in the
determination of the Administrator, after the occurrence and during the
continuation of a Termination Event, to collect any and all amounts or portions
thereof due under any and all Pool Assets, including endorsing the name of the
Seller on checks and other instruments representing Collections and enforcing
such Pool Assets. Notwithstanding anything to the contrary contained in this
subsection, none of the powers conferred upon such attorney-in-fact pursuant to
the preceding sentence shall subject such attorney-in-fact to any liability if
any action taken by it shall prove to be inadequate or invalid, nor shall they
confer any obligations upon such attorney-in-fact in any manner whatsoever.
Section 4.5. RESPONSIBILITIES OF THE SELLER. (a) Anything herein to the
contrary notwithstanding, the Seller shall pay when due any taxes, including any
sales taxes payable in connection with the Pool Receivables and their creation
and satisfaction. The Administrator and the Issuer shall not have any obligation
or liability with respect to any Pool Asset, nor shall either of them be
obligated to perform any of the obligations of the Seller, Servicer, Hollow Tree
or any Originator thereunder.
(b) Keebler hereby irrevocably agrees that if at any time it shall cease to
be the Servicer hereunder, it shall act (if the then-current Servicer so
requests) as the data-processing agent of the Servicer and, in such capacity,
Keebler shall conduct the data-processing functions of the administration of the
Receivables and the Collections thereon in substantially the same way that
Keebler
20
<PAGE>
conducted such data-processing functions while it acted as the Servicer.
Section 4.6. SERVICING FEE. (a) Subject to CLAUSE (b), the Servicer shall
be paid a fee equal to 1.0% PER ANNUM (the "Servicing Fee Rate") of the daily
average aggregate Outstanding Balance of the Pool Receivables. The Issuer's
Share of such fee shall be paid through the distributions contemplated by
SECTION 1.4(d), and the Seller's Share of such fee shall be paid by the Seller.
(b) If the Servicer ceases to be Keebler or an Affiliate thereof, the
servicing fee shall be the greater of: (i) the amount calculated pursuant to
CLAUSE (a), and (ii) an alternative amount specified by the successor Servicer
not to exceed 100% of the aggregate reasonable costs and expenses incurred by
such successor Servicer in connection with the performance of its obligations as
Servicer.
ARTICLE V.
MISCELLANEOUS
Section 5.1. AMENDMENTS, ETC. No amendment or waiver of any provision of
this Agreement or any other Transaction Document, or consent to any departure by
the Seller or the Servicer therefrom, shall be effective unless in a writing
signed by the Administrator, and, in the case of any amendment, by the other
parties thereto; and then such amendment, waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given;
PROVIDED, HOWEVER, that no such material amendment shall be effective until both
Moody's and Standard & Poor's have notified the Administrator in writing that
such action will not result in a reduction or withdrawal of the rating of any
Notes. No failure on the part of the Issuer or the Administrator to exercise,
and no delay in exercising any right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The Administrator shall provide each Rating Agency with a copy of each
amendment to or waiver or consent under this Agreement promptly following the
effective date thereof.
Section 5.2. NOTICES, ETC. All notices and other communications provided
for hereunder shall, unless otherwise stated herein, be in writing (including
facsimile communication) and shall be personally delivered or sent by express
mail or courier or by certified mail, postage-prepaid, or by facsimile, to the
intended party at the address or facsimile number of such party set forth under
its name on the signature pages hereof or at such
21
<PAGE>
other address or facsimile number as shall be designated by such party in a
written notice to the other parties hereto. All such notices and communications
shall be effective, (i) if personally delivered or sent by express mail or
courier or if sent by certified mail, when received, and (ii) if transmitted by
facsimile, when sent, receipt confirmed by telephone or electronic means.
Section 5.3. ASSIGNABILITY. (a) This Agreement and the Issuer's rights and
obligations herein (including ownership of the Purchased Interest or an interest
therein) shall be assignable, in whole or in part, by the Issuer and its
successors and assigns with the prior written consent of the Seller; PROVIDED,
HOWEVER, that such consent shall not be unreasonably withheld; and PROVIDED
FURTHER, that no such consent shall be required if the assignment is made to
BNS, any Affiliate of BNS, any Purchaser or other Program Support Provider or
any Person that is: (i) in the business of issuing Notes and (ii) associated
with or administered by BNS or any Affiliate of BNS.
(b) The Issuer may at any time grant to one or more banks or other
institutions (each a "Purchaser") party to the Liquidity Agreement, or to any
other Program Support Provider, participating interests in the Purchased
Interest. In the event of any such grant by the Issuer of a participating
interest to a Purchaser or other Program Support Provider, the Issuer shall
remain responsible for the performance of its obligations hereunder and except
as otherwise provided herein, Seller and Servicer shall continue to deal with
Issuer as if Issuer had not granted such participating interest. The Seller
agrees that each Purchaser or other Program Support Provider shall be entitled
to the benefits of SECTIONS 1.8 and 1.9.
(c) This Agreement and the rights and obligations of the Administrator
hereunder shall be assignable, in whole or in part, by the Administrator and its
successors and assigns; PROVIDED, that unless: (i) such assignment is to an
Affiliate of BNS, (ii) it becomes unlawful for BNS to serve as the Administrator
or (iii) a Termination Event exists, the Seller has consented to such
assignment, which consent shall not be unreasonably withheld.
(d) Except as provided in SECTION 4.1(d), none of the Seller, Keebler or
the Servicer may assign its rights or delegate its obligations hereunder or any
interest herein without the prior written consent of the Administrator.
(e) Without limiting any other rights that may be available under
applicable law, the rights of the Issuer may be enforced through it or by its
agents.
22
<PAGE>
Section 5.4. COSTS, EXPENSES AND TAXES. (a) In addition to the rights of
indemnification granted under SECTION 3.1, the Seller agrees to pay on demand
all reasonable costs and expenses in connection with the preparation, execution,
delivery and administration (including periodic internal audits by the
Administrator of Pool Receivables) of this Agreement, the other Transaction
Documents and the other documents and agreements to be delivered hereunder (and
all reasonable costs and expenses in connection with any amendment, waiver or
modification of any thereof), including: (i) Attorney Costs for the
Administrator, the Issuer and their respective Affiliates and agents with
respect thereto and with respect to advising the Administrator, the Issuer and
their respective Affiliates and agents as to their rights and remedies under
this Agreement and the other Transaction Documents, and (ii) all reasonable
costs and expenses (including Attorney Costs), if any, of the Administrator, the
Issuer and their respective Affiliates and agents in connection with the
enforcement of this Agreement and the other Transaction Documents.
(b) In addition, the Seller shall pay on demand any and all stamp and other
taxes and fees payable in connection with the execution, delivery, filing and
recording of this Agreement or the other documents or agreements to be delivered
hereunder, and agrees to save each Indemnified Party harmless from and against
any liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes and fees.
Section 5.5. NO PROCEEDINGS; LIMITATION ON PAYMENTS. Each of the Seller,
Keebler, the Servicer, the Administrator, each assignee of the Purchased
Interest or any interest therein, hereby covenants and agrees that it will not
institute against, or join any other Person in instituting against, the Issuer
any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceeding, or other proceeding under any federal or state bankruptcy or similar
law, for one year and one day after the latest maturing Note issued by the
Issuer is paid in full. The provision of this SECTION 5.5 shall survive any
termination of this Agreement.
Section 5.6. CONFIDENTIALITY. Unless otherwise required by applicable law,
each of the Seller and Servicer agrees to maintain the confidentiality of this
Agreement and the other Transaction Documents (and all drafts hereof and
thereof) in communications with third parties and otherwise; PROVIDED that this
Agreement may be disclosed to: (a) third parties to the extent such disclosure
is made pursuant to a written agreement of confidentiality in form and substance
reasonably satisfactory to the Administrator, (b) the Seller's legal counsel and
auditors if they agree to hold it confidential and (c) in filings made under
securities laws. Unless otherwise required by applicable law, each of the
Administrator and the Issuer agrees to maintain the confidentiality of all
information regarding Keebler and its Subsidiaries; PROVIDED that
23
<PAGE>
such information may be disclosed to: (i) third parties to the extent such
disclosure is made pursuant to a written agreement of confidentiality in form
and substance reasonably satisfactory to Keebler, (ii) legal counsel and
auditors of the Issuer or the Administrator if they agree to hold it
confidential, (iii) the rating agencies rating the Notes to the extent such
information relates to the Receivables Pool or the transactions contemplated by
this Agreement, or if not so related, upon obtaining the prior consent of
Keebler (such consent not to be unreasonably withheld), (iv) any Program Support
Provider or potential Program Support Provider to the extent such information
relates to the Receivables Pool or the transactions contemplated by this
Agreement, or if not so related, upon obtaining the prior written consent of
Keebler (such consent not to be unreasonably withheld), (v) any placement agent
placing the Notes, and (vi) any regulatory authorities having jurisdiction over
BNS, the Issuer any Program Support Provider or any Purchaser.
Section 5.7. GOVERNING LAW AND JURISDICTION. (a) THIS AGREEMENT SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK) EXCEPT TO THE EXTENT THAT THE
VALIDITY OR PERFECTION OF A SECURITY INTEREST OR REMEDIES HEREUNDER, IN RESPECT
OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF NEW YORK.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE
SOUTHERN DISTRICT OF NEW YORK; AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT,
EACH OF THE PARTIES HERETO CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY,
TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION,
INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM
NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION
OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT
RELATED HERETO. EACH OF THE PARTIES HERETO WAIVES PERSONAL SERVICE OF ANY
SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH SERVICE MAY BE MADE BY ANY OTHER
MEANS PERMITTED BY NEW YORK LAW.
Section 5.8. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
any number of counterparts, each of which, when so executed, shall be deemed to
be an original, and all of which, when taken together, shall constitute one and
the same agreement.
Section 5.9. SURVIVAL OF TERMINATION. The provisions of SECTIONS 1.8, 1.9,
3.1, 3.2, 5.4, 5.5, 5.6, 5.7, 5.8, 5.10 and 5.13 shall survive any termination
of this Agreement.
24
<PAGE>
Section 5.10. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO WAIVES THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY
OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO
CONTRACT CLAIMS, TORT CLAIMS OR OTHERWISE. EACH OF THE PARTIES HERETO AGREES
THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY. WITHOUT LIMITING THE FOREGOING, EACH OF THE PARTIES HERETO FURTHER AGREES
THAT ITS RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS
SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING THAT SEEKS, IN WHOLE
OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY
PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
Section 5.11. ENTIRE AGREEMENT. This Agreement and the other Transaction
Documents embody the entire agreement and understanding between the parties
hereto, and supersede all prior or contemporaneous agreements and understandings
of such Persons, verbal or written, relating to the subject matter hereof and
thereof.
Section 5.12. HEADINGS. The captions and headings of this Agreement and any
Exhibit, Schedule or Annex hereto are for convenience of reference only and
shall not affect the interpretation hereof or thereof.
Section 5.13. ISSUER'S LIABILITIES. The obligations of the Issuer under the
Transaction Documents are solely the corporate obligations of the Issuer. No
recourse shall be had for any obligation or claim arising out of or based upon
any Transaction Document against any stockholder, employee, officer, director or
incorporator of the Issuer; PROVIDED, HOWEVER, that this Section shall not
relieve any such Person of any liability it might otherwise have for its own
gross negligence or willful misconduct.
Section 5.14. TAX TREATMENT. The Seller has structured this Agreement and
the Purchased Interest to facilitate a secured, credit-enhanced financing on
favorable terms with the intention that the Purchased Interest will constitute
indebtedness of the Seller for federal income and state and local tax purposes.
The Seller and Issuer by acceptance of the Purchased Interest, agree to
recognize and report the Purchased Interest as indebtedness of the Seller for
purposes of federal, state and local income or franchise taxes and any other tax
imposed on or measured by income, and to report all receipts and payments
relating thereto in a manner that is consistent with such characterization.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
25
<PAGE>
IN WITNESS WHEREOF, the parties have caused this agreement to be exectued
by their respective officers thereunto duly authorized, as of the date first
above written.
KEEBLER FUNDING CORPORATION
By: /s/ THOMAS E. O'NEILL
-------------------------------------
Name: Thomas E. O'Neill
Title: Vice President
Address:
3875 Bay Center Place
Hayward, California 94545
Attention:
Telephone:
Facsimile:
KEEBLER FOODS COMPANY
By: /s/ THOMAS E. O'NEILL
-------------------------------------
Name: Thomas E. O'Neill
Title: Vice President
Address:
One Hollow Tree Lane
677 Larch Avenue
Elmhurst, Illinois 60126
Attention: Treasurer
Telephone: (630) 782-2690
Facsimile: (630) 833-3372
S-1
<PAGE>
LIBERTY STREET FUNDING CORP.
By: /s/ ANDREW L. STIDD
-------------------------------------
Name: Andrew L. Stidd
Title: President
Address:
Liberty Street Funding Corp.
c/o Global Securitization
Services, LLC
25 West 43rd Street, Suite 704
New York, New York 10036
Attention: Andrew L. Stidd
Telephone No.: (212) 302-8330
Facsimile No.: (212) 302-8767
With a copy to:
The Bank of Nova Scotia
One Liberty Plaza
New York, New York 10006
Attention: Richard A. Josephs
Telephone No.: (212) 225-5000
Facsimile No.: (212) 225-5090
THE BANK OF NOVA SCOTIA,
as Administrator
By: /s/ RICHARD A. JOSEPHS
-------------------------------------
Name: Richard A. Josephs
Title: Product Manager
Address:
The Bank of Nova Scotia
One Liberty Plaza
New York, New York 10006
Attention: Richard A. Josephs
Telephone No.: (212) 225-5000
Facsimile No.: (212) 225-5090
S-2
<PAGE>
<TABLE>
EXHIBIT 21
SUBSIDIARIES OF KEEBLER FOODS COMPANY
<CAPTION>
STATE OF
COMPANY INCORPORATION
------- -------------
<S> <C>
WHOLLY-OWNED SUBSIDIARIES OF KEEBLER FOODS COMPANY
1. Keebler Leasing Corp. Delaware
2. Keebler Company Delaware
3. Shaffer, Clarke & Co., Inc. Delaware
4. Johnston's Ready-Crust Company Delaware
5. Bake-Line Products, Inc. Illinois
WHOLLY-OWNED SUBSIDIARIES OF KEEBLER COMPANY
1. Steamboat Corporation Georgia
2. Illinois Baking Corporation Delaware
3. Keebler Cookie & Cracker Company Nevada
4. Hollow Tree Company, L.L.C. Delaware
5. Keebler Co./Puerto Rico, Inc. Delaware
6. Keebler H.C., Inc. Illinois
7. Keebler-Georgia, Inc. Georgia
8. Keebler Foreign Sales Corporation Virgin Islands
9. Hollow Tree Financial Company, L.L.C. Delaware
10. Godfrey Transport, Inc. Delaware
11. Bishop Baking Company, Inc. Delaware
12. Famous Amos Chocolate Chip Cookie Company, L.L.C. Delaware
13. Mother's Cookie Company, L.L.C. Delaware
14. Murray Biscuit Company, L.L.C. Delaware
15. Barbara Dee Cookie Company, L.L.C. Delaware
16. Little Brownie Bakers, L.L.C. Delaware
17. President Baking Company, L.L.C. Delaware
18. Sunny Cookie Company, L.L.C. Delaware
19. Sunshine Biscuits, L.L.C. Delaware
JOINTLY-OWNED SUBSIDIARIES OF KEEBLER COMPANY AND SUNSHINE BISCUITS, INC.
1. Elfin Equity Co., LLC (1) Delaware
INDIRECTLY OWNED SUBSIDIARIES OF KEEBLER FOODS COMPANY
1. Keebler Assets Company (2) Delaware
(1) 64.6% of the limited liability company interests are owned by Keebler
Company and 35.4% of the limited liability company interests are owned
by Sunshine Biscuits, Inc.
(2) 34% of the limited liability company interests are owned by Keebler
Company, 33% of the limited liability company interests are owned by
Keebler-Georgia, Inc. and 33% of the limited liability company
interests are owned by Keebler Leasing Corp.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Keebler
Foods Company Consolidated Balance Sheet at January 2, 1999 and the Consolidated
Statement of Operations for the year ended January 2, 1999 found on pages F-3
through F-5 of Keebler's Form 10-K and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0001018848
<NAME> KEEBLER FOODS COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-2-1999
<PERIOD-START> JAN-4-1998
<PERIOD-END> JAN-2-1999
<CASH> 23,515
<SECURITIES> 0
<RECEIVABLES> 148,859
<ALLOWANCES> 7,782
<INVENTORY> 166,377
<CURRENT-ASSETS> 415,318
<PP&E> 719,227
<DEPRECIATION> 154,703
<TOTAL-ASSETS> 1,655,780
<CURRENT-LIABILITIES> 510,186
<BONDS> 541,765
0
0
<COMMON> 841
<OTHER-SE> 328,460
<TOTAL-LIABILITY-AND-EQUITY> 1,655,780
<SALES> 2,226,480
<TOTAL-REVENUES> 2,226,480
<CGS> 938,896
<TOTAL-COSTS> 2,018,940
<OTHER-EXPENSES> 11,501
<LOSS-PROVISION> 20,148
<INTEREST-EXPENSE> 26,500
<INCOME-PRETAX> 169,539
<INCOME-TAX> 72,962
<INCOME-CONTINUING> 96,577
<DISCONTINUED> 0
<EXTRAORDINARY> (1,706)
<CHANGES> 0
<NET-INCOME> 94,871
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.08
</TABLE>
