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 1, 2000
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
$124,400,000 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 8, 2000, BASED UPON THE CLOSING
PRICE OF THE COMMON STOCK AS REPORTED ON THE NEW YORK STOCK EXCHANGE ON SUCH
DATE, WAS APPROXIMATELY $944,000,000.
NUMBER OF SHARES OF COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF THE CLOSE
OF BUSINESS ON MARCH 8, 2000: 83,795,717.
DOCUMENTS INCORPORATED BY REFERENCE:
PROXY STATEMENT TO BE FILED ON OR BEFORE APRIL 23, 2000 FOR THE ANNUAL
MEETING TO BE HELD ON MAY 23, 2000.................................. PART III
<PAGE>
FORM 10-K REPORT
TABLE OF CONTENTS
PAGE
----
PART I:
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 6
Item 3. Legal Proceedings................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders............... 7
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 Operations...................................... 10
Item 7a. Quantitative and Qualitative Disclosures About Market Risk........ 19
Item 8. Financial Statements and Supplementary Data....................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 20
PART III:
Item 10. Directors and Executive Officers of the Registrant................ 20
Item 11. Executive Compensation............................................ 20
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 20
Item 13. Certain Relationships and Related Transactions.................... 20
PART IV:
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 21
<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 2, 2000, 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, 1999, 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 annual net sales of $2.7 billion and a 25.4% 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 leading 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's 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%. During 1999, all remaining
shares owned by both Artal and Claremont were sold in the open market. On March
6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin"), for
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$252.4 million, in a business combination that will be accounted for as a
purchase. Austin is a leading producer and marketer of single serve baked
snacks, including cracker sandwiches and bite-sized crackers and cookies.
GENERAL BUSINESS DESCRIPTION
Keebler competes in the U.S. retail cookie and cracker industry, which in
1999 generated sales of approximately $8.0 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 82.9%
of 1999 sales in the cookie and cracker industry, with mass merchandisers (such
as Wal*Mart) and drug stores accounting for the balance. We believe that
non-supermarket channels of distribution are becoming increasingly important and
since 1998, annual three-channel (supermarkets, mass merchandisers and drug
stores) dollar sales of cookies and crackers have increased by an average of
4.3% per year. Since 1992, U.S. annual dollar supermarket sales of cookies and
crackers have increased by an average of 1.7% per year.
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,
Branded and Specialty. 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 are also the leading manufacturer of
retail branded ice cream cones in the U.S. 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.
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Keebler also 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 private
label cookies and crackers are shipped via common carrier directly to customer
warehouses.
With the acquisition of President, we acquired their franchised DSD
distribution system, which principally distributes products east of the
Mississippi River. This DSD distribution system, which primarily services both
supermarkets and certain non-supermarket channels, is comprised of independent
franchisees who purchase and resell certain 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.
Keebler has focused on new product introductions and line extensions within
our core product types, such as KEEBLER DOUBLE FUDGE AND CARAMEL cookies,
KEEBLER RAINBOW VANILLA WAFERS, KEEBLER WALNUT CHIPS DELUXE cookies, KEEBLER
CHIPS DELUXE SPRING RAINBOW cookies, CHIPS DELUXE RAINBOW USA cookies, KEEBLER
LEMON SUGAR WAFERS, CHEEZ-IT Grab Bag, CHEEZ-IT GET NUTTY snack mix, KEEBLER
SNAX STIX, KEEBLER WHEAT & CHEDDAR sandwich crackers and KEEBLER ELF GRAHAMS. We
have also introduced resealable stand-up packages for CHEEZ-IT snack mix and
FAMOUS AMOS cookies. In order to generate growth in non-supermarket channels, we
have also expanded our use of snack size packaging to include more products.
The integration of Sunshine and President into Keebler's operations allowed
us to achieve efficiencies in administration, purchasing, production, marketing,
sales and distribution. In 1999, we began distributing FAMOUS AMOS and MURRAY
SUGAR FREE cookies through the Keebler DSD distribution system to areas outside
the reach of President's franchised DSD distribution system. This incremental
distribution enabled us to achieve higher utilization of existing capacity and
allowed us to achieve national distribution and recognition of both of these
brands. The sales and distribution of Sunshine retail branded products have been
incorporated into our DSD distribution system which previously 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 and
holidays 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, custom-baked products and
pie crusts 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 the U.S.A. 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 the U.S.A.
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 eleven people is employed, in addition to independent
brokers, which market to U.S. Girl Scout Councils.
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We also manufacture a variety of custom-baked products for other marketers
of branded food products including: Kellogg POP TARTS and 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.
Keebler is also the leading manufacturer of preformed retail branded pie
crusts, which are sold under the KEEBLER READY CRUST brand name. We use a
warehouse sales and distribution system to sell and distribute KEEBLER READY
CRUST pie crusts. We also import and distribute CARR'S crackers in the U.S.
under an exclusive long-term licensing and distribution agreement with United
Biscuits (Holdings) Plc ("United Biscuits"). CARR'S crackers are the
best-selling specialty crackers in the U.S. CARR'S crackers are sold through a
network of independent specialty distributors.
Our net sales, net income and cash flow are higher in the first quarter than
any other fiscal quarter because the first quarter is comprised of sixteen
weeks, compared to the other quarters which are comprised of only twelve weeks,
and substantially all sales of Girl Scout cookies occur in that quarter. We
expect this pattern to continue.
COMPETITION
The U.S. branded cookie and cracker industry is led by Keebler and Nabisco,
Inc. ("Nabisco"), which together account for 59.9% 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 25.4% share of the retail cookie and cracker market, while Nabisco has
a 34.5% 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 1999 accounted for 30.4% of our net sales. No
single customer accounted for more than 5.0% of net sales.
RAW AND PACKAGING 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 products. Raw 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, DROXIES, FAMOUS AMOS, FUDGE SHOPPE,
HI-HO, HYDROX, SUNSHINE KRISPY, MUNCH'EMS, MURRAY, OLDE NEW ENGLAND, READY
CRUST,
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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.
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 11,600 persons, of which approximately 5,400 are
represented by unions. We believe relations with our employees to be good.
EXECUTIVE OFFICERS OF KEEBLER
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------- --- -----------------------------------------------------------
<S> <C> <C>
Robert P. Crozer 53 Chairman of the Board and Director
Sam K. Reed 53 Chief Executive Officer, President and Director
E. Nichol McCully 45 Chief Financial Officer and Senior Vice President - Finance
David B. Vermylen 49 President - Keebler Brands
Jack M. Lotker 56 President - Specialty Products
James T. Willard 59 Senior Vice President - Operations
Thomas E. O'Neill 45 Senior Vice President, Secretary and General Counsel
James T. Spear 45 Vice President - Finance and Corporate Controller
</TABLE>
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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. Mr. Crozer has twenty-six years of experience in the snack
and baking industries.
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-six 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.
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 twelve 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.
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. He has twenty-five 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.
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-five years, most recently at Homeland Stores of Oklahoma
from 1988 to 1995.
JAMES T. WILLARD. Mr. Willard has been Senior Vice President-Operations of
Keebler since July 1996. Mr. Willard has thirty-five years experience in the
food industry. Prior to joining Keebler, Mr. Willard was Senior Vice President
at Nabisco Biscuit Co. from 1993 to 1996.
THOMAS E. O'NEILL. Mr. O'Neill has been Senior Vice President, Secretary and
General Counsel of Keebler since February 2000 and Vice President, Secretary and
General Counsel since December 1996. Mr. O'Neill has spent more than fourteen
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.
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.
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 fifteen manufacturing facilities in the U.S. of which thirteen
are owned and two are leased. The manufacturing facilities are located in
Athens, Georgia; Augusta, Georgia; Charlotte, North Carolina; Chicago, Illinois;
Cincinnati, Ohio; Cleveland, Tennessee; Columbus, Georgia; Denver, Colorado; Des
Plaines, Illinois; Florence, Kentucky; Grand Rapids, Michigan; Kansas City,
Kansas; Louisville, Kentucky; Macon, Georgia and Marietta, Oklahoma. 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 Sayreville, New Jersey that is
currently held for sale. We also lease one manufacturing facility located in
Lake Bluff, Illinois, which is anticipated to cease operations during the first
quarter of 2000. As a result of capital expenditures made over the past decade,
we believe the manufacturing facilities are modern and efficient. We also
believe manufacturing capacity is sufficient to meet foreseeable needs.
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Distribution facilities consist of fifteen shipping centers attached to the
manufacturing facilities, nine stand-alone shipping centers (two owned and seven
leased, of which two are idle) and sixty-three distribution centers (ten owned
and fifty-three leased) throughout the U.S. Of the sixty-three distribution
centers, eleven are subleased. We also lease one hundred warehouses (of which
one is idle) and twenty depots (of which one is idle) that are located
throughout the U.S. and are utilized by the sales force in the distribution of
our products. We believe there is sufficient distribution capacity to meet
foreseeable needs.
In addition to manufacturing and distribution facilities, we own two office
buildings and lease 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.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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 1999
and 1998 are as shown below:
<TABLE>
<CAPTION>
Market Price Per Share
-------------------------------------------------------
1999 1998
-------------------------- ---------------------------
High Low High Low
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Quarter 1................. $ 40.50 $ 30.25 $ 31.75 $ 25.88
Quarter 2................. $ 34.75 $ 26.75 $ 30.13 $ 24.69
Quarter 3................. $ 31.75 $ 28.00 $ 29.00 $ 23.88
Quarter 4................. $ 32.38 $ 25.69 $ 37.81 $ 26.19
</TABLE>
HOLDERS
The approximate number of holders of record of common stock as of March 8,
2000 was 484. 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 1999 or 1998.
Historically, we have not paid dividends on our common stock; however, an
initial quarterly dividend of $0.1125 per common share was declared on February
23, 2000, payable on March 22, 2000, to stockholders of record on March 8, 2000.
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
years ended January 1, 2000, January 2, 1999 and January 3, 1998, have been
derived from, and should be read in conjunction with the historical consolidated
financial statements of Keebler, including the respective notes thereto,
included elsewhere. The selected historical financial data presented below as of
and for the forty-eight weeks ended December 28, 1996, the four weeks ended
January 26, 1996 and the fiscal year ended December 30, 1995, have been derived
from the consolidated financial statements of Keebler and UBIUS, 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 Year Ended
January 1, January 2, January 3, December 28,|| January 26, December 30,
2000 1999 (a) 1998 1996 (b)|| 1996 1995
------------ ------------ ------------ ------------||------------ ------------
<S> <C> <C> <C> <C> ||<C> <C>
(In Millions Except Per Share Data) || (In Millions)
OPERATING DATA: ||
Net sales............................... $ 2,667.8 $ 2,226.5 $ 2,065.2 $ 1,645.5 || $ 101.7 $ 1,578.6
Gross profit............................ 1,517.2 1,287.6 1,177.2 871.3 || 46.8 831.8
Restructuring and impairment charge..... 66.3 - - - || - -
Loss on impairment of Salty Snacks ||
business.............................. - - - - || - 86.5
Income (loss) from continuing operations 197.6 196.1 141.4 70.1 || (25.5) (137.9)
Income tax expense (benefit)............ 73.2 73.0 45.2 14.0 || - (0.5)
Extraordinary item: ||
Loss on early extinguishment of debt, ||
net of tax.......................... - 1.7 5.4 1.9 || - -
Net income (loss)....................... $ 88.2 $ 94.9 $ 57.0 $ 15.8 || $ (6.5) $ (158.3)
||
Diluted net income per share: ||
Income from continuing operations ||
before extraordinary item........... $ 1.01 $ 1.10 $ 0.77 $ 0.23 ||
Extraordinary item.................... - 0.02 0.07 0.02 ||
------------ ------------ ------------ ------------||
Net income............................ $ 1.01 $ 1.08 $ 0.70 $ 0.21 ||
============ ============ ============ ============||
||
Weighted Average Shares Outstanding..... 87.6 87.5 80.6 76.1 ||
============ ============ ============ ============||
||
OTHER DATA: ||
EBITDA, as adjusted (c)................. $ 348.0 $ 265.2 $ 202.1 $ 119.6 || $ (23.5) $ (93.3)
Depreciation and amortization (excluding ||
items related to discontinued 84.1 69.1 60.7 49.5 || 2.0 44.6
operations)........................... ||
Capital expenditures (excluding ||
expenditures related to discontinued 100.7 66.8 48.4 29.4 || 3.2 54.2
operations)........................... ||
||
CASH FLOW DATA: ||
Cash Provided from (Used by) ||
Operating activities................. $ 197.2 $ 144.5 $ 219.7 $ 61.3 || $ (0.4) $ (61.4)
Investing activities................. (96.8) (510.7) (41.5) (130.1)|| 65.2 (52.6)
Financing activities................. (103.2) 362.5 (163.0) 78.7 || (65.7) 104.4
------------ ------------ ------------ ------------||------------ ------------
(Decrease) increase in cash and cash $ (2.8) $ (3.7) $ 15.2 $ 9.9 || $ (0.9) $ (9.6)
equivalents.......................... ============ ============ ============ ============||============ ============
- -----------------------------------------------------------------
(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.
(c) EBITDA, as adjusted, is defined as income (loss) from continuing operations before interest, taxes, depreciation, amortization
and restructuring and impairment charges. EBITDA, as adjusted, is presented as additional information because we believe it to
be a useful indicator of a company's ability to meet debt service and capital expenditure requirements. It is not, however,
intended as an alternative measure of operating results or cash flow from operations, as determined in accordance with
generally accepted accounting principles.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Keebler Foods Company || UBIUS
---------------------------------------------------||-------------------------
As of || As of
---------------------------------------------------||-------------------------
January 1, January 2, January 3, December 28,|| January 26, December 30,
2000 1999 1998 1996|| 1996 1995
------------ ------------ ------------ ------------||------------ ------------
<S> <C> <C> <C> <C> ||<C> <C>
(In Millions) || (In Millions)
BALANCE SHEET DATA: ||
Cash and cash equivalents............... $ 20.7 $ 23.5 $ 27.2 $ 12.0 || $ 2.1 $ 3.0
Total assets............................ 1,528.2 1,655.8 1,042.9 1,102.1 || 849.1 926.9
Due to affiliate........................ - - - - || 105.0 108.0
Total debt (including capital leases)... 456.4 654.5 298.8 457.9 || 371.4 437.6
Shareholders' equity.................... 409.3 329.3 222.0 165.1 || 45.3 51.8
</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 1, 2000, JANUARY 2, 1999 AND JANUARY 3,
1998. 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 we may not be
successful in protecting our business from price increases in the future. In
addition to the foregoing factors, our cost of sales is 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.
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 1999 and
1998 fiscal years consisted of fifty-two weeks and the 1997 fiscal year
consisted of fifty-three weeks.
Keebler's operating results for the year ended January 1, 2000, include a
$66.3 million pre-tax restructuring and impairment charge resulting from a
decision to close our Sayreville, New Jersey, manufacturing facility due to
excess capacity within the Company's manufacturing network. See additional
disclosure regarding this charge under the caption RESTRUCTURING AND IMPAIRMENT
CHARGE in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
10
<PAGE>
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,
whereas the subsequent year ended January 1, 2000, includes the operating
results of President for the entire year.
RESULTS OF OPERATIONS
Keebler's results of operations, expressed as a percentage of net sales, for
the last three years ended January 1, 2000, January 2, 1999 and January 3, 1998
are set forth below:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------------
January 1, 2000 January 2, 1999 January 3, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
NET SALES......................................... 100.0% 100.0% 100.0%
Cost of sales..................................... 43.1 42.2 43.0
Selling, marketing and administrative expenses.... 46.0 48.5 49.7
Restructuring and impairment charge............... 2.5 - -
INCOME FROM OPERATIONS............................ 7.4 8.8 6.8
Interest Expense, Net............................. 1.4 1.2 1.6
Loss on early extinguishment of debt, net of tax.. - - 0.3
NET INCOME........................................ 3.3% 4.3% 2.7%
</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
income from operations.
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, as well as to private label retailers.
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------------------
January 1, 2000 January 2, 1999 January 3, 1998
------------------------- ------------------------- -------------------------
($ IN MILLIONS) $ % $ % $ %
--------------- --------- --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 2,099.3 $ 1,798.3 $ 1,646.6
PROFIT CONTRIBUTION $ 339.8 16.2% $ 277.8 15.4% $ 223.4 13.6%
</TABLE>
Net sales in the Branded segment grew 16.7% in 1999 to $2,099.3 million
versus $1,798.3 million in 1998. The acquisition of President contributed $276.2
million or 13.2% to total net revenues in 1999, compared to fourteen weeks
totaling just 4.4% of overall net sales in 1998. Volume gains of 6.0% in the
Keebler core business, which exclude sales attributed to the President
acquisition, together with the national distribution of FAMOUS AMOS and MURRAY
SUGAR FREE cookies, significantly contributed to the top-line growth. New
products introduced under our KEEBLER and CHEEZ-IT brands during 1999 included
KEEBLER DOUBLE FUDGE AND CARAMEL cookies, KEEBLER RAINBOW VANILLA WAFERS and
KEEBLER WALNUT CHIPS DELUXE cookies. Growth in the CHEEZ-IT brand was realized
through the introduction of CHEEZ-IT HOT & SPICY and CHEEZ-IT GET NUTTY snack
mix. Multiple variations of our single serve snack size products, both in new
products and the CHEEZ-IT brand, also drove the sales increases. Sales growth
also benefited from price increases taken in the Branded segment earlier-in-the-
year. Partially offsetting the favorable revenue growth was a shift in the sales
mix in mass merchandisers away from frequent, low margin promotional activities,
to a more profitable, consistent distribution focus. Net sales in 1998 increased
9.2% to $1,798.3 million as compared to $1,646.6 million in 1997, with the
acquisition of President contributing $78.9 million in incremental revenue.
Adjusting to an equal number of selling days in 1997 and before including the
acquisition growth in 1998,
11
<PAGE>
branded revenues grew 6.0% 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. 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.
Profit contribution for the Branded segment was $339.8 million and $277.8
million for the years ended January 1, 2000 and January 2, 1999, respectively.
The 1999 profit contribution surpassed the prior year mainly due to a higher
gross profit on Keebler core products, incremental volume associated with a full
year of sales of President products and several cost reduction programs designed
to improve efficiencies and reduce distribution costs. The gross profit on
Keebler core products increased 1.2 percentage points in 1999, achieving 60.0%,
as a percentage of net sales. The Branded segment's 1998 profit contribution was
$54.4 million above the prior year. After removing the impact of President,
profit contribution was 15.8% of net sales, which represented a 2.2 percentage
point increase over 1997. A higher gross profit and lower distribution expenses
drove the improvement. The benefit noted in gross profit was attributed to
improved sales mix, selected price increases and continued productivity gains in
our bakeries. Lower distribution expenses were due to more fully utilizing
available trailer capacity and productivity and cost savings programs designed
to minimize inventory losses.
SPECIALTY SEGMENT
The Specialty segment produces cookies and crackers for the foodservice
market, custom-baked products for other marketers of branded food products,
including sales of cookies to the Girl Scouts of the U.S.A., and preformed pie
crusts. This segment also imports and distributes CARR'S crackers in the U.S.
under an exclusive long-term licensing and distribution agreement with United
Biscuits.
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------------------
January 1, 2000 January 2, 1999 January 3, 1998
------------------------- ------------------------- -------------------------
($ IN MILLIONS) $ % $ % $ %
--------------- --------- --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 568.5 $ 428.1 $ 418.6
PROFIT CONTRIBUTION $ 119.7 21.1% $ 90.7 21.2% $ 83.8 20.0%
</TABLE>
The Specialty segment recorded revenues of $568.5 million in 1999, $140.4
million higher than 1998. The inclusion of President for a full year contributed
$147.1 million to net sales, which was $130.9 million greater than 1998. Revenue
growth of 2.3% achieved in the core Specialty business, which excludes sales
attributed to the President acquisition, was driven by volume increases of
custom-baked products for other marketers of branded food products.
Additionally, sales in the foodservice market were favorably impacted by volume
gains, which occurred principally in the last half of the year, combined with
the earlier-in-the-year benefit of prior year price increases. These higher
sales were partially offset by reduced sales of preformed pie crusts, due to a
soft pie crust market. Before including the $16.2 million of sales attributed to
President in 1998, and after adjusting 1997 to an equal number of selling days,
1998 revenues finished $1.8 million below 1997. The decrease in net sales was
principally associated with lower margin products that were either subsequently
discontinued or re-positioned at higher price levels.
Profit contribution in the Specialty segment increased $29.0 million to
$119.7 million in 1999. Excluding the impact of President, the profit
contribution of 20.1%, as a percentage of net sales, declined $4.1 million due
to a change in the sales mix, which was heavily weighted toward custom-baked
products, that carry a higher cost of sales. The benefits from cost reduction
programs were not enough to offset the effects of increased production of lower
margin products and higher marketing expenses. Excluding President, profit
contribution was 21.5% of net sales in 1998, compared to 20.0% in 1997. The
improvement in profit contribution was primarily achieved by a
12
<PAGE>
more profitable sales mix, selected price increases and productivity gains
received through bakery automation projects and supply chain initiatives in
distribution and inventory management.
COST OF SALES
Cost of sales was $1,150.6 million, or 43.1% of net sales in 1999, compared
to $938.9 million, or 42.2% of net sales in 1998. The increase, both in dollars
and as a percentage of net sales, was primarily caused by the inclusion of
President for a full year compared to only fourteen weeks in 1998. Excluding the
impact of President, cost of sales as a percentage of net sales, was 40.0%,
41.2% and 43.0% in 1999, 1998 and 1997, respectively. The improvement in
year-over-year comparisons resulted from the benefits received on productivity
and cost savings programs designed to improve efficiency at our manufacturing
facilities, as well as from other cost reduction initiatives. Cost of sales was
also favorably impacted by lower raw and packaging material costs in each
respective year. In 1999, the benefits generated by these lower costs were
partially offset by a change in the production mix to include more products
sourced outside of the Keebler manufacturing network, which generally carry a
higher cost than internally produced products.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES
Selling, marketing and administrative expenses of $1,227.5 million in 1999,
were $147.4 million greater than 1998, but 2.5 percentage points favorable, as a
percentage of net sales. In addition to the inclusion of President expenses for
a full year in 1999, as compared to just fourteen weeks in 1998, higher selling,
marketing and administrative expenses were also experienced as a result of core
Keebler volume growth. After removing the expenses contributed by President,
selling, marketing and administrative expenses, as a percentage of net sales,
were 49.3% in 1999, compared to 49.4% in 1998. Total marketing expenses
increased as we continued our focus on building brand equity and incremental
trade promotion programs were instituted in support of the national distribution
of FAMOUS AMOS and MURRAY SUGAR FREE cookies. Despite higher sales levels
in 1999, more efficient marketing programs resulted in a lower rate of marketing
expenses, as a percentage of net sales. In addition, increased administrative
expenses were incurred in 1999, due principally to higher compensation costs
resulting from growth in the core Keebler business. Net increases in selling and
distribution expenses resulting from volume gains were lower-than-expected, as
savings were achieved through a more efficient selling and distribution network.
In 1998, selling, marketing and administrative expenses were $53.8 million
higher than 1997, however, 1.2 percentage points better as a percentage of net
sales. After removing $27.2 million of expenses 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.
OTHER
Other expense was $25.8 million in 1999, compared to $11.5 million in 1998
and $9.5 million in 1997. The increases for both 1999 and 1998 were driven by
incremental amortization expense resulting from the addition of over $400
million of intangible assets from the President acquisition in the fourth
quarter of 1998. Also contributing to the higher current year spending, were
various fees and costs of $5.3 million associated with the selling of accounts
receivable under the Receivables Purchase Agreement ("Agreement"). These higher
1999 costs were partially offset by $2.8 million of income recorded to recognize
the mark-to-market of an interest rate swap that no longer served as a hedge in
1999.
RESTRUCTURING AND IMPAIRMENT CHARGE
As part of the continuing process of integrating the business of President
into our operations, on May 14, 1999, Keebler announced the decision to close
its manufacturing facility in Sayreville, New Jersey due to excess capacity
within the Company's 15-plant manufacturing network. As a result, a pre-tax
restructuring and impairment charge to operating income of $66.3 million was
recorded in 1999. The restructuring and impairment charge included $20.2 million
for cash costs related to severance and other exit costs from the Sayreville
facility. The remaining $46.1 million was non-cash charges for asset impairments
related to the Sayreville closing, including write-downs
13
<PAGE>
of property, plant and equipment at Sayreville and equipment at other locations,
and a proportionate reduction of goodwill acquired in the acquisition of
Sunshine in June 1996. The impairment charge for equipment at other locations
resulted from a combination of factors. The acquisition of President brought a
new capability to Keebler's production network. The President baking process is
principally based on shorter, more flexible ovens compared to the larger ovens
common to Keebler and Sunshine bakeries. This new capability resulted in a
comprehensive analysis of system-wide production needs. The acquisition and
resulting exit plans of Keebler, Sunshine and President, when considered
together, resulted in redundant productive equipment, which ultimately became
idle.
The original $69.2 million charge recorded in the second quarter of 1999
was reduced by a fourth quarter adjustment of $2.9 million. The adjustment was
for costs related to severance and other exit costs from the facility due to
lower-than-expected severance costs and an earlier-than-expected disposal of the
facility. Of the total $66.3 million charge, approximately $65.6 million was
recorded as plant and facility closing costs and severance, with the remaining
$0.7 million recorded as other liabilities and accruals. Approximately 650
employees were expected to be terminated as a result of the closing of the
Sayreville facility, of which approximately 600 employees were represented by
unions. At January 1, 2000, approximately 595 employees under union contract and
approximately 45 employees not under union contract have been terminated. At
January 1, 2000, $6.0 million remained for plant and facility closing costs and
severance accruals and $0.3 million for other liabilities and accruals.
Substantially all of the remaining severance liability is expected to be spent
in 2000, as nearly all employees have been terminated. Production at the
Sayreville, New Jersey manufacturing facility ceased on September 3, 1999.
Spending for exit costs associated with the closure of the facility will
continue into the year 2000 as the facility is prepared for sale. Spending for
exit costs related to the facility closure is expected to continue for eighteen
months or until the facility is disposed of, whichever occurs earlier. The
amount of suspended depreciation and amortization that would have been
recognized for the year ended January 1, 2000, if the impairments had not been
recognized, was approximately $3.7 million, with $5.6 million of annualized
savings anticipated in 2000.
INTEREST EXPENSE, NET
Net interest expense was $36.2 million in 1999, $26.5 million in 1998 and
$33.8 million in 1997. The increase in interest expense in 1999 was primarily
due to the overall higher average debt balance outstanding as a result of the
President acquisition late in 1998. The debt incurred from the President
acquisition, less quarterly principal payments, was outstanding for the full
year as compared to only three months in 1998. The President acquisition also
caused a reduction in the average invested cash balance in 1999, which resulted
in lower interest income as compared to 1998. Interest expense declined in 1998
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. Additionally, each year has benefited from favorable interest
rates. The 1999 weighted average interest rate was 0.54 percentage points lower
than the previous year and the 1998 weighted average interest rate was 0.62
percentage points lower than 1997.
INCOME TAX EXPENSE
Income taxes were provided at an effective tax rate of 45.3% in 1999, 43% in
1998 and 42% in 1997. 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 increase in nondeductible expenses, mainly a full year amortization period
for the President intangibles and the goodwill impairment related to the closure
of the Sayreville, New Jersey facility, was the principal reason for the 2.3
percentage point increase in the effective tax rate in 1999, as compared to
1998. 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. In
1999, the previously established valuation allowance on deferred tax assets of
$84.4 million, was eliminated as part of effecting a change in the tax basis of
the assets and liabilities that resulted from the Keebler acquisition.
Previously, 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 would then be available to Keebler, but
were significantly restricted under current tax law. As such, we carried a
deferred tax valuation allowance of $84.4 million at January 2, 1999 and January
3, 1998 to fully reserve all net operating loss carryforwards due to the past
uncertainty of their realization. The ability of the
14
<PAGE>
predecessor company to use these net operating losses is now considered
unlikely; and therefore, their realization by Keebler was more likely than not.
In addition, we sought and successfully obtained permission from the Internal
Revenue Service to value the assets acquired and liabilities assumed in the
Keebler acquisition in accordance with Internal Revenue Code Section 338. In
conjunction with filing amended tax returns to effect the change in the tax
basis of the assets acquired and liabilities assumed, all net operating loss
carryforwards were utilized.
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 we also recorded an
extraordinary charge of $5.4 million, net of income taxes, with $3.8 million of
the charge related to the write-off of debt issuance costs associated with the
early retirement of term loans. The additional $1.6 million after-tax
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.
There were no extraordinary charges recorded in 1999.
NET INCOME
Net income for 1999 was $88.2 million, which when compared to 1998 net
income was $6.7 million lower. The decrease was primarily due to a $43.9 million
after-tax restructuring and impairment charge that was recorded in 1999.
Excluding the restructuring and impairment charge, net income of $132.1 million
in 1999 was up 39.2% over 1998. The improvement in net earnings, before
considering the restructuring and impairment charge, reflects growth due to the
inclusion of the President business for a full year, growth in the Keebler core
business and the benefits of productivity and cost savings programs. In 1998,
net income of $94.9 million was 66.5% higher than the prior year of $57.0
million. 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.
LIQUIDITY AND CAPITAL RESOURCES
A condensed cash flow statement of Keebler follows:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------
(IN MILLIONS) January 1, 2000 January 2, 1999 January 3, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH PROVIDED FROM (USED BY)
Operating activities............................. $ 197.2 $ 144.5 $ 219.7
Investing activities............................. (96.8) (510.7) (41.5)
Financing activities............................. (103.2) 362.5 (163.0)
--------------- --------------- ---------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... $ (2.8) $ (3.7) $ 15.2
=============== =============== ===============
</TABLE>
CASH FLOW FOR 1999
For the year ended January 1, 2000, operating activities provided $197.2
million of cash. Net earnings contributed $88.2 million to the growth. An
increase in trade accounts payable and other current liabilities of $9.8
million, along with higher income taxes payable of $12.8 million also
contributed to the positive cash flow. Higher trade accounts payable and current
liabilities were driven by increased purchases of production related inputs, as
well as from higher marketing accruals. Income taxes payable increased
principally due to the timing of income tax payments. Somewhat offsetting the
favorable cash flow position were higher levels of inventory. In addition, trade
accounts and notes receivable, before accounting for the securitization of
receivables, increased primarily from a shift in the timing of sales to later in
the year, as well as reduced cash collections resulting from the timing of our
year end date, which coincided with the bank's holiday schedule. Included in
operating activities was the restructuring and impairment charge recorded in the
second quarter of 1999, which included $46.1 million relating to the non-cash
write-down of impaired property, plant and equipment and intangible assets,
while the remaining portion of the charge related to cash costs.
15
<PAGE>
During 1999, investing activities used a total of $96.8 million. Spending on
capital projects of $100.7 million was principally for on-going enhancement,
capacity enrichments, automation expansion and numerous cost reduction programs
at various manufacturing and distribution locations. Additional funds were also
used for the implementation of new computer equipment at the President locations
to install and support the SAP R/3 management information system, as well as
year 2000 information technology compliance upgrades. Asset disposals, including
the sale of the Atlanta, Georgia manufacturing facility and an idle muffin line,
generated the majority of the $3.9 million proceeds.
Cash used by financing activities in 1999 totaled $103.2 million. The
primary uses of cash in the year were for long-term debt repayments to pay down
$85.0 million on the Revolving facility, repay the $75.0 million Bridge facility
and to make regularly scheduled principal payments of $38.1 million. Also, $21.4
million was used to repurchase common stock into treasury. These uses of cash
were partially offset by net cash proceeds of $103.0 million received from the
sale of accounts receivable under the Receivables Purchase Agreement. This
Agreement, which was initially entered into during the first quarter of the
year, allowed funds to be borrowed at a lower cost to the Company. Additionally,
the $10.0 million income tax benefit related to stock options exercised further
reduced the total financing uses of cash, as did the $3.2 million in cash
proceeds from the exercise of employee stock options during the year.
CASH FLOW FOR 1998 AND 1997
Operating activities provided $144.5 million of cash during 1998, a $75.2
million decrease from 1997. Net earnings of $94.9 million, together with a
deferral of additional income taxes, were the primary drivers of the positive
cash flow, while additional investments in accounts receivable and inventories
utilized a portion of the cash flow generated from operations. The addition of
President's trade accounts receivable subsequent to the acquisition was the
principal contributor to the higher trade accounts receivable balance. A build
in finished goods drove the additional investment in inventories in anticipation
of the upcoming Girl Scout cookie-selling season. Additionally, higher income
tax payments attributable to a $62.0 million increase in pre-tax income over
1997 also used incremental operating cash. Spending on plant and facility
closing costs and severance related to exit costs associated with recent
acquisitions, while continuing to decline from prior years, accounted for $5.4
million of cash used by operations. Exit cost spending associated with these
acquisitions includes noncancelable lease obligations, which are expected to
continue through 2006.
Cash used by investing activities was $510.7 million in 1998 compared to
$41.5 million in 1997. The increase in cash used by investing activities in 1998
was primarily attributable to the $444.8 million, net of cash acquired,
acquisition of President in September of that year. Capital spending increased
$18.4 million over 1997 to $66.8 million. New product modifications, updates and
enhancements of production facilities and progress towards the achievement of
near-term cost savings and efficiencies in the manufacturing, sales and
distribution process drove the increase in capital spending. At year end 1998,
Keebler held the idle Atlanta, Georgia manufacturing facility, a distribution
center in Kensington, Connecticut and a warehouse in Houston, Texas for sale,
and disposition of these facilities was expected to be completed before the end
of 1999.
In 1998, financing activities generated $362.5 million, which was $525.5
million greater than in 1997. The increase in 1998 mainly resulted from proceeds
of long-term debt borrowings under $825.0 million of available new debt
financing used to fund the acquisition of President. These cash sources were
partially offset by the pre-payment of the outstanding term note balance and a
$20.0 million repayment on the revolving facility. In 1997, however, financing
activities resulted in a net use of $163.0 million. 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 the 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. The increase in cash provided from financing activities in 1998 was
also due to the receipt of $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 were also exercised
during the year providing another $0.8 million, while cash totaling $8.6 million
was used to repurchase common stock into treasury under the stock repurchase
program.
16
<PAGE>
CAPITAL RESOURCES
In 1999, our capital resources were provided by the $700.0 million Credit
Facility that existed at the end of 1998. In September 1998, a change in our
credit agreements was needed to accommodate the additional cash required for the
acquisition of President. In order to consummate the acquisition, we entered
into the $700.0 million 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 Purchase Agreement on January 29, 1999. These new debt facilities
replaced the previously available $140.0 million revolving loan facility and an
existing term loan which were outstanding in 1998 until the time of the
President acquisition. Available borrowings under the revolving facility were
$350.0 million and $265.0 million in 1999 and 1998, respectively. Borrowings
under the $350.0 million revolving facility in 1999 were $85.0 million, which
were all repaid as of January 1, 2000, and in 1998 borrowings 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.
Capital expenditures for fiscal 2000 are expected to be approximately $85
million, down $15.7 million from 1999. The majority of capital spending in 2000
will be used for the continued improvement in automation to generate additional
productivity and cost savings. We anticipate that future capital expenditures
will be funded by cash provided from operations and will continue at a level
sufficient to support our strategies and operating needs.
Historically, we have not paid dividends. However, in the first quarter of
2000, Keebler's Board of Directors declared an initial quarterly dividend of
$0.1125 per common share. 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 1999 and 1998, we met all financial covenants in
each of our financing agreements. Total debt was $456.4 million and $654.5
million at January 1, 2000 and January 2, 1999, respectively. Current maturities
on the total debt outstanding were $37.3 million and $112.7 million at such
respective dates. Cash and cash equivalents on January 1, 2000 and January 2,
1999 were $20.7 million and $23.5 million, respectively. We believe that
available cash, as well as amounts available under our 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 ("FASB") 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 and 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. However, in June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment to FASB Statement No.
133." Citing concerns about companies' ability to both modify their information
systems for year 2000 readiness and become educated with the new derivatives and
hedging standard, the FASB has delayed the effective date on SFAS No. 133 for
one year, to fiscal years beginning after June 15, 2000. We have not yet
determined the impact SFAS No. 133 may have on the consolidated financial
statements.
SEASONALITY
Our net sales, net income and cash flow are affected by the timing of new
product introductions, promotional activities, price increases and seasonal
biases in the first quarter and second half of the year. The first quarter bias
results because substantially all sales of Girl Scout cookies occur in that
quarter. The bias in the second half of the year has been due to events and
holidays 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.
17
<PAGE>
SELF INSURANCE
We purchase insurance coverage for workers' 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 used 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 were at risk for possible computer application
miscalculations or systems failures causing disruptions in business operations.
These risks were commonly referred to as the "Y2K issues."
We performed a comprehensive review of our computer systems and
non-information systems to identify potential Y2K issues because we utilize
software and related technologies that were anticipated to be impacted by the
date change in the year 2000. Our SAP R/3 Enterprise Wide Information Systems
("SAP") and Manugistics software were developed/purchased as Y2K compliant.
Additionally, a complete simulation of the SAP production environment was
conducted in the second quarter of 1999 and the overall success revealed that
the risk factors for potential issues in the year 2000 were minimal for the SAP
environment. Our secondary information systems, which are not material to our
ability to forecast, manufacture or deliver product, were also corrected or
upgraded where needed. We completed our plan to test all business critical
systems before the end of the third quarter of 1999 and this testing did not
indicate any Y2K issues. Additionally, the results of a comprehensive
questionnaire sent to our significant vendors and suppliers indicated that they
all intended to be Y2K compliant prior to the end of 1999. We also developed a
contingency plan to address potential critical Y2K issues caused internally or
by a third party; however, this contingency plan was not needed.
We incurred costs of $2.9 million in 1999 for becoming Y2K compliant, which
were entirely funded by cash provided from operations and expensed as incurred.
This spending was exclusive of Y2K issues regarding the President acquisition.
Many of the Y2K risks at President were mitigated through our implementation of
the SAP and Manugistics software at President facilities in 1999; however,
additional spending of $0.1 million was incurred to correct and upgrade
President's secondary information systems in order to make them Y2K compliant.
As of the date of this filing, we have not experienced any Y2K failures with
our internal systems or equipment, nor have we detected any Y2K problems
affecting any third parties. We will continue to monitor our information
systems, facilities, equipment and relationships with third parties regarding
the Y2K issue. Although we believe our efforts to address Y2K issues have been
adequate, there can be no certainty that failures or problems related to Y2K may
not develop in the future. Also, we cannot guarantee that we will not experience
unanticipated consequences by undetected errors or defects in the technology
used in our internal systems or those of significant third parties. However, we
believe no such failure or problem is reasonably likely to materially disrupt
our business.
The above discussion of our efforts and expectations relating to Y2K
compliance is forward-looking based on our best estimates given information that
is currently available and is subject to change. 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:
18
<PAGE>
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;
o other statements that are not historical facts and
o Year 2000 issues.
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.
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 1, 2000, with a
notional amount of $334.0 million, would increase the net receivable to $9.7
million, while the impact of a ten percent decrease in market price would reduce
the net receivable to $6.0 million. The fair value of the interest rate swap
agreements at January 2, 1999, with an assumed ten percent increase in market
price and the 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. During 1999, an interest
rate swap that no longer served as a hedge, with a notional amount of $170.0
million, was recognized in income from operations with a marked-to-market fair
value of $2.8 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 $48.7 million
at January 1, 2000 would be impacted by $4.4 million. 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.
19
<PAGE>
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 2000 annual meeting.
Information regarding our Executive Officers can be found in Part I of this
Annual Report on Form 10-K on pages 5 and 6.
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 2000 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 2000 annual meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to Keebler's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2000 annual meeting.
20
<PAGE>
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-31.
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) Exhibits
See Exhibit Index at page i.
(c) Financial Statement Schedule
See Index to Financial Statements and Financial Statement Schedule on page
F-1.
21
<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 20, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 20, 2000.
<TABLE>
<CAPTION>
<S> <C>
/s/ SAM K. REED /s/ ROBERT P. CROZER
- ----------------------------------------------------------- ---------------------------------------------------------
Sam K. Reed Robert P. Crozer
President, Chief Executive Officer and Director Chairman of the Board
(Principal Executive Officer) (Director)
/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/ DR. MELVIN T. STITH
- ----------------------------------------------------------- ---------------------------------------------------------
Johnston C. Adams, Jr. Dr. Melvin T. Stith
(Director) (Director)
/s/ FRANKLIN L. BURKE /s/ C. MARTIN WOOD III
- ----------------------------------------------------------- ---------------------------------------------------------
Franklin L. Burke C. Martin Wood III
(Director) (Director)
/s/ G. ANTHONY CAMPBELL /s/ JIMMY M. WOODWARD
- ----------------------------------------------------------- ---------------------------------------------------------
G. Anthony Campbell Jimmy M. Woodward
(Director) (Director)
</TABLE>
22
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Keebler Foods Company and Subsidiaries
FINANCIAL STATEMENTS: PAGE
----
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets at January 1, 2000 and January 2, 1999...... F-3
Consolidated Statements of Operations for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998.................. F-5
Consolidated Statements of Shareholders' Equity for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998.................. F-6
Consolidated Statements of Cash Flows for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998.................. 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
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Keebler
Foods Company and Subsidiaries at January 1, 2000 and January 2, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 1, 2000, except note 18, as to
which the date is March 6, 2000
F-2
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
JANUARY 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,717 $ 23,515
Trade accounts and notes receivable, net 65,052 141,077
Inventories, net:
Raw materials 34,243 31,722
Package materials 13,907 13,081
Finished goods 126,954 120,550
Other 1,176 1,024
--------------- ---------------
176,280 166,377
Deferred income taxes 46,252 57,713
Other 27,278 26,636
--------------- ---------------
Total current assets 335,579 415,318
PROPERTY, PLANT AND EQUIPMENT, NET 553,031 564,524
GOODWILL, NET 370,188 391,449
TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 211,790 226,084
PREPAID PENSION 33,240 38,205
ASSETS HELD FOR SALE 6,662 2,972
OTHER ASSETS 17,693 17,228
--------------- ---------------
Total assets $ 1,528,183 $ 1,655,780
=============== ===============
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 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 37,283 $ 112,730
Trade accounts payable 147,862 143,572
Other liabilities and accruals 237,447 232,087
Income taxes payable 23,603 10,779
Plant and facility closing costs and severance 11,290 11,018
--------------- ---------------
Total current liabilities 457,485 510,186
LONG-TERM DEBT 419,160 541,765
OTHER LIABILITIES:
Deferred income taxes 124,389 147,098
Postretirement/postemployment obligations 64,383 63,754
Plant and facility closing costs and severance 12,062 15,563
Deferred compensation 24,581 19,368
Other 16,808 28,745
--------------- ---------------
Total other liabilities 242,223 274,528
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
84,655,874 and 84,125,164 shares issued, respectively) 846 841
Additional paid-in capital 182,686 169,532
Retained earnings 255,813 167,608
Treasury stock (30,030) (8,680)
--------------- ---------------
Total shareholders' equity 409,315 329,301
--------------- ---------------
Total liabilities and shareholders' equity $ 1,528,183 $ 1,655,780
=============== ===============
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>
Years Ended
----------------------------------------------------------------
JANUARY 1, 2000 January 2, 1999 January 3, 1998
-------------------- -------------------- --------------------
<S> <C> <C> <C>
NET SALES $ 2,667,771 $ 2,226,480 $ 2,065,184
COSTS AND EXPENSES:
Cost of sales 1,150,553 938,896 888,031
Selling, marketing and administrative expenses 1,227,481 1,080,044 1,026,245
Other 25,834 11,501 9,511
Restructuring and impairment charge 66,349 - -
-------------------- -------------------- --------------------
INCOME FROM OPERATIONS 197,554 196,039 141,397
Interest (income) (1,700) (3,763) (1,191)
Interest expense 37,874 30,263 35,038
-------------------- -------------------- --------------------
INTEREST EXPENSE, NET 36,174 26,500 33,847
-------------------- -------------------- --------------------
INCOME BEFORE INCOME TAX EXPENSE 161,380 169,539 107,550
Income tax expense 73,175 72,962 45,169
-------------------- -------------------- --------------------
INCOME BEFORE EXTRAORDINARY ITEM 88,205 96,577 62,381
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of tax - 1,706 5,396
-------------------- -------------------- --------------------
NET INCOME $ 88,205 $ 94,871 $ 56,985
==================== ==================== ====================
BASIC NET INCOME PER SHARE:
Income before extraordinary item $ 1.05 $ 1.16 $ 0.80
Extraordinary item - 0.02 0.07
-------------------- -------------------- --------------------
Net income $ 1.05 $ 1.14 $ 0.73
==================== ==================== ====================
WEIGHTED AVERAGE SHARES OUTSTANDING 83,759 83,254 77,604
==================== ==================== ====================
DILUTED NET INCOME PER SHARE:
Income before extraordinary item $ 1.01 $ 1.10 $ 0.77
Extraordinary item - 0.02 0.07
-------------------- -------------------- --------------------
Net income $ 1.01 $ 1.08 $ 0.70
==================== ==================== ====================
WEIGHTED AVERAGE SHARES OUTSTANDING 87,645 87,486 80,562
==================== ==================== ====================
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
(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 28, 1996 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 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 84,125 841 169,532 167,608 (335) (8,680) 329,301
Purchase of treasury shares - - - - (646) (21,350) (21,350)
Exercise of employee stock options 531 5 13,154 - - - 13,159
Net income - - - 88,205 - - 88,205
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JANUARY 1, 2000 84,656 $ 846 $ 182,686 $ 255,813 (981) $ (30,030) $ 409,315
=========== =========== =========== =========== =========== =========== ===========
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>
Years Ended
--------------------------------------------------------
JANUARY 1, 2000 January 2, 1999 January 3, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES
Net income $ 88,205 $ 94,871 $ 56,985
Adjustments to reconcile net income to cash from
operating activities:
Depreciation and amortization 84,125 69,125 60,708
Deferred income taxes (11,248) 10,075 18,548
Accretion on Seller Note - - 2,376
Loss on early extinguishment of debt, net of tax - 1,706 3,761
Loss (gain) on sale of property, plant and equipment 1,799 424 (358)
Restructuring and impairment charge 46,071 - -
Other - 1,460 -
Changes in assets and liabilities:
Trade accounts and notes receivable, net (26,975) (5,082) 38,187
Inventories, net (9,903) (13,830) 203
Income taxes payable 12,824 (4,556) 16,113
Other current assets (642) (2,845) (966)
Trade accounts payable and other current liabilities 9,840 869 36,806
Plant and facility closing costs and severance (3,641) (5,373) (13,715)
Other, net 6,771 (2,319) 1,044
---------------- ---------------- ----------------
Cash provided from operating activities 197,226 144,525 219,692
CASH FLOWS USED BY INVESTING ACTIVITIES
Capital expenditures (100,685) (66,798) (48,429)
Proceeds from property disposals 3,904 917 6,950
Purchase of President International, Inc., net of cash acquired - (444,818) -
---------------- ---------------- ----------------
Cash used by investing activities (96,781) (510,699) (41,479)
CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES
Purchase of treasury stock (21,350) (8,605) (75)
Exercise of options and warrant 3,203 20,577 -
Proceeds from receivables securitization 103,000 - -
Deferred debt issue costs - (1,845) (1,344)
Long-term debt borrowings - 425,000 109,750
Long-term debt repayments (113,052) (157,626) (271,310)
Revolving facility, net (85,000) 85,000 -
Income tax benefit related to stock options exercised 9,956 - -
---------------- ---------------- ----------------
Cash (used by) provided from financing activities (103,243) 362,501 (162,979)
---------------- ---------------- ----------------
(Decrease) increase in cash and cash equivalents (2,798) (3,673) 15,234
Cash and cash equivalents at beginning of period 23,515 27,188 11,954
---------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 20,717 $ 23,515 $ 27,188
================ ================ ================
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
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
BUSINESS AND OWNERSHIP
Keebler Foods Company ("the Company" or "Keebler"), a manufacturer and
distributor of food products, was acquired by INFLO Holdings Corporation
("INFLO") on January 26, 1996. INFLO was owned by Artal Luxembourg S. A.
("Artal"), a private investment company, Flowers Industries, Inc. ("Flowers"), a
New York Stock Exchange-listed company, Bermore, Limited ("Bermore"), a
privately held corporation and the parent of G.F. Industries, Inc. ("GFI") and
certain members of 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. 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%. 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 acquisition of Sunshine Biscuits, Inc. ("Sunshine"). 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. 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. 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%. During
1999, all remaining shares owned by both Artal and Claremont were sold in the
open market. Keebler is comprised of primarily the following wholly-owned
subsidiaries: Keebler Company, Bake-Line Products, Inc. ("Bake-Line"), Sunshine,
President International, Inc. ("President"), Keebler Leasing Corp., Keebler
Funding Corporation and Johnston's Ready Crust Company. 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. Additional operating subsidiaries of Keebler
Company include Elfin Equity Company, L.L.C., Hollow Tree Company, L.L.C.,
Hollow Tree Financial Company, L.L.C. and Godfrey Transport, Inc.
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 1999 and
1998 fiscal years consisted of fifty-two weeks and the 1997 fiscal year
consisted of fifty-three weeks.
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, 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
(IN THOUSANDS, EXCEPT PER SHARE DATA) For the Years Ended
------------------------------------
January 2, 1999 January 3, 1998
----------------- -----------------
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. RESTRUCTURING AND IMPAIRMENT CHARGE
As part of the continuing process of integrating the business of President
into the Company's operations, on May 14, 1999, Keebler announced the decision
to close its manufacturing facility in Sayreville, New Jersey due to excess
capacity within the Company's 15-plant manufacturing network. As a result, a
pre-tax restructuring and impairment charge to operating income of $66.3 million
was recorded in 1999. The restructuring and impairment charge included $20.2
million for cash costs related to severance and other exit costs from the
Sayreville facility. The remaining $46.1 million was non-cash charges for asset
impairments related to the Sayreville closing, including write-downs of
property, plant and equipment at Sayreville and equipment at other locations,
and a proportionate reduction of goodwill acquired in the acquisition of
Sunshine in June 1996. The impairment charge for equipment at other locations
resulted from a combination of factors. The acquisition of President brought a
new capability to Keebler's production network. The President baking process is
principally based on shorter, more flexible ovens compared to the larger ovens
common to Keebler and Sunshine bakeries. This new capability resulted in a
comprehensive analysis of system-wide production needs. The acquisition and
resulting exit plans of Keebler, Sunshine and President, when considered
together, resulted in redundant productive equipment, which ultimately became
idle.
F-9
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTRUCTURING AND IMPAIRMENT CHARGE (CONTINUED)
The original $69.2 million charge recorded in the second quarter of 1999
was reduced by a fourth quarter adjustment of $2.9 million. The adjustment was
for costs related to severance and other exit costs from the facility due to
lower-than-expected severance costs and an earlier-than-expected disposal of the
facility. Of the total $66.3 million charge, approximately $65.6 million was
recorded as plant and facility closing costs and severance, with the remaining
$0.7 million recorded as other liabilities and accruals. Approximately 650
employees were expected to be terminated as a result of the closing of the
Sayreville facility, of which approximately 600 employees were represented by
unions. At January 1, 2000, approximately 595 employees under union contract and
approximately 45 employees not under union contract had been terminated.
The following table sets forth the activity related to the liabilities
accrued in conjunction with the restructuring and impairment charge:
<TABLE>
<CAPTION>
January 2, JANUARY 1,
(IN THOUSANDS) 1999 Provision Spending Adjustment 2000
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Severance............... $ - $ 15,564 $ (12,442) $ (1,085) $ 2,037
Facility closure........ - 4,570 (438) (1,565) 2,567
Fixed asset impairment.. - 37,824 (37,824) - -
Goodwill impairment..... - 7,600 (7,600) - -
Other................... - 3,650 (1,724) (209) 1,717
-------------- -------------- -------------- -------------- --------------
Total............... $ - $ 69,208 $ (60,028) $ (2,859) $ 6,321
============== ============== ============== ============== ==============
</TABLE>
At January 1, 2000, $6.0 million remained for plant and facility closing
costs and severance accruals and $0.3 million for other liabilities and
accruals. Substantially all of the remaining severance liability is expected to
be spent in 2000, as nearly all employees have been terminated. Production at
the Sayreville, New Jersey manufacturing facility ceased on September 3, 1999.
Spending for exit costs associated with the closure of the facility will
continue into the year 2000 as the facility is prepared for sale. Spending for
exit costs related to the facility closure is expected to continue for eighteen
months or until the facility is disposed of, whichever occurs earlier. The
majority of the remaining reserves are cash costs.
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 $8.6 million as of January 1, 2000 and $7.8 million as of
January 2, 1999.
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 both January
1, 2000 and at January 2, 1999. 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 1, 2000 or January 2, 1999 to state the inventory on a LIFO
basis.
F-10
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At January 1, 2000 and January 2, 1999, inventories are shown net of an
allowance for slow-moving and aged inventory of $6.7 million and $9.6 million,
respectively.
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 $9.2 million, $7.1 million and $3.8 million in the years ended
January 1, 2000, January 2, 1999 and January 3, 1998, respectively. The notional
amount of open futures and options contracts at January 1, 2000 and January 2,
1999 was $48.7 million and $61.7 million, respectively. The fair values of the
open futures and options contracts at January 1, 2000 and January 2, 1999, based
on the stated market value at those dates, were $44.1 million and $57.9 million,
respectively. The open contracts at January 1, 2000, will expire between March
2000 and December 2000.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation expense is
computed using the straight-line method based on the estimated useful lives of
the depreciable assets. Certain facilities and equipment held under capital
leases are classified as property, plant and equipment and amortized using the
straight-line method over the lease terms, and the related obligations are
recorded as liabilities. Lease amortization is included in depreciation expense.
TRADEMARKS, 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
$18.9 million and $11.8 million at January 1, 2000 and January 2, 1999,
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 $14.7 million and $4.9 million at January 1, 2000 and January 2,
1999, 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 $13.1 million
for the year ended January 1, 2000, and $10.2 million for the years ended
January 2, 1999 and January 3, 1998, respectively.
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 $87.3 million, $87.2 million and
$67.6 million for the years ended January 1, 2000, January 2, 1999 and January
3, 1998, respectively. There were no deferred advertising costs at January 1,
2000 or January 2, 1999.
F-11
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 8).
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 AND INTANGIBLE 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued 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 and 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. However, in June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an amendment to FASB
Statement No. 133." Citing concerns about companies' ability to both modify
their information systems for year 2000 readiness and become educated with the
new derivatives and hedging standard, the FASB has delayed the effective date on
SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. We
have not yet determined the impact SFAS No. 133 may have on the consolidated
financial statements.
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.
F-12
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment, including related accumulated
depreciation follows:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
----------------- -----------------
Land................................ $ 16,290 $ 18,374
Buildings........................... 138,288 140,907
Machinery and equipment............. 437,032 424,574
Office furniture and fixtures....... 90,266 76,447
Delivery equipment.................. 6,689 7,208
Construction in progress............ 68,156 51,717
----------------- -----------------
756,721 719,227
Accumulated depreciation............ (203,690) (154,703)
----------------- -----------------
Total.......................... $ 553,031 $ 564,524
================= =================
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.
6. ASSETS HELD FOR SALE
On May 14, 1999, management announced the closure of the Sayreville, New
Jersey manufacturing facility in order to eliminate excess capacity within
Keebler's manufacturing network. As part of the total restructuring and
impairment charge, the Sayreville facility was placed for sale together with
other idle machinery and equipment held at various Keebler facilities.
Disposition of the remaining assets held for sale is expected to occur within
the next eighteen months without a significant gain or loss.
Also in 1999, land in Fort Worth, Texas, which had been acquired in
conjunction with the President acquisition in 1998, was placed for sale. This
land, along with a warehouse in Houston, Texas and a distribution center in
Kensington, Connecticut, which had both been held for sale during 1998, were
disposed of in the current year without a significant gain or loss.
Additionally, in June 1999, the Atlanta, Georgia manufacturing facility, which
had been held for sale, was sold for $1.2 million with a realized loss of
approximately $0.6 million. During 1998, Keebler had recognized an impairment
charge of $0.9 million in order to reflect the Atlanta, Georgia manufacturing
facility at fair value.
7. OTHER CURRENT LIABILITIES AND ACCRUALS
Other current liabilities and accruals consisted of the following at January
1, 2000 and January 2, 1999:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
----------------- -----------------
Self insurance reserves............. $ 52,266 $ 52,202
Employee compensation............... 72,527 73,017
Marketing and consumer promotions... 60,954 53,027
Other............................... 51,700 53,841
----------------- -----------------
Total.......................... $ 237,447 $ 232,087
================= =================
F-13
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OTHER CURRENT LIABILITIES AND ACCRUALS (CONTINUED)
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 1, 2000 and January 2, 1999 was $52.3 million and $52.2 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
$18.6 million.
8. DEBT AND LEASE COMMITMENTS
DEBT
Long-term debt consisted of the following at January 1, 2000 and January 2,
1999:
<TABLE>
<CAPTION>
(IN THOUSANDS) Interest Rate Final Maturity JANUARY 1, 2000 January 2, 1999
--------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Bridge Facility................ 6.263% September 26, 1999 $ - $ 75,000
Revolving Facility............. 5.843% September 28, 2004 - 85,000
Term Facility.................. 5.814% September 28, 2004 314,000 350,000
Senior Subordinated Notes...... 10.750% July 1, 2006 124,400 124,400
Other Senior Debt.............. Various 2001-2005 10,455 11,805
Capital Lease Obligations...... Various 2002-2042 7,588 8,290
----------------- -----------------
456,443 654,495
Less: Current maturities....... 37,283 112,730
----------------- -----------------
Total..................... $ 419,160 $ 541,765
================= =================
</TABLE>
At January 1, 2000 and January 2, 1999, Keebler's primary credit financing
was provided by a $700.0 million Credit Facility, consisting of $350.0 million
under the Revolving Facility and $350.0 million under the Term Facility. At
January 2, 1999, financing was also provided under a $125.0 million Bridge
Facility.
The current outstanding balance on the Term Facility at January 1, 2000, was
$314.0 million, with quarterly scheduled principal payments through the final
maturity of September 2004. The Revolving Facility, with no outstanding balance
and an available balance of $350.0 million at January 1, 2000, also has a final
maturity of September 2004, but with no scheduled principal payments. Certain
letters of credit totaling $28.7 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 0.125% -
0.30% based on the relationship of debt to adjusted earnings. At January 1,
2000, the commitment fee was 0.125%.
At January 2, 1999, the outstanding balance on the Term Facility was $350.0
million and the Revolving Facility had an outstanding balance of $85.0 million
and an available balance of $265.0 million. Certain letters of credit totaling
$42.2 million reduced the available balance on the Revolving Facility and any
unused borrowings under the Revolving Facility were subject to a commitment fee.
The commitment fee varied from 0.125% - 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 outstanding balance on the Bridge Facility at January 2,
1999, was $75.0 million, with an additional $50.0 million in available
borrowings.
Interest on the Credit Facility is calculated based on a 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 was calculated in the same manner as the Credit Facility and
also was restricted by the same financial covenants.
F-14
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
The $75.0 million Bridge Facility outstanding at January 2, 1999, that had a
final maturity of September 1999, with no scheduled principal payments, was
refinanced on January 29, 1999. Keebler entered into a Receivables Purchase
Agreement ("Agreement") to replace the $75.0 million of debt held under the
Bridge Facility, allowing funds to be borrowed at a lower cost to the Company.
The accounting for this Agreement is governed by SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Under the guidelines of SFAS No. 125, a special-purpose entity was created,
Keebler Funding Corporation, as a subsidiary of Keebler Foods Company. All
transactions under this Agreement occur through Keebler Funding Corporation and
are treated as a sale of accounts receivable and not as a debt instrument. At
January 1, 2000, a net $103.0 million of accounts receivable had been sold at
fair value, which is below the maximum amount currently available under the
Agreement.
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 a 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.
Interest of $37.5 million, $24.0 million and $39.0 million was paid on debt
for the years ended January 1, 2000, January 2, 1999 and January 3, 1998,
respectively.
Aggregate scheduled annual maturities of long-term debt as of January 1,
2000 are as follows:
(IN THOUSANDS)
2000....................................... $ 37,283
2001....................................... 42,162
2002....................................... 68,647
2003....................................... 105,596
2004....................................... 75,769
2005 and thereafter........................ 126,986
-------------------
Total................................. $ 456,443
===================
F-15
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
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 value of cash and cash equivalents and short-term debt
approximates fair value because of the short-term maturity of the instruments.
The fair value of long-term debt was $417.2 million and $536.6 million at
January 1, 2000 and January 2, 1999, respectively, which was based on current
rates offered to Keebler for similar debt with the same maturities.
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 typically
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. There were no new swap transactions entered into
during 1999.
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 11.33% through July 3, 2000. 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 $105.0 million of the Credit Facility to fixed rate debt of
5.084% and 4.89%, respectively. The estimated fair values of the hedged swap
agreements at January 1, 2000 and January 2, 1999, were a net receivable of $7.9
million and $1.1 million, respectively.
In 1999, Keebler also maintained an interest rate swap that no longer served
as a hedge with the Bank of Nova Scotia, which has a notional amount of $170.0
million and a fixed rate obligation of 5.0185% through February 1, 2001. During
the year, $2.8 million was recognized in income from operations in order to
mark-to-market the interest rate swap. The receivable resulting from this
transaction was recorded as a $0.5 million current receivable in other current
assets and a $2.3 million long-term receivable in other assets in the
consolidated balance sheet.
LEASE COMMITMENTS
Assets recorded under capitalized lease agreements included in property,
plant and equipment consist of the following:
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
------------------- -------------------
Land.......................... $ 980 $ 980
Buildings..................... 2,894 2,894
Machinery and equipment....... 2,842 2,853
Other leased assets........... 1 1
------------------- -------------------
6,717 6,728
Accumulated depreciation...... (417) (242)
------------------- -------------------
Total.................... $ 6,300 $ 6,486
=================== ===================
F-16
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT AND LEASE COMMITMENTS (CONTINUED)
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:
Capital Operating
(IN THOUSANDS) Leases Leases
-------------- --------------
2000.......................................... $ 1,046 $ 32,230
2001.......................................... 1,063 26,690
2002.......................................... 1,390 21,375
2003.......................................... 449 18,725
2004.......................................... 4,827 11,152
2005 and thereafter........................... 1,324 24,312
-------------- --------------
Total minimum payments........................ 10,099 $ 134,484
==============
Amount representing interest.................. (2,511)
--------------
Obligations under capital lease............... 7,588
Obligations due within one year............... (670)
--------------
Long-term obligations under capital leases.... $ 6,918
==============
Rent expense for all operating leases was $50.1 million, $38.7 million and
$36.1 million for the years ended January 1, 2000, January 2, 1999 and January
3, 1998, respectively.
9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE
During 1998, 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. 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. Initially, it was estimated that 410 employees were to be
terminated as a result of this plan, of which approximately 175 employees were
represented by a union. At January 1, 2000, approximately 40 employees not under
union contract had been terminated. In addition, during the year management
reviewed its exit plan and made a determination that approximately 110 employees
not under union contract, would not be terminated. During the year ended January
1, 2000, Keebler adjusted accruals previously established in the accounting for
the President acquisition by reducing goodwill and other intangibles by $4.5
million to recognize exit costs that are now expected to be less than initially
anticipated. The remainder of management's exit plan is expected to be
substantially complete before the end of 2000, with only noncancelable lease
obligations to be paid over the next six years concluding in 2006.
During 1996, 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. Severance,
outplacement and other related costs associated with staff reductions were
initially 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. Approximately 1,420 employees were terminated as a result of this plan.
An additional $6.8 million was anticipated for lease costs related to exiting
legacy information systems. During the year ended January 1, 2000, Keebler
adjusted accruals previously established in the accounting for the Keebler
acquisition by reducing goodwill and other intangibles by $0.5 million and
reversing $1.3 million into income from operations to recognize exit costs that
are now expected to be less than initially anticipated. The $1.3 million was
credited to operating income as it had originally been charged to income from
operations in the year ended January 3, 1998, January 2, 1999 or January 1,
2000. During the year ended January 2, 1999, Keebler also adjusted accruals
previously established in the accounting for the Keebler and Sunshine
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. Only noncancelable lease obligations are anticipated to extend
beyond 2000, to be paid over the next six years concluding in 2006.
F-17
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)
In addition, during the years ended January 1, 2000, January 2, 1999 and
January 3, 1998, Keebler expensed an additional $0.8 million, $2.8 million and
$2.7 million, respectively. These charges were principally for costs related to
the closure of distribution facilities not included in the original plan adopted
by management for the acquisition of Keebler Company.
The following table sets forth the activity in Keebler's plant and facility
closing costs and severance liabilities exclusive of the liabilities resulting
from the restructuring and impairment charge recorded in 1999:
<TABLE>
<CAPTION>
(IN THOUSANDS) December 28, 1996 Provision Spending Adjustment January 3, 1998
------------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
KEEBLER COMPANY
- ---------------
Severance............ $ 3,293 $ 85 $ (3,147) $ - $ 231
Facility closure..... 13,933 2,482 (3,910) - 12,505
Other................ 3,771 100 (1,976) - 1,895
------------------- -------------- -------------- -------------- -----------------
Subtotal......... 20,997 2,667 (9,033) - 14,631
------------------- -------------- -------------- -------------- -----------------
SUNSHINE BISCUITS, INC.
- -----------------------
Severance............ $ 3,114 $ - $ (3,002) $ - $ 112
Facility closure..... 11,873 - (4,138) - 7,735
Other................ - - - - -
------------------- -------------- -------------- -------------- -----------------
Subtotal......... 14,987 - (7,140) - 7,847
------------------- -------------- -------------- -------------- -----------------
TOTAL.......... $ 35,984 $ 2,667 $ (16,173) $ - $ 22,478
=================== ============== ============== ============== =================
(IN THOUSANDS) January 3, 1998 Provision Spending Adjustment January 2, 1999
------------------- -------------- -------------- -------------- -----------------
KEEBLER COMPANY
- ---------------
Severance............ $ 231 $ 139 $ (293) $ (28) $ 49
Facility closure..... 12,505 2,662 (3,265) (418) 11,484
Other................ 1,895 - (1,689) (182) 24
------------------- -------------- -------------- -------------- -----------------
Subtotal......... 14,631 2,801 (5,247) (628) 11,557
------------------- -------------- -------------- -------------- -----------------
SUNSHINE BISCUITS, INC.
- -----------------------
Severance............ $ 112 $ - $ (26) $ - $ 86
Facility closure..... 7,735 - (2,388) (3,120) 2,227
Other................ - - - - -
------------------- -------------- -------------- -------------- -----------------
Subtotal......... 7,847 - (2,414) (3,120) 2,313
------------------- -------------- -------------- -------------- -----------------
PRESIDENT INTERNATIONAL, INC.
- -----------------------------
Severance............ $ - $ 6,653 $ (59) $ - $ 6,594
Facility closure..... - 5,670 - - 5,670
Other................ - 447 - - 447
------------------- -------------- -------------- -------------- -----------------
Subtotal......... - 12,770 (59) - 12,711
------------------- -------------- -------------- -------------- -----------------
TOTAL.......... $ 22,478 $ 15,571 $ (7,720) $ (3,748) $ 26,581
=================== ============== ============== ============== =================
</TABLE>
F-18
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS) January 2, 1999 Provision Spending Adjustment JANUARY 1, 2000
------------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
KEEBLER COMPANY
- ---------------
Severance............ $ 49 $ 25 $ (50) $ - $ 24
Facility closure..... 11,484 751 (2,646) (1,760) 7,829
Other................ 24 - (14) (10) -
------------------- -------------- -------------- -------------- -----------------
Subtotal......... 11,557 776 (2,710) (1,770) 7,853
------------------- -------------- -------------- -------------- -----------------
SUNSHINE BISCUITS, INC.
- -----------------------
Severance............ $ 86 $ - $ (23) $ - $ 63
Facility closure..... 2,227 - (265) - 1,962
Other................ - - - - -
------------------- -------------- -------------- -------------- -----------------
Subtotal......... 2,313 - (288) - 2,025
------------------- -------------- -------------- -------------- -----------------
PRESIDENT INTERNATIONAL, INC.
- -----------------------------
Severance............ $ 6,594 $ - $ (576) $ (3,189) $ 2,829
Facility closure..... 5,670 - (83) (991) 4,596
Other................ 447 - (118) (319) 10
------------------- -------------- -------------- -------------- -----------------
Subtotal......... 12,711 - (777) (4,499) 7,435
------------------- -------------- -------------- -------------- -----------------
TOTAL.......... $ 26,581 $ 776 $ (3,775) $ (6,269) $ 17,313
=================== ============== ============== ============== =================
</TABLE>
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, bonds, mortgages and money market funds.
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.
Pension expense included the following components:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------------
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost.......................................... $ 13,364 $ 9,040 $ 8,560
Interest cost......................................... 32,841 31,080 29,673
Expected return on plan assets........................ (41,887) (39,352) (37,935)
Amortization of prior service cost.................... 689 689 -
Amortization of net loss.............................. 43 - -
----------------- ----------------- -----------------
Pension expense....................................... $ 5,050 $ 1,457 $ 298
================= ================= =================
</TABLE>
The expected long-term rate of return on plan assets was 8.7% for the year
ended January 1, 2000 and 9.0% for the years ended January 2, 1999 and January
3, 1998, respectively.
F-19
<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>
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
------------------- -------------------
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year............................. $ (520,312) $ (437,334)
Service cost........................................................ (13,364) (9,040)
Interest cost....................................................... (32,841) (31,080)
Amendments.......................................................... - (4,874)
Actuarial gain (loss)............................................... 60,261 (45,871)
Acquisition......................................................... - (22,805)
Benefits and expenses paid.......................................... 30,009 30,692
Curtailment gain.................................................... 897 -
------------------- -------------------
Benefit obligation at year end...................................... (475,350) (520,312)
------------------- -------------------
Change in plan assets:
Fair value of plan assets at beginning of year...................... 565,710 499,379
Actual return on plan assets........................................ 2,253 77,731
Employer contributions.............................................. 115 -
Acquisition......................................................... - 19,292
Benefits and expenses paid.......................................... (30,009) (30,692)
------------------- -------------------
Fair value of plan assets at year end............................... 538,069 565,710
------------------- -------------------
Funded status....................................................... 62,719 45,398
Unrecognized actuarial gain......................................... (37,209) (16,538)
Unrecognized prior service cost..................................... 7,730 9,230
Contributions subsequent to measurement date........................ - 115
------------------- -------------------
Prepaid pension..................................................... $ 33,240 $ 38,205
=================== ===================
</TABLE>
The pension plan uses the September 30 preceding the fiscal year end as the
measurement date. Assumptions used in accounting for the pension plan at each of
the respective year ends are as follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------
JANUARY 1, 2000 January 2, 1999 January 3, 1998
---------------- ----------------- -----------------
<S> <C> <C> <C>
Discount rate......................................... 7.5% 6.5% 7.3%
Rate of compensation level increases.................. 4.5 4.0 4.0
</TABLE>
As a result of the closure of the Sayreville, New Jersey manufacturing
facility in 1999, the plan recognized a net curtailment gain of $0.1 million
resulting from a liability gain of $0.9 million offset by the recognition of
$0.8 million of unrecognized prior service cost.
The plan assets, as of January 1, 2000 and January 2, 1999, 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
and an unfunded plan for certain highly compensated current and former
executives ("the excess retirement plan"). Benefits provided are based on years
of service.
F-20
<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>
Years Ended
----------------------------------------------------------
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Interest cost........................................ $ 698 $ 722 $ 732
------------------ ------------------ ------------------
Plan expense......................................... $ 698 $ 722 $ 732
================== ================== ==================
</TABLE>
The unfunded status of the supplemental retirement plan and the amounts
recognized in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
------------------- --------------------
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year............................. $ (11,119) $ (10,303)
Interest cost....................................................... (698) (722)
Actuarial gain (loss)............................................... 944 (844)
Benefits and expenses paid.......................................... 640 750
------------------- --------------------
Benefit obligation at year end...................................... (10,233) (11,119)
Fair value of plan assets........................................... - -
------------------- --------------------
Funded status....................................................... (10,233) (11,119)
Unrecognized actuarial loss (gain).................................. (558) 387
Benefit payments subsequent to measurement date..................... 168 109
------------------- --------------------
Accrued obligation.................................................. $ (10,623) $ (10,623)
=================== ====================
</TABLE>
The excess retirement plan expense includes the following components:
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Service cost.......................................... $ 431 $ 173 $ 306
Interest cost......................................... 155 78 43
Amortization of net loss (gain)....................... 8 (47) (84)
------------------ ------------------ ------------------
Pension expense....................................... $ 594 $ 204 $ 265
================== ================== ==================
</TABLE>
The unfunded status of the excess retirement plan and the amounts recognized
in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
------------------- --------------------
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year............................. $ (2,395) $ (1,085)
Service cost........................................................ (431) (173)
Interest cost....................................................... (155) (78)
Actuarial loss...................................................... (158) (1,076)
Benefits and expenses paid.......................................... 31 17
------------------- --------------------
Benefit obligation at year end...................................... (3,108) (2,395)
Fair value of plan assets........................................... - -
------------------- --------------------
Funded status....................................................... (3,108) (2,395)
Unrecognized actuarial loss......................................... 501 351
Benefit payments subsequent to measurement date..................... 17 -
------------------- --------------------
Accrued obligation.................................................. $ (2,590) $ (2,044)
=================== ====================
</TABLE>
F-21
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The supplemental and excess retirement plans use the September 30 preceding
the fiscal year end as the measurement date. Assumptions used in accounting for
the supplemental and excess retirement plans for each of the respective year
ends are as follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------
JANUARY 1, 2000 January 2, 1999 January 3, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Discount rate......................................... 7.5% 6.5% 7.3%
Rate of compensation level increase................... 4.5 4.0 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 years ended
January 1, 2000, January 2, 1999 and January 3, 1998, Keebler expensed
contributions of $2.5 million, $2.3 million and $2.6 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 $6.8 million, $8.9 million and $10.5
million for the years ended January 1, 2000, January 2, 1999 and January 3,
1998, respectively.
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Keebler provides certain medical and life insurance benefits for eligible
retired employees. The medical plan, which covers nonunion and certain union
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>
(IN THOUSANDS) Years Ended
-----------------------------------------------------------
JANUARY 1, 2000 January 2, 1999 January 3, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost.......................................... $ 2,178 $ 2,045 $ 2,242
Interest cost......................................... 3,424 3,961 3,888
Amortization of prior service cost.................... (115) (115) -
Amortization of net gain.............................. (375) - -
----------------- ----------------- -----------------
Net periodic postretirement benefit cost.............. $ 5,112 $ 5,891 $ 6,130
================= ================= =================
</TABLE>
F-22
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The unfunded status of the plan reconciled to the postretirement obligation
in Keebler's consolidated balance sheets is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
------------------- --------------------
<S> <C> <C>
Change in accumulated postretirement benefit obligation:
Benefit obligation at beginning of year............................. $ (56,269) $ (56,690)
Service cost........................................................ (2,178) (2,045)
Interest cost....................................................... (3,424) (3,961)
Amendments.......................................................... 8,531 -
Actuarial gain...................................................... 717 3,641
Acquisition......................................................... - (1,598)
Curtailment gain.................................................... 108 -
Benefits and expenses paid.......................................... 4,411 4,384
------------------- --------------------
Benefit obligation at year end...................................... (48,104) (56,269)
Fair value of plan assets........................................... - -
------------------- --------------------
Funded status....................................................... (48,104) (56,269)
Unrecognized actuarial gain......................................... (8,187) (7,856)
Unrecognized prior service cost..................................... (8,897) (574)
Benefit payments subsequent to measurement date..................... 880 978
------------------- --------------------
Postretirement obligation........................................... $ (64,308) $ (63,721)
=================== ====================
</TABLE>
The plan was amended in 1999 for a change in the calculation of retiree
contribution rates that resulted in an $8.5 million reduction to the benefit
obligation and a corresponding decrease in unrecognized prior service cost. In
addition, as a result of the closure of the Sayreville, New Jersey manufacturing
facility in 1999, the plan also recognized a net curtailment gain of $0.2
million resulting in a liability reduction of $0.1 million plus the recognition
of $0.1 million of unrecognized prior service credit.
The accumulated postretirement benefit obligation was determined using a
weighted average discount rate of 7.5%, 6.5% and 7.3% for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998, respectively. The plan
uses the September 30 preceding the fiscal year end as the measurement date.
The weighted average annual assumed rate of increase in the cost of covered
benefits was 8.0% for 1999 declining to an ultimate trend rate of 5.0% in 2002.
A 1% increase in the trend rate for health care costs would have increased the
accumulated benefit obligation for the year ended January 1, 2000 by $1.9
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 $1.8 million and $0.3 million,
respectively, for the year ended January 1, 2000.
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 January 1, 2000 and January 2, 1999 was $5.5
million and $4.7 million, respectively.
F-23
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
The components of income tax expense were as shown below:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------------------
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998
------------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal............................................. $ 71,794 $ 58,269 $ 22,172
State............................................... 6,739 4,618 3,840
------------------- ----------------- -----------------
Current provision for income taxes.................... 78,533 62,887 26,012
Deferred:
Federal............................................. (4,837) 8,494 17,203
State............................................... (521) 1,581 1,954
------------------- ----------------- -----------------
Deferred provision for income taxes................... (5,358) 10,075 19,157
------------------- ----------------- -----------------
$ 73,175 $ 72,962 $ 45,169
=================== ================= =================
</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>
Years Ended
-------------------------------------------------------------
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998
------------------- ----------------- -----------------
<S> <C> <C> <C>
U.S. federal statutory rate........................... $ 56,483 $ 59,339 $ 37,643
State income taxes (net of federal benefit)........... 5,849 5,813 3,766
Intangible amortization............................... 6,306 3,160 1,836
All others............................................ 4,537 4,650 1,924
------------------- ----------------- -----------------
$ 73,175 $ 72,962 $ 45,169
=================== ================= =================
</TABLE>
The deferred tax assets and deferred tax (liabilities) recorded on the
consolidated balance sheets consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
------------------- -------------------
<S> <C> <C>
Depreciation....................................................... $ (57,604) $ (108,866)
Trademarks, trade names and intangibles............................ (64,887) (49,348)
Prepaid pension.................................................... (13,327) (14,283)
Inventory valuation................................................ (559) (6,779)
Other.............................................................. (10,503) -
------------------- -------------------
(146,880) (179,276)
------------------- -------------------
Net operating loss carryforwards................................... - 80,195
Postretirement/postemployment benefits............................. 26,778 26,171
Plant and facility closing costs and severance..................... 17,469 23,728
Workers' compensation.............................................. 5,695 14,769
Incentives and deferred compensation............................... 7,801 12,063
Employee benefits.................................................. 11,000 10,879
Other.............................................................. - 6,436
------------------- -------------------
68,743 174,241
Valuation allowance................................................ - (84,350)
------------------- -------------------
$ (78,137) $ (89,385)
=================== ===================
</TABLE>
F-24
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
In 1998, net operating loss carryforwards were approximately $207.1 million.
All net operating loss carryforwards were used in 1999 to offset gains incurred
through the Section 338 income tax election, which adjusted the tax basis of all
assets and liabilities that resulted from the Keebler acquisition. The
intangible asset related to the Keebler acquisition was reduced by $11.8 million
as a result of resolving the preacquistion tax basis of acquired assets and
liabilities. In 1999, the previously established valuation allowance on deferred
tax assets of $84.4 million was eliminated due to the resolution of the
uncertainty regarding the availability of preacquisition net operating losses.
Income taxes paid, net of refunds, were approximately $49.6 million, $67.1
million and $9.9 million for the years ended January 1, 2000, January 2, 1999
and January 3, 1998, respectively.
13. SHAREHOLDERS' EQUITY
COMMON STOCK
There were no cash dividends declared for the years ended January 1, 2000,
January 2, 1999 or January 3, 1998. 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.
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. Keebler repurchased the remaining authorized shares in 1999, which
fulfilled the treasury stock plan. 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 following table summarizes the pro forma disclosures regarding net
income and earnings per share for the years ended January 1, 2000, January 2,
1999 and January 3, 1998:
F-25
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA) Years Ended
-------------------------------------------------------------
JANUARY 1, 2000 January 2, 1999 January 3, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income:
As reported........................................ $ 88,205 $ 94,871 $ 56,985
Pro forma.......................................... $ 86,890 $ 91,032 $ 55,032
Basic net income per share:
As reported........................................ $ 1.05 $ 1.14 $ 0.73
Pro forma.......................................... $ 1.04 $ 1.09 $ 0.71
Diluted net income per share:
As reported........................................ $ 1.01 $ 1.08 $ 0.70
Pro forma.......................................... $ 0.99 $ 1.04 $ 0.68
Weighted average grant date fair value of options
granted during the year............................ $ 11.88 $ 8.53 $ 8.09
</TABLE>
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 1999 and 1998, the fair value of each option grant was
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, 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>
Years Ended
-------------------------------------------------------------
JANUARY 1, 2000 January 2, 1999 January 3, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Dividend yield........................................ 0.0% 0.0% 0.0%
Expected volatility................................... 24.8% 27.2% 0.0%
Risk-free interest rate............................... 5.76% 5.04% 6.00%
Expected option life (years).......................... 5 5 5
</TABLE>
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>
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>
F-26
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
<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>
<TABLE>
YEAR ENDED JANUARY 1, 2000
<CAPTION> --------------------------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------------------ ------------------
<S> <C> <C>
Outstanding at the beginning of the period............ 6,456,280 $ 1.99
Granted............................................... - -
Exercised............................................. 491,570 2.23
Forfeited............................................. 45,081 1.93
Expired............................................... - -
------------------
Outstanding at the end of the period.................. 5,919,629 $ 1.97
==================
Exercisable at the period end......................... 4,493,801 $ 1.96
==================
- ------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices as of January 1, 2000, for options outstanding under the
1996 Stock Option Plan ranged from $1.74 to $5.23. The weighted average
remaining contractual life of these options is approximately six and one-half
years.
Under Keebler's 1998 Omnibus Stock Incentive Plan, 6,500,000 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>
F-27
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 2000
--------------------------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------------------ ------------------
<S> <C> <C>
Outstanding at the beginning of the period............ 2,715,636 $ 25.01
Granted............................................... 270,234 34.98
Exercised............................................. 39,140 24.82
Forfeited............................................. 123,634 25.27
Expired............................................... 5,494 27.31
------------------
Outstanding at the end of the period.................. 2,817,602 $ 25.96
==================
Exercisable at the period end......................... 899,699 $ 25.74
==================
- ------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices as of January 1, 2000, for options outstanding under the
1998 Omnibus Stock Incentive Plan ranged from $24.00 to $39.25. The weighted
average remaining contractual life of these options is approximately five years.
Under Keebler's Non-Employee Director Stock Plan, 300,000 shares of
Keebler's stock were authorized for future grant. All options granted have ten
year terms and vest automatically upon grant.
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>
<TABLE>
<CAPTION> YEAR ENDED JANUARY 1, 2000
--------------------------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------------------ ------------------
<S> <C> <C>
Outstanding at the beginning of the period............ 22,500 $ 27.44
Granted............................................... 7,500 30.75
Exercised............................................. - -
Forfeited............................................. - -
Expired............................................... - -
------------------
Outstanding at the end of the period.................. 30,000 $ 28.27
==================
Exercisable at the period end......................... 30,000 $ 28.27
==================
- ------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices as of January 1, 2000 for options outstanding under the
Non-Employee Director Stock Plan ranged from $27.44 to $30.75. The weighted
average remaining contractual life of these options is approximately eight and
one-half years.
F-28
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
Years Ended
--------------------------------------------------------------
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
NUMERATOR:
Income before extraordinary item................. $ 88,205 $ 96,577 $ 62,381
Extraordinary item, net of tax................... - 1,706 5,396
------------------ ------------------ ------------------
Net income....................................... $ 88,205 $ 94,871 $ 56,985
================== ================== ==================
DENOMINATOR:
Denominator for Basic Net Income Per Share
Weighted Average Shares..................... 83,759 83,254 77,604
Effect of Dilutive Securities:
Stock options............................... 3,886 3,992 2,168
Warrants.................................... - 240 790
------------------ ------------------ ------------------
Diluted potential common shares............. 3,886 4,232 2,958
------------------ ------------------ ------------------
Denominator for Diluted Net Income Per Share..... 87,645 87,486 80,562
================== ================== ==================
</TABLE>
For the year ended January 1, 2000, there were weighted average options to
purchase 143,122 shares of common stock at an exercise price ranging from $32.13
to $39.25, 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. 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.
16. 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, cracker and brownie products to retail outlets, as
well as private label biscuit products. Either a Keebler sales employee or a
distributor sells products in the Branded segment. The sales 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.), as well
as cookies manufactured for the Girl Scouts of the U.S.A. Many of the products
sold by the Specialty segment are done so through the use of brokers.
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
for the total company 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, whereas actual cost of sales
is used to determine consolidated income from operations.
F-29
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SEGMENT INFORMATION (CONTINUED)
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 years ended January 1, 2000, January 2, 1999 and January
3, 1998. Prior year numbers have been restated for reclassifications between
reportable segments.
<TABLE>
<CAPTION>
Branded Specialty
(IN THOUSANDS) Segment Segment Other (1) Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
YEAR ENDED JANUARY 1, 2000:
- ---------------------------
NET SALES TO EXTERNAL CUSTOMERS........... $ 2,099,257 $ 568,514 $ - $ 2,667,771
DEPRECIATION EXPENSE...................... 22,820 6,700 35,014 64,534
PROFIT CONTRIBUTION....................... 339,847 119,705 - 459,552
Year Ended January 2, 1999:
- ---------------------------
Net sales to external customers........... $ 1,798,347 $ 428,133 $ - $ 2,226,480
Depreciation expense...................... 24,457 6,563 28,383 59,403
Profit contribution....................... 277,791 90,746 - 368,537
Year Ended January 3, 1998:
- ---------------------------
Net sales to external customers........... $ 1,646,627 $ 418,557 $ - $ 2,065,184
Depreciation expense...................... 20,798 5,602 27,331 53,731
Profit contribution....................... 223,437 83,795 - 307,232
</TABLE>
(1) Represents expenses incurred by the functional support departments that are
not allocated to the reportable segments.
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 for the years ended January 1, 2000, January 2, 1999 and
January 3, 1998 is as follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------------
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999 January 3, 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
INCOME BEFORE INCOME TAX EXPENSE:
Reportable segment's profit contribution............ $ 459,552 $ 368,537 $ 307,232
Unallocated functional support costs (1)............ 195,649 172,498 165,835
Restructuring and impairment charge................. 66,349 - -
Interest expense, net............................... 36,174 26,500 33,847
------------------ ----------------- -----------------
Income before Income Tax Expense................. $ 161,380 $ 169,539 $ 107,550
================== ================= =================
</TABLE>
(1) Includes support costs such as distribution, research and development,
corporate administration and other (income) expense, which are not
allocated internally to reportable segments.
Net sales to external customers consist of cookies, crackers and other baked
goods for all periods presented. All long-lived assets at January 1, 2000 and
January 2, 1999 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 years ended January 1, 2000,
January 2, 1999 and January 3, 1998.
F-30
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA
Results of operations for each of the four quarters of the fiscal years
ended January 1, 2000 and January 2, 1999 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
------------------ ------------------ ------------------ ------------------
(IN MILLIONS EXCEPT PER SHARE DATA) 1999 1998 1999 1998 1999 1998 1999 1998*
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $852.0 $636.8 $587.9 $490.0 $615.8 $499.9 $612.1 $599.8
Gross profit............................ 471.3 372.7 330.5 281.3 354.6 294.4 360.8 339.2
Restructuring and impairment charge..... - - 69.2 - - - (2.9) -
Income before extraordinary item........ 32.7 14.1 (21.4) 19.4 32.1 29.0 44.8 34.1
Extraordinary item...................... - - - - - 1.7 - -
Net income (loss)....................... 32.7 14.1 (21.4) 19.4 32.1 27.3 44.8 34.1
Basic net income per share:
Income before extraordinary item..... $0.39 $0.17 $(0.25) $0.23 $0.38 $0.35 $0.53 $0.41
Extraordinary item................... - - - - - 0.02 - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).................... $0.39 $0.17 $(0.25) $0.23 $0.38 $0.33 $0.53 $0.41
======== ======== ======== ======== ======== ======== ======== ========
Diluted net income per share:
Income before extraordinary item..... $0.37 $0.16 $(0.24) $0.22 $0.37 $0.33 $0.51 $0.39
Extraordinary item................... - - - - - 0.02 - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).................... $0.37 $0.16 $(0.24) $0.22 $0.37 $0.31 $0.51 $0.39
======== ======== ======== ======== ======== ======== ======== ========
- ----------
* Quarter 4, 1998 includes the operating results of President from the acquisition date of September 28, 1998 through
January 2, 1999.
</TABLE>
18. SUBSEQUENT EVENTS
On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin"),
for $252.4 million, in a business combination that will be accounted for as a
purchase. Austin is a leading producer and marketer of single serve baked
snacks, including cracker sandwiches and bite-sized crackers and cookies.
Keebler will finance the acquisition with borrowings under its existing credit
facilities.
On February 23, 2000, the Board of Directors declared an initial quarterly
cash dividend of $0.1125 per common share payable on March 22, 2000, to
stockholders of record on March 8, 2000.
On February 2, 2000, Keebler's Board of Directors authorized the
repurchase, at management's discretion, of up to an additional $30.0 million in
shares of Keebler common stock. Purchases will be made through the open market
or through private transactions. The share repurchase program was approved
primarily to offset future dilution, which may result from the exercise and sale
of shares related to employee stock options.
On January 4, 2000, Keebler sold its Birmingham, Alabama and North Little
Rock, Arkansas bakeries and the SUNNY and GREGS brands to Consolidated Biscuit
Company ("Consolidated"). Keebler received $17.0 million from Consolidated,
which is estimated to result in an after-tax gain of approximately $3.5 million
that will be included in income from operations during the first quarter of
fiscal 2000.
F-31
<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 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 1, 2000
S-1
<PAGE>
<TABLE>
ITEM 14 (D). FINANCIAL STATEMENT SCHEDULE SCHEDULE II
KEEBLER FOODS COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(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 1, 2000
For discounts and doubtful accounts $ 7,782 $ 22,474 $ - $(21,688)(2) $ 8,568
========== ========== ========== ========== ==========
For deferred taxes $ 84,350 $ - $(84,350)(4) $ - $ -
========== ========== ========== ========== ==========
For inventory reserves $ 9,614 $ 4,026 $ - $ (6,965)(3) $ 6,675
========== ========== ========== ========== ==========
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
========== ========== ========== ========== ==========
(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 eliminated due to the resolution of a pre-acquisition contingency.
S-2
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------- ------------------------------------------------------------------
2.1 Stock Purchase Agreement dated as of August 24, 1998 between
Keebler Foods Company ("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 Securities
and Exchange Commission (the "Commission") on October 9, 1998
(Commission File No. 001-13705) (the "October Report"))
2.2 Stock Purchase Agreement dated as of January 19, 2000 by and among
R & H Trust Co (Jersey) Limited, as Trustee, as a Seller, HB
Marketing & Franchising L.P., as a Seller, 697163 Alberta Ltd, as
a Seller, William C. Burkhardt, as a Seller, Austin Quality Foods,
Inc., and Keebler, as Purchaser (incorporated herein by reference
to Exhibit 2.3 of Keebler's Current Report on Form 8-K previously
filed with the Commission on March 16, 2000 (Commission File No.
001-13705))
3.1 Amended and Restated Certificate of Incorporation of Keebler
(incorporated herein by reference to Exhibit 3.1 of Keebler's
Registration Statement on Form S-1 previously filed with the
Commission (Commission File No. 333-42075) (the "1998 Registration
Statement"))
3.2 Amended and Restated By-Laws of Keebler (incorporated herein by
reference to Exhibit 3.2 of the 1998 Registration Statement)
4.1 Indenture dated as of June 15, 1996 among Keebler, the guarantors
named therein and The U.S. Trust Company of New York ("Trustee")
(incorporated herein by reference to Exhibit 4.1 of Keebler's
Registration Statement on Form S-4 previously filed with the
Commission (File No. 333-8379) (the "1996 Registration
Statement"))
4.2 The 10 3/4% Senior Subordinated Note due 2006 (included in Exhibit
4.1) (incorporated herein by reference to Exhibit 4.2 of the 1996
Registration Statement)
10.1 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 Holdings
Corporation ("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)
i
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------- ------------------------------------------------------------------
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)
10.6 Employment and Severance Agreement between Keebler and Sam K. Reed
(incorporated herein by reference to Exhibit 10.24 of the 1998
Registration Statement)
10.7 Employment and Severance Agreement between Keebler and certain
executive officers (incorporated herein by reference to Exhibit
10.25 of the 1998 Registration Statement)
10.8 1998 Omnibus Stock Incentive Plan of Keebler (incorporated herein
by reference to Exhibit 10.26 of the 1998 Registration Statement)
10.8(a) 1998 Non-Qualified Stock Option Agreement for certain key
employees (incorporated herein by reference to Exhibit 10.12(a) of
Keebler's 1998 Annual Report on Form 10-K previously filed with
the Commission on March 22, 1999 (Commission File No. 001-13705)
(the "1998 Form 10-K"))
10.9 Non-Employee Director Stock Plan of Keebler (incorporated herein
by reference to Exhibit 10.27 of the 1998 Registration Statement)
10.10 Supplement to Subsidiary Guaranty (Hollow Tree) (incorporated
herein by reference to Exhibit 10.29 of the 1998 Registration
Statement)
10.11 Supplement to Subsidiary Guaranty (Elfin Equity) (incorporated
herein by reference to Exhibit 10.30 of the 1998 Registration
Statement)
10.12 $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)
10.13 Keebler Company Deferred Compensation Plan for certain officers of
Keebler dated January 1, 1999 (herein incorporated by reference to
Exhibit 10.18 of the 1998 Form 10-K)
10.14 Keebler Foods Company Deferred Compensation Plan for Non-Affiliate
Directors dated March 10, 1999 (herein incorporated by reference
to Exhibit 10.19 of the 1998 Form 10-K)
10.15 Receivables Purchase Agreement dated as of January 29, 1999 among
Keebler Funding Corporation, Keebler, Liberty Street Funding Corp.
and the Bank (herein incorporated by reference to Exhibit 10.20 of
the 1998 From 10-K)
21 Subsidiaries of Keebler
27 Financial Data Schedule
ii
EXHIBIT 21
SUBSIDIARIES OF KEEBLER FOODS COMPANY
STATE OF
COMPANY INCORPORATION
------- -------------
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
6. Keebler Funding Corporation Delaware
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. Elfin Equity Co., L.L.C. Delaware
12. Bishop Baking Company, Inc. Delaware
13. Famous Amos Chocolate Chip Cookie Company, L.L.C. Delaware
14. Mother's Cookie Company, L.L.C. Delaware
15. Murray Biscuit Company, L.L.C. Delaware
16. Barbara Dee Cookie Company, L.L.C. Delaware
17. Little Brownie Bakers, L.L.C. Delaware
18. President Baking Company, L.L.C. Delaware
19. Sunny Cookie Company, L.L.C. Delaware
20. Sunshine Biscuits, L.L.C. Delaware
INDIRECTLY OWNED SUBSIDIARIES OF KEEBLER FOODS COMPANY
1. Keebler Assets Company (a) Delaware
(a) 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> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Keebler
Foods Company Consolidated Balance Sheet at January 1, 2000 and the Consolidated
Statement of Operations for the year ended January 1, 2000 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-1-2000
<PERIOD-START> JAN-4-1999
<PERIOD-END> JAN-1-2000
<CASH> 20,717
<SECURITIES> 0
<RECEIVABLES> 73,620
<ALLOWANCES> 8,568
<INVENTORY> 176,280
<CURRENT-ASSETS> 335,579
<PP&E> 756,721
<DEPRECIATION> 203,690
<TOTAL-ASSETS> 1,528,183
<CURRENT-LIABILITIES> 457,485
<BONDS> 419,160
0
0
<COMMON> 846
<OTHER-SE> 408,469
<TOTAL-LIABILITY-AND-EQUITY> 1,528,183
<SALES> 2,667,771
<TOTAL-REVENUES> 2,667,771
<CGS> 1,150,553
<TOTAL-COSTS> 2,444,383
<OTHER-EXPENSES> 25,834
<LOSS-PROVISION> 22,474
<INTEREST-EXPENSE> 36,174
<INCOME-PRETAX> 161,380
<INCOME-TAX> 73,175
<INCOME-CONTINUING> 88,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,205
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.01
</TABLE>
