<PAGE> 1
EXHIBIT 99.3
Financial statements of Keebler Foods Company for the fiscal year ended
January 1, 2000, filed as an exhibit to the Flowers Industries, Inc. Annual
Report on Form 10-K on March 31, 2000.
<PAGE> 2
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
1
<PAGE> 3
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<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
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE> 4
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<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
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE> 5
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<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
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE> 6
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<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
====== ==== ======== ======== ==== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE> 7
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<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
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE> 8
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.
7
<PAGE> 9
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to
conform with the current year reporting.
2. ACQUISITION OF 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.
<TABLE>
<CAPTION>
Unaudited
(IN THOUSANDS, EXCEPT PER SHARE DATA) For the Years Ended
----------------------------------
January 2, 1999 January 3, 1998
--------------- ---------------
<S> <C> <C>
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
</TABLE>
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.
8
<PAGE> 10
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.
9
<PAGE> 11
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.
10
<PAGE> 12
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.
11
<PAGE> 13
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
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
========== ==========
</TABLE>
Property, plant and equipment is depreciated on a straight-line basis
over the estimated useful lives of the depreciable assets. Buildings are
depreciated over a useful life of ten to forty years. Machinery and equipment is
depreciated over a useful life of three to twenty-five years. Office furniture
and fixtures are depreciated over a useful life of three to fifteen years.
Delivery equipment is depreciated over a useful life of two to twelve years.
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
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
========== ==========
</TABLE>
12
<PAGE> 14
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.
13
<PAGE> 15
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)
<TABLE>
<S> <C>
2000 .................... $ 37,283
2001 .................... 42,162
2002 .................... 68,647
2003 .................... 105,596
2004 .................... 75,769
2005 and thereafter ..... 126,986
--------
Total .............. $456,443
========
</TABLE>
14
<PAGE> 16
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
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
======== ========
</TABLE>
15
<PAGE> 17
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:
<TABLE>
<CAPTION>
Capital Operating
(IN THOUSANDS) Leases Leases
-------- ---------
<S> <C> <C>
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
========
</TABLE>
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.
16
<PAGE> 18
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
======= ====== ======== ========== =======
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS) January 3, 1998 Provision Spending Adjustment January 2, 1999
--------------- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
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>
17
<PAGE> 19
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.
18
<PAGE> 20
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.
19
<PAGE> 21
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>
20
<PAGE> 22
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>
21
<PAGE> 23
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.
22
<PAGE> 24
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>
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>
23
<PAGE> 25
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 preacquisition 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:
24
<PAGE> 26
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>
25
<PAGE> 27
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 3, 1998
------------------------------------
Weighted
Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at the beginning of the period ..... 6,852,344 $ 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>
<CAPTION>
YEAR ENDED JANUARY 3, 1998
------------------------------------
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 3, 1998
------------------------------------
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>
26
<PAGE> 28
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 3, 1998
------------------------------------
Weighted
Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at the beginning of the period ..... 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 3, 1998
------------------------------------
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 3, 1998
------------------------------------
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.
27
<PAGE> 29
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.
28
<PAGE> 30
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.
29
<PAGE> 31
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
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
----------
* Quarter 4, 1998 includes the operating results of President from the
acquisition date of September 28, 1998 through January 2, 1999.
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.
30
<PAGE> 32
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
31
<PAGE> 33
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)
<TABLE>
<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> <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
======= ======== ======== ======== =======
</TABLE>
(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.
32
