-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JyG51flt+0S0DcWjUbCUKZIHjjcbn/SFMVFY/gOJ+4evSj3UTLyUqCvR44FeebWW lWpiheGoX9lKy1mvUgiyUw== 0001018848-99-000003.txt : 19990323 0001018848-99-000003.hdr.sgml : 19990323 ACCESSION NUMBER: 0001018848-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEEBLER FOODS CO CENTRAL INDEX KEY: 0001018848 STANDARD INDUSTRIAL CLASSIFICATION: COOKIES & CRACKERS [2052] IRS NUMBER: 363839556 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13705 FILM NUMBER: 99569968 BUSINESS ADDRESS: STREET 1: 677 LARCH AVE CITY: ELMHURST STATE: IL ZIP: 60126 BUSINESS PHONE: 6308332900 FORMER COMPANY: FORMER CONFORMED NAME: KEEBLER CORP DATE OF NAME CHANGE: 19960715 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: NO. 001-13705 KEEBLER FOODS COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 36-3839556 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 677 LARCH AVE., ELMHURST, IL 60126 (Address of principal executive offices) (Zip Code) 630-833-2900 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE $125,000 OF ITS 10 3/4% SENIOR SUBORDINATED NOTES DUE 2006 WHICH ARE FULLY AND UNCONDITIONALLY GUARANTEED BY THE RESTRICTED SUBSIDIARIES INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO | | INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. | | THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF MARCH 15, 1999, BASED UPON THE CLOSING PRICE OF THE COMMON STOCK AS REPORTED ON THE NEW YORK STOCK EXCHANGE ON SUCH DATE, WAS APPROXIMATELY $1,358,000,000. NUMBER OF SHARES OF COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF THE CLOSE OF BUSINESS ON MARCH 15, 1999: 84,303,958. DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT TO BE FILED ON OR BEFORE APRIL 25, 1999 FOR THE ANNUAL MEETING TO BE HELD ON MAY 25, 1999..................... PART III FORM 10-K REPORT TABLE OF CONTENTS PART I: PAGE Item 1. Business......................................................... 1 Item 2. Properties....................................................... 7 Item 3. Legal Proceedings................................................ 8 Item 4. Submission of Matters to a Vote of Security Holders.............. 8 PART II: Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters......................................................... 8 Item 6. Selected Financial Data.......................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation............................................ 10 Item 7a. Quantitative and Qualitative Disclosures About Market Risk....... 18 Item 8. Financial Statements and Supplementary Data...................... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 19 PART III: Item 10. Directors and Executive Officers of the Registrant............... 19 Item 11. Executive Compensation........................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management... 19 Item 13. Certain Relationships and Related Transactions................... 20 PART IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 20 PART I ITEM 1. BUSINESS Unless stated otherwise, market share data included in this Annual Report on Form 10-K are based on supermarket, mass merchandiser and drug store sales, measured in pounds sold, for the fifty-two week period ended January 3, 1999 as reported by Information Resources, Inc. ("IRI"). Sales to club stores and vending distributors are not included in this data. With respect to the foodservice industry, market share data included herein are based on sales, measured in pounds sold, for the twelve-month period ended December 31, 1998 as reported by the International Foodservice Manufacturers Association ("IFMATRAC"). Keebler Foods Company and its subsidiaries ("Keebler" or "the Company") is the second largest cookie and cracker manufacturer in the United States ("U.S.") with annualized net sales of over $2.5 billion and a 25.7% share of the U.S. cookie and cracker market. We market a majority of our products under well-recognized brands such as KEEBLER, CHEEZ-IT, CARR'S and FAMOUS AMOS. In the U.S., we are the number two manufacturer of branded cookies and crackers, the leading licensed supplier of Girl Scout cookies and the number one manufacturer of private label cookies and the number one manufacturer of crackers for the foodservice market. We are also the number one manufacturer of retail branded ice cream cones in the U.S. and a major producer of retail branded pie crusts. In addition, we produce custom-baked products for other marketers of branded food products. RECENT HISTORY Keebler was originally organized under the laws of the State of Delaware as UB Investments US Inc. ("UBIUS" or "predecessor company") on July 14, 1992. Keebler was acquired from UB Investments (Netherlands) B.V. on January 26, 1996 (the "Keebler acquisition") by INFLO Holdings Corporation ("INFLO"), a corporation which was jointly owned by Artal Luxembourg S.A. ("Artal"), a private investment company, and Flowers Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company and one of the country's largest manufacturers and marketers of fresh and frozen baked foods. Immediately after the Keebler acquisition, the Company was renamed Keebler Corporation. In conjunction with the Keebler acquisition, INFLO sold 2.5% of the outstanding shares of $0.01 par value common stock to certain members of management. On June 4, 1996, Keebler acquired Sunshine Biscuits, Inc. ("Sunshine" or the "Sunshine acquisition") from G.F. Industries, Inc. ("GFI"). As part of consideration paid in the sale of Sunshine, GFI was issued common stock and a warrant to purchase 6,135,781 shares of common stock. On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger") and subsequently changed its name to Keebler Foods Company. After the Merger, the stock and warrant held by GFI were transferred to Bermore, Limited ("Bermore"), a privately held corporation and the parent of GFI, and reissued for the same value in the name of Keebler. On February 3, 1998, Keebler completed an initial public offering (the "Offering") of 13,386,661 shares of common stock. Concurrent with the Offering, Bermore exercised the warrant in exchange for 6,135,781 shares of common stock. The exercise of the warrant resulted in Keebler receiving $19.8 million of cash proceeds. Artal and Bermore sold all of the shares in the Offering, with no proceeds from the Offering going to Keebler. As part of the transaction, Flowers acquired additional shares of common stock from Artal and Bermore, which increased its ownership from approximately 45% to 55%. Artal, having sold shares to both Flowers and the public, retained ownership of approximately 21%. Bermore exercised the warrant, sold shares to both Flowers and the public and retained ownership of approximately 6%. During 1998, Bermore, through a series of transactions, transferred its shares held to Claremont Enterprises, Limited ("Claremont"), a privately held Bahamian limited company. On September 28, 1998, Keebler acquired President International, Inc. ("President") from President International Trade and Investment Corporation, a company limited by shares under the International Business Companies Ordinance of the British Virgin Islands. On January 21, 1999, Keebler registered 16,200,000 shares of the Company common stock in connection with a secondary public offering. Artal and Claremont owned all of the shares sold in the secondary offering, with no proceeds going to Keebler. As a result, Artal's ownership percentage decreased from approximately 21% to 2% and Claremont's ownership percentage was reduced from approximately 6% to 5% of the outstanding common stock. Management's ownership remained at approximately 2% and Flowers' ownership remained at approximately 55%. 1 GENERAL BUSINESS DESCRIPTION Keebler competes in the U.S. retail cookie and cracker industry which in 1998 generated sales of approximately $8.5 billion measured in retail sales to consumers. The U.S. cookie and cracker industry, which is relatively stable, has experienced slow, but steady growth over the past twenty years. The cookie and cracker industry is comprised of distinct types of products. Cookie product types include, among others, sandwich cookies, chocolate chip cookies and fudge-covered cookies. Cracker product types include, among others, saltine crackers, graham crackers and snack crackers. Supermarkets accounted for 76.9% of 1998 sales in the cookie and cracker industry, with mass merchandisers (such as Wal-Mart), convenience stores and drug stores accounting for the balance. Since 1992, U.S. annual dollar supermarket sales of cookies and crackers have increased by an average of 1.5% per year. We believe that non-supermarket channels of distribution are becoming increasingly important. Since the acquisition of the Keebler business in January 1996, we have employed a business strategy designed to capitalize on our competitive strengths, which include strong national brands and a national direct to store door sales and distribution system, which is known as a "DSD distribution system." The acquisitions of Sunshine and President have enabled us to further develop this business strategy. The key elements of this strategy include: o building on the KEEBLER brand and taking advantage of its strength across product types; o expanding the CHEEZ-IT brand; o increasing sales in non-supermarket channels; o increasing the efficiency of operations and o pursuing acquisitions that complement or provide further opportunities to use existing brands, product lines or distribution systems. Keebler operates its business through the use of two reportable segments. The mass distribution of consumer food products in both the Branded and Specialty segments is an important element in maintaining sales growth and providing service to customers. We attempt to meet the changing demands of customers by planning appropriate stock levels and reasonable delivery times consistent with achieving optimal economics of distribution. In order to achieve these objectives, we have developed a network of manufacturing plants, shipping centers and distribution warehouses strategically located throughout the continental U.S. to provide high national in-store presence. We use a combination of Keebler-owned, public and contract carriers to deliver products from distribution points to customers. BRANDED SEGMENT The Branded segment produces a number of well-recognized brands including: CHEEZ-IT, CHIPS DELUXE, CLUB, DROXIES, FAMOUS AMOS, FUDGE SHOPPE, SUNSHINE KRISPY, MUNCH'EMS, MURRAY, OLDE NEW ENGLAND, READY CRUST, SANDIES, TOWN HOUSE, VIENNA FINGERS, WHEATABLES and ZESTA. We also import and distribute CARR'S crackers in the U.S. under an exclusive long-term licensing and distribution agreement with United Biscuits. CARR'S crackers are the best-selling specialty crackers in the U.S. In addition, we are the top manufacturer of retail branded ice cream cones in the U.S., as well as the leading manufacturer of preformed retail branded pie crusts which are sold under the KEEBLER READY CRUST brand name. All of our branded products are sold in supermarkets, mass merchandisers, club stores, convenience stores and drug stores, among others. Keebler distributes retail branded cookie and cracker products through our DSD distribution system, which services substantially all supermarkets in the U.S., as measured by IRI. We believe our national DSD distribution system provides us with certain competitive advantages. Members of Keebler's sales force, rather than store employees, stock and arrange our products on store shelves and build end-aisle and free-standing product displays. Frequent presence of our sales force employees provides us with a high level of control over the availability and presentation of our products. We believe that this control allows us to maintain shelf space, better execute in-store promotions and more effectively introduce new products. In-store promotions are important because we believe that purchases of cookies and crackers are often impulse driven. 2 With the acquisition of President, we acquired their franchised DSD distribution system, which principally distributes products east of the Mississippi River. The President DSD distribution system, which services both supermarkets and certain non-supermarket channels, is comprised of independent franchisees who purchase and resell certain President products. In addition to the Keebler and President DSD distribution systems, we use a network of independent distributors and brokers to serve convenience stores and vending distributors. In the case of club stores, Keebler uses a dedicated sales force and ships products directly to the customers' warehouses. We also use a warehouse sales and distribution system to sell and distribute KEEBLER READY CRUST pie crusts. CARR'S crackers are sold through a network of independent specialty distributors. Keebler has focused on new product introductions and line extensions within our core product types, such as CHEEZ-IT HEADS AND TAILS, CHEEZ-IT snack mix, CHEEZ-IT HOT & SPICY crackers, KEEBLER PEANUT BUTTER FUDGE STICKS, LEMON CREME VIENNA FINGER cookies and HOMESTYLE SOFT BATCH cookies. We have previously introduced innovative product types such as KEEBLER COOKIE STIX. We also developed new sizes of our leading products to enable us to expand in non-supermarket channels and introduced innovative new packaging, such as holographic holiday packaging and resealable stand-up packages for our CHEEZ-IT snack mix and FAMOUS AMOS cookies. The planned integration of Sunshine's operations into those of Keebler was completed by the end of 1996. The combination of Keebler and Sunshine allowed us to achieve efficiencies in administration, purchasing, production, marketing, sales and distribution. In particular, the sales and distribution of Sunshine retail branded products were incorporated into our DSD distribution system which had excess capacity. Filling excess capacity with Sunshine products made Keebler's DSD distribution system more efficient and allowed us to focus sales and marketing efforts on more profitable retail branded products. Net sales, net income and cash flow of the Branded segment are affected by the timing of new product introductions, promotional activities, price increases and a seasonal bias toward the second half of the year due to events such as back-to-school, Thanksgiving and Christmas. The relative mix between cookie and cracker sales varies throughout the year with stronger cracker sales in the last quarter of the calendar year. SPECIALTY SEGMENT The Specialty segment produces cookies, crackers and custom-baked products for several markets. We are the number one manufacturer of crackers for the foodservice market, as reported by IFMATRAC. Our foodservice products are sold by a national sales force dedicated solely to the foodservice market, with the assistance of independent brokers. These products are shipped directly to customers' warehouses and in the foodservice market, we generally sell to large distributors who sell our products to restaurants and institutions. With the acquisition of President, we are now also the leading licensed supplier of cookies for the Girl Scouts of America. We exclusively supply more than one-half of the approximately 320 Girl Scout Councils in the U.S. and are one of only three cookie manufacturers licensed by the Girl Scouts of America to manufacture Girl Scout cookies. Keebler employs dedicated marketing personnel to assist the various Girl Scout Councils with sales, marketing and public relations. A team of nine salespersons is employed, in addition to independent brokers, which market to U.S. Girl Scout Councils. In addition, Keebler manufactures private label products to be sold by retailers under their own brands. We believe we are the leading manufacturer of private label cookie products in the U.S. We serve leading supermarkets in the U.S. with a variety of private label products ranging from value-oriented standard products to premium items that compete with branded alternatives. Our Bake-Line Products, Inc. plant located in Des Plaines, Illinois, is dedicated to producing private label cookies, and is capable of producing a wide variety of products with numerous packaging options to meet the wide-ranging demands of our private label customers. Our private label cookies and crackers are shipped via common carrier directly to customer warehouses. 3 We also manufacture a variety of custom-baked products for other marketers of branded food products including: Kellogg POP TARTS, Kellogg NUTRIGRAIN bars, MCDONALDLAND cookies and Gerber BITER biscuits, as well as crackers for Oscar Mayer LUNCHABLES, Starkist CHARLIE TUNA snack kits and Kraft HANDI-SNACKS. Our custom-baked products are packaged under customers' labels and shipped from Keebler plants to the customers' regional warehouses or distribution centers via common carrier. Historically, President's net sales, net income and cash flow have been higher in the first quarter than any other fiscal quarter because substantially all sales of Girl Scout cookies have occurred in that quarter. As such, we expect to realize proportionately higher net sales, net income and cash flow during the first quarter than we historically have experienced. COMPETITION The U.S. branded cookie and cracker industry is led by Keebler and Nabisco, Inc. ("Nabisco"), which together account for 59.4% of sales volume. Smaller competitors include numerous national, regional and local manufacturers of both branded and private label products. Competition in our markets takes many forms including: o establishing favorable brand recognition; o developing products sought by consumers; o implementing appropriate pricing; o providing strong marketing support and o obtaining access to retail outlets and sufficient shelf space. Nabisco is the largest manufacturer in the U.S. cookie and cracker industry. We have a 25.7% share of the retail cookie and cracker market, while Nabisco has a 33.7% share. The remaining industry participants primarily target certain portions of the industry or focus on certain geographical regions of the U.S. Keebler and Nabisco are also the only cookie and cracker producers that have national wholly-owned DSD distribution systems, although Pepperidge Farm operates a national DSD distribution system through independent distributors. CUSTOMERS Keebler's top ten customers in 1998 accounted for 29.6% of our net sales. No single customer accounted for more than 4.3% of net sales. RAW MATERIALS The principal raw materials used in our food products consist of flour, sugar, chocolate, shortening and milk. We also use paper products such as corrugated cardboard, as well as films and plastics to package its products. Raw materials and packaging materials are readily available from various suppliers. There is no significant reliance on any one supplier. We use hedging techniques to minimize the impact of price fluctuations in raw materials and not for speculative or trading purposes. The hedging techniques, however, may not result in a reduction in our raw material costs or protect us from sharp increases in certain raw material costs, which we have experienced in the past. INTELLECTUAL PROPERTY We own a number of patents, licenses, trademarks and trade names. Principal trademarks and trade names include KEEBLER, Ernie the Keebler Elf, the Hollow Tree logo, CHEEZ-IT, CHIPS DELUXE, CLUB, FAMOUS AMOS, FUDGE SHOPPE, HI-HO, HYDROX, SUNSHINE KRISPY, MUNCH'EMS, MURRAY, OLDE NEW ENGLAND, READY CRUST, SANDIES, SOFT BATCH, SUNSHINE, TOASTEDS, TOWN HOUSE, VIENNA FINGERS, WHEATABLES and ZESTA. We are also the exclusive licensee of the CARR'S brand name in the U.S. Such trademarks and trade names are considered to be of material importance to our business since they have the effect of developing brand identification and maintaining consumer loyalty. We are not aware of any fact that would negatively impact the continuing use of any material patents, licenses, trademarks or trade names. 4 RESEARCH AND DEVELOPMENT Keebler engages in research activities, which principally involve development of new products, improvement of the quality of existing products and improvement and modernization of production processes. We also carry out development and evaluation of new processing techniques for both current and proposed product lines. Identifiable research and development costs are set forth on page F-11 of our consolidated financial statements. REGULATION As a manufacturer and marketer of food items, our operations are subject to regulation by various federal government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission (the "FTC"), the Environmental Protection Agency and the Department of Commerce, as well as various state agencies. These agencies regulate various aspects of our business, including production processes, product quality, packaging, labeling, storage and distribution. Under various statutes and regulations, such agencies prescribe requirements and establish standards for quality, purity and labeling. The finding of a failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines or compulsory withdrawal of products from store shelves. In addition, advertising of our businesses is subject to regulation by the FTC, and we are subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act. ENVIRONMENTAL Our operations and properties are subject to federal, state and local laws and regulations relating to the storage, handling, emission and discharge of materials and wastes into the environment. The primary environmental laws affecting our operations are the Federal Clean Air Act and Clean Water Act. We may be required to spend significant sums in order to maintain our compliance with environmental laws, particularly with respect to emission control equipment, replacement of chlorofluorocarbons (i.e. ozone-depleting substances) in cooling equipment and asbestos abatement projects. Although it is difficult to estimate the cost of complying with environmental laws, we do not believe that compliance with, or liability under, any environmental laws individually or in the aggregate will have a material adverse effect on our operations or financial condition. EMPLOYEES We employ approximately 12,200 persons, of which approximately 5,800 are represented by unions. We believe relations with our employees to be good. EXECUTIVE OFFICERS OF KEEBLER
NAME AGE POSITION Robert P. Crozer 52 Chairman of the Board and Director Sam K. Reed 52 Chief Executive Officer, President and Director E. Nichol McCully 44 Chief Financial Officer and Senior Vice President - Finance David B. Vermylen 48 President - Keebler Brands Jack M. Lotker 55 President - Specialty Products James T. Willard 58 Senior Vice President - Operations Thomas E. O'Neill 44 Vice President, Secretary and General Counsel James T. Spear 44 Vice President - Finance and Corporate Controller
5 ROBERT P. CROZER. Mr. Crozer was elected Chairman of the Board of Directors of Keebler in February 1998. Mr. Crozer has been a Director of Keebler since March 1996. Mr. Crozer has served as Vice Chairman of the Board of Directors of Flowers since 1989. He joined Flowers in 1973 and has been a director of Flowers since 1989. Mr. Crozer served as Vice President-Marketing of Flowers from 1985 to 1989, Corporate Director of Marketing Planning of Flowers from 1979 to 1985, as well as President and Chief Operating Officer, Convenience Products Group of Flowers from 1979 to 1989. Mr. Crozer received both a B.A. and an M.B.A. from the University of Virginia. SAM K. REED. Mr. Reed has been the Chief Executive Officer, President and a Director of Keebler since the Keebler acquisition in January 1996. Mr. Reed has twenty-five years of experience in the snack and baking industries. From January 1994 to January 1995 he served as Chief Executive Officer of Specialty Foods Corporation's $450 million Western Bakery Group division. Prior to that, he was President and Chief Executive Officer of Mother's Cake and Cookie Co. from 1991 to 1994, and held Executive Vice President positions at Wyndham Bakery Products from 1988 to 1990 and Murray Bakery Products from 1985 to 1988. Mr. Reed managed a natural foods company from 1984 to 1985, which later became The Quaker Oats Company's rice cake division. He started his career in 1974 with Oroweat Foods Company where he spent ten years in finance, manufacturing and general management. Mr. Reed received a B.A. from Rice University and an M.B.A. from Stanford University. E. NICHOL MCCULLY. Mr. McCully has been the Chief Financial Officer and Senior Vice President-Finance of Keebler since the Keebler acquisition in January 1996. Mr. McCully has over eleven years of experience as a senior financial executive in the food industry, most recently as group Chief Financial Officer for the Western Bakery Group division of Specialty Foods Corporation from 1993 to 1995. Mr. McCully was Vice President-Finance for Mother's Cake and Cookie Co. from 1991 until its acquisition by Specialty Foods Corporation in 1993. From 1990 to 1991, he was Vice President-Finance, and from 1988 to 1990, he was Controller for Spreckels Sugar Co. Prior to entering the food industry, Mr. McCully held financial management positions with Triad Systems Corporation and Wells Fargo Leasing Corporation, and he has auditing experience with Arthur Andersen & Co. Mr. McCully received a B.A. from the University of California at Berkeley and an M.B.A. from the University of California at Los Angeles. Mr. McCully is also a Certified Public Accountant. DAVID B. VERMYLEN. Mr. Vermylen has been the President-Keebler Brands since the Keebler acquisition in January 1996. Mr. Vermylen manages Keebler's branded biscuits, pie crust and imported products sector. He has twenty-four years experience in marketing consumer packaged goods including cookies, cereals, beverages and convenience foods. In 1995, he served as Chairman, President and Chief Executive Officer of Brothers Gourmet Coffee, a publicly traded specialty beverage manufacturer and retailer. He served as President and Chief Operating Officer from 1994 to 1995 and Vice President-Marketing from 1991 to 1993 at Mother's Cake and Cookie Co. Mr. Vermylen spent fourteen years in product management at General Foods from 1974 to 1988 managing a variety of businesses, including serving as Vice President of Marketing for Post Cereals. Mr. Vermylen was also a founding partner of a consulting firm specializing in food marketing and grocery distribution. He holds a B.A. in economics from Georgetown University and an M.B.A. from New York University. JACK M. LOTKER. Mr. Lotker has been President-Specialty Products of Keebler since the Keebler acquisition in January 1996. Mr. Lotker has worked in the food industry for twenty-four years, most recently at Homeland Stores of Oklahoma from 1988 to 1995. His experience in the baking industry and with DSD distribution systems includes two years at CPC International as Vice President and General Manager of Dry Products from 1986 to 1988 and eight years at Arnold Food Company as Vice President and Group Executive from 1978 to 1986. Mr. Lotker headed the American Bakers Association Industrial Relations Committee from 1983 to 1986 and has an extensive knowledge of the interaction among food retailing, wholesale bakery distribution and unionized bakery operations. Mr. Lotker received his B.A. from Queens College and his M.B.A. from Long Island University. JAMES T. WILLARD. Mr. Willard has been Senior Vice President-Operations of Keebler since July 1996. With thirty-four years experience in the food industry, Mr. Willard most recently was Senior Vice President at Nabisco Biscuit Co. from 1993 to 1996, and Senior Vice President-Operations and Technical Services at Nabisco Specialty Products Division from 1991 to 1993. From 1988 to 1991, Mr. Willard was Senior Vice President-Operations at ALPO Pet Foods, Inc., and Mr. Willard was Senior Vice President-North American Operations at Cadbury Schweppes, Inc. from 1986 to 1988. Prior to those assignments, Mr. Willard held various positions at Nestle Foods 6 Corporation from 1964 to 1986. These positions were Vice President-U.S. Chocolate Manufacturing (1983 to 1986), General Manager-Chocolate Manufacturing (1980 to 1983 and 1975 to 1978), General Manager-Fruits, Tomatoes & Meats (1978 to 1980), Division Manager-Manufacturing (1971 to 1975), Assistant Manager-Quality Control (1970 to 1972) and Microbiologist and Chemist-Regional Laboratory (1964 to 1970). Mr. Willard received a B.S. from Capital University and an M.S. from Ohio State University. THOMAS E. O'NEILL. Mr. O'Neill has been Vice President, Secretary and General Counsel of Keebler since December 1996. Mr. O'Neill has spent more than thirteen years in the food industry, most recently serving as Vice President and Division Counsel for the Worldwide Beverage Division of The Quaker Oats Company from December 1994 to December 1996. In that position, Mr. O'Neill was responsible for all legal matters in both domestic and international markets concerning the $2 billion division. Mr. O'Neill was Vice President and Division Counsel of the Gatorade Worldwide Division of The Quaker Oats Company from 1991 through 1994. Prior to joining Quaker Oats in 1985, Mr. O'Neill spent three years with Winston & Strawn, a law firm based in Chicago. Mr. O'Neill received both a B.A. and J.D. from the University of Notre Dame. He also completed additional work in the executive management program at Harvard University's Graduate School of Business. JAMES T. SPEAR. Mr. Spear has been Vice President Finance and Corporate Controller of Keebler since July 1995. He originally joined Keebler in February 1992 as Corporate Controller. Before starting with Keebler, Mr. Spear was Chief Financial Officer of Kirkland & Ellis from 1989 to 1991. From 1979 to 1989, he was with Price Waterhouse as both an auditor and consultant, mainly with clients in the food industry. Mr. Spear holds a B.A. from Miami University and an M.B.A. from Indiana University Graduate School of Business. Mr. Spear is also a Certified Public Accountant. All executive officers serve at the pleasure of the Board of Directors. There is no family relationship between any of the executive officers of Keebler. ITEM 2. PROPERTIES We operate nineteen manufacturing facilities in the U.S. of which sixteen are owned and three are leased. The manufacturing facilities are located in Athens, Georgia; Augusta, Georgia; Birmingham, Alabama; Charlotte, North Carolina; Chicago, Illinois; Cincinnati, Ohio; Cleveland, Tennessee; Columbus, Georgia; Denver, Colorado; Des Plaines, Illinois; Florence, Kentucky; Grand Rapids, Michigan; Kansas City, Kansas; Lake Bluff, Illinois; Louisville, Kentucky; Macon, Georgia; Marietta, Oklahoma; North Little Rock, Arkansas and Sayreville, New Jersey. We also own and operate a dairy in Fremont, Ohio that produces cheese under a proprietary formula that is used as an ingredient in CHEEZ-IT crackers. In addition, we own one idle manufacturing facility located in Atlanta, Georgia that is held for sale. As a result of capital expenditures made over the past decade, we believe the manufacturing facilities are modern and efficient. Additional investment may be necessary to improve the facilities recently acquired in conjunction with the President acquisition. We also believe manufacturing capacity is sufficient to meet foreseeable needs. Distribution facilities consist of nineteen shipping centers attached to the manufacturing facilities, eight stand-alone shipping centers (two owned and six leased; of which two are idle) and sixty-two distribution centers (ten owned and fifty-two leased) throughout the U.S. Of the sixty-two distribution centers, nine were subleased and two were idle. The four idle facilities have been accrued for in the plant and facility closing costs. We also lease seventy-seven warehouses and eighteen depots that are located throughout the U.S. and are utilized by the sales force in the distribution of our products. Following the President acquisition, we own one idle warehouse that is held for sale. We believe there is sufficient distribution capacity to meet foreseeable needs. In addition to manufacturing and distribution facilities, we own two office buildings and leases two others as part of our corporate office facility. Keebler also leases numerous sales offices throughout the country. All of our manufacturing, distribution and corporate office facilities are used by both the Branded and Specialty segments of our business. 7 ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION FOR COMMON STOCK The New York Stock Exchange (the "Exchange") is the principal market on which Keebler's common stock is traded. The common stock was first traded on the Exchange on January 29, 1998, concurrent with the underwritten initial public offering of 13,386,661 shares of Keebler's common stock at an initial price to the public of $24.00 per share. Prior to the Offering, there was no established public trading market for Keebler's shares. Quarterly market price data for 1998 is as shown below:
Market Price per share ------------------------------- High Low -------------- ------------- 1998: Quarter 1............................................ $ 31.75 $ 25.88 Quarter 2............................................ $ 30.13 $ 24.69 Quarter 3............................................ $ 29.00 $ 23.88 Quarter 4............................................ $ 37.81 $ 26.19
HOLDERS The approximate number of holders of record of common stock as of March 15, 1999 was 523. This number does not include beneficial owners of Keebler's securities held in the name of nominees. DIVIDENDS No dividends were declared on Keebler's common stock in 1998 or 1997. Historically, we have not paid dividends on our common stock and do not currently anticipate paying any cash dividends. Additionally, the existing $700.0 million Senior Credit Facility Agreement ("Credit Facility") and the Senior Subordinated Notes ("Notes") place limitations on our ability to pay dividends or make other distributions on our common stock. The most limiting dividend restriction exists under the Notes, which limits dividend payments to the sum of: (i) 50% of consolidated cumulative net income, (ii) net cash proceeds received from the issuance of capital stock, (iii) net cash proceeds received from the exercise of stock options and warrants, (iv) net cash proceeds received from the conversion of indebtedness into capital stock and (v) the net reduction in investments made by Keebler. Any future determination as to the payment of dividends will be subject to such limitations, will be at the discretion of the Board of Directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by the Board of Directors. 8 ITEM 6. SELECTED FINANCIAL DATA The selected historical financial data presented below as of and for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, have been derived from, and should be read in conjunction with the historical consolidated financial statements of Keebler and UBIUS, the predecessor company, including the respective notes thereto, included elsewhere. The selected historical financial data presented below as of and for the fiscal years ended December 30, 1995 and December 31, 1994 have been derived from the consolidated financial statements of the predecessor company that are not included herein. The distinction between Keebler and the predecessor company's selected financial data, as shown below, has been made by inserting a double line. The results of operations presented below are not necessarily indicative of results to be expected for any future period. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and respective notes thereto, included elsewhere herein.
Keebler Foods Company || UBIUS --------------------------------------|| -------------------------------------- Forty-Eight || Four Weeks Year Ended Year Ended Year Ended Weeks Ended || Ended ------------------------- January 2, January 3, December 28,|| January 26, December 30, December 31, 1999 (a) 1998 1996 (b) || 1996 1995 1994 ------------ ------------ ------------|| ------------ ------------ ------------ (In Millions Except Per Share Data) || (In Millions) || || OPERATING DATA: || Net sales............................... $ 2,226.5 $ 2,065.2 $ 1,645.5 || $ 101.7 $ 1,578.6 $ 1,599.7 Gross profit............................ 1,287.6 1,177.2 871.3 || 46.8 831.8 894.2 Loss on impairment of Salty Snacks || business.............................. - - - || - 86.5 - Income (loss) from continuing operations 196.1 141.4 70.1 || (25.5) (137.9) 46.4 Income tax expense (benefit)............ 73.0 45.2 14.0 || - (0.5) (1.1) Discontinued operations: || Income from operations of discontinued || Frozen Food businesses, net of tax.. - - - || - 7.4 3.4 Gain on disposal of Frozen Food || businesses, net of tax.............. - - - || 18.9 - - Extraordinary item: || Loss on early extinguishment of debt, || net of tax.......................... 1.7 5.4 1.9 || - - - Net income (loss)....................... $ 94.9 $ 57.0 $ 15.8 || $ (6.5) $ (158.3) $ (23.0) || Diluted net income per share: || Income from continuing operations || before extraordinary item........... $ 1.10 $ 0.77 $ 0.23 || Extraordinary item.................... 0.02 0.07 0.02 || ------------ ------------ ------------|| Net income............................ $ 1.08 $ 0.70 $ 0.21 || ============ ============ ============|| || Weighted Average Shares Outstanding..... 87.5 80.6 76.1 || ============ ============ ============|| OTHER DATA: || EBITDA, as adjusted (c)................. $ 265.2 $ 202.1 $ 119.6 || $ (23.5) $ (93.3) $ 89.5 Depreciation and amortization (excluding || items related to discontinued || operations)........................... 69.1 60.7 49.5 || 2.0 44.6 43.1 Capital expenditures (excluding || expenditures related to discontinued || operations)........................... 66.8 48.4 29.4 || 3.2 54.2 54.6 || CASH FLOW DATA: || Cash Provided from (Used by) || Operating activities.................. $ 142.7 $ 218.3 $ 53.2 || $ (0.4) $ (61.4) $ (17.4) Investing activities.................. (510.7) (41.5) (130.1)|| 65.2 (52.6) (45.9) Financing activities.................. 364.3 (161.6) 86.8 || (65.7) 104.4 69.4 ------------ ------------ ------------|| ------------ ------------ ------------ (Decrease) increase in cash and cash || equivalents........................... $ (3.7) $ 15.2 $ 9.9 || $ (0.9) $ (9.6) $ 6.1 ============ ============ ============|| ============ ============ ============ - --------------------------------------------------------------- (a) Includes the operating results of President from the acquisition date of September 28, 1998 through January 2, 1999. Other matters affecting comparability are detailed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (b) Includes the operating results of Sunshine from the acquisition date of June 4, 1996 through December 28, 1996. Other matters affecting comparability are detailed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (c) EBITDA, as adjusted, is defined as income (loss) from continuing operations before interest, taxes, depreciation, amortization and restructuring charges (gains).
9
Keebler Foods Company || UBIUS --------------------------------------|| -------------------------------------- As of || As of --------------------------------------|| -------------------------------------- January 2, January 3, December 28,|| January 26, December 30, December 31, 1999 1998 1996 || 1996 1995 1994 ------------ ------------ ------------|| ------------ ------------ ------------ (In Millions) || (In Millions) || || BALANCE SHEET DATA: || Cash and cash equivalents............... $ 23.5 $ 27.2 $ 12.0 || $ 2.1 $ 3.0 $ 12.5 Total assets............................ 1,655.8 1,042.9 1,102.1 || 849.1 926.9 1,001.2 Due to affiliate........................ - - - || 105.0 108.0 551.6 Total debt (including capital leases)... 654.5 298.8 457.9 || 371.4 437.6 333.2 Shareholders' equity (deficit).......... 329.3 222.0 165.1 || 45.3 51.8 (234.9)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SET FORTH BELOW IS A DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996. THE YEAR ENDED DECEMBER 28, 1996 INCLUDES BOTH THE FORTY-EIGHT WEEKS OF KEEBLER FOODS COMPANY UNDER CURRENT MANAGEMENT AND THE FOUR WEEKS OF UBIUS UNDER FORMER MANAGEMENT. THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY AND THE RELATED NOTES THERETO APPEARING ELSEWHERE. OVERVIEW GENERAL We sell cookies and crackers, custom-baked products to other manufacturers of branded food products, pie crusts and ice cream cones. Our net sales are principally affected by product pricing and quality, brand recognition, new product introductions, product line extensions, marketing and service. We manage these factors to achieve a sales mix favoring our higher margin products while driving volume through our national DSD distribution system. The principal elements comprising our cost of sales are raw and packaging materials, labor and manufacturing overhead. The major raw materials that we use in the manufacture of our products are flour, sugar, chocolate, shortening and milk. We also use paper products, such as corrugated cardboard, as well as films and plastics to package our products. The prices of these raw materials have been subject to significant volatility. We have mitigated the effect of such volatility in the past through our hedging programs, but may not be successful in protecting our business from price increases in the future. In addition to the foregoing factors, our cost of sales are affected by the efficiency of production methods and manufacturing capacity utilization. Our selling, marketing and administrative expenses are comprised mainly of labor and lease costs associated with our national DSD distribution system, trade and consumer promotion costs, other advertising costs and the cost of our corporate offices. While costs associated with our national DSD distribution system and the cost of our corporate offices are generally fixed, promotion and other advertising costs are more variable. Promotion and other advertising costs represent the largest component of our cost structure other than cost of sales and are principally influenced by changes in net sales. We are in the process of integrating President into our operations. In connection with this integration, we are currently undertaking a complete analysis of our system-wide manufacturing and distribution operations as we assess opportunities to improve our operational efficiencies in 1999 and beyond. We currently anticipate that we will take a restructuring charge during 1999 when our analysis and related plans are finalized. 10 MATTERS AFFECTING COMPARABILITY Keebler's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The 1998 fiscal year consists of fifty-two weeks and the 1997 fiscal year consists of fifty-three weeks. As a result of the Keebler acquisition, which closed on the last day of the first four week period of 1996, the fiscal year for 1996 consisted of the forty-eight weeks ended December 28, 1996. Keebler's operating results for the forty-eight weeks ended December 28, 1996 have been combined with the operating results of the predecessor company for the four weeks ended January 26, 1996 to compare the year ended December 28, 1996 to the years ended January 2, 1999 and January 3, 1998. Keebler's operating results for the year ended January 2, 1999 include the operating results of President from the acquisition date of September 28, 1998. Keebler's operating results for the year ended December 28, 1996 include the operating results of Sunshine from the acquisition date of June 4, 1996, whereas the subsequent years include the operating results of Sunshine for the entire year. Additionally, Keebler's operating results have been restated to reflect the Merger with INFLO as if it had been effective January 26, 1996. RESULTS OF OPERATIONS Keebler's results of operations, expressed as a percentage of net sales, for the last three years ended January 2, 1999, January 3, 1998 and December 28, 1996 are set forth below:
Years Ended ------------------------------------------------ January 2, January 3, December 28, 1999 1998 1996 -------------- -------------- -------------- NET SALES....................................................... 100.0% 100.0% 100.0% Cost of sales................................................... 42.2 43.0 47.5 Selling, marketing and administrative expenses.................. 48.5 49.7 49.6 INCOME FROM CONTINUING OPERATIONS............................... 8.8 6.8 2.5 Interest Expense, Net........................................... 1.2 1.6 2.2 Loss on early extinguishment of debt, net of tax................ - 0.3 0.1 NET INCOME...................................................... 4.3% 2.7% 0.5%
Keebler's reportable segments are Branded and Specialty, which were determined using Keebler's method of internal reporting, which divides and analyzes the business by sales channel. The reportable segments represent an aggregation of similar sales channels. We evaluate the performance of the reportable segments and allocate resources based on the segment's profit contribution, defined as earnings before certain functional support costs, amortization, interest and income taxes. While the accounting policies for each reportable segment are the same as for the total company, the cost of sales used to determine a segment's profit contribution is calculated using standard costs for each product, whereas actual cost of sales is used to determine consolidated operating income (loss). BRANDED SEGMENT The Branded segment sells a number of well-recognized products, primarily to retail outlets such as supermarkets, mass merchandisers, warehouse club stores, convenience stores and drug stores. This segment also imports and distributes CARR'S crackers in the U.S. under an exclusive long-term licensing and distribution agreement with United Biscuits.
Years Ended ---------------------------------------------------------------------------- January 2, 1999 January 3, 1998 December 28, 1996 ------------------------ ------------------------ ------------------------ $ % $ % $ % ------------- ---------- ------------- ---------- ------------- ---------- ($ IN MILLIONS) NET SALES $ 1,726.7 $ 1,566.7 $ 1,247.9 PROFIT CONTRIBUTION $ 282.6 16.4% $ 226.9 14.5% $ 154.0 12.3%
11 Net sales in the Branded segment increased 10.2% in 1998 to $1,726.7 million. The acquisition of President contributed $78.9 million in incremental revenue. Adjusting to an equal number of selling days and before including the acquisition growth, branded revenues grew 6.7% over the prior year. The primary drivers of the increase were higher sales of products under both the KEEBLER and CHEEZ-IT brands. The KEEBLER brand name was used to leverage new product introductions through line extensions such as the KEEBLER PEANUT BUTTER FUDGE STICKS. The growth in CHEEZ-IT sales was partly attributed to new products such as CHEEZ-IT HEADS AND TAILS, CHEEZ-IT sandwich crackers and CHEEZ-IT snack mix. Additionally, we redirected marketing support into brand-building advertising and consumer promotions. For example, with this support, sales of KEEBLER FUDGE SHOPPE cookies and CHEEZ-IT products grew in 1998, with CHEEZ-IT products increasing 22.1% over 1997. A favorable sales mix of KEEBLER branded products, combined with selected price increases, also generated higher revenues. Further contributing to the improvement was continued revenue growth outside supermarkets, such as in mass merchandisers, convenience and club stores. Net sales in 1997 were 25.6% higher compared to 1996. Revenue growth in 1997 was achieved by incremental sales associated with the Sunshine acquisition as well as increased volumes. In 1996, sales of Sunshine products by the Branded segment were approximately $216.0 million from the acquisition date until year end compared to approximately $486.0 million for all of 1997. Successful new product introductions and growth in the retail businesses outside supermarkets also propelled increased volume. The Branded segment had a 1998 profit contribution of $282.6 million or 16.4% of net sales. After removing the impact of President, profit contribution was 16.8% of net sales, which represented a 2.3 percentage point increase over 1997. A higher gross profit and lower distribution expenses drove the improvement. The benefit noted in gross profit was attributed to improved sales mix, selected price increases and continued productivity gains in our bakeries. Lower distribution expenses were due to more fully utilizing available trailer capacity and productivity and cost savings programs designed to minimize inventory losses. The 1997 profit contribution of $226.9 million was 14.5% of net sales compared to the 1996 profit contribution of 12.3% of net sales. A higher gross profit was also the main contributor to the 2.2 percentage point improvement in the 1997 profit contribution. After discontinuing several less profitable products in 1996, the 1997 sales mix consisted of higher margin products. Additionally, the 1997 profit contribution reflected lower prices on certain raw materials and lower production costs due to the implementation of several productivity programs in our manufacturing facilities. Selling and distribution expenses also decreased as a percent of net sales due to increased volume coupled with the benefit of cost reduction initiatives. Somewhat offsetting these improvements were higher marketing expenses primarily spent on brand-building, national advertising. SPECIALTY SEGMENT The Specialty segment produces cookies and crackers for the foodservice market, the Girl Scouts of America and private label retailers. In addition, we also produce custom-baked products for other marketers of branded food products.
Years Ended ---------------------------------------------------------------------------- January 2, 1999 January 3, 1998 December 28, 1996 ------------------------ ------------------------ ------------------------ $ % $ % $ % ------------- ---------- ------------- ---------- ------------- ---------- ($ IN MILLIONS) NET SALES $ 499.8 $ 498.5 $ 499.3 PROFIT CONTRIBUTION $ 85.9 17.2% $ 80.3 16.1% $ 58.2 11.7%
Net revenues in the Specialty segment in 1998 were flat compared to 1997. The acquisition of President contributed $16.2 million of incremental sales. Adjusting to an equal number of selling days and before including the acquisition growth, net sales in the Specialty segment were $9.0 million, or 1.8%, below 1997. Net sales in 1997 were also flat compared to 1996. While an improved sales mix benefited each year, the overall decrease in net sales for each year-on-year comparison was principally associated with lower margin products that were either discontinued or re-positioned at higher price levels. Volume declines in custom-baked products in 1997 also served to offset gains received from selected price increases. 12 The Specialty segment's profit contribution of $85.9 million was 1.1 percentage point above the prior year, as a percent of net sales. Before considering the impact of President, profit contribution was 17.3% of net sales in 1998 compared to 16.1% in 1997. The improvement in profit contribution was primarily achieved by a more profitable sales mix, selected price increases and productivity gains received through bakery automation projects and supply chain initiatives in distribution and inventory management. Profit contribution was $80.3 million in 1997 which resulted in a 4.4 percentage point increase in profit contribution over 1996 that was principally driven by a more favorable sales mix in 1997 coupled with growth in sales of private label products. Lower raw material costs in 1997 also contributed to the profit contribution improvement. COST OF SALES Cost of sales was $938.9 million in 1998 which included an additional $61.3 million related to cost of sales for President that was not included in prior years. Excluding the impact of President, cost of sales, as a percent of net sales, was 41.2% for 1998 compared to 43.0% in 1997 and 47.5% in 1996. The improvements made in each year were principally achieved from initiatives implemented to increase automation and productivity at our manufacturing facilities along with other cost reduction programs. The streamlining of our manufacturing facilities, creating increased capacity utilization, also contributed to a lower cost of sales. Additionally, the cost of certain raw and packaging materials has declined from previous years. SELLING, MARKETING AND ADMINISTRATIVE EXPENSES Selling, marketing and administrative expenses were $53.8 million higher compared to 1997, however, 1.2 percentage points better as a percent of net sales. After removing $27.2 million of additional expense attributable to President, selling, marketing and administrative expenses were $26.6 million above the prior year. Higher marketing expenses related to our continued focus on building brand equity through advertising and consumer promotions was the primary driver of the increased spending. Partially offsetting these higher marketing expenses were savings achieved in distribution costs due to improved inventory handling and deployment. In 1997, selling, marketing and administrative spending increased $160.0 million compared to 1996, yet remained consistent as a percentage of net sales. Increased spending was driven by higher volume captured through both internal growth and the Sunshine acquisition. In 1997, we began spending more on advertising and other consumer promotions to create increased brand and consumer awareness. Selling, marketing and administrative expenses remained comparable as a percent of net sales in 1997 and 1996 due to higher volumes passing through a more efficient, fixed cost, selling and distribution network. INTEREST EXPENSE Interest expense was $26.5 million in 1998, $33.8 million in 1997 and $38.4 million in 1996. The steady decline was primarily due to both a continuing overall lower average debt balance and more favorable interest rates. Interest expense declined from 1997, despite the $530.0 million of additional debt incurred from the acquisition of President, due to lower interest rates, fees and favorable terms. In conjunction with the President acquisition, the $145.0 million outstanding balance on the term note was extinguished, also contributing to the reduction in interest expense. The 1997 decrease in the average debt balance from 1996 was the result of principal pre-payments of $113.8 million on the term loans and a $29.0 million pre-payment of the seller note. In addition, the 1998 weighted average interest rate was 0.62 percentage points lower than the previous year while the 1997 weighted average rate was 0.28 percentage points lower than 1996. INCOME TAXES Income taxes were provided at an effective tax rate of 43% in 1998, 42% in 1997 and 44.2% in 1996. In each year, the effective tax rate exceeded the statutory rate due to nondeductible expenses, principally amortization of intangibles, including trademarks, trade names, other intangibles and goodwill. The 1.0 percentage point increase in the effective tax rate from 1997 to 1998 was due primarily to the increase in nondeductible expenses, principally the amortization of intangibles, resulting from the President acquisition. The effective tax rate declined in 1997, compared to 1996, as earnings were significantly higher in 1997, thereby reducing the impact of nondeductible expenses, such as amortization of intangibles, on the calculation of the effective tax rate. Income tax expense was 13 not provided for during the first four weeks of 1996. As part of the Keebler acquisition, the valuation allowance on deferred taxes was adjusted by $25.1 million to reflect the elimination of certain deferred tax assets revalued in the purchase price allocation. We carried a deferred tax valuation allowance of $84.4 million at January 2, 1999, January 3, 1998 and December 28, 1996 to provide for the uncertainty in realizing the deductibility of deferred tax assets recognized. Pursuant to the terms of the Keebler acquisition, the predecessor company retained the right to use the net operating losses for potential carrybacks. Any unused operating losses are then available to us, but are significantly restricted under current tax law. Therefore, all net operating loss carryforwards have been fully reserved due to the uncertainty of their realization. DISCONTINUED OPERATIONS In 1995, the predecessor company adopted plans to discontinue the operations of the Frozen Food businesses, and in the first four weeks of 1996, a gain of $18.9 million, net of income taxes, was recognized on the disposal of the Frozen Food businesses. EXTRAORDINARY ITEM NET OF INCOME TAXES In the latter part of 1998, an after-tax extraordinary charge of $1.7 million was recorded for the write-off of unamortized bank fees related to the early extinguishment of the term note. Similarly, in 1997 and 1996, we also recorded extraordinary charges, net of income taxes, of $5.4 million and $1.9 million, respectively. In 1997, $3.8 million of the extraordinary charges, net of tax, also related to the write-off of debt issuance costs associated with the early retirement of term loans. An additional $1.6 million, net of income taxes, extraordinary charge was recorded due to a loss on the early extinguishment of the seller note which was entered into at the time of the Keebler acquisition. The 1996 extraordinary charge of $1.9 million, net of income taxes, related to the write-off of debt issuance costs made in connection with the $125.0 million early extinguishment of increasing rate notes. NET INCOME In 1998, net income of $94.9 million was 66.5% higher than the prior year and net income of $57.0 million for 1997 was $47.7 million above 1996. The substantial growth in net earnings in year-over-year comparisons was achieved through revenue gains combined with lower operating expenses resulting from productivity and cost savings programs. Revenue growth in both 1998 and 1997 was achieved through volume increases, higher prices and an improved sales mix. Compared to 1996, 1997 also benefited from increased revenue due to the inclusion of the Sunshine business for the entire fiscal year. LIQUIDITY AND CAPITAL RESOURCES A condensed cash flow statement of Keebler follows:
Years Ended ------------------------------------------------------------ January 2, January 3, December 28, 1999 1998 1996 ----------------- ------------------ ----------------- (IN MILLIONS) CASH PROVIDED FROM (USED BY) Operating activities........................... $ 142.7 $ 218.3 $ 52.8 Investing activities........................... (510.7) (41.5) (64.9) Financing activities........................... 364.3 (161.6) 21.1 ----------------- ------------------ ----------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................... $ (3.7) $ 15.2 $ 9.0 ================= ================== =================
14 CASH FLOW FOR 1998 Operating activities provided $142.7 million of cash during 1998. Net earnings of $94.9 million coupled with the deferral of additional income taxes were the primary drivers of the favorable cash flow. Partially offsetting these sources of cash was an increased investment in inventories and trade accounts receivable of $13.8 million and $5.1 million, respectively. A build in finished goods, principally associated with the upcoming Girl Scout cookie season, accounted for the larger investment in inventory. The increase in trade accounts receivable was due principally to the addition of the President's trade accounts receivable subsequent to the acquisition. Also offsetting these cash sources was $5.4 million of current year net spending for plant and facility closing costs and severance related to the exit costs associated with the Keebler, Sunshine and President acquisitions. Spending on plant and facility closing costs and severance is expected to be substantially completed by the end of 1999, except for noncancelable lease obligations which are expected to continue until 2006. Higher income tax payments attributable to a $62.0 million increase in pre-tax income over the prior year also offset the positive cash flow. Cash used by investing activities was $510.7 million, of which $444.8 million, net of cash acquired, was attributable to the acquisition of President in September 1998. An additional $66.8 million of capital spending was made for modifications related to new products, to update and enhance production facilities and to achieve near-term cost savings and efficiencies in the manufacturing, sales and distribution process. At year end, we held the idle Atlanta, Georgia manufacturing facility, a distribution center in Kensington, Connecticut and a warehouse in Houston, Texas for sale and expect the disposition of these facilities to be completed before the end of 1999. Financing activities generated $364.3 million of cash for the year principally from proceeds of long-term debt borrowings under $825.0 million of available new debt facilities used to finance the acquisition of President. We also received $19.8 million of cash proceeds resulting from Bermore exercising a warrant in exchange for 6,135,781 shares of common stock at the time of our initial public offering. Employee stock options exercised during the year provided another $0.8 million of cash. These cash sources were partially offset by the pre-payment of the $145.0 million outstanding term note balance and a $20.0 million repayment on the revolving facility. In addition, cash totaling $8.6 million was used to repurchase common stock into treasury under the stock repurchase program. CASH FLOW FOR 1997 AND 1996 Cash provided from operating activities was $218.3 million in 1997 which was an increase of $165.5 million over the cash provided from operations in 1996. The primary contributors to the positive cash flow for 1997 were net earnings of $57.0 million, a lower investment in trade accounts receivable and reduced funding of current liabilities and income taxes. Improved accounts receivable collection procedures provided $38.2 million of working capital. The reduced funding of current liabilities was attributable primarily to the timing of payments, while the increase in income taxes payable was attributable to a $47.7 million increase in earnings over 1996. Partially offsetting these benefits was spending on plant and facility closing costs and severance and the payment of an arbitration award. Spending on plant and facility closing costs and severance relating to exit costs associated with the Keebler and Sunshine acquisitions, although down from 1996, accounted for $13.7 million of cash used by operations for the year ended January 3, 1998. Exit cost spending associated with these acquisitions was substantially complete at the end of 1998, with the exception of noncancelable lease obligations, which are expected to continue until 2004. In addition, we paid an arbitration award in 1997 regarding a contract production arrangement, which was entered into by the predecessor company, in the amount of $6.8 million plus legal fees. Cash used by investing activities was $41.5 million in 1997 compared to $64.9 million in 1996. The cash used in 1997 was primarily used to fund capital expenditures. Capital expenditures were $48.4 million and $32.6 million in 1997 and 1996, respectively. In 1997, capital spending was made principally to enhance, update or realign the existing production lines, provide distribution and production efficiencies and to achieve near-term cost savings. Proceeds received from asset disposals of $7.0 million partially offset capital expenditures. The sale of the Santa Fe Springs plant in 1997 accounted for $3.6 million of the proceeds, with the remainder provided mainly from the sale of trucks and machinery and equipment. 15 Cash used by financing activities in 1997 was $161.6 million. In 1997, we entered into an amendment and restatement of our prior senior credit agreement, proceeds from which were used to extinguish existing term loans of $153.6 million. The extinguishment was funded primarily by a draw down on the revolving loan facility and $109.8 million under a new term loan. During 1997, the draw down on the revolving loan facility was completely repaid. Additionally, in the fourth quarter of 1997, we extinguished $29.0 million of debt related to the seller note and made $70.0 million in principal pre-payments on the term loan using existing cash resources. Scheduled principal payments of $18.7 million were made on the term loan and other debt during the year. CAPITAL RESOURCES In 1998 and 1997, our capital resources were provided under two separate credit arrangements. In order to consummate the acquisition of President in September 1998, we entered into a new Credit Facility consisting of a $350.0 million revolving facility and a $350.0 million term facility. In addition, we also entered into a $125.0 million bridge facility that was subsequently refinanced with a receivables facility on January 29, 1999. These new debt facilities replaced the available $140.0 million revolving loan facility and an existing term loan which were outstanding in 1997 and 1998 until the time of the President acquisition. Available borrowings under the revolving facility and the previous revolving loan facility were $265.0 million and $140.0 million in 1998 and 1997, respectively. Borrowings under the $350.0 million revolving facility in 1998 were $105.0 million, with $20.0 million repaid as of January 2, 1999. There were no borrowings under the $140.0 million revolving loan facility in 1998, however, there were $32.8 million of borrowings in 1997, which was all repaid as of January 3, 1998. Capital expenditures for 1999 are expected to be approximately $90.0 million, up nearly $23.2 million from 1998. The majority of capital spending in 1999 will be used to increase the automation in production and distribution facilities in order to obtain additional productivity and cost savings. We anticipate that capital expenditures will be funded from cash provided by operations and will continue at a level sufficient to support our strategies and operating needs. Historically, we have not paid dividends, and at this time do not anticipate paying any cash dividends. The existing Credit Facility and Notes place limitations on our ability to pay dividends or make other distributions on our common stock. Additionally, the Credit Facility requires us to meet certain financial covenants including a debt to earnings before interest, taxes, depreciation and amortization ratio and cash flow coverage ratios. In addition to these ratios, the credit agreement also requires us to meet net worth and interest coverage ratios. In 1998 and 1997, we met all financial covenants in each of our financing agreements. Total debt was $654.5 million, $298.8 million and $457.9 million as of January 2, 1999, January 3, 1998 and December 28, 1996, respectively. Current maturities on the total debt outstanding were $112.7 million, $26.4 million and $18.6 million as of such respective dates. Cash and cash equivalents on January 2, 1999, January 3, 1998 and December 28, 1996 were $23.5 million, $27.2 million and $12.0 million, respectively. We believe that available cash, as well as amounts available under our new debt facilities, will be sufficient to meet normal operating requirements for the foreseeable future. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The new statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and that the instruments be measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. We have not yet determined the impact the new statement may have on the consolidated financial statements. 16 SEASONALITY Our net sales, net income and cash flow are affected by the timing of new product introductions, promotional activities, price increases and a seasonal bias toward the second half of the year due to events such as back-to-school, Thanksgiving and Christmas. The relative mix between cookie and cracker sales varies throughout the year with stronger cracker sales in the last quarter of the calendar year. President's net sales, net income and cash flow historically has been higher in the first quarter than in any other fiscal quarter because substantially all sales of Girl Scout cookies have occurred in that quarter. For this reason, going forward, we expect to realize proportionately higher net sales, net income and cash flow during the first quarter of our fiscal year than we historically have experienced. SELF INSURANCE We purchase insurance coverage for worker's compensation as well as general, product and vehicle liability maintaining certain levels of retained risk (self-insured portion). Potential losses relating to claims under the self-insured portion of the policies are accrued in accordance with the requirements of SFAS No. 5, "Accounting for Contingencies." There are no unasserted claims that require a reserve or disclosure in accordance with SFAS No. 5. YEAR 2000 ISSUE The Year 2000 issue arose because many existing computer programs use only the last two digits to refer to a year. As a result, computer programs may not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many businesses are at risk for possible computer application miscalculations or systems failures causing disruptions in business operations. These risks are commonly referred to as the "Y2K issues." We utilize software and related technologies that will be affected by the date change in the year 2000. We have completed a comprehensive review of our computer systems and non-information technology systems to identify potential Y2K issues. Since we have implemented the SAP R/3 management information system and Manugistics software, both of which were developed/purchased as Y2K compliant, we do not anticipate that the impact of Y2K issues on our business will be material. Additionally, secondary information systems, which are not material to our ability to forecast, manufacture or deliver product, have been reviewed and Y2K issues identified. We are currently in the process of correcting or upgrading these systems. We intend to be Y2K compliant on all critical systems by the middle of 1999. We have undertaken efforts to verify that all of our material vendors and suppliers will be Y2K compliant. Specifically, we sent a comprehensive questionnaire to all of our significant suppliers and vendors regarding their Y2K compliance in an attempt to identify any problem areas with respect to these groups. Although the results of the questionnaire indicated that our material vendors and suppliers intend to be Y2K compliant before the end of 1999, they were not able to provide us any assurances. We are currently in the process of developing a contingency plan to address any potential Y2K failures caused by a third party. While we cannot assure that third parties will convert their systems in a timely manner and in a way compatible with our systems, we believe that our actions with third parties detailed above, along with the development of a contingency plan, will minimize these risks. We currently estimate that the incremental costs for becoming Y2K compliant are approximately $2.0 - $3.0 million, which will be funded from cash provided by operations and expensed as incurred. Spending of $1.0 million against this estimate has occurred to date. This estimate is exclusive of Y2K issues regarding the President acquisition. We have completed a comprehensive review of President's computer systems and non-information technology systems to identify potential Y2K issues. Many of the Y2K risks at President will be mitigated through our implementation of the SAP R/3 management information system, Manugistics software and our warehouse management system at the President facilities. We expect this implementation to be completed during 1999. We estimate additional costs of approximately $0.3 million will be necessary to correct or upgrade President's secondary information systems in order to make them Y2K compliant. 17 Based on the progress we have made in addressing our Y2K issues and our compliance with Y2K issues on our primary business information systems, we do not foresee significant risks associated with our Y2K compliance at this time. As our plan is to address any significant risks associated with our Y2K issues prior to being affected by them, a comprehensive contingency plan has not been developed. However, if a significant risk related to our Y2K compliance or a delay in the anticipated timeline for compliance occurs, we will develop contingency plans as deemed necessary at that time. The information presented above sets forth the steps we have taken to address the Y2K issues. We do not expect compliance with Y2K issues or the most reasonably likely worst case scenario and related contingency plan to have a material impact on our business, results of operations or financial condition. The above discussion of our efforts and expectations relating to Y2K compliance is forward-looking. Readers are cautioned that forward-looking statements contained in this discussion should be read in conjunction with our disclosure under the heading "FORWARD-LOOKING STATEMENTS" that follows below. FORWARD-LOOKING STATEMENTS Certain statements incorporated by reference or made in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject to the safe harbor provisions of the Reform Act. Such forward-looking statements include, without limitation, statements about: o the competitiveness of the cookie and cracker industry; o the future availability and prices of raw and packaging materials; o potential regulatory obligations; o our strategies and o other statements that are not historical facts. When used in this discussion, the words "anticipate," "believe," "estimate" and similar expressions are generally intended to identify forward-looking statements. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including but not limited to: o changes in general economic or business conditions (including in the cookie and cracker industry); o actions of competitors; o our ability to recover material costs in the pricing of our products; o the extent to which we are able to develop new products and markets for our products; o the time required for such development; o the level of demand for such products and o changes in our business strategies. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risks to which we are exposed that may adversely affect results of operations and financial position include changes in future interest rates and raw material prices. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of interest rate swap agreements and commodity futures and options contracts. The use of these instruments is limited to hedging activities and they are not entered for trading or speculative purposes. These agreements and contracts are entered into at a corporate level and as such, any income or expense associated with these transactions is not allocated to our reportable segments. 18 Our exposure to market risk for changes in interest rates relates primarily to long-term debt obligations. Our current debt structure consists of both fixed and floating rate debt. Interest rate swap agreements are used to effectively manage changes in interest rates related to the majority of our borrowings with the objective of reducing overall interest costs. Sensitivity analysis was used to assess the impact that changes in market prices have on the fair value of interest rate swap agreements. Assuming a ten percent increase in market price, the fair value of the interest rate swap agreements at January 2, 1999, with a notional amount of $527.3 million, would increase the net receivable to $3.1 million, while the impact of a ten percent decrease in market price would result in a net payable of $4.4 million. We enter into commodity futures and options contracts to neutralize the impact of price increases on raw material purchases that are not likely to be recovered through higher prices on our products. We also used sensitivity analysis to assess the potential impact on the fair value of commodity futures and options contracts. Assuming a ten percent increase or decrease in market price, the fair value of open contracts with a notional amount of $61.7 million at January 2, 1999 would be impacted by $5.8 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the Index to Financial Statements and Financial Statement Schedule on F-1 for the required information. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding our Directors is incorporated by reference to Keebler's Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 1999 annual meeting. Information regarding our Executive Officers can be found in Part I of this Annual Report on Form 10-K on pages 5 through 7. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to Keebler's Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 1999 annual meeting. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to Keebler's Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 1999 annual meeting. 19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The financial statements listed in the accompanying Index to Financial Statements and Financial Statement Schedule are filed as part of this report on pages F-2 to F-30. 2. The financial statement schedule listed in the accompanying Index to Financial Statements and Financial Statement Schedule is filed as part of this report on page S-2. 3. The exhibits listed in the accompanying Index to Exhibits are filed as part of this Form 10-K unless noted otherwise. (b) Reports on Form 8-K 1. Current Report on Form 8-K/A dated December 10, 1998 related to the acquisition of President International, Inc. by Keebler Foods Company on September 28, 1998. (c) Exhibits See Exhibit Index at page i. (d) Financial Statement Schedule See Index to Financial Statements and Financial Statement Schedule on page F-1. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KEEBLER FOODS COMPANY (Registrant) /s/ SAM K. REED -------------------------------------------------------- Sam K. Reed President, Chief Executive Officer and Director Date: March 22, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 22, 1999.
/s/ SAM K. REED /s/ ROBERT P. CROZER - ---------------------------------------------------------- -------------------------------------------------------- Sam K. Reed Robert P. Crozer President, Chief Executive Officer and Director (Director) (Principal Executive Officer) /s/ E. NICHOL MCCULLY /s/ AMOS R. MCMULLIAN - ---------------------------------------------------------- -------------------------------------------------------- E. Nichol McCully Amos R. McMullian Senior Vice President and Chief Financial Officer (Director) (Principal Financial Officer) /s/ JAMES T. SPEAR /s/ WAYNE H. PACE - ---------------------------------------------------------- -------------------------------------------------------- James T. Spear Wayne H. Pace Vice President Finance and Corporate Controller (Director) (Chief Accounting Officer) /s/ JOHNSTON C. ADAMS, JR. /s/ C. MARTIN WOOD III - ---------------------------------------------------------- -------------------------------------------------------- Johnston C. Adams, Jr. C. Martin Wood III (Director) (Director) /s/ FRANKLIN L. BURKE /s/ JIMMY M. WOODWARD - ---------------------------------------------------------- -------------------------------------------------------- Franklin L. Burke Jimmy M. Woodward (Director) (Director) /s/ G. ANTHONY CAMPBELL - ---------------------------------------------------------- G. Anthony Campbell (Director) 21
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Keebler Foods Company and UB Investments US Inc. and Subsidiaries
FINANCIAL STATEMENTS: PAGE Report of Independent Accountants....................................................................... F-2 Consolidated Balance Sheets at January 2, 1999 and January 3, 1998...................................... F-3 Consolidated Statements of Operations for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996........ F-5 Consolidated Statements of Shareholders' Equity (Deficit) for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996................................................................................ F-6 Consolidated Statements of Cash Flows for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996........ F-7 Notes to Consolidated Financial Statements.............................................................. F-8 FINANCIAL STATEMENT SCHEDULE: Report of Independent Accountants.................................................................... S-1 Schedule II - Valuation and Qualifying Accounts...................................................... S-2 Note: The consolidated financial statements listed in the above index for Keebler Foods Company include the financial statements of the successor company for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996, and the predecessor company for the four weeks ended January 26, 1996, the date on which UBIUS was acquired by INFLO. The distinction between the successor company's and the predecessor company's consolidated financial statements has been made by inserting a double line between such consolidated financial statements. F-1
REPORT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY We have audited the accompanying consolidated balance sheets of Keebler Foods Company and Subsidiaries as of January 2, 1999 and January 3, 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended, and the forty-eight week period ended December 28, 1996. We have also audited the consolidated statements of operations, shareholders' equity and cash flows of UB Investments US Inc. and Subsidiaries for the four-week period ended January 26, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keebler Foods Company and Subsidiaries as of January 2, 1999 and January 3, 1998, and the consolidated results of operations and cash flows of Keebler Foods Company and Subsidiaries for the years ended January 2, 1999 and January 3, 1998, and the forty-eight weeks ended December 28, 1996, and the consolidated results of operations and cash flows of UB Investments US Inc. and Subsidiaries for the four week period ended January 26, 1996 in conformity with generally accepted accounting principles. PRICEWATERHOUSECOOPERS LLP Chicago, Illinois February 2, 1999 F-2 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 2, January 3, 1999 1998 -------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 23,515 $ 27,188 Trade accounts and notes receivable, net 141,077 98,963 Inventories, net: Raw materials 31,722 25,543 Package materials 13,081 7,306 Finished goods 120,550 78,131 Other 1,024 1,482 -------------- -------------- 166,377 112,462 Deferred income taxes 57,713 42,730 Other 26,636 20,303 -------------- -------------- Total current assets 415,318 301,646 PROPERTY, PLANT AND EQUIPMENT, NET 564,524 478,121 GOODWILL, NET 391,449 47,059 TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 226,084 154,146 PREPAID PENSION 38,205 43,060 ASSETS HELD FOR SALE 2,972 3,742 OTHER ASSETS 17,228 15,077 -------------- -------------- Total assets $ 1,655,780 $ 1,042,851 ============== ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3
KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 2, January 3, 1999 1998 -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 112,730 $ 26,365 Trade accounts payable 143,572 126,213 Other liabilities and accruals 232,087 194,923 Income taxes payable 10,779 13,784 Plant and facility closing costs and severance 11,018 6,900 -------------- -------------- Total current liabilities 510,186 368,185 LONG-TERM DEBT 541,765 272,390 OTHER LIABILITIES: Deferred income taxes 147,098 69,417 Postretirement/postemployment obligations 63,754 60,605 Plant and facility closing costs and severance 15,563 15,578 Deferred compensation 19,368 18,669 Other 28,745 15,956 -------------- -------------- Total other liabilities 274,528 180,225 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 100,000,000 shares authorized and none issued) - - Common stock ($.01 par value; 500,000,000 shares authorized and 84,125,164 and 77,638,206 shares issued, respectively) 841 776 Additional paid-in capital 169,532 148,613 Retained earnings 167,608 72,737 Treasury stock (8,680) (75) -------------- -------------- Total shareholders' equity 329,301 222,051 -------------- -------------- Total liabilities and shareholders' equity $ 1,655,780 $ 1,042,851 ============== ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4
KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
KEEBLER FOODS COMPANY || UBIUS --------------------------------------------------------|| ------------------ Forty-Eight || Four YEAR ENDED Year Ended Weeks Ended || Weeks Ended JANUARY 2, 1999 January 3, 1998 December 28, 1996 || January 26, 1996 ------------------ ------------------ ------------------|| ------------------ || NET SALES $ 2,226,480 $ 2,065,184 $ 1,645,532 || $ 101,656 || COSTS AND EXPENSES: || Cost of sales 938,896 888,031 774,198 || 54,870 Selling, marketing and administrative || expenses 1,080,044 1,026,245 794,837 || 71,427 Other 11,501 9,511 6,347 || 857 ------------------ ------------------ ------------------|| ------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS 196,039 141,397 70,150 || (25,498) || Interest (income) from affiliates - - - || (875) Interest (income) (3,763) (1,191) (450)|| (3) Interest expense to affiliates - - - || 664 Interest expense 30,263 35,038 38,921 || 98 ------------------ ------------------ ------------------|| ------------------ INTEREST EXPENSE (INCOME), NET 26,500 33,847 38,471 || (116) ------------------ ------------------ ------------------|| ------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS || BEFORE INCOME TAX EXPENSE 169,539 107,550 31,679 || (25,382) Income tax expense 72,962 45,169 14,002 || - ------------------ ------------------ ------------------|| ------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS || BEFORE EXTRAORDINARY ITEM 96,577 62,381 17,677 || (25,382) || DISCONTINUED OPERATIONS: || Gain on disposal of Frozen Food || businesses, net of tax - - - || 18,910 ------------------ ------------------ ------------------|| ------------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 96,577 62,381 17,677 || (6,472) EXTRAORDINARY ITEM: || Loss on early extinguishment of debt, || net of tax 1,706 5,396 1,925 || - ------------------ ------------------ ------------------|| ------------------ NET INCOME (LOSS) $ 94,871 $ 56,985 $ 15,752 || $ (6,472) ================== ================== ==================|| ================== BASIC NET INCOME PER SHARE: || Income from continuing operations || before extraordinary item $ 1.16 $ 0.80 $ 0.24 || Extraordinary item 0.02 0.07 0.03 || ================== ================== ==================|| Net income $ 1.14 $ 0.73 $ 0.21 || ================== ================== ==================|| WEIGHTED AVERAGE SHARES OUTSTANDING 83,254 77,604 75,244 || ================== ================== ==================|| DILUTED NET INCOME PER SHARE: || Income from continuing operations || before extraordinary item $ 1.10 $ 0.77 $ 0.23 || Extraordinary item 0.02 0.07 0.02 || ================== ================== ==================|| Net income $ 1.08 $ 0.70 $ 0.21 || ================== ================== ==================|| WEIGHTED AVERAGE SHARES OUTSTANDING 87,486 80,562 76,076 || ================== ================== ==================|| THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5
KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK ---------------------- PAID-IN EARNINGS --------------------- SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT TOTAL ----------- ---------- ----------- ----------- ---------- ---------- ----------- BALANCE AT DECEMBER 30, 1995 (UBIUS) 1,000 $ 1,000 $ 745,000 $ (694,243) - $ - $ 51,757 Net loss for the four weeks - - - (6,472) - - (6,472) ----------- ---------- ----------- ----------- ---------- ---------- ----------- BALANCE AT JANUARY 26, 1996 (UBIUS) 1,000 1,000 745,000 (700,715) - - 45,285 Write-off of predecessor company equity (1,000) (1,000) (745,000) 700,715 - - (45,285) Purchase of the Company by INFLO Holdings Corporation effective January 26, 1996 71,656 717 124,284 - - - 125,001 Management investment 306 2 786 - - - 788 Issuance of common stock and warrants 5,676 57 23,543 - - - 23,600 to Bermore Net income for the forty-eight weeks - - - 15,752 - - 15,752 ----------- ---------- ----------- ----------- ---------- ---------- ----------- BALANCE AT DECEMBER 28, 1996 (KEEBLER FOODS COMPANY) 77,638 776 148,613 15,752 - - 165,141 Purchase of treasury shares - - - - (43) (75) (75) Net income - - - 56,985 - - 56,985 ----------- ---------- ----------- ----------- ---------- ---------- ----------- BALANCE AT JANUARY 3, 1998 (KEEBLER FOODS COMPANY) 77,638 776 148,613 72,737 (43) (75) 222,051 Exercise of Bermore warrant 6,136 61 19,740 - - - 19,801 Purchase of treasury shares - - - - (292) (8,605) (8,605) Exercise of employee stock options 351 4 1,179 - - - 1,183 Net income - - - 94,871 - - 94,871 ----------- ---------- ----------- ----------- ---------- ---------- ----------- BALANCE AT JANUARY 2, 1999 (KEEBLER FOODS COMPANY) 84,125 $ 841 $ 169,532 $ 167,608 (335) $ (8,680) $ 329,301 =========== ========== =========== =========== ========== ========== =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-6
KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
KEEBLER FOODS COMPANY || UBIUS --------------------------------------------------|| ---------------- Forty-Eight || Four YEAR ENDED Year Ended Weeks Ended || Weeks Ended JANUARY 2, 1999 January 3, 1998 December 28,1996|| January 26, 1996 ---------------- ---------------- ----------------|| ---------------- || CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES || Net income (loss) $ 94,871 $ 56,985 $ 15,752 || $ (6,472) Adjustments to reconcile net income (loss) to cash from || operating activities: || Depreciation and amortization 69,125 60,708 49,461 || 1,973 Deferred income taxes 10,075 18,548 12,254 || - Accretion on Seller Note - 2,376 2,246 || - Loss on early extinguishment of debt, net of tax 1,706 3,761 1,925 || - Loss (gain) on sale of property, plant and equipment 424 (358) (328)|| 33 Gain on the disposal of the Frozen Food businesses, || net of tax - - - || (18,910) Other 1,460 - - || - Changes in assets and liabilities: || Trade accounts and notes receivable, net (5,082) 38,187 3,842 || 22,068 Accounts receivable/payable from affiliates, net - - - || (1,941) Inventories, net (13,830) 203 (9,809)|| 4,353 Recoverable income taxes and income taxes payable (4,556) 16,113 - || 25 Other current assets (2,845) (966) 1,644 || 1,192 Deferred debt issue costs (1,845) (1,344) (8,032)|| - Trade accounts payable and other current liabilities 869 36,806 26,105 || 11,550 Plant and facility closing costs and severance (5,373) (13,715) (41,279)|| - Restructuring reserves - - - || (14,469) Other, net (2,319) 1,044 (553)|| 246 ---------------- ---------------- ----------------|| ---------------- Cash provided from (used by) operating activities 142,680 218,348 53,228 || (352) || CASH FLOWS (USED BY) PROVIDED FROM INVESTING ACTIVITIES || Capital expenditures (66,798) (48,429) (29,352)|| (3,228) Proceeds from property disposals 917 6,950 9,236 || 644 Working capital adjustment paid by UB Investment || (Netherlands) B.V. - - 32,609 || - Purchase of President International, Inc., net of cash || acquired (444,818) - - || - Purchase of Sunshine Biscuits, Inc., net of cash acquired - - (142,670)|| - Disposition of the Frozen Food businesses - - - || 67,749 ---------------- ---------------- ----------------|| ---------------- Cash (used by) provided from investing activities (510,699) (41,479) (130,177)|| 65,165 || CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES || || Purchase of treasury stock/capital contributions (8,605) (75) 788 || - Exercise of options and warrant 20,577 - - || - Long-term debt borrowings 425,000 109,750 220,000 || - Long-term debt repayments (157,626) (271,310) (134,000)|| (2,377) Commercial paper and Revolving Loan facilities, net 85,000 - - || (63,300) ---------------- ---------------- ----------------|| ---------------- Cash provided from (used by) financing activities 364,346 (161,635) 86,788 || (65,677) ---------------- ---------------- ----------------|| ---------------- (Decrease) increase in cash and cash equivalents (3,673) 15,234 9,839 || (864) Cash and cash equivalents at beginning of period 27,188 11,954 2,115 || 2,978 ---------------- ---------------- ----------------|| ---------------- Cash and cash equivalents at end of period $ 23,515 $ 27,188 $ 11,954 || $ 2,114 ================ ================ ================|| ================ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-7
KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- THE CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY ("THE COMPANY," "KEEBLER" OR "SUCCESSOR COMPANY") INCLUDE THE FINANCIAL STATEMENTS OF THE SUCCESSOR COMPANY FOR THE YEAR ENDED JANUARY 2, 1999, THE YEAR ENDED JANUARY 3, 1998 AND THE FORTY-EIGHT WEEK PERIOD ENDED DECEMBER 28, 1996, AND UB INVESTMENTS US INC. ("UBIUS" OR "PREDECESSOR COMPANY") FOR THE FOUR WEEK PERIOD ENDED JANUARY 26, 1996, THE DATE ON WHICH UBIUS WAS ACQUIRED BY INFLO HOLDINGS CORPORATION ("INFLO"). THE DISTINCTION BETWEEN THE CONSOLIDATED FINANCIAL STATEMENTS OF THE SUCCESSOR COMPANY AND PREDECESSOR COMPANY HAS BEEN MADE BY INSERTING A DOUBLE LINE BETWEEN SUCH CONSOLIDATED FINANCIAL STATEMENTS AND RELATED FOOTNOTES. 1. BASIS OF PRESENTATION BUSINESS AND OWNERSHIP Keebler Foods Company, a manufacturer and distributor of food products, was acquired by INFLO on January 26, 1996. INFLO was owned by Artal Luxembourg S. A. ("Artal"), a private investment company, Flowers Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company, Bermore, Limited ("Bermore"), a privately held corporation and the parent of G.F. Industries, Inc. ("GFI") and certain members of Keebler's current management. On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger"), and subsequently changed its name to Keebler Foods Company. The financial statements as of and for all periods subsequent to January 26, 1996 have been restated to reflect the Merger as if it had been effective January 26, 1996. INFLO was legally established as of November 2, 1995, but did not have any operating activity, assets or liabilities until the Keebler acquisition on January 26, 1996. On January 29, 1998, Keebler made an initial public offering of 13,386,661 shares of common stock ("the Offering"). As part of the transaction, Flowers acquired additional shares of common stock from Artal and Bermore so that its ownership of outstanding stock increased to approximately 55%. In addition, during 1998, Bermore, through a series of transactions, transferred its shares held to Claremont Enterprises, Limited ("Claremont"), a privately held Bahamian limited company. Keebler is comprised of primarily the following wholly-owned subsidiaries: Keebler Company, Bake-Line Products, Inc. ("Bake-Line"), Sunshine Biscuits, Inc. ("Sunshine"), President International, Inc. ("President"), Keebler Leasing Corp. and Johnston's Ready Crust Company. The Company, formerly UBIUS, had previously been owned by UB Investments (Netherlands) B.V., a Dutch company (See Note 3). UB Investments (Netherlands) B.V. is a member of the worldwide group of affiliated companies owned by United Biscuits (Holdings) plc., a publicly held company in the United Kingdom. FISCAL YEAR Keebler's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The 1998 fiscal year consisted of fifty-two weeks and the 1997 fiscal year consisted of fifty-three weeks. As a result of the Keebler acquisition, which closed on the last day of the first four week period of 1996, the 1996 fiscal year consisted of the forty-eight weeks ended December 28, 1996. PRINCIPLES OF CONSOLIDATION All subsidiaries are wholly-owned and included in the consolidated financial statements of Keebler. Intercompany accounts and transactions have been eliminated. GUARANTEES OF NOTES The subsidiaries of Keebler that are not Guarantors of the Senior Subordinated Notes are inconsequential (which means that the total assets, revenues, income or equity of such non-guarantors, both individually and on a combined basis, is less than 3% of Keebler's consolidated assets, revenues, income or equity), individually and in the aggregate, to the consolidated financial statements of Keebler. The guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors in the Senior Subordinated Notes. F-8 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) RECLASSIFICATIONS Certain reclassifications of prior years' data have been made to conform with the current year reporting. 2. ACQUISITION OF PRESIDENT INTERNATIONAL, INC. On September 28, 1998, Keebler acquired President International, Inc. from President International Trade and Investment Corporation, a company limited by shares under the International Business Companies Ordinance of the British Virgin Islands, for an aggregate purchase price of $446.1 million, excluding related fees and expenses paid of $4.5 million. The acquisition of President was a cash transaction funded with approximately $75.0 million from existing resources and the remainder from borrowings under the $700.0 million Senior Credit Facility Agreement ("Credit Facility") and a $125.0 million Bridge Facility, both dated as of September 28, 1998. The acquisition of President by Keebler has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of President based on respective fair values. The acquisition has resulted in an unallocated excess purchase price over fair value of net assets acquired of $329.2 million, which is being amortized on a straight-line basis over a forty year period. Results of operations for President from September 28, 1998 to January 2, 1999 have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place at the beginning of fiscal year 1997. The unaudited pro forma information includes adjustments for interest expense that would have been incurred related to financing the purchase, additional depreciation of the property, plant and equipment acquired and amortization of the trademarks, trade names, other intangibles and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been reported had the President acquisition been effected on the assumed date. Unaudited For the Year Ended ------------------------- January 2, January 3, 1999 1998 ----------- ----------- (IN THOUSANDS) Net sales..............................................$ 2,583.5 $ 2,501.5 Income before extraordinary item.......................$ 104.7 $ 56.7 Net income.............................................$ 102.7 $ 49.3 Diluted net income per share: Income before extraordinary item...................$ 1.20 $ 0.70 Net income.........................................$ 1.18 $ 0.61 3. PREDECESSOR COMPANY UBIUS, the predecessor company to Keebler Foods Company, was formed in 1992 as a result of the legal restructuring of United Biscuit (Holdings) plc.'s operations in the United States. UBIUS received the stock of the subsidiaries in exchange for the $850.0 million in debt with UB Investments (Netherlands) B.V., as well as all of the capital stock of UBIUS. F-9 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PREDECESSOR COMPANY (CONTINUED) On May 20, 1995, the predecessor company adopted plans to sell the Salty Snacks business. On January 24, 1996, the predecessor company sold to Kelly Food Products, Inc. selected assets of the Salty Snacks business including the production plant in Bluffton, Indiana, trademarks and other intangibles related to the business, inventory and property, plant and equipment, including selected assets related to the convenience sales division. During July 1995, the predecessor company adopted plans to discontinue the operations of its Frozen Food businesses. On January 9, 1996, UB Investments (Netherlands) B.V. sold the assets and stock of Bernardi Italian Foods Co., The Original Chili Bowl, Inc., Chinese Food Processing Corporation (wholly-owned subsidiaries collectively known as the Frozen Food businesses) and certain assets of Keebler Company to Windsor Food Company Ltd. for $70.0 million. There were no operating activities for the Frozen Food businesses during the four weeks ended January 26, 1996, as the sale was effective as of December 31, 1995. A gain on sale of $18.9 million was recorded during the four weeks ended January 26, 1996. Income tax expense was not recognized on the gain on the sale of the Frozen Food businesses as the predecessor company did not provide for any income taxes during the four weeks ended January 26, 1996. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS All highly liquid instruments purchased with an original maturity of three months or less are classified as cash equivalents. The carrying amount of cash equivalents approximates fair value due to the relatively short maturity of these investments. TRADE ACCOUNTS RECEIVABLE Substantially all of Keebler's trade accounts receivable are from retail dealers and wholesale distributors. Keebler performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Trade accounts receivable, as shown on the consolidated balance sheets, were net of allowances of $7.8 million as of January 2, 1999 and $5.0 million as of January 3, 1998. INVENTORIES Inventories are stated at the lower of cost or market with cost determined principally by the last-in, first-out ("LIFO") method. Inventories stated under the LIFO method represent approximately 94% of total inventories at January 2, 1999 and 88% of total inventories at January 3, 1998. Because Keebler has adopted a natural business unit single pool approach to determining LIFO inventory cost, classification of the LIFO reserve by inventory component is impractical. There was no reserve required at January 2, 1999 to state the inventory on a LIFO basis. The excess of the current production cost of inventories over LIFO cost was $2.2 million at January 3, 1998. At January 2, 1999 and January 3, 1998, inventories are shown net of an allowance for slow-moving and aged inventory of $9.6 million and $6.8 million, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation expense is computed using the straight-line method based on the estimated useful lives of the depreciable assets. Certain facilities and equipment held under capital leases are classified as property, plant and equipment and amortized using the straight-line method over the lease terms, and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense. F-10 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES Trademarks, trade names and other intangibles are stated at cost and are amortized on a straight-line basis over a period of twenty to forty years. Accumulated amortization of trademarks, trade names and other intangibles was $11.8 million and $7.1 million at January 2, 1999 and January 3, 1998, respectively. GOODWILL Goodwill represents the excess cost over the fair value of the tangible and identifiable intangible net assets of acquired businesses. Goodwill is amortized on a straight-line basis over a period of forty years. Accumulated amortization of goodwill was $4.9 million and $1.8 million at January 2, 1999 and January 3, 1998, respectively. REVENUE RECOGNITION Revenue from the sale of products is recognized at the time of the shipment to customers. RESEARCH AND DEVELOPMENT Activities related to new product development and major improvements to existing products and processes are expensed as incurred and were $10.2 million for the year ended January 2, 1999, $10.2 million for the year ended January 3, 1998, $4.3 million for the forty-eight weeks ended December 28, 1996 and $0.6 million for the four weeks ended January 26, 1996. ADVERTISING AND CONSUMER PROMOTION Advertising and consumer promotion costs are generally expensed when incurred or no later than when the advertisement appears or the event is run. Advertising and consumer promotion expense was $87.2 million for the year ended January 2, 1999, $67.6 million for the year ended January 3, 1998, $33.3 million for the forty-eight weeks ended December 28, 1996 and $5.1 million for the four weeks ended January 26, 1996. There were no deferred advertising costs at January 2, 1999 and January 3, 1998. DERIVATIVE FINANCIAL INSTRUMENTS Keebler uses derivative financial instruments as part of an overall strategy to manage market risk. Keebler uses forward commodity futures and options contracts to hedge existing or future exposures to changes in commodity prices. Interest rate swap agreements are used to reduce the impact of changes in interest rates. Keebler does not enter into these derivative financial instruments for trading or speculative purposes (See Note 16). INCOME TAXES The consolidated financial statements reflect the application of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes." Keebler files a consolidated federal income tax return. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the determination as to whether there has been an impairment of long-lived assets and the related unamortized goodwill, is based on whether certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost of any long-lived assets and the related unamortized goodwill may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. F-11 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." The consolidated financial statements reflect the application of SFAS No. 128 which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options and warrants. Diluted earnings per share is similar to fully diluted earnings per share. SEGMENTS In 1998, Keebler adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization used by management to make operating decisions and to assess performance as the source in identifying and reporting segment information. In addition, SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the results of operations or financial position, but did affect the disclosure of segment information (See Note 17). PENSION PLANS AND POSTRETIREMENT BENEFITS In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The consolidated financial statements and related footnotes reflect the application of SFAS No. 132 (See Notes 10 and 11). USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 5. PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment, including related accumulated depreciation follows:
JANUARY 2, 1999 January 3, 1998 ----------------- ----------------- (IN THOUSANDS) Land.............................................................. $ 18,374 $ 16,487 Buildings......................................................... 140,907 130,241 Machinery and equipment........................................... 424,574 328,473 Office furniture and fixtures..................................... 76,447 56,559 Delivery equipment................................................ 7,208 6,946 Construction in progress.......................................... 51,717 38,080 ----------------- ----------------- 719,227 576,786 Accumulated depreciation.......................................... (154,703) (98,665) ----------------- ----------------- $ 564,524 $ 478,121 ================= =================
Property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the depreciable assets. Buildings are depreciated over a useful life of ten to forty years. Machinery and equipment is depreciated over a useful life of three to twenty-five years. Office furniture and fixtures are depreciated over a useful life of three to fifteen years. Delivery equipment is depreciated over a useful life of two to twelve years. F-12 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. ASSETS HELD FOR SALE In 1998, a warehouse located in Houston, Texas, acquired as part of the President acquisition, was placed for sale. In addition, Keebler continued to hold an idle manufacturing facility in Atlanta, Georgia and a distribution center in Kensington, Connecticut for sale. During 1998, Keebler recognized an impairment charge of $0.9 million in order to reflect the manufacturing facility at fair value. Disposition of all assets held for sale is expected to occur before the end of 1999 without a significant gain or loss. 7. OTHER CURRENT LIABILITIES AND ACCRUALS Other current liabilities and accruals consisted of the following at January 2, 1999 and January 3, 1998:
JANUARY 2, 1999 January 3, 1998 ----------------- ----------------- (IN THOUSANDS) Self insurance reserves........................................... $ 52,202 $ 55,185 Employee compensation............................................. 73,017 55,724 Marketing and consumer promotions................................. 53,027 52,838 Other............................................................. 53,841 31,176 ----------------- ----------------- $ 232,087 $ 194,923 ================= =================
Keebler obtains insurance to manage potential losses and liabilities related to workers' compensation, health and welfare claims and general, product and vehicle liability. Keebler has elected to retain a significant portion of the expected losses through the use of deductibles and stop-loss limitations. Provisions for losses expected under these programs are recorded based on Keebler's estimates of aggregate liability for claims incurred. These estimates utilize Keebler's prior experience and actuarial assumptions provided by the Company's insurance carrier. The total estimated liability for these losses at January 2, 1999 and January 3, 1998 was $52.2 million and $55.2 million, respectively, and is included in other current liabilities and accruals. Keebler has collateralized its liability for potential self-insurance losses in several states by obtaining standby letters of credit which aggregate to approximately $17.0 million. 8. DEBT AND LEASE COMMITMENTS Long-term debt consisted of the following at January 2, 1999 and January 3, 1998:
Interest Rate Final Maturity JANUARY 2, 1999 January 3, 1998 ----------------- --------------------- ----------------- ----------------- (IN THOUSANDS) Bridge Facility................ 6.263% September 26, 1999 $ 75,000 $ - Revolving Facility............. 6.073% September 28, 2004 85,000 - Term Facility.................. 5.944% September 28, 2004 350,000 - Term-A Loans................... 6.144% April 7, 2003 - 156,000 Senior Subordinated Notes...... 10.750% July 1, 2006 124,400 125,000 Other Senior Debt.............. Various 2001-2005 11,805 12,645 Capital Lease Obligations...... Various 2002-2042 8,290 5,110 ----------------- ----------------- 654,495 298,755 Less: Current maturities....... 112,730 26,365 ----------------- ----------------- $ 541,765 $ 272,390 ================= =================
At January 2, 1999, Keebler's primary credit financing was provided by a $700.0 million Credit Facility and a $125.0 million Bridge Facility. Keebler entered into new debt facilities in order to finance the acquisition of President on September 28, 1998. The new debt structure specifically provides for available borrowings of $825.0 million consisting of $350.0 million under the Revolving Facility, $350.0 million under the Term Facility and an additional $125.0 million under the Bridge Facility. F-13 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DEBT AND LEASE COMMITMENTS (CONTINUED) The current outstanding balance on the Term Facility at January 2, 1999 was $350.0 million with quarterly scheduled principal payments through the final maturity of September 2004. The Revolving Facility, with a current outstanding balance of $85.0 million and available balance of $265.0 million at January 2, 1999, has a final maturity of September 2004, with no scheduled principal payments. Certain letters of credit totaling $42.2 million reduce the available balance on the Revolving Facility. Any unused borrowings under the Revolving Facility are subject to a commitment fee. The current commitment fee will vary from 0.1250% - 0.30% based on the relationship of debt to adjusted earnings with a minimum commitment fee of 0.20% required through March 28, 1999. The Bridge Facility, which is anticipated to be refinanced with a receivables facility (See Note 19), has a final maturity of September 1999, with no scheduled principal payments. At January 2, 1999, the current outstanding balance on the Bridge Facility was $75.0 million with an additional $50.0 million in available borrowings. Interest on the Credit Facility is calculated based on base rate plus applicable margin. The base rate can, at Keebler's option, be: i) the higher of the base domestic lending rate as established by the administrative agent for the lender of the Credit Facility, or the Federal Funds Rate plus one-half of one percent or ii) a reserve percentage adjusted LIBO Rate as offered by the administrative agent. The Credit Facility requires Keebler to meet certain financial covenants including debt to earnings before interest, taxes, depreciation and amortization ratio and cash flow coverage ratios. Interest on the Bridge Facility is calculated in the same manner as the Credit Facility and also is restricted by the same financial covenants. In conjunction with the President acquisition on September 28, 1998, Term Loan A was extinguished by using $145.0 million of borrowings under the new Credit Facility. Keebler recorded a before-tax extraordinary charge of $2.8 million related primarily to expensing certain bank fees which were being amortized and which were incurred at the time Term Loan A was issued. The related after-tax charge was $1.7 million. At January 3, 1998, Keebler's primary credit financing was provided by a $380.0 million Second Amended and Restated Credit Agreement ("Credit Agreement") consisting of a $140.0 million Revolving Loan facility and a $240.0 million Term Loan of which the outstanding balance at January 3, 1998 was $156.0 million. The amendment to the Credit Agreement was entered into on April 8, 1997 to obtain more favorable terms, fees and interest rates. The interest expense, including commitment fee, on the Credit Agreement was calculated in substantially the same manner as is done under the current Credit Facility. During the fourth quarter of 1997, using existing cash resources, Keebler pre-paid $70.0 million of principal on Term Loan A; $30.0 million on December 8, 1997 and $40.0 million on November 10, 1997. The pre-payments resulted in the recognition of a $1.1 million after-tax extraordinary charge related to the expensing of certain unamortized bank fees which were incurred at the time Term Loan A was issued. On November 21, 1997, Keebler settled the Seller Note with a payment of $31.7 million funded through working capital. Keebler assumed the $32.5 million Seller Note, previously held by INFLO, as a result of the Merger. The Seller Note did not bear interest until January 26, 1999 and was recorded at a discounted value of $24.4 million on January 26, 1996. The discount was being amortized over three years at an effective interest rate of 10.0%. Keebler recorded a before-tax extraordinary charge of $2.6 million on the early extinguishment of debt. The related after-tax charge was $1.6 million. In conjunction with the amendment to the Credit Agreement on April 8, 1997, Term Loans B and C were extinguished using $40.0 million of borrowings under the Revolving Loan facility, $109.8 million of increased borrowings against Term Loan A and $3.8 million from cash resources. Keebler recorded a before-tax extraordinary charge of $4.6 million related primarily to expensing certain unamortized bank fees which were incurred at the time Term Loans B and C were issued. The related after-tax charge was $2.7 million. F-14 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DEBT AND LEASE COMMITMENTS (CONTINUED) On October 23, 1996, pursuant to an exchange and registration rights agreement, Keebler registered its 10.75% Senior Subordinated Notes due 2006 (the "Notes") under the Securities Act of 1933 in exchange for previously held Increasing Rate Notes. The Notes were issued under an indenture dated June 15, 1996 between Keebler, Keebler's Restricted Subsidiaries (as defined in the indenture) and the U.S. Trust Company of New York, as trustee. The Notes are unsecured, senior subordinated obligations of Keebler guaranteed by the Restricted Subsidiaries. Interest on the Notes is paid semi-annually on January 1 and July 1 of each year, commencing January 1, 1997. At Keebler's option, up to 35.0% of the aggregate original principal of the Notes can be redeemed at a redemption price of 110.0% on or prior to July 1, 1999 following a public equity offering. In addition, Keebler's ability to pay dividends or make other distributions on its common stock is limited by the terms of the indenture governing the Notes. The Increasing Rate Notes, issued to finance the Keebler acquisition, were repaid in June 1996 with the proceeds from a private placement offering for the 10.75% Senior Subordinated Notes due in 2006. Keebler recorded a before-tax extraordinary loss of $3.2 million on the early extinguishment of the Increasing Rate Notes. The loss consisted primarily of bank fees incurred at the time the Increasing Rate Notes were issued. The after-tax loss was $1.9 million. On July 1, 1998, Keebler entered into a swap transaction with the Bank of Nova Scotia, who also serves as the administrative agent for the lenders under the Credit Facility, which matures on July 1, 2001. The swap transaction had the effect of converting the fixed rate of 10.75% on $124.0 million of the Notes to a rate of 10.26% through January 1, 1999 and 10.32% through July 1, 1999. In addition, on September 30, 1998 and October 5, 1998, Keebler entered into two swap transactions with the Bank of Nova Scotia both maturing on September 30, 2004. Each swap transaction converts the base rate on $116.7 million of the Credit Facility to fixed rate debt of 5.084% and 4.89%, respectively. Keebler also continues to maintain the swap transaction entered into with the Bank of Nova Scotia on January 30, 1996 which converts the base rate on $170.0 million of the Credit Facility to a fixed rate obligation of 5.0185% through February 1, 1999. The maturity date on the $170.0 million swap transaction was extended to February 1, 2001 by the Bank of Nova Scotia on January 28, 1999. Interest of $24.0 million, $39.0 million, $25.2 million and $3.8 million was paid on debt for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, respectively. Aggregate scheduled annual maturities of long-term debt as of January 2, 1999 are as follows: (IN THOUSANDS) 1999............................................................ $ 112,730 2000............................................................ 27,814 2001............................................................ 51,151 2002............................................................ 68,871 2003............................................................ 105,929 2004 and thereafter............................................. 288,000 --------------- $ 654,495 =============== F-15 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DEBT AND LEASE COMMITMENTS (CONTINUED) Assets recorded under capitalized lease agreements included in property, plant and equipment consist of the following:
JANUARY 2, January 3, 1999 1998 -------------- -------------- (IN THOUSANDS) Land............................................. $ 980 $ 980 Buildings........................................ 2,894 51 Machinery and equipment.......................... 2,853 212 Other leased assets.............................. 1 1 -------------- -------------- 6,728 1,244 Accumulated depreciation......................... (242) (105) -------------- -------------- $ 6,486 $ 1,139 ============== ==============
Future minimum lease payments under scheduled capital and operating leases that have initial or remaining noncancelable terms in excess of one year are as follows:
Capital Operating Leases Leases -------------- -------------- (IN THOUSANDS) 1999............................................. $ 986 $ 29,488 2000............................................. 1,018 25,450 2001............................................. 1,073 21,454 2002............................................. 1,481 17,614 2003............................................. 460 16,186 2004 and thereafter.............................. 6,170 25,530 -------------- -------------- Total minimum payments........................... 11,188 $ 135,722 ============== Amount representing interest..................... (2,898) -------------- Obligations under capital lease.................. 8,290 Obligations due within one year.................. (680) -------------- Long-term obligations under capital leases....... $ 7,610 ==============
Rent expense for all operating leases was $38.7 million, $36.1 million, $30.1 million and $2.7 million, for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, respectively. 9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE As part of accounting for the acquisition of President, Keebler recognized costs pursuant to a plan to exit certain activities and operations of the acquired company. These exit costs, for which there is no future economic benefit, were provided for in the allocation of the purchase price and totaled $12.8 million. Company-wide staff reductions were estimated at $6.7 million, with the balance of the reserves allocated to costs associated with manufacturing, sales and distribution facility closings, which principally include lease termination and carrying costs. Spending against the reserves established related to the President acquisition for the year ended January 2, 1999 totaled $0.1 million. Management's plan is expected to be substantially complete before the end of 1999 with only noncancelable lease obligations exceeding the one year time frame. As part of acquiring Keebler and Sunshine, management adopted and began executing a plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4 million were provided for in the allocation of the purchase price of both the Keebler and Sunshine acquisitions. Management's plan included company-wide staff reductions, the closure of manufacturing, distribution and sales force facilities and information system exit costs. F-16 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED) Severance, outplacement and other related costs associated with staff reductions were estimated at $30.7 million. Costs incurred related to the closing of manufacturing, distribution and sales force facilities, which include primarily severance and lease termination and carrying costs, were expected to total $39.9 million. An additional $6.8 million was anticipated for lease costs related to exiting legacy information systems. Spending against the reserves established for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996 totaled $7.7 million, $16.2 million and $41.4 million, respectively. In addition, during the years ended January 2, 1999 and January 3, 1998, Keebler expensed an additional $2.8 million and $2.7 million, respectively, principally for costs related to the closure of distribution facilities not included in the original plan. No additional provisions were made during the forty-eight weeks ended December 28, 1996. Also during the year ended January 2, 1999, Keebler adjusted accruals previously established in the accounting for prior acquisitions by reducing goodwill and other intangibles by $3.7 million to recognize exit costs that are now expected to be less than initially anticipated. At January 2, 1999 and January 3, 1998, the total plant and facility closing costs and severance reserve balance was $26.6 million and $22.5 million, respectively. Only noncancelable lease obligations are anticipated to extend beyond 1999, to be paid out over the next eight years concluding in 2006. 10. EMPLOYEE BENEFIT PLANS The Retirement Plan for Salaried and Certain Hourly-Paid Employees of Keebler Company (the "pension plan") is a trusteed, noncontributory, defined-benefit, pension plan. The pension plan covers certain salaried and hourly-paid employees. Assets held by the pension plan consist primarily of common stocks, government securities and bonds. Benefits provided under the pension plan are primarily based on years of service and the employee's final level of compensation. Keebler's funding policy is to contribute annually not less than the ERISA minimum funding requirements. Effective December 31, 1998, the pension plans of President were merged with Keebler's pension plan. The pension plans of Sunshine, Athens Packaging, Bake-Line and Emerald Industries were merged with Keebler's pension plan effective January 1, 1997. Pension expense included the following components:
Forty-Eight || Four Weeks YEAR ENDED Year Ended Weeks Ended || Ended JANUARY 2, January 3, December 28, || January 26, 1999 1998 1996 || 1996 --------------- --------------- -------------- || --------------- (IN THOUSANDS) || Service cost............................... $ 9,040 $ 8,560 $ 7,711 || $ 599 Interest cost.............................. 31,080 29,673 21,338 || 1,133 Expected return on plan assets............. (39,352) (37,935) (28,247) || (1,693) Amortization of transition obligation...... - - - || 47 Amortization of prior service cost......... 689 - - || (12) --------------- --------------- --------------- || --------------- Pension expense............................ $ 1,457 $ 298 $ 802 || $ 74 =============== =============== =============== || ===============
F-17 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:
JANUARY 2, 1999 January 3, 1998 ----------------- ----------------- (IN THOUSANDS) Change in projected benefit obligation: Benefit obligation at beginning of year............................. $ (437,334) $ (408,060) Service cost........................................................ (9,040) (8,560) Interest cost....................................................... (31,080) (29,673) Amendments.......................................................... (4,874) (5,045) Actuarial loss...................................................... (45,871) (14,795) Acquisition......................................................... (22,805) - Benefits and expenses paid.......................................... 30,692 28,799 ----------------- ----------------- Benefit obligation at year end...................................... (520,312) (437,334) ----------------- ----------------- Change in plan assets: Fair value of plan assets at beginning of year...................... 499,379 464,433 Actual return on plan assets........................................ 77,731 63,745 Acquisition......................................................... 19,292 - Benefits and expenses paid.......................................... (30,692) (28,799) ----------------- ----------------- Fair value of plan assets at year end............................... 565,710 499,379 ----------------- ----------------- Funded status....................................................... 45,398 62,045 Unrecognized actuarial gain......................................... (16,538) (24,029) Unrecognized prior service cost..................................... 9,230 5,044 Contributions subsequent to measurement date........................ 115 - ----------------- ----------------- Prepaid pension..................................................... $ 38,205 $ 43,060 ================= =================
Assumptions used in accounting for the pension plan at each of the respective period-ends are as follows:
Forty-Eight || Four Weeks YEAR ENDED Year Ended Weeks Ended || Ended JANUARY 2, January 3, December 28, || January 26, 1999 1998 1996 || 1996 -------------- -------------- ---------------- || --------------- || Discount rate..................................... 6.5% 7.3% 7.5% || 7.5% Rate of compensation level increases.............. 4.0 4.0 4.0 || 4.0 Expected long-term rate of return on plan assets.. 9.0 9.0 8.6 || 10.0
The plan assets, as of January 2, 1999 and January 3, 1998, include a real estate investment of $3.1 million in a distribution center which is under an operating lease to Keebler. In addition to the pension plan, Keebler also maintains an unfunded supplemental retirement plan for certain highly compensated former executives. Benefits provided are based on years of service. Vesting is graduated depending on termination after age 55. F-18 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) The supplemental retirement plan expense includes the following components:
Forty-Eight || Four Weeks YEAR ENDED Year Ended Weeks Ended || Ended JANUARY 2, January 3, December 28, || January 26, 1999 1998 1996 || 1996 --------------- --------------- --------------- || --------------- (IN THOUSANDS) || Service cost............................... $ - $ - $ - || $ 35 Interest cost.............................. 722 732 637 || 66 Amortization of transition obligation...... - - - || 8 Amortization of prior service cost......... - - - || 13 --------------- --------------- --------------- || --------------- Plan expense............................... $ 722 $ 732 $ 637 || $ 122 =============== =============== =============== || ===============
The unfunded status of the supplemental retirement plan and the amounts recognized in the consolidated balance sheets are as follows:
JANUARY 2, 1999 January 3, 1998 ------------------- ------------------- (IN THOUSANDS) Change in projected benefit obligation: Benefit obligation at beginning of year............................. $ (10,303) $ (10,028) Interest cost....................................................... (722) (732) Actuarial loss...................................................... (844) (296) Benefits and expenses paid.......................................... 750 753 ------------------- ------------------- Benefit obligation at year end...................................... (11,119) (10,303) Fair value of plan assets........................................... - - ------------------- ------------------- Funded status....................................................... (11,119) (10,303) Unrecognized actuarial loss (gain).................................. 387 (458) Benefit payments subsequent to measurement date..................... 109 206 ------------------- ------------------- Accrued obligation.................................................. $ (10,623) $ (10,555) =================== ===================
Assumptions used in accounting for the supplemental retirement plan at each of the respective period-ends are as follows:
Forty-Eight || Four Weeks YEAR ENDED Year Ended Weeks Ended || Ended JANUARY 2, January 3, December 28, || January 26, 1999 1998 1996 || 1996 -------------- -------------- -------------- || -------------- || Discount rate............................. 6.5% 7.3% 7.5% || 7.5% Rate of compensation level increase....... 4.0 N/A N/A || 4.0
Contributions are also made by Keebler to a retirement program for Grand Rapids union employees. Benefits provided under the plan are based on a flat monthly amount for each year of service and are unrelated to compensation. Contributions are made based on a negotiated hourly rate. For the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, Keebler expensed contributions of $2.3 million, $2.6 million, $2.3 million and $0.2 million, respectively. Keebler contributes to various multiemployer union administered defined-benefit and defined-contribution pension plans. Benefits provided under the multiemployer pension plans are generally based on years of service and employee age. Expense under these plans was $8.9 million, $10.5 million, $7.8 million and $0.9 million for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996, respectively. F-19 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) Prior to 1997, Bake-Line Products, Inc. administered a money purchase pension plan for certain hourly and salaried employees. Contributions were based on 4% of employees' annual salary. Effective January 1, 1997, the Bake-Line money purchase pension plan was merged into Keebler's pension plan. Expenses paid to administer the Bake-Line money purchase pension plan were nominal. 11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Keebler provides certain medical and life insurance benefits for eligible retired employees. The medical plan, which covers nonunion employees with ten or more years of service, is a comprehensive indemnity-type plan. The plan incorporates an up-front deductible, coinsurance payments and employee contributions which are based on length of service. The life insurance plan offers a small amount of coverage versus the amount the employees had while employed. Keebler does not fund the plan. The net periodic postretirement benefit expense includes the following components:
Forty-Eight || Four Weeks YEAR ENDED Year Ended Weeks Ended || Ended JANUARY 2, January 3, December 28, || January 26, 1999 1998 1996 || 1996 -------------- -------------- -------------- || ------------- (IN THOUSANDS) || Service cost...................................... $ 2,045 $ 2,242 $ 2,142 || $ 123 Interest cost..................................... 3,961 3,888 2,729 || 246 Amortization of prior service cost................ (115) - - || - -------------- -------------- -------------- || ------------- Net periodic postretirement benefit expense....... $ 5,891 $ 6,130 $ 4,871 || $ 369 ============== ============== ============== || =============
The unfunded status of the plan reconciled to the postretirement obligation in Keebler's consolidated balance sheets are as follows:
JANUARY 2, 1999 January 3, 1998 ----------------- ----------------- (IN THOUSANDS) Change in accumluated postretirement benefit obligation: Benefit obligation at beginning of year............................. $ (56,690) $ (54,324) Service cost........................................................ (2,045) (2,242) Interest cost....................................................... (3,961) (3,888) Amendments.......................................................... - 689 Actuarial gain...................................................... 3,641 357 Acquisition......................................................... (1,598) - Benefits and expenses paid.......................................... 4,384 2,718 ----------------- ----------------- Benefit obligation at year end...................................... (56,269) (56,690) Fair value of plan assets........................................... - - ----------------- ----------------- Funded status....................................................... (56,269) (56,690) Unrecognized actuarial gain......................................... (7,856) (4,215) Unrecognized prior service cost..................................... (574) (689) Benefit payments subsequent to measurement date..................... 978 614 ----------------- ----------------- Postretirement obligation........................................... $ (63,721) $ (60,980) ================= =================
F-20 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED) The accumulated postretirement benefit obligation was determined using a weighted average discount rate of 6.5% for the year ended January 2, 1999, 7.3% for the year ended January 3, 1998 and 7.5% for both the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996. The weighted average annual assumed rate of increase in the cost of covered benefits is 6.0% for 1998 declining to an ultimate trend rate of 5.0% in 1999. A 1% increase in the trend rate for health care costs would have increased the accumulated benefit obligation as of January 2, 1999 by $2.6 million and the net periodic benefit cost by $0.3 million. A 1% decrease in the trend rate for health care costs would have decreased the accumulated benefit obligation and net periodic benefit cost by $2.7 million and $0.3 million, respectively, as of January 2, 1999. Keebler also provides postemployment medical benefits to employees on long-term disability. The plan is a comprehensive indemnity-type plan which covers nonunion employees on long-term disability. There is no length of service requirement. The plan incorporates coinsurance payments and deductibles. Keebler does not fund the plan. The postemployment obligation included in the consolidated balance sheets at both January 2, 1999 and January 3, 1998 was $4.7 million. 12. INCOME TAXES The components of income tax expense were as shown below:
Forty-Eight || Four Weeks YEAR ENDED Year Ended Weeks Ended || Ended JANUARY 2, January 3, December 28, || January 26, 1999 1998 1996 || 1996 -------------- -------------- -------------- || -------------- (IN THOUSANDS) || Current: || Federal....................................... $ 58,269 $ 22,172 $ - || $ - State......................................... 4,618 3,840 - || - -------------- -------------- -------------- || -------------- Current provision for income taxes.............. 62,887 26,012 - || - Deferred: || Federal....................................... 8,494 17,203 11,524 || 6,490 State......................................... 1,581 1,954 2,478 || 843 Valuation allowance (federal and state)....... - - - || (7,333) -------------- -------------- -------------- || -------------- Deferred provision for income taxes............. 10,075 19,157 14,002 || - -------------- -------------- -------------- || -------------- $ 72,962 $ 45,169 $ 14,002 || $ - ============== ============== ============== || ==============
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:
Forty-Eight || Four Weeks YEAR ENDED Year Ended Weeks Ended || Ended JANUARY 2, January 3, December 28, || January 26, 1999 1998 1996 || 1996 -------------- -------------- -------------- || -------------- (IN THOUSANDS) || U.S. federal statutory rate..................... $ 59,339 $ 37,643 $ 11,140 || $ - State income taxes (net of federal benefit)..... 5,813 3,766 1,608 || - Intangible amortization......................... 3,160 1,836 1,268 || - All others...................................... 4,650 1,924 (14) || - -------------- -------------- -------------- || -------------- $ 72,962 $ 45,169 $ 14,002 || $ - ============== ============== ============== || ==============
F-21 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INCOME TAXES (CONTINUED) The deferred tax assets and deferred tax (liabilities) recorded on the consolidated balance sheets consist of the following:
JANUARY 2, 1999 January 3, 1998 ----------------- ----------------- (IN THOUSANDS) Depreciation....................................................... $ (108,866) $ (82,204) Trademarks, trade names and intangibles............................ (49,348) (88) Prepaid pension.................................................... (14,283) (16,164) Inventory valuation................................................ (6,779) (5,257) ----------------- ----------------- (179,276) (103,713) ----------------- ----------------- Net operating loss carryforwards................................... 80,195 80,195 Postretirement/postemployment benefits............................. 26,171 25,123 Plant and facility closing costs and severance..................... 23,728 10,996 Workers' compensation.............................................. 14,769 15,119 Incentives and deferred compensation............................... 12,063 11,493 Employee benefits.................................................. 10,879 9,583 Charitable contributions........................................... 3,425 8,425 Other.............................................................. 3,011 442 ----------------- ----------------- 174,241 161,376 Valuation allowance................................................ (84,350) (84,350) ----------------- ----------------- $ (89,385) $ (26,687) ================= =================
Net operating loss carryforwards total approximately $203.2 million through 1998 and expire in 2008 through 2011. Pursuant to the terms of the Keebler acquisition, the predecessor company retained the right to use the net operating losses for potential carrybacks. Any unused operating losses are then available to Keebler, but are significantly restricted under current tax law. Therefore, all net operating loss carryforwards have been fully reserved due to the uncertainty of their realization. In the event the net operating loss carryforwards become realizable, the valuation allowance would be reversed against trademarks, trade names and other intangibles. Income taxes paid, net of refunds, were approximately $67.1 million, $9.9 million and $1.6 million for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996, respectively. There were no taxes paid or refunded during the four weeks ended January 26, 1996. 13. SHAREHOLDERS' EQUITY COMMON STOCK There were no cash dividends declared for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 or the four weeks ended January 26, 1996. Keebler's ability to pay cash dividends is limited by the Credit Facility and the Senior Subordinated Notes. The most limiting dividend restriction exists under the Senior Subordinated Notes, which limits dividend payments to the sum of: (i) 50% of consolidated cumulative net income, (ii) net cash proceeds received from the issuance of capital stock, (iii) net cash proceeds received from the exercise of stock options and warrants, (iv) net cash proceeds received from the conversion of indebtedness into capital stock and (v) the net reduction in investments made by Keebler. On January 29, 1998, Keebler made an initial public offering of 13,386,661 shares of common stock. Concurrent with the Offering, Bermore exercised a warrant to purchase 6,135,781 shares of common stock that had been issued in conjunction with the Sunshine acquisition. The exercise of the warrant resulted in Keebler receiving $19.8 million of cash proceeds. Artal and Bermore sold all of the shares in the Offering, with none of the proceeds going to Keebler. F-22 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. SHAREHOLDERS' EQUITY (CONTINUED) The consolidated financial statements reflect Keebler's declaration of a 57.325-for-1 stock split of common stock (the "Stock Split") effective January 22, 1998. The Stock Split was effected in the form of a stock dividend. On July 29, 1997, the Board of Directors of Keebler also approved a 1-for-10 reverse stock split of Keebler's common stock. Accordingly, all references in the consolidated financial statements to number of shares, options, warrants and the related prices, as well as per share amounts and the average number of shares outstanding, have been restated to reflect the stock splits as if they had been effective January 26, 1996. TREASURY STOCK In March 1998, Keebler's Board of Directors authorized the repurchase, at management's discretion, of up to $30.0 million of shares of the Company's common stock. The share repurchase program was primarily instituted to offset dilution which may result from the exercise and sale of shares related to employee stock options. The repurchases of shares of common stock are recorded as treasury stock using the cost method and result in a reduction of shareholders' equity. Should the treasury shares be reissued, Keebler intends to use a first-in, first-out method of reissuance. 14. STOCK OPTION PLAN Keebler has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of options equals the fair value (market value) of the underlying stock options at the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if Keebler had accounted for its employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The four weeks ended January 26, 1996 are not included in the pro forma disclosures, as it was prior to the Keebler acquisition and the adoption of any stock option plan. The following table summarizes the pro forma disclosures regarding net income and earnings per share for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28,1996:
Forty-Eight Weeks Ended YEAR ENDED Year Ended December 28, (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) JANUARY 2, 1999 January 3, 1998 1996 ----------------- ----------------- ---------------- Net income: As reported..................................... $ 94,871 $ 56,985 $ 15,752 Pro forma....................................... $ 91,032 $ 55,032 $ 14,027 Basic net income per share: As reported..................................... $ 1.14 $ 0.73 $ 0.21 Pro forma....................................... $ 1.09 $ 0.71 $ 0.19 Diluted net income per share: As reported..................................... $ 1.08 $ 0.70 $ 0.21 Pro forma....................................... $ 1.04 $ 0.68 $ 0.18 Weighted average grant date fair value of options granted during the year......................... $ 8.53 $ 8.09 $ 1.87
F-23 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. STOCK OPTION PLAN (CONTINUED) These pro forma amounts may not be representative of future disclosures because the estimated fair value of stock options is amortized to expense over the vesting period, which is variable, and additional options may be granted in future years. In 1998, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective input assumptions including the expected stock price volatility. Because Keebler's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of the pro forma disclosures for 1997 and 1996, the fair value for the options was estimated at the date of grant using a present value approach as Keebler was not a public company. For options granted, the following weighted average assumptions were used to determine the fair value:
Forty-Eight Weeks Ended YEAR ENDED Year Ended December 28, JANUARY 2, 1999* January 3, 1998 1996 ---------------- ---------------- -------------- Dividend yield............................ 0.0% 0.0% 0.0% Expected volatility....................... 27.2% 0.0% ** Risk-free interest rate................... 5.04% 6.00% 6.00% Expected option life (years).............. 5 5 5
* Utilized the Black-Scholes option pricing model. ** Volatility accounted for with a discount rate of 20% applied to the valuation of Keebler's stock based upon the present value of future cash flows discounted at the weighted average cost of capital of 19% after tax. Under Keebler's 1996 Stock Option Plan, 9,673,594 shares of Keebler's stock were authorized for future grant. All options granted have ten year terms and, due to acceleration resulting from the achievement of certain performance measures, vest by 2001. The following table summarizes the 1996 Stock Option Plan activity:
Forty-Eight Weeks Ended December 28, 1996 -------------------------------------- Weighted Average Options Exercise Price ------------------ ------------------ Outstanding at the beginning of the period.................................... - $ - Granted....................................................................... 7,031,198 1.98 Exercised..................................................................... - - Forfeited..................................................................... 228,727 1.74 Expired....................................................................... - - ------------------ Outstanding at the end of the period.......................................... 6,802,471 $ 1.98 ================== Exercisable at the period end................................................. - - ================== - ------------------------------------------------------------------------------------------------------------------------
F-24 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. STOCK OPTION PLAN (CONTINUED)
Year Ended January 3, 1998 -------------------------------------- Weighted Average Options Exercise Price ------------------ ------------------ 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 ================== - ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 2, 1999 -------------------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------------------ ------------------ 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 ================== - ------------------------------------------------------------------------------------------------------------------------
Exercise prices as of January 2, 1999 for options outstanding under the 1996 Stock Option Plan range from $1.74 to $5.23. The weighted average remaining contractual life of these options is approximately seven and one-half years. Under Keebler's 1998 Omnibus Stock Incentive Plan, 2,850,200 shares of Keebler's stock were authorized for future grant. All options granted generally have ten year terms and vest at the end of five years. Vesting can be accelerated if certain stock price performance measures are met. The following table summarizes the 1998 Omnibus Stock Incentive Plan activity:
YEAR ENDED JANUARY 2, 1999 -------------------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------------------ ------------------ 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................................................. - - ================== - ------------------------------------------------------------------------------------------------------------------------
Exercise prices as of January 2, 1999 for options outstanding under the 1998 Omnibus Stock Incentive Plan range from $24.00 to $32.13. The weighted average remaining contractual life of these options is approximately nine years. Under Keebler's Non-Employee Director Stock Plan, 22,500 shares of Keebler's stock were authorized for future grant, all of which have been granted. All options granted have ten year terms and vest automatically upon grant. F-25 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. STOCK OPTION PLAN (CONTINUED) The following table summarizes the Non-Employee Director Stock Plan activity:
YEAR ENDED JANUARY 2, 1999 -------------------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------------------ ------------------ 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 ================== - ------------------------------------------------------------------------------------------------------------------------
As of January 2, 1999, the exercise price for options outstanding under the Non-Employee Director Stock Plan was $27.44. The weighted average remaining contractual life of these options is approximately nine years. 15. NET INCOME PER SHARE Basic net income per share is calculated using the weighted average number of common shares outstanding during each period. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during each period. The common equivalent shares arise from the 1996 Stock Option Plan, the 1998 Omnibus Stock Incentive Plan, the Non-Employee Director Stock Plan and the warrant issued in connection with the Sunshine acquisition and are calculated using the treasury stock method. The following table sets forth the computation of basic and diluted net income per share:
Forty-Eight YEAR ENDED Year Ended Weeks Ended JANUARY 2, 1999 January 3, 1998 December 28, 1996 ------------------- ------------------- ------------------- (IN THOUSANDS) NUMERATOR: Income before extraordinary item................. $ 96,577 $ 62,381 $ 17,677 Extraordinary item, net of tax................... 1,706 5,396 1,925 ------------------- ------------------- ------------------- Net income....................................... $ 94,871 $ 56,985 $ 15,752 =================== =================== =================== DENOMINATOR: Denominator for Basic Net Income Per Share Weighted average shares..................... 83,254 77,604 75,244 Effect of Dilutive Securities: Stock options............................... 3,992 2,168 832 Warrants.................................... 240 790 - ------------------- ------------------- ------------------- Diluted potential common shares............. 4,232 2,958 832 ------------------- ------------------- ------------------- Denominator for Diluted Net Income Per Share..... 87,486 80,562 76,076 =================== =================== ===================
For the year ended January 2, 1999, there were weighted average options to purchase 96,478 shares of common stock at an exercise price ranging from $28.88 to $32.13, which were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. There were no antidilutive securities for the year ended January 3, 1998. For the forty-eight weeks ended December 28, 1996, there were weighted average options to purchase 56,216 shares of common stock at $3.23 per share and the weighted average warrant to purchase 3,768,863 shares of common stock at $3.23 per share which were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. F-26 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair market value of financial instruments, which includes short and long-term borrowings, was estimated using discounted cash flow analyses based on current interest rates which would be obtained for similar financial instruments. The carrying amounts of these financial instruments disclosed in Note 8 approximate fair value. Keebler uses interest-rate swap agreements to effectively convert certain fixed rate debt to a floating rate instrument and certain floating rate debt to a fixed rate instrument. The interest rate swap agreements result in Keebler paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts. The interest rate differential to be paid or received is accrued as interest rates change and is recorded as interest expense. The fair values of the swap agreements were obtained from the Bank of Nova Scotia and were estimated using market prices at each respective year-end. The fair values of the swap agreements are not recognized in the financial statements as Keebler accounts for the agreements as hedges. In 1998, Keebler had entered into four swap transactions expiring between 2001 and 2004. At January 2, 1999, interest rate swap agreements with a notional amount of $403.3 million were used to hedge interest rate fluctuations on floating rate debt and a swap agreement with a notional amount of $124.0 million used to hedge interest rate fluctuations on fixed rate debt. The estimated fair value of the swap agreements at January 2, 1999 was a net receivable of $1.1 million. At January 3, 1998, there were two outstanding swap agreements, both maturing in 2001. A swap agreement with a notional amount of $170.0 million was used to hedge interest rate fluctuations on floating rate debt and another swap agreement with a notional amount of $81.3 million was used to hedge interest rate fluctuations on fixed rate debt. The estimated fair value of the swap agreements at January 3, 1998 was a net receivable of $1.6 million. Keebler often enters into exchange traded commodity futures and options contracts to protect or hedge against adverse raw material price movements related to anticipated inventory purchases. Realized gains or losses on contracts are determined based on the stated market value at the time the contracts are liquidated or expire and are deferred in inventory until the underlying raw material is purchased. Gains or losses realized from the liquidation or expiration of the contracts are recognized as part of the cost of raw materials. Cost of sales was increased by losses on futures and options transactions of $7.1 million and $3.8 million in the years ended January 2, 1999 and January 3, 1998, respectively, and reduced by gains on futures and options transactions of $0.8 million for the forty-eight weeks ended December 28, 1996. Operations for the four weeks ended January 26, 1996, were unaffected by gains or losses on futures and options as the $0.5 million loss was recorded as an adjustment to the opening balance sheet. The notional amount of open futures and options contracts at January 2, 1999 and January 3, 1998 were $61.7 million and $58.7 million, respectively. The fair values of the open futures and options contracts at January 2, 1999 and January 3, 1998, based on the stated market value at those dates, were $57.9 million and $53.8 million, respectively. The open contracts at January 2, 1999 will expire between January 1999 and July 1999. 17. SEGMENT INFORMATION In 1998, Keebler adopted SFAS 131 "Disclosures about Segments of an Enterprise and Related Information." Keebler's reportable segments are Branded and Specialty. The reportable segments were determined using Keebler's method of internal reporting, which divides and analyzes the business by sales channel. The nature of the customers, products and method of distribution can vary by sales channel. The reportable segments represent an aggregation of similar sales channels. The Branded segment is comprised of sales channels that principally market brand name cookie and cracker products to retail outlets. Products in the Branded segment are sold by either a Keebler sales employee or a distributor. The sale channels in the Specialty segment primarily sell cookie and cracker products that are manufactured on a made-to-order basis or that are produced in individual packs to be used in various institutions (i.e., restaurants, hospitals, etc.). Many of the products sold by the Specialty segment are done so through the use of brokers. F-27 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED) Keebler evaluates the performance of the reportable segments and allocates resources based on the segment's profit contribution, defined as earnings before certain functional support costs, amortization, interest and income taxes. The accounting policies for each reportable segment are the same as those described in Note 4 "Summary of Significant Accounting Policies." The cost of sales, however, used to determine a segment's profit contribution is calculated using standard costs for each product, while actual cost of sales is used to determine consolidated operating income (loss). There are no intersegment transactions that result in revenue or profit (loss). Asset information by reportable segment is not presented, as Keebler does not report or generate such information internally. However, depreciation expense included in the determination of a segment's profit contribution has been presented. The depreciation expense for each reportable segment reflects the amount absorbed in the standard cost of products sold as well as the depreciation that relates to assets used entirely by the respective segment. The following table presents certain information included in the profit contribution of each segment for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996.
Branded Specialty Segment Segment Other (1) Total --------------- -------------- --------------- --------------- (IN THOUSANDS) YEAR ENDED JANUARY 2, 1999: NET SALES TO EXTERNAL CUSTOMERS.............. $ 1,726,668 $ 499,812 $ - $ 2,226,480 DEPRECIATION EXPENSE......................... 31,087 7,934 20,382 59,403 PROFIT CONTRIBUTION.......................... 282,639 85,898 - 368,537 YEAR ENDED JANUARY 3, 1998: Net sales to external customers.............. $ 1,566,702 $ 498,482 $ - $ 2,065,184 Depreciation expense......................... 19,650 6,750 27,331 53,731 Profit contribution.......................... 226,911 80,321 - 307,232 FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996: Net sales to external customers.............. $ 1,178,023 $ 467,509 $ - $ 1,645,532 Depreciation expense......................... 15,919 6,174 22,251 44,344 Profit contribution.......................... 145,311 53,908 - 199,219 ========================================================================================================================== FOUR WEEKS ENDED JANUARY 26, 1996: Net sales to external customers.............. $ 69,842 $ 31,814 $ - $ 101,656 Depreciation expense......................... 1,121 502 223 1,846 Profit contribution.......................... 8,660 4,295 - 12,955 (1) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments.
The net sales to external customers from the reportable segments equal the consolidated net sales of Keebler. A reconciliation of segment profit contribution to total consolidated income from continuing operations before income tax expense (benefit) for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996 is as follows: F-28 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED)
Forty-Eight || Four Weeks YEAR ENDED Year Ended Weeks Ended || Ended JANUARY 2, January 3, December 28, || January 26, 1999 1998 1996 || 1996 --------------- --------------- --------------- || --------------- (IN THOUSANDS) || INCOME (LOSS) FROM CONTINUING OPERATIONS || BEFORE INCOME TAX EXPENSE (BENEFIT): || Reportable segments profit contribution......... $ 368,537 $ 307,232 $ 199,219 || $ 12,955 Unallocated functional support costs (1)........ 172,498 165,835 129,069 || 38,453 Interest expense (income), net.................. 26,500 33,847 38,471 || (116) --------------- --------------- --------------- || --------------- Income (Loss) from Continuing Operations || before Income Tax Expense (Benefit)......... $ 169,539 $ 107,550 $ 31,679 || $ (25,382) =============== =============== =============== || =============== (1) Includes support costs such as distribution, research and development, corporate administration and other (income) expense, which are not allocated internally to reportable segments.
Net sales to external customers consist of cookies, crackers and other baked goods for all periods presented. All long-lived assets at January 2, 1999 and January 3, 1998 are located in the United States. Net sales to external customers made outside the United States, as well as to any single customer, are not material to consolidated net sales for the year ended January 2, 1999, the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996 and the four weeks ended January 26, 1996. 18. UNAUDITED QUARTERLY FINANCIAL DATA Results of operations for each of the four quarters of the fiscal years ended January 2, 1999 and January 3, 1998 follow. Each quarter represents a period of twelve weeks except the first quarter which includes sixteen weeks.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 ------------------- ------------------- ------------------- ------------------- 1998 1997 1998 1997 1998 1997 1998* 1997** --------- --------- --------- --------- --------- --------- --------- --------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Net sales............................. $636.8 $597.0 $490.0 $459.8 $499.9 $485.3 $599.8 $523.1 Gross profit.......................... 372.7 337.0 281.3 259.7 294.4 277.0 339.2 303.5 Income before extraordinary item...... 14.1 7.6 19.4 13.0 29.0 18.5 34.1 23.3 Extraordinary item.................... - 2.7 - - 1.7 - - 2.7 Net income............................ 14.1 4.9 19.4 13.0 27.3 18.5 34.1 20.6 Basic net income per share: Income before extraordinary item... $0.17 $0.10 $0.23 $0.16 $0.35 $0.24 $0.41 $0.30 Extraordinary item................. - 0.04 - - 0.02 - - 0.03 --------- --------- --------- --------- --------- --------- --------- --------- Net income......................... $0.17 $0.06 $0.23 $0.16 $0.33 $0.24 $0.41 $0.27 ========= ========= ========= ========= ========= ========= ========= ========= Diluted net income per share: Income before extraordinary item... $0.16 $0.10 $0.22 $0.16 $0.33 $0.23 $0.39 $0.28 Extraordinary item................. - 0.04 - - 0.02 - - 0.03 --------- --------- --------- --------- --------- --------- --------- --------- Net income......................... $0.16 $0.06 $0.22 $0.16 $0.31 $0.23 $0.39 $0.25 ========= ========= ========= ========= ========= ========= ========= ========= - ---------- * Quarter 4, 1998 includes the operating results of President from the acquisition date of September 28, 1998 through January 2, 1999. ** Quarter 4, 1997 includes thirteen weeks as fiscal 1997 was a fifty-three week year.
F-29 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUBSEQUENT EVENTS On January 29, 1999 Keebler entered into a Receivables Purchase Agreement ("Agreement") to replace the Bridge Facility existing at January 2, 1999. This Agreement allows funds to be borrowed at a lower cost to the Company and is collateralized by the accounts receivable of Keebler. On January 21, 1999, Keebler made a secondary public offering of 16,200,000 shares of common stock. Artal and Claremont sold all of the shares, with no proceeds going to Keebler. As a result, Artal's ownership percentage decreased from approximately 21% to 2% and Claremont's ownership percentage was reduced from approximately 6% to 5% of the outstanding common stock. Management's ownership remained at approximately 2% and Flowers' ownership remained at approximately 55%. On January 4, 1999, Keebler engaged in a series of corporate-entity transactions that resulted in Sunshine and President being merged into Keebler Company. Consequently, these former subsidiaries of Keebler Foods Company are currently wholly-owned subsidiaries of Keebler Company. F-30 REPORT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY Our report on the consolidated financial statements of Keebler Foods Company and Subsidiaries and UB Investments US Inc. and Subsidiaries is included on page F-2 of the Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page F-1 of the Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. PRICEWATERHOUSECOOPERS LLP Chicago, Illinois February 2, 1999 S-1 ITEM 14 (D). FINANCIAL STATEMENT SCHEDULE SCHEDULE II KEEBLER FOODS COMPANY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (NOTE 1) FOR THE YEAR ENDED JANUARY 2, 1999, THE YEAR ENDED JANUARY 3, 1998, THE FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996 AND THE FOUR WEEKS ENDED JANUARY 26, 1996 (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- Those valuation and qualifying accounts which are deducted in the balance sheet from the assets to which they apply: YEAR ENDED JANUARY 2, 1999 For discounts and doubtful accounts $ 4,965 $ 20,148 $ 2,879 (1) $ (20,210)(2) $ 7,782 ========== ========== ========== ========== ========== For deferred taxes $ 84,350 $ - $ - $ - $ 84,350 ========== ========== ========== ========== ========== For inventory reserves $ 6,782 $ 7,484 $ 1,807 (1) $ (6,459)(3) $ 9,614 ========== ========== ========== ========== ========== YEAR ENDED JANUARY 3, 1998 For discounts and doubtful accounts $ 5,390 $ 18,970 $ - $ (19,395)(2) $ 4,965 ========== ========== ========== ========== ========== For deferred taxes $ 84,350 $ - $ - $ - $ 84,350 ========== ========== ========== ========== ========== For inventory reserves $ 5,508 $ 9,716 $ - $ (8,442)(3) $ 6,782 ========== ========== ========== ========== ========== FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996 For discounts and doubtful accounts $ 4,181 $ 14,399 $ 907 (4) $ (14,097)(2) $ 5,390 ========== ========== ========== ========== ========== For deferred taxes $ 109,484 $ - $ - $ (25,134)(5) $ 84,350 ========== ========== ========== ========== ========== For inventory reserves $ 9,578 (6) $ 3,370 $ - $ (7,440)(7) $ 5,508 ========== ========== ========== ========== ========== ======================================================================================================================== FOUR WEEKS ENDED JANUARY 26, 1996 For discounts and doubtful accounts $ 3,558 $ 1,577 $ - $ (954)(2) $ 4,181 ========== ========== ========== ========== ========== For deferred taxes $ 116,817 $ (7,333) $ - $ - $ 109,484 ========== ========== ========== ========== ========== For inventory reserves $ 637 $ 378 $ - $ - $ 1,015 ========== ========== ========== ========== ========== Note 1: Schedule II - Valuation and Qualifying Accounts includes certain financial data of Keebler Foods Company ("Keebler") for the year ended January 2, 1999, the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996, as well as certain financial data of UB Investments US Inc. ("UBIUS"), the predecessor company, for the four weeks ended January 26, 1996, the date on which UBIUS was acquired by INFLO Holdings Company ("INFLO"). The distinction between Keebler's and the predecessor company's financial data has been made by inserting a double line. (1) Amount acquired in the acquisition of President International, Inc. (2) Primarily charges against reserves, net of recoveries. (3) Inventory write-offs, net. (4) Amount acquired in the acquisition of Sunshine Biscuits, Inc. (5) Adjustment to reduce the valuation allowance as a result of the acquisition of Keebler. (6) Includes inventory reserves established in the acquisition of Keebler. (7) Adjustment to reduce reserve. S-2
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------ 2.1 Plan and Agreement of Merger dated November 20, 1997 between Keebler Foods Company ("Keebler") and INFLO Holdings Corporation ("INFLO") (incorporated herein by reference to Exhibit 2.1 of Keebler's Registration Statement on Form S-1 previously filed with the Securities and Exchange Commission (the "Commission") (File No. 333-42075) (the "1998 Registration Statement")) 2.2 Stock Purchase Agreement dated as of August 24, 1998 between Keebler and President International, Inc. (incorporated herein by reference to Exhibit 2.2 of Keebler's Current Report on Form 8-K previously filed with the Commission on October 9, 1998 (Commission File No. 001-13705) (the "October Report")) 3.1 Amended and Restated Certificate of Incorporation of Keebler (incorporated herein by reference to Exhibit 3.1 of 1998 Registration Statement) 3.2 Amended and Restated By-Laws of Keebler (incorporated herein by reference to Exhibit 3.2 of the 1998 Registration Statement) 4.1 Indenture dated as of June 15, 1996 among Keebler, the guarantors named therein and The U.S. Trust Company of New York ("Trustee") (incorporated herein by reference to Exhibit 4.1 of Keebler's Registration Statement on Form S-4 previously filed with the Commission (File No. 333-8379) (the "1996 Registration Statement")) 4.2 The 10 3/4% Senior Subordinated Note due 2006 (included in Exhibit 4.1) (incorporated herein by reference to Exhibit 4.2 of the 1996 Registration Statement) 10.1 Distribution Agreement dated as of January 26, 1996 between United Biscuits (UK) Limited ("UBL") and Shaffer, Clarke & Co., Inc. ("Shaffer") (incorporated herein by reference to Exhibit 10.5 of the 1996 Registration Statement) 10.2 Trademark License Agreement dated as of January 26, 1996 between UBL and Shaffer (incorporated herein by reference to Exhibit 10.6 of the 1996 Registration Statement) 10.3 Management Stockholder's Agreement between INFLO and Key Employees of INFLO (incorporated herein by reference to Exhibit 10.8 of the 1996 Registration Statement) 10.3(a) Amendment No. 1 to Management Stockholder's Agreement (Non-Executives) (incorporated herein by reference to Exhibit 10.31.1 of the 1998 Registration Statement) 10.3(b) Amendment No. 1 to Management Stockholder's Agreement (Executives other than O'Neill, Walsh and Spear) (incorporated herein by reference to Exhibit 10.31.2 of the 1998 Registration Statement) 10.3(c) Amendment No. 1 to Management Stockholder's Agreement (O'Neill, Walsh and Spear) (incorporated herein by reference to Exhibit 10.31.3 of the 1998 Registration Statement) 10.4 Non-Qualified Stock Option Agreement between INFLO and Key Employees of INFLO (incorporated herein by reference to Exhibit 10.9 of the 1996 Registration Statement) 10.4(a) Amendments to the 1996 Non-Qualified Option Agreements (incorporated herein by reference to Exhibit 10.28 of the 1998 Registration Statement) 10.5 1996 Stock Purchase and Option Plan for Key Employees of INFLO (incorporated herein by reference to Exhibit 10.10 of the 1996 Registration Statement) i EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------ 10.6 Sale Participation Agreement among Artal, Flowers, and Key Employees of INFLO (incorporated herein by reference to Exhibit 10.11 of the 1996 Registration Statement) 10.7 Stock Appreciation Rights Plan of Keebler for Certain Management Employees dated March 4, 1997 (incorporated herein by reference to Exhibit 10.16 of the Quarterly Report) 10.8 Artal Stock Purchase Agreement among Artal, Flowers and Keebler (incorporated herein by reference to Exhibit 10.22 of the 1998 Registration Statement) 10.8(a) First Amendment to the Stock Purchase Agreement dated March 31, 1998 among Artal, Flowers and Keebler (incorporated herein by reference to Exhibit 10.22(a) of Keebler's Quarterly Report on Form 10-Q previously filed with the Commission on May 26, 1998 (Commission File No. 001-13705)) 10.9 Bermore Stock Purchase Agreement among Artal, Flowers, Bermore and Keebler (incorporated herein by reference to Exhibit 10.23 of the 1998 Registration Statement) 10.10 Employment and Severance Agreement between Keebler and Sam K. Reed (incorporated herein by reference to Exhibit 10.24 of the 1998 Registration Statement) 10.11 Employment and Severance Agreement between Keebler and certain executive officers (incorporated herein by reference to Exhibit 10.25 of the 1998 Registration Statement) 10.12 1998 Omnibus Stock Incentive Plan of Keebler (incorporated herein by reference to Exhibit 10.26 of the 1998 Registration Statement) 10.12(a) 1998 Non-Qualified Stock Option Agreement for certain key employees 10.13 Non-Employee Director Stock Plan of Keebler (incorporated herein by reference to Exhibit 10.27 of the 1998 Registration Statement) 10.14 Supplement to Subsidiary Guaranty (Hollow Tree) (incorporated herein by reference to Exhibit 10.29 of the 1998 Registration Statement) 10.15 Supplement to Subsidiary Guaranty (Elfin Equity) (incorporated herein by reference to Exhibit 10.30 of the 1998 Registration Statement) 10.16 $700,000,000 Senior Credit Facility dated as of September 28, 1998 among Keebler, various financial institutions and the Bank, as Lead Arranger and Administrative Agent, The First National Bank of Chicago, as the Syndication Agent and the Bank of Montreal, as the Managing Agent (incorporated herein by reference to Exhibit 10.33 of the October Report) 10.17 $125,000,000 Bridge Facility Credit Agreement dated as of September 28, 1998 among Keebler, various financial institutions and the Bank as the Arranger and the Administrative Agent (incorporated herein by reference to Exhibit 10.34 of Keebler's Quarterly Report on Form 10-Q previously filed with the Commission on November 16, 1998 (Commission File No. 001-13705)) 10.18 Keebler Company Deferred Compensation Plan for certain officers of Keebler dated January 1, 1999 10.19 Keebler Foods Company Deferred Compensation Plan for Non-Affiliate Directors dated March 10, 1999 ii EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------ 10.20 Receivables Purchase Agreement dated as of January 29, 1999 among Keebler Funding Corporation, Keebler, Liberty Street Funding Corp. and the Bank 21 Subsidiaries of Keebler 27 Financial Data Schedule iii EX-10.12(A) 2 EXHIBIT 10.12(a) KEEBLER FOODS COMPANY NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, dated as of ________________, ______, is made by and between KEEBLER FOODS COMPANY, a Delaware corporation hereinafter referred to as the "Company," and ______________________, an employee of the Company or a Subsidiary (as defined below) of the Company, hereinafter referred to as "Optionee." WHEREAS, the Company wishes to afford the Optionee the opportunity to purchase shares of its $.01 par value Common Shares ("Common Stock"); WHEREAS, the Company wishes to issue the options described herein in accordance with the Plan (as hereinafter defined), the terms of which are hereby incorporated by reference and made a part of this Agreement; and WHEREAS, the Committee (as hereinafter defined), appointed to administer the Plan, has determined that it would be to the advantage and best interest of the Company and its stockholders to grant the Non-Qualified Options provided for herein to the Optionee as an incentive for increased efforts during his term of office with the Company or its Subsidiaries and has advised the Company hereof and instructed the undersigned officers to issue said Options; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 - CAUSE "Cause" shall mean an act of or acts of dishonesty, moral turpitude or willful misconduct, which act or acts were intended to result in substantial personal enrichment at the expense of the Company or any of its Subsidiaries or Affiliates which have a material adverse effect on the business or reputation of the Company or any of its Subsidiaries or Affiliates. SECTION 1.2 - CODE "Code" shall mean the Internal Revenue Code of 1986, as amended. SECTION 1.3 - COMMITTEE "Committee" shall mean the Compensation Committee of the Board of Directors of the Company. SECTION 1.4 - GOOD REASON "Good Reason" shall mean: (i) (A) the assignment to the Optionee of any duties inconsistent in any material adverse respect with the Optionee's authority, duties or responsibilities either as contemplated by any Employment Agreement or as existing on the date hereof, or (B) any other action by the Company which results in a material diminishment in such authority, duties or responsibilities, other than action or inaction which is remedied by the Company within 15 days after receipt of written notice thereof given by the Optionee; (ii) any failure by the Company to comply with any of his duties described in any Employment Agreement, other than any failure which is remedied by the Company within 15 days after receipt of written notice thereof given by the Optionee; (iii) if any Employment Agreement exists, any purported termination by the Company of the Optionee's employment otherwise than as permitted by said Employment Agreement; (iv) any reduction in the total potential annual compensation of the Optionee, consisting of base salary or potential bonus (but not including diminution in bonus as a consequence of economic performance of the Company); (v) an adverse change in employee benefits other than a change which results from an amendment or alteration of the Company's employee benefit plans which affect its salaried employees generally. SECTION 1.5 - GRANT DATE "Grant Date" shall mean the date on which the Options provided for in this Agreement were granted. SECTION 1.6 - OPTIONS "Options" shall mean the non-qualified options to purchase Common Stock granted under this Agreement. SECTION 1.7 - PERMANENT DISABILITY The Optionee shall be deemed to have a "Permanent Disability" if the Optionee is unable to engage in the activities required by the Optionee's job by reason of any medically determined physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months (in each case, 2 as determined in good faith by a majority of the Board of Directors of the Company, which determination shall be conclusive). SECTION 1.8 - PERSON "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. SECTION 1.9 - PLAN "Plan" shall mean the Keebler Foods Company 1998 Omnibus Stock Incentive Plan. SECTION 1.10 - PRONOUNS The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates. SECTION 1.11 - RETIREMENT "Retirement" shall mean retirement at age 65 or over (or such other age as may be approved by the Board of Directors of the Company) after having been employed by the Company or a Subsidiary for at least three years after the date hereof. SECTION 1.12 - SECRETARY "Secretary" shall mean the Secretary of the Company. Any other terms which are capitalized in this Agreement shall have the meaning given to them in the Plan. ARTICLE II GRANT OF OPTIONS SECTION 2.1 - GRANT OF OPTIONS For good and valuable consideration, on and as of the date hereof, the Company irrevocably grants to the Optionee an Option to purchase any part or all of an aggregate of the number of shares set forth with respect to such Option on the signature page hereof of its $.01 par value Common Stock upon the terms and conditions set forth in this Agreement. 3 SECTION 2.2 - EXERCISE PRICE The exercise price of the shares of stock covered by the Options shall be $______ per share without commission or other charge, which is understood to be the fair market value of a share of the Company's stock as of the Grant Date. SECTION 2.3 - CONSIDERATION TO THE COMPANY In consideration of the granting of these Options by the Company, the Optionee agrees to render faithful and efficient services to the Company or a Subsidiary with such duties and responsibilities as the Company shall from time to time prescribe. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries, which are hereby expressly reserved, to terminate the employment of the Optionee at any time for any reason whatsoever, with or without cause. SECTION 2.4 - ADJUSTMENTS IN OPTIONS Subject to Section 11 of the Plan, in the event that the outstanding shares of the stock subject to an Option are, from time to time, changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of an event or transaction described in said Section 11, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares or other consideration as to which such Option, or portions thereof then unexercised, shall be exercisable. Any such adjustment made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons. ARTICLE III SECTION 3.1 - COMMENCEMENT OF EXERCISABILITY (a) All of the Options granted in this Agreement shall become exercisable no later than the fifth anniversary of the Grant Date (the "Automatic Vesting Date"). Said Options shall remain exercisable for a period of thirty (30) days from the Automatic Vesting Date (provided, however, that the 30-day exercise period shall not include any days during which the Optionee is prohibited from selling Common Stock as a result of Company policy or regulations promulgated under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended), unless they previously became exercisable pursuant to the provisions of subparagraph (b) below, in which event they shall continue to be exercisable according to the provisions of said paragraph. (b) On the last day of any period of twenty (20) consecutive trading days, after the Grant Date, during which the average of the Market Value per Share of the Common Stock equals or exceeds the Target Value indicated below, prior to the fifth anniversary of the Grant Date, the corresponding percentage of the total Options granted under this 4 Agreement shall become immediately exercisable and shall continue to be exercisable until the tenth anniversary of the Grant Date: AGGREGATE PERCENTAGE OF OPTIONS GRANTED HEREUNDER TARGET VALUE WHICH ARE EXERCISABLE $ 36.00 33 1/3% $ 42.00 66 2/3% $ 48.00 100% (c) Notwithstanding the foregoing, no Option shall become exercisable as to any additional shares of Common Stock following the termination of employment of the Optionee by the Company and its Subsidiaries for any reason other than a termination of employment because of retirement (as described below) death or Permanent Disability of the Optionee, and any Option (other than as provided in the next succeeding sentence) which is non-exercisable as of the Optionee's termination of employment shall be immediately canceled. In the event of a Change in Control, or in the event of a termination of employment because of such death or Permanent Disability, any such Options shall become immediately exercisable. In the event of termination of employment for normal or delayed retirement pursuant to the terms of any tax-qualified defined benefit retirement plan maintained by the Company in which the Optionee participates (a "Pension Plan"), the Option will become exercisable as to the same proportion of the then unexercisable shares as is represented by the number of months which has elapsed since the Date of Grant compared with sixty months. In the event the Optionee's employment terminates (other than for reasons described above) after he is eligible for early retirement under the provisions of a Pension Plan, the Committee may determine whether any additional share will become exercisable, but in the absence of such a determination, the Option as to any such additional shares will be canceled upon said termination of employment. SECTION 3.2 - EXPIRATION OF OPTIONS The Options may not be exercised to any extent by the Optionee after the first to occur of the following events: (a) The tenth anniversary of the Grant Date; (b) The second anniversary of the date of the Optionee's termination of employment by reason of normal, early or delayed retirement pursuant to any Pension Plan benefit, or death or Permanent Disability; (c) The date of an Optionee's termination of employment by the Company for Cause; or 5 (d) The date of an Optionee's voluntary termination of employment other than for Good Reason; or (e) The date ninety (90) days after termination of the Optionee's employment by the Company other than for Cause or by the Optionee for Good Reason; (f) To the extent practicable, at least ten (10) days prior to the effective date of a Change in Control, the Committee shall give the Optionee notice of such event if the Option has then neither been fully exercised nor become unexercisable under this Section 3.2. ARTICLE IV EXERCISE OF OPTION SECTION 4.1 - PERSON ELIGIBLE TO EXERCISE During the lifetime of the Optionee, only (i) he, or (ii) a member of his immediate or charitable organization Family to whom he has transferred the Option in accordance with the provisions of Section 10(c) of the Plan, may exercise an Option or any portion thereof. After the death of the Optionee, any exercisable portion of an Option may, prior to the time when an Option becomes unexercisable under Section 3.2, be exercised by his personal representative or by any person empowered to do so under the Optionee's will or under the then applicable laws of descent and distribution, or by the family member or charitable organization to whom such a transfer may have been made as permitted by the Plan. SECTION 4.2 - PARTIAL EXERCISE Any exercisable portion of an Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 3.2; provided, however, that any partial exercise shall be for whole shares of Common Stock only. SECTION 4.3 - MANNER OF EXERCISE An Option, or any exercisable portion thereof, may be exercised solely by delivering to the Secretary or his office all of the following prior to the time when the Option or such portion becomes unexercisable under Section 3.2: (a) Notice in writing signed by the Optionee or the other person then entitled to exercise the Option or portion thereof, stating that the Option or portion thereof is thereby exercised, such notice complying with all applicable rules established by the Committee; (b) Full payment (in cash, by check, through the exchange of previously acquired shares which have been owned by the Optionee for no less than six (6) months, 6 subject to the Committee's approval, or by a combination thereof) for the shares with respect to which such Option or portion thereof is exercised; (c) A bona fide written representation and agreement, in a form satisfactory to the Committee, signed by the Optionee or other person then entitled to exercise such Option or portion thereof, stating that the shares of stock are being acquired for his own account, for investment and without any present intention of distributing or reselling said shares or any of them exact as may be permitted under the Securities Act of 1933, as amended (the "Act"), and then applicable rules and regulations thereunder, and that the Optionee or other person then entitled to exercise such Option or portion thereof will indemnify the Company against and hold it free and harmless from any loss, damage expense or liability resulting to the Company if any sale or distribution of share by such person is contrary to the representation and agreement referred to above; PROVIDED, HOWEVER, that the Committee may, in its absolute discretion, take whatever additional actions it deems appropriate to ensure the observance and performance of such representation and agreement and to effect compliance with the Act and any other federal or state securities laws or regulations; (d) Full payment to the Company of all amounts which, under federal, state or local law, it is required to withhold upon exercise of the Option, or other satisfactory arrangement, with respect thereto, which may include relinquishment of a portion of the Option; and (e) In the event the Option or portion thereof shall be exercised pursuant to Section 4.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the option. Without limiting the generality of the foregoing, the Committee may require an option of counsel acceptable to it to the effect that any subsequent transfer of shares acquired on exercise of an Option does not violate the Act, and may issue stop-transfer orders covering such shares. Share certificates evidencing stock issued on exercise of this Option shall bear an appropriate legend referring to the provisions of subsection (c) above and the agreements herein. The written representation and agreement referred to in subsection (c) above shall, however, not be required if the shares to be issued pursuant to such exercise have been registered under the Act, and such registration is then effective in respect to such shares. SECTION 4.4 - CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES The shares of stock deliverable upon the exercise of an Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Such shares shall be fully paid and nonassessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of an Option or portion thereof prior to fulfillment of all of the following conditions: (a) The obtaining of approval of other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and 7 (b) The lapse of such reasonable period of time following the exercise of the Option as the Committee may from time to time establish for reasons of administrative convenience. SECTION 4.5 - RIGHTS AS STOCKHOLDER The holder of an Option shall not be, nor have any of the rights or privileges of, a stockholder of the Company in respect of any shares purchasable upon the exercise of the Option or any portion thereof unless and until certificate representing such shares have been issued by the Company to such holder. ARTICLE V MISCELLANEOUS SECTION 5.1 - ADMINISTRATION The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Options. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement. SECTION 5.2 - OPTIONS NOT TRANSFERABLE Neither the Options nor any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Optionee or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 5.2 shall not prevent transfers by will or by the applicable laws of descent and distribution, nor transfers which are permitted by Section 10(c) of the Plan. 8 SECTION 5.3 - SHARES TO BE RESERVED The Company shall at all times during the term of the Options reserve and keep available such number of shares of stock as will be sufficient to satisfy the requirements of this Agreement. SECTION 5.4 - NOTICES Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary, and any notice to be given to the Optionee shall be addressed to him at the address given beneath his signature hereto. By a notice given pursuant to this Section 5.4, either party may hereafter designate a different address for notices to be given to him. Any notice which is required to be given to the Optionee shall, if the Optionee is then deceased, be given to the Optionee's personal representative if such representative has previously informed the Company of his status and address by written notice under this Section 5.4. Any notice shall have been deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service. SECTION 5.5 - TITLES Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. SECTION 5.6 - APPLICABILITY OF PLAN The Options and the shares of Common Stock issued to the Optionee upon exercise of the Options shall be subject to all of the terms and provisions of the Plan, to the extent applicable to the Options and such shares. In the event of any conflict between this Agreement and the Plan, the terms of the Plan shall control. SECTION 5.7 - AMENDMENT This Agreement may be amended only by a writing executed by the parties hereto which specifically states that it is amending this Agreement. SECTION 5.8 - GOVERNING LAW The laws of the State of Delaware was govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under principles of conflicts of laws. SECTION 5.9 - JURISDICTION Any suit, action or proceeding against the Optionee with respect to this Agreement, or any judgment entered by any court in respect of any thereof, may be brought in any court of competent jurisdiction in the State of Delaware as the Company may elect in its sole 9 discretion, and the Optionee hereby submits to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. The Optionee hereby irrevocably waives any objections which he may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. No suit, action or proceeding against the Company with respect to this Agreement may be brought in any court, domestic or foreign, or before any similar domestic or foreign authority other than in a court of competent jurisdiction in the State of Delaware and the Optionee hereby irrevocably waives any right which he may otherwise have had to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. The Company hereby submits to the jurisdiction of such courts for the purpose of any such suit, action or proceeding. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto. KEEBLER FOODS COMPANY By: ------------------------------ Its: VICE PRESIDENT ------------------------------ (Typed Name) Aggregate number of shares of Common Stock for which the Option granted hereunder is exercisable: - ----------------------------------- Signature - ----------------------------------- (Street Address) - ----------------------------------- (City/State/ZIP Code) Optionee's Social Security Number: - ----------------------------------- 10 EX-10.18 3 EXHIBIT 10.18 KEEBLER COMPANY DEFERRED COMPENSATION PLAN EFFECTIVE - JANUARY 1, 1999 KEEBLER COMPANY DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS ARTICLE I............................................................................................1 1.1 Statement of Purpose....................................................................1 ARTICLE II...........................................................................................2 DEFINITIONS..........................................................................................2 2.1 Account.................................................................................2 2.2 Base Salary.............................................................................2 2.3 Beneficiary.............................................................................2 2.4 Board...................................................................................2 2.5 Bonus...................................................................................2 2.6 Change in Control.......................................................................3 2.7 Code....................................................................................3 2.8 Committee...............................................................................3 2.9 Company.................................................................................3 2.10 Company Matching Account...............................................................4 2.11 Company Matching Amount................................................................4 2.12 Compensation...........................................................................4 2.13 Credited Service.......................................................................4 2.14 Deferral Account.......................................................................4 2.15 Deferral Benefit.......................................................................4 2.16 Deferral Election......................................................................4 2.17 Disability.............................................................................4 2.18 Early Retirement.......................................................................4 2.19 Eligible Employee......................................................................5 2.20 Employer...............................................................................5 2.21 ERISA..................................................................................5 2.22 Haircut Withdrawal.....................................................................5 2.23 Investment Return Rate.................................................................5 2.24 Participant............................................................................5 2.25 Participation Agreement................................................................5 2.26 Plan...................................................................................5 2.27 Plan Year..............................................................................5 2.28 Retirement.............................................................................6 2.29 Savings Plan...........................................................................6 2.30 Selected Affiliate.....................................................................6 2.31 Valuation Date.........................................................................6
ARTICLE III..........................................................................................7 ELIGIBILITY AND PARTICIPATION........................................................................7 3.1 Eligibility.............................................................................7 3.2 Participation...........................................................................7 3.3 Ineligible Participant..................................................................7 3.4 Termination of Participation............................................................7 ARTICLE IV...........................................................................................8 DEFERRAL OF COMPENSATION.............................................................................8 4.1 Amount of Deferral......................................................................8 4.2 Change in Deferral Elections............................................................8 4.3 Crediting Deferred Compensation.........................................................9 4.4 Company Matching Amount.................................................................9 ARTICLE V............................................................................................10 BENEFIT ACCOUNTS.....................................................................................10 5.1 Valuation of Account....................................................................10 5.2 Crediting of Investment Return..........................................................10 5.3 Statement of Account....................................................................10 5.4 Vesting of Account......................................................................10 5.5 Investment Vehicles.....................................................................11 5.6 Transfers from Other Plan...............................................................11 ARTICLE VI...........................................................................................12 PAYMENT OF BENEFITS..................................................................................12 6.1 Payment of Deferral Benefit upon Death, Disability or Retirement........................12 6.2 Payment of Deferral Benefit upon Other Termination......................................12 6.3 Payments to Beneficiaries...............................................................12 6.4 Haircut Withdrawal......................................................................12 6.5 Form of Payment.........................................................................13 6.6 Commencement of Payments................................................................13 6.7 Small Benefit...........................................................................13 ARTICLE VII..........................................................................................14 BENEFICIARY DESIGNATION..............................................................................14 7.1 Beneficiary Designation.................................................................14 7.2 Change of Beneficiary Designation.......................................................14 7.3 No Designation..........................................................................14 7.4 Effect of Payment.......................................................................14
ARTICLE VIII.........................................................................................15 ADMINISTRATION.......................................................................................15 8.1 Committee...............................................................................15 8.2 Delegation..............................................................................15 8.3 Binding Effect of Decisions.............................................................15 8.4 Indemnification of Committee............................................................15 8.5 Election and Notice Procedures..........................................................16 ARTICLE IX...........................................................................................17 AMENDMENT AND TERMINATION OF PLAN....................................................................17 9.1 Amendment...............................................................................17 9.2 Termination.............................................................................17 ARTICLE X............................................................................................18 MISCELLANEOUS........................................................................................18 10.1 Funding................................................................................18 10.2 Nonassignability.......................................................................18 10.3 Legal Fees and Expenses................................................................19 10.4 Captions...............................................................................19 10.5 Governing Law..........................................................................19 10.6 Successors.............................................................................19 10.7 No Implied Rights......................................................................20 EXHIBIT A............................................................................................21 EXHIBIT B............................................................................................22 EXHIBIT C............................................................................................23
ARTICLE I 1.1 STATEMENT OF PURPOSE Keebler Company establishes the Keebler Company Deferred Compensation Plan (the "Plan"), a nonqualified deferred compensation plan for the benefit of certain management or highly compensated employees of the Employers. The purpose of the Plan is to provide management and highly compensated employees of the Employers with the option to defer the receipt of portions of their compensation payable for services rendered to the Employers and to provide such participating employees with Employer contributions. It is intended that the Plan will assist in attracting and retaining qualified individuals to serve as officers and managers of the Employer. The Plan is intended to be subject to the tax-law rules of Code Section 451(a), is intended to be treated as a "top hat" plan within the meaning of ERISA Section 201(2), and is effective as of January 1, 1999. 1 ARTICLE II DEFINITIONS When used in this Plan and initially capitalized, the following words and phrases shall have the meanings indicated: 2.1 ACCOUNT. "Account" means the sum of a Participant's Deferral Account and Company Matching Account. 2.2 BASE SALARY. "Base Salary" means a Participant's base earnings paid by an Employer to a Participant without regard to any increases or decreases in base earnings as a result of (i) an election to defer base earnings under this Plan or (ii) an election between benefits or cash provided under a Plan of an Employer maintained pursuant to Section 125 or 401(k) of the Code and as limited in Exhibit B attached hereto. 2.3 BENEFICIARY. "Beneficiary" means the person or persons designated or deemed to be designated by the Participant pursuant to Article VII to receive benefits payable under the Plan in the event of the Participant's death. 2.4 BOARD. "Board" means the Board of Directors of the Company. 2.5 BONUS. "Bonus" means a Participant's bonus or sales commission paid by the Employer to a Participant under the plans listed in Exhibit B attached hereto and to the degree limited in Exhibit B, as applicable, without regard to any decreases as a result of (i) an election to defer all or any portion of a Bonus under this Plan or (ii) an election between benefits or cash provided under a plan of the Employer maintained pursuant to Section 401(k) of the Code (including the Savings Plan). 2 2.6 CHANGE IN CONTROL. For purposes of this Plan, a "Change in Control" shall be deemed to occur on the earliest of: (i) The effective time of any purchase, sale, merger, consolidation or other transaction after which any person, corporation, partnership or other entity OTHER THAN Flower Industries, Inc. ("Flowers") or its Affiliates, the then current management of Keebler Foods Company or of Flowers or any member of the immediate family of said management, or any employee benefit plan of Keebler Foods Company or of Flowers ("Permitted Owners") shall own more than fifty percent (50%) of the outstanding capital stock of Keebler Foods Company which stock is entitled to vote for the election of directors. (ii) If it occurs prior to February 3, 2001, the effective time of any purchase, sale, merger, consolidation or other transaction after which any person, corporation, partnership or entity OTHER THAN the then current management of Keebler Foods Company or Flowers or any member of the immediate family of said management, or any employee benefit plan of Keebler Foods Company or of Flowers ("Permitted Owners") shall own more than fifty percent (50%) of the outstanding capital stock of Flowers which stock is entitled to vote for the election of directors. (iii) The effective time of a transfer to an entity other than a Permitted Owner of substantially all of the property of Keebler Foods Company. (iv) Continuing Directors at any time fail to constitute a majority of the Board of Directors of Keebler Foods Company. "Continuing Directors" shall mean the members of the Board of Directors as of the date hereof, plus any new directors whose nominations were approved by at least a majority of the Continuing Directors in office at the time of the election of any such new directors. For the purposes of this Agreement, the term "Affiliate" shall be defined in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended. 2.7 CODE. "Code" means the Internal Revenue Code of 1986, as amended. 2.8 COMMITTEE. "Committee" has the meaning set forth in Section 8.1. 2.9 COMPANY. "Company" means Keebler Company and any successor(s) thereto. 3 2.10 COMPANY MATCHING ACCOUNT. "Company Matching Account" means the account maintained on the books of the Employer for the purpose of accounting for the Company Matching Amount and for the amount of investment return credited thereto for each Participant pursuant to Article V. 2.11 COMPANY MATCHING AMOUNT. "Company Matching Amount" means the amount credited to a Participant's Company Matching Account under Section 4.4. 2.12 COMPENSATION. "Compensation" means the Base Salary and Bonus, payable with respect to an Eligible Employee for each Plan Year. 2.13 CREDITED SERVICE. "Credited Service" means the sum of all periods of a Participant's employment by the Company or a Selected Affiliate for which service credit is given under the Savings Plan. 2.14 DEFERRAL ACCOUNT. "Deferral Account" means the account maintained on the books of the Employer for the purpose of accounting for the amount of Compensation that a Participant elects to defer under the Plan and for the amount of investment return credited thereto for the Participant pursuant to Article V. 2.15 DEFERRAL BENEFIT. "Deferral Benefit" means the benefit payable to a Participant or his or her Beneficiary pursuant to Article VI. 2.16 DEFERRAL ELECTION. "Deferral Election" means the written election made by a Participant to defer Compensation pursuant to Article IV. 2.17 DISABILITY. "Disability" means a Participant's Disability as defined under the Savings Plan. 2.18 EARLY RETIREMENT. "Early Retirement" will be as granted by the Committee at its sole discretion. 4 2.19 ELIGIBLE EMPLOYEE. "Eligible Employee" means a highly compensated or management employee of the Company who is designated by the Committee, by name or group or description, in accordance with Section 3.1 as eligible to participate in the Plan. 2.20 EMPLOYER. "Employer" means, with respect to a Participant, the Company or the Selected Affiliate which is the employer of that Participant and pays such Participant's Compensation. 2.21 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.22 HAIRCUT WITHDRAWAL. "Haircut Withdrawal" has the meaning set forth in Section 6.4. 2.23 INVESTMENT RETURN RATE. "Investment Return Rate" means: (a) In the case of an investment named in Exhibit C of a fixed income nature, the interest deemed to be credited, (b) In the case of an investment named in Exhibit C of an equity investment nature, the increase and decrease in deemed value and dividends deemed to be credited. 2.24 PARTICIPANT. "Participant" means any Eligible Employee who elects to participate by filing a Participation Agreement. 2.25 PARTICIPATION AGREEMENT. "Participation Agreement" means the agreement filed by a Participant, in the form prescribed by the Committee, pursuant to Section 3.2. 2.26 PLAN. "Plan" means this Keebler Company Deferred Compensation Plan effective January 1, 1999, as amended from time to time. 2.27 PLAN YEAR. "Plan Year" means a twelve-month period commencing January 1 and ending the following December 31. 5 2.28 RETIREMENT. "Retirement" means the termination of employment of a Participant who has reached age 65. 2.29 SAVINGS PLAN. "Savings Plan" means the Keebler Company Salaried Savings Plan, as amended from time to time, or its successor. 2.30 SELECTED AFFILIATE. "Selected Affiliate" means (1) any company in an unbroken chain of companies beginning with Keebler Foods Company, except for Keebler Foods Company itself, if each of the companies other than the last company in the chain owns or controls, directly or indirectly, stock possessing not less than 50 percent of the total combined voting power of all classes of stock in one of the other companies, or (2) any partnership or joint venture in which one or more of such companies is a partner or venturer, each of which shall be selected by the Committee. 2.31 VALUATION DATE. "Valuation Date" means a date on which the amount of a Participant's Account is valued as provided in Article V. The Valuation Date shall be the last day of each calendar quarter and any other date specified by the Committee for this purpose. 6 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY. Eligibility to participate in the Plan is limited to Eligible Employees. From time to time and subject to Section 3.4, the Committee shall prepare, and attach to the Plan as Exhibit A, a complete list of the Eligible Employees, by individual name or by reference to an identifiable group of persons or by descriptions of the components of compensation of an individual which would qualify individuals who are eligible to participate. It is expressly intended that the Eligible Employees will comprise a "select group of management or highly compensated employees" within the meaning of ERISA Section 201(2). No employee of the Company or a Selected Affiliate has a right to be selected as an Eligible Employee under this Plan. 3.2 PARTICIPATION. Participation in the Plan shall be limited to Eligible Employees who elect to participate in the Plan by filing a Participation Agreement with the Committee. An Eligible Employee shall commence participation in the Plan upon the first day of his or her first payroll period following the receipt of his or her Participation Agreement by the Committee. 3.3 INELIGIBLE PARTICIPANT. Notwithstanding any other provisions of this Plan to the contrary, if the Committee determines that any Participant may not qualify as a member of a "select group of management or highly compensated employees" within the meaning of ERISA Section 201(2), the Committee may determine, in its sole discretion, that such Participant shall cease to be eligible to participate in this Plan. Upon such determination, the Employer shall make a sum payment to the Participant equal to the vested amount credited to his Account as soon as administratively practicable. Upon such payment, no benefit shall thereafter be payable under this Plan either to the Participant or any Beneficiary of the Participant, and all of the Participant's elections as to the time and manner of payment of his Account will be deemed to be canceled, until such time as the Participant again is specified by the Committee as being eligible to participate in the Plan. 3.4 TERMINATION OF PARTICIPATION. A Participant may elect to terminate his or her active participation in the Plan at any time by filing a written notice thereof with the Committee. Such termination of active participation shall become effective as of the beginning of the next full payroll period following receipt of such election by the Committee. Amounts credited to the Participant's Account before the effective date of such termination of active participation shall continue to be payable, receive investment credits, and otherwise be governed in accordance with the terms of the Plan as applied to all Participants. If such a Participant wishes to resume his or her active participation in the Plan, provided that he or she remains an Eligible Employee, the Committee shall determine if and when such active participation shall resume. 7 ARTICLE IV DEFERRAL OF COMPENSATION 4.1 AMOUNT OF DEFERRAL. With respect to each Plan Year, a Participant may elect to defer a specified percentage of his or her Compensation up to the percentage of compensation defined and the terms described in Exhibit B attached hereto, in accordance with the following provisions: (a) The deferral election under this Plan shall be made at the same time, and in the same manner, as the deferral election made by the Participant under the Savings Plan. However, with respect to the Plan Year in which the Plan becomes effective or in which an Eligible Employee is specified by the Committee as such, whichever is later, the Eligible Employee may make his or her deferral election under the Plan for that Plan Year within 30 days after such effective date of the Plan or initial eligibility. Such deferral election shall apply prospectively to payroll periods beginning after the date on which the election is submitted to the Committee. (b) The amount of the deferral under this Section is the percentage of Compensation specified by the Participant (within the guidelines described in Exhibit B), reduced by the amount that is effectively deferred under the Savings Plan for that Plan Year. Accordingly, any amount that would have been returned to the Participant under Section 5.2 of the Savings Plan due to the failure of the Savings Plan to comply with the nondiscrimination rules of Code Section 401(k) (i.e., the "average deferral percentage" test also described in Section 5.2 of the Savings Plan) shall automatically be subject to the deferral election, and included in the amount deferred, under this Plan. (c) If a participant makes an election under subsection (a) that applies to less than an entire Plan Year (i.e., because the Plan became effective, or the Participant was named as an Eligible Employee, after January 1 of that Plan Year), the Participant may specify in the election that the deferral amount shall be determined with respect to the entire amount of Compensation received in that Plan Year. Notwithstanding the foregoing calculation of the amount of the deferral, the deferral election shall then be applied to Base Salary otherwise payable in payroll periods beginning after the date on which the election is submitted to the Committee. In other words, such a Participant may make a full Plan Year deferral election, but such election shall be applied prospectively to Base Salary in all subsequent payroll periods. 4.2 CHANGE IN DEFERRAL ELECTIONS. A Participant may change a previously elected percentage of deferral of Base Salary at any time by filing a written notice thereof with the Committee. Changes will only become effective as of the beginning of the next full payroll period following receipt of the change in election by the Committee. A Participant may change a previously elected percentage of deferral of Bonus, or elect to terminate future Bonus deferrals, by filing a written notice thereof with the Committee prior to December 31 of the year preceding the actual payment or deferral date of the Bonus. 8 4.3 CREDITING DEFERRED COMPENSATION. The amount of Compensation that a Participant elects to defer under the Plan shall be credited by the Employer to the Participant's Deferral Account periodically, the frequency of which will be determined by the Committee. To the extent that the Employer is required to withhold any taxes or other amounts from a Participant's Deferred Compensation pursuant to any state, federal or local law, such amounts shall be withheld only from the Participant's compensation before such amounts are credited. 4.4 COMPANY MATCHING AMOUNT. The Company Matching Amount with respect to each Participant shall be determined generally in the same manner as the matching contribution made by the Participant's employer under the Savings Plan for the same Plan Year. However, such determination shall be subject to the following provisions: (a) No Company Matching Amount shall be credited in or during the 1999 Plan Year. (b) No Company Matching Amount shall be credited for a particular Plan Year for a Participant whose employment terminated before the last day of the Plan Year, unless such termination was due to Retirement, Disability or death. The foregoing exceptions shall be determined in the same manner for this Plan as under the Savings Plan. (c) The Company Matching Amount for a particular Plan Year shall be determined by the Committee after the Plan Year has ended, and shall be credited to eligible Participants for such Plan Year at the time determined by the Committee in its discretion. (d) The Company Matching Amount with respect to a particular Participant shall be determined on the basis of the Participant's total salary deferrals under the Savings Plan and this Plan, and shall be offset by the matching contributions made on behalf of the Participant under the Savings Plan. 9 ARTICLE V BENEFIT ACCOUNTS 5.1 VALUATION OF ACCOUNT. As of each Valuation Date, a Participant's Account shall consist of the balance of the Participant's Account as of the immediately preceding Valuation Date, plus the Participant's Deferred Compensation and Company Matching Amount credited pursuant to Section 4.4 since the immediately preceding Valuation Date, plus investment return credited as of such Valuation Date pursuant to Section 5.2, minus the aggregate amount of distributions, if any, made from such Account since the immediately preceding Valuation Date. 5.2 CREDITING OF INVESTMENT RETURN. As of each Valuation Date, the account value of each Participant's Deferral Account and Company Matching Account shall be increased by the amount of investment return since the immediately preceding Valuation Date. Investment return with respect to the portion of an Account invested on a deemed basis (under Section 5.5) in a particular investment vehicle shall be credited at the Investment Return Rate (for that investment vehicle) as of such Valuation Date based on the average balance of the relevant portion of the Participant's Deferral Account and Company Matching Account, respectively, since the immediately preceding Valuation Date, but after such Accounts have been adjusted for any contributions or distributions to be credited or deducted for such period. Investment return for the period prior to the first Valuation Date applicable to a Deferral Account or a Company Matching Account shall be deemed earned ratably over such period. Until a Participant or his or her Beneficiary receives his or her entire Account, the unpaid balance thereof shall be credited with an investment return as provided in this Section 5.2. 5.3 STATEMENT OF ACCOUNT. The Committee shall provide to each Participant, within 30 days after the close of each calendar quarter, a statement setting forth the balance of such Participant's Account as of the last day of the preceding calendar quarter and showing all adjustments made thereto during such calendar quarter. 5.4 VESTING OF ACCOUNT. A Participant shall be 100% vested in his or her Deferral Account at all times. A Participant's interest in his or her Company Matching Account becomes 100% vested as of a Change in Control, his or her death, Disability or Retirement. Prior to this event, a Participant's interest in his or her Company Matching Account shall vest at the same rate, and in accordance with the same rules, that apply(ies) to the vesting of the matching contribution account under the Savings Plan. Any non-vested portion of a Participant's Company Matching Account shall be forfeited at termination of Participant's employment with Company (provided that the termination does not otherwise cause the acceleration of full vesting). Forfeitures under the Plan shall be for the benefit of the Employer and shall not be credited to other Participants. 10 5.5 INVESTMENT VEHICLES. The Company may select investment vehicles that will serve as the basis for determining deemed investment credits to Participants' Accounts (i.e., for determining the Investment Return Rate). If and when a trust is established and funded in accordance with Section 10.1, the investment vehicle shares, units or other evidences of ownership shall be considered assets of the trust and general assets of the relevant Employers. The deemed investment vehicles are set forth in Exhibit C, which the Company may amend from time to time in its sole discretion. A Participant may request the Company to make deemed investments of the credit balance of his Account in one or more of such investment vehicles. A Participant may change the deemed investment of his Account or change the deemed investment of future credits to his Account, and the deemed investment of his existing Account balance may differ from the deemed investment of future amounts credited to the Account. Such changes shall be made in accordance with procedures as the Committee may establish from time to time. Such procedures may regulate the frequency of such changes and the form of notice required to make such election or changes. The Committee may also establish a deemed investment which shall apply if the Participant makes no election. The effective date of any change shall be the date for which the appropriate direction to the Company or its designee has been properly received in accordance with the procedures established by the Committee. The Committee shall have the right to refuse to honor any Participant direction related to investments or withdrawals, including transfers among investment options, to the extent reasonably necessary to assure compliance with applicable law including U.S. and other securities laws. However, neither the Company nor the Committee assumes any responsibility for compliance by officers or others with any such laws, and any failure by the Company or the Committee to delay or dishonor any such direction shall not be deemed to increase the Company's legal obligations to the Participant or third parties. 5.6 TRANSFERS FROM OTHER PLAN. The Plan may accept the transfer of amounts or assets deferred by a Participant under any nonqualified deferred compensation plan or other deferral arrangement sponsored by the Company, including without limitation, any shares of Company Common Stock (whether or not restricted) which, but for such deferral, would be vested and nonforfeitable. Any amount so transferred shall be credited to the Participant's Deferred Account as of the date of the transfer. A transfer under this Section may have significant legal and administrative consequences (including but not limited to tax and securities law consequences) and, accordingly, the determination as to whether the Plan may accept such a transfer shall be made by the Committee in its sole discretion. 11 ARTICLE VI PAYMENT OF BENEFITS 6.1 PAYMENT OF DEFERRAL BENEFIT UPON DEATH, DISABILITY OR RETIREMENT. Upon the death, Disability, Early Retirement, or Retirement of a Participant, the Employer shall pay to the Participant or his Beneficiary a Deferral Benefit equal to the balance of his or her vested Account determined pursuant to Article V, less any amounts previously distributed, based on his or her written election pursuant to Section 6.5. 6.2 PAYMENT OF DEFERRAL BENEFIT UPON OTHER TERMINATION. Upon the termination of service of the Participant as an employee of the Employer and all Selected Affiliates for reasons other than death, Disability, or Retirement, the Employer shall pay to the Participant a Deferral Benefit in a lump sum equal to the balance of his or her vested Account determined pursuant to Article V, less any amounts previously distributed, as soon as administratively practical. 6.3 PAYMENTS TO BENEFICIARIES. In the event of the Participant's death prior to his or her receipt of all elected annual installments, his or her Beneficiary will receive the remaining annual installments at such times as such installments would have become distributable to the Participant. 6.4 HAIRCUT WITHDRAWAL Notwithstanding any other provision of the Plan, a Participant at any time shall be entitled to receive, upon written request to the Committee, a lump sum distribution equal to the entire vested amount owed to the Participant under the Plan at that time, subject to penalties as set forth below: (a) The lump-sum will be equal to 90% of the Participant's then current vested Deferral Account and Matching Account balances, and; (b) The remaining balance shall be forfeited by the Participant, and; (c) The Participant will not be eligible to recommence income deferrals until the first of the January following a one (1) year period commencing on the date of withdrawal, and then only if otherwise eligible to participate under the terms of the Plan. The amount payable under this section of the Plan shall be paid within sixty (60) days following receipt of written notice by the Committee. 12 6.5 FORM OF PAYMENT. The Deferral Benefit payable pursuant to Section 6.1 shall be paid in one of the following forms, as elected by the Participant in his or her Participant Agreement on file as of one (1) year and one (1) day prior to the date of Retirement, Death or Disability: (a) Annual payments of a fixed amount which shall amortize the vested Account balance as of the payment commencement date over a period not to exceed three (3) years (together, in the case of each unpaid annual payment, with deemed investment earnings thereon credited after the payment commencement date pursuant to Section 5.2). (b) A lump sum as soon as administratively practical. In the event a Participant fails to make a distribution election, his or her vested Account Balance shall be distributed as a lump sum distribution as soon as administratively practical after his or her Retirement, Death or Disability. 6.6 COMMENCEMENT OF PAYMENTS. Commencement of payments under Section 6.1 of the Plan shall begin within 60 days following receipt of written notice by the Committee of an event which entitles a Participant (or a Beneficiary) to payments in lump sum under the Plan or in the January following the event for annual payment. 6.7 SMALL BENEFIT. In the event the Committee determines that the balance of a Participant's Account is less than $5,000 at the time of commencement of payments, or the portion of the balance of the Participant's Account payable to any Beneficiary is less than $5,000 at the time of commencement of payments, the Committee may inform the Employer and the Employer, in its discretion, may choose to pay the benefit in the form of a lump sum payment, notwithstanding any provision of the Plan or a Participant election to the contrary. Such lump sum payment shall be equal to the balance of the Participant's Account or the portion thereof payable to a Beneficiary. 13 ARTICLE VII BENEFICIARY DESIGNATION 7.1 BENEFICIARY DESIGNATION. Each Participant shall have the sole right, at any time, to designate any person or persons as his Beneficiary to whom payment under the Plan shall be made in the event of his or her death prior to complete distribution to the Participant of his or her Account. Any Beneficiary designation shall be made in a written instrument provided by the Committee. All Beneficiary designations must be filed with the Committee and shall be effective only when received in writing by the Committee. 7.2 CHANGE OF BENEFICIARY DESIGNATION. Any Beneficiary designation may be changed by a Participant by the filing of a new Beneficiary designation, which will cancel all Beneficiary designations previously filed. The designation of a Beneficiary may be made or changed at any time without the consent of any person. 7.3 NO DESIGNATION. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant, then the Participant's designated Beneficiary shall be deemed to be the Participant's estate. 7.4 EFFECT OF PAYMENT. Payment to a Participant's Beneficiary (or, upon the death of a primary Beneficiary, to the contingent Beneficiary or, if none, to the Participant's estate) shall completely discharge the Employer's obligations under the Plan. 14 ARTICLE VIII ADMINISTRATION 8.1 COMMITTEE. The administrative committee for the Plan (the "Committee") shall be the Keebler Retirement Committee, as it is comprised from time to time. The Committee (a) shall have complete discretion to supervise the administration and operation of the Plan and to adopt rules and procedures governing the Plan from time to time, and, (b) shall have authority to give interpretive rulings with respect to the Plan. If and when any members of the Committee are also Participants, the Committee shall adopt and adhere to a conflicts of interest policy designed to prevent a Participant from acting in his or her own interest. If, due to the application of such a conflicts of interest policy, the Committee is unable to act on a particular matter under this Plan, the Committee shall bring such matter to the Personnel and Compensation Committee of the Board for action or approval. 8.2 DELEGATION. The Committee may appoint one or more individuals, who may be an employee of the Company, to be the Committee's agent with respect to the administration and operation of the Plan. The Committee may delegate all or any portion of its duties to such individual(s), provided that the Committee may cease such delegation at any time and provided further that any individual to whom duties are so delegated shall not be Participants. In addition, the Committee may, from time to time, employ other agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company. 8.3 BINDING EFFECT OF DECISIONS. Any decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan shall be final and binding upon all persons having any interest in the Plan. 8.4 INDEMNIFICATION OF COMMITTEE. The Company shall indemnify and hold harmless the members of the Committee and their duly appointed agents under Section 8.2 (to the extent that such agents are employees of the Company) against any and all claims, loss, damage, expense or liability (including reasonable attorney fees) arising from any action or failure to act with respect to the Plan, except in the case of gross negligence or willful misconduct by any such member or agent of the Committee. 15 8.5 ELECTION AND NOTICE PROCEDURES. Except as otherwise expressly stated in the Plan or required by applicable law, all elections and notices by Eligible Employees and Participants under the Plan shall be made at the time and in the manner specified by the Committee in accordance with its administrative procedures. The Committee may choose for this purpose to use all or any of the administrative procedures that apply under the Savings Plan. 16 ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1 AMENDMENT. The Board of Directors of the Company, on behalf of itself and of each Selected Affiliate, may at any time amend, suspend or reinstate any or all of the provisions of the Plan, except that no such amendment, suspension or reinstatement may adversely affect any Participant's Account, as it existed as of the day before the effective date of such amendment, suspension or reinstatement, without such Participant's prior written consent. Written notice of any amendment or other action with respect to the Plan shall be given to each Participant. 9.2 TERMINATION. The Board of Directors of the Company, on behalf of itself and of each Selected Affiliate, in its sole discretion, may terminate this Plan at any time and for any reason whatsoever. Upon termination of the Plan, the Committee shall take those actions necessary to administer any Accounts existing prior to the effective date of such termination; provided, however, that a termination of the Plan shall not adversely affect the value of a Participant's Account, as it existed as of the day before the effective date of such termination, or the timing or method of distribution of a Participant's Account, without the Participant's prior written consent. Notwithstanding the foregoing, a termination of the Plan shall not give rise to accelerated or automatic vesting of any Participant's Account. 17 ARTICLE X MISCELLANEOUS 10.1 FUNDING. Participants, their Beneficiaries, and their heirs, successors and assigns, shall have no secured interest or claim in any property or assets of the Employers. Each Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Employer to pay money in the future. Notwithstanding the foregoing, the Company shall create a rabbi trust to hold funds to be used in payment of the obligations of the Employers under the Plan, which trust shall not be funded except as provided in the following sentence. In the event of a Change in Control (or prior thereto in the sole discretion of the Employers), the Employers shall fund such trust in an amount equal to not less than the total value of the Participants' Accounts under the Plan as of the Valuation Date immediately preceding the Change in Control, provided that any funds contained therein shall remain liable for the claims of each respective Employer's general creditors. In addition, upon a Change in Control, the trust by its terms shall become irrevocable. 10.2 NONASSIGNABILITY. No right or interest under the Plan of a Participant or his or her Beneficiary (or any person claiming through or under any of them) shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Participant or Beneficiary. If any Participant or Beneficiary shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge or otherwise encumber his or her benefits hereunder or any part thereof, or if by reason of his or her bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him or her, then the Committee, in its discretion, may terminate his or her interest in any such benefit (including the Deferral Account) to the extent the Committee considers necessary or advisable to prevent or limit the effects of such occurrence. Termination shall be effected by the delivery of a written "termination declaration" to the last known address of the Participant or Beneficiary whose interest is adversely affected (the "terminated participant"). 18 10.3 LEGAL FEES AND EXPENSES. It is the intent of the Company and each Selected Affiliate that no Eligible Employee or former Eligible Employee be required to incur the expenses associated with the enforcement of his or her rights under this Plan by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to an Eligible Employee hereunder. Accordingly, if after a Change in Control it should appear that the Employer has failed to comply with any of its obligations under this Plan or in the event that the Employer or any other person takes any action to declare this Plan void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Eligible Employee the benefits intended to be provided to such Eligible Employee hereunder (although such actions do not include the valid exercise by the Company of its right to amend or terminate the Plan under Article IX), the Employer irrevocably authorizes such Eligible Employee from time to time to retain counsel of his or her choice, at the expense of the Employer as hereafter provided, to represent such Eligible Employee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Employer or any director, officer, stockholder or other person affiliated with the Employer in any jurisdiction. The Employer shall pay and be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by such Eligible Employee as a result of the Employer's failure to perform under this Plan or any provision thereof; or as a result of the Employer or any person contesting the validity or enforceability of this Plan or any provision thereof. 10.4 CAPTIONS. The captions contained herein are for convenience only and shall not control or affect the meaning or construction hereof. 10.5 GOVERNING LAW. The provisions of the Plan shall be construed and interpreted according to the laws of the state of Illinois (other than those conflict of law rules that could lead to the application of another state's laws). 10.6 SUCCESSORS. The provisions of the Plan shall bind and inure to the benefit of the Company, its Selected Affiliates, and their respective successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of the Company or a Selected Affiliate and successors of any such Company or other business entity. 19 10.7 NO IMPLIED RIGHTS. Nothing contained herein shall be construed to confer upon any Eligible Employee the right to continue to serve as an Eligible Employee of the Employer or in any other capacity. In addition, nothing contained herein shall be construed to limit either the right of the Employer to terminate the employment of any Eligible Employee, or the right of an Eligible Employee to terminate employment. Executed this 29th day of January, 1999. KEEBLER COMPANY By: /s/ SAM K. REED -------------------------------- Sam K. Reed Title: President and CEO ----------------------------- 20 The following schedules to the Keebler Company Deferred Compensation Plan have been omitted. Keebler hereby undertakes to furnish supplementally a copy of any such omitted schedules to the Commission upon request. SCHEDULE TITLE Exhibit A Eligible Employees Exhibit B Amount of Deferral Exhibit C Investment Return Rate EX-10.19 4 EXHIBIT 10.19 KEEBLER FOODS COMPANY DEFERRED COMPENSATION PLAN FOR NON-AFFILIATE DIRECTORS ARTICLE I PURPOSE AND EFFECTIVE DATE 1.1. PURPOSE. The purpose of the Keebler Foods Company Deferred Compensation Plan For Non-Affiliate Directors is to provide non-employee directors of Keebler Company the opportunity to defer the receipt of retainer and fees otherwise payable to such directors for services as a member of the Company's Board of Directors. The Plan is designed to aid the Company in attracting and retaining as members of its Board of Directors persons whose abilities, experience and judgment can contribute to the well-being and long-term success and growth of the Company. 1.2. EFFECTIVE DATE. The Plan shall be effective March 1, 1999 and shall remain in effect until terminated in accordance with Article IX. ARTICLE II DEFINITIONS When used in the Plan and initially capitalized, the following words and phrases shall have the meanings indicated: 2.1. "ACCOUNT" shall mean the recordkeeping account established for each Participant in the Plan to which the Compensation deferred under Article IV shall be credited. 2.2. "ADMINISTRATOR" shall mean the Board or the individual or committee appointed by the Board to administer the Plan. 2.3. "BOARD" shall mean the Board of Directors of the Company. 2.4. "CHANGE IN CONTROL" shall mean the earliest to occur of: (a) The effective time of any purchase, sale, merger, consolidation or other transaction after which any person, corporation, partnership or other entity OTHER than Flowers or its Affiliates, the then current management of Keebler Foods Company or of Flowers or any member of the immediate family of said management, or any employee benefit plan of Keebler Foods Company or of Flowers ("Permitted Owners") shall own more than fifty percent (50%) of the outstanding capital stock of Keebler Foods Company which stock is entitled to vote for the election of directors. (b) If it occurs prior to February 3, 2001, the effective time of any purchase, sale, merger, consolidation or other transaction after which any person, corporation, partnership or entity OTHER THAN the then current management of Keebler Foods Company or Flowers or any member of the immediate family of said management, or any employee benefit plan of Keebler Foods Company or of Flowers ("Permitted Owners") shall own more than fifty percent (50%) of the outstanding capital stock of Flowers which stock is entitled to vote for the election of directors. (c) The effective time of a transfer to an entity other than a Permitted Owner of substantially all of the property of Keebler Foods Company. (d) Continuing Directors at any time fail to constitute a majority of the Board of Directors of Keebler Foods Company. "Continuing Directors" shall mean the members of the Board of Directors as of the date hereof, plus any new directors whose nominations were approved by at least a majority of the Continuing Directors in office at the time of the election of any such new directors. For the purposes of this Plan, the term "Affiliate" shall be defined in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended. 2.5. "COMPANY" shall mean Keebler Foods Company and any successor(s) thereto. 2.6. "COMPENSATION" shall mean any annual retainer, attendance fees or committee chairman fees payable to an Eligible Director for services as a member of the Board during a Plan Year. 2.7. "DEFERRAL ELECTION" shall mean the written election made by an Eligible Director to defer Compensation in accordance with Article IV. 2.8. "ELIGIBLE DIRECTOR" shall mean a member of the Board who is not also an employee of the Company or Flowers or their Affiliates. 2.9. "FLOWERS" shall mean Flowers Industries, Inc. 2.10. "INTEREST RATE" shall mean an annual rate of 6.5%; provided, however, prior to the beginning of any Plan Year the Administrator may establish a different rate with respect to such Plan Year. Participants shall be notified of any change in Interest Rate under this Section 2.10 no later than 30 days prior to the beginning of the applicable Plan Year. 2.11. "PARTICIPANT" shall mean an Eligible Director who elects to participate in the Plan by filing a Deferral Election in accordance with Section 4.1. 2.12. "PLAN" shall mean this Keebler Foods Company Deferred Compensation Plan For Non-Affiliate Directors, as amended from time to time. 2 2.13. "PLAN YEAR" shall mean the twelve-month period beginning January 1 and ending the following December 31; provided, however, the first Plan Year shall be the period beginning March 1, 1999 and ending December 31, 1999. 2.14. "VALUATION DATE" shall mean the date on which the amount of a Participant's Account is adjusted as provided in Section 5.1. The last day of each calendar quarter shall be a Valuation Date and any other date specified by the Administrator for this purpose. ARTICLE III PARTICIPATION 3.1. PARTICIPATION. Eligibility to participate in the Plan is limited to Eligible Directors. An Eligible Director shall become a Participant in the Plan by filing a Deferral Election with the Administrator in accordance with Article IV. 3.2. TERMINATION OF PARTICIPATION. A Participant may elect to terminate his or her active participation in the Plan at any time by filing a written notice thereof with the Administrator. Such termination of active participation shall become effective with respect to Compensation payable for the Plan Year beginning after the date such election is received by the Administrator. Such a Participant may resume participation in the Plan as of the first day of any Plan Year beginning after such termination of active participation by filing a new Deferral Election in accordance with Section 4.1(a). A Participant's Deferral Election shall automatically terminate on the date he or she ceases to be an Eligible Director. Amounts credited to a Participant's Account before the effective date of termination of active participation shall continue to be governed in accordance with the terms of the Plan as applied to all Participants. ARTICLE IV DEFERRAL OF COMPENSATION 4.1. AMOUNT OF DEFERRAL. An Eligible Director may elect to defer all or a portion of his or her Compensation pursuant to the terms of a Deferral Election. An Eligible Director's Deferral Election shall be subject to the following: (a) An individual who prior to the beginning of any Plan Year satisfies the requirements of an Eligible Director shall be eligible to file a Deferral Election with respect to all or a portion of his or her Compensation for such Plan Year. Such Deferral Election shall be filed during the period established by the Administrator, but in no event later than the last day of the preceding Plan Year. 3 (b) Notwithstanding subsection (a) next above, if an individual has not satisfied the requirements of an Eligible Director prior to the beginning of a Plan Year but becomes an Eligible Director during such Plan Year, such Eligible Director may file a Deferral Election with the Administrator within 30 days of first becoming an Eligible Director. Such Deferral Election shall be effective with respect to Compensation payable for the first month beginning after the Deferral Election is received by the Administrator. (c) A separate Deferral Election shall be made for each Plan Year. (d) Deferral Elections shall be subject to the terms, conditions and limitations established by the Administrator. 4.2. CHANGE IN DEFERRAL ELECTIONS. A Deferral Election may not be modified on or after the first day of the Plan Year to which it relates. 4.3. CREDITING DEFERRED COMPENSATION. The amount of Compensation that a Participant elects to defer under the Plan shall be credited by the Company to the Participant's Account periodically, the frequency of which shall be determined by the Administrator. ARTICLE V PLAN ACCOUNTS 5.1. VALUATION OF ACCOUNT. The Administrator shall establish an Account for each Participant who has filed a Deferral Election. As of each Valuation Date, the Participant's Account balance as of the immediately preceding Valuation Date shall be adjusted upward or downward to reflect (i) the Participant's Compensation deferrals, if any, credited pursuant to Section 4.3 since the immediately preceding Valuation Date, (ii) the investment return to be credited as of such Valuation Date pursuant to Section 5.2, and (iii) the aggregate amount of distributions, if any, to be debited to the Account as of that Valuation Date under Section 6.3. 5.2. INVESTMENT RETURN ADJUSTMENTS. As of each Valuation Date, a Participant's Account balance shall be increased to reflect the interest that would have been earned had such Account balance been invested at the Interest Rate then in effect during the period since the last preceding Valuation Date. Any distributions from the Plan as of such Valuation Date shall be debited to the Participant's Account pursuant to Section 6.3 after the Account has been adjusted for investment return under this Section 5.2. 4 ARTICLE VI PAYMENT OF BENEFITS 6.1. DISTRIBUTION OF ACCOUNT. Distribution of a Participant's Account balance shall be made in cash, commencing as of the Valuation Date coincident with or next following the Eligible Director's termination of service on the Board for any reason, in one of the following forms elected by the Participant: (a) Substantially equal annual installments not to exceed three years, or (b) A lump sum. Such payment shall be made as soon as administratively practicable following the applicable Valuation Date. If an election with respect to the form of payment has not been filed with the Administrator at least 12 months prior to the date distribution is to commence, such election shall be disregarded and payments shall be made in accordance with the Participant's most recent election form that has been on file with the Administrator at least 12 months, or if no such election has been filed, in the form determined by the Administrator in its sole discretion. Notwithstanding the foregoing provisions of this Section 6.1, if the Participant's Account balance is less than $5,000 at the time payments are to commence under the Plan, such Account balance shall be paid in a lump-sum payment. 6.2. PAYMENTS TO BENEFICIARIES. In the event of the Participant's death prior to his or her commencement of benefits under the Plan, payment shall be made to the Participant's Beneficiary based on the method of payment elected by the Participant prior to death in accordance with Section 6.1 If the Participant dies after commencement of payments under the Plan but prior to the time his or her entire Account balance has been distributed, the remainder of the Participant's Account balance shall be distributed to the Beneficiary at the same times and in the same forms as such payments would have been distributed to the Participant. 6.3. DEBITING OF DISTRIBUTIONS. The amount of any distribution under this Article VI shall be debited to the Participant's Account as of the Valuation Date for which it is made. 6.4 SPECIAL CIRCUMSTANCES. The Administrator shall have the power in its absolute discretion to treat a Participant as if he or she had terminated service on the Board within the meaning of Section 6.1 if the Participant in the judgment of the Administrator experiences an extreme financial hardship or rapidly failing health. The Administrator also shall have the power in its absolute discretion to accelerate the distribution of a Participant's Account balance to the extent that the Administrator deems appropriate under the circumstances in the event that the Participant dies or, in the judgment of the Administrator, experiences an extreme financial hardship or rapidly failing health. 5 6.5. EFFECT OF CHANGE IN CONTROL. Notwithstanding the foregoing provisions of this Article VI, effective as of the date of a Change in Control, the balance in each Participant's Account under the Plan shall be distributed to the Participant (or Beneficiary, if applicable) in a single lump sum cash payment. ARTICLE VII BENEFICIARY DESIGNATION 7.1. BENEFICIARY DESIGNATIONS. Each Participant shall have the sole right, at any time, to designate any person or persons as his or her Beneficiary to whom payment under the Plan shall be made in the event of the Participant's death prior to complete distribution of his or her Account. Any Beneficiary designation shall be made in a written instrument provided by the Administrator. All Beneficiary designations must be filed with the Administrator and shall be effective only when received in writing by the Administrator. 7.2. CHANGE OF BENEFICIARY DESIGNATIONS. Any Beneficiary designation may be changed by a Participant by the filing of a new Beneficiary designation, which will cancel all Beneficiary designations previously filed. The designation of a Beneficiary may be made or changed at any time without the consent of any person. 7.3. NO DESIGNATION. If a Participant falls to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant, the Participant's designated Beneficiary shall be deemed to be the Participant's estate. 7.4. EFFECT OF PAYMENT. Payment to a Participant's Beneficiary (or, upon the death of a primary Beneficiary, to the contingent Beneficiary or, if none, to the Participant's estate) shall completely discharge the Company's obligations under the Plan. ARTICLE VIII ADMINISTRATION 8.1. AUTHORITY OF ADMINISTRATOR. The Administrator (a) shall have complete discretion to supervise the administration and operation of the Plan and to adopt rules and procedures governing the Plan from time to time, and (b) shall have authority to give interpretive rulings with respect to the Plan. If the Administrator or, if the Administrator is committee, any members of the Administrator are also Participants, the Administrator shall adopt and adhere to a conflicts of interest policy designed to prevent a Participant from acting in his or her own interest. If, due to the application of such a conflicts of interest policy, the Administrator is unable to act on a particular matter under this Plan, the Administrator shall bring such matter to the Board for action or approval. 6 8.2. DELEGATION. The Administrator may appoint one or more individuals, who may be an employee of the Company, to be the Administrator's agent with respect to the administration and operation of the Plan. The Administrator may delegate all or any portion of its duties to such individual(s), provided that the Administrator may cease such delegation at any time and provided further that any individual to whom duties are so delegated shall not be Participants. In addition, the Administrator may, from time to time, employ other agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company. 8.3. BINDING EFFECT OF DECISIONS. Any decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan shall be final and binding upon all persons having any interest in the Plan. 8.4. INDEMNIFICATION OF ADMINISTRATOR. The Company shall indemnify and hold harmless the Administrator and, if the Administrator is a committee, the individual members thereof, their duly appointed agents under Section 8.2 (to the extent that such agents are employees of the Company) against any and all claims, loss, damage, expense or liability (including reasonable attorney fees) arising from any action , or failure to act with respect to the Plan, except in the case of gross negligence or willful misconduct by any such member or agent of the Administrator. 8.5. ELECTION AND NOTICE PROCEDURES. Except as otherwise expressly stated in the Plan or required by applicable law, all elections and notices by Eligible Directors and Participants under the Plan shall be made at the time and in the manner specified by the Administrator, in accordance with its administrative procedures. ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1. AMENDMENT. The Board may at any time amend, suspend or reinstate any or all of the provisions of the Plan, except that no such amendment suspension or reinstatement may adversely affect any Participant's Account, as it existed as of the day before the effective date of such amendment, suspension or reinstatement, without such Participant's prior written consent 9.2. TERMINATION. The Board in its sole discretion may terminate this Plan at any time and for any reason whatsoever. Upon termination of the Plan, the Administrator shall take those actions necessary to administer any Accounts existing prior to the effective date of such termination; provided, however, that a termination of the Plan shall not adversely affect the value of a Participant's Account, as it existed as of the day before the effective date of such termination, or the timing or method of distribution of a Participant's Account without the Participant's prior written consent. 7 ARTICLE X MISCELLANEOUS 10.1. FUNDING. Participants, their Beneficiaries, and their heirs, successors and assigns, shall have no secured interest or claim in any property or assets of the Company. The Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. 10.2. NONASSIGNABILITY. No right or interest under the Plan of a Participant or his or her Beneficiary (or any person claiming through or under any of them) shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Participant or Beneficiary. If any Participant or Beneficiary shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge or otherwise encumber his or her benefits hereunder or any part thereof, or if by reason of his or her bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him or her, then the Administrator, in its discretion, may terminate his or her interest in any such benefit to the extent the Administrator considers necessary or advisable to prevent or limit the effects of such occurrence. Termination shall be effected by the delivery of a written "termination declaration" to the last known address of the Participant or Beneficiary whose interest is adversely affected. 10.3. LEGAL FEES AND EXPENSES. It is the intent of the Company that no Eligible Director be required to incur the expenses associated with the enforcement of his or her rights under this Plan by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to an Eligible Director hereunder. Accordingly, if after a Change in Control it should appear that the Company has failed to comply with any of its obligations under this Plan or in the event that the Company or any other person takes any action to declare this Plan void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Eligible Director the benefits intended to be provided to such Eligible Director hereunder (although such actions do not include the valid exercise by the Company of its right to amend or terminate the Plan under Article IX), the Company irrevocably authorizes such Eligible Director from time to time to retain counsel of his or her choice, at the expense of the Company as hereafter provided, to represent such Eligible Director in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company in any jurisdiction. The Company shall pay and be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by such Eligible Director as a result of the Company's failure to perform under this Plan or any provision thereof, or as a result of the Company or any person contesting the validity or enforceability of this Plan or any provision thereof. 8 10.4. CAPTIONS. The captions contained herein are for convenience only and shall not control or affect the meaning or construction hereof. 10.5. GOVERNING LAW. The provisions of the Plan shall be construed and interpreted according to the laws of the State of Illinois (other than those conflict of law rules that could lead to the application of another state's laws). 10.6. SUCCESSORS. The provisions of the Plan shall bind and inure to the benefit of the Company and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of the Company and successors of any such company or other business entity. 10.7. NO IMPLIED RIGHTS. Nothing contained herein shall be construed to confer upon any Eligible Director the right to continue to serve as a member of the Board or in any other capacity. WHEREAS, the Company has caused this Plan to be executed this 10th day of March, 1999. KEEBLER FOODS COMPANY By: /s/ SAM K. REED -------------------------------------------- Sam K. Reed Title: President and CEO ----------------------------------------- 9 EX-10.20 5 EXHIBIT 10.20 RECEIVABLES PURCHASE AGREEMENT dated as of January 29, 1999 among KEEBLER FUNDING CORPORATION KEEBLER FOODS COMPANY LIBERTY STREET FUNDING CORP. and THE BANK OF NOVA SCOTIA TABLE OF CONTENTS ARTICLE I. AMOUNTS AND TERMS OF THE PURCHASES Section 1.1. Purchase Facility................................ 1 Section 1.2. Making Purchases................................. 2 Section 1.3. Purchased Interest Computation................... 4 Section 1.4. Settlement Procedures............................ 4 Section 1.5. Fees............................................. 10 Section 1.6. Payments and Computations, Etc................... 10 Section 1.7. Dividing or Combining Portions of the Capital of the Purchased Interest........................ 10 Section 1.8. Increased Costs.................................. 11 Section 1.9. Requirements of Law.............................. 12 Section 1.10. Inability to Determine Eurodollar Rate........... 13 Section 1.11. Mitigation....................................... 14 ARTICLE II. REPRESENTATIONS AND WARRANTIES; COVENANTS; TERMINATION EVENTS Section 2.1. Repesentations and Warranties; Covenants......... 14 Section 2.2. Termination Events............................... 14 ARTICLE III. INDEMNIFICATION Section 3.1. Indemnities by the Seller........................ 15 Section 3.2. Indemnities by the Servicer...................... 17 Section 3.3. Defense of Claims................................ 18 ARTICLE IV. ADMINISTRATION AND COLLECTIONS Section 4.1. Appointment of the Servicer...................... 20 Section 4.2. Duties of the Servicer........................... 21 Section 4.3. Establishment and Use of Certain Accounts........ 22 Section 4.4. Enforcement Rights............................... 23 Section 4.5. Responsibilities of the Seller................... 24 Section 4.6. Servicing Fee.................................... 25 ARTICLE V. MISCELLANEOUS Section 5.1. Amendments, Etc.................................. 25 Section 5.2. Notices, Etc..................................... 26 Section 5.3. Assignability.................................... 26 Section 5.4. Costs, Expenses and Taxes........................ 27 i Section 5.5. No Proceedings; Limitation On Payments............ 28 Section 5.6. Confidentiality................................... 28 Section 5.7. GOVERNING LAW AND JURISDICTION.................... 29 Section 5.8. Execution in Counterparts......................... 29 Section 5.9. Survival of Termination........................... 30 Section 5.10. WAIVER OF JURY TRIAL.............................. 30 Section 5.11. Entire Agreement.................................. 30 Section 5.12. Headings.......................................... 30 Section 5.13. Issuer's Liabilities.............................. 30 Section 5.14. Tax Treatment..................................... 31 EXHIBIT I Definitions EXHIBIT II Conditions of Purchases EXHIBIT III Representations and Warranties EXHIBIT IV Covenants EXHIBIT V Termination Events SCHEDULE I Credit and Collection Policy SCHEDULE II Lock-box Banks and Lock-box Accounts SCHEDULE III Trade Names ANNEX A Form of Monthly Report ANNEX B Form of Purchase Notice ii This RECEIVABLES PURCHASE AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Agreement") is entered into as of January 29, 1999, Among KEEBLER FUNDING CORPORATION, a Delaware corporation, as seller (the "SELLER"),KEEBLER FOODS COMPANY, a Delaware corporation ("KEEBLER"), as initial servicer (in such capacity, together with its successors and permitted assigns in such capacity, the "SERVICER"), LIBERTY STREET FUNDING CORP., a Delaware corporation (together with its successors and permitted assigns, the "ISSUER"), and THE BANK OF NOVA SCOTIA, a Canadian chartered bank acting through its New York Agency ("BNS"), as administrator (in such capacity, together with its successors and assigns in such capacity, the "ADMINISTRATOR"). PRELIMINARY STATEMENTS. Certain terms that are capitalized and used throughout this Agreement are defined in EXHIBIT I. References in the Exhibits hereto to the "Agreement" refer to this Agreement, as amended, supplemented or otherwise modified from time to time. The Seller desires to sell, transfer and assign an undivided variable percentage interest in a pool of receivables, and the Issuer desires to acquire such undivided variable percentage interest, as such percentage interest shall be adjusted from time to time based upon, in part, reinvestments made by the Issuer. In consideration of the mutual agreements, provisions and covenants contained herein, the parties hereto agree as follows: ARTICLE I. AMOUNTS AND TERMS OF THE PURCHASES Section 1.1 PURCHASE FACILITY. (a) On the terms and conditions hereinafter set forth, the Issuer hereby agrees subject to the next sentence to purchase, and make reinvestments in, undivided percentage ownership interests up to the Purchase Limit with regard to the Purchased Interest from the Seller from time to time from the date hereof to the Facility Termination Date. Under no circumstances shall the Issuer make any such purchase or reinvestment if, after giving effect to such purchase or reinvestment, the aggregate outstanding Capital of the Purchased Interest would exceed the Purchase Limit. (b) The Seller may, upon at least 15 days' written notice to the Administrator, terminate in whole or reduce in part the unused portion of the Purchase Limit; PROVIDED, that each partial reduction shall be in the amount of at least $5,000,000, or an integral multiple of $1,000,000 in excess thereof, and that, unless terminated in whole, the Purchase Limit shall in no event be reduced below $50,000,000. Section 1.2 MAKING PURCHASES. (a) Each purchase (but not reinvestment) of undivided percentage ownership interests with regard to the Purchased Interest hereunder shall be made upon the Seller's irrevocable written notice in the form of Annex B delivered to the Administrator in accordance with SECTION 5.2 (which notice must be received by the Administrator before 11:00 a.m., New York City time): (i) at least three Business Days before the requested purchase date, in the case of a purchase to be funded at the Alternate Rate and based upon the Eurodollar Rate, (ii) at least two Business Days before the requested purchase date, in the case of a purchase to be funded at the Alternate Rate and based upon the Base Rate, and (iii) at least one Business Day before the requested purchase date, in the case of a purchase to be funded at the CP Rate, which notice shall specify: (A) the amount requested to be paid to the Seller (such amount, which shall not be less than $1,000,000, being the Capital relating to the undivided percentage ownership interest then being purchased), (B) the date of such purchase (which shall be a Business Day), and (C) the desired funding basis for such purchase (which shall be based upon the Eurodollar Rate, the Base Rate or the CP Rate). If the Seller has requested that the purchase be funded at the CP Rate, the Administrator shall promptly thereafter notify the Seller whether the Issuer has exercised its discretion not to fund such purchase with the issuance of Notes because such purchase with the issuance of Notes would be economically inadvisable to the Issuer or the Issuer is unable to or prohibited from issuing Notes, the Administrator, the Seller or any other similarly situated Person, or otherwise not permitted, in which case the Seller shall be deemed to have requested that the purchase be funded at the Alternate Rate and be based upon the Base Rate. (b) On the date of each purchase (but not reinvestment) of undivided percentage ownership interests with regard to the Purchased Interest hereunder, the Issuer shall, upon satisfaction of the applicable conditions set forth in EXHIBIT II, make available to the Seller in same day funds, at First National Bank of Chicago, account number 5585600, ABA 071000013, an amount equal to the Capital (as specified by the Seller pursuant to Section 1.2(a) above) relating to the undivided percentage ownership interest then being purchased. (c) Effective on the date of each purchase pursuant to this Section and each reinvestment pursuant to SECTION 1.4, the Seller hereby sells and assigns to the Issuer an undivided percentage ownership interest in: (i) each Pool Receivable then existing, (ii) all Related Security with respect to such Pool Receivables, and (iii) all Collections with respect to, and other proceeds of, such Pool Receivables and Related Security. (d) To secure all of the Seller's obligations (monetary or otherwise) under this Agreement and the other Transaction Documents 2 to which it is a party, whether now or hereafter existing or arising, due or to become due, direct or indirect, absolute or contingent, the Seller hereby grants to the Issuer a security interest in all of the Seller's right, title and interest (including any undivided interest of the Seller) in, to and under all of the following, whether now or hereafter owned, existing or arising: (i) all Pool Receivables, (ii) all Related Security with respect to such Pool Receivables, (iii) all Collections with respect to such Pool Receivables, (iv) the Lock-Box Accounts and the Collection Account, and all amounts on deposit therein, and all certificates and instruments, if any, from time to time evidencing such Lock-Box Accounts and the Collection Account, and amounts on deposit therein, (v) all rights (but none of the obligations) of the Seller under the Purchase and Sale Agreement, and (vi) all proceeds of, and all amounts received or receivable under any or all of, the foregoing (collectively, the "Pool Assets"). The Issuer shall have, with respect to the Pool Assets, and in addition to all the other rights and remedies available to the Issuer, all the rights and remedies of a secured party under any applicable UCC. Section 1.3. PURCHASED INTEREST COMPUTATION. The Purchased Interest shall be initially computed on the date of the initial purchase hereunder. Thereafter, until the Facility Termination Date, the Purchased Interest shall be automatically recomputed (or deemed to be recomputed) on each Business Day other than a Termination Day. The Purchased Interest as computed (or deemed recomputed) as of the day before the Facility Termination Date shall thereafter remain constant. The Purchased Interest shall become zero when the Capital thereof and Discount thereon shall have been paid in full, all the amounts owed by the Seller and the Servicer hereunder to the Issuer, the Administrator and any other Indemnified Party or Affected Person are paid in full, and the Servicer shall have received the accrued Servicing Fee thereon. Section 1.4. SETTLEMENT PROCEDURES. (a) The collection of the Pool Receivables shall be administered by the Servicer in accordance with this Agreement. The Seller shall provide to the Servicer on a timely basis all information needed for such administration, including notice of the occurrence of any Termination Day and current computations of the Purchased Interest. (b) The Servicer shall, on each Business Day on which Collections of Pool Receivables are received by the Seller or Servicer or are deposited into the Lock-Box Accounts, transfer such Collections therefrom and deposit such Collections into the Collection Account. With respect to such Collections on such day and with respect to any Collection transferred to the Collection Account on such day pursuant to the last paragraph of Section 1.4(e), the Servicer shall: 3 (i) set aside and hold in the Collection Account for the benefit of the Issuer, out of the percentage of such Collections represented by the Purchased Interest, FIRST an amount equal to the Discount accrued through such day for each Portion of Capital and not previously transferred, SECOND, an amount equal to the fees set forth in the Fee Letter accrued through such day for the Purchased Interest and not previously transferred, and THIRD, to the extent funds are available therefor, an amount equal to the Issuer's Share of the Servicing Fee accrued through such day and not previously transferred; and (ii) subject to SECTION 1.4 (f), if such day is not a Termination Day, remit to the Seller, on behalf of the Issuer, the remainder of the percentage of such Collections, represented by the Purchased Interest, to the extent representing a return on the Capital; such Collections shall be automatically reinvested in Pool Receivables, and in the Related Security and Collections and other proceeds with respect thereto, and the Purchased Interest shall be automatically recomputed pursuant to SECTION 1.3; IT BEING UNDERSTOOD, that prior to remitting to the Seller the remainder of such Collections by way of reinvestment in Pool Receivables, the Servicer shall have calculated the Purchased Interest on such day, and if such Purchased Interest shall exceed 100% on such day, such Collections shall not be remitted to the Seller but shall be set aside and held in the Collection Account for the benefit of the Issuer in accordance with PARAGRAPH (iii) below; (iii) if such day is a Termination Day (or if such day is a day on which the Purchased Interest exceeds 100%), (A) set aside and hold in the Collection Account for the benefit of the Issuer the entire remainder of the percentage of the Collections represented by the Purchased Interest (or such amount set forth in PARAGRAPH (ii) above); PROVIDED that so long as the Facility Termination Date has not occurred if any amounts are so set aside on any Termination Day and thereafter, the conditions set forth in SECTION 2 of EXHIBIT II are satisfied or are waived by the Administrator, such previously set aside amounts shall, to the extent representing a return on the Capital, be reinvested in accordance with the preceding PARAGRAPH (ii) on the day of such subsequent satisfaction or waiver of conditions, and (B) set aside and hold in the Collection Account for the benefit of the Issuer the entire remainder of the Collections in the Collection Account represented by the Seller's Share of the Collections, if any; PROVIDED that so long as the Facility Termination Date has not occurred if any amounts are so set aside on any Termination Day and thereafter, the conditions set forth in SECTION 2 of EXHIBIT II are satisfied or are waived by the 4 Administrator, such previously set aside amounts shall be distributed to the Seller on the day of such subsequent satisfaction or waiver of conditions; and (iv) during the times when amounts are required to be reinvested in accordance with the foregoing PARAGRAPH (ii) or the proviso to PARAGRAPH (iii), release to the Seller (subject to SECTION 1.4(f)) for its own account any Collections in excess of (x) such amounts, (y) the amounts that are required to be set aside in the Collection Account pursuant to PARAGRAPH (i) above and (z) in the event the Seller is not the Servicer, all reasonable and appropriate out-of-pocket costs and expenses (including the Servicing Fee to the extent such Servicing Fee has not already been paid) of such Servicer of servicing, collecting and administering the Pool Receivables. (c) The Servicer shall deposit into the Administration Account (or such other account designated by the Administrator), on each Settlement Date: (i) Collections held on deposit in the Collection Account for the benefit of the Issuer pursuant to SECTION 1.4(b)(i) in respect of accrued Discount and accrued and unpaid Fees; (ii) Collections held on deposit in the Collection Account for the benefit of the Issuer pursuant to SECTION 1.4(f); and (iii) the lesser of (x) the amount of Collections then held on deposit in the Collection Account for the benefit of the Issuer pursuant to SECTION 1.4(b)(iii) and (y) the aggregate amount of Capital on such date. The Servicer shall deposit to its own account from Collections held on deposit in the Collection Account pursuant to SECTION 1.4(b)(i) in respect of the accrued Servicing Fee, an amount equal to such accrued Servicing Fee. (d) Upon receipt of funds deposited into the Administration Account pursuant to CLAUSE (c), the Administrator shall cause such funds to be distributed as follows: (i) if such distribution occurs on a day that is not a Termination Day and the Purchased Interest does not exceed 100%, FIRST to the Issuer in payment in full of all accrued Discount with respect to each Portion of Capital and accrued and unpaid Fees, and SECOND, if the Servicer has set aside amounts in respect of the Servicing Fee pursuant to CLAUSE (b)(i) and has not retained such amounts pursuant to CLAUSE (c), to the Servicer (payable in arrears on each Settlement 5 Date) in payment in full of the Issuer's Share of accrued Servicing Fees so set aside, and (ii) if such distribution occurs on a Termination Day or on a day when the Purchased Interest exceeds 100%, FIRST to the Issuer in payment in full of all accrued Discount with respect to each Portion of Capital and accrued and unpaid Fees, SECOND to the Issuer in payment in full of Capital (or, if such day is not a Termination Day, the amount necessary to reduce the Purchased Interest to 100%), THIRD, if Keebler or an Affiliate thereof is not the Servicer, to the Servicer in payment in full of all accrued Servicing Fees, FOURTH, if the Capital and accrued Discount with respect to each Portion of Capital have been reduced to zero, and all accrued Servicing Fees payable to the Servicer (if other than Keebler or an Affiliate thereof) have been paid in full, to the Issuer, the Administrator and any other Indemnified Party or Affected Person in payment in full of any other amounts owed thereto by the Seller under this Agreement and, FIFTH, unless such amount has been retained by the Servicer pursuant to CLAUSE (c), to the Servicer (if the Servicer is Keebler or an Affiliate thereof) in payment in full of the Issuer's Share of all accrued Servicing Fees. After the Capital, Discount, and Fees with respect to the Purchased Interest, Servicing Fees, and any other amounts payable by the Seller and the Servicer to the Issuer, the Administrator or any other Indemnified Party or Affected Person hereunder, have been paid in full, all additional Collections with respect to the Purchased Interest shall be paid to the Seller for its own account. (e) For the purposes of this SECTION 1.4: (i) if on any day the Outstanding Balance of any Pool Receivable is reduced or adjusted as a result of any defective, rejected, returned, repossessed or foreclosed goods or services, or any revision, cancellation, allowance, discount or other adjustment made by any Originator, Hollow Tree, the Servicer, the Seller or any Affiliate of the Seller, or any setoff or dispute between any Originator, Hollow Tree, the Seller or any Affiliate of the Seller and an Obligor, the Seller shall be deemed to have received on such day a Collection of such Pool Receivable in the amount of such reduction or adjustment; (ii) if on any day any of the representations or warranties in Section 1(g) or (m) of EXHIBIT III is not true with respect to any Pool Receivable, the Seller shall be deemed to have received on such day a Collection of such Pool Receivable in full (Collections deemed to have been received 6 pursuant to CLAUSE (i) and (ii) of this paragraph (e) are hereinafter sometimes referred to as "Deemed Collections"); (iii) except as otherwise required by applicable law or the relevant Contract, all Collections received from an Obligor of any Receivable shall be applied to the Receivables of such Obligor in the order of the age of such Receivables, starting with the oldest such Receivable, unless such Obligor designates in writing its payment for application to specific Receivables; and (iv) if and to the extent the Administrator or the Issuer shall be required for any reason to pay over to an Obligor (or any trustee, receiver, custodian or similar official pursuant to an Event of Bankruptcy) any amount received by it hereunder, such amount shall be deemed not to have been so received by the Administrator or the Issuer but rather to have been retained by the Seller and, accordingly, the Administrator or the Issuer, as the case may be, shall have a claim against the Seller for such amount, payable when and to the extent that any distribution from or on behalf of such Obligor is made in respect thereof. On or before the last day of each Reporting Period that contains one or more days on which Seller is deemed to have received a Collection pursuant to this SECTION 1.4(e), Seller shall transfer an amount equal to the aggregate amount of such Deemed Collections to the Collection Account and the Servicer shall distribute such transferred amount in the manner set forth in SECTION 1.4(c), as if such transferred amount actually had been received by Seller or Servicer on the date of such transfer from the Obligors of such Pool Receivables and as if such transferred amount actually had been deposited into a Lockbox Account on the date of such transfer. (f) If at any time the Seller shall wish to cause the reduction of Capital of the Purchased Interest (but not to commence the liquidation, or reduction to zero, of the entire Capital of the Purchased Interest), the Seller may do so as follows: (i) the Seller shall give the Administrator and the Servicer at least two Business Days' prior written notice thereof (including the amount of such proposed reduction and the proposed date on which such reduction will commence); (ii) on the proposed date of commencement of such reduction and on each day thereafter, the Servicer shall cause Collections not to be reinvested until the amount thereof not so reinvested shall equal the desired amount of reduction; and (iii) the Servicer shall hold such Collections in the Collection Account for the benefit of the Issuer, for payment 7 to the Administrator on the next Settlement Date immediately following the current Settlement Period, and the Capital of the Purchased Interest shall be deemed reduced in the amount to be paid to the Administrator only when in fact finally so paid; provided, that: (A) the amount of any such reduction shall be not less than $5,000,000 and shall be an integral multiple of $1,000,000, and the entire Capital of the Purchased Interest after giving effect to such reduction shall be not less than $50,000,000 and shall be in an integral multiple of $1,000,000; and (B) the Seller shall choose a reduction amount, and the date of commencement thereof, so that to the extent practicable such reduction shall commence and conclude in the same Settlement Period. Section 1.5. FEES. The Seller shall pay to the Administrator certain fees in the amounts and on the dates set forth in a letter, dated the date hereof, among the Servicer, the Seller and the Administrator (as such letter agreement may be amended, supplemented or otherwise modified from time to time, the "Fee Letter"). Section 1.6. PAYMENTS AND COMPUTATIONS, ETC. (a) All amounts to be paid or deposited by the Seller or the Servicer hereunder shall be made without reduction for offset or counterclaim and shall be paid or deposited no later than noon (New York City time) on the day when due in same day funds to the Administration Account. All amounts received after noon (New York City time) will be deemed to have been received on the next Business Day. (b) The Seller or the Servicer, as the case may be, shall, to the extent permitted by law, pay interest on any amount not paid or deposited by the Seller or the Servicer, as the case may be, when due hereunder, at an interest rate equal to 1.0% per annum above the Base Rate, payable on demand. (c) All computations of interest under CLAUSE (b) and all computations of Discount, fees and other amounts hereunder shall be made on the basis of a year of 360 (or 365 or 366, as applicable, with respect to Discount or other amounts calculated by reference to the Base Rate) days for the actual number of days elapsed. Whenever any payment or deposit to be made hereunder shall be due on a day other than a Business Day, such payment or deposit shall be made on the next Business Day and such extension of time shall be included in the computation of such payment or deposit. 8 Section 1.7. DIVIDING OR COMBINING PORTIONS OF THE CAPITAL OF THE PURCHASED INTEREST. The Seller may, on the last day of any Settlement Period, pursuant to written notice delivered to the Administrator in accordance with SECTION 5.2: (a) at least three Business Days before such last day in the case of a Portion of Capital to be funded based upon the Eurodollar Rate and (b) at least two Business Days before such last day in all other cases, either: (i) divide the Capital of the Purchased Interest into two or more portions (each a "PORTION OF CAPITAL"), which Portions of Capital may accrue Discount by reference to different rates, equal, in aggregate, to the Capital of the Purchased Interest; PROVIDED, that after giving effect to such division the amount of each such Portion of Capital shall be not less than $5,000,000 and shall be an integral multiple of $1,000,000, or (ii) combine any two or more Portions of Capital outstanding on such last day and having Settlement Periods ending on such last day into a single Portion of Capital equal to the aggregate of the Capital of the Purchased Interest. Section 1.8. INCREASED COSTS. (a) If the Administrator, the Issuer, any Purchaser, any other Program Support Provider or any of their respective Affiliates (each an "Affected Person") reasonably determines that the existence of or compliance with: (i) any law or regulation or any change therein or in the interpretation or application thereof, in each case adopted, issued or occurring after the date hereof, or (ii) any request, guideline or directive from any central bank or other Governmental Authority (whether or not having the force of law) issued or occurring after the date of this Agreement, affects or would affect the amount of capital required or expected to be maintained by such Affected Person, and such Affected Person determines that the amount of such capital is increased by or based upon the existence of any commitment to make purchases of (or otherwise to maintain the investment in) Pool Receivables related to this Agreement or any related liquidity facility, credit enhancement facility and other commitments of the same type, then, upon written demand by such Affected Person (with a copy to the Administrator), the Seller shall promptly pay to the Administrator, for the account of such Affected Person, from time to time as specified by such Affected Person, additional amounts sufficient to compensate such Affected Person. A certificate describing in reasonable detail, such amounts and the basis for such Affected Person's demand for such amounts submitted to the Seller and the Administrator by such Affected Person shall be conclusive and binding for all purposes, absent manifest error. (b) If, due to either: (i) the introduction of or any change in or in the interpretation of any law or regulation occurring after the date hereof or (ii) compliance with any guideline or request occurring after the date hereof from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Affected 9 Person of agreeing to purchase or purchasing, or maintaining the ownership of, the Purchased Interest in respect of which Discount is computed by reference to the Eurodollar Rate, then, upon written demand by such Affected Person, the Seller shall promptly pay to such Affected Person, from time to time as specified by such Affected Person, additional amounts sufficient to compensate such Affected Person for such increased costs. A certificate describing in reasonable detail, such amounts and the basis for such Affected Person's demand for such amounts submitted to the Seller and the Administrator by such Affected Person shall be conclusive and binding for all purposes, absent manifest error. (c) In determining the additional amounts necessary to compensate an Affected Person pursuant to clause (a) or (b) above, such Affected Person may use any method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. Section 1.9. REQUIREMENTS OF LAW. If any Affected Person reasonably determines that the existence of or compliance with: (a) any law or regulation or any change therein or in the interpretation or application thereof, in each case adopted, issued or occurring after the date hereof, or (b) any request, guideline or directive from any central bank or other Governmental Authority (whether or not having the force of law) issued or occurring after the date of this Agreement: (i) does or shall subject such Affected Person to any tax of any kind whatsoever with respect to this Agreement, any increase in the Purchased Interest or in the amount of Capital relating thereto, or does or shall change the basis of taxation of payments to such Affected Person on account of Collections, Discount or any other amounts payable hereunder (excluding taxes imposed on the overall pre-tax net income of such Affected Person, franchise taxes imposed on such Affected Person and any withholding taxes imposed as a result of amounts paid or payable to such Affected Person pursuant to this Agreement), (ii) does or shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, purchases, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Affected Person that are not otherwise included in the determination of the Eurodollar Rate or the Base Rate hereunder, or (iii) does or shall impose on such Affected Person any other condition, 10 and the result of any of the foregoing is: (A) to increase the cost to such Affected Person of acting as Administrator, or of agreeing to purchase or purchasing or maintaining the ownership of undivided percentage ownership interests with regard to the Purchased Interest (or interests therein) or any Portion of Capital, or (B) to reduce any amount receivable hereunder (whether directly or indirectly), then, in any such case, upon written demand by such Affected Person, the Seller shall promptly pay to such Affected Person additional amounts necessary to compensate such Affected Person for such additional cost or reduced amount receivable. All such amounts shall be payable as incurred. A certificate from such Affected Person to the Seller describing in reasonable detail the amount and basis for the amount of such additional costs or reduced amount receivable shall be conclusive and binding for all purposes, absent manifest error. Section 1.10. INABILITY TO DETERMINE EURODOLLAR RATE. If the Administrator shall have determined before the first day of any Settlement Period (which determination shall be conclusive and binding upon the parties hereto), by reason of circumstances affecting the interbank Eurodollar market, either that: (a) dollar deposits in the relevant amounts and for the relevant Settlement Period are not available, (b) adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Settlement Period or (c) the Eurodollar Rate determined pursuant hereto does not accurately reflect the cost to the Issuer (as conclusively determined by the Administrator) of maintaining any Portion of Capital during such Settlement Period, the Administrator shall promptly give telephonic notice of such determination, confirmed in writing, to the Seller before the first day of such Settlement Period. Upon delivery of such notice: (i) no Portion of Capital shall be funded thereafter at the Alternate Rate determined by reference to the Eurodollar Rate unless and until the Administrator shall have given notice to the Seller that the circumstances giving rise to such determination no longer exist, and (ii) with respect to any outstanding Portions of Capital then funded at the Alternate Rate determined by reference to the Eurodollar Rate, such Alternate Rate shall, on the immediately succeeding Settlement Date, automatically be converted to the Alternate Rate determined by reference to the Base Rate at the respective last days of the then-current Settlement Periods relating to such Portions of Capital. Section 1.11. MITIGATION. Each Affected Person agrees that if it makes any demand for payment under SECTION 1.8 or 1.9, it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to mitigate the effect upon such Affected Person of the capital requirements, increased costs, tax or other matter described in SECTION 1.8 or 1.9, as applicable. 11 ARTICLE II. REPRESENTATIONS AND WARRANTIES; COVENANTS; TERMINATION EVENTS Section 2.1. REPRESENTATIONS AND WARRANTIES; COVENANTS. Each of the Seller and the Servicer hereby makes the representations and warranties, and hereby agrees to perform and observe the covenants, applicable to it set forth in EXHIBITS III and IV, respectively. Section 2.2. TERMINATION EVENTS. If any of the Termination Events set forth in EXHIBIT V shall occur, the Administrator may, by notice to the Seller, declare the Facility Termination Date to have occurred (in which case the Facility Termination Date shall be deemed to have occurred); PROVIDED, that automatically upon the occurrence of any event (without any requirement for the passage of time or the giving of notice) described in paragraph (f) of EXHIBIT V, the Facility Termination Date shall occur. Upon any such declaration, occurrence or deemed occurrence of the Facility Termination Date, the Issuer and the Administrator shall have, in addition to the rights and remedies that they may have under this Agreement, all other rights and remedies provided after default under the New York UCC and under other applicable law, which rights and remedies shall be cumulative. ARTICLE III. INDEMNIFICATION Section 3.1. INDEMNITIES BY THE SELLER. Without limiting any other rights that the Administrator, the Issuer, any Program Support Provider or any of their respective Affiliates, employees, officers, directors, agents, counsel, successors, transferees or assigns (each, an "Indemnified Party" and collectively, the "Parties") may have hereunder or under applicable law, the Seller hereby agrees to indemnify each Indemnified Party from and against any and all claims, damages, expenses, costs, losses and liabilities (including Attorney Costs) (all of the foregoing being collectively referred to as "Indemnified Amounts") arising out of or resulting from this Agreement (whether directly or indirectly), the use of proceeds of purchases or reinvestments, the ownership of the Purchased Interest, or any interest therein, or in respect of any Receivable, Related Security or Contract, excluding, however: (a) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Indemnified Party or its officers, directors, agents (including any successor Servicer appointed by the Administrator pursuant to SECTION 4.1(a)) or counsel, (b) recourse (except as otherwise specifically provided in this Agreement) for uncollectible Receivables, or (c) any overall net income taxes or franchise taxes imposed on such 12 Indemnified Party and any withholding taxes imposed as a result of amounts paid or payable to such Indemnified Party pursuant to this Agreement. Subject to the exclusions set forth in the preceding sentence, but without otherwise limiting or being limited by the foregoing, the Seller shall pay on demand to each Indemnified Party any and all amounts necessary to indemnify such Indemnified Party from and against any and all Indemnified Amounts relating to or resulting from any of the following: (i) the failure of any Receivable included in the calculation of the Net Receivables Pool Balance as an Eligible Receivable to be an Eligible Receivable, the failure of any information contained in an Monthly Report to be true and correct, or the failure of any other information provided to the Issuer or the Administrator with respect to Receivables or this Agreement to be true and correct, (ii) the failure of any representation, warranty or statement made or deemed made by the Seller (or any of its officers) under or in connection with this Agreement to have been true and correct as of the date made or deemed made in all respects, (iii) the failure by the Seller to comply with any applicable law, rule or regulation with respect to any Pool Receivable or the related Contract, or the failure of any Pool Receivable or the related Contract to conform to any such applicable law, rule or regulation, (iv) the failure to vest in the Issuer a valid and enforceable: (A) perfected undivided percentage ownership interest, to the extent of the Purchased Interest, in the Receivables in, or purporting to be in, the Receivables Pool and the other Pool Assets, or (B) first priority perfected security interest in the Pool Assets, in each case, free and clear of any Adverse Claim, (v) the failure to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables in, or purporting to be in, the Receivables Pool and the other Pool Assets, whether at the time of any purchase or reinvestment or at any subsequent time, (vi) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of an Obligor to the payment of any Receivable in, or purporting to be in, the Receivables Pool (including a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in 13 accordance with its terms), or any other claim resulting from the sale of the goods or services related to such Receivable or the furnishing or failure to furnish such goods or services or relating to collection activities with respect to such Receivable (if such collection activities were performed by the Seller or any of its Affiliates acting as Servicer or by any agent or independent contractor retained by the Seller or any of its Affiliates), (vii) any failure of the Seller (or any of its Affiliates acting as the Servicer) to perform its duties or obligations in accordance with the provisions hereof or under the Contracts, (viii) any products liability or other claim, investigation, litigation or proceeding arising out of or in connection with merchandise, insurance or services that are the subject of any Contract, (ix) the commingling of Collections at any time with other funds, (x) the use of proceeds of purchases or reinvestments, or (xi) any reduction in Capital as a result of the distribution of Collections pursuant to SECTION 1.4(d), if all or a portion of such distributions shall thereafter be rescinded or otherwise must be returned for any reason. Section 3.2. INDEMNITIES BY THE SERVICER. Without limiting any other rights that the Administrator, the Issuer or any other Indemnified Party may have hereunder or under applicable law, the Servicer hereby agrees to indemnify each Indemnified Party from and against any and all Indemnified Amounts arising out of or resulting from (whether directly or indirectly): (a) the failure of any information contained in a Monthly Report to be true and correct, or the failure of any other information provided to the Issuer or the Administrator by, or on behalf of, the Servicer to be true and correct, (b) the failure of any representation, warranty or statement made or deemed made by the Servicer (or any of its officers) under or in connection with this Agreement to have been true and correct in all respects as of the date made or deemed made, (c) the failure by the Servicer to comply with any applicable law, rule or regulation with respect to any Pool Receivable or the related Contract, (d) any dispute, claim, offset or defense of the Obligor to the payment of any Receivable in, or purporting to be in, the Receivables Pool resulting from or related to the collection activities with respect to such Receivable, or (e) any failure of the Servicer to perform its duties or obligations in accordance with the provisions hereof. 14 Section 3.3. DEFENSE OF CLAIMS. (a) Promptly after the receipt by an Indemnified Party or Parties of a notice of the commencement of any action, suit, proceeding, investigation or claim against such Indemnified Party or Parties as to which it proposes to demand indemnification from the Seller or Servicer (either or both such parties, as applicable, the "INDEMNIFYING PARTY" or "PARTIES") pursuant to SECTION 3.1 or 3.2, as applicable, such Indemnified Party or Parties shall notify the Indemnifying Party or Parties in writing of the commencement thereof; but the failure so to notify the Indemnifying Party or Parties will not relieve such Indemnifying Party or Parties from any liability which such Indemnifying Party or Parties may have to such Indemnified Party or Parties pursuant to SECTION 3.1 or 3.2 unless to the extent that such failure results in a material impairment of the Indemnifying Party or Parties ability to defend such action, suit, proceeding, investigation or claim in accordance with the terms of this SECTION 3.3. After such notice, if (i) an Indemnifying Party or Parties shall acknowledge (without prejudice to any exclusion of Indemnified Amounts as a result of an Indemnified Party's gross negligence or willful misconduct pursuant to SECTION 3.1 or 3.2) in writing to such Indemnified Party or Parties that such Indemnifying Party or Parties shall be obligated to indemnify such Indemnified Party or Parties for any Indemnified Amounts described in SECTION 3.1 or 3.2, as applicable, with respect to such action, suit, proceeding, investigation or claim, (ii) the defendants in, or targets of, any such action, suit, proceeding, investigation or claim include both the Indemnifying Party or Parties and any such Indemnified Party or Parties, and (iii) no Termination Event of Unmatured Termination Event shall have occurred and be continuing, the Indemnifying Party or Parties, to the extent that it or they shall wish, jointly with such Indemnified Party or Parties, shall be entitled to participate therein in defense of such action, suit, proceeding or investigation, and the Indemnifying Party or Parties and such Indemnified Party or Parties shall cooperate in the defense thereof and shall retain counsel reasonably satisfactory to the Indemnifying Party or Parties and such Indemnified Party or Parties to undertake the joint defense of such Indemnifying Party or Parties and such Indemnified Party or Parties at such Indemnifying Party's or Parties' cost, risk and expense. If (i) in the reasonable opinion of such Indemnified Party or Parties, the engagement of such counsel would present a conflict of interest that would prevent such counsel from effectively undertaking such joint defense, (ii) such Indemnified Party or Parties reasonably conclude that there may be legal defenses available to it or them that are different from or in addition to those available to such Indemnifying Party or Parties, (iii) such Indemnifying Party or Parties fail to employ counsel reasonably satisfactory to such Indemnified Party or Parties in a timely manner, or (iv) if a Termination Event or Unmatured Termination Event shall have occurred and be continuing, then such Indemnified Party or Parties may employ separate counsel to represent or defend it or them in 15 any such action, suit, proceeding or investigation and such Indemnifying Party or Parties shall pay all fees, expenses and disbursements of such counsel; PROVIDED, HOWEVER, that in no event shall such Indemnifying Party or Parties be liable for the fees, expenses and disbursements of more than one counsel representing all Indemnified Parties that are parties to the same action, suit, proceeding, investigation or claim. (b) No Indemnifying Party shall (i) without the prior written consent of the relevant Indemnified Party or Parties (which consent shall not be unreasonably withheld or delayed) settle or compromise or consent to the entry of any judgment with respect to any pending action, suit, proceeding, investigation or claim in respect to which indemnification or contribution may be sought hereunder (whether or not the relevant Indemnified Party or Parties are actual or potential parties to such claim) unless such settlement, compromise or consent includes an unconditional release of each relevant Indemnified Party from all liability arising out of such action, suit, proceeding, investigation or claim or (ii) be liable for any settlement of any such action affected without its written consent (which consent shall not be unreasonably withheld or delayed), but if settled with its written consent or if there be a final judgment of the plaintiff in any action, the Indemnifying Parties agree to indemnify and hold harmless any Indemnified Party from and against any indemnified amounts (subject to the terms of SECTION 3.1 and 3.2) relating thereto. In the event of any dispute between any Indemnified Party or Parties, on the one hand, and any Indemnifying Party, on the other hand, as to whether such Indemnifying Party or Indemnified party is acting reasonably in objecting to any proposed settlement, compromise or consent, such dispute shall be resolved through binding arbitration in Chicago, Illinois in accordance with the commercial arbitration rules of the American Arbitration Association. There shall be a single arbitrator to be selected by mutual agreement of such Indemnified Party or Parties and such Indemnifying Party or Parties (or if such parties cannot agree on an arbitrator, by an arbitrator selected by a federal or state court located in the City of Chicago). Any such arbitration must be commenced not later than 30 days after the date such dispute arose. ARTICLE IV. ADMINISTRATION AND COLLECTIONS Section 4.1. APPOINTMENT OF THE SERVICER. (a) The servicing, administering and collection of the Pool Receivables shall be conducted by the Person so designated from time to time as the 16 Servicer in accordance with this Section. Until the Administrator gives notice to Keebler (in accordance with this Section) of the designation of a new Servicer, Keebler is hereby designated as, and hereby agrees to perform the duties and obligations of, the Servicer pursuant to the terms hereof. Upon the occurrence and during the continuation of a Termination Event, the Administrator may designate as Servicer any Person (including itself) to succeed Keebler or any successor Servicer, on the condition in each case that any such Person so designated shall agree to perform the duties and obligations of the Servicer pursuant to the terms hereof. (b) Upon the designation of a successor Servicer as set forth in CLAUSE (a), Keebler agrees that it will terminate its activities as Servicer hereunder in a manner that the Administrator reasonably determines will facilitate the transition of the performance of such activities to the new Servicer, and Keebler shall cooperate with and assist such new Servicer. Such cooperation shall include access to and transfer of related records and, to the extent legally permissible, use by the new Servicer of all licenses, hardware or software necessary or desirable to collect the Pool Receivables and the Related Security. (c) Keebler acknowledges that, in making their decision to execute and deliver this Agreement, the Administrator and the Issuer have relied on Keebler's agreement to act as Servicer hereunder. Accordingly, Keebler agrees that it will not voluntarily resign as Servicer. (d) The Servicer may with the prior written consent of the Administrator, delegate its duties and obligations hereunder to any subservicer (each a "Sub-Servicer"); PROVIDED, that, in each such delegation: (i) such Sub-Servicer shall agree in writing to perform the duties and obligations of the Servicer pursuant to the terms hereof, (ii) the Servicer shall remain primarily liable for the performance of the duties and obligations so delegated, (iii) the Seller, the Administrator and the Issuer shall have the right to look solely to the Servicer for performance, and (iv) the terms of any agreement with any Sub-Servicer shall provide that the Administrator may terminate such agreement upon the termination of the Servicer hereunder by giving notice of its desire to terminate such agreement to the Servicer (and the Servicer shall provide appropriate notice to each such Sub-Servicer). Section 4.2. DUTIES OF THE SERVICER. (a) The Servicer shall take or cause to be taken all such action as may be necessary or advisable to administer and collect each Pool Receivable from time to time, all in accordance with this Agreement and all applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. The Servicer shall set aside, for the accounts of the Seller and the 17 Issuer, the amount of the Collections to which each is entitled in accordance with ARTICLE I. The Servicer may, in accordance with the Credit and Collection Policy, extend the maturity of any Pool Receivable (but not beyond 30 days) and extend the maturity or adjust the Outstanding Balance of any Defaulted Receivable as the Servicer may determine to be appropriate to maximize Collections thereof; PROVIDED, HOWEVER, that: (i) such extension or adjustment shall not alter the status of such Pool Receivable as a Delinquent Receivable or a Defaulted Receivable or limit the rights of the Issuer or the Administrator under this Agreement and (ii) if a Termination Event has occurred and Keebler or an Affiliate thereof is serving as the Servicer, Keebler or such Affiliate may make such extension or adjustment only upon the prior written approval of the Administrator. The Seller shall deliver to the Servicer and the Servicer shall hold for the benefit of the Seller and the Administrator (individually and for the benefit of the Issuer), in accordance with their respective interests, all records and documents (including computer tapes or disks) with respect to each Pool Receivable. Notwithstanding anything to the contrary contained herein, the Administrator may direct the Servicer (whether the Servicer is Keebler or any other Person) to commence or settle any legal action to enforce collection of any Pool Receivable which is a Defaulted Receivable or to foreclose upon or repossess any Related Security. (b) The Servicer shall, as soon as practicable following actual receipt of collected funds, turn over to the Seller the collections of any indebtedness that is not a Pool Receivable, less, if Keebler or an Affiliate thereof is not the Servicer, all reasonable and appropriate out-of-pocket costs and expenses of such Servicer of servicing, collecting and administering such collections. The Servicer, if other than Keebler or an Affiliate thereof, shall, as soon as practicable upon demand, deliver to the Seller all records in its possession that evidence or relate to any indebtedness that is not a Pool Receivable, and copies of records in its possession that evidence or relate to any indebtedness that is a Pool Receivable. (c) The Servicer's obligations hereunder shall terminate on the later of: (i) the Facility Termination Date and (ii) the date on which all amounts required to be paid to the Issuer, the Administrator and any other Indemnified Party or Affected Person hereunder shall have been paid in full. After such termination, if Keebler or an Affiliate thereof was not the Servicer on the date of such termination, the Servicer shall promptly deliver to the Seller all books, records and related materials that the Seller previously provided to the Servicer, or that have been obtained by the Servicer, in connection with this Agreement. 18 Section 4.3. ESTABLISHMENT AND USE OF CERTAIN ACCOUNTS. (a) Prior to the initial purchase hereunder, the Seller shall enter into Lock-Box Agreements establishing the Lock-Box Accounts listed on SCHEDULE II with all of the Lock-Box Banks, and deliver original counterparts thereof to the Administrator. (b) The Servicer agrees to establish the Collection Account on or before the date of the first purchase hereunder. The Collection Account shall be used to accept the transfer of Collections of Pool Receivables from the Lock-Box Accounts pursuant to SECTION 1.4(b) and for such other purposes described in the Transaction Documents. (c) Any amounts in the Collection Account may be invested by the Collection Account Bank at the Servicer's direction, in Permitted Investments, so long as Issuer's interest in such Permitted Investments is perfected and such Permitted Investments are subject to no Adverse Claims other than those of the Issuer provided hereunder. (d) Upon the occurrence and during the continuation of a Termination Event, the Administrator may at any time thereafter give notice to each Lock-Box Bank and the Collection Account Bank that the Administrator is exercising its rights under the Lock-Box Agreements and the Collection Account Agreement, as applicable, to do any or all of the following: (i) to have the exclusive ownership and control of the Lock-Box Accounts and the Collection Account transferred to the Administrator and to exercise exclusive dominion and control over the funds deposited therein, (ii) to have the proceeds that are sent to the respective Lock-Box Accounts redirected pursuant to the Administrator's instructions, and (iii) to take any or all other actions permitted under the applicable Lock-Box Agreement and the Collection Account Agreement. The Seller hereby agrees that if the Administrator at any time takes any action set forth in the preceding sentence, the Administrator shall have exclusive control of the proceeds (including Collections) of all Pool Receivables and the Seller hereby further agrees to take any other action that the Administrator may reasonably request to transfer such control. Any proceeds of Pool Receivables received by the Seller or the Servicer thereafter shall be sent immediately to the Administrator. Section 4.4. ENFORCEMENT RIGHTS. (a) At any time following the occurrence and during the continuation of a Termination Event: (i) the Administrator may direct the Obligors that payment of all amounts payable under any Pool Receivable is to be made directly to the Administrator or its designee, (ii) the Administrator may give notice of the Issuer's interest in Pool Receivables to each Obligor, which notice 19 shall direct that payments be made directly to the Administrator or its designee, and (iii) the Administrator may request the Servicer to, and upon such request the Servicer shall: (A) assemble all of the records necessary or desirable to collect the Pool Receivables and the Related Security, and to the extent legally permissible transfer or license to a successor Servicer the use of all software necessary or desirable to collect the Pool Receivables and the Related Security, and make the same available to the Administrator or its designee at a place selected by the Administrator, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections in a manner acceptable to the Administrator and, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Administrator or its designee. (b) The Seller hereby authorizes the Administrator, and irrevocably appoints the Administrator as its attorney-in-fact with full power of substitution and with full authority in the place and stead of the Seller, which appointment is coupled with an interest, to take any and all steps in the name of the Seller and on behalf of the Seller necessary or desirable, in the determination of the Administrator, after the occurrence and during the continuation of a Termination Event, to collect any and all amounts or portions thereof due under any and all Pool Assets, including endorsing the name of the Seller on checks and other instruments representing Collections and enforcing such Pool Assets. Notwithstanding anything to the contrary contained in this subsection, none of the powers conferred upon such attorney-in-fact pursuant to the preceding sentence shall subject such attorney-in-fact to any liability if any action taken by it shall prove to be inadequate or invalid, nor shall they confer any obligations upon such attorney-in-fact in any manner whatsoever. Section 4.5. RESPONSIBILITIES OF THE SELLER. (a) Anything herein to the contrary notwithstanding, the Seller shall pay when due any taxes, including any sales taxes payable in connection with the Pool Receivables and their creation and satisfaction. The Administrator and the Issuer shall not have any obligation or liability with respect to any Pool Asset, nor shall either of them be obligated to perform any of the obligations of the Seller, Servicer, Hollow Tree or any Originator thereunder. (b) Keebler hereby irrevocably agrees that if at any time it shall cease to be the Servicer hereunder, it shall act (if the then-current Servicer so requests) as the data-processing agent of the Servicer and, in such capacity, Keebler shall conduct the data-processing functions of the administration of the Receivables and the Collections thereon in substantially the same way that Keebler 20 conducted such data-processing functions while it acted as the Servicer. Section 4.6. SERVICING FEE. (a) Subject to CLAUSE (b), the Servicer shall be paid a fee equal to 1.0% PER ANNUM (the "Servicing Fee Rate") of the daily average aggregate Outstanding Balance of the Pool Receivables. The Issuer's Share of such fee shall be paid through the distributions contemplated by SECTION 1.4(d), and the Seller's Share of such fee shall be paid by the Seller. (b) If the Servicer ceases to be Keebler or an Affiliate thereof, the servicing fee shall be the greater of: (i) the amount calculated pursuant to CLAUSE (a), and (ii) an alternative amount specified by the successor Servicer not to exceed 100% of the aggregate reasonable costs and expenses incurred by such successor Servicer in connection with the performance of its obligations as Servicer. ARTICLE V. MISCELLANEOUS Section 5.1. AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement or any other Transaction Document, or consent to any departure by the Seller or the Servicer therefrom, shall be effective unless in a writing signed by the Administrator, and, in the case of any amendment, by the other parties thereto; and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; PROVIDED, HOWEVER, that no such material amendment shall be effective until both Moody's and Standard & Poor's have notified the Administrator in writing that such action will not result in a reduction or withdrawal of the rating of any Notes. No failure on the part of the Issuer or the Administrator to exercise, and no delay in exercising any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The Administrator shall provide each Rating Agency with a copy of each amendment to or waiver or consent under this Agreement promptly following the effective date thereof. Section 5.2. NOTICES, ETC. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by express mail or courier or by certified mail, postage-prepaid, or by facsimile, to the intended party at the address or facsimile number of such party set forth under its name on the signature pages hereof or at such 21 other address or facsimile number as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, (i) if personally delivered or sent by express mail or courier or if sent by certified mail, when received, and (ii) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means. Section 5.3. ASSIGNABILITY. (a) This Agreement and the Issuer's rights and obligations herein (including ownership of the Purchased Interest or an interest therein) shall be assignable, in whole or in part, by the Issuer and its successors and assigns with the prior written consent of the Seller; PROVIDED, HOWEVER, that such consent shall not be unreasonably withheld; and PROVIDED FURTHER, that no such consent shall be required if the assignment is made to BNS, any Affiliate of BNS, any Purchaser or other Program Support Provider or any Person that is: (i) in the business of issuing Notes and (ii) associated with or administered by BNS or any Affiliate of BNS. (b) The Issuer may at any time grant to one or more banks or other institutions (each a "Purchaser") party to the Liquidity Agreement, or to any other Program Support Provider, participating interests in the Purchased Interest. In the event of any such grant by the Issuer of a participating interest to a Purchaser or other Program Support Provider, the Issuer shall remain responsible for the performance of its obligations hereunder and except as otherwise provided herein, Seller and Servicer shall continue to deal with Issuer as if Issuer had not granted such participating interest. The Seller agrees that each Purchaser or other Program Support Provider shall be entitled to the benefits of SECTIONS 1.8 and 1.9. (c) This Agreement and the rights and obligations of the Administrator hereunder shall be assignable, in whole or in part, by the Administrator and its successors and assigns; PROVIDED, that unless: (i) such assignment is to an Affiliate of BNS, (ii) it becomes unlawful for BNS to serve as the Administrator or (iii) a Termination Event exists, the Seller has consented to such assignment, which consent shall not be unreasonably withheld. (d) Except as provided in SECTION 4.1(d), none of the Seller, Keebler or the Servicer may assign its rights or delegate its obligations hereunder or any interest herein without the prior written consent of the Administrator. (e) Without limiting any other rights that may be available under applicable law, the rights of the Issuer may be enforced through it or by its agents. 22 Section 5.4. COSTS, EXPENSES AND TAXES. (a) In addition to the rights of indemnification granted under SECTION 3.1, the Seller agrees to pay on demand all reasonable costs and expenses in connection with the preparation, execution, delivery and administration (including periodic internal audits by the Administrator of Pool Receivables) of this Agreement, the other Transaction Documents and the other documents and agreements to be delivered hereunder (and all reasonable costs and expenses in connection with any amendment, waiver or modification of any thereof), including: (i) Attorney Costs for the Administrator, the Issuer and their respective Affiliates and agents with respect thereto and with respect to advising the Administrator, the Issuer and their respective Affiliates and agents as to their rights and remedies under this Agreement and the other Transaction Documents, and (ii) all reasonable costs and expenses (including Attorney Costs), if any, of the Administrator, the Issuer and their respective Affiliates and agents in connection with the enforcement of this Agreement and the other Transaction Documents. (b) In addition, the Seller shall pay on demand any and all stamp and other taxes and fees payable in connection with the execution, delivery, filing and recording of this Agreement or the other documents or agreements to be delivered hereunder, and agrees to save each Indemnified Party harmless from and against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. Section 5.5. NO PROCEEDINGS; LIMITATION ON PAYMENTS. Each of the Seller, Keebler, the Servicer, the Administrator, each assignee of the Purchased Interest or any interest therein, hereby covenants and agrees that it will not institute against, or join any other Person in instituting against, the Issuer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, for one year and one day after the latest maturing Note issued by the Issuer is paid in full. The provision of this SECTION 5.5 shall survive any termination of this Agreement. Section 5.6. CONFIDENTIALITY. Unless otherwise required by applicable law, each of the Seller and Servicer agrees to maintain the confidentiality of this Agreement and the other Transaction Documents (and all drafts hereof and thereof) in communications with third parties and otherwise; PROVIDED that this Agreement may be disclosed to: (a) third parties to the extent such disclosure is made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the Administrator, (b) the Seller's legal counsel and auditors if they agree to hold it confidential and (c) in filings made under securities laws. Unless otherwise required by applicable law, each of the Administrator and the Issuer agrees to maintain the confidentiality of all information regarding Keebler and its Subsidiaries; PROVIDED that 23 such information may be disclosed to: (i) third parties to the extent such disclosure is made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to Keebler, (ii) legal counsel and auditors of the Issuer or the Administrator if they agree to hold it confidential, (iii) the rating agencies rating the Notes to the extent such information relates to the Receivables Pool or the transactions contemplated by this Agreement, or if not so related, upon obtaining the prior consent of Keebler (such consent not to be unreasonably withheld), (iv) any Program Support Provider or potential Program Support Provider to the extent such information relates to the Receivables Pool or the transactions contemplated by this Agreement, or if not so related, upon obtaining the prior written consent of Keebler (such consent not to be unreasonably withheld), (v) any placement agent placing the Notes, and (vi) any regulatory authorities having jurisdiction over BNS, the Issuer any Program Support Provider or any Purchaser. Section 5.7. GOVERNING LAW AND JURISDICTION. (a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK) EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF A SECURITY INTEREST OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK; AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HERETO CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH OF THE PARTIES HERETO WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH SERVICE MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW. Section 5.8. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which, when so executed, shall be deemed to be an original, and all of which, when taken together, shall constitute one and the same agreement. Section 5.9. SURVIVAL OF TERMINATION. The provisions of SECTIONS 1.8, 1.9, 3.1, 3.2, 5.4, 5.5, 5.6, 5.7, 5.8, 5.10 and 5.13 shall survive any termination of this Agreement. 24 Section 5.10. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO WAIVES THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS OR OTHERWISE. EACH OF THE PARTIES HERETO AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, EACH OF THE PARTIES HERETO FURTHER AGREES THAT ITS RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING THAT SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. Section 5.11. ENTIRE AGREEMENT. This Agreement and the other Transaction Documents embody the entire agreement and understanding between the parties hereto, and supersede all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. Section 5.12. HEADINGS. The captions and headings of this Agreement and any Exhibit, Schedule or Annex hereto are for convenience of reference only and shall not affect the interpretation hereof or thereof. Section 5.13. ISSUER'S LIABILITIES. The obligations of the Issuer under the Transaction Documents are solely the corporate obligations of the Issuer. No recourse shall be had for any obligation or claim arising out of or based upon any Transaction Document against any stockholder, employee, officer, director or incorporator of the Issuer; PROVIDED, HOWEVER, that this Section shall not relieve any such Person of any liability it might otherwise have for its own gross negligence or willful misconduct. Section 5.14. TAX TREATMENT. The Seller has structured this Agreement and the Purchased Interest to facilitate a secured, credit-enhanced financing on favorable terms with the intention that the Purchased Interest will constitute indebtedness of the Seller for federal income and state and local tax purposes. The Seller and Issuer by acceptance of the Purchased Interest, agree to recognize and report the Purchased Interest as indebtedness of the Seller for purposes of federal, state and local income or franchise taxes and any other tax imposed on or measured by income, and to report all receipts and payments relating thereto in a manner that is consistent with such characterization. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 25 IN WITNESS WHEREOF, the parties have caused this agreement to be exectued by their respective officers thereunto duly authorized, as of the date first above written. KEEBLER FUNDING CORPORATION By: /s/ THOMAS E. O'NEILL ------------------------------------- Name: Thomas E. O'Neill Title: Vice President Address: 3875 Bay Center Place Hayward, California 94545 Attention: Telephone: Facsimile: KEEBLER FOODS COMPANY By: /s/ THOMAS E. O'NEILL ------------------------------------- Name: Thomas E. O'Neill Title: Vice President Address: One Hollow Tree Lane 677 Larch Avenue Elmhurst, Illinois 60126 Attention: Treasurer Telephone: (630) 782-2690 Facsimile: (630) 833-3372 S-1 LIBERTY STREET FUNDING CORP. By: /s/ ANDREW L. STIDD ------------------------------------- Name: Andrew L. Stidd Title: President Address: Liberty Street Funding Corp. c/o Global Securitization Services, LLC 25 West 43rd Street, Suite 704 New York, New York 10036 Attention: Andrew L. Stidd Telephone No.: (212) 302-8330 Facsimile No.: (212) 302-8767 With a copy to: The Bank of Nova Scotia One Liberty Plaza New York, New York 10006 Attention: Richard A. Josephs Telephone No.: (212) 225-5000 Facsimile No.: (212) 225-5090 THE BANK OF NOVA SCOTIA, as Administrator By: /s/ RICHARD A. JOSEPHS ------------------------------------- Name: Richard A. Josephs Title: Product Manager Address: The Bank of Nova Scotia One Liberty Plaza New York, New York 10006 Attention: Richard A. Josephs Telephone No.: (212) 225-5000 Facsimile No.: (212) 225-5090 S-2 EX-21 6 EXHIBIT 21 SUBSIDIARIES OF KEEBLER FOODS COMPANY
STATE OF COMPANY INCORPORATION ------- ------------- WHOLLY-OWNED SUBSIDIARIES OF KEEBLER FOODS COMPANY 1. Keebler Leasing Corp. Delaware 2. Keebler Company Delaware 3. Shaffer, Clarke & Co., Inc. Delaware 4. Johnston's Ready-Crust Company Delaware 5. Bake-Line Products, Inc. Illinois WHOLLY-OWNED SUBSIDIARIES OF KEEBLER COMPANY 1. Steamboat Corporation Georgia 2. Illinois Baking Corporation Delaware 3. Keebler Cookie & Cracker Company Nevada 4. Hollow Tree Company, L.L.C. Delaware 5. Keebler Co./Puerto Rico, Inc. Delaware 6. Keebler H.C., Inc. Illinois 7. Keebler-Georgia, Inc. Georgia 8. Keebler Foreign Sales Corporation Virgin Islands 9. Hollow Tree Financial Company, L.L.C. Delaware 10. Godfrey Transport, Inc. Delaware 11. Bishop Baking Company, Inc. Delaware 12. Famous Amos Chocolate Chip Cookie Company, L.L.C. Delaware 13. Mother's Cookie Company, L.L.C. Delaware 14. Murray Biscuit Company, L.L.C. Delaware 15. Barbara Dee Cookie Company, L.L.C. Delaware 16. Little Brownie Bakers, L.L.C. Delaware 17. President Baking Company, L.L.C. Delaware 18. Sunny Cookie Company, L.L.C. Delaware 19. Sunshine Biscuits, L.L.C. Delaware JOINTLY-OWNED SUBSIDIARIES OF KEEBLER COMPANY AND SUNSHINE BISCUITS, INC. 1. Elfin Equity Co., LLC (1) Delaware INDIRECTLY OWNED SUBSIDIARIES OF KEEBLER FOODS COMPANY 1. Keebler Assets Company (2) Delaware (1) 64.6% of the limited liability company interests are owned by Keebler Company and 35.4% of the limited liability company interests are owned by Sunshine Biscuits, Inc. (2) 34% of the limited liability company interests are owned by Keebler Company, 33% of the limited liability company interests are owned by Keebler-Georgia, Inc. and 33% of the limited liability company interests are owned by Keebler Leasing Corp.
EX-27 7
5 This schedule contains summary financial information extracted from the Keebler Foods Company Consolidated Balance Sheet at January 2, 1999 and the Consolidated Statement of Operations for the year ended January 2, 1999 found on pages F-3 through F-5 of Keebler's Form 10-K and is qualified in its entirety by reference to such financial statements. 0001018848 KEEBLER FOODS COMPANY 1,000 12-MOS JAN-2-1999 JAN-4-1998 JAN-2-1999 23,515 0 148,859 7,782 166,377 415,318 719,227 154,703 1,655,780 510,186 541,765 0 0 841 328,460 1,655,780 2,226,480 2,226,480 938,896 2,018,940 11,501 20,148 26,500 169,539 72,962 96,577 0 (1,706) 0 94,871 1.14 1.08
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