-----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, ErwVQixr0ysWqk2RAN16iZnzG4feTwpaJctWe+80x8KIl8i72USShpGo+x9Sneji 40+S81oCpl8NRb5UoCTzWw== 0000950144-98-002665.txt : 19980317 0000950144-98-002665.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950144-98-002665 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980313 ITEM INFORMATION: FILED AS OF DATE: 19980313 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOWERS INDUSTRIES INC /GA CENTRAL INDEX KEY: 0000826227 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 580244940 STATE OF INCORPORATION: GA FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-09787 FILM NUMBER: 98565004 BUSINESS ADDRESS: STREET 1: US HWY 19 STREET 2: P O BOX 1338 CITY: THOMASVILLE STATE: GA ZIP: 31792 BUSINESS PHONE: 9122269110 MAIL ADDRESS: STREET 1: PO BOX 1338 200 US HIGHWAY 19 S CITY: THOMASVILLE STATE: GA ZIP: 31792 FORMER COMPANY: FORMER CONFORMED NAME: FLOWERS INDUSTRIES OF GEORGIA INC DATE OF NAME CHANGE: 19871220 8-K/A 1 FLOWERS INDUSTRIES, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): March 13, 1998 (February 3, 1998) FLOWERS INDUSTRIES, INC. ------------------------ Georgia 1-9787 58-0244940 ------- ------ ---------- (State or Other (Commission (I.R.S. Employer Jurisdiction of File Number) Identification No.) Incorporation) 1919 Flowers Circle, P.O. Box 1338, Thomasville, GA 31799 - --------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (912) 226-9110 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Item 7 of the Form 8-K of Flowers Industries, Inc., dated February 18, 1998 is hereby amended in its entirety to add the following: (a) Financial Statements of Businesses Acquired.
2 3 INDEX TO FINANCIAL STATEMENTS Keebler Foods Company Consolidated Balance Sheets at December 28, 1996 and October 4, 1997 (Unaudited) .......................................F-2 Consolidated Statements of Operations for the four weeks ended January 26, 1996, the twelve and thirty-six weeks ended October 5, 1996, and the twelve and forty weeks ended October 4, 1997 (Unaudited) .................................F-4 Consolidated Statements of Cash Flows for the four weeks ended January 26, 1996, the thirty-six weeks ended October 5, 1996, and the forty weeks ended October 4, 1997 (Unaudited)..................F-5 Notes to Consolidated Financial Statements (Unaudited).................F-6 Report of Independent Accountants dated December 5, 1997...............F-9 Consolidated Balance Sheets at December 30, 1995 and December 28, 1996.................................................F-10 Consolidated Statements of Operations for the years ended December 31, 1994, December 30, 1995, the four weeks ended January 26, 1996, and the forty-eight weeks ended December 28, 1996.........................F-11 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1994, December 30, 1995, the four weeks ended January 26, 1996, and the forty-eight weeks ended December 28, 1996.........................F-12 Consolidated Statements of Cash Flows for the years ended December 31, 1994, December 30, 1995, the four weeks ended January 26, 1996, and the forty-eight weeks ended December 28, 1996...........F-13 Notes to Consolidated Financial Statements............................F-14 Sunshine Biscuits, Inc. Independent Auditors' Report dated May 15, 1996.......................F-34 Balance Sheets -- March 31, 1995 and 1996.........................F-35 Statements of Operations -- Years ended March 31, 1994, 1995 and 1996................................................F-36 Statements of Stockholder's Equity -- Years ended March 31, 1994, 1995 and 1996...........................................F-37 Statements of Cash Flows -- Years ended March 31, 1994, 1995 and 1996.....................................................F-38 Notes to Financial Statements -- Years ended March 31, 1994, 1995 and 1996...............................................F-39
Note: The financial statements listed in the above index for Keebler Foods Company (the "Company") include the financial statements of the Predecessor Company for all periods and dates through January 26, 1996, the date the Company was acquired by INFLO, and the Company for all periods and dates subsequent to January 26, 1996. The Company's operating results have been restated as of and for the forty-eight weeks ended December 28, 1996 to reflect the merger of Keebler Corporation and INFLO Holdings Corporation, as if it had been effective January 26, 1996. This distinction between predecessor/successor financial statements has been made by inserting a double line between such financial statements. F-1 3 4 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
DECEMBER 28, OCTOBER 4, 1996 1997 ------------ ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 11,954 $ 61,077 Trade accounts and notes receivable, net.................. 137,150 129,785 Inventories, net: Raw materials.......................................... 25,296 23,006 Package materials...................................... 9,842 10,949 Finished goods......................................... 76,054 86,902 Other.................................................. 1,473 2,107 ---------- ---------- 112,665 122,964 Deferred income taxes..................................... 55,929 44,052 Other..................................................... 19,337 22,741 ---------- ---------- Total current assets.............................. 337,035 380,619 PROPERTY, PLANT, AND EQUIPMENT, NET......................... 486,080 470,795 TRADEMARKS AND TRADENAMES, NET.............................. 158,033 155,043 GOODWILL, NET............................................... 48,280 47,341 PREPAID PENSION............................................. 43,359 42,421 ASSETS HELD FOR SALE........................................ 6,785 3,178 OTHER ASSETS................................................ 22,502 16,685 ---------- ---------- Total assets...................................... $1,102,074 $1,116,082 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-2 4 5 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS, CONTINUED (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 28, OCTOBER 4, 1996 1997 ------------ ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 18,570 $ 31,265 Trade accounts payable.................................... 96,754 97,815 Other liabilities and accruals............................ 186,893 228,434 Income taxes payable...................................... -- 22,381 Plant and facility closing costs and severance............ 19,860 10,309 ---------- ---------- Total current liabilities......................... 322,077 390,204 LONG-TERM DEBT.............................................. 439,369 370,582 OTHER LIABILITIES: Deferred income taxes..................................... 64,068 49,226 Postretirement/postemployment obligations................. 56,382 59,138 Plant and facility closing costs and severance............ 16,124 11,602 Deferred compensation..................................... 18,205 17,075 Other..................................................... 20,708 16,756 ---------- ---------- Total other liabilities........................... 175,487 153,797 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 100,000,000 shares authorized and none issued)............................ -- -- Common stock ($.01 par value; 500,000,000 shares authorized and 77,638,206 and 77,595,213 shares issued, respectively).......................................... 776 776 Additional paid-in capital................................ 148,613 148,538 Retained earnings......................................... 15,752 52,185 ---------- ---------- Total shareholders' equity........................ 165,141 201,499 ---------- ---------- Total liabilities and shareholders' equity........ $1,102,074 $1,116,082 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-3 5 6 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
UBIUS COMPANY COMPANY ---------------- --------------------------------- --------------------------------- FOUR THIRTY-SIX FORTY TWELVE TWELVE WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JANUARY 26, 1996 OCTOBER 5, 1996 OCTOBER 4, 1997 OCTOBER 5, 1996 OCTOBER 4, 1997 ---------------- --------------- --------------- --------------- --------------- NET SALES..................... $101,656 $1,171,354 $1,542,157 $452,329 $485,295 COSTS AND EXPENSES: Cost of sales............... 54,870 560,719 668,446 217,348 208,345 Selling, marketing, and administrative expenses... 71,427 571,310 770,442 220,197 234,775 Other....................... 857 4,366 7,115 1,844 2,369 ------- ----------- ---------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS.................. (25,498) 34,959 96,154 12,940 39,806 Interest (income) from affiliates................ (875) -- -- -- -- Interest (income)........... (3) (399) (710) -- (382) Interest expense to affiliates................ 664 -- -- -- -- Interest expense............ 98 29,055 29,312 10,995 8,179 ------- ---------- ---------- -------- -------- INTEREST EXPENSE (INCOME), NET......................... (116) 28,656 28,602 10,995 7,797 ------- ---------- ---------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE..................... (25,382) 6,303 67,552 1,945 32,009 Income tax expense.......... -- 3,723 28,427 1,143 13,461 ------- ---------- ---------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM........................ (25,382) 2,580 39,125 802 18,548 DISCONTINUED OPERATIONS: Gain on disposal of the Frozen Food businesses, net of tax................ 18,910 -- -- -- -- ------- ---------- ---------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.......... (6,472) 2,580 39,125 802 18,548 EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of tax....... -- 1,925 2,692 -- -- ------- ---------- ---------- -------- -------- NET INCOME (LOSS)............. $ (6,472) $ 655 $ 36,433 $ 802 $ 18,548 ======== ========== ========== ======== ======== PRIMARY NET INCOME PER SHARE: Continuing operations....... $ 0.03 $ 0.48 $ 0.01 $ 0.22 Extraordinary item.......... 0.02 0.03 -- -- ---------- ---------- -------- -------- Net income.................. $ 0.01 $ 0.45 $ 0.01 $ 0.22 ========== ========== ======== ======== Weighted average shares outstanding............... 75,502 81,593 80,122 83,696 ========== ========== ======== ======== FULLY DILUTED NET INCOME PER SHARE: Continuing operations....... $ 0.03 $ 0.46 $ 0.01 $ 0.22 Extraordinary item.......... 0.02 0.03 -- -- ---------- ---------- -------- -------- Net income.................. $ 0.01 $ 0.43 $ 0.01 $ 0.22 ========== ========== ======== ======== Weighted average shares outstanding............... 76,067 84,179 80,122 84,195 ========== ========== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 6 7 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
UBIUS COMPANY ---------------- --------------------------------- FOUR THIRTY-SIX FORTY WEEKS ENDED WEEKS ENDED WEEKS ENDED JANUARY 26, 1996 OCTOBER 5, 1996 OCTOBER 4, 1997 ---------------- --------------- ---------------- CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES Net income (loss)................................. $ (6,472) $ 655 $ 36,433 Adjustments to reconcile net income (loss) to cash from operating activities: Depreciation and amortization.................. 1,973 33,140 45,523 Deferred income taxes.......................... -- -- (2,965) Accretion on Seller Note....................... -- 1,665 2,028 Gain on the disposal of the Frozen Food businesses, net of tax....................... (18,910) -- -- Loss on early extinguishment of debt, net of tax.......................................... -- 1,925 2,692 (Gain) loss on sale of property, plant, and equipment.................................... -- (26) (422) Changes in assets and liabilities: Trade accounts and notes receivable, net....... 22,068 22,264 7,365 Accounts receivable/payable from affiliates, net.......................................... (1,941) -- -- Inventories, net............................... 4,353 (34,255) (10,299) Recoverable income taxes and income taxes payable...................................... 25 2,886 24,331 Other current assets........................... 1,192 (6,353) (3,404) Deferred debt issue costs...................... -- (6,123) (1,250) Trade accounts payable and other current liabilities.................................. 11,550 21,773 42,417 Restructuring reserves......................... (14,469) -- -- Plant and facility closing costs and severance.................................... -- (32,994) (14,027) Other, net........................................ 246 9,554 (313) -------- --------- --------- Cash provided from (used by) operating activities................................ (385) 14,111 128,109 CASH FLOWS (USED BY) PROVIDED FROM INVESTING ACTIVITIES Capital expenditures.............................. (3,228) (17,989) (26,097) Proceeds from property disposals.................. 677 3,389 5,306 Disposition of the Frozen Food businesses......... 67,749 -- -- Purchase of Sunshine Biscuits, Inc., net of cash acquired....................................... -- (142,670) -- Working capital adjustment paid by UB Investment (Netherlands) B.V. ............................ -- 32,609 -- -------- --------- --------- Cash (used by) provided from investing activities................................ 65,198 (124,661) (20,791) CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES Capital contributions............................. -- 234 (75) Long-term debt borrowings......................... -- 220,000 109,750 Long-term debt repayments......................... (2,377) (130,987) (167,870) Revolving Loan facility, net...................... (63,300) 23,600 -- -------- --------- --------- Cash (used by) provided from financing activities................................ (65,677) 112,847 (58,195) -------- --------- --------- Increase (decrease) in cash and cash equivalents............................... (864) 2,297 49,123 Cash and cash equivalents at beginning of period.................................... 2,978 2,115 11,954 -------- --------- --------- Cash and cash equivalents at end of period... $ 2,114 $ 4,412 $ 61,077 ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 7 8 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The consolidated financial statements of Keebler Foods Company (the "Company", "Keebler", "successor company") include the financial statements of UB Investments US Inc. ("UBIUS"), the predecessor company, for the four weeks ended January 26, 1996, the date the Company was acquired by INFLO Holdings Corporation ("INFLO"), and the successor company for the forty weeks ended October 4, 1997 and the thirty-six weeks ended October 5, 1996. The distinction between the predecessor company's and the successor company's consolidated financial statements has been made by inserting a double line between such consolidated financial statements. The consolidated financial statements for the four weeks ended January 26, 1996 include "the Frozen Food businesses", defined as Bernardi Italian Foods Co., The Original Chili Bowl, Inc., and Chinese Food Processing Corporation, all of which were wholly owned subsidiaries of UBIUS prior to their sale on December 31, 1995. 1. BASIS OF PRESENTATION INTERIM FINANCIAL STATEMENTS The unaudited interim consolidated financial statements included herein were prepared pursuant to the rules and regulations for interim reporting under the Securities Exchange Act of 1934. Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements were omitted. The interim consolidated financial statements and notes should be read in conjunction with the annual audited consolidated financial statements and notes thereto. The accompanying unaudited interim consolidated financial statements contain all adjustments, consisting only of normal and necessary adjustments, which in the opinion of management were necessary for a fair statement of the results for the interim periods. Results for the interim periods are not necessarily indicative of results for the full year. On November 20, 1997, INFLO was merged into Keebler Corporation ("the Merger"), which subsequently changed its name to Keebler Foods Company. The financial statements for all periods after 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. FISCAL PERIODS PRESENTED The Company's fiscal year consists of thirteen four-week periods (52 or 53 weeks) and ends on the Saturday nearest December 31. The first quarter consists of four four-week periods. In 1996, the Keebler acquisition closed on the last day of the first four-week period. The 1996 year-to-date information can be derived from the sum of the thirty-six weeks ended October 5, 1996 of the Company and the four weeks ended January 26, 1996 of UBIUS. RECLASSIFICATIONS Certain reclassifications of prior period data have been made to conform with the current period reporting. 2. ASSETS HELD FOR SALE Subsequent to the acquisition of Sunshine Biscuits, Inc. ("Sunshine"), management decided to close and sell the production plant in Santa Fe Springs, California. The land and buildings, which were valued at a fair market value of $3.6 million as of the date of acquisition, were sold on March 27, 1997. No gain or loss was recognized from the sale of the idle facility. The Company is currently seeking a buyer for the manufacturing facility in Atlanta, Georgia which has been held for sale since June 1996. Disposition of the facility is expected to occur before the end of 1998 without a significant gain or loss. F-6 8 9 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 3. DEBT COMMITMENTS Long-term debt consisted of the following at October 4, 1997:
INTEREST RATE FINAL MATURITY OCTOBER 4, 1997 ------------- ----------------- --------------- (IN THOUSANDS) Revolving Loans.......................... Floating April 7, 2003 $ -- Term Note................................ 6.938% April 7, 2003 230,000 Senior Subordinated Notes................ 10.750% June 15, 2006 125,000 Seller Note.............................. 10.000% January 26, 2007 28,692 Other Senior Debt........................ various 2001-2005 18,155 -------- 401,847 Less: Current maturities................. (31,265) -------- $370,582 ========
On April 8, 1997, the Company amended the primary credit financing facility in order to obtain more favorable terms, fees, and interest rates. The Second Amended and Restated Credit Agreement ("Credit Agreement") specifically provides for available borrowings of $380.0 million consisting of a $140.0 million Revolving Loan facility and a $240.0 million Term Note. Any unused borrowings under the Revolving Loan facility are subject to a commitment fee. The current commitment fee will vary from 0.125%-0.375% based on the relationship of debt to adjusted earnings. In conjunction with the amendment to the Credit Agreement, Term Notes B and C were extinguished by using $40.0 million of borrowings under the Revolving Loan facility, $109.8 million of increased borrowings against Term Note A, and $3.8 million from cash resources. The Company recorded a before-tax extraordinary charge of $4.6 million related primarily to expensing certain bank fees which were being amortized and which were incurred at the time Term Notes B and C were issued. The related after-tax charge was $2.7 million. On November 10, 1997, the Company made a $40.0 million pre-payment of principal on the Term Note. The pre-payment resulted in the recognition of a $0.5 million after-tax extraordinary charge related to the expensing of certain unamortized bank fees which were incurred at the time the Term Note was issued. 4. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE As part of acquiring Keebler and Sunshine, management adopted and began executing a plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4 million were provided for in the allocation of the purchase price of both the Keebler and Sunshine acquisitions. Spending against the reserves totaled $14.1 million for the forty weeks ended October 4, 1997 resulting in a remaining balance of $21.9 million, detailed as follows:
STAFF FACILITY INFORMATION LEASE REDUCTION CLOSURE SYSTEM TERMINATION COSTS COSTS EXIT COSTS COSTS TOTAL --------- -------- ----------- ----------- -------- (IN THOUSANDS) Balance at December 28, 1996...... $ 6,219 $ 3,209 $ 3,771 $22,785 $ 35,984 Charges........................... (6,219) (1,271) (1,537) (5,046) (14,073) ------- ------- ------- ------- -------- Balance at October 4, 1997........ $ -- $ 1,938 $ 2,234 $17,739 $ 21,911 ======= ======= ======= ======= ========
The plans initiated by management are expected to be completed prior to the end of 1998. Only noncancellable contractual lease obligations are expected to extend beyond 1998, to be paid out over the next eight years concluding in 2004. F-7 9 10 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 5. SUBSEQUENT EVENT The consolidated financial statements reflect the Company's 57.325-for-1 stock split of its Common Stock ("Stock Split") effective January 22, 1998. The Stock Split was effected in the form of a stock dividend. Accordingly, all references in the consolidated financial statements to number of shares, average number of shares outstanding and related prices, per share amounts and common stock option and warrant data have been restated to reflect such changes. F-8 10 11 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders of Keebler Foods Company We have audited the accompanying consolidated balance sheet of UB Investments US Inc. and Subsidiaries as of December 30, 1995 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the fifty-two week periods ended December 31, 1994 and December 30, 1995 and the four-week period ended January 26, 1996. We have also audited the accompanying consolidated balance sheet of Keebler Foods Company and Subsidiaries as of December 28, 1996 and, the related consolidated statement of operations, shareholders' equity and cash flows for the forty-eight week period then ended. 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 UB Investments US Inc. and Subsidiaries at December 30, 1995 and of Keebler Foods Company and Subsidiaries at December 28, 1996 and the consolidated results of operations and cash flows of UB Investments US Inc. for the fifty-two week periods ended December 31, 1994 and December 30, 1995 and the four week period ended January 26, 1996 and the consolidated results of operations and cash flows of Keebler Foods Company for the forty-eight week period ended December 28, 1996 in conformity with generally accepted accounting principles. As described in the notes to the consolidated financial statements, in 1994 UB Investments US Inc. changed its method of accounting for postemployment benefits and spare machinery and equipment parts. COOPERS & LYBRAND L.L.P. Chicago, Illinois December 5, 1997, except for Note 23, as to which the date is January 22, 1998. F-9 11 12 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AMOUNTS)
UBIUS COMPANY DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 2,978 $ 11,954 Trade accounts and notes receivable, net.................. 117,293 137,150 Recoverable income taxes.................................. 1,791 -- Receivables from affiliates............................... 8,073 -- Inventories, net: Raw materials........................................... 10,646 25,296 Package materials....................................... 11,053 9,842 Finished goods.......................................... 45,517 76,054 Other................................................... 892 1,473 --------- ---------- 68,108 112,665 Deferred income taxes..................................... 35,694 55,929 Other..................................................... 33,417 19,337 --------- ---------- Total current assets............................... 267,354 337,035 PROPERTY, PLANT, AND EQUIPMENT, NET......................... 392,727 486,080 TRADEMARKS AND TRADENAMES, NET.............................. -- 158,033 GOODWILL, NET............................................... 74,977 48,280 PREPAID PENSION............................................. 23,836 43,359 NOTES RECEIVABLE FROM AFFILIATE............................. 125,000 -- ASSETS HELD FOR SALE........................................ 38,950 6,785 OTHER ASSETS................................................ 4,042 22,502 --------- ---------- Total assets....................................... $ 926,886 $1,102,074 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Commercial paper and revolving credit facilities.......... $ 284,000 $ -- Current maturities of long-term debt...................... 2,475 18,570 Trade accounts payable.................................... 51,877 96,754 Other liabilities and accruals............................ 123,719 186,893 Restructuring reserves.................................... 38,168 -- Plant and facility closing costs and severance............ -- 19,860 Accounts payable to affiliate............................. 3,016 -- --------- ---------- Total current liabilities.......................... 503,255 322,077 LONG-TERM DEBT.............................................. 151,153 439,369 NOTES PAYABLE TO AFFILIATE.................................. 105,000 -- OTHER LIABILITIES: Deferred income taxes..................................... 43,806 64,068 Postretirement/postemployment obligations................. 44,603 56,382 Plant and facility closing costs and severance............ -- 16,124 Deferred compensation..................................... 16,281 18,205 Other..................................................... 11,031 20,708 --------- ---------- Total other liabilities............................ 115,721 175,487 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 100,000,000 shares authorized and none issued)............................. -- -- Common stock ($.01 par value; 500,000,000 shares authorized and 77,638,206 shares issued)................ 1,000 776 Additional paid-in capital................................ 745,000 148,613 Retained earnings (deficit)............................... (694,243) 15,752 --------- ---------- Total shareholders' equity......................... 51,757 165,141 --------- ---------- Total liabilities and shareholders' equity......... $ 926,886 $1,102,074 ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-10 12 13 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
UBIUS COMPANY ----------------------------------------- ------------ FIFTY-TWO FIFTY-TWO FOUR FORTY-EIGHT WEEKS WEEKS WEEKS WEEKS ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 30, JANUARY 26, DECEMBER 28, 1994 1995 1996 1996 ------------ ------------ ----------- ------------ Net Sales...................................... $1,599,675 $1,578,601 $101,656 $1,645,532 COSTS AND EXPENSES: Cost of sales................................ 705,464 746,754 54,870 774,198 Selling, marketing, and administrative expenses.................................. 845,704 884,591 71,427 794,837 Loss on impairment of Salty Snacks business.................................. -- 86,516 -- -- Other........................................ 2,115 (1,363) 857 6,347 ---------- ---------- -------- ---------- INCOME (LOSS) FROM OPERATIONS.................. 46,392 (137,897) (25,498) 70,150 Interest (income) from affiliates............ (11,385) (11,376) (875) -- Interest (income)............................ (118) (151) (3) (450) Interest expense to affiliates............... 65,195 11,802 664 -- Interest expense............................. 20,751 27,976 98 38,921 ---------- ---------- -------- ---------- INTEREST EXPENSE (INCOME), NET................. 74,443 28,251 (116) 38,471 ---------- ---------- -------- ---------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE (BENEFIT)................. (28,051) (166,148) (25,382) 31,679 Income tax expense (benefit)................. (1,134) (459) -- 14,002 ---------- ---------- -------- ---------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES........................... (26,917) (165,689) (25,382) 17,677 DISCONTINUED OPERATIONS: Income from operations of discontinued Frozen Food businesses, net of tax............... 3,362 7,344 -- -- Gain on disposal of Frozen Food businesses, net of tax................................ -- -- 18,910 -- ---------- ---------- -------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES...... (23,555) (158,345) (6,472) 17,677 EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of tax....................................... -- -- -- 1,925 ---------- ---------- -------- ---------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES........................... (23,555) (158,345) (6,472) 15,752 Cumulative effect of accounting changes, net of tax.................................... 535 -- -- -- ---------- ---------- -------- ---------- NET INCOME (LOSS).............................. $ (23,020) $ (158,345) $ (6,472) $ 15,752 ========== ========== ======== ========== NET INCOME PER SHARE: Continuing operations........................ $ 0.23 Extraordinary item........................... 0.02 ---------- Net income................................... $ 0.21 ========== WEIGHTED AVERAGE SHARES OUTSTANDING............ 76,621 ==========
The accompanying notes are an integral part of these consolidated financial statements. F-11 13 14 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
ADDITIONAL RETAINED COMMON PAID-IN EARNINGS STOCK CAPITAL (DEFICIT) TOTAL ------- ---------- --------- --------- BALANCE AT JANUARY 1, 1994 (UBIUS).................. $ 1,000 $ -- $(512,878) $(511,878) Net loss.......................................... -- -- (23,020) (23,020) Capital contribution from UB Investments (Netherlands) B.V.............................. -- 300,000 -- 300,000 ------- --------- --------- --------- BALANCE AT DECEMBER 31, 1994 (UBIUS)................ 1,000 300,000 (535,898) (234,898) Net loss.......................................... -- -- (158,345) (158,345) Capital contribution from UB Investments (Netherlands) B.V.............................. -- 445,000 -- 445,000 ------- --------- --------- --------- BALANCE AT DECEMBER 30, 1995 (UBIUS)................ 1,000 745,000 (694,243) 51,757 Net loss for the four weeks....................... -- -- (6,472) (6,472) ------- --------- --------- --------- BALANCE AT JANUARY 26, 1996 (UBIUS)................. 1,000 745,000 (700,715) 45,285 Write-off of Predecessor Company equity........... (1,000) (745,000) 700,715 (45,285) Purchase of the Company by INFLO Holdings Corporation effective January 26, 1996......... 717 124,284 -- 125,001 Issuance of common stock and warrants to GFI...... 57 23,543 -- 23,600 Management investment............................. 2 786 -- 788 Net income for the forty-eight weeks.............. -- -- 15,752 15,752 ------- --------- --------- --------- BALANCE AT DECEMBER 28, 1996 (COMPANY).............. $ 776 $ 148,613 $ 15,752 $ 165,141 ======= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-12 14 15 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
UBIUS COMPANY ----------------------------------------- ------------ FIFTY-TWO FIFTY-TWO FOUR FORTY-EIGHT WEEKS WEEKS WEEKS WEEKS ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 30, JANUARY 26, DECEMBER 28, 1994 1995 1996 1996 ------------ ------------ ----------- ------------ CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES Net income (loss)................................. $ (23,020) $ (158,345) $ (6,472) $ 15,752 Adjustments to reconcile net income (loss) to cash from operating activities: Depreciation and amortization................... 46,642 47,361 1,973 49,461 Deferred income taxes........................... 2,057 (1,985) -- 12,254 Accretion on Seller Note........................ -- -- -- 2,246 Loss on impairment of the Salty Snacks business, net of tax................................... -- 86,516 -- -- Gain on the disposal of the Frozen Food businesses, net of tax....................... -- -- (18,910) -- Loss on early extinguishment of debt, net of tax.......................................... -- -- -- 1,925 Cumulative effect of accounting changes, net of tax.......................................... (535) -- -- -- Changes in assets and liabilities: Trade accounts and notes receivable, net........ 6,673 (11,716) 22,068 3,842 Accounts receivable/payable from affiliates, net.......................................... (20,303) (4,737) (1,941) -- Inventories, net................................ (4,389) 6,605 4,353 (9,809) Recoverable income taxes and income taxes payable...................................... 22,137 (1,304) 25 -- Other current assets............................ (4,693) 3,772 1,192 1,644 Deferred debt issue costs....................... -- -- -- (8,032) Trade accounts payable and other current liabilities.................................. (2,200) (13,304) 11,550 26,105 Restructuring reserves.......................... (42,262) (24,122) (14,469) -- Plant and facility closing costs and severance.................................... -- -- -- (41,279) Other, net........................................ 2,525 9,702 246 (553) ---------- ---------- -------- ---------- Cash provided from (used by) operating activities............................... (17,368) (61,557) (385) 53,556 CASH FLOWS (USED BY) PROVIDED FROM INVESTING ACTIVITIES Capital expenditures.............................. (56,016) (55,386) (3,228) (29,352) Proceeds from property disposals.................. 8,928 2,956 677 8,908 Disposition of Frozen Food businesses............. -- -- 67,749 -- Working capital adjustment paid by UB Investment (Netherlands) B.V............................... -- -- -- 32,609 Purchase of Sunshine Biscuits, Inc., net of cash acquired........................................ -- -- -- (142,670) Other............................................. 1,204 -- -- -- ---------- ---------- -------- ---------- Cash (used by) provided from investing activities............................... (45,884) (52,430) 65,198 (130,505) CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES Capital contributions............................. 300,000 445,000 -- 788 Reduction of notes payable to affiliate........... (300,000) (445,000) -- -- Long-term debt borrowings......................... -- -- -- 220,000 Long-term debt repayments......................... (6,894) (30,078) (2,377) (134,000) Commercial paper and revolving credit facilities, net............................................. 76,300 134,500 (63,300) -- ---------- ---------- -------- ---------- Cash (used by) provided from financing activities................................... 69,406 104,422 (65,677) 86,788 ---------- ---------- -------- ---------- Increase (decrease) in cash and cash equivalents.................................. 6,154 (9,565) (864) 9,839 Cash and cash equivalents at beginning of period....................................... 6,389 12,543 2,978 2,115 ---------- ---------- -------- ---------- Cash and cash equivalents at end of period...... $ 12,543 $ 2,978 $ 2,114 $ 11,954 ========== ========== ======== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-13 15 16 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements of the Company include the financial statements of the predecessor company for the years ended December 31, 1994 and December 30, 1995 and the four week period ended January 26, 1996, the date on which UBIUS was acquired by INFLO, and the successor company for the forty-eight week period ended December 28, 1996. The distinction between the predecessor company and successor company consolidated financial statements 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 (the "Company", "Keebler", "successor company"), a manufacturer and distributor of food products was acquired by INFLO Holdings Corporation ("INFLO") on January 26, 1996. INFLO is owned by Artal Luxembourg S. A. ("Artal"), a private investment company, Flowers Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company, Bermore, Limited, a privately held corporation and the parent of G.F. Industries, Inc. ("GFI"), and certain members of the Company's current management. On November 20, 1997, INFLO was merged into Keebler Corporation ("the Merger"), which subsequently changed its name to Keebler Foods Company. The financial statements as of and for the forty-eight weeks ended December 28, 1996 of the Company have been restated to reflect the Merger as if it had been effective January 26, 1996. INFLO was legally established as of November 2, 1995, but did not have any operating activity, assets or liabilities until the Keebler acquisition on January 26, 1996. The Company is comprised of primarily the following wholly-owned subsidiaries: Keebler Company, Shaffer, Clarke & Co., Inc., Bake-Line Products, Inc., Johnston's Ready Crust Company, Sunshine Biscuits, Inc., and Keebler Leasing Corp. The Company, formerly UB Investments US Inc. ("UBIUS", "predecessor company"), had previously been owned by UB Investments (Netherlands) B.V., a Dutch Company (See Note 4). UB Investments (Netherlands) B.V. is a member of the worldwide group of affiliated companies owned by United Biscuits (Holdings) plc., a publicly held company in the United Kingdom. FISCAL YEAR The Company's fiscal year consists of thirteen four week periods (52 or 53 weeks) and ends on the Saturday nearest December 31. The Keebler acquisition closed on the last day of the first four week period. As a result of the acquisition, the 1996 fiscal year consists of the forty-eight weeks ended December 28, 1996. The 1994 and 1995 fiscal years of the predecessor company were comprised of 52 weeks. PRINCIPLES OF CONSOLIDATION All subsidiaries are wholly-owned and included in the consolidated financial statements of the Company. Intercompany accounts and transactions have been eliminated. GUARANTEES OF NOTES The subsidiaries of the Company that are not Guarantors of the Senior Subordinated Notes are inconsequential (which means that the total assets, revenues, income or equity of such non-guarantors, both individually and on a combined basis, is less than 3% of the Company's consolidated assets, revenues, income or equity), individually and in the aggregate, to the consolidated financial statements of the Company. The Guarantees are full, unconditional, and joint and several. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors in the Senior Subordinated Notes. RECLASSIFICATIONS Certain reclassifications of prior years' data have been made to conform with the current year reporting. F-14 16 17 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACQUISITION OF KEEBLER FOODS COMPANY BY INFLO HOLDINGS CORPORATION On January 26, 1996, UB Investments (Netherlands) B.V. sold all the stock of UBIUS to INFLO. Subsequent to the acquisition, UBIUS changed its name to Keebler Corporation. On November 20, 1997, INFLO was merged into Keebler Corporation which subsequently changed its name to Keebler Foods Company. The sale specifically excluded the stock of the Frozen Food businesses as well as the Salty Snacks business conducted by Keebler Company and other subsidiaries of UBIUS, as well as the UBIUS finance companies of U.B.H.C., Inc. and U.B.F.C., Inc., also wholly-owned subsidiaries (See Note 4). The aggregate gross purchase price of $487.5 million (excluding fees and expenses paid at closing of approximately $15.3 million) was financed by $125 million in equity from INFLO, $200 million in Senior Term Notes, $125 million in Increasing Rate Notes, the assumption of $20.3 million in existing senior indebtedness of the Company and a note payable ("Seller Note") by INFLO to UB Investments (Netherlands) B.V. for $32.5 million. The Seller Note does not bear interest until January 26, 1999, and has been accounted for at a discounted value of $24.4 million. In addition, the Company, subsequent to the purchase by INFLO, received a working capital adjustment of $32.6 million from United Biscuits (Netherlands) B.V. pursuant to the terms of the stock purchase agreement between INFLO and United Biscuits (Netherlands) B.V. The Keebler acquisition has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of the Company based on the respective fair values. The following provides an allocation of the purchase price:
(In Millions) Purchase Price.............................................. $487.5 Less: Net book value of assets acquired..................... 329.5 Less: Asset purchase price allocation - Working capital receivable from UB (Netherlands) B.V. .................................................. $ 32.6 - Inventories............................................. 4.4 - Deferred income taxes................................... 11.4 - Property, plant and equipment........................... 45.7 - Prepaid pension......................................... 33.1 - Other assets............................................ (14.2) - Trademarks and tradenames............................... 104.0 217.0 ------ Plus: Liability purchase price allocation - Other current liabilities and accruals.................. 1.1 - Plant and facility closing costs and severance.......... 55.3 - Deferred income taxes................................... 13.8 - Postretirement/postemployment obligations............... (17.5) - Other................................................... 6.3 59.0 ------ ------ Unallocated excess purchase price over fair value of net assets acquired........................................... $ 0.0 ======
See Note 3 for the unaudited pro forma consolidated results of operations of the Keebler acquisition. 3. ACQUISITION OF SUNSHINE BISCUITS, INC. On June 4, 1996, the Company acquired Sunshine Biscuits, Inc. ("Sunshine") from GFI for an aggregate consideration of $171.7 million (excluding related fees and expenses paid at closing of approximately $2.2 million). The acquisition of Sunshine was funded by $150.3 million in cash, of which $36.3 million was provided by the Company's existing cash sources and $114 million in borrowings under the F-15 17 18 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACQUISITION OF SUNSHINE BISCUITS, INC. (CONTINUED) Amended and Restated Credit Agreement (See Note 10). In addition, approximately $23.6 million of common stock and warrants were issued to GFI. Subsequent to the Merger, the stock and warrants held by GFI were transferred to Bermore, Limited and reissued for the same value in the name of the Company. These shares and warrants represent 13.1% of the Company's common stock on a fully diluted basis. The acquisition of Sunshine by the Company has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of Sunshine based on the respective fair values. The acquisition resulted in goodwill of $48.8 million, which is being amortized over a 40-year period. The following provides an allocation of the purchase price:
(In Millions) Purchase Price.............................................. $171.7 Less: Net book value of assets acquired..................... 92.8 Less: Asset purchase price allocation - Trade accounts receivable............................... $ 0.3 - Inventories............................................. 3.6 - Deferred income taxes................................... 8.4 - Property, plant, and equipment.......................... 9.5 - Other assets............................................ (3.8) - Trademarks and tradenames............................... 57.0 75.0 ----- Plus: Liability purchase price allocation - Other current liabilities and accruals.................. 8.4 - Plant and facility closing costs and severance.......... 22.1 - Deferred income taxes................................... (8.3) - Pension obligation...................................... 5.0 - Postretirement/postemployment obligations............... 17.8 - Other................................................... (0.1) 44.9 ----- ------ Unallocated excess purchase price over fair value of net assets acquired........................................... $ 48.8 ======
Results of operations for Sunshine from June 4, 1996 to December 28, 1996 have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place at January 1, 1995. The unaudited pro forma information includes adjustments for interest expense that would have been incurred to finance the purchase, additional depreciation of the property, plant, and equipment acquired, and amortization of the trademarks, tradenames, and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been had the Keebler and Sunshine acquisitions been effected on the assumed date.
UNAUDITED FOR THE YEAR ENDED --------------------------- DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS) Net sales................................................... $2,213,574 $1,979,105 Loss from continuing operations before income taxes......... $ (241,323) $ (8,652) Net loss.................................................... $ (253,924) $ (5,440)
F-16 18 19 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. PREDECESSOR COMPANY UBIUS, the predecessor company to Keebler Foods Company, was formed in 1992 as a result of the legal restructuring of United Biscuit (Holdings) plc.'s operations in the United States. UBIUS received the stock of the subsidiaries in exchange for the $850 million in debt with UB Investments (Netherlands) B.V. as well as all of the capital stock of UBIUS. On May 20, 1995, the predecessor company adopted plans to sell the Salty Snacks business. On January 24, 1996, the predecessor company sold to Kelly Food Products, Inc. selected assets of the Salty Snacks business including the production plant in Bluffton, Indiana, trademarks and other intangibles related to the business, inventory and property, plant and equipment including selected assets related to the convenience sales division. During July, 1995, the predecessor company adopted plans to discontinue the operations of its Frozen Food businesses. On January 9, 1996, UB Investments (Netherlands) B.V. sold the assets and stock of Bernardi Italian Foods Co., The Original Chili Bowl, Inc., Chinese Food Processing Corporation (wholly-owned subsidiaries collectively known as the Frozen Food businesses) and certain assets of Keebler Company to Windsor Food Company Ltd. The sale was effective as of December 31, 1995. On December 5, 1995, Shaffer, Clarke & Co., Inc. ("Shaffer, Clarke"), a wholly-owned subsidiary, sold certain assets related to Shaffer, Clarke's KA-ME business to Liberty Richter, Inc. for a gain of $2.6 million. These assets included inventory, contractual rights, and other intellectual property. 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS All highly liquid instruments purchased with an original maturity of three months or less are classified as cash equivalents. The carrying amount of cash equivalents approximates fair value due to the relatively short maturity of these investments. TRADE ACCOUNTS RECEIVABLE Substantially all of the Company's trade accounts receivable are from retail dealers and wholesale distributors. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Trade accounts receivable, as shown on the consolidated balance sheets, were net of allowances of $3.6 million as of December 30, 1995 and $5.4 million as of December 28, 1996. INVENTORIES Inventories are stated at the lower of cost or market with cost determined principally by the last-in, first-out ("LIFO") method. Inventories stated under the LIFO method represent approximately 84% of total inventories in 1995 and 91% of total inventories in 1996. Because the Company has adopted a natural business unit single pool approach to determining LIFO inventory cost, classification of the LIFO reserve by inventory component is impractical. The excess of the current production cost of inventories over LIFO cost was approximately $17.6 million at December 30, 1995. There was no reserve required at December 28, 1996 to state inventory on a LIFO basis. At December 30, 1995 and December 28, 1996, inventories are shown net of an allowance for slow-moving and aged inventory of $0.6 million and $5.5 million, respectively. F-17 19 20 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost at December 30, 1995. Property, plant and equipment was adjusted to fair market value due to the Keebler and Sunshine acquisitions. Depreciation expense is computed using the straight-line method based on the estimated useful lives of the depreciable assets. Certain facilities and equipment held under capital leases are classified as property, plant, and equipment and amortized using the straight-line method over the lease terms, and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense. TRADEMARKS AND TRADENAMES Trademarks and tradenames are amortized on a straight-line basis over a period of 40 years. Accumulated amortization of trademarks and tradenames was $0.1 million and $3.1 million as of December 30, 1995 and December 28, 1996, respectively. GOODWILL Goodwill shown in the consolidated financial statements at December 30, 1995 related to the excess cost over the fair value of tangible net assets acquired in the purchases of Johnson Ready Crust, Bake-Line Products, Inc., and the Frozen Food businesses. At December 28, 1996, goodwill reflects the excess cost over the fair value of the tangible net assets acquired from the Sunshine purchase. Goodwill is amortized on a straight-line basis over a period of 40 years. Accumulated amortization of goodwill was $31.4 million and $0.5 million as of December 30, 1995 and December 28, 1996, respectively. RESEARCH AND DEVELOPMENT Activities related to new product development and major improvements to existing products and processes are expensed as incurred and were $15.1 million in 1994, $14.5 million in 1995, $0.6 million for the four weeks ended January 26, 1996 and $4.3 million for the forty-eight weeks ended December 28, 1996. ADVERTISING AND CONSUMER PROMOTION Advertising and consumer promotion costs are generally expensed when incurred. Production costs for advertising are deferred until the first run of the advertisement. There were no deferred advertising costs at December 30, 1995 and December 28, 1996. Advertising and consumer promotion expense was $72.3 million in 1994, $87.9 million in 1995, $5.1 million for the four weeks ended January 26, 1996 and $33.3 million for the forty-eight weeks ended December 28, 1996. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into derivative financial transactions to hedge existing or future exposures to changes in commodity prices. The Company does not enter into derivative transactions for speculative purposes. Gains and losses on commodity futures and options transactions are deferred until the contracts are liquidated (See Note 21). INCOME TAXES The consolidated financial statements reflect the application of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes". The Company files a consolidated federal income tax return. F-18 20 21 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER SHARE On July 29, 1997, the Board of Directors of the Company approved a 1 for 10 reverse stock split. All per share and related amounts contained in these financial statements and notes have been adjusted to reflect this stock split. Net income (loss) per common share is calculated using the weighted average number of common and common equivalent shares outstanding during each period. The common equivalent shares relate to the 1996 Stock Option Plan and the warrant issued in connection with the Sunshine acquisition and are calculated using the treasury stock method. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. IMPAIRMENT OF LONG-LIVED ASSETS In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. 6. CHANGES IN ACCOUNTING POLICIES Effective January 2, 1994, the predecessor company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits". The predecessor company recorded a $4 million pre-tax obligation as a cumulative effect of accounting change, resulting in an after-tax charge of $2.5 million. Prior to this date, these expenses were recognized on a pay-as-you-go basis. As of December 31, 1994, the predecessor company adopted a policy of capitalizing spare machinery and equipment parts. Previously, spare machinery and equipment parts were expensed when purchased. The new policy was adopted in order to bring the predecessor company in conformity with the predecessor company guidelines and to match the cost with the associated benefit of these supplies. Expense is recognized as the parts are used. Adoption of the new policy resulted in a pre-tax benefit of $5 million, $3 million net of income tax. 7. PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment, including related accumulated depreciation follows:
DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS) Land.............................................. $ 12,899 $ 16,344 Buildings......................................... 156,200 126,824 Machinery and equipment........................... 531,007 301,588 Office furniture and fixtures..................... 49,620 54,985 Delivery equipment................................ 6,150 6,785 Construction in progress.......................... 37,264 23,980 --------- -------- 793,140 530,506 Accumulated depreciation.......................... (400,413) (44,426) --------- -------- $ 392,727 $486,080 ========= ========
F-19 21 22 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the depreciable assets. Buildings are depreciated over a useful life of ten to forty years. Machinery and equipment is depreciated over a useful life of eight to twenty-five years. Office furniture and fixtures are depreciated over useful lives of five to fifteen years. Delivery equipment is depreciated over a twelve year life. 8. ASSETS HELD FOR SALE During 1995, the predecessor company adopted plans to sell the Salty Snacks business. The decision to sell the Salty Snacks business was based on the overcapacity in a highly competitive industry. Late in 1995, it was determined that the predecessor company would not be able to sell the three operating Salty Snack plants as a single unit. A buyer was found for selected assets, which included the production plant in Bluffton, Indiana. The remaining production plants were closed down. The aggregate carrying amount of the net assets held for sale was $116.5 million. The assets held for sale primarily included inventory and property, plant, and equipment. The predecessor company recorded an impairment loss of $86.5 million for the expected costs associated with exiting the Salty Snacks business. The charge was comprised of $77.6 million related to the write-down of the net assets to their net realizable value of $38.9 million. In addition, $8.9 million was recorded for the estimated severance and other costs associated with the liquidation of the Salty Snacks business. The $38.9 million of Salty Snack assets held for sale were not included in the net assets acquired by the Company as part of the acquisition. Since the Keebler acquisition, management has executed a strategic plan to reduce inefficiencies. In June 1996, the Company, in an effort to reduce excess capacity, closed the manufacturing facility in Atlanta, Georgia. At December 28, 1996, the estimated fair value of land and buildings held for sale was $3.2 million, net of $0.3 million for selling costs. Similarly, after the acquisition of Sunshine, management decided to close the production plant in Santa Fe Springs, California due to overcapacity. The fair market value of land and buildings held for sale at December 28, 1996 was $3.6 million. The Santa Fe Springs, California facility was subsequently sold on March 27, 1997. Disposition of the Atlanta, Georgia manufacturing facility is expected to occur before the end of 1998 without a significant gain or loss. 9. OTHER CURRENT LIABILITIES AND ACCRUALS Other current liabilities and accruals consisted of the following at December 30, 1995 and December 28, 1996:
DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS) Self insurance reserves..................................... $ 53,737 $ 58,527 Employee compensation....................................... 28,364 42,555 Marketing and consumer promotions........................... 28,618 45,892 Taxes, other than income.................................... 7,196 10,555 Interest.................................................... 2,751 9,887 Postretirement/Postemployment benefit obligation............ 2,816 5,523 Reclamations................................................ -- 4,321 Other....................................................... 237 9,633 -------- -------- $123,719 $186,893 ======== ========
The Company obtains insurance to manage potential losses and liabilities related to workers' compensation, health and welfare claims, and general product and vehicle liability. The Company has elected to retain a significant portion of the expected losses through the use of deductibles and stop-loss limitations. Provisions F-20 22 23 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. OTHER CURRENT LIABILITIES AND ACCRUALS (CONTINUED) for losses expected under these programs are recorded based on the Company's estimates of aggregate liability for claims incurred. These estimates utilize the Company's prior experience and actuarial assumptions provided by the Company's insurance carrier. The total estimated liability for these losses at December 30, 1995 and December 28, 1996 was $53.7 million and $58.5 million, respectively, and is included in other current liabilities and accruals. The Company has collateralized its liability for potential workers' compensation claims in several states by obtaining standby letters of credit which aggregate to approximately $17 million. 10. DEBT AND LEASE COMMITMENTS Long-term debt consisted of the following at December 30, 1995 and December 28, 1996:
DECEMBER 30, DECEMBER 28, INTEREST RATE FINAL MATURITY 1995 1996 ------------- ---------------- ------------ ------------ (IN THOUSANDS) Term-A Loans................... 7.380-7.875% January 31, 2002 $ -- $132,875 Term-B Loans................... 7.880-8.375 July 31, 2003 -- 89,400 Term-C Loans................... 8.130-8.625 July 31, 2004 -- 64,575 Senior Subordinated Notes...... 10.750 July 1, 2006 -- 125,000 Seller Note.................... 10.000 January 26, 2007 -- 26,664 Other Senior Debt.............. various 2001-2005 16,416 14,290 Private Placement Notes........ 9.000 May 1, 2001 125,000 -- Capital Lease Obligations...... various 1997-2008 6,800 5,135 Other.......................... 5,412 -- -------- -------- 153,628 457,939 Less: Current maturities....... 2,475 18,570 -------- -------- $151,153 $439,369 ======== ========
The Company's primary credit financing as of December 28, 1996 was provided by a $447.9 million Amended and Restated Credit Agreement ("Credit Agreement") consisting of a $155 million Revolving Loan facility and three Term Loans (Term Loans A, B and C) of which the current outstanding balance aggregates to $286.9 million. Interest on the Revolving Loans and Term Loans is calculated based on a Base Rate plus applicable margin. The Base Rate can, at the Company's option, be 1) the higher of the base domestic lending rate as established by the Administrative Agent for the Lenders under the Credit Agreement, or the Federal Funds Rate plus one-half of one-percent, or 2) a reserve percentage adjusted LIBO Rate as offered by the Administrative Agent's office in London. Base Rate loan interest rates fluctuate immediately based upon a change in the established Base Rate by the Administrative Agent. The Credit Agreement requires the Company to meet certain financial covenants including net worth; earnings before interest, taxes, depreciation and amortization; and cash flow and interest coverage ratios. As of December 28, 1996, the Company had a Revolving Loan facility with an available balance of $155 million. Actual available borrowings under the Revolving Loan facility can be reduced by the level of qualifying working capital as defined in the Company's Amended and Restated Credit Agreement. This gross available balance is further reduced by certain letters of credit totaling $10.9 million and outstanding borrowings. There were no amounts outstanding under this facility as of December 28, 1996. Any unused borrowings under the Revolving Loan facility are subject to a commitment fee, which will vary from 0.25%-0.5% based on the relationship of debt to adjusted earnings. F-21 23 24 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. DEBT AND LEASE COMMITMENTS (CONTINUED) On January 30, 1996, the Company entered into a swap transaction with the Bank of Nova Scotia, who also serves as the Administrative Agent for the Lenders under the Credit Agreement. The swap transaction had the effect of converting the base rate on $170 million of the Term Loans to a fixed rate obligation of 5.0185% plus applicable margin through February 1, 1999. The maturity date on the swap transaction can be extended to February 1, 2001 at the option of the Bank of Nova Scotia on January 28, 1999. The Increasing Rate Notes issued to finance the Keebler acquisition were repaid in June 1996 with the proceeds from a private placement offering for new 10.75% Senior Subordinated Notes due 2006 ("the Private Notes"). The Company recorded a before-tax extraordinary loss of $3.2 million on the early extinguishment of the Increasing Rate Notes. The loss consists primarily of bank fees incurred at the time the Increasing Rate Notes were issued. The after-tax loss was $1.9 million. On October 23, 1996, pursuant to an exchange and registration rights agreement, the Company registered its 10.75% Senior Subordinated Notes due 2006 ("the Notes") under the Securities Act of 1933 in exchange for the Private Notes. The Notes were issued under an indenture dated June 15, 1996 between the Company, the Company's Restricted Subsidiaries (as defined in the indenture), and the U.S. Trust Company of New York, as trustee. The Notes are unsecured senior subordinated obligations of the Company guaranteed by the Restricted Subsidiaries. Interest on the Notes will be paid semi-annually on January 1 and July 1 of each year, commencing January 1, 1997. At the Company's option, up to 35.0% of the aggregate original principal of the Notes can be redeemed at a redemption price of 110.0% on or prior to July 1, 1999 following a public equity offering. In addition, the Company's ability to pay dividends or make other distributions on its Common Stock is limited by the terms of the indenture governing the Notes to an amount equal to 50% of the consolidated net income of the Company for the relevant period, subject to other limitations. As a result of the Merger, the Company assumed the $32.5 million Seller Note previously held by INFLO. The Seller Note does not bear interest until January 26, 1999 and was recorded at a discounted value of $24.4 million on January 26, 1996. The discount is being amortized over three years at an effective interest rate of 10.0%. In 1995, the predecessor company maintained a commercial paper program in the United States supported by a line of credit agreement which was guaranteed by United Biscuits (Holdings) plc. The line of credit agreement totaled $200 million as of December 30, 1995. The agreement could be canceled at any time. The commercial paper had a weighted average interest rate of 5.9% during 1995. The interest rate was 6.1% for year-end 1995. The predecessor company had $184 million of outstanding borrowings under this program as of December 30, 1995. Furthermore, during 1995, the predecessor company, along with other United Biscuits (Holdings) plc. affiliated companies, had access to a revolving credit agreement in Europe which was guaranteed by United Biscuits (Holdings) plc. Available borrowings under this agreement were limited by total United Biscuits (Holdings) plc. borrowings. Maximum borrowings available under this agreement were $300 million as of year-end 1995. This agreement had a weighted average interest rate of 6.2% during 1995. The interest rate at year-end was 6.0% for 1995. The predecessor company had $100 million of outstanding borrowings under this program as of December 30, 1995. During 1995, the predecessor company prepaid $25.1 million of long-term debt. Interest of $111.1 million, $37.6 million, $3.8 million, and $25.2 million was paid on debt, including notes payable to affiliates (see Note 11), for the years ended December 31, 1994 and December 30, 1995, the four weeks ended January 26, 1996, and the forty-eight weeks ended December 28, 1996, respectively. F-22 24 25 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. DEBT AND LEASE COMMITMENTS (CONTINUED) Aggregate scheduled annual maturities of long-term debt as of December 28, 1996 are as follows:
(IN THOUSANDS) 1997........................................................ $ 18,570 1998........................................................ 22,940 1999........................................................ 29,175 2000........................................................ 33,865 2001........................................................ 42,255 2002 and thereafter......................................... 311,134 -------- $457,939 ========
Assets recorded under capitalized lease agreements and equipment purchase obligations included in property, plant, and equipment consist of the following:
DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS) Land.......................................... $ 1,246 $ 1,209 Buildings..................................... 8,700 2,881 Machinery and equipment....................... 21,424 6,361 Other leased assets........................... 1,213 259 -------- ------- 32,583 10,710 Accumulated amortization...................... (21,397) (1,000) -------- ------- $ 11,186 $ 9,710 ======== =======
Future minimum lease payments under scheduled capital and operating leases that have initial or remaining noncancellable terms in excess of one year are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) 1997.......................................... $ 238 $ 23,858 1998.......................................... 258 19,375 1999.......................................... 278 16,567 2000.......................................... 349 14,523 2001.......................................... 366 11,924 2002 and thereafter........................... 5,813 30,753 ------- -------- Total minimum payments........................ 7,302 $117,000 ======== Amount representing interest.................. (2,167) ------- Obligations under capital lease............... 5,135 Obligations due within one year............... (25) ------- Long-term obligations under capital leases.... $ 5,110 =======
Rent expense for all operating leases was $38.8 million, $37.4 million, $2.7 million and $30.1 million for the years ended December 31, 1994 and December 30, 1995, the four weeks ended January 26, 1996, and the forty-eight weeks ended December 28, 1996, respectively. F-23 25 26 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. NOTES RECEIVABLE AND PAYABLE TO AFFILIATE At December 31, 1995, U.B.H.C., Inc. held $125 million in notes receivable from UB Investments plc., an affiliated entity of United Biscuits (Holdings) plc. These notes, which carried an interest rate of 9%, represented unsecured obligations of UB Investments plc. and were due May 1, 2001. The note receivable was settled as of the Keebler acquisition. As part of the 1992 reorganization of United Biscuits (Holdings) plc. operations in the United States, UBIUS had received the stock of its subsidiaries in exchange for two notes payable. There was a $300 million note payable to UB Investments, plc. which carried an interest rate of 9.75% due on September 20, 2002 and a $550 million note payable due to UB Investments, plc. with a 8.24% rate of interest due in seven annual installments with the final installment due on September 20, 1999. On September 7, 1994, the predecessor company received a capital contribution of $300 million from U.B. Investments (Netherlands) B.V. and used the capital contribution to repay the $300 million note. On February 1, 1995, the predecessor company received a capital contribution of $445 million from U.B. Investments (Netherlands) B.V. which was used by the predecessor company to make payments against the $550 million note which would have been due in years 1995, 1996, 1997, 1998 and a portion of the payment due in 1999 leaving one payment for the balance of $105 million note due September 1999. The remaining note payable balance was settled as of the Keebler acquisition. 12. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE As part of acquiring Keebler and Sunshine, management adopted and began executing a plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4 million were provided for in the allocation of the purchase price of both the Keebler and Sunshine acquisitions. Management's plan included company-wide staff reductions, the closure of manufacturing, distribution, and sales force facilities, and information system exit costs. Severance, outplacement, and other related costs associated with staff reductions were estimated at $30.7 million. Costs incurred related to closing the Atlanta, Georgia and Santa Fe Springs, California manufacturing facilities, which include primarily severance and carrying costs, are expected to total $13.0 million. The carrying and lease termination costs associated with the closure of distribution and sales force facilities were estimated at $26.9 million. In addition, the Company expects to incur $6.8 million in lease costs related to exiting legacy information systems. Spending against reserves established totaled $41.5 million resulting in a balance of $36.0 million at December 28, 1996, detailed as follows:
STAFF FACILITY INFORMATION LEASE REDUCTION CLOSURE SYSTEM TERMINATION COSTS COSTS EXIT COSTS COSTS TOTAL --------- -------- ----------- ----------- -------- (IN THOUSANDS) Liabilities provided for in the allocation of the purchase price of the Keebler acquisition on January 26, 1996........................... $ 22,760 $ 12,069 $ 6,809 $13,700 $ 55,338 Liabilities provided for in the allocation of the purchase price of the Sunshine acquisition on June 4, 1996.... 7,975 929 -- 13,240 22,144 Charges.......................... (24,516) (9,789) (3,038) (4,155) (41,498) -------- -------- ------- ------- -------- Balance at December 28, 1996..... $ 6,219 $ 3,209 $ 3,771 $22,785 $ 35,984 ======== ======== ======= ======= ========
F-24 26 27 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED) The plans initiated by management are expected to be completed prior to the end of 1998. Only noncancellable lease obligations are expected to extend beyond 1998, to be paid out over the next eight years concluding in 2004. 13. EMPLOYEE BENEFIT PLANS The Company maintains a trusteed, noncontributory pension plan covering certain salaried and hourly-paid employees. Assets held by the plan consist primarily of common stocks, collective trust funds, government securities, bonds, and guaranteed insurance contracts. Benefits provided under the defined-benefit pension plan are primarily based on years of service and the employee's final level of compensation. The Company's funding policy is to contribute annually not less than the ERISA minimum funding requirements. Effective September 30, 1996, the Sunshine Biscuits, Inc. Pension Plan was merged with the Retirement Plan for Salaried and Certain Hourly-Paid Employees of Keebler Company. Pension expense included the following components:
FOUR WEEKS FORTY-EIGHT YEAR ENDED YEAR ENDED ENDED WEEKS ENDED DECEMBER 31, DECEMBER 30, JANUARY 26, DECEMBER 28, 1994 1995 1996 1996 ------------ ------------ ----------- ------------- (IN THOUSANDS) Service cost.......................... $ 7,888 $ 6,611 $ 599 $ 7,711 Interest cost......................... 13,374 13,877 1,133 21,338 Actual return on plan assets.......... (9,295) (43,661) (1,693) (12,752) Net amortization of transition obligation.......................... 616 616 47 -- Deferral of (gains) losses............ (10,407) 24,468 -- (15,495) Prior service cost.................... (512) (155) (12) -- Net gain.............................. -- (437) -- -- -------- -------- ------- -------- Pension expense....................... $ 1,664 $ 1,319 $ 74 $ 802 ======== ======== ======= ========
The funded status of the Company's pension plan and amounts recognized in the consolidated balance sheets are as follows:
DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS) Actuarial present value of accumulated benefit obligation: Vested.................................................... $(136,131) $(366,253) Nonvested................................................. (24,109) (7,255) --------- --------- $(160,240) $(373,508) ========= ========= Projected benefit obligation................................ $(201,267) $(408,060) Plan assets at fair value................................... 241,604 464,433 --------- --------- Plan assets greater than projected benefit obligation....... 40,337 56,373 Unrecognized transition obligation.......................... 3,682 -- Unrecognized prior service.................................. (1,123) -- Unrecognized net gain....................................... (19,060) (13,014) --------- --------- Prepaid pension............................................. $ 23,836 $ 43,359 ========= =========
F-25 27 28 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. EMPLOYEE BENEFIT PLANS (CONTINUED) Assumptions used in accounting for the defined-benefit pension plan at each of the respective period-ends are as follows:
FORTY-EIGHT FOUR WEEKS WEEKS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 30, JANUARY 26, DECEMBER 28, 1994 1995 1996 1996 ------------ ------------ ----------- ------------ Discount rate.......................... 7.75-8.5% 7.5% 7.5% 7.5% Rate of compensation level increases... 4.4-6.0 4.0-6.0 4.0 4.0 Expected long-term rate of return on plan assets.......................... 8.0-10.0 8.0-9.0 10.0 8.6
As of December 31, 1995, included in plan assets were real estate investments of $7.2 million in two distribution centers which are under two operating leases to a subsidiary of UBIUS. The plan assets, as of December 28, 1996, include a real estate investment of $3.1 million in a distribution center which is under an operating lease to the Company. The Company, in addition to the defined-benefit pension plan, also maintains an unfunded supplemental retirement plan for certain highly compensated executives. Benefits provided are based on years of service. Vesting is graduated depending on termination after age 55. The supplemental retirement plan expense includes the following components:
FORTY-EIGHT FOUR WEEKS WEEKS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 30, JANUARY 26, DECEMBER 28, 1994 1995 1996 1996 ------------ ------------ ----------- ------------ (IN THOUSANDS) Service cost........................... $ 126 $ 452 $ 35 $ -- Interest cost.......................... 710 854 66 637 Net amortization of transition obligation........................... 110 111 8 -- Prior service cost..................... 134 170 13 -- ------ ------ ---- ---- Plan expense........................... $1,080 $1,587 $122 $637 ====== ====== ==== ====
F-26 28 29 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. EMPLOYEE BENEFIT PLANS (CONTINUED) The unfunded status of the supplemental retirement plan and the amounts recognized in the consolidated balance sheets are as follows:
DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS) Actuarial present value of accumulated benefit obligation Vested.................................................... $(11,301) $(10,028) Nonvested................................................. -- -- -------- -------- $(11,301) $(10,028) ======== ======== Projected benefit obligation................................ $(12,077) $ (9,890) Plan assets at fair value................................... -- -- -------- -------- Projected benefit obligation in excess of plan assets....... (12,077) (9,890) Unrecognized transition obligation.......................... 664 -- Unrecognized prior service cost............................. 1,307 -- Unrecognized net (gain) loss................................ 1,732 (754) -------- -------- Plan obligation included in other liabilities............... $ (8,374) $(10,644) ======== ========
Assumptions used in accounting for the supplemental retirement plan at each of the respective period-ends are as follows:
FORTY-EIGHT FOUR WEEKS WEEKS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 30, JANUARY 26, DECEMBER 28, 1994 1995 1996 1996 ------------ ------------ ----------- ------------ Discount rate.......................... 8.5% 7.5% 7.5% 7.5% Rate of compensation level increase.... 4.5 4.0 4.0 4.0
Contributions are also made by the Company to a retirement program for Grand Rapids union employees. Benefits provided under the plan are based on a flat monthly amount for each year of service and are unrelated to compensation. Contributions are made based on a negotiated hourly rate. In 1994, 1995, the four weeks ended January 26, 1996, and the forty-eight weeks ended December 28, 1996, the Company expensed contributions of $2.3 million, $2.5 million, $0.2 million, and $2.3 million, respectively. The Company contributes to various multiemployer union administered defined-benefit and defined-contribution pension plans. Benefits provided under the multiemployer pension plans are generally based on years of service and employee age. Expense under these plans was $8.7 million, $9.6 million, $0.9 million, and $7.8 million in 1994, 1995, the four weeks ended January 26, 1996 and the forty-eight weeks ended December 28, 1996, respectively. The Company also offers certain employees participation in the Keebler Company Salaried Savings Plan, a defined-contribution plan. Prior to July 1, 1995, certain nonunion employees who met length-of-service requirements could elect to participate in the plan. Currently, participation in the plan can be elected immediately. Contributions, made by participants with no company matching, are based on an elected percentage of the participants' compensation within a specified range. Expenses incurred by the Company to administer the plan are nominal. During 1996, the Company matched a portion of employee contributions to a defined contribution savings plan for qualified salaried employees of Sunshine. Contributions made by the Company were not to exceed 6% F-27 29 30 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. EMPLOYEE BENEFIT PLANS (CONTINUED) of gross wages. The Company also provides a savings plan for certain hourly employees of Sunshine which provides no matching company contributions. Expenses in 1996 for the plans were nominal. A Voluntary Employee Beneficiary Association ("VEBA") provides health and welfare benefits for certain Sunshine employees. Payments made by the Company to the VEBA relating to future employee benefits are included in other assets. The Company's policy is to fund the VEBA based on actual expenses of the preceding year to the extent deductible under current federal income tax laws. The Company funded $10 million during the forty-eight weeks ended December 28, 1996. The Company also makes contributions to a money purchase pension plan for certain hourly and salaried employees of Bake-Line Products, Inc. Contributions are based on 4% of employees' annual salary. Expenses paid by the Company to administer the plan were nominal. 14. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS The Company provides certain medical and life insurance benefits for eligible retired employees. The medical plan, which covers nonunion employees with ten or more years of service, is a comprehensive indemnity-type plan. The plan incorporates up-front deductible, coinsurance payments, and employee contributions which are based on length of service. The life insurance plan offers a small amount of coverage versus the amount the employees had while employed. The Company does not fund the plan. The net periodic postretirement benefit expense includes the following components:
FOUR FORTY-EIGHT WEEKS WEEKS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 30, JANUARY 26, DECEMBER 28, 1994 1995 1996 1996 ------------ ------------ ----------- ------------ (IN THOUSANDS) Service cost............................ $1,669 $1,598 $123 $2,142 Interest cost........................... 3,015 3,194 246 2,729 ------ ------ ---- ------ Net periodic postretirement benefit expense............................... $4,684 $4,792 $369 $4,871 ====== ====== ==== ======
The funded status of the plan reconciled to the postretirement obligation in the Company's consolidated balance sheets are as follows:
DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees.................................................. $(18,914) $(33,054) Fully eligible active participants........................ (3,522) (8,579) Other active participants................................. (19,635) (11,815) -------- -------- (42,071) $(53,448) Unrecognized net gain....................................... (1,048) (3,857) -------- -------- Postretirement obligation................................... $(43,119) $(57,305) ======== ========
The accumulated postretirement benefit obligation was determined using a weighted-average discount rate of 8.5% for the year ended December 31, 1994, and 7.5% for the year ended December 30, 1995, the four weeks ended January 26, 1996, and the forty-eight weeks ended December 28, 1996. F-28 30 31 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED) The weighted-average annual assumed rate of increase in the cost of covered benefits is 7.0% for 1996 declining gradually to an ultimate trend rate of 5.0% by the year 1999. A 1% increase in the trend rate for health care costs would have increased the accumulated benefit obligation as of December 28, 1996 by $3.7 million and the net periodic benefit cost by $0.4 million. The Company also provides postemployment medical benefits to employees on long-term disability. The plan is a comprehensive indemnity-type plan which covers nonunion employees on long-term disability. There is no length of service requirement. The plan incorporates coinsurance payments and deductibles. The Company does not fund the plan. The postemployment obligation included in the consolidated balance sheets at December 30, 1995 and December 28, 1996 was $4.3 million and $4.6 million, respectively. 15. INCOME TAXES The components of income tax expense (benefit) were as shown below:
FOUR FORTY-EIGHT WEEKS WEEKS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 30, JANUARY 26, DECEMBER 28, 1994 1995 1996 1996 ------------ ------------ ----------- ------------ (IN THOUSANDS) Current: Federal.................................. $ (1,505) $ 1,526 $ -- $ -- State.................................... 1,425 -- -- -- -------- -------- ------- ------- Current provision (benefit) for income taxes.................................... (80) 1,526 -- -- -------- -------- ------- ------- Deferred: Federal.................................. (11,599) (63,212) 6,490 11,524 State.................................... (733) (9,215) 843 2,478 Valuation allowance (federal and state)................................ 11,278 70,442 (7,333) -- -------- -------- ------- ------- Deferred provision (benefit) for income taxes.................................... (1,054) (1,985) -- 14,002 -------- -------- ------- ------- $ (1,134) $ (459) $ -- $14,002 ======== ======== ======= =======
The differences between the income tax expense (benefit) calculated at the federal statutory income tax rate and the company's consolidated income tax expense (benefit) are as follows:
FORTY-EIGHT WEEKS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 30, DECEMBER 28, 1994 1995 1996 ------------ ------------ ------------ (IN THOUSANDS) U.S. federal statutory rate..................... $(10,098) $(64,843) $11,140 State income taxes (net of federal benefit)..... 603 (8,208) 1,608 Deferred tax asset valuation adjustment......... 9,227 70,442 -- Intangible amortization......................... 693 828 1,268 Non-taxable items............................... 228 883 -- All others...................................... (1,787) 439 (14) -------- -------- ------- $ (1,134) $ (459) $14,002 ======== ======== =======
F-29 31 32 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. INCOME TAXES (CONTINUED) The deferred tax assets and deferred tax (liabilities) recorded on the consolidated balance sheets consist of the following:
DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS) Depreciation................................................ $ (92,573) $ (91,860) Prepaid pension............................................. (9,207) (17,050) Capitalized interest........................................ (1,010) -- Inventory valuation......................................... -- (7,073) Other....................................................... (131) (144) --------- --------- (102,921) (116,127) --------- --------- Net operating loss carryforwards............................ 81,922 94,659 Restructuring reserves...................................... 63,998 -- Postretirement/postemployment benefits...................... 18,755 24,997 Workers' compensation....................................... 18,375 16,703 Plant and facility closing costs and severance.............. -- 14,232 Incentives and deferred compensation........................ 10,084 11,658 Charitable contributions.................................... 9,204 10,067 Employee benefits........................................... 7,751 8,251 Other current assets........................................ -- 3,121 Other....................................................... 1,537 8,650 --------- --------- 211,626 192,338 Valuation allowance......................................... (116,817) (84,350) --------- --------- $ (8,112) $ (8,139) ========= =========
Net operating loss carryforwards total approximately $236 million through 1996 and expire in 2008 through 2011. Pursuant to the terms of the Keebler acquisition, the Predecessor Company retained the right to use the net operating losses for potential carrybacks. Any unused operating losses are then available to Keebler, but are significantly restricted under current tax law. Therefore, all net operating loss carryforwards have been fully reserved due to the uncertainty of their realization. Income taxes paid (refunded) were approximately $(22.8) million, $2.3 million, and $1.6 million for the year ended December 31, 1994, December 30, 1995, 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. 16. SHAREHOLDERS' EQUITY As a result of the Sunshine acquisition, the Company issued GFI 5,675,633 shares of the Company's common stock and a warrant to purchase 6,135,781 shares of the Company's common stock. The shares of $.01 par value stock were valued at $3.23 per share. The warrant is exercisable at $3.23 per share over a seven year period, beginning June 4, 1996 and expiring June 4, 2003. At December 28, 1996, the warrant has not been exercised. The total value of the stock and warrant held by GFI was $23.6 million at December 28, 1996. Subsequent to the Merger, the stock and warrant held by GFI were transferred to Bermore, Limited and reissued for the same value in the name of the Company. During the forty-eight weeks ended December 28, 1996, management invested $3.7 million in exchange for 1,963,361 shares of the Company's common stock. F-30 32 33 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. STOCK OPTION PLAN The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for employee stock options. Under the Company's 1996 Stock Option Plan 9,673,594 shares of the Company's stock were authorized for future grant. Options granted to management personnel in 1996 were 7,031,198 shares of the Company's common stock. All options granted have ten year terms and vest and become exercisable over five years. The following table summarizes stock option activity:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- ---------------- Outstanding at January 26, 1996 ........................... -- -- Granted.................................................... 7,031,198 $1.98 Exercised.................................................. -- -- Forfeited.................................................. 228,727 $1.74 Outstanding at December 28, 1996........................... 6,802,471 $1.98 Exercisable at December 28, 1996........................... -- --
Exercise prices for options as of December 28, 1996 for options outstanding arising from the May 1996 grant (5,688,073 options) were $1.74 and for options outstanding from the December 1996 grant (1,114,398 options) were $3.23. The weighted average fair value for options granted in 1996 was $1.86. The weighted average remaining contractual life of those options is nine years. Pro forma information regarding net income is required by the SFAS No. 123, "Accounting for Stock-Based Compensation", and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a present value approach with the following weighted-average assumptions: risk-free interest rate of 6.0%; no expected dividend yield; volatility of zero; and a weighted-average expected life of the option of five years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income and primary net income per share would have been approximately $14.0 million and $0.18, respectively, for the forty-eight weeks ended December 28, 1996. 18. RESTRUCTURING CHARGE In 1993, the predecessor company had recorded an operating charge of $122.7 million to restructure operations. In 1995, spending against the restructuring reserves totaled $24.1 million. Restructuring reserves remaining as of December 30, 1995 were $38.2 million related primarily to future cash costs for contractual obligations related to streamlining of the sales and distribution network as well as related information system projects and a reserve to reduce a manufacturing facility to its net realizable value. At December 28, 1996, there were no restructuring reserves. The restructuring reserve balance of $38.2 million at December 30, 1995 was not a cost assumed as part of the Keebler acquisition. F-31 33 34 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. RESTRUCTURING CHARGE (CONTINUED) A summary of the restructuring reserve activity from the time the initial restructuring reserve was recorded to the Keebler acquisition follows:
FOUR WEEKS YEAR ENDED YEAR ENDED YEAR ENDED ENDED JANUARY 1, DECEMBER 31, DECEMBER 30, JANUARY 26, 1994 1994 1995 1996 ---------- ------------ ------------ ----------- (IN MILLIONS) Beginning balance........................ $ 14.0 $104.6 $ 62.3 $38.2 Liabilities recorded in connection with the 1993 acquisition of Bake-Line Products Inc........................... 5.5 -- -- -- Provision for continuing operations...... 120.1 -- -- -- Provision for discontinued operations.... 2.6 -- -- -- Charges.................................. (19.3) (42.3) (24.1) -- Reclassification of property, plant, and equipment.............................. (18.3) -- -- -- ------ ------ ------ ----- Ending balance........................... $104.6 $ 62.3 $ 38.2 $38.2 ====== ====== ====== =====
19. DISCONTINUED OPERATIONS During July 1995, the predecessor company adopted plans to discontinue the operations of the Frozen Food businesses. On January 9, 1996, UB Investments (Netherlands) B.V. sold the Frozen Food businesses to the Windsor Food Company Ltd. for $70 million. A gain on sale of $18.9 million was recorded during the four weeks ended January 26, 1996. Net sales from these operations were $70.6 million and $70.9 million for the years ended December 31, 1994 and December 30, 1995. Expenses charged against discontinued operations include expenses associated with the costs of production, marketing, and specific administrative expenses. Expenses do not include an allocation of shared selling, distribution, and general administrative costs. Income from discontinued operations relating to the Frozen Food businesses was $3.4 million, net of $3.2 million of tax, for the year ended December 31, 1994. For the year ended December 30, 1995, income from discontinued operations was $7.3 million. Income tax expense was not recognized for discontinued operations in 1995 due to the Company having a net loss on a consolidated basis. There were no operating activities for the Frozen Food businesses during the four weeks ended January 26, 1996 as the sale was effective as of December 31, 1995. The net assets of the Frozen Food businesses as of December 30, 1995 were $47.7 million. Included in the net assets were primarily inventory, other current assets, property, plant, and equipment, and certain current liabilities and accruals. 20. AFFILIATE TRANSACTIONS In 1995, the predecessor company conducted business with various affiliated companies that ultimately are under the control of United Biscuits (Holdings) plc. Transactions with related parties included working capital financing and the purchase of product for resale in the United States. Receivables from affiliates and payables to affiliates are summarized in Note 11. Purchases of product from affiliated companies for resale in the United States were $11.3 million for the year-ended 1995. On November 30, 1995, Keebler Company sold to UB Group Ltd., ultimately United Biscuits (Holdings) plc., for a $5 million affiliate receivable, the entire rights, titles and interests in certain logos, tradenames, trademarks, and service marks registered or pending registration by Keebler Company in Australia, New Zealand, Asia, and Europe. The proceeds of this transaction were offset by certain legal fees and registration and licensing costs aggregating $0.5 million. The net gain on the sale of these trademarks is included in other costs and expenses for the year-ended December 30, 1995. Near the end of 1995 and in consideration of completing various pending stock and asset purchase agreements, as described in Note 4, the predecessor company entered into several transactions with affiliated companies within United Biscuits (Holdings) plc. The accompanying consolidated financial statements have not F-32 34 35 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 20. AFFILIATE TRANSACTIONS (CONTINUED) adjusted to reflect these transactions which are summarized below, as it is the Company's policy to only give effect to dispositions resulting in a gain on the completion of the transaction with the ultimate third party acquirer. On December 29, 1995, the predecessor company transferred certain assets and the stock of the Frozen Food businesses to U.B. Investments (Netherlands) B.V. for promissory notes that aggregated $70 million. On January 9, 1996, U.B. Investments (Netherlands) B.V. sold both these assets and stock to Windsor Food Company Ltd. for $70 million, effective December 31, 1995. The aggregate carrying value of these businesses and assets reflected in the December 30, 1995 consolidated balance sheet is $47.7 million, consisting primarily of goodwill of $22 million, property, plant and equipment of $21.2 million and inventory of $7.6 million, which resulted in a pre-tax realized gain, net of a $3.4 million charge for severance arising from the sale, of $18.9 million for UBIUS. On December 29, 1995, the predecessor company sold the stock of both U.B.F.C., Inc. and U.B.H.C., Inc. to U.B. Investments plc. for $100 each which resulted in no significant gain or loss. 21. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair market value of financial instruments, which includes short and long-term borrowings, was estimated using discounted cash flow analyses based on current interest rates which would be obtained for similar financial instruments. The carrying amounts of these financial instruments approximate fair value. The Company often enters into exchange traded commodity futures and options contracts to protect the Company against a portion of adverse raw material price movements. Gains or losses realized from the liquidation or expiration of the contracts are recognized as part of the cost of raw materials. Gains or losses are deferred until realized. Cost of sales was reduced by gains on futures and options transactions of $0.6 million in 1994, $3.4 million in 1995, and $0.8 million for the forty-eight weeks ended December 28, 1996. Operations for the four weeks ended January 26, 1996, was unaffected by gains or losses on futures and options as the $0.5 million loss was recorded as an adjustment to the opening balance sheet. As of December 28, 1996, $3.3 million in unrealized futures contracts losses have been deferred. There were no outstanding options contracts at December 28, 1996. As of December 28, 1996 the notional amount of open futures contracts was $45 million. 22. UNAUDITED QUARTERLY FINANCIAL DATA The unaudited quarterly financial results of operations are as follows:
TWELVE WEEKS ENDED ------------------------------------------------ APRIL 20, JULY 13, OCTOBER 5, DECEMBER 28, 1996* 1996 1996 1996 --------- -------- ---------- ------------ (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Net sales............................................. $335.3 $383.8 $452.3 $474.1 Gross profit.......................................... 177.8 197.9 235.0 260.6 Income before extraordinary items and cumulative effect of a change in accounting.................... 1.3 0.5 0.8 15.1 Extraordinary item.................................... -- 1.9 -- -- Net income (loss)..................................... 1.3 (1.4) 0.8 15.1 Net income (loss) per share........................... $ 0.02 $(0.02) $ 0.01 $ 0.19
- ------------------------- * Quarter 1 excludes the financial data of the predecessor company for the four weeks ended January 26, 1996. 23. SUBSEQUENT EVENT The consolidated financial statements reflect the Company's 57.325-for-1 stock split of its Common Stock ("Stock Split") effective January 22, 1998. The Stock Split was effected in the form of a stock dividend. Accordingly, all references in the consolidated financial statements to number of shares, average number of shares outstanding and related prices, per share amounts and common stock option and warrant data have been restated to reflect such changes. F-33 35 36 INDEPENDENT AUDITORS' REPORT To the Stockholder Sunshine Biscuits, Inc. Woodbridge, New Jersey We have audited the accompanying balance sheets of Sunshine Biscuits, Inc. (a wholly-owned subsidiary of G.F. Industries, Inc.) (the "Company") as of March 31, 1995 and 1996, and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended March 31, 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, such financial statements present fairly, in all material respects, the financial position of the Company at March 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Parsippany, New Jersey May 15, 1996 F-34 36 37 SUNSHINE BISCUITS, INC. BALANCE SHEETS MARCH 31, 1995 AND 1996 (IN THOUSANDS)
1995 1996 -------- -------- ASSETS CURRENT ASSETS: Cash................................................ $ 2,140 $ 1,841 Trade accounts receivable, less allowance for doubtful accounts of $1,399 and $830...................... 43,036 42,361 Due from Parent and affiliates...................... 2,783 3,362 Inventories......................................... 44,272 35,220 Prepaid expenses and other.......................... 5,583 5,428 Deferred income taxes............................... 11,521 6,767 -------- -------- Total current assets............................. 109,335 94,979 PROPERTY HELD FOR SALE -- Net......................... 1,698 993 PROPERTY, PLANT AND EQUIPMENT -- Net.................. 98,879 88,844 OTHER ASSETS.......................................... 30,409 27,877 -------- -------- TOTAL ASSETS.......................................... $240,321 $212,693 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Trade accounts payable.............................. $ 35,497 $ 32,944 Other accrued liabilities........................... 40,020 27,444 Accrued restructuring costs......................... 9,830 1,904 Due to affiliates................................... 2,802 399 Current maturities of long-term debt................ 33 13,192 -------- -------- Total current liabilities................... 88,182 75,883 LONG-TERM DEBT........................................ 93,780 73,458 OTHER LIABILITIES..................................... 31,475 30,638 DEFERRED INCOME TAXES................................. 9,325 10,058 STOCKHOLDER'S EQUITY: Common stock, no par value; authorized, issued and outstanding 100 shares........................... 15,000 15,000 Additional paid-in capital.......................... 19,660 19,660 Accumulated deficit................................. (17,101) (12,004) -------- -------- Total stockholder's equity.................. 17,559 22,656 -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $240,321 $212,693 ======== ========
See notes to financial statements. F-35 37 38 SUNSHINE BISCUITS, INC. STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS)
1994 1995 1996 -------- -------- -------- SALES (Net of discounts and allowances of $22,155, $24,637 and $21,450).............................................. $643,215 $629,841 $628,302 COST OF SALES............................................... 335,416 350,283 339,982 -------- -------- -------- GROSS MARGIN................................................ 307,799 279,558 288,320 -------- -------- -------- OPERATING EXPENSES: Selling and marketing..................................... 267,782 272,476 258,018 General and administrative................................ 23,620 23,233 22,585 Restructuring charge (gain)............................... -- 21,933 (16,458) Other..................................................... 955 5,051 727 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS............................... 15,442 (43,135) 23,448 INTEREST EXPENSE............................................ 6,529 8,409 9,361 -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.................................... 8,913 (51,544) 14,087 ALLOCATED INCOME TAXES (TAX BENEFIT)........................ 4,033 (18,918) 6,169 -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM........................................ 4,880 (32,626) 7,918 LOSS FROM DISCONTINUED OPERATIONS........................... (2,610) -- -- -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... 2,270 (32,626) 7,918 EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT (NET OF TAX).............................................. -- -- 2,821 -------- -------- -------- NET INCOME (LOSS)........................................... $ 2,270 $(32,626) $ 5,097 ======== ======== ========
See notes to financial statements. F-36 38 39 SUNSHINE BISCUITS, INC. STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS)
RETAINED ADDITIONAL EARNINGS TOTAL COMMON PAID-IN (ACCUMULATED STOCKHOLDER'S STOCK CAPITAL DEFICIT) EQUITY ------- ---------- ------------ ------------- BALANCE, MARCH 31, 1993............................ $15,000 $ 35,000 $ 13,255 $ 63,255 Capital contribution............................. -- 8,000 -- 8,000 Transfer of snack food businesses to Parent...... -- (23,340) -- (23,340) Net income....................................... -- -- 2,270 2,270 ------- -------- -------- -------- BALANCE, MARCH 31, 1994............................ 15,000 19,660 15,525 50,185 Net loss......................................... -- -- (32,626) (32,626) ------- -------- -------- -------- BALANCE, MARCH 31, 1995............................ 15,000 19,660 (17,101) 17,559 Net income....................................... -- -- 5,097 5,097 ------- -------- -------- -------- BALANCE, MARCH 31, 1996............................ $15,000 $ 19,660 $(12,004) $ 22,656 ======= ======== ======== ========
See notes to financial statements. F-37 39 40 SUNSHINE BISCUITS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS)
1994 1995 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 2,270 $(32,626) $ 5,097 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Loss from discontinued operations...................... 2,610 -- -- Depreciation and amortization.......................... 9,049 8,773 8,204 Deferred income taxes (benefit)........................ (190) (20,211) 6,109 Extraordinary item -- loss on extinguishment of debt... -- -- 2,821 Restructuring charge (gain)............................ -- 21,933 (16,458) Other.................................................. (62) 3 108 Changes in assets and liabilities: Decrease (increase) in accounts receivable............. (6,228) 11,568 675 Decrease (increase) in inventory....................... (5,474) 7,248 9,052 Decrease in prepaid expenses and other................. 432 7,553 155 Changes in amounts due to and due from affiliates -- net.................................... (6,494) 1,278 (2,982) Decrease (increase) in other noncurrent assets......... 394 (11,547) 1,962 (Decrease) increase in trade accounts payable.......... 3,989 4,695 (2,553) (Decrease) increase in other accrued liabilities....... 2,568 (1,504) (12,576) Decrease in accrued restructuring charges.............. -- -- (5,417) Increase in income taxes payable....................... 158 -- -- Increase (decrease) in long-term liabilities........... 1,857 14,886 (2,484) -------- -------- -------- Net cash (used in) provided by operating activities...................................... 4,879 12,049 (8,287) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (10,930) (10,660) (6,108) Proceeds from sale of plant and distribution operation.... -- -- 21,954 Proceeds from sale of other assets........................ 10 34 1,321 -------- -------- -------- Net cash provided by (used in) investing activities...................................... (10,920) (10,626) 17,167 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loan refinancing............................ -- -- 74,522 Payment of debt issue costs............................... (1,461) (47) (1,116) Payments of revolving credit loans........................ (4,989) (1,460) (21,635) (Payments) proceeds on senior secured notes............... 60,500 -- (60,500) Payments on other loans and capital leases................ (48,248) (35) (450) -------- -------- -------- Net cash (used in) provided by financing activities...................................... 5,802 (1,542) (9,179) -------- -------- -------- NET DECREASE IN CASH........................................ (239) (119) (299) CASH, BEGINNING OF YEAR..................................... 2,498 2,259 2,140 -------- -------- -------- CASH, END OF YEAR........................................... $ 2,259 $ 2,140 $ 1,841 ======== ======== ========
See notes to financial statements. F-38 40 41 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 1. ORGANIZATION AND OPERATIONS Sunshine Biscuits, Inc. (the "Company") is a wholly-owned subsidiary of G.F. Industries, Inc. (the "Parent"). The Company manufactures cookies, crackers and related products at several plants located in the United States. These products are sold directly to retailers, distributors and food service customers. No single customer accounts for more than 10% of total revenues and export sales are not significant. As discussed in Note 15, in 1994 the Company transferred to the Parent its salty snack foods operations. On March 29, 1996 the Parent announced that it had entered into preliminary discussions with a third party with respect to a possible merger of the Company. As of May 15, 1996, no definitive purchase agreement has been signed. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates -- The preparation of 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. Inventories -- Inventories are stated at the lower of last-in, first-out ("LIFO") cost or market. Property, Plant and Equipment -- Property, plant and equipment is stated at fair market value determined at the time the Company was acquired by the Parent. Property, plant and equipment additions subsequent to such acquisition are stated at cost, including capitalized interest related to plant expansion and other major capital projects. Capitalized leases are stated at the lesser of the present value of future minimum lease payments or the fair value of the leased property. Depreciation is computed using the straight-line method over the estimated economic useful lives of the related assets. Leasehold improvements are amortized over related lease terms. Other Assets -- The excess cost over fair value of assets acquired is being amortized over 40 years. Debt issuance costs are being amortized over the terms of the related loans. Package design and plate costs are deferred and amortized over periods from twelve to sixty months. On an on-going basis, the Company reassesses the recorded values of long-lived assets based on estimated undiscounted expected future cash flows. If the results of these periodic assessments indicate that an impairment may be likely, the Company recognizes a charge to operations at that time. Allocated Income Taxes -- The Company's taxable income or loss is included in the Parent's consolidated Federal income tax return. A tax-sharing agreement between the Parent and its subsidiaries specifies that income taxes will be allocated to each company in an amount equal to the amount of income tax that would be due if the Company filed separate income tax returns. The Company receives benefit for losses to the extent that it has paid tax in the past. Allocated income taxes in these financial statements have been recognized in accordance with Statement of Financial Accounting Standards No. 109, and deferred income taxes provided for the differences between the tax bases of assets and liabilities and their related financial statement amounts using current income tax rates. Fair Value of Financial Instruments -- The fair market value of certain financial instruments, including cash, accounts receivable, accounts payable, amounts due to and from affiliates and other accrued liabilities, approximate the amounts recorded in the balance sheet because of the relatively current maturities of these financial instruments. The fair market value of long-term debt at March 31, 1995 and 1996 approximates the amounts recorded in the balance sheet based on information available to the Company with respect to interest rates and terms for similar financial instruments. F-39 41 42 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Advertising and Consumer Promotion -- Advertising and consumer promotion costs of $16,083 in 1994, $24,062 in 1995 and $7,231 in 1996 are expensed when incurred. New Accounting Standard -- Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, is effective for the Company's fiscal year ending March 31, 1997. This standard requires impairment losses to be recorded on long-lived assets and certain intangible assets when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Although the Company has not yet completed its evaluation of the impact of adopting this standard, management does not expect the effect, if any, to be significant. Reclassifications -- Certain prior year financial statement amounts have been reclassified to conform to classifications used in the 1996 financial statements. 3. RESTRUCTURING PROGRAMS Results of operations for 1995 include the accrual of $21,933 for a restructuring program designed to reduce costs and improve operating efficiency. The restructuring represents primarily the closing of the Oakland, California bakery and includes (1) a provision to adjust the carrying values of property held for sale to estimated net realizable values ($7.5 million); (2) severance and related benefits ($9.3 million); (3) facility shutdown costs ($1.7 million); and (4) other related expenses ($3.4 million). During 1996, the Company substantially completed this restructuring program and, as a result, accrued restructuring costs were reduced by approximately $2,913. This amount is included in restructuring gain in 1996. Also during 1996, the Company sold its Chicago, Illinois bakery for cash proceeds of approximately $17,600, resulting in a gain of approximately $15,900, and sold its Chicago-based distribution operations for cash proceeds of approximately $4,200, resulting in a loss of approximately $2,400. As a result of these transactions, the Company reduced its workforce and recognized a curtailment gain for the net decrease in accrued pension and postretirement benefit obligations (see Note 11). Also in connection with the sale of the distribution operations, the Company recorded a withdrawal liability of approximately $250 related to a multiemployer pension plan. On March 27, 1996, the Company entered into a contract to sell the Oakland bakery property for approximately $2,700. The closing is subject to the satisfaction of certain conditions. The Company expects that the sale will be completed in September 1996 at which time any gain, net of related costs to dispose of the property, will be recognized. 4. INVENTORIES Inventories at March 31, 1995 and 1996 consist of the following:
1995 1996 ------- ------- Finished goods.............................................. $27,742 $20,046 Raw materials............................................... 12,116 11,328 Packaging................................................... 4,414 3,846 ------- ------- Total....................................................... $44,272 $35,220 ======= =======
F-40 42 43 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 4. INVENTORIES -- (CONTINUED) The cost of finished goods on the LIFO method exceeds their replacement cost by approximately $2,867 and $1,768 at March 31, 1995 and 1996, respectively. The replacement cost of raw materials and packaging exceeds their LIFO cost by approximately $5,716 and $5,618 at March 31, 1995 and 1996, respectively. Inventory reductions during 1996 resulted in a LIFO liquidation which decreased net income by approximately $540. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 1995 and 1996 consists of the following:
1995 1996 -------- -------- Land and improvements....................................... $ 9,666 $ 7,575 Buildings and improvements.................................. 43,194 42,885 Machinery and equipment..................................... 91,236 89,629 Vehicles.................................................... 2,304 1,348 Leasehold improvements...................................... 1,953 1,924 Construction in progress.................................... 6,948 4,587 -------- -------- Total....................................................... 155,301 147,948 Less accumulated depreciation and amortization.............. (56,422) (59,104) -------- -------- Total....................................................... $ 98,879 $ 88,844 ======== ========
Property above excludes $1,698 and $993 at March 31, 1995 and 1996, respectively, relating to the Company's closure of the Oakland bakery. Such amounts have been segregated in the accompanying balance sheet as property held for sale. 6. OTHER ASSETS Other assets at March 31, 1995 and 1996 consist of the following:
1995 1996 ------- ------- Excess cost over fair value of assets acquired (net of related amortization of $2,005 and $1,559)................ $14,707 $14,261 Intangible pension asset.................................... 11,613 10,610 Debt issuance costs......................................... 1,132 1,023 Other....................................................... 2,957 1,983 ------- ------- Total....................................................... $30,409 $27,877 ======= =======
7. TRADE ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES Checks outstanding in excess of related cash balances totaling $10,509 and $9,935 at March 31, 1995 and 1996, respectively, are included in trade accounts payable. F-41 43 44 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 7. TRADE ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES -- (CONTINUED) Other accrued liabilities at March 31, 1995 and 1996 consist of the following:
1995 1996 ------- ------- Accrued selling expenses.................................... $15,298 $ 7,030 Compensation and payroll taxes.............................. 13,544 11,335 Other....................................................... 11,178 9,079 ------- ------- Total....................................................... $40,020 $27,444 ======= =======
8. INCOME TAXES Allocated income taxes (tax benefit) from continuing operations for the years ended March 31, 1994, 1995 and 1996 consist of the following:
1994 1995 1996 ------ -------- ------ Currently (receivable) payable: Federal.................................................. $3,334 $ 1,341 $ 60 State.................................................... 889 (48) -- ------ -------- ------ Total currently payable.................................... 4,223 1,293 60 ------ -------- ------ Deferred: Federal.................................................. (163) (15,921) 4,750 State.................................................... (27) (4,290) 1,359 ------ -------- ------ Total deferred............................................. (190) (20,211) 6,109 ------ -------- ------ Total...................................................... $4,033 $(18,918) $6,169 ====== ======== ======
Included in the amount due from Parent and affiliates at March 31, 1996 is $2,679 which represents the portion of the federal tax benefit of the 1995 consolidated net operating loss carryback allocated to the Company pursuant to the tax sharing agreement among the Parent and its subsidiaries. At March 31, 1996, the Company has net operating loss carryforwards for Federal and State tax purposes of approximately $9,625 and $16,200, respectively, expiring in 2010. The differences between income taxes calculated at Federal statutory income tax rate and the Company's allocated income tax provision (benefit) from continuing operations are as follows:
YEAR ENDED MARCH 31, -------------------------- 1994 1995 1996 ------ -------- ------ U.S. Federal Statutory Rate................................ $3,030 $(17,525) $4,930 State income taxes (net of federal benefit)................ 569 (2,863) 883 Goodwill amortization...................................... 152 152 156 Adjustments to prior years' allocated income taxes......... 117 1,106 -- Nondeductible expenses..................................... 165 212 200 ------ -------- ------ $4,033 $(18,918) $6,169 ====== ======== ======
F-42 44 45 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 8. INCOME TAXES -- (CONTINUED) Deferred tax assets and liabilities at March 31, 1995 and 1996 are as follows:
1995 1996 --------------------- --------------------- ASSETS LIABILITIES ASSETS LIABILITIES ------- ----------- ------- ----------- Current: Accrued employee benefits...................... $ 4,658 $ -- $ 6,323 $ -- Inventory costing and valuation................ -- 3,644 -- 3,052 Accrued promotion and marketing costs.......... 1,100 -- 175 -- Accrued restructuring costs.................... 6,913 -- 1,206 -- Accrued plant closing and other costs.......... 694 -- 557 -- Other accrued expenses......................... 760 -- 688 -- Allowance for doubtful accounts................ 560 -- 332 -- Other.......................................... 480 -- 538 -- ------- ------- ------- ------- Total current.................................... 15,165 3,644 9,819 3,052 ------- ------- ------- ------- Noncurrent: Depreciation................................... -- 24,081 -- 20,381 Net operating loss carryforwards............... 7,868 -- 5,353 -- Accrued pension and post-retirement benefits... 6,284 344 4,539 344 Alternative minimum tax credit carryforwards... 948 -- 775 -- ------- ------- ------- ------- Total noncurrent................................. 15,100 24,425 10,667 20,725 ------- ------- ------- ------- Total............................................ $30,265 $28,069 $20,486 $23,777 ======= ======= ======= =======
The Internal Revenue Service has examined the Parent's consolidated income tax returns for years 1989 through 1992. The Parent believes that the amounts accrued are adequate to cover taxes payable for these years. 9. OTHER LIABILITIES Other liabilities as of March 31, 1995 and 1996 consist of the following:
1995 1996 ------- ------- Postretirement benefit obligations (Note 11)................ $15,711 $11,347 Pension obligation.......................................... 15,694 19,178 Other....................................................... 70 113 ------- ------- Total....................................................... $31,475 $30,638 ======= =======
F-43 45 46 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 10. NOTES PAYABLE Notes payable as of March 31, 1995 and 1996 consist of the following:
1995 1996 ------- ------- Borrowings under BankAmerica Business Credit Inc. loan and security agreement, interest payable monthly at a rate based on prime or LIBOR(1)................................ $ -- $74,105 Borrowings under Wells Fargo revolving credit loan, interest payable at a rate based on prime (9.0% at March 31, 1995) plus .25%(1).............................................. 21,635 -- Senior secured notes, interest at 8.69% payable semi-annually in arrears on May 1st and November 1st commencing May 1, 1994. Notes are payable in installments beginning in 1997 with final payment due in 2005(1)....... 60,500 -- Notes payable to Parent (includes accrued interest)(2)...... 10,645 11,545 Subordinated, unsecured, note payable to American Brands, Inc., interest at prime (8.25% at March 31, 1996) payable semi-annually beginning July 1993, balance due January 22, 1998...................................... 1,000 1,000 Capital lease obligation.................................... 33 -- ------- ------- Total(3).................................................... 93,813 86,650 Less current maturities, including revolving loans of $8,192.................................................... 33 13,192 ------- ------- Long-term portion........................................... $93,780 $73,458 ======= =======
- ------------------------- (1) On February 1, 1996, the Company refinanced the Wells Fargo and senior secured notes with BankAmerica Business Credit, Inc. The new credit facility consists of revolving loans, letters of credit and a term loan of up to $90,000 in the aggregate. The revolving loans are available for a two-year period, not exceeding $50,000 at any one time, based on eligible accounts receivable and inventory. The term loan is for $40,000 and is payable in twenty-three equal monthly installments with a final balloon payment at maturity. At March 31, 1996 the amounts outstanding under the revolving loans and term loan were $34,522 (interest at 7.56%) and $39,583 (interest at 7.81%), respectively, and letters of credit outstanding totaled $725 at March 31, 1996. Based on eligible receivables and inventory at March 31, 1996, the Company had $8,657 available under this credit facility. Revolving loans of $26,330 have been classified as long-term as management expects to maintain at least this level of borrowings during fiscal year 1997. The agreement includes restrictive financial covenants related to capital expenditures, minimum earnings and fixed charge coverage, and borrowings are collateralized by substantially all of the Company's assets. As a result of this refinancing, the Company recognized an extraordinary loss on the early extinguishment of debt of $2,821 (net of related tax benefit of $2,123). (2) Notes payable to Parent, due February 1, 2001, are subordinated and bear interest at prime plus 1/2%. Interest on these notes was approximately $495, $810 and $900 for the years ended March 31, 1994, 1995 and 1996, respectively. During 1994, other notes of $8,000 due the Parent were contributed to capital and recorded as additional paid-in capital. (3) At March 31, 1996, the long-term portion of notes payable is due, $61,913 in 1998 and $11,545 in 2001. F-44 46 47 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 11. EMPLOYEE BENEFIT PLANS The following table sets forth the funded status of the Company's pension plan and the amounts recognized in the Company's financial statements at March 31, 1995 and 1996:
1995 1996 --------- --------- Actuarial present value of benefit obligation: Vested.................................................... $(174,218) $(197,420) Nonvested................................................. (16,561) (16,972) --------- --------- Total accumulated benefit obligation........................ $(190,779) $(214,392) ========= ========= Projected benefit obligation................................ $(199,804) $(221,305) Plan assets at fair value................................... 175,085 195,214 --------- --------- Projected benefit obligation in excess of plan assets....... (24,719) (26,091) Unrecognized net loss....................................... 5,903 1,206 Additional minimum liability................................ (11,613) (10,610) Unrecognized prior service cost............................. 14,536 16,153 Unrecognized net obligation from adoption................... 199 164 --------- --------- Accrued pension cost (including intangible pension asset of $11,613 in 1995 and $10,610 in 1996, see Note 6).......... $ (15,694) $ (19,178) ========= ========= Components of net pension cost for the year: Service cost-benefits earned during the period............ $ 3,823 $ 3,363 Interest costs on projected benefit obligation............ 14,888 16,268 Return on plan assets..................................... (12,160) (35,297) Net amortization and deferral............................. (2,426) 19,874 --------- --------- Net pension cost............................................ $ 4,125 $ 4,208 ========= =========
Prior to March 31, 1994, eligible salaried and hourly employees participated in defined benefit pension plans sponsored by the Company or the Parent. The plans provided for payment of retirement benefits and certain disability and severance benefits. Effective March 31, 1994, a decision was made to merge the Company's defined benefit pension plan into the Parent's defined benefit pension plan. Accordingly, for 1994, the Company was allocated pension costs, for both salaried and hourly employees, by the Parent. Total pension costs allocated for 1994 were $3,905. During 1995, the Parent reevaluated its continuing operations and decided that the plan merger described above would not be completed. On December 31, 1994, the Parent's defined benefit pension plan was reorganized into two continuing plans, one primarily for all employees of the Company and the other for the employees of the Parent and its other subsidiaries. Certain benefit obligations and accruals were allocated to the plans in accordance with the Internal Revenue Code and other regulations and other components of the projected benefit obligations were allocated on a historical basis as shown above. The Company's policy is to make plan contributions required by applicable ERISA regulations. Plan assets are primarily invested in equity and fixed income securities. The actuarial present value of the benefit obligation at March 31, 1995 and 1996 was determined using assumed discount rates of 8.5% and 7.75%, respectively, an expected long-term rate of return on plan assets of 10%, and an assumed increase in future compensation of 4.5% and 4.75%, respectively. F-45 47 48 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 11. EMPLOYEE BENEFIT PLANS -- (CONTINUED) In addition, the Company provides a savings plan for qualified salaried employees and matches a portion of employee contributions not to exceed 6% of gross wages. Expense for this plan was approximately $692, $411 and $93 in 1994, 1995 and 1996, respectively. The Company also provides a savings plan for certain hourly employees which provides for no matching Company contributions. In addition to pension benefits, the Company provides certain health care benefits and life insurance to eligible retired employees (and their eligible dependents) who are not covered by any collective bargaining agreements. The Company continues to fund benefit costs on a pay-as-you-go basis, with retirees paying a portion of the cost. The following table sets forth amounts recognized in the Company's 1994, 1995 and 1996 financial statements:
1995 1996 -------- -------- Accumulated postretirement benefit obligation: Retirees.................................................. $ 18,352 $ 14,046 Fully eligible active employees........................... 5,702 5,939 Other employees........................................... 9,783 9,908 -------- -------- Total............................................. 33,837 29,893 Unrecognized net gain....................................... 5,828 9,406 Unrecognized transition obligation.......................... (23,954) (27,952) -------- -------- Accrued postretirement benefit obligation at March 31 (Note 9)......................................... $ 15,711 $ 11,347 ======== ========
1994 1995 1996 ------ ------ ------ Service cost of benefits earned............................. $ 891 $ 945 $ 792 Interest cost on accumulated postretirement benefit obligation........................................ 2,955 2,574 2,335 Amortization -- net......................................... 1,447 1,215 959 ------ ------ ------ Net postretirement benefit cost for the year................ $5,293 $4,734 $4,086 ====== ====== ======
The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 12% and 10.25% for those retirees not eligible for Medicare (pre 65 years of age) and 9% and 7.25% for those eligible for Medicare in 1995 and 1996, respectively, gradually declining to 5.5% and 5.75% by the years 2001 and 2002, respectively, and remaining at that level thereafter. A one percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit liability by approximately 14% and 10% and net postretirement health care costs by approximately 14% and 8% at March 31, 1995 and 1996, respectively. The assumed discount rate and rate of compensation increases used in determining the accumulated postretirement benefit obligation were 5.25% and 7.75%, respectively, at March 31, 1995, and 5.25% and 8.25%, respectively, at March 31, 1996. In 1995, curtailment losses of $4,650 associated with these programs were included in restructuring costs. In 1996 a net curtailment gain of $5,570 associated with the Company's restructuring programs (see Note 3) was recognized and is included in restructuring gains for 1996. A Voluntary Employee Beneficiary Association ("VEBA") provides health and welfare benefits for certain employees. Payments made to the VEBA relating to future employee benefits are included in prepaid expenses. The Company's policy is to fund the VEBA based on actual expenses of the preceding year to the F-46 48 49 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 11. EMPLOYEE BENEFIT PLANS -- (CONTINUED) extent deductible under current Federal income tax laws. Expenses funded through the VEBA were approximately $18,298, $18,212 and $15,252 in 1994, 1995 and 1996, respectively. 12. LEASES The Company leases manufacturing, warehouse and office facilities, vehicles and other bakery equipment under long-term operating leases. These leases generally contain renewal options for periods ranging from one to ten years and generally require the payment of other costs such as property taxes, maintenance and insurance. Future minimum payments under operating leases as of March 31, 1996 are as follows:
YEAR ENDING: - ------------ 1997........................................................ $10,273 1998........................................................ 7,892 1999........................................................ 5,559 2000........................................................ 4,240 2001........................................................ 2,960 Thereafter.................................................. 5,051 ------- Total minimum lease payments...................... $35,975 =======
Rent expense was approximately $11,490, $12,346 and $12,537 for the years ended March 31, 1994, 1995 and 1996, respectively. 13. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended March 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996 ------ ------ ------- Cash paid during the year for: Interest.................................................. $4,181 $7,432 $10,084 Income taxes.............................................. 724 252 90
14. RELATED PARTY TRANSACTIONS Subsequent to March 31, 1995, one of the Parent's subsidiaries filed for protection under Chapter 11 of the United States Bankruptcy Code, and another subsidiary's business was closed and in process of being liquidated. It is expected that the assets of both of these subsidiaries will be insufficient to satisfy all of the creditors' claims. For 1995 and 1996, $2,567 and $750, respectively of trade receivables due from these subsidiaries were written off as uncollectible. At March 31, 1996, amounts due from Parent and affiliates includes $513 of these receivables remaining unpaid. The Company is obligated as guarantor under certain lease agreements of these subsidiaries. In 1996 the Company subleased certain property subject to these leases and, accordingly, reduced the amounts recorded for these guarantees by approximately $600. At March 31, 1995, the Company recorded a liability of $1,734 related to its expected future obligations (including rental payments and carrying costs, etc.) associated with such leases. F-47 49 50 SUNSHINE BISCUITS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (IN THOUSANDS) 15. DISCONTINUED OPERATIONS Effective October 1, 1993, the Company transferred its salty snack food operations to the Parent and has accounted for these businesses as discontinued operations. Accordingly, their operating results for 1994 have been segregated in the accompanying statement of operations as follows: Sales....................................................... $ 42,721 Costs and expenses.......................................... (46,895) Income tax benefit.......................................... 1,564 -------- Net loss.................................................... $ (2,610) ========
* * * * * * F-48 50 51 (b) Pro Forma Financial Information. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The Unaudited Pro Forma Consolidated Financial Statements are based on the historical presentation of the consolidated financial statements of Flowers Industries, Inc. ("Flowers"). The Unaudited Pro Forma Consolidated Statement of Income for the fiscal year ended June 28, 1997 and the twenty-four weeks ended December 13, 1997 gives effect to certain pro forma adjustments related to the acquisition of an additional 11.5% of the common stock of the Keebler Foods Company ("Keebler") as if such transaction had occurred as of June 29, 1996. The Unaudited Pro Forma Consolidated Balance Sheet at December 13, 1997 gives effect to the pro forma adjustments as if the transaction occurred on December 13, 1997. The Unaudited Pro Forma Consolidated Financial Statements do not purport to be indicative of the results that actually would have been obtained if the combined operations had been conducted during the period presented and they are not necessarily indicative of operating results to be expected in future periods. The Unaudited Pro Forma Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and the related notes thereto of Flowers and Keebler. 51 52 Flowers Industries, Inc. Unaudited Pro Forma Consolidated Balance Sheet At December 13, 1997 (Amounts in thousands)
Flowers Keebler 12/13/97 10/4/97 Pro-Forma Pro Forma Historical Historical Adjustments Combined Assets Current Assets: Cash and cash equivalents $ 10,178 $ 60,901 $ $ 71,079 Accounts receivable 153,623 130,020 283,643 Inventories 106,598 122,964 229,562 Prepaid expenses and other 8,809 22,741 31,550 Deferred income taxes 15,674 44,052 59,726 294,882 380,678 675,560 Net Property, Plant & Equipment 439,308 470,795 910,103 Other Assets and Deferred Charges: Investment in unconsolidated affiliate 91,315 0 (91,315)(3) 0 Other long-term assets 31,097 62,284 93,381 122,412 62,284 (91,315) 93,381 Cost in Excess of Net Tangible Assets 76,734 202,384 280,281(2) 559,399 $933,336 $ 1,116,141 $ 188,966 $ 2,238,443 Liabilities and Common Stockholders' Equity Current Liabilities: Commercial paper $ 60,957 $ 0 $ $ 60,957 Current portion of long-term debt 1,625 31,265 32,890 Obligations under capital leases 2,727 0 2,727 Accounts payable 77,462 97,815 175,277 Accrued taxes other than income taxes 4,453 0 4,453 Income taxes 2,168 24,162 26,330 Other accrued liabilities 104,503 238,743 343,246 253,895 391,985 645,880 Long-Term Debt 286,148 341,890 314,624(4) 942,662 Deferred Taxes 41,848 49,226 91,074 Postretirement/Postemployment obligations 0 59,138 59,138 Other 2,265 45,433 47,698 Minority Interest 0 0 102,811(5) 102,811 Common Stockholders' Equity: Common stock 55,398 1,000 (1,000)(6) 55,398 Capital in excess of par value 44,860 172,568 (172,568)(6) 44,860 Retained earnings 268,031 54,901 (54,901)(6) 268,031 Less: Treasury stock (2,513) 0 (2,513) Restricted Stock Award and Equity Incentive Award (16,596) 0 (16,596) 349,180 228,469 (228,469) 349,180 $ 933,336 $ 1,116,141 $ 188,966 $ 2,238,443
52 53 Flowers Industries, Inc. Unaudited Pro Forma Consolidated Statement of Income For the year ended June 28, 1997 (Amounts in thousands, except per share data)
Flowers Keebler 6/28/97 7/12/97 Pro-Forma Pro Forma Historical Historical (12) Adjustments Combined Sales $1,437,713 $ 1,983,369 $ $3,421,082 Gain on sale of distributor notes receivable 43,244 0 43,244 Other income 3,540 0 3,540 1,484,497 1,983,369 3,467,866 Cost of goods sold 815,864 890,928 1,706,792 Selling, delivery and administrative expenses 555,730 987,762 7,007 (7) 1,550,499 Interest 25,109 39,073 19,192 (8) 83,374 1,396,703 1,917,763 26,199 3,340,665 Income before income taxes 87,794 65,606 (26,199) 127,201 Federal and state income tax expense (benefit) 33,191 27,475 (7,389) (9) 53,277 Income from investment in unconsolidated affiliate 7,721 0 (7,721) (10) 0 Income before minority interest 62,324 38,131 (26,531) 73,924 Minority interest 0 0 (17,159) (11) (17,159) Net income $ 62,324 $ 38,131 $ (43,690) $ 56,765 Net income per common share 0.72 $ 0.65 Weighted average number of shares outstanding used in calculation of net income per common share 87,087 87,087
53 54 Flowers Industries, Inc. Unaudited Pro Forma Consolidated Statement of Income For the twenty-four weeks ended December 13, 1997 (Amounts in thousands, except per share data)
Flowers Keebler 12/13/97 10/4/97 Pro-Forma Pro Forma Historical Historical (12) Adjustments Combined Sales $ 712,953 $ 945,123 $ $1,658,076 Other income 3,243 0 3,243 716,196 945,123 1,661,319 Cost of goods sold 389,145 408,427 797,572 Selling, delivery and administrative expenses 277,498 465,859 3,234 (7) 746,591 Interest 10,750 14,957 8,858 (8) 34,565 677,393 889,243 12,092 1,578,728 Income before income taxes 38,803 55,880 (12,092) 82,591 Federal and state income tax expense (benefit) 14,939 23,480 (3,410)(9) 35,009 Income from investment in unconsolidated affiliate 12,535 0 (12,535)(10) 0 Income before minority interest 36,399 32,400 (21,217) 47,582 Minority interest 0 0 (14,580)(11) (14,580) Net income $ 36,399 $ 32,400 $ (35,797) $ (33,002) Earnings Per Common Share: Net income per common share $ 0.42 $ 0.38 Weighted average number of shares outstanding used in calculation of net income per common share 87,687 87,687
54 55 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (000'S OMITTED, EXCEPT FOR SHARE DATA) 1. Basis of Presentation: On February 3, 1998, Flowers acquired an additional 11.5% of the common stock of Keebler from two existing shareholders. Prior to the acquisition of the 11.5%, Flowers owned 45.2% of Keebler and accounted for its investment under the equity method of accounting. As a result of the acquisition of an additional 11.5%, Flowers will consolidate Keebler's financial statements. The acquisition will be accounted for as a purchase. The purchase of an additional 11.5% of Keebler's Common Stock is as follows: Cash paid for 11,198,000 shares of Keebler stock $308,624 Acquisition costs 6,000 -------- Total Purchase Price $314,624 ========
For pro forma purposes, the net purchase price has been ascribed to Cost in Excess of Net Tangible Assets due to Flowers' estimate that Keebler's historical net assets approximate fair value based on the fact that Keebler's assets and liabilities were adjusted to fair value in January 1996 as part of the initial acquisition of Keebler by Flowers and Artal. 2. Represents net purchase price recorded as Cost in Excess of Net Tangible Assets. 3. Represents the elimination of Flowers' investment in Keebler prior to the acquisition of a controlling interest. 4. Flowers financed 100% of the purchase price using its existing credit facilities. 5. Represents the 45% minority interest in Keebler. 6. Represents the elimination of Keebler's equity due to Flowers' investment and minority interest. 7. Represents the amortization of the increase in Cost in Excess of Net Tangible Assets of $280,281 over 40 years. 8. Represents increased interest expense on additional borrowings of $314,624 at an assumed interest rate of 6.1%. 9. To record the tax benefit for the increased interest expense. 10. To eliminate Flowers' equity income related to its investment in Keebler. 11. To record a 45% minority interest in Keebler's net income. 12. The twelve weeks ended July 12, 1997 for Keebler are included in each of the Unaudited Pro Forma Consolidated Statements of Income. 55 56 (c) Exhibits. 23.1 Consent of Coopers & Lybrand L.L.P. (Independent Auditors of Keebler). 23.2 Consent of Deloitte & Touche, LLP (Independent Auditors of Sunshine Biscuits, Inc.) 56 57 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FLOWERS INDUSTRIES, INC. By: /s/ C. Martin Wood, III ----------------------------- C. Martin Wood, III Senior Vice President and Chief Financial Officer Date: March 13, 1998 57 EX-23.1 2 CONSENT OF COOPERS & LYBRAND 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this current report on Form 8-K/A of Flowers Industries, Inc. of our report dated December 5, 1997, except for Note 23, as to which the date is January 22, 1998, on our audits of the consolidated financial statements of Keebler Foods Company. /s/ COOPERS & LYBRAND L.L.P. Chicago, Illinois March 10, 1998 58 EX-23.2 3 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the inclusion in this current report on Form 8-K/A of Flowers Industries, Inc. of our report dated May 15, 1996, on our audits of the financial statements of Sunshine Biscuits, Inc. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey March 11, 1998 59 -----END PRIVACY-ENHANCED MESSAGE-----