Annex Moves Forward In Lawsuit Against Kellogg

Annex Reply Calls into Question Kellogg's Commitment to Sanitary Conditions at Kellogg's Gardenburger Manufacturing Facility

Kellogg's Acquisition Practices Also Questioned

Oct 28, 2009, 08:00 ET from Annex Holdings

NEW YORK, Oct. 28 /PRNewswire/ -- Annex Holdings, the former owner of Wholesome & Hearty Foods Company ("WHF"), today announced that it has filed a reply in its pending lawsuit against Kellogg Company (NYSE: K). In addition to questioning Kellogg's commitment to sanitary conditions, as well as its manufacturing and acquisition practices, the lawsuit says that Kellogg is attempting to shift the blame for its construction-related problems at Kellogg's Clearfield, Utah manufacturing plant, which led to the market withdrawal of Gardenburger products.

Following WHF's sale of Gardenburger to Kellogg in November 2007, Kellogg engaged in a major construction project at the Gardenburger manufacturing facility. In May 2008, Kellogg withdrew Gardenburger products from the market, publicly citing "facility improvements" as the reason for the product withdrawal. Despite its public admissions, Kellogg is attempting to transfer the expense of its product withdrawal to WHF and is wrongfully retaining the $10 million escrow that was established as part of the Gardenburger transaction, which is the subject of the Annex-WHF lawsuit. Kellogg has never disclosed exactly what was wrong with the withdrawn Gardenburger products nor has it identified the specific construction conditions that led to the withdrawal.

"We are surprised that Kellogg is seeking damages for products that Kellogg admittedly manufactured and sold," said Robert W. Forman Esq., a Partner at Shapiro Forman Allen & Sava LLP, legal counsel for Annex and WHF. "Under Annex's ownership, Gardenburger had an unblemished history of quality and safety, including passing numerous third-party and governmental sanitation audits, lending credence to the notion that consumer safety is of greater concern to smaller companies such as WHF than to the larger Kellogg conglomerate.

"It is unfortunate that Kellogg is trying to 'pass the buck' for its plant sanitation issues. We wonder whether this is an intentional component of Kellogg's acquisition and growth strategy.

Further, Kellogg's apparent claim that it conducted no due diligence on food safety issues prior to acquiring Gardenburger is unsettling given Kellogg's supposed commitment to consumer safety and its acquisition strategy," continued Mr. Forman.

Annex's lawsuit, which calls into question the conditions at Kellogg's Gardenburger manufacturing plant, is not the first time that Kellogg has faced food safety and product quality issues. As reported:

  • In September 2009, Kellogg was forced to recall approximately 4,500 cases of Eggo waffles and Eggo pastries after the Georgia Department of Agriculture found listeria monocytogenes in its products.
  • In early 2009, numerous Kellogg products and Kellogg manufactured products were recalled in connection with potential salmonella contamination and unsanitary conditions at the manufacturing facility of a key supplier to Kellogg, Peanut Corporation of America:
              - In February 2009, due to concerns about potential salmonella
                contamination, Kellogg was forced to recall its Keebler Soft
                Batch Homestyle Chocolate Chunk Cookies and Oatmeal Raisin
                Cookies as well as cases of Special K Protein Meal Bar
                Honey Almond.
              - In January 2009, Kellogg recalled millions of cases of more
                than 15 kinds of cookies and crackers manufactured under the
                Austin, Keebler and Famous Amos brands after Kellogg products
                tested positive for salmonella.  Kellogg's recall was part of
                one of the largest recalls in U.S. history.
              - In January 2009, two Kellogg subsidiaries announced a number
                of recalls, also due to potential salmonella contamination.
                Kellogg's Kashi Chewy Granola Bars in Trail Mix and Honey
                Almond Flax varieties as well as Kashi Chewy Cookies in
                Oatmeal Dark Chocolate, Happy Trail Mix and Oatmeal Raisin
                Flax were pulled from store shelves.  In addition, Bear Naked,
                the Kellogg-owned granola business, said that it would recall
                all Appalachian Trail Mix products.
              - In January 2009, McKee Foods recalled two Little Debbie snacks
                produced in a Kellogg facility due to potential salmonella
              - In January 2009, Weis Markets was forced to recall two of its
                products, which were manufactured by the Kellogg and
                distributed in Pennsylvania, Maryland, New Jersey, New York
                and West Virginia due to concerns about salmonella
              - In January 2009, Kellogg announced the recall of two varieties
                of ShopRite brand peanut butter sandwich crackers because of
                potential salmonella contamination.
  • In August 2007, Kellogg recalled 300,000 packs of its Crunchy Nut cereal from across the United Kingdom following consumer complaints of product quality problems, including an "unusual" taste and smell of the honeycoated cereal flakes.

Congressional leaders have also been outspoken in their criticism of Kellogg's failure to appropriately audit the quality of its ingredient suppliers, including Peanut Corporation of America. Though other leading food companies decided against doing business with Peanut Corporation of America after inspectors found grossly unsanitary conditions at two processing plants, Kellogg did not bother to invest in a quality inspection.

  • At a U.S. congressional hearing on March 19, 2009, Representative Henry Waxman said "Kellogg was sloppy" for not conducting its own inspections of the Peanut Corporation of America's plants in Georgia and Texas.
  • Speaking at the same March 19, 2009 hearing, Representative Bart Stupak, Chairman of the Energy and Commerce Subcommittee on Oversight and Investigations said, "You all talked about safety as the number one concern. It seems like you passed that responsibility to someone else."

Mr. Forman added, "Given Kellogg's record of recalls, it seems that Kellogg is seeking to divert attention from its own production problems by blaming Annex and WHF for conditions brought about by Kellogg. We, unfortunately, have no choice but to pursue this matter in court. We are confident that we will prevail and hope that consumers will benefit from greater scrutiny of Kellogg's manufacturing practices."

The case is WHF Liquidating Corp., f/k/a Wholesome & Hearty Foods Company, Inc. and Annex Holdings I, LP, vs. Kellogg Company, in the Supreme Court of the State of New York, County of New York. Annex's reply can be found at http://iapps.courts.state.ny/iscroll/index.jsp. The index number is 650475-2008.

About Annex

Annex Capital Management LLC ("Annex"), the general partner of Annex Holdings, is a middle-market private equity group focused on control leveraged buyouts and special situations. Since its formation in 2004, Annex has successfully acquired interests in over 25 private companies in a variety of industries.

    Kelly Sullivan / Andrew Siegel
    Joele Frank, Wilkinson Brimmer Katcher

SOURCE Annex Holdings