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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-27961
LOGO
6,781,000 Shares
INTERSTATE BAKERIES CORPORATION
Common Stock
(par value $.01 per share)
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This Prospectus relates to 6,781,000 shares of common stock, par value $.01
per share (the "Common Stock"), of Interstate Bakeries Corporation (the
"Company"), which may be delivered by Ralston Purina Company ("Ralston"),
at its option, pursuant to the terms of Ralston's 7% Exchangeable Notes
Due August 1, 2000 (the "Stock Appreciation Income Linked
SecuritiesSM" or "SAILSSM"). This Prospectus accompanies a
prospectus and prospectus supplement of Ralston (the "SAILS
Prospectus") relating to the sale of SAILS (the "SAILS
Offering"). The SAILS Prospectus does not constitute a part of
this Prospectus nor is it incorporated by reference herein.
Ralston has granted the Underwriters of the SAILS a 30-day option to purchase
up to an additional 968,000 SAILS, which may be exchanged at their maturity
for additional shares of Common Stock. Such option has been granted
solely to cover over-allotments, if any. To the extent that the over-
allotment option is not exercised by the Underwriters in full,
Ralston may, at its option, and subject to certain limitations, sell
the unexercised portion of up to 968,000 shares of Common Stock
pursuant to this Prospectus. See "Underwriting." The Company
will not receive any of the proceeds from the offering
contemplated hereby.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSIDER CAREFULLY THE INFORMATION
CONTAINED UNDER "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF.
The Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "IBC." On July 23, 1997, the last reported sale price
of Common Stock on the NYSE Composite Tape was $61.9375 per
share. See "Price Range of Common Stock and Dividends."
Other than (i) the sale of shares of Common Stock by Ralston to the Company,
and (ii) options granted and Common Stock issued pursuant to the Company's
existing employee benefit and stock option plans, the Company, its
directors and executive officers, Ralston and its wholly owned
subsidiaries have agreed not to issue, sell, agree to sell or otherwise
dispose of, without the prior written consent of Credit Suisse First
Boston Corporation, any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for Common Stock
for a period of 90 days after the date of this Prospectus. See
"Underwriting."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
"Stock Appreciation Income Linked Securities" and "SAILS" are service marks
of Credit Suisse First Boston, Inc.
Prospectus dated July 23, 1997
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THE COMPANY HAS BEEN ADVISED THAT CERTAIN PERSONS PARTICIPATING IN THE
OFFERING BY RALSTON OF THE SAILS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SAILS OR THE COMMON STOCK,
INCLUDING OVER-ALLOTMENTS, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERAGE
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such documents may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven
World Trade Center, Suite 1200, New York, New York 10048. The Commission also
maintains an Internet site on the World Wide Web at http://www.sec.gov that
contains reports, proxy statements and other information regarding the
Company. In addition, information concerning the Company is available for
inspection at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
The Company has filed with the Commission a registration statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act")
(together with any amendments thereto, the "Registration Statement") with
respect to the Common Stock offered hereby. This Prospectus, which constitutes
a part of the Registration Statement, omits certain information set forth in
the Registration Statement, as permitted by the Rules and Regulations of the
Commission. For further information pertaining to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits filed therewith, which may be obtained as provided in
the immediately preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated in and made a part of this Prospectus by
reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
June 1, 1996.
2. The Company's Quarterly Reports on Form 10-Q for the periods ended
March 8, 1997, November 16, 1996 and August 24, 1996.
3. The description of the Company's Common Stock contained in the Form 8-
A registration statement filed with the Commission on May 28, 1992 pursuant
to Section 12 of the Exchange Act.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the offering of the Common Stock offered hereby, shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the respective dates of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any
or all the documents that have been or may be incorporated by reference into
this Prospectus, other than exhibits to such documents (unless such exhibits
are incorporated by reference into the document). Requests for such copies
should be directed to Ray Sandy Sutton, Corporate Secretary, 12 East Armour
Boulevard, Kansas City, Missouri 64111; telephone number (816) 502-4000.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus as well as the information
appearing in the documents incorporated by reference herein. Investors should
carefully consider the information set forth under the caption "Risk Factors."
THE COMPANY
The Company, through its wholly-owned operating subsidiary, Interstate Brands
Corporation ("Brands"), is the largest baker and distributor of fresh bakery
products in the United States. The Company produces, markets, distributes and
sells a wide range of breads, rolls, snack cakes, donuts, sweet goods and
related products. These products are sold under a number of national brand
names, such as "Wonder(R)," "Hostess(R)" and "Home Pride(R)," as well as
regional brand names, including "Butternut(R)," "Dolly Madison(R)" and
"Merita(R)." "Wonder(R)" white bread and "Home Pride(R)" wheat bread are the
number one and two selling branded breads sold in the United States.
"Hostess(R)" products, including "Twinkies(R)," "CupCakes" and "Ho-Hos(R)," are
among the leading snack cake products sold in the United States.
The Company distributes its products in markets representing approximately
90% of the United States population. The Company operates 67 bakeries and more
than 1,400 thrift stores and employs over 32,000 people. The Company's driver-
salesmen deliver products directly from the Company's over 1,200 distribution
centers to more than 200,000 food outlets and stores.
The Company has grown to its present size primarily through the acquisition
of other bakery businesses. In July 1995, the Company acquired Continental
Baking Company ("CBC") from Ralston for $220,000,000 in cash and 16,923,077
shares of the Common Stock. Since the acquisition of CBC, the Company has taken
significant steps to continue to build and capitalize on the brand equity in
the "Wonder(R)" and "Hostess(R)" brands. The Company has also worked to realize
cost savings from the CBC acquisition and to achieve economies of scale in the
operations of Brands and CBC. As a result of the CBC acquisition and these
actions, the Company has significantly increased net sales and profitability.
The Company has more than doubled its net sales to $2.9 billion in fiscal 1996
from $1.2 billion in fiscal 1995. The Company's operating income as a
percentage of net sales increased to 5.5% for the forty weeks ended March 8,
1997 from 2.6% for the comparable period in fiscal 1996. Net income per share
increased to $1.78 per share for the forty week period in fiscal 1997 from $.47
per share for the comparable period in fiscal 1996. See "Recent Development"
for information regarding the Company's unaudited results of operations for the
twelve weeks ended May 31, 1997 and for fiscal 1997.
The principal executive offices of the Company are located at 12 East Armour
Boulevard, Kansas City, Missouri 64111, and its telephone number is (816) 502-
4000.
INDUSTRY OVERVIEW
Annual bread and cake sales in the United States were approximately $23
billion in 1996 according to Datamonitor. Nutritional guidelines have helped
focus consumers on the benefits of grain-based foods. The Company believes
that, through its extensive line of bread products, it is well positioned to
take advantage of this trend.
In addition to the Company, several large baking and diversified food
companies market bread and cake products under various brand names in the
United States. There are also a significant number of medium and small baking
companies that sell bread and cake products in certain regions of the United
States. The Company believes that the larger, national baking companies enjoy
significant competitive advantages over smaller operations due principally to
their economies of scale in areas such as purchasing, advertising, marketing
and distribution, as well as greater brand awareness.
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A significant trend in the bread and cake baking industry over the last
several years has been the consolidation of smaller bakeries into larger baking
businesses. Consolidation, which has reduced industry capacity, continues to be
driven by several factors including generational changes at family-owned
operations as well as capital constraints on smaller bakeries which limit their
ability to make major capital investments necessary to increase productivity
and develop new products. The Company believes the baking industry will
continue to present opportunities for strategic acquisitions that will
complement its existing business.
BUSINESS STRATEGY
The Company's strategy is to increase shareholder value by focusing on the
following elements:
DEVELOP AND SUPPORT BRANDED PRODUCTS
The Company continues to emphasize higher-margin branded products in order to
increase net sales and profitability. The Company's experience has shown that
branded products generally have a higher consumer awareness, resulting in
premium pricing and increased shelf space. The Company supports its brands
through aggressive marketing and advertising campaigns specifically tailored to
selected target markets and consumer categories. In addition, since the CBC
acquisition, the Company has implemented a new advertising campaign for its
leading national brands. The Company believes its focus on freshness and high
quality products will continue to enhance its brand-building efforts.
The Company operates a research and development facility in Kansas City,
Missouri, which engages in new product development, line extensions of existing
products and the enhancement of product graphics and packaging. For example,
the Company recently introduced fat free bread products under the "Wonder(R)"
and "Butternut(R)" brand names in certain test markets, as well as new
"Hostess(R)" packaging to enhance shelf appeal of its snack cake products.
MAINTAIN DECENTRALIZED OPERATIONS
The Company's decentralized operations and related incentive programs are key
elements of the Company's business strategy to increase net sales and improve
profitability. The Company is organized into bakery profit centers, each
operating as a stand-alone business responsible for sales, pricing,
manufacturing, distribution, accounting and data processing. The Company
compensates local bakery management under an incentive bonus program tied to
operating cash flow targets for each profit center. The corporate staff
provides direction and focus to the plants in areas such as quality and brand
building, while also providing centralized support in national advertising and
promotion, purchasing, legal and human resources.
The Company believes its presence throughout the United States helps it to
compete successfully with regionally-based competition as well as minimize
exposure to regional economic downturns. The Company's plants and distribution
depots across the United States position the Company close to major
marketplaces enabling the Company to provide efficient delivery and superior
customer service.
PURSUE STRATEGIC ACQUISITIONS
The Company believes that the size and geographic scope of its operations
position it for growth through selective acquisitions in the consolidating
baking industry. The Company pursues acquisition candidates that complement its
existing product lines and geographic presence and leverage its purchasing
power, brand management capabilities and operating efficiencies. For example,
in March 1997, the Company acquired the assets comprising the San Francisco
French Bread Company ("SFFB"), a producer and distributor of sourdough breads,
from Metz Baking Company. In addition, in April 1997, the Company acquired the
right to use the trademark "Marie Callender's(R)" in connection with the
manufacture, marketing, distribution and sale of croutons.
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COMMON STOCK PURCHASE
In connection with the SAILS transaction, the Company and Ralston have
entered into an agreement pursuant to which the Company has agreed to
repurchase, simultaneously with the closing of the SAILS transaction, 1,000,000
shares of its Common Stock from Ralston at a purchase price per share equal to
the Initial Price (as that term is defined in the SAILS Prospectus) less a 3%
discount (the "Repurchase Transaction"). See "Selling Stockholder."
THE OFFERING
Pursuant to the terms of the SAILS, Ralston may deliver 6,781,000 shares of
Common Stock to the holders of the SAILS at the maturity thereof on August 1,
2000. This Prospectus relates to the delivery by Ralston of such shares of
Common Stock, and up to 968,000 additional shares of Common Stock with respect
to the SAILS that are subject to an over-allotment option granted by Ralston to
the Underwriters in the SAILS offering solely to cover over-allotments. The
SAILS are being offered by Ralston pursuant to the SAILS Prospectus. To the
extent the over-allotment option is not exercised by the Underwriters in full,
Ralston may, at its option, but not sooner than 90 days from the date of this
Prospectus, sell the unexercised portion of up to 968,000 shares of Common
Stock pursuant to this Prospectus. Ralston owns 16,923,077 shares of Common
Stock, constituting approximately 45% of the Company's outstanding Common
Stock, as of May 30, 1997.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective investors.
RECENT DEVELOPMENT
On June 26, 1997, the Company announced its earnings for the fourth quarter
of fiscal 1997 which ended May 31, 1997. Earnings per share for the fourth
quarter were $0.77 per share compared to $0.23 a year earlier. For the full
1997 fiscal year, the Company reported earnings per share of $2.55, a 264%
increase over the prior year's $0.70. The prior year's fourth quarter and full
year results included a one-time charge of $0.15 per share.
Specifically, for the twelve weeks ended May 31, 1997, the Company reported
net sales of $755.2 million, compared to net sales of $745.7 million for the
twelve weeks ended June 1, 1996. In addition, operating income was $55 million,
compared to the prior year's $23.8 million. However, the prior year's results
include a one-time pretax charge of $9.5 million resulting from a payment due a
union-administered, multi-employer pension plan which failed. Net income for
the twelve weeks was $29.6 million, or 3.9% of net sales, compared to the prior
year's $8.5 million, or 1.1% of net sales. Earnings per share of $0.77 were up
234% over the prior year's $0.23 ($0.38 before the one-time charge).
For the fifty-two weeks ended May 31, 1997, the Company reported net sales of
$3,212.4 million, an 11.6% increase in comparison to the prior year's net sales
of $2,878.2 million. However, fiscal 1996 included only 45 weeks of combined
operations with CBC. Operating income was $191.1 million, or nearly 6% of net
sales, compared to the prior year's $78.8 million, or 2.7% of net sales (3.1%
before the one-time charge). Net income for the fifty-two weeks was $97.2
million, or slightly more than 3% of net sales, compared to fiscal 1996's $24.5
million, or 0.8% of net sales. Earnings per share were $2.55 compared to the
prior year's $0.70 ($0.85 before the one-time charge).
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SUMMARY HISTORICAL FINANCIAL DATA
The following summary financial information for each of the five fiscal years
indicated below has been derived from the audited Consolidated Financial
Statements of the Company. The summary financial information for the forty week
periods ended March 8, 1997 and March 9, 1996 has been derived from the
unaudited Consolidated Financial Statements of the Company, which, in the
opinion of the Company, reflect all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation. Financial information
for the interim periods presented is not necessarily indicative of financial
information to be anticipated for the full year. The information set forth
below should be read in connection with the Consolidated Financial Statements
incorporated herein by reference and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein.
<TABLE>
<CAPTION>
40 WEEKS ENDED FISCAL YEAR ENDED(1)
-------------- ------------------------------------------------------
MARCH 8, MARCH 9, JUNE 1, JUNE 3, MAY 28, MAY 29, MAY 30,
1997 1996(2) 1996(3) 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales............... $2,457.3 $2,132.5 $2,878.2 $1,222.8 $1,142.7 $1,165.6 $1,145.9
Gross profit............ 1,251.4 1,044.9 1,425.0 591.9 561.5 575.6 563.7
SDA expenses(4)......... 1,036.3 914.0 1,236.6 501.0 473.6 472.6 458.5
Operating income........ 136.1 54.9 78.8(5) 57.3 46.9(6) 71.3 73.6
Interest expense........ 18.0 22.7 29.3 17.7 14.7 17.4 25.0
Net income.............. 67.5 16.0 24.5(5) 20.7 15.8(6) 16.7(7) 15.6(8)
Per Share:
Net income.............. 1.78 0.47 0.70(5) 1.05 0.78(6) 0.79(7) 0.94(8)
Common stock dividends.. 0.395 0.375 0.50 0.50 0.495 0.47 0.33
Weighted average common
shares outstanding..... 38.0 34.2 35.0 19.7 20.3 21.1 18.7
BALANCE SHEET DATA
Total assets............ 1,437.9 1,433.8 1,486.5 598.4 574.8 586.8 573.6
Long-term debt,
excluding current
maturities............. 239.0 349.0 303.7 212.2 201.2 189.2 211.1
Stockholders' equity.... 514.0 454.9 460.2 198.0 187.4 202.3 194.6
OTHER FINANCIAL DATA
Gross profit margin..... 50.9% 49.0% 49.5% 48.4% 49.1% 49.4% 49.2%
SDA as a percentage of
net sales.............. 42.2 42.9 43.0 41.0 41.4 40.5 40.0
Operating income margin. 5.5 2.6 2.7 4.7 4.1 6.1 6.4
Long-term debt as a
percentage of total
capitalization......... 31.7 43.4 39.8 51.7 51.8 48.3 52.0
</TABLE>
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(1) 52 weeks except for the fiscal year ended June 3, 1995 which is 53 weeks.
(2) Includes the operations of CBC for 33 weeks from its acquisition on July
22, 1995.
(3) Includes the operations of CBC for 45 weeks from its acquisition on July
22, 1995.
(4) Selling, delivery and administrative expenses.
(5) Fiscal 1996 includes a charge of $9.5 million ($5.7 million and $.16 per
share on an after-tax basis) resulting from a payment due a union-
administered multi-employer pension plan which failed.
(6) Fiscal 1994 includes a charge of $9.4 million ($5.7 million and $.28 per
share on an after tax basis) related to a plant disposal and environmental
matters.
(7) Fiscal 1993 includes a charge of $14.1 million ($.67 per share) for the
cumulative effect of the change in accounting for postretirement benefits
other than pensions, from adopting Statement of Financial Accounting
Standards No. 106.
(8) Fiscal 1992 includes an extraordinary charge of $10.2 million ($.55 per
share) related to additional interest payments and the write-off of
unamortized deferred financing charges in connection with the retirement
of debt.
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FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this Prospectus
under the captions "Prospectus Summary," "Risk Factors," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Prospectus are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
and are subject to the safe harbor created by that Act. Such forward-looking
statements include, without limitation, the future availability and prices of
raw materials, the availability of capital on acceptable terms, the
competitiveness of the bread and cake industry, potential environmental
liabilities and the Company's strategies and other statements contained herein
that are not historical facts. Because such forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, changes in general economic and
business conditions (including in the bread and cake markets), the Company's
ability to recover its raw material costs in the pricing of its products, the
availability of capital on acceptable terms, actions of competitors, the
extent to which the Company is able to develop new products and markets for
its products, the time required for such development, the level of demand for
such products, changes in the Company's business strategies and other factors
discussed under "Risk Factors."
RISK FACTORS
RISK OF PRICE INCREASES AND SHORTAGES OF RAW MATERIALS
The principal raw materials used in the baking business are flour, sugar and
edible oils, all of which are subject to substantial price fluctuations. Any
substantial increase in the prices of raw materials would, if not offset by
product price increases, have an adverse impact on the profitability of the
Company. Historically, the Company has been able to recover the majority of
its commodity cost increases through increasing prices, switching to a higher-
margin revenue mix and obtaining additional operating efficiencies. There can
be no assurance, however, that the Company will continue to be able to offset
raw material price increases to the same extent in the future. From time to
time the Company enters into contracts, generally not longer than one year in
duration, for the purchase of baking ingredients at fixed prices which are
designed to protect the Company against raw material price increases during
their term. These contracts could result in the Company paying higher prices
for its raw materials than would otherwise be available in the spot markets.
The bakery operations of the Company are also dependent upon natural gas and
propane as a fuel for firing ovens, and the Company's distribution operation
is dependent upon the price and availability of motor fuel, particularly
gasoline and diesel fuel. Substantial future increases in prices or shortages
of such fuels could have a material adverse effect on the Company.
ABILITY OF THE COMPANY TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE BAKING
INDUSTRY
The baking industry is highly competitive. The Company faces competition in
all of its markets from large, national bakeries and smaller, regional
operators, as well as from supermarket chains with their own bakeries or
private label products and grocery stores with their own in-store bakeries.
Some of the Company's competitors, including other diversified food companies,
are larger and have greater financial resources than the Company. The Company
from time to time experiences price pressure in certain of its markets as a
result of competitors' promotional pricing practices. Competition is based on
product quality, price, brand loyalty, effective promotional activities and
the ability to identify and satisfy emerging consumer preferences. Customer
service, including frequency of deliveries and maintenance of fully stocked
shelves, is also an important competitive factor and is central to the
competition for retail shelf space among bread and cake product distributors.
See "Business--Competition."
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POSSIBLE UNAVAILABILITY AND RISK OF UNSUCCESSFUL INTEGRATION OF FUTURE
ACQUISITIONS
Historically, the Company's growth has depended, in large part, on its
ability to acquire and, thereafter, integrate and operate additional baking
businesses. The Company's strategy includes pursuing acquisition candidates
that complement its existing product lines and geographic presence and
leverage its purchasing power, brand management capabilities and operating
efficiencies. The Company presently has no acquisitions under consideration.
Potential competitors for acquisition opportunities include larger companies
with significantly greater financial resources. Competition for the
acquisition of baking businesses may result in acquisitions on terms that
prove to be less advantageous to the Company than have been attainable in the
past or may increase acquisition prices to levels beyond the Company's
financial capability. The Company's financial capability to make acquisitions
is partially a function of its ability to access the debt and equity capital
markets. In addition, there can be no assurance that the Company will find
attractive acquisition candidates in the future or succeed in reducing the
costs and increasing the profitability of any business acquired in the future.
DIFFICULTY IN EFFECTING CHANGES IN CONTROL DUE TO ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and Delaware law could discourage potential acquisition proposals and could
delay or prevent a change in control of the Company. The Company is authorized
to issue up to one million shares of Preferred Stock, the relative rights and
preferences of which may be fixed by the Company's Board of Directors, without
stockholder approval. While the Company has no present plans to issue any
shares of Preferred Stock, the future issuance thereof could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, outstanding voting stock of the Company. The
Company's Certificate of Incorporation requires that any business combination
(as defined) with a stockholder who beneficially owns more than 5% or more of
the Company's outstanding voting stock be approved, subject to certain
exceptions, by a majority of stockholders not involved in the transaction. In
addition, provisions of Delaware law prohibit the Company from engaging in a
business combination (as defined) with a person who, together with affiliates
and associates own (or within three years prior to the proposed business
combination, did own) 15% or more of the Company's voting stock. The Company's
Certificate of Incorporation provides for a classified board of directors with
staggered three-year terms, a provision that increases the difficulty of
removing all of the incumbent directors at one time which, in turn, could
discourage a proxy contest. Other provisions of the Company's Certificate of
Incorporation, including removal of directors only for cause and a prohibition
on action by stockholders by consent, could have similar effects. See
"Description of Capital Stock."
LACK OF MANAGEMENT AGREEMENTS WITH AND DEPENDENCE ON KEY PERSONNEL
The operation of the Company requires managerial and operational expertise.
The Company does not have employment contracts with any members of current
management other than a contract with Charles A. Sullivan, Chairman of the
Board and Chief Executive Officer, which is automatically renewed on May 31 of
each year unless terminated by the Company and Brands or Mr. Sullivan. The
Company has no reason to believe that any of its key management personnel will
not continue to be active in the Company's operations.
IMPACT OF GOVERNMENTAL REGULATION ON THE COMPANY'S OPERATIONS
The Company's operations are subject to regulation by various federal, state
and local government entities and agencies. As a baker of goods for human
consumption, the Company's operations are subject to stringent quality and
labeling standards, including the Federal Food and Drug Act. The operations of
the Company's bakeries and its delivery fleet are subject to various federal,
state and local environmental laws and workplace regulations, including the
Occupational Safety and Health Act, the Fair Labor Standards Act, the Clean
Air Act and the Clean Water Act. Although the Company believes that its
current legal and environmental compliance programs adequately address such
concerns and that it is in substantial compliance with such applicable laws
and regulations, there can be no assurance that future regulation by various
federal, state and local government entities and agencies would not have a
material adverse effect on the Company's results of operations.
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COSTS ASSOCIATED WITH ENVIRONMENTAL REMEDIATION
The Company has underground fuel storage tanks at various locations
throughout the United States which are subject to federal and state
regulations establishing minimum standards for such tanks and where necessary,
remediation of associated contamination. The Company is presently in the
process of testing and evaluating, and, if necessary, removing, replacing or
upgrading such tanks in order to comply with such laws. In addition, the
Company has received notices from the United States Environmental Protection
Agency, state agencies, and/or private parties seeking contribution, that it
has been identified as a "potentially responsible party" under the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended. Because of these activities, the Company may be required to share in
the cost of cleanup with respect to a relatively small number of "Superfund"
sites. The Company's ultimate liability in connection with these sites may
depend on many factors including the volume and type of material contributed
to the site, the number of other PRPs and their financial viability and the
remediation methods and technology to be used. While it is difficult to
quantify the potential financial impact of actions involving environmental
matters, particularly remediation costs at waste disposal sites and future
capital expenditures for environmental control equipment, in the opinion of
the Company's management, the ultimate liability arising from such
environmental matters, taking into account established accruals for estimated
liabilities, should not be material to the overall financial position of the
Company, but could be material to results of operations or cash flows for a
particular quarter or annual period.
POSSIBLE CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE RALSTON
REPRESENTATIVES ON THE BOARD OF DIRECTORS
Mr. William P. Stiritz and Mr. James R. Elsesser, directors of the Company,
are also Chairman of the Board and Chief Executive Officer and Chief Financial
Officer, respectively, of Ralston and owe certain fiduciary duties to Ralston
and its stockholders which may, under certain circumstances, conflict with
their fiduciary duties to the Company and its stockholders when serving as
directors of the Company. There can be no assurance that a situation involving
conflicting interests of Ralston and the Company will not arise. If the
Company's Board of Directors is presented with a proposal putting these
directors in a conflicting situation between the interests of the Company and
the interests of Ralston, they may abstain from participating in the
consideration of such proposal and any such proposal would then be considered
by, and be subject to the approval of, a majority of the disinterested
directors of the Company.
RISKS THAT SHARES ELIGIBLE FOR FUTURE SALE MAY DEPRESS MARKET PRICE OF COMMON
STOCK
Under the Shareholder Agreement (as defined below), Ralston agreed to own
less than 15.0% of the Company's voting securities as of August 15, 2000 and
is entitled to certain registration rights with respect to shares of Common
Stock held by it. Assuming that the Repurchase Transaction is consummated,
Ralston delivers one share of Common Stock per SAILS at their maturity and the
number of outstanding shares of Common Stock at August 15, 2000 is the same as
the number of such outstanding shares at May 30, 1997, under the Shareholder
Agreement, Ralston would be required to dispose of an additional 3,658,530
shares of Common Stock prior to August 15, 2000 (2,690,530 shares if the
Underwriters' overallotment option is exercised in full). Further, Ralston may
determine to sell the remainder of its shares of Common Stock at any time
prior to or after August 15, 2000. No prediction can be made as to the effect,
if any, that future sales of shares, or the availability of shares for future
sale, will have on the market price of the Common Stock prevailing from time
to time. Sales of substantial amounts of Common Stock, or the perception that
such sales could occur, could adversely affect prevailing market prices for
the Common Stock.
IMPACT OF THE SAILS ON THE MARKET FOR THE COMMON STOCK
It is not possible to predict accurately how or whether the SAILS will trade
in the secondary market. Any market that develops for the SAILS is likely to
influence and be influenced by the market for the Common Stock. For example,
the price of the shares of Common Stock could become more volatile and could
be depressed by investors' anticipation of the potential distribution into the
market of shares of Common Stock which may be
9
<PAGE>
delivered by Ralston upon maturity of the SAILS. As of May 30, 1997, such
shares would constitute appoximately 18.5% of the outstanding Common Stock
(21.2% if the Underwriters' over-allotment option is exercised in full). See
"Selling Stockholder." The price of shares of Common Stock could also be
affected by possible sales of shares of Common Stock by investors who view the
SAILS as a more attractive means of equity participation in the Company and by
hedging or arbitrage trading activity that may develop involving the SAILS and
the Common Stock.
SELLING STOCKHOLDER
Pursuant to the terms of the SAILS, Ralston may deliver 6,781,000 shares of
Common Stock to the holders of the SAILS at the maturity thereof. This
Prospectus relates to the delivery by Ralston of such shares of Common Stock,
and up to 968,000 additional shares of Common Stock with respect to the SAILS
that are subject to an over-allotment option granted by Ralston to the
Underwriters in the SAILS Offering solely to cover over-allotments. The SAILS
are being offered by Ralston pursuant to the SAILS Prospectus. To the extent
the over-allotment option is not exercised by the Underwriters in full,
Ralston may, at its option and not sooner than 90 days from the date of this
Prospectus, sell the unexercised portion of up to 968,000 shares of Common
Stock pursuant to this Prospectus. Ralston owns 16,923,077 shares of Common
Stock, constituting approximately 45% of the Company's outstanding Common
Stock, as of May 30, 1997. If the over-allotment option is not exercised and
Ralston sells the unexercised portion of the shares of Common Stock pursuant
to this Prospectus, after completion of such sale Ralston would own 14,955,077
shares of the Common Stock, constituting approximately 40.9% of the Company's
outstanding Common Stock, as of May 30, 1997, assuming consummation of the
Repurchase Transaction. If the over-allotment option is exercised in full and
Ralston delivers one share of Common Stock per SAILS at their maturity,
assuming consummation of the Repurchase Transaction and the number of shares
outstanding remains the same, then Ralston would own 8,174,077 shares of the
Company's Common Stock, constituting approximately 22.4% of the Company's
outstanding Common Stock as of May 30, 1997.
Ralston acquired its shares of Common Stock subject to the terms of a
Shareholder Agreement dated July 22, 1995 (as amended, the "Shareholder
Agreement") entered into by the Company, Ralston and a subsidiary of Ralston
in connection with the acquisition of CBC. The Shareholder Agreement provides,
among other things, that, prior to August 15, 2001, Ralston, without the
consent of the Company, shall not acquire any additional shares of Common
Stock or take other specified actions with respect to the Company, commonly
the subject of standstill agreements between an issuer and a significant
stockholder. Ralston has further agreed that by August 15, 2000, its ownership
of Common Stock will be reduced to less than 15.0% of the Company's
outstanding voting securities. Under the Shareholder Agreement, Ralston has
registration rights with respect to the shares of Common Stock owned by it,
which, however, are subject to certain transfer restrictions. Subject to
certain limited exceptions, Ralston may not sell the Common Stock owned by it
without first offering it to the Company. The Company has waived such right of
first refusal with respect to the Common Stock which may be offered pursuant
to this Prospectus. The Company also has the right between August 15, 2000 and
August 15, 2001 to acquire any Common Stock owned by Ralston, at a price equal
to 110% of its then current market price (as defined in the Shareholder
Agreement).
The Shareholder Agreement requires that Ralston vote the shares of Common
Stock owned by it in accordance with the recommendation of the Company's Board
of Directors with respect to stockholder proposals and nominations to the
Company's Board of Directors and, with respect to other proposals, in
proportion to the votes of all other stockholders; provided, however, that
Ralston may vote as it deems appropriate with respect to proposals for the
merger of the Company, the sale of all or substantially all of the Company's
assets or the issuance of any other class of voting stock of the Company. Mr.
Stiritz and Mr. Elsesser serve on the Board of Directors of the Company. Mr.
Stiritz's term expires in 1997 and Mr. Elsesser's term expires in 1999.
The Company has agreed, simultaneously with the closing of the SAILS
transaction, to purchase from Ralston 1,000,000 shares of Common Stock at a
purchase price per share equal to the Initial Price (as defined in the SAILS
Prospectus) less a 3% discount.
10
<PAGE>
Assuming the Company's purchase of 1,000,000 shares of Common Stock from
Ralston in the Repurchase Transaction had been completed as of May 30, 1997,
Ralston would have owned 43.6% of the Common Stock. Assuming, additionally the
completion of such purchase, that Ralston delivers one share of Common Stock
per SAILS at the maturity thereof and the number of shares of Common Stock at
August 15, 2000 remains the same as the number of outstanding shares at May
30, 1997, under the Shareholder Agreement Ralston would be required to dispose
of an additional 3,658,530 shares of Common Stock prior to August 15, 2000
(2,690,530 additional shares if the Underwriters' overallotment option is
exercised in full).
For the forty weeks ended March 8, 1997, Ralston or its affiliates received
approximately $0.7 million in payments from the Company, primarily in
connection with certain post-CBC acquisition transition services.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the SAILS or
delivery thereunder of Common Stock or any other sales of shares of Common
Stock by Ralston to which this Prospectus relates.
11
<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company as of March 8, 1997 and (ii) the pro forma consolidated capitalization
of the Company as of March 8, 1997 as if the Company had purchased the
1,000,000 shares of Common Stock subject to the Repurchase Transaction as
described under "Prospectus Summary--Common Stock Purchase" at an assumed
price of $60.08 per share (based on the last reported sales price of the
Common Stock on the NYSE Composite Tape on July 23, 1997, less a 3% discount).
The data should be read in conjunction with the Consolidated Financial
Statements of the Company incorporated herein by reference and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
related thereto, included elsewhere herein.
<TABLE>
<CAPTION>
MARCH 8, 1997
-----------------
ACTUAL PRO FORMA
------ ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Long-term debt, excluding current maturities.............. $239.0 $299.1
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized--
1,000,000 shares; issued--none......................... -- --
Common stock, par value $.01 per share; authorized--
60,000,000 shares; issued--39,067,000 shares........... 0.4 0.4
Additional paid-in capital.............................. 520.5 520.5
Retained earnings....................................... 18.7 18.7
Treasury stock, at cost (1)............................. (25.6) (85.7)
------ ------
Total stockholders' equity............................ $514.0 $453.9
------ ------
Total capitalization...................................... $753.0 $753.0
====== ======
Long-term debt as a percentage of total capitalization.... 31.7% 39.7%
</TABLE>
- --------
(1) Consisting of 1,537,000 shares actual and 2,537,000 shares pro forma for
the Repurchase Transaction.
12
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is listed on the NYSE and is traded under the symbol "IBC."
The table below presents, for each of the quarterly periods indicated, the
high and low sales prices for the Common Stock, as reported on the NYSE
Composite Tape, and cash dividends paid during fiscal 1998, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
FISCAL 1998 CASH
QUARTER HIGH LOW DIVIDEND
- ----------- ------- ------- --------
<S> <C> <C> <C>
First (1)............................................ $64.375 $54.625 $.135(2)
<CAPTION>
FISCAL 1997
QUARTER
- -----------
<S> <C> <C> <C>
First................................................ 30.125 25.500 .125
Second............................................... 45.250 29.625 .135
Third................................................ 51.000 42.250 .135
Fourth............................................... 55.125 46.375 .135
<CAPTION>
FISCAL 1996
QUARTER
- -----------
<S> <C> <C> <C>
First................................................ 19.500 14.375 .125
Second............................................... 22.250 18.875 .125
Third................................................ 23.250 20.500 .125
Fourth............................................... 27.625 22.500 .125
<CAPTION>
FISCAL 1995
QUARTER
- -----------
<S> <C> <C> <C>
First................................................ 12.875 11.875 .125
Second............................................... 13.500 12.500 .125
Third................................................ 15.375 12.500 .125
Fourth............................................... 14.875 14.125 .125
</TABLE>
- --------
(1) Through July 23, 1997.
(2) The Board of Directors of the Company has declared a dividend of $.135 to
be paid to shareholders of record as of July 15, 1997, payable August 1,
1997.
On July 23, 1997, the last reported sale price of the Common Stock on the
NYSE Composite Tape was $61.9375 per share. On July 23, 1997, the Common Stock
was held by 4,719 holders of record.
The declaration of dividends is at the discretion of the Board of Directors
of the Company. The declaration and payment of future dividends and the amount
thereof will be dependent upon the Company's results of operations, financial
condition, cash requirements for its business, future prospects and other
factors deemed relevant by the Board of Directors.
The ability of the Company to pay dividends on the Common Stock depends on
the ability of Brands, the Company's principal operating subsidiary, to pay
dividends to the Company. Brands has entered into a Credit Agreement (as
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources") pursuant to which
Brands may not pay dividends or make payments in respect of the purchase of
capital stock of the Company to the extent that the aggregate amount of all
such payments made after June 4, 1995 exceeds the sum of $20 million plus 75%
of consolidated net income (as defined) for the period beginning June 4, 1995
and ending on the last day of the most recent fiscal quarter. As of March 8,
1997, Brands had $53.3 million available for such purposes. The Company
believes that it will be permitted, pursuant to a waiver to be granted by its
lenders, to perform its obligations under the Repurchase Transaction without a
reduction in the amount available under the Credit Agreement for dividends and
other stock repurchases.
13
<PAGE>
BUSINESS
The following information contains forward-looking statements which involve
certain risks and uncertainties. See "Forward-Looking Statements."
THE COMPANY
The Company, through Brands, is the largest baker and distributor of fresh
bakery products in the United States. The Company produces, markets,
distributes and sells a wide range of breads, rolls, snack cakes, donuts,
sweet goods and related products. These products are sold under a number of
national brand names, such as "Wonder(R)," "Hostess(R)" and "Home Pride(R),"
as well as regional brand names, including "Butternut(R)," "Dolly Madison(R)"
and "Merita(R)". "Wonder(R)" white bread and "Home Pride(R)" wheat bread are
the number one and two selling branded breads sold in the United States.
"Hostess(R)" products, including "Twinkies(R)," "CupCakes" and "Ho-Hos(R),"
are among the leading snack cake products sold in the United States.
The Company distributes its products in markets representing approximately
90% of the United States population. The Company operates 67 bakeries and more
than 1,400 thrift stores and employs over 32,000 people. Its driver-salesmen
deliver products directly from the Company's over 1,200 distribution centers
to more than 200,000 food outlets and stores.
The Company or its predecessors have baked and distributed fresh bread and
cake products since 1927. The Company has grown to its present size primarily
through acquisitions of other baking businesses. In its 1988 fiscal year, the
Company underwent a change in control through a leveraged buyout transaction
and acquired 10 bakeries in the Southeastern United States. In July 1991, the
Company returned to the public market by issuing shares of Common Stock. In
July 1995, the Company acquired CBC from Ralston for $220,000,000 in cash and
16,923,077 shares of the Common Stock. Since the acquisition of CBC, the
Company has taken significant steps to continue to build and capitalize on the
brand equity in the "Wonder(R)" and "Hostess(R)" brands. The Company has also
worked to realize cost savings from the CBC acquisition and to achieve
economies of scale in the operations of Brands and CBC.
INDUSTRY OVERVIEW
Annual bread and cake sales in the United States were approximately $23
billion in 1996 according to Datamonitor. Nutritional guidelines, such as the
Food Guide Pyramid issued by the United States Department of Agriculture, have
helped focus consumers on the benefits of grain-based foods. The Company
believes that, through its extensive line of bread products, it is well
positioned to take advantage of this trend.
In addition to the Company, several large baking and diversified food
companies market bread and cake products under various brand names in the
United States. There are also a significant number of medium and small baking
companies that sell bread and cake products in certain regions of the United
States. The Company believes that the larger, national baking companies enjoy
significant competitive advantages over smaller operations due principally to
their economies of scale in areas such as purchasing, advertising, marketing
and distribution, as well as greater brand awareness.
A significant trend in the bread and cake baking industry over the last
several years has been the consolidation of smaller bakeries into larger
baking businesses. Consolidation, which has reduced industry capacity,
continues to be driven by several factors, including generational changes at
family-owned operations as well as capital constraints on smaller bakeries
which limit their ability to make major capital investments necessary to
increase productivity and develop new products. The Company believes that
trends in the baking industry will continue to present opportunities for
strategic acquisitions that complement its existing business.
Other changes in the baking business have resulted from large conglomerates
divesting their non-core baking businesses. For example, Ralston sold CBC to
the Company in July 1995 and, in March 1996, Anheuser
14
<PAGE>
Busch Company spun-off its large baking subsidiary (which became The
Earthgrains Company) to its shareholders. These divestitures have resulted in
greater management accountability to public shareholders and a larger group of
companies whose primary business is baking.
BUSINESS STRATEGY
The Company's business strategy is to increase shareholder value by
developing and supporting branded products, maintaining decentralized
operations and pursuing strategic acquisitions.
DEVELOP AND SUPPORT BRANDED PRODUCTS
The Company continues to emphasize higher-margin branded products in order
to increase net sales and profitability. The Company's experience has shown
that branded products generally have a higher consumer awareness, resulting in
premium pricing and increased shelf space. The Company supports its brands
through aggressive marketing and advertising campaigns specifically tailored
to selected target markets and consumer categories. In addition, since the CBC
acquisition, the Company has implemented a new advertising campaign for its
leading national brands. The Company believes its focus on freshness and high
quality products will continue to enhance its brand-building efforts.
The Company operates a research and development facility in Kansas City,
Missouri, which engages in new product development, line extensions of
existing products and enhancement of product graphics and packaging. For
example, the Company recently introduced fat free bread products under the
"Wonder(R)" and "Butternut(R)" brand names in certain test markets, as well as
new "Hostess(R)" packaging to enhance shelf appeal of its snack cake products.
MAINTAIN DECENTRALIZED OPERATIONS
The Company's operations are decentralized in order to increase the net
sales and profitability of its baking plants and increase efficiencies in its
distribution systems. The Company is organized into bakery profit centers,
each operating as a stand-alone business responsible for sales, pricing,
manufacturing, distribution, accounting and data processing. The Company
compensates local bakery management under an incentive bonus program tied to
operating cash flow targets for each profit center. The corporate staff
provides direction and focus to the plants in areas such as quality and brand
building, while also providing centralized support in national advertising and
promotion, purchasing, legal and human resources.
The Company's believes its broad presence throughout the United States helps
it to compete successfully with regionally-based competition as well as
minimize exposure to regional economic downturns. The Company's plants and
distribution centers across the United States position the Company close to
major marketplaces enabling the Company to provide efficient delivery and
superior customer service.
PURSUE STRATEGIC ACQUISITIONS
The Company believes that the size and geographic scope of its operations
position it for growth through selective acquisitions in the consolidating
baking industry. The Company pursues acquisition candidates that complement
its existing product lines and geographic presence and leverage its purchasing
power, brand management capabilities and operating efficiencies. For example,
in March 1997, the Company acquired the assets of SFFB, a producer and
distributor of sourdough breads, from Metz Baking Company. In addition, in
April 1997, the Company acquired the right to use the trademark "Marie
Callender's(R)" in connection with the manufacture, marketing, distribution
and sale of croutons.
PRODUCTS AND BRANDS
The Company produces, markets, distributes and sells white breads, variety
breads, crusty breads, reduced calorie breads, English muffins, rolls and buns
under a number of well-known national brand names, including
15
<PAGE>
"Wonder(R)," "Home Pride(R)" and "Bread du Jour(R)," and regional brand names
including "Beefsteak(R)," "Buttermaid(R)," "Butternut(R)," "Colombo(R),"
"Cotton's Holsum(R)," "DiCarlo(R)," "Eddy's(R)," "Emperor Norton(R),"
"Holsum(R)," "Merita(R)," "Millbrook(R)," "Parisian(R)," "Sweetheart(R),"
"Toscano(R)," and "Weber's(R)"; bagels under the brand name "Braun's(R)"; and
croutons under the brand names "Mrs. Cubbison's(R)" and "Marie
Callender's(R)." The Company's snack cakes, donuts, sweet rolls, snack pies,
breakfast pastries, variety cakes, large cakes and shortcakes are also sold
under a number of well-known national and regional brand names, including
"Hostess(R)" and "Dolly Madison(R)." The Company is also a baker and
distributor of "Roman Meal(R)" breads, including traditional Roman Meal bread,
Roman Meal variety breads, Roman Meal light breads, Roman Meal buns, rolls and
English muffins. The Company's various brands are positioned across a wide
spectrum of consumer categories and price points.
The Company believes that its brand and product trademarks such as
"Wonder(R)," "Hostess(R)," "Home Pride(R)," "Butternut(R)" and "Dolly
Madison(R)" and product trademarks such as "Twinkies(R)," "Ho-Hos(R)" and
"Zingers(R)" are of material importance to its strategy of brand building. The
Company takes appropriate action from time to time against third parties to
prevent infringement of its trademarks and other intellectual property. The
Company also enters into confidentiality agreements from time to time with
employees and third parties as necessary to protect formulas and processes
used in producing the Company's products.
MARKETING AND DISTRIBUTION
The majority of the Company's bread sales are through supermarkets while the
Company's cake products are sold principally through supermarkets and
convenience stores. Cake sales tend to be somewhat seasonal, with a
historically weak winter period, which the Company believes is attributable to
home baking and consumption patterns during the holiday season. Spring and
early summer months are historically stronger due to increased sales of
shortcake products during the fresh strawberry season. No single customer
accounts for more than 5% of the Company's net sales.
The Company's marketing and advertising campaigns are conducted through
targeted television and radio advertising, coupons in newspapers and other
printed media.
The Company distributes its products in markets representing approximately
90% of the United States population, with its strongest presence in southern
California, the Pacific Northwest, the upper Midwest, the Northeast, the
Mountain States, the Middle Atlantic States and Florida. With plants and
distribution centers across the United States, the Company is located close to
the major marketplaces enabling efficient delivery and superior customer
service.
The Company's fresh bakery products are delivered from the Company's network
of 67 bakeries to its over 1,200 distribution centers. The products are then
delivered primarily to grocery and convenience stores by the Company's
delivery/salesman on its more than 10,000 Company-owned routes. Unsold
products are picked up by the Company's delivery/salesman and delivered to the
Company's more than 1,400 thrift stores for retail sale. Thrift store sales
represented approximately 12% of the net sales of the Company during the forty
week period ended March 8, 1997.
BAKERIES AND OTHER PROPERTIES
BAKERIES
The Company produces substantially all of its products through its national
network of 67 bakeries. The following map sets forth the locations of the
Company's bakeries, all of which are owned with the exception of a bakery in
each of San Francisco, Sacramento and San Diego and the bakeries in
Castroville and Montebello, California, which are located in leased premises.
16
<PAGE>
<TABLE>
<CAPTION>
[A map of the United States containing points indicating the locations of the
following bread and cake bakeries]
<S> <C> <C>
Wonder Peoria, Illinois Alexandria, Louisiana
Wonder Bread Bakeries Grand Rapids, Michigan Monroe, Louisiana
Anchorage, Alaska Boonville, Missouri
Pomona, California Springfield, Missouri Parisian
Sacramento, California Cincinnati, Ohio Parisian Bread Bakeries
Tampa, Florida Decatur, Illinois San Diego, California
Hodgkins, Illinois Minonk, Illinois San Francisco, California
Waterloo, Iowa
Jamaica, New York Merita Toscana
Akron, Ohio Merita Bread Bakeries Toscana Bread Bakery
Columbus, Ohio Birmingham, Alabama Castorville, California
Portland, Oregon Jacksonville, Florida
Salt Lake City, Utah Orlando, Florida Mrs. Cubbison's
Richmond, Virginia Charlotte, North Carolina Dry Products
Seattle, Washington Rocky Mount, North Carolina Montebello, California
Florence, South Carolina
Hostess Knoxville, Tennessee Sweetheart
Hostess Cake Bakeries Sweetheart Bread Bakeries
Schiller Park, Illinois Dolly Madison Bakery Billings, Montana
Detroit, Michigan Dolly Madison Cake Minot, North Dakota
Seattle, Washington Bakeries
Los Angeles, California Columbus, Georgia Braun's
Columbus, Indiana Braun's Bagel Bakery
Wonder/Hostess Bakeries Emporia, Kansas Milwaukee, Wisconsin
San Francisco, California Los Angeles, California
Denver, Colorado Rainbo
Indianapolis, Indiana Eddy's Rainbo Bread Bakery
Davenport, Iowa Eddy's Bread Bakery Roanoke, Virginia
Natick, Massachusetts Boise, Idaho
Kansas City, Missouri DiCarlo
St. Louis, Missouri Weber's DiCarlo Bread Bakery
Buffalo, New York Weber's Bread Bakeries San Pedro, California
Tulsa, Oklahoma Glendale, California
Philadelphia, Pennsylvania Los Angeles, California Colombo
Memphis, Tennessee San Diego, California Colombo Bread Bakeries
Ogden, Utah Oakland, California
Spokane, Washington Holsum Sacramento, California
Holsum Bread Bakeries
Butternut Grand Junction, Colorado
Butternut Bread Bakeries Miami, Florida
Cotton's Holsum
Cotton's Bread Bakeries
</TABLE>
<PAGE>
The Company attempts to realize operating synergies through consolidation of
redundant facilities. For example, in 1996 the Company closed its East
Brunswick, New Jersey and Utica, New York bakeries, sold its Tempe, Arizona
bakery and closed its Dallas bakery and exchanged certain of its assets for
the Roanoke, Virginia bakery of The Earthgrains Company. As a result of these
measures, the Company was able to consolidate production of certain products,
reduce costs and more efficiently utilize its remaining facilities.
The Company also makes capital investments to update or retrofit its
facilities to produce new products on existing lines and to increase line
speeds. For example, the Company retrofitted production lines in Columbus,
Georgia to produce snack cakes being produced by CBC in the Midwest and sold
in the Southeast, thereby reducing transportation costs. The Company is
completing a $20 million expansion and modernization of its Rocky Mount, North
Carolina bakery to produce bread and buns for sale in the Southeast United
States and has announced preliminary plans to build a new baking facility in
the Midwestern United States. The Company believes that its other facilities
are well maintained and does not foresee the need to make significant capital
improvements to such existing facilities in the near future.
OTHER PROPERTIES
The Company's over 1,200 distribution centers and more than 1,400 thrift
stores are located throughout the Company's distribution area. Generally, each
thrift store is between 500 and 1,600 square feet in size. Most of the stores
are located at the Company's distribution centers, with the remainder located
along the Company's distribution routes. The majority of the Company's
distribution centers and thrift stores are located in leased premises.
RAW MATERIALS
The ingredients of bread and cake products, principally flour, sugar and
edible oils, are readily available from numerous sources. The Company attempts
to lock in prices for raw materials through advance purchase contracts
generally not longer than one year in duration when prices are expected to
increase. Through its program of central purchasing of baking ingredients and
packaging materials, the Company is able to utilize its national presence to
obtain competitive prices. Historically, the Company has been able to recover
the majority of its commodity cost increases through increasing prices,
switching to a higher-margin revenue mix and obtaining additional operating
efficiencies.
EMPLOYEES
The Company employs over 32,000 people. Approximately 81% of the Company's
employees are covered by over 600 union contracts. Most of the Company's
unionized workers are members of either the International Brotherhood of
Teamsters or the Bakery, Confectionery and Tobacco Workers International
Union. None of the 600 individual collective bargaining agreements is material
to the Company's consolidated operations. The Company believes it has good
relations with its union and nonunion employees.
COMPETITION
The Company faces intense competition in all of its markets from large,
national bakeries and smaller regional operators, as well as from supermarket
chains with their own bakeries or private label products and grocery stores
with their own in-store bakeries. Competition is based on product quality,
price, brand loyalty, effective promotional activities and the ability to
identify and satisfy emerging consumer preferences. Customer service,
including frequency of deliveries and maintenance of fully stocked shelves, is
also an important competitive factor and is central to the competition for
retail shelf space among bread and cake product distributors. The Earthgrains
Company, CPC International, Inc. and Flowers Industries, Inc. are the
Company's largest bread competitors, each marketing bread products under
various brand names. McKee Foods Corp., Tasty Baking Co., Drake Bakeries and
Entenmann's are the largest competitors of the Company with respect to cake
sales. The Company from time to time experiences price pressure in certain of
its markets as a result of competitors' promotional pricing practices.
However, the Company believes that its geographic diversity helps to limit the
effect of regionally-based competition.
18
<PAGE>
GOVERNMENT REGULATION; ENVIRONMENTAL MATTERS
The Company's operations are subject to regulation by various federal, state
and local governmental entities and agencies. As a baker of goods for human
consumption, the Company's operations are subject to stringent quality and
labeling standards, including the Federal Food and Drug Act. The operations of
the Company's bakeries and its delivery fleet are subject to various federal,
state and local environmental laws and workplace regulations, including the
Occupational Safety and Health Act, the Fair Labor Standards Act, the Clean
Air Act and the Clean Water Act. The Company believes that its current legal
and environmental compliance programs adequately address such concerns and
that it is in substantial compliance with such applicable laws and
regulations.
The Company has underground fuel storage tanks at various locations
throughout the United States which are subject to federal and state
regulations establishing minimum standards for such tanks and where necessary,
remediation of associated contamination. The Company is presently in the
process of testing and evaluating, and, if necessary, removing, replacing or
upgrading such tanks in order to comply with such laws. In addition, the
Company has received notices from the United States Environmental Protection
Agency, state agencies, and/or private parties seeking contribution, that it
has been identified as a "potentially responsible party" (PRP), under the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended. Because of these activities, the Company may be required to share in
the cost of cleanup with respect to a relatively small number of "Superfund"
sites. The Company's ultimate liability in connection with these sites may
depend on many factors including the volume and type of material contributed
to the site, the number of other PRPs and their financial viability and the
remediation methods and technology to be used. While it is difficult to
quantify the potential financial impact of actions involving environmental
matters, particularly remediation costs at waste disposal sites and future
capital expenditures for environmental control equipment, in the opinion of
the Company's management, the ultimate liability arising from such
environmental matters, taking into account established accruals for estimated
liabilities, should not be material to the overall financial position of the
Company, but could be material to results of operations or cash flows for a
particular quarter or annual period.
LEGAL PROCEEDINGS
On July 20, 1995, the Company, CBC and the Antitrust Division of the United
States Department of Justice ("DOJ") signed, and filed with the United States
District Court for the Northern District of Illinois, stipulations for Final
Judgment (the "Final Judgment") and for holding separate certain assets
following the closing of the acquisition of CBC. The Final Judgment required
the divestiture of one white pan bread label in certain counties in southern
California, eastern Wisconsin, central Illinois and the Chicago area. The
Company has divested, to the satisfaction of the DOJ, certain assets in
eastern Wisconsin, central Illinois and the Chicago area, and is actively
pursuing the divestiture required in southern California pursuant to the Final
Judgment.
The Company has been named as a defendant in various other claims arising
out of its normal business operations. Based upon the facts available to date,
management believes that the Company has meritorious defenses to these actions
and that their ultimate resolution will not have a material adverse effect on
the Company's financial position.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Summary
Historical Financial Data" included herein and the Consolidated Financial
Statements and Notes thereto of the Company incorporated herein by reference.
The following information contains forward-looking statements which involve
certain risks and uncertainties. See "Forward-Looking Statements."
RESULTS OF OPERATIONS
FORTY WEEKS ENDED MARCH 8, 1997 COMPARED WITH FORTY WEEKS ENDED MARCH 9, 1996
Net sales for the forty weeks ended March 8, 1997 were $2,457.3 million, an
increase of $324.8 million, or 15.2%, over net sales of $2,132.5 million for
the forty weeks ended March 9, 1996. The substantial increase in year-to-date
net sales was attributable to the acquisition of CBC on July 22, 1995, with
the forty week period in fiscal 1996 reflecting only thirty-three weeks of
CBC's operations.
Gross profit for the forty weeks ended March 8, 1997 was $1,251.4 million,
or 50.9% of net sales, compared with gross profit of $1,044.9 million, or
49.0% of net sales, for the forty weeks ended March 9, 1996. These
improvements resulted from synergies realized through continuing integration
of existing and acquired operations and favorable mix changes to higher-margin
branded products. These factors, along with higher selling prices, more than
offset the effect of higher ingredient costs experienced in fiscal 1997.
Selling, delivery and administrative expenses were $1,036.3 million,
representing 42.2% of net sales, for the forty week period ended March 8,
1997, compared to $914.0 million, representing 42.9% of net sales, for the
prior year forty week period. Continued emphasis on cost control, integration
synergies and higher selling prices resulted in improved selling, delivery and
administrative expenses as a percent of net sales for the combined operation
for the forty week period ended March 8, 1997.
Based upon these factors, operating income for the forty week period ended
March 8, 1997 was $136.1 million, an increase of $81.2 million, or 147.8%,
from the prior year's forty week operating income of $54.9 million. Operating
income was 5.5% of net sales for the forty weeks ended March 8, 1997 compared
to 2.6% of net sales in the prior year.
Interest expense for the forty weeks ended March 8, 1997 was $18.0 million,
a $4.7 million decrease from the prior year. The lower expense reflects lower
average borrowing levels and interest rates during the period.
The effective tax rates of 43.1% and 51.4% in the forty week periods ended
March 8, 1997 and March 9, 1996, respectively, reflect the non-deductibility
of intangible asset amortization.
Reflecting the improved operations, net income for the forty week period
ended March 8, 1997 improved to $67.5 million, or $1.78 per share, from $16.0
million, or $.47 per share, for the prior year, an earnings per share
improvement of 279%.
FISCAL 1996 COMPARED WITH FISCAL 1995
Net sales for the fifty-two weeks ended June 1, 1996 were $2,878.2 million,
a $1,655.4 million increase over net sales of $1,222.8 million for the fifty-
three weeks ended June 3, 1995. This substantial increase was attributable to
the acquisition of CBC on July 22, 1995, with fiscal 1996 results reflecting
forty-five weeks of CBC's operations. Excluding the impact of the acquisition
and the additional week in fiscal 1995, net sales increased approximately 5.6%
for fiscal 1996. This increase reflects higher selling prices, offset by some
volume erosion in cake units.
Gross profit for fiscal 1996 was $1,425.0 million, or 49.5% of net sales,
compared to the prior year's gross profit of $591.9 million, or 48.4% of net
sales. This margin improvement resulted from efficiencies of the
20
<PAGE>
acquired operations, as well as synergies realized through integration of
existing and acquired operations. Excluding the impact of acquired operations,
cost of products sold reflects substantially higher ingredient and packaging
costs, offset somewhat by higher selling prices.
Selling, delivery and administrative expenses for fiscal 1996 were $1,236.6
million, representing 43.0% of net sales, while the prior year's selling,
delivery and administrative expenses were $501.0 million, or 41.0% of net
sales. This unfavorable variance was attributable to the CBC acquisition, with
the new operations having higher selling and delivery labor and labor related
costs as a percentage of net sales. Selling, delivery and administrative
expenses as a percentage of net sales were consistent with the prior year,
excluding the impact of the acquisition.
Depreciation and amortization for fiscal 1996 was $100.1 million, up from
$33.6 million during fiscal 1995. Property and equipment, as well as
intangibles, obtained in the acquisition of CBC were responsible for this
increased expense.
Based upon these factors, operating income for fiscal 1996 was $78.8
million, an increase of $21.5 million, or 37.5%, from fiscal 1995's operating
income of $57.3 million. Operating income was 2.7% of net sales in fiscal 1996
compared to 4.7% of net sales in the prior year. Included in fiscal 1996
operating income were other charges of $9.5 million ($5.7 million and $.16 per
share on an after-tax basis) resulting from a payment due a union-administered
multi-employer pension plan which failed.
Interest expense was $29.3 million for fiscal 1996, up $11.6 million, or
65.2%, from the prior year's expense of $17.7 million, with the increase
attributable to higher borrowings to finance the acquisition of CBC.
The fiscal 1996 effective tax rate of 51.4%, as well as the fiscal 1995 rate
of 47.8%, reflects the nondeductibility of amortization of various
intangibles.
Net income for fiscal 1996 was $24.5 million, or $.70 per share, compared to
$20.7 million, and $1.05 per share, the prior year. The per share earnings
decline was the result of increased interest expense and the additional shares
issued in conjunction with the CBC acquisition.
FISCAL 1995 COMPARED WITH FISCAL 1994
Net sales for the fifty-three weeks ended June 3, 1995 were $1,222.8
million, an increase of $80.1 million, or 7.0%, over net sales of $1,142.7
million for the fifty-two weeks ended May 28, 1994. This increase primarily
reflects the impact of acquisitions, unit volume gains for bread and the
additional week included in fiscal 1995.
Gross profit for fiscal 1995 was $591.9 million, or 48.4% of net sales,
compared to the prior year's gross profit of $561.5 million, or 49.1% of net
sales, a $30.4 million increase but representing a lower percentage of net
sales. This margin decline was primarily attributable to higher labor and
overhead costs associated with acquisitions, as well as slightly higher
commodity costs for certain key ingredients.
Selling, delivery and administrative expenses for fiscal 1995 were $501.0
million, or 41.0% of net sales, compared with $473.6 million, or 41.4% of net
sales, in fiscal 1994. This favorable variance on a percentage of net sales
basis resulted from labor and labor related efficiencies gained during fiscal
1995. Fiscal 1994 also included higher delivery costs associated with a two-
month transport drivers strike at one bakery.
Depreciation and amortization increased $2.0 million in fiscal 1995 related
to the completion of the Jacksonville, Florida bakery and acquisitions.
Based upon these factors, operating income for fiscal 1995 was $57.3
million, an increase of $10.4 million, or 22.2%, from fiscal 1994's operating
income of $46.9 million. Fiscal 1994 reflects $9.4 million ($5.7 million after
tax, or $.28 per share) of other charges, which includes costs related to a
plant disposal of $6.7 million and
21
<PAGE>
environmental matters of $2.7 million. Operating income was 4.7% of net sales
in fiscal 1995 compared to 4.1% of net sales in fiscal 1994.
Interest expense was $17.7 million in fiscal 1995, up $3.0 million, or
20.3%, over the prior year's expense of $14.7 million. This increase was
principally attributable to higher interest rates during fiscal 1995, as well
as higher debt levels resulting from an acquisition in the first quarter of
fiscal 1995.
The fiscal 1995 effective tax rate of 47.8% primarily reflects the
nondeductibility of intangibles amortization. The Company's effective tax rate
of 51.2% for fiscal 1994 reflects the passage of the Omnibus Budget
Reconciliation Act of 1993 during the first fiscal quarter. The increase in
the corporate tax rate provided for in the Act raised the fiscal 1994
provision for income taxes by approximately $.8 million, or $.04 per share,
due to the cumulative adjustment of the Company's net deferred tax liability
at May 29, 1993 and the additional current taxes attributable to the fiscal
year ended May 29, 1993. Nondeductible intangibles amortization also
contributed to the higher effective rate in fiscal 1994.
Net income for fiscal 1995 was $20.7 million, or $1.05 per share, up $4.9
million, or 31.4%, from fiscal 1994's $15.8 million, or $.78 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operating activities for the forty weeks ended March 8,
1997 was $144.3 million compared to $113.6 million for the forty weeks ended
March 9, 1996. This increase reflects the acquisition of CBC and improved
operations, offset by a net increase in working capital and some reduction in
long-term liabilities. Cash generated by operations during fiscal 1997 was
used to fund capital expenditures of $54.2 million, pay common stock dividends
of $14.8 million and reduce debt by $86.2 million.
Brands is a party to a credit agreement with certain banks (the "Credit
Agreement") which provides for borrowings of up to $350.0 million under a
revolving credit facility which matures on February 25, 2002. As of March 8,
1997, the unused borrowing capacity under the Credit Agreement was $97.0
million. The Credit Agreement contains covenants which, among other matters,
limit the payment of cash dividends on capital stock and capital stock
repurchases after June 4, 1995 to a total of $20.0 million plus 75% of
consolidated net income for the period beginning June 4, 1995 and ending on
the last day of the most recent fiscal quarter. As of March 8, 1997, the
Company had $53.3 million available to pay cash dividends and repurchase
capital stock.
On March 29, 1997, the Company acquired the assets of SFFB. SFFB, which
produces and distributes sourdough bread and rolls throughout northern
California and in the San Diego area, had net sales in calendar year 1996 of
approximately $95 million and employs 1,100 people at five bakery locations.
In addition, in April 1997, the Company acquired the right to use the
trademark "Marie Callender's(R)" in connection with the manufacture,
marketing, distribution and sale of croutons.
For fiscal 1997, the Company anticipates spending approximately $75 million
for capital expenditures, $42 million for the acquisitions described in the
preceding paragraph and $19.9 million to pay dividends on Common Stock. For
fiscal 1998, the Company anticipates cash needs of approximately $165 million,
consisting of $60 million for the Repurchase Transaction, $85 million of
planned capital expenditures and $20 million of dividends on Common Stock. The
Company believes cash flows from operations and borrowing capacity under the
Credit Agreement should be sufficient to meet all of the Company's currently
anticipated cash requirements for fiscal 1997 and fiscal 1998.
22
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their respective
ages and positions are set forth in the table below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles A. Sullivan.................. 62 Chairman of the Board and Chief
Executive Officer of the Company and
Brands
G. Kenneth Baum...................... 67 Director
Leo Benatar.......................... 67 Director
E. Garrett Bewkes, Jr................ 70 Director
Philip Briggs........................ 69 Director
Robert B. Calhoun, Jr................ 54 Director
James R. Elsesser.................... 53 Director
Frank E. Horton...................... 58 Director
William P. Stiritz................... 62 Director
Michael D. Kafoure................... 48 President and Chief Operating Officer
of the Company and Brands
Ray Sandy Sutton..................... 59 Vice President, Corporate Secretary
and General Counsel of the Company and
Brands
H. L. Shetler........................ 64 Executive Vice President of Brands
John F. McKenny...................... 47 Vice President and Corporate
Controller of the Company and Brands
Paul E. Yarick....................... 58 Vice President and Treasurer of the
Company and Brands
</TABLE>
Mr. Sullivan has been the Chairman of the Board and Chief Executive Officer
of the Company and Brands for more than the past five years. He was the
President of the Company and Brands until January 1995. Mr. Sullivan became a
director of the Company in August 1989. He also serves as a director of UMB
Bank, n.a., Sealright Co., Inc. and The Andersons, Inc.
Mr. Baum has been the Chairman of the Board of George K. Baum Group, Inc.
from May 1994 to present. Prior to that, he was the Chairman of the Board of
George K. Baum & Company, an investment company, from 1982 until May 1994. Mr.
Baum serves as a director of H & R Block, Inc., Sealright Co., Inc. and Unitog
Company. Mr. Baum became a director of the Company in April 1988.
Mr. Benatar has been an Associated Consultant for A. T. Kearney, Inc. and
Principal for Benatar & Associates from June 1996 to present. He is the
Chairman of the Board of Engraph, Inc. (a subsidiary of Sonoco Products
Company) and was Senior Vice President of Sonoco Products Company from October
1993 until May 1996. Prior to that, he was the Chairman and Chief Executive
Officer of Engraph, Inc. from 1981 until October 1993. Mr. Benatar serves as a
director of Sonoco Products Company, Schuller Corporation, Mohawk Industries,
Inc., PAXAR Corporation and Aaron Rents, Inc. He was Chairman and director of
the Federal Reserve Bank of Atlanta until January 1996. Mr. Benatar became a
director of the Company in August 1991.
Mr. Bewkes has been a Consultant and Chairman for a number of PaineWebber
mutual funds for more than the past five years. He formerly was the Chairman
of American Bakeries Company. Mr. Bewkes serves as a director of PaineWebber
Group, Inc. and Napro BioPharmaceutical, Inc. Mr. Bewkes became a director of
the Company in August 1991.
Mr. Briggs has been the Chairman of the Board of Empire Blue Cross Blue
Shield since July 1993. For more than two years prior to that, he was Vice-
Chairman and director of Metropolitan Life Insurance Company. Mr. Briggs
became a director of the Company in August 1991.
23
<PAGE>
Mr. Calhoun has been Managing Director of Monitor Clipper Partners since
April, 1997. Prior to that, he was the Chief Executive Officer of the Clipper
Group, L.P., from January 1991 to December 1993. Mr. Calhoun serves as a
director of Avondale Mills, Inc., Sterling Chemicals, Hvide Marine and
TravelCenters of America, Inc. Mr. Calhoun became a director of the Company in
May 1991.
Mr. Elsesser has been Vice President and Chief Financial Officer of Ralston
for more than the past five years. Mr. Elsesser became a director of the
Company in July 1995.
Dr. Horton has been the President of The University of Toledo for more than
the past five years. He serves as a member of the Advisory Board of Northwest
Ohio Keybank. Dr. Horton became a director of the Company in September 1992.
Mr. Stiritz has been the Chairman of the Board, Chief Executive Officer and
President of Ralston for more than the past five years. He serves as a
director of Ralcorp Holdings, Inc., Angelica Corporation, Vail Resorts, Inc.,
Reinsurance Group of America, Inc., the May Department Stores Company and Ball
Corporation. Mr. Stiritz became a director of the Company in July 1995.
Mr. Kafoure has been President and Chief Operating Officer of the Company
and Brands since September 1995. Prior to that, he was Senior Vice President
of the Company's Western Division-North from July 1995 to September 1995,
President and Chief Operating Officer of Merico, Inc., a subsidiary of
Campbell-Taggert, Inc., from April 1994 to June 1995, and President and Chief
Operating Officer of the U.S. Bakery Division of Campbell-Taggert, Inc. for
more than two years prior thereto.
Mr. Sutton has been Vice President, Corporate Secretary and General Counsel
of the Company and Brands for more than the past five years.
Mr. Shetler has been Executive Vice President of Brands for more than the
past five years.
Mr. McKenny has been Vice President and Corporate Controller of the Company
and Brands for more than the past five years.
Mr. Yarick has been Vice President and Treasurer of the Company and Brands
for more than the past five years.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes, each consisting of
three directors. All directors hold office for a term of three years. Class I
directors hold office until the Annual Meeting of stockholders in 1997, Class
II directors hold office until the Annual Meeting of stockholders in 1998 and
Class III directors hold office until the Annual Meeting of stockholders in
1999, and, in each case, until their successors are duly elected and
qualified. Of the current members of the Company's Board of Directors, two
were nominated by Ralston pursuant to the Shareholder Agreement: Mr. Stiritz
(whose current term expires in 1997) and Mr. Elsesser. In 1996, Mr. Elsesser
was re-elected by the stockholders to serve until 1999.
DESCRIPTION OF CAPITAL STOCK
The following discussion of the Company's Certificate of Incorporation,
Bylaws and Delaware law is qualified in its entirety by the actual terms of
such documents and Delaware law. Copies of the Company's Certificate of
Incorporation, Bylaws and Section 203 of the Delaware General Corporation Law
have been filed with the Commission as exhibits to the Registration Statement.
GENERAL
The Company has the authority to issue 60,000,000 shares of Common Stock of
$.01 par value and 1,000,000 shares of Preferred Stock of $.01 par value (the
"Preferred Stock"). The Company's Board of Directors has authority (without
action by the Company's stockholders) to issue the authorized and unissued
shares of Preferred Stock in one or more series and, within certain
limitations, to determine the voting rights
24
<PAGE>
(including the right to vote as a series on particular matters), preference as
to dividends and in liquidation, conversion, redemption and other rights of
each such series. The ability of the Board of Directors to issue Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company. There
are no shares of Preferred Stock issued or outstanding and the Company has no
present plans to issue any of the Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted on by stockholders, including the election of directors. Stockholders
are not entitled to cumulative voting rights, and accordingly, the holders of
a majority of the shares voting for the election of directors can elect the
entire Board if they choose to do so and, in that event the holders of the
remaining shares of Common Stock will not be able to elect any person to the
Board of Directors. Shares of Common Stock held by Ralston are subject to
certain voting restrictions as set forth in the Shareholder Agreement, which,
among other things, requires Ralston to vote its shares of Common Stock in
accordance with the recommendation of the Company's Board of Directors with
respect to the election of Directors. See "Selling Stockholder." Pursuant to
the Company's Bylaws, the number of directors of the Company may be not less
than five nor more than nine, as determined from time to time by the
directors. The number of directors is currently nine. The Company's
Certificate of Incorporation provides that the Board of Directors be divided
into three classes in respect of term of office, each class to contain as near
as may be one-third of the whole number of the Board. At each Annual Meeting
of stockholders, one class of directors is elected to serve until the Annual
Meeting of stockholders held three years next following and until their
successors are elected and qualified. See "Management--Election of Directors."
In the event any vacancy occurs on the Board of Directors, the Bylaws give the
remaining directors the power to fill the vacancy for the balance of the term
of office.
The holders of shares of Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors, in its discretion, from funds legally available therefor and
subject to the prior dividend rights of holders of any shares of Preferred
Stock which may be outstanding. Upon liquidation or dissolution of the
Company, subject to prior liquidation rights of holders of Preferred Stock, if
any, the holders of shares of Common Stock are entitled to receive on a pro
rata basis the remaining assets of the Company available for distribution.
Holders of shares of Common Stock have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares.
APPROVAL OF BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
Generally, pursuant to the Company's Certificate of Incorporation, any
business combination between the Company and a stockholder who beneficially
owns 5% or more of the Company's outstanding voting stock (an "Interested
Stockholder"), which would include Ralston, must be approved by the
affirmative vote of not less than a majority of the Company's outstanding
voting stock held by the stockholders who are not involved in the transaction.
Exceptions to this rule exist for: (1) a business combination that is solely
between the Company and another corporation whose voting stock is 100% owned,
directly or indirectly, by the Company, and (2) a business combination that is
a merger or consolidation and the value of the consideration to be received
per share by holders of Common Stock is not less than the highest per-share
price (with appropriate adjustments for recapitalizations and for stock
splits, stock dividends and like distributions), paid by the Interested
Stockholder in acquiring any of its holdings of Common Stock. Further, the
conditions of the provision may be waived by the Company's Board of Directors
in appropriate circumstances as set forth in the Certificate of Incorporation.
The term "business combination" generally includes: (1) a merger or
consolidation of the Company or a subsidiary with or into an Interested
Stockholder; (2) a sale, lease, exchange, transfer or other disposition to an
Interested Stockholder of all or any substantial part of the assets either of
the Company or of a subsidiary; (3) any merger or consolidation of an
Interested Stockholder with or into the Company or a subsidiary; (4) any sale,
25
<PAGE>
lease, exchange, transfer or other disposition of all or any substantial part
of the assets of an Interested Stockholder to the Company or a subsidiary; (5)
except in certain circumstances, the issuance of any securities of the Company
or a subsidiary to an Interested Stockholder; (6) any recapitalization that
would have the effect of increasing the voting power of an Interested
Stockholder by more than 10%; and (7) any agreement, contract or other
arrangement providing for any of the transactions described above.
In addition, the Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"), an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, own (or within three years prior to the proposed business
combination, did own) 15% or more of the corporations voting stock. The Company
has not opted to elect out of Section 203 of the DGCL.
OTHER PROVISIONS OF THE CERTIFICATE OF INCORPORATION
Any Director of the Company, or the entire Board of Directors, may be removed
from office only for "cause" (as such term is defined in the Company's
Certificate of Incorporation) and only by the affirmative vote of the holders
of a majority of the voting power of all of the shares of the Company entitled
to vote for the election of Directors, voting together as a single class. The
size of the Board of Directors may generally only be increased by majority vote
of the Directors then in office. Newly created directorships resulting from any
such increase in the authorized number of Directors and any vacancies in the
Board of Directors may be filled only by majority vote of the Directors then in
office, even though less than a quorum, or by a sole remaining Director, and
Directors so chosen shall hold office for a term expiring at the Annual Meeting
of stockholders at which the term of the class or classes to which they have
been elected expires.
The Company's Certificate of Incorporation provides that special meetings of
the Company's stockholders may be called only by the Board of Directors, and
the power of the stockholders, or any of them, to call special meetings of the
stockholders is specifically denied. No action required to be taken or which
may be taken at any Annual Meeting or Special Meeting of the stockholders of
the Company may be taken without a meeting, and the power of the stockholders
to consent in writing to the taking of any action is specifically denied.
The affirmative vote of at least 66 2/3% of the shares of the Company then
entitled to be voted in an election of Directors is required to amend or
repeal, or to adopt any provision inconsistent with, the provisions of the
Company's Certificate of Incorporation relating to a classified board as
described under "Common Stock" above or as described in the above two
paragraphs.
TRANSFER AGENT AND REGISTRAR
UMB Bank, n.a., Kansas City, Missouri, is the co-transfer agent and co-
registrar with the Company for the Company's Common Stock.
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated July 23, 1997, by and among the Underwriters named below for
whom Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc., J.P.
Morgan Securities Inc., Lehman Brothers Inc. and Salomon Brothers Inc. are
acting as
26
<PAGE>
representatives (the "Representatives"), the Company and Ralston (the
"Underwriting Agreement"), the Underwriters have agreed to purchase from
Ralston the aggregate number of SAILS set forth opposite their names:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SAILS
----------- ---------------
<S> <C>
Credit Suisse First Boston Corporation................... 992,934
Bear, Stearns & Co. Inc.................................. 992,932
J.P. Morgan Securities Inc............................... 992,932
Lehman Brothers Inc...................................... 992,932
Salomon Brothers Inc..................................... 992,932
George K. Baum & Company................................. 302,723
Sanford C. Bernstein & Co., Inc. ........................ 302,723
A.G. Edwards & Sons, Inc. ............................... 302,723
Janney Montgomery Scott Inc. ............................ 302,723
Prudential Securities Incorporated....................... 302,723
The Robinson-Humphrey Company, Inc. ..................... 302,723
---------
Total................................................ 6,781,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the SAILS (other than those SAILS covered by the
overallotment option described below) if any are purchased. The Underwriting
Agreement provides that, in the event of a default by an Underwriter, in
certain circumstances the purchase commitments of non-defaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.
Ralston has granted to the Underwriters an option, expiring at the close of
business on the 30th day after the date of the SAILS Prospectus, to purchase
up to 968,000 additional SAILS, at the initial public offering price less the
underwriting discounts and commissions, all as set forth on the cover of the
SAILS Prospectus. Such option may be exercised only to cover over-allotments
in the sale of the SAILS. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional SAILS as it was obligated
to purchase pursuant to the Underwriting Agreement. To the extent such option
is not exercised in full, subject to the second paragraph below, Ralston may
sell the unexercised portion of up to 968,000 shares of Common Stock pursuant
to this Prospectus.
The Company has been advised by the Underwriters that they propose to offer
the SAILS to the public initially at the offering price set forth on the cover
of the SAILS Prospectus and to certain dealers at such price less a concession
of $1.11 per SAILS, and the Underwriters and such dealers may allow a discount
of $0.10 per SAILS on sales to other dealers. After the initial public
offering, the public offering price and concession and discount may be changed
by the Representatives.
Except as otherwise described herein, the Company, its directors and
officers and Ralston and its wholly owned subsidiaries have agreed not to
issue, sell, offer, agree to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to any additional shares of Common Stock, any options,
warrants or other rights to purchase any Common Stock, or any securities
convertible into or exercisable or exchangeable for shares of Common Stock,
other than (i) the sale of shares of Common Stock by Ralston to the Company
and (ii) options granted and Common Stock issued pursuant to the Company's
existing employee benefit and stock option plans, without the prior written
consent of Credit Suisse First Boston Corporation, for a period of 90 days
after the date of this Prospectus.
The SAILS will be a new issue of securities with no established trading
market. The Underwriters have advised the Company that one or more of them
intends to act as a market maker for the SAILS. However, the Underwriters are
not obligated to do so and may discontinue any market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the SAILS.
27
<PAGE>
Upon the maturity of the SAILS, Ralston has the option to pay cash or deliver
shares of Common Stock pursuant to the terms of the SAILS. For a description of
the terms of such exchange, see the SAILS Prospectus.
The Company and Ralston have agreed to indemnify the Underwriters against
certain liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
In the Shareholder Agreement, the Company agreed, subject to certain
limitations, that it would indemnify Ralston against certain liabilities,
including those under the Securities Act, for any untrue statement of a
material fact or omission or alleged omission of a material fact required to be
made so as to make the statements not misleading, in connection with the
delivery of this Prospectus.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
SAILS in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit the Representatives to
reclaim a selling concession from a syndicate member when the SAILS originally
sold by such syndicate member are purchased in a syndicate covering transaction
to cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the SAILS to be
higher than it would otherwise be in the absence of such transactions.
Certain of the Underwriters and their respective affiliates engage in
transactions with, and perform services for, the Company and Ralston in the
ordinary course of business, including various investment banking services.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Shook, Hardy &
Bacon L.L.P., Kansas City, Missouri.
EXPERTS
The annual consolidated financial statements incorporated by reference in
this Prospectus have been audited by Deloitte & Touche LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon such report given upon the authority of said
firm as experts in accounting and auditing.
28
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UN-
LAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE SUCH DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents
By Reference............................................................. 2
Prospectus Summary........................................................ 3
Summary Historical Financial Data......................................... 6
Forward-Looking Statements................................................ 7
Risk Factors.............................................................. 7
Selling Stockholder....................................................... 10
Use of Proceeds........................................................... 11
Capitalization............................................................ 12
Price Range of Common Stock and Dividends................................. 13
Business.................................................................. 14
Management Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Management................................................................ 23
Description of Capital Stock.............................................. 24
Underwriting.............................................................. 26
Legal Matters............................................................. 28
Experts................................................................... 28
</TABLE>
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[LOGO OF INTERSTATE BAKERIES CORPORATION]
6,781,000 Shares
INTERSTATE BAKERIES CORPORATION
Common Stock
(par value $.01 per share)
PROSPECTUS
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