UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-11165
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INTERSTATE BAKERIES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 43-1470322
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
12 East Armour Boulevard, Kansas City, Missouri 64111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (816) 502-4000
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock,
$.01 par value per share New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
----------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $1,146,347,575 as of August 8, 1997. For these purposes only,
the registrant has assumed that shares of Common Stock, $.01 par value per
share, that may be deemed to be beneficially owned by certain members of the
Board of Directors constitute shares held by affiliates of the registrant.
There were 36,581,952 shares of Common Stock, $.01 par value per share,
outstanding as of August 8, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part and Item Document Incorporated
of Form 10-K: By Reference
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Part II, Item 5 Annual Report*
Part II, Item 6 Annual Report*
Part II, Item 7 Annual Report*
Part II, Item 8 Annual Report*
Part III, Item 10 Proxy Statement**
Part III, Item 11 Proxy Statement**
Part III, Item 12 Proxy Statement**
Part III, Item 13 Proxy Statement**
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* Refers to portions of Registrant's annual report to security
holders with respect to the fiscal year ended May 31, 1997.
** Refers to portions of Registrant's definitive proxy statement
filed on August 22, 1997.
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this Report,
including those under the captions "Business," "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere 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 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), Interstate Bakeries Corporation's ability to recover its raw
material costs in the pricing of its products, the availability of capital on
acceptable terms, actions of competitors and governmental entities, the extent
to which Interstate Bakeries Corporation 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 Interstate Bakeries Corporation's
business strategies and other factors.
<PAGE>
PART I
Item 1. Business
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General
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Interstate Bakeries Corporation ("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," "Hostess"
and "Home Pride," as well as regional brand names, including "Butternut,"
"Dolly Madison" and "Merita". Based on independent publicly available
market data, "Wonder" white bread and "Home Pride" wheat bread are the
number one and two selling branded breads sold in the United States.
"Hostess" products, including "Twinkies" and "Ho-Hos," are among the
leading snack cake products sold in the United States.
The principal executive offices of the Company are located at 12 East
Armour Boulevard, Kansas City, Missouri 64111, and the telephone number is
(816) 502-4000.
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 Continental Baking Company
("CBC") from Ralston Purina Company ("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" and "Hostess" 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. On July 29, 1997,
Ralston issued $479,953,687.50 of 7% Stock Appreciation Income Linked
Securities ("SAILS"), which are exchangeable at maturity, at the option of
Ralston, for cash or up to 7,749,000 shares of the Company's Common Stock.
Pursuant to the SAILS transaction, the Company repurchased 1,000,000 shares of
its Common Stock from Ralston for $60,079,375, or $60.079375 per share, which
amount was the closing sales price of the Common Stock on the New York Stock
Exchange on July 23, 1997 of $61.9375 per share, less a 3% discount.
<PAGE>
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
"Wonder," "Home Pride" and "Bread du Jour," and regional brand names
including "Beefsteak," "Buttermaid," "Butternut," "Colombo," "Cotton's
Holsum," "DiCarlo," "Eddy's," "Emperor Norton," "Holsum," "Merita,"
"Millbrook Farms," "Parisian," "Sweetheart," "Toscano" and "Weber's";
bagels under the brand name "Braun's"; and croutons under the brand names
"Mrs. Cubbison's" and "Marie Callender's". 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" and "Dolly Madison." The Company
is also a baker and distributor of "Roman Meal" breads, including traditional
Roman Meal bread, Roman Meal variety breads, Roman Meal light breads, Roman
Meal buns, rolls and English muffins, and Sunmaid raisin bread. The
Company's various brands are positioned across a wide spectrum of consumer
categories and price points.
The Company believes that its brand product trademarks such as "Wonder,"
"Hostess," "Home Pride," "Butternut" and "Dolly Madison" and product
trademarks such as "Twinkies," "Ho-Hos" and "Zingers" are of material
importance to its strategy of brand building. The Company also owns a number
of patents related to the processes used in making the Company's bread and
cake products. 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 does not keep a backlog of inventory
as its fresh bakery products are promptly distributed to its customers after
being produced.
<PAGE>
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/salesmen on its more than 10,000 Company-owned routes.
Unsold products are picked up by the Company's delivery/salesmen 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 fifty-two week period ended May 31, 1997.
Sources and Availability of Raw Materials
- -----------------------------------------
The ingredients of bread and cake products, principally flour, sugar and
edible oils, are readily available from numerous sources. Generally, the
Company purchases its commodity requirements on the spot markets, although 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 believes it is able to
utilize its national presence to obtain competitive prices. The prices for
raw materials are dependent on a number of factors including the results of
crop production, transportation and processing costs, governmental legislation
and policies and export sales demand. Although commodity prices have been
volatile and may continue to be volatile, 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
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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.
<PAGE>
Governmental Regulation; Environmental Matters
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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 of material contributed to the
site, the number of other PRP's 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.
<PAGE>
Item 2. Properties
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Bakeries
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The Company produces substantially all of its products through its
national network of 67 bakeries. All of the Company's bakeries 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. The Company's bakeries are located as follows:
Akron, Ohio Memphis, Tennessee
Alexandria, Louisiana Miami, Florida
Anchorage, Alaska Milwaukee, Wisconsin
Billings, Montana Minonk, Illinois
Birmingham, Alabama Minot, North Dakota
Boise, Idaho Monroe, Louisiana
Boonville, Missouri Montebello, California
Buffalo, New York Natick, Massachusetts
Castroville, California Oakland, California
Charlotte, North Carolina Ogden, Utah
Cincinnati, Ohio Orlando, Florida
Columbus, Georgia Peoria, Illinois
Columbus, Indiana Philadelphia, Pennsylvania
Columbus, Ohio Pomona, California
Davenport, Iowa Portland, Oregon
Decatur, Illinois Richmond, Virginia
Denver, Colorado Roanoke, Virginia
Detroit, Michigan Rocky Mount, North Carolina
Emporia, Kansas Sacramento, California (2)
Florence, South Carolina Salt Lake City, Utah
Glendale, California San Diego, California (2)
Grand Junction, Colorado San Francisco, California (2)
Grand Rapids, Michigan San Pedro, California
Hodgkins, Illinois Schiller Park, Illinois
Indianapolis, Indiana Seattle, Washington (2)
Jacksonville, Florida Spokane, Washington
Jamaica, New York Springfield, Missouri
Kansas City, Missouri St. Louis, Missouri
Knoxville, Tennessee Tampa, Florida
Los Angeles, California (3) Tulsa, Oklahoma
Waterloo, Iowa
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.
<PAGE>
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 broken ground on the construction of a new state-of-the-art
bread bakery near Toledo, Ohio. 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
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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.
Item 3. Legal Proceedings
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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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not applicable.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
-------------------------------------------------------------
Matters
-------
The section entitled "Common Stock Information" appearing on page 3 of
the Annual Report is incorporated herein by this reference. Note 3, entitled
"Debt", to the consolidated financial statements appearing on pages 23 and 24
of the Annual Report is also incorporated herein by this reference with regard
to limitations on cash dividends and Common Stock repurchases. The section
entitled, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", specifically the subsection entitled "Capital
Resources and Liquidity" appearing on page 17 of the Annual Report is also
incorporated herein by this reference with regard to planned common stock
repurchases and dividend payments on the Common Stock. The 16,923,077
unregistered shares of the Company's Common Stock issued to Ralston on
July 22, 1995 in connection with the Company's acquisition of CBC, were issued
in reliance upon Section 4(2) of the Securities Act of 1933, as amended, as a
transaction by an issuer not involving any public offering.
Item 6. Selected Financial Data
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The section entitled "Five-Year Summary of Financial Data", appearing on
page 15 of the Annual Report, is incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 16 to 17 of the Annual
Report is incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data
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The consolidated financial statements and accompanying notes and Report
of Independent Public Accountants appearing on pages 18 to 28 of the Annual
Report are incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
<PAGE>
PART III
The information required by Part III (Item 10, 11, 12 and 13) is
incorporated herein by reference to the Company's definitive proxy statement,
involving the election of directors, approval of the proposed Amendment to the
Company's Restated Certificate of Incorporation and ratification of
independent auditors filed on August 22, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
- -------- --------------------------------------------------------------
(a) Documents Filed as Part of this Report:
1. Financial Statements
The following financial statements and report included in the
Company's Annual Report are incorporated herein by reference:
Consolidated Balance Sheet at May 31, 1997 and June 1,
1996
For the 52 weeks ended May 31, 1997 and June 1,
1996, and the 53 weeks ended June 3, 1995:
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Report of Independent Public Accountants dated July 15,
1997
2. Financial Statement Schedule
The following report and schedule are filed herewith as a
part hereof:
Report of Independent Public Accountants dated July 15,
1997
Schedule for the 52 weeks ended May 31, 1997 and June 1,
1996, and the 53 weeks ended June 3, 1995:
II Valuation and Qualifying Accounts
All other schedules have been omitted since the required
information is not present or not present in amounts
sufficient to require submission of the schedule, or because
the information required is included in the consolidated
financial statements or the notes thereto.
<PAGE>
3. Exhibits
The exhibits are listed in the Exhibit Index. Copies of
certain documents have not been filed as exhibits, in
reliance upon paragraph (b)(4)(iii) of Item 601 of
Regulation S-K. Registrant agrees to furnish a copy of any
such instrument to the Securities and Exchange Commission
upon request.
(b) Reports on Form 8-K:
--------------------
No reports on Form 8-K were filed in the last quarter of the
fiscal year to which this Annual Report on Form 10-K relates.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTERSTATE BAKERIES CORPORATION
Dated: August 22, 1997 By: /s/ Charles A. Sullivan
-------------------------------
Charles A. Sullivan
Chairman of the Board and
Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
Capacities
Name of Signatory In Which Signing Date
- ----------------- ---------------- ----
/s/ Charles A. Sullivan Chairman of the Board, August 22, 1997
- ----------------------- Chief Executive Officer
Charles A. Sullivan and Director (Principal
Executive Officer)
/s/ G. Kenneth Baum Director August 22, 1997
- -------------------
G. Kenneth Baum
/s/ Leo Benatar Director August 22, 1997
- ---------------
Leo Benatar
/s/ E. Garrett Bewkes, Jr. Director August 22, 1997
- --------------------------
E. Garrett Bewkes, Jr.
/s/ Philip Briggs Director August 22, 1997
- -----------------
Philip Briggs
/s/ Robert B. Calhoun, Jr. Director August 22, 1997
- --------------------------
Robert B. Calhoun, Jr.
/s/ Frank E. Horton Director August 22, 1997
- -------------------
Frank E. Horton
/s/ William P. Stiritz Director August 22, 1997
- ----------------------
William P. Stiritz
/s/ James R. Elsesser Director August 22, 1997
- ---------------------
James R. Elsesser
/s/ Paul E. Yarick Vice President and Treasurer August 22, 1997
- ------------------ (Principal Financial Officer)
Paul E. Yarick
/s/ John F. McKenny Vice President and Corporate August 22, 1997
- ------------------- Controller (Principal
John F. McKenny Accounting Officer)
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Interstate Bakeries Corporation
We have audited the consolidated financial statements of Interstate
Bakeries Corporation and its subsidiaries as of May 31, 1997 and June 1, 1996,
and for each of the three fiscal years in the period ended May 31, 1997, and
have issued our report thereon dated July 15, 1997; such consolidated
financial statements and report are included in your 1997 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also
included the consolidated financial statement schedule of Interstate Bakeries
Corporation and its subsidiaries, listed on Item 14. This consolidated
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
July 15, 1997
<PAGE>
INTERSTATE BAKERIES CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FIFTY-TWO WEEKS ENDED MAY 31, 1997 AND JUNE 1, 1996,
AND FIFTY-THREE WEEKS ENDED JUNE 3, 1995
(In Thousands)
Balance at Additions Accounts Balance
beginning charged charged at end
Description of period to income off of period
- ----------- ---------- --------- -------- ---------
1997:
Reserve for
discounts
and allow-
ances on
accounts
receivable $ 7,414 $ 563 $ - $ 7,977
Allowance for
doubtful
accounts 3,606 2,478 1,507 4,577
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$11,020 $3,041 $ 1,507 $12,554
======= ====== ======= =======
1996:
Reserve for
discounts
and allow-
ances on
accounts
receivable $ 8,404 $ (990) $ - $ 7,414
Allowance for
doubtful
accounts 3,744 621 759 3,606
------- ------ ------- -------
$12,148(1) $ (369) $ 759 $11,020
======= ====== ======= =======
1995:
Reserve for
discounts
and allow-
ances on
accounts
receivable $ 4,278 $ 143 $ - $ 4,421
Allowance for
doubtful
accounts 1,645 652 505 1,792
------- ------ ------- -------
$ 5,923 $ 795 $ 505 $ 6,213
======= ====== ======= =======
(1) Restated to include opening balance of Continental Baking Company acquired
on July 22, 1995.
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Exhibit
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3.1 Restated Certificate of Incorporation of Interstate Bakeries
Corporation, as amended (incorporated herein by reference to
Exhibit 3.1 to the Annual Report on Form 10-K of Interstate
Bakeries Corporation filed on August 30, 1995).
3.2 Restated Bylaws of Interstate Bakeries Corporation (incorporated
herein by reference to Exhibit 3.2 to the Annual Report on
Form 10-K of Interstate Bakeries Corporation filed on August 30,
1991 (the "1991 10-K")).
4.1 Article FOURTH of Restated Certificate of Incorporation of
Interstate Bakeries Corporation (incorporated herein by reference
to Exhibit A to the Proxy Statement relating to the 1997 Annual
Meeting of Stockholders of Interstate Bakeries Corporation).
10.1 Interstate Bakeries Corporation 1991 Stock Option Plan
(incorporated herein by reference to Exhibit 10.1 to the
Registration Statement on Form S-1 of Interstate Bakeries
Corporation, File No. 33-40830 (the "Form S-1")).
10.2 Employment Agreement, dated as of March 1, 1989, by and among
Interstate Bakeries Corporation, Interstate Brands Corporation and
Charles A. Sullivan (incorporated herein by reference to
Exhibit 10.2 to the Form S-1).
10.4 Memorandum of Agreement, dated as of May 16, 1991, by and among
Interstate Bakeries Corporation, Interstate Brands Corporation and
Charles A. Sullivan (incorporated herein by reference to
Exhibit 10.4 to the Form S-1).
10.5 Restated Memorandum of Agreement dated as of July 22, 1992 by and
among Interstate Bakeries Corporation, Interstate Brands
Corporation and Charles A. Sullivan (incorporated herein by
reference to Exhibit 10.5 to the Annual Report on Form 10-K of
Interstate Bakeries Corporation filed on August 20, 1992).
10.6 Credit Agreement, dated May 31, 1995, signed by Interstate Brands
Corporation, Chemical Bank, the Lenders and Issuing Bank (as
defined therein) (incorporated by reference to Exhibit 1 to the
Form 8-K filed on June 9, 1995).
10.7 Interstate Bakeries Corporation 1996 Stock Incentive Plan
(incorporated by reference to Exhibit A to the Proxy Statement
relating to the 1996 Annual Meeting of Stockholders of Interstate
Bakeries Corporation).
<PAGE>
11.1 Statement regarding computation of per share earnings.*
13.1 Page 3 and pages 15 to 28 of the Interstate Bakeries Corporation
annual report to security holders for the year ended May 31,
1997. (Those portions of the annual report to security holders
not listed here shall not be deemed to be filed as a part of this
Report.)*
21.1 Subsidiaries of Interstate Bakeries Corporation (incorporated
herein by reference to Exhibit 22.1 to the 1991 10-K).
-------------------------
* Filed herewith.
EXHIBIT 11.1
INTERSTATE BAKERIES CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Per Share Data)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
May 31, June 1, June 3,
1997 1996 1995
-------- -------- --------
Net income $97,177 $24,463 $20,697
======= ======= =======
Weighted average common shares
outstanding 37,464 34,601 19,639
Dilutive stock options 636 383 68
------- ------- -------
Weighted average common and
equivalent shares outstanding 38,100 34,984 19,707
======= ======= =======
Earnings per share $ 2.55 $ .70 $ 1.05
======= ======= =======
FINANCIAL HIGHLIGHTS
- --------------------
(In Thousands, Except Per Share Data)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
May 31, June 1, June 3,
1997 1996(1) 1995
------------ ------------ ------------
Statement of Income
Net sales $3,212,431 $2,878,180 $1,222,779
Operating income (1) 191,143 78,758(2) 57,293
% of net sales 6.0% 2.7% 4.7%
Net income $ 97,177 $ 24,463(2) $ 20,697
% of net sales 3.0% 0.8% 1.7%
Per share:
Net income $ 2.55 $ .70(2) $ 1.05
Book value 14.34 12.34 10.09
Common stock dividends .53 .50 .50
Common shares outstanding (Avg.) 38,100 34,984 19,707
May 31, June 1, June 3,
1997 1996(1) 1995
------------ ------------ ------------
Balance Sheet
Total assets $1,493,087 $1,486,460 $ 598,441
Long-term debt 251,000 303,651 212,205
Stockholders' equity 538,722 460,247 198,037
Debt to total capital 31.8% 39.8% 51.7%
(1) Fiscal 1996 includes the operations of Continental Baking Company for 45
weeks from its acquisition on July 22, 1995.
(2) Fiscal 1996 includes a charge of $9,500,000 ($5,738,000 and $.16 per share
on an after-tax basis) resulting from a payment due a union-administered
multi-employer pension plan which failed
[This page includes 3 bar graphs which depict net sales, net income and % of
debt to total capital for fiscal 1995, 1996 and 1997. All numbers presented
in these graphs are included in tabular form above.]
<PAGE>
COMMON STOCK INFORMATION
- ------------------------
The Company's common stock is listed on the New York Stock Exchange and is
traded under the symbol IBC. The table below presents the high and low sales
prices for the stock and cash dividends paid during fiscal 1997 and 1996:
Stock Price
Fiscal --------------------- Cash
Year Quarter High Low Dividends
------ --------- -------- ------- ------------
1997 1 $30.125 $25.500 $.125
2 45.250 29.625 .135
3 51.000 42.250 .135
4 55.125 46.375 .135
1996 1 $19.500 $14.375 .125
2 22.250 18.875 .125
3 23.250 20.500 .125
4 27.625 22.500 .125
The Company had approximately 4,700 shareholders at May 31, 1997.
-3-
[This page includes a bar graph of closing prices on the NYSE for Interstate
Bakeries Corporation common stock at fiscal 1996 year end, as well as at each
quarter end of fiscal 1997. The prices presented are as follows: FYE 1996 -
$27.625; QTR 1 1997 - $30.125; QTR 2 1997 - $43.375; QTR 3 1997 - $46.500; and
FYE 1997 - $53.750]
<PAGE>
INTERSTATE BAKERIES CORPORATION
FIVE-YEAR SUMMARY OF FINANCIAL DATA
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
52 Weeks 52 Weeks 53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
May 31, June 1, June 3, May 28, May 29,
1997 1996(1) 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Income
Net sales $3,212,431 $2,878,180 $1,222,779 $1,142,684 $1,165,588
Operating income 191,143 78,758(2) 57,293 46,883(3) 71,344
% of net sales 6.0% 2.7% 4.7% 4.1% 6.1%
Income before
cumulative effect
of accounting change $ 97,177 $ 24,463(2) $ 20,697 $ 15,754(3) $ 30,784
% of net sales 3.0% 0.8% 1.7% 1.4% 2.6%
Net income $ 97,177 $ 24,463(2) $ 20,697 $ 15,754(3) $ 16,663(4)
Per Share:
Income before
cumulative effect
of accounting change 2.55 .70(2) 1.05 .78(3) 1.46
Net income 2.55 .70(2) 1.05 .78(3) .79(4)
Common stock dividends .53 .50 .50 .495 .47
Weighted average common
shares outstanding 38,100 34,984 19,707 20,306 21,132
Balance Sheet
Total assets $1,493,087 $1,486,460 $ 598,441 $ 574,791 $ 586,756
Long-term debt, excluding
current maturities 251,000 303,651 212,205 201,235 189,238
Stockholders' equity 538,722 460,247 198,037 187,441 202,315
Debt to total capital 31.8% 39.8% 51.7% 51.8% 48.3%
(1) Fiscal 1996 includes the operations of Continental Baking Company for 45 weeks from its acquisition on
July 22, 1995.
(2) Fiscal 1996 includes a charge of $9,500,000 ($5,738,000 and $.16 per share on an after-tax basis)
resulting from a payment due a union-administered multi-employer pension plan which failed.
(3) Fiscal 1994 includes a charge of $9,400,000 ($5,687,000 net of tax, or $.28 per share), related to a
plant disposal and environmental matters.
(4) Fiscal 1993 includes a charge of $14,121,000 ($.67 per share) for the cumulative effect of the change
in accounting for postretirement benefits other than pensions, from adopting SFAS No. 106.
</TABLE>
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1997 Compared With Fiscal 1996
Net sales for the fifty-two weeks ended May 31, 1997 were $3,212,431,000, an
increase of $334,251,000 and 11.6% over net sales of $2,878,180,000 for the
fifty-two weeks ended June 1, 1996. This increase in net sales was primarily
attributable to the acquisition of Continental Baking Company ("CBC") on July
22, 1995, with fiscal 1996 results reflecting only forty-five weeks of CBC's
operations. Excluding the impact of current year acquisitions and
dispositions, net sales rose approximately 3.8%.
Fiscal 1997's gross profit was $1,646,166,000, or 51.2% of net sales, up
$221,177,000 from gross profit of $1,424,989,000, or 49.5% of net sales, the
prior year. This margin improvement resulted from synergies realized through
continuing integration of existing and acquired operations, particularly
product sourcing efficiencies, 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 totaled $1,352,026,000, or 42.1%
of net sales, for fiscal 1997 compared to $1,236,586,000, or 43.0% of net
sales, in the prior year. 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 in the current year.
Included in fiscal 1996 were other charges of $9,500,000 ($5,738,000 and $.l6
per share on an after-tax basis) resulting from a payment due a union-
administered multi-employer pension plan which failed.
Based upon these factors, operating income for fiscal 1997 was $191,143,000,
or 6.0% of net sales, a $112,385,000 and 142.7% increase over fiscal 1996's
operating income of $78,758,000, or 2.7% of net sales.
Interest expense for the current year was $22,592,000, a decrease of
$6,718,000 from the prior year. The lower expense reflects both lower average
borrowing levels and lower interest rates.
The fiscal 1997 effective tax rate of 42.6%, as well as the fiscal 1996 rate
of 51.4%, reflects the nondeductibility of amortization of various
intangibles.
Reflecting the improved operations, net income for fiscal 1997 improved to
$97,177,000, or $2.55 per share, up from $24,463,000, or $.70 per share, for
fiscal 1996, an earnings per share improvement of 264%.
<PAGE>
Fiscal 1996 Compared With Fiscal 1995
Net sales for the fifty-two weeks ended June 1, 1996 were $2,878,180,000, a
$1,655,401,000 increase over net sales of $1,222,779,000 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 $1,424,989,000, or 49.5% of net sales,
compared to fiscal 1995's gross profit of $591,895,000, or 48.4% of net sales.
This margin improvement resulted from efficiencies of the 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
$1,236,586,000, representing 43.0% of net sales, while fiscal 1995's selling,
delivery and administrative expenses were $501,008,000, or 41.0% of net sales.
This unfavorable variance was attributable to the CBC acquisition, with the
CBC 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 fiscal 1995
excluding the impact of the acquisition.
-16-
Included in fiscal 1996 were other charges of $9,500,000 ($5,738,000 and $.16
per share on an after-tax basis) resulting from a payment due a union-
administered multi-employer pension plan which failed.
Depreciation and amortization for fiscal 1996 was $100,145,000, up from
$33,594,000 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 $78,758,000, or
2.7% of net sales, an increase of $21,465,000 from fiscal 1995's operating
income of $57,293,000, or 4.7% of net sales.
Interest expense was $29,310,000 for fiscal 1996, up $11,565,000 and 65.2%
from fiscal 1995's expense of $17,745,000, 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 $24,463,000, or $.70 per share, compared to
$20,697,000 and $1.05 per share in fiscal 1995. The per share earnings
decline was the result of increased interest expense and the additional shares
issued in conjunction with the CBC acquisition.
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of liquidity is cash provided by operations which
totaled $196,173,000 for fiscal 1997, an increase of $31,787,000 from the
prior year's $164,386,000. This increase reflects improved operations,
partially offset by less favorable changes in working capital components.
Cash generated by operations, along with asset sales of $19,291,000, during
fiscal 1997 was used to fund capital expenditures of $78,418,000, reduce
long-term debt a net $74,205,000, pay common stock dividends of $19,857,000
and fund acquisitions of $43,618,000.
For fiscal 1998, the Company anticipates cash needs of approximately
$165,000,000, consisting of $85,000,000 of planned capital expenditures,
$60,000,000 for the repurchase of common stock ($58,000,000 of which has been
expressly excluded from stock repurchase limitations under the Company's
borrowing agreements) and $20,000,000 of common stock dividends. The Company
expects these needs to be funded by ongoing operations and borrowing capacity
under its bank credit facility.
NEW ACCOUNTING STANDARDS
See Note 2 to the Company's consolidated financial statements for discussions
on new accounting standards relating to earnings per share computation and
presentation, comprehensive income and segment disclosures.
-17-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED BALANCE SHEET
(In Thousands)
May 31, June 1,
1997 1996
----------- -----------
Assets
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $4,577,000
($3,606,000 in 1996) $ 190,747 $ 179,538
Inventories 63,962 67,254
Other current assets 70,453 71,481
---------- ----------
Total current assets 325,162 318,273
---------- ----------
Property and equipment:
Land and buildings 291,526 279,863
Machinery and equipment 784,910 741,705
---------- ----------
1,076,436 1,021,568
Less accumulated depreciation (269,153) (204,173)
---------- ----------
Net property and equipment 807,283 817,395
---------- ----------
Intangibles 360,642 350,792
---------- ----------
$1,493,087 $1,486,460
========== ==========
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ - $ 21,554
Accounts payable 146,638 135,447
Accrued expenses 201,878 200,221
---------- ----------
Total current liabilities 348,516 357,222
---------- ----------
Long-term debt 251,000 303,651
Other liabilities 230,967 254,962
Deferred income taxes 123,882 110,378
---------- ----------
Total long-term liabilities 605,849 668,991
---------- ----------
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 - 39,265,000 shares
(38,735,000 in 1996) 393 387
Additional paid-in capital 529,127 515,497
Retained earnings (accumulated deficit) 43,228 (34,092)
Treasury stock, at cost - 1,708,000 shares
(1,449,000 in 1996) (34,026) (21,545)
---------- ----------
Total stockholders' equity 538,722 460,247
---------- ----------
$1,493,087 $1,486,460
========== ==========
See accompanying notes.
-18-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
May 31, June 1, June 3,
1997 1996 1995
---------- ---------- ----------
Net sales $3,212,431 $2,878,180 $1,222,779
---------- ---------- ----------
Cost of products sold 1,566,265 1,453,191 630,884
Selling, delivery and
administrative expenses 1,352,026 1,236,586 501,008
Other charges - 9,500 -
Depreciation and amortization 102,997 100,145 33,594
---------- ---------- ----------
3,021,288 2,799,422 1,165,486
---------- ---------- ----------
Operating income 191,143 78,758 57,293
---------- ---------- ----------
Other income (747) (887) (104)
Interest expense 22,592 29,310 17,745
---------- ---------- ----------
21,845 28,423 17,641
---------- ---------- ----------
Income before income taxes 169,298 50,335 39,652
Provision for income taxes 72,121 25,872 18,955
---------- ---------- ----------
Net income $ 97,177 $ 24,463 $ 20,697
========== ========== ==========
Earnings per common share $ 2.55 $ .70 $ 1.05
========== ========== ==========
See accompanying notes.
-19-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
May 31, June 1, June 3,
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income $ 97,177 $ 24,463 $ 20,697
Depreciation and amortization 102,997 100,145 33,594
Other (7,171) (4,468) 44
Change in operating assets
and liabilities:
Accounts receivable (11,209) (5,958) (3,450)
Inventories 3,292 (233) (3,187)
Other current assets (1,761) (10,497) (126)
Accounts payable and accrued expenses 12,848 60,934 2,094
--------- --------- ---------
Cash from operating activities 196,173 164,386 49,666
--------- --------- ---------
Cash flows from investing activities:
Acquisitions (43,618) (225,912) (3,103)
Additions to property and equipment (78,418) (47,658) (34,272)
Sale of assets 19,291 1,945 1,167
Other (521) (697) (15,414)
--------- --------- ---------
Cash from investing activities (103,266) (272,322) (51,622)
--------- --------- ---------
Cash flows from financing activities:
Reduction of long-term debt (126,205) (134,030) (1,263)
Addition to long-term debt 52,000 245,000 12,000
Common stock dividends paid (19,857) (16,342) (9,819)
Stock option exercise proceeds and
related tax benefits 13,636 11,339 1
Acquisition of treasury stock (12,481) (519) (283)
Other - (1,238) -
--------- --------- ---------
Cash from financing activities (92,907) 104,210 636
--------- --------- ---------
Change in cash and cash equivalents - (3,726) (1,320)
Cash and cash equivalents:
Beginning of period - 3,726 5,046
--------- --------- ---------
End of period $ - $ - $ 3,726
========= ========= =========
Cash payments made:
Interest $ 22,226 $ 28,710 $ 18,852
Income taxes 63,402 24,162 23,533
See accompanying notes.
-20-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In Thousands)
Common
Stock Issued Treasury Stock
--------------- Retained ------------------
Number Additional Earnings Number
of Par Paid-in (Accumulated of
Shares Value Capital Deficit) Shares Cost
------ ----- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance May 28, 1994 21,050 $211 $261,064 $(53,091) (1,400) $(20,743)
Net income - - - 20,697 - -
Stock options exercised
and related tax benefits 6 - 1 - - -
Dividends paid -
$.50 per share - - - (9,819) - -
Treasury stock acquired - - - - (21) (283)
------ ---- -------- -------- ----- --------
Balance June 3, 1995 21,056 211 261,065 (42,213) (1,421) (21,026)
Net income - - - 24,463 - -
Shares issued for an
acquisition 16,923 169 243,100 - - -
Stock options exercised
and related tax benefits 756 7 11,332 - - -
Dividends paid -
$.50 per share - - - (16,342) - -
Treasury stock acquired - - - - (28) (519)
------ ---- -------- -------- ----- --------
Balance June 1, 1996 38,735 387 515,497 (34,092) (1,449) (21,545)
Net income - - - 97,177 - -
Stock options exercised
and related tax benefits 530 6 13,630 - - -
Dividends paid -
$.53 per share - - - (19,857) - -
Treasury stock acquired - - - - (259) (12,481)
------ ---- -------- -------- ----- --------
Balance May 31, 1997 39,265 $393 $529,127 $ 43,228 (1,708) $(34,026)
====== ==== ======== ======== ===== ========
</TABLE>
See accompanying notes.
-21-
<PAGE>
INTERSTATE BAKERIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Acquisitions
On March 29, 1997, Interstate Bakeries Corporation (the "Company") purchased
the assets comprising the San Francisco French Bread Company ("SFFB") from
Metz Baking Company. SFFB, which prior to the acquisition produced and
distributed sourdough bread and rolls throughout Northern California and in
the San Diego area, had net sales in calendar 1996 of approximately $95
million and employed 1,100 people at five bakery locations. In addition, in
April 1997, the Company acquired the right to use the "Marie Callender's"
trademark in conjunction with the manufacture, marketing, distribution and
sale of croutons. The aggregate cash purchase price of these acquisitions was
$43,618,000.
On July 22, 1995, the Company acquired Continental Baking Company ("CBC") from
Ralston Purina Company ("RPC") for a total purchase price of $220,000,000 in
cash and 16,923,077 shares of the Company's common stock. Prior to the
acquisition, CBC was the nation's largest wholesale baking company with annual
sales of approximately $2 billion and 21,000 employees at 36 bakery locations.
As a result of the acquisition, RPC owns approximately 45% of the Company's
common stock. Under terms of a shareholder agreement, RPC's holdings of the
Company's common stock must be less than 15% of the outstanding shares within
five years of the acquisition.
The acquisition of CBC has been accounted for as a purchase and the results of
CBC have been included in the accompanying consolidated financial statements
since the date of the acquisition. The cash and stock portions of the
purchase price, including fees and expenses, were as follows:
(In Thousands)
Estimated fair value of net assets acquired $ 472,284
Common stock issued (243,269)
---------
Cash paid for acquisition of CBC $ 229,015
=========
The pro forma unaudited consolidated results of operations as though CBC had
been acquired as of the beginning of fiscal 1996 and 1995 are as follows:
(In Thousands, Except Per Share Data)
52 Weeks 53 Weeks
Ended Ended
June 1, June 3,
1996 1995
----------- -----------
Net sales $3,140,501 $3,180,109
Net income 25,830 14,543
Earnings per share .69 .40
Pro forma data does not purport to be indicative of the results that would
have been obtained had these events actually occurred at the beginning of the
periods presented and is not intended to be a projection of future results.
<PAGE>
2. Description of Business and Significant Accounting Policies
Description of business - The Company is the largest baker and distributor of
fresh bakery products in the United States.
Fiscal year end - The Company has a 52-53 week year that ends on the Saturday
closest to the last day of May.
Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Inventories - Inventories are stated at the lower of cost or market.
Specific invoiced costs are used with respect to ingredients and average
costs are used for other inventory items.
The components of inventories are as follows:
(In Thousands)
May 31, June 1,
1997 1996
-------- --------
Ingredients and packaging $43,195 $42,591
Finished goods 14,420 14,806
Other 6,347 9,857
------- -------
$63,962 $67,254
======= =======
Property and equipment - Property and equipment are recorded at cost and
depreciated over estimated useful lives of 4 to 35 years, using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes. Depreciation expense was $89,507,000, $85,747,000 and
$25,900,000 for fiscal 1997, 1996 and 1995, respectively. Interest cost
capitalized as part of the construction cost of capital assets was $555,000 in
fiscal 1997.
-22-
Intangibles - Included in intangibles, which are being amortized using the
straight-line method, are the following:
(In Thousands)
May 31, June 1,
Life 1997 1996
----------- -------- --------
Licenses and patents 9 years $ 2,510 $ 2,510
Trademarks and tradenames 25-40 years 112,838 100,870
Excess of purchase cost over
net assets acquired 40 years 312,522 306,358
Deferred financing cost
and other-net Term of loans 6,055 3,787
-------- --------
433,925 413,525
Accumulated amortization (73,283) (62,733)
-------- --------
Net intangibles $360,642 $350,792
======== ========
<PAGE>
Long-lived assets - During fiscal 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Under SFAS No. 121, impairment losses are recognized when information
indicates the carrying amount of long-lived assets, identifiable intangibles
and goodwill related to those assets will not be recovered through future
operations or disposal based upon a review of expected undiscounted cash
flows. The adoption of this statement had no effect on the Company's
consolidated financial statements.
Interest rate swap agreements - The Company enters into interest rate swaps
with major banks to manage the balance of variable versus fixed rate debt
based upon current and anticipated future market conditions. The differential
to be paid or received is recognized over the term of the swap agreements as a
component of interest expense. The risk associated with these agreements is
limited to the cost of replacing these agreements at current market rates.
Statement of cash flows - For purposes of the statement of cash flows, the
Company considers all investments purchased with a maturity of three months
or less to be cash equivalents.
Earnings per share - Per share amounts are calculated on the basis of the
weighted average common shares outstanding and outstanding options to the
extent they are dilutive. Weighted average common and common equivalent
shares outstanding were 38,100,000, 34,984,000 and 19,707,000 for fiscal 1997,
1996 and 1995, respectively.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New accounting standards - In February 1997, SFAS No. 128, "Earnings per
Share" was issued by the Financial Accounting Standards Board ("FASB"). SFAS
No. 128, which establishes standards for computing and presenting basic and
diluted earnings per share for publicly held companies, is effective for
periods ending after December 15, 1997. The Company believes that adoption of
the provisions of SFAS No. 128 will not have a material effect on its
financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Based upon a preliminary review of the provisions of these
standards, the Company believes that they will have no impact on its financial
statements.
<PAGE>
3. Debt
Long-term debt consists of the following:
(In Thousands)
May 31, June 1,
1997 1996
-------- --------
Bank borrowings:
Revolving credit loans(a) $172,000 $120,000
Term loans - 125,000
Senior notes (b) 79,000 79,000
Other - 1,205
-------- --------
251,000 325,205
Less amounts payable
within one year - (21,554)
-------- --------
$251,000 $303,651
======== ========
-23-
(a) Represents borrowings under an unsecured $350,000,000 revolving credit
facility, including up to $150,000,000 available for letters of credit (with
an unused amount of $54,000,000 at May 31, 1997), maturing in February 2002.
The outstanding borrowings bear interest at variable rates generally equal to
the London Interbank Offered Rate (LIBOR) plus from .20% to .63% (.20% at May
31, 1997), depending on certain financial ratios. The Company also pays a fee
of between .08% and .23% (.08% at May 31, 1997) on the unused portion of the
revolving credit facility.
To offset the variable rate characteristic of a portion of these bank
borrowings, the Company entered into interest rate swap agreements resulting
in fixed interest rates of 6.16% on $51,000,000 through July 1998, 5.47% on
$35,000,000 through January 1998, 5.95% on $43,000,000 through October 1997
and 6.35% on $51,000,000 through July 1997. The overall weighted average
interest rate on the bank borrowings was 6.08% and 6.32% at May 31, 1997 and
June 1, 1996, respectively.
The credit facility agreement contains covenants which, among other matters
(i) limit the Company's ability to incur indebtedness, merge, consolidate and
acquire or sell assets, (ii) require the Company to satisfy certain ratios
related to net worth, debt-to-capitalization and interest coverage and (iii)
limit the payment of cash dividends on common stock and common stock
repurchases to a total of $20,000,000 plus 75% of aggregate consolidated net
income after fiscal 1995, with availability of $62,031,000 at May 31, 1997.
(b) Represents 10.00% notes due in annual installments from July 1998 to July
2000. The note agreement includes covenants mirroring those of the bank
credit agreement.
<PAGE>
The fair value of the senior notes, described in (b) above, is estimated at
$83,800,000 and $85,800,000 as of May 31, 1997 and June 1, 1996, respectively,
based upon rates available for debt with similar terms. The Company believes,
based upon current terms, that the carrying value of all other long-term debt
approximates fair value. Additionally, the termination value of all swap
agreements at May 31, 1997 is not material.
The scheduled repayment of long-term debt is as follows:
Fiscal Years Ending (In Thousands)
------------------- --------------
1998 $ -
1999 25,000
2000 25,000
2001 29,000
2002 172,000
--------
$251,000
========
4. Commitments and Contingencies
Future minimum rental commitments for all noncancelable operating leases,
exclusive of taxes and insurance, are as follows:
Fiscal Years Ending (In Thousands)
------------------- --------------
1998 $ 48,211
1999 39,257
2000 30,059
2001 22,508
2002 14,869
Thereafter 25,478
---------
$180,382
=========
Net rental expense under operating leases was $53,792,000, $49,955,000 and
$28,145,000 for fiscal 1997, 1996 and 1995, respectively. The majority
of the operating leases contain renewal options for varying periods.
Certain leases include purchase options during or at the end of the lease
term.
The Company is subject to various routine legal proceedings, environmental
actions and other matters in the ordinary course of business, some of which
may be covered in whole or in part by insurance. In management's opinion,
none of these matters will have a material adverse effect on the Company's
financial position, but could be material to the results of operations or cash
flows for a particular quarter or annual period.
-24-
<PAGE>
5. Income Taxes
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
May 31, June 1, June 3,
1997 1996 1995
-------- -------- --------
Statutory federal tax 35.0% 35.0% 35.0%
State income tax 5.1 5.6 5.4
Intangibles amortization 2.0 9.6 6.2
Other 0.5 1.2 1.2
---- ---- ----
42.6% 51.4% 47.8%
==== ==== ====
The components of the provision for income taxes are as follows:
(In Thousands)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
May 31, June 1, June 3,
1997 1996 1995
-------- -------- --------
Current:
Federal $54,057 $22,426 $18,063
State 11,789 4,906 3,025
------- ------- -------
65,846 27,332 21,088
------- ------- -------
Deferred:
Federal 4,985 (561) (2,446)
State 1,290 (899) 313
------- ------- -------
6,275 (1,460) (2,133)
------- ------- -------
$72,121 $25,872 $18,955
======= ======= =======
<PAGE>
Temporary differences and carryforwards which give rise to the deferred income
tax assets and liabilities are as follows:
(In Thousands)
May 31, June 1,
1997 1996
-------- --------
Deferred tax asset:
Payroll and benefits accruals $ 19,404 $ 23,198
Self-insurance reserves 16,355 15,056
Other 25,098 15,374
Valuation allowance - -
-------- --------
$ 60,857 $ 53,628
======== ========
Deferred tax liability:
Property and equipment $154,559 $161,202
Intangibles 43,191 40,419
Self-insurance reserves (37,241) (44,532)
Payroll and benefits accruals (37,686) (36,602)
Environmental accruals (9,392) (10,138)
Other 10,451 29
-------- --------
$123,882 $110,378
======== ========
6. Employee Benefit Plans
The 1991 Employee Stock Purchase Plan, which is noncompensatory, allows all
eligible employees to purchase common stock of the Company. The common stock
can be either issued by the Company at market prices or purchased on the open
market. At May 31, 1997, 116,000 shares were authorized but not issued under
this plan.
The Company sponsors a defined contribution retirement plan for eligible
employees not covered by union plans. Contributions are based upon a
percentage of annual compensation plus a percentage of voluntary employee
contributions. Retirement expense related to this plan was $15,543,000,
$15,301,000 and $6,528,000 for fiscal 1997, 1996 and 1995, respectively.
There are also in effect numerous negotiated pension plans covering employees
participating by reason of union contracts. Expense for these plans was
$88,971,000, $78,378,000 and $28,219,000 for fiscal 1997, 1996 and 1995,
respectively.
In addition to providing retirement pension benefits, the Company provides
health care benefits for eligible retired employees. Under the Company's
plans, all nonunion employees, with 10 years of service after age 50, are
eligible for retiree health care coverage between ages 60 and 65.
Grandfathered nonunion employees and certain union employees who have
bargained into the Company-sponsored health care plans are generally eligible
after age 55, with 10 years of service, and have only supplemental benefits
after Medicare eligibility is reached. Certain of the plans require
contributions by retirees and spouses.
-25-
<PAGE>
The components of the net postretirement benefit expense are as follows:
(In Thousands)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
May 31, June 1, June 3,
1997 1996 1995
-------- -------- --------
Service cost $ 2,237 $1,209 $ 743
Interest cost 6,977 5,850 2,488
Amortization of unrecognized
prior service cost 695 115 -
Amortization of unrecognized
net loss 688 135 355
------- ------ ------
Net postretirement benefit
expense $10,597 $7,309 $3,586
======= ====== ======
The status of the Company's unfunded postretirement benefit obligation is as
follows:
(In Thousands)
May 31, June 1,
1997 1996
------- -------
Retirees $58,915 $59,892
Fully eligible active
plan participants 14,155 10,354
Other active plan
participants 16,716 12,609
------- -------
Accumulated postretirement
benefit obligation (APBO) 89,786 82,855
Unrecognized prior service
cost (5,082) (1,231)
Unrecognized net loss from
assumption changes (2,409) (3,749)
------- -------
Accrued postretirement
benefit 82,295 77,875
Less current portion (7,450) (6,450)
------- -------
APBO included in other
liabilities $74,845 $71,425
======= =======
In determining the APBO, the weighted average discount rate was assumed to be
8.0% for fiscal 1997, 1996 and 1995. The assumed health care cost trend rate
for fiscal 1997 was 9.5%, declining gradually to 6.5% over the next 12 years
and to 5.5% after 18 years. A 1.0% increase in this assumed health care cost
trend rate would increase the service and interest cost components of the net
postretirement benefit expense for fiscal 1997 by approximately $1,686,000, as
well as increase the May 31, 1997 APBO by approximately $13,199,000.
<PAGE>
The Company also participates in a number of multi-employer plans which
provide postretirement health care benefits to substantially all union
employees not covered by Company-administered plans. Amounts reflected as
benefit cost and contributed to such plans, including amounts related to
health care benefits for active employees, totaled $134,917,000, $123,867,000
and $47,672,000 in fiscal 1997, 1996 and 1995, respectively.
7. Stock Option Plans
The 1996 Stock Option Plan allows the Company to grant to employees and
directors stock options to purchase up to 6,842,000 shares of common stock at
prices which are not less than the fair market value at the date of grant.
These options may be granted over a period not to exceed 10 years and
generally vest from one to three years from the date of grant. At May 31,
1997, options to purchase 3,896,000 shares were authorized but not granted.
The changes in outstanding options are as follows:
Weighted Average
Shares Exercise Price
Under Option Per Share
------------ ----------------
Balance May 28, 1994 924,000 $15.75
Issued 726,000 13.50
Surrendered (62,000) 15.45
--------- ------
Balance June 3, 1995 1,588,000 14.73
Issued 252,000 20.61
Surrendered (61,000) 20.50
Exercised (748,000) 15.16
--------- ------
Balance June 1, 1996 1,031,000 15.52
Issued 1,123,000 37.00
Surrendered (19,000) 33.43
Exercised (520,000) 15.66
--------- ------
Balance May 31, 1997 1,615,000 $30.20
========= ======
-26-
<PAGE>
Stock options outstanding and exercisable at May 31, 1997 were as follows:
Weighted Average
Weighted Average Remaining
Range of Exercise Shares Exercise Price Contractual Life
Prices Per Share Under Option Per Share In Years
- ----------------- ------------ ---------------- ----------------
Outstanding:
$12.25 - $14.50 325,000 $13.59 6.7
17.00 - 21.25 193,000 19.53 6.8
37.00 - 37.00 1,097,000 37.00 9.3
- ---------------- --------- ------ ---
$12.25 - $37.00 1,615,000 $30.20 8.5
- ---------------- --------- ------ ---
Exercisable:
$12.25 - $14.50 325,000 $13.59
17.00 - 21.25 193,000 19.53
37.00 - 37.00 70,000 37.00
- ---------------- --------- ------
$12.25 - $37.00 588,000 $18.32
- ---------------- --------- ------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB25"), and related interpretations in
accounting for its stock option plan, and, therefore, no compensation expense
has been recognized for its plan. For companies electing to continue the use
of APB25, SFAS No. 123, "Accounting for Stock-Based Compensation" requires
proforma disclosures determined through the use of an option-pricing model as
if the provisions of SFAS No. 123 had been adopted.
The weighted average fair value at date of grant for options granted during
fiscal 1997 and 1996 was $12.96 and $6.64 per share, respectively. The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following assumptions used for
1997 and 1996 grants: dividend yield of 1.0% for both years; expected
volatility of 26.5% and 27.9%, respectively; risk-free interest rate of 6.4%
and 5.9%, respectively; and an expected term of four years for all grants.
Had the Company adopted the provisions of SFAS No. 123, reported net income
would have been reduced by $4,050,000 ($.11 per share) and $565,000 ($.02 per
share) for fiscal 1997 and 1996, respectively.
At May 31, 1997, 5,648,000 total shares of common stock were reserved for
issuance under various employee benefit plans.
<PAGE>
8. Accrued Expenses and Other Liabilities
Included in accrued expenses are the following:
(In Thousands)
May 31, June 1,
1997 1996
-------- --------
Payroll, vacation and other
compensation $64,454 $61,737
Self-insurance reserves 53,160 44,498
Pension and welfare 34,372 39,799
Taxes other than income 21,306 21,731
Included in other liabilities are the following:
(In Thousands)
May 31, June 1,
1997 1996
-------- --------
Self-insurance reserves $ 95,819 $113,484
Accrued postretirement benefit 74,845 71,425
9. Other Charges
The Company incurred $9,500,000 of other charges in fiscal 1996 as the result
of a payment due a union-administered multi-employer pension plan which
failed.
-27-
<PAGE>
10. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for the fiscal years ended May 31,
1997 and June 1, 1996 is as follows (each quarter represents a period of
twelve weeks except the third quarters, which cover sixteen weeks):
(In Thousands, Except Per Share Data)
First Second Third Fourth
-------- -------- -------- --------
1997
Net sales $753,625 $758,378 $945,258 $755,170
Cost of products sold 374,139 365,865 465,891 360,370
Operating income 38,735 51,126 46,268 55,014
Net income 18,667 26,242 22,629 29,639
Earnings per share .49 .69 .59 .77
1996
Net sales $471,441 $734,537 $926,482 $745,720
Cost of products sold 241,302 375,791 470,459 365,639
Operating income 16,523 20,694 17,711 23,830
Net income 5,726 6,095 4,166 8,476
Earnings per share .21 .16 .11 .23
First quarter fiscal 1996 results include the operations of CBC for five
weeks, from the acquisition date of July 22, 1995. The fourth quarter of
fiscal 1996 includes other charges of $9,500,000 ($5,738,000 and $.15 per
share on an after-tax basis) resulting from a payment due a union-administered
multi-employer pension plan which failed.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To the Board of Directors and Stockholders
Interstate Bakeries Corporation
We have audited the accompanying consolidated balance sheets of Interstate
Bakeries Corporation and its subsidiaries as of May 31, 1997 and June 1, 1996,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended May 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Interstate Bakeries Corporation
and its subsidiaries as of May 31, 1997 and June 1, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended May 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
July 15, 1997
-28-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANACIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MAY 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE FIFTY-TWO WEEKS ENDED MAY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 195,324
<ALLOWANCES> 4,577
<INVENTORY> 63,962
<CURRENT-ASSETS> 325,162
<PP&E> 1,076,436
<DEPRECIATION> 269,153
<TOTAL-ASSETS> 1,493,087
<CURRENT-LIABILITIES> 348,516
<BONDS> 251,000
0
0
<COMMON> 393
<OTHER-SE> 538,329
<TOTAL-LIABILITY-AND-EQUITY> 1,493,087
<SALES> 3,212,431
<TOTAL-REVENUES> 3,212,431
<CGS> 1,566,265
<TOTAL-COSTS> 1,566,265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,592
<INCOME-PRETAX> 169,298
<INCOME-TAX> 72,121
<INCOME-CONTINUING> 97,177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,177
<EPS-PRIMARY> 2.55
<EPS-DILUTED> 0
</TABLE>
