UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 22, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
_______________
For the Quarter Ended August 22, 1998 Commission File Number 1-11165
INTERSTATE BAKERIES CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1470322
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12 East Armour Boulevard, Kansas City, Missouri 64111
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (816) 502-4000
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- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
---------------
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 / /
There were 71,977,580 shares of common stock, $.01 par value per share,
outstanding on September 25, 1998.
<PAGE>
INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED AUGUST 22, 1998
CONTENTS
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Description Page
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PART I - FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations 1-3
Consolidated Balance Sheet 4
Consolidated Statement of Income 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7-9
PART II - OTHER INFORMATION
- ---------------------------
Legal Proceedings Not Applicable
Changes in Securities Not Applicable
Defaults Upon Senior Securities Not Applicable
Submission of Matters to a Vote of Security Holders Not Applicable
Other Information Not Applicable
Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
INTERSTATE BAKERIES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net sales for the first quarter of 1999, the twelve weeks ended August 22,
1998, were $788,416,000, up $24,697,000 and 3.2%, from net sales of
$763,719,000 in the prior year. This increase was primarily attributable to
acquisitions. After adjusting for acquisitions, net sales dollars and overall
unit volume held steady, while branded unit volume was up 1.5% from the prior
year.
Gross profit was 52.8% of net sales for the first quarter of fiscal 1999, up
slightly from 52.6% of net sales in the prior year. This improvement resulted
from lower ingredient costs, primarily flour, and additional production
efficiencies, partially offset by higher labor and labor-related costs.
Selling, delivery and administrative expenses increased 3.0% over the first
quarter of fiscal 1998, due to acquisitions. First quarter fiscal 1999 and
1998's selling, delivery and administrative expenses as a percentage of net
sales were consistent from year-to-year at 42.3%.
Based upon these factors, operating income for the first quarter of fiscal
1999 was $59,396,000, or 7.5% of net sales, up $4,641,000 from fiscal 1998's
$54,755,000, or 7.2% of net sales.
Interest expense for the first quarter of fiscal 1999 was $4,336,000,
comparable to the prior year's expense of $4,466,000, reflecting similar
average borrowing levels and market interest rates.
The effective tax rates for fiscal 1999 and 1998 were 37.5% and 40.7%,
respectively. The fiscal 1999 effective tax rate approximates the overall
federal and state rates while the fiscal 1998 effective tax rate reflects
higher nondeductible intangibles amortization.
Net income for the first quarter of fiscal 1999 was $34,491,000, or $.47 per
share (diluted basis), compared to $29,880,000, or $.39 per share, in fiscal
1998. The earnings per share gain represents a 20.5% improvement over the
prior year, which has been adjusted for a two-for-one stock split effected in
the form of a stock dividend paid November 3, 1997.
-1-
<PAGE>
Changes in Financial Condition
- ------------------------------
Cash generated by operating activities for the twelve weeks ended August 22,
1998 was $41,199,000 compared to $59,638,000 a year ago, with the decrease
primarily attributable to higher working capital requirements. Cash
generated by operations during fiscal 1999, along with increased borrowings
of $89,000,000, was used for acquisitions of $80,103,000, fund net capital
expenditures of $25,651,000, repurchase common stock of $19,249,000 and pay
common stock dividends of $5,092,000.
As noted in the Company's Annual Report on Form 10-K for the year ended May
30, 1998, cash flows from operations, along with existing debt and a new
senior debt issuance, are expected to be sufficient to meet the fiscal 1999
cash requirements. On September 10, 1998, the Company entered into a
6.43% senior note agreement for $200,000,000 with several major insurance
companies. The debt is unsecured and matures September 2005. The proceeds
were used to repay a short-term bank facility and reduce borrowings under the
existing revolving credit facility.
YEAR 2000 COMPLIANCE
The Company has been assessing the impact that the turn of the century will
have on its internal computer systems for several years. The turn of the
century could potentially impact the Company's production systems, route
operations, inventory purchasing and control, receivable collections, cash
management and financial reporting. The Company has developed an overall plan
to evaluate and correct all computer and non-information technology date-
related system issues by mid-summer of 1999. This evaluation and correction
process has already been completed on a number of the Company's most critical
systems with testing of changes already in process. The Company is also in
the process of communicating with significant suppliers and customers to
ascertain the status of their year 2000 compliance programs. To date, the
costs of year 2000 remediation have not been and are not expected to be
material.
Based upon efforts to date and the assumed continued implementation of its
year 2000 compliance plan, the Company does not anticipate that year 2000
issues will significantly impact the business or that the costs associated
with year 2000 compliance will have a material impact on future consolidated
financial position, results of operations or cash flows of the Company.
The Company currently does not have a formal contingency plan in place.
Contingency planning is scheduled to occur during the spring and summer of
1999 as final implementation and testing of the compliance plan takes place.
-2-
<PAGE>
FORWARD-LOOKING STATEMENTS
The Company or its representatives may from time-to-time provide information,
in either written or oral form, which contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. In receiving
and reviewing such information, it should be kept in mind that forward-looking
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those discussed or projected.
Factors which create these risks and uncertainties can be either internal to
the Company or related to general external market conditions.
-3-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(000's)
August 22, May 30,
1998 1998
------------ -----------
Assets
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $4,287,000
($4,106,000 at May 30) $ 203,734 $ 198,644
Inventories 70,132 66,427
Other current assets 69,296 69,387
---------- ----------
Total current assets 343,162 334,458
---------- ----------
Property and equipment:
Land and buildings 364,773 343,339
Machinery and equipment 894,533 849,671
---------- ----------
1,259,306 1,193,010
Less accumulated depreciation (364,791) (344,130)
---------- ----------
Net property and equipment 894,515 848,880
---------- ----------
Intangibles 409,761 366,648
---------- ----------
$1,647,438 $1,549,986
========== ==========
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ 25,000 $ 25,000
Accounts payable 126,763 146,852
Accrued expenses 209,243 193,236
---------- ----------
Total current liabilities 361,006 365,088
---------- ----------
Long-term debt 350,000 261,000
Other liabilities 238,259 236,506
Deferred income taxes 122,237 122,237
---------- ----------
Total long-term liabilities 710,496 619,743
---------- ----------
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized - 1,000,000 shares; issued - none - -
Common stock, par value $.01 per share;
authorized - 120,000,000 shares; issued -
79,170,000 shares (79,126,000 at May 30) 792 791
Additional paid-in capital 539,989 539,359
Retained earnings 180,117 150,718
Treasury stock, at cost - 7,056,000 shares
(6,382,000 at May 30) (144,962) (125,713)
---------- ----------
Total stockholders' equity 575,936 565,155
---------- ----------
$1,647,438 $1,549,986
========== ==========
See accompanying notes.
-4-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(000'S EXCEPT PER SHARE DATA)
Twelve Weeks Ended
----------------------
August 22, August 23,
1998 1997
---------- ----------
Net sales $788,416 $763,719
-------- --------
Cost of products sold 371,806 362,155
Selling, delivery and administrative
expenses 333,112 323,326
Depreciation and amortization 24,102 23,483
-------- --------
729,020 708,964
-------- --------
Operating income 59,396 54,755
-------- --------
Other income (125) (99)
Interest expense 4,336 4,466
-------- --------
4,211 4,367
-------- --------
Income before income taxes 55,185 50,388
Provision for income taxes 20,694 20,508
-------- --------
Net income $ 34,491 $ 29,880
======== ========
Earnings per share:
Basic $ .48 $ .40
======== ========
Diluted $ .47 $ .39
======== ========
See accompanying notes.
-5-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000's)
Twelve Weeks Ended
--------------------------
August 22, August 23,
1998 1997
------------ ------------
Cash flows from operating activities:
Net income $ 34,491 $ 29,880
Depreciation and amortization 24,102 23,483
Other (120) 1,336
Change in operating assets and liabilities:
Accounts receivable 1,760 (8,435)
Inventories (969) 390
Other current assets 91 5,124
Accounts payable and accrued expenses (18,156) 7,860
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Cash from operating activities 41,199 59,638
------- -------
Cash flows from investing activities:
Acquisitions (80,103) -
Additions to property and equipment (25,768) (14,491)
Sale of assets 117 1,811
Other (735) (159)
------- -------
Cash from investing activities (106,489) (12,839)
------- -------
Cash flows from financing activities:
Addition of long-term debt 114,000 18,000
Reduction of long-term debt (25,000) -
Common stock dividends paid (5,092) (5,072)
Issuance of common stock 631 363
Acquisition of treasury stock (19,249) (60,090)
------- -------
Cash from financing activities 65,290 (46,799)
------- -------
Change in cash and cash equivalents - -
Cash and cash equivalents:
Beginning of period - -
------- -------
End of period $ - $ -
======= =======
Supplemental disclosures:
Interest paid $ 7,071 $ 6,536
Income taxes paid 905 1,958
See accompanying notes.
-6-
<PAGE>
INTERSTATE BAKERIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Accounting Policies and Basis of Presentation
---------------------------------------------
The accompanying unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, which, in the
opinion of management, are necessary for a fair presentation of financial
position, results of operations and cash flows. Results of operations for
interim periods are not necessarily indicative of results to be expected for a
full year.
2. Inventories
-----------
The components of inventories are as follows:
(000's)
-------------------------
August 22, May 30,
1998 1998
---------- ----------
Ingredients and packaging $44,798 $43,534
Finished goods 19,198 16,996
Other 6,136 5,897
------- -------
$70,132 $66,427
======= =======
3. Income Taxes
------------
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
Twelve Weeks Ended
----------------------------
August 22, August 23,
1998 1997
------------ ------------
Statutory federal tax 35.0% 35.0%
State income tax 2.7 4.8
Intangibles amortization 1.0 1.4
Other (1.2) (.5)
-------- -------
37.5% 40.7%
======== =======
-7-
<PAGE>
4. Stock Split
-----------
On September 23, 1997, the shareholders of the Company approved an increase in
the number of authorized common shares to 120,000,000. The same day the
Company's Board of Directors declared a two-for-one stock split effected in
the form of a stock dividend payable November 3, 1997 to stockholders of
record on October 15, 1997. All prior year share and per share amounts have
been adjusted to reflect this stock split.
5. Earnings Per Share
------------------
During the third quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaced primary earnings per share with a dual presentation of basic and
diluted earnings per share. Earnings per share amounts for prior periods have
been restated in accordance with this standard. Following is a reconciliation
between basic and diluted weighted average shares outstanding used in the
Company's earnings per share computations (000's):
Twelve Weeks Ended
-------------------------
August 22, August 23,
1998 1997
---------- ----------
Basic weighted average
common shares outstanding 72,597 74,522
Effect of dilutive stock
compensation 1,121 1,354
------ ------
Dilutive weighted average
common shares outstanding 73,718 75,876
====== ======
6. Acquisition
-----------
On August 16, 1998, the Company acquired the assets of the Drake baking
operation in Wayne, New Jersey ("Drake's"). Drake's employs over 800 people,
sells cake product throughout the northeastern United States and has annual
sales of approximately $115 million. The transaction has been accounted for
as a purchase.
-8-
<PAGE>
7. Subsequent Event
----------------
On September 10, 1998, the Company entered into a 6.43% senior note agreement
for $200,000,000 with several major insurance companies. The debt, which is
unsecured, has a maturity date of September 2005. The note agreement
contains covenants, which a) limit the Company's ability to incur
indebtedness, merge, consolidate and sell assets, and b) require the Company
to satisfy certain ratios related to net worth and interest coverage. These
covenants are comparable to those under the existing revolving credit
facility.
The proceeds were used to repay a short-term bank facility and reduce
borrowings under the revolving credit facility.
-9-
<PAGE>
PART II
ITEM 6 - Exhibits and Reports on Form 8-K
a) Exhibits filed with this report:
1) 11 - Schedule regarding computation of per share earnings
2) 27 - Financial data schedule
-10-
<PAGE>
**************
SIGNATURES
Pursuant to the requirements 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
-------------------------------
(Registrant)
DATE: October 2, 1998 /s/ Charles A. Sullivan
--------------------------------
Charles A. Sullivan, Chairman
and Chief Executive Officer
DATE: October 2, 1998 /s/ John F. McKenny
--------------------------------
John F. McKenny, Vice President/
Corporate Controller and
Principal Accounting Officer
-11-
EXHIBIT 11
INTERSTATE BAKERIES CORPORATION
SCHEDULE REGARDING COMPUTATION OF PER SHARE EARNINGS
(000's EXCEPT PER SHARE DATA)
Twelve Weeks Ended
-----------------------
August 22, August 23,
1998 1997
---------- ----------
Net income $34,491 $29,880
======= =======
Basic weighted average common shares
outstanding 72,597 74,522
Effect of dilutive stock compensation 1,121 1,354
------- -------
Diluted weighted average common
shares outstanding 73,718 75,876
======= =======
Earnings per share:
Basic $ .48 $ .40
======= =======
Diluted $ .47 $ .39
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF AUGUST 22, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE TWELVE WEEKS ENDED AUGUST 22, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-END> AUG-22-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 208,021
<ALLOWANCES> 4,287
<INVENTORY> 70,132
<CURRENT-ASSETS> 343,162
<PP&E> 1,259,306
<DEPRECIATION> 364,791
<TOTAL-ASSETS> 1,647,438
<CURRENT-LIABILITIES> 361,006
<BONDS> 350,000
0
0
<COMMON> 792
<OTHER-SE> 575,144
<TOTAL-LIABILITY-AND-EQUITY> 1,647,438
<SALES> 788,416
<TOTAL-REVENUES> 788,416
<CGS> 371,806
<TOTAL-COSTS> 371,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,336
<INCOME-PRETAX> 55,185
<INCOME-TAX> 20,694
<INCOME-CONTINUING> 34,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,491
<EPS-PRIMARY> .48
<EPS-DILUTED> .47
</TABLE>
