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 29, 1999
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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
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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
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(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 $899,602,311 as of August 2, 1999. 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 70,293,437 shares of Common Stock, $.01 par value per share,
outstanding as of August 2, 1999.
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 29, 1999.
** Refers to portions of Registrant's definitive proxy statement
filed on August 20, 1999.
<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"), a Delaware corporation
incorporated in 1987, 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," "Drake's" 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 approximately 1,500 thrift stores and employs more than 34,000
people. Its sales force delivers products directly from the Company's more
than 1,300 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
33,846,154 shares of 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 its operations. 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
15,498,000 shares of the Company's Common Stock. Pursuant to the SAILS
transaction, the Company repurchased 2,000,000 shares of its Common Stock from
Ralston for $60,079,375, or $30.0396875 per share, which amount was the
closing sales price of the Common Stock on the New York Stock Exchange on July
23, 1997 of $30.96875 per share, less a 3% discount.
During the 1998 fiscal year, the Company purchased from Ralston 1,200,000
shares of the Company's Common Stock at an average price of $31.375 per share,
and during the 1999 fiscal year, the Company purchased from Ralston 500,000
shares at $28.375 per share.
<PAGE>
On September 23, 1997, the Company declared a two-for-one stock split
effected in the form of a stock dividend payable November 3, 1997 to
stockholders of record of the Company's common stock at the close of business
October 15, 1997. All share and per share amounts presented reflect this
stock split.
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," "J.J. Nissen,"
"Merita," "Millbrook Farms," "Parisian," "Sunbeam," "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",
"Drake's" 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 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.
<PAGE>
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.
The Company's fresh bakery products are delivered from the Company's
network of 67 bakeries to its more than 1,300 distribution centers. The
products are then delivered primarily to supermarkets and convenience stores
by the Company's sales force on its more than 11,000 delivery routes. Unsold
products are picked up by the Company's sales force and delivered to the
Company's more than 1,500 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 29, 1999.
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
- ---------
The Company employs more than 34,000 people. Approximately 80% of the
Company's employees are covered by more than 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.
<PAGE>
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, Bestfoods 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. 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.
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 remediating any contaminated sites. 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 bakeries in San Diego, Castroville and Montebello,
California, all three of which are leased premises. The Company's bakeries
are located as follows:
Akron, Ohio Memphis, Tennessee
Alexandria, Louisiana Miami, Florida
Anchorage, Alaska Milwaukee, Wisconsin
Biddeford, Maine Minonk, Illinois
Billings, Montana Monroe, Louisiana
Birmingham, Alabama Montebello, California
Boise, Idaho New Bedford, Massachusetts
Boonville, Missouri Northwood, Ohio
Buffalo, New York Oakland, California
Castroville, California Ogden, Utah
Charlotte, North Carolina Orlando, Florida
Cincinnati, Ohio Peoria, Illinois
Columbus, Georgia Philadelphia, Pennsylvania
Columbus, Indiana Pomona, California
Columbus, Ohio Portland, Oregon
Davenport, Iowa Richmond, Virginia
Decatur, Illinois Rocky Mount, North Carolina
Denver, Colorado Sacramento, California (2)
Detroit, Michigan Salt Lake City, Utah
Emporia, Kansas San Diego, California (2)
Florence, South Carolina San Francisco, California (2)
Glendale, California San Pedro, California
Grand Rapids, Michigan Schiller Park, Illinois
Hodgkins, Illinois Seattle, Washington (2)
Indianapolis, Indiana Spokane, Washington
Jacksonville, Florida Springfield, Missouri
Jamaica, New York St. Louis, Missouri
Kansas City, Missouri Tampa, Florida
Knoxville, Tennessee Tulsa, Oklahoma
Los Angeles, California (3) Waterloo, Iowa
Wayne, New Jersey
The Company makes capital investments to update or retrofit its
facilities to produce new products on existing lines and to increase line
speeds. The Company believes that its facilities are well maintained but
continues to pursue opportunities to enhance operating efficiencies through
strategic capital investments, some of which may allow the Company to realize
operating synergies through the consolidation of less efficient or redundant
facilities. During fiscal 1999, the Company opened its $60 million Biddeford,
Maine bakery, which resulted in the closure of four less efficient bakeries in
the Northeast. A similar consolidation effort is underway in the Company's
Pacific Northwest market area where production of three bakeries will be
merged into a single bakery in Lakewood, Washington by the spring of 2000.
<PAGE>
The Company also recently consolidated its Minot, North Dakota production into
Billings, Montana and its Roanoke, Virginia production into Charlotte, North
Carolina.
Other Properties
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The Company's more than 1,300 distribution centers and approximately
1,500 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 leased facilities.
Item 3. Legal Proceedings
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The Company has been named as a defendant in various 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
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Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
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Matters
-------
The section entitled "Common Stock Information" appearing on page 1 of
the Annual Report is incorporated herein by this reference. Note 2, entitled
"Description of Business and Significant Accounting Policies", specifically
the section subtitled "Stock Split" appearing on page 20 of the Annual Report
is also incorporated herein by this reference. Note 3, entitled "Debt", to
the consolidated financial statements appearing on pages 20 and 21 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 14 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 33,846,154
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 12 of the Annual Report, is incorporated herein by this reference.
<PAGE>
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 13 and 14 of the
Annual Report is incorporated herein by this reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
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The Company is exposed to market risks relative to commodity price
fluctuations and interest rate changes. The Company actively manages these
risks through the use of derivative financial instruments. As a matter of
policy, the Company uses these financial instruments only for hedging
purposes, and the use of derivatives for trading and speculative purposes is
prohibited.
Commodity Prices
Commodities used by the Company in the production of its products are
subject to wide price fluctuations, depending upon factors such as weather,
worldwide market supply and demand and government regulation. To reduce the
risk associated with commodity price fluctuations (primarily for wheat), the
Company enters into commodity futures and options contracts, fixing commodity
prices for future periods. A sensitivity analysis was prepared and based upon
the Company's commodity-related derivatives position as of May 29 1999, an
assumed 10% adverse change in commodity prices would not result in a material
effect on future earnings, fair values or cash flows of the Company.
Interest Rates
The Company manages its exposure to interest rate risk through the use of
a combination of floating and fixed rate debt. In addition, from time to
time, the Company has entered into interest rate swap agreements to fix rates
on variable rate debt instruments. The Company had no outstanding interest
rate swap agreements at May 29, 1999. Based upon the Company's sensitivity
analysis at May 29, 1999, an assumed 10% adverse change in interest rates
would not have a material impact on future earnings, fair values or cash flows
of the Company.
Item 8. Financial Statements and Supplementary Data
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The consolidated financial statements and accompanying notes and the
Independent Auditors' Report appearing on pages 15 to 26 of the Annual Report
are incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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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 and ratification of independent auditors
filed on August 20, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
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(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 29, 1999 and May 30,
1998.
For the 52 weeks ended May 29, 1999, May 30, 1998 and
May 31, 1997:
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report dated July 14, 1999.
2. Financial Statement Schedule
The following report and schedule are filed herewith as a
part hereof:
Independent Auditors' Report dated July 14, 1999.
Schedule for the 52 weeks ended May 29, 1999, May 30,
1998 and May 31, 1997:
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.
<PAGE>
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 19, 1999 By: /s/ Charles A. Sullivan
-------------------------------
Charles A. Sullivan
Chairman of the Board and
Chief Executive Officer
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 19, 1999
- ----------------------- Chief Executive Officer
Charles A. Sullivan and Director (Principal
Executive Officer)
/s/ Michael J. Anderson Director August 19, 1999
- -----------------------
Michael J. Anderson
/s/ G. Kenneth Baum Director August 19, 1999
- -------------------
G. Kenneth Baum
/s/ Leo Benatar Director August 19, 1999
- ---------------
Leo Benatar
/s/ E. Garrett Bewkes, Jr. Director August 19, 1999
- --------------------------
E. Garrett Bewkes, Jr.
/s/ Robert B. Calhoun, Jr. Director August 19, 1999
- --------------------------
Robert B. Calhoun, Jr.
/s/ Frank E. Horton Director August 19, 1999
- -------------------
Frank E. Horton
/s/ James R. Elsesser Director August 19, 1999
- ---------------------
James R. Elsesser
/s/ Frank W. Coffey Senior Vice President and August 19, 1999
- ------------------- Chief Financial Officer
Frank W. Coffey
<PAGE>
INDEPENDENT AUDITORS' REPORT
Interstate Bakeries Corporation
We have audited the consolidated financial statements of Interstate
Bakeries Corporation and its subsidiaries as of May 29, 1999 and May 30, 1998,
and for each of the three fiscal years in the period ended May 29, 1999, and
have issued our report thereon dated July 14, 1999; such consolidated
financial statements and report are included in your 1999 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 14, 1999
<PAGE>
INTERSTATE BAKERIES CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FIFTY-TWO WEEKS ENDED MAY 29, 1999, MAY 30, 1998
AND MAY 31, 1997
(In Thousands)
Balance at Additions Accounts Balance
beginning charged charged at end
Description of period to income off of period
- ----------- ---------- --------- -------- ---------
1999:
Reserve for
discounts
and allow-
ances on
accounts
receivable $ 5,314 $ (776) $ - $ 4,538
Allowance for
doubtful
accounts 4,107 2,465 2,332 4,240
------- ------- ------- -------
$ 9,421 $ 1,689 $ 2,332 $ 8,778
======= ======= ======= =======
1998:
Reserve for
discounts
and allow-
ances on
accounts
receivable $ 7,977 $(2,663) $ - $ 5,314
Allowance for
doubtful
accounts 4,577 1,853 2,323 4,107
------- ------- ------- -------
$12,554 $ (810) $ 2,323 $ 9,421
======= ======= ======= =======
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
------- ------- ------- -------
$11,020 $ 3,041 $ 1,507 $12,554
======= ======= ======= =======
<PAGE>
EXHIBIT INDEX
--------------
Exhibit
No. Exhibit
- ------- ---------
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>
13.1 Page 1 and pages 12 to 26 of the Interstate Bakeries Corporation
annual report to security holders for the year ended May 29,
1999. (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.*
27.0 Financial Data Schedule.*
-------------------------
* Filed herewith.
FINANCIAL HIGHLIGHTS
- --------------------
(In Thousands, Except Per Share Data)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
May 29, May 30, May 31,
1999 1998 1997
------------ ------------ ------------
Statement of Income
Net sales $3,459,377 $3,265,842 $3,212,431
Operating income 224,477 231,592 191,143
% of net sales 6.5% 7.1% 6.0%
Net income $ 126,155 $ 127,924 $ 97,177
% of net sales 3.6% 3.9% 3.0%
Per common share(1):
Net income (diluted basis) $ 1.74 $ 1.71 $ 1.28
Book value 8.60 7.77 7.17
Common stock dividends .28 .28 .27
Average diluted shares
outstanding (1) 72,483 74,845 76,200
May 29, May 30, May 31,
1999 1998 1997
------------ ------------ ------------
Balance Sheet
Total assets $1,680,775 $1,549,986 $1,493,087
Long-term debt 369,000 261,000 251,000
Stockholders' equity 603,803 565,155 538,722
Debt to total capital 37.9% 31.6% 31.8%
(1) All per share and average shares outstanding amounts reflect a November
1997 two-for-one stock split.
[This page includes 4 bar graphs which depict net sales, operating income,
earnings per share and stockholders' equity for fiscal 1997, 1998 and 1999.
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 1999 and 1998:
Stock Price
Fiscal --------------------- Cash
Year Quarter High Low Dividends
------ --------- -------- -------- ------------
1999 1 $34.8125 $24.8750 $.0700
2 34.0625 25.0000 .0700
3 27.1875 23.2500 .0700
4 23.5625 21.1875 .0700
1998 1 32.1875 27.3125 .0675
2 36.7813 28.7813 .0700
3 37.3750 32.0000 .0700
4 33.6250 30.1875 .0700
The Company had approximately 6,000 shareholders on May 29, 1999.
-1-
<PAGE>
INTERSTATE BAKERIES CORPORATION
FIVE-YEAR SUMMARY OF FINANCIAL DATA
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended Ended
May 29, May 30, May 31, June 1, June 3,
1999 1998 1997 1996<2> 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Income
Net sales $3,459,377 $3,265,842 $3,212,431 $2,878,180 $1,222,779
Operating income 224,477 231,592 191,143 78,758<3> 57,293
% of net sales 6.5% 7.1% 6.0% 2.7% 4.7%
Net income $ 126,155 $ 127,924 $ 97,177 $ 24,463<3> $ 20,697
% of net sales 3.6% 3.9% 3.0% .8% 1.7%
Earnings per share:
Basic <1> $ 1.76 $ 1.74 $ 1.30 $ .35<3> $ .53
Diluted <1> 1.74 1.71 1.28 .35<3> .53
Common stock dividends
per share <1> .28 .28 .27 .25 .25
Weighted average common
shares outstanding:
Basic <1> 71,662 73,512 74,928 69,202 39,278
Diluted <1> 72,483 74,845 76,200 69,968 39,414
Balance Sheet
Total assets $1,680,775 $1,549,986 $1,493,087 $1,486,460 $ 598,441
Long-term debt, excluding
current maturities 369,000 261,000 251,000 303,651 212,205
Stockholders' equity 603,803 565,155 538,722 460,247 198,037
Debt to total capital 37.9% 31.6% 31.8% 39.8% 51.7%
<F1> All per share and average shares outstanding amounts reflect a November 1997 two-for-one stock split.
<F2> Fiscal 1996 includes the operations of Continental Baking Company for 45 weeks from its acquisition on
July 22, 1995.
<F3> Fiscal 1996 includes a charge of $9,500,000 ($5,738,000 and $.08 per basic and diluted share on an
after-tax basis) resulting from a payment due a union-administered, multi-employer pension plan which
failed.
</TABLE>
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1999 Compared With Fiscal 1998
Net sales for the fifty-two weeks ended May 29, 1999 were $3,459,377,000, an
increase of $193,535,000 and 5.9% over net sales of $3,265,842,000 for the
fifty-two weeks ended May 30, 1998. Excluding the effect of acquisitions and
dispositions, net sales increased approximately 1.3% for the year. This
adjusted increase reflects slight gains in branded unit volume, as well as
narrowly higher selling prices realized during the latter part of the year.
Fiscal 1999's gross profit was $1,823,994,000, or 52.7% of net sales, up
$100,072,000 from gross profit of $1,723,922,000, or 52.8% of net sales, in
fiscal 1998. This stable margin performance reflects slightly lower
ingredient costs for fiscal 1999, offset by higher labor and labor-related
costs, as well as higher production-related costs of acquired operations.
Selling, delivery and administrative expenses totaled $1,489,472,000, or 43.1%
of net sales, for fiscal 1999 compared to $1,389,627,000, or 42.6% of net
sales, in fiscal 1998. This unfavorable variance was attributable to higher
selling, delivery and administrative expenses, primarily labor and labor-
related costs, as a percentage of net sales associated with acquired
operations.
Depreciation and amortization increased $7,342,000, or 7.1%, to $110,045,000
in fiscal 1999 from $102,703,000 in fiscal 1998. This increase resulted from
acquisitions, as well as the start-up of operations in the new Biddeford,
Maine, and Northwood, Ohio, bakeries.
Based upon these factors, operating income for fiscal 1999 was $224,477,000,
or 6.5% of net sales, a $7,115,000 decrease from fiscal 1998's operating
income of $231,592,000, or 7.1% of net sales.
Interest expense for fiscal 1999 was $23,113,000, an increase of $4,489,000,
or 24.1%, from fiscal 1998. Fiscal 1999's interest expense reflects higher
average borrowing levels, primarily due to acquisitions, partially offset by
lower average interest rates and increased interest capitalized on major
capital projects.
The fiscal 1999 effective tax rate of 37.5%, as well as the fiscal 1998 rate
of 40.1%, approximate the overall federal and state statutory rates.
Reflecting these results, net income for fiscal 1999 was $126,155,000, or
$1.76 and $1.74 per basic and diluted share, respectively, compared to
$127,924,000, or $1.74 and $1.71 per basic and diluted share, respectively,
for fiscal 1998.
<PAGE>
Fiscal 1998 Compared With Fiscal 1997
Net sales for the fifty-two weeks ended May 30, 1998 were $3,265,842,000,
increasing $53,411,000 and 1.7% over net sales of $3,212,431,000 for the
fifty-two weeks ended May 31, 1997. Excluding the impact of acquisitions and
dispositions, net sales for fiscal 1998 were up only slightly over fiscal
1997. Selling prices remained relatively steady, as did overall unit volume.
Branded units, after adjusting for acquisitions and dispositions, were up
slightly more than 1% while non-branded units were down due to an emphasis on
selling higher-margin, branded products.
Gross profit for fiscal 1998 was $1,723,922,000, representing 52.8% of net
sales, an increase of $77,756,000 over gross profit of $1,646,166,000, or
51.2% of net sales, in fiscal 1997. This improvement in fiscal 1998 was
attributable to lower ingredient costs, primarily flour, as well as favorable
mix changes to higher-margin, branded products. These positive factors were
partially offset by higher labor and labor-related costs experienced in fiscal
1998.
Selling, delivery and administrative expenses were $1,389,627,000, or 42.6% of
net sales, for fiscal 1998 compared to $1,352,026,000, or 42.1% of net sales,
for fiscal 1997. The 2.8% year-over-year dollar increase in selling, delivery
and administrative expenses resulted from inflationary increases, primarily in
labor and labor-related costs, as well as the impact of acquisitions, net of
dispositions.
Reflecting these factors, operating income for fiscal 1998 rose $40,449,000,
or 21.2%, to $231,592,000, representing 7.1% of net sales, from $191,143,000,
or 6.0% of net sales, in fiscal 1997.
Interest expense decreased $3,968,000, or 17.6%, in fiscal 1998 to $18,624,000
from $22,592,000 in fiscal 1997. This decrease was due to somewhat lower
average borrowing levels and interest rates, as well as increased interest
capitalized on major capital projects during fiscal 1998.
The fiscal 1998 effective tax rate of 40.1% approximated the statutory rate,
while the fiscal 1997 rate of 42.6% reflected the nondeductibility of
amortization of various intangibles.
Based upon these overall results, net income for fiscal 1998 increased
$30,747,000, or 31.6%, to $127,924,000 from $97,177,000 in fiscal 1997.
Reflecting this increase, basic earnings per share improved 33.8% to $1.74 per
share in fiscal 1998 from $1.30 per share in fiscal 1997, while diluted
earnings per share improved 33.6% to $1.71 per share from $1.28 per share.
Fiscal 1997 per share amounts were adjusted for a two-for-one stock split
effected in the form of a stock dividend paid November 3, 1997, as well as the
fiscal 1998 adoption of Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share".
-13-
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of liquidity is cash provided by operations which
totaled $187,541,000 for fiscal 1999, a decrease of $14,081,000 from fiscal
1998's $201,622,000. This decrease was primarily due to higher working
capital requirements. Cash generated by operations during fiscal 1999, along
with net additional long-term borrowings of $108,000,000 and stock issuance
proceeds of $9,726,000, was used to fund net capital expenditures of
$100,413,000, common stock repurchases of $77,167,000, acquisitions of
$106,180,000 and common stock dividends of $20,066,000.
For fiscal 2000, the Company anticipates cash needs of approximately
$130,000,000, consisting of $85,000,000 of planned capital expenditures,
$25,000,000 of required debt reduction and $20,000,000 of common stock
dividends. The Company expects its fiscal 2000 cash needs to be funded by
ongoing operations and borrowing capacity under its existing bank credit
facility.
In addition, the Company will continue to evaluate among its investment
alternatives the repurchase of additional shares of its common stock under its
stock repurchase program.
YEAR 2000 COMPLIANCE
The Company is continuing to assess the impact that the turn of the century
will have on its internal computer systems and overall operations. The
Company has developed and is well into implementing a Company-wide Year 2000
plan (the "Plan"). The Plan consists of three major focus areas: information-
technology ("IT") systems, critical corporate support areas and bakery
critical systems and processes. The corporate and bakery focus areas are
comprised of primarily non-IT systems and third-party considerations. The
tasks common to each of these areas of focus are: (i) inventory and
prioritization of all critical Year 2000 issues, (ii) assessment of
compliance, (iii) remediation, (iv) testing and (v) design and implementation
of contingency and business continuation plans.
The IT systems area focuses on the Company's internal computer hardware and
software systems. All hardware, operating systems and business critical
software programs have been remediated and the Company is currently in the
final stages of testing for all operationally critical systems, replacement of
personal computer hardware and software and development of contingency and
business continuation plans for IT systems support. These final procedures
should be completed by the end of September 1999.
All corporate support departments and bakery facilities have completed their
inventory, assessment and remediation efforts with regard to all non-IT
systems which include any hardware, software and associated embedded computer
technologies that are used to operate Company facilities, equipment and other
activities. The Company continues its efforts to test these non-IT systems
and develop appropriate contingency plans with an estimated completion date
for this phase of the Plan by the end of September 1999.
<PAGE>
The Company, through its corporate support departments and individual bakery
facilities, has identified, prioritized and is continuing to communicate with
all critical business partners, including all third-party suppliers of goods
and services, to ascertain the status of their Year 2000 compliance programs.
The Company intends to monitor the progress of these critical third parties
and test critical system interfaces, where appropriate.
The Company does not anticipate that the Year 2000 issues related to
internally-controllable systems will significantly impact the overall business
operations or financial results of the Company. However, the Company could
face significant disruptions in business operations and financial losses if
certain business-critical third parties, such as utility providers,
telecommunication systems, transportation service providers or certain
government entities, do not successfully complete their Year 2000 remediation
plans. The Company is currently in the process of identifying and developing
contingency plans for the most reasonably likely worst case scenarios. The
Company expects to complete its analysis and contingency planning by September
1999.
The total cost of the Company's Plan is not expected to be material to the
Company's financial position. The estimated total cost of the Plan is not
expected to exceed $5 million, and is being funded through normal operating
cash flows of the Company.
PENDING ACCOUNTING STANDARD
See Note 2 to the Company's consolidated financial statements for discussion
regarding the pending accounting standard relating to derivative instruments
and hedging activities.
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.
-14-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED BALANCE SHEET
(In Thousands)
May 29, May 30,
1999 1998
----------- -----------
Assets
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $4,240,000
($4,106,000 in 1998) $ 216,984 $ 198,644
Inventories 65,861 66,427
Other current assets 65,905 69,387
---------- ----------
Total current assets 348,750 334,458
---------- ----------
Property and equipment:
Land and buildings 385,495 343,339
Machinery and equipment 942,748 849,671
---------- ----------
1,328,243 1,193,010
Less accumulated depreciation (425,327) (344,130)
---------- ----------
Net property and equipment 902,916 848,880
---------- ----------
Intangibles 429,109 366,648
---------- ----------
$1,680,775 $1,549,986
========== ==========
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ 25,000 $ 25,000
Accounts payable 134,681 146,852
Accrued expenses 195,515 193,236
---------- ----------
Total current liabilities 355,196 365,088
---------- ----------
Long-term debt 369,000 261,000
Other liabilities 225,030 236,506
Deferred income taxes 127,746 122,237
---------- ----------
Total long-term liabilities 721,776 619,743
---------- ----------
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 - 79,630,000 shares
(79,126,000 in 1998) 796 791
Additional paid-in capital 549,080 539,359
Retained earnings 256,807 150,718
Treasury stock, at cost - 9,412,000 shares
(6,382,000 in 1998) (202,880) (125,713)
---------- ----------
Total stockholders' equity 603,803 565,155
---------- ----------
$1,680,775 $1,549,986
========== ==========
See accompanying notes.
-15-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
May 29, May 30, May 31,
1999 1998 1997
---------- ---------- ----------
Net sales $3,459,377 $3,265,842 $3,212,431
---------- ---------- ----------
Cost of products sold 1,635,383 1,541,920 1,566,265
Selling, delivery and
administrative expenses 1,489,472 1,389,627 1,352,026
Depreciation and amortization 110,045 102,703 102,997
---------- ---------- ----------
3,234,900 3,034,250 3,021,288
---------- ---------- ----------
Operating income 224,477 231,592 191,143
---------- ---------- ----------
Other income (484) (594) (747)
Interest expense 23,113 18,624 22,592
---------- ---------- ----------
22,629 18,030 21,845
---------- ---------- ----------
Income before income taxes 201,848 213,562 169,298
Provision for income taxes 75,693 85,638 72,121
---------- ---------- ----------
Net income $ 126,155 $ 127,924 $ 97,177
========== ========== ==========
Earnings per share:
Basic $ 1.76 $ 1.74 $ 1.30
========== ========== ==========
Diluted $ 1.74 $ 1.71 $ 1.28
========== ========== ==========
See accompanying notes.
-16-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
May 29, May 30, May 31,
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income $126,155 $127,924 $ 97,177
Depreciation and amortization 110,045 102,703 102,997
Other (6,764) (12,226) (7,171)
Change in operating assets
and liabilities:
Accounts receivable (10,813) 507 (11,209)
Inventories 2,860 (1,042) 3,292
Other current assets 3,863 1,121 (1,761)
Accounts payable and accrued expenses (37,805) (17,365) 12,848
-------- -------- --------
Cash from operating activities 187,541 201,622 196,173
-------- -------- --------
Cash flows from investing activities:
Acquisitions (106,180) (43,743) (43,618)
Additions to property and equipment (108,029) (97,664) (78,418)
Sale of assets 7,616 4,013 19,291
Other (556) 2,263 (521)
-------- -------- --------
Cash from investing activities (207,149) (135,131) (103,266)
-------- -------- --------
Cash flows from financing activities:
Reduction of long-term debt (92,000) - (126,205)
Addition to long-term debt 200,000 35,000 52,000
Common stock dividends paid (20,066) (20,434) (19,857)
Stock option exercise proceeds and
related tax benefits 9,726 10,630 13,636
Acquisition of treasury stock (77,167) (91,687) (12,481)
Other (885) - -
-------- -------- --------
Cash from financing activities 19,608 (66,491) (92,907)
-------- -------- --------
Change in cash and cash equivalents - - -
Cash and cash equivalents:
Beginning of period - - -
-------- -------- --------
End of period $ - $ - $ -
======== ======== ========
Cash payments made:
Interest $ 24,632 $ 19,859 $ 22,226
Income taxes 58,616 84,009 63,402
See accompanying notes.
-17-
<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 June 1, 1996 77,470 $775 $515,109 $(34,092) (2,898) $ (21,545)
Net income - - - 97,177 - -
Stock options exercised
and related tax benefits 1,061 10 13,626 - - -
Dividends paid -
$.27 per share - - - (19,857) - -
Treasury stock acquired - - - - (519) (12,481)
------ ---- -------- -------- ------ ---------
Balance May 31, 1997 78,531 785 528,735 43,228 (3,417) (34,026)
Net income - - - 127,924 - -
Stock options exercised
and related tax benefits 595 6 10,624 - - -
Dividends paid -
$.28 per share - - - (20,434) - -
Treasury stock acquired - - - - (2,965) (91,687)
------ ---- -------- -------- ------ ---------
Balance May 30, 1998 79,126 791 539,359 150,718 (6,382) (125,713)
Net income - - - 126,155 - -
Stock options exercised
and related tax benefits 504 5 9,721 - - -
Dividends paid -
$.28 per share - - - (20,066) - -
Treasury stock acquired - - - - (3,030) (77,167)
------ ---- -------- -------- ------ ---------
Balance May 29, 1999 79,630 $796 $549,080 $256,807 (9,412) $(202,880)
====== ==== ======== ======== ====== =========
</TABLE>
See accompanying notes.
-18-
<PAGE>
INTERSTATE BAKERIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Acquisitions
On August 16, 1998, Interstate Bakeries Corporation (the "Company") acquired
the assets of the Drake baking operation in Wayne, New Jersey ("Drake's").
Drake's employed over 800 people, distributed cake product throughout the
northeastern United States and had annual net sales of approximately $115
million.
On October 4, 1998, the Company acquired the My Bread Baking Co. ("My Bread")
operation in New Bedford, Massachusetts, in exchange for its Grand Junction,
Colorado bakery and an additional cash payment. My Bread had annual net sales
of approximately $37 million and employed over 400 people.
During fiscal 1998, the Company acquired the assets of the John J. Nissen
Baking companies ("Nissen"), a major baker and distributor of fresh bread to
the New England region. Nissen had annual net sales of approximately $115
million and employed 1,000 people.
During fiscal 1997, the Company purchased the assets comprising the San
Francisco French Bread Company ("SFFB"). SFFB produced and distributed
sourdough bread and rolls throughout Northern California and in the San Diego
area, had net sales of approximately $95 million and employed 1,100 people.
Also during fiscal 1997, the Company acquired the right to use the "Marie
Callender's" trademark in conjunction with the manufacture, marketing,
distribution and sale of croutons.
All of these acquisitions were accounted for as purchases. In addition, the
My Bread exchange included a noncash portion not reflected in investing
activities on the statement of cash flows for fiscal 1999 amounting to
$14,365,000.
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.
<PAGE>
The components of inventories are as follows:
(In Thousands)
May 29, May 30,
1999 1998
-------- --------
Ingredients and packaging $44,222 $43,534
Finished goods 15,936 16,996
Other 5,703 5,897
------- -------
$65,861 $66,427
======= =======
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 $97,024,000, $91,296,000 and $89,507,000 for fiscal
1999, 1998 and 1997, respectively. Interest cost capitalized as part of the
construction cost of capital assets was $3,084,000, $1,707,000 and $555,000 in
fiscal 1999, 1998 and 1997, respectively.
Intangibles - Included in intangibles, which are being amortized using the
straight-line method, are the following:
(In Thousands)
May 29, May 30,
Life 1999 1998
----------- -------- --------
Licenses and patents 9 years $ 2,510 $ 2,510
Trademarks and tradenames 25-40 years 202,345 144,555
Excess of purchase cost over
net assets acquired 40 years 314,699 296,473
Deferred financing cost
and other-net Term of loans 6,679 7,505
-------- --------
526,233 451,043
Accumulated amortization (97,124) (84,395)
-------- --------
$429,109 $366,648
======== ========
Long-lived assets - 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 Company currently expects the carrying amounts to be fully
recoverable.
-19-
<PAGE>
Interest rate swap agreements - The Company has from time to time entered 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 an original maturity of three
months or less to be cash equivalents.
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. On 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 share and per share amounts
presented reflect this stock split.
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 were 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:
(In Thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
May 29, May 30, May 31,
1999 1998 1997
-------- -------- --------
Basic weighted average
common shares outstanding 71,662 73,512 74,928
Effect of dilutive stock
compensation 821 1,333 1,272
------ ------ ------
Diluted weighted average
common shares outstanding 72,483 74,845 76,200
====== ====== ======
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.
<PAGE>
Pending accounting standard - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued in June 1998. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 2000. The Company is
currently assessing the impact that the adoption of SFAS No. 133 will have on
its consolidated financial statements.
3. Debt
Long-term debt consists of the following:
(In Thousands)
May 29, May 30,
1999 1998
-------- --------
Bank borrowings -
Revolving credit loans (a) $140,000 $207,000
6.43% Senior notes (b) 200,000 -
10.00% Senior notes (c) 54,000 79,000
-------- --------
394,000 286,000
Less amounts payable
within one year (25,000) (25,000)
-------- --------
$369,000 $261,000
======== ========
(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 $67,000,000 at May 29, 1999), 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
-20-
<PAGE>
29, 1999), depending on certain financial ratios. The Company also pays a fee
of between .08% and .23% (.08% at May 29, 1999) on the unused portion of the
revolving credit facility. The overall weighted average interest rate on the
bank borrowings was 5.23% and 5.96% at May 29, 1999 and May 30, 1998,
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 $110,000,000 plus 75% of aggregate consolidated net
income after fiscal 1998, with availability of $107,383,000 at May 29, 1999.
(b) Represents borrowings under a 6.43% senior note agreement with several
major insurance companies entered into on September 10, 1998. The debt, which
is unsecured, has a maturity date of September 2005. The note agreement
contains covenants, which (i) limit the Company's ability to incur
indebtedness, merge, consolidate and sell assets, and (ii) require the Company
to satisfy certain ratios related to net worth and interest coverage. These
covenants are comparable to those under the revolving credit facility.
(c) Represents 10.00% unsecured notes, with installments maturing in July 1999
and 2000. The note agreement includes covenants mirroring those of the
revolving credit facility.
The fair value of all senior notes is estimated at $255,600,000 and
$83,500,000 as of May 29, 1999 and May 30, 1998, respectively. The Company
believes, based upon current terms, that the carrying value of all other
long-term debt approximates fair value.
The scheduled repayment of long-term debt is as follows:
Fiscal Years Ending (In Thousands)
------------------- --------------
2000 $ 25,000
2001 29,000
2002 140,000
2006 200,000
--------
$394,000
========
<PAGE>
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)
------------------- --------------
2000 $ 62,778
2001 53,710
2002 41,661
2003 29,144
2004 17,525
Thereafter 24,820
--------
$229,638
========
Net rental expense under operating leases was $67,568,000, $59,817,000 and
$53,792,000 for fiscal 1999, 1998 and 1997, 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.
5. Income Taxes
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
May 29, May 30, May 31,
1999 1998 1997
-------- -------- --------
Statutory federal tax 35.0% 35.0% 35.0%
State income tax 2.2 4.9 5.1
Intangibles amortization 1.2 1.1 2.0
Other (0.9) (0.9) 0.5
---- ---- ----
37.5% 40.1% 42.6%
==== ==== ====
-21-
<PAGE>
The components of the provision for income taxes are as follows:
(In Thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
May 29, May 30, May 31,
1999 1998 1997
-------- -------- --------
Current:
Federal $62,227 $64,449 $54,057
State 5,829 13,811 11,789
------- ------- -------
68,056 78,260 65,846
------- ------- -------
Deferred:
Federal 6,702 5,176 4,985
State 935 2,202 1,290
------- ------- -------
7,637 7,378 6,275
------- ------- -------
$75,693 $85,638 $72,121
======= ======= =======
Temporary differences and carryforwards which give rise to the deferred income
tax assets and liabilities are as follows:
(In Thousands)
May 29, May 30,
1999 1998
-------- --------
Deferred tax assets:
Payroll and benefits accruals $ 18,635 $ 19,046
Self-insurance reserves 14,292 15,224
Other 16,778 17,563
Valuation allowance - -
-------- --------
$ 49,705 $ 51,833
======== ========
Deferred tax liabilities:
Property and equipment $138,776 $150,476
Intangibles 53,324 48,986
Self-insurance reserves (28,532) (33,412)
Payroll and benefits accruals (38,267) (39,250)
Environmental accruals (7,099) (9,407)
Other 9,544 4,844
-------- --------
$127,746 $122,237
======== ========
<PAGE>
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 29, 1999, 232,000 shares were authorized but not issued under
this plan.
SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits," was issued in February 1998. This statement revised employers'
disclosures about pension and other postretirement benefit plans, but did not
change the measurement or recognition of such plans. The Company adopted SFAS
No. 132 during fiscal 1999 and certain prior year disclosures have been
revised in accordance with the requirements of this new standard.
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 $16,268,000,
$16,134,000 and $15,543,000 for fiscal 1999, 1998 and 1997, respectively.
There are also in effect numerous negotiated pension plans covering employees
participating by reason of union contracts. Expense for these plans was
$107,220,000, $97,442,000 and $88,971,000 for fiscal 1999, 1998 and 1997,
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.
-22-
<PAGE>
The components of the net postretirement benefit expense are as follows:
(In Thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
May 29, May 30, May 31,
1999 1998 1997
-------- -------- --------
Service cost $2,089 $2,146 $2,237
Interest cost 6,675 6,791 6,977
Amortization of unrecognized
prior service cost 320 297 292
Amortization of unrecognized
net(gain)loss - (316) 429
------ ------ ------
Net postretirement benefit
expense $9,084 $8,918 $9,935
====== ====== ======
The aggregate change in the Company's accumulated postretirement benefit
obligation ("APBO"), which is unfunded, is as follows:
(In Thousands)
May 29, May 30,
1999 1998
------- -------
APBO at beginning of year $90,254 $91,880
Service cost 2,089 2,146
Interest cost 6,675 6,791
Plan participants' contributions 1,756 1,679
Amendments 50 330
Actuarial (gain)loss 6,964 (5,769)
Acquisitions 268 1,829
Benefits paid (10,000) (8,632)
------- -------
APBO at end of year 98,056 90,254
Unrecognized prior service cost (2,473) (2,743)
Unrecognized net gain(loss) (4,246) 2,718
------- -------
Accrued postretirement benefit 91,337 90,229
Less current portion (8,650) (7,650)
------- -------
APBO included in other
liabilities $82,687 $82,579
======= =======
<PAGE>
In determining the APBO, the weighted average discount rate was assumed to be
7.0% for fiscal 1999 and 8.0% for fiscal 1998 and 1997. The assumed health
care cost trend rate for fiscal 1999 was 8.5%, declining gradually to 6.5%
over the next 6 years and to 5.5% after 15 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 1999 by
approximately $1,059,000, as well as increase the May 29, 1999 APBO by
approximately $9,629,000. Conversely, a 1.0% decrease in this rate would
decrease the fiscal 1999 expense by approximately $847,000 and the May 29,
1999 APBO by approximately $8,139,000.
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 $154,670,000, $142,368,000
and $134,917,000 in fiscal 1999, 1998 and 1997, respectively.
7. Stock-Based Compensation
The 1996 Stock Incentive Plan (the "Plan") allows the Company to grant to
employees and directors various stock awards, including stock options, which
are granted at prices not less than the fair market value at the date of
grant, and restricted stock. A maximum of 13,683,000 shares was approved to
be issued under the Plan. On May 29, 1999, shares totaling 4,162,000 were
authorized but not awarded under the Plan.
The stock 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. The changes in
outstanding options are as follows:
(In Thousands) Weighted Average
Shares Exercise Price
Under Option Per Share
------------ ----------------
Balance June 1, 1996 2,061 $ 7.76
Issued 2,246 18.50
Surrendered (38) 16.71
Exercised (1,040) 7.83
------ ------
Balance May 31, 1997 3,229 15.10
Issued 2,648 33.90
Surrendered (63) 22.39
Exercised (553) 12.17
------ ------
Balance May 30, 1998 5,261 24.78
Issued 1,030 26.60
Surrendered (184) 29.81
Exercised (504) 14.36
------ ------
Balance May 29, 1999 5,603 $25.89
====== ======
-23-
<PAGE>
Stock options outstanding and exercisable on May 29, 1999 are as follows:
Weighted Average
(In Thousands) Weighted Average Remaining
Range of Exercise Shares Exercise Price Contractual Life
Prices Per Share Under Option Per Share In Years
- ----------------- ------------ ---------------- ----------------
Outstanding:
$ 6.13 - $10.63 509 $ 7.91 5.9
18.50 - 22.50 1,669 18.71 7.5
26.44 - 33.91 3,425 32.06 8.6
- ---------------- ----- ------ ---
$ 6.13 - $33.91 5,603 $25.89 8.0
- ---------------- ----- ------ ---
Exercisable:
$ 6.13 - $10.63 509 $ 7.91
18.50 - 22.50 951 18.50
26.44 - 33.91 1,024 33.43
- ---------------- ----- ------
$ 6.13 - $33.91 2,484 $22.48
- ---------------- ----- ------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB25"), and related interpretations in
accounting for the Plan, and, therefore, no compensation expense has been
recognized for stock options issued under the 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 1999, 1998 and 1997 was $8.80, $11.94 and $6.48 per share,
respectively. The fair value of each option grant was estimated on the date
of the grant using the Black-Scholes option-pricing model with the following
assumptions:
1999 1998 1997
---- ---- ----
Expected dividend yield 1.3% .9% 1.0%
Expected volatility 28.5% 27.2% 26.5%
Risk-free interest rate 5.4% 6.0% 6.4%
Expected term in years 4 4 4
<PAGE>
If the Company had adopted the provisions of SFAS No. 123, the impact on
reported net income and earnings per share would have been as follows:
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
May 29, May 30, May 31,
1999 1998 1997
-------- -------- --------
Net income (in thousands) $10,621 $11,242 $ 4,050
Earnings per share:
Basic .15 .15 .05
Diluted .15 .15 .05
During fiscal 1998, the Company also awarded 200,000 shares of restricted
stock under the Plan, with a weighted average fair value at the date of grant
of $33.91 per share. These restricted shares vest ratably after one, two and
three years of continued employment. Compensation expense related to this
award was $2,260,000 and $1,565,000 for fiscal 1999 and 1998, respectively.
On May 29, 1999, 10,197,000 total shares of common stock were reserved for
issuance under various employee benefit plans.
8. Accrued Expenses and Other Liabilities
Included in accrued expenses are the following:
(In Thousands)
May 29, May 30,
1999 1998
-------- --------
Payroll, vacation and other
compensation $57,838 $64,065
Self-insurance reserves 47,366 54,256
Pension and welfare 37,840 36,832
Taxes other than income 20,642 20,928
Included in other liabilities are the following:
(In Thousands)
May 29, May 30,
1999 1998
-------- --------
Self-insurance reserves $80,327 $86,182
Accumulated postretirement benefit
obligation 82,687 82,579
-24-
<PAGE>
9. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for the fiscal years ended May 29,
1999 and May 30, 1998 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
-------- -------- ---------- --------
1999
Net sales $788,416 $814,593 $1,031,342 $825,026
Cost of products sold 371,806 389,354 488,976 385,247
Operating income 59,396 56,460 54,511 54,110
Net income 34,491 32,107 29,583 29,974
Earnings per share:
Basic .48 .45 .41 .42
Diluted .47 .44 .41 .42
1998
Net sales $763,719 $754,167 $ 964,778 $783,178
Cost of products sold 362,155 352,130 457,054 370,581
Operating income 54,755 62,246 55,894 58,697
Net income 29,880 34,247 29,871 33,926
Earnings per share:
Basic .40 .47 .41 .46
Diluted .39 .46 .40 .46
-25-
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
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 29, 1999 and May 30, 1998
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended May 29,
1999. 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 audits 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 29, 1999 and May 30, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended May 29, 1999 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
July 14, 1999
-26-
EXHIBIT 21.1
SUBSIDIARIES OF INTERSTATE BAKERIES CORPORATION
Subsidiaries of Percentage of
Interstate Jurisdiction Voting Shares
Bakeries Corporation of Incorporation Owned
- -------------------- ---------------- -------------
Interstate Brands Delaware 100%
Corporation
Interstate Brands West Delaware 100%
Corporation
Subsidiary of
Interstate Brands
Corporation
- -----------------
IBC Trucking Corporation Delaware 100%
Subsidiary of
Interstate
Brands West Corporation
- -----------------------
Mrs. Cubbison's Foods, Inc. California 80%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MAY 29, 1999 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE FIFTY-TWO WEEKS ENDED MAY 29, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-END> MAY-29-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 221,224
<ALLOWANCES> 4,240
<INVENTORY> 65,861
<CURRENT-ASSETS> 348,750
<PP&E> 1,328,243
<DEPRECIATION> 425,327
<TOTAL-ASSETS> 1,680,775
<CURRENT-LIABILITIES> 355,196
<BONDS> 369,000
0
0
<COMMON> 796
<OTHER-SE> 603,007
<TOTAL-LIABILITY-AND-EQUITY> 1,680,775
<SALES> 3,459,377
<TOTAL-REVENUES> 3,459,377
<CGS> 1,635,383
<TOTAL-COSTS> 1,635,383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,113
<INCOME-PRETAX> 201,848
<INCOME-TAX> 75,693
<INCOME-CONTINUING> 126,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,155
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.74
</TABLE>
