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 November 13, 1999
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 November 13, 1999 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
--------------
- ------------------------------------------------------------------------------
(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 68,354,589 shares of common stock, $.01 par value per share,
outstanding on December 7, 1999.
<PAGE>
INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED NOVEMBER 13, 1999
CONTENTS
- --------
Description Page
----------- ----
PART I - FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations 1-3
Quantitative and Qualitative Disclosures
About Market Risk 4
Consolidated Balance Sheet 5
Consolidated Statement of Income 6
Consolidated Statement of Cash Flows 7
Notes to Consolidated Financial Statements 8-10
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 11
Signatures 12
<PAGE>
INTERSTATE BAKERIES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net sales for the second quarter of fiscal 2000, the twelve weeks ended
November 13, 1999, were $810,600,000, down $3,993,000 and .5%, from net sales
of $814,593,000 in the prior year. Year-to-date net sales for fiscal 2000
were $1,620,073,000, an increase of $17,064,000 or 1.1%, over net sales of
$1,603,009,000 for fiscal 1999. Year-to-date net sales adjusted for acquired
and disposed operations decreased approximately .5%. The slight dips in both
quarterly and adjusted year-to-date net sales reflect somewhat higher selling
prices, offset by some unit volume declines.
Gross profit was 53.2% of net sales for the second quarter of fiscal 2000, up
from 52.2% of net sales in the prior year. Year-to-date gross profit
increased to 53.1% of net sales, from the prior year's 52.5%. These
improvements reflect lower ingredient costs, primarily flour, as well as
somewhat higher selling prices. In addition, inflationary labor and labor-
related cost increases have been offset by operational efficiencies.
Selling, delivery and administrative expenses increased $12,912,000, or 3.8%,
for the second quarter of fiscal 2000 and $24,170,000, or 3.6%, on a year-to-
date basis. Selling, delivery and administrative expense as a percentage of
net sales was 43.9% and 43.2% for fiscal 2000's second quarter and year-to-
date, respectively, compared to fiscal 1999's quarterly 42.1% and year-to-
date 42.2%. These unfavorable variances reflect inflationary labor and labor-
related cost increases, as well as higher fuel costs.
Based upon these factors, operating income for the second quarter of fiscal
2000 was $50,143,000, or 6.2% of net sales, down $6,317,000 from the prior
year's $56,460,000, or 6.9% of net sales. Year-to-date operating income for
fiscal 2000 was $108,942,000, or 6.7% of net sales, compared to $115,856,000,
or 7.2% of net sales, for fiscal 1999, a $6,914,000 decrease.
Increases in interest expense of $330,000 and $1,763,000 for the second
quarter and year-to-date, respectively, reflect higher average borrowing
levels primarily due to acquisitions and treasury stock repurchases.
The effective tax rate of 37.5% for fiscal 2000 and 1999 approximates the
overall federal and state statutory rates.
Reflecting these results, net income for the second quarter of fiscal 2000 was
$27,938,000, or $.40 per share (diluted basis), compared to $32,107,000, or
$.44 per share, the prior year. Year-to-date net income declined to
- 1 -
<PAGE>
$61,164,000, or $.87 per share, from $66,598,000, or $.91 per share, last
year.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Cash generated by operating activities for the twenty-four weeks ended
November 13, 1999 was $105,429,000, compared to $125,164,000 a year ago, with
the decrease reflecting lower net income and greater working capital needs.
Cash generated by operations, along with other cash flows during fiscal 2000,
was used to reduce debt by $13,000,000, fund capital expenditures of
$40,566,000, repurchase common stock of $45,208,000 and pay common stock
dividends of $9,749,000.
Subsequent to quarter end, on December 9, 1999, the Company's board of
directors authorized the repurchase of an additional 3,000,000 shares of the
Company's common stock, bringing the total to approximately 5,000,000 shares
available under the stock repurchase program.
As noted in the Company's Annual Report on Form 10-K for the year ended May
29, 1999, cash flows from operations, along with borrowing capacity under the
existing credit facility, are expected to be sufficient to meet the fiscal
2000 cash requirements.
YEAR 2000 COMPLIANCE
- --------------------
The Company has assessed the impact that the turn of the century will have on
its internal computer systems and overall operations. The Company has
developed and implemented 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 implementing its Plan.
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.
- 2 -
<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 has completed its contingency plans for the most
reasonably likely worst case scenarios. The Company will continue to assess
the adequacy of all contingency plans through the end of the calendar year.
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.
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>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
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 November 13, 1999,
an assumed 10% adverse change in commodity prices would not result in a
material effect on fair values, future earnings 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 November 13, 1999. Based upon the Company's sensitivity
analysis at November 13, 1999, an assumed 10% adverse change in interest rates
would not have a material impact on fair values, future earnings or cash flows
of the Company.
- 4 -
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(000's)
November 13, May 29,
1999 1999
------------ -----------
Assets
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $4,179,000
($4,240,000 at May 29) $ 213,430 $ 216,984
Inventories 74,480 65,861
Other current assets 71,420 65,905
---------- ----------
Total current assets 359,330 348,750
---------- ----------
Property and equipment:
Land and buildings 395,467 385,495
Machinery and equipment 968,331 942,748
---------- ----------
1,363,798 1,328,243
Less accumulated depreciation (465,779) (425,327)
---------- ----------
Net property and equipment 898,019 902,916
---------- ----------
Intangibles 421,538 429,109
---------- ----------
$1,678,887 $1,680,775
========== ==========
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ 29,000 $ 25,000
Accounts payable 124,157 134,681
Accrued expenses 217,938 195,515
---------- ----------
Total current liabilities 371,095 355,196
---------- ----------
Long-term debt 352,000 369,000
Other liabilities 216,353 225,030
Deferred income taxes 127,746 127,746
---------- ----------
Total long-term liabilities 696,099 721,776
---------- ----------
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 -
79,804,000 shares (79,630,000 at May 29) 798 796
Additional paid-in capital 550,761 549,080
Retained earnings 308,222 256,807
Treasury stock, at cost - 11,449,000 shares
(9,412,000 at May 29) (248,088) (202,880)
---------- ----------
Total stockholders' equity 611,693 603,803
---------- ----------
$1,678,887 $1,680,775
========== ==========
See accompanying notes.
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<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
-------------------------- ----------------------------
November 13, November 14, November 13, November 14,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $810,600 $814,593 $1,620,073 $1,603,009
-------- -------- ---------- ----------
Cost of products sold 378,963 389,354 759,677 761,160
Selling, delivery and administrative
expenses 355,749 342,837 700,119 675,949
Depreciation and amortization 25,745 25,942 51,335 50,044
-------- -------- ---------- ----------
760,457 758,133 1,511,131 1,487,153
-------- -------- ---------- ----------
Operating income 50,143 56,460 108,942 115,856
-------- -------- ---------- ----------
Other income (90) (114) (222) (239)
Interest expense 5,532 5,202 11,301 9,538
-------- -------- ---------- ----------
5,442 5,088 11,079 9,299
-------- -------- ---------- ----------
Income before income taxes 44,701 51,372 97,863 106,557
Provision for income taxes 16,763 19,265 36,699 39,959
-------- -------- ---------- ----------
Net income $ 27,938 $ 32,107 $ 61,164 $ 66,598
======== ======== ========== ==========
Earnings per share:
Basic $ .40 $ .45 $ .88 $ .92
======== ======== ========== ==========
Diluted $ .40 $ .44 $ .87 $ .91
======== ======== ========== ==========
</TABLE>
See accompanying notes.
-6-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000's)
Twenty-Four Weeks Ended
--------------------------
November 13, November 14,
1999 1998
------------ ------------
Cash flows from operating activities:
Net income $ 61,164 $ 66,598
Depreciation and amortization 51,335 50,044
Other (8,389) 1,493
Change in operating assets and liabilities:
Accounts receivable 3,554 (6,140)
Inventories (8,619) (4,955)
Other current assets (5,515) 11,394
Accounts payable and accrued expenses 11,899 6,730
-------- --------
Cash from operating activities 105,429 125,164
-------- --------
Cash flows from investing activities:
Acquisitions - (105,248)
Additions to property and equipment (40,566) (52,661)
Sale of assets 369 5,850
Other 1,042 (521)
-------- --------
Cash from investing activities (39,155) (152,580)
-------- --------
Cash flows from financing activities:
Addition to long-term debt 12,000 200,000
Reduction of long-term debt (25,000) (127,000)
Common stock dividends paid (9,749) (10,138)
Stock option exercise proceeds and
related tax benefits 1,683 4,046
Acquisition of treasury stock (45,208) (38,661)
Other - (831)
-------- --------
Cash from financing activities (66,274) 27,416
-------- --------
Change in cash and cash equivalents - -
Cash and cash equivalents:
Beginning of period - -
-------- --------
End of period $ - $ -
======== ========
Cash payments made:
Interest $ 13,528 $ 10,990
Income taxes 14,699 10,152
See accompanying notes.
- 7 -
<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.
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.
2. Inventories
-----------
The components of inventories are as follows:
(000's)
-------------------------
November 13, May 29,
1999 1999
------------ ----------
Ingredients and packaging $47,154 $44,222
Finished goods 21,807 15,936
Other 5,519 5,703
------- -------
$74,480 $65,861
======= =======
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<PAGE>
3. Income Taxes
------------
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
Twenty-Four Weeks Ended
----------------------------
November 13, November 14,
1999 1998
------------ ------------
Statutory federal tax 35.0% 35.0%
State income tax 2.2 2.7
Intangibles amortization 1.2 1.0
Other (.9) (1.2)
---- ----
37.5% 37.5%
==== ====
4. Earnings Per Share
------------------
Following is a reconciliation between basic and diluted weighted average
shares outstanding used in the Company's earnings per share computations:
(000's)
Twelve Twenty-Four
Weeks Ended Weeks Ended
-------------------- -------------------
Nov. 13, Nov. 14, Nov. 13, Nov. 14,
1999 1998 1999 1998
--------- -------- -------- --------
Basic weighted average
common shares outstanding 69,407 72,053 69,893 72,358
Effect of dilutive stock
compensation 448 1,029 478 1,082
------ ------ ------ ------
Dilutive weighted average
common shares outstanding 69,855 73,082 70,371 73,440
====== ====== ====== ======
5. Stockholder Rights Plan
-----------------------
On September 21, 1999, the Company's board of directors adopted a stockholder
rights plan which provided that a dividend of one preferred stock purchase
right was declared for each share of the Company's common stock outstanding on
October 8, 1999 and any common shares issued thereafter. The rights are not
exercisable until 10 business days following either 1) a public announcement
that a person or group acquired 15% or more of the Company's common stock or
- 9 -
<PAGE>
2) the announcement of a tender offer which could result in a person or group
acquiring 15% or more of the Company's common stock.
Each right, if exercisable, will entitle its holder to purchase one one-
thousandth of a share of the Company's Series A Junior Participating Preferred
Stock at an exercise price of $80.00, subject to adjustment. If a person or
group acquires 15% or more of the Company's outstanding common stock, the
holder of each right not owned by the acquiring party will be entitled to
purchase shares of the Company's common stock (or in certain cases, preferred
stock, cash or other property) having a market value of twice the exercise
price of the right. In addition, after a person or group has become an
acquiring person, if the Company is acquired in a merger or other business
combination or 50% or more of its consolidated assets or earning power are
sold, each right will entitle its holder to purchase at the exercise price of
the right, a number of the acquiring party's common shares valued at twice the
exercise price of the right.
The Board may redeem the rights at any time before they become exercisable for
$.001 per right and, if not exercised or redeemed, the rights will expire on
October 7, 2009.
- 10 -
<PAGE>
PART II
ITEM 6 - Exhibits and Reports on Form 8-K
a) Exhibits filed with this report:
1) 27.1 - Financial data schedule
b) Reports on Form 8-K
1) A report on Form 8-K was filed by the Company on September 23,
1999 announcing the declaration of a dividend of one preferred
stock purchase right for each outstanding share of the Company's
common stock, payable to stockholders of record as of October 8,
1999, and incorporating the Rights Agreement dated as of
September 21, 1999.
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<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: December 15, 1999 /s/ Charles A. Sullivan
--------------------------------
Charles A. Sullivan, Chairman
and Chief Executive Officer
DATE: December 15, 1999 /s/ Frank W. Coffey
--------------------------------
Frank W. Coffey, Senior Vice
President and Chief Financial
Officer
- 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 13, 1999 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE TWENTY-FOUR WEEKS ENDED NOVEMBER 13, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-03-2000
<PERIOD-END> NOV-13-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 217,609
<ALLOWANCES> 4,179
<INVENTORY> 74,480
<CURRENT-ASSETS> 359,330
<PP&E> 1,363,798
<DEPRECIATION> 465,779
<TOTAL-ASSETS> 1,678,887
<CURRENT-LIABILITIES> 371,095
<BONDS> 352,000
0
0
<COMMON> 798
<OTHER-SE> 610,895
<TOTAL-LIABILITY-AND-EQUITY> 1,678,887
<SALES> 1,620,073
<TOTAL-REVENUES> 1,620,073
<CGS> 759,677
<TOTAL-COSTS> 759,677
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,301
<INCOME-PRETAX> 97,863
<INCOME-TAX> 36,699
<INCOME-CONTINUING> 61,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,164
<EPS-BASIC> .88
<EPS-DILUTED> .87
</TABLE>
