FINANCIAL HIGHLIGHTS
--------------------
(In Thousands, Except Per Share Data)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
------------ ------------ ------------
Statement of Income
Net sales $3,522,929 $3,459,377 $3,265,842
Operating income 170,398 224,477 231,592
% of net sales 4.8% 6.5% 7.1%
Net income $ 89,388 $ 126,155 $ 127,924
% of net sales 2.5% 3.6% 3.9%
Per common share:
Net income (diluted basis) $ 1.31 $ 1.74 $ 1.71
Book value 8.98 8.60 7.77
Common stock dividends .28 .28 .28
Average diluted shares
outstanding 68,356 72,483 74,845
June 3, May 29, May 30,
2000 1999 1998
------------ ------------ ------------
Balance Sheet
Total assets $1,651,925 $1,680,775 $1,549,986
Long-term debt 385,000 369,000 261,000
Stockholders' equity 591,677 603,803 565,155
Debt to total capital 39.4% 37.9% 31.6%
[This page includes 3 bar graphs which depict net sales, operating income and
earnings per share for fiscal 1998, 1999 and 2000. 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 2000 and 1999:
Stock Price
Fiscal --------------------- Cash
Year Quarter High Low Dividends
------ --------- -------- -------- ------------
2000 1 $24.8125 $20.5000 $.0700
2 24.5000 19.5625 .0700
3 19.8125 11.4375 .0700
4 16.5625 11.5625 .0700
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
The Company had approximately 6,400 shareholders on June 3, 2000.
-1-
<PAGE>
INTERSTATE BAKERIES CORPORATION
FIVE-YEAR SUMMARY OF FINANCIAL DATA
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
53 Weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
June 3, May 29, May 30, May 31, June 1,
2000 1999 1998 1997 1996<F2>
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Income
Net sales $3,522,929 $3,459,377 $3,265,842 $3,212,431 $2,878,180
Operating income 170,398 224,477 231,592 191,143 78,758<F3>
% of net sales 4.8% 6.5% 7.1% 6.0% 2.7%
Net income $ 89,388 $ 126,155 $ 127,924 $ 97,177 $ 24,463<F3>
% of net sales 2.5% 3.6% 3.9% 3.0% .8%
Earnings per share <F1>:
Basic $ 1.31 $ 1.76 $ 1.74 $ 1.30 $ .35<F3>
Diluted 1.31 1.74 1.71 1.28 .35<F3>
Common stock dividends
per share <F1> .28 .28 .28 .27 .25
Weighted average common
shares outstanding <F1>:
Basic 68,156 71,662 73,512 74,928 69,202
Diluted 68,356 72,483 74,845 76,200 69,968
Balance Sheet
Total assets $1,651,925 $1,680,775 $1,549,986 $1,493,087 $1,486,460
Long-term debt, excluding
current maturities 385,000 369,000 261,000 251,000 303,651
Stockholders' equity 591,677 603,803 565,155 538,722 460,247
Debt to total capital 39.4% 37.9% 31.6% 31.8% 39.8%
<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>
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 2000 Compared With Fiscal 1999
Net sales for the fifty-three weeks ended June 3, 2000 were $3,522,929,000,
increasing $63,552,000 and 1.8% over net sales for the fifty-two weeks ended
May 29, 1999 of $3,459,377,000. Excluding the impact of the extra week, as
well as acquisitions and dispositions, net sales were down slightly,
approximately .8% for the year. This decrease reflects an eight-day work
stoppage at five Northeastern bakeries during fiscal 2000, as well as other
slight overall unit volume declines, partially offset by selling price
increases realized in the current year.
Gross profit for fiscal 2000 was $1,850,761,000, representing 52.5% of net
sales, comparable to fiscal 1999's gross profit of $1,823,994,000, or 52.7% of
net sales. Lower ingredient costs during fiscal 2000 contributed to higher
gross margins, but this favorable impact was offset by higher labor and labor-
related costs, as well as higher packaging costs principally resulting from
higher fuel prices.
Selling, delivery and administrative expenses were $1,568,759,000, or 44.5% of
net sales, for fiscal 2000 compared to $1,489,472,000, or 43.1% of net sales,
for fiscal 1999. This unfavorable variance reflects labor and labor-related
cost increases, as well as substantially higher fuel costs, measured against
essentially flat net sales.
Reflecting these factors, operating income for fiscal 2000 was $170,398,000,
or 4.8% of net sales, down $54,079,000 from fiscal 1999's operating income of
$224,477,000, or 6.5% of net sales.
Interest expense for fiscal 2000 was $27,809,000, an increase of $4,696,000
over interest expense of $23,113,000 in fiscal 1999. This increase reflects
higher average borrowing levels during fiscal 2000, primarily due to
acquisitions and treasury stock repurchases, higher interest rates and lower
capitalized interest.
The effective tax rate of 37.5% for fiscal 2000 and 1999 approximates the
overall federal and state statutory rates.
Based upon these results, net income for fiscal 2000 decreased $36,767,000 to
$89,388,000, or $1.31 per basic and diluted share, from $126,155,000, or $1.76
and $1.74 per basic and diluted share, respectively, in fiscal 1999.
<PAGE>
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 fiscal 1999.
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 Toledo, 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.
-14-
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of liquidity is cash provided by operations which
totaled $165,918,000 for fiscal 2000, a decrease of $21,623,000 from fiscal
1999's $187,541,000. This decrease was primarily due to lower net income in
fiscal 2000, offset somewhat by lower working capital requirements. Cash
generated by operations during fiscal 2000, along with net additional long-term
borrowings of $20,000,000, was used to fund net capital expenditures of
$74,478,000, common stock repurchases of $85,211,000 and common stock
dividends of $19,044,000.
In July 2000, the Company announced that it had agreed to repurchase
15,498,000 shares of its common stock from Ralston Purina Company ("RPC") at a
price per share equal to the average closing market price for the 20
consecutive trading days prior to August 1, 2000. After this repurchase, RPC
will own approximately 29.5% of the Company's outstanding common stock. Also,
the shareholder agreement with RPC was amended whereby RPC would be required
to reduce its ownership of the Company's common stock to not more than 15% by
August 1, 2004 and not more than 10% by August 1, 2005. The Company will
continue to have the right of first offer on disposal of the Company's stock
by RPC. The shareholder agreement was further amended to eliminate the
requirement that RPC use the Company's common stock to satisfy RPC's
obligation under the 7% Stock Appreciation Income Linked Securities, which
matured August 1, 2000.
For fiscal 2001, the Company anticipates cash needs of approximately
$572,000,000, consisting of approximately $243,000,000 for the repurchase of
common stock from RPC, $85,000,000 of planned capital expenditures,
$15,000,000 of common stock dividends and $229,000,000 to repay the
outstanding senior notes. The Company expects these cash needs to be funded
by ongoing operations, amending its present bank credit facility and a new
$500,000,000 unsecured bank credit facility. The new bank credit facility is
expected to be a 364-day term loan which the Company expects to refinance on a
long-term basis during the year. The bank credit facilities are expected to
have several options available to borrow at floating interest rates based upon
the Company's overall credit rating. Also, the Company is working with its
lenders and insurance carriers and fully expects to be able to provide the
surety required for the litigation described in "Legal Matters".
In addition, the Company will continue to evaluate among its investment
alternatives the repurchase of additional shares of its common stock. In
addition to authorizing the repurchase of the 15,498,000 shares from RPC,
during fiscal 2000 the Company's board of directors authorized the repurchase
of an additional 8,000,000 shares under the Company's stock repurchase
program. At June 3, 2000, approximately 7,500,000 authorized shares were
available to be repurchased under the program.
<PAGE>
LEGAL MATTERS
On July 31, 2000, a jury in California awarded compensatory damages totaling
approximately $10,800,000 against the Company and in favor of 18 plaintiffs
who alleged various forms of racial discrimination at the Company's San
Francisco bakery. The court subsequently reduced these compensatory damages
to approximately $5,800,000. On August 2, 2000, the jury also awarded
punitive damages totaling approximately $121,000,000. The Company intends to
appeal these verdicts. Based upon the opinion of outside counsel, the Company
believes the compensatory damages should be overturned or reduced on appeal
and it is likely that the Company will succeed in obtaining either a reversal
of the punitive damages or a new trial. The Company believes it has adequate
reserves for the compensatory damages.
PENDING ACCOUNTING STANDARD
See Note 1 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.
-15-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED BALANCE SHEET
(In Thousands)
June 3, May 29,
2000 1999
----------- -----------
Assets
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $4,638,000
($4,240,000 in 1999) $ 204,660 $ 216,984
Inventories 78,840 65,861
Other current assets 57,647 65,905
---------- ----------
Total current assets 341,147 348,750
---------- ----------
Property and equipment:
Land and buildings 397,923 385,495
Machinery and equipment 989,704 942,748
---------- ----------
1,387,627 1,328,243
Less accumulated depreciation (501,549) (425,327)
---------- ----------
Net property and equipment 886,078 902,916
---------- ----------
Intangibles 424,700 429,109
---------- ----------
$1,651,925 $1,680,775
========== ==========
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ 29,000 $ 25,000
Accounts payable 123,461 134,681
Accrued expenses 177,996 195,515
---------- ----------
Total current liabilities 330,457 355,196
---------- ----------
Long-term debt 385,000 369,000
Other liabilities 212,981 225,030
Deferred income taxes 131,810 127,746
---------- ----------
Total long-term liabilities 729,791 721,776
---------- ----------
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 - 79,837,000 shares
(79,630,000 in 1999) 798 796
Additional paid-in capital 551,819 549,080
Retained earnings 327,151 256,807
Treasury stock, at cost - 13,948,000 shares
(9,412,000 in 1999) (288,091) (202,880)
---------- ----------
Total stockholders' equity 591,677 603,803
---------- ----------
$1,651,925 $1,680,775
========== ==========
See accompanying notes.
-16-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
---------- ---------- ----------
Net sales $3,522,929 $3,459,377 $3,265,842
---------- ---------- ----------
Cost of products sold 1,672,168 1,635,383 1,541,920
Selling, delivery and
administrative expenses 1,568,759 1,489,472 1,389,627
Depreciation and amortization 111,604 110,045 102,703
---------- ---------- ----------
3,352,531 3,234,900 3,034,250
---------- ---------- ----------
Operating income 170,398 224,477 231,592
---------- ---------- ----------
Other income (431) (484) (594)
Interest expense 27,809 23,113 18,624
---------- ---------- ----------
27,378 22,629 18,030
---------- ---------- ----------
Income before income taxes 143,020 201,848 213,562
Provision for income taxes 53,632 75,693 85,638
---------- ---------- ----------
Net income $ 89,388 $ 126,155 $ 127,924
========== ========== ==========
Earnings per share:
Basic $ 1.31 $ 1.76 $ 1.74
========== ========== ==========
Diluted $ 1.31 $ 1.74 $ 1.71
========== ========== ==========
See accompanying notes.
-17-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income $ 89,388 $126,155 $127,924
Depreciation and amortization 111,604 110,045 102,703
Other (16,189) (6,764) (12,226)
Change in operating assets
and liabilities:
Accounts receivable 13,596 (10,813) 507
Inventories (12,156) 2,860 (1,042)
Other current assets 8,271 3,863 1,121
Accounts payable and accrued expenses (28,596) (37,805) (17,365)
-------- -------- --------
Cash from operating activities 165,918 187,541 201,622
-------- -------- --------
Cash flows from investing activities:
Acquisitions (3,259) (106,180) (43,743)
Additions to property and equipment (93,092) (108,029) (97,664)
Sale of assets 18,614 7,616 4,013
Other (6,667) (556) 2,263
-------- -------- --------
Cash from investing activities (84,404) (207,149) (135,131)
-------- -------- --------
Cash flows from financing activities:
Reduction of long-term debt (25,000) (92,000) -
Addition to long-term debt 45,000 200,000 35,000
Common stock dividends paid (19,044) (20,066) (20,434)
Stock option exercise proceeds and
related tax benefits 2,741 9,726 10,630
Acquisition of treasury stock (85,211) (77,167) (91,687)
Other - (885) -
-------- -------- --------
Cash from financing activities (81,514) 19,608 (66,491)
-------- -------- --------
Change in cash and cash equivalents - - -
Cash and cash equivalents:
Beginning of period - - -
-------- -------- --------
End of period $ - $ - $ -
======== ======== ========
Cash payments made:
Interest $ 27,994 $ 24,632 $ 19,859
Income taxes 46,427 58,616 84,009
See accompanying notes.
-18-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In Thousands)
Common
Stock Issued Treasury Stock
--------------- ------------------
Number Additional Number
of Par Paid-in Retained of
Shares Value Capital Earnings Shares Cost
------ ----- ---------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
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)
Net income - - - 89,388 - -
Stock options exercised
and related tax benefits 207 2 2,739 - - -
Dividends paid -
$.28 per share - - - (19,044) - -
Treasury stock acquired - - - - (4,536) (85,211)
------ ---- -------- -------- ------ ---------
Balance June 3, 2000 79,837 $798 $551,819 $327,151 (13,948) $(288,091)
====== ==== ======== ======== ====== =========
</TABLE>
See accompanying notes.
-19-
<PAGE>
INTERSTATE BAKERIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Significant Accounting Policies
Description of business - Interstate Bakeries Corporation (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.
Revenue recognition - The Company recognizes sales upon delivery of its
products to the customer.
Inventories - Inventories are stated at the lower of cost or market.
Specific invoiced costs are used with respect to ingredients and average
costs are used for other inventory items.
The components of inventories are as follows:
(In Thousands)
June 3, May 29,
2000 1999
-------- --------
Ingredients and packaging $48,697 $44,222
Finished goods 23,845 15,936
Other 6,298 5,703
------- -------
$78,840 $65,861
======= =======
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 $97,547,000, $97,024,000 and $91,296,000 for fiscal
2000, 1999 and 1998, respectively. Interest cost capitalized as part of the
construction cost of capital assets was $1,200,000, $3,084,000 and $1,707,000
in fiscal 2000, 1999 and 1998, respectively.
<PAGE>
Intangibles - Included in intangibles, which are being amortized using the
straight-line method, are the following:
(In Thousands)
June 3, May 29,
Life 2000 1999
----------- -------- --------
Licenses and patents 9 years $ 2,510 $ 2,510
Trademarks and tradenames 25-40 years 204,425 202,345
Excess of purchase cost over
net assets acquired 40 years 314,699 314,699
Deferred financing cost Term of
and other-net agreements 13,521 6,679
-------- --------
535,155 526,233
Accumulated amortization (110,455) (97,124)
-------- --------
$424,700 $429,109
======== ========
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.
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.
-20-
<PAGE>
Earnings per share - Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share include the effect of all potential dilutive common shares,
primarily stock options outstanding under the Company's stock compensation
plan. Following is a reconciliation between basic and diluted weighted
average shares outstanding used in the Company's earnings per share
computations:
(In Thousands)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
-------- -------- --------
Basic weighted average
common shares outstanding 68,156 71,662 73,512
Effect of dilutive stock
compensation 200 821 1,333
------ ------ ------
Diluted weighted average
common shares outstanding 68,356 72,483 74,845
====== ====== ======
Diluted weighted average common shares outstanding exclude options on common
stock of 4,263,000, 3,330,000 and 1,814,000 for fiscal 2000, 1999 and 1998,
respectively, because their effect would have been antidilutive.
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
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. In June 1999, SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" was issued, making FASB No. 133
effective for all quarters of fiscal years beginning after June 15, 2000, or
the Company's fiscal 2002. The Company is currently assessing the impact that
the adoption of SFAS No. 133 will have on its consolidated financial
statements.
<PAGE>
2. Acquisitions
During fiscal 1999, 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.
Also in fiscal 1999, 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.
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.
The proforma impact as if these acquisitions had taken place at the beginning
of the fiscal year prior to acquisition is not significant.
3. Debt
Long-term debt consists of the following:
(In Thousands)
June 3, May 29,
2000 1999
-------- --------
Bank borrowings -
Revolving credit loans (a) $185,000 $140,000
6.43% Senior notes (b) 200,000 200,000
10.00% Senior notes (c) 29,000 54,000
-------- --------
414,000 394,000
Less amounts payable
within one year (29,000) (25,000)
-------- --------
$385,000 $369,000
======== ========
-21-
<PAGE>
(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 $58,000,000 at June 3, 2000), 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% (.33% at June
3, 2000), depending on certain financial ratios. The Company also pays a fee
of between .08% and .23% (.13% at June 3, 2000) on the unused portion of the
revolving credit facility. The overall weighted average interest rate on the
bank borrowings was 6.51% and 5.23% at June 3, 2000 and May 29, 1999,
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 $70,179,000 at June 3, 2000.
(b) Represents borrowings under a 6.43% senior note agreement with several
major insurance companies. 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, maturing in July 2000. The note
agreement includes covenants mirroring those of the revolving credit facility.
The fair value of all senior notes is estimated at $221,361,000 and
$255,600,000 as of June 3, 2000 and May 29, 1999, 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)
------------------- --------------
2001 $ 29,000
2002 185,000
2006 200,000
--------
$414,000
========
See Note 10 - Subsequent Events.
<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)
------------------- --------------
2001 $ 68,370
2002 55,518
2003 41,350
2004 28,034
2005 17,478
Thereafter 24,452
--------
$235,202
========
Net rental expense under operating leases was $74,475,000, $67,568,000 and
$59,817,000 for fiscal 2000, 1999 and 1998, 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.
See Note 10 - Subsequent Events.
5. Income Taxes
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
-------- -------- --------
Statutory federal tax 35.0% 35.0% 35.0%
State income tax 2.6 2.2 4.9
Intangibles amortization 1.6 1.2 1.1
Other (1.7) (0.9) (0.9)
---- ---- ----
37.5% 37.5% 40.1%
==== ==== ====
-22-
<PAGE>
The components of the provision for income taxes are as follows:
(In Thousands)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
-------- -------- --------
Current:
Federal $41,283 $62,227 $64,449
State 3,814 5,829 13,811
------- ------- -------
45,097 68,056 78,260
------- ------- -------
Deferred:
Federal 5,963 6,702 5,176
State 2,572 935 2,202
------- ------- -------
8,535 7,637 7,378
------- ------- -------
$53,632 $75,693 $85,638
======= ======= =======
Temporary differences and carryforwards which give rise to the deferred income
tax assets and liabilities are as follows:
(In Thousands)
June 3, May 29,
2000 1999
-------- --------
Deferred tax assets:
Payroll and benefits accruals $ 19,178 $ 18,635
Self-insurance reserves 17,216 14,292
Other 8,840 16,778
Valuation allowance - -
-------- --------
$ 45,234 $ 49,705
======== ========
Deferred tax liabilities:
Property and equipment $141,330 $138,776
Intangibles 53,569 53,324
Self-insurance reserves (25,502) (28,532)
Payroll and benefits accruals (38,319) (38,267)
Environmental accruals (7,129) (7,099)
Other 7,861 9,544
-------- --------
$131,810 $127,746
======== ========
<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 June 3, 2000, 232,000 shares were authorized but not issued under
this plan.
The Company sponsors a defined contribution retirement plan for eligible
employees not covered by union plans. Contributions are based upon a
percentage of annual compensation plus a percentage of voluntary employee
contributions. Retirement expense related to this plan was $16,355,000,
$16,268,000 and $16,134,000 for fiscal 2000, 1999 and 1998, respectively.
The Company participates in numerous negotiated multi-employer pension plans
covering employees participating by reason of union contracts. Expense for
these plans was $112,740,000, $107,220,000 and $97,442,000 for fiscal 2000,
1999 and 1998, respectively.
The Company also maintains a defined benefit pension plan to benefit certain
union and nonunion employee groups, with participation generally resulting
from business acquisitions.
The components of the pension expense (income) for the defined benefit pension
plan are as follows:
(In Thousands)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
-------- -------- --------
Service cost $ 957 $ 1,025 $ 811
Interest cost 3,498 3,100 1,740
Expected return on plan assets (4,471) (3,784) (2,122)
Amortization:
Unrecognized prior service cost 50 97 97
Unrecognized net gain (361) (462) (423)
------- ------- -------
Net pension expense (income) $ (327) $ (24) $ 103
======= ======= =======
-23-
<PAGE>
The aggregate changes in the Company's accumulated benefit obligation ("ABO")
and plan assets, along with actuarial assumptions used, related to the defined
benefit pension plan are as follows:
(In Thousands)
June 3, May 29,
2000 1999
-------- --------
ABO at beginning of year $ 50,628 $ 40,108
Service cost 957 1,025
Interest cost 3,498 3,100
Amendments (73) (318)
Actuarial (gain) loss (3,685) 263
Acquisition - 8,900
Benefits paid (3,890) (2,450)
-------- --------
ABO at end of year 47,435 50,628
-------- --------
Fair value of plan assets at
beginning of year 57,488 44,067
Actual return on plan assets 18,010 6,966
Contributions:
Employer 13 79
Employee 122 93
Acquisition - 8,733
Benefits paid (3,890) (2,450)
-------- --------
Fair value of plan assets at
end of year 71,743 57,488
-------- --------
Plan assets in excess of ABO (24,308) (6,860)
Unrecognized prior service cost (214) (337)
Unrecognized net gain 26,348 9,363
-------- --------
ABO included in other liabilities $ 1,826 $ 2,166
======== ========
Weighted average actuarial
assumptions:
Discount rate 8.0% 7.0%
Expected return on plan assets 8.0% 8.0%
Rate of compensation increase 4.5% 4.5%
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.
<PAGE>
The components of the net postretirement benefit expense are as follows:
(In Thousands)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
-------- -------- --------
Service cost $ 2,343 $2,089 $2,146
Interest cost 8,439 6,675 6,791
Amortization:
Unrecognized prior service cost 353 320 297
Unrecognized net(gain)loss 213 - (316)
------- ------ ------
Net postretirement benefit
expense $11,348 $9,084 $8,918
======= ====== ======
The aggregate change in the Company's accumulated postretirement benefit
obligation ("APBO"), which is unfunded, is as follows:
(In Thousands)
June 3, May 29,
2000 1999
------- -------
APBO at beginning of year $98,056 $90,254
Service cost 2,343 2,089
Interest cost 8,439 6,675
Participant contributions 1,838 1,756
Amendments 197 50
Actuarial loss 9,754 6,964
Acquisitions 463 268
Benefits paid (11,295) (10,000)
------- -------
APBO at end of year 109,795 98,056
Unrecognized prior service cost (2,317) (2,473)
Unrecognized net loss (13,787) (4,246)
------- -------
Accrued postretirement benefit 93,691 91,337
Less current portion (11,000) (8,650)
------- -------
APBO included in other
liabilities $82,691 $82,687
======= =======
In determining the APBO, the weighted average discount rate was assumed to be
8.0% for fiscal 2000, 7.0% for fiscal 1999 and 8.0% for fiscal 1998. The
assumed health care cost trend rate for fiscal 2000 was 8.0%, declining
gradually to 6.5% over the next 5 years and to 5.5% after 14 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 2000 by approximately $1,067,000, as well as increase the June 3,
2000 APBO by approximately $10,650,000. Conversely, a 1.0% decrease in this
rate would decrease the fiscal 2000 expense by approximately $1,057,000 and
the June 3, 2000 APBO by approximately $9,113,000.
-24-
<PAGE>
The Company also participates in a number of multi-employer plans which
provide postretirement health care benefits to substantially all union
employees not covered by Company-administered plans. Amounts reflected as
benefit cost and contributed to such plans, including amounts related to
health care benefits for active employees, totaled $162,990,000, $154,670,000
and $142,368,000 in fiscal 2000, 1999 and 1998, 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 June 3, 2000, shares totaling 2,341,000 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 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
Issued 2,129 18.65
Surrendered (308) 28.56
Exercised (207) 9.50
------ ------
Balance June 3, 2000 7,217 $24.12
====== ======
<PAGE>
Stock options outstanding and exercisable on June 3, 2000 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:
$ 6.25 - $18.50 2,971 $15.73 7.6
21.88 - 27.06 1,912 25.20 8.7
33.28 - 33.91 2,334 33.90 7.3
--------------- ----- ------ ---
$ 6.25 - $33.91 7,217 $24.12 7.8
--------------- ----- ------ ---
Exercisable:
$ 6.25 - $18.50 1,886 $16.46
21.88 - 27.06 446 26.18
33.28 - 33.91 1,606 33.90
--------------- ----- ------
$ 6.25 - $33.91 3,938 $24.67
--------------- ----- ------
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 2000, 1999 and 1998 was $7.08, $8.80 and $11.94 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:
2000 1999 1998
---- ---- ----
Expected dividend yield 1.9% 1.3% .9%
Expected volatility 36.8% 28.5% 27.2%
Risk-free interest rate 6.3% 5.4% 6.0%
Expected term in years 4.0 4.0 4.0
-25-
<PAGE>
If the Company had adopted the provisions of SFAS No. 123, the impact would
have been to reduce reported net income and earnings per share as follows:
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 3, May 29, May 30,
2000 1999 1998
-------- -------- --------
Net income (in thousands) $12,804 $10,621 $11,242
Earnings per share:
Basic .12 .15 .15
Diluted .12 .15 .15
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, $2,260,000 and $1,565,000 for fiscal 2000, 1999 and
1998, respectively.
On June 3, 2000, 9,990,000 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)
June 3, May 29,
2000 1999
-------- --------
Payroll, vacation and other
compensation $56,321 $57,838
Self-insurance reserves 48,708 47,366
Pension and welfare 34,638 37,840
Taxes other than income 19,967 20,642
Included in other liabilities are the following:
(In Thousands)
June 3, May 29,
2000 1999
-------- --------
Self-insurance reserves $70,374 $80,327
Accumulated postretirement benefit
obligation 82,691 82,687
<PAGE>
9. Stockholder Rights Plan
In May 2000, 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 May 26,
2000 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 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
May 25, 2010.
During September 1999, the Company's board of directors adopted a similar
stockholder rights plan. In February 2000, the Company, pursuant to the terms
of this previous rights plan, redeemed all former rights for $.001 per right
and terminated the plan.
10. Subsequent Events
In July 2000, the Company announced that it had agreed to repurchase
15,498,000 shares of its common stock from Ralston Purina Company ("RPC") at a
price per share equal to the average closing market price for the 20
consecutive trading days prior to August 1, 2000. After this repurchase, RPC
will own approximately 29.5% of the Company's outstanding common stock. Also,
the shareholder agreement with RPC was amended whereby RPC would be required
to reduce its ownership of the Company's common stock to not more than 15% by
August 1, 2004 and not more than 10% by August 1, 2005. The Company will
continue to have the right of first offer on disposal of the Company's stock
by RPC. The shareholder agreement was further amended to eliminate the
requirement that RPC use the Company's common stock to satisfy RPC's
obligation under the 7% Stock Appreciation Income Linked Securities, which
matured August 1, 2000.
-26-
<PAGE>
To fund this stock acquisition, as well as repay all of the outstanding senior
notes, the Company is making certain amendments to its present $350,000,000
bank credit facility and expects to enter into an additional $500,000,000
unsecured bank credit facility. The new bank credit facility is expected to
be a 364-day term loan which the Company expects to refinance on a long-term
basis during the year. The bank credit facilities are expected to have
several options available to borrow at floating interest rates based upon the
Company's overall credit rating. Also, the Company is working with its
lenders and insurance carriers and fully expects to be able to provide the
surety required for the litigation described below.
On July 31, 2000, a jury in California awarded compensatory damages totaling
approximately $10,800,000 against the Company and in favor of 18 plaintiffs
who alleged various forms of racial discrimination at the Company's San
Francisco bakery. The court subsequently reduced these compensatory damages
to approximately $5,800,000. On August 2, 2000, the jury also awarded
punitive damages totaling approximately $121,000,000. The Company intends to
appeal these verdicts. Based upon the opinion of outside counsel, the Company
believes the compensatory damages should be overturned or reduced on appeal
and it is likely that the Company will succeed in obtaining either a reversal
of the punitive damages or a new trial. The Company believes it has adequate
reserves for the compensatory damages.
11. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for the fiscal years ended June 3,
2000 and May 29, 1999 is as follows (each quarter represents a period of
twelve weeks except the third quarters, which cover sixteen weeks, and the
fourth quarter of fiscal 2000 which covers thirteen weeks):
(In Thousands, Except Per Share Data)
First Second Third Fourth
-------- -------- ---------- --------
2000
Net sales $809,473 $810,600 $1,035,609 $867,247
Cost of products sold 380,714 378,963 494,886 417,605
Operating income 58,799 50,143 41,336 20,120
Net income 33,226 27,938 20,417 7,807
Earnings per share:
Basic .47 .40 .30 .12
Diluted .47 .40 .30 .12
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
The fourth quarter of fiscal 2000 includes the impact of one-time events
totaling $23,600,000 ($.22 per basic and diluted share on an after-tax basis)
related to a work stoppage that idled five Northeast bakeries, bakery
consolidation and start-up costs in the Pacific Northwest and an adjustment to
the self-insurance reserves.
-27-
<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 June 3, 2000 and May 29, 1999
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended June 3,
2000. 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 auditing standards generally
accepted in the United States of America. 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 June 3, 2000 and May 29, 1999, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended June 3, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
August 11, 2000
<PAGE>
Corporate Information
Corporate Headquarters Transfer Agent & Registrar
12 East Armour Boulevard UMB Bank, n.a.
P.O. Box 419627 928 Grand Avenue
Kansas City, Missouri 64141 Kansas City, Missouri 64106
(816) 502-4000
Subsidiaries 10-K Report
Interstate Brands Corporation A copy of the Company's 10-K
Interstate Brands West Corporation Report, as filed with the
Mrs. Cubbison's Foods, Inc. Securities and Exchange
IBC Trucking Corporation Commission, is available upon
request to the Corporate
Division Offices Secretary at the Headquarters
Western - Phoenix, Arizona address.
Eastern - Charlotte, North Carolina
Central - Kansas City, Missouri Annual Meeting
Dry Products - Montebello, California The Annual Meeting of
Stockholders of Interstate
Common Stock Bakeries Corporation will be
Listed on the New York Stock Exchange held in the Atkins Auditorium
Trading Symbol - IBC of The Nelson-Atkins Museum of
Trade Journal Listing - IntstBaker Art, 4525 Oak, Kansas City,
Missouri at 10:00 a.m. Central
Daylight Time on Tuesday,
September 26, 2000.
-28-
