1997 ANNUAL REPORT
A great year,
and it’s now history.
But...
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
1997 WILL BE
REMEMBERED
AS THE YEAR
IN WHICH
A NEW IBC
EMERGED.
one
Brought to you by Global Reports
who we are
Interstate Bakeries Corporation is the largest wholesale baker and distributor
of fresh delivered bread and snack cake in the United States. The Company
has three major divisions — the Western Division, headquartered in Phoenix,
Arizona; the Central Division, headquartered in St. Louis, Missouri; and the
Eastern Division, headquartered in Charlotte, North Carolina. The Company
also sells dry products, primarily in the western United States.
The Company operates 67 bakeries throughout the United States and
employs more than 32,000 people. From these geographically dispersed bakeries, the Company’s sales force delivers baked goods to more than 200,000
food outlets on approximately 10,000 delivery routes. The Company’s products are distributed throughout the United States, primarily through its direct
route system and more than 1,400 Company-operated thrift stores, and to
some extent through distributors.
The IBC product line is marketed under a number of well-known
national and regional brands, which include Wonder, Hostess, Home Pride,
Beefsteak, Bread du Jour, Dolly Madison, Butternut, Merita, Weber’s, Mickey,
Millbrook, Eddy’s, Holsum, Sweetheart, Cotton’s Holsum, Mrs. Cubbison’s,
Marie Callender’s, Colombo, Parisian and Toscana. In addition, the Company is
two
a baker and distributor of Roman Meal and Sun Maid raisin bread.
Brought to you by Global Reports
financial
highlights
Net Sales (In Millions)
$3,212.4
$2,878.2
(In Thousands, Except Per Share Data)
52 Weeks Ended
May 31, 1997
Statement of Income
Net sales
Operating income
% of net sales
Net income
% of net sales
Per share:
Net income
Book value
Common stock dividends
Common shares outstanding (Avg.)
52 Weeks Ended
June 1, 1996 (1)
53 Weeks Ended
June 3, 1995
$1,222.8
$3,212,431
191,143
6.0%
$ 97,177
3.0%
$ 2,878,180
78,758 (2)
2.7%
$ 24,463 (2)
0.8%
$ 1,222,779
57,293
4.7%
$ 20,697
1.7%
$
$
$
1995
1997
Net Income (In Millions)
$97.2
2.55
14.34
.53
38,100
.70 (2)
12.34
.50
34,984
1.05
10.09
.50
19,707
$20.7
May 31, 1997
Balance Sheet
Total assets
Long-term debt
Stockholders’ equity
Debt to total capital
1996
June 1, 1996
(1)
June 3, 1995
1995
$1,493,087
251,000
538,722
31.8%
$24.5
$1,486,460
303,651
460,247
39.8%
$ 598,441
212,205
198,037
51.7%
1996
1997
% of Debt
to Total Capital
51.7% 39.8% 31.8%
(1) Fiscal 1996 includes the operations of Continental Baking Company for 45 weeks from its acquisition on July 22, 1995.
(2) Fiscal 1996 includes a charge of $9,500,000 ($5,738,000 and $ .16 per share on an after-tax basis) resulting from a payment
due a union-administered multi-employer pension plan which failed.
common stock
information
1995
1996
1997
Long-Term Debt
The Company’s common stock is listed on the New York Stock
Exchange and is traded under the symbol IBC. The table below
presents the high and low sales prices for the stock and cash
dividends paid during fiscal 1997 and 1996:
Equity
Stock Price
Fiscal Year
1997
1996
Quarter
High
Low
1
2
3
4
$30.125
45.250
51.000
55.125
$ 25.500
29.625
42.250
46.375
$ .125
.135
.135
.135
1
2
3
4
$19.500
22.250
23.250
27.625
$ 14.375
18.875
20.500
22.500
$ .125
.125
.125
.125
The Company had approximately 4,700 shareholders at May 31, 1997.
Brought to you by Global Reports
Cash Dividends
Stock Price (End of Quarter)
53 3 ⁄4
(In Dollars)
46 ⁄2
1
43 3 ⁄8
27 5⁄8
FY
1996
30 1 ⁄8
Qtr
1
Qtr
2
Qtr
3
FY
1997
letter to
shareholders
To O u r F e l l o w S h a r e h o l d e r s a n d E m p l o y e e s :
As the cover of our report implies, fiscal 1997 was a great year for our Company. By any standard, it
was solid, productive and one in which our key report card — shareholder value — showed dramatic improvement, starting with profitability. We earned nearly $100 million — a Company record and a profit swing from
the year before of $72,714,000. We grew to 67 bakeries nationwide, and broke ground for a new facility in
Ohio. We accelerated our synergies much faster than expected and significantly improved our margins. Yes, a
great year, and it’s now history. But 1997 will be remembered as the year in which a new IBC emerged.
four
Paraphrasing Charles Darwin, it’s not necessarily the fittest who survive, but rather those
who adapt best to change. With the acquisition of Continental Baking Company, IBC evolved. We
went from being a regional baking company — whose future profitability was tied to fluctuating
ingredient markets — to a prototypical company properly structured to succeed in tomorrow’s
tough, competitive baking industry. We are, in fact, transforming IBC into a national, branded food
company.
But just how do we intend to drive this transformation? By sticking to our established
game plan:
• build margin through strong brands;
• fuel growth through strategic acquisitions and product line diversity;
• stay competitive and ahead of the game through capital investment; and
• maintain a competitive edge through strong, positive performance and a
streamlined operation.
Brought to you by Global Reports
To be sure, all of us at IBC know our transformation into a branded food company is far
from complete. Yes, our Company’s performance last year did exceed even our own expectations.
But we also know that the best way to lose our momentum is to sit back and admire the handiwork.
We will not let that happen. Our sense of urgency, our sense of commitment, both remain strong.
In reviewing the year’s numbers, one mark particularly stands out. For the first time in our
Company’s history, we crossed the $3 billion revenue barrier. For the 52 weeks ended May 31,
1997, IBC reported net sales of $3,212,431,000, up 11.6 percent over last year’s net sales of
$2,878,180,000. The results for the prior year, however, represented only 45 weeks of combined
operations resulting from the acquisition of Continental.
Our profits also escalated. By concentrating on cost control at every level and taking advantage of synergies, we increased operating income to $191,143,000, or 6.0 percent of net sales. This
compares very favorably to the prior year’s $78,758,000 after a one-time charge. Net income also
rose appreciably to $97,177,000, or 3.0 percent of net sales. This compares to $24,463,000, or 0.8
percent of net sales for the prior year. Earnings per share came in at $2.55 per share, a 264 percent
increase over the prior year’s $0.70.
With the increased revenue, our cash flow remained strong for the year. We further strengthened our balance sheet by reducing the debt load by more than $74 million. In fact, we closed out
the fourth quarter of fiscal 1997 with our long-term debt to total capitalization at a very healthy
31.8 percent. This financial strength gives us great flexibility in achieving our objectives.
We also reported quarterly earnings which exceeded analysts’ expectations. Perhaps reacting
in part to that consistently positive news, our stock price increased to $53.75 at the end of the fiscal
year. As a result, our ultimate report card — IBC’s market value — has doubled from the prior
fiscal year-end to over $2.0 billion.
Brought to you by Global Reports
margin branded products, particularly branded white bread. This is true, not only for our
strong regional brands like Butternut and
Merita, but also for our No. 1 selling national
brand, Wonder. In addition, cake sales have
recently shown some improvement, paced by
our Hostess brand. We can credit aggressive
brand-building efforts for much of this performance. Over the years, and particularly
most recently, we have made significant
investments — both in marketing and product quality assurance — to strengthen and
protect those brands. “Brand Power” is a
cornerstone to our Company’s success.
A lot of what we accomplish operationally — smart decisions we enact, strategic investments we initiate — may not produce measurable results for months into the
future, but in terms of building shareholder
value, those actions position us for growth,
prepare us to respond to consumer needs and
make us more capable of competing successfully. We have completed a $20 million
expansion and modernization of our Rocky
Mount, N.C., Merita bread plant. This gives
our bakery the latest in industry equipment,
including new, high-speed bread and bun
lines. By autumn, our capacity will triple in
this key mid-Atlantic Coast market. Also
ready for construction is a new, $27 million
state-of-the-industry bakery near Toledo,
Ohio, our first new facility since completion
of Jacksonville, Fla., in 1994. More than 16
other major planned capital projects are on
the docket for fiscal 1998, including the construction of the new Kansas City Research &
Development Lab.
While capital expenditures are important to keep us competitive, we also know the
importance of keeping a tight rein on expenses. Taking advantage of synergies in production and distribution is a key strategy in cost
control. Thanks to our Synergy Task Force,
we are ahead of schedule to realize cost savings in excess of the $100 million we forecast
for the Continental acquisition.
Of course, external events will certainly affect us in fiscal 1998 as they have done
in every year of our Company’s existence.
Ingredient prices will fluctuate. Markets will
change. And now that we are a national com-
pany, the variety of possible events becomes
much greater than for those of regional companies. But if there is one word that best
summarizes our feeling entering fiscal 1998,
it is confidence. We are confident that our
strategies are sound and that we can proactively affect the necessary changes that
impact performance. We are confident IBC
will continue its growth, although not on the
magnitude of the past year.
One reason for our optimism springs
from the confidence we have in our employees. They are smart, disciplined, firmly committed to quality and possessing a zeal for
detail. None of our year’s accomplishments,
nor those awaiting us in the future, could be
made without their dedication and hard work.
In conclusion, the steps we have taken
this fiscal year allow us a clear view of what
we have become and where we are headed in
the future. We have a vision: become one of
the most successful branded food companies
in the nation. And we have a mission: build
shareholder value.
But we are realistic. The work has just
begun. We cannot afford to slacken our
efforts if we intend to remain the industry
leader. Indeed, we are recommitted toward
maintaining our sense of urgency that has
served us so well through these long months
of merger and consolidation. We are recommitted to making good use of our synergies
and remaining agile. We are recommitted to
emphasizing cost control and maintaining
low overhead while continuing strategically
wise capital investments and acquisitions.
We are recommitted to emphasizing quality
assurance and building our brands.
This past year stands as an example of
what we can accomplish. It is definitely not
an end to what we can do, but rather a
springboard to greater heights and broader
horizons. With fiscal 1997 as a benchmark,
we are confident we will continue our
journey toward another successful year.
Charles A. Sullivan
Chairman of the Board
and Chief Executive Officer
five
During the year we continued our
efforts to comply with the U.S. Justice
Department’s divestiture order stemming
from our Continental purchase. The Chicago
Butternut Bakery was sold in January 1997,
and work is continuing toward meeting a
similar divestiture order in southern
California.
Though we continue to sell bakery
products in Chicago under the Wonder,
Hostess and Dolly Madison brands, we knew
the Midwest divestiture would have an
impact on our Company’s cash flow. And it
did. However, we offset much of the
decrease with the March 1997, acquisition of
the San Francisco French Bread Company,
producer and distributor of sourdough breads
and rolls principally under the highly popular
Parisian, Columbo and Toscana brand
names. The five bakeries, clustered in northern California and San Diego, annually produce $95 million in sales of San Francisco’s
trademark bread. This is a good fit for our
Company. The brand names are well-known
and respected throughout the California
market, and there is potential for wider
distribution.
In a smaller, but significant deal, we
completed the buyout of Marie Callender’s
Croutons, whose products we have manufactured and helped distribute over the years.
This is a fine addition to our growing stable
of dry products, which includes Mrs.
Cubbison’s brand of croutons, stuffing and
snacks. It also firmly establishes IBC as a
major player in the crouton category.
Acquisitions are important, but internal growth also is critical. This year we introduced to several Midwest test markets a new
product line — Wonder and Butternut FatFree breads. This new line is unique to the
store shelves. Initial reports are positive, but
it’s far too early to speculate on sales impact.
In our Hostess Lights cake, we introduced a
new cream filling we feel tastes as good as
the regular cream filling. The good news: the
new filling has less fat and the cake’s overall
taste and texture has been improved.
One of the more positive trends for
our Company this year has been the solid
improvement in our product mix to higher-
Number
1
key elements
that will
continue our
success in
the future
O
ur Company brands are among the most powerful in the industry. National brands like Hostess cakes, Wonder and Home Pride
breads. Regional favorites, Merita and Butternut breads and
Dolly Madison cakes. The near-legendary San Francisco sourdoughs Parisian, Colombo and Toscana. Stuffing mix or croutons from Marie Callender’s or Mrs. Cubbison’s. Indeed, brand power is our
Company’s most important asset.
Why do we consider brand equity so important? Brand building is what
differentiates IBC from the competition. It sets IBC apart in the hearts, the
minds, the experience of the consumer, the customer and our employees. Our
brands are trusted bakery products that continue to demonstrate their value to
generation after generation. These powerhouse brand names are integrated into
the lifestyle of America’s consumer.
Our brand reputation is that of a fresh, great-tasting, high-quality bread
or snack cake, convenient to buy and sold at a fair price. It is a unique distinction
that must be earned each and every day in the aisles and on the shelves of
America’s food stores. At IBC, we do not take our brand reputation for granted.
We listen closely to consumers. We pay attention to detail. Close doesn’t count in
our business.
six
POWERHOUSE
BRANDS
Brought to you by Global Reports
Our success story begins with brand power. Wonder white bread is
the No. 1 selling bread brand in America, outdistancing its closest
rival, our own Home Pride wheat, by nearly two to one. Hostess
Cup Cakes and Twinkies are icons of our childhood, and — with
over a billion sold annually — remain the favorites for snackers of all ages. Supported by breakthrough television advertising, these brands have developed a new vitality.
★
★
®
®
seven
Brought to you by Global Reports
Number
2
key elements
that will
continue our
success in
the future
STRATEGIC
GROWTH
eight
G
Brought to you by Global Reports
rowth has never been more critical to achieving IBC’s objectives than
it is today. Strategic acquisitions have been our primary engine for
growth over the past 10 years, and will continue to drive our growth
well into the future. There is a reason for this: dramatic changes in the
American food industry. Companies are moving to simplify the preparation and distribution of food while simultaneously diversifying the product offered.
These market forces have created a major consolidation trend in the baking industry,
and that consolidation continues to create acquisition opportunities for IBC.
Our successful track record over the years has been the result of a disciplined
approach: acquisition candidates must complement our existing product lines, fill out
our geographic presence and leverage our purchasing power, brand management capabilities and operating efficiencies. Our recent acquisitions of the San Francisco French
Bread Company and Marie Callender’s Croutons are examples of this approach.
Recent food trends also indicate consumer horizons are broadening to include
a wider variety of baked goods. This too will stimulate growth opportunities. IBC is
committed to targeting significant niche market opportunities and the development of
strategically innovative new products. Examples of that commitment: the introduction
of Wonder and Butternut Fat-Free breads, Bubble Gum and S’Mores Hostess Mini
Muffins, and the new, improved, low-fat cream filling in Hostess Lights.
The consumer landscape is in constant change.
Today, those changes occur more rapidly than
ever before. Some new products added to our
portfolio this year reflect that new environment. Through acquisitions, we’ve added the
strong sourdough bread brands of Parisian,
Colombo and Toscana, as well as the distinctive
line of Marie Callender’s Croutons. With some
remarkable technological innovation, we’ve
also introduced Wonder and Butternut Fat-Free
bread into test markets in the Midwest.
nine
Brought to you by Global Reports
Number
3
key elements
that will
continue our
success in
the future
CAPITAL
INVESTMENT
ten
I
Brought to you by Global Reports
f your plant and equipment aren’t continuously updated in the baking industry, your competition will let you know your mistake in a hurry. It is a very
dynamic environment and a highly competitive one. The edge often goes to
the manufacturer committed to utilizing innovative technology and modifying the operation to make it work better. IBC is one company that has that
commitment.
During the past fiscal year, IBC invested over $78 million in various capital projects intended to keep our operations running smoothly and efficiently. The
list of projects was led by completion of the Rocky Mount, N.C., expansion adding
new, high-speed Merita bread and bun lines; the Northeast consolidation, transferring a bun line to Jamaica, N.Y., and a donut line to Philadelphia, Pa.; and the
expansion of our cake bakery at Emporia, Kan.
Our capital improvements budget for the new fiscal year is no less ambitious. We have broken ground on the construction of a new, state-of-the-art bread
bakery near Toledo, Ohio, assuring quality branded product to this key Upper
Midwest market area. In addition, we have begun construction of a new research
and development facility in Kansas City, positioning IBC for even better response
to future challenges.
Today’s capital investment decisions
impact tomorrow’s performance. For
example, the consistent freshness and
high quality of Wonder and Home Pride
bread will be assured in future years
through the completion of the new
bread bakery near Toledo, Ohio. This
forward-looking vision by IBC continues
to place our Company in an enviable
position: the ability to adapt to the
many challenges faced in a rapidly
changing food market.
eleven
Brought to you by Global Reports
twelve
Number
4
key elements
that will
continue our
success in
the future
T
he baking industry is a simple business wrapped in a complicated environment. Keeping it simple is the key to maintaining a competitive edge in the
baking industry.
For IBC, that means a decentralized management structure with
day-to-day operating decisions made in the local market by managers
rewarded to achieve financial goals.
For IBC, that means motivated employees, attentive to detail and committed to
producing, distributing and merchandising fresh quality bakery products daily. Some of
our best ideas come from employees dedicated to achieving customer satisfaction and
market leadership.
For IBC, that means thinking outside the box, developing innovative technology
— much of it unique to the baking industry — helping solve problems today before they
become obstacles tomorrow.
For IBC, that means keeping in touch with both customers and consumers in the
changing marketplace. It also means keeping in touch with reality, focusing on the
important issues and activities and avoiding distraction by the unimportant.
For IBC, that means proper allocation of resources to achieve results. Investing
in our facilities to keep them competitive. Continually streamlining our operation by
building more cost-efficient plants. Achieving new synergies through strategic acquisition. Communicating meaningful brand images.
That is the way we do business at IBC, taking care of our future by doing
today’s job right every time.
MAINTAINING
THE COMPETITIVE
EDGE
Brought to you by Global Reports
We’ve become a leading food company
by understanding what the consumer
demands and caring about the product
we produce. Individual accountability —
that’s one of the secrets to our
Company’s success. From quality assurance to production to merchandising to
the placing of our bread and cake on the
shelves, each IBC employee is responsible
for the total operation, not just the job
before them.
thirteen
Brought to you by Global Reports
INTERSTATE BAKERIES CORPORATION
Butternut Bread Bakeries
Peoria, Illinois
Grand Rapids, Michigan
Boonville, Missouri
Springfield, Missouri
Cincinnati, Ohio
Decatur, Illinois
Minonk, Illinois
Weber’s Bread Bakeries
Glendale, California
Los Angeles, California
San Diego, California
Sweetheart Bread Bakeries
Billings, Montana
Minot, North Dakota
®
Merita Bread Bakeries
Birmingham, Alabama
Jacksonville, Florida
Orlando, Florida
Charlotte, North Carolina
Rocky Mount, North Carolina
Florence, South Carolina
Knoxville, Tennessee
★
®
Dolly Madison Cake Bakeries
Columbus, Georgia
Columbus, Indiana
Emporia, Kansas
Los Angeles, California
®
Holsum Bread Bakeries
Grand Junction, Colorado
Miami, Florida
Rainbo Bread Bakery
Roanoke, Virginia
Cotton’s Bread Bakeries
Alexandria, Louisiana
Monroe, Louisiana
Parisian Bread Bakeries
San Diego, California
San Francisco, California
ITI
Eddy’s Bread Bakery
Boise, Idaho
Braun’s Bagel Bakery
Milwaukee, Wisconsin
DiCarlo Bread Bakery
San Pedro, California
895
fourteen
®
MIL
Y TRAD
Brought to you by Global Reports
®
®
★
Wonder/Hostess Bakeries
San Francisco, California
Denver, Colorado
Indianapolis, Indiana
Davenport, Iowa
Natick, Massachusetts
St. Louis, Missouri
Buffalo, New York
Tulsa, Oklahoma
Philadelphia, Pennsylvania
Memphis, Tennessee
Ogden, Utah
Spokane, Washington
Dry Products
Montebello, California
E1
Hostess Cake Bakeries
Schiller Park, Illinois
Detroit, Michigan
Seattle, Washington
Los Angeles, California
®
A FA
Wonder Bread Bakeries
Anchorage, Alaska
Pomona, California
Sacramento, California
Tampa, Florida
Hodgkins, Illinois
Waterloo, Iowa
Kansas City, Missouri
Jamaica, New York
Akron, Ohio
Columbus, Ohio
Portland, Oregon
Salt Lake City, Utah
Richmond, Virginia
Seattle, Washington
O N SINC
Toscana Bread Bakery
Castroville, California
Colombo Bread Bakeries
Oakland, California
Sacramento, California
five-year summary
of financial data
Statement of Income
Net sales
Operating income
% of net sales
Income before
cumulative effect
of accounting change
% of net sales
Net income
Per share:
Income before
cumulative effect
of accounting change
Net income
Common stock dividends
Weighted average common
shares outstanding
Balance Sheet
Total assets
Long-term debt, excluding
current maturities
Stockholders’ equity
Debt to total capital
52 Weeks
Ended
May 31,
1997
-—–——-
(In Thousands, Except Per Share Data)
52 Weeks
53 Weeks
52 Weeks
Ended
Ended
Ended
June 1,
June 3,
May 28,
(1)
1996
1995
1994
-—–——-—–——-—–——-
52 Weeks
Ended
May 29,
1993
–———-
$3,212,431
191,143
6.0%
$2,878,180
78,758(2)
2 .7%
$1,222,779
57,293
4.7%
$1,142,684
46,883(3)
4.1%
$1,165,588
71,344
6.1%
$
$
$
$
$
$
97,177
3.0%
97,177
2.55
2.55
.53
$
24,463(2)
0.8%
24,463(2)
.70(2)
.70(2)
.50
$
20,697
1.7%
20,697
1.05
1.05
.50
$
15,754(3)
1.4%
15,754(3)
.78(3)
.78(3)
.495
$
30,784
2.6%
16,663(4)
1.46
.79(4)
.47
38,100
34,984
19,707
20,306
21,132
$1,493,087
$1,486,460
$ 598,441
$ 574,791
$ 586,756
251,000
538,722
31.8%
303,651
460,247
39.8%
212,205
198,037
51.7%
201,235
187,441
51.8%
189,238
202,315
48.3%
(1)
Fiscal 1996 includes the operations of Continental Baking Company for 45 weeks from its acquisition on July 22, 1995.
(2)
Fiscal 1996 includes a charge of $9,500,000 ($5,738,000 and $.16 per share on an after-tax basis) resulting from a payment due a union-administered
multi-employer pension plan which failed.
(3)
Fiscal 1994 includes a charge of $9,400,000 ($5,687,000 net of tax, or $.28 per share), related to a plant disposal and environmental matters.
(4)
Fiscal 1993 includes a charge of $14,121,000 ($.67 per share) for the cumulative effect of the change in accounting for postretirement benefits other
than pensions, from adopting SFAS No. 106.
fifteen
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
management’s discussion
and analysis of financial
condition and results
of operations
RESULTS OF OPERATIONS
Fiscal 1997 Compared With Fiscal 1996
sixteen
Net sales for the fifty-two weeks ended May 31,
1997 were $3,212,431,000, an increase of $334,251,000
and 11.6% over net sales of $2,878,180,000 for the fiftytwo weeks ended June 1, 1996. This increase in net sales
was primarily attributable to the acquisition of Continental
Baking Company (“CBC”) on July 22, 1995, with fiscal
1996 results reflecting only forty-five weeks of CBC’s
operations. Excluding the impact of current year acquisitions and dispositions, net sales rose approximately 3.8%.
Fiscal 1997’s gross profit was $1,646,166,000, or
51.2% of net sales, up $221,177,000 from gross profit of
$1,424,989,000, or 49.5% of net sales, the prior year. This
margin improvement resulted from synergies realized
through continuing integration of existing and acquired
operations, particularly product sourcing efficiencies, and
favorable mix changes to higher-margin branded products.
These factors, along with higher selling prices, more than
offset the effect of higher ingredient costs experienced in
fiscal 1997.
Selling, delivery and administrative expenses
totaled $1,352,026,000, or 42.1% of net sales, for fiscal
1997 compared to $1,236,586,000, or 43.0% of net sales,
in the prior year. Continued emphasis on cost control,
integration synergies and higher selling prices resulted in
improved selling, delivery and administrative expenses as
a percent of net sales in the current year.
Included in fiscal 1996 were other charges of
$9,500,000 ($5,738,000 and $.l6 per share on an after-tax
basis) resulting from a payment due a union-administered
multi-employer pension plan which failed.
Based upon these factors, operating income for
fiscal 1997 was $191,143,000, or 6.0% of net sales, a
$112,385,000 and 142.7% increase over fiscal 1996’s
operating income of $78,758,000, or 2.7% of net sales.
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
Interest expense for the current year was
$22,592,000, a decrease of $6,718,000 from the prior year.
The lower expense reflects both lower average borrowing
levels and lower interest rates.
The fiscal 1997 effective tax rate of 42.6%,
as well as the fiscal 1996 rate of 51.4%, reflects the
nondeductibility of amortization of various intangibles.
Reflecting the improved operations, net income
for fiscal 1997 improved to $97,177,000, or $2.55 per
share, up from $24,463,000, or $.70 per share, for fiscal
1996, an earnings per share improvement of 264%.
Fiscal 1996 Compared With Fiscal 1995
Net sales for the fifty-two weeks ended June 1,
1996 were $2,878,180,000, a $1,655,401,000 increase over
net sales of $1,222,779,000 for the fifty-three weeks ended
June 3, 1995. This substantial increase was attributable to
the acquisition of CBC on July 22, 1995, with fiscal 1996
results reflecting forty-five weeks of CBC’s operations.
Excluding the impact of the acquisition and the additional
week in fiscal 1995, net sales increased approximately
5.6% for fiscal 1996. This increase reflects higher selling
prices, offset by some volume erosion in cake units.
Gross profit for fiscal 1996 was $1,424,989,000,
or 49.5% of net sales, compared to fiscal 1995’s gross
profit of $591,895,000, or 48.4% of net sales. This margin
improvement resulted from efficiencies of the acquired
operations, as well as synergies realized through integration
of existing and acquired operations. Excluding the impact
of acquired operations, cost of products sold reflects substantially higher ingredient and packaging costs, offset
somewhat by higher selling prices.
Selling, delivery and administrative expenses for
fiscal 1996 were $1,236,586,000, representing 43.0% of
net sales, while fiscal 1995’s selling, delivery and administrative expenses were $501,008,000, or 41.0% of net sales.
This unfavorable variance was attributable to the CBC
acquisition, with the CBC operations having higher selling
and delivery labor and labor related costs as a percentage
of net sales.
Selling, delivery and administrative
expenses as a percentage of net sales were consistent with
fiscal 1995 excluding the impact of the acquisition.
Included in fiscal 1996 were other charges of
$9,500,000 ($5,738,000 and $.16 per share on an after-tax
basis) resulting from a payment due a union-administered
multi-employer pension plan which failed.
Depreciation and amortization for fiscal 1996 was
$100,145,000, up from $33,594,000 during fiscal 1995.
Property and equipment, as well as intangibles, obtained in
the acquisition of CBC were responsible for this increased
expense.
Based upon these factors, operating income for
fiscal 1996 was $78,758,000, or 2.7% of net sales, an
increase of $21,465,000 from fiscal 1995’s operating
income of $57,293,000, or 4.7% of net sales.
Interest expense was $29,310,000 for fiscal 1996,
up $11,565,000 and 65.2% from fiscal 1995’s expense
of $17,745,000, with the increase attributable to higher
borrowings to finance the acquisition of CBC.
The fiscal 1996 effective tax rate of 51.4%,
as well as the fiscal 1995 rate of 47.8%, reflects the
nondeductibility of amortization of various intangibles.
Net income for fiscal 1996 was $24,463,000, or
$.70 per share, compared to $20,697,000 and $1.05 per
share in fiscal 1995. The per share earnings decline was
the result of increased interest expense and the additional
shares issued in conjunction with the CBC acquisition.
For fiscal 1998, the Company anticipates cash
needs of approximately $165,000,000, consisting of
$85,000,000 of planned capital expenditures, $60,000,000
for the repurchase of common stock ($58,000,000 of which
has been expressly excluded from stock repurchase limitations under the Company’s borrowing agreements) and
$20,000,000 of common stock dividends. The Company
expects these needs to be funded by ongoing operations
and borrowing capacity under its bank credit facility.
NEW ACCOUNTING STANDARDS
See Note 2 to the Company’s consolidated financial statements for discussions on new accounting standards relating to earnings per share computation and presentation, comprehensive income and segment disclosures.
CAPITAL RESOURCES AND LIQUIDITY
seventeen
The Company’s primary source of liquidity is
cash provided by operations which totaled $196,173,000
for fiscal 1997, an increase of $31,787,000 from the prior
year’s $164,386,000. This increase reflects improved operations, partially offset by less favorable changes in working
capital components. Cash generated by operations, along
with asset sales of $19,291,000, during fiscal 1997 was
used to fund capital expenditures of $78,418,000, reduce
long-term debt a net $74,205,000, pay common stock
dividends of $19,857,000 and fund acquisitions of
$43,618,000.
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
consolidated balance sheet
(In Thousands)
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts of
$4,577,000 ($3,606,000 in 1996)
Inventories
Other current assets
Total current assets
Property and equipment:
Land and buildings
Machinery and equipment
Less accumulated depreciation
Net property and equipment
Intangibles
Liabilities and Stockholders’ Equity
Current liabilities:
Long-term debt payable within one year
Accounts payable
Accrued expenses
Long-term debt
Other liabilities
Deferred income taxes
Total long-term liabilities
Stockholders’ equity:
Preferred stock, par value $.01 per share;
authorized - 1,000,000 shares; issued - none
Common stock, par value $.01 per share;
authorized - 60,000,000 shares;
issued - 39,265,000 shares (38,735,000 in 1996)
Additional paid-in capital
Retained earnings (accumulated deficit)
Treasury stock, at cost - 1,708,000 shares
(1,449,000 in 1996)
eighteen
Total stockholders’ equity
See accompanying notes.
Brought to you by Global Reports
June 1,
1996
–—----——
$ 190,747
63,962
70,453
–—----——
325,162
–—----——
$ 179,538
67,254
71,481
–—----——
318,273
–—----——
291,526
784,910
–—----——
1,076,436
(269,153)
–—----——
807,283
–—----——
360,642
–—----——
$1,493,087
–—
–—----——
----——
279,863
741,705
–—----——
1,021,568
(204,173)
–—----——
817,395
–—----——
350,792
–—----——
$ 1,486,460
–—
----——
–—----——
$
$
–
146,638
201,878
–—----——
348,516
–—----——
251,000
230,967
123,882
–—----——
605,849
–—----——
Total current liabilities
INTERSTATE BAKERIES CORPORATION
May 31,
1997
–—----——
21,554
135,447
200,221
–—----——
357,222
–—----——
303,651
254,962
110,378
–—----——
668,991
–—----——
–
–
393
529,127
43,228
387
515,497
(34,092)
(34,026)
–—----——
538,722
–—----——
$1,493,087
–—
–—----——
----——
(21,545)
–—----——
460,247
–—----——
$ 1,486,460
–—
–—----——
----——
consolidated statement
of income
52 Weeks
Ended
May 31,
1997
—----——
$3,212,431
—----——
1,566,265
1,352,026
–
102,997
—----——
3,021,288
—----——
191,143
—----——
(747)
22,592
—----——
21,845
—----——
169,298
72,121
—----——
(In Thousands, Except Per Share Data)
52 Weeks
Ended
June 1,
1996
–—--——
$2,878,180
–—--——
1,453,191
1,236,586
9,500
100,145
–—--——
2,799,422
–—--——
78,758
–—--——
(887)
29,310
–—--——
28,423
–—--——
50,335
25,872
–—--——
53 Weeks
Ended
June 3,
1995
–—--——
$1,222,779
–—--——
630,884
501,008
–
33,594
–—--——
1,165,486
–—--——
57,293
–—--——
(104)
17,745
–—--——
17,641
–—--——
39,652
18,955
–—--——
Net income
$ 97,177
—----——
—----——
$ 24,463
–—---—
——
—
–—-
$ 20,697
–—---—
——
—
–—-
Earnings per common share
$
2.55
—----——
—----——
$
.70
–—---—
——
—
–—-
$
1.05
–—---—
——
—
–—-
Net sales
Cost of products sold
Selling, delivery and administrative expenses
Other charges
Depreciation and amortization
Operating income
Other income
Interest expense
Income before income taxes
Provision for income taxes
See accompanying notes.
nineteen
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
consolidated statement
of cash flows
Cash flows from operating activities:
Net income
Depreciation and amortization
Other
Change in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Accounts payable and accrued expenses
Cash from operating activities
Cash flows from investing activities:
Acquisitions
Additions to property and equipment
Sale of assets
Other
Cash from investing activities
Cash flows from financing activities:
Reduction of long-term debt
Addition to long-term debt
Common stock dividends paid
Stock option exercise proceeds and
related tax benefits
Acquisition of treasury stock
Other
Cash from financing activities
Change in cash and cash equivalents
Cash and cash equivalents:
Beginning of period
End of period
Cash payments made:
Interest
Income taxes
52 Weeks
Ended
May 31,
1997
–—---—–
(In Thousands)
52 Weeks
Ended
June 1,
1996
–—---—–
53 Weeks
Ended
June 3,
1995
–—---—–
$ 97,177
102,997
(7,171)
$ 24,463
100,145
(4,468)
$ 20,697
33,594
44
(11,209)
3,292
(1,761)
12,848
—---——
196,173
—---——
(5,958)
(233)
(10,497)
60,934
––––––––
164,386
––––––––
(3,450)
(3,187)
(126)
2,094
––––––––
49,666
––––––––
(43,618)
(78,418)
19,291
(521)
—---——
(103,266)
—---——
(225,912)
(47,658)
1,945
(697)
––––––––
(272,322)
––––––––
(3,103)
(34,272)
1,167
(15,414)
––––––––
(51,622)
––––––––
(126,205)
52,000
(19,857)
(134,030)
245,000
(16,342)
(1,263)
12,000
(9,819)
13,636
(12,481)
–
—---——
(92,907)
—---——
–
11,339
(519)
(1,238)
––––––––
104,210
––––––––
(3,726)
1
(283)
–
––––––––
636
––––––––
(1,320)
–
—---——
$
–
—-----—
——
—
—-
3,726
––––––––
$
–
––––––––
––––––––
5,046
––––––––
$ 3,726
––––––––
––––––––
$ 22,226
63,402
$ 28,710
24,162
$ 18,852
23,533
twenty
See accompanying notes.
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
consolidated statement
of stockholders’ equity
(In Thousands)
Balance May 28, 1994
Net income
Stock options exercised
and related tax benefits
Dividends paid $.50 per share
Treasury stock acquired
Balance June 3, 1995
Net income
Shares issued for an
acquisition
Stock options exercised
and related tax benefits
Dividends paid $.50 per share
Treasury stock acquired
Balance June 1, 1996
Net income
Stock options exercised
and related tax benefits
Dividends paid $.53 per share
Treasury stock acquired
Balance May 31, 1997
Common Stock Issued
–—––––––––––––—
Number
of
Par
Shares
Value
–——
——
21,050
$211
–
–
Additional
Paid-in
Capital
———
$261,064
–
Retained Earnings
(Accumulated
Deficit)
———
$(53,091)
20,697
Treasury Stock
––––––––––––—–––
Number
of
Shares
Cost
–——
———
(1,400)
$(20,743)
–
–
6
–
1
–
–
–
–
–
–——
21,056
–
–
–
––––
211
–
–
–
———
261,065
–
(9,819)
–
———
(42,213)
24,463
–
(21)
–——
(1,421)
–
–
(283)
———
(21,026)
–
16,923
169
243,100
–
–
–
756
7
11,332
–
–
–
–
–
–——
–
–
––––
–
–
———
(16,342)
–
———
–
(28)
–——
–
(519)
———
38,735
–-
387
–
515,497
–
(34,092)
97,177
(1,449)
–
(21,545)
–
530
6
13,630
–
–
–
–
–
–——
39,265
–——
–——
–
–
––––
$393
––––
––––
–
–
———
$529,127
———
———
(19,857)
–
———
$ 43,228
———
———
–
(259)
–——
(1,708)
–——
–——
–
(12,481)
———
$(34,026)
———
———
See accompanying notes.
twenty-one
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
notes to consolidated
financial statements
1. Acquisitions
On March 29, 1997, Interstate Bakeries Corporation
(the “Company”) purchased the assets comprising the San
Francisco French Bread Company (“SFFB”) from Metz Baking
Company. SFFB, which prior to the acquisition produced and
distributed sourdough bread and rolls throughout Northern
California and in the San Diego area, had net sales in calendar
1996 of approximately $95 million and employed 1,100 people
at five bakery locations. In addition, in April 1997, the
Company acquired the right to use the “Marie Callender’s”
trademark in conjunction with the manufacture, marketing, distribution and sale of croutons. The aggregate cash purchase
price of these acquisitions was $43,618,000.
On July 22, 1995, the Company acquired Continental
Baking Company (“CBC”) from Ralston Purina Company
(“RPC”) for a total purchase price of $220,000,000 in cash and
16,923,077 shares of the Company’s common stock. Prior to
the acquisition, CBC was the nation’s largest wholesale baking
company with annual sales of approximately $2 billion and
21,000 employees at 36 bakery locations. As a result of the
acquisition, RPC owns approximately 45% of the Company’s
common stock. Under terms of a shareholder agreement,
RPC’s holdings of the Company’s common stock must be
less than 15% of the outstanding shares within five years of
the acquisition.
The acquisition of CBC has been accounted for as a
purchase and the results of CBC have been included in the
accompanying consolidated financial statements since the date
of the acquisition. The cash and stock portions of the purchase
price, including fees and expenses, were as follows:
Estimated fair value of net assets acquired
Common stock issued
twenty-two
Cash paid for acquisition of CBC
(In Thousands)
$ 472,284
(243,269)
––––––
$ 229,015
––––––
––––––
The pro forma unaudited consolidated results of operations as
though CBC had been acquired as of the beginning of fiscal
1996 and 1995 are as follows:
Net sales
Net income
Earnings per share
(In Thousands,
Except Per Share Data)
52 Weeks Ended
53 Weeks Ended
June 1, 1996
June 3, 1995
–––————
—————$3,140,501
$3,180,109
25,830
14,543
.69
.40
Pro forma data does not purport to be indicative of
the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is
not intended to be a projection of future results.
2. Description of Business and Significant Accounting Policies
Description of business - The Company is the largest
baker and distributor of fresh bakery products in the United
States.
Fiscal year end - The Company has a 52-53 week
year that ends on the Saturday closest to the last day of May.
Principles of consolidation - The consolidated
financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Inventories - Inventories are stated at the lower of
cost or market. Specific invoiced costs are used with respect to
ingredients and average costs are used for other inventory items.
The components of inventories are as follows:
Ingredients and packaging
Finished goods
Other
(In Thousands)
May 31,
June 1,
1997
1996
–——
–——
$43,195
$42,591
14,420
14,806
6,347
9,857
–——
–——
$63,962
$67,254
–——
–——
–——
–——
Property and equipment - Property and equipment
are recorded at cost and depreciated over estimated useful lives
of 4 to 35 years, using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes.
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
Depreciation expense was $89,507,000, $85,747,000 and
$25,900,000 for fiscal 1997, 1996 and 1995, respectively.
Interest cost capitalized as part of the construction cost of capital
assets was $555,000 in fiscal 1997.
Intangibles – Included in intangibles, which are being
amortized using the straight-line method, are the following:
Licenses and patents
Trademarks and
tradenames
Excess of purchase
cost over net assets
acquired
Deferred financing
cost and other-net
Accumulated amortization
Net intangibles
Life
–———
9 years
(In Thousands)
May 31,
June 1,
1997
1996
———
———
$ 2,510
$ 2,510
25-40 years
112,838
100,870
40 years
312,522
306,358
Term of loans
6,055
———
433,925
(73,283)
———
$360,642
———
———
3,787
———
413,525
(62,733)
———
$350,792
———
———
3. Debt
Long-term debt consists of the following:
(In Thousands)
May 31,
June 1,
1997
1996
———
———
Bank borrowings:
Revolving credit loans(a)
Term loans
Senior notes (b)
Other
Less amounts payable
within one year
$172,000
–
79,000
–
———
251,000
$120,000
125,000
79,000
1,205
———
325,205
–
———
$251,000
———
———
(21,554)
———
$303,651
———
———
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
twenty-three
Long-lived assets – During fiscal 1997, the Company
adopted Statement of Financial Accounting Standards (“SFAS”)
No. 121, “Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.” Under SFAS
No. 121, impairment losses are recognized when information
indicates the carrying amount of long-lived assets, identifiable
intangibles and goodwill related to those assets will not be
recovered through future operations or disposal based upon a
review of expected undiscounted cash flows. The adoption of
this statement had no effect on the Company’s consolidated
financial statements.
Interest rate swap agreements – The Company
enters into interest rate swaps with major banks to manage the
balance of variable versus fixed rate debt based upon current
and anticipated future market conditions. The differential to be
paid or received is recognized over the term of the swap agreements as a component of interest expense. The risk associated
with these agreements is limited to the cost of replacing these
agreements at current market rates.
Statement of cash flows – For purposes of the
statement of cash flows, the Company considers all investments
purchased with a maturity of three months or less to be cash
equivalents.
Earnings per share – Per share amounts are calculated on the basis of the weighted average common shares
outstanding and outstanding options to the extent they are
dilutive. Weighted average common and common equivalent
shares outstanding were 38,100,000, 34,984,000 and 19,707,000
for fiscal 1997, 1996 and 1995, respectively.
Use of estimates –The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
New accounting standards – In February 1997,
SFAS No. 128, “Earnings per Share” was issued by the Financial
Accounting Standards Board (“FASB”). SFAS No. 128, which
establishes standards for computing and presenting basic and
diluted earnings per share for publicly held companies, is
effective for periods ending after December 15, 1997. The
Company believes that adoption of the provisions of SFAS No.
128 will not have a material effect on its financial statements.
In June 1997, the FASB issued SFAS No. 130,
“Reporting Comprehensive Income” and SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related
Information.” Based upon a preliminary review of the provisions of these standards, the Company believes that they will
have no impact on its financial statements.
notes to consolidated
financial statements
twenty-four
(a) Represents borrowings under an unsecured
$350,000,000 revolving credit facility, including up to
$150,000,000 available for letters of credit (with an unused
amount of $54,000,000 at May 31, 1997), maturing in February
2002. The outstanding borrowings bear interest at variable rates
generally equal to the London Interbank Offered Rate (LIBOR)
plus from .20% to .63% (.20% at May 31, 1997), depending on
certain financial ratios. The Company also pays a fee of
between .08% and .23% (.08% at May 31, 1997) on the unused
portion of the revolving credit facility.
To offset the variable rate characteristic of a portion of
these bank borrowings, the Company entered into interest rate
swap agreements resulting in fixed interest rates of 6.16% on
$51,000,000 through July 1998, 5.47% on $35,000,000 through
January 1998, 5.95% on $43,000,000 through October 1997 and
6.35% on $51,000,000 through July 1997. The overall weighted
average interest rate on the bank borrowings was 6.08% and
6.32% at May 31, 1997 and June 1, 1996, respectively.
The credit facility agreement contains covenants
which, among other matters (i) limit the Company’s ability to
incur indebtedness, merge, consolidate and acquire or sell assets,
(ii) require the Company to satisfy certain ratios related to net
worth, debt-to-capitalization and interest coverage and (iii) limit
the payment of cash dividends on common stock and common
stock repurchases to a total of $20,000,000 plus 75% of aggregate consolidated net income after fiscal 1995, with availability
of $62,031,000 at May 31, 1997.
(b) Represents 10.00% notes due in annual installments from July 1998 to July 2000. The note agreement includes
covenants mirroring those of the bank credit agreement.
The fair value of the senior notes, described in (b)
above, is estimated at $83,800,000 and $85,800,000 as of May
31, 1997 and June 1, 1996, respectively, based upon rates available for debt with similar terms. The Company believes, based
upon current terms, that the carrying value of all other long-term
debt approximates fair value. Additionally, the termination value
of all swap agreements at May 31, 1997 is not material.
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
The scheduled repayment of long-term debt is as follows:
Fiscal Years Ending
––––––––––––
1998
1999
2000
2001
2002
(In Thousands)
–––––––––
$
–
25,000
25,000
29,000
172,000
———
$251,000
———
———
4. Commitments and Contingencies
Future minimum rental commitments for all noncancelable operating leases, exclusive of taxes and insurance,
are as follows:
Fiscal Years Ending
––––––––––––
1998
1999
2000
2001
2002
Thereafter
(In Thousands)
–––––––––
$ 48,211
39,257
30,059
22,508
14,869
25,478
———
$180,382
———
———
Net rental expense under operating leases was
$53,792,000, $49,955,000 and $28,145,000 for fiscal 1997,
1996 and 1995, respectively. The majority of the operating leases
contain renewal options for varying periods. Certain leases
include purchase options during or at the end of the lease term.
The Company is subject to various routine legal
proceedings, environmental actions and other matters in the
ordinary course of business, some of which may be covered in
whole or in part by insurance. In management’s opinion, none
of these matters will have a material adverse effect on the
Company’s financial position, but could be material to the
results of operations or cash flows for a particular quarter or
annual period.
Temporary differences and carryforwards which give
rise to the deferred income tax assets and liabilities are as follows:
5. Income Taxes
The reconciliation of the provision for income taxes
to the statutory federal rate is as follows:
Statutory federal tax
State income tax
Intangibles amortization
Other
52 Weeks
Ended
May 31,
1997
——
35.0%
5.1
2.0
0.5
–—
42.6%
–—
–—
52 Weeks
Ended
June 1,
1996
——
35.0%
5.6
9.6
1.2
–—
51.4%
–—
–—
53 Weeks
Ended
June 3,
1995
——
35.0%
5.4
6.2
1.2
–—
47.8%
–—
–—
The components of the provision for income taxes are
as follows:
Current:
Federal
State
Deferred:
Federal
State
52 Weeks
Ended
May 31,
1997
——–
(In Thousands)
52 Weeks
Ended
June 1,
1996
——–
53 Weeks
Ended
June 3,
1995
——–
$54,057
11,789
——–
65,846
——–
$22,426
4,906
——–
27,332
——–
$18,063
3,025
——–
21,088
——–
4,985
1,290
——–
6,275
——–
$72,121
——–
——–
(561)
(899)
——–
(1,460)
——–
$25,872
——–
——–
(2,446)
313
——–
(2,133)
——–
$18,955
——–
——–
(In Thousands)
May 31,
June 1,
1997
1996
———
———
Deferred tax asset:
Payroll and benefits accruals
Self-insurance reserves
Other
Valuation allowance
Deferred tax liability:
Property and equipment
Intangibles
Self-insurance reserves
Payroll and benefits accruals
Environmental accruals
Other
$ 19,404
16,355
25,098
–
———
$ 60,857
———
———
$ 23,198
15,056
15,374
–
———
$ 53,628
———
———
$154,559
43,191
(37,241)
(37,686)
(9,392)
10,451
———
$123,882
———
———
$161,202
40,419
(44,532)
(36,602)
(10,138)
29
———
$110,378
———
———
6. Employee Benefit Plans
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
twenty-five
The 1991 Employee Stock Purchase Plan, which is
noncompensatory, allows all eligible employees to purchase
common stock of the Company. The common stock can be
either issued by the Company at market prices or purchased on
the open market. At May 31, 1997, 116,000 shares were authorized but not issued under this plan.
The Company sponsors a defined contribution retirement plan for eligible employees not covered by union plans.
Contributions are based upon a percentage of annual compensation plus a percentage of voluntary employee contributions.
Retirement expense related to this plan was $15,543,000,
$15,301,000 and $6,528,000 for fiscal 1997, 1996 and 1995,
respectively.
There are also in effect numerous negotiated pension
plans covering employees participating by reason of union contracts. Expense for these plans was $88,971,000, $78,378,000
and $28,219,000 for fiscal 1997, 1996 and 1995, respectively.
In addition to providing retirement pension benefits,
the Company provides health care benefits for eligible retired
employees. Under the Company’s plans, all nonunion employees, with 10 years of service after age 50, are eligible for retiree
notes to consolidated
financial statements
twenty-six
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.
The components of the net postretirement benefit
expense are as follows:
(In Thousands)
52 Weeks
52 Weeks
53 Weeks
Ended
Ended
Ended
May 31,
June 1,
June 3,
1997
1996
1995
–——
–——
–——
Service cost
$ 2,237
$1,209
$ 743
Interest cost
6,977
5,850
2,488
Amortization of
unrecognized
prior service cost
695
115
–
Amortization of
unrecognized net loss
688
135
355
–——
–——
–——
Net postretirement
benefit expense
$10,597
$7,309
$3,586
–——
––—
––—
–——
——
—
——
—
The status of the Company’s unfunded postretirement
benefit obligation is as follows:
(In Thousands)
May 31,
June 1,
1997
1996
——–
——–
Retirees
$58,915
$59,892
Fully eligible active plan participants
14,155
10,354
Other active plan participants
16,716
12,609
——–
——–
Accumulated postretirement benefit
obligation (APBO)
89,786
82,855
Unrecognized prior service cost
(5,082)
(1,231)
Unrecognized net loss from
assumption changes
(2,409)
(3,749)
——–
——–
Accrued postretirement benefit
82,295
77,875
Less current portion
(7,450)
(6,450)
——–
——–
APBO included in other liabilities
$74,845
$71,425
——–
——–
——–
——–
In determining the APBO, the weighted average
discount rate was assumed to be 8.0% for fiscal 1997, 1996 and
1995. The assumed health care cost trend rate for fiscal 1997
was 9.5%, declining gradually to 6.5% over the next 12 years
and to 5.5% after 18 years. A 1.0% increase in this assumed
health care cost trend rate would increase the service and interest
cost components of the net postretirement benefit expense for
fiscal 1997 by approximately $1,686,000, as well as increase
the May 31, 1997 APBO by approximately $13,199,000.
The Company also participates in a number of
multi-employer plans which provide postretirement health care
benefits to substantially all union employees not covered by
Company-administered plans. Amounts reflected as benefit cost
and contributed to such plans, including amounts related to
health care benefits for active employees, totaled $134,917,000,
$123,867,000 and $47,672,000 in fiscal 1997, 1996 and 1995,
respectively.
7. Stock Option Plans
The 1996 Stock Option Plan allows the Company to
grant to employees and directors stock options to purchase up to
6,842,000 shares of common stock at prices which are not less
than the fair market value at the date of grant. These options may
be granted over a period not to exceed 10 years and generally
vest from one to three years from the date of grant. At May 31,
1997, options to purchase 3,896,000 shares were authorized but
not granted. The changes in outstanding options are as follows:
Balance May 28, 1994
Issued
Surrendered
Balance June 3, 1995
Issued
Surrendered
Exercised
Balance June 1, 1996
Issued
Surrendered
Exercised
Balance May 31, 1997
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
Shares
Under
Option
–——–
924,000
726,000
(62,000)
–——–
1,588,000
252,000
(61,000)
(748,000)
–——–
1,031,000
1,123,000
(19,000)
(520,000)
–——–
1,615,000
–——–
–——–
Weighted
Average
Exercise Price
Per Share
––––––––
$15.75
13.50
15.45
–——
14.73
20.61
20.50
15.16
–——
15.52
37.00
33.43
15.66
–——
$30.20
–——
–——
Stock options outstanding and exercisable at May 31,
1997 were as follows:
Weighted
Weighted
Average
Average
Remaining
Range of Exercise
Shares
Exercise Price Contractual Life
Prices Per Share
Under Option
Per Share
In Years
——————–––
–––––––
–––––––
––––––––
Outstanding:
$12.25 - $14.50
325,000
$13.59
6.7
17.00 - $21.25
193,000
19.53
6.8
37.00 - $37.00
1,097,000
37.00
9.3
––————
—————
—$12.25 - $37.00
1,615,000
$30.20
8.5
––————
—————
—Exercisable:
$12.25 - $14.50
17.00 - $21.25
37.00 - $37.00
––————
$12.25 - $37.00
––————
8. Accrued Expenses and Other Liabilities
Included in accrued expenses are the following:
(In Thousands)
May 31,
June 1,
1997
1996
———
———
Payroll, vacation and other
compensation
Self-insurance reserves
Pension and welfare
Taxes other than income
$64,454
53,160
34,372
21,306
$61,737
44,498
39,799
21,731
Included in other liabilities are the following:
325,000
193,000
70,000
———588,000
———-
$13.59
19.53
37.00
——
$18.32
——
9. Other Charges
The Company incurred $9,500,000 of other charges
in fiscal 1996 as the result of a payment due a unionadministered multi-employer pension plan which failed.
twenty-seven
The Company applies Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB25”), and related interpretations in accounting for its
stock option plan, and therefore, no compensation expense has
been recognized for its plan. For companies electing to continue
the use of APB25, SFAS No. 123, “Accounting for Stock-Based
Compensation” requires proforma disclosures determined
through the use of an option-pricing model as if the provisions
of SFAS No. 123 had been adopted.
The weighted average fair value at date of grant for
options granted during fiscal 1997 and 1996 was $12.96 and
$6.64 per share, respectively. The fair value of each option
grant is estimated on the date of the grant using the BlackScholes option-pricing model with the following assumptions
used for 1997 and 1996 grants: dividend yield of 1.0% for both
years; expected volatility of 26.5% and 27.9%, respectively;
risk-free interest rate of 6.4% and 5.9%, respectively; and an
expected term of four years for all grants. Had the Company
adopted the provisions of SFAS No. 123, reported net income
would have been reduced by $4,050,000 ($.11 per share) and
$565,000 ($.02 per share) for fiscal 1997 and 1996, respectively.
At May 31, 1997, 5,648,000 total shares of common
stock were reserved for issuance under various employee benefit plans.
Self-insurance reserves
Accrued postretirement benefit
(In Thousands)
May 31,
June 1,
1997
1996
———
–——–
$95,819
$113,484
74,845
71,425
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
notes to consolidated
financial statements
10. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for the fiscal years ended May 31, 1997 and June 1, 1996 is as follows (each
quarter represents a period of twelve weeks except the third quarters, which cover sixteen weeks):
First
———
(In Thousands, Except Per Share Data)
Second
Third
———
———
Fourth
———
1997
Net sales
Cost of products sold
Operating income
Net income
Earnings per share
$753,625
374,139
38,735
18,667
.49
$758,378
365,865
51,126
26,242
.69
$945,258
465,891
46,268
22,629
.59
$755,170
360,370
55,014
29,639
.77
1996
Net sales
Cost of products sold
Operating income
Net income
Earnings per share
471,441
241,302
16,523
5,726
.21
734,537
375,791
20,694
6,095
.16
926,482
470,459
17,711
4,166
.11
745,720
365,639
23,830
8,476
.23
First quarter fiscal 1996 results include the operations of CBC for five weeks, from the acquisition date of July 22, 1995.
The fourth quarter of fiscal 1996 includes other charges of $9,500,000 ($5,738,000 and $.15 per share on an after-tax basis) resulting
from a payment due a union-administered multi-employer pension plan which failed.
twenty-eight
report of independent
public accountants
To the Board of Directors and Stockholders
Interstate Bakeries Corporation
We have audited the accompanying consolidated balance sheets of
Interstate Bakeries Corporation and its subsidiaries as of May 31, 1997 and June 1,
1996, and the related consolidated statements of income, stockholders’ equity and cash
flows for each of the three fiscal years in the period ended May 31, 1997. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Interstate Bakeries Corporation and its subsidiaries as of May 31, 1997 and June 1, 1996, and the results of their operations and
their cash flows for each of the three fiscal years in the period ended May 31, 1997 in
conformity with generally accepted accounting principles.
Kansas City, Missouri
July 15, 1997
corporate
information
CORPORATE HEADQUARTERS
12 East Armour Boulevard
P.O. Box 419627
Kansas City, Missouri 64141
(816) 502-4000
DIVISION OFFICES
Western – Phoenix, Arizona
Eastern – Charlotte, North Carolina
Central – St. Louis, Missouri
Dry Products – Montebello, California
COMMON STOCK
Listed on the New York Stock Exchange
Trading Symbol – IBC
Trade Journal Listing – IntstBaker
CO-TRANSFER AGENTS & CO-REGISTRARS
Interstate Bakeries Corporation
12 East Armour Boulevard
Kansas City, Missouri 64111
UMB Bank, n.a.
928 Grand Avenue
Kansas City, Missouri 64106
10-K REPORT
A copy of the Company’s 10-K report, as filed with the
Securities and Exchange Commission, is available upon
request to the Corporate Secretary at the Headquarters address.
ANNUAL MEETING
The Annual Meeting of Stockholders of Interstate Bakeries
Corporation will be held at the auditorium of Waddell & Reed,
6300 Lamar, Shawnee Mission, Kansas at 10:00 a.m. Central
Daylight Time on Tuesday, September 23, 1997.
twenty-nine
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
officers
INTERSTATE BAKERIES CORPORATION
CHARLES A. SULLIVAN
H. L. SHETLER
LINDA L. THOMPSON
Chairman of the Board and
Chief Executive Officer
Executive Vice President
Assistant Secretary and
Director, Shareholder Relations
JOHN F. MCKENNY
MICHAEL D. KAFOURE
President and
Chief Operating Officer
Vice President and
Corporate Controller
PAUL E. YARICK
RAY SANDY SUTTON
Vice President and Treasurer
Vice President, Corporate
Secretary and General Counsel
INTERSTATE BRANDS CORPORATION
CHARLES A. SULLIVAN
BOBBY J. MCCLELLAN
GEORGE L. LAMPROS
Chairman of the Board and
Chief Executive Officer
Senior Vice President
Eastern Division – South
Vice President
Bread Marketing
MICHAEL D. KAFOURE
ROBERT P. MORGAN
JOHN F. MCKENNY
President and
Chief Operating Officer
Senior Vice President
Central Division – North
Vice President and
Corporate Controller
RAY SANDY SUTTON
BRIAN A. POULTER
STAN W. OSMAN
Vice President, Corporate
Secretary and General Counsel
Senior Vice President
Engineering
Vice President
Cake Marketing
R. C. LOWERY
RICHARD D. WILLSON
Executive Vice President
Western Division
Senior Vice President
Western Division – North
RONALD D. PARQUE
H. L. SHETLER
THERESA S. COGSWELL
Executive Vice President
Vice President
Research and Development
Vice President
Dry Products Division
TERRY A. STEPHENS
Vice President
National Account Sales
RICHARD H. SUROWIEC
Executive Vice President
Central Division
RICHARD B. COOK
Vice President
Labor Relations
JAMES R. WIDLER
Executive Vice President
Eastern Division
MELVIN H. GHEARING
Vice President
Retail Operations
TIMOTHY W. CRANOR
Senior Vice President
Central Division – South
MARK D. DIRKES
thirty
Senior Vice President
Corporate Marketing
INTERSTATE BAKERIES CORPORATION
Brought to you by Global Reports
MICHAEL R. HOLDGRAF
Vice President
Information Systems
SCOTT A. WAY
Vice President
Internal Audit
PAUL E. YARICK
Vice President and Treasurer
LINDA L. THOMPSON
Assistant Secretary
board of
directors
Standing (left to right) Philip Briggs, E. Garrett Bewkes, Jr., Frank E. Horton,
Robert B. Calhoun, Jr., William P. Stiritz, James R. Elsesser, Leo Benatar
Seated (left to right) G. Kenneth Baum, Charles A. Sullivan
CHARLES A. SULLIVAN
E. GARRETT BEWKES, JR.
JAMES R. ELSESSER
Chairman of the Board
and Chief Executive Officer
Interstate Bakeries Corporation
Kansas City, Missouri
Consultant
PaineWebber Group, Inc.
New York, New York
Vice President and
Chief Financial Officer
Ralston Purina Company
St. Louis, Missouri
PHILIP BRIGGS
G. KENNETH BAUM
Chairman of the Board
George K. Baum Group, Inc.
Kansas City, Missouri
Chairman of the Board
Empire Blue Cross Blue Shield
New York, New York
FRANK E. HORTON, PH.D.
President
The University of Toledo
Toledo, Ohio
ROBERT B. CALHOUN, JR.
LEO BENATAR
Consultant
Benatar & Associates and
A.T. Kearney, Inc.
Atlanta, Georgia
Brought to you by Global Reports
President
The Clipper Group
New York, New York
WILLIAM P. STIRITZ
Chairman of the Board,
Chief Executive Officer
and President
Ralston Purina Company
St. Louis, Missouri
INTERSTATE BAKERIES CORPORATION
12 East Armour Boulevard
P.O. Box 419627
Kansas City, Missouri 64141
(816) 502-4000
Brought to you by Global Reports