FINANCIAL HIGHLIGHTS
- --------------------
(In Thousands, Except Per Share Data)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
June 1, June 3, May 28,
1996 (1) 1995 1994
------------ ------------ ------------
Statement of Income
Net sales $2,878,180 $1,222,779 $1,142,684
Operating income 78,758(2) 57,293 46,883(3)
% of net sales 2.7% 4.7% 4.1%
Net income $ 24,463(2) $ 20,697 $ 15,754(3)
% of net sales 0.8% 1.7% 1.4%
Per share:
Net income .70(2) 1.05 .78(3)
Book value 12.34 10.09 9.54
Common stock dividends .50 .50 .495
Common shares outstanding (Avg.) 34,984 19,707 20,306
June 1, June 3, May 28,
1996 (1) 1995 1994
------------ ------------ ------------
Balance Sheet
Total assets $1,486,460 $ 598,441 $ 574,791
Long-term debt 303,651 212,205 201,235
Stockholders' equity 460,247 198,037 187,441
Debt to total capital 39.8% 51.7% 51.8%
(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.
(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.
[This page includes three bar graphs which depict net sales, net income and
% of debt to total capital for fiscal 1994, 1995 and 1996. All numbers
presented in the graphs are included in tabular form above.]
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 1996 and 1995:
Stock Price
Fiscal --------------------- Cash
Year Quarter High Low Dividends
------ --------- -------- ------- ------------
1996 1 $19.500 $14.375 $.125
2 22.250 18.875 .125
3 23.250 20.500 .125
4 27.625 22.500 .125
1995 1 12.875 11.875 .125
2 13.500 12.500 .125
3 15.375 12.375 .125
4 14.875 14.125 .125
The Company had approximately 4,900 shareholders at June 1, 1996.
1
INTERSTATE BAKERIES CORPORATION
FIVE-YEAR SUMMARY OF FINANCIAL DATA
(In Thousands, Except Per Share Data)
52 Weeks 53 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
June 1, June 3, May 28, May 29, May 30,
1996(1) 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Statement of Income
Net sales $2,878,180 $1,222,779 $1,142,684 $1,165,588 $1,145,875
Operating income 78,758(2) 57,293 46,883(3) 71,344 73,615
% of net sales 2.7% 4.7% 4.1% 6.1% 6.4%
Income before
extraordinary
charge and
cumulative effect
of accounting change $ 24,463(2) $ 20,697 $ 15,754(3) $ 30,784 $ 25,780
% of net sales .8% 1.7% 1.4% 2.6% 2.2%
Net income $ 24,463(2) $ 20,697 $ 15,754(3) $ 16,663(4) $ 15,604(5)
Per Share:
Income before
extraordinary
charge and
cumulative effect
of accounting change .70(2) 1.05 .78(3) 1.46 1.49
Net income .70(2) 1.05 .78(3) .79(4) .94(5)
Common stock dividends .50 .50 .495 .47 .33
Weighted average common
shares outstanding 34,984 19,707 20,306 21,132 18,735
Balance Sheet
Total assets $1,486,460 $ 598,441 $ 574,791 $ 586,756 $ 573,609
Long-term debt, excluding
current maturities 303,651 212,205 201,235 189,238 211,124
Stockholders' equity 460,247 198,037 187,441 202,315 194,608
Debt to total capital 39.8% 51.7% 51.8% 48.3% 52.0%
(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.
(5) Fiscal 1992 includes an extraordinary charge of $10,176,000 ($.55 per share) related to additional
interest payments and the write-off of unamortized deferred financing charges in connection with the
retirement of debt.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 for the fifty-three weeks ended June 3,
1995 of $1,222,779,000. This substantial increase was attributable to the
acquisition of Continental Baking Company ("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%. This increase reflects higher
selling prices, offset by some volume erosion in cake units.
The gross profit for fiscal 1996 was $1,424,989,000, or 49.5% of net sales,
compared to the prior year'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.
Fiscal 1996's selling, delivery and administrative expenses were
$1,236,586,000, representing 43.0% of net sales, while the prior year's
selling, delivery and administrative expenses amounted to $501,008,000, or
41.0% of net sales. This unfavorable variance was attributable to the
acquisition, with the new 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 the
prior year excluding the impact of the acquisition.
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.
Depreciation and amortization for the current year amounted to $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
(2.7% of net sales), a $21,465,000 increase from fiscal 1995's operating
income of $57,293,000 (4.7% of net sales).
Interest expense was $29,310,000 for the current year, up $11,565,000 and
65.2% from the prior year'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 the year was $24,463,000, or $.70 per share, compared to
$20,697,000 and $1.05 per share a year ago. The per share earnings decline
reflects the operating results discussed herewith, as well as the additional
shares issued in conjunction with the CBC acquisition.
Fiscal 1995 Compared With Fiscal 1994
Net sales for the fifty-three weeks ended June 3, 1995 were $1,222,779,000,
representing an increase of $80,095,000, or 7.0%, over net sales of
$1,142,684,000 for the fifty-two weeks ended May 28, 1994. This increase
primarily reflects the impact of acquisitions, unit volume gains for bread and
the additional week included in fiscal 1995. Bread Division net sales were up
$104,066,000, or 13.3% to $883,616,000 from $779,550,000 in fiscal 1994,
related to the acquisitions of the Tampa and Miami bakeries, unit volume
gains, somewhat higher selling prices and the additional week. Cake Division
net sales, at $319,478,000, were down 8.0% from fiscal 1994's $347,371,000 due
to the sale of the Los Angeles bakery in fiscal 1994 and continued softness
in cake volume and pricing, offset somewhat by the additional week.
Fiscal 1995's gross profit was $591,895,000 (48.4% of net sales) compared to
fiscal 1994's gross profit of $561,458,000 (49.1% of net sales), a $30,437,000
increase but representing a lower percentage of net sales. This margin
decline was primarily attributable to higher labor and overhead costs
associated with recent acquisitions, as well as slightly higher commodity
costs for certain key ingredients.
Selling, delivery and administrative expenses were up $27,401,000 to
$501,008,000 (41.0% of net sales) for fiscal 1995 from $473,607,000 (41.4% of
net sales) in fiscal 1994. This favorable variance on a percentage of net
14
sales basis resulted from labor and labor related efficiencies gained during
fiscal 1995. Fiscal 1994 also included higher delivery costs associated with
a two-month transport drivers strike at one bakery.
Fiscal 1994 reflects $9,400,000 ($5,687,000 after tax, or $.28 per share) of
other charges, which includes costs related to a plant disposal of $6,700,000
and environmental matters of $2,700,000.
Depreciation and amortization increased $2,026,000 in fiscal 1995 related to
the completion of the new Jacksonville, Florida bakery and recent
acquisitions. As a result of the noted factors, operating income for fiscal
1995 was $57,293,000 (4.7% of net sales), an increase of $10,410,000 and 22.2%
from fiscal 1994's $46,883,000 (4.1% of net sales).
Interest expense increased $3,000,000 to $17,745,000 from $14,745,000 in
fiscal 1994. This increase was principally attributable to higher interest
rates during fiscal 1995, as well as higher debt levels resulting from an
acquisition in the first quarter of fiscal 1995.
The fiscal 1995 effective tax rate of 47.8% primarily reflects the
nondeductibility of intangibles amortization. The Company's effective tax
rate of 51.2% for fiscal 1994 reflects the passage of the Omnibus Budget
Reconciliation Act of 1993 during the first fiscal quarter. The increase in
the corporate tax rate provided for in the Act raised the fiscal 1994
provision for income taxes by approximately $800,000, or $.04 per share, due
to the cumulative adjustment of the Company's net deferred tax liability at
May 29, 1993 and the additional current taxes attributable to the fiscal year
ended May 29, 1993. Non-deductible intangibles amortization also contributed
to the higher effective rate in fiscal 1994.
Net income for fiscal 1995 was $20,697,000, or $1.05 per share, up $4,943,000,
or 31.4%, from fiscal 1994's $15,754,000, or $.78 per share.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of liquidity is cash provided by operations which
totaled $164,386,000 for fiscal 1996, an increase of $114,720,000 from the
prior year's $49,666,000. This increase reflects both the impact of the
acquired operations and favorable changes in working capital components. Cash
generated by operations during fiscal 1996, along with a net increase in bank
borrowings of $110,970,000 and common stock issuances of $11,339,000, were
used to acquire CBC for $225,912,000, fund capital expenditures of $47,658,000
and pay dividends of $16,342,000.
For fiscal 1997, the Company anticipates cash needs of approximately
$125,154,000 to fund $85,000,000 of planned capital expenditures, $18,600,000
of common stock dividends and $21,554,000 of required principal reductions on
debt. The Company expects these needs to be funded by ongoing operations, but
also has borrowing capacity under its bank credit facility.
INFLATION
General inflation is not expected to have a significant impact on the
Company's results of operations. However, the Company has recently
experienced sharp escalations in certain commodity costs due to lower than
normal supplies and increased demand. Future market conditions cannot be
predicted but the Company plans to offset any higher costs with price
increases and additional operational efficiencies.
NEW ACCOUNTING STANDARDS
See Note 2 to the Company's consolidated financial statements for discussions
on new accounting standards relating to impairment of long-lived assets and
stock-based compensation.
15
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED BALANCE SHEET
(In Thousands)
June 1, June 3,
1996 1995
----------- ---------
Assets
Current assets:
Cash and cash equivalents $ - $ 3,726
Accounts receivable, less allowance for
doubtful accounts of $3,606,000
($1,792,000 in 1995) 179,538 75,184
Inventories 67,254 24,207
Other current assets 71,481 17,232
----------- ---------
Total current assets 318,273 120,349
----------- ---------
Property and equipment:
Land and buildings 279,863 99,609
Machinery and equipment 741,705 246,800
----------- ---------
1,021,568 346,409
Less accumulated depreciation (204,173) (123,440)
----------- ---------
Net property and equipment 817,395 222,969
----------- ---------
Intangibles 350,792 255,123
----------- ---------
$1,486,460 $598,441
=========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ 21,554 $ 1,030
Accounts payable 135,447 48,979
Accrued expenses 200,221 59,145
----------- ---------
Total current liabilities 357,222 109,154
----------- ---------
Long-term debt:
Related party 79,000 79,000
Other 224,651 133,205
Other liabilities 254,962 45,461
Deferred income taxes 110,378 33,584
----------- ---------
Total long-term liabilities 668,991 291,250
----------- ---------
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 - 38,735,000 shares
(21,056,000 in 1995) 387 211
Additional paid-in capital 515,497 261,065
Accumulated deficit (34,092) (42,213)
Treasury stock, at cost - 1,449,000 shares
(1,421,000 in 1995) (21,545) (21,026)
----------- ---------
Total stockholders' equity 460,247 198,037
----------- ---------
$1,486,460 $598,441
=========== =========
See accompanying notes.
16
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
June 1, June 3, May 28,
1996 1995 1994
---------- ---------- ----------
Net sales $2,878,180 $1,222,779 $1,142,684
---------- ---------- ----------
Cost of products sold 1,453,191 630,884 581,226
Selling, delivery and
administrative expenses 1,236,586 501,008 473,607
Other charges 9,500 - 9,400
Depreciation and amortization 100,145 33,594 31,568
---------- ---------- ----------
2,799,422 1,165,486 1,095,801
---------- ---------- ----------
Operating income 78,758 57,293 46,883
---------- ---------- ----------
Other income (887) (104) (144)
Interest expense 29,310 17,745 14,745
---------- ---------- ----------
28,423 17,641 14,601
---------- ---------- ----------
Income before income taxes 50,335 39,652 32,282
Provision for income taxes 25,872 18,955 16,528
---------- ---------- ----------
Net income $ 24,463 $ 20,697 $ 15,754
========== ========== ==========
Earnings per common share $ .70 $ 1.05 $ .78
========== ========== ==========
See accompanying notes.
17
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
June 1, June 3, May 28,
1996 1995 1994
--------- -------- --------
Cash flows from operating activities:
Net income $ 24,463 $ 20,697 $ 15,754
Depreciation and amortization 100,145 33,594 31,568
Other (4,468) 44 4,389
Change in operating assets
and liabilities:
Accounts receivable (5,958) (3,450) (476)
Inventories (233) (3,187) 1,310
Other current assets (10,497) (126) 3,439
Accounts payable and accrued expenses 60,934 2,094 (2,897)
--------- -------- --------
Cash from operating activities 164,386 49,666 53,087
--------- -------- --------
Cash flows from investing activities:
Acquisition of a business (225,912) (3,103) -
Additions to property and equipment (47,658) (34,272) (31,163)
Sale of assets 1,945 1,167 6,296
Other (697) (15,414) (1,430)
--------- -------- --------
Cash from investing activities (272,322) (51,622) (26,297)
--------- -------- --------
Cash flows from financing activities:
Reduction of long-term debt (134,030) (1,263) (6,719)
Addition to long-term debt 245,000 12,000 16,000
Common stock dividends paid (16,342) (9,819) (10,009)
Issuance of common stock 11,339 1 2
Acquisition of treasury stock (519) (283) (20,621)
Other (1,238) - (5,000)
--------- -------- --------
Cash from financing activities 104,210 636 (26,347)
--------- -------- --------
Change in cash and cash equivalents (3,726) (1,320) 443
Cash and cash equivalents:
Beginning of period 3,726 5,046 4,603
--------- -------- --------
End of period $ - $ 3,726 $ 5,046
========= ======== ========
Cash payments made:
Interest $ 28,710 $ 18,852 $ 14,301
Income taxes 24,162 23,533 17,937
See accompanying notes.
18
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
Common
Stock Issued Treasury Stock
-------------- ----------------
Number Additional Number
of Par Paid-in Accumulated of
Shares Value Capital Deficit Shares Cost
------ ----- ---------- -------- ------ --------
Balance May 29, 1993 21,040 $210 $261,063 $(58,836) (7) $ (122)
Net income - - - 15,754 - -
Shares issued -
exercise of employee
stock options 10 1 1 - - -
Dividends paid -
$.495 per share - - - (10,009) - -
Treasury stock
acquired - - - - (1,393) (20,621)
------ ---- -------- -------- ------ --------
Balance May 28, 1994 21,050 211 261,064 (53,091) (1,400) (20,743)
Net income - - - 20,697 - -
Shares issued -
exercise of employee
stock options 6 - 1 - - -
Dividends paid -
$.50 per share - - - (9,819) - -
Treasury stock
acquired - - - - (21) (283)
------ ---- -------- -------- ------ --------
Balance June 3, 1995 21,056 211 261,065 (42,213) (1,421) (21,026)
Net income - - - 24,463 - -
Shares issued -
acquisition of
a business 16,923 169 243,100 - - -
Shares issued -
exercise of employee
stock options 756 7 11,332 - - -
Dividends paid -
$.50 per share - - - (16,342) - -
Treasury stock
acquired - - - - (28) (519)
------ ---- -------- -------- ------ --------
Balance June 1, 1996 38,735 $387 $515,497 $(34,092) (1,449) $(21,545)
====== ==== ======== ======== ====== ========
See accompanying notes.
19
INTERSTATE BAKERIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Acquisition
On July 22, 1995, Interstate Bakeries Corporation (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. The funds used for the acquisition of CBC were
provided by a new bank credit agreement. 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 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 $ 472,284
Common stock issued (243,269)
---------
Cash paid for acquisition of CBC $ 229,015
=========
The allocation of the purchase price resulted in intangibles, primarily
trademarks and tradenames, of $103,380,000 which are being amortized on a
straight-line basis over periods of from 9 to 40 years.
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:
(In Thousands, Except per Share Data)
52 Weeks 53 Weeks
Ended Ended
June 1, June 3,
1996 1995
----------- -----------
Net sales $3,140,501 $3,180,109
Net income 25,830 14,543
Earnings per share .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.
The divestiture of certain white bread brands in selected markets required by
the consent order between the Company and the U.S. Department of Justice
should represent less than 5% of the consolidated pro forma net sales.
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:
(In Thousands)
June 1, June 3,
1996 1995
-------- --------
Ingredients and packaging $42,591 $15,274
Finished goods 14,806 7,122
Other 9,857 1,811
------- -------
$67,254 $24,207
======= =======
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 $85,747,000, $25,900,000 and
$24,224,000 for fiscal 1996, 1995 and 1994, respectively. Interest cost
capitalized as part of the construction cost of capital assets was $903,000 in
fiscal 1994.
Intangibles - Included in intangibles is excess of purchase cost over net
assets acquired ("goodwill") which is being amortized over 40 years using the
straight-line method. The Company assesses whether any impairment of its
20
goodwill has occurred at each balance sheet date based upon a review of
expected undiscounted cash flows of the Company. Accumulated amortization on
all intangibles as of June 1, 1996 and June 3, 1995 was $62,733,000 and
$53,619,000, respectively.
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. In fiscal 1994, the Company entered into an
exchange of production facilities with a $7,006,000 noncash portion.
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 34,984,000, 19,707,000 and 20,306,000 for fiscal 1996,
1995 and 1994, 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 - The Company plans to adopt 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", effective with the
first quarter of fiscal 1997. 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. The Company does not
currently expect the adoption of this statement to have a material effect on
its consolidated financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation", defines a fair value
based method of accounting for employee stock compensation plans, but allows
for the continuation of the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). For companies electing to continue the use of APB 25,
SFAS No. 123 requires pro forma disclosures of net income and earnings per
share as if the provisions of SFAS No. 123 had been adopted. The Company will
continue to apply APB 25 in its consolidated financial statements and will
provide required disclosures effective in fiscal 1997. As a result, SFAS No.
123 will have no effect on the financial condition or results of operations of
the Company.
Reclassifications - Certain reclassifications have been made in the prior
years' financial statements to conform to the current year presentation.
3. Debt
Long-term debt consists of the following:
(In Thousands)
June 1, June 3,
1996 1995
-------- --------
Bank borrowings:
Term loans (a) $125,000 $ -
Revolving credit loans(a) 120,000 133,000
Senior notes(b) 79,000 79,000
Other 1,205 1,235
-------- --------
325,205 213,235
Less amounts payable
within one year (21,554) (1,030)
-------- --------
$303,651 $212,205
======== ========
(a) Represents borrowings under an unsecured $550,000,000 credit agreement
consisting of the term loans and a $425,000,000 revolving credit facility,
including up to $150,000,000 availability for letters of credit (with an
unused amount of $75,000,000 at June 1, 1996). The term loans mature semi-
annually from November 1996 to May 2000, while the revolving credit facility
matures in May 2000. The outstanding borrowings bear interest at variable
rates generally equal to the London Interbank Offered Rate (LIBOR) plus from
.35% to 1.25% (.55% at June 1, 1996), depending on certain financial ratios.
The Company also will pay a fee of between .15% and .50% (.20% at June 1,
1996) on the unused portion of the revolving credit facility. This debt
agreement was entered into on May 31, 1995 to finance the acquisition of CBC
and was used to repay the amounts outstanding under the old agreement at the
acquisition date.
To offset the variable rate characteristic of a portion of these bank
borrowings, the Company entered into interest rate swap agreements resulting
21
in fixed interest rates of 6.39% on $30,000,000 through July 1998, 5.82% on
$35,000,000 through January 1998, 6.30% on $43,000,000 through October 1997
and 6.69% on $72,000,000 through July 1997. The overall weighted average
interest rate on the bank borrowings was 6.32% and 6.24% at June 1, 1996 and
June 3, 1995, 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 $21,486,000 at June 1, 1996.
(b) Represents 10.00% notes issued to an owner of the Company's common stock.
Principal is due in annual installments from July 1998 to July 2000. The note
agreement includes covenants mirroring those of the bank credit agreement.
Interest expense on these notes totaled $7,878,000, $8,030,000 and $7,878,000
for fiscal 1996, 1995 and 1994, respectively.
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of the year-end fair value of significant financial
instruments, including long-term debt. The fair value of the senior notes,
described in (b) above, is estimated at $85,800,000 and $88,600,000 as of June
1, 1996 and June 3, 1995, 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 June 1, 1996 is
not material.
The scheduled repayment of long-term debt is as follows:
Fiscal Years Ending (In Thousands)
------------------- --------------
1997 $ 21,554
1998 29,070
1999 59,884
2000 185,697
2001 29,000
--------
$325,205
========
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)
------------------- --------------
1997 $ 38,400
1998 28,616
1999 20,331
2000 12,873
2001 7,915
Thereafter 12,476
---------
$120,611
=========
Net rental expense under operating leases was $49,955,000, $28,145,000 and
$27,435,000 for fiscal 1996, 1995 and 1994, respectively. The majority
of the operating leases contain renewal options for varying periods.
Certain capital and operating leases include purchase options during or
at the end of the lease term.
The Company is subject to various routine legal proceedings, environmental
actions and other matters in the ordinary course of business, some of which
may be covered in whole or in part by insurance. In management's opinion,
none of these matters will have a material adverse effect on the Company's
financial position, but could be material to the results of operations or cash
flows for a particular quarter or annual period.
5. Income Taxes
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
June 1, June 3, May 28,
1996 1995 1994
-------- -------- --------
Statutory federal tax 35.0% 35.0% 35.0%
State income tax 5.6 5.4 5.5
Intangibles amortization 9.6 6.2 7.7
Cumulative impact of
tax law changes - - 2.5
Other 1.2 1.2 0.5
---- ---- ----
51.4% 47.8% 51.2%
==== ==== ====
22
The components of the provision for income taxes are as follows:
(In Thousands)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
June 1, June 3, May 28,
1996 1995 1994
-------- -------- --------
Current:
Federal $22,426 $18,063 $14,645
State 4,906 3,025 3,416
------- ------- -------
27,332 21,088 18,061
------- ------- -------
Deferred:
Federal (561) (2,446) (838)
State (899) 313 (695)
------- ------- -------
(1,460) (2,133) (1,533)
------- ------- -------
$25,872 $18,955 $16,528
======= ======= =======
Temporary differences and carryforwards which give rise to the deferred income
tax assets and liabilities are as follows:
(In Thousands)
June 1, June 3,
1996 1995
-------- --------
Deferred tax asset:
Payroll and benefits accruals $ 23,198 $ 7,399
Self-insurance reserves 15,056 3,278
Other 15,374 2,659
Valuation allowance - -
-------- --------
$ 53,628 $ 13,336
======== ========
Deferred tax liability:
Property and equipment $161,202 $ 39,771
Intangibles 40,419 2,101
Self-insurance reserves (44,532) (2,765)
Payroll and benefits accruals (36,602) (11,628)
Environmental accruals (10,138) (1,774)
Other 29 7,879
-------- --------
$110,378 $ 33,584
======== ========
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 1, 1996, 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 $15,301,000,
$6,528,000 and $6,352,000 for fiscal 1996, 1995 and 1994, respectively.
There are also in effect numerous negotiated pension plans covering employees
participating by reason of union contracts. Expense for these plans was
$78,378,000, $28,219,000 and $27,276,000 for fiscal 1996, 1995 and 1994,
respectively.
In addition to providing retirement pension benefits, the Company provides
health care benefits for eligible retired employees. Under the Company's
plans, all nonunion employees, with 10 years of service after age 50, are
eligible for retiree health care coverage between ages 60 and 65.
Grandfathered nonunion employees and certain union employees who have
bargained into the Company-sponsored health care plans are generally eligible
after age 55, with 10 years of service, and have only supplemental benefits
after Medicare eligibility is reached. Certain of the plans require
contributions by retirees and/or spouses.
The components of the net postretirement benefit expense are as follows:
(In Thousands)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
June 1, June 3, May 28,
1996 1995 1994
-------- -------- --------
Service cost $1,209 $ 743 $ 615
Interest cost 5,850 2,488 2,178
Amortization of unrecognized
net loss 250 355 422
------ ------ ------
Net postretirement benefit
expense $7,309 $3,586 $3,215
====== ====== ======
23
The status of the Company's unfunded postretirement benefit obligation is as
follows:
(In Thousands)
June 1, June 3,
1996 1995
------- -------
Retirees $59,892 $15,849
Fully eligible active
plan participants 10,354 8,166
Other active plan
participants 12,609 8,595
------- -------
Accumulated postretirement
benefit obligation (APBO) 82,855 32,610
Unrecognized net loss from
assumption changes (4,980) (5,871)
------- -------
Accrued postretirement
benefit 77,875 26,739
Less current portion (6,450) (2,150)
------- -------
APBO included in other
liabilities $71,425 $24,589
======= =======
In determining the APBO, the weighted average discount rate was assumed to be
8.0%, 8.0% and 7.0% for fiscal 1996, 1995 and 1994, respectively. The
assumed health care cost trend rate for fiscal 1996 was 10.0%, declining
gradually to 6.5% over the next 10 years and to 5.5% after 20 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 1996 by approximately $910,000, as well as increase the June 1,
1996 APBO by approximately $10,643,000.
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 $123,867,000, $47,672,000,
and $42,613,000 in fiscal 1996, 1995 and 1994, respectively.
7. Stock Option Plans
The 1991 Stock Option Plan allows the Company to grant to employees stock
options to purchase up to 4,000,000 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 ten years and are currently exercisable
from one to either five or ten years after the date of grant. The changes in
outstanding options are as follows:
Shares Price Range
Under Option Per Share
------------ -------------
Balance May 29, 1993 808,000 $15.63-$17.00
Issued 163,000 12.25- 14.50
Surrendered (47,000) 15.63- 17.00
--------- -------------
Balance May 28, 1994 924,000 12.25- 17.00
Issued 726,000 12.13- 14.38
Surrendered (62,000) 12.13- 17.00
--------- -------------
Balance June 3, 1995 1,588,000 12.25- 17.00
Issued 252,000 17.25- 21.25
Surrendered (61,000) 15.63- 21.25
Exercised (748,000) 12.25- 17.00
--------- -------------
Balance June 1, 1996 1,031,000 $12.25-$21.25
========= =============
Exercisable June 1, 1996 831,000 $12.25-$17.00
========= =============
At June 1, 1996, options to purchase 2,158,000 shares were authorized but not
granted.
Key personnel were also granted options to purchase shares of common stock in
January 1988. The options are exercisable at $.19 per share for a period of
ten years after the first anniversary of their issuance. The changes in these
outstanding options are as follows:
Balance May 29, 1993 56,000
Exercised (10,000)
-------
Balance May 28, 1994 46,000
Exercised (7,000)
-------
Balance June 3, 1995 39,000
Exercised (7,000)
-------
Balance June 1, 1996 32,000
=======
At June 1, 1996, 3,337,000 total shares of common stock were reserved for
issuance under various employee benefit plans.
24
8. Accrued Expenses and Other Liabilities
Included in accrued expenses are the following:
(In Thousands)
June 1, June 3,
1996 1995
-------- --------
Payroll, vacation and other
compensation $61,737 $23,960
Self-insurance reserves 44,498 13,065
Pension and welfare 39,799 8,638
Taxes other than income 21,731 6,660
Included in other liabilities are the following:
(In Thousands)
June 1, June 3,
1996 1995
-------- --------
Self-insurance reserves $113,484 $ 7,000
Accrued postretirement benefit 71,425 24,589
9. Other Charges
The Company incurred $9,500,000 of other charges in fiscal 1996 as the result
of a payment due a union-administered multi-employer pension plan which
failed. During fiscal 1994, the Company incurred $9,400,000 of other charges
including costs related to a plant disposal of $6,700,000 and environmental
matters of $2,700,000.
10. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for the fiscal years ended June 1,
1996 and June 3, 1995 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 1995, which covers thirteen weeks):
(In Thousands, Except Per Share Data)
First Second Third Fourth
-------- -------- -------- --------
1996
Net sales $471,441 $734,537 $926,482 $745,720
Cost of products sold 241,302 375,791 470,459 365,639
Operating income 16,523 20,694 17,711 23,830
Net income 5,726 6,095 4,166 8,476
Earnings per share .21 .16 .11 .23
1995
Net sales $274,099 $280,726 $358,240 $309,714
Cost of products sold 140,849 143,708 186,651 159,676
Operating income 15,171 15,544 11,192 15,386
Net income 5,886 6,063 3,096 5,652
Earnings per share .30 .31 .16 .29
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 failed union-administered multi-employer pension plan.
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
We have audited the accompanying consolidated balance sheets of Interstate
Bakeries Corporation and its subsidiaries as of June 1, 1996 and June 3, 1995,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended June 1,
1996. 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 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 1, 1996 and June 3, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended June 1, 1996 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
July 19, 1996
26