Annual Report (Form 10-K), fiscal year 1994

Item 1. Business - - ------- --------
General - - -------
Interstate Bakeries Corporation (the "Company") was organized in 1987 as a Delaware corporation under the name IBC Holdings Corp. and through its wholly-owned operating subsidiary, Interstate Brands Corporation, is the largest independent and third largest baker and distributor of fresh bakery products in the United States. The Company or its predecessors have baked and distributed fresh bread and cake products since 1927. The Company has grown to its present size primarily through acquisitions of other bakery businesses. In its 1988 fiscal year, the Company underwent a change in control through a leveraged buyout transaction and acquired 10 bakeries in the Southeastern United States.
The Company operates 31 bakeries throughout the United States and employs over 14,000 people. From these geographically dispersed bakeries, the Company's driver-salesmen deliver baked goods to more than 100,000 food outlets on more than 4,000 delivery routes. The Company's products are distributed throughout the United States through its direct route system and its 790 Company-operated thrift stores, and to some extent through distributors.
The principal executive offices of the Company are located at 12 East Armour Boulevard, Kansas City, Missouri 64111, and the telephone number is (816) 561-6600.
Operating Divisions - - -------------------
Bread Division
The principal products of the Bread Division are white breads, variety breads, "lite" breads, rolls, buns and English muffins, marketed under well-known brand names, including "Butternut", "Cotton's Holsum", "Eddy's", "Holsum", "Merita", "Millbrook", "Mrs. Karl's", "Sweetheart" and "Weber's". The majority of the Bread Division's sales are generated by white breads and variety breads, the latter consisting of whole wheat, rye and other whole grain breads. The Bread Division is the largest licensed baker and distributor of "Roman Meal" and "Sun Maid" breads. These products include traditional Roman Meal bread, Roman Meal variety breads, Roman Meal light breads and Roman Meal buns, rolls and English muffins and also include Sun Maid's line of raisin bread and English muffins.
In fiscal 1994, the Bread Division had net sales of $779,550,000, which represented 68.2% of the net sales of the Company. The Bread Division's sales are generally concentrated in the Southeast, Southern California, the Midwest and certain Northern Mountain states. Bread Division customers consist primarily of supermarkets and are served by its separate distribution system. No single customer accounts for more than 5% of the Company's net sales. Many of the Bread Division's accounts are also serviced by the Cake Division.
The Bread Division faces intense competition in all of its markets from large, national bakeries and smaller regional operators, as well as from supermarket chains with their own bakeries or private label products. The Continental Baking Company (majority-owned by Ralston Purina), Campbell Taggert, Inc. (owned by Anheuser-Busch) and Flowers Industries, Inc. are the Bread Division's largest competitors, each marketing bread products under various brand names. The Bread Division from time to time experiences price pressure in certain of its markets as a result of competitors' promotional pricing practices. However, management believes that the Company's geographic diversity helps to limit the effect of regionally-based competition.
Competition in the Bread Division's business is based on product quality, price, brand loyalty, effective promotional activities and the ability to identify and satisfy emerging consumer preferences. Customer service, including frequency of deliveries and maintenance of fully stocked shelves, is also an important competitive factor and is central to the competition for retail shelf space among bread product distributors.
Cake Division
The Cake Division produces fresh baked sweet goods, including snack cakes, donuts, sweet rolls, snack pies, breakfast pastries, variety cakes, large cakes and shortcakes, approximately 90% of which are sold under the nationally known "Dolly Madison Bakery" brand name.
In fiscal 1994, the Cake Division had net sales of $347,371,000, representing 30.4% of the net sales of the Company. The Cake Division distributes its products principally through convenience stores, in markets representing approximately 75% of the U.S. population, in all areas of the country except certain Northeast markets.
No single customer represents more than 5% of the Company's net sales. The Company believes that its credit practices adequately address the financial condition of its customers, particularly in the convenience store industry. Cake sales tend to be somewhat seasonal, with a historically weak winter period, which management believes is attributable to home baking and consumption patterns during the holiday seasons. Spring and early summer months are historically stronger due to the sale of shortcake products during the fresh strawberry season.
The wholesale cake industry is highly competitive with product quality, retail account service and price being the most significant competitive factors. The Cake Division from time to time experiences price pressures in certain of its markets as a result of competitors' promotional pricing practices. The Cake Division's ability to sell its products depends on its ability to attain store shelf space in relation to competing cake brands and other food products. The Company competes primarily with a few large national bakeries, as well as with certain regional bakeries. Continental Baking Company (majority-owned by Ralston Purina) and McKee Baking, marketing cake products under the brand names Hostess and Little Debbie, respectively, are the largest competitors of the Cake Division.
Dry Products
The Company's line of dry products consists of branded, dry, bread- based products, including traditional stuffing and salad croutons, principally under the "Mrs. Cubbison's" brand name. The majority of the Company's dry product sales (which account for l.4% of the Company's net sales) is generated during the Thanksgiving and Christmas holiday periods. The "Mrs. Cubbison's" product line is distributed primarily in 11 western states through a subsidiary that is 80% owned by the Company. The largest market for the Company's dry products is Southern California.
Raw Materials - - -------------
The ingredients of bread and cake products, principally flour, sugar and edible oils, are readily available from numerous sources. The Company periodically engages in commodity futures hedging programs, and also attempts to lock in prices through advance purchase contracts of up to six months in duration when prices are expected to increase. Through its program of central purchasing of baking ingredients and packaging materials, the Company is able to utilize its national presence to obtain competitive prices. The Company historically has been able to pass through most commodity price increases.
Management and Employees - - ------------------------
The Company employs over 14,000 people. Approximately 75% of the Company's employees are covered by approximately 250 union contracts. Unionized workers are generally members of either the International Brotherhood of Teamsters or the Bakery, Confectionery and Tobacco Workers International Union. The Company believes it has good relations with all of its union and nonunion employees.
Governmental Regulation; Environmental Matters - - ----------------------------------------------
The Company's operations are subject to regulation by various federal, state and local governmental entities and agencies. As a baker of goods for human consumption, the Company's operations are subject to stringent quality and labeling standards. The operations of the Company's bakeries and its delivery fleet are subject to various federal, state and local environmental laws and workplace regulations, including the Occupational Safety and Health Act, the Fair Labor Standards Act, the Clean Air Act and the Clean Water Act. The Company believes that its current legal and environmental compliance programs adequately address such concerns and that it is in substantial compliance with such applicable laws and regulations.
Item 2.



Item 2. Properties - - ------- ----------
The Company's principal properties are its bakeries, distribution depots and thrift stores. Shown below are the locations of the Company's bakeries, all of which are owned with the exception of the Charlotte, North Carolina, bread bakery, which is operated under a capital lease with an option to purchase the facility in 1996, and the Dry Products bakery. The Company owns the building in Kansas City, Missouri in which its principal executive offices are located. The Company's distribution depots and thrift stores are located throughout the Company's distribution area and the majority of these facilities are leased.
Bread Division Bakeries -----------------------
Alexandria, Louisiana Jacksonville, Florida Billings, Montana Knoxville, Tennessee Birmingham, Alabama Los Angeles, California Boise, Idaho Miami, Florida Boonville, Missouri Minonk, Illinois Charlotte, North Carolina Minot, North Dakota Chicago, Illinois Monroe, Louisiana Cincinnati, Ohio Orlando, Florida Decatur, Illinois Peoria, Illinois Florence, South Carolina Rocky Mount, North Carolina Fort Pierce, Florida San Diego, California Glendale, California Springfield, Missouri Grand Junction, Colorado Tampa, Florida Grand Rapids, Michigan
Cake Division Bakeries Dry Products Bakery ---------------------- ----------------------
Columbus, Georgia Montebello, California Columbus, Indiana Emporia, Kansas
The Company believes that its facilities are well maintained and does not foresee the need to make significant capital improvements to existing facilities in the near future.
On June 13, 1994, the Company completed the acquisition of the assets and liabilities of Fuchs Baking Co. of Miami, Florida. Fuchs, which has annual sales of approximately $50,000,000, distributes bakery products throughout central and southern Florida from bakeries in Miami and Fort Pierce, Florida.
The Company operates 790 retail stores which sell its bakery products not otherwise sold through its primary distribution system. Generally, each thrift store is between 500 and 1,200 square feet in size. Approximately 80% of the stores are located at the Company's distribution depots, while the others are freestanding units located along the Company's distribution routes.
Item 3.

Item 3. Legal Proceedings - - ------- -----------------
The Company has been named as a defendant in various claims arising out of its normal business operations. Based upon the facts available to date, management believes that the Company has meritorious defenses to these actions and that their ultimate resolution will not have a material adverse effect on the Company's financial position.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders - - ------- ---------------------------------------------------
Not applicable.
PART II -------
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder - - ------- ------------------------------------------------------------- Matters. --------
The section entitled "Common Stock Information" appearing on the inside front cover of the Annual Report is incorporated herein by this reference. Footnote (a) (iii) to note 2, entitled "Debt", to the consolidated financial statements appearing on page 20 of the Annual Report is also incorporated herein by this reference with regard to limitations on cash dividends and common stock repurchases. The section entitled, "Management's Discussion and Analysis of Financial Condition and Results of Operations", specifically the subsection entitled "Capital Resources and Liquidity" appearing on page 15 of the Annual Report is also incorporated herein by this reference with regard to planned common stock dividend payments.
Item 6.

Item 6. Selected Financial Data - - ------- -----------------------
The section entitled "Five-Year Summary of Financial Data", appearing on page 13 of the Annual Report, is incorporated herein by this reference.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and - - ------- --------------------------------------------------------------- Results of Operations ---------------------
The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 14 through 15 of the Annual Report is incorporated herein by this reference.
Item 8.


Item 8. Financial Statements and Supplementary Data - - ------- -------------------------------------------
The consolidated financial statements and accompanying notes and report of Independent Public Accountants appearing on pages 16 through 25 of the Annual Report are incorporated herein by this reference.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and - - ------- --------------------------------------------------------------- Financial Disclosure --------------------
Not applicable.
PART III --------
The information required by Part III (Item 10, 11, 12 and 13) is incorporated herein by reference to the Company's definitive proxy statement, involving the election of directors and ratification of independent auditors filed on August 18, 1994.
PART IV -------
Item 14.







Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - - -------- ---------------------------------------------------------------
(a) Documents Filed as Part of this Report:
1. Financial Statements
The following financial statements and report included in the Company's Annual Report are incorporated herein by reference:
Consolidated Balance Sheet at May 28, 1994 and May 29,
For the 52 weeks ended May 28, 1994, May 29, 1993 and May 30, 1992:
Consolidated Statement of Income Consolidated Statement of Cash Flows Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Report of Independent Public Accountants dated July 8,
2. Financial Statement Schedules
The following report and schedules are filed herewith as a part hereof:
Report of Independent Public Accountants dated July 8,
Schedules for the 52 weeks ended May 28, 1994, May 29, 1993 and May 30, 1992:
II Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other Than Related Parties V Property, Plant and Equipment VI Accumulated Depreciation of Property, Plant and Equipment VIII Valuation and Qualifying Accounts IX Short-term Borrowings X Supplementary Income Statement Information
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
3. Exhibits
The exhibits are listed in the Exhibit Index. Copies of certain documents have not been filed as exhibits, in reliance upon paragraph (b) (4) (iii) of Item 601 of Regulation S-K. Registrant agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
(b) Reports on Form 8-K: --------------------
No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERSTATE BAKERIES CORPORATION
Dated: August 19, 1994 By: /s/ Charles A. Sullivan ---------------------------- Charles A. Sullivan President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
Capacities Name of Signatory In Which Signing Date - - ----------------- ---------------- ----
/s/ Charles A. Sullivan Chairman of the Board, August 19, 1994 - - -------------------------- President, Chief Charles A. Sullivan Executive Officer and Director (Principal Executive Officer)
/s/ G. Kenneth Baum Director August 19, 1994 - - -------------------------- G. Kenneth Baum
/s/ Leo Benatar Director August 19, 1994 - - -------------------------- Leo Benatar
/s/ E. Garrett Bewkes, Jr. Director August 19, 1994 - - -------------------------- E. Garrett Bewkes, Jr.
/s/ Philip Briggs Director August 19, 1994 - - -------------------------- Philip Briggs
/s/ Robert B. Calhoun, Jr. Director August 19, 1994 - - -------------------------- Robert B. Calhoun, Jr.
/s/ Frank E. Horton Director August 19, 1994 - - -------------------------- Frank E. Horton
/s/ Paul E. Yarick Vice President August 19, 1994 - - -------------------------- and Treasurer Paul E. Yarick (Principal Financial Officer)
/s/ John F. McKenny Vice President August 19, 1994 - - -------------------------- and Corporate John F. McKenny Controller (Principal Accounting Officer)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Interstate Bakeries Corporation
We have audited the consolidated financial statements of Interstate Bakeries Corporation and its subsidiaries as of May 28, 1994 and May 29, 1993, and for each of the three fiscal years in the period ended May 28, 1994, and have issued our report thereon dated July 8, 1994; such consolidated financial statements and report are included in your 1994 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of Interstate Bakeries Corporation and its subsidiaries, listed in Item 14. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche
Kansas City, Missouri July 8, 1994
INTERSTATE BAKERIES CORPORATION SCHEDULE II AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES FIFTY-TWO WEEKS ENDED MAY 28, 1994, MAY 29, 1993 AND MAY 30, 1992 (In Thousands)
Deductions Balance at end Balance at ---------------------- of period beginning Amounts Amounts ------------------ Name of debtor of period Additions collected written off Current Noncurrent - - -------------- ---------- --------- --------- ----------- ------- ----------
1994:
None
1993:
Ellingboe $ 134 $ - $ 2 $ - $ - $ 132 Shetler 107 - 107 - - - ---------- --------- --------- ----------- ------- ----------- $ 241 $ - $ 109 $ - $ - $ 132 ========== ========= ========= =========== ======= ===========
1992:
Bartoszewski $ 105 $ - $ 61 $ - $ - $ 44 Ellingboe 198 - 64 - - 134 Fiorini 635 - 175 - - 460 McKenny 106 - 39 - - 67 O'Connor 134 - 94 - - 40 Parque 105 - 55 - - 50 Shetler 252 - 145 - - 107 Sullivan 150 - 150 - - - Sutton 244 - 244 - - - ---------- --------- --------- ----------- ------- ---------- $1,929 $ - $1,027 $ - $ - $ 902 ========== ========= ========= =========== ======= ==========
Note: The loans are payable on demand, bear interest at a rate of 3% per annum and are secured by a pledge of Interstate Bakeries Corporation common stock.
INTERSTATE BAKERIES CORPORATION SCHEDULE V PROPERTY, PLANT AND EQUIPMENT FIFTY-TWO WEEKS ENDED MAY 28, 1994, MAY 29, 1993 AND MAY 30, 1992 (In Thousands)
Reclassifi- Balance at cations, Balance beginning sales and Other at end Classification of period Additions retirements changes of period - - -------------- ---------- --------- ----------- ------- --------- 1994:
Land $ 24,433 $ 1,252 $ (5,079) $ - $ 20,606 Buildings and improvements 67,197 8,147 (4,410) - 70,934 Plant equipment 193,287 26,389 (34,123) - 185,553 Delivery equipment 28,377 1,963 (4,218) - 26,122 Construction in progress 16,153 (2,906) - - 13,247 --------- --------- ----------- ------- --------- $329,447 $34,845 $(47,830) $ - $316,462 ========= ========= =========== ======= =========
1993:
Land $ 24,435 $ 46 $ (48) $ - $ 24,433 Buildings and improvements 64,182 3,060 (45) - 67,197 Plant equipment 183,072 18,519 (8,304) - 193,287 Delivery equipment 28,049 2,179 (1,851) - 28,377 Construction in progress 9,367 6,786 - - 16,153 --------- --------- ----------- ------- --------- $309,105 $30,590 $(10,248) $ - $329,447 ========= ========= =========== ======= =========
1992:
Land $ 24,418 $ 119 $ (102) $ - $ 24,435 Buildings and improvements 62,552 1,738 (108) - 64,182 Plant equipment 170,873 13,624 (1,425) - 183,072 Delivery equipment 25,439 2,784 (174) - 28,049 Construction in progress 4,155 5,212 - - 9,367 --------- --------- ----------- ------- --------- $287,437 $23,477 $ (1,809) $ - $309,105 ========= ========= =========== ======= =========
INTERSTATE BAKERIES CORPORATION SCHEDULE VI ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT FIFTY-TWO WEEKS ENDED MAY 28, 1994, MAY 29, 1993 AND MAY 30, 1992 (In Thousands)
Additions Reclassifi- Balance at charged to cations, Balance beginning costs and sales and Other at end Classification of period expenses retirements changes of period - - -------------- ---------- ---------- ----------- ------- ----------
1994:
Buildings and improvements $ 14,448 $ 2,330 $ (2,041) $ - $ 14,737 Plant equipment 78,794 19,197 (26,770) - 71,221 Delivery equipment 15,820 2,697 (3,453) - 15,064 ---------- ---------- ----------- ------- ---------- $109,062 $24,224 $(32,264) $ - $101,022 ========== ========== =========== ======= ==========
1993:
Buildings and improvements $ 11,783 $ 2,627 $ 38 $ - $ 14,448 Plant equipment 68,303 18,764 (8,273) - 78,794 Delivery equipment 14,387 3,020 (1,587) - 15,820 ---------- ---------- ----------- ------- ---------- $ 94,473 $24,411 $ (9,822) $ - $109,062 ========== ========== =========== ======= ==========
1992:
Buildings and improvements $ 9,084 $ 2,734 $ (35) $ - $ 11,783 Plant equipment 51,736 17,819 (1,252) - 68,303 Delivery equipment 10,770 3,768 (151) - 14,387 ---------- ---------- ----------- ------- ---------- $ 71,590 $24,321 $ (1,438) $ - $ 94,473 ========== ========== =========== ======= ==========
INTERSTATE BAKERIES CORPORATION SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS FIFTY-TWO WEEKS ENDED MAY 28, 1994, MAY 29, 1993 AND MAY 30, 1992 (In Thousands)
Balance at Additions Accounts Balance beginning charged charged at end Description of period to income off of period - - ----------- ---------- --------- -------- ---------
1994:
Reserve for discounts and allowances on accounts receivable $4,328 $ (50) $ - $4,278 Allowance for doubtful accounts 1,511 510 376 1,645 ---------- --------- -------- --------- $5,839 $ 460 $ 376 $5,923 ========== ========= ======== =========
1993:
Reserve for discounts and allowances on accounts receivable $4,297 $ 31 $ - $4,328 Allowance for doubtful accounts 2,143 1,142 1,774 1,511 ---------- --------- -------- --------- $6,440 $1,173 $1,774 $5,839 ========== ========= ======== =========
1992:
Reserve for discounts and allowances on accounts receivable $3,770 $ 527 $ - $4,297 Allowance for doubtful accounts 2,462 364 683 2,143 ---------- --------- -------- --------- $6,232 $ 891 $ 683 $6,440 ========== ========= ======== =========
INTERSTATE BAKERIES CORPORATION SCHEDULE IX SHORT-TERM BORROWINGS FIFTY-TWO WEEKS ENDED MAY 28, 1994, MAY 29, 1993 AND MAY 30, 1992
Maximum Average Weighted Weighted amount amount average Fiscal Balance at average outstanding outstanding interest year end of interest during during rate during ended Category period rate the period the period* the period** - - ------ -------- ---------- -------- ----------- ----------- ------------ 1994 Bank Borrowings $ - - $5,000,000 $126,000 3.96%
1993 Bank Borrowings $5,000,000 4.00% $5,000,000 $346,000 3.95%
1992 None
* Computed by actual amounts outstanding times the actual number of days outstanding divided by number of days in the year.
** Computed by actual interest costs incurred divided by average amount outstanding during the period as computed in "*".
Note: The Company has no short-term borrowing agreements in place at May 28, 1994.
INTERSTATE BAKERIES CORPORATION SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION FIFTY-TWO WEEKS ENDED MAY 28, 1994, MAY 29, 1993 AND MAY 30, 1992 (In Thousands)
Charged to costs and expenses -----------------------------
1994 1993 1992 ------- ------- --------
Maintenance and repairs $48,620 $48,738 $49,126 ======= ======= =======
Advertising $15,959 $15,987 $16,166 ======= ======= =======
EXHIBIT INDEX -------------
Exhibit No. Exhibit - - ------- -------
3.1 Restated Certificate of Incorporation of Interstate Bakeries Corporation, as amended.*
3.2 Restated Bylaws of Interstate Bakeries Corporation (incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K of Interstate Bakeries Corporation filed on August 30, 1991 (the "1991 10-K")).
4.1 Article FOURTH of Restated Certificate of Incorporation of Interstate Bakeries Corporation (contained in Exhibit 3.1 hereto and incorporated herein by reference to Exhibit 3.1 to the 1991 10-K).
10.1 Interstate Bakeries Corporation 1991 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1 of Interstate Bakeries Corporation, File No. 33-40830 (the "Form S-1")).
10.2 Employment Agreement, dated as of March 1, 1989, by and among Interstate Bakeries Corporation, Interstate Brands Corporation and Charles A. Sullivan (incorporated herein by reference to Exhibit 10.2 to the Form S-1).
10.3 Stock Performance Unit Agreement, dated as of November 1, 1989, by and between Interstate Bakeries Corporation and Charles A. Sullivan (incorporated herein by reference to Exhibit 10.3 to the Form S-1).
10.4 Memorandum of Agreement, dated as of May 16, 1991, by and among Interstate Bakeries Corporation, Interstate Brands Corporation and Charles A. Sullivan (incorporated herein by reference to Exhibit 10.4 to the Form S-1).
10.5 Restated Memorandum of Agreement dated as of July 22, 1992 by and among Interstate Bakeries Corporation, Interstate Brands Corporation and Charles A. Sullivan (incorporated herein by reference to Exhibit 10.5 to the Annual Report on Form 10-K of Interstate Bakeries Corporation filed on August 20, 1992).
11.1 Statement regarding computation of per share earnings.*
13.1 The inside front cover and pages 13 through 25 of the Interstate Bakeries Corporation annual report to security holders for the year ended May 28, 1994. (Those portions of the annual report to security holders not listed here shall not be deemed to be filed as a part of this Report.)*
21.1 Subsidiaries of Interstate Bakeries Corporation (incorporated herein by reference to Exhibit 22.1 to the 1991 10-K).
99 Interstate Brands Corporation Retirement Income Plan (incorporated herein by reference to Exhibit 28.1 to the Form S-1). - - ---------------------- * Filed herewith.