UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 3, 2006
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-11165
INTERSTATE BAKERIES
CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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43-1470322
(I.R.S. Employer
Identification No.) |
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12 East Armour Boulevard,
Kansas City, Missouri
(Address of principal executive offices)
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64111
(Zip Code) |
(816) 502-4000
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The
aggregate market value of the 21,523,009 shares of voting stock of the registrant held by
non-affiliates, computed by reference to the $2.85 closing price of such stock on November 17,
2006, the last business day of the registrants most recently completed second fiscal quarter, was
$61,340,576. The aggregate market value of such stock, computed by reference to the $8.28 closing
price of such stock on June 2, 2006, the last business day of the registrants fourth quarter of
fiscal 2006, was $178,210,515.
There were 45,285,314 shares of common stock, $0.01 par value per share, outstanding as of
December 6, 2006. Giving effect to our senior subordinated convertible notes and common stock
equivalents, there were 55,183,755 shares of common stock outstanding as of December 6, 2006.
DOCUMENTS INCORPORATED BY REFERENCE: None
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EXPLANATORY NOTE
In addition to this annual report on Form 10-K, on the same date, we also filed our Quarterly
Reports on Form 10-Q for the quarters ended August 20, 2005, November 12, 2005, March 4, 2006, and
August 26, 2006. The primary reasons for our delay in filing certain of these reports are related
to our Chapter 11 filing and issues related to the restatement of our fiscal 2004 Form 10-K. All
of the reports filed concurrently herewith should be read together and in connection with this
Annual Report on Form 10-K for a comprehensive description of our current financial condition and
operating results.
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INDEX
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Page Number |
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FORWARD-LOOKING STATEMENTS |
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4 |
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PART I |
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8 |
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ITEM 1. BUSINESS |
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ITEM 1A. RISK FACTORS |
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16 |
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ITEM 1B. UNRESOLVED STAFF COMMENTS |
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26 |
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ITEM 2. PROPERTIES |
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27 |
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ITEM 3. LEGAL PROCEEDINGS |
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27 |
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
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31 |
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PART II |
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31 |
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ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS |
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31 |
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ITEM 6. SELECTED FINANCIAL DATA |
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34 |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
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35 |
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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54 |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
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106 |
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ITEM 9A. CONTROLS AND PROCEDURES |
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106 |
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ITEM 9B. OTHER INFORMATION |
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113 |
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PART III |
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114 |
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
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114 |
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ITEM 11. EXECUTIVE COMPENSATION |
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117 |
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
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123 |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
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125 |
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
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126 |
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PART IV |
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128 |
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE |
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128 |
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Subsidiaries
of Interstate Bakeries Corporation |
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Certification of Antonio C. Alvarez II pursuant to Rule 13a-14(a)/15d-14(a) |
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Certification of Ronald B. Hutchison pursuant to Rule 13a-14(a)/15d-14(a) |
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Certification of Antonio C. Alvarez II pursuant to 18 U.S.C. Section 1350 |
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Certification of
Ronald B. Hutchison pursuant to 18 U.S.C. Section 1350 |
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3
FORWARD-LOOKING STATEMENTS
Some information contained in or incorporated by reference herein may be forward-looking statements
within the meaning of the federal securities laws. These forward-looking statements are not
historical in nature and include statements that reflect, when made, our views with respect to
current events and financial performance. These forward-looking statements can be identified by
forward-looking words such as may, will, expect, intend, anticipate, believe,
estimate, plan, could, should and continue or similar words. These forward-looking
statements may also use different phrases. These forward-looking statements are not historical in
nature and include statements relating to, among other things:
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our ability to continue as a going concern; |
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our ability to obtain court approval with respect to motions filed by us from time to time in the
Chapter 11 proceeding (as described below); |
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our ability to operate pursuant to the covenants, terms and certifications of the Revolving Credit
Agreement, or DIP Facility (as described in Item 1 below); |
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our ability to obtain any necessary relief from the minimum
EBITDA covenant under our DIP Facility,
as described herein; |
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our ability to negotiate an extension (if necessary) or refinance our DIP Facility, which, pursuant
to an extension, expires on June 2, 2007; |
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our ability to develop, propose, confirm and consummate one or more plans of reorganization with
respect to the Chapter 11 proceeding; |
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risks associated with failing to obtain court approval for one or more extensions to the
exclusivity period for us to propose and confirm one or more plans of reorganization or with third
parties seeking and obtaining court approval to terminate or shorten any such exclusivity period,
for the appointment of a Chapter 11 trustee or to convert the Chapter 11 proceeding to a Chapter 7
proceeding; |
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risks associated with inflationary cost increases in materials, ingredients, energy, and employee
wages and benefits; |
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risks associated with our restructuring process, including the risks associated with achieving the
desired savings in connection with our profit center restructuring and bakery and route
consolidations (as described below); |
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potential adverse publicity; |
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our ability to obtain and maintain adequate terms with vendors and service providers; |
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the potential adverse impact of the Chapter 11 proceeding on our liquidity or results of operations; |
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risks associated with product price increases, including the risk that such actions will not
effectively offset inflationary cost pressures and may adversely impact sales of our products; |
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the effectiveness of our efforts to hedge our exposure to price increases with respect to various
ingredients and energy; |
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our ability to finalize, fund and execute a going-forward business plan; |
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our ability to attract, motivate and/or retain key executives and employees; |
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changes in our relationship with employees and the unions that represent them; |
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increased costs and uncertainties related to periodic renegotiation of union contracts; |
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risks associated with a stockholder action to compel an annual meeting for the purpose of effecting
a change in |
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control of the Company; |
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increased costs and uncertainties with respect to the American Bakers Association Retirement Plan,
or ABA Plan; |
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the Securities and Exchange Commissions, or SECs, acceptance of the recommendation from the staff
of the SECs Division of Enforcement to accept the proposed settlement of the previously announced
investigation relating to the establishment of our workers compensation and other reserves; |
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the delayed filing with the SEC of our fiscal 2006 Form 10-K and of our fiscal 2006 and 2007 Forms
10-Q; |
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successful resolution of material weaknesses in our internal controls; |
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resolution of any deficiencies and implementation of software updates
with respect to our financial reporting systems; |
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changes to dietary guidelines; |
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the continuing effects of changes in consumers eating habits; |
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the performance of our recent new product introductions, including the
success of such new products in achieving and retaining market share;
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the outcome of legal proceedings to which we are or may become a party. |
These forward-looking statements are and will be subject to numerous risks and uncertainties, many
of which are beyond our control that could cause actual results to differ materially from such
statements. Factors that could cause actual results to differ materially include, without
limitation:
Bankruptcy-Related Factors
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our ability to evaluate various alternatives including, but not limited to, the sale of some or
all of our assets, infusion of capital, debt restructuring and the filing and ultimate approval of
a plan of reorganization with the Bankruptcy Court (as described below), or any combination of
these options; |
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our ability to develop and implement a successful plan of reorganization in the Chapter 11 process; |
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our ability to operate our business under the restrictions imposed by the Chapter 11 process and
in compliance with the limitations contained in the debtor-in-possession credit facility; |
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the instructions, orders and decisions of the bankruptcy court and other effects of legal and
administrative proceedings, settlements, investigations and claims; |
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changes in our relationships with suppliers and customers, including the ability to maintain these
relationships and contracts that are critical to our operations, in light of the Chapter 11
process; |
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our ability to maintain adequate liquidity and working capital under our DIP Facility, as well as
our ongoing ability to purchase from vendors on satisfactory terms throughout the reorganization. |
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the significant time that will be required by management to structure and implement a plan of
reorganization as well as to evaluate various alternatives including, but not limited to, the sale
of some or all of our assets, infusion of capital and debt restructuring or any combination of
these options, as well as our restructuring plan; |
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our reliance on key management personnel, including the effects of the Chapter 11 process on our
ability to attract and retain key management personnel; |
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our ability to successfully reject unfavorable contracts and leases; and |
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the duration of the Chapter 11 process. |
General Factors
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the availability of capital on acceptable terms in light of the various factors discussed herein,
including our reorganization under the Chapter 11 process; |
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the availability and cost of raw materials, packaging, fuels and utilities, and the ability to recover
these costs in the pricing of products, improved efficiencies and other strategies; |
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increased pension, health care, workers compensation and other employee costs; |
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actions of competitors, including pricing policy and promotional spending; |
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increased costs, delays or deficiencies related to restructuring activities; |
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the effectiveness of advertising and marketing spending; |
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the effectiveness and adequacy of our information and data systems; |
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changes in general economic and business conditions (including in the bread and sweet goods markets); |
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costs associated with increased contributions to single employer, multiple employer or multi-employer
pension plans; |
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any inability to protect and maintain the value of our intellectual property; |
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future product recalls or food safety concerns; |
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further consolidation in the retail food industry; |
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changes in consumer tastes or eating habits; |
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costs associated with environmental compliance and remediation; |
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increased costs and uncertainties related to periodic renegotiation of union contracts; |
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obligations and uncertainties with respect to the ABA Plan; |
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the impact of any withdrawal liability arising under our multi-employer pension plans as a result of
prior actions or current consolidations; |
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actions of governmental entities, including regulatory requirements; |
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acceptance of new product offerings by consumers and our ability to expand existing brands; |
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the performance of our recent new product introductions, including the success of such new products in
achieving and retaining market share; |
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the effectiveness of hedging activities; |
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expenditures necessary to carry out cost-saving initiatives and savings derived from these initiatives; |
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changes in our business strategies; |
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unexpected costs or delays incurred in connection with our previously announced and other future
facility closings; |
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bankruptcy filings by customers; |
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changes in our relationship with employees and the unions that represent them; |
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the outcome of legal proceedings to which we are or may become a party, including any litigation
stemming from our sale of convertible notes on August 12, 2004 or events leading up to our filing of a
voluntary petition for protection under Chapter 11 of the Bankruptcy Code; |
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business disruption from terrorist acts, our nations response to such acts and acts of war; and |
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other factors. |
These statements speak only as of the date of this report, and we disclaim any intention or
obligation to update or revise any forward-looking statements to reflect new information, future
events or developments or otherwise, except as required by law. All subsequent written and oral
forward-looking statements attributable to us and persons acting on our behalf are qualified in
their entirety by the cautionary statements contained in this section and elsewhere herein.
Similarly, these and other factors, including the terms of any reorganization plan ultimately
confirmed, can affect the value of our various pre-petition liabilities, common stock and/or other
equity securities. No assurance can be given as to what values, if any, will be ascribed in the
Chapter 11 proceeding to each of these liabilities and/or securities. Accordingly, we urge that the
appropriate caution be exercised with respect to existing and future investments in any of these
liabilities and/or securities.
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PART I
ITEM 1. BUSINESS
General
Interstate Bakeries Corporation, a Delaware corporation incorporated in 1987, is one of the largest
wholesale bakers and distributors of fresh baked bread and sweet goods in the United States. Unless
otherwise noted, any reference to IBC, us, we or our refers to Interstate Bakeries
Corporation and its subsidiaries, taken as a whole. We produce, market and distribute a wide range
of breads, rolls, croutons, snack cakes, donuts, sweet rolls and related products under national
brand names such as Wonder®, Hostess®, Bakers Inn® and Home Pride®, as well as regional
brand names such as Butternut®, Dolly Madison®, Drakes® and Merita®. Based on independent
publicly available market data, Wonder® bread is the number one selling white bread brand sold in
the United States and Home Pride® wheat bread is a leading wheat bread brand in the United
States. Hostess® products, including Twinkies®, Ding Dongs® and HoHos®, are among the
leading snack cake products sold in the United States.
Our principal executive offices are located at 12 East Armour Boulevard, Kansas City, Missouri
64111, and our telephone number is (816) 502-4000.
We operate 45 bakeries and approximately 800 distribution centers, from which our sales force
delivers fresh baked goods on approximately 6,400 delivery routes. We also operate approximately
830 bakery outlets located in markets throughout the United States.
Proceedings Under Chapter 11 of the Bankruptcy Code
On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the
Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the
Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819, 04-45820, 04-45821
and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed
in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee of equity
security holders was appointed in our Chapter 11 cases. Mrs. Cubbisons Foods, Inc., or Mrs.
Cubbisons, a subsidiary of which we are an eighty percent owner, was not originally included in
the Chapter 11 filing. However, on January 14, 2006, Mrs. Cubbisons filed a voluntary petition for
relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). We are continuing to
operate our business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and
in accordance with the applicable provisions of the Bankruptcy Code and the orders of the
Bankruptcy Court. In general, as a debtor-in-possession, we are authorized under the Bankruptcy
Code to continue to operate as an ongoing business, but may not engage in transactions outside the
ordinary course of business without the prior approval of the Bankruptcy Court.
On September 23, 2004, we entered into a DIP Facility with JPMorgan Chase Bank, or JPMCB, and each
of the other commercial banks, finance companies, insurance companies or other financial
institutions or funds from time to time party thereto, together, with JPMCB, the Lenders, J.P.
Morgan Securities Inc., as lead arranger and book runner, and JPMCB, as administrative and
collateral agent for the Lenders. The DIP Facility received interim approval by the Bankruptcy
Court on September 23, 2004 and final approval on October 22, 2004. The DIP Facility provides for a
$200.0 million commitment, or the Commitment, of debtor-in-possession financing to fund our
post-petition operating expenses, supplier and employee obligations. We entered into the first
amendment to the DIP Facility on November 1, 2004, the second amendment to the DIP Facility on
January 20, 2005, the third amendment to the DIP Facility on May 26, 2005, the fourth amendment to
the DIP Facility on November 30, 2005, the fifth amendment to the DIP Facility on December 27,
2005, the sixth amendment to the DIP Facility on March 29, 2006, the seventh amendment to the DIP
Facility on June 28, 2006 and the eighth amendment to the DIP Facility on August 25, 2006 to
reflect certain modifications. See Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources below for a further
discussion regarding the DIP Facility.
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In conjunction with the commencement of the Chapter 11 process, we sought and obtained several
orders from the Bankruptcy Court which were intended to enable us to operate in the normal course
of business during the Chapter 11 process. The most significant of these orders:
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authorize us to pay pre-petition and post-petition employee wages and salaries and related benefits during
our restructuring under Chapter 11; |
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authorize us to pay trust fund taxes in the ordinary course of business, including pre-petition amounts; and |
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authorize the continued use of our cash management systems. |
Pursuant to the Bankruptcy Code, our pre-petition obligations, including obligations under debt
instruments, generally may not be enforced against us. In addition, any actions to collect
pre-petition indebtedness are automatically stayed unless the stay is lifted by the Bankruptcy
Court.
As a debtor-in-possession, we have the right, subject to Bankruptcy Court approval and certain
other limitations, to assume or reject executory contracts and unexpired leases. In this context,
assume means that we agree to perform our obligations and cure all existing defaults under the
contract or lease, and reject means that we are relieved from our obligations to perform further
under the contract or lease but are subject to a claim for damages for the breach thereof. Any
damages resulting from rejection of executory contracts and unexpired leases will be treated as
general unsecured claims in the Chapter 11 process unless such claims had been secured on a
pre-petition basis. As of December 6, 2006, we have rejected over 420 unexpired leases and have
included charges for our estimated liability related thereto in the period of rejection. We are in
the process of reviewing our executory contracts and remaining unexpired leases to determine which,
if any, we will reject. For these executory contracts and remaining unexpired leases, we cannot
presently determine or reasonably estimate the ultimate liability that may result from rejecting
these contracts or leases, and no provisions have yet been made for these items.
We continue to communicate with principal vendors and customers, and we believe that most of our
current relationships will continue. The loss of major vendors or customers, as well as significant
adverse changes to vendor payment terms, could have a material adverse effect on our results of
operations and financial condition, including our ability to operate as a going concern.
The Bankruptcy Code provides that we have the exclusive right for 120 days (which exclusive period
may be extended by the Bankruptcy Court) during which only we may file and solicit acceptances of a
plan of reorganization. The periods during which we have the exclusive right to file a plan and
solicit acceptances of a plan have been extended on five occasions and are presently set to expire
on January 31, 2007, and April 21, 2007, respectively. If we fail to file a plan of reorganization
during the exclusive period or, after such plan has been filed, if we fail to obtain acceptance of
such plan from the requisite impaired classes of creditors and equity holders during the exclusive
solicitation period, any party in interest, including a creditor, an equity holder, a committee of
creditors or equity holders or an indenture trustee, may file their own plan of reorganization.
Since the Petition Date, we have been actively engaged in restructuring our operations. With the
assistance of Alvarez & Marsal LLC, or A&M, a firm specializing in corporate advisory and crisis
management services to troubled and under-performing companies and their stakeholders, we
restructured our 10 profit centers (PCs), including the closure of nine bakeries and approximately
200 distribution centers; rationalized our delivery route network, reducing the number of routes by
approximately 30 percent, from approximately 9,100 delivery routes to approximately 6,400; and
reduced our workforce by approximately 7,000 positions. In addition, we disposed of certain
non-core assets during our Chapter 11 case, the aggregate net proceeds of which have been
approximately $102.8 million, and commenced negotiations of long-term extensions with respect to
most of our 420 collective bargaining agreements (CBAs) with union-represented employees resulting
in ratification by employees or agreements reached in principle, subject to ratification by
employees, of approximately 310 CBAs. Finally, we have initiated a marketing program designed to
offset revenue declines by developing protocols to better anticipate and meet changing consumer
demand through a consistent flow of new products. As part of our restructuring efforts, we are
evaluating various alternatives including, but not limited to, the sale of some or all of our
assets, infusion of
capital, debt restructuring and the filing of a plan of reorganization with the Bankruptcy Court,
or any combination of these options.
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When we began the PC review process, we recognized that such complex consolidation activities would
entail certain implementation risks. For example, it could not be determined with precision that
forecasted sales would be achieved in terms of either sales volume or gross margin. We anticipated
that there would be a period of transition before the true impact of the projected efficiencies
could be realized. We expected that the path would not always be smooth as both employees and
customers had to become accustomed to the restructured operations. Accordingly, we have been and
will continue to evaluate the impact of these restructurings. For instance, we continue to focus on
improving manufacturing processes in the bakeries and enhancing service to customers through our
field sales force. Understanding the true impact of the projected efficiencies to be gained by
these actions is a critical component of a credible long-term business plan. A credible long-term
business plan is essential to the assessment of a reasonable range of values for our reorganized
business and the determination of how much debt and equity our businesses will be able to support.
Both of these assessments are prerequisites to discussions regarding, and the filing of, a plan of
reorganization.
In the event that we file a plan of reorganization with the Bankruptcy Court, the plan, along with
a disclosure statement approved by the Bankruptcy Court, will be sent to all creditors, equity
holders and parties in interest. Following the solicitation period, the Bankruptcy Court will
consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy
Court, among other things, is required to find that:
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with respect to each impaired class of creditors and equity
holders, each holder in such class has accepted the plan or
will, pursuant to the plan, receive at least as much as
such holder would receive in a liquidation; |
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each impaired class of creditors and equity holders has
accepted the plan by the requisite vote (except as
described in the following sentence); and |
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confirmation of the plan is not likely to be followed by a
liquidation or the need for further financial
reorganization unless the plan proposes such liquidation or
reorganization. |
If any impaired class of creditors or equity holders does not accept the plan and, assuming that
all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke
the cram down provisions of the Bankruptcy Code.
Under the cram down provisions, the Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders if certain
requirements of the Bankruptcy Code are met. These requirements may, among other things,
necessitate payment in full for senior classes of creditors before payment to a junior class can be
made. As a result of the amount of pre-petition indebtedness and the availability of the cram
down provisions, the holders of our common stock may receive no value for their interests under
the plan of reorganization. Because of this possibility, the value of our outstanding common stock
is highly speculative.
The administrative and reorganization expenses resulting from the Chapter 11 process will and have
unfavorably affected our results of operations. Future results of operations may also be adversely
affected by other factors related to the Chapter 11 process.
Company History
Our predecessor company, Schulze Baking Company, was founded in Kansas City in 1927. We were
subsequently created through the merger of Schulze Baking Co. and Western Bakeries Ltd. in 1937.
Since 1937, we have completed a number of acquisitions of other baking businesses. We have grown to
our present size primarily through strategic acquisitions.
In July 1995, we acquired Continental Baking Company from Ralston Purina Company, adding the
Wonder® and Hostess® brands to our portfolio of products. This acquisition made us the nations
largest baker of fresh baked bread and sweet goods in terms of net sales. In January 1998, we
acquired the assets of John J. Nissen Baking Company, a Maine-based baker and distributor of fresh
bread primarily in New England and various related entities.
In August 1998, we acquired the assets of Drake Bakeries, Inc. and the Drakes baking division,
which sells snack cakes throughout the northeastern U.S. under its well-known brand names, Devil
Dogs®, Ring Dings®,
10
Yodels® and Yankee Doodles®. Our acquisitions throughout the years have
allowed us to increase scale, expand our product and brand portfolio and broaden our geographic
presence.
Financial Information about Segments
We have aggregated our identified operating segments into two distinct reportable segments by
production process, type of customer, and distribution method as follows:
Wholesale Operations Our Wholesale Operations accounted for approximately 88.3% of our fiscal
2006 net sales and consists of an aggregation of our ten profit centers that manufacture,
distribute, and sell fresh baked goods.
Retail Operations Our Retail Operations generated approximately 11.7% of our fiscal 2006 net
sales and consists of five regions that sell our baked goods and other food items.
Our reportable segments are strategic business units that are managed separately using different
marketing strategies.
See Note 23. Segment Information to our consolidated financial statements, which is incorporated
in this section by reference, for financial information about our reportable business segments.
11
Products and Brands
We produce, market, distribute and sell white breads, variety breads, reduced calorie breads,
English muffins, croutons, rolls, buns and baked sweet goods under a number of well-known national
and regional brand names. Our brands are positioned across a wide spectrum of categories and price
points. The following chart illustrates our principal categories and brands:
|
|
|
|
|
Category |
|
Our National Brands |
|
Our Regional Brands |
Breads, Rolls and Buns |
|
|
|
|
(White, variety, crusty, reduced-calorie and bagels)
|
|
Wonder
|
|
Bunny* |
|
|
Home Pride
|
|
Butternut |
|
|
Bakers Inn
|
|
Merita |
|
|
Bread du Jour
|
|
Millbrook |
|
|
Beefsteak
|
|
Eddys |
|
|
|
|
Cottons Holsum* |
|
|
|
|
Holsum* |
|
|
|
|
J.J. Nissen |
|
|
|
|
Sunbeam* |
|
|
|
|
Sweetheart |
|
|
|
|
Di Carlo |
|
|
|
|
Colombo |
|
|
|
|
Roman Meal* |
|
|
|
|
Sun-Maid* |
|
|
|
|
Pillsbury* |
|
|
|
|
|
Fresh Baked Sweet Goods
|
|
Hostess
|
|
Dolly Madison |
(Donuts, sweet rolls, snack pies and snack cakes)
|
|
Twinkies
|
|
Drakes |
|
|
Ding Dongs
|
|
Devil Dogs |
|
|
HoHos
|
|
Ring Dings |
|
|
Suzy-Qs
|
|
Yodels |
|
|
|
|
Yankee Doodles |
|
|
|
|
Zingers |
|
|
|
|
|
Other
|
|
Mrs. Cubbisons |
|
|
(Croutons and stuffing mix)
|
|
Marie Callenders* |
|
|
We believe that our brand trademarks such as Wonder®, Hostess®, Home Pride®, Bakers Inn®,
Butternut® and Dolly Madison® and product trademarks such as Twinkies®, HoHos® and
Zingers® are of material importance to our strategy of brand building. We take appropriate action
from time to time against third parties to prevent infringement of our trademarks and other
intellectual property. We also enter into confidentiality agreements from time to time with
employees and third parties, as necessary, to protect formulas and processes used in producing our
products. Some of our products are sold under brands that we have licensed from others on terms
that are generally renewable at our discretion. These licensed brands include Bunny®, Cottons®
Holsum, Holsum®, Marie
Callenders®, Pillsbury®, Roman Meal®, Sunbeam® and Sun-Maid®.
In the
third quarter of fiscal 2006, we introduced nationally three new white bread varieties,
Wonder® Made with Whole Grain White, Wonder® White Bread FansTM, and Wonder
Kids®. Wonder® Made with Whole Grain White and Wonder® White Bread FansTM are
targeted to people who prefer the taste and texture of white bread but who want to add more
nutrition to their diets. In the fourth quarter of 2006, we introduced a national program on
Wonder® buns
and rolls to add new varieties, including wheat hamburger and hot dog buns and buns made with whole
grains. In the first quarter of fiscal 2007, we introduced Wonder® Wheat and Wonder® Honey Wheat
bread.
12
Marketing and Distribution
The majority of our bread is sold through national mass merchandisers and supermarkets, while our
sweet goods are sold principally through national mass merchandisers, supermarkets and convenience
stores. One customer, Wal-Mart Stores, Inc., accounted for approximately 13.4% of our net sales in
fiscal 2006. No other single customer accounted for more than 10.0% of our net sales. Sweet goods
sales tend to be somewhat seasonal, with a historically weak winter period, which we believe is
attributable to altered consumption patterns during the holiday season. Sales of buns, rolls and
shortcake products are historically higher in the spring and summer months.
Our marketing and advertising campaigns are conducted through targeted television, radio and print
advertising as well as coupon inserts in newspapers and other printed media. Our national accounts
department manages our relationships with our largest customers. This group focuses on customer
service and satisfaction and communicates on a regular basis to our customers regarding new
products and upcoming product events.
We distribute our products in markets representing over 80.0% of U.S. supermarket volume. Our
plants and distribution centers across the U.S. are located close to the major marketplaces
enabling effective delivery and superior customer service. We do not keep a significant backlog of
inventory, as our fresh bakery products are promptly distributed to our customers after being
produced.
We deliver our fresh baked bread and sweet goods from our network of bakeries to our distribution
centers. Our sales force then delivers primarily to mass merchandisers, supermarkets and
convenience stores on approximately 6,400 delivery routes. We are one of only a few fresh baked
bread and sweet goods producers with a national direct store delivery, or DSD, system that enables
us to provide frequent and individualized service to our national and regional customers. Our DSD
system allows us to effectively manage shelf space and efficiently execute in-store promotions and
new product introductions. In accordance with industry practice, we repurchase dated and damaged
bread products from most of our customers. A portion of our dated bread and other products are
delivered to our approximately 830 bakery outlets for retail sale. Bakery outlet sales represented
approximately 11.7% of our net sales during the 53-week period ended June 3, 2006.
Sources and Availability of Raw Materials
Most ingredients in our products, principally flour, sugar and edible oils, are readily available
from numerous sources. We currently are dependent on a small number of suppliers for an ingredient
we use to produce fresh bread products under our extended shelf life, or ESL, program. Maintenance
of our relationships with our suppliers is a material focus of our reorganization proceeding.
Failure to maintain satisfactory on-going trading terms with our suppliers would have a material
adverse impact on our business. We do not have a long-term supply contract with any of these
suppliers; however, we believe this is in our best interest because of rapidly changing technology
in this area. We utilize commodity hedging derivatives, including exchange traded futures and
options on wheat, corn, soybean oil and certain fuels, to reduce our exposure to commodity price
movements for future ingredient and energy needs. The terms of such instruments, and the hedging
transactions to which they relate, generally do not exceed one year. Our ability to hedge may be
negatively impacted by counterparty concern regarding our financial situation. We also purchase
other major commodity requirements through advance purchase contracts, generally not longer than
one year in duration, to lock in prices for raw materials. The balance of our commodity needs are
purchased on the spot markets. Through our program of central purchasing of baking ingredients and
packaging materials, we believe we are able to utilize our national presence to obtain competitive
prices.
Prices for our raw materials are dependent on a number of factors including the weather, crop
production, transportation and processing costs, government regulation and policies, and worldwide
market supply of, and demand for, such commodities. Although we believe that we are able to utilize
our central purchasing function to obtain competitive prices, the inherent volatility of commodity
prices occasionally exposes us to fluctuating costs. We attempt to recover the majority of our
commodity cost increases by increasing prices, moving towards a higher margin product mix or
obtaining additional operating efficiencies. We are limited, however, in our ability to take
greater price increases than the bakery industry as a whole because demand for our products has
shown to be negatively affected by such price increases.
13
Employees
As of
December 6, 2006, we employ approximately 25,000 people, approximately 82% of whom are covered
by one of approximately 420 union contracts. Most of our employees are members of either the
International Brotherhood of Teamsters or the Bakery, Confectionery, Tobacco Workers & Grain
Millers International Union. We are in the process of renegotiating union contracts affecting the
majority of our unionized workforce. We are in the process of renegotiating the remaining union
contracts. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Labor Union Negotiations for a discussion of the negotiations. We believe that we
have good relations with our employees. However, because our union groups are concentrated in the
two organizations listed, contract negotiations with any local unit can involve the threat of
strike by other union members at other IBC facilities. Although the Chapter 11 process could strain
relations with employee groups and labor unions, we are committed to working with those groups to
attempt to resolve any conflicts that may arise in order to ensure the continued viability of our
business.
Competition
We face intense competition in all of our markets from large national bakeries, smaller regional
operators, small retail bakeries, supermarket chains with their own bakeries, grocery stores with
their own in-store bakery departments or private label products and diversified food companies.
Competition is based on product quality, price, customer service, brand recognition and loyalty,
promotional activities, access to retail outlets and sufficient shelf space and the ability to
identify and satisfy consumer preferences. Customer service, including responsiveness to delivery
needs and maintenance of fully stocked shelves, is also an important competitive factor and is
central to the competition for retail shelf space. Our ability to provide customer service through
our DSD delivery system is highly reliant on the execution and performance of our route drivers.
This system is operated under collective bargaining agreements that can restrict the
implementation, timing and effectiveness of our sales operation. Campbell Soup Company, George
Weston Limited, Flowers Foods, Inc., Grupo Bimbo, S.A. and Sara Lee Corporation are our largest
fresh baked bread competitors, each marketing bread products under various brand names. Flowers
Foods, Inc., George Weston Limited, Grupo Bimbo, S.A., Krispy Kreme Doughnuts, Inc., McKee Foods
Corporation and Tasty Baking Company are our largest competitors with respect to fresh baked sweet
goods. In addition, fresh baked sweet goods also compete with other sweet snack foods like cookies
and candies. From time to time, we experience price pressure in certain of our markets as a result
of competitors promotional pricing practices.
Governmental Regulation; Environmental Matters
Our operations are subject to regulation by various federal, state and local government entities
and agencies. As a baker of fresh baked bread and sweet goods, our operations are subject to
stringent quality, labeling and traceability standards, including the Federal Food and Drug Act and
Bioterrorism Act of 2002. Our bakery operations and our delivery fleet are subject to various
federal, state and local environmental laws and workplace regulations, including the federal
Occupational Safety and Health Act of 1970, the federal Fair Labor Standards Act of 1938, the
federal Clean Air Act of 1990 and the federal Clean Water Act of 1972. Future compliance with or
violation of such regulations, and future regulation by various federal, state and local government
entities and agencies, which could become more stringent, may have a material adverse effect on our
financial condition and results of operations. We could also be subject to litigation arising out
of such governmental regulations that could have a material adverse effect on our financial
condition and results of operations. We believe that our current legal and environmental compliance
programs adequately address such concerns and that we are in substantial compliance with such
applicable laws and regulations.
We have underground storage tanks at various locations throughout the U.S. that are subject to
federal and state regulations that establish minimum standards for these tanks and where necessary,
require remediation of associated contamination. On some parcels of owned real property, we
discovered that underground storage tanks containing gasoline or diesel fuel had leaked and
contaminated the adjacent soil. Typically, the discovery of these leaks and the resulting soil
contamination is made in connection with the sale of a property or the removal of an underground
storage tank. When we discover that a leaking tank has contaminated a site, we take appropriate
steps to clean up or remediate the site. We are presently in the process of or have completed
remediating any known contaminated sites.
14
In addition, the Environmental Protection Agency, or EPA, has made inquiries into the refrigerant
handling practices of companies in our industry. Two of these companies entered into a negotiated
settlement with the EPA and made substantial settlement payments. In September 2000, we received a
request for information from the EPA relating to our handling of regulated refrigerants, which we
use in equipment in our bakeries for a number of purposes, including to cool our dough during the
production process. In January 2002, the EPA offered a partnership program to members of the baking
industry pursuant to which individual companies can elect to participate. Because we had previously
received a request for information from the EPA, the EPA/Department of Justice (DOJ) policies
indicated that we were not eligible to participate in the program. Nevertheless, we undertook our
own voluntary program to convert our industrial equipment to eliminate the use of ozone-depleting
refrigerants. Prior to our Chapter 11 filing, we had undertaken negotiations with the EPA. The DOJ,
on behalf of the United States of America, filed a proof of claim in our bankruptcy case on March
21, 2005 based upon our refrigerant handling practices. Although the proof of claim does not set
forth a specific amount, the claimants allege more than 3,400 violations during the period from
1998 through 2002 and assert that each violation is subject to penalties of up to $27,500 per day.
We intend to vigorously challenge any penalties calculated on this basis and defend against such
claims by the EPA/DOJ. We have also received notices from the EPA, state agencies, and/or private
parties seeking contribution, that we have been identified as a potentially responsible party, or
PRP, under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
arising out of the alleged disposal of hazardous substances at certain disposal sites on properties
owned or controlled by others. Because liability under CERCLA may be imposed retroactively without
regard to fault, we may be required to share in the cleanup cost with respect to six Superfund
sites. Our ultimate liability in connection with these sites may depend on many factors including
the volume and types of materials contributed to the site, the number of other PRPs and their
financial viability and the remediation methods and technology to be used.
The Clean Air Act of 1970, as amended, provides for federal, state and local regulation of the
emission of air pollutants. Under the Clean Air Act, many of our facilities are required to report
and control air emissions, including volatile organic compounds, nitrogen oxides and
ozone-depleting substances. In April 2004 the EPA promulgated rules relating to EPAs more
stringent National Ambient Air Quality Standards (NAAQS) for ozone. State and local authorities may
apply additional emissions limits to certain of our bakeries to comply with the new ozone NAAQS
likely beginning in 2006.
While it is difficult to quantify the potential financial impact of actions involving environmental
matters, particularly remediation costs at waste disposal sites and future capital expenditures for
environmental control equipment, in the opinion of our management, the ultimate liability arising
from such environmental matters, taking into account established accruals for estimated
liabilities, should not be material to our overall financial position, but could be material to
results of operations or cash flows for a particular quarter or annual period.
Availability of Reports; Website Access
Our Internet address is http://www.interstatebakeriescorp.com. We provide a hyperlink to the
10kWizard.com website on our website by selecting the heading Investors and then SEC Filings.
Through that hyperlink, we make available, free of charge, our Annual Reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
In addition, we provide a hyperlink entitled Restructuring Information on the Investors webpage
that provides access to all filings related to our Chapter 11 proceedings.
15
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, together with all of the other information
included or incorporated in this report, in considering our business and prospects. The risks and
uncertainties described below are not the only ones facing us. Additional risks and uncertainties
not presently known to us or that we currently deem insignificant may also impair our business
operations. The occurrence of any of these risks could adversely affect our financial condition,
results of operations and cash flows.
We face significant challenges and uncertainties in connection with our bankruptcy
reorganization.
On September 22, 2004, we and each of our wholly-owned subsidiaries filed voluntary petitions for
relief under the Bankruptcy Code in the Bankruptcy Court. On January 14, 2006, Mrs. Cubbisons, a
subsidiary of which we are an eighty percent owner, filed a voluntary petition for relief under the
Bankruptcy Code in the Bankruptcy Court. We currently operate our business as a
debtor-in-possession pursuant to the Bankruptcy Code.
We are continuing the process of stabilizing our businesses and evaluating our operations before
beginning the development of a plan of reorganization. We have evaluated operations at each of our
ten profit centers and have consolidated bakeries, depots, thrift stores and routes in these profit
centers. This process is discussed in greater detail below. In addition, as part of our
restructuring efforts we are evaluating various alternatives including, but not limited to, the
sale of some or all of our assets, infusion of capital, debt restructuring and the filing of a plan
of reorganization with the Bankruptcy Court, or any combination of these options. In the event that
we file a plan of reorganization with the Bankruptcy Court, the plan, along with a disclosure
statement approved by the Bankruptcy Court, will be sent to creditors, equity holders and parties
in interest in order to solicit acceptance of the plan. Following the solicitation, the Bankruptcy
Court will consider whether to confirm the plan. If proposed, our plan of reorganization may not
receive the requisite acceptance by creditors, equity holders and parties in interest, or the
Bankruptcy Court may not confirm the proposed plan. Moreover, even if a plan of reorganization
receives the requisite acceptance by creditors, equity holders and parties in interest and is
approved by the Bankruptcy Court, the plan may not be viable.
In addition, due to the nature of the reorganization process, actions may be taken by creditors and
parties in interest that may have the effect of preventing or unduly delaying the filing and
confirmation of a plan of reorganization in connection with the Chapter 11 process. Accordingly, we
can provide no assurance as to whether or when a plan of reorganization may be filed or confirmed
in the Chapter 11 process.
We face uncertainty regarding the adequacy of our capital resources, including liquidity, and
have limited access to additional financing.
We currently have available a $200.0 million DIP Facility to potentially fund our post-petition
operating expenses, supplier and employee obligations. The DIP Facility received interim approval
by the Bankruptcy Court on September 23, 2004 and final approval on October 21, 2004. The DIP
Facility has been amended eight times through the date of this filing.
The DIP Facility subjects us to certain obligations, including the delivery of a Borrowing Base
Certificate (as defined in the DIP Facility), cash flow forecasts and operating budgets at
specified intervals, as well as certain limitations on the payment of indebtedness, entering into
investments, the payment of capital expenditures and the payment of dividends. The DIP Facility
also contains financial covenants, requiring minimum Consolidated EBITDA (as defined in the DIP
Facility), restricting Capital Expenditures (as defined in the DIP Facility), and limiting the
amount of periodic cash restructuring charges (as defined in the DIP Facility). There can be no
assurance that we will be able to consistently comply with these obligations, financial covenants
and other restrictive obligations in our DIP Facility. Currently, we
expect that we will not be able to remain in compliance with the
minimum Consolidated EBITDA covenant as early as prior to the end of
our 2007 third fiscal quarter. We intend to negotiate with the
lenders under the DIP Facility to obtain the necessary relief from
this covenant. However, we can give no assurance that any relief
will be obtained. Failure to comply with the terms,
covenants and requirements of the DIP Facility could have a material adverse impact on our
operations.
We are highly reliant on suppliers and vendors to continue to provide capital and materials for our
ongoing operations. Any interruptions in our capital and materials could have a material adverse
effect on our operations.
16
In addition to the cash requirements necessary to fund ongoing operations, we have incurred
significant professional fees and other restructuring costs in connection with the Chapter 11
process and the restructuring of our business operations and expect that we will continue to incur
significant professional fees and restructuring costs. As of November 18, 2006, we had
approximately $84.0 million in available cash and $77.8 million available for borrowing under the
DIP Facility. This compares to the $78.2 million in available cash and $90.1 million available for
borrowing under the DIP Facility as of June 3, 2006. We cannot assure you that the amounts of cash
available from operations together with our DIP Facility will be sufficient to fund operations
until such time as we are able to propose a plan of reorganization that will receive the requisite
acceptance by creditors, equity holders and parties in interest and be confirmed by the Bankruptcy
Court. In the event that cash flows and available borrowings under the DIP Facility are not
sufficient to meet our cash requirements, we may be required to seek additional financing. We can
provide no assurance that additional financing would be available or, if available, offered on
acceptable terms. Failure to secure additional financing would have a material adverse impact on
our operations.
As a result of the Chapter 11 process and the circumstances leading to the bankruptcy filing, our
access to additional financing is, and for the foreseeable future will likely continue to be, very
limited. Our long-term liquidity requirements and the adequacy of our capital resources are
difficult to predict at this time and ultimately cannot be determined until a plan of
reorganization has been developed and is confirmed by the Bankruptcy Court in the Chapter 11
process.
The maturity date of the DIP Facility has been extended from September 22, 2006 to June 2, 2007. We
may need to negotiate an additional extension of the maturity date or refinance the DIP Facility to
provide adequate time to complete a plan of reorganization. There can be no assurance that we will
be successful in extending or refinancing the DIP Facility or that we can extend or refinance the
DIP Facility on terms favorable to us.
We face uncertainty due to an action commenced by a stockholder seeking to compel us to hold an
annual meeting of stockholders.
On October 30, 2006, a stockholder of the Company, commenced an action in the Court of Chancery of
the State of Delaware seeking to compel us to convene an annual meeting of stockholders. See Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations Company
Overview Recent Developments Stockholder Action below for a further discussion of this action.
Although we have filed a motion in the Bankruptcy Court seeking to enjoin the stockholder from
proceeding with action, there can be no assurance that the Bankruptcy Court will grant us this
relief.
If the action is allowed to proceed and we are compelled to hold an annual meeting of
stockholders, the election of directors at such meeting could result in a change of control of the
majority of our Board of Directors. This change of control could adversely affect the success of
our restructuring process as well as our financial condition, results of operations and cash flows.
Such a change would constitute an event of default under the DIP Facility and trigger significant
claims under management continuity agreements with certain of our key senior executives in the
event any of these executives is terminated within two years of the change in control. We are
dependent upon the financing provided by the DIP Facility and, in the event that such event of
default were to occur and we were unable to obtain a waiver, there can be no assurance that we
would be able to obtain financing from alternative sources on acceptable terms, if at all.
In addition, the uncertainty created by the threat of a change of control of our Board of Directors
is undermining (i) our permanent CEO search process, (ii) the development of a credible long-term
business plan for the Company based on current results, (iii) the exploration of potential
availability of financing for the Company to facilitate a plan of reorganization to emerge from
Chapter 11, (iv) our ability to regain lost customers and take advantage of new business
opportunities, and (v) the availability of adequate credit terms from our vendors and creditors.
These activities are vital components of our restructuring process, and if such uncertainty
persists, it could have an adverse affect on the success of our restructuring process, as well as
our financial condition, results of operations and cash flows.
17
Our potential inability to implement our restructuring plan, or to realize its anticipated
benefits, could adversely affect our results of operations and financial condition.
Since filing to restructure under Chapter 11, we have undertaken a comprehensive review of our
operations to determine the appropriate actions necessary to restructure our business. The outcome
of our restructuring is dependent on a number of factors, including the success of our new product
introductions as well as the positive resolution of on-going labor negotiations. Our restructuring
process also could expose us to increased risks, including the diversion of resources and
management time, disruptions to our business, the impairment of relationships with employees,
unions or customers and the impairment of supplier relationships.
As the first step in our restructuring process, we closed one bakery, implemented a reduction in
workforce, reduced corporate costs, reduced or suspended certain employee benefit programs and
renegotiated our contracts with a third party service provider. The second stage of our
restructuring process involved an exhaustive review of each of our ten profit centers on an
individual basis in order to address continued revenue declines and our high-cost structure. We
have recently closed a number of bakeries and consolidated a number of routes, depots and outlet
stores in our ten profit centers. The profit center restructuring process was intended to improve
profitability by rationalizing marginal products and strengthening our focus on branded sales and
deliveries. The success of the profit center restructuring process also will be influenced by our
ability to achieve increased route averages as a result of newly consolidated routes. While we
believe it is critical that we eliminate unprofitable products and routes, streamline distribution,
rationalize the number of brands and stock-keeping units (SKUs) and eliminate excess capacity in
order to return the company to profitability, the profit center restructuring process has and will
result in lower revenues for at least a period of time, which could adversely affect our financial
condition, results of operations and cash flows.
Beginning in the fourth quarter of 2006, we began focusing on improving manufacturing processes and
service to customers through our restructured sales force.
In addition, we have been and will continue to evaluate the impact of these restructurings.
Understanding the true impact of the projected efficiencies to be gained by these actions is a
critical component in evaluating the credibility of a long-term business plan. A credible long-term
business plan is essential to the assessment of a reasonable range of values for our reorganized
business and the determination of how much debt and equity our businesses will be able to support.
Both of these assessments are prerequisites to discussions regarding, and the filing of, a plan of
reorganization. There can be no assurance that we will be able to successfully develop and
implement a credible business plan or a plan of reorganization, which could adversely affect the
success of our restructuring process as well as our financial condition, results of operations and
cash flows.
If we are unable to effectively implement our restructuring process, we may not reap the
anticipated benefits and may face higher than anticipated costs and delays. In addition, we may not
be able to achieve the cost savings and efficiencies we anticipate will result from the closures
and consolidations, or realize these savings or efficiencies as quickly as we expect. Even if we
are able to achieve the expected cost savings and efficiencies, there can be no assurance that such
savings and efficiencies will offset the significant upward cost pressure we are experiencing.
Terms of collective bargaining agreements and labor disruptions could adversely impact our
results of operations.
We employ approximately 25,000 people, approximately 82% of whom are covered by one of
approximately 420 union contracts. Most of our employees are members of either the International
Brotherhood of Teamsters or the Bakery, Confectionery, Tobacco Workers & Grain Millers
International Union. Because a substantial portion of our workers are unionized, our costs are
generally higher and our ability to implement productivity improvements and effect savings with
respect to health care, pension and other retirement costs is more restricted than in many nonunion
operations as a result of various restrictions specified in our collective bargaining agreements.
Terms of collective bargaining agreements that prevent us from competing effectively could
adversely affect our financial condition, results of operations and cash flows. In addition, our
Chapter 11 filing and restructuring activities, including changes to our benefit programs and
on-going labor negotiations in connection with our profit center review process, have strained
relations with employee groups and labor unions. We are committed to working with those groups to
resolve conflicts as they arise in order to ensure the continued viability of our business.
However, there can be no assurance that these efforts will be successful.
18
The Chapter 11 process and the DIP Facility impose restrictions on the conduct of our
business.
We are operating our business as a debtor-in-possession pursuant to the Bankruptcy Code. Under
applicable bankruptcy law, during the pendency of the Chapter 11 process, we will be required to
obtain the approval of the Bankruptcy Court prior to engaging in any transaction outside the
ordinary course of business. In connection with an approval, creditors and parties in interest may
raise objections to the request for approval and may appear and be heard at any hearing with
respect to the approval. Accordingly, although we may sell assets and settle liabilities (including
for amounts other than those reflected on our financial statements) with the approval of the
Bankruptcy Court, there can be no assurance that the Bankruptcy Court will approve any sales or
proposed settlements. The Bankruptcy Court also has the authority to oversee and exert control over
our ordinary course operations.
The DIP Facility contains both affirmative and negative covenants pursuant to which we agree to
take, or refrain from taking, certain actions. The primary on-going affirmative obligation that we
are required to perform is the scheduled periodic delivery of a Borrowing Base Certificate (as
defined in the DIP Facility), which reflects the components of and reserves against the Borrowing
Base (as defined in the DIP Facility), establishes borrowing availability pursuant to an agreed
formula, certifies as to the accuracy and completeness of the information presented and includes
any documentation necessary or appropriate to support the information presented. Additionally, we
are required to deliver periodic operating budgets and cash flow forecasts, as required by the DIP
Facility.
The DIP Facility also contains several restrictive covenants that are typical for a
debtor-in-possession credit facility of this type. The DIP Facility contains certain financial
covenants requiring minimum Consolidated EBITDA (as defined in the DIP Facility), restricting
Capital Expenditures (as defined in the DIP Facility), and limiting the amount of periodic cash
restructuring charges (as defined in the DIP Facility). In addition, the DIP Facility also imposes
restrictions relating to, among other things, incurrence of liens, our ability to consolidate or
merge with or into another entity, incurrence or guarantee of debt, payment of dividends, making of
investments, and the disposition of assets.
Failure to satisfy any of these covenants could result in an event of default that could cause,
absent the receipt of appropriate waivers, an interruption in cash and letter of credit
availability, which could cause an interruption of our normal operations. As a result of the
restrictions described above, our ability to respond in a timely fashion to changing business and
economic conditions may be significantly restricted and, absent approval by the requisite number of
lenders, we may be prevented from engaging in transactions that might otherwise be considered
beneficial to us.
Our financial statements assume we can continue as a going concern.
Our consolidated financial statements included elsewhere in this Annual Report on Form 10-K have
been prepared assuming we can continue as a going concern. Because of the Chapter 11 process and
the circumstances leading to the bankruptcy there is substantial doubt that we can continue as a
going concern.
Our continuation as a going concern is dependent upon, among other things, our ability to evaluate
various alternatives including the sale of some or all of our assets, infusion of capital, debt
restructuring and the development, confirmation and implementation of a plan of reorganization, our
ability to comply with the terms of the DIP Facility, our ability to negotiate an extension of or
refinance our DIP Facility at its maturity, our ability to implement our restructuring process, our
ability to obtain financing upon exit from bankruptcy and our ability to generate sufficient cash
from operations to meet our obligations and any combination of these factors. In the event our
restructuring activities are not successful and we are required to liquidate, additional
significant adjustments would be necessary in the carrying value of assets and liabilities, the
revenues and expenses reported and the balance sheet classifications used.
In addition, the amounts reported in the consolidated financial statements included in this Annual
Report on Form 10-K do not reflect adjustments to the carrying value of assets or the amount and
classification of liabilities that ultimately may be necessary as the result of a plan of
reorganization.
19
We are no longer listed on the New York Stock Exchange and the market in our common stock is
highly speculative and may not continue.
Our common stock was delisted from the New York Stock Exchange, or the NYSE, on September 23, 2004.
Our common stock now trades on the over-the-counter bulletin board under the symbol IBCIQ.PK. Our
delisting has reduced the market and liquidity of our common stock and consequently may adversely
affect the ability of our stockholders and brokers/dealers to purchase and sell our shares in an
orderly manner or at all. Trading in our common stock through market makers and quotation on the
over-the-counter bulletin board entails other risks. Due in part to the decreased trading price of
our common stock and the elimination of analyst coverage, the trading price of our common stock may
change quickly, and market makers may not be able to execute trades as quickly as they could when
the common stock was listed on the NYSE. The NYSE also has notified us that its Market Trading
Analysis Department is reviewing transactions in our common stock occurring prior to our
announcement on August 30, 2004 that we were delaying the filing of our Form 10-K and prior to our
filing of a petition for relief under Chapter 11 of the Bankruptcy Code on September 22, 2004. In
connection with its investigation, the NYSE requested information from us on various dates,
including September 22 and October 5, 2004, and February 2, 2005. We believe that we have fully
responded to each of the NYSEs requests for information, with our last response to the NYSE dated
June 10, 2005, and we expect to continue to cooperate with the NYSE if it requires any further
information or assistance from us in connection with its inquiry.
In addition, as a result of pre-petition indebtedness and the availability of the cram-down
provisions of the Bankruptcy Code described in Item 1. Business Proceedings Under Chapter 11 of
the Bankruptcy Code in this Annual Report on Form 10-K, the holders of our common stock may not
receive value for their interests under a plan of reorganization. Because of this possibility, the
value of our common stock is highly speculative and any investment in our common stock would pose
an extremely high degree of risk. In connection with our motion filed in the Bankruptcy Court
in response to the recently filed stockholder action to compel an annual meeting, we described our
view that, based on current financial performance, it is difficult (if not impossible) to derive a
current enterprise value for the Company that would result in value for the equity interests after
first taking into consideration the amount of creditor claims against the Company. Potential
investors in our common stock should consider the highly speculative nature of our common stock
prior to making any investment decision with respect to our common stock.
We may face deregistration proceedings under Section 12(j) of the Exchange Act.
Due to our failure to timely file our periodic reports with the SEC, we believe that the SEC will
commence deregistration proceedings under Section 12(j) of the Exchange Act to deregister our
common stock under the Exchange Act if we do not become current in our filings with the SEC by
December 31, 2006. If our common stock is deregistered, publicly available information regarding
the Company may be limited and the price of our common stock would likely suffer an immediate and
significant decline. Our common stock would no longer be quoted on the OTC Bulletin Board and there
can be no assurance that there will be any active trading market for our common stock. Accordingly,
investors would likely find it more difficult to acquire or dispose of our common stock or obtain
accurate quotations for our common stock following any such deregistration.
Our internal control over financial reporting was not effective as of June 3, 2006 and
weaknesses in our internal controls and procedures could adversely affect our financial condition.
As discussed in Item 9A, management assessed our internal control over financial reporting as of
June 3, 2006, the end of our most recent fiscal year, and concluded that material weaknesses
existed and our internal control over financial reporting was not effective.
We have engaged in, and are continuing to engage in, substantial efforts to improve our internal
control over financial reporting and disclosure controls and procedures related to substantially
all areas of our financial statements and disclosures. The remediation efforts are continuing and
are expected to continue throughout fiscal 2007 and beyond. There remains a risk that we will fail
to prevent or detect a material misstatement of our annual or interim financial statements. In
addition, if we are unsuccessful in our remediation efforts, our financial condition, our ability
to report our financial condition and results of operations accurately and in a timely manner and
our ability to earn and retain the trust of our shareholders, employees, and customers, could be
adversely affected.
20
Our reorganization will require substantial effort by management and may impact our ability to
attract, retain and compensate key employees.
Our senior management has been, and will be, required to expend a substantial amount of time and
effort structuring a plan of reorganization, as well as evaluating various restructuring
alternatives including, but not limited to, the sale of some or all of our assets, infusion of
capital and debt restructuring, or any combination of these options, which could have a disruptive
impact on managements ability to focus on the operation of our business. Our restructuring process
has, and will continue to, require a substantial amount of time and effort on the part of our
senior management. In addition, we have had and continue to have difficulty retaining, compensating
and attracting key executives and associates and retaining employees generally as a result of a
number of problems related to the Chapter 11 process.
Declining demand for our products could have adverse effects on our financial results.
We have experienced a significant decline in the demand for our products. According to data from
Information Resources Incorporated (IRI), an independent market research concern that reports sales
trends in most supermarkets (excluding mass merchandisers, club stores and discount stores), our
total unit volume of branded bread products declined by 14.3% during fiscal 2006 from the
comparable fiscal 2005 period, while unit volumes of branded sweet goods also declined by 9.1%.
During fiscal 2006, revenues related to these products declined 10.0% from the comparable fiscal
2005 period. Data from IRI also indicates that the declining bread trend was broadly evident in the
industry during fiscal 2006. We believe that we will continue to experience reduced demand for our
products.
New dietary guidelines also could result in further reduced demand for our products. The Department
of Health and Human Services and Department of Agriculture released the 2005 Dietary Guidelines for
Americans in January 2005. The Guidelines provide dietary advice aimed at promoting health and
reducing the risk for major chronic diseases, and serve as the basis for federal food and nutrition
education programs. The guidelines recommend limiting the intake of saturated and trans fats,
cholesterol, added sugar, salt and alcohol. The guidelines recognize that whole grains are an
important source of fiber and nutrients and recommend an increased consumption of whole grain
products by substituting whole grain products for some enriched bread products. We have a number of
whole grain products among our product offerings. However, the substantial majority of our bread
revenues are from the sale of white bread and other refined grain bread products. There can be no
assurance that, if consumers increase their consumption of whole grain products as a result of the
new guidelines, they will increase consumption of our whole grain product offerings.
We have not been able to adequately respond to decreased demand for our products because we have
limitations on flexibility with our costs. Our labor costs are relatively fixed. We employ
approximately 25,000 people, approximately 82% of whom are covered by one of approximately 420
union contracts. Because a substantial portion of our workers are unionized, our costs are
generally higher and our ability to implement productivity improvements and effect savings with
respect to health care, pension and other retirement costs is more restricted than in many nonunion
operations as a result of various restrictions specified in our collective bargaining agreements.
We may have difficulty in maintaining relationships and material contracts with our suppliers.
Although we have not had significant difficulty, in the future we may have difficulty in
maintaining existing relationships with our suppliers or creating new relationships with suppliers
as a result of the Chapter 11 process. Our suppliers may stop providing materials to us or provide
materials on a cash on delivery or cash on order basis, or on other terms that could have an
adverse impact on our short-term cash flow. Our ability to maintain arrangements with our suppliers
that are critical to our operations may be adversely impacted due to supplier uncertainty regarding
our cash-flow resources and the outcome of the Chapter 11 process. Failure to maintain these
arrangements could have a material and immediate adverse impact on our ability to operate as a
going concern.
21
An investigation by the SEC regarding the restatement of our fiscal 2004 financial statements
and related potential litigation could adversely impact our business.
On July 9, 2004, we received notice of an informal inquiry from the SEC. This request followed the
voluntary disclosures that we made to the SEC regarding the increase in our reserve for workers
compensation during fiscal 2004 with a charge to pre-tax income of approximately $48.0 million. We
cooperated with the SEC in its inquiry by providing documents and other information. On January
18, 2005, we announced that the SEC had issued an Order commencing a formal investigation of the
Company for the time period June 2002 through the present. The Formal Order indicated that the SEC
staff had reported information tending to show possible violations of Section 10(b), 13(a) and
13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1 and 13b2-2.
The specific allegations pertaining to these subsections included that IBC may have, in connection
with the purchase or sale of securities, made untrue statements of material fact or omitted
material facts, or engaged in acts which operated as a fraud or deceit upon purchasers of our
securities; failed to file accurate annual and quarterly reports; failed to add material
information to make any filed reports not misleading; failed to make and keep accurate books and
records and maintain adequate internal controls; and falsified books or records.
Pursuant to the Formal Order, the SEC subpoenaed documents and testimony from several current or
former officers and directors and individuals from third party professional firms providing
services to us. We have continued to cooperate fully with the SECs investigation. On November 2,
2006, we announced that we had submitted an offer of settlement to the staff of the Division of
Enforcement of the SEC in connection with the investigation. The proposed settlement is subject to
approval by the Commission. IBC has been informed that the staff of the Division of Enforcement
has determined to recommend the settlement to the Commission. However, IBC cannot give assurance
that the Commission will approve the proposed settlement. As part of the proposed settlement, IBC
will consent, without admitting or denying the allegations by the SEC, to the entry of a cease and
desist order from the SEC against future violations of the record-keeping, internal controls and
reporting provisions of the federal securities laws and related SEC rules. No fines would be
imposed under the proposed settlement.
Increases in employee and employee-related costs could have adverse effects on our financial
results.
Our health care and workers compensation costs have been increasing and may continue to increase.
Our ability to pass along these increases in health care to our employees is limited by our
collective bargaining agreements, which cover approximately 82% of our employees. Any substantial
increase in health care or workers compensation costs may adversely affect our financial
condition, results of operations and cash flows. In addition, a shortage of qualified employees or
a substantial increase in the cost of qualified employees could adversely affect our financial
condition, results of operations and cash flows.
Increases in prices and shortages of raw materials, fuels and utilities could cause our costs
to increase.
The principal raw materials used to bake our fresh bread and sweet goods, including flour, sugar
and edible oils, and the paper, films and plastics used to package our products, are subject to
substantial price fluctuations. The prices for raw materials are influenced by a number of factors,
including the weather, crop production, transportation and processing costs, government regulation
and policies, and worldwide market supply and demand. Commodity prices have been volatile and may
continue to be volatile. Any substantial increase in the prices of raw materials may adversely
affect our financial condition, results of operations and cash flows. We enter into contracts to be
performed in the future, generally with a term of one year or less, to purchase raw materials at
fixed prices to protect us against price increases. These contracts could cause us to pay higher
prices for raw materials than are available in the spot markets.
We rely on utilities to operate our business. For example, our bakeries and other facilities use
natural gas, propane and electricity to operate. In addition, our distribution operations use
gasoline and diesel fuel to deliver our products. For these reasons, substantial future increases
in prices for, or shortages of, these fuels or electricity could adversely affect our financial
condition, results of operations and cash flows.
22
Price increases could reduce demand for our products.
In late fiscal 2006 and early fiscal 2007, we implemented significant price increases for many of
our products. The increased prices could have a negative effect on consumer demand for our products
and our sales and profits.
Competition could adversely impact our results of operations.
The baking industry is highly competitive. Competition is based on product quality, price, customer
service, brand recognition and loyalty, effective promotional activities, access to retail outlets
and sufficient shelf space and the ability to identify and satisfy consumer preferences. We compete
with large national bakeries, smaller regional operators, small retail bakeries, supermarket chains
with their own bakeries, grocery stores with their own in-store bakery departments or private label
products and diversified food companies. Some of these competitors are more diversified and have
greater financial resources than we do. Customer service, including responsiveness to delivery
needs and maintenance of fully stocked shelves, is an important competitive factor and is central
to the competition for retail shelf space. From time to time, we experience price pressure in
certain of our markets as a result of our competitors promotional pricing practices. Excess
industry capacity could also result in price pressure in certain markets. As a result, we may need
to reduce the prices for some of our products to respond to competitive and customer pressures and
to maintain market share. Such pressures also may restrict our ability to increase prices in
response to raw material and other cost increases. Any reduction in prices as a result of
competitive pressures, or any failure to increase prices when raw material costs increase, would
harm profit margins and, if our sales volumes fail to grow sufficiently to offset any reduction in
margins, our results of operations will suffer.
In order to protect our existing market share or capture increased market share in this highly
competitive retail environment, we continue to promote our products, advertise and introduce and
establish new products. Due to inherent risks in the marketplace associated with advertising and
new product introductions, including uncertainties about trade and consumer acceptance, our actions
may not prove successful in maintaining or enhancing our market share and could result in lower
sales and profits. In addition, we may incur increased credit and other business risks as a result
of competing for customers in a highly competitive retail environment.
We may be obligated to make additional contributions, or incur withdrawal liability, to
multi-employer pension plans.
We have collective bargaining agreements with our unions that stipulate the amount of contributions
that we and other companies must make to union-sponsored, multi-employer pension plans in which our
employees participate. Under our collective bargaining agreements, we are obligated to make
contributions to a number of multi-employer plans which cover the majority of our employees.
Benefits under these plans generally are based on a specified amount for each year of service. We
contributed $125.8 million, $133.5 million, and $132.0 million to all of our multi-employer plans
in fiscal 2006, 2005, and 2004, respectively. Based on the most recent information available to us,
we believe that certain of the multi-employer pension plans to which we contribute are
substantially underfunded.
Multi-employer pension plans generally are managed by trustees, who are appointed by management of
the employers participating in the plans (including our company, in some cases) and the affiliated
unions, and who have fiduciary obligations to act prudently and in the best interests of the plans
participants. For example, we have recently received notice from the trustees of one multi-employer
plan to which we contribute requesting an increase in the amount of our contributions to the plan.
We may also receive similar requests from other plans to which we contribute. Thus, while we expect
contributions to these plans to continue to increase as they have in recent years, the amount of
increase will depend upon the outcome of collective bargaining, actions taken by trustees, the
actual return on assets held in these plans and the rate of employer withdrawals from the plans, as
discussed below. Recent pension reform legislation will establish certain funding measures for
multi-employer pension plans which could result in heightened contribution obligations in certain
circumstances.
Under current law, an employer that withdraws or partially withdraws from a multi-employer pension
plan may incur withdrawal liability to the plan, which represents the portion of the plans
underfunding that is allocable to the withdrawing employer under very complex actuarial and
allocation rules. If employers that withdraw or partially withdraw from a multi-employer pension
plan are not able or fail to pay their withdrawal liability to the plan, by
23
reason of bankruptcy or otherwise, the remaining participating employers in the plan must meet the
plans funding obligations and are responsible for an increased portion of the plans underfunding.
The decline in the value of assets held by certain of the multi-employer pension plans to which we
contribute, coupled with the high level of benefits generally provided by the plans and the
inability or failure of withdrawing employers to pay their withdrawal liability, has dramatically
increased the underfunding of these plans in recent years. As a result, and in light of recent
pension reform legislation at the federal level, we expect that our contributions to these plans
will continue to increase and the plans benefit levels, underfunding and related issues will
continue to create challenges for us and other employers in the bakery and trucking industries.
When we close bakeries, distribution centers and retail outlets, we may incur withdrawal
liabilities with respect to underfunded multi-employer pension plans. In fiscal 2004, fiscal 2005
and fiscal 2006, we closed four, three and seven bakeries, respectively and, in connection with our
restructuring activities, we may close additional bakeries, routes, bakery outlets and distribution
centers. Any assessments for any withdrawal liability that we might incur by future closures will
be recorded when the affected plans determine that it is probable that a liability exists and that
the amount of the withdrawal liability can be reasonably estimated.
Additionally, the Internal Revenue Code and related regulations establish minimum funding
requirements for multi-employer pension plans (which may be impacted by recent pension reform
legislation). If any of these plans fail to meet these requirements and the trustees of these plans
are unable to obtain waivers of the requirements from the Internal Revenue Service or reduce
benefits to a level where the requirements are met, the Internal Revenue Service could impose
excise taxes on us and the other employers participating in these plans, or we and the other
employers may need to make additional funding contributions beyond the contractually agreed rates
to correct the funding deficiency and avoid the imposition of such excise taxes. If excise taxes
were imposed on us, or we make additional contributions, it could adversely affect our financial
condition, results of operations and cash flows.
For the forgoing reasons, we are unable to determine the amount of future contributions, excise
taxes or withdrawal liabilities, if any, for which we may be responsible or whether an adverse
affect on our financial condition, results of operations and cash flows could result from our
participation in these plans.
Future cash contribution obligations to the American Bakers Association Retirement Plan, or
the ABA Plan, are expected to significantly exceed previous contributions to the ABA Plan.
As a result of the review of the ABA Plan begun in December 2004, we have recorded a significant
net pension liability. Since January 2006, we have been notified of $27.8 million of required
contributions which we have not paid and due to our severely underfunded position within the plan,
future cash contribution obligations could continue to significantly exceed levels experienced in
calendar years prior to 2006. Our responsibility to make all of these payments, as well as the
timing of such payments, may be impacted by application of the Bankruptcy Code and/or other
applicable law, including the August 8, 2006 determination from the Pension Benefit Guaranty
Corporation that the ABA Plan is a multiple employer plan, as had been asserted by the Company and
disputed by the ABA Plan, as well as pension reform legislation recently enacted by Congress.
We rely on the value of our brands, and the costs of maintaining and enhancing the awareness
of our brands are increasing.
We believe that maintaining our brands via marketing and other brand-building efforts is an
important aspect of our efforts to attract and expand our consumer base. However, the costs
associated with maintaining and enhancing consumer awareness of our brands are increasing. We may
not be able to successfully maintain or enhance consumer awareness of our brands and, even if we
are successful in our branding efforts, such efforts may not be cost-effective. In addition, our
Chapter 11 filing may have an adverse impact on the reputation of our brands with consumers. If we
are unable to maintain or enhance consumer awareness of our brands in a cost effective manner, it
would adversely affect our financial condition, results of operations and cash flows.
24
Economic downturns could cause consumers to shift their food purchases from our branded
products to lower priced items.
The willingness of consumers to purchase premium branded food products depends in part on national
and local economic conditions. In periods of economic downturns or uncertainty, consumers tend to
purchase more private label or other lower priced products. If this were to happen, our sales
volume of higher margin branded products could suffer, which would adversely affect our financial
condition, results of operations and cash flows.
Inability to anticipate changes in consumer preferences may result in decreased demand for
products.
Our success depends in part on our ability to anticipate the tastes and dietary habits of consumers
and to offer products that appeal to their preferences. Consumer preferences change, and our
failure to anticipate, identify or react to these changes could result in reduced demand for our
products, which could in turn adversely affect our financial condition, results of operations and
cash flows. We have recently introduced several new products and improved products in order to
achieve and retain market share and have incurred significant development and marketing costs in
connection therewith. If our products fail to meet consumer preferences, then our strategy to
maintain and grow sales and profits with new products will be less successful.
Our intellectual property rights are valuable and any inability to protect them could dilute
our brand image and adversely affect our business.
We regard our trademarks, including Wonder®, Hostess®, Home Pride®, Bakers Inn®,
Butternut®, Dolly Madison®, Drakes®, and Merita®, as well as our trade secrets and similar
intellectual property, as important to our success. The efforts we have taken to protect our
proprietary rights may not be sufficient or effective. In the event that any of our proprietary
information is misappropriated, our business could be seriously harmed. For example, if we are
unable to protect our trademarks from unauthorized use, our brand image may be harmed. Other
parties may take actions that could impair the value of our proprietary rights or the reputation of
our products. Any impairment of our brand image could cause our enterprise value to decline. Also,
we may not be able to timely detect unauthorized use of our intellectual property and take
appropriate steps to enforce our rights. In the event we are unable to enforce our intellectual
property rights, it could adversely affect our financial condition, results of operations and cash
flows. In addition, protecting our intellectual property and other proprietary rights can be
expensive. Any increase in the unauthorized use of our intellectual property could make it more
expensive to do business and could adversely affect our financial condition, results of operations
and cash flows. A number of our brands are also manufactured and produced pursuant to licensing
agreements. Our ability to renew these licensing agreements as they come due may be made more
difficult by the Chapter 11 process, which could also adversely affect our financial condition,
results of operations and cash flows.
Further consolidation in the retail food industry may adversely impact profitability.
As supermarket chains continue to consolidate and as mass merchants gain scale, our larger
customers may seek more favorable terms for their purchases of our products, including increased
spending on promotional programs. Sales to our larger customers on terms less favorable than our
current terms could adversely affect our financial condition, results of operations and cash flows.
Future product recalls or safety concerns could adversely impact our business and financial
condition and results of operations.
We may be required to recall certain of our products should they become contaminated or be damaged.
We may also become involved in lawsuits and legal proceedings if it is alleged that the consumption
of any of our products causes injury, illness or death. A product recall or an adverse result in
any such litigation could adversely affect our financial condition, results of operations and cash
flows.
We could be adversely affected if consumers in our principal markets lose confidence in the safety
and quality of our products. Adverse publicity about the safety and quality of certain food
products, such as the publicity about foods containing genetically modified ingredients, whether or
not valid, may discourage consumers from buying our products or cause production and delivery
disruptions.
25
A number of our brand names are owned, and products are produced and sold under these brand names,
by third parties outside the U.S. Product recalls or adverse publicity about the safety and quality
of these products could discourage consumers from buying our products, which could adversely affect
our financial condition, results of operations and cash flows.
Costs associated with environmental compliance and remediation could adversely impact our
operations.
We are subject to numerous environmental laws and regulations that impose environmental controls on
us or otherwise relate to environmental protection and health and safety matters, including, among
other things, the discharge of pollutants into the air and water, the handling, use, treatment,
storage and clean-up of solid and hazardous wastes, and the investigation and remediation of soil
and groundwater affected by regulated substances. We have underground storage tanks at various locations throughout the U.S. that are subject to
federal and state regulations establishing minimum standards for these tanks and where necessary,
remediation of associated contamination. We are presently in the process of or have completed
remediating any known contaminated sites. In addition, we have received a request for information
from the Environmental Protection Agency, or EPA, relating to our handling of regulated
refrigerants. The EPA has not assessed any fines relating to this matter to date; however, the EPA
may do so in the future. We have also received notices from the EPA, state agencies, and/or private
parties seeking contribution, that we have been identified as a potentially responsible party, or
PRP, under CERCLA, arising out of the alleged disposal of hazardous substances at certain disposal
sites on properties owned or controlled by others. Because liability under CERCLA may be imposed
retroactively without regard to fault, we may be required to share in the cleanup cost of six
Superfund sites. Our ultimate liability may depend on many factors, including (i) the volume and
types of materials contributed to the site, (ii) the number of other PRPs and their financial
viability and (iii) the remediation methods and technology to be used.
It is difficult to quantify the potential financial impact of actions involving environmental
matters, particularly fines, remediation costs at waste disposal sites and future capital
expenditures for environmental control equipment at these or other presently unknown locations. We
believe the ultimate liability arising from such environmental matters, taking into account
established accruals for estimated liabilities, should not be material to our overall financial
position, but could be material to our results of operations or cash flows for a particular quarter
or fiscal year.
Government regulation could adversely impact our operations.
Our operations and properties are subject to regulation by federal, state and local government
entities and agencies. As a baker of fresh baked bread and sweet goods, our operations are subject
to stringent quality and labeling standards, including under the Federal Food and Drugs Act of
1906. Our operations are also subject to federal, state and local workplace laws and regulations,
including the federal Fair Labor Standards Act of 1938 and the federal Occupational Safety and
Health Act of 1970. Future compliance with or violation of such regulations, and future regulation
by various federal, state and local government entities and agencies, which could become more
stringent, may adversely affect our financial condition, results of operations and cash flows. We
could also be subject to litigation or other regulatory actions arising out of government
regulations, which could adversely affect our financial condition, results of operations and cash
flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
26
ITEM 2. PROPERTIES
Bakeries
We currently own and operate 45 bakeries in the following locations, which were also owned and
operated as of June 3, 2006:
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Birmingham, Alabama
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Schiller Park, Illinois
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Rocky Mount, North Carolina |
Anchorage, Alaska
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Columbus, Indiana
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Akron, Ohio |
Glendale, California
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Indianapolis, Indiana
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Cincinnati, Ohio |
Los Angeles, California (3)
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Waterloo, Iowa
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Columbus, Ohio |
Oakland, California
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Emporia, Kansas
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Defiance, Ohio |
Pomona, California
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Lenexa, Kansas
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Northwood, Ohio |
Sacramento, California
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Alexandria, Louisiana
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Tulsa, Oklahoma |
San Diego, California
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Biddeford, Maine
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Philadelphia, Pennsylvania |
Denver, Colorado
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Boonville, Missouri
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Knoxville, Tennessee |
Jacksonville, Florida
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Springfield, Missouri
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Memphis, Tennessee |
Orlando, Florida
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St. Louis, Missouri
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Ogden, Utah |
Columbus, Georgia
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Billings, Montana
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Salt Lake City, Utah |
Decatur, Illinois
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Henderson, Nevada
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Seattle, Washington |
Hodgkins, Illinois
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Wayne, New Jersey |
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Peoria, Illinois
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Jamaica, New York |
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Other Properties
As of December 6, 2006, we operate approximately 800 distribution centers and approximately 830
bakery outlets in approximately 1,100 locations throughout the United States. The majority of our
bakery outlets and distribution centers are leased. Over the past few years, we have been able to
realize operating synergies through consolidation of redundant bakeries and distribution centers.
For further discussion of our properties and profit center review, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations Profit Center Review.
ITEM 3. LEGAL PROCEEDINGS
On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the
Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the
Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819, 04-45820, 04-45821
and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed
in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee of equity
security holders was appointed in our Chapter 11 cases. On January 14, 2006, Mrs. Cubbisons, a
subsidiary of which we are an eighty percent owner, filed a voluntary petition for relief under the
Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). We are continuing to operate our
business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. As a
result of the filing, our pre-petition obligations, including obligations under debt instruments,
may not be generally enforceable against us, and any actions to collect pre-petition indebtedness
and most legal proceedings are automatically stayed, unless the stay is lifted by the Bankruptcy
Court. For more information about the filing, see Item 1. Business Proceedings Under Chapter 11
of the Bankruptcy Code.
On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior
subordinated convertible notes due August 15, 2014 in a private placement to six institutional
accredited investors under an exemption from registration pursuant to Rule 506 of Regulation D
promulgated by the SEC. The convertible notes were purchased by Highbridge International LLC,
Isotope Limited, AG Domestic Convertibles LP, AG Offshore
Convertibles LTD, Shepherd Investments International, Ltd., and Stark Trading. Between the dates of
September 2 and September 21, 2004, we received written correspondence from all of the purchasers
of the convertible notes
27
stating that it was their position that we had made certain
misrepresentations in connection with the sale of the notes. No legal action has been filed by any
of the purchasers with regard to their claims and we will aggressively defend any such action in
the event it is filed. On December 6, 2004, U.S. Bank National Association, as indenture trustee,
filed proofs of claim in our bankruptcy case on behalf of the noteholders in the amount of $100.7
million, plus any other amounts owing pursuant to the terms of the indenture and reimbursement of
the trustees fees and expenses. In addition, on March 18, 2005, R2 Investments, LDC filed a proof
of claim in the amount of $70.4 million plus interest, fees and expenses based on its holdings of
70% of the notes.
On July 9, 2004, we received notice of an informal inquiry from the SEC. This request followed the
voluntary disclosures that we made to the SEC regarding the increase in our reserve for workers
compensation during fiscal 2004 with a charge to pre-tax income of approximately $48.0 million. We
cooperated with the SEC in its inquiry by providing documents and other information. On January
18, 2005, we announced that the SEC had issued an Order commencing a formal investigation of the
Company for the time period June 2002 through the present. The Formal Order indicated that the SEC
staff had reported information tending to show possible violations of Section 10(b), 13(a) and
13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1 and 13b2-2.
The specific allegations pertaining to these subsections included that IBC may have, in connection
with the purchase or sale of securities, made untrue statements of material fact or omitted
material facts, or engaged in acts which operated as a fraud or deceit upon purchasers of our
securities; failed to file accurate annual and quarterly reports; failed to add material
information to make any filed reports not misleading; failed to make and keep accurate books and
records and maintain adequate internal controls; and falsified books or records.
Pursuant to the Formal Order, the SEC subpoenaed documents and testimony from several current or
former officers and directors and individuals from third party professional firms providing
services to us. We have continued to cooperate fully with the SECs investigation. On November 2,
2006, we announced that we had submitted an offer of settlement to the staff of the Division of
Enforcement of the SEC in connection with the investigation. The proposed settlement is subject to
approval by the Commission. IBC has been informed that the staff of the Division of Enforcement
has determined to recommend the settlement to the Commission. However, IBC cannot give assurance
that the Commission will approve the proposed settlement. As part of the proposed settlement, IBC
will consent, without admitting or denying the allegations by the SEC, to the entry of a cease and
desist order from the SEC against future violations of the record-keeping, internal controls and
reporting provisions of the federal securities laws and related SEC rules. No fines would be
imposed under the proposed settlement.
After the commencement of our Chapter 11 cases, the NYSE notified us that its Market Trading
Analysis Department was reviewing transactions in the common stock of IBC occurring prior to our
August 30, 2004 announcement that we were delaying the filing of our Form 10-K and prior to our
September 22, 2004 filing of a petition for relief under Chapter 11. In connection with its
investigation, the NYSE requested information from us on various dates, including September 22 and
October 5, 2004, and February 2, 2005. We believe that we have fully responded to each of the
NYSEs requests for information, with our last response to the NYSE dated June 10, 2005, and we
expect to continue to cooperate with the NYSE if it requires any further information or assistance
from us in connection with its inquiry.
In February and March 2003, seven putative class actions were brought against us and certain of our
current or former officers and directors in the United States District Court for the Western
District of Missouri. The lead case is known as Smith, et al. v. Interstate Bakeries Corp., et al.,
No. 4:03-CV-00142 FJG (W.D. Mo.). The seven cases have been consolidated before a single judge and
a lead plaintiff has been appointed by the Court. On October 6, 2003, plaintiffs filed their
consolidated amended class action complaint. The putative class covered by the complaint is made up
of purchasers or sellers of our stock between April 2, 2002 and April 8, 2003. On March 30, 2004,
we and our insurance carriers participated in a mediation with the plaintiffs. At the end of that
session, the parties reached a preliminary agreement on the economic terms of a potential
settlement of the cases in which our insurers would contribute $15.0 million and we would
contribute $3.0 million. We also agreed with plaintiffs and our carriers to work towards the
resolution of any non-economic issues related to the potential settlement, including documenting
and implementing the parties agreement. On September 21, 2004, the parties executed a definitive
settlement agreement consistent with the terms of the agreement reached at the mediation. The
settlement agreement was subject to court approval after notice to the class and a hearing. In
connection with the potential settlement, we
recorded a charge of $3.0 million during fiscal 2004, which is classified in liabilities subject to
compromise at June 3, 2006.
28
As a result of our Chapter 11 filing, further proceedings in the case were automatically stayed.
The settlement agreement provided, however, that the parties would cooperate in seeking to have the
Bankruptcy Court lift the automatic stay so that consideration and potential approval of the
settlement could proceed. A motion to lift the stay was filed with the Bankruptcy Court on November
24, 2004, and the Bankruptcy Court entered an order granting this motion on April 8, 2005, so that
the parties could seek final approval of the settlement agreement from the District Court where the
litigation was pending. On September 8, 2005, the District Court entered a final order approving
the settlement agreement. We understand that even though the settlement was approved, plaintiffs
received an allowed, pre-petition unsecured claim in our Chapter 11 case that may be subject to
subordination to the claims of other unsecured creditors.
In June 2003, a purported shareholder derivative lawsuit was filed in Missouri state court against
certain current and former officers and directors of IBC, seeking damages and other relief. In the
case, which is captioned Miller v. Coffey, et al., No. 03-CV-216141 (Cir. Ct., Jackson Cty.),
plaintiffs allege that the defendants in this action breached their fiduciary duties to IBC by
using material non-public information about IBC to sell IBC stock at prices higher than they could
have obtained had the market been aware of the material non-public information. Our Board of
Directors previously had received a shareholder derivative demand from the plaintiffs in the June
2003 derivative lawsuit, requesting legal action by us against certain officers and directors of
IBC. In response, our Board of Directors appointed a Special Review Committee to evaluate the
demand and to report to the board. Prior to our Chapter 11 filing, the parties had agreed to stay
the lawsuit until October 11, 2004 and also had initiated preliminary discussions looking towards
the possibility of resolving the matter. On October 8, 2004, the court entered an order extending
the stay for an additional 60 days. It is our position that, as a result of our Chapter 11 filing,
the case has been automatically stayed under the Bankruptcy Code.
We are named in two wage and hour cases in New Jersey that have been brought under state law, one
of which has been brought on behalf of a putative class of route sales representatives .
The case involving the putative class is captioned Ruzicka, et al. v. Interstate Brands Corp., et
al., No. 03-CV 2846 (FLW) (Sup. Ct., Ocean City, N.J.), and the other case is captioned McCourt, et
al. v. Interstate Brands Corp., No. 1-03-CV-00220 (FLW) (D.N.J.). These cases are in their
preliminary stages. As a result of our Chapter 11 filing, these cases have been automatically
stayed. The named plaintiffs in both cases have filed a proof of claim in our bankruptcy case for
unpaid wages.
We are named in an additional wage and hour case brought on behalf of a putative class of bakery
production supervisors under federal law, captioned Anugweje v. Interstate Brands Corp., 2:03 CV
00385 (WGB) (D.N.J.). This action is in the preliminary stages. As a result of our Chapter 11
filing, this case has been automatically stayed.
The EPA has made inquiries into the refrigerant handling practices of companies in our industry. In
September 2000, we received a request for information from the EPA relating to our handling of
regulated refrigerants, which we historically have used in equipment in our bakeries for a number
of purposes, including to cool the dough during the production process. The EPA has entered into
negotiated settlements with two companies in our industry, and has offered a partnership program to
other members of the bakery industry that offered amnesty from fines if participating companies
converted their equipment to eliminate the use of ozone-depleting substances. Because we had
previously received an information request from the EPA, the EPA/Department of Justice (DOJ)
policies indicated that we were not eligible to participate in the partnership program.
Nevertheless, we undertook our own voluntary program to convert our industrial equipment to reduce
the use of ozone-depleting refrigerants. Prior to our Chapter 11 filing, we had undertaken
negotiations with the EPA to resolve issues that may exist regarding our historic management of
regulated refrigerants. The DOJ, on behalf of the United States of America, filed a proof of claim
in our bankruptcy case on March 21, 2005 based upon our refrigerant handling practices. Although
the proof of claim does not set forth a specific amount, the claimants allege more than 3,400
violations during the period from 1998 through 2002 and assert that each violation is subject to
penalties of up to $27,500 per day. We are engaged in settlement discussions with the EPA/DOJ. If
these discussions are unsuccessful, we intend to vigorously challenge any penalties calculated on
this basis and defend against such claims by the EPA/DOJ.
On June 11, 2003 the South Coast Air Quality Management District in California, or SCAQMD, issued a
Notice of Violation alleging that we had failed to operate catalytic oxidizers on bakery emissions
at our Pomona, California
facility in accordance with the conditions of that facilitys Clean Air Act Title V Permit. Among
other things, that permit requires that the operating temperatures of the catalytic oxidizers be at
least 550 degrees Fahrenheit. Under
29
the South Coast Air Quality Management District rules,
violations of permit conditions are subject to penalties of up to $1,000 per day, for each day of
violation. The Notice of Violation alleges we were in violation of the permit through temperature
deviations on more than 700 days from September 1999 through June 2003. Since that time, four
additional instances of alleged violations, some including more than one day, have been cited by
the SCAQMD. We are cooperating with the SCAQMD, have taken steps to remove the possible cause of
the deviations alleged in the Notice of Violation, applied for and received a new permit, and have
replaced the oxidizers with a single, more effective oxidizer. The SCAQMD filed a proof of claim
dated December 8, 2004 in our bankruptcy case for $0.2 million in civil penalties. Management is
committed to cooperating with the SCAQMD and is taking actions necessary to minimize or eliminate
any future violations and negotiate a reasonable settlement of those that have been alleged.
In December, 2004, we began a review with respect to the proper accounting treatment for the
American Bakers Association Retirement Plan, or ABA Plan, in light of newly identified information.
Prior to our recent restructuring efforts, approximately 900 active IBC employees participated
under the pension plan, although the number of active employees has significantly decreased as a
result of the restructuring to approximately 350 active employees in
the ABA Plan as of September 30,
2006. We had previously accounted for the ABA Plan as a multi-employer plan, which resulted in
recognition of expense in the amount of our actual contributions to the ABA Plan but did not
require recognition of any service cost or interest cost or for the Company to record any minimum
pension benefit obligation on our balance sheet.
Upon review, the Company has determined that the ABA Plan is a type of pension plan that requires
recognition of service cost and interest cost. Additionally, we have concluded our balance sheet
should also reflect the appropriate pension benefit obligation. We believe that the ABA Plan has
been historically administered as a multiple employer plan under ERISA and tax rules and should be
treated as such. However, the amounts reflected in our financial statements after the fiscal 2004
financial statement restatement were calculated on the basis of treating the ABA Plan as an
aggregate of single employer plans under ERISA and tax rules, which is how the ABA Plan contends it
should be treated. We have reflected our interest in the ABA Plan as an aggregate of single
employer plans despite our position on the proper characterization of the ABA Plan due to
representations we received from the ABA Plan and a 1979 determination issued by the Pension
Benefit Guaranty Corporation (PBGC) (as discussed below). As of June 3, 2006, we have recorded a
net pension benefit obligation liability of approximately $58.0 million with respect to our
respective interest in the ABA Plan, reflecting its characterization as an aggregate of single
employer plans.
As a result of a request made by us and the Kettering Baking Company, another participating
employer in the ABA Plan, the PBGC, which is the federal governmental agency that insures and
supervises defined benefit pension plans, revisited its 1979 determination that the Plan was an
aggregate of single employer plans and after reviewing the status of the ABA Plan, on August 8,
2006, made a final determination that the ABA Plan is a multiple employer plan under ERISA and tax
rules. On August 9, 2006, we filed a lawsuit in Bankruptcy Court seeking enforcement of the PBGCs
determination, but there can be no assurance as to whether we will obtain such enforcement or the
amount of any reduction to our net benefit obligation liability. Accordingly, due to the lack of a
definitive resolution of this uncertainty prior to the end of the fiscal periods presented herein,
as noted above we have continued to reflect our interests in the ABA Plan as an aggregate of single
employer plans.
In our December 2005 submission requested by the PBGC in connection with its review of the 1979
determination referred to above, we asserted our belief based on available information that
treatment of the ABA Plan as a multiple employer plan will result in an allocation of pension plan
assets to our pension plan participants in an amount equal to approximately $40 million. We believe
that treatment of the ABA Plan as a multiple employer plan will result in a significant reduction
in our net pension benefit obligation with respect to our employee participants. The ultimate
outcome of this uncertainty cannot presently be determined.
In addition, we have received requests for additional corrective contributions assessed after May
28, 2005, under the single employer plan assumption, which we do not believe is correct. We have
not made such contributions pending the resolution of the uncertainties surrounding the ABA Plan.
However, we expect that the amount of such contributions would be significantly less than amounts
assessed by the ABA Plan on the assumption that the plan
was an aggregate of single employer plans. See Note 11. Employee Benefit Plans American Bakers
Association Retirement Plan to our consolidated financial statements for a discussion of these
assessments from the ABA Plan.
30
On May 3, 2006, Sara Lee Corporation instituted proceedings against the ABA Plan and the Board of
Trustees of the Plan (the Board of Trustees) in the United States District Court for the District
of Columbia. Sara Lee Corporation v. American Bakers Assn Retirement Plan, et al., Case No.
1:06-cv-00819-HHK (D.D.C.) (the Sara Lee Litigation). The relief Sara Lee seeks includes, among
other things, a mandatory injunction that would compel the ABA Plan and the Board of Trustees to
(i) require all participating employers in the ABA Plan with negative asset balances which would
include the Company to make payments to the Plan in order to maintain a positive asset balance
and (ii) cut off the payment from the ABA Plan of benefits to employee-participants of the Company
and other participating employers with negative asset balances, to the extent such employers did
not maintain a positive balance. However, the Sara Lee Litigation is premised on the notion that
the ABA Plan is an aggregate of single employer plans, which is inconsistent with the PBGCs
determination dated August 8, 2006 that the ABA Plan is a multiple employer plan. On September 29,
2006, Sara Lee filed an amended complaint adding the PBGC as a defendant and challenging the PBGCs
August 8, 2006 determination. In order to obtain a resolution of these matters without litigation
over the proper forum, we have voluntarily stayed our lawsuit in Bankruptcy Court seeking
enforcement of the August 8, 2006 determination upon the agreement by the ABA Plan and its Board of
Trustees to join IBC as a party to the Sara Lee Litigation.
On December 4, 2006, the ABA Plan and the Board of Trustees served a summons upon us as a third
party defendant to a Third Party Complaint filed in the Sara Lee Litigation against Sara Lee and
the other participating employers in the ABA Plan. The Third Party Complaint seeks a declaratory
judgment as to the nature of the ABA Plan and further asserts that the August 8, 2006 determination
was arbitrary and capricious and should be rescinded. At this time, we believe all relevant parties have been joined to the Sara Lee Litigation and the
District Court for the District of Columbia will review the PBGCs administrative determination.
On November 22, 2006, the ABA Plan and the Board of Trustees filed a motion in the bankruptcy court
seeking an order requiring IBC to file an application with the Internal Revenue Service requesting
a waiver of the minimum funding requirements applicable to the ABA Plan or, in the alternative,
make $3.9 million of contributions to the ABA Plan no later than June 15, 2007. On December 8,
2006, the Bankruptcy Court denied the ABA motion.
We record accruals for contingencies, such as legal proceedings, in accordance with SFAS No. 5,
Accounting for Contingencies. See Note 2. Description of Business and Significant Accounting
Policies to our consolidated financial statements for more information. In addition, we are subject
to various other routine legal proceedings, environmental actions and matters in the ordinary
course of business, some of which may be covered in whole or in part by insurance. Except for the
matters disclosed herein, we are not aware of any other items as of this filing which could have a
material adverse effect on our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. As a result of our Chapter 11 filing, the Company has not held an Annual or
Special Stockholders Meeting since September 2003.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to our bankruptcy filing, our common stock was listed on the New York Stock Exchange, or
NYSE, and was traded under the symbol IBC. On September 23, 2004, we received written notice from
the NYSE that our common stock would be delisted from the NYSE immediately in accordance with
Section 802.00 of the NYSE Listed Company Manual. The NYSE indicated in a press release issued
September 23, 2004 that application to the Securities and Exchange Commission to delist our common
stock was pending the completion of applicable procedures. The NYSE stated that the delisting
determination followed its review of our September 22, 2004 press release announcing that we had
filed cases under Chapter 11 of the Bankruptcy Code. The NYSE further noted the
overall uncertainty surrounding the bankruptcy process and the current delay in the filing of our
audited financial statements for the fiscal year 2004 due to the previously announced restatement,
financial reporting and other issues. As a result, our common stock now trades on the
over-the-counter market under the symbol IBCIQ.PK.
31
As of December 6, 2006, we had issued and outstanding 45,285,314 shares of our common stock, which
were held of record by 2,854 persons (excluding account holders in our 1991 Employee Stock Purchase
Plan). Giving effect to our senior subordinated convertible notes, common stock equivalents, we had
issued and outstanding 55,183,755 shares of our common stock as of December 6, 2006.
The table below presents the range of high and low closing sales prices of our common stock by
quarter for each fiscal quarter in fiscal 2006 and 2005, as well as the dividends paid on our stock
in each such quarter:
Stock Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Quarter |
|
High |
|
Low |
|
Cash Dividends |
2006 |
|
|
1 |
|
|
$ |
11.85 |
|
|
$ |
5.95 |
|
|
|
|
|
|
|
|
2 |
|
|
|
11.95 |
|
|
|
8.55 |
|
|
|
|
|
|
|
|
3 |
|
|
|
8.40 |
|
|
|
6.45 |
|
|
|
|
|
|
|
|
4 |
|
|
|
9.80 |
|
|
|
7.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
1 |
|
|
$ |
11.05 |
|
|
$ |
7.50 |
|
|
|
|
|
|
|
|
2 |
|
|
|
8.19 |
|
|
|
2.05 |
|
|
|
|
|
|
|
|
3 |
|
|
|
6.75 |
|
|
|
4.05 |
|
|
|
|
|
|
|
|
4 |
|
|
|
6.63 |
|
|
|
4.75 |
|
|
|
|
|
In March 2004, our Board of Directors suspended dividend payments on our common stock effective for
the fourth quarter of fiscal 2004. The decision was made as a result of our cash flow shortfall due
to recent operating performance in bread sales. Under the DIP Facility, we are prohibited from
paying dividends.
On August 12, 2004, we also issued $100.0 million aggregate principal amount of our 6.0% senior
subordinated convertible notes due August 15, 2014 in a private placement to six institutional
accredited investors under an exemption from registration pursuant to Rule 506 of Regulation D
promulgated by the SEC. Purchasers received an option to purchase in the aggregate up to $20.0
million in additional notes for a period of 60 days following the closing, which was not exercised.
The convertible notes were purchased by Highbridge International LLC, Isotope Limited, AG Domestic
Convertibles LP, Shepherd Investments International, Ltd., AG Offshore Convertibles LTD, and Stark
Trading. The notes are convertible at the option of the holder under certain circumstances into
shares of our common stock at an initial conversion rate of 98.9854 shares per $1,000 principal
amount of notes (an initial conversion price of $10.1025 per share), subject to adjustment. We used
the net proceeds of the offering to prepay our principal payments due under our senior secured
credit facility over the course of the next four quarters and for general corporate purposes,
improving our near-term liquidity and financial flexibility.
See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters below for a further discussion regarding equity compensation plan information.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Since May 11, 1999, our Board of Directors has authorized the purchase of approximately 11.0
million shares of our common stock. Prior to the Chapter 11 filing, management had the discretion
to determine the number of the shares to be purchased, as well as the timing of any such purchases,
with the pricing of any shares repurchased to be at prevailing market prices. As of June 3, 2006,
7,396,688 shares of our common stock were available to be purchased under this stock
repurchase program. As a result of our Chapter 11 filing and restrictions imposed by the DIP
Facility, however, the program has effectively been suspended since the filing.
32
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
|
Shares (or Units) |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
|
Value) of Shares (or |
|
|
|
Total Number of |
|
|
Average Price |
|
of Publicly |
|
|
Units) that May Yet Be |
|
|
|
Shares (or Units) |
|
|
Paid per Share |
|
Announced Plans |
|
|
Purchased Under the |
|
Period |
|
Purchased (A) |
|
|
(or Unit) |
|
or Programs |
|
|
Plans or Programs |
|
Period 1
May 29-June 25, 2005 |
|
|
7 |
|
|
$ |
6.30 |
|
|
|
7 |
|
|
|
7,396,835 |
|
Period 2
June 26-July 23, 2005 |
|
|
17 |
|
|
$ |
7.83 |
|
|
|
17 |
|
|
|
7,396,818 |
|
Period 3
July 24-Aug 20, 2005 |
|
|
11 |
|
|
$ |
11.12 |
|
|
|
11 |
|
|
|
7,396,807 |
|
Period 4
Aug 21-Sept 17, 2005 |
|
|
24 |
|
|
$ |
10.64 |
|
|
|
24 |
|
|
|
7,396,783 |
|
Period 5
Sept 18-Oct 15, 2005 |
|
|
22 |
|
|
$ |
9.72 |
|
|
|
22 |
|
|
|
7,396,761 |
|
Period 6
Oct 16-Nov 12, 2005 |
|
|
5 |
|
|
$ |
9.00 |
|
|
|
5 |
|
|
|
7,396,756 |
|
Period 7
Nov 13-Dec 10, 2005 |
|
|
9 |
|
|
$ |
8.15 |
|
|
|
9 |
|
|
|
7,396,747 |
|
Period 8
Dec 11, 2005-Jan 7, 2006 |
|
|
13 |
|
|
$ |
7.44 |
|
|
|
13 |
|
|
|
7,396,734 |
|
Period 9
Jan 8-Feb 4, 2006 |
|
|
5 |
|
|
$ |
7.00 |
|
|
|
5 |
|
|
|
7,396,729 |
|
Period 10
Feb 5-March 4, 2006 |
|
|
12 |
|
|
$ |
7.12 |
|
|
|
12 |
|
|
|
7,396,717 |
|
Period 11
March 5-April 1, 2006 |
|
|
9 |
|
|
$ |
7.70 |
|
|
|
9 |
|
|
|
7,396,708 |
|
Period 12
April 2-April 29, 2006 |
|
|
4 |
|
|
$ |
8.15 |
|
|
|
4 |
|
|
|
7,396,704 |
|
Period 13
April 30-June 3, 2006 |
|
|
16 |
|
|
$ |
8.72 |
|
|
|
16 |
|
|
|
7,396,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
154 |
|
|
$ |
8.72 |
|
|
|
154 |
|
|
|
7,396,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A) |
|
Repurchases resulted from the repurchase of fractional shares upon
issuance of certificates representing stock held in the Employee
Stock Purchase Plan. This plan was terminated in conjunction with
the Bankruptcy filing in September 2004. |
33
ITEM 6. SELECTED FINANCIAL DATA
INTERSTATE BAKERIES CORPORATION
FIVE-YEAR SUMMARY OF FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
May 31, |
|
|
June 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(1) |
|
|
(4) (5) |
|
|
(6) |
|
|
(7) |
|
|
(8) |
|
|
|
(dollars and shares in thousands, except per share data) |
Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,060,473 |
|
|
$ |
3,403,505 |
|
|
$ |
3,467,562 |
|
|
$ |
3,525,780 |
|
|
$ |
3,531,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold (exclusive of
depreciation and amortization) (3) |
|
|
1,552,731 |
|
|
|
1,724,054 |
|
|
|
1,733,303 |
|
|
|
1,739,746 |
|
|
|
1,676,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(56,368 |
) |
|
|
(335,536 |
) |
|
|
(18,326 |
) |
|
|
70,276 |
|
|
|
143,838 |
|
% of net sales |
|
|
(1.8 |
)% |
|
|
(9.8 |
)% |
|
|
(0.5 |
)% |
|
|
2.0 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of
accounting change |
|
$ |
(127,300 |
) |
|
$ |
(379,280 |
) |
|
$ |
(33,370 |
) |
|
$ |
18,727 |
|
|
$ |
67,100 |
|
Cumulative effect of accounting change (2) |
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(128,317 |
) |
|
$ |
(379,280 |
) |
|
$ |
(33,370 |
) |
|
$ |
18,727 |
|
|
$ |
67,100 |
|
% of net sales |
|
|
(4.2 |
)% |
|
|
(11.1 |
)% |
|
|
(1.0 |
)% |
|
|
0.5 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share before cumulative
effect of accounting change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.82 |
) |
|
$ |
(8.43 |
) |
|
$ |
(0.74 |
) |
|
$ |
0.42 |
|
|
$ |
1.34 |
|
Diluted |
|
|
(2.82 |
) |
|
|
(8.43 |
) |
|
|
(0.74 |
) |
|
|
0.41 |
|
|
|
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends per share |
|
|
|
|
|
|
|
|
|
|
0.21 |
|
|
|
0.28 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
45,124 |
|
|
|
45,010 |
|
|
|
44,868 |
|
|
|
44,599 |
|
|
|
50,091 |
|
Diluted |
|
|
45,124 |
|
|
|
45,010 |
|
|
|
44,868 |
|
|
|
45,185 |
|
|
|
51,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,253,055 |
|
|
$ |
1,398,650 |
|
|
$ |
1,673,797 |
|
|
$ |
1,697,349 |
|
|
$ |
1,654,716 |
|
Long-term debt, excluding current maturities (9) |
|
|
|
|
|
|
|
|
|
|
10,362 |
|
|
|
536,788 |
|
|
|
588,610 |
|
Stockholders equity (deficit) |
|
|
(240,583 |
) |
|
|
(116,924 |
) |
|
|
261,708 |
|
|
|
290,430 |
|
|
|
274,343 |
|
|
|
|
(1) |
|
Fiscal 2006 operating loss includes net restructuring credits of
approximately $27.2 million, or $0.60 per diluted share, relating to
gains realized on the sale of the restructuring related assets
partially offset by costs related to certain closings and
restructurings of bakeries, depots and bakery outlets; and a machinery
and equipment impairment of approximately $4.8 million, or $0.11 per
diluted share. |
|
(2) |
|
In Fiscal 2006, as a result of adopting FIN 47, we recorded a
cumulative effect of an accounting change of approximately $1.0
million, $0.02 per share, and a liability of the same amount as the
related asset values were fully depreciated as of June 3, 2006. |
|
(3) |
|
Depreciation and amortization excluded from cost of products sold
amounted to approximately $59.7 million, $70.2 million, $71.6 million,
$72.7 million, and $72.8 million in fiscal 2006, 2005, 2004, 2003, and
2002, respectively. |
|
(4) |
|
Fiscal 2005 operating loss includes goodwill and other intangible
asset impairments of approximately $229.5 million, or $5.10 per
diluted share; restructuring charges of approximately $54.3 million,
or $1.21 per diluted share, relating to the closures of five bakeries,
a general workforce reduction and other cost reductions; settlement of
class action litigation of approximately $8.7 million, or $0.19 per
diluted share; and a curtailment loss from the suspension of our
Supplemental Employee Retirement Plan of $12.4 million or $0.28 per
diluted share. |
|
(5) |
|
Fiscal 2005 net loss includes a tax valuation allowance adjustment of
$5.6 million, or $0.13 per diluted share, related to deferred tax
assets originating in prior years. |
|
(6) |
|
Fiscal 2004 operating loss includes restructuring charges of
approximately $12.1 million, or $0.17 per diluted share, relating to
the closures of three bakeries, severance costs in connection with the
centralization of certain finance and data maintenance administrative
functions and the |
34
|
|
|
|
|
relocation of certain key management employees in
conjunction with our new more centralized organizational structure and
settlement of class action litigation of approximately $3.0 million,
or $0.04 per diluted share. |
|
(7) |
|
Fiscal 2003 operating income includes restructuring charges of
approximately $9.9 million, or $0.14 per diluted share, relating to
certain closings and restructurings of bakeries and bakery outlets and
other charges of approximately $3.6 million, or $0.05 per diluted
share, relating to the common stock award made on October 1, 2002 to
IBCs retiring Chief Executive Officer. |
|
(8) |
|
Fiscal 2002 operating income includes other charges of $25.7 million,
amounting to $0.31 per diluted share, related to the closure of a
bakery and the settlement of employment discrimination litigation. |
|
(9) |
|
In fiscal 2006, 2005, and 2004, we have reflected the total amount due
under our senior secured credit facility agreement as amounts payable
within one year due to our default under this facility. See Note 1.
Voluntary Chapter 11 Filing to our consolidated financial statements
regarding going concern considerations. |
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
Interstate Bakeries Corporation is one of the largest wholesale bakers and distributors of fresh
baked bread and sweet goods in the United States, producing, marketing, distributing and selling a
wide range of breads, rolls, croutons, snack cakes, donuts, sweet rolls and related products. Our
various brands are positioned across a wide spectrum of consumer categories and price points. We
operate 45 bakeries and approximately 830 bakery outlets located in strategic markets throughout
the United States. Our sales force delivers baked goods from approximately 800 distribution centers
on approximately 6,400 delivery routes.
In fiscal 2003, we commenced a major, company-wide project internally referred to as Program SOAR,
an acronym for Systems Optimization And Re-engineering. This program was focused on re-engineering
our business processes to increase efficiency, centralizing our management and administrative
functions from the current decentralized model and on rationalizing our investment in production,
distribution and administrative functionality to reduce the ongoing cost of supporting these
infrastructures. Subsequent to our Chapter 11 filing, in an effort to conserve resources and focus
on restructuring our business model, we made the determination to postpone our Program SOAR efforts
indefinitely. In January 2006, the Company decided to resume implementation of the project to
upgrade our current payroll and human resource system, which was originally part of Program SOAR.
Our net sales are affected by various factors, including our marketing programs, competitors
activities and consumer preferences. We recognize sales, net of estimated credits for dated and
damaged products, when our products are delivered to our customers.
Our cost of products sold consists of labor costs, ingredients, packaging, energy and other
production costs. The primary ingredients used in producing our products are flour, sweeteners,
edible oils, yeast, cocoa and the ingredients used to produce our extended shelf life products.
Our selling, delivery and administrative expenses include the employee costs and transportation
costs of delivering our product to our customers; the employee costs, occupancy and other selling
costs of our bakery outlets; the costs of marketing our products and other general sales and
administrative costs not directly related to production.
We end our fiscal year on the Saturday closest to the last day of May. Consequently, most years
contain 52 weeks of operating results while every fifth or sixth year includes 53 weeks. In
addition, each quarter of our fiscal year represents a period of 12 weeks, except the third
quarter, which covers 16 weeks, and the fourth quarter of any 53-week year, which covers 13 weeks.
Our financial statements are prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business, but our Chapter 11
filing raises substantial doubt about our ability to continue as a going concern. Our continuation
as a going concern is dependent upon, among other things, our ability to evaluate various
alternatives including the sale of some or all of our assets, infusion of capital, debt
restructuring and the development, confirmation and implementation of a plan of reorganization, our
ability to
35
comply with the terms of the DIP Facility, our ability to obtain financing upon exit from
bankruptcy and our ability to generate sufficient cash from operations to meet our obligations and
any combination of these factors. In the event our restructuring activities are not successful and
we are required to liquidate, additional significant adjustments would be necessary in the carrying
value of assets and liabilities, the revenues and expenses reported and the balance sheet
classifications used.
Further, a plan of reorganization could materially change the amounts and classifications reported
in the consolidated financial statements, which do not give effect to any adjustments to the
carrying value or the classification of assets or liabilities that might be necessary as a
consequence of a plan of reorganization.
RECENT DEVELOPMENTS
As more fully described in Item 1. Business Proceedings Under Chapter 11 of the Bankruptcy
Code, on September 22, 2004, we filed voluntary petitions for reorganization under the Bankruptcy
Code in the Bankruptcy Court. On September 24, 2004, the official committee of unsecured creditors
was appointed in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee
of equity security holders was appointed in our Chapter 11 cases. On January 14, 2006, Mrs.
Cubbisons, a subsidiary of which we are an eighty percent owner, filed a voluntary petition for
relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). We are currently
operating our businesses as a debtor-in-possession pursuant to the Bankruptcy Code. We are in the
process of stabilizing our businesses and evaluating our operations in connection with the
development of a plan of reorganization. As part of our restructuring efforts we are evaluating
various alternatives including, but not limited to, the sale of some or all of our assets, infusion
of capital, debt restructuring and the filing of a plan of reorganization with the Bankruptcy
Court, or any combination of these options. In the event that we develop a plan of reorganization,
we would seek the requisite acceptance of the plan by creditors, equity holders and third parties
and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable
provisions of the Bankruptcy Code.
As a result of the filing, our creditors were automatically stayed from taking certain enforcement
actions under their respective agreements with us unless the stay is lifted by the Bankruptcy
Court. In addition, we have entered into the DIP Facility, which is more fully described below. All
of our pre-petition debt is now in default due to the filing. During the Chapter 11 process, we may, with Bankruptcy Court approval, sell assets and settle
liabilities, including for amounts other than those reflected in our financial statements. As of
December 6, 2006, we have rejected over 420 unexpired leases. We are in the process of reviewing
our executory contracts and remaining unexpired leases to determine which, if any, we will reject
as permitted by the Bankruptcy Code. We cannot presently estimate the ultimate liability that may
result from rejecting contracts or leases or from the filing of claims for any rejected contracts
or leases, and no provisions have yet been made for these items. The administrative and
reorganization expenses resulting from the Chapter 11 process will and have unfavorably affected
our results of operations. Future results of operations may also be affected by other factors
related to the Chapter 11 process.
Profit Center Review
As part of our previously announced operational and financial restructuring, in fiscal 2006, we
took the following actions:
On June 9, 2005, we announced plans to consolidate operations in our Northern California PC by
closing two bakeries in San Francisco and consolidating production, routes, depots and bakery
outlets. At the date of the announcement, we estimated this restructuring would affect
approximately 650 employees with projected severance costs of approximately $6.0 million, projected
asset impairment charges of approximately $2.5 million, and other projected exit costs of
approximately $5.0 million for a total estimated cost of approximately $13.5 million.
On June 23, 2005, we announced plans to consolidate operations in our Southern California PC by
standardizing distribution and consolidating routes. At the date of the announcement, we estimated
this restructuring would affect approximately 350 employees with projected severance costs of
approximately $1.5 million, no asset impairment charges, and other projected exit costs of
approximately $1.0 million for a total estimated cost of approximately $2.5 million.
36
On August 31, 2005, we announced plans to close the bakery located in Davenport, Iowa in the North
Central PC. At the date of the announcement, we estimated this closing would affect approximately
150 employees with projected severance costs of approximately $1.5 million, projected asset
impairment charges of approximately $2.0 million, and other projected exit costs of approximately
$1.5 million for a total estimated cost of approximately $5.0 million.
On October 18, 2005, we announced plans to consolidate operations in our Northwest PC by closing
the Lakewood, Washington bakery and consolidating routes, depots and bakery outlets. At the date of
the announcement, we estimated this restructuring would affect approximately 500 employees with
projected severance costs of approximately $2.5 million, projected asset impairment charges of
approximately $12.0 million, and other projected exit costs of approximately $2.5 million for a
total estimated cost of approximately $17.0 million.
On November 22, 2005, we announced our intention to consolidate sales and retail operations in the
North and South Central PCs as well as the Southeast PC by standardizing distribution and
consolidating delivery routes and bakery outlets. At the date of the announcement, we estimated
this restructuring would affect approximately 450 employees with projected severance costs of
approximately $1.0 million, no asset impairment charges, and other projected exit costs of
approximately $2.0 million for a total estimated cost of approximately $3.0 million.
On February 27, 2006, we announced our intention to consolidate sales and retail operations in the
Upper Midwest PC by consolidating delivery routes, depots, and bakery outlets. At the date of the
announcement, we estimated this restructuring would affect approximately 230 employees with
projected severance costs of approximately $0.4 million, projected asset impairment charges of
approximately $0.1 million, and other projected exit costs of approximately $0.2 million for a
total estimated cost of approximately $0.7 million.
See Note 15. Restructuring (Credits) Charges to our consolidated financial statements for actual
fiscal year 2006 costs incurred, as well as expected remaining costs, related to the fiscal 2006 PC
review.
Labor Union Negotiations
On October 18, 2005, we reached agreement with the International Brotherhood of Teamsters (IBT)
local bargaining units within our Northeast PC to modify and extend through July 31, 2010, the
existing collective bargaining agreements (CBAs) that govern the covered IBT members employment
relationship with us. Since this initial agreement, we have commenced negotiations of long-term
extensions with respect to most of our approximately 420 CBAs with our union-represented employees
resulting in ratification by employees or agreements reached in principle, subject to ratification
by employees, of approximately 315 CBAs. In total, these CBAs cover approximately 86% of our
unionized workforce. We hope to negotiate similar agreements with our remaining collective
bargaining units, although there are no assurances that the CBA negotiation process will proceed in
the same time frame or fashion as it has to date. In addition, because the framework for the
agreements was initially fashioned based upon operating assumptions made during the early stages of
the PC restructuring process, it is possible that, if actual results do not meet expectations,
these agreements (which remain subject to assumption or rejection in the Chapter 11 case) may need
to be revisited and additional concessions may be necessary.
Stockholder Action
On October 30, 2006, Brencourt Advisors, LLC (Brencourt), a stockholder of the Company, filed a
complaint in the Court of Chancery of the State of Delaware for New Castle County, captioned
Brencourt Advisors LLC v. Interstate Bakeries Corporation, C.A. No. 2506-N (the Delaware Action).
The Delaware Action seeks to compel us pursuant to Section 211 of the Delaware General Corporation
Law to convene an annual meeting of stockholders for the purpose of electing directors. We have
not held an annual meeting of stockholders since September 23, 2003.
On November 29, 2006, we filed a motion with the Bankruptcy Court in response to the Brencourt
Delaware Action. The motion we filed with the Bankruptcy Court seeks (i) to have the Bankruptcy
Court confirm our Board of Directors to be the nine individuals currently serving as members of our
Board of Directors and (ii) an injunction from the Bankruptcy Court ordering Brencourt to cease the
prosecution of the Delaware Action.
37
The trial of the Delaware Action in the Court of Chancery is scheduled for December 27, 2006. If
that trial proceeds, we expect that the Court of Chancery will compel us to hold an annual meeting
during the first three months of 2007. However, the Bankruptcy Court has scheduled a hearing date
of December 21, 2006 for our motion in response to the Delaware Action. There can be no assurance
that the Bankruptcy Court will grant us the relief that we seek in that motion, including the
injunction preventing Brencourt from continuing the Delaware Action. If the Delaware Action is
allowed to proceed and we are compelled to hold an annual meeting of stockholders, the election of
directors at such meeting could result in a change of control of the majority of our Board of
Directors. This change of control could adversely affect the success of our restructuring process,
as well as our financial condition, results of operations and cash flows. Such a change would
constitute an event of default under the DIP Facility and trigger significant claims under
management continuity agreements with certain of our key senior executives in the event any of
these executives is terminated within two years of the change in control.
In addition, the uncertainty created by the threat of a change of control of our Board of Directors
as contemplated by the Delaware Action is undermining (i) our permanent CEO search process, (ii)
the development of a credible long-term business plan for the Company based on current results,
(iii) the exploration of potential availability of financing for the Company to facilitate a plan
of reorganization to emerge from Chapter 11, (iv) our ability to regain lost customers and take
advantage of new business opportunities and (v) the availability of adequate credit terms from our
vendors and creditors. These activities are vital components of our restructuring process, and if
such uncertainty persists, it could have an adverse affect on the success of our restructuring
process, as well as our financial condition, results of operations and cash flows.
We are currently in discussions with the major constituent groups
in our Chapter 11 proceedings to arrive at a consensual resolution that would
result in the dismissal of the Delaware Action and a modification of our motion filed
in the Bankruptcy Court in response to the Delaware Action. The consensual resolution being
discussed contemplates that our modified motion would seek an order of the Bankruptcy Court
reconstituting the Board of Directors to consist of several new members as well as several
existing members of our Board of Directors. While there can be no assurance that a consensual
resolution will be reached, if the parties are able to agree and the Bankruptcy Court grants
the requested order on a reasonably prompt basis, we expect that the risks presented by the
Delaware Action discussed above would no longer pose a significant threat to our restructuring
process or our financial condition, results of operations and cash flows.
OVERVIEW OF CERTAIN TRENDS AND EVENTS AFFECTING OPERATIONS, FINANCIAL POSITION AND LIQUIDITY
We have experienced a significant decline in the demand for our products in recent years. Data from
IRI indicates that the declining trend in bread and sweet goods was broadly evident in the industry
in 2004, 2005 and 2006. During fiscal 2004, 2005 and 2006, our revenues, total unit volumes of
branded bread and unit volumes of branded sweet goods all declined. We continue to experience
reduced demand for our products in fiscal 2007 and expect that this trend will continue.
In light of our declining revenue and the significant upward cost pressure we are experiencing,
discussed in more detail below, we have undertaken a detailed review of the competitive environment
in all of our markets and for all of our product lines, including sweet goods, bread and buns and
rolls, and implemented a significant price increase in many of our products and across virtually
all markets in the fourth quarter of 2006 and second quarter of fiscal 2007. We cannot assure you
that these steps will be effective in addressing declines in our revenues or maintaining our
operating margins or will fully offset the cost pressure we are experiencing.
While consumer interest in low carbohydrate diets in 2004 and 2005 has historically contributed to
the reduced demand for our products, IRI has reported declining sales of low carbohydrate bread
products since February 2004 and we believe that the popularity of the low carbohydrate diet
phenomenon is waning. However, we believe that the low carbohydrate trend, as well as the recent
national awareness regarding obesity trends in children and adults and related issues, has had an
impact on the eating habits of many consumers and, as a result, consumers have changed and will
continue to change their consumption of bread products and sweet goods. While the long-term impact
of consumers concerned about eating habits, including consumption of carbohydrates, calories, and
fat is still unclear, changes in consumption habits could impact demand for our products going
forward.
In addition, new dietary guidelines could result in further reduced demand for our products. The
Department of Health and Human Services and Department of Agriculture released the 2005 Dietary
Guidelines for Americans in January 2005. The Guidelines provide dietary advice aimed at promoting
health and reducing the risk for major chronic diseases, and serve as the basis for federal food
and nutrition education programs. The guidelines recommend limiting the intake of saturated and
trans fats, cholesterol, added sugar, salt and alcohol. Although virtually all of our bread
products and such key iconic Hostess sweet goods as Twinkies, Cupcakes and HoHos will have the 0
grams trans fat label under the Food and Drug Administrations new labeling regulations that
became effective January 1, 2006, certain of our products, primarily those that are fried or
Kosher, will have an amount of trans fat declared on the products label. With respect to our new
product offerings, we intend to introduce only those new products that can properly be labeled with
the 0 grams trans fat declaration to assist those consumers
38
concerned about their trans fat consumption. There can be no assurance that these and other actions
that we may take will offset the effect, if any, of the guidelines recommendation to reduce the
intake of saturated and trans fats and added sugar. The guidelines also recognize that whole grains
are an important source of fiber and nutrients and recommend an increased consumption of whole
grain products by substituting whole grain products for some enriched bread products. We have a
number of whole grain products among our product offerings. However, the substantial majority of
our bread revenues are from the sale of white bread and other refined grain bread products. There
can be no assurance that, if consumers increase their consumption of whole grain products as a
result of the new guidelines, they will increase consumption of our whole grain product offerings
or that such consumption will offset any reduced consumption of our enriched bread products.
To address these and other market trends, increase sales and grow our earnings over time, we have
introduced new products. In the third quarter of fiscal 2006, we introduced nationally three new
white bread varieties, two of which incorporate a special 100% whole wheat flour milled from a
white wheat. These varieties are targeted to people who prefer the taste and texture of white bread
but who want to add more nutrition to their diets. In the first quarter of fiscal 2007, we
introduced Wonder Wheat and Wonder Honey Wheat, both of which have
whole grains. In the
second quarter of fiscal 2007, we re-launched our line of super premium breads under the Bakers
Inn label. The re-launch included six full-sized loaves, in varieties including 100% Whole Wheat
and Seven Grain; three short-sized loaves, in varieties including Cracked Wheat and Made with Whole
Grain Rye, as well as new packaging. The short loaves are targeted to smaller households as well
as families who prefer to have a variety of breads in the kitchen. Beginning in fiscal 2006, we
also began to devote significant resources to strengthening the marketing of our products. We have
hired new employees for our marketing department and updated the packaging of our snack cake and
bread products. We plan to place a greater emphasis on regular sweet goods promotions and are
considering ways to expand our existing product lines to appeal to changing consumer tastes.
We also face increasingly intense price competition. Declining unit sales in certain product
categories (such as the premium white bread and private label segments) and more efficient
production methods (including extended shelf life programs), have resulted in excess industry
capacity. This and retail channel consolidation have increased the bargaining leverage of wholesale
customers and resulted in increasingly intense price competition. Given the nature of the bakery
market, the success of our planned price increases will be highly dependent on the response of
consumers and our competitors.
Our production and distribution facilities represent substantial and largely fixed costs.
Relatively robust utilization is needed to break even, and past this break even point, an
increasing volume of production is normally increasingly profitable. The combined effects of recent
net sales and unit volume declines and the success of our extended shelf life programs have,
together with industry conditions described above, resulted in substantial unused capacity in our
system. As a consequence, and in connection with our comprehensive review of our operations to
determine the appropriate actions necessary to restructure our business following our Chapter 11
filing, we performed an exhaustive review of each of our PCs on an individual basis in order to
address continued revenue declines and our high-cost structure. In part to address the unused
capacity in our system, we have closed 10 bakeries since fiscal 2004. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations Profit Center Review
for a discussion of the PC review.
Our other costs include ingredients, packaging, energy and labor. The ingredients and energy used
to produce our products, and the energy used to distribute them (primarily motor vehicle fuels),
are commodities that are generally widely available and that fluctuate in price, sometimes rapidly.
We are unable to adjust product prices as often as the prices of these commodities change. In
recent periods, the prices of our ingredients (particularly flour and sugar), packaging and energy
have been generally increasing, reducing margins. Assuming current market conditions and
historically high fuel prices continue, we may experience higher commodity costs and we have only
limited protection against price increases. See Item 1. Business Sources and Availability of Raw
Materials for a discussion of our utilization of commodity hedging derivatives to reduce our
exposure to commodity price movements for future ingredient and energy needs. However, there can be
no assurance that our hedging strategies will be successful in mitigating fluctuations in the
prices of such commodities.
Our largest cost is labor. As with many other highly unionized businesses, our labor costs have
been rising. Since a very substantial portion of the workforce in our bakeries and distribution
networks is unionized, our costs are generally higher and our ability to implement productivity
improvements and effect savings with respect to health
39
care, pension and other retirement costs is more restricted than in many nonunion operations as a
result of various restrictions specified in our collective bargaining agreements. Where possible,
we are taking steps to affect economies. For example, in connection with the PC review process, we
have modified and extended approximately 275 IBT and BCT collective bargaining agreements, and
approximately an additional 40 have been negotiated subject to documentation and ratification by
the affected employees, together affecting approximately 86% of our unionized workers, to provide
for increased savings with respect to wages and benefit obligations. While we are continuing to
negotiate similar agreements with other IBT and BCT locals, there can be no assurance that the
terms of any additional modified agreements will be on as favorable terms or that those agreements
not yet ratified by the affected employees will be ratified. The collective bargaining agreements
with our unions also stipulate the amount of contributions that we and other companies must make to
union-sponsored, multi-employer pension plans in which our employees participate and, as a result,
we may be obligated to make additional contributions or incur withdrawal liability with respect to
such plans, as more fully discussed in Item 1A. Risk Factors.
As of November 18, 2006, we had approximately 84.0 million in available cash and 77.8 million
available for borrowing under the DIP Facility. This compares to the $78.2 million in available
cash and $90.1 million available for borrowing under the DIP Facility as of June 3, 2006. We
cannot assure you that the amount of cash available from operations and from our DIP Facility will
be sufficient to fund operations until such time as we are able to propose a plan of reorganization
that will receive the requisite acceptance by creditors, equity holders and parties in interest and
be confirmed by the Bankruptcy Court. In the event that cash flows and available borrowings under
the DIP Facility are not sufficient to meet our cash requirements, we may be required to seek
additional financing. In addition, the maturity date of the DIP Facility has been extended from
September 22, 2006 to June 2, 2007. We can provide no assurance that we will be able to negotiate a
further extension of the maturity date with our lenders or that additional or replacement financing
will be available prior to or following the DIP Facility maturity date or, if available, offered on
acceptable terms. Failure to obtain such extension or additional or replacement financing will
have a material adverse impact on our ability to operate as a going concern.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements included herein have been prepared assuming we can continue
as a going concern. Because of the Chapter 11 process and the circumstances leading to the
bankruptcy filing, it is possible that we may not be able to continue as a going concern.
Our significant accounting policies are discussed in Note 2. Description of Business and
Significant Accounting Policies to our consolidated financial statements. The preparation of our
consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the
amounts reported in our consolidated financial statements and related notes. These estimates and
assumptions are evaluated on an on-going basis and are based upon many factors, including
historical experience, consultation with outside professionals, such as actuaries, and managements
judgment. Actual results could differ from any estimates made and results could be materially
different if different assumptions or conditions were to prevail.
We believe the following represents our critical accounting policies and estimates, involving those
areas of financial statement preparation which are most important to the portrayal of our financial
condition and results and which require managements most difficult, subjective and complex
judgments.
Reserves for self-insurance and postretirement benefits. We maintain insurance programs covering
our exposure to workers compensation, general and vehicle liability and health care claims. Such
programs include the retention of certain levels of risks and costs through high deductibles and
other risk retention strategies. Reserves for these exposures are estimated for reported but unpaid
losses, as well as incurred but not reported losses, for our retained exposures and are calculated
based upon actuarially determined loss development factors as well as other assumptions considered
by management, including assumptions provided by our external insurance brokers, consultants and
actuaries. The factors and assumptions used for estimating reserves are subject to change based
upon historical experience, changes in expected cost and inflation trends, discount rates and other
factors.
The reserves, including both the current and long-term portions, as well as the portion included in
liabilities subject to compromise, recorded by us for these liabilities amounted to approximately
$305.6 million and $313.2 million at June 3, 2006 and May 28, 2005, respectively.
40
Pension obligations. We record the pension cost and the liability related to our defined benefit
plan and the ABA Plan based on actuarial valuations. These valuations include key assumptions
determined by management, including discount rate and expected long-term rate of return on plan
assets. The expected long-term rate of return assumption considers the asset mix of the plan
portfolio, past performance of these assets and other factors. Changes in pension cost may occur in
the future due to changes in the number of plan participants, changes in discount rate, changes in
the expected long-term rate of return, changes in the level of contributions to the plan and other
factors, including recent pension reform legislation. Due to lack of historical data, we have
immediately recognized the impacts of all prior service costs, plan amendments, and actuarial gains
(losses) associated with ABA Plan.
Our pension liabilities for these plans, including both the current and long-term portions,
amounted to approximately $62.2 million and $70.9 million at June 3, 2006 and May 28, 2005,
respectively.
Long-lived assets. Property and equipment purchases are recorded at cost or fair market value when
acquired as part of a business acquisition. These assets are depreciated based on useful lives,
developed by historical experience and managements judgment.
We periodically assess the net realizable value of our long-lived assets. The assessment of our
intangible assets with indefinite lives is performed at least on an annual basis but more
frequently whenever events occur which indicate that the carrying value of an asset may be impaired
as these assets are not amortized. The assessment of all other long lived assets is performed only
when an event occurs which indicates the carrying value of the asset may be impaired. This
assessment involves comparing the assets estimated fair value to its carrying value, with the
impairment loss measured as the amount by which the carrying value exceeds the fair value of the
asset.
In fiscal 2006, we tested for impairment our intangible assets and our long-lived asset groups.
Based upon the results of our testing, we determined that the carrying value of one asset group
exceeded our estimate of the related fair value. Accordingly, we recorded an impairment loss of
approximately $4.8 million related to the machinery and equipment in that asset group.
During fiscal 2005, we performed impairment tests on our goodwill and other intangible assets which
resulted in the write-off of all of our goodwill in the amount of $215.3 million and $27.1 million
of our other intangible assets.
When we plan to dispose of property by sale, the asset is carried in the financial statements at
the lower of the carrying amount or estimated fair value, less cost to sell, and is reclassified to
assets held for sale. Additionally, after such reclassification, there is no further depreciation
taken on the asset. In order for an asset to be classified as held for sale, management must
approve and commit to a formal plan, the expected sale must be completed during the ensuing year,
the asset must be actively marketed, be available for immediate sale, and meet certain other
specified criteria.
Long-lived assets recorded in our consolidated financial statements at June 3, 2006, include
approximately $601.1 million of net property and equipment, $11.9 million of assets held for sale
and $161.1 million of other intangible assets. At May 28, 2005, our consolidated financial
statements include approximately $705.4 million of net property and equipment, $10.6 million of
assets held for sale and $162.0 million of other intangible assets.
Restructuring (credits) charges. Costs associated with any plan to restructure our operational
infrastructure are generally identified and reported as restructuring charges in our consolidated
statements of operations. These restructuring efforts include the closure of a bakery; the partial
shut down of a bakerys production; the closing of distribution and bakery outlet operations;
relocation of bakery equipment, production or distribution to another facility; centralization of
work effort and other organizational changes.
Management judgments are made with regard to the incurrence of restructuring-related liabilities,
as well as impairment of long-term assets as described above. Subsequent gains and losses on the
sale of such assets are also included in restructuring (credits) charges. We incurred
restructuring (credits) charges during fiscal 2006, 2005, and 2004 and anticipate additional
(credits) charges in future years in connection with our restructuring efforts.
41
Income taxes. The amount of income taxes we pay is subject to periodic audits by federal, state and
local tax authorities, which from time to time result in proposed assessments. Our estimate for the
potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately
provided for any reasonable foreseeable outcome related to these matters. However, our future
results may include favorable or unfavorable adjustments to our estimated tax liabilities in the
period the assessments are made or resolved, or when statutes of limitation on potential
assessments expire. We provide a valuation allowance against deferred tax assets, if, based on
managements assessment of operating results and other available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized.
Legal reserves. We are periodically involved in various legal actions. We are required to assess
the probability of any adverse judgments as well as the potential range of loss. We determine the
required accruals based on managements judgment after a review of the facts of each legal action
and the opinions of outside counsel.
Environmental liabilities. We are subject to certain environmental liabilities (see Governmental
Regulation; Environmental Matters). We have recorded our best estimate of our probable liability
under those obligations, with the assistance of outside consultants and other professionals. Such
estimates and the recorded liabilities are subject to various factors, including the allocation of
liabilities among other potentially responsible parties, the advancement of technology for means of
remediation, possible changes in the scope of work at the contaminated sites, as well as possible
changes in related laws, regulations and agency requirements.
Liabilities subject to compromise. Under bankruptcy law, actions by creditors to collect amounts we
owe prior to the Petition Date are stayed and certain other pre-petition contractual obligations
may not be enforced against us. All pre-petition obligations have been classified as liabilities
subject to compromise in the fiscal 2006 and 2005 consolidated balance sheets except for secured
debt and those other liabilities that we currently anticipate will not be impaired pursuant to a
confirmed plan of reorganization.
Reorganization charges. Reorganization items are expense or income items that we incurred or
realized because we are in bankruptcy. These items include professional fees and similar types of
expenses incurred directly related to the Chapter 11 proceedings, loss accruals or gains or losses
resulting from activities of the reorganization process, payroll related expenses to retain key
employees during our reorganization, costs and claims, which stem from the rejection of leases, and
interest earned on cash accumulated by us because we are not paying a substantial portion of our
pre-petition liabilities.
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 153, Exchanges of Nonmonetary Assets An Amendment of APB
Opinion No. 29 (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153 is effective for the first fiscal
period beginning after June 15, 2005, and was effective for us in the second quarter of fiscal
2006. The implementation of SFAS 153 did not have a significant impact on our consolidated
results of operations, cash flows, and financial position. |
In October 2005, the FASB issued FASB Staff Position (FSP) No. 13-1, Accounting for Rental Costs
Incurred during a Construction Period, (FSP 13-1), which requires companies to expense rental costs
associated with ground or building operating leases that are incurred during a construction period.
As a result, entities that are currently capitalizing these rental costs are required to expense
them beginning in its first reporting period commencing after December 15, 2005. FSP 13-1 was
effective for us as of the fourth quarter of fiscal 2006. Our leases are structured such that we
do not take possession and accordingly do not incur rental costs during the construction period and
therefore, the implementation of FSP 13-1 did not have an impact on our consolidated results of
operations, cash flows, and financial position.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset
Retirement Obligations an interpretation of FASB Statement No. 143 (FIN 47). This
interpretation clarifies the term conditional asset retirement obligation as used in SFAS No. 143
Accounting for Asset Retirement Obligations and requires a liability to be recorded if the fair
value of the obligation can be reasonably estimated. Asset retirement
42
obligations covered by this interpretation include those for which an entity has a legal obligation
to perform an asset retirement activity, however the timing and (or) method of settling the
obligation are conditional on a future event that may or may not be within the control of the
entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation.
We adopted FIN 47 on June 3, 2006. Upon initial application, FIN 47 requires recognition of (1) a
liability, adjusted for cumulative accretion from the date the obligation was incurred until the
date of adoption of FIN 47 for existing asset retirement obligations; (2) an asset retirement cost
capitalized as an increase to the carrying amount of the associated long-lived asset; and (3)
accumulated depreciation on the capitalized asset retirement cost with the net difference recorded
as a cumulative effect of a change in accounting principle.
We have conditional asset retirement obligations for the removal of underground storage tanks
(USTs) utilized for refined petroleum products. There is no obligation to remove USTs while they
remain in service. However, environmental laws require that unused USTs be removed within certain
periods of time after the USTs no longer remain in service, usually six months to three years
depending on the jurisdiction in which the USTs are located. As a result of adopting FIN 47, we
recorded a cumulative effect from retirement obligations for our 45 USTs of an accounting change of
approximately $1.0 million, $0.02 per share, and a liability of the same amount as the related
asset values were fully depreciated as of June 3, 2006. Had the adoption of FIN 47 occurred at the
beginning of the earliest period presented, our results of operations and loss per share would not
have been significantly different from the amounts reported. Accordingly, pro forma financial
information has not been provided.
We also have known conditional asset retirement obligations for asbestos remediation in many of our
bakery buildings, ovens, and depots. Environmental regulations require us to handle and dispose of
asbestos in a specific manner if the building or oven undergoes major renovations or is demolished.
Otherwise, we are not required to remove the asbestos. We have determined that our practice of
maintenance and improvements to our buildings and ovens has created indeterminate lives for the
purpose of estimating asset retirement obligations. We are presently operating four bakeries that
are in excess of one hundred years old and sixty percent of all of our bakeries are fifty years old
or older. We cannot estimate the fair value of our asset retirement obligations for the asbestos
in the 36 bakeries, as well as certain of our distribution
centers and outlets, we have determined contain asbestos due to the fact that information is not
available for us to reasonably estimate a date or range of dates over which these settlements may
occur. Notwithstanding the foregoing, we performed calculations assuming a demolition settlement,
with settlement dates ranging from 50 to 100 years. We determined that the present value of the net
liability and the annual accretion amounts, under these various scenarios, were not material to our
June 3, 2006 consolidated financial statements. A liability for these obligations will be recorded
in the period when sufficient information regarding timing and method of settlement becomes
available to make a reasonable estimate of the liabilitys fair value. Although we have conducted
a formal assessment in an effort to identify our asset retirement obligation, there may be
conditional asset retirement obligations that we have not yet discovered (e.g. asbestos may exist
in certain buildings or equipment), which has not been identified and therefore, these potential
obligations also have not been included in the consolidated financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (SFAS 158). SFAS 158 requires companies to recognize a net
liability or asset and an offsetting adjustment to accumulated other comprehensive income to report
the funded status of defined benefit pension and other postretirement benefit plans. SFAS 158
requires prospective application, and the recognition and disclosure requirements are effective for
the end of fiscal years ending after December 15, 2006, which will be effective for us in fiscal
2007. Additionally, SFAS 158 requires companies to measure plan assets and obligations at their
year-end balance sheet date. This requirement is effective for fiscal years ending after December
15, 2008 and will be effective for us in fiscal 2009. We are currently in the process of
evaluating the effects of the adoption of SFAS 158 on our consolidated results of operations, cash
flows, and financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for using fair value to measure assets and liabilities,
and expands disclosures about fair value measurements. This statement applies whenever other
statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 and will be
43
effective for us in fiscal 2009. We are currently in the process of evaluating the effects of the
adoption of SFAS 157 on our consolidated results of operations, cash flows, and financial position.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 108, Quantifying Financial Misstatements (SAB 108), which expresses the Staffs views
regarding the process of quantifying financial statement misstatements. Registrants are required
to quantify the impact of correcting all misstatements, including both the carryover and reversing
effects of prior year misstatements, on the current year financial statements. The financial
statements would require adjustment when either approach results in quantifying a misstatement that
is material, after considering all relevant quantitative and qualitative factors. SAB 108 is
effective for financial statements covering the first fiscal year ending after November 15, 2006
and will be effective for us in the fourth quarter of fiscal 2007. We
are currently in the process of evaluating the effects of the
adoption of SAB 108 on our consolidated results of operations, cash
flows and financial position.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is effective for us in fiscal 2008. FIN 48 clarifies the way that
companies account for uncertainty in income taxes by prescribing a consistent recognition threshold
and measurement attribute, as well as establishing criteria for subsequently recognizing,
derecognizing, and measuring such tax positions for financial statement purposes. The
interpretation also requires expanded disclosure with respect to uncertain income tax positions.
We are currently in the process of evaluating the effects of FIN 48 on our consolidated results of
operations, cash flows, and financial position.
In March 2006, the Emerging Issues Task Force (EITF) issued EITF Issue No. 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). A consensus was reached
that entities may adopt a policy of presenting sales taxes in the income statement on either a
gross or net basis. If taxes are significant, an entity should disclose its policy of presenting
taxes and the tax amounts. The guidance is effective for interim and annual reporting periods
beginning after December 15, 2006, which would be effective for us in the fourth quarter of fiscal
2007. We present retail sales net of sales taxes collected. This issue will not impact the method
for recording these sales taxes in our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154),
which replaces Accounting Principles Board Opinion (APB Opinion) No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting and reporting of a change in accounting principle. SFAS 154
requires that, when a company changes its accounting policies, it must apply the change
retrospectively to all periods presented instead of a cumulative effect adjustment in the period of
the change. SFAS 154 may also apply when the FASB issues new rules requiring changes in
accounting. However, if the new rule allows cumulative effect treatment, it would take precedence
over SFAS 154. This statement is effective for accounting changes and error corrections made in
fiscal years beginning after December 15, 2005. SFAS 154 will be effective for us in the first
quarter of fiscal 2007.
In December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based Payment (SFAS 123R),
which amends SFAS 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB Opinion 25). In April 2005, the Securities and Exchange Commission delayed the implementation
of SFAS 123R, which will be effective for public companies as of the first interim or annual
reporting period of the registrants first fiscal year that begins after June 15, 2005. Under the
new rule, SFAS 123R will become effective for us in the first quarter of fiscal 2007. Based on our
current outstanding stock options, the impact to our consolidated results of operations, cash
flows, and financial position as a result of implementing SFAS 123R is not expected to be
significant but could have a significant impact if we issue stock based compensation in future
periods.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs An Amendment of ARB No. 43,
Chapter 4 (SFAS 151). SFAS 151 is effective for fiscal years beginning after June 15, 2005, and is
effective for us in the first quarter of fiscal 2007. SFAS 151 amends the existing guidance on the
recognition of inventory costs to clarify the accounting for abnormal amounts of idle expense,
freight, handling costs, and wasted material (spoilage). Existing rules indicate that under some
circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period charges. SFAS 151
requires that those items be recognized as current period charges regardless of whether they meet
the criterion of so
44
abnormal. In addition, SFAS 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production facilities. We do not expect
SFAS 151 to have a material impact on our consolidated results of operations, cash flows, and
financial position.
RESULTS OF OPERATIONS
The following table sets forth, for fiscal years 2006, 2005, and 2004, the relative percentages
that certain income and expense items bear to net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of products sold (exclusive of items shown below) |
|
|
50.7 |
|
|
|
50.7 |
|
|
|
50.0 |
|
Selling, delivery and administrative expenses |
|
|
49.1 |
|
|
|
47.9 |
|
|
|
47.4 |
|
Restructuring (credits) charges |
|
|
(0.9 |
) |
|
|
1.6 |
|
|
|
0.3 |
|
Depreciation and amortization |
|
|
2.5 |
|
|
|
2.6 |
|
|
|
2.6 |
|
Loss on sale or abandonment of assets |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Property and equipment impairment |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
|
|
|
|
6.3 |
|
|
|
|
|
Other intangible assets impairment |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(1.8 |
) |
|
|
(9.8 |
) |
|
|
(0.5 |
) |
Interest expense |
|
|
1.7 |
|
|
|
1.2 |
|
|
|
1.1 |
|
Reorganization charges |
|
|
1.2 |
|
|
|
1.2 |
|
|
|
|
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of accounting change |
|
|
(4.7 |
) |
|
|
(12.2 |
) |
|
|
(1.6 |
) |
Provision (benefit) for income taxes |
|
|
(0.5 |
) |
|
|
(1.1 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change |
|
|
(4.2 |
) |
|
|
(11.1 |
) |
|
|
(1.0 |
) |
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(4.2 |
)% |
|
|
(11.1 |
)% |
|
|
(1.0 |
)% |
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 Compared to Fiscal 2005
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three Weeks Ended |
|
|
Fifty-Two Weeks Ended |
|
|
|
|
|
|
June 3, 2006 |
|
|
May 28, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
(Decrease) |
|
Wholesale operations |
|
$ |
2,701,751 |
|
|
|
88.3 |
% |
|
$ |
2,995,481 |
|
|
|
88.0 |
% |
|
|
(9.8 |
)% |
Retail operations |
|
|
358,722 |
|
|
|
11.7 |
|
|
|
408,024 |
|
|
|
12.0 |
|
|
|
(12.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,060,473 |
|
|
|
100.0 |
% |
|
$ |
3,403,505 |
|
|
|
100.0 |
% |
|
|
(10.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales. Net sales for the 53 weeks ended June 3, 2006, were approximately
$3,060.5 million, representing a decrease of $343.0 million, or 10.1%, from net sales of
approximately $3,403.5 million for the 52 weeks ended May 28, 2005.
45
Wholesale operations net sales. Wholesale operations net sales for the 53 weeks ended June 3,
2006, were approximately $2,701.8 million, representing a decrease of approximately $293.7 million,
or 9.8%. The decline reflected a total unit volume decline of approximately 16.9%, partially
offset by a unit value increase of approximately 8.2% in fiscal 2006 as compared to the prior year.
This unit value increase is related to selling price increases and product mix changes.
Retail operations net sales. Retail operations net sales for the 53 weeks ended June 3, 2006, were
approximately $358.7 million, representing a decrease of approximately $49.3 million, or 12.1%. The
decline in revenue is mainly attributable to the closing of retail outlets.
Gross profit (exclusive of depreciation and amortization). Gross profit was approximately $1,507.7
million, or 49.3% of net sales, for fiscal 2006, in comparison with approximately $1,679.5 million,
or 49.3% of net sales in fiscal 2005. Total cost of products sold decreased by approximately $171.3
million when compared to fiscal 2005. A substantial amount of this cost decrease relates to
reduced costs resulting from the effects of our restructuring activities. On a cost per pound
basis, direct component costs per pound decreased approximately 2.6% when compared to fiscal 2005.
These direct component costs when compared on a cost per pound of production with fiscal 2005
decreased 1.9% for ingredients and 1.5% for labor while packaging increased .8%. Overhead and
administrative costs as a percent of sales increased approximately 1.1% when compared to fiscal
2005 due principally to the fixed nature of these costs relative to a declining net sales base.
Additionally, we also have experienced an increase in route returns as a percent of route sales of
approximately 1.1% when compared to fiscal 2005. The net effect of these increases offset by the
favorable decline in direct per pound costs when compared to our sales declines resulted in our
gross profit margin percentage remaining constant between fiscal 2006 and 2005.
Selling, delivery and administrative expenses. Selling, delivery and administrative expenses were
approximately $1,504.0 million, or 49.1% of net sales, for fiscal 2006, representing a decrease of
approximately $127.0 million from fiscal 2005s selling, delivery and administrative expenses of
approximately $1,630.9 million, or 47.9% of net sales. This dollar decrease results from the
impact of our restructuring efforts to consolidate routes, depots, and outlets in fiscal 2006 and
2005. The 1.2% increase in selling, delivery, and administrative expenses as a percent of net
sales is attributable to: (1) a 1.1% increase in distribution costs as a percent of net sales, due
principally to higher energy costs; (2) a 0.5% increase in payroll and payroll-related costs as a
percent of net sales; (3) a 0.3% decrease as a percent of net sales related to fiscal 2005 legal
settlements; and (4) a 0.1% decrease in all other selling, delivery, and administrative expenses as
a percent of net sales.
Restructuring charges. During fiscal 2006, we realized a net gain of approximately $27.2 million
which included net gains on the sale of assets of $58.0 million and benefit plan gains of
$0.7 million, partially offset by asset impairment charges of $19.4 million,
severance costs of $6.1 million and other exit costs of $6.0 million. The other exit costs include
facility closure costs such as clean up, security, relocation, utilities, and taxes. See Note 15.
Restructuring (Credits) Charges to our consolidated financial statements for further information.
Property and equipment impairment. In fiscal 2006 we tested our long-lived assets for
recoverability and determined that the carrying value of one of our asset groups exceeded our
estimate of the related fair value. Accordingly we recorded an impairment loss of approximately
$4.8 million.
Goodwill and other intangible assets impairment. In fiscal 2006 we had no goodwill and other
intangible impairment write-offs. The decrease from 2005 is attributable to the goodwill
impairment charge of $215.3 million and impairment charges for other intangible assets in the
amount of $14.2 million recognized in fiscal 2005. See Note 6. Goodwill and Other Intangible
Assets to our consolidated financial statements for further information.
46
Operating Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three Weeks Ended |
|
|
Fifty-Two Weeks Ended |
|
|
|
|
|
|
June 3, 2006 |
|
|
May 28, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
(Decrease) |
|
Wholesale operations |
|
$ |
(7,353 |
) |
|
|
13.0 |
% |
|
$ |
43,874 |
|
|
|
(13.1 |
)% |
|
|
(116.8 |
)% |
Retail operations |
|
|
10,682 |
|
|
|
(18.9 |
) |
|
|
7,264 |
|
|
|
(2.1 |
) |
|
|
47.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,329 |
|
|
|
(5.9 |
) |
|
|
51,138 |
|
|
|
(15.2 |
) |
|
|
(93.5 |
) |
Corporate |
|
|
(59,697 |
) |
|
|
105.9 |
|
|
|
(386,674 |
) |
|
|
115.2 |
|
|
|
84.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss |
|
$ |
(56,368 |
) |
|
|
100.0 |
% |
|
$ |
(335,536 |
) |
|
|
100.0 |
% |
|
|
83.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating loss. The operating loss for fiscal 2006 was approximately $56.4
million, representing a reduction of approximately $(279.1) million from the prior years operating
loss of approximately $335.5 million. Included in the operating loss for fiscal 2006 is
restructuring income of approximately $27.2 million and property and equipment impairment charges
of approximately $4.8 million. The fiscal 2005 operating loss included restructuring charges of
approximately $54.3 million and goodwill and other intangibles impairment of approximately $229.5
million.
Wholesale operating loss. Wholesale operating income declined by approximately $51.2 million from
approximately $43.9 million in the prior year resulting in an operating loss of approximately $7.3
million. The loss was attributable to a $293.7 million, or 9.8% decrease in wholesale net sales
partially offset by a $(242.5) million, or 8.2%, reduction in wholesale operating costs.
Retail operating income. Retail operating income for fiscal 2006 was approximately $10.7 million
representing an improvement of approximately $3.4 million over the prior year. This gain was
attributable to a $49.3 million, or 12.1%, decline in revenue which was offset by a $(52.7)
million, or (13.2)% reduction of costs. This improvement is attributable to the closing of less
profitable outlet locations in conjunction with our restructuring efforts.
Reorganization charges. In fiscal 2006, we incurred a net reorganization charge of $37.0 million.
This charge relates to expense or income items that we incurred or
realized related to our bankruptcy proceedings. The cost of these activities includes such items
as (1) professional fees and similar types of expenses incurred directly related to the Chapter 11
proceedings of $35.1 million; (2) payroll related expenses to retain key employees during our
reorganization of $6.0 million; (3) losses realized as we rejected certain of our lease agreements
covering equipment and real estate of $0.9 million; (4) interest earned on cash accumulated by us
because we are not paying a substantial portion of our pre-petition liabilities of $(4.5) million;
and (5) gains realized on the sale of our excess properties of $(0.6) million.
Interest expense. Interest expense for fiscal 2006 was $52.5 million, representing an increase of
$11.1 million from fiscal 2005s expense of $41.4 million. The increase in interest expense is
attributable in approximate amounts to: (1) a $10.7 million increase relating to an increased
average interest rate and amount of debt; (2) a $1.7 million increase in DIP fees; (3) decreased
financing fees of $(1.1) million; and (4) all other interest categories netting to a $(0.2) million
decrease.
Provision (benefit) for income taxes. The effective income tax benefit rate for fiscal 2006 was
10.9% compared to an effective income tax benefit rate of 8.8% for fiscal 2005. The higher
effective income tax benefit rate relates principally to a valuation allowance recorded against
prior year and current year deferred tax assets in 2005. In 2006, we recorded a valuation
allowance only against deferred tax assets arising in 2006. See Note 17. Income Taxes to our
consolidated financial statements for further information.
47
Fiscal 2005 Compared to Fiscal 2004
Net sales. Net sales for the 52 weeks ended May 28, 2005, were approximately $3,403.5 million,
representing a decrease of $64.1 million, or 1.8%, from net sales of approximately $3,467.6 million
for the 52 weeks ended May 29, 2004. The decline in net sales in fiscal 2005 reflected a total unit
volume decline of approximately 5.4%, partially offset by a unit value increase of approximately
4.0% in fiscal 2005 as compared to the prior year. This unit value increase is related to selling
price increases and mix changes.
Gross profit (exclusive of depreciation and amortization). Gross profit was approximately $1,679.5
million, or 49.3% of net sales, for fiscal 2005, representing a decrease from approximately
$1,734.3 million, or 50.0% of net sales in fiscal 2004. Overall direct production costs per pound
increased approximately 2.0% over the prior year due to cost increases per pound of 0.5% on
ingredients, 1.9% on packaging, 2.3% on labor and labor-related costs and 6.1% on overhead costs.
Selling, delivery and administrative expenses. Selling, delivery and administrative expenses were
approximately $1,630.9 million, or 47.9% of net sales, for fiscal 2005, representing a decrease of
approximately $12.9 million from fiscal 2004s selling, delivery and administrative expenses of
approximately $1,643.8 million, or 47.4% of net sales. This decrease results from the impact of our
bakery closings and resulting route reductions in fiscal 2005 and 2004 and other reorganization
efforts during fiscal 2005. We experienced a decline in labor costs of approximately $22.7 million
and a decline in workers compensation costs of approximately $25.1 million. The decrease in
workers compensation is due principally to the $48.0 million adjustment made in fiscal 2004 of
which $28.8 million was allocated to selling, delivery and administrative expenses. These two cost
decreases were partially offset by energy cost increases of $17.1 million and a charge allocated to
selling, delivery and administrative expense of $7.4 million resulting from a curtailment loss from
the suspension of our Supplemental Employee Retirement Plan.
Restructuring and other charges. During fiscal 2005, we incurred charges of approximately $54.3
million which was composed of severance costs of $12.8 million, asset impairment charges of $43.7
million, a curtailment gain on benefit plans of $(6.9) million and other exit costs of $4.7
million. These charges relate principally to the closure of six bakeries and the related shifting
of production to other bakeries and the consolidation of delivery routes, depots and bakery
outlets. Certain of these charges are a result of the undertaking of a comprehensive review of
operations since filing to restructure under Chapter 11. These charges also include $2.3 million
related to 2004 restructurings initiated in the second and fourth quarters and consisted
principally of cleanup costs, loss on equipment disposals and additional costs to ready a bakery
for disposition. See the Cash Resources and Liquidity section of this Managements Discussion and
Analysis of Financial Condition and Results of Operations regarding future expected restructuring
charges.
During fiscal 2004, we incurred restructuring charges of approximately $12.1 million related to the
closures of three bakeries, severance costs in connection with the centralization of certain
finance and data maintenance administrative functions and the relocation of certain key management
employees in conjunction with our new more centralized organizational structure. These charges were
in conjunction with our Program SOAR initiative, which was designed to consolidate business
functions, reduce headcount and achieve operating efficiencies. These charges also included costs
related to certain closures and restructurings of several bakeries and bakery outlet locations
initiated during fiscal 2003. Approximately $10.9 million represents severance and other cash costs
and approximately $1.2 million represents impairment of bakery machinery and equipment.
Goodwill and other intangible assets impairment. Due to our declining operating profits and
liquidity issues resulting from a decrease in sales, a high fixed cost structure, rising employee
healthcare and pension costs and higher costs for ingredients and energy experienced during the
first quarter of fiscal 2005, we tested our goodwill and other intangible assets for possible
impairment. From the results of our testing we determined that our goodwill was fully impaired and
took a goodwill impairment charge of $215.3 million. Certain other intangible assets were also
tested for impairment. Based on our testing, we took an additional impairment charge for other
intangible assets in the amount of $27.1 million, including $14.2 million of other intangible
assets impairment and $12.9 million of restructuring charges. See Note 6. Goodwill and Other
Intangible Assets to our consolidated financial statements for further information.
Operating loss. The operating loss for fiscal 2005 was approximately $335.5 million, representing a
decrease in income of approximately $317.2 million from the prior years operating loss of
approximately $18.3 million.
48
Included in the operating loss for fiscal 2005 are restructuring charges of approximately $54.3
million, and goodwill and other intangibles impairment of approximately $229.5 million. The fiscal
2004 operating loss included restructuring charges of approximately $12.1 million.
Reorganization charges. Reorganization charges aggregated approximately $39.2 million in fiscal
2005 and relate to expense or income items that we incurred or realized because we are in
reorganization under our bankruptcy proceedings. The cost of these activities includes such items
as (1) professional fees and similar types of expenses incurred directly related to the Chapter 11
proceedings of $33.2 million; (2) payroll related expenses to retain key employees during our
reorganization of $5.6 million; (3) gains realized as we rejected certain of our lease agreements
covering equipment and real estate of $(0.4) million; (4) the write-off of debt fees related to our
pre-petition debt of $3.0 million; (5) interest earned on cash accumulated by us because we are not
paying a substantial portion of our pre-petition liabilities of $(0.5) million; and (6) gains
realized on the sale of our excess properties of $(1.7) million.
Interest expense. Interest expense for fiscal 2005 was $41.4 million, representing an increase of
$3.9 million from fiscal 2004s expense of $37.5 million. The year-over-year increase was due
primarily to amortization of debt fees and legal costs incurred for the pre-petition credit
facility and the DIP Facility totaling approximately $4.3 million and $0.7 million in interest
expense related to the $100 million convertible bond issuance in August 2005.
Provision for income taxes. The effective income tax benefit rate for fiscal 2005 was 8.8% compared
to an effective income tax benefit rate of 39.9% for fiscal 2004. The lower effective income tax
benefit rate relates principally to a valuation allowance recorded against deferred tax assets in
2005, and to the goodwill impairment charge as the goodwill was primarily nondeductible for tax
purposes. See Note 17. Income Taxes to our consolidated financial statements for further
information.
CASH RESOURCES AND LIQUIDITY
CASH FLOWS
During the fiscal year ended June 3, 2006 the Company used $73.4 million of cash, which was the net
impact of $57.7 million of cash used in operating activities,
$27.4 million of cash used in
investing activities, and $11.7 million of cash generated from financing activities.
Cash
from (used in) operating activities. Cash used in operating activities for the fifty-three weeks
ended June 3, 2006 was $57.7 million, which represents a
decrease of $174.0 million from cash
generated in fiscal 2005 of $116.3 million. While the company posted a net loss of $128.3 million
in fiscal 2006, a number of items that contributed to the loss were non-cash items, including $77.8
million and $6.7 million for depreciation and amortization and non-cash interest expense,
respectively. The positive cash effect of these non-cash items was offset by $30.5 million related
to gains on asset sales included in investing activities. In addition, net changes in working
capital components generated $15.4 million in cash in fiscal 2006 primarily due to (1) a reduction
in accounts receivable of $26.3 million; (2) an increase in our long-term self insurance reserves
of $15.6 million; (3) a decrease in inventory of $4.0 million; offset by (4) a reduction in
accounts payable and accrued expenses of $22.3 million; and (5) other items totaling $8.2 million.
Changes in working capital components generated cash equal to $85.4 million in fiscal 2005.
Cash used in investing activities. Cash used in investing activities for the fifty-three weeks
ended June 3, 2006 was $27.4 million, $3.3 million, less than fiscal 2005 of $30.7
million. The net decrease is primarily attributable to higher sales of assets of $90.4 million
compared to fiscal 2005 of $4.1 million offset by restricted
cash deposits of $85.5 (excluding interest earned) million
compared to $0 in fiscal 2005, and a decline in spending of $3.1 million in fiscal 2006 on
purchases of property, equipment and software assets from that spent in fiscal 2005.
Cash
from (used in) financing activities. Cash generated from financing activities for the fifty-three weeks
ended June 3, 2006 was $11.7 million, $14.5 million, or 55.3%, less than fiscal 2005 of $26.2
million. During fiscal 2006 we increased our borrowings under the senior secured revolving credit
facility by $13.4 million and reduced our long-term debt by $1.1 million. During 2005 we issued
$100 million aggregate principal amount of our 6% senior subordinated convertible notes due August
15, 2014. During 2005 we reduced net long-term debt by $63.7 million in part due to the issuance
of our 6% senior subordinated convertible notes and used $9.5 million to pay debt issuance costs.
We did not pay dividends in fiscal 2006 or 2005.
49
SOURCES OF LIQUIDITY AND CAPITAL
We have historically maintained two primary sources for debt capital: (1) bank lines of credit; and
(2) capital and operating lease financing to support the acquisition and lease of our thrift
stores, depots, route trucks, tractors, trailers and computer equipment. In addition, on August 12,
2004 we issued $100.0 million aggregate principal amount of 6% senior subordinated convertible
notes due in August 2014. Failure to maintain adequate sources of debt capital would have material
adverse impact on our operations.
At June 3, 2006 we owed $404.5 million under our pre-petition secured term loans and $85.3 million
under our pre-petition secured revolving loan credit facility. In addition, at June 3, 2006 we had
used our senior secured revolving credit facility to issue $122.3 million in letters of credit.
On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior
subordinated convertible notes due August 15, 2014 in a private placement. Purchasers had an option
to purchase in the aggregate up to $20.0 million in additional notes for a period of 60 days
following the closing, which purchase option was not exercised. Under certain circumstances, the
notes are convertible at the option of the holder into shares of our common stock at an initial
conversion rate of 98.9854 shares per $1,000 principal amount of notes (an initial conversion price
of $10.1025 per share), subject to adjustment.
The foregoing commitments regarding our senior secured term and revolving credit facilities and our
6% senior subordinated convertible notes due August 15, 2014 include significant obligations that
occurred prior to our bankruptcy filing (see Voluntary Chapter 11 Bankruptcy Filing below). Under
the Bankruptcy Code, actions to collect pre-petition indebtedness are stayed and our other
contractual obligations may not be enforced against us. Therefore, the commitments shown above may
not reflect actual cash outlays in future periods.
Voluntary Chapter 11 Bankruptcy Filing. On September 22, 2004 (the Petition Date), due to
significantly limited liquidity, we and each of our wholly-owned subsidiaries filed voluntary
petitions for reorganization relief under Chapter 11 of the Bankruptcy Code. On January 14, 2006, a
subsidiary of which we are an eighty percent owner, Mrs. Cubbisons Foods, Inc., also filed a
voluntary petition for reorganization relief under Chapter 11 of the Bankruptcy Code. These filings
were made in order to facilitate the restructuring of our business operations, trade liabilities,
debt, and other obligations. We are currently operating our business as a debtor-in-possession
under the supervision of the Court.
Subsequent to the Petition Date, the Company and a syndicate of lenders, including JPMorgan Chase
Bank, entered into the DIP Facility, which was subsequently revised and approved by the Court, to
provide up to $200.0 million in post-petition financing. The DIP Facility expires on the occurrence
of an event that constitutes a termination date as defined in the DIP Facility agreement or, if no
such event has occurred, pursuant to an extension, on June 2, 2007. All outstanding borrowings
under the DIP Facility are due and payable on the termination date. The obligations under the DIP
Facility are secured by a super priority lien against our assets in favor of the DIP lenders. The
DIP Facility may be utilized for the issuance of letters of credit up to an aggregate amount equal
to $150.0 million, which amount was increased from the original limitation of $75.0 million as a
result of prior amendments. In connection with entering into the DIP Facility we also make periodic
adequate protection payments to our pre-petition secured lenders in the form of interest, fees and
expenses based on amounts owed under the pre-petition senior secured credit facility.
The DIP Facility subjects us to certain obligations, including the delivery of financial statements
and certifications, cash flow forecasts, operating budgets at specified intervals and cumulative
minimum EBITDA requirements. Currently, we expect that we will not be able to remain in compliance with the minimum EBITDA covenant as early as prior to the end of our 2007 third fiscal quarter. We intend to negotiate with the lenders under our DIP Facility to obtain the necessary relief from this covenant. However, we can give no assurance that any relief will be obtained. Furthermore, we are subject to certain limitations on the payment of
indebtedness, entering into investments, the payment of capital expenditures, the incurrence of
cash restructuring charges and the payment of dividends. Failure to comply with these obligations
could lead to an event of default under the DIP Facility and acceleration of payments thereunder.
In addition, payment under the DIP Facility may be accelerated following certain events of default
including, but not limited to, (1) the conversion of any of the bankruptcy cases to a case under
Chapter 7 of the Bankruptcy Code or the appointment of a trustee pursuant to Chapter 11 of the
Bankruptcy Code; (2) our making certain payments of principal or interest on account of
pre-petition indebtedness or payables; (3) a change of control (as defined in the DIP Facility);
(4) an order of the Bankruptcy Court permitting holders of security interests to foreclose on the
debt
50
on any of our assets which have an aggregate value in excess of $1.0 million; (5) the entry of any
judgment in excess of $1.0 million against us, the enforcement of which remains unstayed; (6)
certain Termination Events (as defined in the DIP Facility) related to ERISA plans; and (7) failure
to make payments required by Section 302(f)(1) of ERISA where the amount determined under Section
302(f)(3) of ERISA is equal to or greater than $1.0 million, subject to certain exceptions.
Notwithstanding acceleration pursuant to an event of default, the maturity date of the DIP Facility
is June 2, 2007.
At June 3, 2006 we were in compliance with all financial covenants, terms and conditions of the DIP
Facility.
As of June 3, 2006 we had not borrowed under the DIP Facility. However, the DIP Facility was
utilized to support the issuance of letters of credit in the amount of $91.3 million primarily to
support our workers compensation and auto liability insurance programs. These letters of credit
were partially collateralized by $86.4 million of restricted cash as required by the DIP Facility.
As calculated at June 3, 2006, additional borrowing availability under the DIP Facility was
approximately $90.1 million.
As of June 3, 2006, $404.5 million in pre-petition secured term loans remained outstanding. In
addition we owed $85.3 million under the pre-petition secured revolving loan credit facility. As of
June 3, 2006, the pre-petition secured revolving loan facility was also utilized to support the
issuance of $122.3 million letters of credit primarily to support our workers compensation, auto
and general liability insurance programs. All principal payments required to be made after the
Petition Date under the terms of the pre-petition term loans and revolving loans are stayed due to
the bankruptcy filing.
Since the Petition Date, we have been actively engaged in restructuring our operations and selling
assets no longer necessary to our operations. With the assistance of A&M, we continue to analyze
our business based on a number of factors including, but not limited to, historical sales results,
expected future sales results, cash availability, production costs, utilization of resources, and
manufacturing and distribution efficiencies. As part of our restructuring efforts we are evaluating
various alternatives including, but not limited to, the sale of some or all of our assets, infusion
of capital, debt restructuring and the filing of a plan of reorganization with the Bankruptcy
Court, or any combination of these options.
As a result of the Chapter 11 filing, our principal sources of liquidity used in funding short-term
operating expenses, supplies and employee obligations include cash balances, operating cash flows
and the $200.0 million DIP Facility. These sources will be used to fund the Companys operations in
fiscal 2007.
The maturity date of the DIP Facility has been extended from September 22, 2006 to June 2, 2007. We
may need to negotiate an additional extension of the maturity date or refinance the DIP Facility to
provide adequate time to complete a plan of reorganization. There can be no assurance that we will
be successful in extending or refinancing the DIP Facility or that we can extend or refinance the
DIP Facility on terms favorable to us.
Our future capital requirements will depend on many factors, including our evaluation of various
alternatives in connection with our restructuring, the form of our plan of reorganization, the
aggregate amount to be distributed to creditors to satisfy claims, the amount of any unknown claims
or contingent claims from creditors or equity holders, the outcome of litigation and the costs of
administering the Chapter 11 process, including legal and other fees. At this time it is not
possible to predict the exact amount or nature of such new capital. In addition, there can be no
guarantee that additional capital will be available to us, or that such capital will be available
on favorable terms. Raising additional capital could result in the significant dilution of current
equity interests, but it is not possible to predict the extent of such potential dilution at this
time.
Our financial statements are prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. However, no
assurance can be given that we will be able to continue to operate on a going concern basis.
Because of the Chapter 11 filing process and the circumstances leading to the bankruptcy there is
substantial doubt about our ability to continue as a going concern. Our continuation as a going
concern is dependent upon, among other things, our ability to evaluate various alternatives
including the sale of some or all of our assets, infusion of capital, debt restructuring and the
development, confirmation and implementation of a plan of reorganization, our ability to comply
with the terms of the DIP Facility, our ability to obtain financing upon exit from bankruptcy and
our ability to generate sufficient cash from operations to meet our obligations and any combination
of these factors. In the event our restructuring activities are not successful and we are required
to liquidate, additional significant adjustments would be necessary in the carrying
51
value of assets and liabilities, the revenues and expenses reported and the balance sheet
classifications used. Further, the value of debt and equity interests may be significantly or
completely impaired in the event of a liquidation or conversion to a Chapter 7 proceeding.
Contractual Obligations. The following is a summary of certain of our contractual obligations as of
June 3, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Fiscal Year Under Certain Contractual Obligations (a) (g) |
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior Secured |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional |
|
Fiscal Years |
|
|
|
|
|
DIP |
|
|
Credit Facility |
|
|
Subordinated |
|
|
Capital |
|
|
Operating |
|
|
Purchase |
|
Ending |
|
Total |
|
|
Facility (b) |
|
|
(c) |
|
|
Notes (d) |
|
|
Leases |
|
|
Leases (e) |
|
|
Obligations (f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
744,499 |
|
|
$ |
|
|
|
$ |
489,817 |
|
|
$ |
100,000 |
|
|
$ |
5,065 |
|
|
$ |
28,914 |
|
|
$ |
120,703 |
|
2008 |
|
|
33,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,122 |
|
|
|
18,017 |
|
2009 |
|
|
21,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,918 |
|
|
|
13,890 |
|
2010 |
|
|
8,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,820 |
|
|
|
5,025 |
|
2011 |
|
|
6,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,569 |
|
|
|
3,873 |
|
Thereafter |
|
|
5,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,176 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
819,916 |
|
|
$ |
|
|
|
$ |
489,817 |
|
|
$ |
100,000 |
|
|
$ |
5,065 |
|
|
$ |
63,519 |
|
|
$ |
161,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The commitments listed herein include significant pre-petition
obligations. Under the Bankruptcy Code, actions to collect
pre-petition indebtedness are stayed and our other contractual
obligations may not be enforced against us. Therefore, the commitments
shown above may not reflect actual cash outlays in future periods. In
addition, under the Bankruptcy Code, we may reject certain executory
contracts and leases, thus eliminating all or part of those future
obligations. |
|
(b) |
|
On September 23, 2004, we entered into a debtor-in-possession
Revolving Credit Agreement (the DIP Facility) which provides for a
$200.0 million commitment (the Commitment) of financing to fund our
post-petition operating expenses, supplier and employee obligations.
The DIP Facility, as amended from time to time, provides for a secured
revolving line of credit through June 2, 2007. The Commitment also may
be used, with certain restrictions, for the issuance of letters of
credit in the aggregate amount of $125.0 million, increased to $150.0
million by amendment in August 2006, of which $91.3 million was
utilized at June 3, 2006. As of June 3, 2006, there were no
borrowings outstanding under the revolving credit facility and we had
$90.1 million available under the DIP Facility (of which up to $33.7
million could be used for additional letters of credit). |
|
(c) |
|
Borrowings under our variable rate senior secured credit facility are
secured by all of our accounts receivable and a majority of our owned
real property, intellectual property and equipment. The revolving
credit line had a total capacity of $207.7 million of which $122.3
million was utilized to support the issuance of letters of credit and
$85.3 million was borrowed. At June 3, 2006, there was no availability
under the revolving credit line for additional borrowings or letters
of credit. At June 3, 2006, we also had an aggregate $404.5 million
borrowed under the Tranche A, B, and C term loans provided under the
variable rate senior secured credit facility. We have presented this
facility in our June 3, 2006 financial statements as amounts payable
within one year due to our default under this facility. |
|
(d) |
|
On August 12, 2004, we issued $100.0 million aggregate principal
amount of our 6.0% Senior Subordinated Convertible Notes due August
15, 2014 in a private placement. The notes are convertible at the
option of the holder under certain circumstances into shares of our
common stock at an initial conversion rate of 98.9854 shares per
$1,000 principal amount of notes (an initial conversion price of
$10.1025 per share), subject to adjustment. As these notes are
unsecured, they are included in liabilities subject to compromise and
the accrual of interest has been suspended. See Note 7. Debt and Note
10. Liabilities Subject to Compromise to the accompanying consolidated
financial statements. |
|
(e) |
|
At June 3, 2006, we had in place various operating leases for
equipment on which at the end of the lease term we had guaranteed a
buyout price, or residual value. FIN No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness of Others, on its effective date required
us to disclose the undiscounted maximum potential liability of all
guaranteed lease residual values and to record a liability for the
fair value of such guarantees. The effective date of this
pronouncement was for all leases entered into or modified after
December 31, 2002. At June 3, 2006, the maximum potential liability
for all lease residual values guaranteed prior and subsequent to the
effective date was $3.8 million and $3.6 million, respectively. At
June 3, 2006, we had an unamortized liability for the fair value of
all guaranteed lease residual values that were entered into or
modified subsequent to the effective date of $0.2 million. |
52
|
|
|
(f) |
|
The unconditional purchase obligations represent obligations as of
June 3, 2006. This includes items such as ingredients, packaging,
third party agreements to perform certain functions and other
obligations. |
|
(g) |
|
We have not included estimated interest payments as a component of
this contractual obligations table since interest on the senior
secured credit facility is dependent upon the timing of emergence from
bankruptcy, as well as the ultimate treatment of this type of
obligation under any reorganization plan. See Note (d) above for a
discussion of interest obligations related to the 6.0% senior
subordinated convertible notes. |
OFF-BALANCE SHEET FINANCING
We do not participate in, nor secure financings for, any unconsolidated, special purpose entities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks relative to commodity price fluctuations. We actively manage these
risks through the use of forward purchase contracts and derivative financial instruments. As a
matter of policy, we use derivative financial instruments only for hedging purposes, and the use of
derivatives for trading and speculative purposes is prohibited.
Commodity prices. Commodities we use in the production of our products are subject to wide price
fluctuations, depending upon factors such as weather, crop production, worldwide market supply and
demand, and government regulation. To reduce the risk associated with commodity price fluctuations,
primarily for wheat, corn, sweeteners, soybean oil, and certain fuels, we sometimes enter into
forward purchase contracts and commodity futures and options in order to fix prices for future
periods. A sensitivity analysis was prepared and, based upon our commodity-related derivatives
positions as of June 3, 2006, an assumed 10% adverse change in commodity prices could potentially
have a $1.4 million effect on our fair values, future earnings or cash flows.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
|
Number |
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
64 |
|
|
|
|
71 |
|
|
|
|
72 |
|
|
|
|
72 |
|
|
|
|
73 |
|
|
|
|
75 |
|
|
|
|
77 |
|
|
|
|
77 |
|
|
|
|
78 |
|
|
|
|
79 |
|
|
|
|
86 |
|
|
|
|
87 |
|
|
|
|
87 |
|
|
|
|
89 |
|
|
|
|
93 |
|
|
|
|
94 |
|
|
|
|
95 |
|
|
|
|
101 |
|
|
|
|
101 |
|
|
|
|
101 |
|
|
|
|
102 |
|
|
|
|
103 |
|
|
|
|
104 |
|
|
|
|
104 |
|
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Interstate Bakeries Corporation
Kansas City, Missouri
We have
audited the accompanying consolidated balance sheets of Interstate
Bakeries Corporation (Debtor-in-Possession) and subsidiaries, (the Company)
as of June 3, 2006 and May 28, 2005, and the related consolidated statements
of operations, stockholders equity (deficit), and cash flows for each of
the three years in the period ended June 3, 2006. Our audits also included
the schedule of valuation and qualifying accounts listed in the Index at
Item 15. These consolidated financial statements and financial statement
schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted
our audits in accordance with standards of the Public Company Accounting
Oversight Board (United States). 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 the Company
as of June 3, 2006 and May 28, 2005, and the results of its
operations and its cash flows for each of the three years in the period
ended June 3, 2006, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
As discussed in Note 1, the Company has filed for reorganization
under Chapter 11 of the Federal Bankruptcy Code. The accompanying
consolidated financial statements do not purport to reflect
or provide for the consequences of the bankruptcy proceedings.
In particular, such consolidated financial statements do not
purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities;
(b) as to prepetition liabilities, the amounts that may be allowed
for claims or contingencies, or the status and priority thereof;
(c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; or (d) as to
operations, the effect of any changes that may be made in its business.
55
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements,
the Companys recurring losses from operations, negative working
capital, downward sales trends, the expected violation of DIP
facility covenants during 2007, and the potential lack of liquidity
should the Company be unable to successfully reorganize under its
Chapter 11 bankruptcy filing, raise substantial doubt about its
ability to continue as a going concern. Managements plans concerning
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed
in Note 2 to the financial statements, the Company changed its method of
accounting for conditional asset retirement obligations with the adoption
of Financial Accounting Standards Board (FASB) Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations an
interpretation of FASB Statement No. 143, effective June 3, 2006.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal
control over financial reporting as of June 3, 2006, based on the criteria
established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated December 20, 2006, expressed an unqualified opinion on
managements assessment of the effectiveness of the Companys internal control
over financial reporting and expressed an adverse opinion on the effectiveness
of the Companys internal control over financial reporting because of material weaknesses.
DELOITTE
& TOUCHE LLP
Kansas City, Missouri
December 20, 2006
56
INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
78,178 |
|
|
$ |
151,558 |
|
Restricted cash |
|
|
86,353 |
|
|
|
|
|
Accounts receivable, less allowance for doubtful accounts of $3,400 and $3,492, respectively |
|
|
150,507 |
|
|
|
176,781 |
|
Inventories |
|
|
65,431 |
|
|
|
69,431 |
|
Assets held for sale |
|
|
11,931 |
|
|
|
10,582 |
|
Other current assets |
|
|
67,637 |
|
|
|
83,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
460,037 |
|
|
|
492,202 |
|
|
Property and equipment, net |
|
|
601,101 |
|
|
|
705,373 |
|
Other intangible assets |
|
|
161,128 |
|
|
|
162,043 |
|
Other assets |
|
|
30,789 |
|
|
|
39,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,253,055 |
|
|
$ |
1,398,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities not subject to compromise |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
494,882 |
|
|
$ |
482,199 |
|
Accounts payable |
|
|
117,044 |
|
|
|
101,141 |
|
Accrued expenses |
|
|
244,166 |
|
|
|
260,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
856,092 |
|
|
|
843,782 |
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
272,647 |
|
|
|
299,391 |
|
Deferred income taxes |
|
|
77,819 |
|
|
|
90,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities not subject to compromise |
|
|
1,206,558 |
|
|
|
1,233,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities subject to compromise |
|
|
287,080 |
|
|
|
282,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 120,000,000 shares authorized, 81,579,000 shares issued,
45,295,000 and 45,337,000 shares outstanding, respectively |
|
|
816 |
|
|
|
816 |
|
Additional paid-in capital |
|
|
585,631 |
|
|
|
586,089 |
|
Accumulated deficit |
|
|
(142,711 |
) |
|
|
(14,394 |
) |
Treasury stock, 36,284,000 and 36,242,000 shares at cost, respectively |
|
|
(678,572 |
) |
|
|
(678,379 |
) |
Unearned restricted stock compensation |
|
|
(1,869 |
) |
|
|
(3,521 |
) |
Accumulated other comprehensive loss |
|
|
(3,878 |
) |
|
|
(7,535 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(240,583 |
) |
|
|
(116,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit |
|
$ |
1,253,055 |
|
|
$ |
1,398,650 |
|
|
|
|
|
|
See accompanying notes.
57
INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,060,473 |
|
|
$ |
3,403,505 |
|
|
$ |
3,467,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold (exclusive of items shown below) |
|
|
1,552,731 |
|
|
|
1,724,054 |
|
|
|
1,733,303 |
|
Selling, delivery and administrative expenses |
|
|
1,504,038 |
|
|
|
1,630,921 |
|
|
|
1,643,757 |
|
Restructuring (credits) charges |
|
|
(27,187 |
) |
|
|
54,293 |
|
|
|
12,066 |
|
Depreciation and amortization |
|
|
77,795 |
|
|
|
89,486 |
|
|
|
91,024 |
|
Loss on sale or abandonment of assets |
|
|
4,671 |
|
|
|
10,744 |
|
|
|
5,738 |
|
Property and equipment impairment |
|
|
4,793 |
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
|
|
|
|
215,346 |
|
|
|
|
|
Other intangible assets impairment |
|
|
|
|
|
|
14,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,116,841 |
|
|
|
3,739,041 |
|
|
|
3,485,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(56,368 |
) |
|
|
(335,536 |
) |
|
|
(18,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (excluding unrecorded contractual interest expense
of $6,033, $4,150, and $0, respectively) |
|
|
52,504 |
|
|
|
41,430 |
|
|
|
37,543 |
|
Reorganization charges, net |
|
|
37,015 |
|
|
|
39,206 |
|
|
|
|
|
Other income |
|
|
(2,994 |
) |
|
|
(353 |
) |
|
|
(331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,525 |
|
|
|
80,283 |
|
|
|
37,212 |
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of accounting change |
|
|
(142,893 |
) |
|
|
(415,819 |
) |
|
|
(55,538 |
) |
Provision (benefit) for income taxes |
|
|
(15,593 |
) |
|
|
(36,539 |
) |
|
|
(22,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change (See Note 2) |
|
|
(127,300 |
) |
|
|
(379,280 |
) |
|
|
(33,370 |
) |
Cumulative effect of accounting change, net of income taxes of $0 |
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(128,317 |
) |
|
$ |
(379,280 |
) |
|
$ |
(33,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change |
|
$ |
(2.82 |
) |
|
$ |
(8.43 |
) |
|
$ |
(0.74 |
) |
Cumulative effect of accounting change |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(2.84 |
) |
|
$ |
(8.43 |
) |
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
See accompanying notes.
58
INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(128,317 |
) |
|
$ |
(379,280 |
) |
|
$ |
(33,370 |
) |
Depreciation and amortization |
|
|
77,795 |
|
|
|
89,486 |
|
|
|
91,024 |
|
Provision (benefit) for deferred income taxes |
|
|
(1,681 |
) |
|
|
7,750 |
|
|
|
(5,336 |
) |
Reorganization charges, net |
|
|
37,015 |
|
|
|
39,206 |
|
|
|
|
|
Cash reorganization items |
|
|
(35,384 |
) |
|
|
(26,473 |
) |
|
|
|
|
Non-cash bankruptcy-related credits |
|
|
(713 |
) |
|
|
|
|
|
|
|
|
Non-cash interest expense deferred debt fees |
|
|
6,724 |
|
|
|
5,616 |
|
|
|
2,461 |
|
Non-cash interest on swap agreements |
|
|
|
|
|
|
(655 |
) |
|
|
(3,217 |
) |
Non-cash restricted stock and deferred share compensation expense |
|
|
944 |
|
|
|
1,762 |
|
|
|
2,146 |
|
Non-cash cumulative effect of accounting change |
|
|
1,017 |
|
|
|
|
|
|
|
|
|
(Gain) loss on sale, write-down or abandonment of assets |
|
|
(30,473 |
) |
|
|
34,302 |
|
|
|
7,146 |
|
Write-off of goodwill and other intangibles |
|
|
|
|
|
|
242,410 |
|
|
|
|
|
Write-down of software assets |
|
|
|
|
|
|
4,424 |
|
|
|
|
|
Write-off prior service cost asset |
|
|
|
|
|
|
12,384 |
|
|
|
|
|
Income tax benefit on employee stock transactions |
|
|
|
|
|
|
|
|
|
|
4 |
|
Change in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
26,274 |
|
|
|
5,279 |
|
|
|
678 |
|
Inventories |
|
|
4,000 |
|
|
|
2,470 |
|
|
|
2,780 |
|
Other current assets |
|
|
5,541 |
|
|
|
(6,586 |
) |
|
|
(15,354 |
) |
Accounts payable and accrued expenses |
|
|
(22,313 |
) |
|
|
51,490 |
|
|
|
25,817 |
|
Long-term portion of self insurance reserves |
|
|
15,591 |
|
|
|
19,439 |
|
|
|
33,870 |
|
Other |
|
|
(13,743 |
) |
|
|
13,332 |
|
|
|
3,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities |
|
|
(57,723 |
) |
|
|
116,356 |
|
|
|
112,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(32,328 |
) |
|
|
(29,175 |
) |
|
|
(55,266 |
) |
Proceeds from sale of assets |
|
|
90,367 |
|
|
|
4,156 |
|
|
|
4,701 |
|
Restricted cash deposit |
|
|
(85,458 |
) |
|
|
|
|
|
|
|
|
Acquisition of other intangible assets |
|
|
|
|
|
|
|
|
|
|
(198 |
) |
Acquisition and development of software assets |
|
|
|
|
|
|
(6,206 |
) |
|
|
(14,758 |
) |
Other |
|
|
56 |
|
|
|
513 |
|
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(27,363 |
) |
|
|
(30,712 |
) |
|
|
(65,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of long-term debt |
|
|
(1,067 |
) |
|
|
(75,647 |
) |
|
|
(41,145 |
) |
Increase in revolving credit facility |
|
|
13,415 |
|
|
|
11,902 |
|
|
|
|
|
Issuance of convertible bonds |
|
|
|
|
|
|
100,000 |
|
|
|
|
|
Common stock dividends paid |
|
|
|
|
|
|
|
|
|
|
(9,479 |
) |
Stock option exercise proceeds |
|
|
101 |
|
|
|
|
|
|
|
776 |
|
Acquisition of treasury stock |
|
|
(1 |
) |
|
|
(192 |
) |
|
|
(53 |
) |
Cash reorganization items |
|
|
|
|
|
|
(398 |
) |
|
|
|
|
Debt fees |
|
|
(742 |
) |
|
|
(9,479 |
) |
|
|
(1,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
11,706 |
|
|
|
26,186 |
|
|
|
(51,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(73,380 |
) |
|
|
111,830 |
|
|
|
(5,233 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the beginning of period |
|
|
151,558 |
|
|
|
39,728 |
|
|
|
44,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of period |
|
$ |
78,178 |
|
|
$ |
151,558 |
|
|
$ |
39,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments (received) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
47,260 |
|
|
$ |
41,587 |
|
|
$ |
39,453 |
|
Income taxes |
|
|
(15,705 |
) |
|
|
(41,506 |
) |
|
|
(2,339 |
) |
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock |
|
$ |
|
|
|
$ |
221 |
|
|
$ |
7,840 |
|
Accrued deferred share award liability settled through equity issuance |
|
|
|
|
|
|
1,371 |
|
|
|
|
|
Equipment purchases financed with capital lease obligations |
|
|
|
|
|
|
409 |
|
|
|
|
|
Long-term debt reduction from lease rejections |
|
|
890 |
|
|
|
1,560 |
|
|
|
|
|
Asset disposals from lease rejections |
|
|
705 |
|
|
|
1,189 |
|
|
|
|
|
Interest
income earned on restricted cash deposit |
|
|
895 |
|
|
|
|
|
|
|
|
|
See accompanying notes.
60
INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(dollars and shares in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held in Rabbi |
|
|
|
|
|
|
|
|
|
|
|
|
Stock Issued |
|
|
|
|
|
Retained |
|
|
Treasury Stock |
|
|
Trust |
|
|
Unearned |
|
|
Accumulated |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
Other |
|
|
Stockholders |
|
|
|
Number |
|
|
Par |
|
|
Paid-in |
|
|
(Accumulated |
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
Stock |
|
|
Comprehensive |
|
|
Equity |
|
|
|
of Shares |
|
|
Value |
|
|
Capital |
|
|
Deficit) |
|
|
Shares |
|
|
Cost |
|
|
Shares |
|
|
Cost |
|
|
Compensation |
|
|
Loss |
|
|
(Deficit) |
|
Balance May 31, 2003 |
|
|
81,579 |
|
|
$ |
816 |
|
|
$ |
588,950 |
|
|
$ |
407,735 |
|
|
|
(36,298 |
) |
|
$ |
(680,913 |
) |
|
|
(477 |
) |
|
$ |
(8,946 |
) |
|
$ |
|
|
|
$ |
(17,212 |
) |
|
$ |
290,430 |
|
Comprehensive loss (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,600 |
|
|
|
(20,770 |
) |
Restricted share award |
|
|
|
|
|
|
|
|
|
|
(2,098 |
) |
|
|
|
|
|
|
530 |
|
|
|
9,938 |
|
|
|
|
|
|
|
|
|
|
|
(7,840 |
) |
|
|
|
|
|
|
|
|
Restricted share
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800 |
|
|
|
|
|
|
|
800 |
|
Restricted share
forfeitures and other |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
(4 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
(14 |
) |
Stock options exercised and
related income tax benefit |
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
|
|
55 |
|
|
|
1,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
794 |
|
Dividends paid $0.21 per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,479 |
) |
Treasury stock acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
Transfer of treasury stock
from rabbi trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(477 |
) |
|
|
(8,946 |
) |
|
|
477 |
|
|
|
8,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 29, 2004 |
|
|
81,579 |
|
|
|
816 |
|
|
|
586,616 |
|
|
|
364,886 |
|
|
|
(36,198 |
) |
|
|
(679,016 |
) |
|
|
|
|
|
|
|
|
|
|
(6,982 |
) |
|
|
(4,612 |
) |
|
|
261,708 |
|
Comprehensive loss (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(379,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,923 |
) |
|
|
(382,203 |
) |
Restricted share award |
|
|
|
|
|
|
|
|
|
|
(155 |
) |
|
|
|
|
|
|
20 |
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
(221 |
) |
|
|
|
|
|
|
(1 |
) |
Deferred share award |
|
|
|
|
|
|
|
|
|
|
407 |
|
|
|
|
|
|
|
51 |
|
|
|
965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,372 |
|
Restricted share
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,978 |
|
|
|
|
|
|
|
2,978 |
|
Restricted share
forfeitures and other |
|
|
|
|
|
|
|
|
|
|
(779 |
) |
|
|
|
|
|
|
(87 |
) |
|
|
(511 |
) |
|
|
|
|
|
|
|
|
|
|
704 |
|
|
|
|
|
|
|
(586 |
) |
Treasury stock acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
(192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 28, 2005 |
|
|
81,579 |
|
|
|
816 |
|
|
|
586,089 |
|
|
|
(14,394 |
) |
|
|
(36,242 |
) |
|
|
(678,379 |
) |
|
|
|
|
|
|
|
|
|
|
(3,521 |
) |
|
|
(7,535 |
) |
|
|
(116,924 |
) |
Comprehensive loss (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,657 |
|
|
|
(124,660 |
) |
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
(86 |
) |
|
|
|
|
|
|
10 |
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
|
Restricted share
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,486 |
|
|
|
|
|
|
|
1,486 |
|
Restricted share forfeitures |
|
|
|
|
|
|
|
|
|
|
(372 |
) |
|
|
|
|
|
|
(52 |
) |
|
|
(379 |
) |
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
(585 |
) |
Treasury stock acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 3, 2006 |
|
|
81,579 |
|
|
$ |
816 |
|
|
$ |
585,631 |
|
|
$ |
(142,711 |
) |
|
|
(36,284 |
) |
|
$ |
(678,572 |
) |
|
|
|
|
|
$ |
|
|
|
$ |
(1,869 |
) |
|
$ |
(3,878 |
) |
|
$ |
(240,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Note 22. Comprehensive Loss to these consolidated financial statements for the
reconciliations of net loss to comprehensive loss. |
See accompanying notes.
61
INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Voluntary Chapter 11 Filing
On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the
Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the
Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819, 04-45820, 04-45821
and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed
in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee of equity
security holders was appointed in our Chapter 11 cases. Mrs. Cubbisons Foods, Inc., or Mrs.
Cubbisons, a subsidiary of which we are an eighty percent owner, was not originally included in
the Chapter 11 filing. However, on January 14, 2006, Mrs. Cubbisons filed a voluntary petition for
relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). The respective $2.4
million and $2.2 million minority interest in Mrs. Cubbisons is reflected in other liabilities at
June 3, 2006 and May 28, 2005, respectively, and the minority interest impact on the statement of
operations is insignificant for all periods presented. We are continuing to operate our business as
a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In general, as
a debtor-in-possession, we are authorized under the Bankruptcy Code to continue to operate as an
ongoing business, but may not engage in transactions outside the ordinary course of business
without the prior approval of the Bankruptcy Court.
On September 23, 2004, we entered into a Revolving Credit Agreement (the DIP Facility) with
JPMorgan Chase Bank, or JPMCB, and each of the other commercial banks, finance companies, insurance
companies or other financial institutions or funds from time to time party thereto, together with
JPMCB, the Lenders, J.P. Morgan Securities Inc., as lead arranger and book runner, and JPMCB, as
administrative and collateral agent for the Lenders. The DIP Facility received interim approval by
the Bankruptcy Court on September 23, 2004 and final approval on October 22, 2004. The DIP Facility
provides for a $200.0 million commitment, or the Commitment, of debtor-in-possession financing to
fund our post-petition operating expenses, supplier and employee obligations. We entered into the
first amendment to the DIP Facility on November 1, 2004, the second amendment to the DIP Facility
on January 20, 2005, the third amendment to the DIP Facility on May 26, 2005, the fourth amendment
to the DIP Facility on November 30, 2005, the fifth amendment to the DIP Facility on December 27,
2005, the sixth amendment to the DIP Facility on March 29, 2006, the seventh amendment to the DIP
Facility on June 28, 2006 and the eighth amendment to the DIP Facility on August 25, 2006 to
reflect certain modifications. See Note 7. Debt for further discussion regarding the DIP Facility.
In conjunction with the commencement of the Chapter 11 process, we sought and obtained several
orders from the Bankruptcy Court which were intended to enable us to operate in the normal course
of business during the Chapter 11 process. The most significant of these orders:
|
|
|
authorize us to pay pre-petition and post-petition employee wages and salaries and
related benefits during our restructuring under Chapter 11; |
|
|
|
|
authorize us to pay trust fund taxes in the ordinary course of business, including
pre-petition amounts; and |
|
|
|
|
authorize the continued use of our cash management systems. |
Pursuant to the Bankruptcy Code, our pre-petition obligations, including obligations under debt
instruments, generally may not be enforced against us. In addition, any actions to collect
pre-petition indebtedness are automatically stayed unless the stay is lifted by the Bankruptcy
Court.
As a debtor-in-possession, we have the right, subject to Bankruptcy Court approval and certain
other limitations, to assume or reject executory contracts and unexpired leases. In this context,
assume means that we agree to perform our obligations and cure all existing defaults under the
contract or lease, and reject means that we are relieved from our obligations to perform further
under the contract or lease but are subject to a claim for damages for the
62
breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases
will be treated as general unsecured claims in the Chapter 11 process unless such claims had been
secured on a pre-petition basis. As of December 6, 2006, we have rejected over 420 unexpired leases
and have included charges for our estimated liability related thereto in the applicable periods. We
are in the process of reviewing our executory contracts and remaining unexpired leases to determine
which, if any, we will reject. For these executory contracts and remaining unexpired leases, we
cannot presently determine or reasonably estimate the ultimate liability that may result from
rejecting these contracts or leases, and no provisions have yet been made for these items.
Since the Petition Date, we have been actively engaged in restructuring our operations. With the
assistance of an independent consulting firm specializing in restructuring operations, we
restructured our 10 profit centers (PCs), including the closure of bakeries and distribution
centers, rationalized our delivery route network, and reduced our workforce. In addition, we
disposed of certain non-core assets during our Chapter 11 case and commenced negotiations of
long-term extensions with respect to most of our 420 collective bargaining agreements (CBAs) with
union-represented employees. Finally, we have initiated a marketing program designed to offset
revenue declines by developing protocols to better anticipate and meet changing consumer demand
through a consistent flow of new products. As part of our restructuring efforts we are evaluating
various alternatives including, but not limited to, the sale of some or all of our assets, infusion
of capital, debt restructuring and the filing of a plan of reorganization with the Bankruptcy
Court, or any combination of these options.
When we began the PC review process, we recognized that such complex consolidation activities would
entail certain implementation risks. For example, it could not be determined with precision that
forecasted sales would be achieved in terms of either sales volume or gross margin. We anticipated
that there would be a period of transition before the true impact of the projected efficiencies
could be realized. Indeed, we expected that the path would not always be smooth as both employees
and customers had to become accustomed to the restructured operations. Accordingly, we have been
and will continue to evaluate the impact of these restructurings. For instance, we continue to
focus on improving manufacturing processes in the bakeries and enhancing service to customers
through our field sales force. Understanding the true impact of the projected efficiencies is a
critical component in evaluating the credibility of a long-term business plan. A credible long-term
business plan is essential to the assessment of a reasonable range of values for our reorganized
business and the determination of how much debt and equity our businesses will be able to support.
Both of these assessments are prerequisites to discussions regarding and the filing of a plan of
reorganization.
See Note 15. Restructuring (Credits) Charges to these consolidated financial statements for related
disclosures.
Our financial statements are prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. However, because of
the Chapter 11 filing process and the circumstances leading to the bankruptcy there is substantial
doubt about our ability to continue as a going concern. Our continuation as a going concern is
dependent upon, among other things, our ability to evaluate and execute various alternatives
including the sale of some or all of our assets, infusion of capital, debt restructuring and the
development, confirmation and implementation of a plan of reorganization, our ability to comply
with the terms of the DIP Facility, the expected violation of DIP
Facility covenants during 2007, our ability to obtain financing upon exit from bankruptcy and
our ability to generate sufficient cash from operations to meet our obligations and any combination
of these factors. In the event our restructuring activities are not successful and we are required
to liquidate, additional significant adjustments will be necessary in the carrying value of assets
and liabilities, the revenues and expenses reported and the balance sheet classifications used.
The consolidated financial statements reflect adjustments in accordance with American Institute of
Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code (SOP 90-7), which was adopted for financial reporting in
periods ending after September 22, 2004, assuming that we will continue as a going concern. In the
Chapter 11 proceedings, substantially all unsecured liabilities except payroll and benefit related
charges as of the Petition Date are subject to compromise or other treatment under a plan of
reorganization which must be confirmed by the Bankruptcy Court after submission to any required
vote by affected parties. For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction is dependent on the outcome of the Chapter 11 proceedings are segregated
and classified as Liabilities Subject to Compromise in the consolidated balance sheet under SOP
90-7. The ultimate amount of and settlement terms for our pre-bankruptcy liabilities are dependent
on the outcome of the Chapter 11 proceedings and, accordingly, are not presently determinable.
Pursuant to SOP 90-7, professional fees associated with the Chapter 11 proceedings, and certain
gains and losses resulting from a reorganization of our business are reported separately as
reorganization
63
items. In addition, interest expense is reported only to the extent that it will be paid during the
Chapter 11 proceedings or that it is probable that it will be an allowed claim under the bankruptcy
proceedings.
2. Description of Business and Significant Accounting Policies
Description of business Interstate Bakeries Corporation is one of the largest wholesale bakers
and distributors of fresh bakery products in the United States. Any reference, unless otherwise
noted, to IBC, us, we and our refers to Interstate Bakeries Corporation and its
subsidiaries, taken as a whole.
Fiscal year end Our fiscal year is a 52 or 53-week period ending on the Saturday closest to the
last day of May. Fiscal year 2006 is a 53-week period and fiscal years 2005 and 2004 are 52-week
periods.
Principles of consolidation The consolidated financial statements include the accounts of IBC and
its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of estimates The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents We consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Additionally, included in accounts
payable are checks written in excess of bank balances totaling approximately $26.7 million and
$17.5 million at June 3, 2006 and May 28, 2005, respectively. Restricted cash represents cash held
as collateral pursuant to our debtor-in-possession financing agreement and is not considered a cash
equivalent in the consolidated statement of cash flows. See Note 7. Debt to these consolidated
financial statements for related disclosures.
Inventories Inventories are stated at the lower of cost or market. Specific first-in first-out
invoiced costs are used with respect to ingredients and packaging and average costs are used for
other inventory items.
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(dollars in thousands) |
|
Ingredients and packaging |
|
$ |
44,540 |
|
|
$ |
47,617 |
|
Finished goods |
|
|
20,891 |
|
|
|
21,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,431 |
|
|
$ |
69,431 |
|
|
|
|
|
|
|
|
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. In order to maximize the efficiency of our operations, we remove and relocate equipment
between bakeries. Such removal and relocation costs are expensed as incurred. Reinstallation costs
are capitalized if the useful life is extended or the equipment is significantly improved.
Otherwise, reinstallation costs are expensed as incurred.
Assets held for sale Property that is no longer used and is to be disposed of by sale is
recognized in the financial statements at the lower of the carrying amount or estimated fair value,
less estimated cost to sell, and is not depreciated after being classified as held for sale.
Lease obligations We lease office space, handheld computer equipment and real property used both
for outlets for retail distribution of our bakery products and as depots and warehouses in our
distribution system. All leases are accounted for under the guidance provided by Statement of
Financial Accounting Standards (SFAS) No. 13, Accounting for Leases. These leases are classified
as either capital leases or operating leases as appropriate. The amortization of assets under
capital lease is included with depreciation expense.
64
Software costs Costs associated with computer software projects during the preliminary project
stage are expensed as incurred. Once management authorizes and commits to funding a project,
appropriate application development stage costs are capitalized. Capitalization ceases when the
project is substantially complete and the software is ready for its intended use. Training and
maintenance costs associated with software applications are expensed as incurred. As of June 3,
2006 and May 28, 2005, approximately $20.0 million and $22.0 million, respectively, of capitalized
software costs were included in other assets in the consolidated balance sheets. Interest cost
capitalized as part of the development stage was approximately zero, $0.3 million, and $ 0.8
million in fiscal 2006, 2005, and 2004, respectively. Software costs are amortized over an
estimated useful life of seven years commencing when such assets are ready for their intended use,
resulting in approximately $2.0 million and $2.2 million of amortization expense in fiscal 2006 and
2005, respectively. At June 3, 2006 and May 28, 2005, capitalized software cost included projects
totaling approximately $10.1 million that were not yet ready for their intended use. The current
expectation is that these assets will be ready for their intended use in late fiscal 2007.
Additionally, in fiscal 2005, a decision was made by management to cease all funding, work, and
roll out of the final phase of a large software project. This event resulted in the abandonment of
a software asset and consequently, it was determined that a portion of the asset was impaired and
approximately $4.5 million of capitalized software costs were written-off in 2005.
Other intangible assets Other intangible assets, such as trademarks and trade names, are defined
as purchased assets that lack physical substance, but can be distinguished from goodwill because of
contractual or other legal rights or because the asset is capable of being sold or exchanged either
on its own or in combination with a related contract, asset or liability.
Other intangible assets with indefinite useful lives are not amortized, and are required to be
tested for impairment at least annually and more frequently if an event occurs which indicates the
intangible asset may be impaired. Intangible assets which have finite lives are amortized over
their estimated useful lives and are subject to impairment testing. We perform our annual
impairment tests of other intangible assets with indefinite useful lives at the end of our fiscal
third quarter. The performance of our impairment testing requires us to determine the fair value of
our other intangible assets, principally trademarks and trade names, for which we utilized a relief
from royalty approach.
See Note 6. Goodwill and Other Intangible Assets to these consolidated financial statements
regarding the fiscal 2005 impairment of goodwill and other intangible assets.
Impairment of long-lived assets Our long-lived assets are aggregated in ten profit centers (asset
groups) that permit us to identify cash flows from such asset groups that are largely independent
from other asset groups. We review and evaluate our asset groups for impairment when events or
changes in circumstances indicate that the related carrying amounts may not be recoverable. An
impairment loss is considered to exist if the total estimated future cash flows on an undiscounted
basis are less than the carrying amount of the related asset group.
Environmental liabilities Our environmental liabilities typically result from the remediation of
soil contamination caused by hydraulic lift and underground storage tank leakage and fuel spills at
and around depot refueling stations. To manage our environmental related liabilities, we utilize
our own employees and outside environmental engineering experts. We estimate future costs for known
environmental remediation requirements and accrue for environmental related liabilities on an
undiscounted basis when it is probable that we have incurred a liability and the related costs can
be reasonably estimated. The regulatory and government management of these projects is complex,
which is one of the primary factors that make it difficult to assess the cost of potential and
future remediation of contaminated sites. Adjustments to the liabilities are made when additional
information becomes available that affects the estimated remediation costs. In fiscal 2006, 2005,
and 2004, charges to income were approximately $2.0 million, $2.2 million and $5.1 million,
respectively, for the cost of future remediation of contaminated sites. Accruals totaling
approximately $6.6 million and $8.5 million were recorded at June 3, 2006 and May 28, 2005,
respectively, for environmental related liabilities.
Liabilities subject to compromise Under bankruptcy law, actions by creditors to collect amounts
we owe prior to the Petition Date are stayed and certain other pre-petition contractual obligations
may not be enforced against us. All pre-petition obligations, except for secured debt and those
other liabilities that we currently anticipate will not be impaired pursuant to a confirmed plan of
reorganization, have been classified as liabilities subject to compromise in the fiscal 2006 and
2005 consolidated balance sheets.
65
Pension obligations We record the pension costs and the liabilities related to our defined
benefit plan and American Bakers Association Retirement Plan, or ABA Plan, based upon actuarial
valuations. These valuations include the key assumptions determined by management, including
discount rate and expected long-term rate of return on plan assets. The expected long-term rate of
return assumption considers the asset mix of the plan portfolio, past performance of these assets
and other factors. Changes in pension cost may occur in the future due to changes in the number of
plan participants, changes in discount rate, changes in the expected long-term rate of return,
changes in the level of contributions to the plan and other factors. Due to the lack of historical
data, we have immediately recognized the impacts of all prior service costs, plan amendments, and
actuarial gains (losses) associated with the ABA Plan. See Note 11. Employee Benefit Plans to these
consolidated financial statements for related disclosures.
We also have a Supplemental Executive Retirement Plan (SERP), which provides retirement benefits to
certain officers and other select employees. The SERP is an unfunded, non-tax qualified mechanism,
which was used to enhance our ability to retain the services of certain employees. The operation of
this plan was suspended as of November 11, 2004. See Note 12. Supplemental Executive Retirement
Plan to these consolidated financial statements for related disclosures.
Reserves for self-insurance and postretirement benefits We maintain insurance programs covering
our exposure to workers compensation, general and vehicle liability and health care claims. Such
programs include the retention of certain levels of risks and costs through high deductibles and
other risk retention strategies. Reserves for these exposures are estimated for reported but unpaid
losses, as well as incurred but not reported losses, for our retained exposures and are calculated
based upon actuarially determined loss development factors as well as other assumptions considered
by management, including assumptions provided by our external insurance brokers, consultants and
actuaries. The factors and assumptions used for estimating reserves are subject to change based
upon historical experience, changes in expected cost and inflation trends, discount rates and other
factors.
Derivative instruments Derivative instruments are recognized as assets or liabilities on the
consolidated balance sheets at fair value. Changes in the fair value of derivatives are recorded
each period in earnings or accumulated other comprehensive income (OCI), to the extent effective,
depending on whether the derivative is designated and qualifies for hedge accounting under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) during the current
period. Changes in the fair value of derivative instruments recorded to OCI are reclassified to
earnings in the period affected by the underlying hedged item. Any portion of the change in fair
value of a derivative instrument determined to be ineffective under the rules is recognized in
current earnings. We record the fair market value of our derivatives based on widely available
market quotes, as well as information supplied by independent third parties. See Note 9.
Derivative Instruments to these consolidated financial statements regarding our derivative hedging
activities.
Other comprehensive income (loss) OCI relates to revenue, expenses, gains and losses which we
reflect in stockholders equity but exclude from net income. We reflect the effect of accounting
for derivative instruments which qualify for cash flow hedge accounting and the effect of the
recognition of the minimum pension liability in OCI. See Note 22. Comprehensive Income to these
consolidated financial statements for related disclosures.
Revenue recognition We recognize sales upon delivery of our products to the customer, net of
estimated credits for dated and damaged products. These estimated credits are based upon historical
experience.
Cost of products sold Our cost of products sold consists of labor costs, ingredients, packaging,
energy and other production costs. The primary ingredients used in producing our products are
flour, sweeteners, edible oils, yeast, cocoa and the other ingredients used to produce our extended
shelf life products.
Advertising and promotion costs We record advertising and promotion costs in selling and delivery
expenses. Advertising and promotion costs, through both national and regional media, are expensed
in the period in which the costs are incurred. Such costs amounted to approximately $35.8 million,
$35.1 million, and $47.5 million for fiscal 2006, 2005, and 2004, respectively.
Sales incentives We record sales incentives such as discounts, coupons and rebates, as a
reduction of net sales in our consolidated statements of operations.
66
Consideration given to a customer We record certain costs incurred by us to benefit the reseller
of our products such as costs related to improved shelf space, improved shelf position and in-store
marketing programs, as a reduction to net sales in our consolidated statements of operations.
Shipping and handling costs We record shipping and handling costs in selling, delivery and
administrative expenses. Such costs amounted to approximately $695.6 million, $736.8 million, and
$778.2 million for fiscal 2006, 2005, and 2004, respectively.
Restructuring (credits) charges Costs associated with any plan to restructure our operational
infrastructure are reported as restructuring charges in our consolidated statements of operations.
These restructuring efforts include the closure of a bakery; the partial shut down of a bakerys
production; the closing of distribution and bakery outlet operations; relocation of bakery
equipment, production or distribution to another facility; centralization of work effort and other
organizational changes. See Note 15. Restructuring (Credits) Charges to these consolidated
financial statements for related disclosures.
Long-term asset impairments related to restructurings are determined and recorded as described in
the section above entitled, Impairment of long-lived assets. Subsequent gains and losses on the
sale of such assets are also included in restructuring (credits) charges.
Reorganization charges Reorganization items are expense or income items that we incurred or
realized because we are in bankruptcy. These items include professional fees and similar types of
expenses incurred directly related to the Chapter 11 proceedings, loss accruals or gains or losses
resulting from activities of the reorganization process, payroll related expenses to retain key
employees during our reorganization, costs and claims, which stem from the rejection of leases, and
interest earned on cash accumulated by us because we are not paying a substantial portion of our
pre-petition liabilities. See Note 16. Reorganization Charges to these consolidated financial
statements for related disclosures.
Income taxes We account for income taxes using an asset and liability approach that is used to
recognize deferred tax assets and liabilities for the expected future consequences of temporary
differences between the financial reporting and tax carrying amounts of assets and liabilities. The
deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. We provide a valuation allowance against
deferred tax assets if, based on managements assessment of operating results and other available
evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized. Our tax accrual requirements are periodically adjusted based upon events impacting our
anticipated tax liabilities, such as the closing of examinations by taxing authorities. These
adjustments are charged or credited to income in the period in which the determination is made. See
Note 17. Income Taxes to these consolidated financial statements for related disclosures.
Stock-based compensation We apply Accounting Principles Board Opinion (APB Opinion) No. 25,
Accounting for Stock Issued to Employees (APB Opinion 25), and related interpretations in
accounting for our 1996 Stock Incentive Plan (the Plan), and, therefore, no compensation expense is
recognized for stock options issued under the Plan. For companies electing to continue the use of
APB Opinion 25, SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123), as amended by
SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, requires pro
forma disclosures determined through the use of an option-pricing model as if the provisions of
SFAS 123 had been adopted.
No stock options were granted during fiscal 2006 and 2005. The weighted average fair value at date
of grant for options granted during fiscal 2004 was $4.75. The fair value of each option grant was
estimated on the date of the grant using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
|
|
2004 |
Expected dividend yield |
|
|
2.0 |
% |
Expected volatility |
|
|
46.4 |
% |
Risk-free interest rate |
|
|
2.4 |
% |
Expected term in years |
|
|
4.0 |
|
67
Had we adopted the provisions of SFAS 123, estimated pro forma net income and earnings per
share would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks |
|
|
Weeks |
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(dollars in thousands, except per share data) |
|
Net loss, as reported |
|
$ |
(128,317 |
) |
|
$ |
(379,280 |
) |
|
$ |
(33,370 |
) |
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects |
|
|
944 |
|
|
|
2,670 |
|
|
|
1,341 |
|
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects |
|
|
(1,375 |
) |
|
|
(4,157 |
) |
|
|
(6,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(128,748 |
) |
|
$ |
(380,767 |
) |
|
$ |
(38,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(2.84 |
) |
|
$ |
(8.43 |
) |
|
$ |
(0.74 |
) |
Pro forma |
|
|
(2.85 |
) |
|
|
(8.46 |
) |
|
|
(0.86 |
) |
See Note 14. Stock-Based Compensation to these consolidated financial statements for related
disclosures.
Earnings per share Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted earnings per share
reflects the effect of all potential dilutive common shares, primarily stock options outstanding
under our stock compensation plan and the impact of our 6% senior subordinated convertible notes.
See Note 21. Earnings (Loss) per Share to these consolidated financial statements for related
disclosures.
Related party transactions On September 21, 2004, we appointed Antonio C. Alvarez II as our Chief
Executive Officer and John K. Suckow as our Executive Vice President and Chief Restructuring
Officer. Messrs. Alvarez and Suckow, as employees of Alvarez & Marsal, or A&M, were designated as
officers pursuant to a Letter Agreement. The terms and conditions of the Letter Agreement were
approved by the Bankruptcy Court on October 25, 2004 for services to be provided by A&M. Under the
terms of the Letter Agreement, expenses incurred for the services provided by A&M for the years
ended June 3, 2006 and May 28, 2005, excluding out-of-pocket expenses, were approximately $9.8
million and $8.6 million, respectively.
On July 18, 2005, we entered into a supplemental letter agreement with A&M (the Incentive Fee
Agreement), which sets forth the manner in which A&Ms incentive compensation is to be calculated
under the Letter Agreement. Pursuant to the Bankruptcy Courts October 25, 2004 order, notice of
the Incentive Fee Agreement was provided to certain interested parties in our bankruptcy. Upon
agreement of such parties, the time to object to the Incentive Fee Agreement has been repeatedly
extended, most recently until February 15, 2007. Therefore, absent consent of such parties, the
Incentive Fee Agreement remains subject to Bankruptcy Court approval and, accordingly, its terms
will not become effective until such consent or approval has been obtained. Pursuant to the
Incentive Fee Agreement, A&M is entitled to incentive compensation to be based on five percent of
our Total Enterprise Value (as defined in the Incentive Fee Agreement) in excess of $723 million.
Total Enterprise Value consists of two components: (1) our total cash balance as of the effective
date of our plan of reorganization, less the normalized level of cash required by us in the
ordinary course of business, plus (2) either (a) the midpoint enterprise value set forth in the
disclosure statement with respect to our plan of reorganization as confirmed by the Bankruptcy
Court or (b) the aggregate consideration received by us in a sale. Under all circumstances other
than a liquidation of our company (in which case A&M will have no guaranteed incentive
compensation), A&Ms incentive compensation will be a minimum of $3.9 million. The incentive
compensation will be payable upon the consummation of our plan of reorganization.
We purchase flour at market prices from Cereal Food Processors, Inc., a long-standing supplier, in
the regular course of our business. G. Kenneth Baum, a current director, beneficially owns not more
than a 15% equity interest in
Cereal Food Processors. Our flour purchases from Cereal Food Processors totaled approximately $85.5
million, $87.5 million, and $80.0 million for fiscal 2006, 2005, and 2004, respectively.
68
In October 2006, The Andersons, Inc. was the successful bidder in a live auction we held to sell a
purchase option we controlled as to 89 railcars we leased. Michael J. Anderson, a current
director, is the President & Chief Executive Officer of The Andersons, Inc. We issued Request for
Bids to eight railcar lessors, one of which was The Andersons, Inc. Seven bidders submitted bids.
In the arms-length bidding process, each of the seven bidders was required to submit a bid that
included specific terms, including buying our purchase option, immediately exercising the purchase
option, purchasing the railcars, and thereafter leasing the railcars to our flour suppliers for a
specified period of time. We held a live identity-preserved auction with the top three bidders,
and The Andersons, Inc. was the highest bidder. The auction process and results were approved by
the bankruptcy court in November 2006. The Andersons, Inc. paid IBC approximately $1.2 million for
the right to exercise the purchase option with the lessor, all of which IBC recorded as other income in
the second quarter of fiscal 2007.
Contingencies Various lawsuits, claims and proceedings are pending against us. In accordance with
SFAS No. 5, Accounting for Contingencies , we record accruals for such contingencies when it is
probable that a liability will be incurred and the amount of loss can be reasonably estimated. See
Note 18. Commitments and Contingencies to these consolidated financial statements for related
disclosures.
Newly Adopted Accounting Pronouncements In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 153, Exchanges of Nonmonetary Assets An Amendment of APB
Opinion No. 29 (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153 is effective for the first fiscal
period beginning after June 15, 2005, and was effective for us in the second quarter of fiscal
2006. The implementation of SFAS 153 did not have a significant impact on our consolidated
results of operations, cash flows, and financial position.
In October 2005, the FASB issued FASB Staff Position (FSP) No. 13-1, Accounting for Rental Costs
Incurred during a Construction Period, (FSP 13-1), which requires companies to expense rental costs
associated with ground or building operating leases that are incurred during a construction period.
As a result, entities that are currently capitalizing these rental costs are required to expense
them beginning in its first reporting period commencing after December 15, 2005. FSP 13-1 was
effective for us as of the fourth quarter of fiscal 2006. Our leases are structured such that we
do not take possession and accordingly do not incur rental costs during the construction period and
therefore, the implementation of FSP 13-1 did not have an impact on our consolidated results of
operations, cash flows, and financial position.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset
Retirement Obligations an interpretation of FASB Statement No. 143 (FIN 47). This
interpretation clarifies the term conditional asset retirement obligation as used in SFAS No. 143
Accounting for Asset Retirement Obligations and requires a liability to be recorded if the fair
value of the obligation can be reasonably estimated. Asset retirement obligations covered by this
interpretation include those for which an entity has a legal obligation to perform an asset
retirement activity, however the timing and (or) method of settling the obligation are conditional
on a future event that may or may not be within the control of the entity. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair value of an asset
retirement obligation.
We adopted FIN 47 on June 3, 2006. Upon initial application, FIN 47 requires recognition of (1) a
liability, adjusted for cumulative accretion from the date the obligation was incurred until the
date of adoption of FIN 47 for existing asset retirement obligations; (2) an asset retirement cost
capitalized as an increase to the carrying amount of the associated long-lived asset; and (3)
accumulated depreciation on the capitalized asset retirement cost with the net difference recorded
as a cumulative effect of a change in accounting principle.
We have conditional asset retirement obligations for the removal of underground storage tanks
(USTs) utilized for refined petroleum products. There is no obligation to remove USTs while they
remain in service. However, environmental laws require that unused USTs be removed within certain
periods of time after the USTs no longer remain in service, usually six months to three years
depending on the jurisdiction in which the USTs are located. As a result of adopting FIN 47, we
recorded a cumulative effect from retirement obligations for our 45 USTs of an
accounting change of approximately $1.0 million, $0.02 per share, and a liability of the same
amount as the related asset values were fully depreciated as of June 3, 2006. Had the adoption of
FIN 47 occurred at the beginning of the
69
earliest period presented, our results of operations and loss per share would not have been
significantly different from the amounts reported. Accordingly, pro forma financial information
has not been provided.
We also have known conditional asset retirement obligations for asbestos remediation in many of our
bakery buildings, ovens, and depots. Environmental regulations require us to handle and dispose of
asbestos in a specific manner if the building or oven undergoes major renovations or is demolished.
Otherwise, we are not required to remove the asbestos. We have determined that our practice of
maintenance and improvements to our buildings and ovens has created indeterminate lives for the
purpose of estimating asset retirement obligations. We are presently operating four bakeries that
are in excess of one hundred years old and sixty percent of all of our bakeries are fifty years old
or older. We cannot estimate the fair value of our asset retirement obligations for the asbestos
in the 36 bakeries, as well as certain of our distribution centers and
outlets, we have determined contain asbestos due to the fact that information is not
available for us to reasonably estimate a date or range of dates over which these settlements may
occur. Notwithstanding the foregoing, we performed calculations assuming a demolition settlement,
with settlement dates ranging from 50 to 100 years. We determined that the present value of the net
liability and the annual accretion amounts, under these various scenarios, were not material to our
June 3, 2006 consolidated financial statements. A liability for these obligations will be recorded
in the period when sufficient information regarding timing and method of settlement becomes
available to make a reasonable estimate of the liabilitys fair value. Although we have conducted
a formal assessment in an effort to identify our asset retirement obligation, there may be
conditional asset retirement obligations that we have not yet discovered (e.g. asbestos may exist
in certain buildings or equipment which has not been identified) and therefore, these potential
obligations also have not been included in the consolidated financial statements.
Recently Issued Accounting Pronouncements In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS
158 requires companies to recognize a net liability or asset and an offsetting adjustment to
accumulated other comprehensive income to report the funded status of defined benefit pension and
other postretirement benefit plans. SFAS 158 requires prospective application, and the recognition
and disclosure requirements are effective for the end of fiscal years ending after December 15,
2006, which will be effective for us in fiscal 2007. Additionally, SFAS 158 requires companies to
measure plan assets and obligations at their year-end balance sheet date. This requirement is
effective for fiscal years ending after December 15, 2008 and will be effective for us in fiscal
2009. We are currently in the process of evaluating the effects of the adoption of SFAS 158 on our
consolidated results of operations, cash flows, and financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for using fair value to measure assets and liabilities,
and expands disclosures about fair value measurements. This statement applies whenever other
statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 and will be effective for us in fiscal
2009. We are currently in the process of evaluating the effects of the adoption of SFAS 157 on our
consolidated results of operations, cash flows, and financial position.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 108, Quantifying Financial Misstatements (SAB 108), which expresses the Staffs views
regarding the process of quantifying financial statement misstatements. Registrants are required
to quantify the impact of correcting all misstatements, including both the carryover and reversing
effects of prior year misstatements, on the current year financial statements. The financial
statements would require adjustment when either approach results in quantifying a misstatement that
is material, after considering all relevant quantitative and qualitative factors. SAB 108 is
effective for financial statements covering the first fiscal year ending after November 15, 2006
and will be effective for us in the fourth quarter of fiscal 2007.
We are currently in the process of evaluating the effects of the
adoption of SAB 108 on our consolidated results of operations, cash
flows, and financial position.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is effective for us in fiscal 2008. FIN 48 clarifies the way that
companies account for uncertainty in income taxes by prescribing a consistent recognition threshold
and measurement attribute, as well as establishing criteria for subsequently recognizing,
derecognizing, and measuring such tax positions for financial statement purposes. The
interpretation also requires expanded disclosure with respect to uncertain income tax positions.
We are currently in the process of evaluating the effects of FIN 48 on our consolidated results of
operations, cash flows, and financial position.
70
In March 2006, the Emerging Issues Task Force (EITF) issued EITF Issue No. 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). A consensus was reached
that entities may adopt a policy of presenting sales taxes in the income statement on either a
gross or net basis. If taxes are significant, an entity should disclose its policy of presenting
taxes and the tax amounts. The guidance is effective for interim and annual reporting periods
beginning after December 15, 2006, which would be effective for us in the fourth quarter of fiscal
2007. We present retail sales net of sales taxes collected. This issue will not impact the method
for recording these sales taxes in our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154),
which replaces Accounting Principles Board Opinion (APB Opinion) No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting and reporting of a change in accounting principle. SFAS 154
requires that, when a company changes its accounting policies, it must apply the change
retrospectively to all periods presented instead of a cumulative effect adjustment in the period of
the change. SFAS 154 may also apply when the FASB issues new rules requiring changes in
accounting. However, if the new rule allows cumulative effect treatment, it would take precedence
over SFAS 154. This statement is effective for accounting changes and error corrections made in
fiscal years beginning after December 15, 2005. SFAS 154 will be effective for us in the first
quarter of fiscal 2007.
In December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based Payment (SFAS 123R),
which amends SFAS 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB Opinion 25). In April 2005, the Securities and Exchange Commission delayed the implementation
of SFAS 123R, which will be effective for public companies as of the first interim or annual
reporting period of the registrants first fiscal year that begins after June 15, 2005. Under the
new rule, SFAS 123R will become effective for us in the first quarter of fiscal 2007. Based on our
current outstanding stock options, the impact to our consolidated results of operations, cash
flows, and financial position as a result of implementing SFAS 123R is not expected to be
significant but could have a significant impact if we issue stock based compensation in future
periods.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs An Amendment of ARB No. 43,
Chapter 4 (SFAS 151). SFAS 151 is effective for fiscal years beginning after June 15, 2005, and is
effective for us in the first quarter of fiscal 2007. SFAS 151 amends the existing guidance on the
recognition of inventory costs to clarify the accounting for abnormal amounts of idle expense,
freight, handling costs, and wasted material (spoilage). Existing rules indicate that under some
circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period charges. SFAS 151
requires that those items be recognized as current period charges regardless of whether they meet
the criterion of so abnormal. In addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
We do not expect SFAS 151 to have a material impact on our consolidated results of operations, cash
flows, and financial position.
3. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Land and buildings (lives ranging from 10 to 35 years) |
|
$ |
390,573 |
|
|
$ |
440,164 |
|
Machinery and equipment (lives ranging from 4 to 15 years) |
|
|
931,408 |
|
|
|
1,023,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,321,981 |
|
|
|
1,463,691 |
|
Less accumulated depreciation |
|
|
(720,880 |
) |
|
|
(758,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
601,101 |
|
|
$ |
705,373 |
|
|
|
|
|
|
71
Based upon our historical results of operations and the availability of newly projected
financial information, in the fourth quarter of fiscal 2006, we tested our long-lived assets for
recoverability. The results of our testing indicated that the carrying value of one asset group
exceeded our estimate of the related fair value. Accordingly, we recorded an impairment loss of
approximately $4.8 million related to the machinery and equipment in that asset group.
Depreciation expense was approximately $75.7 million, $87.0 million, and $90.3 million for fiscal
2006, 2005, and 2004, respectively. Interest cost capitalized as part of the construction cost of
capital assets was approximately zero, $0.3 million, and $0.1 million in fiscal 2006, 2005, and
2004, respectively.
Included in depreciation and amortization expense is approximately $59.7 million, $70.2 million,
and $71.6 million in fiscal 2006, 2005, and 2004, respectively, that relates to property and
equipment used in our production process.
4. Assets Held for Sale
As part of our continuing efforts to address our revenue declines and high cost structure, we have
commenced a restructuring process for the consolidation and standardization of our distribution
system, delivery routes and bakery outlets throughout the nation. This process also includes a
review of productive capacity in our bakeries and where logical, we are closing bakeries and
consolidating production. Total assets held for sale at May 28, 2005 amounted to approximately
$10.6 million; all of which were sold during fiscal 2006. Also, in fiscal 2006, additional excess
assets amounting to approximately $29.4 million were identified and reclassified to assets held for
sale with $11.9 million remaining at June 3, 2006.
Net gains realized on the sale of our assets held for sale amounted to approximately $59.1 million,
$2.0 million and $0 for fiscal 2006, 2005 and 2004, respectively. Substantially all of the net
gains realized in fiscal 2006 relate to restructuring activities and are classified as long-lived
asset credits to our restructuring charges, see Note 15. Restructuring (Credits) Charges.
5. Lease Obligations
In the normal course of business, we enter into leases for office, transportation and delivery
equipment as well as real estate used for both our retail outlets and as depots and warehouses in
our distribution system. Future minimum lease payments under both operating and capital leases
(exclusive of taxes, insurance, and all leases rejected as part of our reorganization process under
our Chapter 11 proceedings as of June 3, 2006) are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Years Ending |
|
Capital Leases |
|
|
Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
1,446 |
|
|
$ |
28,914 |
|
2008 |
|
|
1,333 |
|
|
|
15,122 |
|
2009 |
|
|
1,081 |
|
|
|
7,918 |
|
2010 |
|
|
945 |
|
|
|
3,820 |
|
2011 |
|
|
748 |
|
|
|
2,569 |
|
Thereafter |
|
|
1,245 |
|
|
|
5,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
6,798 |
|
|
$ |
63,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts representing interest |
|
|
(1,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
5,065 |
|
|
|
|
|
Less: Capital lease obligations, short-term |
|
|
(5,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, long-term |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rental expense under operating leases was approximately $54.4 million, $66.2 million, and
$69.1 million for fiscal 2006, 2005, and 2004, respectively. The majority of the operating leases
contain renewal options for varying periods. Certain leases provide us with an option to acquire
the related equipment at a fair market value during or at the end of the lease term.
72
At June 3, 2006, we had in place various operating leases for equipment on which at the end of the
lease term we had guaranteed a buyout price, or residual value. FIN No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others,
on its effective date required us to disclose the undiscounted maximum potential liability of all
guaranteed lease residual values and to record a liability for the fair value of such guarantees.
At June 3, 2006, the maximum potential liability for all
guaranteed lease residual values was $7.4 million, including amounts guaranteed prior and
subsequent to the December 31, 2002 effective date of the
guidance of approximately $3.8 million
and $3.6 million, respectively. At June 3, 2006 and May 28, 2005, we had an unamortized liability
for the fair value of all guaranteed lease residual values that were entered into or modified
subsequent to the effective date of approximately $0.2 million for each year.
Certain of our leases for retail outlets and depots and warehouses in our distribution system are
classified as capital leases. Included in land and buildings we had approximately $9.6 million and
$8.8 million of asset cost under capital lease and related accumulated depreciation of
approximately $5.5 million and $4.0 million at June 3, 2006 and May 28, 2005, respectively.
During fiscal 2003 we entered into a capital lease to acquire hand-held computers and related
equipment for use in our bakery delivery system and recorded a capital lease obligation of
approximately $11.7 million to finance the purchase of this equipment. In March of 2006, the
bankruptcy court approved a motion to transfer from the lessor to us all right, title and
interest in this leased equipment for a general unsecured claim in the amount of
approximately $6.1 million, which has been reclassified to liabilities subject to compromise.
6. Goodwill and Other Intangible Assets
In fiscal 2006, our annual impairment testing of our other intangible assets indicated that no
reduction in our carrying value was required.
During the first quarter of fiscal 2005, we tested our goodwill and other intangible assets for
possible impairment following the guidance provided by SFAS No. 142, Goodwill and Other Intangible
Assets, due to our declining operating profits and liquidity issues resulting from a decrease in
sales, a high fixed cost structure, rising employee healthcare and pension costs and higher costs
for ingredients and energy. From the results of our testing, we determined that our goodwill was
fully impaired. Accordingly, we took a charge to expense during fiscal 2005 in the pre-tax amount
of $215.3 million to eliminate our goodwill.
Additionally, in the third and fourth quarters of fiscal 2005, as a result of our restructuring and
reorganization activities subsequent to our filing for bankruptcy, we further tested certain of our
intangible assets for possible impairment. Such further testing revealed that certain of our other
intangible assets were also impaired. A pre-tax impairment charge for $23.2 million was taken on
certain of our indefinite lived assets and a pre-tax impairment charge of $3.9 million was taken on
other finite lived assets. These charges resulted from plant closures and other activities which
impaired the value of certain of our trademarks and trade names.
73
Goodwill and other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
Gross carrying amount |
|
$ |
|
|
|
$ |
215,346 |
|
Impairment charge |
|
|
|
|
|
|
(215,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with indefinite lives (generally trademarks and trade names) |
|
|
|
|
|
|
|
|
Gross carrying amount |
|
$ |
157,471 |
|
|
$ |
180,662 |
|
Impairment charge |
|
|
|
|
|
|
(23,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
157,471 |
|
|
$ |
157,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with finite lives |
|
|
|
|
|
|
|
|
Gross carrying amount |
|
$ |
13,854 |
|
|
$ |
19,484 |
|
Less: |
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
(10,197 |
) |
|
|
(11,040 |
) |
Impairment charge |
|
|
|
|
|
|
(3,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
3,657 |
|
|
$ |
4,572 |
|
|
|
|
|
|
The following is a reconciliation of the impairment charges related to our other intangible
assets for fiscal 2005 and indicates where such items are reflected in the consolidated statement
of operations:
|
|
|
|
|
|
|
Fifty-Two Weeks Ended |
|
|
May 28, 2005 |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
Intangible assets with indefinite lives impairment |
|
$ |
23,191 |
|
Intangible assets with finite lives impairment |
|
|
3,872 |
|
|
|
|
|
|
|
|
|
Total impairment |
|
|
27,063 |
|
|
|
|
|
|
Restructuring charges (A) |
|
|
(12,866 |
) |
|
|
|
|
|
|
|
|
Other intangible assets impairment |
|
$ |
14,197 |
|
|
|
|
(A) See Note 15. Restructuring (Credits) Charges to these consolidated financial statements for more information.
Intangible amortization expense for fiscal 2006, 2005, and 2004 was approximately $0.9
million, $1.3 million, and $1.5 million, respectively. Of these amounts, $0.8 million for each year
was recorded as a reduction of net sales, with the remainder recorded to amortization expense in
the consolidated statements of operations. Intangible amortization for each of the subsequent five
fiscal years is estimated at $0.9 million for 2007 and 2008, $0.8 million for 2009, $0.4 million
for 2010, and $49,000 for 2011, with virtually all to be recorded as a reduction of net sales.
74
7. Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Secured |
|
|
|
|
|
|
|
|
Post-petition credit agreement |
|
$ |
|
|
|
$ |
|
|
Senior secured credit facility pre-petition |
|
|
489,817 |
|
|
|
476,402 |
|
Unsecured |
|
|
|
|
|
|
|
|
6% senior subordinated convertible notes pre-petition |
|
|
100,000 |
|
|
|
100,000 |
|
Capital leases |
|
|
|
|
|
|
|
|
Real estate |
|
|
5,065 |
|
|
|
5,797 |
|
Capital lease converted to pre-petition debt |
|
|
6,125 |
|
|
|
5,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601,007 |
|
|
|
587,916 |
|
Less: |
|
|
|
|
|
|
|
|
Current portion |
|
|
(494,882 |
) |
|
|
(482,199 |
) |
Pre-filing date claims included in liabilities subject to compromise |
|
|
(106,125 |
) |
|
|
(105,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
Post-Petition Credit Agreement
On September 23, 2004, we entered into a debtor-in-possession Revolving Credit Agreement (the DIP
Facility) which provides for a $200.0 million commitment (the Commitment) of financing to fund our
post-petition operating expenses, supplier and employee obligations. The DIP Facility originally
provided for a secured revolving line of credit through September 22, 2006, which date has been
extended to June 2, 2007 pursuant to the eighth amendment. The Commitment additionally provides,
with certain restrictions, for the issuance of letters of credit in the aggregate amount of $125.0
million (increased from the original limitation of $75.0 million as a result of prior amendments)
of which $91.3 million was utilized at June 3, 2006. We pay fees approximating 3.0% on the balance
of all letters of credit issued and outstanding under the DIP Facility. The Commitment is subject
to the maintenance of a satisfactory Borrowing Base as defined by the DIP Facility. Obligations
under the DIP Facility are secured by a superpriority lien in favor of the Lenders over virtually
all of our assets. Interest on borrowings under the DIP Facility is at either the alternate base
rate (as defined in the DIP Facility) plus 1.75%, or, at our option, the London Interbank Offered
Rate (LIBOR) plus 2.75%. We also pay a commitment fee of 0.50% on the unused portion of the DIP
Facility. Interest is payable monthly in arrears. As of June 3, 2006, there were no borrowings
outstanding under the DIP Facility and we had $90.1 million available under the DIP Facility (of
which up to $33.7 million could be used for additional letters of credit).
The DIP Facility subjects us to certain obligations, including the delivery of financial
statements, cash flow forecasts, operating budgets at specified intervals and cumulative minimum
EBITDA covenants. Currently, we expect that we will not be able to
remain in compliance with the minimum EBITDA covenant as early as
prior to the end of our 2007 third fiscal quarter. We intend to
negotiate with the lenders under the DIP Facility to obtain the
necessary relief from this covenant. However, we can give no
assurance that any relief will be obtained. Furthermore, we are subject to certain limitations on the payment of
indebtedness, entering into investments, the payment of capital expenditures, the incurrence of
cash restructuring charges and the payment of dividends. In addition, payment under the DIP
Facility may be accelerated following certain events of default including, but not limited to, (1)
the conversion of any of the bankruptcy cases to cases under Chapter 7 of the Bankruptcy Code or
the appointment of a trustee pursuant to Chapter 11 of the Bankruptcy Code; (2) our making certain
payments of principal or interest on account of pre-petition indebtedness or payables; (3) a change
of control (as defined in the DIP Facility); (4) an order of the Bankruptcy Court permitting
holders of security interests to foreclose on the debt on any of our assets which have an aggregate
value in excess of $1.0 million; and (5) the entry of any judgment in excess of $1.0 million
against us, the enforcement of which remains unstayed.
During fiscal year 2005, we completed three amendments with the DIP Facility lenders. The
amendments included the following: (1) the specification of maximum capital expenditures permitted;
(2) an increase in the maximum letter of credit facility from $75.0 million to $125.0 million; (3)
the specification of minimum cumulative EBITDA performance goals; and (4) the specification of
maximum cash restructuring charges permitted. Furthermore, during fiscal year 2006, we completed
three additional amendments. We completed a fourth amendment in November 2005
75
which authorized us to make payments up to $12.0 million for certain pre-petition real property
claims and other secured claims which were prohibited by the DIP Facility that were accruing
post-petition interest and or penalties. Our fifth amendment was completed in December 2005 and
provided us with the flexibility needed to continue to seek a resolution regarding the status of
the ABA Plan as either a multiple employer plan or an aggregate of single employer plans. Also this
amendment restated the cumulative consolidated EBITDA required under the DIP Facility and provided
for a suspension period from December 10, 2005 through June 3, 2006 where we would not be
required to meet the cumulative EBITDA requirements if our letter of credit usage under the DIP
Facility met certain prescribed limits. The sixth amendment was completed in March 2006 and
provided us with (1) the option of extending the expiration date of the letters of credit issued
under the DIP Facility for up to 365 days beyond September 22, 2006 concurrent with the posting of
cash collateral (as described in the DIP Facility); (2) the extension of the delivery date for the
consolidated financial statements for May 28, 2005, June 3, 2006 and the first, second and third
quarters of fiscal 2006 to such time as the financial statements are available; and (3) the
extension of the delivery of certain budget information from April 18, 2006 to June 30, 2006. In
fiscal 2007, we completed two additional amendments. The seventh amendment, dated June 28, 2006,
extended the suspension period established by the fifth amendment from June 3, 2006 through July
29, 2006. On August 25, 2006 the eighth amendment extended the maturity date of the DIP Facility to
June 2, 2007 and made certain other financial accommodations, including (1) increased the sub-limit
for the issuance of letters of credit to $150.0 million from $125.0 million; (2) extended the
period for delivery of financial statements; (3) reset the maximum capital expenditures covenant
levels; and (4) amended the cumulative consolidated EBITDA amounts. In addition, the eighth
amendment contained a provision that allowed us to use for general corporate purposes fifty percent
of the restricted cash previously unavailable to us, with the remaining fifty percent going to
partially repay our senior pre-petition loans. The total amount of such restricted cash subject to
the eighth amendment was approximately $90.7 million at August 25, 2006. These covenant adjustments
and accommodations were made in lieu of extending the suspension period set forth in prior
amendments.
Senior Secured Credit Facility
During fiscal year 2002, we entered into a $900.0 million senior secured credit facility agreement
with a syndicate of banks and institutional lenders which includes (1) a five-year $375.0 million
term loan A, repayable in quarterly installments; (2) a six-year $125.0 million term loan B,
repayable in quarterly installments; (3) a five-year $100.0 million term loan C, repayable in
quarterly installments; and (4) a five-year $300.0 million revolving credit facility, maturing in
July 2006, which allowed for up to $215.0 million for letters of credit. At June 3, 2006, we owed
$187.5 million, $120.0 million, $97.0 million and $85.3 million under the term loan A, term loan B,
term loan C and the revolving credit facility, respectively. In fiscal 2006, certain insurance
carriers drew upon selected letters of credit securing our insurance liabilities. As a result of
these actions, our pre-petition secured revolving debt was increased by $13.4 million with a
corresponding decrease in our reserves for insurance liabilities. At June 3, 2006, there was no
availability for additional borrowing or issuance of letters of credit under the revolving credit
facility. The Senior Secured Credit Facility is secured by all accounts receivable and a majority
of owned real property, intellectual property and equipment. The outstanding borrowings bear
interest at variable rates generally equal to LIBOR plus 3.0% on term loan A and the revolving
credit facility (9.14% at June 3, 2006), LIBOR plus 3.25% on term loan B (9.37% at June 3, 2006)
and LIBOR plus 3.0% on term loan C (9.16% at June 3, 2006). We also pay a facility fee of 0.50% on
the revolving credit facility commitment. At June 3, 2006 we had $122.3 million in letters of
credit outstanding. We pay fees ranging from 3.625% to 4.0% on the balance of all letters of credit
outstanding under the senior secured credit facility.
The senior secured credit facility agreement contains covenants which, among other matters (1)
limit our ability to incur indebtedness, merge, consolidate and acquire, dispose of or incur liens
on assets; and (2) limit aggregate payments of cash dividends on common stock and common stock
repurchases.
Due to the secured nature of the Senior Secured Credit Facility, amounts outstanding are not
considered as liabilities subject to compromise and interest, fees and expenses continue to be
accrued and paid monthly.
6% Senior Subordinated Convertible Notes
On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior
subordinated convertible notes due August 15, 2014 in a private placement. Purchasers had an option
to purchase in the aggregate up to $20.0 million in additional notes for a period of 60 days
following the closing, which purchase option was not
76
exercised. The notes are convertible at the option of the holder under certain circumstances into
shares of our common stock at an initial conversion rate of 98.9854 shares per $1,000 principal
amount of notes (an initial conversion price of $10.1025 per share), subject to
adjustment. As these notes are unsecured, they are included in liabilities subject to compromise
and the accrual of interest has been suspended.
Other Matters
At June 3, 2006 and May 28, 2005, we have classified all of our debt as payable within one year due
to our default under credit agreements or due to the effects of our bankruptcy process.
We believe, based upon the variable nature of our interest terms that the carrying value of our
senior secured credit facility as of June 3, 2006 and May 28, 2005 approximated fair value. We have
suspended interest payments on our 6% subordinated convertible notes and have reclassified the
notes to liabilities subject to compromise. Accordingly, there is no reasonable method to determine
the fair value of these notes at June 3, 2006 and May 28, 2005.
In fiscal 2006, we incurred approximately $0.7 million in debt fees associated with the fifth and
sixth amendments of the DIP Facility. In fiscal 2005, we incurred approximately $10.4 million in
debt fees which included syndication and structuring fees on our DIP, placement fees on our $100.0
million 6% senior subordinated convertible bonds, and amendment fees on our senior secured credit
facility agreement. Additionally, included in this balance is approximately $1.6 million in legal
costs related to the above debt. Fees in the amount of $3.0 million
for the placement of the $100.0 million 6% senior subordinated
convertible bonds and legal expenses of $0.9 million were each
written off to reorganization expense in accordance with Emerging
Issues Task Force 96-19, Debtors Accounting for a
Modification or Exchange of Debt Instruments. All other debt fees
are classified as other assets in the consolidated balance sheets and
are being amortized as interest expense over the term of the
respective debt agreements.
8. Accrued Expenses and Other Liabilities
Included in accrued expenses are the following:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Self-insurance reserves |
|
$ |
74,882 |
|
|
$ |
91,170 |
|
Payroll, vacation and other compensation |
|
|
66,560 |
|
|
|
73,267 |
|
Current portion of postretirement benefit plan obligations |
|
|
43,245 |
|
|
|
19,301 |
|
Pension and welfare accruals |
|
|
15,869 |
|
|
|
21,378 |
|
Taxes other than income |
|
|
25,509 |
|
|
|
30,262 |
|
Included in other liabilities are the following:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Accumulated postretirement benefit obligation |
|
$ |
87,955 |
|
|
$ |
94,522 |
|
Self-insurance reserves |
|
|
131,421 |
|
|
|
118,758 |
|
9. Derivative Instruments
We are exposed to market risks relative to commodity price fluctuations. To manage the volatility
associated with this exposure, we utilize commodity derivative instruments to manage certain
commodity prices. All financial instruments are used solely for hedging purposes and are not
issued or held for speculative reasons.
Commodities we use in the production of our products are subject to wide price fluctuations,
depending upon factors such as weather, crop production, worldwide market supply and demand and
government regulation. Our objective
77
is to utilize commodity hedging derivatives, including exchange traded futures and options on
wheat, corn, soybean oil and certain fuels, to reduce our exposure to commodity price movements for
future ingredient and energy needs. The strategy is to purchase futures and options to hedge the
variability of cash flows related to the underlying commodity. The terms of such instruments, and
the hedging transactions to which they relate, generally do not exceed one year.
We formally document the nature of and relationships between the hedging instruments and the hedged
items at the inception of the trade, as well as its risk-management objectives, strategies for
undertaking the various hedge transactions and methods of assessing hedge effectiveness.
Historically, the majority of our derivative instruments related to wheat and natural gas have been
designated and qualify as cash flow hedges under SFAS No. 133. The wheat instruments are designated
as cash flow hedges under the long-haul method, which requires us to evaluate the effectiveness of
the hedging relationships on an ongoing basis and to recalculate changes in fair value of the
derivatives and the related hedged items independently. Unrealized gains or losses on cash flow
hedges are recorded in OCI, to the extent the cash flow hedges are effective, and are reclassified
to cost of products sold in the period in which the hedged forecasted transaction impacts earnings.
For hedges of future commodities needs, earnings are impacted when our products are produced.
In addition, from time to time we enter into commodity derivatives, principally corn, soybean oil,
and heating oil, in which we do not elect to apply hedge accounting. Realized and unrealized gains
or losses on these positions are recorded in the consolidated statements of operations in cost of
products sold or selling, delivery and administrative expenses as appropriate.
Derivative commodity instruments accounted for under SFAS No. 133 are subject to mark-to-market
accounting, under which changes in the market value of outstanding commodities are recognized as
unrealized gains or losses in the consolidated statements of operations or OCI in the period of
change. We record the fair market value of our derivatives based on widely available market
quotes, as well as information supplied by independent third parties.
During fiscal 2006, we did not elect to apply hedge accounting for any of our derivative commodity
purchases and all such derivatives were marked-to-market through cost of products sold or selling,
delivery and administrative expenses as appropriate. The only derivative activity in OCI for
fiscal 2006 was the reclassification to cost of products sold of amounts in OCI at fiscal 2005 year
end.
At May 28, 2005, we had accumulated gains of $0.5 million related to commodity derivatives which
were substantially realized and recorded in OCI, with offsetting entries to other current assets.
During fiscal 2005, we recognized a loss of $0.7 million in cost of products sold resulting from
hedge ineffectiveness of commodity hedges.
During fiscal 2004, we recognized a gain in earnings resulting from hedge ineffectiveness of
commodity hedges of $1.0 million, net of income taxes, in cost of products sold.
At June 3, 2006, the fair value of our commodity derivatives was a loss of approximately $0.1
million based upon widely available market quotes. At May 28, 2005, the fair value of our
commodity derivatives was de minimis based upon widely available market quotes.
We are exposed to credit losses in the event of nonperformance by counterparties on commodity
derivatives.
10. Liabilities Subject to Compromise
Under bankruptcy law, actions by creditors to collect amounts we owe prior to the petition date are
stayed and certain other pre-petition contractual obligations may not be enforced against us. All
pre-petition amounts have been classified as liabilities subject to compromise in the fiscal 2006
and 2005 consolidated balance sheets except for secured debt and those other liabilities that we
expect will not be impaired pursuant to a confirmed plan of reorganization.
On December 14, 2004, the Court entered an Order establishing March 21, 2005 as the last date for
all persons and entities holding or wishing to assert bankruptcy claims against the Company or one
of its subsidiaries to file a proof
78
of claim form. As of December 6, 2006, we have received approximately 9,100 claims, some of which
have been filed after the deadline established by the court. We continue to evaluate all claims
asserted in the bankruptcy proceedings and file periodic motions with the court to reject, modify,
liquidate or allow such claims. In addition, we may receive additional claims resulting from the
future rejection of executory contracts where the deadline to file a claim resulting from a
contract rejection is a function of when such contracts are formally rejected. Amounts that we have
recorded may, in certain instances, be different than amounts asserted by our creditors and remain
subject to reconciliation and adjustment.
We received approval from the Court to pay or otherwise honor certain of our pre-petition
obligations, including employee salaries and wages, benefits and certain tax and other claims. We
also have suspended the accrual of interest on the unsecured 6% senior subordinated convertible
notes in the aggregate principle amount of $100.0 million that we issued August 12, 2004. The
cumulative contractual unrecorded interest at June 3, 2006 on these obligations was approximately
$10.1 million. The unrecorded interest expense for fiscal 2006 and 2005 on these obligations was
approximately $6.0 million and $4.1 million, respectively. See Note 7. Debt to these consolidated
financial statements for a discussion of the credit arrangements we entered into subsequent to the
Chapter 11 filing.
The following table summarizes the components of the liabilities subject to compromise in our
consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
129,951 |
|
|
$ |
129,294 |
|
Taxes payable |
|
|
7,966 |
|
|
|
10,264 |
|
Retirement obligations (SERP and deferred compensation) |
|
|
14,598 |
|
|
|
13,821 |
|
Legal reserve |
|
|
12,910 |
|
|
|
12,931 |
|
Interest bearing debt and capital leases |
|
|
106,125 |
|
|
|
105,717 |
|
Other |
|
|
15,530 |
|
|
|
10,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
287,080 |
|
|
$ |
282,229 |
|
|
|
|
|
|
Liabilities subject to compromise for taxes payable decreased in 2006 for two primary reasons.
During 2006, we received approval from a taxing jurisdiction for tax credits we had claimed for
prior years, which offset other amounts previously recorded as payable to this jurisdiction. In
addition, we also reached settlements with other taxing jurisdictions regarding amounts owed for
prior periods, at amounts less than we had previously recorded.
The increase in other liabilities subject to compromise primarily reflects an increase of $2.9
million related to the settlement of various insurance claims and an increase of $1.2 million
related to additional leases rejected in our bankruptcy proceedings.
11. Employee Benefit Plans
American Bakers Association Retirement Plan
In December, 2004, we began a review with respect to the proper accounting treatment for the
American Bakers Association Retirement Plan, or ABA Plan, in light of newly identified information.
Prior to our recent restructuring efforts, approximately 900 active IBC employees participated
under the pension plan, although the number of active employees has significantly decreased as a
result of the restructuring to approximately 350 active employees in
the ABA Plan as of September 30,
2006. We had previously accounted for the ABA Plan as a multi-employer plan, which resulted in
recognition of expense in the amount of our actual contributions to the ABA Plan but did not
require recognition of any service cost or interest cost or for the Company to record any minimum
pension benefit obligation on our balance sheet.
Upon review, the Company has determined that the ABA Plan is a type of pension plan that requires
recognition of service cost and interest cost. Additionally, we have concluded our balance sheet
should also reflect the appropriate
79
pension benefit obligation. We believe that the ABA Plan has been historically administered as a
multiple employer plan under ERISA and tax rules and should be treated as such. However, the
amounts reflected in our financial statements were calculated on the basis of treating the ABA Plan
as an aggregate of single employer plans under ERISA and tax rules, which is how the ABA Plan
contends it should be treated. We have reflected our interest in the ABA Plan as an aggregate of
single employer plans despite our position on the proper characterization of the ABA Plan due to
representations we received from the ABA Plan and a 1979 determination issued by the Pension
Benefit Guaranty Corporation (PBGC) (as discussed below). As of June 3, 2006, we have recorded a
net pension benefit obligation liability of approximately $58.0 million with respect to our
respective interest in the ABA Plan, reflecting its characterization as an aggregate of single
employer plans.
As a result of a request made by us and the Kettering Baking Company, another participating
employer in the ABA Plan, the PBGC, which is the federal governmental agency that insures and
supervises defined benefit pension plans, revisited its 1979 determination that the Plan was an
aggregate of single employer plans and after reviewing the status of the ABA Plan, on August 8,
2006, made a final determination that the ABA Plan is a multiple employer plan under ERISA and tax
rules. On August 9, 2006, we filed a lawsuit in Bankruptcy Court seeking enforcement of the PBGCs
determination, but there can be no assurance as to whether we will obtain such enforcement or the
amount of any reduction to our net benefit obligation liability. Accordingly, due to the lack of a
definitive resolution of this uncertainty prior to the end of the fiscal periods presented herein,
as noted above we have continued to reflect our interests in the ABA Plan as an aggregate of single
employer plans.
In our December 2005 submission requested by the PBGC in connection with its review of the 1979
determination referred to above, we asserted our belief based on available information that
treatment of the ABA Plan as a multiple employer plan will result in an allocation of pension plan
assets to our pension plan participants in an amount equal to approximately $40.0 million. We
believe that treatment of the ABA Plan as a multiple employer plan will result in a significant
reduction in our net pension benefit obligation with respect to our employee participants from that
which is reflected in the table below. The ultimate outcome of this uncertainty cannot presently be
determined.
In addition, we have received requests for additional corrective contributions under the single
employer plan assumption, which we do not believe is correct. We have not made such contributions
pending the resolution of the uncertainties surrounding the ABA Plan. However, we expect that the
amount of such contributions would be significantly less than amounts assessed by the ABA Plan on
the assumption that the plan was an aggregate of single employer plans.
The following tables detail our respective interest in the ABA Plan, reflecting its
characterization as an aggregate of single employer plans.
The components of the pension (credit) expense for the ABA Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,579 |
|
|
$ |
2,051 |
|
|
$ |
2,512 |
|
Interest cost |
|
|
3,208 |
|
|
|
3,252 |
|
|
|
2,870 |
|
Expected return on negative plan assets |
|
|
248 |
|
|
|
398 |
|
|
|
257 |
|
Recognition of |
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
|
|
|
|
423 |
|
|
|
1,358 |
|
Actuarial (gain) loss |
|
|
(5,555 |
) |
|
|
7,708 |
|
|
|
(1,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total periodic pension (credit) cost |
|
|
(520 |
) |
|
|
13,832 |
|
|
|
5,936 |
|
Curtailment gain |
|
|
(1,176 |
) |
|
|
(2,641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension (credit) expense |
|
$ |
(1,696 |
) |
|
$ |
11,191 |
|
|
$ |
5,936 |
|
|
|
|
|
|
|
|
80
The aggregate changes in our benefit obligation and plan assets, along with actuarial
assumptions used, related to the ABA Plan as an aggregate of single employer plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
59,806 |
|
|
$ |
51,463 |
|
Service cost |
|
|
1,579 |
|
|
|
2,051 |
|
Interest cost |
|
|
3,208 |
|
|
|
3,252 |
|
Benefit and expense payments |
|
|
(3,405 |
) |
|
|
(3,308 |
) |
Plan amendment |
|
|
|
|
|
|
423 |
|
Actuarial (gain) loss |
|
|
(4,469 |
) |
|
|
8,566 |
|
Curtailment gain |
|
|
(1,176 |
) |
|
|
(2,641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
|
55,543 |
|
|
|
59,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
(2,444 |
) |
|
|
(4,289 |
) |
Employer contributions |
|
|
2,261 |
|
|
|
4,694 |
|
Benefits and expense payments |
|
|
(3,405 |
) |
|
|
(3,308 |
) |
Actual return on plan assets |
|
|
838 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
(2,750 |
) |
|
|
(2,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation liability at end of year |
|
$ |
58,293 |
|
|
$ |
62,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average actuarial assumptions (using a measurement date of May 31): |
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.3 |
% |
|
|
5.5 |
% |
Expected return on plan assets |
|
|
7.5 |
% |
|
|
7.5 |
% |
The ABA Plans net benefit obligation liability is recorded in other liabilities except for
the current portion of $37.5 million and $12.0 million for June 3, 2006 and May 28, 2005,
respectively, which is recorded in accrued expenses.
The ABA Plan is invested in a diversified portfolio of securities. The plan asset categories as of
June 3, 2006 are as follows: domestic equities 57%, fixed income 40% and cash and cash equivalents
3%.
Based upon historical returns, current asset mix and the target asset allocation as determined by
the plans trustees, we have used a weighted average expected return on plan assets of 7.5%.
In January, April, July, and October 2006, we failed to make four required quarterly minimum
funding contributions for a total of approximately $13.9 million to the ABA Plan and filed the
necessary report with the PBGC. In addition, in June 2006 we received notice of a corrective
contribution of $13.9 million, which we did not pay. The status of future employer contributions is
currently unknown. Our estimated future benefit payments required under the ABA Plan are as
follows:
|
|
|
|
|
Fiscal Years Ending |
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Benefit payments |
|
|
|
|
2007 |
|
$ |
3,436 |
|
2008 |
|
|
3,461 |
|
2009 |
|
|
3,509 |
|
2010 |
|
|
3,592 |
|
2011 |
|
|
3,670 |
|
2012-2016 |
|
|
19,728 |
|
81
Defined Benefit Pension Plan
We also maintain a defined benefit pension plan to benefit certain union and nonunion employee
groups, with participation generally resulting from business acquisitions. The components of the
pension expense for the defined benefit pension plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
904 |
|
|
$ |
673 |
|
|
$ |
704 |
|
Interest cost |
|
|
4,038 |
|
|
|
3,728 |
|
|
|
3,715 |
|
Expected return on plan assets |
|
|
(4,885 |
) |
|
|
(4,347 |
) |
|
|
(3,354 |
) |
Recognition of |
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
285 |
|
|
|
173 |
|
|
|
177 |
|
Actuarial loss |
|
|
542 |
|
|
|
200 |
|
|
|
1,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense |
|
$ |
884 |
|
|
$ |
427 |
|
|
$ |
2,683 |
|
|
|
|
|
|
|
|
The aggregate changes in our benefit obligation and plan assets, along with actuarial
assumptions used, related to the defined benefit pension plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
68,722 |
|
|
$ |
63,520 |
|
Service cost |
|
|
904 |
|
|
|
673 |
|
Interest cost |
|
|
4,038 |
|
|
|
3,728 |
|
Amendments |
|
|
|
|
|
|
998 |
|
Actuarial loss |
|
|
1,812 |
|
|
|
4,560 |
|
Employee contributions |
|
|
61 |
|
|
|
58 |
|
Benefits and expenses paid |
|
|
(5,047 |
) |
|
|
(4,815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
|
70,490 |
|
|
|
68,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
59,174 |
|
|
|
54,473 |
|
Actual return on plan assets |
|
|
10,500 |
|
|
|
5,256 |
|
Employer contributions |
|
|
1,283 |
|
|
|
4,202 |
|
Employee contributions |
|
|
61 |
|
|
|
58 |
|
Benefits and expenses paid |
|
|
(5,047 |
) |
|
|
(4,815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
65,971 |
|
|
|
59,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets less than benefit obligation |
|
|
4,519 |
|
|
|
9,548 |
|
Unrecognized prior service cost |
|
|
(1,990 |
) |
|
|
(2,275 |
) |
Unrecognized net loss |
|
|
(7,335 |
) |
|
|
(11,680 |
) |
Additional minimum pension liability |
|
|
8,668 |
|
|
|
13,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation liability at end of year |
|
$ |
3,862 |
|
|
$ |
8,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset at end of year |
|
$ |
1,990 |
|
|
$ |
2,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation |
|
$ |
69,833 |
|
|
$ |
67,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average actuarial assumptions (using a measurement date of March 31): |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.8 |
% |
|
|
6.0 |
% |
Expected return on plan assets |
|
|
8.5 |
% |
|
|
8.5 |
% |
Rate of compensation increase |
|
|
4.5 |
% |
|
|
4.5 |
% |
82
We recorded a minimum pension liability in other liabilities of approximately $8.7 million at
June 3, 2006 and $13.1 million at May 28, 2005, representing the excess of the unfunded accumulated
benefit obligation over plan assets and accrued pension costs. Of the ending liability balances at
June 3, 2006 and May 28, 2005, approximately $0 and $1.3 million, respectively, were included in
accrued expenses with the remainder in other liabilities. An intangible asset equal to the
unrecognized prior service costs of approximately $2.0 million at June 3, 2006 and $2.3 million at
May 28, 2005 was also recorded. The remaining approximately $6.7 million at June 3, 2006 and $10.8
million at May 28, 2005 was recorded to equity in OCI.
The defined benefit pension plan is invested in a diversified portfolio of securities. The plan
asset categories as of June 3, 2006 are as follows: equities 77%, bonds 21% and cash and cash
equivalents 2%. The target asset allocation for the plan is as follows: equities 78% and bonds 22%.
Based upon historical returns, current asset mix and our target asset allocation which is focused
on equities, we have used a weighted average expected return on plan assets of 8.5% for 2006 and
2005.
Our estimated future cash flows for the defined benefit pension plan are as follows:
|
|
|
|
|
Fiscal Years Ending |
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Employer contributions |
|
|
|
|
2007 |
|
$ |
|
|
|
|
|
|
|
Benefit payments |
|
|
|
|
2007 |
|
$ |
4,430 |
|
2008 |
|
|
4,483 |
|
2009 |
|
|
4,542 |
|
2010 |
|
|
4,588 |
|
2011 |
|
|
4,667 |
|
2012-2016 |
|
|
24,739 |
|
Postretirement Health and Life Plans
In addition to providing retirement pension benefits, we provide health care and life insurance
benefits for certain eligible retired employees.
In fiscal 2004 and prior, under our plans, all nonunion employees, with 10 years of service after
age 50, were eligible for retiree health care coverage between ages 60 and 65.
In early December 2003, we announced a major revision to our nonunion postretirement health care
plans that was effective on January 1, 2004. The revision required grandfathered participants and
their dependents over 65 years of age, who generally have only supplemental benefits after Medicare
eligibility, to contribute at levels intended to fully fund the coverage provided. In addition, the
revision required participants and their dependents between ages 60 and 65 to contribute at levels
intended to fund approximately 40% of the plan costs. These plan changes reduced our accumulated
postretirement benefit obligation, which is unfunded, by approximately $70.0 million.
In April 2005, the bankruptcy court approved a motion to discontinue nonunion postretirement health
care coverage for all future retirees, although participation is open to certain grandfathered
retirees and dependents generally through age 65. This plan change reduced our accumulated
postretirement benefit obligation by $9.2 million.
Certain union employees who have bargained into our company-sponsored health care plans are
generally eligible after age 55 to 60, with 10 to 20 years of service, and have no benefits after
Medicare eligibility is reached. Certain of the plans require contributions by retirees and spouses
and a limited number of participants have supplemental benefits after Medicare eligibility.
83
The components of the net postretirement benefit (credit) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,444 |
|
|
$ |
2,773 |
|
|
$ |
4,988 |
|
Interest cost |
|
|
3,391 |
|
|
|
4,840 |
|
|
|
8,330 |
|
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service benefit |
|
|
(7,392 |
) |
|
|
(6,644 |
) |
|
|
(3,473 |
) |
Unrecognized net loss |
|
|
1,308 |
|
|
|
1,619 |
|
|
|
4,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total postretirement benefit (credit) expense |
|
|
(1,249 |
) |
|
|
2,588 |
|
|
|
14,231 |
|
Curtailment gain included in restructuring
charges (See Note 15. Restructuring (Credits)
Charges) |
|
|
|
|
|
|
(4,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit (credit) expense |
|
$ |
(1,249 |
) |
|
$ |
(1,684 |
) |
|
$ |
14,231 |
|
|
|
|
|
|
|
|
|
The aggregate change in our accumulated postretirement benefit obligation (APBO), which is
unfunded, is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
APBO at beginning of year |
|
$ |
63,213 |
|
|
$ |
76,367 |
|
Service cost |
|
|
1,444 |
|
|
|
2,773 |
|
Interest cost |
|
|
3,391 |
|
|
|
4,840 |
|
Participant contributions |
|
|
2,134 |
|
|
|
5,071 |
|
Plan amendment |
|
|
|
|
|
|
(9,152 |
) |
Plan curtailment |
|
|
|
|
|
|
(2,870 |
) |
Actuarial gain |
|
|
(4,113 |
) |
|
|
(1,495 |
) |
Benefits paid |
|
|
(7,724 |
) |
|
|
(12,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APBO at end of year |
|
|
58,345 |
|
|
|
63,213 |
|
Unrecognized prior service benefit |
|
|
55,872 |
|
|
|
63,264 |
|
Unrecognized net loss |
|
|
(20,517 |
) |
|
|
(25,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued postretirement benefit |
|
|
93,700 |
|
|
|
100,540 |
|
Less current portion |
|
|
(5,745 |
) |
|
|
(6,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APBO included in other liabilities |
|
$ |
87,955 |
|
|
$ |
94,522 |
|
|
|
|
|
|
In determining the APBO, the weighted average discount rate was assumed to be 6.3%, 5.5%, and
6.5% for fiscal 2006, 2005, and 2004, respectively (using a May 31 measurement date). The assumed
health care cost trend rate for fiscal 2006 was 9.0%, declining gradually to 5.5% over the next 8
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 2006 by approximately
$0.6 million, as well as increase the June 3, 2006 APBO by approximately $5.4 million. Conversely,
a 1.0% decrease in this rate would decrease the fiscal 2006 expense by approximately $0.5 million
and the June 3, 2006 APBO by approximately $5.0 million.
84
Our estimated future cash flows for the postretirement benefit plan are as follows:
|
|
|
|
|
Fiscal Years Ending |
|
(dollars in thousands) |
|
|
|
|
|
|
Employer contributions (reduced by expected participant contributions) |
|
|
|
|
2007 |
|
$ |
5,745 |
|
|
|
|
|
|
Benefit payments |
|
|
|
|
2007 |
|
$ |
7,500 |
|
2008 |
|
|
6,984 |
|
2009 |
|
|
6,573 |
|
2010 |
|
|
6,221 |
|
2011 |
|
|
6,213 |
|
2012-2016 |
|
|
29,763 |
|
Employee Stock Purchase Plan
On September 21, 2004, in conjunction with our bankruptcy filing, we terminated our 1991 Employee
Stock Purchase Plan. The Plan was noncompensatory, which allowed all eligible employees to purchase
our common stock.
Defined Contribution Retirement Plan
We sponsor a defined contribution retirement plan for eligible employees not covered by union
plans. Contributions are based upon voluntary employee contributions plus a discretionary company
profit-driven contribution. We did not, nor do we intend to, make the discretionary company
contribution under our defined contribution retirement plan for calendar years 2006, 2005 and 2004.
Retirement expense related to this plan was approximately $5.2 million, $0.2 million and $17.8
million for fiscal 2006, 2005, and 2004, respectively. Fiscal 2005 retirement expense reflects a
$5.0 million reversal of amounts accrued during fiscal 2004 related to the decision during fiscal
2005 to forgo the calendar year 2004 discretionary company contribution.
Negotiated Multi-Employer Pension Plans
Approximately 82% of our employees are covered by collective bargaining agreements.
We contribute
to approximately 40 multi-employer pension plans on behalf of employees covered by our collective bargaining
agreements. Bakery and Confectionery Union and Industry International Pension Fund, which covers
the largest number of our union employees, provides retirement benefits to approximately 9,500 of
our total employees. Our collective bargaining agreements determine the amount of annual
contributions we are required to make to the multi-employer pension plans in which our union
employees participate. The pension plans provide defined benefits to retired participants and, in
some cases, their beneficiaries. The multi-employer plans are managed by trustees, who are
appointed by management of the employers participating in the plans (including our company, in some
cases) and the affiliated unions, who have fiduciary obligations to act prudently and in the best
interests of the plans participants. We recognize as net pension cost contractually required
contributions and special periodic assessments, and recognize as a liability any contribution due
or unpaid. Expense for these plans was approximately $125.8 million, $133.5 million and $132.0
million for fiscal 2006, 2005, and 2004, respectively. Based on the most recent information
available to us, we believe that certain of the multi-employer pension plans to which we contribute
are substantially underfunded.
Under current law regarding multi-employer pension plans, a termination, withdrawal or significant
partial withdrawal from any such plan, which was underfunded, would render us liable for our
proportionate share of that liability. This potential unfunded pension liability also applies
ratably to other contributing employers, including our unionized competitors. Information regarding
under-funding is generally not provided by plan administrators and trustees and when provided, is
difficult to independently validate. Any public information available relative to multi-employer
pension plans is often dated and of limited value as well. Accordingly, the necessary information
is not reliably available to accurately estimate a dollar amount or a range of a potential
contingent liability in the event we were to partially or fully withdraw from certain or all of our
multi-employer pension plans.
85
Multi-Employer Postretirement Health Care Benefit Plans
We also participate in a number of multi-employer plans which provide postretirement health care
benefits to substantially all union employees not covered by our plans. Amounts reflected as
benefit cost and contributed to such plans, including amounts related to health care benefits for
active employees, totaled approximately $195.0 million, $205.7 million, and $193.5 million in
fiscal 2006, 2005, and 2004, respectively.
12. Supplemental Executive Retirement Plan
We established a Supplemental Executive Retirement Plan (SERP) effective June 2, 2002. The SERP
provided retirement benefits to certain officers and other select employees. The SERP is a non-tax
qualified mechanism, which was intended to enhance our ability to retain the services of certain
employees. The benefits were limited to a maximum of 1.8% of a participants final average salary
multiplied by the years of credited service up to twenty years. In fiscal 2003, we entered into a
rabbi trust agreement to protect the assets of the SERP for our participating employees. Included
in other assets on the consolidated balance sheet as of June 3, 2006 and May 28, 2005 is
approximately $5.9 million and $5.7 million, respectively, of restricted assets held in the rabbi
trust.
Subsequent to our bankruptcy filing, we suspended the SERP as of November 11, 2004. The related
suspension of payments and accruals of service credit under our SERP resulted in a net curtailment
loss of approximately $10.3 million, which included a curtailment loss related to the write-off of
prior service costs of approximately $12.4 million and a curtailment gain of approximately $2.1
million resulting from the reduction in the salary increase assumption to zero. An additional $1.5
million of the curtailment gain was offset to the actuarial loss not yet recognized at the date of
the plan suspension. Approximately $10.6 million and $9.9 million representing the portion of the
SERP liability, at June 3, 2006 and May 28, 2005, respectively, attributable to retired
participants has been reclassified to liabilities subject to compromise.
The components of the SERP expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
462 |
|
|
$ |
1,066 |
|
Interest cost |
|
|
1,354 |
|
|
|
1,494 |
|
|
|
1,508 |
|
Recognition of |
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
|
|
|
|
1,259 |
|
|
|
2,729 |
|
Actuarial loss |
|
|
|
|
|
|
58 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
|
1,354 |
|
|
|
3,273 |
|
|
|
5,406 |
|
Net curtailment loss related to plan suspension |
|
|
|
|
|
|
10,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SERP expense |
|
$ |
1,354 |
|
|
$ |
13,614 |
|
|
$ |
5,406 |
|
|
|
|
|
|
|
|
|
|
|
86
The aggregate changes in our SERP, along with actuarial assumptions used, are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
SERP obligation at beginning of year |
|
$ |
22,573 |
|
|
$ |
26,928 |
|
Service cost |
|
|
|
|
|
|
462 |
|
Interest cost |
|
|
1,354 |
|
|
|
1,494 |
|
Plan amendment |
|
|
|
|
|
|
(3,511 |
) |
Actuarial (gain) loss |
|
|
(105 |
) |
|
|
(2,619 |
) |
Benefits paid |
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP obligation at end of year |
|
|
23,822 |
|
|
|
22,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of SERP assets at beginning of year |
|
|
|
|
|
|
|
|
Employer contributions |
|
|
|
|
|
|
181 |
|
Benefits paid |
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of SERP assets at end of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status |
|
|
23,822 |
|
|
|
22,573 |
|
Unrecognized net actuarial gain |
|
|
666 |
|
|
|
561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SERP liability |
|
|
24,488 |
|
|
|
23,134 |
|
SERP liability classified as liabilities subject to compromise |
|
|
(10,621 |
) |
|
|
(9,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net SERP liability included in other liabilities |
|
$ |
13,867 |
|
|
$ |
13,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate assumptions (using a measurement date of March 31) |
|
|
5.8 |
% |
|
|
6.0 |
% |
Due to the suspension of the SERP, we are not currently contributing funds or paying benefits
out of the plan. Future contributions and benefit payments are dependent on the disposition of the
plan in conjunction with the bankruptcy reorganization plan.
13. Key Employee Retention Plan
On February 17, 2005, the Bankruptcy Court approved a Key Employee Retention Plan which was
designed to provide incentives to retain key employees of IBC during our reorganization and
restructuring period. The plan provides first for a retention bonus which would compensate senior
participants to remain with IBC during and throughout the reorganization and restructuring process.
Second, there is a performance bonus element which rewards key management employees for
successfully meeting or exceeding a predetermined range of earnings before interest, taxes,
depreciation, amortization and restructuring (EBITDAR). Retention and performance bonus amounts are
calculated upon varying percentages of annual compensation based upon management positions held
within IBC and the degree to which the financial goal of EBITDAR is met or exceeded.
Expense is accrued ratably over the period of time that performance or service is expected.
Expense under these two plans for fiscal 2006 and 2005 is classified as employee retention expense
and is included in reorganization expense, see Note 16. Reorganization Charges. It is expected
that the aggregate expense we will incur under these two incentive plans will be approximately
$12.9 million.
14. Stock-Based Compensation
The 1996 Stock Incentive Plan allows us to grant to employees and directors various stock awards
including stock options, which are granted at prices not less than the fair market value at the
date of grant, and deferred shares. A maximum of approximately 18.7 million shares was approved by
our stockholders to be issued under the Plan. On June 3, 2006, shares totaling approximately 8.1
million were authorized but not awarded under the Plan.
87
The stock options may be granted for a period not to exceed ten years and generally vest from one
to three years from the date of grant. The changes in outstanding options are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
|
Under Option |
|
|
Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 31, 2003 |
|
|
9,584 |
|
|
$ |
21.96 |
|
Issued |
|
|
20 |
|
|
|
13.59 |
|
Surrendered |
|
|
(4,477 |
) |
|
|
29.26 |
|
Exercised |
|
|
(55 |
) |
|
|
14.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 29, 2004 |
|
|
5,072 |
|
|
|
15.57 |
|
Options reinstated due to rescinds |
|
|
312 |
|
|
|
31.82 |
|
Surrendered |
|
|
(866 |
) |
|
|
16.90 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 28, 2005 |
|
|
4,518 |
|
|
|
16.43 |
|
Issued |
|
|
|
|
|
|
|
|
Surrendered |
|
|
(409 |
) |
|
|
16.81 |
|
Exercised |
|
|
(10 |
) |
|
|
10.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 3, 2006 |
|
|
4,099 |
|
|
|
16.41 |
|
|
|
|
|
|
|
|
Stock options outstanding and exercisable as of June 3, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
Range of Exercise |
|
Shares |
|
|
Price |
|
|
Contractual |
|
Prices Per Share |
|
Under Option |
|
|
Per Share |
|
|
Life In Years |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
$10.00 |
|
|
1,498 |
|
|
$ |
10.00 |
|
|
|
6.73 |
|
11.80 $14.50 |
|
|
1,120 |
|
|
|
14.22 |
|
|
|
4.56 |
|
14.98 23.75 |
|
|
925 |
|
|
|
20.87 |
|
|
|
2.00 |
|
24.19 33.91 |
|
|
556 |
|
|
|
30.66 |
|
|
|
3.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10.00 - $33.91 |
|
|
4,099 |
|
|
|
16.41 |
|
|
|
4.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable: |
|
|
|
|
|
|
|
|
|
|
|
|
$10.00 |
|
|
1,498 |
|
|
|
10.00 |
|
|
|
|
|
11.80 14.50 |
|
|
1,120 |
|
|
|
14.22 |
|
|
|
|
|
14.98 23.75 |
|
|
924 |
|
|
|
20.88 |
|
|
|
|
|
24.19 33.91 |
|
|
556 |
|
|
|
30.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10.00 $33.91 |
|
|
4,098 |
|
|
|
16.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 23, 2004, we exchanged outstanding options to purchase shares of our common stock
with exercise prices of $25.00 or greater held by certain eligible employees for shares of
restricted stock. The offer resulted in the exchange of options representing the right to purchase
an aggregate of approximately 3.5 million shares of our common stock for approximately 0.5 million
shares of restricted stock. The restricted stock, which vests ratably over a four-year term, was
granted, and the eligible options were granted, under our 1996 Stock Incentive Plan. We used
approximately 0.5 million shares of treasury stock for the award and recorded approximately $7.4
million of unearned compensation as a reduction to stockholders equity. The unearned compensation
is being charged to expense over the vesting period, with approximately $1.4 million, $2.9 million,
and $0.8 million recognized as expense in fiscal 2006, 2005 and 2004, respectively. In addition, lowered costs resulting from
forfeited awards were approximately $0.5 million, $0.7 million, and $0.1 million in fiscal 2006,
2005 and 2004, respectively.
88
During fiscal 2003, we granted the right to receive in the future up to approximately 0.2 million
shares of our common stock under the Plan, with a weighted average fair value at the date of grant
of $27.00 per share, to our then Chief Executive Officer. The deferred shares, which accrued
dividends in the form of additional shares, were to vest ratably after one, two, and three years of
continued employment. Upon his departure during fiscal 2005, an adjustment was made to
compensation expense to reflect the vesting of only the first one-third of these shares and the
remaining shares were forfeited. Compensation expense (benefit) related to this award was
approximately $(0.9) million and $1.4 million for fiscal 2005 and 2004, respectively.
During the first quarter of fiscal 2005, in conjunction with his hiring, the Chief Financial
Officer was granted 20,000 shares of restricted stock pursuant to the 1996 Stock Incentive Plan.
The fair value of these restricted shares at the date of grant was $11.05 per share. These shares
vest ratably after one, two, and three years of continued employment. We recorded approximately
$74,000 in related compensation expense during fiscal 2006, which was subsequently offset by a
$74,000 reversal of unearned compensation costs resulting from voluntarily forfeited awards. We
recorded approximately $65,000 in related compensation expense during fiscal 2005.
During the first quarter of fiscal 2005, the Board of Directors were granted 31,675 shares of
restricted stock with a fair value of $11.05 per share at the date of grant. The deferred shares,
which are entitled to accrue dividends in the form of additional shares, vest ratably every quarter
during the following twelve months. Compensation expense related to the award was $43,000 and $0.3
million for fiscal 2006 and 2005, respectively.
On June 3, 2006, approximately 12.7 million total shares of common stock were reserved for issuance
under various employee benefit plans.
15. Restructuring (Credits) Charges
The following table summarizes the restructuring (credits) charges incurred in fiscal 2006, 2005,
and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Severance costs |
|
$ |
6,101 |
|
|
$ |
12,754 |
|
|
$ |
3,617 |
|
Long-lived asset (credits) charges |
|
|
(38,570 |
) |
|
|
43,745 |
|
|
|
1,170 |
|
Curtailment gain on a benefit plan |
|
|
(706 |
) |
|
|
(6,913 |
) |
|
|
|
|
Other exit costs |
|
|
5,988 |
|
|
|
4,707 |
|
|
|
7,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(27,187 |
) |
|
$ |
54,293 |
|
|
$ |
12,066 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 Restructuring
In fiscal 2006, we continued our review of the operations in our various Profit Centers which was
started in fiscal 2005. As a result of this continued review process, we closed an additional four
bakeries and consolidated routes, depots and retail stores in the remaining seven PCs including
Northern California, Southern California, the Pacific Northwest, North Central, South Central
Southeast and the Upper Midwest. Along with our gains realized on the sales of our excess real
estate and equipment, these restructuring activities resulted in a net restructuring credit of
approximately $5.2 million. These restructurings resulted in the termination of approximately
2,080 employee positions for which we incurred approximately $6.2 million in severance charges. We
also incurred other exit costs of approximately $3.0 million principally related to cleanup, taxes,
security, utilities and equipment removal charges. We realized gains on the sale of certain real
property during the year of approximately $31.5 million which was partially offset by equipment and
real property impairment charges of approximately $17.1 million to reduce certain real property and
equipment to fair value.
During fiscal 2006, we also initiated activities to close two of our accounting offices which
resulted in severance charges of approximately $0.3 million. Additional charges will be incurred
in fiscal 2007 related to additional planned office closings.
89
Fiscal 2005 Restructuring
In the first three quarters of fiscal 2005, we continued the process of consolidating operations in
order to achieve production efficiencies and more effectively allocate production capacity, as well
as continue to serve most of our existing customers.
As a continuation of our fiscal 2004 activities, we closed three bakeries, 35 outlet stores and
initiated some limited consolidation of operations all of which resulted in restructuring charges
of approximately $12.2 million. We recorded severance charges of approximately $4.0 million for
the elimination of approximately 365 employee positions and incurred approximately $6.1 million
related to asset impairment at the bakery locations. Also we incurred approximately $2.1 million
of other exit costs which included lease cancellation costs, utilities and taxes plus cleanup costs
associated with readying the properties for sale. In addition to the closing of the bakeries and
outlet stores, we also implemented a company-wide reduction in force of approximately 175 employees
that resulted in the recognition of $1.6 million in additional severance expense.
In fiscal 2006, we experienced additional restructuring charges of approximately $0.7 million
related to asset impairment charges of approximately $0.3 million related principally to two of our
closed bakeries and approximately $0.4 million of charges related to security, taxes, utilities and
cleanup costs.
In further reviewing the actions necessary to improve profitability and to address continuing
revenue declines coupled with a high-cost structure, in late fiscal 2005 we undertook an extensive
review of our ten PCs in order to consolidate production, delivery routes, depots and bakery
outlets. This review of our Florida, Mid-Atlantic and North East PCs undertaken in fiscal 2005
resulted in the closure of three additional bakeries along with the consolidation of various
delivery routes, depots, and bakery outlets as well as the shifting of production to other bakeries
which resulted in restructuring charges of approximately $33.1 million. We recorded severance
charges of approximately $7.6 million for the elimination of approximately 2,320 employee positions
and incurred approximately $19.5 million primarily due to the write-down of real property and
bakery equipment to fair value. As a result of these restructuring efforts, we abandoned certain
trade names which resulted in an additional impairment charge of approximately $12.9 million.
Offsetting these charges was approximately $6.9 million in credits as a result of curtailment gains
on the pension and postretirement benefit plans related to this restructuring.
In fiscal 2006 we recorded a net credit of approximately $12.3 million for these restructuring
activities. This included severance credits of approximately $0.4 million related to adjustments
of severance accruals and net restructuring credits of approximately $15.7 million related to gains
on the sale of equipment and real property offset by additional asset impairments of approximately
$1.9 million. Other charges totaling approximately $2.6 million were incurred for taxes, cleanup,
security and utilities, as well as certain relocation adjustments, offset by a $0.7 million
curtailment gain on a pension plan.
Additionally, as part of the restructuring activity, a decision was made by management to cease all
funding, work and roll-out of the final phase of a large software project. This event resulted in
the abandonment of a long-lived software asset, and, consequently, it was determined that a portion
of the asset was impaired and $4.5 million of capitalized software costs were written off in fiscal
2005.
Fiscal 2004 Restructuring
In fiscal 2004 we initiated a major company-wide project that was referred to as Program SOAR, an
acronym for Systems Optimization And Re-engineering, that was to focus on re-engineering our
business processes to increase efficiency and on rationalizing our investment in production,
distribution and administrative functionality. Under Program Soar we recorded restructuring
charges of approximately $4.1 million for the closure of three bakeries. This included asset
impairment charges of approximately $0.9 million and security, utilities and cleanup costs to ready
the properties for sale of approximately $0.8 million. Additionally, there were severance charges
of approximately $2.4 million related to the elimination of approximately 250 employee positions.
We also shifted production from one facility to another to gain efficiencies which resulted in an
impairment charge of approximately $1.2 million to record the write down of certain effected
equipment to fair value. Due to a new centralized organizational structure, we also recorded
approximately $0.6 million of severance costs associated with the elimination of certain finance
administrative functions involving 116 employees and approximately $4.0 million of additional costs
associated with the relocation of key management employees.
90
During fiscal 2005 we incurred additional restructuring costs of approximately $2.3 million. These
costs resulted principally from additional bakery cleanup costs to ready the facilities for sale of
approximately $2.4 million along with a loss on equipment sales
of approximately $0.3 million
offset by an adjustment to reduce severance costs by approximately
$0.4 million
In fiscal 2006, we realized a net restructuring credit of approximately $10.7 million which
primarily reflected the gain on the sale of a bakery of approximately $10.8 million.
Fiscal 2003 Restructuring
In fiscal 2003 we initiated restructuring activities for the closure of certain of our less
efficient operations which included five bakeries and 96 outlets. In connection with this
restructuring effort, during fiscal 2004, we incurred additional charges of approximately $2.1
million. Severance charges in the amount of approximately $0.6 were related to an additional 51
employees whose positions were eliminated. Also we realized a gain of approximately $1.7 million
on the sale of a bakery which was partially offset by an additional asset impairment resulting from
updated information on certain bakery equipment of approximately $0.8 million and additional exit
costs of approximately $2.4 million related to security, utilities and cleanup for the closed
bakeries. During fiscal 2005 we expensed an additional $0.6 million which was related to losses on
equipment disposals and additional clean up costs.
The analysis of our restructuring costs activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived |
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
|
|
|
and Related |
|
|
Charges |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
(Credits) |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Fiscal 2003 Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 31, 2003 |
$ |
|
1,205 |
|
$ |
|
|
|
$ |
|
2,039 |
|
$ |
|
3,244 |
|
|
Expenses in Fiscal 2004 |
|
|
646 |
|
|
|
(954 |
) |
|
|
2,447 |
|
|
|
2,139 |
|
Cash Paid in Fiscal 2004 |
|
|
(1,851 |
) |
|
|
|
|
|
|
(3,192 |
) |
|
|
(5,043 |
) |
Noncash Utilization in 2004 |
|
|
|
|
|
|
954 |
|
|
|
|
|
|
|
954 |
|
|
Balance May 29, 2004 |
|
|
|
|
|
|
|
|
|
|
1,294 |
|
|
|
1,294 |
|
|
Expensed in Fiscal 2005 |
|
|
|
|
|
|
262 |
|
|
|
294 |
|
|
|
556 |
|
Cash Paid in Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
(555 |
) |
|
|
(555 |
) |
Noncash Utilization in 2005 |
|
|
|
|
|
|
(262 |
) |
|
|
(1,033 |
) |
|
|
(1,295 |
) |
|
Balance May 28, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed in Fiscal 2006 |
|
|
|
|
|
|
(34 |
) |
|
|
32 |
|
|
|
(2 |
) |
Cash Paid in Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(32 |
) |
Noncash Utilization in 2006 |
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
34 |
|
|
Balance June 3, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses in Fiscal 2004 |
|
|
2,971 |
|
|
|
2,124 |
|
|
|
4,832 |
|
|
|
9,927 |
|
Cash Paid in Fiscal 2004 |
|
|
(1,611 |
) |
|
|
|
|
|
|
(1,723 |
) |
|
|
(3,334 |
) |
Noncash Utilization in 2004 |
|
|
|
|
|
|
(2,124 |
) |
|
|
|
|
|
|
(2,124 |
) |
|
Balance May 29, 2004 |
|
|
1,360 |
|
|
|
|
|
|
|
3,109 |
|
|
|
4,469 |
|
|
Expensed in Fiscal 2005 |
|
|
(434 |
) |
|
|
429 |
|
|
|
2,267 |
|
|
|
2,262 |
|
Cash Paid in Fiscal 2005 |
|
|
(871 |
) |
|
|
|
|
|
|
(5,376 |
) |
|
|
(6,247 |
) |
Noncash Utilization in 2005 |
|
|
|
|
|
|
(429 |
) |
|
|
|
|
|
|
(429 |
) |
|
Balance May 28, 2005 |
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
55 |
|
|
Expensed in Fiscal 2006 |
|
|
|
|
|
|
(10,636 |
) |
|
|
(97 |
) |
|
|
(10,733 |
) |
Cash Paid in Fiscal 2006 |
|
|
(55 |
) |
|
|
|
|
|
|
97 |
|
|
|
42 |
|
Noncash Utilization in 2006 |
|
|
|
|
|
|
10,636 |
|
|
|
|
|
|
|
10,636 |
|
|
Balance June 3, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived |
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
|
|
|
and Related |
|
|
Charges |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
(Credits) |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Fiscal 2005
Consolidation &
RIF Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 29, 2004 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Expensed in Fiscal 2005 |
|
|
5,575 |
|
|
|
6,119 |
|
|
|
2,145 |
|
|
|
13,839 |
|
Cash Paid in Fiscal 2005 |
|
|
(4,779 |
) |
|
|
|
|
|
|
(1,534 |
) |
|
|
(6,313 |
) |
Noncash Utilization in 2005 |
|
|
|
|
|
|
(6,119 |
) |
|
|
(611 |
) |
|
|
(6,730 |
) |
|
Balance May 28, 2005 |
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
796 |
|
|
Expensed in Fiscal 2006 |
|
|
|
|
|
|
270 |
|
|
|
438 |
|
|
|
708 |
|
Cash Paid in Fiscal 2006 |
|
|
(597 |
) |
|
|
|
|
|
|
(438 |
) |
|
|
(1,035 |
) |
Noncash Utilization in 2006 |
|
|
|
|
|
|
(270 |
) |
|
|
|
|
|
|
(270 |
) |
|
Balance June 3, 2006 |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 PC Review Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 29, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed in Fiscal 2005 |
|
|
7,613 |
|
|
|
32,426 |
|
|
|
(6,912 |
) |
|
|
33,127 |
|
Cash Paid in Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Noncash Utilization in 2005 |
|
|
|
|
|
|
(32,426 |
) |
|
|
6,913 |
|
|
|
(25,513 |
) |
|
Balance May 28, 2005 |
|
|
7,613 |
|
|
|
|
|
|
|
|
|
|
|
7,613 |
|
|
Expensed in Fiscal 2006 |
|
|
(407 |
) |
|
|
(13,769 |
) |
|
|
1,884 |
|
|
|
(12,292 |
) |
Cash Paid in Fiscal 2006 |
|
|
(6,313 |
) |
|
|
|
|
|
|
(2,492 |
) |
|
|
(8,805 |
) |
Noncash Utilization in 2006 |
|
|
|
|
|
|
13,769 |
|
|
|
706 |
|
|
|
14,475 |
|
|
Balance June 3, 2006 |
|
|
893 |
|
|
|
|
|
|
|
98 |
|
|
|
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software Write-off |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 29, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed in Fiscal 2005 |
|
|
|
|
|
|
4,509 |
|
|
|
|
|
|
|
4,509 |
|
Cash Paid in Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Utilization in 2005 |
|
|
|
|
|
|
(4,509 |
) |
|
|
|
|
|
|
(4,509 |
) |
|
Balance May 28, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 PC Review Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 28, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed in Fiscal 2006 |
|
|
6,163 |
|
|
|
(14,401 |
) |
|
|
3,025 |
|
|
|
(5,213 |
) |
Cash Paid in Fiscal 2006 |
|
|
(5,163 |
) |
|
|
|
|
|
|
(2,980 |
) |
|
|
(8,143 |
) |
Noncash Utilization in 2006 |
|
|
|
|
|
|
14,401 |
|
|
|
|
|
|
|
14,401 |
|
|
Balance June 3, 2006 |
|
|
1,000 |
|
|
|
|
|
|
|
45 |
|
|
|
1,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting Office Closings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 28, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed in Fiscal 2006 |
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
345 |
|
Cash Paid in Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Utilization in 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 3, 2006 |
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 31, 2003 |
|
|
1,205 |
|
|
|
|
|
|
|
2,039 |
|
|
|
3,244 |
|
|
Expenses in Fiscal 2004 |
|
|
3,617 |
|
|
|
1,170 |
|
|
|
7,279 |
|
|
|
12,066 |
|
Cash Paid in Fiscal 2004 |
|
|
(3,462 |
) |
|
|
|
|
|
|
(4,915 |
) |
|
|
(8,377 |
) |
Noncash Utilization in 2004 |
|
|
|
|
|
|
(1,170 |
) |
|
|
|
|
|
|
(1,170 |
) |
|
Balance May 29, 2004 |
|
|
1,360 |
|
|
|
|
|
|
|
4,403 |
|
|
|
5,763 |
|
|
Expensed in Fiscal 2005 |
|
|
12,754 |
|
|
|
43,745 |
|
|
|
(2,206 |
) |
|
|
54,293 |
|
Cash Paid in Fiscal 2005 |
|
|
(5,650 |
) |
|
|
|
|
|
|
(7,466 |
) |
|
|
(13,116 |
) |
Noncash Utilization in 2005 |
|
|
|
|
|
|
(43,745 |
) |
|
|
5,269 |
|
|
|
(38,476 |
) |
|
Balance May 28, 2005 |
|
|
8,464 |
|
|
|
|
|
|
|
|
|
|
|
8,464 |
|
|
Expensed in Fiscal 2006 |
|
|
6,101 |
|
|
|
(38,570 |
) |
|
|
5,282 |
|
|
|
(27,187 |
) |
Cash Paid in Fiscal 2006 |
|
|
(12,128 |
) |
|
|
|
|
|
|
(5,845 |
) |
|
|
(17,973 |
) |
Noncash Utilization in 2006 |
|
|
|
|
|
|
38,570 |
|
|
|
706 |
|
|
|
39,276 |
|
|
Balance June 3, 2006 |
|
$ |
2,437 |
|
|
$ |
|
|
|
$ |
143 |
|
|
$ |
2,580 |
|
|
92
Summarized below are the cumulative restructuring charges recognized through fiscal 2006 for
all plans discussed, as well as expected remaining charges through plan completion. Most of the
remaining costs are expected to be incurred during fiscal 2007.
Cumulative restructuring (credits) charges by plan (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived |
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
|
|
|
and Related |
|
|
Charges |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
(Credits) |
|
|
Other |
|
|
Total |
|
Fiscal 2003 Plan |
|
$ |
4,304 |
|
|
$ |
1,474 |
|
|
$ |
6,825 |
|
|
$ |
12,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 Plan |
|
|
2,537 |
|
|
|
(8,083 |
) |
|
|
7,002 |
|
|
|
1,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 Consolidation & RIF Plan |
|
|
5,575 |
|
|
|
6,389 |
|
|
|
2,583 |
|
|
|
14,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 PC Review Plan |
|
|
7,206 |
|
|
|
18,657 |
|
|
|
(5,028 |
) |
|
|
20,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software Write-off |
|
|
|
|
|
|
4,509 |
|
|
|
|
|
|
|
4,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 PC Review Plan |
|
|
6,163 |
|
|
|
(14,401 |
) |
|
|
3,025 |
|
|
|
(5,213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting Office Closings |
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
345 |
|
Expected remaining restructuring charges by plan (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived |
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
|
|
|
and Related |
|
|
Charges |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
(1) |
|
|
Other |
|
|
Total |
|
Fiscal 2005 Consolidation & RIF Plan |
|
$ |
|
|
|
$ |
|
|
|
$ |
374 |
|
|
$ |
374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 PC Review Plan |
|
|
|
|
|
|
1,135 |
|
|
|
1,037 |
|
|
|
2,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 PC Review Plan |
|
|
|
|
|
|
|
|
|
|
1,248 |
|
|
|
1,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting Office Closings |
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
400 |
|
(1) Excludes gains expected to be realized on subsequent sales of real property.
16. Reorganization Charges
For the years ended June 3, 2006 and May 28, 2005, reorganization charges are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three Weeks Ended |
|
|
Fifty-Two Weeks Ended |
|
|
|
|
|
|
|
|
|
|
June 3, 2006 |
|
|
May 28, 2005 |
|
|
|
|
|
|
|
|
|
|
Reorganization |
|
Cash |
|
Reorganization |
|
Cash |
|
|
Charges |
|
|
Payments |
|
|
Charges |
|
|
Payments |
|
|
|
|
(dollars in thousands) |
|
Professional fees |
|
$ |
35,089 |
|
|
$ |
35,211 |
|
|
$ |
33,184 |
|
|
$ |
27,269 |
|
Employee retention expenses (See Note 13) |
|
|
6,047 |
|
|
|
4,332 |
|
|
|
5,641 |
|
|
|
1,934 |
|
Lease rejections |
|
|
937 |
|
|
|
|
|
|
|
(427 |
) |
|
|
(140 |
) |
Interest income |
|
|
(4,461 |
) |
|
|
(3,562 |
) |
|
|
(537 |
) |
|
|
(537 |
) |
Gain on sale of assets |
|
|
(597 |
) |
|
|
(597 |
) |
|
|
(1,655 |
) |
|
|
(1,655 |
) |
Write-off of debt fees |
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization charges, net |
|
$ |
37,015 |
|
|
$ |
35,384 |
|
|
$ |
39,206 |
|
|
$ |
26,871 |
|
|
|
|
|
|
|
|
|
|
93
17. Income Taxes
The reconciliation of the provision for income taxes to the statutory federal rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income tax, net |
|
|
1.1 |
|
|
|
2.6 |
|
|
|
1.8 |
|
Non-deductible goodwill impairment |
|
|
|
|
|
|
(15.8 |
) |
|
|
|
|
Valuation allowance increase |
|
|
(25.9 |
) |
|
|
(14.7 |
) |
|
|
|
|
Adjustments to prior year tax reserve and refundable credits |
|
|
1.8 |
|
|
|
2.0 |
|
|
|
3.2 |
|
Other |
|
|
(1.1 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9 |
% |
|
|
8.8 |
% |
|
|
39.9 |
% |
|
|
|
|
|
|
|
The income tax benefit recorded during fiscal 2006 primarily consists of tax benefits
realized during the year. We received state approval for additional refundable tax credits related
to prior years. We also utilized a specific statutory federal net operating loss provision that
permits a 10-year carryback in order to file a claim for refund of previously paid tax.
In fiscal 2006, 2005, and 2004, we adjusted our estimate for prior year tax accruals based upon a
review of recently closed tax audits, amended filings, and the status of prior tax years relative
to the statutes of limitation in the jurisdictions in which we conduct business.
The components of the provision for (benefit from) income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(9,759 |
) |
|
$ |
(38,534 |
) |
|
$ |
(14,023 |
) |
State |
|
|
(4,153 |
) |
|
|
(5,755 |
) |
|
|
(2,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,912 |
) |
|
|
(44,289 |
) |
|
|
(16,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,508 |
) |
|
|
6,953 |
|
|
|
(4,785 |
) |
State |
|
|
(173 |
) |
|
|
797 |
|
|
|
(551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,681 |
) |
|
|
7,750 |
|
|
|
(5,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(15,593 |
) |
|
$ |
(36,539 |
) |
|
$ |
(22,168 |
) |
|
|
|
|
|
|
|
94
Temporary differences and carryforwards which give rise to the deferred income tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(dollars in thousands) |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property and equipment |
|
$ |
(127,815 |
) |
|
$ |
(143,426 |
) |
Intangibles |
|
|
(43,415 |
) |
|
|
(41,849 |
) |
Other |
|
|
(9,908 |
) |
|
|
(6,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities |
|
|
(181,138 |
) |
|
|
(191,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
Payroll and benefits accruals |
|
|
87,189 |
|
|
|
96,509 |
|
Self-insurance reserves |
|
|
79,835 |
|
|
|
78,503 |
|
Net operating loss carryforwards |
|
|
41,302 |
|
|
|
16,945 |
|
Other |
|
|
16,010 |
|
|
|
4,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
224,336 |
|
|
|
196,954 |
|
Less: Valuation allowance |
|
|
(98,193 |
) |
|
|
(62,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
|
126,143 |
|
|
|
134,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(54,995 |
) |
|
$ |
(56,676 |
) |
|
|
|
|
|
Our deferred tax assets and liabilities are included in our consolidated balance sheets as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(dollars in thousands) |
|
Other current assets |
|
$ |
22,824 |
|
|
$ |
33,496 |
|
Deferred income taxes (non-current) |
|
|
(77,819 |
) |
|
|
(90,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(54,995 |
) |
|
$ |
(56,676 |
) |
|
|
|
|
|
As of June 3, 2006, we have a federal net operating loss carryforward of $106.8 million which
expires in May 2025 and May 2026 and state net operating loss carryforwards which expire by May
2026. We also have a federal Alternative Minimum Tax Credit which can be carried forward
indefinitely of $0.7 million.
We provide a valuation allowance against deferred tax assets, if, based on managements assessment
of operating results and other available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.
During 2005, we recorded a valuation allowance of $5.6 million related to deferred tax assets
originating in prior years due to a change in circumstances causing a change in judgment about our
ability to realize the value of the assets. During fiscal years 2006 and 2005 we recorded
additional valuation allowances relating to deferred tax assets originating in those years.
18. Commitments and Contingencies
In the third quarter of fiscal 2004, we entered into a long-term arrangement with a third party to
perform certain information technology functions. This agreement was subsequently amended in April
2005. The commitments under this amended agreement for fiscal 2007 through fiscal 2009 are
approximately $8.9 million, $9.0 million and $6.8 million, respectively. Beginning in fiscal 2007,
we may cancel this agreement upon six months notice, but in the event of our cancellation, we
would be required to pay termination fees related to the third partys initial costs
95
and out-of-pocket costs associated with discontinuing those services. The termination fees decrease
over the term of the agreement.
In the fourth quarter of fiscal 2004, we entered into a long-term arrangement with a third party to
perform certain finance and data maintenance administrative functions. This agreement was
subsequently amended in April 2005. The commitments under this amended agreement are approximately
$5.0 million each for fiscal 2007 through fiscal 2010 and $3.9 million in fiscal 2011. Beginning in
fiscal 2007, we may cancel this agreement upon six months notice.
We entered into a long-term arrangement with a third party to perform certain data center services
functions. The commitments under this agreement are approximately $2.4 million each for fiscal 2007
and 2008 and $1.8 million for fiscal 2009.We may cancel this agreement upon six months notice,
but in the event of our cancellation, we would be required to pay termination fees
related to the third partys initial costs and out-of-pocket costs associated with discontinuing
those services. The termination fees decrease over the term of the agreement.
On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the
Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the
Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819, 04-45820, 04-45821
and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed
in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee of equity
security holders was appointed in our Chapter 11 cases. On January 14, 2006, Mrs. Cubbisons, a
subsidiary of which we are an eighty percent owner, filed a voluntary petition for relief under the
Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). We are continuing to operate our
business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. As a
result of the filing, our pre-petition obligations, including obligations under debt instruments,
may not be generally enforceable against us, and any actions to collect pre-petition indebtedness
and most legal proceedings are automatically stayed, unless the stay is lifted by the Bankruptcy
Court.
On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior
subordinated convertible notes due August 15, 2014 in a private placement to six institutional
accredited investors under an exemption from registration pursuant to Rule 506 of Regulation D
promulgated by the SEC. The convertible notes were purchased by Highbridge International LLC,
Isotope Limited, AG Domestic Convertibles LP, AG Offshore Convertibles LTD, Shepherd Investments
International, Ltd., and Stark Trading. Between the dates of September 2 and September 21, 2004, we
received written correspondence from all of the purchasers of the convertible notes stating that it
was their position that we had made certain misrepresentations in connection with the sale of the
notes. No legal action has been filed by any of the purchasers with regard to their claims and we
will aggressively defend any such action in the event it is filed. On December 6, 2004, U.S. Bank
National Association, as indenture trustee, filed proofs of claim in our bankruptcy case on behalf
of the noteholders in the amount of $100.7 million, plus any other amounts owing pursuant to the
terms of the indenture and reimbursement of the trustees fees and expenses. In addition, on March
18, 2005, R2 Investments, LDC filed a proof of claim in the amount of $70.4 million plus interest,
fees and expenses based on its holdings of 70% of the notes.
On July 9, 2004, we received notice of an informal inquiry from the SEC. This request followed the
voluntary disclosures that we made to the SEC regarding the increase in our reserve for workers
compensation during fiscal 2004 with a charge to pre-tax income of approximately $48.0 million. We
cooperated with the SEC in its inquiry by providing documents and other information. On January
18, 2005, we announced that the SEC had issued an Order commencing a formal investigation of the
Company for the time period June 2002 through the present. The Formal Order indicated that the SEC
staff had reported information tending to show possible violations of Section 10(b),
13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1 and
13b2-2. The specific allegations pertaining to these subsections included that IBC may have, in
connection with the purchase or sale of securities, made untrue statements of material fact or
omitted material facts, or engaged in acts which operated as a fraud or deceit upon purchasers of
our securities; failed to file accurate annual and quarterly reports; failed to add material
information to make any filed reports not misleading; failed to make and keep accurate books and
records and maintain adequate internal controls; and falsified books or records.
96
Pursuant to the Formal Order, the SEC subpoenaed documents and testimony from several current or
former officers and directors and individuals from third party professional firms providing
services to us. We have continued to cooperate fully with the SECs investigation. On November 2,
2006, we announced that we had submitted an offer of settlement to the staff of the Division of
Enforcement of the SEC in connection with the investigation. The proposed settlement is subject to
approval by the Commission. IBC has been informed that the staff of the Division of Enforcement
has determined to recommend the settlement to the Commission. However, IBC cannot give assurance
that the Commission will approve the proposed settlement. As part of the proposed settlement, IBC
will consent, without admitting or denying the allegations by the SEC, to the entry of a cease and
desist order from the SEC against future violations of the record-keeping, internal controls and
reporting provisions of the federal securities laws and related SEC rules. No fines would be
imposed under the proposed settlement.
After the commencement of our Chapter 11 cases, the NYSE notified us that its Market Trading
Analysis Department was reviewing transactions in the common stock of IBC occurring prior to our
August 30, 2004 announcement that we were delaying the filing of our Form 10-K and prior to our
September 22, 2004 filing of a petition for relief under Chapter 11. In connection with its
investigation, the NYSE requested information from us on various dates, including September 22 and
October 5, 2004, and February 2, 2005. We believe that we have fully responded to each of the
NYSEs requests for information, with our last response to the NYSE dated June 10, 2005, and we
expect to continue to cooperate with the NYSE if it requires any further information or assistance
from us in connection with its inquiry.
In February and March 2003, seven putative class actions were brought against us and certain of our
current or former officers and directors in the United States District Court for the Western
District of Missouri. The lead case is known as Smith, et al. v. Interstate Bakeries Corp., et al.,
No. 4:03-CV-00142 FJG (W.D. Mo.). The seven cases have been consolidated before a single judge and
a lead plaintiff has been appointed by the Court. On October 6, 2003, plaintiffs filed their
consolidated amended class action complaint. The putative class covered by the complaint is made up
of purchasers or sellers of our stock between April 2, 2002 and April 8, 2003. On March 30, 2004,
we and our insurance carriers participated in a mediation with the plaintiffs. At the end of that
session, the parties reached a preliminary agreement on the economic terms of a potential
settlement of the cases in which our insurers would contribute $15.0 million and we would
contribute $3.0 million. We also agreed with plaintiffs and our carriers to work towards the
resolution of any non-economic issues related to the potential settlement, including documenting
and implementing the parties agreement. On September 21, 2004, the parties executed a definitive
settlement agreement consistent with the terms of the agreement reached at the mediation. The
settlement agreement was subject to court approval after notice to the class and a hearing. In
connection with the potential settlement, we recorded a charge of $3.0 million during fiscal 2004,
which is classified in liabilities subject to compromise at June 3, 2006.
As a result of our Chapter 11 filing, further proceedings in the case were automatically stayed.
The settlement agreement provided, however, that the parties would cooperate in seeking to have the
Bankruptcy Court lift the automatic stay so that consideration and potential approval of the
settlement could proceed. A motion to lift the stay was filed with the Bankruptcy Court on November
24, 2004, and the Bankruptcy Court entered an order granting this motion on April 8, 2005, so that
the parties could seek final approval of the settlement agreement from the District Court where the
litigation was pending. On September 8, 2005, the District Court entered a final order approving
the settlement agreement. We understand that even though the settlement was approved, plaintiffs
received an allowed, pre-petition unsecured claim in our Chapter 11 case that may be subject to
subordination to the claims of other unsecured creditors.
In June 2003, a purported shareholder derivative lawsuit was filed in Missouri state court against
certain current and former officers and directors of IBC, seeking damages and other relief. In the
case, which is captioned Miller v. Coffey, et al., No. 03-CV-216141 (Cir. Ct., Jackson Cty.),
plaintiffs allege that the defendants in this action breached their fiduciary duties to IBC by
using material non-public information about IBC to sell IBC stock at prices higher than they could
have obtained had the market been aware of the material non-public information. Our
Board of Directors previously had received a shareholder derivative demand from the plaintiffs in
the June 2003 derivative lawsuit, requesting legal action by us against certain officers and
directors of IBC. In response, our Board of Directors appointed a Special Review Committee to
evaluate the demand and to report to the board. Prior to our Chapter 11 filing, the parties had
agreed to stay the lawsuit until October 11, 2004 and also had initiated preliminary discussions
looking towards the possibility of resolving the matter. On October 8, 2004, the court entered an
order
97
extending the stay for an additional 60 days. It is our position that, as a result of our
Chapter 11 filing, the case has been automatically stayed under the Bankruptcy Code.
On December 3, 2003, we were served with a state court complaint pending in the Superior Court of
the State of California, County of Los Angeles, captioned Mitchell N. Fishlowitz v. Interstate
Brands Corporation, Case No. BC305085. On December 31, 2003, Fishlowitz filed a first amended
complaint in Los Angeles County Superior Court. On that date, the state court, at our request,
removed the action from the state court to the United States District Court for the Central
District of California. On January 8, 2004, we filed an answer to the first amended complaint. The
action pending in the District Court was captioned Fishlowitz, et al., etc. v. Interstate Brands
Corporation, Inc., Case No. CV03-9585 RGK (JWJx).
The plaintiff alleged violations of the Fair Labor Standards Act, various California Labor Code
Sections, and violations of the California Business and Professions Code and California Wage
Orders. The plaintiff sought class certification alleging that we failed to pay overtime wages to
route sales representatives (RSRs) in California, that the wages of RSRs employed in
California were not accurately calculated, that RSRs in California were not properly granted or
compensated for meal breaks and that the plaintiff and other RSRs were required to pay part of the
cost of uniforms, which the plaintiff alleged violates California state wage and hour laws. The
plaintiff also asserted other minor claims with respect to California state wage and hours laws.
On February 16, 2005, the plaintiff, on behalf of the purported class of individuals similarly
situated, filed a motion to lift the automatic stay to continue the prosecution of the underlying
action in the California district court against us and non-debtor codefendants. The parties engaged
in extensive settlement discussions in an attempt to resolve the action. On August 24, 2005, the
parties engaged in mediation before a sitting bankruptcy court judge from the Western District of
Missouri. During the course of mediation, the parties reached an agreement in principal regarding
the economic terms of a settlement of the action. On September 29, 2005, we requested that the
Bankruptcy Court approve the agreement between Fishlowitz, on behalf of himself individually, and
as representative of a settlement class and Interstate Brands Corporation and conditionally approve
(i) a $6 million general, prepetition unsecured class claim and (ii) a $2 million administrative
expense class claim, which was paid in December 2006. On
September 29, 2005, the Bankruptcy Court
conditionally approved the relief requested, subject to (i) the relevant parties finalizing the
settlement agreement and (ii) the Company and the constituents entering into and submitting to the
Bankruptcy Court an agreed order on the motion. On October 28, 2005, the Bankruptcy Court entered a
final order approving the settlement agreement, subject to entry of a final order from the
California district court approving the settlement agreement. The California district court entered
a final order approving the settlement on July 24, 2006. We have previously recorded the total
amount of the settlement as a first quarter fiscal 2005 charge to operations.
We are named in two wage and hour cases in New Jersey that have been brought under state law, one
of which has been brought on behalf of a putative class of RSRs. The case involving the putative
class is captioned Ruzicka, et al. v. Interstate Brands Corp., et al., No. 03-CV 2846 (FLW) (Sup.
Ct., Ocean City, N.J.), and the other case is captioned McCourt, et al. v. Interstate Brands Corp.,
No. 1-03-CV-00220 (FLW) (D.N.J.). These cases are in their preliminary stages. As a result of our
Chapter 11 filing, these cases have been automatically stayed. The named plaintiffs in both cases
have filed a proof of claim in our bankruptcy case for unpaid wages. We intend to vigorously
contest this litigation.
We are named in an additional wage and hour case brought on behalf of a putative class of bakery
production supervisors under federal law, captioned Anugweje v. Interstate Brands Corp., 2:03 CV
00385 (WGB) (D.N.J.). This action is in the preliminary stages. As a result of our Chapter 11
filing, this case has been automatically stayed. We intend to vigorously contest this litigation.
In February 1998, a class action was brought against us in the Circuit Court of Cook County,
Illinois, Chancery Division captioned Dennis Gianopolous, et al. v. Interstate Brands Corporation
and Interstate Bakeries Corporation, Case No. 98 C 1073. We obtained summary judgment on several of
the class plaintiffs claims and in July 2003 the court decertified a class claim for medical
monitoring. The remaining three claims all allege breach of warranty. The court entered summary
judgment in favor of the individual named plaintiff as to liability on one of those claims, but
denied plaintiffs motion for summary judgment as to damages for that claim. In June 2004, the
court decertified the class of non-Illinois consumers of the recalled snack cakes. On August 23,
2004, plaintiffs counsel filed a second amendment to the complaint identifying proposed new class
representative(s) for the purported Illinois class. As a result of our Chapter 11 filing, the case
was automatically stayed. Pending Bankruptcy Court and Circuit Court approval, we agreed to settle
the case by providing coupons to a class of consumers in twenty-three states. On
98
March 3, 2005, the
Bankruptcy Court granted relief from the automatic stay to allow the proposed settlement class and
us to proceed in the Circuit Court of Cook County to seek approval and implementation of the
settlement. On July 17, 2006, the Circuit Court held a final fairness hearing and approved the
settlement. We recorded a charge of $0.8 million in the first quarter of fiscal 2005 based upon
this settlement.
The EPA has made inquiries into the refrigerant handling practices of companies in our industry. In
September 2000, we received a request for information from the EPA relating to our handling of
regulated refrigerants, which we historically have used in equipment in our bakeries for a number
of purposes, including to cool the dough during the production process. The EPA has entered into
negotiated settlements with two companies in our industry, and has offered a partnership program to
other members of the bakery industry that offered amnesty from fines if participating companies
converted their equipment to eliminate the use of ozone-depleting substances. Because we had
previously received an information request from the EPA, the EPA/Department of Justice (DOJ)
policies indicated that we were not eligible to participate in the partnership program.
Nevertheless, we undertook our own voluntary program to convert our industrial equipment to reduce
the use of ozone-depleting refrigerants. Prior to our Chapter 11 filing, we had undertaken
negotiations with the EPA to resolve issues that may exist regarding our historic management of
regulated refrigerants. The DOJ, on behalf of the United States of America, filed a proof of claim
in our bankruptcy case on March 21, 2005 based upon our refrigerant handling practices. Although
the proof of claim does not set forth a specific amount, the claimants allege more than 3,400
violations during the period from 1998 through 2002 and assert that each violation is subject to
penalties of up to $27,500 per day. We are engaged in settlement discussions with the EPA/DOJ. If
these discussions are unsuccessful, we intend to vigorously challenge any penalties calculated on
this basis and defend against such claims by the EPA/DOJ.
On June 11, 2003 the South Coast Air Quality Management District in California, or SCAQMD, issued a
Notice of Violation alleging that we had failed to operate catalytic oxidizers on bakery emissions
at our Pomona, California facility in accordance with the conditions of that facilitys Clean Air
Act Title V Permit. Among other things, that permit requires that the operating temperatures of the
catalytic oxidizers be at least 550 degrees Fahrenheit. Under the South Coast Air Quality
Management District rules, violations of permit conditions are subject to penalties of up to $1,000
per day, for each day of violation. The Notice of Violation alleges we were in violation of the
permit through temperature deviations on more than 700 days from September 1999 through June 2003.
Since that time, four additional instances of alleged violations, some including more than one day,
have been cited by the SCAQMD. We are cooperating with the SCAQMD, have taken steps to remove the
possible cause of the deviations alleged in the Notice of Violation, applied for and received a new
permit, and have replaced the oxidizers with a single, more effective oxidizer. The SCAQMD filed a
proof of claim dated December 8, 2004 in our bankruptcy case for $0.2 million in civil penalties.
Management is committed to cooperating with the SCAQMD and is taking actions necessary to minimize
or eliminate any future violations and negotiate a reasonable settlement of those that have been
alleged.
In December, 2004, we began a review with respect to the proper accounting treatment for the
American Bakers Association Retirement Plan, or ABA Plan, in light of newly identified information.
Prior to our recent restructuring efforts, approximately 900 active IBC employees participated
under the pension plan, although the number of active employees has significantly decreased as a
result of the restructuring to approximately 350 active employees in
the ABA Plan as of September 30,
2006. We had previously accounted for the ABA Plan as a multi-employer plan, which resulted in
recognition of expense in the amount of our actual contributions to the ABA Plan but did not
require recognition of any service cost or interest cost or for the Company to record any minimum
pension benefit obligation on our balance sheet.
Upon review, the Company has determined that the ABA Plan is a type of pension plan that requires
recognition of service cost and interest cost. Additionally, we have concluded our balance sheet
should also reflect the appropriate pension benefit obligation. We believe that the ABA Plan has
been historically administered as a multiple employer plan under ERISA and tax rules and should be
treated as such. However, the amounts reflected in our financial statements after the fiscal 2004
financial statement restatement were calculated on the basis of treating the ABA Plan as an
aggregate of single employer plans under ERISA and tax rules, which is how the ABA Plan contends it
should be treated. We have reflected our interest in the ABA Plan as an aggregate of single
employer plans despite our position on the proper characterization of the ABA Plan due to
representations we received from the ABA Plan and a 1979 determination issued by the Pension
Benefit Guaranty Corporation (PBGC) (as discussed below). As of June 3, 2006, we have recorded a
net pension benefit obligation liability of approximately $58.0 million with respect to our
respective interest in the ABA Plan, reflecting its characterization as an aggregate of single
employer plans.
99
As a result of a request made by us and the Kettering Baking Company, another participating
employer in the ABA Plan, the PBGC, which is the federal governmental agency that insures and
supervises defined benefit pension plans, revisited its 1979 determination that the Plan was an
aggregate of single employer plans and after reviewing the status of the ABA Plan, on August 8,
2006, made a final determination that the ABA Plan is a multiple employer plan under ERISA and tax
rules. On August 9, 2006, we filed a lawsuit in Bankruptcy Court seeking enforcement of the PBGCs
determination, but there can be no assurance as to whether we will obtain such enforcement or the
amount of any reduction to our net benefit obligation liability. Accordingly, due to the lack of a
definitive resolution of this uncertainty prior to the end of the fiscal periods presented herein,
as noted above we have continued to reflect our interests in the ABA Plan as an aggregate of single
employer plans.
In our December 2005 submission requested by the PBGC in connection with its review of the 1979
determination referred to above, we asserted our belief based on available information that
treatment of the ABA Plan as a multiple employer plan will result in an allocation of pension plan
assets to our pension plan participants in an amount equal to approximately $40 million. We believe
that treatment of the ABA Plan as a multiple employer plan will result in a significant reduction
in our net pension benefit obligation with respect to our employee participants from that which is
reflected in Note 11. Employee Benefit Plans. The ultimate outcome of this uncertainty cannot
presently be determined.
In addition, we have received requests for additional corrective contributions assessed after May
28, 2005, under the single employer plan assumption, which we do not believe is correct. We have
not made such contributions pending the resolution of the uncertainties surrounding the ABA Plan.
However, we expect that the amount of such contributions would be significantly less than amounts
assessed by the ABA Plan on the assumption that the plan was an aggregate of single employer plans.
See Note 11. Employee Benefit Plans American Bakers Association Retirement Plan to these
consolidated financial statements for a discussion of these assessments from the ABA Plan.
On May 3, 2006, Sara Lee Corporation instituted proceedings against the ABA Plan and the Board of
Trustees of the Plan (the Board of Trustees) in the United States District Court for the District
of Columbia. Sara Lee Corporation v. American Bakers Assn Retirement Plan, et al., Case No.
1:06-cv-00819-HHK (D.D.C.) (the Sara Lee Litigation). The relief Sara Lee seeks includes, among
other things, a mandatory injunction that would compel the ABA Plan and the Board of Trustees to
(i) require all participating employers in the ABA Plan with negative asset balances which would
include the Company to make payments to the Plan in order to maintain a positive asset balance
and (ii) cut off the payment from the ABA Plan of benefits to employee-participants of the Company
and other participating employers with negative asset balances, to the extent such employers did
not maintain a positive balance. However, the Sara Lee Litigation is premised on the notion that
the ABA Plan is an aggregate of single employer plans, which is inconsistent with the PBGCs
determination dated August 8, 2006 that the ABA Plan is a multiple employer plan. On September 29,
2006, Sara Lee filed an amended complaint adding the PBGC as a defendant and challenging the PBGCs
August 8, 2006 determination. In order to obtain a resolution of these matters without litigation
over the proper forum, we have voluntarily stayed our lawsuit in Bankruptcy Court seeking
enforcement of the August 8, 2006 determination upon the agreement by the ABA Plan and its Board of
Trustees to join IBC as a party to the Sara Lee Litigation.
On December 4, 2006, the ABA Plan and the Board of Trustees served a summons upon us as a third
party defendant to a Third Party Complaint filed in the Sara Lee Litigation against Sara Lee and
the other participating employers in the ABA Plan. The Third Party Complaint seeks a declaratory
judgment as to the nature of the ABA Plan and further asserts that the August 8, 2006 determination
was arbitrary and capricious and should be rescinded.
At this time, we believe all relevant parties have been joined to the Sara Lee Litigation and the
District Court for the District of Columbia will review the PBGCs administrative determination.
On November 22, 2006, the ABA Plan and the Board of Trustees filed a motion in the bankruptcy court
seeking an order requiring IBC to file an application with the Internal Revenue Service requesting
a waiver of the minimum
funding requirements applicable to the ABA Plan or, in the alternative, make $3.9 million of
contributions to the ABA Plan no later than June 15, 2007. On December 8, 2006, the Bankruptcy
Court denied the ABA motion.
On October 30, 2006, Brencourt Advisors, LLC (Brencourt), a stockholder of the Company, filed a complaint in
the Court of Chancery of the State of Delaware for New Castle County, captioned Brencourt Advisors LLC v.
Interstate Bakeries Corporation, C.A. No. 2506-N (the Delaware
Action). The Delaware Action seeks to compel
us pursuant to Section 211 of the Delaware General Corporation Law to convene an annual meeting of stockholders
for the purpose of electing directors. We have not held an annual meeting of stockholders since September 23, 2003.
On November 29, 2006, we filed a motion with the Bankruptcy Court in response to the Brencourt Delaware Action.
The motion we filed with the Bankruptcy Court seeks (i) to have the Bankruptcy Court confirm our Board of
Directors to be the nine individuals currently serving as members of our Board of Directors and (ii) an injunction
from the Bankruptcy Court ordering Brencourt to cease the prosecution of the Delaware Action.
The trial of the Delaware Action in the Court of Chancery is scheduled for December 27, 2006. If that trial
proceeds, we expect that the Court of Chancery will compel us to hold an annual meeting during the first three
months of 2007. However, the Bankruptcy Court has scheduled a hearing date of December 21, 2006 for our
motion in response to the Delaware Action. There can be no assurance that the Bankruptcy Court will grant us the
relief that we seek in that motion, including the injunction preventing Brencourt from continuing the Delaware
Action. If the Delaware Action is allowed to proceed and we are compelled to hold an annual meeting of
stockholders, the election of directors at such meeting could result in a change of control of the majority of our
Board of Directors. This change of control could adversely affect the success of our restructuring process, as well as
our financial condition, results of operations and cash flows. Such a change would constitute an event of default
under the DIP Facility and trigger significant claims under management continuity agreements with certain of our
key senior executives in the event any of these executives is terminated within two years of the change in control.
In addition, the uncertainty created by the threat of a change of control of our Board of Directors as contemplated by
the Delaware Action is undermining (i) our permanent CEO search process, (ii) the development of a credible long-
term business plan for the Company based on current results, (iii) the exploration of potential availability of
financing for the Company to facilitate a plan of reorganization to emerge from Chapter 11, (iv) our ability to regain
lost customers and take advantage of new business opportunities and (v) the availability of adequate credit terms
from our vendors and creditors. These activities are vital components of our restructuring process, and if such
uncertainty persists, it could have an adverse affect on the success of our restructuring process, as well as our
financial condition, results of operations and cash flows.
We are
currently in discussions with the major constituent groups in our
Chapter 11 proceedings to arrive at a consensual resolution that
would result in the dismissal of the Delaware Action and a
modification of our motion filed in the Bankruptcy Court in response
to the Delaware Action. The consensual resolution being discussed
contemplates that our modified motion would seek an order of the
Bankruptcy Court reconstituting the Board of Directors to consist of
several new members as well as several existing members of our Board
of Directors. While there can be no assurance that a consensual
resolution will be reached, if the parties are able to agree and the
Bankruptcy Court grants the requested order on a reasonably prompt
basis, we expect that the risks presented by the Delaware Action
discussed above would no longer pose a significant threat to our
restructuring process or our financial condition, results of
operations and cash flows.
Except as noted above, the Company cannot currently estimate a range of loss or gain for the items
disclosed herein; however, the ultimate resolutions could have a material impact on our
consolidated financial statements.
We are subject to various other routine legal proceedings, environmental actions and matters in the
ordinary course of business, some of which may be covered in whole or in part by insurance. Except
for the matters disclosed herein,
100
we are not aware of any other items as of this filing which could
have a material adverse effect on our consolidated financial statements.
19. Stock Repurchases
Since May 11, 1999, our Board of Directors has authorized the purchase of approximately 11.0
million shares of our common stock. Prior to the Chapter 11 filing, management had the discretion
to determine the number of the shares to be purchased, as well as the timing of any such purchases,
with the pricing of any shares repurchased to be at prevailing market prices. As of June 3, 2006,
approximately 7.4 million shares of IBC common stock were available to be purchased under this
stock repurchase program. As a result of our bankruptcy filing and restrictions imposed by the DIP
Facility however, the program has been effectively suspended since the filing.
20. Stockholder Rights Plan
In May 2000, our Board of Directors adopted a stockholder rights plan which provided that a
dividend of one preferred stock purchase right was declared for each share of our common stock
outstanding and any common shares issued thereafter. The rights are not exercisable until ten
business days following either 1) a public announcement that a person or group acquired 15% or more
of our common stock (provided such threshold is not exceeded solely as a result of our purchase of
stock by us and corresponding reduction in the number of shares outstanding) or 2) the announcement
of a tender offer which could result in a person or group acquiring 15% or more of our common
stock.
Each right, if exercisable, will entitle its holder to purchase one one-thousandth of a share of
our Series A Junior Participating Preferred Stock at an exercise price of $80.00, subject to
adjustment. If a person or group acquires 15% or more of our outstanding common stock, the holder
of each right not owned by the acquiring party will be entitled to purchase shares of our common
stock (or in certain cases, preferred stock, cash or other property) having a market value of twice
the exercise price of the right. In addition, after a person or group has become an acquiring
person, if we are acquired in a merger or other business combination or 50% or more of its
consolidated assets or earning power are sold, each right will entitle its holder to purchase at
the exercise price of the right, a number of the acquiring partys common shares valued at twice
the exercise price of the right.
The Board of Directors may redeem the rights at any time before they become exercisable for $0.001
per right and, if not exercised or redeemed, the rights will expire on May 25, 2010.
21. Earnings (Loss) per Share
Basic and diluted earnings per share are calculated in accordance with SFAS No. 128, Earnings per
Share. Basic earnings per common share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted earnings per common share
is computed by dividing net income (loss) by the weighted average number of common shares
outstanding during the period including the effect of all potential dilutive common shares,
primarily stock options outstanding under our stock compensation plan and the impact of our 6%
senior subordinated convertible notes.
The following is the reconciliation between basic and diluted weighted average shares outstanding
used in our earnings (loss) per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(in thousands) |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
45,124 |
|
|
|
45,010 |
|
|
|
44,868 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding exclude options on common stock, unvested
restricted stock, deferred shares awarded, and our 6% senior subordinated convertible notes
totaling approximately 14.5 million,
101
13.3 million, and 6.8 million for fiscal 2006, 2005, and 2004,
respectively, because their effect would have been antidilutive. Due to our reported net loss for
fiscal 2006, 2005 and 2004, diluted loss per share amounts are not adjusted for the effect of
dilutive stock awards.
Dividends per common share were zero for fiscal 2006 and 2005, and $0.21 for fiscal 2004. In March
2004, we announced that our Board of Directors had suspended the dividend on our common stock
effective for the fourth quarter of fiscal 2004. Under an August 12, 2004 amendment to our senior
secured credit facility, we are prohibited from paying dividends until our senior secured bank debt
is rated at least BB- by Standard & Poors Ratings Services and Ba3 by Moodys Investors Service,
in each case with a stable outlook or better. In addition, during the term of the DIP Facility,
the payment of dividends is prohibited.
22. Comprehensive Loss
Reconciliations of net loss to comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks |
|
|
Weeks |
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
May 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(dollars in thousands) |
|
Net loss |
|
$ |
(128,317 |
) |
|
$ |
(379,280 |
) |
|
$ |
(33,370 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of cash flow
hedges, net of income taxes
of $0, $0, and $2,410, respectively |
|
|
|
|
|
|
(96 |
) |
|
|
4,017 |
|
Loss on interest rate swaps
reclassified to interest expense, net
of income taxes of $0, $0, and
$3,380, respectively |
|
|
|
|
|
|
816 |
|
|
|
5,634 |
|
Commodity derivative (gains) losses
reclassified to cost of products
sold, net of income taxes of $0, $0,
and $2,537, respectively |
|
|
(671 |
) |
|
|
275 |
|
|
|
(4,229 |
) |
Minimum pension liability adjustment,
net of income taxes of $0, $0, and
$4,316, respectively |
|
|
4,328 |
|
|
|
(3,918 |
) |
|
|
7,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,657 |
|
|
|
(2,923 |
) |
|
|
12,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(124,660 |
) |
|
$ |
(382,203 |
) |
|
$ |
(20,770 |
) |
|
|
|
|
|
|
|
The balance of accumulated other comprehensive loss consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 3, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Derivative instruments |
|
$ |
|
|
|
$ |
671 |
|
Minimum pension liability adjustment |
|
|
(3,878 |
) |
|
|
(8,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(3,878 |
) |
|
$ |
(7,535 |
) |
|
|
|
|
|
102
23. Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires us to
report information about our operating segments according to the management approach for
determining reportable segments. This approach is based on the way management organizes segments
within a company for making operating decisions and assessing performance.
In May 2004, we began a company-wide operational reorganization and implementation of a new
accounting software system. These two events had a significant impact on our internal organization
and our method of generating financial information. As a result, we have aggregated our identified
operating segments into two distinct reportable segments by production process, type of customer,
and distribution method as follows:
Wholesale operations Our wholesale operations accounted for approximately 88.3% and 88.0% of our
fiscal 2006 and 2005, respectively, net sales and consists of an aggregation of our ten profit
centers that manufacture, distribute, and sell fresh baked goods.
Retail operations Our retail operations generated approximately 11.7% and 12.0% of our fiscal
2006 and 2005, respectively, net sales and consists of five regions that sell our baked goods and
other food items.
Our reportable segments are strategic business units that are managed separately using different
marketing strategies.
During fiscal 2006, one customer accounted for approximately $410.3 million or 15.2% and 13.4% of
our wholesale operations and total consolidated 2006 fiscal net sales, respectively. In 2005, the
same customer accounted for approximately $412.0 million or 13.8% and 12.1% of our wholesale
operations and total consolidated 2005 fiscal net sales, respectively. No other customer accounted
for 10% or more of our consolidated net sales. The top five customers accounted for approximately
29.2% and 25.7% of our wholesale operations and total consolidated 2006 fiscal net sales,
respectively, compared to fiscal 2005 of 27.7% and 24.3%, respectively.
Our management evaluates reportable segment performance based on profit or loss from operations
before other income, interest expense, and income taxes. Because of our integrated business
structure, operating costs often benefit both reportable segments and must be allocated between
segments. Additionally, we do not identify or allocate fixed assets and capital expenditures for
long-lived assets by reportable segment and we transfer fresh goods between segments at cost
without recognizing intersegment sales on these transfers.
Our products within both of our reportable segments are fresh baked goods. All of our revenues from
external customers and all of our longlived assets are in the United States of America.
The accounting policies of our reportable segments are the same as those described in the summary
of significant accounting policies in Note 2. Description of Business and Significant Accounting
Policies to these consolidated financial statements.
The measurement of reportable segment results is generally consistent with the presentation of the
consolidated statement of operations. Intersegment transfers of products at cost aggregated
approximately $120.7 million and $146.0 million for the fiscal years ended June 3, 2006 and May 28,
2005, respectively.
With the way we tracked and allocated expenses, along with our accounting software systems in use
prior to June 2004, we did not have the ability to produce segment level income statement
information other than net sales and to generate this information manually would be impracticable.
Therefore, our segment information provided in the table below is for fiscal 2006 and 2005 only.
For fiscal 2004, reportable segment net sales consisted of $3,036.3 million for Wholesale
Operations and $431.3 million for Retail Operations, totaling $3,467.6 million.
103
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three |
|
|
Fifty-Two |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
|
|
|
|
|
|
|
June 3, 2006 |
|
|
May 28, 2005 |
|
|
|
|
(dollars in thousands) |
|
Net Sales |
|
|
|
|
|
|
|
|
Wholesale operations |
|
$ |
2,701,751 |
|
|
$ |
2,995,481 |
|
Retail operations |
|
|
358,722 |
|
|
|
408,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,060,473 |
|
|
$ |
3,403,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
Wholesale operations |
|
$ |
(7,353 |
) |
|
$ |
43,874 |
|
Retail operations |
|
|
10,682 |
|
|
|
7,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,329 |
|
|
|
51,138 |
|
Corporate |
|
|
(59,697 |
) |
|
|
(386,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss |
|
|
(56,368 |
) |
|
|
(335,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
52,504 |
|
|
|
41,430 |
|
Reorganization charges |
|
|
37,015 |
|
|
|
39,206 |
|
Other income |
|
|
(2,994 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,525 |
|
|
|
80,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of accounting change |
|
|
(142,893 |
) |
|
|
(415,819 |
) |
Provision (benefit) for income taxes |
|
|
(15,593 |
) |
|
|
(36,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change |
|
|
(127,300 |
) |
|
|
(379,280 |
) |
Cumulative effect of accounting change |
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(128,317 |
) |
|
$ |
(379,280 |
) |
|
|
|
|
|
24. Subsequent Events
Effective with the eighth amendment to the DIP Facility, on August 25, 2006, certain funds
restricted as to use under the DIP Facility were released, fifty percent for general corporate
purposes and fifty percent going to partially repay our senior pre-petition loans. The total amount
of such restricted cash subject to the eighth amendment was approximately $90.7 million at August
25, 2006.
See Note 18. Commitments and Contingencies for subsequent event discussion related to the ABA Plan.
104
25. Quarterly Financial Information (Unaudited)
Summarized unaudited quarterly financial information for the fiscal years ended June 3, 2006 and
May 28, 2005 is as follows (each quarter represents a period of twelve weeks except the third
quarters, which cover sixteen weeks and the fourth quarter of 2006, which covers thirteen weeks):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
|
|
(dollars in thousands, except per share data) |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
744,649 |
|
|
$ |
702,381 |
|
|
$ |
874,809 |
|
|
$ |
738,634 |
|
Cost of products sold (exclusive of depreciation and amortization) |
|
|
370,413 |
|
|
|
357,022 |
|
|
|
455,740 |
|
|
|
369,556 |
|
Operating loss |
|
|
9,504 |
|
|
|
(41,928 |
) |
|
|
(19,859 |
) |
|
|
(4,085 |
) |
Loss before cumulative effect of accounting change |
|
|
(6,987 |
) |
|
|
(53,325 |
) |
|
|
(42,634 |
) |
|
|
(24,354 |
) |
Net loss |
|
|
(6,987 |
) |
|
|
(53,325 |
) |
|
|
(42,634 |
) |
|
|
(25,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share before cumulative effect of
accounting change |
|
|
(0.15 |
) |
|
|
(1.18 |
) |
|
|
(0.94 |
) |
|
|
(0.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
|
|
(dollars in thousands, except per share data) |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
811,977 |
|
|
$ |
798,711 |
|
|
$ |
1,003,075 |
|
|
$ |
789,742 |
|
Cost of products sold (exclusive of depreciation and amortization) |
|
|
413,078 |
|
|
|
412,883 |
|
|
|
506,101 |
|
|
|
391,992 |
|
Operating loss |
|
|
(248,408 |
) |
|
|
(17,978 |
) |
|
|
(27,496 |
) |
|
|
(41,654 |
) |
Net loss |
|
|
(243,466 |
) |
|
|
(34,011 |
) |
|
|
(45,327 |
) |
|
|
(56,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
|
(5.42 |
) |
|
|
(0.76 |
) |
|
|
(1.01 |
) |
|
|
(1.25 |
) |
Fiscal 2006 first quarter results include net restructuring credits of approximately $4.7
million, or $0.10 per diluted share, relating to certain closings and restructurings charges of
bakeries and bakery outlets and other cost reductions net of gains realized on the sale of the
related assets and settlement of an income tax gain contingency of approximately $4.0 million, or
$0.09 per diluted share. Fiscal 2006 second quarter results include net restructuring charges of
approximately $16.4 million, or $0.36 per diluted share, relating to certain closings and
restructurings of bakeries and bakery outlets and other cost reductions net of gains realized on
the sale of the related assets and a settlement of a gain contingency of approximately $2.8
million, or $0.06 per diluted share. Fiscal 2006 third quarter results include net restructuring
credits of approximately $33.3 million, or $0.74 per diluted share, relating to certain closings
and restructurings of bakeries and bakery outlets and other cost reductions net of gains realized
on the sale of the related assets. Fiscal 2006 fourth quarter results include net restructuring
credits of approximately $5.5 million, or $0.12 per diluted share, relating to certain closings and
restructurings of bakeries and bakery outlets and other cost reductions net of gains realized on
the sale of the related assets; and a machinery and equipment impairment of approximately $4.8
million, or $0.11 per diluted share. Included in depreciation and amortization expense is
approximately $14.1 million, $13.5 million, $18.3 million, and $13.8 million in the first, second,
third, and fourth quarters of fiscal 2006, respectively, that relates to property and equipment
used in our production process.
Fiscal 2005 first quarter results include restructuring charges of approximately $7.3 million, or
$0.16 per diluted share, related to the closing of certain bakeries and bakery outlets, our
goodwill write-off of approximately $215.3 million, or $4.79 per diluted share, which resulted from
our impairment testing of intangible assets, a tax valuation allowance of approximately $5.6
million, or $0.13 per diluted share, related to our evaluation of the recoverability of our
deferred tax assets, and approximately $8.7 million, or $0.19 per diluted share, related to the
settlement of two class action lawsuits. Fiscal 2005 second quarter results include restructuring
charges of approximately $6.0 million, or $0.13 per diluted share, related to the closing of
certain bakeries and bakery outlets, the write-off of our prior-service cost assets of
approximately $12.4 million, or $0.28 per diluted share, related to a curtailment loss from the
suspension of our SERP, a reversal of amounts accrued during fiscal 2004 of approximately $5.0
million, or $0.11 per diluted share, related to our decision to forego the calendar year 2004
discretionary company contribution to our defined contribution retirement plan, and a write-off of
capitalized software costs of approximately $4.4 million, or $0.10 per diluted share, related to
abandonment of the final phase of a large software project. Fiscal 2005 third quarter results
include restructuring charges of approximately $6.9 million, or $0.15 per diluted share, related to
the closing of certain bakeries and bakery outlets. Fiscal 2005 fourth quarter results include
restructuring charges of approximately $34.1 million, or $0.76 per diluted share, related to the
closing of certain bakeries and bakery outlets and a write-off of trademarks and trade names of
approximately $14.2 million, or $0.31 per diluted share, related to impairment testing and planned
dispositions of certain properties. Included in depreciation and amortization expense is
approximately $16.9 million, $15.9 million, $21.9 million, and $15.5 million in the first, second,
third, and fourth quarters of fiscal 2005, respectively, that relates to property and equipment
used in our production process.
105
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Control and Procedures
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of such period,
our disclosure controls and procedures are not effective as a result of the material weaknesses in
internal control over financial reporting discussed below.
Notwithstanding the assessment that our internal control over
financial reporting was not effective and that there were material
weaknesses as identified in this report, we believe that our
consolidated financial statements contained in our annual report on
Form 10-K for the fiscal year ended June 3, 2006, fairly present our
financial condition and results of operations for the fiscal years
covered thereby in all material respects. To address the material
weaknesses in our internal control over financial reporting described
below, we performed additional manual procedures and analysis and
other post-closing procedures in order to prepare the consolidated
financial statements included in this Annual Report on Form 10-K.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Internal
control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States (GAAP)
and includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and
dispositions of our assets; |
|
|
|
|
provide reasonable assurance that the transactions are
recorded as necessary to permit the preparation of
financial statements in accordance with generally accepted
accounting principles, and that our receipts and
expenditures are being made only in accordance with
authorizations of our management and directors; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition
of our assets that could have a material effect on the
financial statements. |
Management recognizes that there are inherent limitations in the effectiveness of any system of
internal control, and accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation and may not prevent or detect
misstatements. In addition, effective internal control at a point in time may become ineffective in
future periods because of changes in conditions or due to deterioration in the degree of compliance
with our established policies and procedures.
A material weakness is a significant deficiency, or combination of significant deficiencies, that
results in there being more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
Management assessed the effectiveness of the companys internal control over financial reporting as
of June 3, 2006, the end of the fiscal period covered by this report.
Managements assessment efforts undertaken in fiscal 2006 were conducted using the framework
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that
the companys internal control over financial reporting was not effective as of June 3, 2006. As a
result of its continuing efforts during the Chapter 11 proceedings, including the associated
additional accounting and financial reporting requirements and the PC review and consolidation
process, which required the time of personnel that would otherwise have been available for the
remediation efforts, management was unable to take necessary corrective actions to remediate the
following identified material weaknesses, which in some cases are made up of multiple deficiencies as of June 3, 2006:
106
Ineffective
Control Environment Insufficient Resources: We did not have
an adequate number of personnel with the requisite expertise in the
key areas of finance and accounting and benefits.
Financial
Statement Closing Process: The controls over the financial
statement closing process did not operate effectively. Due to the
personnel shortage and the additional requirements associated with
the Chapter 11 proceedings, the Company has not been able to file
required reports with the SEC on a timely basis, nor have we been
able to perform related internal control activities including
reconciliations and financial statement reviews on a timely basis.
Accrued Compensated Absences: We did not maintain effective controls over the tracking,
recording and valuation of the accrued compensated absences liabilities related to our employees.
Specifically, effective controls were not designed and in place to ensure that appropriate tracking
mechanisms were adequately functioning, employee eligibility data was accurate and all applicable
rules were accurately and consistently applied to each employee.
Recording Purchases and Processing Expenditures: We did not maintain effective controls over the
complete, accurate and timely processing of purchase and expenditure transactions. Specifically,
our ineffective controls included those necessary to ensure all
vendors invoices were being received, reviewed, approved, processed
and recorded accurately and in the proper accounting period.
Information Technology Access Controls: We did not maintain effective controls over access to
information technology programs and systems. Specifically, we did not have adequate policies and
procedures to control security and access, there were inadequate controls restricting access to
such programs and systems by information technology personnel and there was a lack of periodic,
independent review and monitoring of such access.
Use of Third Party Specialists: We did not maintain effective controls over data provided to third
party specialists or the services of the third party specialists themselves. Specifically, our
ineffective controls included the failure to review and evaluate all data to be provided to third
party specialists.
Third Party Service Providers: Our ineffective controls included the failure to review and evaluate
the potential impact of the third party service providers work on our financial statements and
the internal controls over their processes.
Review and Approval of Contracts: We did not maintain effective controls to ensure compliance with
established policies by personnel entering into contracts and other commitments. Specifically,
effective controls were not designed and activities of personnel were not monitored to ensure
compliance with review and approval requirements for contracts.
Recording Restructuring and Reorganization Expenses and Liabilities: We did not maintain effective
controls over the accurate and timely recognition of restructuring and reorganization costs.
Specifically, we did not have adequate policies or procedures to properly identify adjustments to
costs and related liabilities for restructuring and lease rejection activities undertaken in
conjunction with the bankruptcy and to accurately and timely reflect such activities in the proper
accounting period.
Management
has discussed the material weaknesses noted above with the Audit Committee of the Board of Directors and our independent registered public
accounting firm. Due to the nature of these material weaknesses, there is a more than remote
likelihood that misstatements which could be material to the annual or interim financial statements
could occur that would not be prevented or detected.
107
Our
independent registered public accountant, Deloitte & Touche LLP
(Deloitte), audited managements assessment of the effectiveness of the companys internal control over financial
reporting as of June 3, 2006 and they have issued their report
which appears on pages 110-112, which expressed an unqualified opinion on managements assessment and an adverse opinion on the effectiveness of our internal control over financial reporting as of June 3, 2006 due
to the material weaknesses as noted above.
Changes in Internal Control over Financial Reporting
We have engaged in, and are continuing to engage in, substantial efforts to improve our internal
control over financial reporting and disclosure controls and procedures related to substantially
all areas of our financial statements and disclosures. The following changes in our internal
control over financial reporting were instituted subsequent to the end of fiscal 2005:
The
following material weaknesses were identified by management as of
May 28, 2005, and have been
remediated, or partially remediated, during the fourth quarter of our
fiscal year ended June 3, 2006:
|
|
|
Ineffective Control EnvironmentTone at the Top: Our control environment did not
sufficiently promote effective internal control over financial
reporting throughout the organization. We have completed the design,
documentation, evaluation and communication of standardized policies
and procedures pertaining to all of the processes that are part of our
internal control over financial reporting. Management has
communicated its endorsement and reinforced its commitment to
maintaining sound and effective internal controls over financial
reporting. In addition, management has assessed the effectiveness of
designed internal controls over financial reporting at all levels of
the organization. |
|
|
|
|
Accounting for Pension Plan Obligations: We did not maintain effective
controls over the existence, accuracy, completeness, valuation and
disclosure of our non-company sponsored pension plans to which the
company makes contributions on behalf of certain of its employees.
Specifically, effective controls were not designed and in place to
ensure that the Companys participation in such pension plans were
accounted for properly, and the amount of the Companys obligations
under such plans were properly recorded. Pension accounting has been
reviewed for all plans to determine that the accounting and valuation
of our obligations is appropriate. In addition, we have added controls
to monitor activity and determine that changes to individual plan
provisions are approved and appropriately reflected in our financial
statements. |
|
|
|
|
Establishing Self-Insurance Reserves: We did not maintain effective
controls over the completeness, valuation and disclosure of our
workers compensation liability risks and related expense accounts.
Specifically, effective controls were not designed and in place to
ensure that estimation of these self-insurance liabilities were
reviewed and approved by appropriate personnel and that personnel had
access to appropriate information to assess such reserves. Internal
controls have been implemented to determine the completeness,
valuation and disclosure of our workers compensation liability,
including the appropriate management review of established reserves. |
|
|
|
|
Lease Capitalization: We did not maintain effective controls over the
existence, accuracy, completeness and accounting for leases.
Specifically, effective controls were not designed and in place to
ensure that leases were properly accounted for or disclosed as either
capital or operating leases. Management has performed a review of
existing leases and has implemented appropriate internal controls
related to any new leasing activity to determine proper accounting
classification and disclosure. |
|
|
|
|
Property and Equipment: We did not maintain effective controls in our
accounting for property and equipment. Specifically, we did not have a
comprehensive formal policy regarding property and equipment. As a
result, asset retirements or potentially idle or obsolete assets were
not identified and their values were not appropriately assessed and
adjusted. |
108
|
|
|
Procedures have been documented and centralized
internal controls have been added to enhance the proper accounting for
property and equipment. In addition, management has performed a
physical inventory of a substantial portion of the companys fixed
assets to determine proper accounting and financial statement
disclosure. |
We still believe that the material weaknesses noted as of June 3, 2006, continue to exist as
of the date of this filing, however we have taken the following corrective
actions subsequent to June 3, 2006, to address these material weaknesses:
|
|
|
additional personnel have been hired and service
providers continue to be utilized to address shortfalls
in staffing and assist us with accounting, finance and
benefits responsibilities; |
|
|
|
|
we have filed our consolidated financial statements
contained in our quarterly and annual reports for the
fiscal years ended May 29, 2004, May 28, 2005 and June
3, 2006, and continue to address the requirements
associated with the Chapter 11 proceedings and the
shortage of resources which have affected the timely
filing of our required SEC reports; |
|
|
|
|
we have made progress in automating controls related to
employee accrued compensated absences; |
|
|
|
|
our controls over the recording of purchases and the
processing of expenditures are being improved through
the documentation and communication of formalized
procedures for the authorization and approval of
purchases and expenditures; |
|
|
|
|
policies have been issued and controls have been added
or are in the process of being added to appropriately
restrict and monitor access to information technology
programs and systems; |
|
|
|
|
we have established improved controls over the
completeness and accuracy of data provided to third
party specialists; |
|
|
|
|
we are in the process of evaluating the significance of
third party service providers and their individual
impact on our financial statements and the extent of the
evaluation of their controls that is required; |
|
|
|
|
contracting authority for the review and approval of new
contracts and other commitments has been defined,
communicated and redistributed and a database is being
maintained and distributed to improve appropriate
communication, accounting and disclosure; and |
|
|
|
|
we are in the process of establishing improved controls
over the accurate and timely identification of ongoing
restructuring and reorganization activities associated
with the bankruptcy. |
Efforts to remediate our internal control over financial reporting are continuing and are expected
to continue throughout fiscal 2007 and beyond. There remains a risk
that we will not adequately correct any identified weaknesses in our internal control over financial
reporting or fail to prevent or detect a material misstatement of our annual or interim financial
statements.
109
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Interstate Bakeries Corporation
Kansas City, Missouri
We have audited managements assessment, included in the accompanying Managements Annual Report
on Internal Control Over Financial Reporting, that Interstate Bakeries Corporation
(Debtor-in-Possession) and subsidiaries (the Company) did not maintain effective internal control over
financial reporting as of June 3, 2006, because of the effect of the material weaknesses identified in
managements assessment based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on managements assessment and an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision
of, the companys principal executive and principal financial officers, or persons performing similar
functions, and effected by the companys board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility
of collusion or improper management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in
more than a remote likelihood that a material misstatement of the annual or interim financial statements
will not be prevented or detected. The following material weaknesses, which in some cases are made up
110
of multiple deficiencies, have been identified
and included in managements assessment as of June 3, 2006:
Ineffective Control Environment Insufficient Resources:
The Company did not have an adequate number of personnel with the requisite expertise in the key control areas of finance and accounting and benefits.
The deficiencies represent a deficiency in the design and operation of internal controls which result in more than a remote likelihood that a material
error would not have been prevented or detected, and constitute a material weakness.
Financial Statement Closing Process: The controls over the financial statement closing
process did not operate effectively. The Company has not filed required reports with the Securities and Exchange Commission on a timely basis, nor has the Company
performed related internal control activities including reconciliations and financial statement reviews on a timely basis. The deficiencies represent a deficiency
in the design and operation of internal controls which result in more than a remote likelihood that a material error would not have been prevented or detected, and
constitute a material weakness.
Accrued Compensated Absences: The Company did not maintain effective
controls over the tracking, recording and valuation of the accrued compensated absences liabilities related to its employees. Specifically, effective controls
were not designed and in place to ensure that appropriate tracking mechanisms were adequately functioning, employee eligibility data was accurate and all applicable
rules were accurately and consistently applied to each employee. The deficiencies represent a deficiency in the design and operation of internal controls which result
in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.
Recording Purchases and Processing Expenditures: The Company did not maintain effective controls
over the complete, accurate and timely processing of purchase and expenditure transactions. Specifically, the Companys ineffective controls included those necessary to
ensure all vendor invoices were being received, reviewed, approved, processed and recorded accurately and in the proper accounting period. The deficiencies represent a deficiency in the design and operation of internal controls which result in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.
Information Technology Access Controls: The Company did not maintain
effective controls over access to information technology programs and systems. Specifically, the Company did not have adequate policies and procedures to
control security and access, there were inadequate controls restricting access to such programs and systems by information technology personnel and there
was a lack of periodic, independent review and monitoring of such access. The deficiencies represent a deficiency in the design and operation of internal
controls which result in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.
Use of Third Party Specialists: The Company did not maintain effective controls
over data provided to third party specialists or the services of the third party specialists themselves. Specifically, the Companys ineffective controls included
the failure to review and evaluate all data provided to third party specialists. The deficiencies represent a deficiency in the design and operation of internal
controls which result in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.
111
Third Party Service Providers: The
Companys ineffective controls included the failure to review and evaluate the potential impact of third party
service providers' work on the Company's financial statements and the internal controls over its processes. The deficiencies
represent a deficiency in the design and operation of internal controls which result in more than a remote likelihood that a
material error would not have been prevented or detected, and constitute a material weakness.
Review and Approval of Contracts: The Company did not
maintain effective controls to ensure compliance with established policies by personnel entering into contracts and other commitments.
Specifically, effective controls were not designed and activities of personnel were not monitored to ensure compliance with review and
approval requirements for contracts. The deficiencies represent a deficiency in the design and operation of internal controls which
result in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material
weakness.
Recording Restructuring and Reorganization Expenses and Liabilities:
The Company did not maintain effective controls over the accurate and timely recognition of restructuring and reorganization costs. Specifically,
the Company did not have adequate policies or procedures to properly identify adjustments to costs and related liabilities for restructuring and
lease rejection activities undertaken in conjunction with the bankruptcy and to accurately and timely reflect such activities in the proper
accounting period. The deficiencies represent a deficiency in the design and operation of internal controls which result in more than a
remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.
These material weaknesses were considered in determining
the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule
as of and for the year ended June 3, 2006, of the Company and this report does not affect our report on such consolidated financial statements
and financial statement schedule.
In our opinion, managements assessment that the Company did not maintain
effective internal control over financial reporting as of June 3, 2006, is fairly stated, in all material respects, based on the criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also, in our opinion,
because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not
maintained effective
internal control over financial reporting as of June 3, 2006, based
on the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended June 3, 2006, of the Company and our report thereon, dated December
20, 2006, expressed an unqualified opinion on those financial statements and financial statement schedule and included
explanatory paragraphs relating to the Companys status under Chapter 11 of the Federal Bankruptcy Code, the Companys
ability to continue as a going concern, and a change in accounting principle.
DELOITTE
& TOUCHE LLP
Kansas
City, Missouri
December 20, 2006
112
ITEM 9B. OTHER INFORMATION
Not applicable.
113
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
Set forth below is the name, age, date first elected and present principal occupation or
employment, five-year employment history, and other directorships of our Board of Directors.
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Director |
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|
Name |
|
Age |
|
Since |
|
Principal Occupation or Employment for the Last Five Years and Directorships |
|
Michael J. Anderson 1,3,4
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|
55 |
|
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|
1998 |
|
|
President and Chief Executive Officer of The Andersons, Inc., a diversified
agribusiness and retailing company, for more than five years. Mr. Anderson
is a director of The Andersons, Inc. and Fifth Third BancCorp of Northwest
Ohio. |
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G. Kenneth Baum 3
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76 |
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|
1988 |
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|
Chairman of the Board of George K. Baum Group, Inc., an investment company,
for more than five years. |
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Leo Benatar 4
|
|
|
76 |
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|
1991 |
|
|
Chairman of the Board of IBC since September 2004; Principal for Benatar &
Associates, a consulting firm, for more than five years. Mr. Benatar is a
director of Mohawk Industries, Inc., PAXAR Corporation and Aaron Rents,
Inc. |
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Robert B. Calhoun 2,3
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|
64 |
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1991 |
|
|
Managing Director of Monitor Clipper Partners, a private equity investment
firm, for more than five years. Mr. Calhoun is a director of Avondale
Mills, Inc. and The Lord Abbett Family of Funds. |
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Frank E. Horton l,2
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67 |
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1992 |
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|
Principal Associate, Horton & Associates, Consultants in Higher Education,
Bayfield, Colorado, for more than five years; Executive Consultant to the
Provost, University of Missouri Kansas City, July 2003 to June 2004; and
Interim Dean of Biological Sciences, University of Missouri Kansas City,
August 2002 to February 2003. |
|
|
|
|
|
|
|
|
|
|
|
Richard L. Metrick 2,4
|
|
|
65 |
|
|
|
2000 |
|
|
Senior Managing Director in the Investment Banking Department of Bear
Stearns & Co., Inc. for more than five years. |
|
|
|
|
|
|
|
|
|
|
|
William P. Mistretta1
|
|
|
50 |
|
|
|
2006 |
|
|
Senior Operations Executive for a division of the U.S. operations of
Compass Group PLC, a company specializing in providing food, vending and
related services, since March 2006; Vice President of Operations of Aramark
Uniform and Career Apparel, Inc., a company that provides both rental and
direct marketing of uniforms and career apparel, May 2004 to April 2005;
Senior Vice President of Operations of The B. Manishewitz Company, the
nations largest manufacturer of processed kosher food products, May 2003
to May 2004; Co-Founder of American Baked Ingredients, LLC, January 2001 to
May 2003. |
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|
Ronald L. Thompson 1,4
|
|
|
57 |
|
|
|
2003 |
|
|
Retired October 2005; Chairman of the Board and Chief Executive Officer of
Midwest Stamping Company, a manufacturer of stamped metal components and
assemblies for the automotive industry, for more than four years prior
thereto. Mr. Thompson is a Trustee of the Teachers Insurance and Annuity
Association. |
|
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|
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|
|
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|
David N. Weinstein2
|
|
|
47 |
|
|
|
2006 |
|
|
Chairman of the Board of Pioneer Companies, Inc., a company that
manufactures and markets chlorine, caustic soda and related products in
North America, January 2002 to December 2005; Chairman of the Board of York
Research Corporation, a company that develops, owns and markets
environmentally friendly projects and products, November 2002 to June 2004;
Managing Director and Head of High Yield Origination and Capital Markets of
BNP Paribas, a company specializing in corporate, retail and investment
banking, March 2000 to February 2002. |
|
|
|
|
1 |
|
Member of the Audit Committee |
|
2 |
|
Member of the Compensation Committee |
|
3 |
|
Member of the Nominating/Corporate Governance Committee |
|
4 |
|
Member of the Executive Committee |
114
Audit Committee
The Board of Directors has appointed an Audit Committee consisting of four independent directors:
Michael J. Anderson, Frank E. Horton, Ronald L. Thompson and in fiscal 2007 William P. Mistretta.
Mr. Anderson serves as Chairman of the Audit Committee and has been determined by the Board of
Directors to be a financial expert under applicable SEC and NYSE regulations. The Audit Committee
hires our independent auditors, reviews with the auditors the scope and results of the audit,
reviews with our internal auditors the scope and results of our internal audit procedures, reviews
the independence of the auditors and non-audit services provided by the auditors, considers the
range of audit and non-audit fees, reviews with our independent auditors and management the
effectiveness of our system of internal accounting controls and makes inquiries into other matters
within the scope of its duties. The Audit Committee is governed by a written charter adopted by our
Board of Directors, which is available on our website at www.interstatebakeriescorp.com and
available in print to any stockholder upon request.
Executive Officers
Set forth below is the name, age and present principal occupation or employment and five-year
employment history of each of our executive officers. The executive officers serve at the pleasure
of the Board of Directors. The business address of each person listed below is 12 East Armour
Boulevard, Kansas City, Missouri 64111, except for the business address of Mr. Willson, which is
4100 East Broadway, Suite 150, Phoenix, Arizona 85040.
|
|
|
|
|
|
|
Name |
|
Age |
|
Present Principal Occupation or Employment and Five-Year Employment History |
|
Antonio C. Alvarez II 1
|
|
|
58 |
|
|
Chief Executive Officer of IBC since September 2004; and Managing Director of
Alvarez & Marsal LLC, a professional services firm, for more than three years
prior thereto. |
|
|
|
|
|
|
|
Michael D. Kafoure
|
|
|
57 |
|
|
President and Chief Operating Officer of IBC for more than the past five years. |
|
|
|
|
|
|
|
John K. Suckow 1
|
|
|
47 |
|
|
Executive Vice President and Chief Restructuring Officer of IBC since
September 2004; Managing Director of Alvarez & Marsal LLC, a professional
services firm, since July 2002; and Partner at Arthur Andersen LLP, a public
accounting firm, for more than one year prior thereto. |
|
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|
Ronald B. Hutchison
|
|
|
56 |
|
|
Executive Vice President and Chief Financial Officer of IBC since July 2004;
Executive Vice President of Aurora Foods, a branded food manufacturing
company, from June 2003 to March 2004; Executive Vice President of Kmart
Corporation, an operator of consumer retail stores, from January 2002 to May
2003; and Executive Vice President and Chief Financial Officer of Advantica
Restaurant Group, Inc., parent company of the Dennys Corporation restaurant
chain, for more than one year prior thereto. |
|
|
|
|
|
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|
Kent B. Magill
|
|
|
54 |
|
|
Executive Vice President, General Counsel and Corporate Secretary of IBC since
August 2005; Vice President, General Counsel and Corporate Secretary of IBC
from June 2002 to August 2005; and Associate General Counsel of IBC from
November 2000 to June 2002. |
|
|
|
|
|
|
|
Robert P. Morgan
|
|
|
51 |
|
|
Executive Vice President Wholesale Business Unit, Upper Midwest, North
Central and Northeast PCs of IBC since October 2005; Executive Vice
President Sales and Trade Marketing Strategy from October
2003 to October 2005; Executive Vice President Eastern Division from February 2000 to August 2002; Executive Vice President Central
Division from April 1999 to October 2003. |
|
|
|
|
|
|
|
Steven V. Proscino
|
|
|
52 |
|
|
Executive Vice President Wholesale Business Unit, Southeast, Mid-Atlantic
and Florida PCs of IBC since October 2005; Executive Vice President
Wholesale Business Unit, Eastern Region of IBC from January 2005 to October
2005; Partner at Q6, LLC, a company specializing in the design and
implementation of performance improvement programs for Fortune 500 companies,
from January 2003 to January 2005; and Executive Vice President of
Earthgrains/Sara Lee Corporation, a company engaged in the manufacture and
distribution of wholesale baked goods, for more than two years prior thereto. |
115
|
|
|
|
|
|
|
Name |
|
Age |
|
Present Principal Occupation or Employment and Five-Year Employment History |
|
Richard C. Seban
|
|
|
54 |
|
|
Executive Vice President and Chief Marketing Officer of IBC since August 2005;
President and Chief Operating Officer of High Liner Foods, Inc., a Nova Scotia
based processor and marketer of frozen seafood and pasta products, for more
than four years prior thereto. |
|
|
|
|
|
|
|
Richard D. Willson
|
|
|
58 |
|
|
Executive Vice President Wholesale Business Unit, Western Region of IBC
since June 2004; and Executive Vice President of the Western Division of IBC
for more than three years prior thereto. |
|
|
|
|
|
|
|
J. Randall Vance
|
|
|
46 |
|
|
Senior Vice President Finance and Treasurer of IBC since September 2004;
Vice President and Treasurer of Farmland Industries, Inc. a diversified
agribusiness cooperative, from July 2002 to January 2004; and Assistant
Treasurer of Farmland Industries, Inc. from 2000 to July 2002. |
|
|
|
|
|
|
|
Laura D. Robb
|
|
|
48 |
|
|
Vice President and Corporate Controller of IBC since July 2002 and Assistant
Corporate Controller of IBC for more than 2 years prior thereto. |
|
|
|
|
|
|
|
Melvin H. Ghearing
|
|
|
57 |
|
|
Vice President Bakery Outlet Business Unit since June 2004 and Vice
President Retail Operations for more than three years prior thereto. |
|
|
|
|
1 |
|
Messrs. Alvarez and Suckow, as employees of A&M, were designated as
officers of IBC pursuant to an amended and restated letter
agreement dated as of September 21, 2004, further amended and
restated as of October 14, 2004 and amended on July 18, 2005 and
elected by the Board of Directors in September 2004, April 2005,
and March 2006. |
Involvement in Prior Bankruptcy Proceedings and/or Restructurings
A number of our executive officers have experience in managing companies while subject to Chapter
11 bankruptcy proceedings. Mr. Alvarez previously served as CEO of Warnaco, Inc., Wherehouse
Entertainment, Inc., Phar-Mor, Inc., Long Manufacturing, Inc. and Coleco Industries, Inc.
Additionally, he was the President and Chief Operating Officer of Republic Health Corporation
(renamed OrNda HealthCorp). Mr. Alvarez also served as Restructuring Advisor in Charter Medical
Corporation and Resorts International, Inc. Mr. Suckows diverse restructuring experience includes
American Pad & Paper, Ames, ANC, Beatrice Canada, Bush Industries, Fleming Companies, Magellan
Health Services, Mercury Stainless/Washington Steel, Microcell Telecommunications, Peter J.
Schmitt, and Singer NV. Mr. Hutchison was instrumental in developing reorganization plans pursuant
to Chapter 11 of the Bankruptcy Code during his terms as an executive officer of Leaseway
Transportation, Advantica Restaurant Group, Kmart Corporation, and Aurora Foods. Mr. Vance was an
officer at Farmland Industries during that companys bankruptcy proceedings.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers and
directors and persons who beneficially own more than 10% of the common stock (reporting persons)
file initial reports of ownership and reports of changes in ownership with the SEC. Executive
officers, directors and greater than 10% beneficial owners are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of copies
of such forms and amendments thereto furnished to us and written representations from the executive
officers and directors, to our knowledge, all forms required to be filed by reporting persons of
IBC during fiscal 2006 were timely filed pursuant to Section 16(a) of the Exchange Act, except for
the late filing of a Form 4 for each of Messrs. Ghearing and Hutchison related to disclaiming the
portion of his restricted stock award that was scheduled to vest during fiscal 2006.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees,
including our Chief Executive Officer, Chief Financial Officer, Senior Vice President-Finance and
Treasurer and Controller. The Code of Business Conduct and Ethics is posted on our website,
www.interstatebakeriescorp.com. We intend to satisfy the disclosure requirement regarding an
amendment to, or a waiver from, a provision of the Code of Business Conduct and Ethics by posting
such information on our website.
116
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning compensation received for each of the last
three fiscal years by (i) the person who served as our Chief Executive Officer during our fiscal
year ended June 3, 2006, (ii) our four other most highly compensated executive officers as of June
3, 2006, and (iii) one individual for whom disclosure would have been provided but for the fact
that he was not serving as an executive officer of IBC on June 3, 2006 (the individuals in (i),
(ii), and (iii) are collectively referred to as the Named Executive Officers).
|
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|
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|
Long-Term Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
Annual Compensation |
|
Awards |
|
Payouts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | |
| |
|
Restricted |
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other annual |
|
stock |
|
Underlying |
|
LTIP |
|
All other |
|
|
|
|
|
|
|
|
|
|
Bonus |
|
compensation |
|
award(s) |
|
Options/SARs |
|
payouts |
|
Compensation1 |
|
|
Year |
|
Salary ($) |
|
($) |
|
($) |
|
($) |
|
(#) |
|
($) |
|
($) |
Name and principal position (a) |
|
(b) |
|
(c) |
|
(d) |
|
(e) |
|
(f) |
|
(g) |
|
(h) |
|
(i) |
Antonio C.
Alvarez II 2 |
|
|
2006 |
|
|
|
1,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
2005 |
|
|
|
1,274,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael D. Kafoure |
|
|
2006 |
|
|
|
496,313 |
|
|
|
219,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,151 |
|
President and Chief |
|
|
2005 |
|
|
|
486,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,687 |
|
Operating Officer |
|
|
2004 |
|
|
|
480,537 |
|
|
|
|
|
|
|
|
|
|
|
399,578 |
3 |
|
|
|
|
|
|
|
|
|
|
22,787 |
|
Ronald B. Hutchison |
|
|
2006 |
|
|
|
356,731 |
|
|
|
157,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,564 |
|
EVP and
Chief |
|
|
2005 |
|
|
|
313,653 |
|
|
|
|
|
|
|
|
|
|
|
221,000 |
4 |
|
|
|
|
|
|
|
|
|
|
54,715 |
|
Financial Officer |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John K. Suckow 2 |
|
|
2006 |
|
|
|
1,482,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVP and Chief |
|
|
2005 |
|
|
|
1,117,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Officer |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kent B. Magill |
|
|
2006 |
|
|
|
272,274 |
|
|
|
110,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,660 |
|
EVP, General
Counsel and Corporate |
|
|
2005 |
|
|
|
228,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,751 |
|
Secretary |
|
|
2004 |
|
|
|
225,196 |
|
|
|
30,000 |
|
|
|
|
|
|
|
170,894 |
3 |
|
|
|
|
|
|
|
|
|
|
23,678 |
|
Jacques E. Roizen 2,5 |
|
|
2006 |
|
|
|
431,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former EVP and Chief |
|
|
2005 |
|
|
|
733,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing Officer |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
1 |
|
All other compensation for the fiscal year ended June 3, 2006, includes the Companys contributions in the amounts of $7,560 and $7,560, which accrued during such fiscal year for the
accounts of Messrs. Kafoure and Magill, respectively, under our Companys Retirement Income Plan; the imputed income for term life insurance provided by the Company for the benefit of
Messrs. Hutchison and Magill in the amounts of $966 and $236, respectively; the imputed income for use of a Company car by Messrs. Kafoure, Hutchison and Magill in the amounts of
$5,591, $6,240 and $556, respectively; and taxable income of $3,307 for Mr. Magill related to financial advisory services and $2,358 for Mr. Hutchison related to moving expenses. |
|
2 |
|
Messrs. Alvarez, Suckow and Roizen, as employees of A&M, were designated as officers of IBC pursuant to an amended and restated letter agreement dated September 21, 2004, further
amended and restated as of October 14, 2004 and amended on July 18, 2005 and elected by the Board of Directors in September 2004, April 2005 and except for Mr. Roizen (see note 5),
March 2006. |
|
3 |
|
On January 23, 2004, the Company exchanged outstanding options to purchase shares of our Common Stock with exercise prices of $25.00 or greater held by certain eligible employees for
shares of restricted stock. The restricted stock, which vests ratably over a four-year term, and the eligible options were granted under our 1996 Plan. The value was calculated based
on the closing price of the common stock on January 23, 2004 of $14.75 per share. Subsequent to the exchange of options for restricted stock, Mr. Kafoure and the Company agreed to a
rescission of the exchange and Mr. Kafoure returned the restricted stock grant. Mr. Magill has elected to disclaim ownership of the vested portion of his restricted stock grant and
has surrendered all rights thereunder. |
|
4 |
|
Mr. Hutchison was granted a restricted stock award of 20,000 shares on July 13, 2004. The restricted stock, which vests ratably over a three-year term, was granted under our 1996
Plan. The value was calculated based on |
117
|
|
|
|
|
the closing price of the common stock on July 13, 2004 of $11.05 per share. Mr. Hutchison has elected to disclaim ownership of the vested
portion of his restricted stock grant and has surrendered all rights thereunder. |
|
5 |
|
As Interim Chief Marketing Officer, Mr. Roizen stepped down from his position when Mr. Seban was hired on August 1, 2005. |
Stock Options
The following two sections set forth information for the last completed fiscal year relating to (i)
the grant of stock options to the Named Executive Officers and (ii) the exercise and appreciation
of stock options held by the Named Executive Officers.
Option Grants in the Fiscal Year Ended June 3, 2006
No stock options were granted in fiscal 2006 to any of the Named Executive Officers.
Aggregated Option Exercises in Fiscal 2006 and Option Values at June 3, 2006
|
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|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
Value of unexercised in-the- |
|
|
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|
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|
|
underlying unexercised options |
|
|
money options at fiscal year |
|
|
|
Shares |
|
|
|
|
|
|
at fiscal year end (#) |
|
|
end ($) |
|
|
|
Acquired |
|
|
Value |
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|
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|
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|
|
|
|
|
|
|
|
on exercise |
|
|
Realized |
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
(#) |
|
|
($) |
|
|
Exercisable |
|
|
Unexercisable |
|
|
Exercisable |
|
|
Unexercisable |
|
|
Antonio C. Alvarez II |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
John K. Suckow |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Michael D. Kafoure |
|
|
0 |
|
|
|
0 |
|
|
|
510,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Ronald B. Hutchison |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Kent B. Magill |
|
|
0 |
|
|
|
0 |
|
|
|
60,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Jacques E. Roizen |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Long Term Incentive Plan Awards in the Fiscal Year Ended June 3, 2006
No awards were made under any Long Term Incentive Plan in fiscal 2006 to any of the Named Executive
Officers.
IBC Supplemental Executive Retirement Plan
In connection with our Chapter 11 filing, as of November 11, 2004, we suspended payments and
accruals of service credit under the SERP. The following describes the SERP as it existed prior to
its suspension.
In June 2002, we adopted the SERP, an unfunded, non-tax-qualified supplemental retirement plan.
Under the SERP, we will pay certain key executives and managers who retire after age 60 (the normal
retirement age), including the Named Executive Officers (except for Messrs. Alvarez, Suckow, and
Roizen), an annual retirement benefit equal to 1.8% of the participants average annual base salary
received during the 60 months immediately preceding retirement, for each year of service to IBC, up
to 20 years, or the Benefit. For purposes of this formula, base salary means the salary amount
set forth in the Salary column of the Summary Compensation Table. As a result, the maximum Benefit
is 36% of the participants average annual base salary for the preceding 60 months. Upon
termination of the participants service for any reason other than disability or death after the
participant reaches 60 years of age, one-twelfth of the Benefit will be paid each month, if the
participant is not married at retirement, until the date of the participants death. If the
participant is married at retirement, one-twelfth of the Benefit will be paid each month for the
participants lifetime, unless the participant dies before receiving 300 monthly payments in which
event payments will continue to be made to his or her spouse until the earlier of the spouses
death or the payment of a total of 300 monthly payments to both the participant and the spouse. The
SERP includes certain provisions, exercisable at the participants election, for the payment of a
reduced joint and survivor monthly benefit payable for the surviving spouses lifetime if the
participant is married on the date of his or her retirement.
118
A participant is entitled to a disability benefit, determined and paid in the same manner as the
Benefit, if termination of employment results from total and permanent disability prior to age 60
and if the participant has 20 or more years of service as of the date of disability. Payment begins
the month following the month during which the participant reaches 60 years of age and is payable
for the participants lifetime, unless the participant is married on the date of disability and
dies before receiving 300 monthly payments, in which event payments will continue to be made to his
or her spouse until the earlier of the spouses death or the payment of a total of 300 monthly
payments to both the participant and the spouse. Alternatively, if the participant is married on
the date of disability, he or she can elect the reduced joint and survivor annuity described above.
A participants surviving spouse, if any, will be entitled to receive a death benefit, determined
and paid in the same manner as the Benefit, upon the participants death if the participant dies
after reaching 60 years of age but before retirement, or if the participant dies after 20 or more
years of service, regardless of age. This death benefit begins the month following the month during
which the participant would have reached 60 years of age or the month following his death,
whichever is later, and is payable for the lesser of 300 months or until the death of the spouse.
The following table sets forth the annual estimated Benefits payable upon retirement to
participants in the SERP in the specified compensation and years of service classifications. The
Benefits, including those payable upon death or disability, are not reduced for social security or
any other offset amounts.
SERP Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of Service |
Annual Average Earnings Over the Last 60 Months of Employment |
|
5 |
|
10 |
|
15 |
|
20 |
$100,000 |
|
$ |
9,000 |
|
|
$ |
18,000 |
|
|
$ |
27,000 |
|
|
$ |
36,000 |
|
$200,000 |
|
$ |
18,000 |
|
|
$ |
36,000 |
|
|
$ |
54,000 |
|
|
$ |
72,000 |
|
$300,000 |
|
$ |
27,000 |
|
|
$ |
54,000 |
|
|
$ |
81,000 |
|
|
$ |
108,000 |
|
$400,000 |
|
$ |
36,000 |
|
|
$ |
72,000 |
|
|
$ |
108,000 |
|
|
$ |
144,000 |
|
$500,000 |
|
$ |
45,000 |
|
|
$ |
90,000 |
|
|
$ |
135,000 |
|
|
$ |
180,000 |
|
$600,000 |
|
$ |
54,000 |
|
|
$ |
108,000 |
|
|
$ |
162,000 |
|
|
$ |
216,000 |
|
$700,000 |
|
$ |
63,000 |
|
|
$ |
126,000 |
|
|
$ |
189,000 |
|
|
$ |
252,000 |
|
$800,000 |
|
$ |
72,000 |
|
|
$ |
144,000 |
|
|
$ |
216,000 |
|
|
$ |
288,000 |
|
As of June 3, 2006, Messrs. Kafoure, Hutchison and Magill had accredited service of 9, 0 and 3
years, respectively.
KERP PLAN
In order to retain key employees and minimize management turnover during our Chapter 11 cases, we
have implemented a Key Employee Retention Plan, or KERP, which was approved by the Bankruptcy Court
on February 17, 2005. The KERP has two components: (i) retention or stay bonuses that encourage
and reward employees for continuing with us during and throughout the Chapter 11 process; and (ii)
restructuring performance bonuses that will reward participants if we achieve certain performance
objectives during the Chapter 11 cases.
KERP participants must remain in our employ in order to receive payments under the KERP. A
participant who is terminated for cause (as defined in the KERP) or voluntarily leaves our
employment without good reason (as defined in the KERP) prior to a payment date under the KERP will
forfeit such participants right to future payment under the KERP. If a participant is terminated
without cause or resigns for good reason prior to a payment date, such participant is paid a
pro-rated amount of such participants retention and restructuring performance bonus.
Retention Bonuses
Under the KERP, approximately 200 employees are eligible for retention bonuses between 20% and 60%
of their annual base salary. We estimate that the maximum possible cost of these retention bonuses
will be approximately $7.2 million. The retention bonuses are to be paid in three installments. The
first two installments, each consisting of 25% of the total retention bonus, were paid on May 1,
2005 and November 1, 2005. The remaining 50% of the retention bonus will be paid to eligible
employees 30 days after the substantial consummation of a confirmed plan of
119
reorganization whereby we emerge from bankruptcy as reorganized entities on a stand-alone basis, or
the closing of a sale of all or substantially all of our assets as a going concern.
Restructuring Performance Bonuses
In lieu of our 2005 annual incentive bonus plan, which was terminated, the KERP contains a
performance component under which cash bonuses will be paid to participants if we achieve certain
predetermined financial objectives. The restructuring performance bonuses were based on a target
figure for our adjusted earnings before interest, taxes, depreciation, amortization and
restructuring costs (EBITDAR). If our actual adjusted EBITDAR for fiscal 2005 equaled the target
adjusted EBITDAR, participants were eligible to receive a baseline restructuring performance bonus
ranging from 5% to 30% of their base salary. The aggregate amount of baseline restructuring
performance bonuses is approximately $5.0 million.
The restructuring performance bonuses decreased or increased proportionally if the actual adjusted
EBITDAR was less than or exceeded target adjusted EBITDAR, provided that (i) no restructuring
performance bonuses will be payable if the actual adjusted EBITDAR was less than 80% of the target
adjusted EBITDAR, and (ii) the aggregate amount of the restructuring performance bonuses was capped
at $5.7 million, which was payable in the event that actual adjusted EBITDAR is 125% or more of the
target adjusted EBITDAR.
The amount of restructuring performance bonuses payable to participants consists of (i) a fixed
component equal to 60% of the participants earned restructuring performance bonus and (ii) a
discretionary component to be determined by the Compensation Committee of the Board. Actual
restructuring bonuses will be paid in 2 installments. The first 50% installment, based on an
estimate of 100% of target EBITDAR, was paid on or about August 15, 2005. Actual EBITDAR exceeded
the target adjusted EBITDAR by more than 125%. As a result, an additional payment relating to the
first installment was made in October 2006. Under the original order entered on the KERP, the
remaining 50% would be payable 30 days after the substantial consummation of a confirmed plan of
reorganization whereby we emerge from bankruptcy as reorganized entities on a stand-alone basis, or
the closing of a sale of all or substantially all of our assets as a going concern. However, on
November 8, 2006 the Bankruptcy Court approved an Order to accelerate the payment of the
restructuring performance bonuses. Accordingly, half of the bonus was
paid on December 15, 2006
and the other half is payable on April 30, 2007 to eligible employees who are working for the
Debtors on those dates.
Participation of Named Executive Officers
Messrs. Kafoure, Hutchison and Magill are participants in the KERP. The maximum amounts that
Messrs. Kafoure, Hutchison and Magill may be entitled to under the KERP are approximately $0.5
million, $0.4 million and $0.3 million, respectively.
Compensation of Directors
Directors who are not our salaried employees or consultants are entitled to an annual retainer of
$30,000 plus $2,000 for each Board of Directors meeting attended in person and $1,000 for each
telephonic Board of Directors meeting. In addition, directors who are members of committees of the
Board of Directors and who are not our salaried employees or consultants are entitled to receive
$1,000 for each committee meeting attended that is not conducted in conjunction with a meeting of
the full Board of Directors and $750 for each committee meeting attended in person that is
conducted on the same day as a meeting of the full Board of Directors. For telephonic committee
meetings, each committee member is entitled to receive $500. The Non-Executive Chairman of the
Board is entitled to receive an annual retainer of $150,000. The Chairman of the Audit Committee is
entitled to receive an annual retainer of $5,000. The Chairman of the Compensation Committee and
the Nominating/Corporate Governance Committee are each entitled to receive an annual retainer of
$2,500. In addition, non-employee directors are eligible for awards of stock options and restricted
or unrestricted shares of common stock pursuant to our 1996 Stock Incentive Plan, or the 1996 Plan.
In fiscal 2006, no stock option grants were made to non-employee directors. During fiscal 2006,
the Board of Directors had sixteen meetings (ten of which were telephonic), the Audit Committee had
ten meetings (four of which were telephonic), the Compensation Committee had seven meetings (one of
which was telephonic), the Nominating/Corporate Governance Committee had two meetings, and the
Executive Committee had four meetings (all of which were telephonic).
120
Employment Agreements
We entered into employment agreements with Michael D. Kafoure, Robert P. Morgan, Richard D. Willson
and Ronald B. Hutchison. The agreements were to expire on January 1, 2005, except for Mr.
Hutchisons whose agreement was to expire on July 7, 2006, subject to automatic renewal for
successive one-year periods unless we or the employee gives timely notice that the term will not be
extended; no such notice has been given by either us or the employees. The agreements provide for
annualized base salaries during the term of the agreements of at least the following amounts:
$460,000 for Mr. Kafoure; $204,000 for Mr. Morgan; $186,500 for Mr. Willson; and $350,000 for Mr.
Hutchison; in each case, subject to annual review. In addition to base salary, the agreements
provide for an annual bonus under the Incentive Compensation Plan (IC Plan)at the specified level
under the IC Plan for the employees job title. In addition, Mr. Hutchisons agreement provides for
a guaranteed minimum bonus of $100,000 under the IC Plan for the 2005 fiscal year, an award of
20,000 shares of restricted stock vesting ratably over three years, and payment, under certain
circumstances, of a $100,000 relocation stipend in the event of his termination within two years.
Each agreement terminates in the event of death or permanent disability. In either such case, or in
the event that employment is terminated by us without the employees consent (other than for a
felony conviction, guilty plea or plea of nolo contendere to a felony), the employee will continue
to receive his regular salary payments, continued health, medical, disability and insurance
coverage and continued accrual of retirement and supplemental retirement benefits during the
balance of the agreement term. The employees will not be entitled to receive any benefits under the
employment agreements to the extent that payments are made under a management continuity agreement
following a change in control. The agreements prevent the employees from competing with us or
soliciting customers for a competitive business during the term of the agreement and during the
balance of the agreement term following termination and require the employees to maintain the
confidentiality of our confidential information prior to public disclosure by us.
Because these contracts were entered into pre-petition, they are subject to assumption or rejection
under the provisions of the Bankruptcy Code. We are in the process of reviewing the contracts as
part of our overall restructuring process and have made no decision at this time with regard to
whether we will seek Bankruptcy Court approval to either assume or reject the contracts.
Alvarez and Marsal Agreement
On September 21, 2004, we appointed Antonio C. Alvarez II as our Chief Executive Officer and John
K. Suckow as our Executive Vice President and Chief Restructuring Officer. Messrs. Alvarez and
Suckow, as employees of A&M, were designated as officers pursuant to an amended and restated letter
agreement dated as of September 21, 2004, further amended and restated as of October 14, 2004, or
the Letter Agreement. The terms and conditions of the Letter Agreement were approved by the
Bankruptcy Court on October 25, 2004. Under the terms of the Letter Agreement, we pay $150,000 per
month to A&M for the services of Mr. Alvarez as Chief Executive Officer. In addition, we pay A&M an
hourly rate of $600 for the services of Mr. Suckow as Executive Vice President and Chief
Restructuring Officer and an hourly rate ranging from $200 to $650 for other employees of A&M. We
also compensate A&M for reasonable out-of-pocket expenses.
On July 18, 2005, we entered into a supplemental letter agreement with A&M (the Incentive Fee
Agreement), which sets forth the manner in which A&Ms incentive compensation is to be calculated
under the Letter Agreement. Pursuant to the Bankruptcy Courts October 25, 2004 order, notice of
the Incentive Fee Agreement was provided to certain interested parties in our bankruptcy. Upon
agreement of such parties, the time to object to the Incentive Fee Agreement has been repeatedly
extended, most recently until February 15, 2007. Therefore, absent consent of such parties, the
Incentive Fee Agreement remains subject to Bankruptcy Court approval and, accordingly, its terms
will not become effective until such consent or approval has been obtained. Pursuant to the
Incentive Fee Agreement, A&M is entitled to incentive compensation to be based on five percent of
our Total Enterprise Value (as defined in the Incentive Fee Agreement) in excess of $723 million.
Total Enterprise Value consists of two components: (i) our total cash balance as of the effective
date of our plan of reorganization, less the normalized level of cash required by us in the
ordinary course of business, plus (ii) either (a) the midpoint enterprise value set forth in the
disclosure statement with respect to our plan of reorganization as confirmed by the Bankruptcy
Court or (b) the aggregate consideration received by us in a sale. Under all circumstances other
than a liquidation of our company (in which
121
case A&M will have no guaranteed incentive compensation), A&Ms incentive compensation will be a
minimum of $3,850,000. The incentive compensation will be payable upon the consummation of our plan
of reorganization.
The Letter Agreement may be terminated by either party without cause upon thirty days prior written
notice, subject to the payment by us of any fees and expenses due to A&M. If we terminate the
Letter Agreement without cause or if A&M terminates the Letter Agreement for good reason, A&M will
also be entitled to receive the incentive fee, provided that the consummation of our restructuring
occurs within twelve months of termination. If we terminate the Letter Agreement for cause, we will
be relieved of all of its payment obligations, except for the payment of fees and expenses incurred
by A&M through the effective date of termination. Under the terms of the Letter Agreement, Messrs.
Alvarez and Suckow will continue to be employed by A&M and, while rendering services to us, will
continue to work with A&M personnel in connection with other unrelated matters. In addition to
Messrs. Alvarez and Suckow, additional A&M personnel have been and will be designated as officers
pursuant to the Letter Agreement.
Management Continuity Agreements
Our Company has entered into management continuity agreements with Messrs. Kafoure, Magill, Morgan,
Willson and Hutchison. These agreements provide that if, within two years after a change in
control (as defined below) we, or any purchaser of our business, terminates the executives
employment other than by reason of (i) a transfer of employment to a related entity of such
purchaser under substantially the same employment terms, (ii) the executives death, or (iii) the
executives voluntary termination if the executive has continued to enjoy substantially the same
employment terms, the executive will be entitled to receive:
|
|
|
an amount equal to two years of the executives salary
(based on the executives monthly base salary immediately
prior to the change in control or the employment
termination date, whichever is greater) and bonus (equal to
the target bonus under the IC Plan or the most recent
annual bonus received by the executive, whichever is
greater); |
|
|
|
|
continued life, health, accident and disability benefits
for two years following the employment termination date; |
|
|
|
|
immediate and full vesting under our SERP and at least two
additional years of credited service under the SERP (except
that the adjustment cannot result in the years of credited
service exceeding 20 years); and |
|
|
|
|
up to $15,000 of outplacement counseling services. |
We will reimburse the executive for any excise taxes imposed by Section 4999 of the Internal
Revenue Code of 1986, and will make a gross-up payment to reimburse the executive for any income or
other tax attributable to the gross-up payment and to the tax reimbursement payments themselves.
A change in control generally is defined to take place when (a) there is a change in the
membership of the Board of Directors in which the present directors (and persons nominated or
appointed by the directors) cease to constitute at least a majority of the Board, (b) a person or
group (other than us and various affiliated persons or entities) becomes the beneficial owner,
directly or indirectly, of 50% or more of the total voting power of our outstanding securities, (c)
a sale of all or substantially all of our assets, (d) a merger, share exchange, reorganization or
consolidation involving us in which at least 50% of the total voting power of the voting securities
of the surviving corporation is held by persons who were not previously our stockholders, or (e) a
finding by a majority of the present directors (and persons nominated or appointed by the
directors) that a sale, disposition, merger or other transaction or event that they determine
constitutes a change in control has occurred.
Because these contracts were entered into pre-petition, they are subject to assumption or rejection
under the provisions of the Bankruptcy Code. We are in the process of reviewing the contracts as
part of our overall restructuring process and have made no decision at this time with regard to
whether we will seek Bankruptcy Court approval to either assume or reject the contracts.
122
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are Messrs. Calhoun, Horton, Metrick and Weinstein. No
member of the Compensation Committee was an officer, employee or a former officer or employee of us
or any of our subsidiaries during fiscal 2006.
Option Exchange
In fiscal 2004, the Compensation Committee authorized IBC to offer eligible employees the right to
exchange stock options with exercise prices above $25.00, or the Underwater Options, for restricted
stock. The Underwater Options were valued by an outside independent compensation consulting firm
using a Black-Scholes model employing certain assumptions. The firm employed a standard valuation
that had been utilized by other companies in designing similar programs. The restricted stock
issued in exchange for the Underwater Options has a four year vesting period and the valuation was
not discounted based on such vesting period. The vesting of the restricted stock is accelerated in
the event of an employees death, retirement, disability or involuntary termination for reasons
other than extreme cause such as criminal or willful misconduct. The exchange occurred on January
23, 2004, with the number of shares of restricted stock awarded based upon the prior days closing
price of our stock, $14.80. The restricted stock and the eligible options were granted under our
1996 Plan. During fiscal 2006, certain Named Executive Officers elected to disclaim ownership of
the vested portion of their restricted stock and surrendered all rights thereunder.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Equity Compensation Plan Information
We have only one equity compensation plan for eligible employees under which options, rights or
warrants may be granted, the 1996 Stock Incentive Plan. See Note 14. Stock-Based Compensation to
our consolidated financial statements, contained herein for further information on the material
terms of this plan. The following is a summary of the shares reserved for issuance pursuant to
outstanding options, rights or warrants granted under our 1996 Plan as of June 3, 2006:
Equity Compensation Plan Information as of June 3, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
Weighted- |
|
|
remaining available for |
|
|
|
|
|
|
|
average exercise |
|
|
future issuance under |
|
|
|
Number of securities to be |
|
|
price of |
|
|
equity compensation |
|
|
|
issued upon exercise of |
|
|
outstanding |
|
|
plans (excluding |
|
|
|
outstanding options, |
|
|
options, warrants |
|
|
securities reflected in |
|
|
|
warrants and rights |
|
|
and rights |
|
|
column (a)) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity
compensation plans
approved by
security holders |
|
|
4,099,000 |
|
|
$ |
16.41 |
|
|
|
8,076,000 |
|
Equity compensation
plans not approved
by security holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,099,000 |
|
|
$ |
16.41 |
|
|
|
8,076,000 |
|
|
|
|
|
|
|
|
|
|
|
123
Holdings of Principal Stockholders
The following table sets forth information regarding the ownership of our common stock by each
person known to us to be the beneficial owner of more than 5% of our Companys common stock as of
December 6, 2006.
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
|
|
|
|
|
Amount and |
|
|
|
|
|
|
nature of |
|
|
(1) |
|
(2) |
|
beneficial |
|
(4) |
Title of Class |
|
Name and address of beneficial owner |
|
ownership |
|
Percent of Class |
Common |
|
EagleRock Capital Management, L.L.C. 1
551 Fifth Avenue, 34th Floor
New York, NY 10176 |
|
4,013,176 |
|
8.8% |
Common |
|
Brencourt Advisors, LLC 1
600 Lexington Avenue, 8 th Floor
New York, NY 10022 |
|
3,799,520 |
|
8.4% |
Common |
|
Glenview Capital Management, LLC 1
399 Park Avenue, Floor 39
New York, NY 10022 |
|
3,782,781 |
|
8.3% |
Common |
|
QVT Financial LP 1
527 Madison Avenue, 8th Floor
New York, NY 10022 |
|
3,322,495 |
|
7.32% |
Common |
|
Brandes Investment Partners, L.P. 1
11988 El Camino Real, Suite 500
San Diego, CA 92130 |
|
2,958,045 |
|
6.5% |
Common |
|
Fidelity Management & Research Co. 1
82 Devonshire Street
Boston, MA 02109 |
|
2,848,716 |
|
6.277% |
Common |
|
Ore Hill Partners LLC 1
C/o Butterfield Fund Services (Cayman) Ltd.
PO Box 705GT
Butterfield House
68 Fort Street
Grand Cayman, Cayman Islands |
|
2,811,400 |
|
6.19% |
|
|
|
|
1 |
|
The information concerning beneficial ownership was obtained from
Schedule 13G reports of EagleRock Capital Management, L.L.C.,
Glenview Capital Management, LLC, QVT Financial LP, Brandes
Investment Partners, L.P., Fidelity Management & Research Co., and
Ore Hill Partners LLC filed with the Securities and Exchange
Commission (SEC) on February 14, 2006, February 14, 2006,
February 14, 2005, February 14, 2006, February 14, 2006, and
February 14, 2006, respectively and a Schedule 13D report of
Brencourt Advisors, LLC filed with the SEC on November 7, 2006. |
124
Holdings of Officers and Directors
The number of shares of our common stock beneficially owned as of December 6, 2006, by the
directors, the Named Executive Officers, and all directors, Named Executive Officers and executive
officers as a group, are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
|
|
|
|
|
|
Amount and nature |
|
|
|
(1) |
|
(2) |
|
of beneficial |
|
|
(4) |
Title of Class |
|
Name of beneficial owner |
|
ownership |
|
|
Percent of Class |
|
Common |
|
Michael J. Anderson |
|
|
64,095 |
1,2 |
|
* |
Common |
|
G. Kenneth Baum |
|
|
210,837 |
1,2,3 |
|
* |
Common |
|
Leo Benatar |
|
|
89,330 |
1,2 |
|
* |
Common |
|
Robert B. Calhoun |
|
|
87,257 |
1,2 |
|
* |
Common |
|
Frank E. Horton |
|
|
70,525 |
1,2 |
|
* |
Common |
|
Ronald B. Hutchison |
|
|
6,666 |
2 |
|
* |
Common |
|
Michael D. Kafoure |
|
|
415,844 |
,2 |
|
* |
Common |
|
Kent B. Magill |
|
|
66,294 |
1,2 |
|
* |
Common |
|
Richard L. Metrick |
|
|
54,525 |
1,2 |
|
* |
Common |
|
Ronald L. Thompson |
|
|
9,525 |
1,2 |
|
* |
Common |
|
All Named Executive
Officers, directors and
executive officers as a
group (21 persons) |
|
|
1,325,172 |
,2 |
|
2.9% |
|
|
|
|
* |
|
Less than 1% |
|
1 |
|
Of the shares indicated, 58,000 (Mr.
Anderson), 80,000 (Mr. Baum), 80,000 (Mr.
Benatar), 80,000 (Mr. Calhoun) 60,000 (Dr.
Horton), 410,000 (Mr. Kafoure), 60,000 (Mr.
Magill), 40,000 (Mr. Metrick), 5,000 (Mr.
Thompson) and 1,099,000 (all directors,
Named Executive Officers and executive
officers as a group) are attributable to
currently exercisable employee stock options
or stock options exercisable within 60 days. |
|
2 |
|
Of the shares indicated, 4,525 (Messrs.
Anderson, Baum, Benatar, Calhoun, Horton,
Metrick and Thompson), 6,666 (Mr.
Hutchison), 5,792 (Mr. Magill) and 60,485
(all directors, Named Executive Officers and
executive officers as a group) are
attributable to shares of restricted stock. |
|
3 |
|
Mr. Baum is a director and Chairman of the
Board of George K. Baum Group, Inc. Mr. Baum
is also the majority stockholder of George
K. Baum Group, Inc. Of the 210,837 shares
indicated, 77,858 are held by George K. Baum
Group, Inc. Mr. Baum may be deemed to
beneficially own all 77,858 shares of the
Common Stock held by George K. Baum Group,
Inc. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 21, 2004, we appointed Antonio C. Alvarez II as our Chief Executive Officer and John
K. Suckow as our Executive Vice President and Chief Restructuring Officer. Messrs. Alvarez and
Suckow, as employees of A&M, were designated as officers of IBC pursuant to the Letter Agreement
and elected by the Board of Directors in September 2004, April 2005, and March 2006. The terms and
conditions of the Letter Agreement were approved by the Bankruptcy Court on October 25, 2004. Under
the terms of the Letter Agreement, we pay $150,000 per month to A&M for the services of Mr. Alvarez
as Chief Executive Officer. In addition, we pay to A&M an hourly rate of $600 for the services of
Mr. Suckow as Executive Vice President and Chief Restructuring Officer and an hourly rate ranging
from $200 to $650 for other employees of A&M. We also compensate A&M for reasonable out-of-pocket
expenses.
On July 18, 2005, we entered into a supplemental letter agreement with A&M (the Incentive Fee
Agreement), which sets forth the manner in which A&Ms incentive compensation is to be calculated
under the Letter Agreement. Pursuant to the Bankruptcy Courts October 25, 2004 order, notice of
the Incentive Fee Agreement was provided to
certain interested parties in our bankruptcy. Upon agreement of such parties, the time to object to
the Incentive Fee
125
Agreement has been repeatedly extended, most recently until February 15, 2007.
Therefore, absent consent of such parties, the Incentive Fee Agreement remains subject to
Bankruptcy Court approval and, accordingly, its terms will not become effective until such consent
or approval has been obtained. Pursuant to the Incentive Fee Agreement, A&M is entitled to
incentive compensation to be based on five percent of our Total Enterprise Value (as defined in the
Incentive Fee Agreement) in excess of $723 million. Total Enterprise Value consists of two
components: (i) our total cash balance as of the effective date of our plan of reorganization, less
the normalized level of cash required by us in the ordinary course of business, plus (ii) either
(a) the midpoint enterprise value set forth in the disclosure statement with respect to our plan of
reorganization as confirmed by the Bankruptcy Court or (b) the aggregate consideration received by
us in a sale. Under all circumstances other than a liquidation of our company (in which case A&M
will have no guaranteed incentive compensation), A&Ms incentive compensation will be a minimum of
$3,850,000. The incentive compensation will be payable upon the consummation of our plan of
reorganization.
The Letter Agreement may be terminated by either party without cause upon thirty days prior written
notice, subject to the payment by us of any fees and expenses due to A&M. If we terminate the
Letter Agreement without cause or if A&M terminates the Letter Agreement for good reason, A&M will
also be entitled to receive the incentive fee, provided that the consummation of our restructuring
occurs within twelve months of termination. If we terminate the Letter Agreement for cause, we will
be relieved of all of its payment obligations, except for the payment of fees and expenses incurred
by A&M through the effective date of termination. Under the terms of the Letter Agreement, Messrs.
Alvarez and Suckow will continue to be employed by A&M and, while rendering services to us, will
continue to work with A&M personnel in connection with other unrelated matters. In addition to
Messrs. Alvarez and Suckow, additional A&M personnel have been and will be designated as officers
pursuant to the Letter Agreement.
We purchase flour at market prices from Cereal Food Processors, Inc., a long-standing supplier, in
the regular course of our business under a contract terminating at the end of October 2006. G.
Kenneth Baum, a current director, beneficially owns not more than a 15% equity interest in Cereal
Food Processors. During fiscal 2006, our flour purchases from Cereal Food Processors totaled
approximately $85,500,000.
In October 2006, The Andersons, Inc. was the successful bidder in a live auction we held to sell a
purchase option we controlled as to 89 railcars we leased. Michael J. Anderson, a current
director, is the President & Chief Executive Officer of The Andersons, Inc. We issued Request for
Bids to eight railcar lessors, one of which was The Andersons, Inc. Seven bidders submitted bids.
In the arms-length bidding process, each of the seven bidders was required to submit a bid that
included specific terms, including buying our purchase option, immediately exercising the purchase
option, purchasing the railcars, and thereafter leasing the railcars to our flour suppliers for a
specified period of time. We held a live identity-preserved auction with the top three bidders,
and The Andersons, Inc. was the highest bidder. The auction process and results were approved by
the bankruptcy court in November 2006. The Andersons, Inc. paid IBC approximately $1.2 million for
the right to exercise the purchase option with the lessor.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to our Independent Registered Public Accounting Firm
For the years ended June 3, 2006 and May 28, 2005, professional services were performed by Deloitte
& Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates, or
Deloitte & Touche. Total fees aggregated $3,512,535 and
$3,557,000 for the years ended June 3, 2006 and
May 28, 2005, respectively and were comprised of the following:
Audit
Fees. The aggregate fees incurred for the audit of our annual financial statements for the
fiscal year ended June 3, 2006 and for the reviews of the financial statements included in our
Quarterly Reports on Form 10-Q were $3,352,535 (all but
approximately $500,000 of which has been billed). The aggregate fees incurred for the audit of our annual
financial statements for the fiscal year ended May 28, 2005 and for the reviews of the financial
statements included in our Quarterly Reports on Form 10-Q were $3,386,000. The fees for fiscal year ended May 28, 2005
include amounts for work on the review of documents filed with the SEC and consultation on
financial accounting and reporting standards arising during the course of the audit or reviews, as
well as fees related to the
restatement of our historical financial statements, which restatement related only to periods prior
to the fiscal year ended May 28, 2005.
126
Audit-Related
Fees. The aggregate fees incurred for audit-related services for the fiscal years ended
June 3, 2006 and May 28, 2005 were approximately
$160,000 and $171,000 respectively. These fees relate to
audits of certain of our benefit plans, some of which are paid out of
plan assets.
Tax Fees. The aggregate fees billed for tax services for the fiscal years ended June 3, 2006 and
May 28, 2005 were $0.
All
Other Fees: The aggregate fees for services not included above
were $0 for the fiscal year
ended June 3, 2006 and $0 for the fiscal year ended May 28, 2005.
Audit Committee Pre-Approval Policy
Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility
for appointing, setting compensation and overseeing the work of the independent auditor. In
recognition of this responsibility, the Audit Committee has established a policy to pre-approve all
audit and permissible non-audit services consistent with SEC requirements. Prior to engagement of
the independent auditor, management submits to the Audit Committee for approval an aggregate of
services expected to be rendered during that year for each of four categories of services.
Audit services include audit work performed in the preparation of financial statements, as well
as work that generally only the independent auditor can reasonably be expected to provide,
including comfort letters, statutory audits and attest services and consultation regarding
financial accounting and/or reporting standards.
Audit-Related services for assurance and related services that are traditionally performed by
the independent auditor, including due diligence related to mergers and acquisitions, employee
benefit plan audits and special procedures required to meet certain regulatory requirements.
Tax services include all services performed by the independent auditors tax personnel, except
those services specifically related to the audit of the financial statements, and include fees
in the areas of tax compliance, tax planning and tax advice.
Other Fees are those associated with services not captured in the other categories. Prior to
engagement, the Audit Committee pre-approves these services by category of service. The fees are
budgeted and the Audit Committee requires the independent auditor and management to report
actual fees versus the budget periodically throughout the year by category of service. During
the year, circumstances may arise when it may become necessary to engage the independent auditor
for additional services not contemplated in the original pre-approval. In those instances, the
Audit Committee requires specific pre-approval before engaging the independent auditor.
The Audit Committee may delegate pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes only, any pre-approval
decisions to the Audit Committee at its next scheduled meeting.
There were no audit-related fees, tax fees or any other fees approved by the Audit Committee
pursuant to 17 CFR 210.2-01(c)(7)(i)(C) for fiscal 2006.
127
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
|
(a) Financial Statements and Schedules: |
1. Financial Statements |
The following consolidated financial statements are set forth in Part II, Item 8: |
Consolidated Balance Sheets at June 3, 2006 and May 28, 2005
|
For the 53 weeks ended June 3, 2006, the 52 weeks ended May 28, 2005 and the 52 weeks
ended May 29, 2004: |
Consolidated Statements of Operations |
Consolidated Statements of Cash Flows |
Consolidated Statements of Stockholders Equity (Deficit) |
Notes to Consolidated Financial Statements |
2. Financial Statement Schedule |
Schedule II
on page 138 is filed as part of this Annual Report.
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 |
128
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Exhibit |
3.1
|
|
Restated Certificate of Incorporation of Interstate
Bakeries Corporation, as amended (incorporated herein by
reference to Exhibit 3.1 to Interstate Bakeries
Corporations Amendment No. 1 to its Quarterly Report on
Form 10-Q for the quarter ended March 9, 2002, filed on
April 19, 2002). |
|
|
|
3.2
|
|
Restated Bylaws of Interstate Bakeries Corporation
(incorporated herein by reference to Exhibit 3.1 to
Interstate Bakeries Corporations Quarterly Report on Form
10-Q for the quarter ended November 15, 2003 filed on
December 22, 2003). |
|
|
|
4.1
|
|
Preferred Stock Purchase Rights Agreement effective as of
May 8, 2000 (incorporated herein by reference to the
Current Report on Form 8-K of Interstate Bakeries
Corporation filed on May 16, 2000). |
|
|
|
10.1
|
|
Employment Agreement, dated as of September 4, 2002, by
and among Interstate Bakeries Corporation, Interstate
Brands Corporation and James R. Elsesser (incorporated
herein by reference to Exhibit 10.1 to the Current Report
on Form 8-K of Interstate Bakeries Corporation filed on
October 3, 2002).# |
|
|
|
10.2
|
|
Deferred Share Award Notice dated as of October 1, 2002 by
and between Interstate Bakeries Corporation and James R.
Elsesser (incorporated herein by reference to Exhibit 10.2
to the Current Report on Form 8-K of Interstate Bakeries
Corporation filed on October 3, 2002).# |
|
|
|
10.3
|
|
Consulting Agreement dated as of October 2, 2002 and
effective as of September 30, 2002 by and among Interstate
Bakeries Corporation, Interstate Brands Corporation,
Interstate Brands West Corporation and Charles A. Sullivan
(incorporated herein by reference to Exhibit 10.3 to the
Current Report on Form 8-K of Interstate Bakeries
Corporation filed on October 3, 2002).# |
|
|
|
10.3.1
|
|
Amendment to the Consulting Agreement dated as of June 24,
2004, by and among Interstate Bakeries Corporation,
Interstate Brands Corporation, Interstate Brands West
Corporation and Charles A. Sullivan (incorporated herein
by reference to Exhibit 10.3.1 to Interstate Bakeries
Corporations Annual Report on Form 10-K for the year
ended May 29, 2004, filed October 6, 2006).# |
|
|
|
10.4
|
|
Employment Agreement dated as of March 8, 2003 by and
between Michael D. Kafoure and Interstate Brands West
Corporation (incorporated herein by reference to Exhibit
10.2 to Interstate Bakeries Corporations Quarterly Report
on Form 10-Q for the quarter ended March 8, 2003, filed
April 22, 2003).# |
|
|
|
10.5
|
|
Employment Agreement dated as of March 7, 2003 by and
between Robert P. Morgan and Interstate Brands Corporation
(incorporated herein by reference to Exhibit 10.3 to
Interstate Bakeries Corporations Quarterly Report on Form
10-Q for the quarter ended March 8, 2003, filed April 22,
2003).# |
|
|
|
10.6
|
|
Employment Agreement dated as of March 18, 2003 by and
between Richard D. Willson and Interstate Brands West
Corporation (incorporated herein by reference to Exhibit
10.4 to Interstate Bakeries Corporations Quarterly Report
on Form 10-Q for the quarter ended March 8, 2003, filed
April 22, 2003).# |
|
|
|
10.7
|
|
Employment Agreement dated as of March 7, 2003 by and
between Thomas S. Bartoszewski and Interstate Brands
Corporation (incorporated herein by reference to Exhibit
10.5 to Interstate Bakeries Corporations Quarterly Report
on Form 10-Q for the quarter ended March 8, 2003, filed
April 22, 2003).# |
129
|
|
|
Exhibit No. |
|
Exhibit |
10.8
|
|
Management Continuity Agreement effective as of February
3, 2003 by and between James R. Elsesser and Interstate
Bakeries Corporation (incorporated herein by reference to
Exhibit 10.6 to Interstate Bakeries Corporations
Quarterly Report on Form 10-Q for the quarter ended March
8, 2003, filed April 22, 2003).# |
|
|
|
10.9
|
|
Form of Management Continuity Agreement effective as of
February 3, 2003 by and between Interstate Bakeries
Corporation and Paul E. Yarick, Michael D. Kafoure, Kent
B. Magill, Robert P. Morgan, Richard D. Willson and Thomas
S. Bartoszewski (incorporated herein by reference to
Exhibit 10.7 to Interstate Bakeries Corporations
Quarterly Report on Form 10-Q for the quarter ended March
8, 2003, filed April 22, 2003).# |
|
|
|
10.10
|
|
Amended and Restated Credit Agreement among Interstate
Bakeries Corporation, as a Guarantor, Interstate Brands
Corporation and Interstate Brands West Corporation, each
as a Borrower, the several Lenders from time to time
parties hereto, and The Chase Manhattan Bank, as
Administrative Agent, dated as of April 25, 2002
(incorporated herein by reference to Exhibit 10.3 to
Interstate Bakeries Corporations Amendment No. 2 to its
Registration Statement on Form S-3, File No. 333-86560,
filed May 8, 2002). |
|
|
|
10.10.1
|
|
First Amendment, dated as of April 21, 2003, to the
Amended and Restated Credit Agreement among Interstate
Bakeries Corporation, as a Guarantor, Interstate Brands
Corporation and Interstate Brands West Corporation, each
as a Borrower, the several Lenders from time to time
parties hereto, and The Chase Manhattan Bank, as
Administrative Agent (incorporated herein by reference to
Exhibit 10.1 to Interstate Bakeries Corporations
Quarterly Report on Form 10-Q for the quarter ended March
8, 2003, filed April 22, 2003). |
|
|
|
10.10.2
|
|
Second Amendment, dated as of May 7, 2004, to the Amended
and Restated Credit Agreement among Interstate Bakeries
Corporation, as a Guarantor, Interstate Brands Corporation
and Interstate Brands West Corporation, each as a
Borrower, the several Lenders from time to time parties
hereto, and The Chase Manhattan Bank, as Administrative
Agent (incorporated herein by reference to Exhibit 10.1 to
the Current Report on Form 8-K of Interstate Bakeries
Corporation filed on August 12, 2004). |
|
|
|
10.10.3
|
|
Third Amendment, dated as of May 27, 2004, to the Amended
and Restated Credit Agreement among Interstate Bakeries
Corporation, as a Guarantor, Interstate Brands Corporation
and Interstate Brands West Corporation, each as a
Borrower, the several Lenders from time to time parties
hereto, and The Chase Manhattan Bank, as Administrative
Agent (incorporated herein by reference to Exhibit 10.2 to
the Current Report on Form 8-K of Interstate Bakeries
Corporation filed on August 12, 2004). |
|
|
|
10.10.4
|
|
Fourth Amendment, dated as of June 17, 2004, to the
Amended and Restated Credit Agreement among Interstate
Bakeries Corporation, as a Guarantor, Interstate Brands
Corporation and Interstate Brands West Corporation, each
as a Borrower, the several Lenders from time to time
parties hereto, and The Chase Manhattan Bank, as
Administrative Agent (incorporated herein by reference to
Exhibit 10.3 to the Current Report on Form 8-K of
Interstate Bakeries Corporation filed on August 12, 2004). |
130
|
|
|
Exhibit No. |
|
Exhibit |
10.10.5
|
|
Fifth Amendment, dated as of August 12, 2004, to the Amended and Restated Credit Agreement among Interstate Bakeries Corporation, as a
Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time
parties hereto, and The Chase Manhattan Bank, as Administrative Agent (incorporated herein by reference to Exhibit 10.4 to the Current Report
on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004). |
|
|
|
10.10.6
|
|
Sixth Amendment, dated as of September 7, 2004, to the Amended and Restated Credit Agreement, dated April 25, 2002, among Interstate Bakeries
Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders
from time to time parties thereto, The Bank of Nova Scotia, BNP Paribas, Cooperatieve Central Raiffeisen-Boerenleenbank B.A., Rabobank
International, New York Branch, and SunTrust Bank, each as a co-documentation agent, Bank of America, N.A., as syndication agent and
JPMorgan Chase Bank, as administrative agent (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of
Interstate Bakeries Corporation filed on September 13, 2004). |
|
|
|
10.10.7
|
|
Seventh Amendment to the Amended and Restated Credit Agreement dated as of March 18, 2005, by and among the Interstate Bakeries Corporation,
Interstate Brands Corporation (the Borrower), the several banks and other financial institutions or entities from time to time parties
thereto (the Lenders), The Bank of Nova Scotia, BNP Paribas, Cooperatieve Central Raiffeisen-Boerenleenbank B.A., Rabobank International,
New York Branch, and SunTrust Bank, each as a co-documentation agent (the Co-Documentation Agents), Bank of America, N.A., as syndication
agent (the Syndication Agent) and JPMorgan Chase Bank (JPMorgan), as administrative agent (incorporated herein by reference to the
Current Report on Form 8-K of Interstate Bakeries Corporation filed on March 22, 2005). |
|
|
|
10.11
|
|
Guarantee and Collateral Agreement made by Interstate Bakeries Corporation, Interstate Brands Corporation, Interstate Brands West Corporation
and certain of their Subsidiaries, in favor of The Chase Manhattan Bank, as Administrative Agent, dated as of July 19, 2001 (incorporated
herein by reference to Exhibit 10.4 to the Annual Report on Form 10-K of Interstate Bakeries Corporation filed on August 24, 2001). |
|
|
|
10.12
|
|
Amended and Restated Interstate Bakeries Corporation 1996 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to
Interstate Bakeries Corporations Quarterly Report on Form 10-Q for the quarter ended March 6, 2004 filed on April 19, 2004).# |
|
|
|
10.13
|
|
Interstate Bakeries Corporation Incentive Compensation Plan (incorporated herein by reference to Interstate Bakeries Corporation Amendment
No. 2 to its Registration Statement on Form S-3, File No. 333-86560, filed on May 8, 2002).# |
|
|
|
10.14
|
|
Interstate Bakeries Corporation 1993 Non-Qualified Deferred Compensation Plan (incorporated herein by reference to Interstate Bakeries
Corporation Amendment No. 2 to its Registration Statement on Form S-3, File No. 333-86560, filed on May 8, 2002).# |
|
|
|
10.14.1
|
|
First Amendment to Interstate Brands Corporation 1993 Non-Qualified Deferred Compensation Plan (incorporated herein by reference to Exhibit
10.1 to Interstate Bakeries Corporations Quarterly Report on Form 10-Q for the quarter ended November 15, 2003 filed on December 22, 2003).# |
|
|
|
10.15
|
|
Interstate Bakeries Corporation Amended and Restated Supplemental Retirement Plan (incorporated herein by reference to Exhibit
10.15 to Interstate Bakeries Corporations Annual Report on Form 10-K for the year ended May 29, 2004, filed October 6, 2006).# |
|
|
|
10.16
|
|
Interstate Bakeries Corporation Rabbi Trust Agreement (incorporated herein by reference to Exhibit 10.8 to the Annual Report on
Form 10-K of Interstate Bakeries Corporation filed on August 23, 2002).# |
131
|
|
|
Exhibit No. |
|
Exhibit |
10.16.1
|
|
First Amendment to the IBC Rabbi Trust Agreement effective August 8, 2003 (incorporated herein by reference to Exhibit 10.19.1 to
Interstate Bakeries Corporations Annual Report on Form 10-K filed on August 23, 2003).# |
|
|
|
10.17
|
|
Form of Award Notice and Non-Qualified Stock Option Agreement pursuant to the Interstate Bakeries Corporation 1996 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.9 to the Annual Report on Form 10-K of Interstate Bakeries Corporation filed
on August 23, 2002).# |
|
|
|
10.18
|
|
Form of Award Notice and Incentive Stock Option Agreement pursuant to the Interstate Bakeries Corporation 1996 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.10 to the Annual Report on Form 10-K of Interstate Bakeries Corporation filed
on August 23, 2002).# |
|
|
|
10.19
|
|
Employment Agreement dated as of July 13, 2004 by and between Ronald B. Hutchison and Interstate Bakeries Corporation
(incorporated herein by reference to Exhibit 10.19 to Interstate Bakeries Corporations Annual Report on Form 10-K for the year
ended May 29, 2004, filed October 6, 2006).# |
|
|
|
10.20
|
|
Management Continuity Agreement dated as of July 13, 2004 by and between Ronald B. Hutchison and Interstate Bakeries Corporation
(incorporated herein by reference to Exhibit 10.20 to Interstate Bakeries Corporations Annual Report on Form 10-K for the year
ended May 29, 2004, filed October 6, 2006).# |
|
|
|
10.21
|
|
Form of Indenture for 6.0% Senior Subordinated Convertible Notes Due 2014 (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004). |
|
|
|
10.22
|
|
Form of Purchase Agreement for 6.0% Senior Subordinated Convertible Notes Due 2014 (incorporated herein by reference to Exhibit
10.2 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004). |
|
|
|
10.23
|
|
Form of Registration Rights Agreement for 6.0% Senior Subordinated Convertible Notes Due 2014 (incorporated herein by reference to
Exhibit 10.3 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004). |
|
|
|
10.24
|
|
Letter Agreement, dated as of August 27, 2004, amended and restated as of September 21, 2004 and further amended and restated on
October 14, 2004, by and between Alvarez and Marsal, Inc. and Interstate Bakeries Corporation, Armour & Main Redevelopment
Corporation, Bakers Inn Quality Baked Goods, LLC, IBC Sales Corporation, IBC Services, LLC, IBC Trucking LLC, Interstate Brands
Corporation, New England Bakery Distributors, LLC and Mrs. Cubbisons Foods, Inc (incorporated herein by reference to Exhibit
10.24 to Interstate Bakeries Corporations Annual Report on Form 10-K for the year ended May 29, 2004, filed October 6, 2006).# |
|
|
|
10.24.1
|
|
Letter Agreement, dated as of July 18, 2005, by and between Alvarez and Marsal, Inc. and Interstate Bakeries Corporation, Armour &
Main Redevelopment Corporation, Bakers Inn Quality Baked Goods, LLC, IBC Sales Corporation, IBC Services, LLC, IBC Trucking LLC,
Interstate Brands Corporation, New England Bakery Distributors, LLC and Mrs. Cubbisons Foods, Inc (incorporated herein by
reference to Exhibit 10.24.1 to Interstate Bakeries Corporations Annual Report on Form 10-K for the year ended May 29, 2004,
filed October 6, 2006).# |
|
|
|
10.25
|
|
Revolving Credit Agreement, dated as of September 23, 2004, among Interstate Bakeries Corporation (Parent Borrower), a debtor
and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, and each of the direct and indirect
subsidiaries of the Parent Borrower party to this Agreement (each individually a Subsidiary Borrower and collectively the
Subsidiary Borrowers; and together with the Parent Borrower, the Borrowers), each of which is a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the |
132
|
|
|
Exhibit No. |
|
Exhibit |
|
|
cases of the Borrowers, each a Case and
collectively, the Cases), JPMorgan Chase Bank (JPMCB), and each of the other commercial banks, finance companies, insurance
companies or other financial institutions or funds from time to time party hereto (together with JPMCB, the Lenders), J.P.
Morgan Securities Inc., as lead arranger and book runner, JPMorgan Chase Bank, as administrative agent (in such capacity, the
Administrative Agent) for the Lenders, and JPMorgan Chase Bank, as collateral agent (in such capacity, the Collateral Agent)
for the Lenders (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Interstate Bakeries
Corporation filed on September 27, 2004). |
|
|
|
10.25.1
|
|
First Amendment, dated as of November 1, 2004, to the Revolving Credit Agreement) dated as of September 23, 2004, among Interstate
Bakeries Corporation (Parent Borrower), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy
Code, and each of the direct and indirect subsidiaries of the Parent Borrower party to this Agreement (each individually a
Subsidiary Borrower and collectively the Subsidiary Borrowers; and together with the Parent Borrower, the Borrowers), each
of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the cases of the
Borrowers, each a Case and collectively, the Cases), JPMorgan Chase Bank (JPMCB), and each of the other commercial banks,
finance companies, insurance companies or other financial institutions or funds from time to time party hereto (together with
JPMCB, the Lenders), J.P. Morgan Securities Inc., as lead arranger and book runner, JPMorgan Chase Bank, as administrative agent
(in such capacity, the Administrative Agent) for the Lenders, and JPMorgan Chase Bank, as collateral agent (in such capacity,
the Collateral) for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries
Corporation filed on November 5, 2004). |
|
|
|
10.25.2
|
|
Second Amendment, effective as of January 20, 2005, to the Revolving Credit Agreement, dated as of September 23, 2004, among
Interstate Bakeries Corporation (Parent Borrower), a debtor and debtor-in-possession in a case pending under Chapter 11 of the
Bankruptcy Code, and each of the direct and indirect subsidiaries of the Parent Borrower party to this Agreement (each
individually a Subsidiary Borrower and collectively the Subsidiary Borrowers; and together with the Parent Borrower, the
Borrowers), each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the
cases of the Borrowers, each a Case and collectively, the Cases), JPMorgan Chase Bank (JPMCB), and each of the other
commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party hereto
(together with JPMCB, the Lenders), J.P. Morgan Securities Inc., as lead arranger and book runner, JPMorgan Chase Bank, as
administrative agent (in such capacity, the Administrative Agent) for the Lenders, and JPMorgan Chase Bank, as collateral agent
(in such capacity, the Collateral) for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of
Interstate Bakeries Corporation filed on February 1, 2005). |
|
|
|
10.25.3
|
|
Third Amendment and Waiver, dated as of May 26, 2005, to the Revolving Credit Agreement, dated as of September 23,
2004, as amended, among Interstate Bakeries Corporation, a Delaware corporation (Parent Borrower), a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect
subsidiaries of the Parent Borrower (each individually a Subsidiary Borrower and collectively the Subsidiary
Borrowers; and together with the Parent Borrower, the Borrowers), each of which is a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national
banking association (formerly known as JPMorgan Chase Bank) (JPMCB), and each of the other commercial banks,
finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit
Agreement (together with JPMCB, the Lenders), JPMorgan Chase Bank, N.A., a national banking association (formerly
known as JPMorgan Chase Bank), as administrative agent (the Administrative Agent) for the Lenders, and JPMorgan
Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent (the
Collateral Agent) for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate
Bakeries Corporation filed on May 27, 2005). |
133
|
|
|
Exhibit No. |
|
Exhibit |
10.25.4
|
|
Fourth Amendment and Waiver, dated as of November 30, 2005, to the Revolving Credit Agreement, dated as of September
23, 2004, as amended, among Interstate Bakeries Corporation, a Delaware corporation (Parent Borrower), a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect
subsidiaries of the Parent Borrower (each individually a Subsidiary Borrower and collectively the Subsidiary
Borrowers; and together with the Parent Borrower, the Borrowers), each of which is a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national
banking association (formerly known as JPMorgan Chase Bank) (JPMCB), and each of the other commercial banks,
finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit
Agreement (together with JPMCB, the Lenders), JPMorgan Chase Bank, N.A., a national banking association (formerly
known as JPMorgan Chase Bank), as administrative agent (the Administrative Agent) for the Lenders, and JPMorgan
Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent (the
Collateral Agent) for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate
Bakeries Corporation filed on December 5, 2005). |
|
|
|
10.25.5
|
|
Fifth Amendment, dated as of December 27, 2005, to the Revolving Credit Agreement, dated as of September 23, 2004, as
amended, among Interstate Bakeries Corporation (Parent Borrower), a Delaware corporation, a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect
subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under
Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as
JPMorgan Chase Bank) (JPMCB), and each of the other commercial banks, finance companies, insurance companies or
other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the
Lenders), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as
administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known
as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current Report
on Form 8-K of Interstate Bakeries Corporation filed on December 30, 2005). |
|
|
|
10.25.6
|
|
Sixth Amendment, dated as of March 29, 2006, to the Revolving Credit Agreement, dated as of September 23, 2004, as
amended, among Interstate Bakeries Corporation (Parent Borrower), a Delaware corporation, a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect
subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under
Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as
JPMorgan Chase Bank) (JPMCB), and certain of the other commercial banks, finance companies, insurance companies or
other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the
Lenders), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as
administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known
as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current Report
on Form 8-K of Interstate Bakeries Corporation filed on March 29, 2006). |
|
|
|
10.25.7
|
|
Seventh Amendment, dated as of June 28, 2006, to the Revolving Credit Agreement, dated as of September 23, 2004, as
amended, among Interstate Bakeries Corporation (Parent Borrower), a Delaware corporation, a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect
subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under
Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as
JPMorgan Chase Bank) (JPMCB), and each of the other commercial banks, finance companies, insurance companies or
other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the
Lenders), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as
administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known
as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current |
134
|
|
|
Exhibit No. |
|
Exhibit |
|
|
Report
on Form 8-K of Interstate Bakeries Corporation filed on June 30, 2006). |
|
|
|
10.25.8
|
|
Eighth Amendment, dated as of August 24, 2006, to the Revolving Credit Agreement, dated as of September 23, 2004, as
amended, among Interstate Bakeries Corporation (Parent Borrower), a Delaware corporation, a debtor and
debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect
subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under
Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as
JPMorgan Chase Bank) (JPMCB), and each of the other commercial banks, finance companies, insurance companies or
other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the
Lenders), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as
administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known
as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current Report
on Form 8-K of Interstate Bakeries Corporation filed on August 30, 2006). |
|
10.26
|
|
Offer of Employment dated July 13, 2005 between Interstate Bakeries Corporation and Mr. Richard C. Seban
(incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on
August 5, 2005).# |
|
|
|
10.27
|
|
Interstate Bakeries Corporation Key Employee Retention Plan (incorporated herein by reference to Exhibit 10.27 to
Interstate Bakeries Corporations Annual Report on Form 10-K for the year ended May 29, 2004, filed October 6, 2006). |
|
|
|
21.1
|
|
Subsidiaries of Interstate Bakeries Corporation.* |
|
|
|
24.1
|
|
Power of Attorney (included on signature page). |
|
|
|
31.1
|
|
Certification of Antonio C. Alvarez II pursuant to Rule 13a-14(a)/15d-14(a)* |
|
|
|
31.2
|
|
Certification of Ronald B. Hutchison pursuant to Rule 13a-14(a)/15d-14(a)* |
|
|
|
32.1
|
|
Certification of Antonio C. Alvarez II pursuant to 18 U.S.C. Section 1350* |
|
|
|
32.2
|
|
Certification of Ronald B. Hutchison pursuant to 18 U.S.C. Section 1350* |
|
|
|
|
# |
|
Management contracts or compensatory plans or arrangements required to be identified by Item 15(a). |
|
* |
|
Filed herewith |
135
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.
|
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|
|
|
|
|
|
INTERSTATE BAKERIES CORPORATION |
|
|
|
|
|
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|
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|
Dated: December 20, 2006
|
|
By: |
|
/s/ Antonio C. Alvarez II |
|
|
|
|
|
|
Antonio C. Alvarez II
|
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
Each person whose signature appears below hereby severally constitutes and appoints Antonio C.
Alvarez II and Ronald B. Hutchison, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K
of Interstate Bakeries Corporation for the fiscal year ended June 3, 2006 all documents relating
therewith, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing necessary or
advisable to be done in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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.
|
|
|
|
|
Name of Signatory |
|
Capacities In Which Signing |
|
Date |
|
|
|
|
|
/s/ Antonio C. Alvarez II
Antonio C. Alvarez II
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
December 20, 2006 |
|
|
|
|
|
|
/s/ Ronald B. Hutchison
Ronald B. Hutchison
|
|
Executive Vice President Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
December 20, 2006 |
|
|
|
|
|
|
/s/ Leo Benatar
Leo Benatar
|
|
Non-Executive Chairman of the Board
|
|
December 20, 2006 |
|
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/s/ Michael J. Anderson
Michael J. Anderson
|
|
Director
|
|
December 20, 2006 |
|
|
|
|
|
|
|
|
Director
|
|
December 20, 2006 |
/s/ G. Kenneth Baum
G. Kenneth Baum
|
|
|
|
|
|
|
|
|
|
|
/s/ Robert B. Calhoun
Robert B. Calhoun
|
|
Director
|
|
December 20, 2006 |
|
|
|
|
|
|
/s/ Frank E. Horton
Frank E. Horton
|
|
Director
|
|
December 20, 2006 |
136
|
|
|
|
|
Name of Signatory |
|
Capacities In Which Signing |
|
Date |
|
|
Director
|
|
December 20, 2006 |
/s/ Richard L. Metrick
Richard L. Metrick
|
|
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|
|
/s/ Ronald L. Thompson
Ronald L. Thompson
|
|
Director
|
|
December 20, 2006 |
137
INTERSTATE BAKERIES CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FIFTY-THREE WEEKS ENDED JUNE 3, 2006,
FIFTY-TWO WEEKS ENDED MAY 28, 2005, AND MAY 29, 2004
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Accounts |
|
|
Balance at |
|
|
|
beginning |
|
|
Adjustments to |
|
|
charged |
|
|
end |
|
Description |
|
of period |
|
|
expense |
|
|
off |
|
|
of period |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for discounts and allowances on accounts receivable |
|
$ |
6,510 |
|
|
$ |
2,404 |
|
|
$ |
|
|
|
$ |
8,914 |
|
Allowance for doubtful accounts |
|
|
3,492 |
|
|
|
387 |
|
|
|
(479 |
) |
|
|
3,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,002 |
|
|
$ |
2,791 |
|
|
$ |
(479 |
) |
|
$ |
12,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for discounts and allowances on accounts receivable |
|
$ |
3,839 |
|
|
$ |
2,671 |
|
|
$ |
|
|
|
$ |
6,510 |
|
Allowance for doubtful accounts |
|
|
3,700 |
|
|
|
2,032 |
|
|
|
(2,240 |
) |
|
|
3,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,539 |
|
|
$ |
4,703 |
|
|
$ |
(2,240 |
) |
|
$ |
10,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for discounts and allowances on accounts receivable |
|
$ |
4,486 |
|
|
$ |
(647 |
) |
|
$ |
|
|
|
$ |
3,839 |
|
Allowance for doubtful accounts |
|
|
4,000 |
|
|
|
1,427 |
|
|
|
(1,727 |
) |
|
|
3,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,486 |
|
|
$ |
780 |
|
|
$ |
(1,727 |
) |
|
$ |
7,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
EXHIBIT 21.1
Subsidiaries of Interstate Bakeries Corporation
|
|
|
|
|
Name |
|
Jurisdiction of Formation/Incorporation |
|
Ownership Percentage |
IBC Services, LLC |
|
Missouri |
|
100% |
|
Interstate Brands Corporation |
|
Delaware |
|
100% |
|
IBC Sales Corporation |
|
Delaware |
|
100% |
|
Mrs. Cubbisons Foods, Inc. |
|
California |
|
80% |
|
IBC Trucking, LLC |
|
Delaware |
|
100% |
|
Bakers Inn Quality Baked Goods, LLC |
|
Delaware |
|
100% |
|
New England Bakery Distributors, L.L.C. |
|
Connecticut |
|
100% |
|
Armour and Main Redevelopment Corporation |
|
Missouri |
|
100% |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANESOXLEY ACT OF 2002
I, Antonio C. Alvarez II, certify that:
1. I have reviewed this annual report on Form 10-K of Interstate Bakeries Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Dated: December 20, 2006
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Antonio C. Alvarez II |
|
|
|
|
|
|
Antonio C. Alvarez II
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANESOXLEY ACT OF 2002
I, Ronald B. Hutchison, certify that:
1. I have reviewed this annual report on Form 10-K of Interstate Bakeries Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Dated: December 20, 2006
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Ronald B. Hutchison |
|
|
|
|
|
|
Ronald B. Hutchison
|
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
|
(Principal Financial and Accounting Officer) |
|
|
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned officer of Interstate Bakeries Corporation (the Company) hereby certifies, to such
officers knowledge, that:
(i) the accompanying Annual Report on Form 10-K of the Company for the year
ended June 3, 2006 (the Report) fully complies with the requirements of
Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act
of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: December 20, 2006
|
|
|
|
|
|
|
/s/
Antonio C. Alvarez II
|
|
|
|
|
Antonio C. Alvarez II
|
|
|
|
|
Chief Executive Officer |
|
|
Pursuant to Securities and Exchange Commission Release 33-8238, dated June 5, 2003, this
certification is being furnished and shall not be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended or incorporated by reference in any
registration statement of the Company filed under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned officer of Interstate Bakeries Corporation (the Company) hereby certifies, to such
officers knowledge, that:
(i) the accompanying Annual Report on Form 10-K of the Company for the year
ended June 3, 2006 (the Report) fully complies with the requirements of
Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act
of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: December 20, 2006
|
|
|
|
|
|
|
/s/ Ronald B. Hutchison
|
|
|
|
|
Ronald B. Hutchison
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
Pursuant to Securities and Exchange Commission Release 33-8238, dated June 5, 2003, this
certification is being furnished and shall not be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended or incorporated by reference in any
registration statement of the Company filed under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.