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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 13, 2004
OR
o | 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)
Delaware (State or other jurisdiction of incorporation or organization) | 43-1470322 (I.R.S. Employer Identification No.) |
12 East Armour Boulevard, Kansas City, Missouri (Address of principal executive offices) | 64111 (Zip Code) |
(816) 502-4000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
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. Yeso Noþ
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 filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
There were 45,295,007 shares of common stock, $0.01 par value per share, outstanding as of August 15, 2006. Giving effect to our senior subordinated convertible notes and common stock equivalents, there were 55,193,448 shares of common stock outstanding as of August 15, 2006.
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EXPLANATORY NOTE
Beginning with the Annual Report on Form 10-K for the year ended May 29, 2004 and through our Annual Report on Form 10-K for the year ended June 3, 2006, we have delayed timely filing of Securities and Exchange Commission, or SEC reports. This report, together with several other periodic reports through our Annual Report on Form 10-K for 2005 are being filed with the SEC concurrently herewith, and are our first periodic reports covering periods subsequent to March 6, 2004. The primary reasons for our delayed reporting are related to our filing of Chapter 11 and issues related to the restatement of prior period financial statements. In addition to this Quarterly Report on Form 10-Q for the twelve and twenty four weeks ended November 13, 2004, on the same date, we also filed our Annual Report on form 10-K for the year ended May 29, 2004, our Quarterly Reports on Form 10-Q for the quarters ended August 21, 2004, and March 5, 2005, and our Annual Report on Form 10-K for the year ended May 28, 2005. To the extent these reports relate to periods for which our consolidated financial statements have previously been published, these reports contain a restatement of such previously issued consolidated financial statements. This report on Form 10-Q and the Annual Report on Form 10-K for the year ended May 29, 2004 contains a detailed description of these restatements. All of the reports filed concurrently herewith should be read together and in connection with this Quarterly Report on Form 10-Q for a comprehensive description of our current financial condition and operating results. See Note 2. Restatement in the notes to the consolidated financial statements contained herein for further discussion of the various items requiring restatement in this Quarterly Report on Form 10-Q.
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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
FORM 10-Q
QUARTER ENDED NOVEMBER 13, 2004
(DEBTOR-IN-POSSESSION)
FORM 10-Q
QUARTER ENDED NOVEMBER 13, 2004
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands, except share data)
(dollars in thousands, except share data)
November 13, | May 29, | |||||||
2004 | 2004 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 117,864 | $ | 39,728 | ||||
Accounts receivable, less allowance for doubtful accounts of $3,870 and $3,700, respectively | 182,921 | 182,060 | ||||||
Inventories | 72,915 | 71,901 | ||||||
Assets held for sale | — | 452 | ||||||
Other current assets | 114,532 | 108,577 | ||||||
Total current assets | 488,232 | 402,718 | ||||||
Property and equipment, net | 787,129 | 812,925 | ||||||
Goodwill | — | 215,346 | ||||||
Other intangible assets | 189,740 | 190,416 | ||||||
Other assets | 42,005 | 52,392 | ||||||
Total assets | $ | 1,507,106 | $ | 1,673,797 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
Liabilities not subject to compromise | ||||||||
Current liabilities | ||||||||
Long-term debt payable within one year | $ | 483,427 | $ | 542,701 | ||||
Accounts payable | 103,185 | 158,754 | ||||||
Accrued expenses | 244,057 | 275,354 | ||||||
Total current liabilities | 830,669 | 976,809 | ||||||
Long-term debt | — | 10,362 | ||||||
Other liabilities | 292,305 | 311,183 | ||||||
Deferred income taxes | 113,536 | 113,735 | ||||||
Total liabilities not subject to compromise | 1,236,510 | 1,412,089 | ||||||
Liabilities subject to compromise | 283,917 | — | ||||||
Stockholders’ equity (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, 45,394,000 and 45,381,000 shares outstanding, respectively | 816 | 816 | ||||||
Additional paid-in capital | 586,472 | 586,616 | ||||||
Retained earnings | 87,409 | 364,886 | ||||||
Treasury stock, 36,185,000 and 36,198,000 shares at cost, respectively | (678,736 | ) | (679,016 | ) | ||||
Unearned restricted stock compensation | (5,290 | ) | (6,982 | ) | ||||
Accumulated other comprehensive loss | (3,992 | ) | (4,612 | ) | ||||
Total stockholders’ equity (deficit) | (13,321 | ) | 261,708 | |||||
Total liabilities and stockholders’ equity (deficit) | $ | 1,507,106 | $ | 1,673,797 | ||||
See accompanying notes.
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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share data)
(dollars in thousands, except per share data)
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
(Restated, See | (Restated, See | |||||||||||||||
Note 2) | Note 2) | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Net sales | $ | 798,711 | $ | 813,798 | $ | 1,610,688 | $ | 1,644,813 | ||||||||
Cost of products sold (exclusive of items shown below) | 412,883 | 418,045 | 825,961 | 825,350 | ||||||||||||
Selling, delivery and administrative expenses | 377,030 | 402,932 | 779,930 | 778,811 | ||||||||||||
Restructuring charges | 6,004 | 2,060 | 13,325 | 2,692 | ||||||||||||
Depreciation and amortization | 20,107 | 21,257 | 41,181 | 42,714 | ||||||||||||
Loss on sale or abandonment of assets | 665 | 705 | 1,331 | 773 | ||||||||||||
Goodwill impairment | — | — | 215,346 | — | ||||||||||||
816,689 | 844,999 | 1,877,074 | 1,650,340 | |||||||||||||
Operating loss | (17,978 | ) | (31,201 | ) | (266,386 | ) | (5,527 | ) | ||||||||
Other (income) expense | ||||||||||||||||
Interest expense (excluding unrecorded contractual interest expense of $850, $0, $850, and $0, respectively) | 9,316 | 8,641 | 18,310 | 17,755 | ||||||||||||
Reorganization charges, net | 12,442 | — | 12,442 | — | ||||||||||||
Other (income) expense | (20 | ) | (8 | ) | 129 | (16 | ) | |||||||||
21,738 | 8,633 | 30,881 | 17,739 | |||||||||||||
Income (loss) before income taxes | (39,716 | ) | (39,834 | ) | (297,267 | ) | (23,266 | ) | ||||||||
Provision (benefit) for income taxes | (5,705 | ) | (15,039 | ) | (19,790 | ) | (8,985 | ) | ||||||||
Net loss | $ | (34,011 | ) | $ | (24,795 | ) | $ | (277,477 | ) | $ | (14,281 | ) | ||||
Loss per share | ||||||||||||||||
Basic | $ | (0.76 | ) | $ | (0.55 | ) | $ | (6.17 | ) | $ | (0.32 | ) | ||||
Diluted | $ | (0.76 | ) | $ | (0.55 | ) | $ | (6.17 | ) | $ | (0.32 | ) | ||||
See accompanying notes.
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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
(dollars in thousands)
Twenty-Four Weeks Ended | ||||||||
(Restated, See | ||||||||
Note 2) | ||||||||
November 13, | November 15, | |||||||
2004 | 2003 | |||||||
Operating activities | ||||||||
Net loss | $ | (277,477 | ) | $ | (14,281 | ) | ||
Depreciation and amortization | 41,181 | 42,714 | ||||||
Provision for deferred income taxes | 20,408 | (19,559 | ) | |||||
Reorganization charges, net | 12,442 | — | ||||||
Cash reorganization items | (2,771 | ) | — | |||||
Non-cash interest expense — deferred debt fees | 2,065 | 1,022 | ||||||
Non-cash interest on swap agreements | (655 | ) | (852 | ) | ||||
Non-cash restricted stock and deferred share compensation expense | 1,055 | — | ||||||
Loss on sale, write-down or abandonment of assets | 5,007 | 1,284 | ||||||
Write-off of goodwill | 215,346 | — | ||||||
Write-down of software assets | 4,424 | — | ||||||
Write-off prior service cost asset | 12,384 | — | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (861 | ) | (7,377 | ) | ||||
Inventories | (1,014 | ) | 5,772 | |||||
Other current assets | (26,562 | ) | 5,797 | |||||
Accounts payable and accrued expenses | 50,040 | 10,411 | ||||||
Long-term portion of self insurance reserves | 12,184 | 34,472 | ||||||
Other | 7,306 | 8,363 | ||||||
Net cash from operating activities | 74,502 | 67,766 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (19,883 | ) | (24,517 | ) | ||||
Proceeds from sale of assets | 1,242 | 713 | ||||||
Acquisition of other intangible assets | — | (12 | ) | |||||
Acquisition and development of software assets | (5,445 | ) | (6,027 | ) | ||||
Other | 50 | (19 | ) | |||||
Net cash used in investing activities | (24,036 | ) | (29,862 | ) | ||||
Financing activities | ||||||||
Reduction of long-term debt | (74,686 | ) | (32,198 | ) | ||||
Increase in revolving credit facility | 11,400 | — | ||||||
Issuance of convertible bonds | 100,000 | — | ||||||
Common stock dividends paid | — | (6,329 | ) | |||||
Stock option exercise proceeds | — | 568 | ||||||
Acquisition of treasury stock | (44 | ) | (19 | ) | ||||
Cash reorganization items | (63 | ) | — | |||||
Debt fees | (8,937 | ) | (30 | ) | ||||
Net cash from (used in) financing activities | 27,670 | (38,008 | ) | |||||
Net increase (decrease) in cash | 78,136 | (104 | ) | |||||
Cash at the beginning of period | 39,728 | 44,961 | ||||||
Cash at the end of period | $ | 117,864 | $ | 44,857 | ||||
Cash payments (received) | ||||||||
Interest | $ | 18,834 | $ | 19,003 | ||||
Income taxes | (21,086 | ) | 664 | |||||
Non-cash investing and financing activities | ||||||||
Issuance of restricted stock | 221 | — | ||||||
Equipment purchases financed with capital lease obligations | 409 | — | ||||||
Long-term debt reduction from lease rejections | 279 | — | ||||||
Asset disposals from lease rejections | 215 | — |
See accompanying notes.
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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
(dollars in thousands, except per share data)
(UNAUDITED)
(dollars in thousands, except per share data)
Unearned | Accumulated | Total | ||||||||||||||||||||||||||||||||||
Additional | Restricted | Other | Stockholders’ | |||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Stock | Comprehensive | Equity | |||||||||||||||||||||||||||||||
Stock Issued | Capital | Earnings | Treasury Stock | Compensation | Loss | (Deficit) | ||||||||||||||||||||||||||||||
Number | Par | Number of | ||||||||||||||||||||||||||||||||||
of Shares | Value | Shares | Cost | |||||||||||||||||||||||||||||||||
Balance May 29, 2004 | 81,579 | $ | 816 | $ | 586,616 | $ | 364,886 | (36,198 | ) | $ | (679,016 | ) | $ | (6,982 | ) | $ | (4,612 | ) | $ | 261,708 | ||||||||||||||||
Comprehensive loss | — | — | — | (277,477 | ) | — | — | — | 620 | (276,857 | ) | |||||||||||||||||||||||||
Restricted share award | — | — | (155 | ) | — | 20 | 375 | (221 | ) | — | (1 | ) | ||||||||||||||||||||||||
Restricted share compensation expense | — | — | — | — | — | — | 1,881 | — | 1,881 | |||||||||||||||||||||||||||
Restricted share forfeitures and other | — | — | 11 | — | (2 | ) | (51 | ) | 32 | — | (8 | ) | ||||||||||||||||||||||||
Treasury stock acquired | — | — | — | — | (5 | ) | (44 | ) | — | — | (44 | ) | ||||||||||||||||||||||||
Balance November 13, 2004 | 81,579 | $ | 816 | $ | 586,472 | $ | 87,409 | (36,185 | ) | $ | (678,736 | ) | $ | (5,290 | ) | $ | (3,992 | ) | $ | (13,321 | ) | |||||||||||||||
See accompanying notes.
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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED)
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. Cubbison’s Foods, Inc., or Mrs. Cubbison’s, 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. Cubbison’s filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). The minority interest in Mrs. Cubbison’s is reflected in other liabilities 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 8. 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 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 August 15, 2006, we have rejected over 400 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
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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 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 the filing of a plan of reorganization.
See Note 13. Restructuring 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, 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 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, 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 or restructuring of our business are reported separately as reorganization 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.
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2. Restatement
Subsequent to the issuance of our unaudited consolidated financial statements for the three years ended May 29, 2004 on a Form 8-K filed December 10, 2004, we determined that those financial statements required restatement to correct various errors. The following is a brief discussion of each of these errors:
Workers’ Compensation Reserve
We determined that available information concerning our experience with workers’ compensation claims was not properly evaluated, which resulted in the workers’ compensation reserves not being correctly calculated as of May 29, 2004.
ABA Plan
In December, 2004, we began a review of the accounting treatment of our American Bakers Association Retirement Plan, or ABA Plan, a defined benefit pension plan, in light of newly identified information. 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 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.
Leases
We identified leases that were accounted for as operating leases and should have been accounted for as capital leases, and other leases in which rent escalations were not accounted for properly when calculating straight-line rent expense. We have corrected certain of these identified lease errors as part of this restatement and concluded that the uncorrected lease errors were not material to the financial statements.
Depreciation
As part of a detailed review of machinery and equipment, we determined that certain items had been taken out of service; however the related asset had not been removed from the balance sheet. As a result, prior periods included depreciation expense for items that should have been written off in earlier periods. Therefore, depreciation expense in prior periods was overstated and loss on disposal of machinery and equipment was understated. In addition, amounts were reclassified from depreciation and amortization to loss on sale or abandonment of assets.
Supplemental Executive Retirement Plans
As it relates to our Supplemental Executive Retirement Plan, we previously allocated the expense for expected benefits over the period from plan participation through the date of cliff vesting. This restatement reflects the impact of allocating the expected benefits earned over the benefit accrual period of up to 20 years.
Cash
We determined that our positive cash balances at certain banks should not have been netted with our negative cash balances at other banks and have reclassified the negative cash balances to accounts payable. Accordingly, we have increased our cash and accounts payable balances by approximately $44.9 million and $45.0 million at November 15, 2003 and May 31, 2003, respectively.
Income Taxes
Certain income tax contingency reserves were reclassified from deferred income taxes to other liabilities.
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As a result of the matters discussed above, we are restating our unaudited consolidated financial statements for the twelve and twenty-four weeks ended November 15, 2003 contained in this Quarterly Report on Form 10-Q. The following summarizes the effects of the restatement made to the accompanying consolidated financial statements to reflect the various matters discussed above:
Twelve Weeks Ended | ||||||||||||
November 15, 2003 | ||||||||||||
As Previously | Effect of | |||||||||||
Consolidated Statement of Operations | Reported | Restatement | As Restated | |||||||||
(dollars in thousands, except per share data) | ||||||||||||
Cost of products sold | $ | 397,641 | $ | 20,404 | $ | 418,045 | ||||||
Selling, delivery and administrative expenses | 372,787 | 30,145 | 402,932 | |||||||||
Depreciation and amortization | 21,679 | (422 | ) | 21,257 | ||||||||
Loss on sale or abandonment of assets | — | 705 | 705 | |||||||||
Operating income (loss) | 19,631 | (50,832 | ) | (31,201 | ) | |||||||
Interest expense | 8,398 | 243 | 8,641 | |||||||||
Income (loss) before income taxes | 11,241 | (51,075 | ) | (39,834 | ) | |||||||
Provision for income taxes | 4,114 | (19,153 | ) | (15,039 | ) | |||||||
Net income (loss) | $ | 7,127 | $ | (31,922 | ) | $ | (24,795 | ) | ||||
Income (loss) per share: | ||||||||||||
Basic | $ | 0.16 | $ | (0.71 | ) | $ | (0.55 | ) | ||||
Diluted | $ | 0.16 | $ | (0.71 | ) | $ | (0.55 | ) |
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Twenty-Four Weeks Ended | ||||||||||||
November 15, 2003 | ||||||||||||
As Previously | Effect of | |||||||||||
Consolidated Statement of Operations | Reported | Restatement | As Restated | |||||||||
(dollars in thousands, except per share data) | ||||||||||||
Cost of products sold | $ | 804,542 | $ | 20,808 | $ | 825,350 | ||||||
Selling, delivery and administrative expenses | 748,520 | 30,291 | 778,811 | |||||||||
Depreciation and amortization | 42,921 | (207 | ) | 42,714 | ||||||||
Loss on sale or abandonment of assets | — | 773 | 773 | |||||||||
Operating income (loss) | 46,138 | (51,665 | ) | (5,527 | ) | |||||||
Interest expense | 17,263 | 492 | 17,755 | |||||||||
Income (loss) before income taxes | 28,891 | (52,157 | ) | (23,266 | ) | |||||||
Provision for income taxes | 10,574 | (19,559 | ) | (8,985 | ) | |||||||
Net income (loss) | $ | 18,317 | $ | (32,598 | ) | $ | (14,281 | ) | ||||
Income (loss) per share: | ||||||||||||
Basic | $ | 0.41 | $ | (0.73 | ) | $ | (0.32 | ) | ||||
Diluted | $ | 0.41 | $ | (0.73 | ) | $ | (0.32 | ) |
Consolidated Statement of Cash Flows
Twenty-Four Weeks Ended | |||||||||||
November 15, 2003 | |||||||||||
As Previously | Effect of | ||||||||||
Consolidated Statement of Cash Flows | Reported | Restatement | As Restated | ||||||||
(dollars in thousands) | |||||||||||
Operating activities | |||||||||||
Net income | $ | 18,317 | $ | (32,598 | ) | $ | (14,281 | ) | |||
Depreciation and amortization | 42,921 | (207 | ) | 42,714 | |||||||
Provision for deferred income taxes | — | 19,559 | 19,559 | ||||||||
Loss on sale, write-down or abandonment of assets | 511 | 773 | 1,284 | ||||||||
Change in operating assets and liabilities | |||||||||||
Inventories | 5,489 | 283 | 5,772 | ||||||||
Other current assets | 6,080 | (283 | ) | 5,797 | |||||||
Accounts payable and accrued expenses | 2,495 | 7,916 | 10,411 | ||||||||
Long-term portion of self insurance reserves | (3,528 | ) | 38,000 | 34,472 | |||||||
Other | 2,361 | 6,002 | 8,363 | ||||||||
Net cash from operating activities | 67,439 | 327 | 67,766 | ||||||||
Financing activities | |||||||||||
Reduction of long-term debt | (31,767 | ) | (431 | ) | (32,198 | ) | |||||
Net cash used in financing activities | (37,577 | ) | (431 | ) | (38,008 | ) | |||||
Net decrease in cash | — | (104 | ) | (104 | ) | ||||||
Cash at the beginning of period | — | 44,961 | 44,961 | ||||||||
Cash at the end of period | $ | — | $ | 44,857 | $ | 44,857 | |||||
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3. 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. The accompanying unaudited consolidated financial statements, included herein, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the twelve and twenty-four weeks ended November 13, 2004 are not indicative of the results for the full year ending May 28, 2005.
The consolidated balance sheet presented at May 29, 2004 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended May 29, 2004 filed concurrently with this document.
Unless the context indicates otherwise, “IBC,” “us,” “we,” and “our” refers to Interstate Bakeries Corporation and its subsidiaries, taken as a whole.
Significant Accounting Policies
For further information, refer toSignificant Accounting Policiesin our Annual Report on Form 10-K for the year ended May 29, 2004 filed concurrently with this document.
Fiscal year end— Our fiscal year is a 52 or 53-week period ending on the Saturday closest to the last day of May.
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 the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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 $32.2 million and $45.3 million at November 13, 2004 and May 29, 2004, respectively.
Assets held for sale —Property that 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.
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 2005 Consolidated Balance Sheet except for secured debt and those other liabilities that we currently anticipate will not be impaired pursuant to a confirmed plan of reorganization.
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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.
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.
Had we adopted the provisions of SFAS 123, estimated pro forma net income and earnings per share would have been as follows:
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||
Net loss, as reported | $ | (34,011 | ) | $ | (24,795 | ) | $ | (277,477 | ) | $ | (14,281 | ) | ||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 135 | 197 | 1,055 | 394 | ||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (496 | ) | (1,587 | ) | (1,855 | ) | (3,547 | ) | ||||||||
Pro forma net loss | $ | (34,372 | ) | $ | (26,185 | ) | $ | (278,277 | ) | $ | (17,434 | ) | ||||
Basic loss per share: | ||||||||||||||||
As reported | $ | (0.76 | ) | $ | (0.55 | ) | $ | (6.17 | ) | $ | (0.32 | ) | ||||
Pro forma | (0.76 | ) | (0.58 | ) | (6.19 | ) | (0.39 | ) | ||||||||
Diluted loss per share: | ||||||||||||||||
As reported | (0.76 | ) | (0.55 | ) | (6.17 | ) | (0.32 | ) | ||||||||
Pro forma | (0.76 | ) | (0.58 | ) | (6.19 | ) | (0.39 | ) |
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 $1.3 million and $1.9 million charged for the twelve week and twenty-four week periods ended November 13, 2004.
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 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, an adjustment of approximately $1.2 million was made in the second quarter of fiscal 2005 to compensation expense to reflect the vesting of only the first one-third of these shares, the remaining shares were forfeited.
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
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incurred and the amount of loss can be reasonably estimated. See Note 16. 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 FASB Staff Position (FSP) No. 109-1,Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction and Qualified Production Activities Provided by the American Jobs Creation Act of 2004(FSP 109-1). FSP 109-1 provides accounting guidance for companies that will be eligible for a tax deduction resulting from “qualified production activities income” as defined in the American Jobs Creation Act of 2004 signed into law in October 2004. FSP 109-1 requires this deduction to be treated as a special deduction in accordance with SFAS No. 109,Accounting for Income Taxes, which does not require a revaluation of our deferred tax assets. The implementation of FSP 109-1 did not have any impact on our consolidated results of operations, cash flows, and financial position due to the fact that we were unable to take the special deduction because it is limited by taxable income.
The Medicare and Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law on December 8, 2003. The Act contains a provision for subsidies to employers who provide prescription drug coverage to retirees. In accordance with FSP No. 106-2,Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the measures of the accumulated postretirement benefit obligation and net periodic benefit cost in these financial statements do not reflect the effects of the Act on the plan. The staff position became effective for us at the beginning of the second quarter of fiscal 2005. The implementation of FSP 106-2 did not have any impact on our consolidated results of operations, cash flows, and financial position due to the fact that we have very few individuals under the plan that have Medicare coverage.
In December 2003, the FASB issued SFAS No. 132R (Revised 2003),Employers’ Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements No. 87, 88, and 106 (SFAS 132R), which replaced SFAS 132. SFAS 132R retains the disclosures requirements of SFAS 132, but provides various additional disclosure requirements for defined benefit pension plans and other defined benefit postretirement plans including types of plan assets, investment policies, obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. This guidance does not change the requirements for measurement or recognition of pension and other defined postretirement benefit plans. All new provisions of SFAS 132R, which were effective for interim and fiscal years ending after December 15, 2003 and estimated future benefit payments disclosures effective for fiscal years ending after June 15, 2004, have been reflected in disclosures in Note 11. Employee Benefit Plans and Note 12. Supplemental Executive Retirement Plan to our consolidated financial statements.
Recently Issued Accounting Pronouncements— In July 2006, the FASB issued FASB Interpretation (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 establishes 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 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 is effective for us as of the fourth quarter of fiscal 2006. Our leases are structured such that we do not incur rental costs during the construction period and therefore, do not expect FSP 13-1 to have a material impact on our consolidated results of operations, cash flows, and financial position.
In March 2005, the FASB issued FIN No. 47,Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143(FIN 47). FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005, and is effective for us in fiscal 2006. FIN 47 requires that liabilities be recognized for the fair value of a legal obligation to perform asset retirement activities even if the timing and/or method of such activities are conditional on a future event that may not be within our control as long as the amount can be reasonably estimated. We are currently in the process of evaluating the effects of FIN 47 on our consolidated results of operations, cash flows, and financial position, but based on our relevant current obligations,
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we do not expect that the initial adoption of FIN 47 will have a material impact on our consolidated financial statements.
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 registrant’s 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 December 2004, the 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 periods beginning after June 15, 2005, and is effective for us in the second quarter of fiscal 2006. We do not expect SFAS 153 to have a material impact on our consolidated results of operations, cash flows, and financial position.
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 the 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.
4. Inventories
The components of inventories are as follows:
November 13, | May 29, | |||||||
2004 | 2004 | |||||||
(dollars in thousands) | ||||||||
Ingredients and packaging | $ | 50,194 | $ | 48,936 | ||||
Finished goods | 22,721 | 22,965 | ||||||
$ | 72,915 | $ | 71,901 | |||||
5. Property and Equipment
Property and equipment consists of the following:
November 13, | May 29, | |||||||
2004 | 2004 | |||||||
(dollars in thousands) | ||||||||
Land and buildings | $ | 461,551 | $ | 462,668 | ||||
Machinery and equipment | 1,088,328 | 1,088,985 | ||||||
1,549,879 | 1,551,653 | |||||||
Less accumulated depreciation | (762,750 | ) | (738,728 | ) | ||||
$ | 787,129 | $ | 812,925 | |||||
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6. 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. 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.
At November 13, 2004, 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,Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others, on its effective date requires 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 November 13, 2004, the maximum potential liability for all lease residual values guaranteed prior and subsequent to the effective date was $7.1 million and $5.5 million, respectively. At November 13, 2004, 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.
7. 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 experienced during the first quarter of fiscal 2005, we tested our goodwill and other intangible assets for possible impairment following the guidance provided by SFAS 142. From the results of our testing we determined that our goodwill was fully impaired. Accordingly, we took a charge to expense during the first quarter of fiscal 2005 in the pre-tax amount of $215.3 million to eliminate our goodwill.
Goodwill and other intangibles assets consist of the following:
November 13, | May 29, | |||||||
2004 | 2004 | |||||||
(dollars in thousands) | ||||||||
Goodwill | ||||||||
Gross carrying amount | $ | 215,346 | $ | 215,346 | ||||
Impairment charge | (215,346 | ) | — | |||||
Net carrying amount | $ | — | $ | 215,346 | ||||
Intangible assets with indefinite lives | ||||||||
Gross carrying amount | $ | 180,662 | $ | 180,662 | ||||
Intangible assets with finite lives | ||||||||
Gross carrying amount | $ | 19,484 | $ | 19,484 | ||||
Less: | ||||||||
Accumulated amortization | (10,406 | ) | (9,730 | ) | ||||
Net carrying amount | $ | 9,078 | $ | 9,754 | ||||
Intangible amortization expense for the second quarter of both fiscal 2005 and 2004 was approximately $0.3 million, while year-to-date for both fiscal 2005 and 2004 was approximately $0.7 million. Of these amounts, approximately $0.2 million for the second quarter and $0.4 million year-to-date in both fiscal 2005 and 2004 were recorded as a reduction of net sales, with the remainder recorded to amortization expense in the consolidated statements of operations.
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8. Debt
Long-term debt consists of the following:
November 13, | May 29, | |||||||
2004 | 2004 | |||||||
(dollars in thousands) | ||||||||
Secured: | ||||||||
Post-petition credit agreement | $ | — | $ | — | ||||
Senior secured credit facility — pre-petition | 475,900 | 537,626 | ||||||
Unsecured: | ||||||||
6% senior subordinated convertible notes — pre-petition | 100,000 | — | ||||||
Capital leases — pre-petition | 13,946 | 15,437 | ||||||
589,846 | 553,063 | |||||||
Less: | ||||||||
Current portion | (483,427 | ) | (542,701 | ) | ||||
Pre-filing date claims included in liabilities subject to compromise | (106,419 | ) | — | |||||
Long-term debt | $ | — | $ | 10,362 | ||||
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 $150.0 million (increased from the original limitation of $75 million as a result of prior amendments) of which $45.6 million was utilized at May 28, 2005. 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 May 28, 2005, there were no borrowings outstanding under the DIP Facility and we had $154.4 million available under the DIP Facility (of which up to $79.4 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. 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, (i) 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; (ii) our making certain payments of principal or interest on account of pre-petition indebtedness or payables; (iii) a change of control (as defined in the DIP Facility); (iv) 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 (v) 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: (a) the specification of maximum capital expenditures permitted (b) an increase in the maximum letter of credit facility from $75.0 million to $125.0 million (c) the specification of minimum cumulative EBITDA performance goals and (d) 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 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 agreement that were accruing post-petition interest and or penalties. Our fifth amendment was completed in December 2005 and provides us with the flexibility needed to
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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 agreement 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 extended the suspension period established by the fifth amendment from June 3, 2006 through July 29, 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. 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. At November 13, 2004 under this credit facility, we had letters of credit outstanding of approximately $172.8 million and debt outstanding of approximately $475.9 million which carried a weighted average interest rate of 5.8%.
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. 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.
Other Matters
At November 13, 2004, 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. Additionally, our debt commitments 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, such commitments may not reflect actual cash outlays in the future period.
We have classified the 6% Senior Subordinated Convertible Notes, which are unsecured, and a capital lease for equipment as liabilities subject to compromise. Additionally in accordance with the guidance provided by SOP 90-7 we have suspended the accrual of interest on the 6% Senior Subordinated Convertible Notes.
9. Derivative Instruments
We use commodity derivatives, designated as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to manage exposure to changes in commodity prices. In addition, from time to time we enter into commodity derivatives, which economically hedge certain of our related risks even though the criteria for hedge accounting are not met or we do not elect to apply hedge accounting. All financial instruments are used solely for hedging purposes and are not issued or held for speculative reasons. The terms of such instruments, and the hedging transactions to which they relate, generally do not exceed one year. We are exposed to credit losses in the event of nonperformance by counterparties on commodity derivatives.
At November 13, 2004, we had accumulated losses of $0.1 million related to commodity derivatives most of which were substantially realized and recorded in OCI, with offsetting entries to accrued expenses. All derivative losses recorded in accumulated other comprehensive loss are expected to be reclassified to earnings during the next 12 months. We
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recognized a loss, in cost of products sold, resulting from hedge ineffectiveness of commodity hedges of $1.1 million during the second quarter for a total of $1.3 million fiscal year-to-date. As of November 13, 2004, we held no commodity derivatives in our portfolio and there were no gains or losses on commodity hedges that did not meet the criteria for hedge accounting or for which we did not elect to apply hedge accounting.
During fiscal 2004, we recognized a gain in earnings resulting from hedge ineffectiveness of commodity hedges, net of income taxes, of $0.5 million during the second quarter and $1.1 million fiscal year-to-date that were recorded to cost of products sold.
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 2005 consolidated balance sheet 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 of claim form. As of May 31, 2006, we have received over 8,900 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 lease rejection is a function of when such contracts are formally rejected. We continue to evaluate all bankruptcy claims asserted in our Chapter 11 proceedings. 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 real property 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. Contractual interest on those obligations amounts to $1.5 million, which is $0.9 million in excess of recorded interest expense. See Note 8. Debt to these 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 as of November 13, 2004.
November 13, 2004 | ||||
(dollars in thousands) | ||||
Accounts payable | $ | 132,245 | ||
Taxes payable | 10,298 | |||
Retirement obligations (SERP and deferred compensation) | 13,110 | |||
Legal reserve | 12,931 | |||
Interest bearing debt | 106,419 | |||
Other | 8,914 | |||
$ | 283,917 | |||
11. Employee Benefit Plans
American Bakers Association Retirement Plan
As discussed in Note 2. Restatement to these consolidated financial statements, we have restated our fiscal 2004 and prior financial statements for the ABA Plan. 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 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
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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 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 PBGC’s 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 reflected 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. While we have not been furnished or computed the current actual net reduction in our ABA Plan pension benefit obligation, 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.
The following tables details our respective interest in the ABA Plan, reflecting its characterization as an aggregate of single employer plans.
The components of the pension expense for the ABA Plan are as follows:
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Service cost | $ | 473 | $ | 580 | $ | 946 | $ | 1,160 | ||||||||
Interest cost | 750 | 662 | 1,500 | 1,324 | ||||||||||||
Expected return on negative plan assets | 92 | 59 | 184 | 118 | ||||||||||||
Recognition of | ||||||||||||||||
Prior service cost | 98 | 313 | 196 | 626 | ||||||||||||
Actuarial (gain) loss | 1,779 | (245 | ) | 3,558 | (490 | ) | ||||||||||
Net pension expense | $ | 3,192 | $ | 1,369 | $ | 6,384 | $ | 2,738 | ||||||||
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:
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Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Service cost | $ | 155 | $ | 162 | $ | 310 | $ | 324 | ||||||||
Interest cost | 860 | 857 | 1,720 | 1,714 | ||||||||||||
Expected return on plan assets | (1,003 | ) | (774 | ) | (2,006 | ) | (1,548 | ) | ||||||||
Recognition of | ||||||||||||||||
Prior service cost | 40 | 41 | 80 | 82 | ||||||||||||
Actuarial loss | 46 | 333 | 92 | 666 | ||||||||||||
Net pension expense | $ | 98 | $ | 619 | $ | 196 | $ | 1,238 | ||||||||
Postretirement Health and Life Plans
In addition to providing retirement pension benefits, we provide health care benefits for 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. Grandfathered nonunion employees and certain union employees who have bargained into our company-sponsored health care plans are generally eligible after age 55, with 10 years of service, and have only supplemental benefits after Medicare eligibility is reached. Certain of the plans require contributions by retirees and spouses.
The components of the net postretirement benefit expense are as follows:
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Service cost | $ | 674 | $ | 1,151 | $ | 1,348 | $ | 2,302 | ||||||||
Interest cost | 1,132 | 1,922 | 2,264 | 3,844 | ||||||||||||
Amortization | ||||||||||||||||
Unrecognized prior service cost (benefit) | (1,511 | ) | (801 | ) | (3,022 | ) | (1,602 | ) | ||||||||
Unrecognized net loss | 374 | 1,012 | 748 | 2,024 | ||||||||||||
Net postretirement benefit expense | $ | 669 | $ | 3,284 | $ | 1,338 | $ | 6,568 | ||||||||
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 grandfathered retirees and dependents through age 65. This plan change further reduced our accumulated postretirement benefit obligation by $9.2 million.
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 participant’s final average salary multiplied by the years of credited service up to twenty years.
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 $9.9 million representing the portion of the SERP liability at November 13, 2004 attributable to retired participants has been included in liabilities subject to compromise.
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The components of the SERP expense are as follows:
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Service cost | $ | 231 | $ | 246 | $ | 462 | $ | 492 | ||||||||
Interest cost | 385 | 348 | 770 | 696 | ||||||||||||
Recognition of | ||||||||||||||||
Prior service cost | 630 | 630 | 1,259 | 1,260 | ||||||||||||
Actuarial loss | 29 | 24 | 58 | 48 | ||||||||||||
Net periodic pension cost | 1,275 | 1,248 | 2,549 | 2,496 | ||||||||||||
Net curtailment loss related to plan suspension | 10,341 | — | 10,341 | — | ||||||||||||
Total SERP expense | $ | 11,616 | $ | 1,248 | $ | 12,890 | $ | 2,496 | ||||||||
13. Restructuring Charges
The components of restructuring charges are as follows:
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Severance costs | $ | 107 | $ | 1,176 | $ | 2,288 | $ | 1,213 | ||||||||
Long-lived asset charges | 4,548 | 350 | 7,902 | 350 | ||||||||||||
Other exit costs | 1,349 | 534 | 3,135 | 1,129 | ||||||||||||
Total | $ | 6,004 | $ | 2,060 | $ | 13,325 | $ | 2,692 | ||||||||
Fiscal 2005 Activity
In fiscal 2005, we continued the process of consolidating operations in order to achieve production efficiencies and more effectively allocate production capacity.
During the first quarter, we announced the closing of the Monroe, Louisiana bread bakery and the Buffalo, New York bread, roll and doughnut bakery with the production from these bakeries shifting to other bakeries. We also closed thirty-five outlet stores in conjunction with the Buffalo bakery closing. The actual closings took place during second quarter and resulted in total restructuring charges of approximately $0.7 million for Monroe, $4.3 million for Buffalo, and $0.3 million for the outlet closings. Of that amount, severance of $0.3 million was recorded for Monroe for about 50 employees who were involuntarily separated and severance of $1.3 million was recorded for Buffalo for approximately 155 employees severed. We recorded $0.2 million in asset impairment charges for Monroe and $2.9 million in asset impairment charges for Buffalo. We also incurred $0.2 million in other exit costs for the Monroe closing, $0.1 million in other exit costs for the Buffalo closing, and $0.2 million in other exit costs for the outlet closings. The asset impairment charges were primarily due to the write-down of real property and bakery equipment to fair value. Other exit expenses included lease cancellation costs, utilities and taxes plus clean-up costs associated with readying the properties for sale. In some cases, relocation expenses were also included. Approximately $0.3 million of this expense was recognized in the second quarter of fiscal 2005.
In addition, after we initiated the bankruptcy proceedings in fiscal 2005, we rejected certain real estate leases for locations closed under this restructuring plan. We transferred the balance of the restructuring accruals for remaining rent payments to the bankruptcy reorganization accrual. Any credits for reduction in the accrual related to these lease rejections were recorded in reorganization expense.
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During the first quarter, we also did some limited consolidations in the Pacific Northwest area that resulted in $1.3 million in additional restructuring expenses, including $0.7 million in severance expenses and $0.6 million in other exit costs, principally lease cancellation costs.
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 $4.4 million of capitalized software costs was written off in the second quarter of fiscal 2005.
During the first and second quarters of fiscal 2005, we also incurred restructuring costs related to plans initiated in fiscal 2003 and 2004. For the plan initiated in the third quarter of fiscal 2003, we recorded additional charges in the first and second quarter of $0.3 million and $0.1 million, respectively, related to additional impairments and property taxes, utilities and security for closed facilities. For the plan initiated in the second quarter of fiscal 2004, we incurred charges in the first quarter of fiscal 2005 of $0.3 million related to utilities, security and clean up of closed facilities and $0.6 million in the second quarter for asset impairment and clean up charges. Finally, we recorded $0.4 million of restructuring charges in the first quarter and $0.5 in the second quarter related to the fiscal 2004 fourth quarter plan, principally related to bakery clean up.
The year-to-date analysis of our restructuring costs activity is as follows:
Long-Lived | ||||||||||||||||
Severance | Asset | |||||||||||||||
and Related | Charges | |||||||||||||||
Benefits | (Credits) | Other | Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Third Quarter 2003 Plan | ||||||||||||||||
Balance May 29, 2004 | $ | — | $ | — | $ | 1,294 | $ | 1,294 | ||||||||
Expensed in Fiscal 2005 | — | 187 | 177 | 364 | ||||||||||||
Cash Paid in Fiscal 2005 | — | — | (431 | ) | (431 | ) | ||||||||||
Noncash Utilization in Fiscal 2005 | — | (187 | ) | (543 | ) | (730 | ) | |||||||||
Balance, November 13, 2004 | — | — | 497 | 497 | ||||||||||||
Second Quarter 2004 Plan | ||||||||||||||||
Balance May 29, 2004 | 117 | — | — | 117 | ||||||||||||
Expensed in Fiscal 2005 | — | 124 | 829 | 953 | ||||||||||||
Cash Paid in Fiscal 2005 | (79 | ) | — | (829 | ) | (908 | ) | |||||||||
Noncash Utilization in Fiscal 2005 | — | (124 | ) | — | (124 | ) | ||||||||||
Balance, November 13, 2004 | 38 | — | — | 38 | ||||||||||||
Fourth Quarter 2004 Plan | ||||||||||||||||
Balance May 29, 2004 | 1,243 | — | 3,109 | 4,352 | ||||||||||||
Expensed in Fiscal 2005 | (129 | ) | — | 1,078 | 949 | |||||||||||
Cash Paid in Fiscal 2005 | (801 | ) | — | (3,871 | ) | (4,672 | ) | |||||||||
Noncash Utilization in Fiscal 2005 | — | — | — | — | ||||||||||||
Balance, November 13, 2004 | 313 | — | 316 | 629 | ||||||||||||
Monroe, LA Bakery Closing | ||||||||||||||||
Expensed in Fiscal 2005 | 360 | 200 | 159 | 719 | ||||||||||||
Cash Paid in Fiscal 2005 | (129 | ) | — | (159 | ) | (288 | ) | |||||||||
Noncash Utilization in Fiscal 2005 | — | (200 | ) | — | (200 | ) | ||||||||||
Balance, November 13, 2004 | 231 | — | — | 231 | ||||||||||||
Buffalo, NY Bakery Closing & Outlet Closings | ||||||||||||||||
Expensed in Fiscal 2005 | 1,376 | 2,937 | 335 | 4,648 | ||||||||||||
Cash Paid in Fiscal 2005 | (937 | ) | — | (159 | ) | (1,096 | ) | |||||||||
Noncash Utilization in Fiscal 2005 | — | (2,937 | ) | — | (2,937 | ) | ||||||||||
Balance, November 13, 2004 | 439 | — | 176 | 615 | ||||||||||||
Pacific Northwest | ||||||||||||||||
Expensed in Fiscal 2005 | 681 | 30 | 557 | 1,268 | ||||||||||||
Cash Paid in Fiscal 2005 | (558 | ) | — | 185 | (373 | ) | ||||||||||
Noncash Utilization in Fiscal 2005 | — | (30 | ) | (38 | ) | (68 | ) | |||||||||
Balance, November 13, 2004 | 123 | — | 704 | 827 | ||||||||||||
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Long-Lived | ||||||||||||||||
Severance | Asset | |||||||||||||||
and Related | Charges | |||||||||||||||
Benefits | (Credits) | Other | Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Software Write-Off | ||||||||||||||||
Expensed in Fiscal 2005 | — | 4,424 | — | 4,424 | ||||||||||||
Cash Paid in Fiscal 2005 | — | — | — | — | ||||||||||||
Noncash Utilization in Fiscal 2005 | — | (4,424 | ) | — | (4,424 | ) | ||||||||||
Balance, November 13, 2004 | — | — | — | — | ||||||||||||
Consolidated | ||||||||||||||||
Balance, May 29, 2004 | 1,360 | — | 4,403 | 5,763 | ||||||||||||
Expensed in Fiscal 2005 | 2,288 | 7,902 | 3,135 | 13,325 | ||||||||||||
Cash Paid in Fiscal 2005 | (2,504 | ) | — | (5,264 | ) | (7,768 | ) | |||||||||
Noncash Utilization in Fiscal 2005 | — | (7,902 | ) | (581 | ) | (8,483 | ) | |||||||||
Balance, November 13, 2004 | $ | 1,144 | $ | — | $ | 1,693 | $ | 2,837 | ||||||||
Fiscal 2004 Activity
In the second quarter of fiscal 2004, we initiated a plan to close our Grand Rapids, Michigan bakery, which required consolidating production from this facility with that of other bakeries in the Midwest. This restructuring plan resulted in charges of $1.1 million, which consisted of severance costs of $0.8 million associated with the involuntary employee separations of approximately 135 employees and an asset impairment charge of $0.3 million primarily related to the write-down to fair value of equipment in the bakery to be closed.
During the first and second quarter of fiscal 2004, we incurred restructuring charges for the two restructuring plans initiated in fiscal 2003 related to certain closures and restructurings of bakeries and outlets.
Under the plan initiated in the fiscal 2003 third quarter, we incurred costs of $0.4 million in the first quarter of fiscal 2004 and $0.9 million in the second quarter of 2004. These costs related principally to utilities and cleanup for bakeries that have been closed and are being readied for potential sale. In addition, an adjustment to the severance liability was made in the second quarter of fiscal 2004 of $0.5 million related to additional severance costs and an additional 51 people to be severed. Offsetting these expenses is a reduction in the first quarter of the restructuring liability of $0.1 million due to lower than anticipated costs for a lease cancellation and building repairs. Under the plan initiated in the fiscal 2003 second quarter, we incurred costs of $0.2 million in the first quarter of fiscal 2004 and $0.1 million in the second quarter of fiscal 2004 related to security, utilities and cleanup for a bakery that was being readied for potential sale.
Summarized below are the cumulative restructuring charges recognized through the second quarter of fiscal 2005, as well as expected remaining charges through plan completion. We have undertaken additional restructuring activities during fiscal 2005 and 2006 and these activities are described in more detail in Note 20. Subsequent Events.
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Cumulative restructuring charges by plan (dollars in thousands):
Long-Lived | ||||||||||||||||
Severance | Asset | |||||||||||||||
and Related | Charges | |||||||||||||||
Benefits | (Credits) | Other | Total | |||||||||||||
Second Quarter 2003 Plan | $ | 1,464 | $ | (1,396 | ) | $ | 1,747 | $ | 1,815 | |||||||
Third Quarter 2003 Plan | 2,840 | 2,829 | 4,929 | 10,598 | ||||||||||||
Second Quarter 2004 Plan | 658 | 641 | 1,560 | 2,859 | ||||||||||||
Third Quarter 2004 Plan | — | 1,200 | — | 1,200 | ||||||||||||
Fourth Quarter 2004 Plan | 2,184 | 407 | 5,179 | 7,770 | ||||||||||||
Monroe, LA Bakery Closing | 360 | 200 | 159 | 719 | ||||||||||||
Buffalo, NY Bakery Closing & Outlet Closings | 1,376 | 2,937 | 335 | 4,648 | ||||||||||||
Pacific Northwest | 681 | 30 | 557 | 1,268 | ||||||||||||
Software Write-Off | — | 4,424 | — | 4,424 |
Expected remaining restructuring charges by plan (dollars in thousands):
Long-Lived | ||||||||||||||||
Severance | Asset | |||||||||||||||
and Related | Charges | |||||||||||||||
Benefits | (Credits)(1) | Other | Total | |||||||||||||
Third Quarter 2003 Plan | $ | — | $ | 192 | $ | 214 | $ | 406 | ||||||||
Second Quarter 2004 Plan | (24 | ) | 208 | 234 | 418 | |||||||||||
Fourth Quarter 2004 Plan | (281 | ) | 295 | 41 | 55 | |||||||||||
Monroe, LA Bakery Closing | (144 | ) | 178 | 198 | 232 | |||||||||||
Buffalo, NY Bakery Closing & Outlet Closings | (2 | ) | 68 | 1,053 | 1,119 |
(1) | Excludes gains realized on subsequent sales of real property. |
14. Reorganization Charges
Fiscal 2005 reorganization charges were as follows:
Twelve Weeks Ended | ||||||||
November 13, 2004 | ||||||||
Reorganization | Cash | |||||||
Charges | Payments | |||||||
(dollars in thousands) | ||||||||
Professional fees | $ | 10,376 | $ | 2,834 | ||||
Lease rejection credits | (926 | ) | — | |||||
Write-off of debt fees | 2,992 | — | ||||||
Reorganization charges, net | $ | 12,442 | $ | 2,834 | ||||
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15. Income Taxes
The reconciliation of the provision for income taxes to the statutory federal rate is as follows:
Twenty-four Weeks Ended | ||||||||
November 13, | November 15, | |||||||
2004 | 2003 | |||||||
Statutory federal tax rate | 35.0 | % | 35.0 | % | ||||
State income tax, net | 2.7 | 3.1 | ||||||
Non-deductible goodwill impairment | (22.0 | ) | — | |||||
Valuation allowance increase | (11.4 | ) | — | |||||
Adjustments to prior year tax reserves | 2.7 | — | ||||||
Other | (0.4 | ) | 0.5 | |||||
6.6 | % | 38.6 | % | |||||
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. During the first quarter of fiscal 2005, we adjusted our estimate for prior year tax accruals based upon a review of recently closed audits and the status of prior tax years relative to the statutes of limitation in the jurisdictions in which we conduct business.
We provide a valuation allowance against deferred tax assets, if, based on management’s 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 the first quarter of 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 the realizability of the assets. In addition, we have also recorded a valuation allowance against a portion of our deferred tax assets originating in 2005.
16. Commitments and Contingencies
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. Cubbison’s, 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
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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 trustee’s 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 SEC’s investigation, but we cannot predict the outcome of the inquiry. A resolution of the SEC inquiry, or of other potential proceedings arising from the subject matter of that inquiry, might require us to pay a financial penalty or other sanctions.
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 NYSE’s 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.
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.
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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 has appointed a Special Review Committee to evaluate the demand and to report to the board. That review is ongoing. 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.
In November 1996, certain of our route sales representatives, or RSRs, brought a class action on behalf of RSRs in the State of Washington, alleging that we had failed to pay required overtime wages under state law. During the third quarter of fiscal 2003, we settled this class action with the plaintiffs for approximately $6.1 million, which we had previously reserved for prior to fiscal 2004. We have negotiated and put into effect a new union contract with the RSRs in the State of Washington that we expect to address this issue.
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 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. On that date, 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 recorded the total amount of the settlement as a fiscal 2005 charge to operations.
We are named in two additional 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
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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.
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 alleged 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 plaintiff’s 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, plaintiff’s 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 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 have recorded a charge of $0.8 million in 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 U.S. Department of Justice, 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 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 facility’s 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 settle those that have been alleged.
As discussed in Note 2. Restatement to these consolidated financial statements, we have restated our fiscal 2004 and prior financial statements for the ABA Plan. 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 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
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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 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 PBGC’s 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 reflected 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. While we have not been furnished or computed the current actual net reduction in our ABA Plan pension benefit obligation, 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.
Except as noted above, the Company cannot currently estimate a range of loss 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 matter disclosed herein, we are not aware of any other items as of the filing which could have a material adverse impact on our consolidated financial statements.
17. 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 per share computations:
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(in thousands) | ||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 44,966 | 44,866 | 44,942 | 44,860 | ||||||||||||
Effect of dilutive stock compensation | — | — | — | — | ||||||||||||
Diluted | 44,966 | 44,866 | 44,942 | 44,860 | ||||||||||||
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Diluted weighted average common shares outstanding exclude options on common stock, unvested restricted stock, deferred shares awarded, and our 6% Senior Subordinated Convertible notes of approximately 15.6 million and 6.3 million for the second quarter of fiscal 2005 and 2004, respectively, and approximately 11.3 million and 8.0 million for year-to-date fiscal 2005 and 2004, respectively, because their effect would have been antidilutive. Due to our reported net losses for all periods, diluted loss per share amounts are not adjusted for the effect of dilutive stock compensation.
Dividends per common share were $0.07 and $0.14 for second quarter and year-to-date 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 & Poor’s Ratings Services and Ba3 by Moody’s 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.
18. Comprehensive Income (Loss)
Reconciliations of net income (loss) to comprehensive income (loss) are as follows:
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Net loss | $ | (34,011 | ) | $ | (24,795 | ) | $ | (277,477 | ) | $ | (14,281 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Change in fair value of cash flow hedges, net of income taxes of $0, $1,223, $0, and $2,091, respectively | 491 | 2,039 | (1,428 | ) | 3,486 | |||||||||||
Losses on interest rate swaps reclassified to interest expense, net of income taxes of $0, $782, $0, and $1,795, respectively | — | 1,303 | 816 | 2,991 | ||||||||||||
Commodity derivative gains reclassified to cost of products sold, net of income taxes of $0, $630, $0, and $430, respectively | 1,018 | (1,049 | ) | 1,011 | (716 | ) | ||||||||||
Minimum pension liability adjustment, net of income taxes of $0 | 221 | — | 221 | — | ||||||||||||
1,730 | 2,293 | 620 | 5,761 | |||||||||||||
Comprehensive loss | $ | (32,281 | ) | $ | (22,502 | ) | $ | (276,857 | ) | $ | (8,520 | ) | ||||
19. 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 the 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 87.8% and 87.5% of our net sales for the twelve and twenty-four weeks ended November 13, 2004, respectively, and consists of an aggregation of our ten profit centers that manufacture, distribute, and sell fresh baked goods.
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Retail Operations— Our Retail Operations generated approximately 12.2% and 12.5% of our net sales for the twelve and twenty-four weeks ended November 13, 2004, respectively, 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.
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.
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$34.4 million and $74.4 million for the twelve and twenty-four weeks ended November 13, 2004, 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 the current period only. For the twelve and twenty-four weeks ended November 15, 2003, reportable segment net sales consisted of $713.1 million and $1,438.8 million for Wholesale Operations and $100.7 million and $206.0 million for Retail Operations totaling $813.8 million and $1,644.8 million, respectively.
Twelve Weeks | Twenty-Four Weeks | |||||||
Ended | Ended | |||||||
Consolidated | November 13, 2004 | November 13, 2004 | ||||||
(dollars in thousands) | ||||||||
Net Sales | ||||||||
Wholesale Operations | $ | 701,373 | $ | 1,409,243 | ||||
Retail Operations | 97,338 | 201,445 | ||||||
Total net sales | $ | 798,711 | $ | 1,610,688 | ||||
Operating Income (Loss) | ||||||||
Wholesale Operations | $ | 23,319 | $ | 25,734 | ||||
Retail Operations | (1,038 | ) | (2,139 | ) | ||||
22,281 | 23,595 | |||||||
Corporate | (40,259 | ) | (289,981 | ) | ||||
Total operating loss | (17,978 | ) | (266,386 | ) | ||||
Interest expense | 9,316 | 18,310 | ||||||
Reorganization charges | 12,442 | 12,442 | ||||||
Other (income) expense | (20 | ) | 129 | |||||
21,738 | 30,881 | |||||||
Loss before income taxes | (39,716 | ) | (297,267 | ) | ||||
Provision (benefit) for income taxes | (5,705 | ) | (19,790 | ) | ||||
Net loss | $ | (34,011 | ) | $ | (277,477 | ) | ||
20. Subsequent Events
We entered into a Restructuring Agreement dated April 28, 2005, with the third party provider engaged to perform certain (1) information technology functions, (2) finance and data maintenance administrative functions, and (3) data center services functions. The Restructuring Agreement provided for the assumption of the existing service agreements pursuant to bankruptcy rules, settlement of the third party provider’s bankruptcy claim against us, and release of all other claims between the parties.
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On the same date, we executed an amendment to the agreement for the provision of certain information technology functions that reduced the commitments for fiscal 2005 through fiscal 2009 to approximately $10.6 million, $8.9 million, $8.9 million, $9.0 million, and $6.8 million, respectively. The amendment also moved the first date we may cancel the agreement to fiscal 2007, but reduced the termination fees by approximately 56%.
On the same date, we executed an amendment to the agreement for the provision of certain finance and data maintenance administrative functions that reduced the commitments for fiscal 2005 through fiscal 2009 to approximately $9.5 million and $5.0 million each for fiscal 2006 through fiscal 2010 and $3.9 million for fiscal 2011. The amendment also moved the first date we may cancel the agreement to fiscal 2007, but eliminated the termination fees.
No amendment was entered regarding the agreement for the provision of certain data center maintenance functions.
The Restructuring Agreement and amendments to the service agreements was approved by final order of the bankruptcy court on May 31, 2005.
In the third quarter of fiscal 2005 we announced the Florence, South Carolina bread and roll bakery would be closed, which resulted in total charges of $4.5 million. Additionally, in the same quarter, we implemented a company-wide reduction in force of approximately 175 employees that resulted in the recognition of $1.6 million in severance expense.
As part of our previously announced operational and financial restructuring, in fiscal years 2005 and 2006, we undertook a review of all of our ten profit centers (PCs). As a result of the review, in an effort to reduce costs and improve efficiency, we began closing certain facilities and implementing various route, depot and bakery outlet consolidations.
On April 27, 2005, we announced plans to consolidate operations in our Florida PC by closing the Miami bakery and consolidating production, routes, depots and bakery outlets in Florida and Georgia. At the date of the announcement, we estimated this restructuring would affect approximately 600 employees with projected severance costs of approximately $2.0 million, projected asset impairment charges of approximately $5.0 million, and other projected exit costs of approximately $3.0 million for a total estimated cost of approximately $10.0 million.
On May 4, 2005, we announced plans to consolidate operations in our Mid-Atlantic PC by closing the Charlotte, North Carolina bakery and consolidating production, routes, depots and bakery outlets in North Carolina, South Carolina, and Virginia. At the date of the announcement, we estimated this restructuring would affect approximately 950 employees with projected severance costs of approximately $3.0 million, projected asset impairment charges of approximately $8.5 million, and other projected exit costs of approximately $3.5 million for a total estimated cost of approximately $15.0 million.
On May 19, 2005, we announced plans to consolidate operations in our Northeast PC by closing the New Bedford, Massachusetts bakery and consolidating production, routes, depots and bakery outlets. At the date of the announcement, we estimated this restructuring would affect approximately 1,400 employees with projected severance costs of approximately $7.0 million, projected asset impairment charges of approximately $7.0 million, and other projected exit costs of approximately $3.0 million for a total estimated cost of approximately $17.0 million.
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.
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.
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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.
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 IBT members’ employment relationship with us. Since this initial agreement, we have commenced negotiations of long-term extensions with respect to most of our 420 CBAs with our union-represented employees resulting in ratification by employees or agreements reached in principle, subject to ratification by employees, of approximately 240 CBAs. In total, these CBAs cover approximately 71% 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.
In conjunction with our bankruptcy filing, we terminated our 1991 Employee Stock Purchase Plan. We have also subsequently suspended payments and accruals of service credit under our SERP and suspended certain payments under various deferred compensation plans. In addition, we reached a decision not to make a discretionary company profit-driven contribution under our defined contribution retirement plan for calendar year 2004 and 2005.
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 grandfathered retirees and dependents through age 65. This plan change further reduced our accumulated postretirement benefit obligation by $9.2 million.
Subsequent to year end, in January, April, and July 2006, we failed to make three required quarterly minimum funding contributions for a total of $11.0 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with our consolidated financial statements, notes, and tables included elsewhere in this report, as well as, the more detailedManagement’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contained in our 2005 Annual Report on Form 10-K filed concurrently with this document. MD&A may contain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, future performance involves risks and uncertainties, which may cause actual results to differ materially from those expressed in the forward-looking statements. SeeForward-Looking Statementsfor further information.
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 currently operate 45 bakeries and approximately 850 bakery outlets located in strategic markets throughout the United States. Our sales force delivers baked goods from our approximately 800 distribution centers on approximately 6,400 delivery routes.
OVERVIEW OF CERTAIN TRENDS AND EVENTS AFFECTING OPERATIONS, FINANCIAL POSITION AND LIQUIDITY
Refer toOverview of Certain Trends and Events Affecting Operations, Financial Position and Liquidityin our 2004 Annual Report on Form 10-K filed concurrently with this document for information on trends and events that have affected our operations, financial position and liquidity.
CRITICAL ACCOUNTING POLICIES
Refer toCritical Accounting Policiesin our 2005 Annual Report on Form 10-K filed concurrently with this document for information on accounting policies that we consider critical in preparing our consolidated financial statements. These policies include significant estimates made by management using information available at the time the estimates were made. However, these estimates could change materially if different information or assumptions were used.
RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying discussion of Results of Operations gives effect to the restatement of our consolidated financial statements for the twelve and twenty-four weeks ended November 15, 2003 as described in Note 2. Restatement to the consolidated financial statements.
RESULTS OF OPERATIONS
The following table sets forth, the twelve weeks and twenty-four weeks ended November 13, 2004 and November 15, 2003, the relative percentages that certain income and expense items bear to net sales:
Twelve Weeks Ended | Twenty-Four Weeks Ended | |||||||||||||||
November 13, | November 15, | November 13, | November 15, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of products sold | 51.7 | 51.3 | 51.3 | 50.2 | ||||||||||||
Selling, delivery and administrative expenses | 47.2 | 49.5 | 48.4 | 47.3 | ||||||||||||
Restructuring charges | 0.8 | 0.3 | 0.8 | 0.2 | ||||||||||||
Depreciation and amortization and loss on sale or abandonment of assets | 2.6 | 2.7 | 2.6 | 2.6 | ||||||||||||
Goodwill and other intangible assets impairment | — | — | 13.4 | — | ||||||||||||
Operating loss | (2.3 | ) | (3.8 | ) | (16.5 | ) | (0.3 | ) | ||||||||
Reorganization charges | 1.6 | — | 0.8 | — | ||||||||||||
Interest expense — net | 1.1 | 1.1 | 1.1 | 1.1 | ||||||||||||
Loss before income taxes | (5.0 | ) | (4.9 | ) | (18.4 | ) | (1.4 | ) | ||||||||
Income taxes | (0.7 | ) | (1.8 | ) | (1.2 | ) | (0.5 | ) | ||||||||
Net loss | (4.3 | )% | (3.1 | )% | (17.2 | )% | (0.9 | )% | ||||||||
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Net sales.Net sales for the second quarter of fiscal year 2005, the twelve weeks ended November 13, 2004, were approximately $798.7 million, a decrease of $15.1 million, or 1.9%, from net sales of approximately $813.8 million in fiscal year 2004. Year-to-date net sales for fiscal 2005 decreased approximately $34.1 million, or 2.1%, to approximately $1,610.7 million, from net sales of approximately $1,644.8 million, in fiscal 2004. The net sales for the second quarter and year-to-date periods for fiscal 2005 both reflected unit volume declines of approximately 4.7% as compared to fiscal 2004. These declines are partially offset by an overall unit value increases related to selling price increases and mix changes, of approximately 3.1% for the second quarter and 2.5% for the year-to-date periods of fiscal 2005 as compared to the prior year.
Gross profit.Gross profit was 48.3% of net sales for the second quarter of fiscal year 2005, down from 48.7% of net sales in fiscal 2004. Year-to-date gross profit was 48.7% of net sales, compared to 49.8% in the prior year. Ingredient and packaging costs per pound for the second quarter of fiscal 2005 were up 7.0% and 1.1% respectively compared to the prior year. Labor and labor-related costs were down approximately 8.6% per pound compared to the second quarter fiscal 2004, which is primarily due to a charge to workers’ compensation expense of $20.0 million for the second quarter of fiscal 2004. Labor and fringe excluding worker’s compensation increased slightly in the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004. Overall, costs of goods sold for the second quarter were down $5.2 million or 1.2% as compared to the second quarter of fiscal 2004. A more rapid decline in sales of 1.9% accounts for the 2.5% decline in gross profit for the second quarter of fiscal 2005 as compared to fiscal 2004. On a year-to-date basis, overall direct costs per pound increased approximately 0.6% while the related costs decreased by $5.3 million. A more rapid decline in production pounds as compared to the decline in direct production costs accounts for the nominal increase in the production cost per pound as compared to the prior year. The charge to worker’s compensation expense of $20.0 million in the second quarter of fiscal 2004 resulted in an expense decrease in the year-to-date second quarter of fiscal 2005 when compared to fiscal 2004 which largely offset all other indirect cost increases in fiscal 2005. Accordingly, year-to-date cost of goods sold was essentially flat between fiscal 2005 and 2004 with the decline in gross profit of 4.2% primarily caused by the decrease in sales between years.
Selling, delivery and administrative expenses.Selling, delivery and administrative expenses were approximately $377.0 million, representing 47.2% of net sales, for the second quarter of fiscal 2005 down from fiscal 2004’s selling, delivery and administrative expenses of approximately $402.9 million, or 49.5% of net sales. Year-to-date selling, delivery and administrative expenses for fiscal 2005 amounted to approximately $779.9 million, or 48.4% of net sales, increasing on a percent of net sales basis from approximately $778.8 million, or 47.3% of net sales, in the prior year. In the second quarter of fiscal 2005, lower labor-related costs, notably from restructuring and a charge to the second quarter of fiscal 2004 for a workers’ compensation charge of $30.0 million, were responsible for 3.8% of the decrease as a percent of net sales compared to the prior year. These cost decreases were partially offset by increases in energy and advertising of 0.8% as compared to the prior year, along with an allocated curtailment loss related to the suspension of our Supplemental Employee Retirement Plan (SERP) of $6.2 million. On a year-to-date basis, the reduction in labor related costs accounted for a decrease of 2.3% as a percent of sales compared to the prior year. This decrease was offset by an increase in energy, advertising and allocated costs related principally from bankruptcy related matters of 1.6% as compared to the prior year, along with an allocated curtailment loss related to the suspension of our SERP of $6.2 million.
Restructuring charges.During the second quarter of fiscal 2005, we incurred restructuring charges of approximately $6.0 million related to restructuring plans to close and restructure certain bakeries and retail stores as compared to approximately $2.1 million in fiscal 2004. On a year to date basis, we incurred restructuring charges of approximately $13.3 million as compared to approximately $2.7 million in the prior year. See Note 13. Restructuring Charges to the consolidated financial statements regarding detail components of restructuring charges.
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Goodwill impairment.Due to our declining operating profits and liquidity issues resulting from a decrease in sales, a high cost structure and rising costs for employee healthcare and pension, ingredients, and energy we tested our goodwill for possible impairment during this first quarter of fiscal 2005 following the guidance provided by SFAS No. 142,Goodwill and Other Intangible Assets. From the results of our testing we determined that our goodwill was fully impaired. Accordingly, we took a charge to expense in this first quarter of fiscal 2005 in the pre-tax amount of $215.3 million to eliminate our goodwill.
Operating loss. Based upon the above factors, the operating loss for the second quarter of fiscal 2005 was approximately $(18.0) million, an improvement in operations of $13.2 million from the prior year’s operating loss of approximately $(31.2) million. Our year-to-date operating loss was approximately $(266.4) million in fiscal 2005 down $260.9 million from the prior year’s operating loss of approximately $(5.5) million.
Reorganization charges.For the twelve and twenty four weeks ended November 13, 2004, reorganization charges were approximately $12.4 million 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 $10.3 million; (2) gains realized as we rejected certain of our lease agreements covering equipment and real estate of $(0.9) million and (3) the write-off of fees related to our pre-petition debt of $3.0 million.
Interest expense.Net interest expense increased by approximately $0.7 million during the quarter compared to the same period last year. This increase is primarily due to an increase in debt outstanding of approximately $28.0 million at the end of the quarter and increased debt issuance fees of $0.7 million offset by lower average borrowing rates.
Provision for income taxes.The effective income tax rates were 6.6% and 38.6% for the first two quarters of fiscal 2005 and fiscal 2004, respectively. Our effective income tax rate for 2005 was negatively impacted by valuation allowances recorded against our deferred tax assets, and by the impairment of our goodwill in the first quarter of 2005, the majority of which was permanently nondeductible in nature. We provide a valuation allowance against deferred tax assets if, based on management’s 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 the first quarter of 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 the realizability of the assets. In addition, we have also recorded a valuation allowance against a portion of our deferred tax assets originating in 2005.
CASH RESOURCES AND LIQUIDITY
Refer toSources of Liquidity and Capitalin theCash Resources and Liquiditysection of our 2005 Annual Report on Form 10-K filed concurrently with this document for additional information.
CASH FLOWS
During the twenty-four weeks ended November 13, 2004, the Company generated $78.1 million of cash, which was the net impact of $74.5 million in cash generated from operating activities, $24.0 million in cash used in investing activities, and $27.6 million in cash provided by financing activities.
Cash from operating activities.Cash from operating activities for fiscal 2005 was $74.5 million, which represents an increase of $6.7 million or 9.9% from cash generated in fiscal 2004 of $67.8 million. While we posted a net loss of $277.5 million in the fiscal 2005, a number of items that contributed to the loss were non-cash items, including $215.3 million, $41.2 million, $20.4 million, $9.7 million and $12.4 million related to the write-off of goodwill and other intangibles, depreciation and amortization, provision for deferred income taxes, net reorganization charges, and the write-off of a prior service cost asset, respectively. In addition, changes in working capital components generated $41.1 million in cash during fiscal 2005 primarily due to (i) an increase in accounts payable and accrued expenses of $50.0 million, (ii) an increase in our long-term self insurance reserves of $12.2 million; (iii) a net increase in other current assets which used $26.6 million; and (iv) a net change in other items which provided $7.3 million. For fiscal 2004 changes in working capital components provided cash equal to $57.4 million. Cash flow from operating activities is one of our primary sources of liquidity.
Cash used in investing activities.Cash used in investing activities during fiscal 2005 was $24.0 million, $5.9 million or 19.7% less than the cash used during fiscal 2004 of $29.9 million. The decrease is primarily attributable to lower additions to property and equipment of $4.6 million compared to fiscal 2004.
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Cash used in financing activities.Cash provided by financing activities for fiscal 2005 was $27.6 million compared to cash used in financing activities during fiscal 2004 which totaled $38.0 million. During the first fiscal quarter of 2005 we issued $100.0 million aggregate principal amount of our 6% senior subordinated convertible notes due August 15, 2014. The proceeds from the issuance of the convertible notes along with other sources of cash enabled us to reduce net long-term debt by $63.3 million and pay $8.9 million in debt issuance costs. During fiscal 2004 we used cash to reduce long-term debt in the amount of $32.2 million. We paid dividends on our common stock in the amount of $6.3 million during fiscal 2004.
OFF-BALANCE SHEET FINANCING
We do not participate in, nor secure financings for, any unconsolidated, special purpose entities.
CONTRACTUAL OBLIGATIONS
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.
We entered into a Restructuring Agreement dated April 28, 2005, with a third party provider engaged to perform certain (1) information technology functions, (2) finance and data maintenance administrative functions, and (3) data center services functions. The Restructuring Agreement provided for the assumption of the existing service agreements pursuant to bankruptcy rules, settlement of the third party provider’s bankruptcy claim against us, and release of all other claims between the parties.
On the same date, we executed an amendment to the agreement for the provision of certain information technology functions that reduced the commitments for fiscal 2005 through fiscal 2009 to approximately $10.6 million, $8.9 million, $8.9 million, $9.0 million, and $6.8 million. The amendment also moved the first date we may cancel the agreement to fiscal 2007, but reduced the termination fees by approximately 56%.
On the same date, we executed an amendment to the agreement for the provision of certain finance and data maintenance administrative functions that reduced the commitments for fiscal 2005 through fiscal 2009 to approximately $9.5 million and $5.0 million each for fiscal 2006 through fiscal 2010 and $3.9 million for fiscal 2011. The amendment also moved the first date we may cancel the agreement to fiscal 2007, but eliminated the termination fees.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We have two segments: Wholesale Operations, which consists of an aggregation of our ten profit centers that manufacture, distribute, and sell fresh baked goods; and Retail Operations, which consists of five regions that sell our baked goods and other food items. See Note 19. Segment Information to these consolidated financial statements for further information.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3. Description of Business and Significant Accounting Policies, to our consolidated financial statements for further information regarding recently issued accounting standards.
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,”
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“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:
• | our ability to continue as a going concern; | ||
• | our ability to obtain court approval with respect to motions filed by us from time to time in the Chapter 11 proceeding; | ||
• | our ability to operate pursuant to the covenants, terms and certification of the DIP facility; | ||
• | our ability to negotiate an extension (if necessary) or refinance our DIP facility, which, pursuant to an extension, expires on June 2, 2007; | ||
• | our ability to develop, propose, confirm and consummate one or more plans of reorganization with respect to the Chapter 11 proceeding; | ||
• | 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; | ||
• | 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 to achieve the desired results; | ||
• | potential adverse publicity; | ||
• | our ability to obtain and maintain adequate terms with vendors and service providers; | ||
• | the potential adverse impact of the Chapter 11 proceeding on our liquidity or results of operations; | ||
• | 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; | ||
• | the effectiveness of our efforts to hedge our exposure to price increases with respect to various ingredients and energy; | ||
• | our ability to finalize, fund and execute a going-forward business plan; | ||
• | our ability to recognize, attract, motivate and/or retain key executives and employees; | ||
• | changes in our relationship with employees and the unions that represent them; | ||
• | increased costs and uncertainties related to periodic renegotiation of union contracts; | ||
• | the results of a Securities and Exchange Commission, or SEC, investigation concerning our financial statements following our announcement that the audit committee of our board of directors had retained independent counsel to investigate our manner of setting its workers’ compensation and other reserves; | ||
• | the delayed filing with the SEC of our Annual Reports on Form 10-K and of our Quarterly Reports on Form 10-Q; | ||
• | 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; | ||
• | changes to dietary guidelines; | ||
• | the continuing effects of a low carbohydrate diet trend; | ||
• | the performance of our recent new product introductions, including the success of such new products in achieving and retaining market share; | ||
• | commodity and energy costs; | ||
• | risks associated with price increases; and | ||
• | 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
• | 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, or any combination of these options; | ||
• | our ability to develop and implement a successful plan of reorganization in the Chapter 11 process; | ||
• | 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; | ||
• | the instructions, orders and decisions of the bankruptcy court and other effects of legal and administrative proceedings, settlements, investigations and claims; | ||
• | 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; | ||
• | 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; | ||
• | our reliance on key management personnel, including the effects of the Chapter 11 process on our ability to attract and retain key management personnel; | ||
• | our ability to successfully reject unfavorable contracts and leases; and | ||
• | the duration of the Chapter 11 process. |
General Factors
• | the availability of capital on acceptable terms in light of the various factors discussed herein, including our reorganization under the Chapter 11 process; | ||
• | 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; | ||
• | actions of competitors, including pricing policy and promotional spending; | ||
• | increased costs, delays or deficiencies related to restructuring activities; | ||
• | the effectiveness of advertising and marketing spending; | ||
• | the effectiveness and adequacy of our information and data systems; | ||
• | changes in general economic and business conditions (including in the bread and sweet goods markets); | ||
• | costs associated with increased contributions to single employer, multiple employer or multi-employer pension plans; | ||
• | any inability to protect and maintain the value of our intellectual property rights; | ||
• | future product recalls or food safety concerns; | ||
• | further consolidation in the retail food industry; | ||
• | changes in consumer tastes or eating habits; | ||
• | costs associated with environmental compliance and remediation; | ||
• | increased costs and uncertainties related to periodic renegotiation of union contracts; | ||
• | obligations and uncertainties with respect to the American Bakers Association Retirement Plan; | ||
• | the impact of any withdrawal liability arising under our multi-employer pension plans as a result of prior actions or current consolidations; | ||
• | actions of governmental entities, including regulatory requirements; | ||
• | acceptance of new product offerings by consumers and our ability to expand existing brands; | ||
• | the performance of our recent new product introductions; | ||
• | the effectiveness of hedging activities; | ||
• | expenditures necessary to carry out cost-saving initiatives and savings derived from these initiatives; | ||
• | changes in our business strategies; | ||
• | unexpected costs or delays incurred in connection with our previously announced and other future facility closings; | ||
• | bankruptcy filings by customers; | ||
• | changes in our relationship with employees and the unions that represent them; | ||
• | the outcome of legal proceedings to which we are or may become a party, including any litigation stemming from our restatement of the first, second and third quarters of fiscal 2004, 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; | ||
• | business disruption from terrorist acts, our nation’s response to such acts and acts of war; and | ||
• | other factors. |
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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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
We use derivative instruments, principally commodity derivatives to manage certain commodity prices. All financial instruments are used solely for hedging purposes and are not issued or held for speculative reasons.
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, sugar, 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. As of November 13, 2004, we held no commodity derivatives in our portfolio.
Interest rates.We enter into interest rate swap agreements to manage the interest rate risk associated with variable rate debt instruments. Our May 29, 2004 interest rate swap agreements fixed interest rates on $350.0 million in variable rate debt to fixed rates ranging from 5.47% to 7.91% and expired in July and August 2004. As these swap agreements expired in the first quarter of fiscal 2005, we discontinued management of interest rate risk principally due to the fact that our liquidity problems and subsequent filing for bankruptcy precluded the continuation of such activities.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of November 13, 2004. Based on that evaluation and due to the identification of material weaknesses in our internal control over financial reporting, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of November 13, 2004.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarterly period ended November 13, 2004 other than our ongoing efforts to remediate our ineffective internal controls. In connection with the restatements of the Company’s consolidated financial statements, as
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more fully described in Note 2. Restatement of the consolidated financial statements included in this Form 10-Q, management believes that many, if not all, of the material weaknesses described under the caption “Item 9A — Controls and Procedures” in the Company’s Annual Report on 10-K for the fiscal year ended May 28, 2005 likely existed as of November 13, and has, as a result, effected changes to the Company’s internal control over financial reporting that have materially affected the Company’s internal control over financial reporting. These remediation actions are described under the caption “Item 9A — Controls and Procedures” in the Company’s Annual Report on Form 10-K for the fiscal year ended May 28, 2005. Efforts to test and remediate our internal control over financial reporting are continuing and are expected to continue throughout fiscal 2007 and beyond.
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PART II. OTHER INFORMATION
Item 6. Exhibits
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 Corporation’s 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 Corporation’s Quarterly Report on Form 10-Q for the quarter ended November 15, 2003 filed on December 22, 2003). | |
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* |
* | Filed herewith |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERSTATE BAKERIES CORPORATION | ||||||
Dated: October 6, 2006 | By: | /s/Antonio C. Alvarez II | ||||
Antonio C. Alvarez II | ||||||
Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
Dated: October 6, 2006 | By: | /s/ Ronald B. Hutchison | ||||
Ronald B. Hutchison | ||||||
Executive Vice President and Chief Financial Officer | ||||||
(Principal Financial Officer) |
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