Interstate Bakeries Corporation (IBC) (OTC:IBCIQ - News) said today (August 29) that, pending Bankruptcy Court approval and amendment of its debtor-in-possession (DIP) financing facility, it plans to exit the bread market in Southern California. The company plans to close four bread, bun and roll bakeries in Southern California and consolidate routes and distribution centers across the region. The company said its customers in Southern California can expect to continue receiving delivery of its bread products through October 20, 2007.

IBC will continue to bake, sell, and deliver Hostess® and Dolly Madison® snack cakes and donuts in Southern California.

"Because of its impact on employees and their families, exiting a market is probably the most difficult decision a company can make. At the same time, our primary consideration has to be the company's long-term survival and financial health," said Craig Jung, chief executive officer.

"While IBC has made marked progress in several problem markets over the past six months, bread operations in Southern California continue to be unprofitable."

Mr. Jung went on to say that IBC has long struggled with structural barriers to profitability in the Southern California bread market. These include incursions by lower-cost, non-union competitors; an irrational competitive pricing environment; and changing market and customer demands. This is compounded by a high fixed-cost structure, excessive workers' compensation costs and a confrontational relationship with one of the company's major unions.

"We must stop reinforcing failure and press harder where there is success," Mr. Jung said. "This means allocating our resources to those markets that are profitable, have positive cash flow and can earn their cost of capital."

Business Plan Seeks Operating Changes

In its business plan, which was presented to constituents in June 2007, the company identified two core platforms. The first is to evolve its current, high-cost, "one-size-fits-all" traditional route delivery structure that has been used for several decades to an advanced path-to-market structure it believes creates better jobs for sales employees, and will significantly drive selling and delivery productivity. This involves flexibility in the company's ability to meet changing market demands. Currently, work rules under IBC's collective bargaining agreements are prohibitively restrictive in how it can operate its business.

Second, the company is asking its unions for concessions to achieve meaningful productivity savings in its health and welfare plans. To date, the company has not asked its unions for any concessions on pension plans.

The company said that its secured creditors are running out of patience with IBC's inability to develop a consensual plan of reorganization. IBC has been in bankruptcy for nearly three years.

"We have weeks, not months or years, to act. Union agreement to path-to-market and the health and welfare concessions in our business plan are crucial," said Mr. Jung.

Southern California Details

The four bread, bun and roll plants IBC intends to close are located in Glendale, Pomona, San Diego, and Los Angeles, California. In addition, the company plans to eliminate approximately 325 routes, and close 17 distribution centers and 19 outlet stores by October 29, 2007. The closings and consolidations are expected to impact approximately 1,300 employees.

"We will work closely with customers in Southern California to ensure an orderly transition, and to ensure that we do not disrupt their businesses as we re-shape ours," said Jane Miller, acting executive vice president and chief customer officer.

Assuming Bankruptcy Court approval and amendment of its DIP financing facility, the company's preliminary estimate of charges to be incurred in connection with the planned closures and consolidations in Southern California is approximately $29.2 million, including approximately $12.8 million of employee-related cash charges, approximately $13.8 million of non-cash asset impairment charges, and approximately $2.6 million in other cash charges. In addition, the Company intends to spend approximately $1.8 million for accrued expenses to effect the consolidation. In addition to the asset impairment charges discussed above, the Company may need to recognize impairment charges related to trademarks and trade names that could be impaired as a result of the consolidation announced today. The Company is not able to provide an estimate of these charges currently.

Impact of Closures and Consolidations on Pension Plans

As previously disclosed, IBC currently contributes to more than 40 multi-employer pension plans as required under various collective bargaining agreements, many of which are under-funded. The portion of a plan's under-funding allocable to an employer deemed to be totally or partially withdrawing from the plan as the result of downsizing, job transfers or otherwise is referred to as "withdrawal liability." Certain of the plans have filed proofs of claim in IBC's bankruptcy case alleging that partial withdrawals have already occurred, although IBC disputes these claims. IBC is conducting the Southern California consolidation in a manner that it believes will not result in withdrawal liability to the relevant multi-employer pension plans. Nevertheless, due to the complex nature of such a determination and the inability to obtain current and complete relevant information, no assurance can be given that withdrawal claims based upon IBC's prior action or resulting from this consolidation or future consolidations will not result in significant liabilities for IBC. Should a partial or complete withdrawal be found to have occurred, the amount of any partial or complete withdrawal liability arising from such under-funded multi-employer pension plans to which IBC contributes would likely be material and could adversely affect our financial condition and, as a general unsecured claim in our current bankruptcy proceedings, any potential recovery to our constituencies. -Interstate Bakeries