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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT of NEW YORK ------X : in Re : Chapter 11 : Hostess Brands, Inc., Et Al.,1 : Case No

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT of NEW YORK ------X : in Re : Chapter 11 : Hostess Brands, Inc., Et Al.,1 : Case No 12-22052-rdd Doc 15 Filed 01/11/12 Entered 01/11/12 03:42:43 Main Document Pg 1 of 86 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------x : In re : Chapter 11 : Hostess Brands, Inc., et al.,1 : Case No. 12-_____ (___) : Debtors. : (Jointly Administered) : ---------------------------------------------------------------x APPLICATION OF DEBTORS AND DEBTORS IN POSSESSION, PURSUANT TO SECTIONS 327(a) AND 329(a) OF THE BANKRUPTCY CODE, BANKRUPTCY RULES 2014(a) AND 2016(b) AND LOCAL BANKRUPTCY RULES 2014-1 AND 2016-1, FOR AN ORDER AUTHORIZING THEM TO RETAIN AND EMPLOY JONES DAY AS COUNSEL, NUNC PRO TUNC AS OF THE PETITION DATE TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: Hostess Brands, Inc. and its five domestic direct and indirect subsidiaries, as debtors and debtors in possession (collectively, "Hostess" or the "Debtors"), respectfully represent as follows: Background 1. On the date hereof (the "Petition Date"), the Debtors commenced their reorganization cases by filing voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). By a motion filed on the Petition Date, the Debtors have requested that their chapter 11 cases be consolidated for procedural purposes only and administered jointly. 1 The Debtors are the following six entities (the last four digits of their respective taxpayer identification numbers follow in parentheses): Hostess Brands, Inc. (0322), IBC Sales Corporation (3634), IBC Services, LLC (3639), IBC Trucking, LLC (8328), Interstate Brands Corporation (6705) and MCF Legacy, Inc. (0599). NYI-4357827v7 12-22052-rdd Doc 15 Filed 01/11/12 Entered 01/11/12 03:42:43 Main Document Pg 2 of 86 2. The Debtors are authorized to continue to operate their business and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 3. Hostess Brands, Inc. is a Delaware corporation. Hostess Brands, Inc. is the direct or indirect parent of the other Debtors, each of which is wholly-owned by Hostess Brands, Inc. or one of its Debtor subsidiaries. The Debtors maintain their corporate headquarters in Irving, Texas. Debtor IBC Sales Corporation owns principal real property assets in Elmsford, New York. 4. Founded in 1930, Hostess is one of the largest wholesale bakers and distributors of bread and snack cakes in the United States. Today, Hostess sells an array of popular products under new and iconic brands such as Butternut®, Ding Dongs®, Dolly Madison®, Drake's®, Home Pride®, Ho Hos®, Hostess®, Merita®, Nature's Pride®, Twinkies® and Wonder®. The Debtors operate 36 bakeries, 565 distribution centers, approximately 5,500 delivery routes and 570 bakery outlet stores throughout the United States. 5. The Debtors operate in a mature industry with high levels of competition and related pricing pressures, thin operating margins and competitors with more sophisticated technology and significant cost advantages. Over the past several decades and continuing to the present, the industry has experienced significant consolidation. As a result of this consolidation, the Debtors' primary national and large regional competitors are, at once, expanding their market reach and consolidating operations through acquisitions and other means, thus widening their cost advantages. Importantly, the Debtors' competitors employ work forces that are not unionized or only partially unionized, which allow them to operate with significantly less burdensome operating restrictions and overall cost structures. As a direct result of their -2- NYI-4357827v7 12-22052-rdd Doc 15 Filed 01/11/12 Entered 01/11/12 03:42:43 Main Document Pg 3 of 86 significant and long-standing unionized workforce, the Debtors have significant legacy costs, primarily in the form of pension and medical benefits obligations, that their competitors do not share. Whether the Debtors can achieve long-term viability depends directly and substantially on the Debtors' ability to achieve dramatic change to their labor agreements, with a corresponding material reduction in their cost structure and legacy pension and medical obligations, and a restructuring of their capital structure. That is the purpose and the focus of these chapter 11 cases. 6. The Debtors' production and distribution systems are heavily dependent on labor-intensive processes involving, among other things, complicated and extensive local route delivery systems that service nearly all of the continental United States and a national footprint of 36 bakeries. To staff this labor-intensive network, the Debtors employ approximately 19,000 people, of which 83% are members of unions who are subject to 372 collective bargaining agreements. The Debtors' unionized employees belong to 12 separate unions, but the overwhelming majority of the Debtors' unionized workforce are members of either the International Brotherhood of Teamsters (the "IBT") or the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union (the "BCT"). 7. Because their workforce is heavily unionized, the Debtors also participate in 40 multiemployer pension plans, which, by law, exist only where one or more employers each contribute to a pension plan pursuant to one or more collectively-bargained agreements. The Debtors' cash contribution obligations to these plans go beyond amounts attributable to the retirement benefits for the Debtors' own workforce; they also encompass the contributions attributable to the retirement benefits of the workforces of other employers who have ceased to exist or have otherwise withdrawn from the plans. By statute, the plans are structured to place -3- NYI-4357827v7 12-22052-rdd Doc 15 Filed 01/11/12 Entered 01/11/12 03:42:43 Main Document Pg 4 of 86 the financial burdens of all of a plan's retirees upon those remaining companies that have active union employees. Over the last several decades, the number of companies and the active employee base supporting these pension plans have shrunk significantly, thus increasing the burden on the companies, such as Hostess, that remain. 8. The Debtors' management team, which as currently comprised has only been in place for slightly more than a year, has taken a fresh look at, and has spent considerable time and energy analyzing, the Debtors' operations and cost structure. As a result of that review, management has developed a business plan that it believes will allow the Debtors to regain long- term viability. The business plan is premised upon achieving a competitive cost structure, including relief from uncompetitive pension and medical benefit legacy costs, re-emphasizing and funding the marketing of the Debtors' brands, streamlining and modernizing the distribution of product and obtaining relief from other restrictive work rules that limit the Debtors' flexibility and competitiveness. 9. In particular, the Debtors believe that their successful reorganization must encompass systemic, dramatic change, including: a. withdrawing completely from multiemployer pension plans to achieve relief from the crippling costs of these plans that are, in large part, a result of the required funding of retirees whose former employers no longer contribute to the plans; b. addressing the Debtors' legacy health and welfare costs to achieve a substantial reduction in the cost of providing benefits to bring such costs in line with current competitive market costs; c. modifying the Debtors' existing collective bargaining agreements to relax work rules and obtain other relief necessary to both bring the Debtors' labor costs in line with that of their competitors and provide the operating flexibility necessary to respond to changing customer requirements for delivery and service; d. securing new capital investment to modernize and automate the Debtors' production and distribution operations; and -4- NYI-4357827v7 12-22052-rdd Doc 15 Filed 01/11/12 Entered 01/11/12 03:42:43 Main Document Pg 5 of 86 e. restructuring the Debtors' capital structure to significantly reduce debt and related expense. 10. This company has been down this road before. Hostess (then known as Interstate Bakeries Corporation ("IBC")) sought bankruptcy relief in 2004 (the "IBC Bankruptcy"). The complex and sometimes highly contentious IBC Bankruptcy lasted more than four and a half years and achieved only limited, incremental change to the company's cost structure leaving the multiemployer pension benefits and costs untouched, while allowing the company to emerge as a highly levered entity. As a result, the Debtors currently have four separate tranches of long-term secured debt, under which they have aggregate outstanding liabilities of approximately $860 million. The Debtors exited from the IBC Bankruptcy on February 3, 2009 as a privately-held company, whose largest equityholders are IBC Investors I, LLC, IBC Investors II, LLC and IBC Investors III, LLC (collectively, the "Sponsor Funds") and a subset of their then existing lenders.2 11. Adjusting for one-off receipts, such as tax refunds and the proceeds from asset sales, the Debtors have consumed approaching $250 million in cash since exiting the IBC Bankruptcy in 2009. 12. Accordingly, after developing their business plan, the Debtors initiated negotiations with their lenders and unions to effect the transformational changes required for their business. At the same time, the Debtors required additional liquidity to allow these discussions and negotiations to occur. Accordingly, the Debtors began active
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