12-22052-rdd Doc 3 Filed 01/11/12 Entered 01/11/12 02:55:09 Main Document Pg 1 of 163 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 AFFIDAVIT OF BRIAN J. DRISCOLL IN SUPPORT OF FIRST DAY MOTIONS AND IN ACCORDANCE WITH LOCAL BANKRUPTCY RULE 1007-2 STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) Brian J. Driscoll, being duly sworn, deposes and says: 1. I am the Chief Executive Officer and a member of the board of directors of Hostess Brands, Inc., one of the debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, “Hostess” or the “Debtors”). I have held these positions at Hostess Brands, Inc. since June 2010. Additionally, I am the Chief Executive Officer, President and a member of the boards of directors of Debtors Interstate Brands Corporation and IBC Sales Corporation. I am also the President and a member of the boards of managers of Debtors IBC Trucking, LLC and IBC Services, LLC. Finally, I am the Chairman of the board of directors of MCF Legacy, Inc. As part of my employment and service in all of these capacities, I have 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). CLI-1887203v18 12-22052-rdd Doc 3 Filed 01/11/12 Entered 01/11/12 02:55:09 Main Document Pg 2 of 163 become familiar with the history, day to day operations, businesses and financial affairs of the Debtors. Situational Overview 2. 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. 3. 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. 4. 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 CLI- 1887203v18 2 12-22052-rdd Doc 3 Filed 01/11/12 Entered 01/11/12 02:55:09 Main Document Pg 3 of 163 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. 5. 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 (nearly 92%) of the Debtors' unionized workforce are members of the International Brotherhood of Teamsters (the "IBT") or the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union (the "BCT"). 6. 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 CLI- 1887203v18 3 12-22052-rdd Doc 3 Filed 01/11/12 Entered 01/11/12 02:55:09 Main Document Pg 4 of 163 the financial burdens of all of the 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. 7. Since I joined the Debtors, the management team has taken a fresh look at, and has spent considerable time and energy analyzing, the Debtors' operations, cost structure and capital 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 company's flexibility and competitiveness. 8. 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 CLI- 1887203v18 4 12-22052-rdd Doc 3 Filed 01/11/12 Entered 01/11/12 02:55:09 Main Document Pg 5 of 163 e. restructuring the Debtors' capital structure to significantly reduce debt and related expense. 9. Hostess Brands, Inc. is privately held. Its most significant equity holders are IBC Investors I, LLC, IBC Investors II, LLC and IBC Investors III, LLC (collectively, the “Sponsor Funds”).2 The Debtors have four tiers of secured debt aggregating approximately $860 million and are subject to substantial contingent withdrawal liability on account of their continuing participation in multiemployer pension plans. The ownership and debt structure of Hostess were put in place upon the emergence of its predecessor, Interstate Bakeries Corporation ("IBC") from chapter 11 (the "IBC Bankruptcy") in 2009, while their union-imposed multiemployer pension obligations were left unimpaired and intact through the IBC Bankruptcy. 10. To effect the transformational changes required for their businesses, the Debtors must negotiate with their lenders, unions and the trustees of the multiemployer pension plans. The Debtors began such discussions prior to filing these cases, and in fact bargained extensively with the IBT and the BCT pre-filing. However, liquidity pressures have necessitated filing at this time. Prior to filing, the Debtors approached several parties in attempts to gain sufficient liquidity to provide additional time for out-of-court negotiations to continue. The only additional liquidity that the Debtors could obtain was in-court financing. Accordingly, the Debtors have filed these chapter 11 cases to conserve their remaining cash, access the additional funding required to achieve their operational and financial transformation and