Even bankruptcy funding is apparently falling victim to the credit crisis. Case in point: Interstate Bakeries Corp., which filed for Chapter 11 protection in September 2004.
The maker of Wonder Bread and Twinkies said Wednesday that the amount available under its DIP (Debtor in Possession) funding from JPMorgan Chase and other financial institutions has been reduced by $10 million. The funds will be restored after the bankruptcy court approves a disclosure statement filed by Interstate regarding its plan of reorganization.
A new covenant under the DIP agreement requires the company to provide a revised plan by December 1 that details how it intends to maximize the value of its assets, including the sale of the company or its assets. There was also a change in the agreement’s cash restructuring covenant, which now allows Interstate to incur cash restructuring charges of as much as $23 million.
In July 2004, Interstate announced that its audit committee had retained the law firm Skadden, Arps, Slate, Meagher & Flom to investigate how the company sets its reserves for workers’ compensation and other purposes.
Later that month, Interstate announced that the Securities and Exchange Commission was conducting an informal inquiry. The audit committee eventually decided that a $40 million charge should be reflected in its second fiscal quarter of 2004.
In September 2004, after missing an extended deadline to file its annual report, Interstate filed for Chapter 11 to give itself more time to complete its restructuring. Meanwhile, chairman and CEO James Elsesser resigned.
In early 2005, the SEC upgraded its informal probe to a formal order of investigation. The company said the investigation appears to concern matters related to the company’s manner for setting its reserves, especially those for workers’ compensation.
In December 2006, Paul Yarick, Interstate’s former finance chief, settled civil charges with the SEC that he overstated earnings due to the way he accounted for workers’ compensation expenses. The company settled the same charges with the regulator.
Yarick agreed to a civil penalty of $50,000 and to be barred from serving as an officer and director for five years. The company settled the commission’s cease-and-desist order without admitting or denying the SEC’s findings.
The SEC claimed that as a result of Yarick’s conduct, Interstate failed to account for its workers’ compensation reserve in accordance with generally accepted accounting principles. The complaint further alleged that Yarick’s conduct led the company to file financial statements for the second and third fiscal quarters of 2004 that understated reserves by at least $30 million. Consequently, Interstate materially overstated both pre-tax income in its quarterly report for the period ended November 15, 2003, and cumulative fiscal third quarter pre-tax income in its quarterly report for the period ended March 6, 2004.