Tasty Baking's Liquidity Drying Up; Landlord Defers Rent for One Month

"Tasty Baking Co. in Philadelphia reported that preliminary financial data available for its fourth quarter ended Dec. 25, 2010, indicates that as a result of certain production difficulties during the optimization of its new Philadelphia bakery the company did not achieve the expected operational cash savings from this bakery during the fourth quarter.

Further, due to the lower than expected cost savings and other factors, including the impact of the recent bankruptcy filing by The Great Atlantic & Pacific Tea Company Inc. (A&P) and the sharp rise in commodity costs, the company is currently experiencing extremely tight liquidity.

"As of Nov. 1, 2010, our expectation was that a run rate of $13 million in annualized pre-tax cash savings, net of facility leases but before debt service, would be achieved by the end of the fourth quarter of 2010," said Charles P. Pizzi, president and CEO of the snack food company. "Due to unanticipated operational challenges, the run-rate savings at the end of the fourth quarter of 2010 is now expected to be $10 million."

In response to these circumstances, the company is actively pursuing two parallel processes.

First, the company has entered into discussions with its bank group led by Citizens Bank to explore various alternatives to address its current liquidity needs, including increasing the amount of funds available under the company's bank line of credit, as well as addressing the current and future covenant requirements under the company's credit agreement.

While discussions are ongoing, the bank group has agreed to defer until the end of this week all principal payments and credit facility reductions. In addition, the lenders for the company's loans from the PIDC Local Development Corp. and the Machinery and Equipment Loan Fund of the Department of Community and Economic Development of Pennsylvania, along with the landlords for the company's leases at the new bakery and its office headquarters in Philadelphia, have also agreed to defer until Jan. 31, 2011, certain payments due under their loans and leases.

Second, the company has retained Janney Montgomery Scott LLC as its financial advisor to assist the company in its evaluation of various possible financial and strategic options including refinancing the company's long-term debt due in September 2012, raising additional capital, a potential combination with another company as part of the consolidation occurring in the baked goods industry or a potential sale of the company.

At this time, there can be no assurance that the bank group will increase the line of credit or make any changes to current or future covenant requirements or that any transactions will occur or, if undertaken, their terms or timing.

During the process, the company will continue to operate its two bakeries and produce, distribute and sell Tastykake products to its customers and consumers.

"While this has been a challenging period for us operationally, we remain focused on growing the business," Pizzi said. "To that end we continue to partner with new grocery and convenience store customers within our core markets, increase penetration with key customers, and launch new products into the marketplace. Finally, despite the challenges we have faced, we have continued to outpace the category and grow our overall market share."