**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM 10-Q**

** **

**Quarterly Report Under Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**(MarkOne)**

|                                                                                                                                                                                    |   |                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                              |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                                                                    |   |                                                                                          |
| **For  the quarterly period ended March 8, 2003**                                                                                                                                       |
|                                                                                                                                                                                    |   |                                                                                          |
| **OR**                                                                                                                                                                                  |
|                                                                                                                                                                                    |   |                                                                                          |
| **o**                                                                                                                                                                                   |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                    |   |                                                                                          |
| **For  the transition period from              to            ** |

** **

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** **

| **Commission  File Number 1-11165** |
|-------------------------------------|

** **

**INTERSTATE BAKERIES CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                                                          |   |   |   | **43-1470322**                        |
|-------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                                      |   |   |   | (I.R.S. Employer  Identification No.) |
|                                                                                                  |   |   |   |                                  |
| **12  East Armour Boulevard, Kansas City, Missouri**                                                  |   |   |   | **64111**                             |
| (Address of  principal executive offices)                                                             |   |   |   | (Zip Code)                            |
|                                                                                                  |   |   |   |                                  |
| (Registrant’s telephone  number, including area code)     **(816) 502-4000** |
|                                                                                                  |   |   |   |                                  |
|                                                                                                  |   |   |   |                                  |
| (Former name,  former address and former fiscal year, if changed since last report.)                  |
|                                                                                                       |        |        |        |                                       |  |  |

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

 

| Yes   ý | No   o |
|-----------------------------|-----------------------|

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

| Yes   ý | No   o |
|-----------------------------|-----------------------|

 

There were 44,804,774shares of common stock, $.01 par value per share, outstanding on April 14,2003.

 

 

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INTERSTATEBAKERIES CORPORATION

FORM 10-Q

QUARTER ENDEDMARCH 8, 2003

 

CONTENTS

 
| **Description**                             |                                                                                        |
|---------------------------------------------|---------------------------------------------------------------------------------------------|
|                                        |                                                                                        |
| PART I - FINANCIAL  INFORMATION (UNAUDITED) |
|                                        |                                                                                        |
|                                        |                                                                                        |
|                                        | Consolidated Balance Sheets                                                                 |
|                                        |                                                                                        |
|                                        | Consolidated  Statements of Operations                                                      |
|                                        |                                                                                        |
|                                        | Consolidated  Statements of Cash Flows                                                      |
|                                        |                                                                                        |
|                                        | Notes to  Consolidated Financial Statements                                                 |
|                                        |                                                                                        |
|                                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                        |                                                                                        |
|                                        | Quantitative and Qualitative Disclosures  About Market Risk                                 |
|                                        |                                                                                        |
|                                        | Controls  and Procedures                                                                    |
|                                        |                                                                                        |
|                                        | Forward-Looking Statements                                                                  |
|                                        |                                                                                        |
| PART II - OTHER INFORMATION                 |
|                                        |                                                                                        |
|                                        | Legal  Proceedings                                                                          |
|                                        |                                                                                        |
|                                        | Exhibits and Reports  on Form 8-K                                                           |
|                                        |                                                                                        |
|                                        | Signatures                                                                                  |
|                                        |                                                                                        |
|                                        | Certifications                                                                              |
|                                             |                                                                                             |  |

 

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INTERSTATEBAKERIES CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 
|                                                                                                                            |   | **March 8,  2003**  |      | **June 1,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|-------------------|--------|
|                                                                                                                            |   | **(In  thousands)** |      |
| Assets                                                                                                                          |   |                |      |              |   |
| Current  assets:                                                                                                                |   |                |      |              |   |
| Accounts  receivable, less allowance for doubtful accounts   of $4,384,000 ($4,200,000 at June 1)                               |   | $                   | 184,540   |              | $      | 197,083 |   |
| Inventories                                                                                                                     |   | 82,045              |      | 80,139            |   |
| Other  current assets                                                                                                           |   | 78,887              |      | 67,610            |   |
| Total  current assets                                                                                                           |   | 345,472             |      | 344,832           |   |
|                                                                                                                            |   |                |      |              |   |
| Property  and equipment:                                                                                                        |   |                |      |              |   |
| Land  and buildings                                                                                                             |   | 451,179             |      | 426,322           |   |
| Machinery  and equipment                                                                                                        |   | 1,099,190           |      | 1,051,861         |   |
|                                                                                                                            |   |                |      |              |   |
|                                                                                                                            |   | 1,550,369           |      | 1,478,183         |   |
| Less  accumulated depreciation                                                                                                  |   | (690,414            | )         | (633,178          | )      |
| Net  property and equipment                                                                                                     |   | 859,955             |      | 845,005           |   |
| Goodwill                                                                                                                        |   | 215,346             |      | 215,346           |   |
| Intangibles                                                                                                                     |   | 192,186             |      | 189,059           |   |
| Other  assets                                                                                                                   |   | 7,461               |      | 8,700             |   |
|                                                                                                                            |   | $                   | 1,620,420 |              | $      | 1,602,942 |   |
|                                                                                                                            |   |                |      |              |   |
| Liabilities  and Stockholders’ Equity                                                                                      |   |                |      |              |   |
| Current  liabilities:                                                                                                           |   |                |      |              |   |
| Long-term  debt payable within one year                                                                                         |   | $                   | 51,328    |              | $      | 39,500 |   |
| Accounts  payable                                                                                                               |   | 111,607             |      | 126,348           |   |
| Accrued  expenses                                                                                                               |   | 253,106             |      | 220,541           |   |
| Total  current liabilities                                                                                                      |   | 416,041             |      | 386,389           |   |
|                                                                                                                            |   |                |      |              |   |
| Long-term  debt                                                                                                                 |   | 535,228             |      | 581,438           |   |
| Other  liabilities                                                                                                              |   | 185,428             |      | 186,746           |   |
| Deferred  income taxes                                                                                                          |   | 144,803             |      | 147,139           |   |
| Total  long-term liabilities                                                                                                    |   | 865,459             |      | 915,323           |   |
|                                                                                                                            |   |                |      |              |   |
| Stockholders’  equity:                                                                                                     |   |                |      |              |   |
| Preferred  stock, par value $.01 per share;  authorized - 1,000,000 shares; issued - none                                       |   | —              |      | —            |   |
| Common  stock, par value $.01 per share;   authorized - 120,000,000 shares; issued -   81,579,000 shares (80,684,000 at June 1) |   | 816                 |      | 807               |   |
| Additional  paid-in capital                                                                                                     |   | 586,836             |      | 568,315           |   |
| Retained  earnings                                                                                                              |   | 451,093             |      | 428,434           |   |
| Treasury  stock, at cost - 36,775,000 shares  (36,858,000 at June 1)                                                            |   | (689,858            | )         | (691,369          | )      |
| Accumulated  other comprehensive loss                                                                                           |   | (9,967              | )         | (4,957            | )      |
| Total  stockholders’ equity                                                                                                |   | 338,920             |      | 301,230           |   |
|                                                                                                                            |   | $                   | 1,620,420 |              | $      | 1,602,942 |   |

 

See accompanyingnotes (unaudited).

 

1

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INTERSTATEBAKERIES CORPORATION

CONSOLIDATED STATEMENTSOF OPERATIONS

(UNAUDITED)

 

 
|                                           |   | **Sixteen  Weeks Ended**                   |      | **Forty  Weeks Ended** |   |
|------------------------------------------------|--------|--------------------------------------------|-----------|------------------------|--------|
|                                           |   | **March 8,  2003**                         |      | **March 9,  2002**     |   | **March 8,  2003** |   | **March 9,  2002** |   |
|                                           |   | **(In  thousands, except per share data)** |      |
|                                           |   |                                       |      |                   |   |   |   |   |   |
| Net  sales                                     |   | $                                          | 1,045,574 |                   | $      | 1,047,723 |   | $ | 2,707,761 |   | $ | 2,698,837 |   |
|                                           |   |                                       |      |                   |   |   |   |   |   |
| Cost  of products sold                         |   | 522,543                                    |      | 501,228                |   | 1,320,992 |   | 1,283,129 |   |
| Selling,  delivery and administrative expenses |   | 487,489                                    |      | 480,097                |   | 1,223,072 |   | 1,212,616 |   |
| Other  charges                                 |   | 5,000                                      |      | —                 |   | 10,041 |   | 25,700 |   |
| Depreciation  and amortization                 |   | 29,098                                     |      | 29,292                 |   | 72,821 |   | 73,394 |   |
|                                           |   | 1,044,130                                  |      | 1,010,617              |   | 2,626,926 |   | 2,594,839 |   |
| Operating  income                              |   | 1,444                                      |      | 37,106                 |   | 80,835 |   | 103,998 |   |
|                                           |   |                                       |      |                   |   |   |   |   |   |
| Other  income                                  |   | (32                                        | )         | (83                    | )      | (78 | ) | (333 | ) |
| Interest  expense                              |   | 12,172                                     |      | 10,707                 |   | 30,172 |   | 28,724 |   |
|                                           |   | 12,140                                     |      | 10,624                 |   | 30,094 |   | 28,391 |   |
|                                           |   |                                       |      |                   |   |   |   |   |   |
| Income(loss)  before income taxes              |   | (10,696                                    | )         | 26,482                 |   | 50,741 |   | 75,607 |   |
| Provision  for income taxes                    |   | (3,947                                     | )         | 9,745                  |   | 18,723 |   | 27,823 |   |
| Net  income(loss)                              |   | $                                          | (6,749    | )                      | $      | 16,737 |   | $ | 32,018 |   | $ | 47,784 |   |
|                                           |   |                                       |      |                   |   |   |   |   |   |
| Earnings(loss)  per share:                     |   |                                       |      |                   |   |   |   |   |   |
| Basic                                          |   | $                                          | (.15      | )                      | $      | .33 |   | $ | .72 |   | $ | .94 |   |
|                                           |   |                                       |      |                   |   |   |   |   |   |
| Diluted                                        |   | $                                          | (.15      | )                      | $      | .32 |   | $ | .71 |   | $ | .92 |   |

 

See accompanyingnotes (unaudited).

 

2

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INTERSTATEBAKERIES CORPORATION

CONSOLIDATED STATEMENTSOF CASH FLOWS

(UNAUDITED)
|                                                                    |   | **Forty  Weeks Ended** |   |
|-------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                    |   | **March 8,  2003**     |   | **March 9,  2002** |   |
|                                                                    |   | **(In  thousands)**    |   |
| Cash  flows from operating activities:                                  |   |                   |   |   |   |
| Net  income                                                             |   | $                      | 32,018 |   | $ | 47,784 |   |
| Depreciation  and amortization                                          |   | 72,821                 |   | 73,394 |   |
| Change  in other assets-deferred financing fees                         |   | 1,326                  |   | 2,953 |   |
| Non-cash  common stock award                                            |   | 3,591                  |   | — |   |
| Loss  on sale/write-down of property and equipment                      |   | 1,633                  |   | 8,322 |   |
| Change  in operating assets and liabilities:                            |   |                   |   |   |   |
| Accounts  receivable                                                    |   | 12,543                 |   | 6,136 |   |
| Inventories                                                             |   | (1,906                 | )      | (4,571 | ) |
| Other  current assets                                                   |   | (11,277                | )      | (2,870 | ) |
| Accounts  payable and accrued expenses                                  |   | 17,199                 |   | 22,004 |   |
| Long-term  portion of self-insurance reserves                           |   | (402                   | )      | (556 | ) |
| Other                                                                   |   | (684                   | )      | 191 |   |
| Cash  from operating activities                                         |   | 126,862                |   | 152,787 |   |
|                                                                    |   |                   |   |   |   |
| Cash  flows from investing activities:                                  |   |                   |   |   |   |
| Additions  to property and equipment                                    |   | (80,595                | )      | (53,987 | ) |
| Sale  of assets                                                         |   | 3,384                  |   | 6,889 |   |
| Purchase  of intangibles                                                |   | (4,522                 | )      | (283 | ) |
| Other                                                                   |   | 331                    |   | (51 | ) |
| Cash  from investing activities                                         |   | (81,402                | )      | (47,432 | ) |
|                                                                    |   |                   |   |   |   |
| Cash  flows from financing activities:                                  |   |                   |   |   |   |
| Addition  to long-term debt                                             |   | —                 |   | 555,000 |   |
| Reduction  of long-term debt                                            |   | (46,070                | )      | (649,375 | ) |
| Common  stock dividends paid                                            |   | (9,359                 | )      | (10,869 | ) |
| Stock  option exercise proceeds                                         |   | 10,299                 |   | 7,541 |   |
| Acquisition  of treasury stock                                          |   | (188                   | )      | (285 | ) |
| Debt  issuance costs                                                    |   | (142                   | )      | (7,367 | ) |
| Cash  from financing activities                                         |   | (45,460                | )      | (105,355 | ) |
|                                                                    |   |                   |   |   |   |
| Change  in cash and cash equivalents                                    |   | —                 |   | — |   |
|                                                                    |   |                   |   |   |   |
| Cash  and cash equivalents:                                             |   |                   |   |   |   |
| Beginning  of period                                                    |   | —                 |   | — |   |
|                                                                    |   |                   |   |   |   |
| End  of period                                                          |   | $                      | — |   | $ | — |   |
|                                                                    |   |                   |   |   |   |
| Cash  payments made:                                                    |   |                   |   |   |   |
| Interest                                                                |   | $                      | 27,442 |   | $ | 23,374 |   |
| Income  taxes                                                           |   | 25,349                 |   | 34,049 |   |
|                                                                    |   |                   |   |   |   |
| Non-cash  investing and financing activities excluded above:            |   |                   |   |   |   |
| Accrued  deferred share award liability settled through equity issuance |   | $                      | 7,061  |   | $ | — |   |
| Equipment  purchases financed with capital lease obligations            |   | 11,688                 |   | — |   |

 

See accompanyingnotes (unaudited).

 

3

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INTERSTATEBAKERIES CORPORATION

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(UNAUDITED)

 

1.             Accounting Policies and Basis of Presentation

 

The accompanyingunaudited consolidated financial statements should be read in conjunction withour fiscal 2002 consolidated financial statements contained in our AnnualReport on Form 10-K as filed with the Securities and Exchange Commission (SEC)on August 23, 2002.  Any references,unless otherwise noted, to “us”, “we” and “our” refer to Interstate BakeriesCorporation and its subsidiaries (IBC), taken as a whole.

 

These consolidatedfinancial statements include all adjustments, consisting only of normalrecurring accruals (except for the accruals for other charges discussed in Note5), which, in the opinion of management, are necessary for a fair presentationof financial position, results of operations and cash flows.  Results of operations for interim periodsare not necessarily indicative of results to be expected for a full year.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differfrom those estimates.

 

Certain reclassificationshave been made to our fiscal 2002 consolidated financial statements to conformto the fiscal 2003 presentation.

 

2.             Inventories

 

The components ofinventories are as follows:

 
|                       |   | **March 8,  2003**  |   | **June 1,  2002** |   |
|----------------------------|--------|---------------------|--------|-------------------|--------|
|                       |   | **(In  thousands)** |   |
|                       |   |                |   |              |   |
| Ingredients  and packaging |   | $                   | 53,252 |              | $      | 51,444 |   |
| Finished  goods            |   | 23,536              |   | 23,595            |   |
| Other                      |   | 5,257               |   | 5,100             |   |
|                       |   | $                   | 82,045 |              | $      | 80,139 |   |

 

4

** **

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3.             Income Taxes

 

The reconciliation of theprovision for income taxes to the statutory federal rate is as follows:

 
|                   |   | **Forty  Weeks Ended** |   |
|------------------------|--------|------------------------|--------|
|                   |   | **March 8,  2003**     |   | **March 9,  2002** |   |
|                   |   |                   |   |   |   |
| Statutory  federal tax |   | 35.0                   | %      | 35.0 | % |
| State  income tax      |   | 2.7                    |   | 2.0 |   |
| Other                  |   | (.8                    | )      | (.2 | ) |
|                   |   | 36.9                   | %      | 36.8 | % |

 

 

4.             Earnings Per Share

 

Following is areconciliation between basic and diluted weighted average shares outstandingused in our earnings per share computations:

 
|                                                 |   | **Sixteen  Weeks Ended** |   | **Forty  Weeks Ended** |   |
|------------------------------------------------------|--------|--------------------------|--------|------------------------|--------|
|                                                 |   | **March 8,  2003**       |   | **March 9,  2002**     |   | **March 8,  2003** |   | **March 9,  2002** |   |
|                                                 |   | **(In  thousands)**      |   |
| Basic  weighted average common shares outstanding    |   | 44,783                   |   | 50,896                 |   | 44,537 |   | 50,769 |   |
|                                                 |   |                     |   |                   |   |   |   |   |   |
| Effect  of dilutive stock compensation               |   | —                   |   | 1,300                  |   | 800 |   | 1,168 |   |
|                                                 |   |                     |   |                   |   |   |   |   |   |
| Dilutive  weighted average common shares outstanding |   | 44,783                   |   | 52,196                 |   | 45,337 |   | 51,937 |   |

 

Diluted weighted averagecommon shares outstanding exclude options on common stock and deferred sharesawarded of 6,621,000 and 2,867,000 for the third quarter of fiscal 2003 and2002, respectively, and 5,384,000 and 3,773,000 on a year-to-date basis forfiscal 2003 and 2002, respectively, because their effect would have beenantidilutive.  The third quarter offiscal 2003 does not have any effect of dilutive stock compensation because wereported a net loss.

 

5

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Dividends per commonshare were $.07 for the third quarter of fiscal 2003 and 2002, and $.21 percommon share for year-to-date fiscal 2003 and 2002.

 

On March 26, 2003, ourBoard of Directors declared a cash dividend of $.07 per common share.  The dividend will be paid on May 1, 2003 toshareholders of record as of April 15, 2003.

 

5.             Other Charges

 

Restructuringcharges.   During the third quarter of fiscal 2003, we incurredother charges (including severance, other exit costs and asset impairments)of  $5,000,000 related to closures offour bakeries and 62 thrift stores and restructurings of several otherbakeries. As part of various initiatives to reduce our manufacturing anddistribution cost structures, the planned opening of our new bakery inHenderson, Nevada, as well as improvements to other facilities is allowing usto close less efficient operations.  Theseverance charge is associated with the involuntary employee separation ofapproximately 475 employees.  As ofMarch 8, 2003, 129 employee separations had been completed.  We expect these closings and separations tobe completed by the second quarter of fiscal 2004.  The other exit costs relate to lease cancellations, as well ascharges for security, utilities and cleanup for a bakery that has been closedand is being readied for potential sale. Asset impairments primarily relate tothe write-down to fair value of machinery and equipment in the bakeries to beclosed.

 

The following tablesummarizes the restructuring charges incurred in the third quarter of fiscal2003, with the related liability included in accrued expenses in the unauditedconsolidated balance sheet:

 
|               |   | **Restructuring  Charge** |   | **Cash  Payment** |   | **Non-Cash  Adjustment** |   | **March 8,  2003  Liability Balance** |   |
|--------------------|--------|---------------------------|--------|-------------------|--------|--------------------------|--------|---------------------------------------|--------|
|               |   | **(In  thousands)**       |   |
| Severance  costs   |   | $                         | 2,509  |              | $      | —                   |   | $                                     | — |   | $ | 2,509 |   |
| Other  exit costs  |   | 291                       |   | 102               |   | —                   |   | 189                                   |   |
| Asset  impairments |   | 2,200                     |   | —            |   | 2,200                    |   | —                                |   |
| Total              |   | $                         | 5,000  |              | $      | 102                      |   | $                                     | 2,200  |   | $ | 2,698 |   |

 

Certain other exit costs,principally maintenance and cleanup related to closed facilities, are beingexpensed as incurred and we expect to incur such costs related to theserestructurings in future quarters. In addition, as we continue to evaluateopportunities to reduce our manufacturing and distribution cost structures, wemay incur additional restructuring charges related to the closing of otherbakeries, distribution facilities and thrift stores, including the relocationof some bakery equipment to more efficient facilities.

 

During the second quarterof fiscal 2003, we incurred restructuring charges of $1,450,000 related to cashseverance costs in conjunction with the closing of a bakery.  This bakery has been closed and all 164separations have been completed as of the fourth quarter with $977,000 of theseverance costs paid in the third quarter of fiscal 2003.  The remaining liability of $473,000 isincluded in accrued expenses in the March 8, 2003 unaudited consolidatedbalance sheet.

 

Former CEO fully vestedcommon stock award.   Included in second quarter other chargeswas an October 1, 2002 fully vested common stock award of $3,591,000 toour former Chief Executive Officer.

 

Fiscal 2002activities.   During the first quarter of fiscal 2002, weincurred other charges of $25,700,000, representing costs related to theclosure of a bakery, as well as settlement of an employment discriminationlawsuit.  The bakery was closed and allseparations were completed during fiscal 2002. We paid approximately 80% of the settlement amount in fiscal 2002,shortly following

 

6

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the date of thesettlement agreement, and paid the remaining 20% of the settlement amount infiscal 2003.

 

6.             Derivative Instruments

 

We use derivativeinstruments, principally commodity derivatives and interest rate swapagreements, to manage certain commodity price and interest rate risks.  All financial instruments are used solelyfor hedging purposes and are not issued or held for speculative reasons.

 

We utilize commodityhedging derivatives, including exchange traded futures and options on wheat,corn, soybean oil and certain fuels, to reduce our exposure to commodity pricemovements for future ingredient and energy needs.  The terms of such instruments, and the hedging transactions towhich they relate, generally do not exceed one year.

 

The majority of ourderivative instruments are designated and qualify as cash flow hedges and weapply hedge accounting as allowed by Statement of Financial AccountingStandards, or SFAS, No. 133. Gains or losses on cash flow hedges are recordedto other comprehensive loss, or OCI, to the extent they are effective, and arereclassified to earnings in the period in which the hedged forecastedtransaction impacts earnings. For hedges of future ingredient needs, earningsare impacted when our products are produced. However, we from time to timeenter into commodity derivatives which economically hedge certain of our riskseven though the criteria for hedge accounting are not met or we do not elect toapply hedge accounting.  When suchcriteria are not met, any impact on earnings for these hedges is recorded inthe consolidated statements of operations on the cost of products sold line.

 

We enter into interestrate swap agreements with major banks and institutional lenders to manage theinterest rate risk associated with our variable rate debt.  During the first quarter of fiscal 2003, weamended interest rate swap agreements with a notional amount of $170,000,000,extending the terms by one year and reducing the fixed interest rates.  Neither party was required to make a cashpayment to effect these amendments.  Atthe date of the amendments, these instruments had a loss, net of income taxes,of $2,817,000 accumulated in other comprehensive loss, which will bereclassified into interest expense over the remaining term of the originalhedged period.  This reclassificationwill be offset by the change in fair value of the new swap agreements over theterm of these agreements.  The fiscal2003 net-of-tax amounts reclassified into interest expense related to this itemwere $925,000 for the third quarter and $1,718,000 year-to-date.  The amended swap agreements have beenredesignated as cash flow hedges of variable rate debt.

 

Considering theseamendments and based upon current debt ratings, our current interest rate swapsfix interest rates on $440,000,000 from 4.97% to 7.66% with termination datesranging from April 2004 to August 2004. These swap agreements qualify for cash flow hedge accounting as definedby SFAS No. 133 with changes in fair value of the swap agreements recorded toOCI to the extent the hedge is effective on a quarterly basis.

 

At March 8, 2003, we hadaccumulated losses of $7,944,000, net of income taxes and amounts reclassifiedto earnings, related to interest rate swaps and recorded to OCI, withoffsetting entries to accrued expenses and other liabilities.

 

7

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The fair value of ourinterest rate swaps at March 8, 2003 was a loss of $9,662,000, net of incometaxes.  At March 8, 2003, we also hadaccumulated losses of $2,023,000, net of income taxes, related to commodityderivatives and recorded to OCI, with an offsetting entry to accrued expensefor the unrealized loss of $339,000.  Inaddition, at March 8, 2003, we had accumulated losses on commodity hedges thatdid not meet the criteria for hedge accounting or for which we did not elect toapply hedge accounting of $781,000, net of income taxes, that were recorded tocost of products sold and accrued expenses. We did not recognize any gain orloss in earnings resulting from hedge ineffectiveness. The fair value of allcommodity derivatives at March 8, 2003 was a loss of $1,120,000, net of incometaxes.

 

The changes to OCIrelated to hedging activities for the third quarter and the year-to-dateperiods of fiscal 2003 were as follows:

 

|                                                                     |   | **Sixteen  Weeks  Ended  March 8,  2003** |   | **Forty  Weeks  Ended  March 8,  2003** |   |
|--------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                                                     |   | **(In  thousands)**                       |   |
| Accumulated  OCI at June 1, 2002, net of income taxes of $2,974,000      |   | $                                         | — |                                    | $      | (4,957 | ) |
| Accumulated  OCI at November 16, 2002, net of income taxes of $4,705,000 |   | (7,775                                    | )      | —                                  |   |
| Losses  on interest rate swaps reclassified to interest expense          |   | 2,919                                     |   | 6,518                                   |   |
| Commodity  derivative losses reclassified to cost of products sold       |   | —                                    |   | 178                                     |   |
| Change  in fair value of cash flow hedges                                |   | (5,111                                    | )      | (11,706                                 | )      |
| Accumulated  OCI at March 8, 2003, net of income taxes of $6,032,000     |   | $                                         | (9,967 | )                                       | $      | (9,967 | ) |

 

The only item which iscurrently reflected in OCI is the effect of accounting for these derivativeinstruments.  Comprehensive loss for thethird quarter of fiscal 2003 was $8,941,000 and comprehensive income for thethird quarter of fiscal 2002 was $18,538,000, while year-to-date comprehensiveincome was $27,008,000 and $40,572,000 for fiscal 2003 and 2002, respectively.

 

Of these losses recordedin OCI at March 8, 2003, approximately $8,732,000, net of income taxes, isexpected to be reclassified to earnings during the next 12 months.

 

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7.             Goodwill and Other Intangibles

 

Included on ourconsolidated balance sheets as of March 8, 2003 and June 1, 2002 were thefollowing acquired intangible assets:

 
|                                                                                          |   | **March 8,  2003**          |    | **June 1,  2002**             |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------|---------|-------------------------------|--------|
|                                                                                          |   | **Gross  Carrying  Amount** |    | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                                                                                          |   | **(In  thousands)**         |    |
|                                                                                          |   |                        |    |                          |   |   |   |   |   |
| Goodwill                                                                                      |   | $                           | 215,346 |                          |   |   |   | $ | 215,346 |   |   |   |   |
| Intangibles  with  indefinite lives  (principally trademarks  and trade names) |   | $                           | 180,316 |                          |   |   |   | $ | 176,044 |   |   |   |   |
| Intangibles  with  finite lives                                                          |   | $                           | 19,787  |                          | $      | (7,917 | ) | $ | 19,812 |   | $ | (6,797 | ) |

 

Intangible amortizationfor the third quarter of fiscal 2003 and 2002 was $453,000 and $482,000,respectively, while year-to-date intangible amortization for fiscal 2003 and2002 was $1,120,000 and $1,214,000, respectively.  Of these amounts, $246,000 for the third quarter and $615,000year-to-date in both fiscal 2003 and 2002 were recorded as a reduction of netsales, with the remainder recorded to amortization expense in the consolidatedstatements of operations.  Intangibleamortization for fiscal 2003 through fiscal 2007 is estimated at $1,100,000 to$1,500,000 per year, of which approximately $800,000 per year will be recordedas a reduction of net sales.

 

8.             Capital Lease Obligations

 

During the second quarterof fiscal 2003, we recorded capital lease obligations of $11,688,000 incurredto finance the purchase of machinery and equipment.  The scheduled annual repayment of the capital lease obligationsremaining at March 8, 2003, which are included in long-term debt on theconsolidated balance sheets, amount to $589,000 in fiscal 2003, $2,446,000 infiscal 2004, $3,747,000 in fiscal 2005, $2,186,000 in fiscal 2006 and$1,213,000 in fiscal 2007.

 

9.             Deferred Share Award

 

During the second quarterof fiscal 2003, we granted the right to receive in the future up to 150,000shares of our common stock under the 1996 Stock Incentive Plan, with a weightedaverage fair value at the date of grant of

 

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$27.00 per share.  The deferred shares, which are accruingdividends in the form of additional shares, vest ratably after one, two andthree years of continued employment. Compensation expense related to this award was $414,000 for the third quarterof fiscal 2003 and $588,000 for year-to-date fiscal 2003.

 

10.           Litigation, Claims and Assessments

 

In February andMarch 2003, seven putative class actions were brought against us andcertain of our current or former officers and directors in the United StatesDistrict Court for the Western District of Missouri.  Most of the complaints were brought on behalf of putative classesof shareholders who purchased or sold IBC stock between September 17, 2002 andDecember 17, 2002.  One complaint,however, is brought on behalf of a putative class beginning in April 2002 andseveral complaints seek to include shareholders who purchased or sold stockthrough February 11, 2003.  Thecomplaints generally allege that certain of our press releases, SEC filings,and other public statements prior to a February 11, 2003 announcementreducing our guidance contained misrepresentations regarding our financialcondition.  The complaints furtherallege that certain officers and directors improperly sold IBC shares atartificially inflated prices during the class period.  The cases seek compensatory damages (including interest),disgorgement of allegedly improper gains from insider stock sales, costs andexpenses and any other relief deemed proper by the court.  We have not yet been required to fileanswers to the complaints.   Thelitigation is in its preliminary stages and the amount of potential loss, ifany, cannot reasonably be estimated. 

 

Our Board of Directorshas received a shareholder derivative demand requesting legal action by us inconnection with sales of IBC shares by certain current or former officers anddirectors.  The Board of Directors hasappointed a Special Review Committee to evaluate the demand and to report tothe Board.

 

The New York StockExchange also has notified us that its Market Trading Analysis Department isreviewing transactions in the common stock of IBC occurring prior to ourFebruary 11, 2003 reduction in guidance. We have responded to the Exchange’s requests for information and expectto cooperate fully in that inquiry.

 

In November 1996certain of our route sales representatives (“RSRs”) brought a class action onbehalf of RSRs in the State of Washington, alleging that we had failed to payrequired overtime wages under state law. The class in the case covers RSRs inthe State of Washington who worked for us during all or part of the generalperiod from November 1993 through the date of the settlement.  The plaintiffs seek unpaid wages, withinterest, and other relief deemed proper by the court.  During the quarter, we tentatively settledthis class action with the plaintiffs for approximately $6.1 million, subjectto notice to the class and final court approval.  A preliminary hearing regarding the settlement is scheduled forMay 2, 2003, at which the court is expected to put in place a schedule forcompleting notice and holding a final hearing on the merits of thesettlement.  We have establishedreserves that are expected to sufficiently cover the anticipated costs of thesettlement, if it is approved

 

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by the court.  The amount of potential loss, should thesettlement not receive court approval, cannot reasonably be estimated.  We also have negotiated and put into effecta new union contract with the RSRs in the State of Washington that we expect toaddress this issue.  We have asked theState of Washington’s Department of Industry and Labor to review and approvethe contract’s provision relating to overtime pay.

 

We are aware of two additionalwage and hour cases in New Jersey that have been brought under state law, oneof which has been brought on behalf of a putative class of RSRs.  We are also aware of an additional wage andhour case brought on behalf of a putative class of bakery productionsupervisors under federal law.  Thesecases are in their preliminary stages and we have not filed answers to thecomplaints.  We are evaluating thesecases and the amount of potential loss, if any, cannot reasonably beestimated.  No amount is currentlyreserved in the unaudited consolidated financial statements related to thesematters.

 

On July 17, 2002, wewere served with a state court complaint which is now pending in the UnitedStates District Court for the Northern District of Illinois, filed by oneemployee and one former employee. This complaint arises, in part, from ourremoval of insulation alleged to have contained asbestos at one of our bakeriesin January 1998. We have also been a defendant in other civil actions arisingout of the situation described above. These civil actions seek unspecifiedmonetary damages, funds for medical monitoring and, in one case, damages underthe Racketeer Influenced and Corrupt Organizations Act. In addition, in 1998the U.S. Department of Labor cited us for alleged violation of the OccupationalSafety and Health Act, and the office of the U.S. Attorney for the NorthernDistrict of Illinois in a joint investigation with Illinois officials beganinvestigating the possibility of criminal violations of the Clean Air Act.  The government closed the jointinvestigation without returning any indictments.  In addition, the State of Illinois filed a civil complaintagainst us alleging the insulation removal violated various provisions of theIllinois Environmental Protection Act. This case was voluntarily dismissed; however, the State has recentlysought to refile it pending settlement negotiations.  In none of the foregoing cases has any court or governmental bodymade any factual finding of liability or violation of environmentalregulations. Based upon our own investigation, including assistance from thirdparty consultants, we believe that all of these matters are without merit. Noamount is currently reserved in the unaudited consolidated financial statementsrelated to these matters.

 

We are currentlyundergoing a multi-state abandoned property examination. We have provided andwill continue to provide information requested by the states' representatives.No assessments related to this examination have been received at this point intime. We believe the ultimate outcome of this examination will not have amaterial adverse impact on our financial position or results of operations.

 

We are subject to variousother routine legal proceedings, environmental actions and matters in theordinary course of business, some of which may be covered in whole or in partby insurance. In management’s opinion, none of these other matters will have amaterial adverse effect on our financial

 

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position, but could bematerial to net income or cash flows for a particular quarter or annual period.

 

11.           Environmental Liabilities

 

To manage ourenvironmental related liabilities, we utilize our own employees and outsideenvironmental engineering experts.  Weestimate future costs for known environmental remediation requirements andaccrue for environmental related liabilities on an undiscounted basis when itis probable that we have incurred a liability and the related costs can bereasonably estimated.  The regulatoryand government management of these projects is extremely complex, which is oneof the primary factors that make it difficult to assess the cost of potentialand future remediation of contaminated sites. Adjustments to the liabilities are made when additional informationbecomes available that affects the estimated remediation costs.  There has been no additional accrualrecorded for environmental related liabilities in fiscal 2003.

 

12.           Subsequent Events

 

On April 21, 2003, weamended certain financial covenants on our senior credit facilities. While wewere in compliance with all covenant requirements, recent performance hadraised the possibility that these requirements might not be satisfied goingforward.  To avoid this possibility, weworked with our lenders to amend the credit facilities for futureflexibility.  As part of our covenants,we are required to satisfy certain ratios related to net worth, interestcoverage and leverage.  We have amendedthe interest coverage and leverage requirements for the next six quarters, orthrough the first quarter of fiscal 2005. After six quarters, the covenant requirements will revert to theoriginal agreements.  Pre-tax interestexpense for fiscal 2004 will increase approximately $2,700,000 as a result ofthis amendment.

 

On April 22, 2003, arating agency lowered our senior secured ratings. Due to the interest termsincluded in our senior credit facilities agreement, our annual pre-tax interestexpense is expected to increase by approximately $2,200,000 based upon thesenew ratings.

 

13.           Newly Adopted AccountingPronouncements

 

In October 2001, theFinancial Accounting Standards Board, or FASB, issued SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.”  This statement, which supersedes SFAS No. 121 and was adopted byus at the beginning of fiscal 2003, provides revised guidance regarding therecognition and measurement of impairment losses related to certain long-livedassets and discontinued operations.  Theadoption of this statement had no impact on our financial position or netincome.

 

In April 2002, the FASBissued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendmentof FASB Statement No. 13, and Technical Corrections.”  SFAS No. 145 rescinds both SFAS No. 4, “Reporting Gains andLosses from Extinguishment of Debt” and SFAS No. 64, “Extinguishments of Debt

 

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Made to SatisfySinking-Fund Requirements.”  In sodoing, SFAS No. 145 eliminates the requirement that gains and losses from theextinguishment of debt be classified as an extraordinary item, unless thecriteria in Accounting Principles Board Opinion, or APB, No. 30 are met.  SFAS No. 145 also amends SFAS No. 13,“Accounting for Leases” to require that certain lease modifications that haveeconomic effects similar to sale-leaseback transactions are accounted for inthe same manner as sale-leaseback transactions and amends other existingauthoritative pronouncements to make various technical corrections.  The provisions of SFAS No. 145 related tothe amendment of SFAS No. 13 were effective for us for transactions occurringafter May 15, 2002, while all other provisions of SFAS No. 145 were adopted byus effective with the beginning of fiscal 2003 on June 2, 2002.  The adoption of the provisions of thisstatement had no impact on our financial position or net income.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  This statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  The statement requires that a liability fora cost associated with an exit or disposal activity be recognized when theliability is incurred, and is effective for us for exit or disposal activitiesinitiated after the beginning of the second quarter of fiscal 2003, the date ofour adoption of this statement.

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others.”  This interpretation clarifies disclosures required to be made bya guarantor in its interim and annual financial statements about obligationsunder certain of its issued guarantees. In addition, the interpretation clarifies that a guarantor is requiredto recognize, at the inception of certain types of guarantees, a liability forthe fair value of the obligation undertaken in issuing these guarantees.  The recognition and measurement provisionsof this interpretation are applicable to guarantees issued or modified afterDecember 31, 2002, and the disclosure requirements are effective for our thirdquarter fiscal 2003 consolidated financial statements.  At March 8, 2003, we have in place variousoperating leases on equipment which guarantee the equipment’s residual fairmarket value at lease termination. These leases were entered into on dates from June 1, 1998 throughDecember 16, 2002 and expire on dates from June 30, 2003 through December 15,2007.  The maximum potential amount offuture guarantees is $12,896,000.  Inaccordance with FASB Interpretation No. 45, these guarantees have not beenrecorded on the consolidated balance sheets as of March 8, 2003 as they were inexistence prior to the effective date of the interpretation.

 

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14.           Recently Issued AccountingPronouncements Not Yet Adopted

 

In June 2001, the FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations” which requiresthat the fair value of a liability for an asset retirement obligation berecognized when it is incurred.  Therelated asset retirement costs are capitalized as part of the long-livedasset’s carrying value.  SFAS No. 143will be effective for us during fiscal 2004. We are currently assessing the impact which the adoption of thisstatement will have on our consolidated financial statements, but we do notexpect the impact to be material.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure.”  This statement amendsSFAS No. 123, “Accounting for Stock-Based Compensation.”  The provisions of this statement are effectivefor interim and annual financial statements for periods beginning after December15, 2002.  This statement providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  Also, this statement amends the disclosurerequirements of SFAS No. 123 to require prominent disclosures in both interimand annual financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reportedresults.  We continue to apply APB No.25 recognition and measurement principles, but will comply with the newdisclosure requirements of this statement in the fourth quarter of fiscal 2003.

 

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INTERSTATEBAKERIES CORPORATION

MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

 

Our significantaccounting policies are discussed in the notes to our consolidated financialstatements in our Annual Report on Form 10-K for the fiscal year ended June 1,2002.  The preparation of ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in our consolidatedfinancial statements and related notes. These estimates and assumptions are evaluated on an on-going basis andare based upon many factors including historical experience, consultation withoutside professionals, such as actuaries, and management’s judgment.  Actual results could differ from anyestimates made and results could be materially different if differentassumptions or conditions were to prevail.

 

Our critical accountingpolicies and estimates, involving those areas of financial statementpreparation which are most important to the portrayal of our financialcondition and results and which require management’s most difficult, subjectiveand complex judgments, are discussed in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section of ourAnnual Report on Form 10-K for the fiscal year ended June 1, 2002.  Readers are encouraged to review thesecritical accounting policies and estimates in conjunction with the review ofthis accompanying Form 10-Q for the quarter ended March 8, 2003.

 

RESULTS OF OPERATIONS

 

Net sales.  Net sales for the third quarter of fiscalyear 2003, the sixteen weeks ended March 8, 2003, were $1,045,574,000, adecrease of $2,149,000, or .2%, from net sales of $1,047,723,000 in fiscal year2002.  Year-to-date net sales for fiscal2003 increased $8,924,000, or .3%, to $2,707,761,000, from net sales of$2,698,837,000, in fiscal 2002.  Theslight decline in net sales for the third quarter reflected a unit volumedecline of approximately 2.1%, partially offset by price increases of less than1.0% compared to third quarter of fiscal 2002. The year-to-date increase reflected a .6% reduction in overall unitvolume and comparable selling prices.

 

Gross profit.  Gross profit was 50.0% of net sales for thethird quarter of fiscal year 2003, down from 52.2% of net sales in fiscal2002.  Year-to-date gross profit was51.2% of net sales, compared to 52.5% in the prior year.  Our fiscal 2003 gross profit margins werenegatively impacted by higher ingredient costs, including cocoa, sweeteners,shortenings and the ingredient costs

 

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associated with producingour extended shelf life products.  Theincrease in ingredient costs accounted for 1.1% of our gross profit decline asa percent of net sales for the third quarter of fiscal 2003 and .9% of ourgross profit decline for fiscal 2003. In addition, higher employee costs for health care and pension benefitswere attributable to .4% of the gross profit decline as a percent of net salesfor the third quarter of fiscal 2003 and .5% for fiscal 2003.  Also, in the third quarter of fiscal 2003,higher energy costs accounted for .3% of our gross profit decline as a percentof net sales.  The remaining variancesfor the third quarter and year-to-date periods were composed of items thatrepresented .1% or less of net sales.

 

Selling, delivery andadministrative expenses.  Selling,delivery and administrative expenses were $487,489,000, representing 46.6% ofnet sales, for the third quarter of fiscal 2003, up somewhat from fiscal 2002’sselling, delivery and administrative expenses of $480,097,000, or 45.8% of netsales.  Year-to-date selling, deliveryand administrative expenses for fiscal 2003 amounted to $1,223,072,000, or45.2% of net sales, increasing on a percent of net sales basis from$1,212,616,000, or 44.9% of net sales, in the prior year.  Higher costs for employee benefits,principally health care and pension, were responsible for .6% of the increaseas a percent of net sales for the third quarter and year-to-date fiscal 2003.Also, in the third quarter of fiscal 2003, higher energy costs accounted for..4% of the percent of net sales increase. Partially offsetting these increases was a .2% reduction on a percent ofnet sales basis in advertising expense for the third quarter and year-to-datefiscal 2003.  The remaining variancesfor the third quarter and year-to-date periods were composed of items that represented..1% or less of net sales.

 

Other charges.  During the third quarter of fiscal 2003, weincurred other charges of  $5,000,000related to closures of four bakeries and 62 thrift stores and restructurings ofseveral other bakeries during fiscal 2003. Approximately $2,800,000 represents severance and other cash costs and$2,200,000 represents impairment of bakery machinery and equipment.  As part of various initiatives to reduce ourmanufacturing and distribution cost structures, the planned opening of our newbakery in Henderson, Nevada, as well as improvements to several otherfacilities is allowing us to close less efficient operations.

 

The severance charge forthe third quarter of fiscal 2003 is associated with the involuntary employeeseparation of approximately 475 employees. As of March 8, 2003, 129 employeeseparations had been completed.  Therestructuring should be completed by the end of the second quarter of fiscal2004.  See the "Cash Resources andLiquidity" section of this "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" regarding future expectedrestructuring charges.

 

During the second quarterof fiscal 2003, we incurred restructuring charges of $1,450,000 related to cashseverance costs in conjunction with the announced closing of a bakery.  This bakery has been closed and all 164separations have been completed as of the fourth quarter of fiscal 2003.

 

 

 

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Second quarter fiscal2003 other charges included an October 1, 2002 fully vested common stockaward of $3,591,000 to our former Chief Executive Officer.

 

Other charges of$25,700,000 in fiscal 2002 relate to the closure of a bakery and the settlementof employment discrimination litigation.

 

Operating income.  Based upon the above factors, operatingincome for the third quarter of fiscal 2003 was $1,444,000, or .1% of netsales, down from the prior year’s operating income of $37,106,000, or 3.5% ofnet sales.  As mentioned above, weincurred $5,000,000 in other charges in the third quarter of fiscal 2003.  Year-to-date operating income was$80,835,000, or 3.0% of net sales, in fiscal 2003 compared to $103,998,000, or3.9% of net sales, in fiscal 2002.  On ayear-to-date basis, we incurred other charges of $10,041,000 in fiscal 2003 and$25,700,000 in fiscal 2002.

 

Interest expense.  Interest expense for the third quarter offiscal 2003 was $12,172,000, up $1,465,000 from interest expense in fiscal 2002of $10,707,000.  Year-to-date interestexpense in fiscal 2003 was $30,172,000, compared to interest expense of$28,724,000 in fiscal 2002.  For theseperiods, the impact on interest expense of slightly higher borrowing levelsduring fiscal 2003 was offset by the impact of slightly lower interest rates.  However, during fiscal 2003, we reclassified$1,485,000 and $2,758,000 for the third quarter and year-to-date periods,respectively, to interest expense from other comprehensive loss resulting fromthe amendment of some of our interest rate swap agreements (see Note 6 to theunaudited consolidated financial statements). Year-to-date interest expense for fiscal 2002 included debt feeamortization of approximately $2,000,000 related to our previous debtoutstanding.

 

Income tax expense.  The effective income tax rates were 36.9%and 36.8% for fiscal 2003 and fiscal 2002, respectively.

 

Net income.  The net loss for the third quarter of fiscal2003 was $6,749,000 or $.15 per diluted share, compared to net income of$16,737,000, or $.32 per diluted share in fiscal 2002.  Included in the fiscal 2003 results wereother charges amounting to $.07 per diluted share.  Year-to-date net income in fiscal 2003 was $32,018,000, or $.71per diluted share, compared to $47,784,000, or $.92 per diluted share, in theprior year.  Year-to-date other chargesincluded in net income were $.14 per diluted share for fiscal 2003 and $.31 perdiluted share in fiscal 2002.

 

CAPITAL RESOURCES ANDLIQUIDITY

 

Cash from operatingactivities for the forty weeks ended March 8, 2003 was $126,862,000, down$25,925,000 from cash generated in fiscal 2002 of $152,787,000.  This decrease was primarily attributable tolower net income and working capital variances, notably the timing of paymentson accounts payable and accrued expenses. Cash from operating activities, along with proceeds from stock optionexercises, was used to fund capital expenditures of $80,595,000, pay commonstock dividends of $9,359,000 and reduce debt outstanding by $46,070,000.

 

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Our planned cash needsfor fiscal 2003 include approximately $225,244,000, consisting of $39,500,000of required debt repayments, $2,095,000 of obligations under capital leases,$68,849,000 of obligations under operating leases, $12,200,000 of common stockdividends, $7,600,000 for Program SOAR as detailed below and $95,000,000 ofcapital expenditures, including funds needed to establish a new bakery inHenderson, Nevada.  We believe cash fromongoing operations, along with our borrowing capacity under our creditfacilities, will be sufficient to fund our currently anticipated cash needsthrough fiscal 2003.  If we are not ableto fund our requirements through cash flow from operations, we may seekadditional sources of financing.  Ineither case, additional sources of financing may not be available when neededor may not be available on acceptable terms.

 

We have commenced amajor, company-wide project internally referred to as Program SOAR, an acronymfor Systems Optimization And Re-engineering. This program will focus on re-engineering our business processes toincrease efficiency and on rationalizing our investment in production,distribution and administrative functionality to reduce the ongoing cost ofsupporting this infrastructure.

 

An operating team hasbeen assigned to focus on nine initiatives that have been identified as majorareas for profit improvement and cost reduction.  The operating team is being supported by a national consultingfirm with significant experience in these types of programs in the baking andfood industry.  The initial phase ofthis comprehensive review of operational processes has just beencompleted.  Direct costs of thethree-year program are expected to be in the $50,000,000 range, with themajority of these costs related to software and hardware acquisition andconsulting.  Fiscal 2003 cash needs forthis program are estimated at $7,600,000. As part of the program, additional costs are anticipated as we identifyand implement strategies which are expected to provide future savings.  We plan to achieve positive cumulative cashflow from the program by the end of the third year.

 

During fiscal 2003, weare restructuring certain of our operations, closing five bakeries and 62thrift stores.  The remaining cash costsof $3,171,000 unpaid at March 8, 2003 related to these restructurings areexpected to be paid by the second quarter of fiscal 2004.  In addition, we expect to incur additionalrestructuring charges of approximately $4,000,000 during the fourth quarter offiscal 2003 and further related costs in fiscal 2004 in connection with therestructurings and approximately 38 additional thrift store closings.  Also, as we continue to evaluateopportunities to reduce our manufacturing and distribution cost structures, wemay incur additional restructuring charges in future periods.

 

As a result of the fiscal2003 restructurings, we estimate pre-tax annual savings to be approximately$10,000,000 to $12,000,000 (approximately $6,000,000 to $7,500,000, net ofincome taxes).  Cost of products sold isanticipated to decline between $6,550,000 and $8,000,000, selling, delivery andadministrative between $3,000,000 and $3,550,000 and approximately $450,000will be a non-cash savings related to depreciation expense.  Future savings are difficult to estimate andcould change depending on market conditions, consolidation difficulties orother factors.

 

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On April 21, 2003, weamended certain financial covenants on our senior credit facilities. While wewere in compliance with all covenant requirements, recent performance hadraised the possibility that these requirements might not be satisfied goingforward.  To avoid this possibility, weworked with our lenders to amend the credit facilities for futureflexibility.  As part of our covenants,we are required to satisfy certain ratios related to net worth, interestcoverage and leverage.  We have amendedthe interest coverage and leverage requirements for the next six quarters, orthrough the first quarter of fiscal 2005. After six quarters, the covenant requirements will revert to theoriginal agreements.  As a result ofthis amendment and a lowered senior security rating by a rating agency on April22, 2003, we expect additional annual pre-tax interest expense of approximately$4,900,000.  However, the favorableimpact on interest expense for fiscal 2004 related to the fiscal 2003reclassification to interest expense of the loss on amended swap agreements(see Note 6 to the unaudited consolidated financial statements) is expected tooffset a substantial portion of this increased interest expense.

 

We amended and extendedsome of our interest rate swap agreements during the first quarter of fiscal2003.  Based upon current debt ratings,our current interest rate swap agreements fix interest rates on $440,000,000from 4.97% to 7.66% with termination dates ranging from April 2004 to August2004.

 

We have seen costs forsome of our principal commodities, primarily sweeteners, cocoa, shortenings andnatural gas, rise sharply during the past year and based upon current marketconditions, we cannot be assured that these costs will return to morehistorically normal levels in the near future. We currently have coverage on the majority of our major commoditiesthrough the first quarter of fiscal 2004 at costs exceeding those experiencedin the prior fiscal year.  We havehistorically attempted to offset cost increases with selling price increasesand operational efficiencies.  However,if we are not successful in offsetting these increases with pricing andefficiencies, such cost increases could have an adverse effect on our financialresults.

 

The following is asummary of certain of our contractual obligations as of March 8, 2003 and theanticipated impact these obligations will have on future cash flows:

 

Payments Due By Fiscal Year Under Certain Contractual Obligations

 
| **Fiscal  Year** |   | **Total**           |    | **Revolving  Credit  Line(a)** |   | **Long  Term  Debt(a)** |   | **Capital  Leases** |    | **Operating  Leases(c)** |   | **Unconditional  Purchase  Obligations(b)** |   |
|------------------|--------|---------------------|---------|--------------------------------|--------|-------------------------|--------|---------------------|---------|--------------------------|--------|---------------------------------------------|--------|
|             |   | **(In  thousands)** |    |
| 2003             |   | $                   | 125,641 |                           | $      | —                  |   | $                   | 9,937   |                     | $      | 589                                         |   | $ | 18,112 |   | $ | 97,003 |   |
| 2004             |   | 218,329             |    | —                         |   | 53,813                  |   | 2,446               |    | 55,928                   |   | 106,142                                     |   |
| 2005             |   | 119,499             |    | —                         |   | 58,500                  |   | 3,747               |    | 40,670                   |   | 16,582                                      |   |
| 2006             |   | 189,395             |    | —                         |   | 156,937                 |   | 2,186               |    | 26,450                   |   | 3,822                                       |   |
| 2007             |   | 262,070             |    | 35,000                         |   | 208,500                 |   | 1,213               |    | 17,357                   |   | —                                      |   |
| Thereafter  |   | 76,880              |    | —                         |   | 53,688                  |   | —              |    | 23,192                   |   | —                                      |   |
| Total            |   | $                   | 991,814 |                           | $      | 35,000                  |   | $                   | 541,375 |                     | $      | 10,181                                      |   | $ | 181,709 |   | $ | 223,549 |   |

 

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(a)                                  Borrowingsunder our senior secured credit facilities are secured by all of our accountsreceivable and a majority of our owned real property, intellectual property andequipment.  The revolving credit linehas a total capacity of $300,000,000 and allows up to $175,000,000 for lettersof credit. We had borrowings outstanding of $35,000,000 under the revolvingcredit line and $122,330,000 in letters of credit outstanding as of March 8,2003.

 

(b)                                 Theunconditional purchase obligations represent advance purchase contracts foringredients and packaging to assure supplies and limit price risks.

 

(c)                                  AtMarch 8, 2003, we have in place various operating leases on equipment whichguarantee the equipment’s residual fair market value at lease termination.  These leases were entered into on dates fromJune 1, 1998 through December 16, 2002 and expire on dates from June 30,2003 through December 15, 2007.  Themaximum potential amount of future guarantees is $12,896,000.  In accordance with FASB Interpretation No.45, these guarantees have not been recorded on our consolidated balance sheetas of March 8, 2003, as they were in existence prior to the effective date ofthe interpretation.

 

NEWLY ADOPTED ACCOUNTINGPRONOUNCEMENTS

 

In October 2001, theFinancial Accounting Standards Board, or FASB, issued Statement of FinancialAccounting Standards, or SFAS, No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  Thisstatement, which supersedes SFAS No. 121 and was adopted by us at the beginningof fiscal 2003, provides revised guidance regarding the recognition andmeasurement of impairment losses related to certain long-lived assets anddiscontinued operations.  The adoptionof this statement had no impact on our financial position or net income.

 

In April 2002, the FASBissued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendmentof FASB Statement No. 13, and Technical Corrections.”  SFAS No. 145 rescinds both SFAS No. 4, “Reporting Gains andLosses from Extinguishment of Debt” and SFAS No. 64, “Extinguishments of DebtMade to Satisfy Sinking-Fund Requirements.” In so doing, SFAS No. 145 eliminates the requirement that gains andlosses from the extinguishment of debt be classified as an extraordinary item,unless the criteria in APB No. 30 are met. SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases” to requirethat certain lease modifications that have economic effects similar tosale-leaseback transactions are accounted for in the same manner assale-leaseback transactions and amends other existing authoritativepronouncements to make various technical corrections.  The provisions of SFAS No. 145 related to the amendment of SFASNo. 13 were effective for us for transactions occurring

 

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after May 15, 2002, whileall other provisions of SFAS No. 145 were adopted by us effective with thebeginning of fiscal 2003.  The adoptionof the provisions of this statement had no impact on our financial position ornet income.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  This statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  The statement requires that a liability fora cost associated with an exit or disposal activity be recognized when theliability is incurred, and is effective for us for exit or disposal activitiesinitiated after the beginning of the second quarter of fiscal 2003, the date ofour adoption of this statement.

 

In November 2002, theFASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.”  This interpretation clarifiesdisclosures required to be made by a guarantor in its interim and annualfinancial statements about obligations under certain of its issuedguarantees.  In addition, theinterpretation clarifies that a guarantor is required to recognize, at theinception of certain types of guarantees, a liability for the fair value of theobligation undertaken in issuing the guarantees.  The recognition and measurement provisions of this interpretationare applicable to guarantees issued or modified after December 31, 2002, andthe disclosure requirements are effective for our third quarter fiscal 2003consolidated financial statements.

 

RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

 

In June 2001, the FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations” whichrequires that the fair value of a liability for an asset retirement obligationbe recognized when it is incurred.  Therelated asset retirement costs are capitalized as part of the long-livedasset’s carrying value.  SFAS No. 143will be effective for us during fiscal 2004. We are currently assessing the impact which the adoption of thisstatement will have on our consolidated financial statements, but we do notexpect the impact to be material.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure.”  This statement amendsSFAS No. 123, “Accounting for Stock-Based Compensation.”  The provisions of this statement areeffective for interim and annual financial statements for periods beginningafter December 15, 2002.  This statementprovides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  Also, this statement amends the disclosurerequirements of SFAS No. 123 to require prominent disclosures

 

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in both annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reportedresults.  We continue to apply APB No.25 recognition and measurement principles, but will comply with the newdisclosure requirements of this statement in the fourth quarter of fiscal 2003.

 

QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

We are exposed to marketrisks relative to commodity price fluctuations and interest rate changes.  We actively manage these risks through theuse of forward purchase contracts and derivative financial instruments.  As a matter of policy, we use derivativefinancial instruments only for hedging purposes, and the use of derivatives fortrading and speculative purposes is prohibited.

 

Commodity prices.  Commodities we use in the production of ourproducts are subject to wide price fluctuations, depending upon factors such asweather, crop production, worldwide market supply and demand and governmentregulation.

 

To reduce the riskassociated with commodity price fluctuations, primarily for wheat, corn, sugar,soybean oil and certain fuels, we sometimes enter into forward purchasecontracts and commodity futures and options in order to fix prices for futureperiods.  A sensitivity analysis wasprepared and, based upon our commodity-related derivatives positions as ofMarch 8, 2003, an assumed 10% adverse change in commodity prices would not havea material effect on our fair values, future earnings or cash flows.

 

Interest rates.  We enter into interest rate swap agreementsto manage the interest rate risk associated with variable rate debtinstruments.  Based upon current debtratings, our current interest rate swap agreements fix interest rates on$440,000,000 from 4.97% to 7.66% with termination dates ranging from April 2004to August 2004.  Based upon asensitivity analysis at March 8, 2003, an assumed 10% adverse change ininterest rates would not have a material impact on our fair values, futureearnings or cash flows.

 

CONTROLS AND PROCEDURES

 

Within the 90-day periodprior to the date of this report, we conducted an evaluation, under thesupervision and with the participation of management, including our principalexecutive officer and principal financial officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant toExchange Act Rule 13a-14.  Based on thatevaluation, our principal executive officer and principal financial officer concludedthat our disclosure controls and procedures are effective.  There have been no significant changes inour internal controls or in other factors that could significantly affectinternal controls subsequent to the date our principal executive officer andprincipal financial officer completed their evaluation.

 

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FORWARD-LOOKING STATEMENTS

 

The statements in thisQuarterly Report on Form 10-Q that are not historical statements areforward-looking statements within the meaning of federal securities laws. These forward-looking statements include statements relating to: the closure orrestructuring of non-performing thrift stores and redundant or less efficientbakeries and the cost and savings associated therewith; availability and costsof raw materials, packaging, fuels and utilities; our cash needs, includingcapital expenditures, dividends, debt repayment, capital lease obligations,Program SOAR and operating lease commitments; compliance with our creditfacilities covenants; Program SOAR; long-term profitability and efficiency;general economic conditions; and the outcome of legal proceedings to which weare or may become a party.  Theseforward-looking statements are subject to numerous risks and uncertainties,many of which are beyond our control, which could cause actual results todiffer materially from such statements. Factors that could cause actual resultsto differ materially include, but are not limited to, increased costs or delaysin the review of our business model or other problems related thereto; therecent bankruptcy filing by Fleming Companies and other potential similarfilings by customers; actions of competitors, including pricing policy andpromotional spending; effectiveness of advertising and marketing spending; theavailability and costs of raw materials, packaging, fuels and utilities, andthe ability to recover these costs in the pricing of products; theeffectiveness of hedging activities; the availability of capital on acceptableterms; changes in our business strategies, including our ability to continue toparticipate in industry consolidation and to integrate successfully businesseswe acquire; expenditures necessary to carry out cost-saving initiatives andsavings derived from these initiatives; changes in general economic andbusiness conditions (including in the bread and sweet goods markets); changesin consumer tastes or eating habits; further consolidation in the food retailindustry; future product recalls or safety concerns; costs associated with  environmental compliance and remediation;increased costs and uncertainties related to periodic renegotiation of unioncontracts; changes in our relationship with employees and the unions thatrepresent them; actions of governmental entities, including regulatoryrequirements; the outcome of legal proceedings to which we are or may become aparty; business disruption from terrorist acts, our nation’s response to suchacts and acts of war; and other factors. We disclaim any intention orobligation to update or revise any forward-looking statements to reflect newinformation, future events or developments or otherwise, except as required bylaw. We have provided additional information in our Annual Report on Form 10-Kfor our fiscal year ended June 1, 2002 and Forms 10-Q for the quarters endedAugust 24, 2002 and November 16, 2002 filed with the Securities and ExchangeCommission, which readers are encouraged to review, concerning other factorsthat could cause actual results to differ materially from those indicated inthe forward-looking statements.

 

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PART II

 

ITEM 1 - Legal Proceedings

 

In February andMarch 2003, seven putative class actions were brought against us andcertain of our current or former officers and directors in the United StatesDistrict Court for the Western District of Missouri.  Most of the complaints were brought on behalf of putative classesof shareholders who purchased or sold IBC stock between September 17, 2002 andDecember 17, 2002.  One complaint,however, is brought on behalf of a putative class beginning in April 2002 andseveral complaints seek to include shareholders who purchased or sold stock throughFebruary 11, 2003.  The complaints generallyallege that certain of our press releases, SEC filings, and other publicstatements prior to a February 11, 2003 announcement reducing our guidancecontained misrepresentations regarding our financial condition.  The complaints further allege that certainofficers and directors improperly sold IBC shares at artificially inflatedprices during the class period.  Thecases seek compensatory damages (including interest), disgorgement of allegedlyimproper gains from insider stock sales, costs and expenses, and any otherrelief deemed proper by the court.  Wehave not yet been required to file answers to the complaints.  The litigation is in its preliminary stagesand the amount of potential loss, if any, cannot reasonably be estimated.

 

Our Board of Directorshas received a shareholder derivative demand requesting legal action by us inconnection with sales of IBC shares  bycertain current or former officers and directors.  The Board of Directors has appointed a Special Review Committeeto evaluate the demand and to report to the Board. 

 

The New York StockExchange also has notified us that its Market Trading Analysis Department isreviewing transactions in the common stock of IBC occurring prior to ourFebruary 11, 2003 reduction in guidance. We have responded to the Exchange’s requests for information and expectto cooperate fully in that inquiry. 

 

In November 1996certain of our route sales representatives (“RSRs”) brought a class action onbehalf of RSRs in the State of Washington, alleging that we had failed to payrequired overtime wages under state law. The case is captioned *Santa Rosa, et al v. Interstate Brands Corp.*, No. 51574-8-1 (D. Wa.).  The class in the case covers RSRs in theState of Washington who worked for us during all or part of the general periodfrom November 1993 through the date of settlement.  The plaintiffs

 

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seek unpaid wages, withinterest, and other relief deemed proper by the court.  During the quarter, we tentatively settledthis class action with the plaintiffs for approximately $6.1 million, subjectto notice to the class and final court approval.  A preliminary hearing regarding the settlement is scheduled forMay 2, 2003, at which the court is expected to put in place a schedule forcompleting notice  and holding a finalhearing on the merits of the settlement. We have established reserves that are expected to sufficiently cover theanticipated costs of the settlement, if it is approved by the court. The amountof potential loss, should the settlement not receive court approval, cannotreasonably be estimated. We also have negotiated and put into effect a newunion contract with the RSRs in the State of Washington that we expect toaddress this issue.  We have asked theState of Washington’s Department of Industry and Labor to review and approvethe contract’s provision relating to overtime pay.

 

We are aware of twoadditional wage and hour cases in New Jersey that have been brought under statelaw, one of which has been brought on behalf of a putative class of RSRs. Thecase involving the putative class is captioned *Ruzicka, et al. v. Interstate BrandsCorp., et al.*, No. OCN-L-_03 (Sup. Ct., Ocean Cty, N.J.), and theother case is captioned *McCourt, et al. v.Interstate Brands Corp.*, No. 03-220 (FLW) (D.N.J.).   We are also aware of an additional wage andhour case brought on behalf of a putative class of bakery productionsupervisors under federal law, captioned *Anugweje v. Interstate Brands Corp.*, No.2:03 cv 00385 (WGB) (D.N.J.).  Thesecases are in their preliminary stages and we have not filed answers to thecomplaints.  We are evaluating thesecases and the amount of potential loss, if any, cannot reasonably beestimated.  No amount is currentlyreserved in the unaudited consolidated financial statements related to thesematters.

 

On July 17, 2002, wewere served with a state court complaint which is now pending in the UnitedStates District Court for the Northern District of Illinois, captioned *Anael, et al. v. Interstate Brands Corporation andInterstate Bakeries Corporation*, Case No. 2C 5192, filed by oneemployee and one former employee. This complaint arises, in part, from ourremoval of insulation alleged to have contained asbestos at one of our bakeriesin January 1998. We have also been a defendant in other civil actions arisingout of the situation described above. Of the civil actions, those remaining are*Anael v. Interstate Brands Corporation*,Case No. 00 C 6765, filed October 3, 2000, pending in the United StatesDistrict Court, Northern District of Illinois; and a class action suitcaptioned *Dennis Gianopolous, et al. v.Interstate Brands Corporation and Interstate Bakeries Corporation*,Case No. 98 C 1073, filed February 2, 1998, pending  in the Circuit Court of Cook County Illinois.  These civil actions seek unspecifiedmonetary damages, funds for medical monitoring and, in one case, damages underthe Racketeer Influenced and Corrupt Organizations Act. In addition, related tothe same facts, in 1998, the Des Plaines, Illinois office of the U.S.Department of Labor cited us, in Inspection Number 122496300, for allegedviolation of

 

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the Occupational Safetyand Health Act, and the office of the U.S. Attorney for the Northern Districtof Illinois in a joint investigation with Illinois officials beganinvestigating the  possibility ofcriminal violations of the Clean Air Act. The government closed the joint investigation without returning anyindictments.  In addition, the State ofIllinois filed a civil complaint against us alleging the insulation removalviolated various provisions of the Illinois Environmental Protection Act.  This case was voluntarily dismissed;however, the State has recently sought to refile it pending settlement negotiations.  In none of the foregoing cases has any court or governmental bodymade any factual finding of liability or violation of environmentalregulations. Based upon our own investigation, including assistance from thirdparty consultants, we believe that all of these matters are without merit. Noamount is currently reserved in the unaudited consolidated financial statementsrelated to these matters.

 

We are currentlyundergoing a multi-state abandoned property examination. We have provided andwill continue to provide information requested by the states' reprentatives. Noassessments related to this examination have been received 

at this point in time. Webelieve the ultimate outcome of this examination will not have a materialadverse impact on our financial position or results of operations.

 

We are subject to variousother routine legal proceedings, environmental actions and matters in theordinary course of business, some of which may be covered in whole or in partby insurance.  In management’s opinion,none of these other matters will have a material adverse effect on ourfinancial position, but could be material to net income or cash flows for aparticular quarter or annual period.

 

ITEM 6 - Exhibitsand Reports on Form 8-K

 

a)              Exhibits filed withthis report:

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                              |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.1                |   | First Amendment, dated  as of April 21, 2003, to the Amended and Restated Credit Agreement among  Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation  and Interstate Brands West Corporation, each as a Borrower, the several  Lenders from time to time parties hereto, and The Chase Manhattan Bank, as  Administrative Agent. |
| 10.2                |   | Employment Agreement  dated as of March 8, 2003 by and between Michael D. Kafoure and Interstate  Brands West Corporation.                                                                                                                                                                                                                                   |
| 10.3                |   | Employment Agreement  dated as of March 7, 2003 by and between Robert P. Morgan and Interstate  Brands Corporation.                                                                                                                                                                                                                                          |
| 10.4                |   | Employment Agreement  dated as of March 18, 2003 by and between Richard D. Willson and Interstate  Brands West Corporation.                                                                                                                                                                                                                                  |
| 10.5                |   | Employment Agreement  dated as of March 7, 2003 by and between Thomas S. Bartoszewski and  Interstate Brands Corporation.                                                                                                                                                                                                                                    |
| 10.6                |   | Management Continuity  Agreement effective as of February 3, 2003 by and between James R. Elsesser  and Interstate Bakeries Corporation.                                                                                                                                                                                                                     |
| 10.7                |   | Form of Management  Continuity Agreement effective as of February 3, 2003 by and between  Interstate Bakeries Corporation and Paul E. Yarick, Michael D. Kafoure, Kent  B. Magill, Robert P. Morgan, Richard D. Willson and Thomas S. Bartoszewski.                                                                                                          |
| 99.1                |   | Certification of James  R. Elsesser pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                      |
| 99.2                |   | Certification of Paul  E. Yarick pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                         |

 

b)                  Reports on Form8-K

 

A report on Form 8-K(item 9) was filed on December 18, 2002 regarding expected earnings for fiscal2003, ending May 31, 2003.

 

A report on Form 8-K(item 9) was filed on December 20, 2002 regarding the certifications of theChief Executive Officer and the Chief Financial Officer pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

A report on Form 8-K(item 9) was filed on February 12, 2003 regarding expected earnings for fiscal2003, ending May 31, 2003.

 

* * * * * * * * **

 

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SIGNATURES

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                 | Interstate Bakeries  Corporation                                                               |
|----------------------|------------------------------------------------------------------------------------------------|
|                 | (Registrant)                                                                                   |
|                 |                                                                                           |
|                 |                                                                                           |
| DATE: April 22, 2003 | /s/ James R. Elsesser                                                                          |   |
|                 | James R. Elsesser                                                                              |
|                 | Chief Executive Officer  (Principal Executive Officer)                                         |
|                 |                                                                                           |
|                 |                                                                                           |
| DATE: April 22, 2003 | /s/ Paul E. Yarick                                                                             |   |
|                 | Paul E. Yarick, Senior  Vice  President - Finance and Treasurer  (Principal Financial Officer) |

 

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CERTIFICATIONS

 

I,              James R. Elsesser, certify that:

 

1.             I have reviewed this quarterlyreport on Form 10-Q of Interstate Bakeries Corporation;

 

2.                                     Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                     Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                     Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a- 14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                     Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                   anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                     Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date: April 22, 2003

 
| /s/ James R. Elsesser   |   |
|-------------------------|--------|
| James R. Elsesser       |
| Chief Executive Officer |

 

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I,              Paul E. Yarick, certify that:

 

1.             I have reviewed this quarterlyreport on Form 10-Q of Interstate Bakeries Corporation;

 

2.                                     Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                     Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                     Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a- 14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                   evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                    presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                     Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                     Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: April 22, 2003                           |
|------------------------------------------------|
|                                           |
| /s/ Paul E. Yarick                             |   |
| Paul E. Yarick                                 |
| Senior Vice President  -Finance  and Treasurer |

 

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