##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended August 23, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period
fromto
 Commission File Number 1-11165
 
 INTERSTATE BAKERIES CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of incorporation or organization)
    
    43-1470322
(I.R.S. Employer Identification No.)12 East Armour Boulevard, Kansas City, Missouri
    
    64111(Address of principal executive offices)
    
    (Zip Code)
 (816) 502-4000
(Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer  o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company þ
 o þ




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##### 



INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED AUGUST 23, 2008
 Description
    
    PagePART I - FINANCIAL INFORMATION (UNAUDITED)
    
    
    3ITEM 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Condensed Consolidated Statement of Stockholders Deficit
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Forward-Looking Statements
    
    
    39ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    42ITEM 4. Controls and Procedures
    
    
    42PART II - OTHER INFORMATION
    
    
    44ITEM 1. Legal Proceedings
    
    
    44ITEM 6. Exhibits
    
    
    45Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 (dollars in thousands, except share data)
 August 23,
    
    
    May 31,2008
    
    
    2008ASSETSCurrent assetsCash
    
    $
    22,655
    
    
    $
    25,071Restricted cash
    
    
    21,078
    
    
    
    21,052Accounts receivable, less allowance for doubtful accounts of $2,105 and $2,050, respectively
    
    
    133,540
    
    
    
    136,627Inventories
    
    
    62,660
    
    
    
    61,837Assets held for sale
    
    
    15,065
    
    
    
    17,562Other current assets
    
    
    42,797
    
    
    
    43,995Total current assets
    
    
    297,795
    
    
    
    306,144Property and equipment, net
    
    
    454,986
    
    
    
    464,455Intangible assets
    
    
    158,271
    
    
    
    158,285Other assets
    
    
    23,762
    
    
    
    29,473Total assets
    
    $
    934,814
    
    
    $
    958,357LIABILITIES AND STOCKHOLDERS DEFICITLiabilities not subject to compromiseCurrent liabilitiesPre-petition debt
    
    $
    2,575
    
    
    $
    2,759Post-petition debt
    
    
    88,864
    
    
    
    63,358Accounts payable
    
    
    89,996
    
    
    
    108,288Accrued expenses
    
    
    209,687
    
    
    
    205,411Total current liabilities
    
    
    391,122
    
    
    
    379,816Other liabilities
    
    
    221,811
    
    
    
    219,288Deferred income taxes
    
    
    69,456
    
    
    
    69,475Total liabilities not subject to compromise
    
    
    682,389
    
    
    
    668,579Liabilities subject to compromise
    
    
    752,643
    
    
    
    751,492Stockholders deficitPreferred stock, $0.01 par value, 1,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 120,000,000 shares authorized, 81,579,000 shares issued,
45,202,000 shares outstanding
    
    
    816
    
    
    
    816Additional paid-in capital
    
    
    584,485
    
    
    
    584,485Accumulated deficit
    
    
    (439,904
    )
    
    
    (403,038
    )Treasury stock, 36,377,000 shares at cost
    
    
    (678,740
    )
    
    
    (678,740
    )Accumulated other comprehensive income
    
    
    33,125
    
    
    
    34,763Total stockholders deficit
    
    
    (500,218
    )
    
    
    (461,714
    )Total liabilities and stockholders deficit
    
    $
    934,814
    
    
    $
    958,357
  3




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##### Table of Contents



INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (dollars in thousands, except per share data)
 Twelve Weeks EndedAugust 23,
    
    
    August 25,2008
    
    
    2007Net revenues
    
    $
    658,709
    
    
    $
    689,816Cost of products sold (exclusive of items shown below)
    
    
    356,063
    
    
    
    343,231Selling, delivery and administrative expenses
    
    
    310,931
    
    
    
    321,043Restructuring charges (credits)
    
    
    (4,401
    )
    
    
    (48
    )Depreciation and amortization
    
    
    13,675
    
    
    
    15,648Loss on sale or abandonment of assets
    
    
    302
    
    
    
    13Property and equipment impairment
    
    
    
    
    
    
    10,193676,570
    
    
    
    690,080Operating profit (loss)
    
    
    (17,861
    )
    
    
    (264
    )Other (income) expenseInterest expense (excluding unrecorded contractual
interest expense of $1,383 and $1,383,
respectively)
    
    
    13,458
    
    
    
    11,020Reorganization charges, net
    
    
    6,026
    
    
    
    7,198Other (income) expense
    
    
    (47
    )
    
    
    (54
    )19,437
    
    
    
    18,164Income (loss) before income taxes
    
    
    (37,298
    )
    
    
    (18,428
    )Provision (benefit) for income taxes
    
    
    (432
    )
    
    
    (2,435
    )Net income (loss)
    
    $
    (36,866
    )
    
    $
    (15,993
    )Net income (loss) per shareBasic
    
    $
    (0.82
    )
    
    $
    (0.35
    )Diluted
    
    $
    (0.82
    )
    
    $
    (0.35
    )
  4




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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (dollars in thousands)
 Twelve Weeks EndedAugust 23,
    
    
    August 25,2008
    
    
    2007Operating activitiesNet income (loss)
    
    $
    (36,866
    )
    
    $
    (15,993
    )Depreciation and amortization
    
    
    13,675
    
    
    
    15,648Provision (benefit) for deferred income taxes
    
    
    561
    
    
    
    (1,874
    )Reorganization charges, net
    
    
    6,026
    
    
    
    7,198Cash reorganization items
    
    
    (5,516
    )
    
    
    (5,679
    )Non-cash bankruptcy-related (credits) charges
    
    
    (3
    )
    
    
    206Non-cash interest expense  deferred debt fees
    
    
    4,658
    
    
    
    439Non-cash restricted stock compensation (benefit) expense
    
    
    
    
    
    
    163(Gain) loss on sale, write-down or abandonment of assets
    
    
    (4,678
    )
    
    
    10,109Change in operating assets and liabilitiesAccounts receivable
    
    
    3,087
    
    
    
    7,925Inventories
    
    
    (823
    )
    
    
    2,026Other current assets
    
    
    618
    
    
    
    (236
    )Accounts payable and accrued expenses
    
    
    (14,562
    )
    
    
    (15,395
    )Long-term portion of self insurance reserves
    
    
    735
    
    
    
    218Other
    
    
    126
    
    
    
    345Net cash provided by (used in) operating activities
    
    
    (32,962
    )
    
    
    5,100Investing activitiesPurchases of property and equipment
    
    
    (3,501
    )
    
    
    (5,093
    )Proceeds from sale of assets
    
    
    7,551
    
    
    
    2,226Restricted cash deposit
    
    
    
    
    
    
    (2,536
    )Acquisition and development of software assets
    
    
    
    
    
    
    (371
    )Other
    
    
    
    
    
    
    4Net cash provided by (used in) investing activities
    
    
    4,050
    
    
    
    (5,770
    )Financing activitiesReduction of long-term debt
    
    
    (184
    )
    
    
    (247
    )Increase in pre-petition debt
    
    
    1,164
    
    
    
    2,421Reduction of post-petition debt
    
    
    (7,494
    )
    
    
    Increase in post-petition debt
    
    
    33,000
    
    
    
    Debt fees
    
    
    10
    
    
    
    Net cash provided by (used in) financing activities
    
    
    26,496
    
    
    
    2,174Net increase (decrease) in cash
    
    
    (2,416
    )
    
    
    1,504Cash at beginning of period
    
    
    25,071
    
    
    
    67,212Cash at end of period
    
    $
    22,655
    
    
    $
    68,716Cash payments (received)Interest
    
    $
    9,555
    
    
    $
    7,925Income taxes
    
    
    136
    
    
    
    127Non-cash investing and financing activitiesInterest income earned on restricted cash deposits
    
    
    26
    
    
    
    77
  5




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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
 (UNAUDITED)
 (dollars and shares in thousands)
 Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedStock Issued
    
    
    Additional
    
    
    
    
    
    
    Treasury Stock
    
    
    Other
    
    
    TotalNumber
    
    
    Par
    
    
    Paid-in
    
    
    Accumulated
    
    
    Number of
    
    
    
    
    
    
    Comprehensive
    
    
    Stockholdersof Shares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    Shares
    
    
    Cost
    
    
    Income
    
    
    DeficitBalance May 31, 2008
    
    
    81,579
    
    
    $
    816
    
    
    $
    584,485
    
    
    $
    (403,038
    )
    
    
    (36,377
    )
    
    $
    (678,740
    )
    
    $
    34,763
    
    
    $
    (461,714
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,866
    )
    
    
    
    
    
    
    
    
    
    
    (1,638
    )
    
    
    (38,504
    )Balance August 23, 2008
    
    
    81,579
    
    
    $
    816
    
    
    $
    584,485
    
    
    $
    (439,904
    )
    
    
    (36,377
    )
    
    $
    (678,740
    )
    
    $
    33,125
    
    
    $
    (500,218
    )
  6




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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. Voluntary Chapter 11 Filing
    
    
    authorize us to pay pre-petition and post-petition employee wages and salaries and related benefits during
our restructuring under Chapter 11;
    
    authorize us to pay trust fund taxes in the ordinary course of business, including pre-petition amounts; and
    
    authorize the continued use of our cash management systems.
   7




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8




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borrowing
   9




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10




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Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code
 2. Description of Business and Significant Accounting Policies
 Description of Business
   11




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Significant Accounting Policies
 Significant Accounting Policies
 Fiscal Year End
  Principles of Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Contingencies
 Accounting for Contingencies
 Certain Concentrations of Risk
  Newly Adopted Accounting Pronouncements
 The Fair Value Option for Financial Assets and
Liabilities
 12




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Recently Issued Accounting Pronouncements
 The Hierarchy of Generally Accepted Accounting
Principles
 Determination of the Useful
Life of Intangible Assets Goodwill and Other Intangible Assets
 Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133
 Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No.51
 Business Combinations
 Fair Value Measurements
 13




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3. Inventories
 
 August 23,
    
    
    May 31,2008
    
    
    2008(dollars in thousands)Ingredients and packaging
    
    $
    38,016
    
    
    $
    38,986Finished goods
    
    
    24,644
    
    
    
    22,851$
    62,660
    
    
    $
    61,837
 4. Property and Equipment
  August 23,
    
    May 31,2008
    
    2008(dollars in thousands)Land and buildings (lives ranging from 10 to 35 years)
    
    $
    359,287
    
    
    $
    359,133Machinery and equipment (lives ranging from 4 to 15 years)
    
    
    816,396
    
    
    
    820,4841,175,683
    
    
    
    1,179,617Less accumulated depreciation
    
    
    (720,697
    )
    
    
    (715,162
    )$
    454,986
    
    
    $
    464,455
   5. Assets Held for Sale
  14




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6. Lease Obligations
   7. Intangible Assets
  August 23,
    
    
    May 31,2008
    
    
    2008(dollars in thousands)Intangible assets with indefinite lives(generally trademarks and trade names)
    
    $
    157,471
    
    
    $
    157,471Intangible assets with finite livesGross carrying amount
    
    $
    3,491
    
    
    $
    3,491Less: Accumulated amortization
    
    
    (2,691
    )
    
    
    (2,677
    )Net carrying amount
    
    $
    800
    
    
    $
    814
  15




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8. Debt
  August 23,
    
    
    May 31,2008
    
    
    2008(dollars in thousands)SecuredPost-petition credit debt
    
    $
    88,864
    
    
    $
    63,358Pre-petition credit debt
    
    
    451,412
    
    
    
    450,248Unsecured6% senior
subordinated convertible notes  pre-petition
    
    
    99,999
    
    
    
    99,999Capital lease converted to pre-petition debt
    
    
    6,125
    
    
    
    6,125Capital leasesReal estate
    
    
    2,575
    
    
    
    2,759$
    648,975
    
    
    $
    622,489Balance Sheet classification:Pre-petition debt
    
    $
    2,575
    
    
    $
    2,759Post-petition debt
    
    
    88,864
    
    
    
    63,358Liabilities subject to compromise
    
    
    557,536
    
    
    
    556,372$
    648,975
    
    
    $
    622,489
 Post-Petition Debt
   16




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Pre-Petition Debt
    6% Senior Subordinated Convertible Notes
  17




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Financial Reporting by
Entities in Reorganization under the Bankruptcy Code
 9. Derivative Instruments
    Accounting for Derivative
Instruments and Hedging Activities
   10. Liabilities Subject to Compromise
   18




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August 23,
    
    
    May 31,2008
    
    
    2008(dollars in thousands)Accounts payable
    
    $
    130,818
    
    
    $
    130,828Taxes payable
    
    
    4,637
    
    
    
    4,637Retirement obligations (SERP and deferred compensation)
    
    
    20,200
    
    
    
    20,200Legal reserve
    
    
    14,424
    
    
    
    14,424Interest bearing debt and capital leases
    
    
    557,536
    
    
    
    556,372Other
    
    
    25,028
    
    
    
    25,031$
    752,643
    
    
    $
    751,492
  11. Employee Benefit Plans
 American Bakers Association Retirement Plan
    19




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Twelve Weeks EndedAugust 23,
    
    
    August 25,2008
    
    
    2007(dollars in thousands)Service cost
    
    $
    200
    
    
    $
    234Interest cost
    
    
    852
    
    
    
    825Expected return on negative plan assets
    
    
    252
    
    
    
    168Net pension expense
    
    $
    1,304
    
    
    $
    1,227
 Defined Benefit Pension Plan, Postretirement Health and Life Plans, and Supplemental Executive
Retirement Plan
 Defined Benefit Pension Plan
  Postretirement Health and Life Plans
   Supplemental Executive Retirement Plan
  20




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Twelve Weeks EndedPension
    
    
    Postretirement
    
    
    SERPAugust 23,
    
    
    August 25,
    
    
    August 23,
    
    
    August 25,
    
    
    August 23,
    
    
    August 25,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007(dollars in thousands)Service cost
    
    $
    197
    
    
    $
    195
    
    
    $
    200
    
    
    $
    263
    
    
    $
    
    
    
    $
    Interest cost
    
    
    988
    
    
    
    932
    
    
    
    605
    
    
    
    746
    
    
    
    341
    
    
    
    319Expected return on plan assets
    
    
    (1,212
    )
    
    
    (1,290
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service
cost (credit)
    
    
    76
    
    
    
    63
    
    
    
    (1,599
    )
    
    
    (1,705
    )
    
    
    
    
    
    
    Recognized net actuarial (gain)
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    (116
    )
    
    
    (17
    )Net periodic benefit cost (credit)
    
    $
    49
    
    
    $
    (100
    )
    
    $
    (794
    )
    
    $
    (505
    )
    
    $
    225
    
    
    $
    302
 12. Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
  1996 Stock Incentive Plan
  21




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Weighted
    
    
    WeightedAverage
    
    
    AverageExercise Price
    
    
    RemainingShares
    
    
    Per Share
    
    
    Contractual Term(in thousands)Outstanding, as of May 31, 2008
    
    
    2,560
    
    
    $
    14.61
    
    
    
    3.4Granted
    
    
    
    
    
    
    Surrendered
    
    
    (109
    )
    
    
    20.08Exercised
    
    
    
    
    
    
    Outstanding, as of August 23, 2008
    
    
    2,451
    
    
    
    14.36
    
    
    
    3.3Exercisable at August 23, 2008
    
    
    2,451
    
    
    
    14.36
    
    
    
    3.3
    13. Restructuring Charges (Credits)
 Twelve Weeks EndedAugust 23,
    
    
    August 25,2008
    
    
    2007(dollars in thousands)Severance (credits) charges
    
    $
    (20
    )
    
    $
    (56
    )Long-lived asset (credits) charges
    
    
    (4,775
    )
    
    
    (97
    )Other exit costs
    
    
    394
    
    
    
    105Total
    
    $
    (4,401
    )
    
    $
    (48
    )
 Fiscal 2009 Activity
  22




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Long-LivedSeverance
    
    Assetand Related
    
    ChargesBenefits
    
    (Credits)
    
    Other
    
    Total(dollars in thousands)FY 2008 Southern CaliforniaBalance May 31, 2008
    
    $
    299
    
    
    $
    
    
    
    $
    
    
    
    $
    299Expensed in Fiscal 2009
    
    
    (8
    )
    
    
    (4,775
    )
    
    
    422
    
    
    
    (4,361
    )Cash Paid in Fiscal 2009
    
    
    (55
    )
    
    
    
    
    
    
    (422
    )
    
    
    (477
    )Noncash Utilization in 2009
    
    
    
    
    
    
    4,775
    
    
    
    
    
    
    
    4,775Balance August 23, 2008
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    236FY 2008 Sales
ReorganizationBalance May 31, 2008
    
    
    40
    
    
    
    
    
    
    
    120
    
    
    
    160Expensed in Fiscal 2009
    
    
    (12
    )
    
    
    
    
    
    
    (28
    )
    
    
    (40
    )Cash Paid in Fiscal 2009
    
    
    (28
    )
    
    
    
    
    
    
    (8
    )
    
    
    (36
    )Noncash Utilization in 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance August 23, 2008
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    84ConsolidatedBalance May 31, 2008
    
    
    339
    
    
    
    
    
    
    
    120
    
    
    
    459Expensed in Fiscal 2009
    
    
    (20
    )
    
    
    (4,775
    )
    
    
    394
    
    
    
    (4,401
    )Cash Paid in Fiscal 2009
    
    
    (83
    )
    
    
    
    
    
    
    (430
    )
    
    
    (513
    )Noncash Utilization in 2009
    
    
    
    
    
    
    4,775
    
    
    
    
    
    
    
    4,775Balance August 23, 2008
    
    $
    236
    
    
    $
    
    
    
    $
    84
    
    
    $
    320
 Fiscal 2008 Activity
     23




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Long-LivedSeverance
    
    Assetand Related
    
    ChargesBenefits
    
    (Credits)
    
    Other
    
    TotalFiscal 2008 Southern California
    
    $
    5,339
    
    
    $
    (7,794
    )
    
    $
    1,916
    
    
    $
    (539
    )FY 2008 Sales Reorganization
    
    
    1,086
    
    
    
    
    
    
    
    324
    
    
    
    1,410
  14. Reorganization Charges
  Twelve Weeks Ended
    
    
    Twelve Weeks EndedAugust 23, 2008
    
    
    August 25, 2007Reorganization
    
    
    Cash
    
    
    Reorganization
    
    
    CashCharges
    
    
    Payments
    
    
    Charges
    
    
    Payments(dollars in thousands)Professional fees
    
    $
    6,402
    
    
    $
    5,679
    
    
    $
    7,550
    
    
    $
    5,873Employee retention expenses (credits)
    
    
    (153
    )
    
    
    37
    
    
    
    (151
    )
    
    
    73Lease rejection charges
    
    
    3
    
    
    
    
    
    
    
    143
    
    
    
    Interest income
    
    
    (23
    )
    
    
    3
    
    
    
    (344
    )
    
    
    (267
    )Gain on sale of assets
    
    
    (203
    )
    
    
    (203
    )
    
    
    
    
    
    
    Reorganization charges, net
    
    $
    6,026
    
    
    $
    5,516
    
    
    $
    7,198
    
    
    $
    5,679
 15. Income Taxes
  Twelve Weeks EndedAugust 23,
    
    
    August 25,2008
    
    
    2007Statutory federal tax rate
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net
    
    
    2.6
    
    
    
    2.6Valuation allowance increase
    
    
    (31.2
    )
    
    
    (21.8
    )Adjustments to prior year tax accruals
    
    
    (.3
    )
    
    
    Other
    
    
    (4.9
    )
    
    
    (2.6
    )1.2
    %
    
    
    13.2
    %
 24




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16. Commitments and Contingencies
  2 2
 25




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2
     26




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17. Earnings (Loss) per Share
 Earnings per
Share
  Twelve Weeks EndedAugust 23,
    
    August 25,2008
    
    2007(in thousands)Weighted average common shares outstanding:Basic and diluted
    
    
    45,212
    
    
    
    45,185
   18. Comprehensive Loss
  Twelve Weeks EndedAugust 23,
    
    
    August 25,2008
    
    
    2007(dollars in thousands)Net loss
    
    $
    (36,866
    )
    
    $
    (15,993
    )Other comprehensive loss:Amortization of pension and other postretirement net credits
    
    
    (1,638
    )
    
    
    (1,468
    )Comprehensive loss
    
    $
    (38,504
    )
    
    $
    (17,461
    )
 19. Segment Information
 Disclosures about Segments of an Enterprise and Related Information
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Route revenues
 Outlet revenues
 Direct revenues
   Twelve Weeks EndedAugust 23, 2008
    
    
    August 25, 2007(dollars in thousands)Net RevenuesRoute revenues
    
    $
    569,950
    
    
    $
    599,280Outlet revenues
    
    
    72,292
    
    
    
    74,070Direct revenues
    
    
    16,467
    
    
    
    16,466Total net revenues
    
    $
    658,709
    
    
    $
    689,816Segment Profit (Loss)Route profit (loss)
    
    $
    (7,999
    )
    
    $
    23,257Outlet profit (loss)
    
    
    5,617
    
    
    
    7,208Direct profit (loss)
    
    
    792
    
    
    
    1,473Total segment profit (loss)
    
    
    (1,590
    )
    
    
    31,938Corporate
    
    
    (16,271
    )
    
    
    (32,202
    )Total operating profit (loss)
    
    
    (17,861
    )
    
    
    (264
    )Interest expense
    
    
    13,458
    
    
    
    11,020Reorganization charges
    
    
    6,026
    
    
    
    7,198Other (income) expense
    
    
    (47
    )
    
    
    (54
    )19,437
    
    
    
    18,164Income (loss) before income taxes
    
    
    (37,298
    )
    
    
    (18,428
    )Provision (benefit) for income taxes
    
    
    (432
    )
    
    
    (2,435
    )Net income (loss)
    
    $
    (36,866
    )
    
    $
    (15,993
    )
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20. Subsequent Events
  31




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Managements Discussion
and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
 COMPANY OVERVIEW
  CRITICAL ACCOUNTING POLICIES
 Critical Accounting Policies
 RESULTS OF OPERATIONS
 Twelve Weeks EndedAugust 23,
    
    
    August 25,2008
    
    
    2007Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold (exclusive of items
shown below)
    
    
    54.1
    
    
    
    49.8Selling, delivery and administrative expenses
    
    
    47.2
    
    
    
    46.5Restructuring charges (credits)
    
    
    (0.7
    )
    
    
    Depreciation and amortization
    
    
    2.1
    
    
    
    2.3Loss on sale or abandonment of assets
    
    
    
    
    
    
    Property and equipment impairment
    
    
    
    
    
    
    1.5Operating profit (loss)
    
    
    (2.7
    )
    
    
    (0.1
    )Interest expense
    
    
    2.0
    
    
    
    1.6Reorganization charges
    
    
    1.0
    
    
    
    1.0Other (income) expense
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    (5.7
    )
    
    
    (2.7
    )Provision (benefit) for income taxes
    
    
    (0.1
    )
    
    
    (0.4
    )Net income (loss)
    
    
    (5.6
    )%
    
    
    (2.3
    )%
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Net Revenues
 (dollars in thousands)
 Twelve Weeks Ended
    
    
    Twelve Weeks Ended
    
    
    %August 23, 2008
    
    
    August 25, 2007
    
    
    Increase /Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    (Decrease)Route revenues
    
    $
    569,950
    
    
    
    86.5
    %
    
    $
    599,280
    
    
    
    86.9
    %
    
    
    (4.9
    )%Outlet revenues
    
    
    72,292
    
    
    
    11.0
    
    
    
    74,070
    
    
    
    10.7
    
    
    
    (2.4
    )Direct revenues
    
    
    16,467
    
    
    
    2.5
    
    
    
    16,466
    
    
    
    2.4
    
    
    
    0.0Total net revenues
    
    $
    658,709
    
    
    
    100.0
    %
    
    $
    689,816
    
    
    
    100.0
    %
    
    
    (4.5
    )%
 Consolidated Net Revenues
  Route net revenues.
 Outlet net revenues.
 Direct net revenues.
 Gross Profit (exclusive of depreciation and amortization)
  33




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Selling, Delivery and Administrative Expenses
  Restructuring Charges (Credits)
   Property and Equipment Impairment
   Operating Profit (Loss)
 (dollars in thousands)
 Twelve Weeks Ended
    
    
    Twelve Weeks EndedAugust 23, 2008
    
    
    August 25, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %Segment Profit (Loss)Route profit (loss)
    
    $
    (7,999
    )
    
    
    44.8
    
    
    $
    23,257
    
    
    NMOutlet profit (loss)
    
    
    5,617
    
    
    
    (31.5
    )
    
    
    7,208
    
    
    NMDirect profit (loss)
    
    
    792
    
    
    
    (4.4
    )
    
    
    1,473
    
    
    NMTotal segment profit (loss)
    
    
    (1,590
    )
    
    
    8.9
    
    
    
    31,938
    
    
    NMCorporate
    
    
    (16,271
    )
    
    
    91.1
    
    
    
    (32,202
    )
    
    NMTotal operating profit (loss)
    
    $
    (17,861
    )
    
    
    100.0
    
    
    $
    (264
    )
    
    NM
 
 NM
    
     Not meaningful. 34




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Consolidated Operating Profit (Loss)
  Route operating profit (loss).
 Outlet operating profit (loss).
 Direct operating profit (loss).
 Reorganization Charges
   Interest Expense
  Provision (Benefit) for Income Taxes
  35




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CASH RESOURCES AND LIQUIDITY
 CASH FLOWS
  Cash Provided By (Used In) Operating Activities
  Cash Provided By (Used In) Investing Activities
  Cash Provided By (Used In) Financing Activities
  SOURCES OF LIQUIDITY AND CAPITAL
  36




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DIP Facility
    37




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OFF-BALANCE SHEET FINANCING
  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
      RECENT ACCOUNTING PRONOUNCEMENTS
  
 FORWARD-LOOKING STATEMENTS
  
    
    our ability to continue as a going concern;
    
    our ability to obtain approval of the Plan and related
documents from the
Bankruptcy Court on a timely basis;
    
    our ability to obtain court approval with respect to motions filed by us from time to time in the
Chapter 11 proceeding;
    
    our ability to operate pursuant to the covenants, terms and certifications of the DIP Facility;
    
    our ability to successfully negotiate an extension and increase in the amount available under, or
refinance, our DIP Facility, if needed, which expires on February 9, 2009;
    
    our ability to consummate the Plan, if confirmed by the Bankruptcy Court;
 39




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
    
    our ability to implement our business plan;
    
    our ability to obtain ratification from our unionized workforce of the modifications to their
collective bargaining agreements contemplated by the Plan;
    
    our ability to obtain the financing necessary to implement our business plan and emerge from Chapter 11;
    
    risks associated with third parties seeking and obtaining court approval for the appointment of a
Chapter 11 trustee or to convert the Chapter 11 proceeding to a Chapter 7 proceeding;
    
    risks associated with cost increases in materials, ingredients, energy, and employee wages and benefits;
    
    risks associated with our restructuring activities, including the risks associated with achieving the
desired savings;
    
    our ability to obtain and maintain adequate terms with vendors and service providers;
    
    the potential adverse impact of the Chapter 11 proceeding on our liquidity or results of operations;
    
    risks associated with product price increases, including the risk that such actions will not
effectively offset inflationary cost pressures and may adversely impact sales of our products;
    
    the effectiveness of our efforts to manage our exposure to price increases with respect to various
ingredients and energy through our hedging strategies and our ability to hedge given our financial
condition;
    
    our ability to attract, motivate and/or retain key executives and employees;
    
    changes in our relationship with employees and the unions that represent them;
    
    successful implementation of information technology improvements;
    
    increased costs and uncertainties with respect to the ABA Plan;
    
    successful remediation of material weaknesses in our internal controls;
    
    the performance of our recent and planned new product introductions,
including the success of such new products in achieving and retaining
market share; and
    
    the outcome of legal proceedings to which we are or may become a party.
  Bankruptcy-Related Factors
 
    
    the significant time that is and will be required by management to
implement the Plan, as well as to continue to evaluate various
alternatives in the event the Plan is not confirmed by the Bankruptcy
Court, including, but not
limited to, the sale of the Company or some or all of our assets,
infusion of capital, debt restructuring, or any combination of these
options;
    
    the terms of any reorganization plan ultimately confirmed;
    
    our ability to implement our business plan;
    
    our ability to operate our business under the restrictions imposed by
the Chapter 11 process and in compliance with the limitations contained
in the debtor-in-possession credit facility;
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
    
    the instructions, orders and decisions of the Bankruptcy Court and
other effects of legal and administrative proceedings, settlements,
investigations and claims;
    
    changes in our relationships with suppliers and customers, including
the ability to maintain those relationships and contracts that are
critical to our operations, in light of the Chapter 11 process;
    
    our ability to maintain adequate liquidity and working capital under
our DIP Facility, as well as our ongoing ability to purchase from
vendors on satisfactory terms throughout the reorganization;
    
    our reliance on key management personnel, including the effects of the
Chapter 11 process on our ability to attract and retain key management
personnel;
    
    our ability to successfully reject unfavorable contracts and leases; and
    
    the duration of the Chapter 11 process.
 General Factors
 
    
    the availability of capital on acceptable terms in light of the various factors discussed herein,
including our reorganization under the Chapter 11 process;
    
    the availability and cost of raw materials, packaging, fuels and utilities, and the ability to recover
these costs in the pricing of products, improved efficiencies and other strategies;
    
    increased pension, health care, workers compensation and other employee costs;
    
    actions of competitors, including pricing policies and promotional spending;
    
    increased costs, delays or deficiencies related to restructuring activities;
    
    the effectiveness of advertising and marketing spending;
    
    the effectiveness and adequacy of our information and data processing systems;
    
    changes in general economic and business conditions (including the bread and sweet goods markets);
    
    costs associated with increased contributions to single employer, multiple employer or multi-employer
pension plans;
    
    any inability to protect and maintain the value of our intellectual property;
    
    future product recalls or food safety concerns;
    
    further consolidation in the retail food industry;
    
    changes in consumers eating habits and dietary
preferences;
    
    costs associated with environmental compliance and remediation;
    
    obligations and uncertainties with respect to the ABA Plan;
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
    
    the impact of any withdrawal liability arising under our multi-employer pension plans as a result of
prior actions or current consolidations;
    
    actions of governmental entities, including regulatory requirements;
    
    acceptance of new product offerings by consumers and our ability to expand existing brands;
    
    the performance of new product introductions, including the success of such new products in achieving
and retaining market share;
    
    the effectiveness of hedging activities;
    
    expenditures necessary to carry out cost-saving initiatives and savings derived from these initiatives;
    
    changes in our business strategies;
    
    unexpected costs or delays incurred in connection with facility closings;
    
    bankruptcy filings by customers;
    
    changes in our relationship with employees and the unions that represent them;
    
    the outcome of legal proceedings to which we are or may become a party, including without limitation
any litigation stemming from our sale of convertible notes on August 12, 2004 or events leading up to
our filing of a voluntary petition for protection under Chapter 11 of the Bankruptcy Code;
    
    business disruption from terrorist acts, our nations response to such acts and acts of war; and
    
    other factors.
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   42




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 2 2 2
 Accounting for Contingencies
 44




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Item 6. Exhibits
 Exhibit No.
    
    Exhibit3.1
    
    Restated Certificate of Incorporation of Interstate Bakeries
Corporation, as amended (incorporated herein by reference to
Exhibit 3.1 to Interstate Bakeries Corporations Amendment No. 1 to
its Quarterly Report on Form 10-Q for the quarter ended March 9, 2002,
filed on April 19, 2002).3.1.1
    
    Certificate of Amendment to the Restated Certificate of Incorporation
of Interstate Bakeries Corporation (incorporated herein by reference
to Exhibit 3.1 to Interstate Bakeries Corporations Form 8-K filed on
March 21, 2007).3.2
    
    Restated Bylaws of Interstate Bakeries Corporation (incorporated
herein by reference to Exhibit 3.1 to Interstate Bakeries
Corporations Quarterly Report on Form 10-Q for the quarter ended
November 15, 2003 filed on December 22, 2003).3.2.1
    
    Amendment Number One to the Restated Bylaws of Interstate Bakeries
Corporation (incorporated herein by reference to Exhibit 3.2 to
Interstate Bakeries Corporations Form 8-K filed on March 21, 2007).4.1
    
    Preferred Stock Purchase Rights Agreement effective as of May 8, 2000
(incorporated herein by reference to the Current Report on Form 8-K of
Interstate Bakeries Corporation filed on May 16, 2000).31.1
    
    Certification of Craig D. Jung pursuant to Rule 13a-14(a)/15d-14(a)*31.2
    
    Certification of J. Randall Vance pursuant to Rule 13a-14(a)/15d-14(a)*32.1
    
    Certification of Craig D. Jung pursuant to 18 U.S.C. Section 1350*32.2
    
    Certification of J. Randall Vance pursuant to 18 U.S.C. Section 1350*
 
 *
    
    Filed herewith 45




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SIGNATURES
  INTERSTATE BAKERIES CORPORATIONDated: October 7, 2008
    By:
    /s/ Craig D. JungCraig D. JungChief Executive Officer
(Principal Executive Officer) Dated: October 7, 2008
    By:
    /s/ J. Randall VanceJ. Randall VanceChief Financial Officer
(Principal Financial and Accounting Officer) 46