##### 



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 26, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number 1-11165
 
 INTERSTATE BAKERIES CORPORATION
 (Exact name of registrant 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)
 (816) 502-4000
(Registrants telephone number, including area code)
  o þ
  o þ o
  o þ




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##### 



EXPLANATORY NOTE
  2




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##### 



INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED AUGUST 26, 2006
 Description
    
    PagePART I  FINANCIAL INFORMATION (UNAUDITED)
    
    
    4ITEM 1.
    
    Financial Statements
    
    
    4Condensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Operations
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    6Condensed Consolidated Statement of Stockholders Deficit
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    34Forward-Looking Statements
    
    
    38ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    43ITEM 4.
    
    Controls and Procedures
    
    
    43PART II  OTHER INFORMATION
    
    
    44ITEM 2.
    
    Unregistered Sales of Equity
Securities and use of Proceeds
    
    
    44ITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    44Signatures
    
    
    45
  3




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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 26,
    
    
    June 3,2006
    
    
    2006ASSETSCurrent assetsCash
    
    $
    115,200
    
    
    $
    78,178Restricted cash
    
    
    
    
    
    
    86,353Accounts receivable, less allowance for doubtful accounts of $3,450 and $3,400 respectively
    
    
    144,486
    
    
    
    150,507Inventories
    
    
    67,772
    
    
    
    65,431Assets held for sale
    
    
    10,623
    
    
    
    11,931Other current assets
    
    
    66,959
    
    
    
    67,637Total current assets
    
    
    405,040
    
    
    
    460,037Property and equipment, net
    
    
    584,969
    
    
    
    601,101Other intangible assets
    
    
    160,919
    
    
    
    161,128Other assets
    
    
    30,540
    
    
    
    30,789Total assets
    
    $
    1,181,468
    
    
    $
    1,253,055LIABILITIES AND STOCKHOLDERS DEFICITLiabilities not subject to compromiseCurrent liabilitiesLong-term debt
    
    $
    448,927
    
    
    $
    494,882Accounts payable
    
    
    115,819
    
    
    
    117,044Accrued expenses
    
    
    241,847
    
    
    
    244,166Total current liabilities
    
    
    806,593
    
    
    
    856,092Other liabilities
    
    
    276,435
    
    
    
    272,647Deferred income taxes
    
    
    77,019
    
    
    
    77,819Total liabilities not subject to compromise
    
    
    1,160,047
    
    
    
    1,206,558Liabilities subject to compromise
    
    
    288,138
    
    
    
    287,080Stockholders 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,
45,288,000 and 45,295,000 shares outstanding, respectively
    
    
    816
    
    
    
    816Additional paid-in capital
    
    
    584,003
    
    
    
    585,631Accumulated deficit
    
    
    (169,042
    )
    
    
    (142,711
    )Treasury stock, 36,291,000 and 36,284,000 shares at cost, respectively
    
    
    (678,616
    )
    
    
    (678,572
    )Unearned restricted stock compensation
    
    
    
    
    
    
    (1,869
    )Accumulated other comprehensive loss
    
    
    (3,878
    )
    
    
    (3,878
    )Total stockholders deficit
    
    
    (266,717
    )
    
    
    (240,583
    )Total liabilities and stockholders deficit
    
    $
    1,181,468
    
    
    $
    1,253,055
  4




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##### 



INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)  (dollars in thousands, except per share data)
 Twelve Weeks EndedAugust 26,
    
    
    August 20,2006
    
    
    2005Net sales
    
    $
    684,245
    
    
    $
    744,649Cost of products sold (exclusive of items shown below)
    
    
    352,172
    
    
    
    370,413Selling, delivery and administrative expenses
    
    
    322,668
    
    
    
    351,187Restructuring (credits) charges
    
    
    529
    
    
    
    (4,720
    )Depreciation and amortization
    
    
    16,417
    
    
    
    18,102Loss on sale or abandonment of assets
    
    
    218
    
    
    
    163692,004
    
    
    
    735,145Operating income (loss)
    
    
    (7,759
    )
    
    
    9,504Other (income) expenseInterest expense (excluding unrecorded contractual interest expense of $1,383 and
$1,317, respectively)
    
    
    12,790
    
    
    
    10,891Reorganization charges, net
    
    
    6,655
    
    
    
    10,656Other income
    
    
    (31
    )
    
    
    (33
    )19,414
    
    
    
    21,514Loss before income taxes
    
    
    (27,173
    )
    
    
    (12,010
    )Provision (benefit) for income taxes
    
    
    (842
    )
    
    
    (5,023
    )Net loss
    
    $
    (26,331
    )
    
    $
    (6,987
    )Loss per shareBasic
    
    $
    (0.58
    )
    
    $
    (0.15
    )Diluted
    
    $
    (0.58
    )
    
    $
    (0.15
    )
  5




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##### 



INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)  (dollars in thousands)
 Twelve Weeks EndedAugust 26,
    
    
    August 20,2006
    
    
    2005Operating activitiesNet loss
    
    $
    (26,331
    )
    
    $
    (6,987
    )Depreciation and amortization
    
    
    16,417
    
    
    
    18,102Provision (benefit) for deferred income taxes
    
    
    300
    
    
    
    (419
    )Reorganization charges, net
    
    
    6,655
    
    
    
    10,656Cash reorganization items
    
    
    (5,864
    )
    
    
    (8,911
    )Non-cash bankruptcy-related credits
    
    
    (113
    )
    
    
    (741
    )Non-cash interest expense  deferred debt fees
    
    
    (33
    )
    
    
    1,405Non-cash restricted stock and deferred share compensation expense
    
    
    196
    
    
    
    327(Gain) loss on sale, write-down or abandonment of assets
    
    
    (849
    )
    
    
    (8,110
    )Change in operating assets and liabilitiesAccounts receivable
    
    
    6,021
    
    
    
    25,129Inventories
    
    
    (2,341
    )
    
    
    4,081Other current assets
    
    
    (422
    )
    
    
    14,080Accounts payable and accrued expenses
    
    
    (2,758
    )
    
    
    (17,615
    )Long-term portion of self insurance reserves
    
    
    4,453
    
    
    
    4,058Other
    
    
    (126
    )
    
    
    (1,495
    )Net cash from (used in) operating activities
    
    
    (4,795
    )
    
    
    33,560Investing activitiesPurchases of property and equipment
    
    
    (3,255
    )
    
    
    (8,287
    )Proceeds from sale of assets
    
    
    5,331
    
    
    
    21,977Restricted cash deposit
    
    
    (3,764
    )
    
    
    (19,635
    )Restricted cash release
    
    
    89,222
    
    
    
    Acquisition and development of software assets
    
    
    (307
    )
    
    
    Other
    
    
    186
    
    
    
    4Net cash from (used in) investing activities
    
    
    87,413
    
    
    
    (5,941
    )Financing activitiesReduction of long-term debt
    
    
    (45,596
    )
    
    
    (268
    )Increase in revolving credit facility
    
    
    
    
    
    
    13,414Net cash from (used in) financing activities
    
    
    (45,596
    )
    
    
    13,146Net increase in cash
    
    
    37,022
    
    
    
    40,765Cash at the beginning of period
    
    
    78,178
    
    
    
    151,558Cash at the end of period
    
    $
    115,200
    
    
    $
    192,323Cash payments (received)Interest
    
    $
    8,886
    
    
    $
    9,991Income taxes
    
    
    (564
    )
    
    
    (15,584
    )Non-cash investing and financing activitiesLong-term debt reduction from lease rejections
    
    
    359
    
    
    
    169Asset disposals from lease rejections
    
    
    271
    
    
    
    113Convertible note conversion to equity
    
    
    1
    
    
    
    Interest
income earned on restricted cash deposit
    
    
    598
    
    
    
    
  6




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##### 



INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
 (UNAUDITED)  (dollars and shares in thousands)
 Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    
    AccumulatedStock Issued
    
    
    Additional
    
    
    
    
    
    
    Treasury Stock
    
    
    Restricted
    
    
    Other
    
    
    TotalNumber
    
    
    Par
    
    
    Paid-in
    
    
    Accumulated
    
    
    Number of
    
    
    
    
    
    
    Stock
    
    
    Comprehensive
    
    
    Stockholdersof Shares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    Shares
    
    
    Cost
    
    
    Compensation
    
    
    Loss
    
    
    DeficitBalance June 3, 2006
    
    
    81,579
    
    
    $
    816
    
    
    $
    585,631
    
    
    $
    (142,711
    )
    
    
    (36,284
    )
    
    $
    (678,572
    )
    
    $
    (1,869
    )
    
    $
    (3,878
    )
    
    $
    (240,583
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,331
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,331
    )Adoption of SFAS No. 123R,
Share-Based Payment
    
    
    
    
    
    
    
    
    
    
    (1,869
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,869
    
    
    
    
    
    
    
    Convertible note conversion
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1Restricted share
compensation expense
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270Restricted share
surrendered
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (7
    )
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    (74
    )Balance August 26, 2006
    
    
    81,579
    
    
    $
    816
    
    
    $
    584,003
    
    
    $
    (169,042
    )
    
    
    (36,291
    )
    
    $
    (678,616
    )
    
    $
    
    
    
    $
    (3,878
    )
    
    $
    (266,717
    )
  7




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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.
  8
      Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code
 9
      2. Description of Business and Significant Accounting Policies
 Description of Business
    Significant Accounting Policies
 Significant Accounting Policies
 Fiscal year end
 Principles of consolidation
 Use of estimates
 Cash and cash equivalents
 Contingencies Accounting for Contingencies
 10
      Newly Adopted Accounting Pronouncements Accounting Changes and
Error Corrections Accounting Changes Reporting Accounting Changes in Interim Financial
Statements
 Share-Based Payment Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees
 Inventory Costs  An Amendment of ARB No. 43,
Chapter 4 .
 Recently Issued Accounting Pronouncements Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 Fair Value Measurements
 Quantifying Financial Misstatements
 11
      Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
 How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation)
 12
      3. Inventories
  August 26,
    
    
    June 3,2006
    
    
    2006(dollars in thousands)Ingredients and packaging
    
    $
    43,186
    
    
    $
    44,540Finished goods
    
    
    24,586
    
    
    
    20,891$
    67,772
    
    
    $
    65,431
 4. Property and Equipment
  August 26,
    
    
    June 3,2006
    
    
    2006(dollars in thousands)Land and buildings (lives ranging from 10 to 35 years)
    
    $
    387,641
    
    
    $
    390,573Machinery and equipment (lives ranging from 4 to 15 years)
    
    
    927,801
    
    
    
    931,4081,315,442
    
    
    
    1,321,981Less accumulated depreciation
    
    
    (730,473
    )
    
    
    (720,880
    )$
    584,969
    
    
    $
    601,101
  5. Assets Held for Sale
  13
      6. Lease Obligations
  Guarantors
Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness
of Others
 7. Other Intangible Assets
  August 26,
    
    
    June 3,2006
    
    
    2006(dollars in thousands)Intangible assets with indefinite lives(generally trademarks and trade names)Gross carrying amount
    
    $
    157,471
    
    
    $
    157,471Intangible assets with finite livesGross carrying amount
    
    $
    13,854
    
    
    $
    13,854Less:Accumulated amortization
    
    
    (10,406
    )
    
    
    (10,197
    )Net carrying amount
    
    $
    3,448
    
    
    $
    3,657
  8. Debt
  14
      August 26,
    
    
    June 3,2006
    
    
    2006(dollars in thousands)SecuredPost-petition credit agreement
    
    $
    
    
    
    $
    Senior secured credit facility  pre-petition
    
    
    444,459
    
    
    
    489,817Unsecured6% senior subordinated convertible notes  pre-petition
    
    
    99,999
    
    
    
    100,000Capital leasesReal Estate
    
    
    4,468
    
    
    
    5,065Capital lease converted to pre-petition debt
    
    
    6,125
    
    
    
    6,125555,051
    
    
    
    601,007Less:Long-term
debt recorded to current liabilities
    
    
    (448,927
    )
    
    
    (494,882
    )Pre-petition debt included in liabilities subject to compromise
    
    
    (106,124
    )
    
    
    (106,125
    )Long-term
debt recorded as long-term liability
    
    $
    
    
    
    $
    
 Post-Petition Credit Agreement
    15
      Senior Secured Credit Facility
  6% Senior Subordinated Convertible Notes
  Other Matters
   9. Derivative Instruments
  16
      10. Liabilities Subject to Compromise
    17
      August 26,
    
    
    June 3,2006
    
    
    2006(dollars in thousands)Accounts payable
    
    $
    130,367
    
    
    $
    129,951Taxes payable
    
    
    7,817
    
    
    
    7,966Retirement obligations (SERP and deferred compensation)
    
    
    14,558
    
    
    
    14,598Legal reserve
    
    
    13,160
    
    
    
    12,910Interest bearing debt and capital leases
    
    
    106,124
    
    
    
    106,125Other
    
    
    16,112
    
    
    
    15,530$
    288,138
    
    
    $
    287,080
 11. Employee Benefit Plans
 American Bakers Association Retirement Plan
    18
      Twelve Weeks EndedAugust 26,
    
    
    August 20,2006
    
    
    2005(dollars in thousands)Service cost
    
    $
    261
    
    
    $
    364Interest cost
    
    
    776
    
    
    
    740Expected return on negative plan assets
    
    
    84
    
    
    
    57Recognition ofActuarial (gain) loss
    
    
    
    
    
    
    (1,281
    )Total periodic pension (credit) cost
    
    
    1,121
    
    
    
    (120
    )Curtailment gain
    
    
    
    
    
    
    (1,176
    )Net pension (credit) expense
    
    $
    1,121
    
    
    $
    (1,296
    )
 Defined Benefit Pension Plan
  Twelve Weeks EndedAugust 26,
    
    
    August 20,2006
    
    
    2005(dollars in thousands)Service cost
    
    $
    213
    
    
    $
    209Interest cost
    
    
    916
    
    
    
    932Expected return on plan assets
    
    
    (1,246
    )
    
    
    (1,127
    )Recognition ofPrior service cost
    
    
    63
    
    
    
    66Actuarial loss
    
    
    7
    
    
    
    124Net pension expense
    
    $
    (47
    )
    
    $
    204
 19
      Postretirement Health and Life Plans
     Twelve Weeks EndedAugust 26,
    
    
    August 20,2006
    
    
    2005(dollars in thousands)Service cost
    
    $
    298
    
    
    $
    333Interest cost
    
    
    833
    
    
    
    783AmortizationUnrecognized prior service cost (benefit)
    
    
    (1,706
    )
    
    
    (1,706
    )Unrecognized net loss
    
    
    242
    
    
    
    302Net postretirement benefit (credit) expense
    
    $
    (333
    )
    
    $
    (288
    )
 12. Supplemental Executive Retirement Plan
    20
      13. Stock-Based Compensation
   1996 Stock Incentive Plan
   WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise Price
    
    
    Contractual
    
    
    AggregateShares
    
    
    Per Share
    
    
    Term
    
    
    Intrinsic Value(dollars in(in thousands)
    
    
    
    
    
    
    
    
    thousands)Outstanding, beginning of period
    
    
    4,099
    
    
    $
    16.41Expired
    
    
    (31
    )
    
    
    20.98Outstanding, end of period
    
    
    4,068
    
    
    
    16.38
    
    
    
    4.34
    
    
    $
    28,952Options
exercisable, end of
period
    
    
    4,067
    
    
    
    16.38
    
    
    
    4.34
    
    
    $
    28,944
    21
      WeightedAverageGrant DateShares
    
    
    Fair Value(in thousands)Nonvested, beginning of period
    
    
    162
    
    
    $
    14.49Surrendered
    
    
    (7
    )
    
    
    11.05Nonvested, end of period
    
    
    155
    
    
    
    14.64
   Pro Forma Employee Stock-Based Compensation Expense
 Accounting for
Stock-Based Compensation  Transition and Disclosure
  Twelve WeeksEndedAugust 20,2005(dollars in thousands,except per sharedata)Net loss, as reported
    
    $
    (6,987
    )Add: Stock-based employee
compensation expense included in
reported net income, net of income
taxes of $0
    
    
    327Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of income taxes of
$0
    
    
    (434
    )Pro forma net loss
    
    $
    (7,094
    )Basic and diluted loss per shareAs reported
    
    $
    (0.15
    )Pro forma
    
    
    (0.16
    )
 22
      14. Restructuring (Credits) Charges
  Twelve Weeks EndedAugust 26,
    
    
    August 20,2006
    
    
    2005(dollars in thousands)Severance costs
    
    $
    229
    
    
    $
    2,822Long-lived asset (credits) charges
    
    
    (408
    )
    
    
    (7,777
    )Curtailment gain on a benefit plan
    
    
    3⁄4
    
    
    
    (706
    )Other exit costs
    
    
    708
    
    
    
    941Total
    
    $
    529
    
    
    $
    (4,720
    )
 Fiscal 2007 Activity
      Long-LivedSeverance
    
    Assetand Related
    
    ChargesBenefits
    
    (Credits)
    
    Other
    
    Total(dollars in thousands)Fiscal 2004 PlanBalance June 3, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Expensed in Fiscal 2007
    
    
    
    
    
    
    (8
    )
    
    
    4
    
    
    
    (4
    )Cash Paid in Fiscal 2007
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Noncash Utilization in Fiscal 2007
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Balance, August 26, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fiscal 2005 Consolidation
& RIF PlanBalance June 3, 2006
    
    
    199
    
    
    
    
    
    
    
    
    
    
    
    199Expensed in Fiscal 2007
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    92Cash Paid in Fiscal 2007
    
    
    (140
    )
    
    
    
    
    
    
    (92
    )
    
    
    (232
    )Noncash Utilization in Fiscal 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, August 26, 2006
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    59
 23
      Long-LivedSeverance
    
    Assetand Related
    
    ChargesBenefits
    
    (Credits)
    
    Other
    
    Total(dollars in thousands)Fiscal 2005 PC Review PlanBalance June 3, 2006
    
    $
    893
    
    
    $
    
    
    
    $
    98
    
    
    $
    991Expensed in Fiscal 2007
    
    
    
    
    
    
    (109
    )
    
    
    435
    
    
    
    326Cash Paid in Fiscal 2007
    
    
    (352
    )
    
    
    
    
    
    
    (458
    )
    
    
    (810
    )Noncash Utilization in Fiscal 2007
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    109Balance, August 26, 2006
    
    
    541
    
    
    
    
    
    
    
    75
    
    
    
    616Fiscal 2006 PC Review PlanBalance June 3, 2006
    
    
    1,000
    
    
    
    
    
    
    
    45
    
    
    
    1,045Expensed in Fiscal 2007
    
    
    
    
    
    
    (291
    )
    
    
    177
    
    
    
    (114
    )Cash Paid in Fiscal 2007
    
    
    (338
    )
    
    
    
    
    
    
    (178
    )
    
    
    (516
    )Noncash Utilization in Fiscal 2007
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    291Balance, August 26, 2006
    
    
    662
    
    
    
    
    
    
    
    44
    
    
    
    706Accounting Office ClosingBalance June 3, 2006
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    345Expensed in Fiscal 2007
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    229Cash Paid in Fiscal 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Noncash Utilization in Fiscal 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, August 26, 2006
    
    
    574
    
    
    
    
    
    
    
    
    
    
    
    574ConsolidatedBalance June 3, 2006
    
    
    2,437
    
    
    
    
    
    
    
    143
    
    
    
    2,580Expensed in Fiscal 2007
    
    
    229
    
    
    
    (408
    )
    
    
    708
    
    
    
    529Cash Paid in Fiscal 2007
    
    
    (830
    )
    
    
    
    
    
    
    (732
    )
    
    
    (1,562
    )Noncash Utilization in Fiscal 2007
    
    
    
    
    
    
    408
    
    
    
    
    
    
    
    408Balance, August 26, 2006
    
    $
    1,836
    
    
    $
    
    
    
    $
    119
    
    
    $
    1,955
 Fiscal 2006 Activity
     24
      Long-LivedSeverance
    
    Assetand Related
    
    Charges orBenefits
    
    (Credits)
    
    Other
    
    TotalFiscal 2004 Plan
    
    $
    2,537
    
    
    $
    (8,091
    )
    
    $
    7,006
    
    
    $
    1,452Fiscal 2005 Consolidation
& RIF Plan
    
    
    5,575
    
    
    
    6,389
    
    
    
    2,675
    
    
    
    14,639Fiscal 2005 PC Review Plan
    
    
    7,206
    
    
    
    18,548
    
    
    
    (4,593
    )
    
    
    21,161Software Write-off
    
    
    3⁄4
    
    
    
    4,509
    
    
    
    3⁄4
    
    
    
    4,509Fiscal 2006 PC Review Plan
    
    
    6,163
    
    
    
    (14,691
    )
    
    
    3,202
    
    
    
    (5,326
    )Accounting Office Closings
    
    
    574
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    574
  Severance
    
    
    Long-Livedand Related
    
    
    AssetBenefits
    
    
    Charges (1)
    
    
    Other
    
    
    TotalFiscal 2005 Consolidation
& RIF Plan
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    281
    
    
    $
    281Fiscal 2005 PC Review Plan
    
    
    3⁄4
    
    
    
    335
    
    
    
    598
    
    
    
    933Fiscal 2006 PC Review Plan
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,049
    
    
    
    1,049Accounting Office Closings
    
    
    170
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    170
 
 (1)
    
    Excludes gains expected to be realized on subsequent sales of real property. 15. Reorganization Charges
  Twelve Weeks Ended
    
    
    Twelve Weeks EndedAugust 26, 2006
    
    
    August 20, 2005Reorganization
    
    
    Cash
    
    
    Reorganization
    
    
    CashCharges
    
    
    Payments
    
    
    Charges
    
    
    Payments(dollars in thousands)
    
    
    (dollars in thousands)Professional fees
    
    $
    7,933
    
    
    $
    8,470
    
    
    $
    8,852
    
    
    $
    7,481Employee retention expenses
    
    
    350
    
    
    
    
    
    
    
    2,873
    
    
    
    2,423Lease rejection charges (credits)
    
    
    83
    
    
    
    
    
    
    
    (76
    )
    
    
    Interest income
    
    
    (1,159
    )
    
    
    (2,054
    )
    
    
    (493
    )
    
    
    (493
    )Gain on sale of assets
    
    
    (552
    )
    
    
    (552
    )
    
    
    (500
    )
    
    
    (500
    )Reorganization charges, net
    
    $
    6,655
    
    
    $
    5,864
    
    
    $
    10,656
    
    
    $
    8,911
 25
      16. Income Taxes
  Twelve Weeks EndedAugust 26,
    
    August 20,2006
    
    2005Statutory federal tax rate
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net
    
    
    1.1
    
    
    
    1.1Valuation allowance increase
    
    
    (31.6
    )
    
    
    (26.8
    )Adjustments to prior year tax accruals
    
    
    
    
    
    
    33.6Other
    
    
    (1.4
    )
    
    
    (1.1
    )3.1
    %
    
    
    41.8
    %
    17. Commitments and Contingencies
  26
      27
      28
      29
      30
      31
      18. Earnings (Loss) per Share
 Earnings per
Share
  Twelve Weeks EndedAugust 26,
    
    August 20,2006
    
    2005(in thousands)Weighted average
common shares
outstanding:Basic and diluted
    
    
    45,165
    
    
    
    45,091
   19. Comprehensive Loss
  Twelve Weeks EndedAugust 26,
    
    
    August 20,2006
    
    
    2005(dollars in thousands)Net loss
    
    $
    (26,331
    )
    
    $
    (6,987
    )Other comprehensive loss:Commodity derivative gains
reclassified to cost of
products sold, net of income
taxes of $0
    
    
    
    
    
    
    (477
    )Comprehensive loss
    
    $
    (26,331
    )
    
    $
    (7,464
    )
 20. Segment Information
 Disclosures about Segments of an Enterprise and Related Information
  Wholesale operations
 Retail operations
    32
      Twelve Weeks EndedAugust 26, 2006
    
    
    August 20, 2005(dollars in thousands)Net SalesWholesale operations
    
    $
    605,045
    
    
    $
    655,090Retail operations
    
    
    79,200
    
    
    
    89,559Total net sales
    
    $
    684,245
    
    
    $
    744,649Operating Income (Loss)Wholesale operations
    
    $
    7,631
    
    
    $
    17,775Retail operations
    
    
    2,837
    
    
    
    5,02310,468
    
    
    
    22,798Corporate
    
    
    (18,227
    )
    
    
    (13,294
    )Total operating income (loss)
    
    
    (7,759
    )
    
    
    9,504Interest expense
    
    
    12,790
    
    
    
    10,891Reorganization charges
    
    
    6,655
    
    
    
    10,656Other (income) expense
    
    
    (31
    )
    
    
    (33
    )19,414
    
    
    
    21,514Loss before income taxes
    
    
    (27,173
    )
    
    
    (12,010
    )Provision (benefit) for income taxes
    
    
    (842
    )
    
    
    (5,023
    )Net loss
    
    $
    (26,331
    )
    
    $
    (6,987
    )
 33
      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
  OVERVIEW OF CERTAIN TRENDS AND EVENTS AFFECTING OPERATIONS, FINANCIAL POSITION AND LIQUIDITY
 Overview of Certain Trends and Events Affecting Operations, Financial Position and
Liquidity
 CRITICAL ACCOUNTING POLICIES
 Critical Accounting Policies
 RESULTS OF OPERATIONS
  Twelve Weeks EndedAugust 26,
    
    August 20,2006
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold (exclusive of items shown below)
    
    
    51.5
    
    
    
    49.8Selling, delivery and administrative expenses
    
    
    47.1
    
    
    
    47.2Restructuring (credits) charges
    
    
    0.1
    
    
    
    (0.6
    )Depreciation and amortization
    
    
    2.4
    
    
    
    2.4Loss on sale or abandonment of assets
    
    
    
    
    
    
    Operating income (loss)
    
    
    (1.1
    )
    
    
    1.2Interest expense
    
    
    1.9
    
    
    
    1.4Reorganization charges, net
    
    
    1.0
    
    
    
    1.4Other income
    
    
    
    
    
    
    
 34
      Twelve Weeks EndedAugust 26,
    
    August 20,2006
    
    2005Loss before income taxes
    
    
    (4.0
    )
    
    
    (1.6
    )Provision (benefit) for income taxes
    
    
    (0.1
    )
    
    
    (0.7
    )Net loss
    
    
    (3.9
    )%
    
    
    (0.9
    )%
 Net
Sales  (dollars in thousands)
 Twelve Weeks Ended
    
    
    Twelve Weeks EndedAugust 26, 2006
    
    
    August 20, 2005
    
    
    Increase/Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    (Decrease)Wholesale operations
    
    $
    605,045
    
    
    
    88.4
    %
    
    $
    655,090
    
    
    
    88.0
    %
    
    
    (7.6
    )%Retail operations
    
    
    79,200
    
    
    
    11.6
    
    
    
    89,559
    
    
    
    12.0
    
    
    
    (11.6
    )Total net sales
    
    $
    684,245
    
    
    
    100.0
    %
    
    $
    744,649
    
    
    
    100.0
    %
    
    
    (8.1
    )
 Consolidated net sales.
 Wholesale operations net sales.
 Retail operations net sales.
 Gross profit (exclusive of depreciation and amortization).
 35
      Selling, delivery and administrative expenses.
 Restructuring (credits) charges.
   Operating Income (Loss)  (dollars in thousands)
 Twelve Weeks Ended
    
    
    Twelve Weeks EndedAugust 26, 2006
    
    
    August 20, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %Wholesale operations
    
    $
    7,631
    
    
    
    (98.4
    )%
    
    $
    17,775
    
    
    
    187.0
    %Retail operations
    
    
    2,837
    
    
    
    (36.5
    )
    
    
    5,023
    
    
    
    52.910,468
    
    
    
    (134.9
    )
    
    
    22,798
    
    
    
    239.9Corporate
    
    
    (18,227
    )
    
    
    234.9
    
    
    
    (13,294
    )
    
    
    (139.9
    )Total operating income (loss)
    
    $
    (7,759
    )
    
    
    100.0
    %
    
    $
    9,504
    
    
    
    100.0
    %
 Consolidated operating income (loss).
 Wholesale operating income.
 36
      Retail operating income (loss).
 Reorganization charges.
  Interest expense.
 Provision for income taxes.
  CASH RESOURCES AND LIQUIDITY
 Sources of Liquidity and Capital Cash Resources and Liquidity
 CASH FLOWS
  Cash from (used in) operating activities.
 37
      Cash from (used in) investing activities.
 Cash from (used in) financing activities.
 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 court approval with respect to motions filed by us from time to time in the
Chapter 11 proceeding;
 38
      
    
    our ability to operate pursuant to the covenants, terms and certifications of the DIP Facility;
    
    our ability to obtain any necessary relief from the minimum
EBITDA covenant under our DIP Facility, as described herein;
    
    our ability to negotiate an extension (if necessary) or refinance our DIP Facility, which, pursuant to
an extension, expires on June 2, 2007;
    
    our ability to develop, propose, confirm and consummate one or more plans of reorganization with
respect to the Chapter 11 proceeding;
    
    risks associated with failing to obtain court approval for one or more extensions to the exclusivity
period for us to propose and confirm one or more plans of reorganization or with third parties seeking
and obtaining court approval to terminate or shorten any such exclusivity period, for the appointment
of a Chapter 11 trustee or to convert the Chapter 11 proceeding to a Chapter 7 proceeding;
    
    risks associated with inflationary cost increases in materials, ingredients, energy and employee wages
and benefits;
    
    risks associated with our restructuring process, including the risks associated with achieving the
desired savings in connection with our profit center restructuring and bakery and route consolidations
to achieve the desired results;
    
    potential adverse publicity;
    
    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 hedge our exposure to price increases with respect to various
ingredients and energy;
    
    our ability to finalize, fund and execute a going-forward business plan;
    
    our ability to retain, motivate and/or attract key executives and employees;
    
    changes in our relationship with employees and the unions that represent them;
    
    increased costs and uncertainties related to periodic
renegotiation of union contracts;
    
    risks associated with a stockholder action to compel an
annual meeting for the purpose of effecting a change of control of
the Company;
    
    increased costs and uncertainties with respect to the ABA Plan;
    
    the SECs acceptance of the recommendation from the staff of the SECs Division of Enforcement to
accept the proposed settlement of the previously announced investigation related to the establishment
of our workers compensation and other reserves;
    
    the delayed filing with the SEC of our fiscal 2006 Form 10-K and of our fiscal 2006 and 2007 Forms 10-Q;
    
    successful resolution of material weaknesses in our internal controls;
    
    resolution of any deficiencies and implementation of software updates with respect to our financial
reporting systems;
    
    changes to dietary guidelines;
    
    the continuing effects of changes in consumers eating habits;
 39
      
    
    the performance of our recent 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
 
    
    our ability to evaluate various alternatives including, but not limited to, the sale of some or
all of our assets, infusion of capital, debt restructuring and the filing and ultimate approval of
a plan of reorganization with the Bankruptcy Court, or any combination of these options;
    
    our ability to develop and implement a successful plan of reorganization in the Chapter 11 process;
    
    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;
    
    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 these
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.
    
    the significant time that will be required by management to structure and implement a plan of
reorganization as well as to evaluate various alternatives including, but not limited to, the sale
of some or all of our assets, infusion of capital and debt restructuring or any combination of
these options, as well as our restructuring plan;
    
    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 policy 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 systems:
 40
      
    
    changes in general economic and business conditions (including in 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 consumer tastes or eating habits;
    
    costs associated with environmental compliance and remediation;
    
    increased costs and uncertainties related to periodic renegotiation of union contracts;
    
    obligations and uncertainties with respect to the ABA Plan;
    
    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 our recent 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 our previously announced and other future
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 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.
  41
      42
      Item 3. Quantitative and Qualitative Disclosure about Market Risk
  Commodity prices.
 
 Item 4. Controls and Procedures
      43
      PART II. OTHER INFORMATION
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 Total Number of
    
    
    Maximum Number (orShares (or Units)
    
    
    Approximate DollarPurchased as Part
    
    
    Value) of Shares (orTotal Number of
    
    
    Average Price
    
    
    of Publicly
    
    
    Units) that May Yet BeShares (or Units)
    
    
    Paid per Share
    
    
    Announced Plans
    
    
    Purchased Under thePeriod
    
    Purchased(A)
    
    
    (or Unit)
    
    
    or Programs
    
    
    Plans or ProgramsPeriod 1June 4  July 1, 2006
    
    
    3
    
    
    $
    7.80
    
    
    
    3
    
    
    
    7,396,685Period 2July 2 July 29, 2005
    
    
    9
    
    
    $
    6.58
    
    
    
    9
    
    
    
    7,396,676Period 3July 30Aug 26, 2005
    
    
    9
    
    
    $
    5.77
    
    
    
    9
    
    
    
    7,396,667Total
    
    
    21
    
    
    $
    6.43
    
    
    
    21
    
    
    
    7,396,667
 
 A)
    
    Except as provided in the next sentence, repurchases resulted from the repurchase of fractional shares upon
issuance of certificates representing stock held in the Employee
Stock Purchase Plan. This plan was terminated in conjunction with
the Bankruptcy filing in September 2004. In connection with the
conversion of $1,000 of our 6% senior subordinated convertible
notes, a fractional share was repurchased. 
 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).3.2
    
    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).31.1
    
    Certification of Antonio C. Alvarez II pursuant to Rule 13a-14(a)/15d-14(a)*31.2
    
    Certification of Ronald B. Hutchison pursuant to Rule 13a-14(a)/15d-14(a)*32.1
    
    Certification of Antonio C. Alvarez II pursuant to 18 U.S.C. Section 1350*32.2
    
    Certification of Ronald B. Hutchison pursuant to 18 U.S.C. Section 1350*
 
 *
    
    Filed herewith 44
      SIGNATURES
  INTERSTATE BAKERIES CORPORATIONDated:
December 20, 2006
    
    By:/s/
Antonio C. Alvarez IIAntonio C. Alvarez IIChief Executive Officer(Principal Executive Officer)Dated:
December 20, 2006
    
    By:/s/
Ronald B. HutchisonRonald B. HutchisonExecutive Vice President and ChiefFinancial Officer(Principal Financial Officer)
 45