##### 



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 20, 2005
 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




---



##### 



EXPLANATORY NOTE
  2




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##### 



INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED AUGUST 20, 2005
 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
    
    
    
    42ITEM 4. Controls and Procedures
    
    
    
    42PART II  OTHER INFORMATIONITEM 6. Exhibits and Reports on Form 8-K
    
    
    
    43Signatures
    
    
    
    43Certification
    
    
    
    44CertificationSection 1350 CertificationSection 1350 Certification
 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 20,
    
    
    May 28,2005
    
    
    2005ASSETSCurrent assetsCash
    
    $
    192,323
    
    
    $
    151,558Restricted cash
    
    
    19,635
    
    
    
    Accounts receivable, less allowance for doubtful accounts of $3,500 and $3,492 respectively
    
    
    151,652
    
    
    
    176,781Inventories
    
    
    65,350
    
    
    
    69,431Assets held for sale
    
    
    19,480
    
    
    
    10,582Other current assets
    
    
    67,102
    
    
    
    83,850Total current assets
    
    
    515,542
    
    
    
    492,202Property and equipment, net
    
    
    674,211
    
    
    
    705,373Other intangible assets
    
    
    161,780
    
    
    
    162,043Other assets
    
    
    37,172
    
    
    
    39,032Total assets
    
    $
    1,388,705
    
    
    $
    1,398,650LIABILITIES AND STOCKHOLDERS DEFICITLiabilities not subject to compromiseCurrent liabilitiesLong-term debt
    
    $
    496,342
    
    
    $
    482,199Accounts payable
    
    
    110,198
    
    
    
    101,141Accrued expenses
    
    
    254,034
    
    
    
    260,442Total current liabilities
    
    
    860,574
    
    
    
    843,782Other liabilities
    
    
    282,952
    
    
    
    299,391Deferred income taxes
    
    
    87,085
    
    
    
    90,172Total liabilities not subject to compromise
    
    
    1,230,611
    
    
    
    1,233,345Liabilities subject to compromise
    
    
    282,198
    
    
    
    282,229Stockholders 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,
45,323,000 and 45,337,000 shares outstanding, respectively
    
    
    816
    
    
    
    816Additional paid-in capital
    
    
    586,017
    
    
    
    586,089Accumulated deficit
    
    
    (21,381
    )
    
    
    (14,394
    )Treasury stock, 36,256,000 and 36,242,000 shares at cost, respectively
    
    
    (678,495
    )
    
    
    (678,379
    )Unearned restricted stock compensation
    
    
    (3,049
    )
    
    
    (3,521
    )Accumulated other comprehensive loss
    
    
    (8,012
    )
    
    
    (7,535
    )Total stockholders deficit
    
    
    (124,104
    )
    
    
    (116,924
    )Total liabilities and stockholders deficit
    
    $
    1,388,705
    
    
    $
    1,398,650
  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 20,
    
    
    August 21,2005
    
    
    2004Net sales
    
    $
    744,649
    
    
    $
    811,977Cost of products sold (exclusive of items shown below)
    
    
    370,413
    
    
    
    413,078Selling, delivery and administrative expenses
    
    
    351,187
    
    
    
    402,900Restructuring (credits) charges
    
    
    (4,720
    )
    
    
    7,321Depreciation and amortization
    
    
    18,102
    
    
    
    21,074Loss on sale or abandonment of assets
    
    
    163
    
    
    
    666Goodwill impairment
    
    
    
    
    
    
    215,346735,145
    
    
    
    1,060,385Operating income (loss)
    
    
    9,504
    
    
    
    (248,408
    )Other (income) expenseInterest expense (excluding unrecorded contractual
interest expense of $1,317 and $0,
respectively)
    
    
    10,891
    
    
    
    8,994Reorganization charges, net
    
    
    10,656
    
    
    
    Other (income) expense
    
    
    (33
    )
    
    
    14921,514
    
    
    
    9,143Loss before income taxes
    
    
    (12,010
    )
    
    
    (257,551
    )Provision (benefit) for income taxes
    
    
    (5,023
    )
    
    
    (14,085
    )Net loss
    
    $
    (6,987
    )
    
    $
    (243,466
    )Loss per shareBasic
    
    $
    (0.15
    )
    
    $
    (5.42
    )Diluted
    
    $
    (0.15
    )
    
    $
    (5.42
    )
  5




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##### 



INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (dollars in thousands)
 Twelve Weeks EndedAugust 20,
    
    
    August 21,2005
    
    
    2004Operating activitiesNet loss
    
    $
    (6,987
    )
    
    $
    (243,466
    )Depreciation and amortization
    
    
    18,102
    
    
    
    21,074Provision (benefit) for deferred income taxes
    
    
    (419
    )
    
    
    26,227Reorganization charges, net
    
    
    10,656
    
    
    
    Cash reorganization items
    
    
    (8,911
    )
    
    
    Non-cash bankruptcy-related credits
    
    
    (741
    )
    
    
    Non-cash interest expense  deferred debt fees
    
    
    1,405
    
    
    
    776Non-cash interest on swap agreements
    
    
    
    
    
    
    (655
    )Non-cash restricted stock and deferred share compensation expense
    
    
    327
    
    
    
    920(Gain) loss on sale, write-down or abandonment of assets
    
    
    (8,110
    )
    
    
    4,263Write-off of goodwill
    
    
    
    
    
    
    215,346Change in operating assets and liabilitiesAccounts receivable
    
    
    25,129
    
    
    
    (2,170
    )Inventories
    
    
    4,081
    
    
    
    2Other current assets
    
    
    14,080
    
    
    
    (11,814
    )Accounts payable and accrued expenses
    
    
    (17,615
    )
    
    
    23,553Long-term portion of self insurance reserves
    
    
    4,058
    
    
    
    11,400Other
    
    
    (1,495
    )
    
    
    (6,662
    )Net cash from operating activities
    
    
    33,560
    
    
    
    38,794Investing activitiesPurchases of property and equipment
    
    
    (8,287
    )
    
    
    (13,837
    )Proceeds from sale of assets
    
    
    21,977
    
    
    
    1,128Restricted cash deposit
    
    
    (19,635
    )
    
    
    Acquisition and development of software assets
    
    
    
    
    
    
    (2,870
    )Other
    
    
    4
    
    
    
    15Net cash used in investing activities
    
    
    (5,941
    )
    
    
    (15,564
    )Financing activitiesReduction of long-term debt
    
    
    (268
    )
    
    
    (114,000
    )Increase in long-term debt
    
    
    13,414
    
    
    
    Issuance of convertible bonds
    
    
    
    
    
    
    100,000Acquisition of treasury stock
    
    
    
    
    
    
    (44
    )Debt fees
    
    
    
    
    
    
    (5,323
    )Net cash from (used in) financing activities
    
    
    13,146
    
    
    
    (19,367
    )Net increase in cash
    
    
    40,765
    
    
    
    3,863Cash at the beginning of period
    
    
    151,558
    
    
    
    39,728Cash at the end of period
    
    $
    192,323
    
    
    $
    43,591Cash payments (received)Interest
    
    $
    9,991
    
    
    $
    11,048Income taxes
    
    
    (15,584
    )
    
    
    (20,567
    )Non-cash investing and financing activitiesIssuance of restricted stock
    
    
    
    
    
    
    221Long-term debt reduction from lease rejections
    
    
    169
    
    
    
    Asset disposals from lease rejections
    
    
    113
    
    
    
    
  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 May 28, 2005
    
    
    81,579
    
    
    $
    816
    
    
    $
    586,089
    
    
    $
    (14,394
    )
    
    
    (36,242
    )
    
    $
    (678,379
    )
    
    $
    (3,521
    )
    
    $
    (7,535
    )
    
    $
    (116,924
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,987
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (477
    )
    
    
    (7,464
    )Restricted share
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    374
    
    
    
    
    
    
    
    374Restricted share
forfeitures
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    
    
    
    
    (14
    )
    
    
    (116
    )
    
    
    98
    
    
    
    
    
    
    
    (90
    )Balance August 20, 2005
    
    
    81,579
    
    
    $
    816
    
    
    $
    586,017
    
    
    $
    (21,381
    )
    
    
    (36,256
    )
    
    $
    (678,495
    )
    
    $
    (3,049
    )
    
    $
    (8,012
    )
    
    $
    (124,104
    )
  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
 Stock-based compensation Accounting for Stock Issued to Employees Accounting for
Stock-Based Compensation Accounting for Stock-Based
Compensation  Transition and Disclosure
 10




---



##### 



Twelve Weeks EndedAugust 20,
    
    
    August 21,2005
    
    
    2004(dollars in thousands,except per share data)Net loss, as reported
    
    $
    (6,987
    )
    
    $
    (243,466
    )Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects
    
    
    327
    
    
    
    920Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects
    
    
    (434
    )
    
    
    (1,361
    )Pro forma net loss
    
    $
    (7,094
    )
    
    $
    (243,907
    )Basic and diluted loss per shareAs reported
    
    $
    (0.15
    )
    
    $
    (5.42
    )Pro forma
    
    
    (0.16
    )
    
    
    (5.43
    )
  Contingencies Accounting for Contingencies
 Recently Issued Accounting Pronouncements Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans
 Fair Value Measurements
 11




---



##### 



Quantifying Financial Misstatements
 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)
 Accounting for Rental Costs
Incurred during a Construction Period
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting Changes
in Interim Financial Statements
 Accounting for
Conditional Asset Retirement Obligations
 an interpretation of FASB Statement No. 143
 12




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##### 



Share-Based Payment Accounting for Stock Issued to Employees
 Exchanges of Nonmonetary Assets  An Amendment of
APB Opinion No. 29
 Inventory Costs  An Amendment of ARB No. 43,
Chapter 4 .
 3. Inventories
  August 20,
    
    
    May 28,2005
    
    
    2005(dollars in thousands)Ingredients and packaging
    
    $
    43,507
    
    
    $
    47,617Finished goods
    
    
    21,843
    
    
    
    21,814$
    65,350
    
    
    $
    69,431
 4. Property and Equipment
  August 20,
    
    
    May 28,2005
    
    
    2005(dollars in thousands)Land and buildings (lives ranging from 10 to 35 years)
    
    $
    412,675
    
    
    $
    440,164Machinery and equipment (lives ranging from 4 to 15 years)
    
    
    1,019,153
    
    
    
    1,023,5271,431,828
    
    
    
    1,463,691Less accumulated depreciation
    
    
    (757,617
    )
    
    
    (758,318
    )$
    674,211
    
    
    $
    705,373
 13




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##### 



5. Assets Held for Sale
  6. Lease Obligations
  Guarantors
Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness
of Others
 7. Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets.
 14




---



##### 



August 20,
    
    
    May 28,2005
    
    
    2005(dollars in thousands)GoodwillGross carrying amount
    
    $
    
    
    
    $
    215,346Impairment charge
    
    
    
    
    
    
    (215,346
    )Net carrying amount
    
    $
    
    
    
    $
    Intangible assets with indefinite lives(generally trademarks and trade names)Gross carrying amount
    
    $
    157,471
    
    
    $
    180,662Impairment charge
    
    
    
    
    
    
    (23,191
    )Net carrying amount
    
    $
    157,471
    
    
    $
    157,471Intangible assets with finite livesGross carrying amount
    
    $
    13,854
    
    
    $
    19,484Less:Accumulated amortization
    
    
    (9,545
    )
    
    
    (11,040
    )Impairment charge
    
    
    
    
    
    
    (3,872
    )Net carrying amount
    
    $
    4,309
    
    
    $
    4,572
  8. Debt
  August 20,
    
    
    May 28,2005
    
    
    2005(dollars in thousands)SecuredPost-petition credit agreement
    
    $
    
    
    
    $
    Senior
secured credit facility  pre-petition
    
    
    489,817
    
    
    
    476,402Unsecured6% senior
subordinated convertible notes  pre-petition
    
    
    100,000
    
    
    
    100,000Capital
leases  pre-petition
    
    
    12,327
    
    
    
    11,514602,144
    
    
    
    587,916Less:Current portion
    
    
    (496,342
    )
    
    
    (482,199
    )Pre-filing date claims included in liabilities subject to compromise
    
    
    (105,802
    )
    
    
    (105,717
    )Long-term debt
    
    $
    
    
    
    $
    
 Post-Petition Credit Agreement
  15




---



##### 



Senior Secured Credit Facility
  16




---



##### 



6% Senior Subordinated Convertible Notes
  Other Matters
   9. Derivative Instruments
       17




---



##### 



10. Liabilities Subject to Compromise
    18




---



##### 



August 20,
    
    
    May 28,2005
    
    
    2005(dollars in thousands)Accounts payable
    
    $
    129,168
    
    
    $
    129,294Taxes payable
    
    
    9,035
    
    
    
    10,264Retirement obligations (SERP and deferred compensation)
    
    
    14,027
    
    
    
    13,821Legal reserve
    
    
    12,931
    
    
    
    12,931Interest bearing debt and capital leases
    
    
    105,802
    
    
    
    105,717Other
    
    
    11,235
    
    
    
    10,202$
    282,198
    
    
    $
    282,229
   11. Employee Benefit Plans
 American Bakers Association Retirement Plan
    19




---



##### 



Twelve Weeks EndedAugust 20,
    
    August 21,2005
    
    2004(dollars in thousands)Service cost
    
    $
    364
    
    
    $
    473Interest cost
    
    
    740
    
    
    
    750Expected return on negative plan assets
    
    
    57
    
    
    
    92Recognition ofPrior service cost
    
    
    
    
    
    
    98Actuarial (gain) loss
    
    
    (1,281
    )
    
    
    1,779Total periodic pension (credit) cost
    
    
    (120
    )
    
    
    3,192Curtailment gain
    
    
    (1,176
    )
    
    
    Net pension (credit) expense
    
    $
    (1,296
    )
    
    $
    3,192
 Defined Benefit Pension Plan
  Twelve Weeks EndedAugust 20,
    
    
    August 21,2005
    
    
    2004(dollars in thousands)Service cost
    
    $
    209
    
    
    $
    155Interest cost
    
    
    932
    
    
    
    860Expected return on plan assets
    
    
    (1,127
    )
    
    
    (1,003
    )Recognition ofPrior service cost
    
    
    66
    
    
    
    40Actuarial loss
    
    
    124
    
    
    
    46Net pension expense
    
    $
    204
    
    
    $
    98
 20




---



##### 



Postretirement Health and Life Plans
     Twelve Weeks EndedAugust 20,
    
    August 21,2005
    
    2004(dollars in thousands)Service cost
    
    $
    333
    
    
    $
    674Interest cost
    
    
    783
    
    
    
    1,132AmortizationUnrecognized prior service cost (benefit)
    
    
    (1,706
    )
    
    
    (1,511
    )Unrecognized net loss
    
    
    302
    
    
    
    374Net postretirement benefit (credit) expense
    
    $
    (288
    )
    
    $
    669
 12. Supplemental Executive Retirement Plan
   21




---



##### 



Twelve Weeks EndedAugust 20,
    
    August 21,2005
    
    2004(dollars in thousands)Service cost
    
    $
    
    
    
    $
    231Interest cost
    
    
    312
    
    
    
    385Recognition ofPrior service cost
    
    
    
    
    
    
    629Actuarial loss
    
    
    
    
    
    
    29Total SERP expense
    
    $
    312
    
    
    $
    1,274
 13. Restructuring (Credits) Charges
  Twelve Weeks EndedAugust 20,
    
    
    August 21,2005
    
    
    2004(dollars in thousands)Severance costs
    
    $
    2,822
    
    
    $
    2,181Long-lived asset (credits) charges
    
    
    (7,777
    )
    
    
    3,354Curtailment gain on a benefit plan
    
    
    (706
    )
    
    
    Other exit costs
    
    
    941
    
    
    
    1,786Total
    
    $
    (4,720
    )
    
    $
    7,321
 Fiscal 2006 Activity
    22




---



##### 



Long-LivedSeverance
    
    Assetand Related
    
    ChargesBenefits
    
    (Credits)
    
    Other
    
    Total(dollars in thousands)Fiscal 2003 Plan
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $Balance May 28, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expensed in Fiscal 2006
    
    
    
    
    
    
    (34
    )
    
    
    32
    
    
    
    (2
    )Cash Paid in Fiscal 2006
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    (32
    )Noncash Utilization in Fiscal 2006
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    34Balance August 20, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fiscal 2004 PlanBalance May 28, 2005
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    55Expensed in Fiscal 2006
    
    
    
    
    
    
    (10,832
    )
    
    
    38
    
    
    
    (10,794
    )Cash Paid in Fiscal 2006
    
    
    (43
    )
    
    
    
    
    
    
    (38
    )
    
    
    (81
    )Noncash Utilization in Fiscal 2006
    
    
    
    
    
    
    10,832
    
    
    
    
    
    
    
    10,832Balance August 20, 2005
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Fiscal 2005 Consolidation & RIF PlanBalance May 28, 2005
    
    
    796
    
    
    
    
    
    
    
    
    
    
    
    796Expensed in Fiscal 2006
    
    
    
    
    
    
    80
    
    
    
    173
    
    
    
    253Cash Paid in Fiscal 2006
    
    
    (523
    )
    
    
    
    
    
    
    (173
    )
    
    
    (696
    )Noncash Utilization in Fiscal 2006
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    (80
    )Balance August 20, 2005
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    273Fiscal 2005 PC Review PlanBalance May 28, 2005
    
    
    7,613
    
    
    
    
    
    
    
    
    
    
    
    7,613Expensed in Fiscal 2006
    
    
    (407
    )
    
    
    241
    
    
    
    (98
    )
    
    
    (264
    )Cash Paid in Fiscal 2006
    
    
    (1,843
    )
    
    
    
    
    
    
    (293
    )
    
    
    (2,136
    )Noncash Utilization in Fiscal 2006
    
    
    
    
    
    
    (241
    )
    
    
    706
    
    
    
    465Balance August 20, 2005
    
    
    5,363
    
    
    
    
    
    
    
    315
    
    
    
    5,678Fiscal 2006 PC Review PlanBalance May 28, 2005Expensed in Fiscal 2006
    
    
    3,229
    
    
    
    2,768
    
    
    
    90
    
    
    
    6,087Cash Paid in Fiscal 2006
    
    
    (1,630
    )
    
    
    
    
    
    
    (90
    )
    
    
    (1,720
    )Noncash Utilization in Fiscal 2006
    
    
    
    
    
    
    (2,768
    )
    
    
    
    
    
    
    (2,768
    )Balance August 20, 2005
    
    
    1,599
    
    
    
    
    
    
    
    
    
    
    
    1,599ConsolidatedBalance May 28, 2005
    
    
    8,464
    
    
    
    
    
    
    
    
    
    
    
    8,464Expensed in Fiscal 2006
    
    
    2,822
    
    
    
    (7,777
    )
    
    
    235
    
    
    
    (4,720
    )Cash Paid in Fiscal 2006
    
    
    (4,039
    )
    
    
    
    
    
    
    (626
    )
    
    
    (4,665
    )Noncash Utilization in Fiscal 2006
    
    
    
    
    
    
    7,777
    
    
    
    706
    
    
    
    8,483Balance August 20, 2005
    
    $
    7,247
    
    
    $
    
    
    
    $
    315
    
    
    $
    7,562
 23




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##### 



Fiscal 2005 Activity
      Long-LivedSeverance
    
    Assetand Related
    
    Charges orBenefits
    
    (Credits)
    
    Other
    
    TotalFiscal 2003 Plan
    
    $
    4,304
    
    
    $
    1,474
    
    
    $
    6,825
    
    
    $
    12,603Fiscal 2004 Plan
    
    
    2,537
    
    
    
    (8,279
    )
    
    
    7,137
    
    
    
    1,395Fiscal 2005 Consolidation
& RIF Plan
    
    
    5,575
    
    
    
    6,199
    
    
    
    2,318
    
    
    
    14,092Fiscal 2005 PC Review Plan
    
    
    7,206
    
    
    
    32,667
    
    
    
    (7,010
    )
    
    
    32,863Software Write-off
    
    
    3⁄4
    
    
    
    4,509
    
    
    
    3⁄4
    
    
    
    4,509Fiscal 2006 PC Review Plan
    
    
    3,229
    
    
    
    2,768
    
    
    
    90
    
    
    
    6,087
  Severance
    
    Long-Livedand Related
    
    AssetBenefits
    
    Charges(1)
    
    Other
    
    TotalFiscal 2005 Consolidation
& RIF Plan
    
    $
    3⁄4
    
    
    $
    255
    
    
    $
    639
    
    
    $
    894Fiscal 2005 PC Review Plan
    
    
    3⁄4
    
    
    
    3,780
    
    
    
    3,019
    
    
    
    6,799Fiscal 2006 PC Review Plan
    
    
    2,934
    
    
    
    14,422
    
    
    
    4,183
    
    
    
    21,539
 
 (1)
    
    Excludes gains expected to be realized on subsequent sales of real property. 24




---



##### 



14. Reorganization Charges
  Twelve Weeks EndedAugust 20, 2005Reorganization
    
    
    CashCharges
    
    
    Payments(dollars in thousands)Professional fees
    
    $
    8,852
    
    
    $
    7,481Employee retention expenses
    
    
    2,873
    
    
    
    2,423Lease rejection credits
    
    
    (76
    )
    
    
    Interest income
    
    
    (493
    )
    
    
    (493
    )Gain on sale of assets
    
    
    (500
    )
    
    
    (500
    )Reorganization charges, net
    
    $
    10,656
    
    
    $
    8,911
 15. Income Taxes
  Twelve Weeks EndedAugust 20,
    
    August 21,2005
    
    2004Statutory federal tax rate
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net
    
    
    1.1
    
    
    
    2.7Non-deductible goodwill impairment
    
    
    
    
    
    
    (25.5
    )Valuation allowance increase
    
    
    (26.8
    )
    
    
    (9.6
    )Adjustments to prior year tax accruals
    
    
    33.6
    
    
    
    3.2Other
    
    
    (1.1
    )
    
    
    (0.3
    )41.8
    %
    
    
    5.5
    %
   25




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##### 



16. Commitments and Contingencies
     26




---



##### 



27




---



##### 



28




---



##### 



29




---



##### 



17. Earnings (Loss) per Share
 Earnings per
Share
 30




---



##### 



Twelve Weeks EndedAugust 20,
    
    August 21,2005
    
    2004(in thousands)Weighted average
common shares
outstanding:Basic and diluted
    
    
    45,091
    
    
    
    44,919
   18. Comprehensive Loss
  Twelve Weeks EndedAugust 20,
    
    
    August 21,2005
    
    
    2004(dollars in thousands)Net loss
    
    $
    (6,987
    )
    
    $
    (243,466
    )Other comprehensive loss:Change in fair value of cash flow hedges, net of income taxes of $0
    
    
    
    
    
    
    (1,919
    )Loss on interest rate swaps reclassified to interest expense, net
of income taxes of $0
    
    
    
    
    
    
    816Commodity derivative gains reclassified to cost of products sold,
net of income taxes of $0
    
    
    (477
    )
    
    
    (7
    )(477
    )
    
    
    (1,110
    )Comprehensive loss
    
    $
    (7,464
    )
    
    $
    (244,576
    )
 31




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##### 



19. Segment Information
 Disclosures about Segments of an Enterprise and Related Information
  Wholesale operations
 Retail operations
    Twelve Weeks EndedAugust 20, 2005
    
    
    August 21, 2004(dollars in thousands)Net SalesWholesale operations
    
    $
    655,090
    
    
    $
    707,870Retail operations
    
    
    89,559
    
    
    
    104,107Total net sales
    
    $
    744,649
    
    
    $
    811,977Operating Income (Loss)Wholesale operations
    
    $
    17,775
    
    
    $
    2,414Retail operations
    
    
    5,023
    
    
    
    (1,101
    )22,798
    
    
    
    1,313Corporate
    
    
    (13,294
    )
    
    
    (249,721
    )Total operating income (loss)
    
    
    9,504
    
    
    
    (248,408
    )Interest expense
    
    
    10,891
    
    
    
    8,994Reorganization charges
    
    
    10,656
    
    
    
    Other (income) expense
    
    
    (33
    )
    
    
    14921,514
    
    
    
    9,143Loss before income taxes
    
    
    (12,010
    )
    
    
    (257,551
    )Provision (benefit) for income taxes
    
    
    (5,023
    )
    
    
    (14,085
    )Net loss
    
    $
    (6,987
    )
    
    $
    (243,466
    )
 32




---



##### 



20. Subsequent Events
     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
 34




---



##### 



RESULTS OF OPERATIONS
  Twelve Weeks EndedAugust 20,
    
    August 21,2005
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold (exclusive of items shown below)
    
    
    49.8
    
    
    
    50.9Selling, delivery and administrative expenses
    
    
    47.2
    
    
    
    49.6Restructuring (credits) charges
    
    
    (0.6
    )
    
    
    0.9Depreciation and amortization
    
    
    2.4
    
    
    
    2.7Loss on sale or abandonment of assets
    
    
    
    
    
    
    Goodwill impairment
    
    
    
    
    
    
    26.5Operating income (loss)
    
    
    1.2
    
    
    
    (30.6
    )Interest expense
    
    
    1.4
    
    
    
    1.1Reorganization charges, net
    
    
    1.4
    
    
    
    Other
(income) expense
    
    
    
    
    
    
    Loss before income taxes
    
    
    (1.6
    )
    
    
    (31.7
    )Provision (benefit) for income taxes
    
    
    (0.7
    )
    
    
    (1.7
    )Net loss
    
    
    (0.9
    )%
    
    
    (30.0
    )%
 Net Sales
 Twelve Weeks Ended
    
    
    Twelve Weeks EndedAugust 20, 2005
    
    
    August 21, 2004Increase/Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    (Decrease)(dollars in
    
    
    
    
    
    
    (dollars inthousands)
    
    
    
    
    
    
    thousands)Wholesale operations
    
    $
    655,090
    
    
    
    88.0
    %
    
    $
    707,870
    
    
    
    87.2
    %
    
    
    (7.5
    )%Retail operations
    
    
    89,559
    
    
    
    12.0
    
    
    
    104,107
    
    
    
    12.8
    
    
    
    (14.0
    )Total net sales
    
    $
    744,649
    
    
    
    100.0
    %
    
    $
    811,977
    
    
    
    100.0
    %
    
    
    (8.3
    )
 Consolidated net sales.
 Wholesale operations net sales.
 Retail operations net sales.
 35




---



##### 



Gross profit (exclusive of depreciation and amortization).
 Selling, delivery and administrative expenses.
 Restructuring charges.
 Goodwill impairment.
 Operating Income (Loss)
 Twelve Weeks Ended
    
    
    Twelve Weeks EndedAugust 20, 2005
    
    
    August 21, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %(dollars in
    
    
    
    
    
    
    (dollars inthousands)
    
    
    
    
    
    
    thousands)Wholesale operations
    
    $
    17,775
    
    
    
    187.0
    %
    
    $
    2,414
    
    
    
    (1.0
    )%Retail operations
    
    
    5,023
    
    
    
    52.9
    
    
    
    (1,101
    )
    
    
    0.522,798
    
    
    
    239.9
    
    
    
    1,313
    
    
    
    (0.5
    )Corporate
    
    
    (13,294
    )
    
    
    (139.9
    )
    
    
    (249,721
    )
    
    
    100.5Total operating income (loss)
    
    $
    9,504
    
    
    
    100.0
    %
    
    $
    (248,408
    )
    
    
    100.0
    %
 Consolidated operating income (loss).
 36




---



##### 



Wholesale operating income.
 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 operating activities.
 37




---



##### 



Cash 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;
    
    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
 38




---



##### 



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 in 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;
    
    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.
  39




---



##### 



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:
    
    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;
 40




---



##### 




    
    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




---



##### 



Item 3. Quantitative and Qualitative Disclosure about Market Risk
  Commodity prices.
 
 Item 4. Controls and Procedures
      42




---



##### 



PART II. OTHER INFORMATION
 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 43




---



##### 



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 Chief
Financial Officer
(Principal Financial Officer) 44