##### 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 21, 2004
 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
(State or other jurisdiction of incorporation or organization)
    
    43-1470322
(I.R.S. Employer Identification No.)12 East Armour Boulevard, Kansas City, Missouri
(Address of principal executive offices)
    
    64111
(Zip Code)
 (816) 502-4000
(Registrants telephone number, including area code)
 o þ
  o þ o
 o þ




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##### Table of Contents



EXPLANATORY NOTE
  2




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##### 



INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED AUGUST 21, 2004
 Description
    
    PagePART I  FINANCIAL INFORMATION (UNAUDITED)
    
    4ITEM 1. Financial Statements
    
    4Consolidated Balance Sheets
    
    4Consolidated Statements of Operations
    
    5Consolidated Statements of Cash Flows
    
    6Consolidated Statement of Stockholders Equity
    
    7Notes to Consolidated Financial Statements
    
    8ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    35Forward-Looking Statements
    
    38ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    41ITEM 4. Controls and Procedures
    
    42PART II  OTHER INFORMATION
    
    43ITEM 6. Exhibits
    
    43Signatures
    
    44CertificationCertificationSection 1350 CertificationSection 1350 Certification
  3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 INTERSTATE BAKERIES CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)  (dollars in thousands, except share data)
 August 21,
    
    
    May 29,2004
    
    
    2004ASSETSCurrent assetsCash
    
    $
    43,591
    
    
    $
    39,728Accounts receivable, less allowance for doubtful accounts of $3,808 and $3,700, respectively
    
    
    184,230
    
    
    
    182,060Inventories
    
    
    71,899
    
    
    
    71,901Assets held for sale
    
    
    
    
    
    
    452Other current assets
    
    
    103,343
    
    
    
    108,577Total current assets
    
    
    403,063
    
    
    
    402,718Property and equipment, net
    
    
    801,334
    
    
    
    812,925Goodwill
    
    
    
    
    
    
    215,346Other intangible assets
    
    
    190,078
    
    
    
    190,416Other assets
    
    
    59,203
    
    
    
    52,392Total assets
    
    $
    1,453,678
    
    
    $
    1,673,797LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesLong-term debt payable within one year
    
    $
    529,518
    
    
    $
    542,701Accounts payable
    
    
    187,033
    
    
    
    158,754Accrued expenses
    
    
    270,792
    
    
    
    275,354Total current liabilities
    
    
    987,343
    
    
    
    976,809Long-term debt
    
    
    9,545
    
    
    
    10,362Other liabilities
    
    
    316,218
    
    
    
    311,183Deferred income taxes
    
    
    122,914
    
    
    
    113,735Total liabilities
    
    
    1,436,020
    
    
    
    1,412,089Stockholders equityPreferred 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,
45,396,000 and 45,381,000 shares outstanding, respectively
    
    
    816
    
    
    
    816Additional paid-in capital
    
    
    586,461
    
    
    
    586,616Retained earnings
    
    
    121,420
    
    
    
    364,886Treasury stock, 36,183,000 and 36,198,000 shares at cost, respectively
    
    
    (678,685
    )
    
    
    (679,016
    )Unearned restricted stock compensation
    
    
    (6,632
    )
    
    
    (6,982
    )Accumulated other comprehensive loss
    
    
    (5,722
    )
    
    
    (4,612
    )Total stockholders equity
    
    
    17,658
    
    
    
    261,708Total liabilities and stockholders equity
    
    $
    1,453,678
    
    
    $
    1,673,797
  4




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INTERSTATE BAKERIES CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED) (dollars in thousands, except per share data)
 Twelve Weeks Ended(Restated,see Note 2)August 21,
    
    
    August 23,2004
    
    
    2003Net sales
    
    $
    811,977
    
    
    $
    831,015Cost of products sold (exclusive of items shown below)
    
    
    413,078
    
    
    
    407,305Selling, delivery and administrative expenses
    
    
    402,900
    
    
    
    375,879Restructuring charges
    
    
    7,321
    
    
    
    632Depreciation and amortization
    
    
    21,074
    
    
    
    21,457Loss on sale or abandonment of assets
    
    
    666
    
    
    
    68Goodwill impairment
    
    
    215,346
    
    
    
    1,060,385
    
    
    
    805,341Operating income (loss)
    
    
    (248,408
    )
    
    
    25,674Other (income) expenseInterest expense
    
    
    8,994
    
    
    
    9,114Other (income) expense
    
    
    149
    
    
    
    (8
    )9,143
    
    
    
    9,106Income (loss) before income taxes
    
    
    (257,551
    )
    
    
    16,568Provision (benefit) for income taxes
    
    
    (14,085
    )
    
    
    6,054Net income (loss)
    
    $
    (243,466
    )
    
    $
    10,514Earnings (loss) per shareBasic
    
    $
    (5.42
    )
    
    $
    0.23Diluted
    
    $
    (5.42
    )
    
    $
    0.23
  5




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INTERSTATE BAKERIES CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED) (dollars in thousands)
 Twelve Weeks Ended(Restatedsee Note 2)August 21,
    
    
    August 23,2004
    
    
    2003Operating activitiesNet income (loss)
    
    $
    (243,466
    )
    
    $
    10,514Depreciation and amortization
    
    
    21,074
    
    
    
    21,457Provision for deferred income taxes
    
    
    26,227
    
    
    
    (406
    )Non-cash interest expense  deferred debt fees
    
    
    776
    
    
    
    509Non-cash interest on swap agreements
    
    
    (655
    )
    
    
    (57
    )Non-cash restricted stock and deferred share compensation expense
    
    
    920
    
    
    
    Loss on sale, write-down or abandonment of assets
    
    
    4,263
    
    
    
    38Write-off of goodwill
    
    
    215,346
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (2,170
    )
    
    
    (721
    )Inventories
    
    
    2
    
    
    
    3,787Other current assets
    
    
    (11,814
    )
    
    
    8,174Accounts payable and accrued expenses
    
    
    23,553
    
    
    
    (6,376
    )Long-term portion of self insurance reserves
    
    
    11,400
    
    
    
    (6,427
    )Other
    
    
    (6,662
    )
    
    
    3,667Net cash from operating activities
    
    
    38,794
    
    
    
    34,159Investing activitiesPurchases of property and equipment
    
    
    (13,837
    )
    
    
    (14,028
    )Proceeds from sale of assets
    
    
    1,128
    
    
    
    264Acquisition of other intangible assets
    
    
    
    
    
    
    (12
    )Acquisition and development of software assets
    
    
    (2,870
    )
    
    
    (2,614
    )Other
    
    
    15
    
    
    
    (24
    )Net cash used in investing activities
    
    
    (15,564
    )
    
    
    (16,414
    )Financing activitiesReduction of long-term debt
    
    
    (114,000
    )
    
    
    (15,747
    )Issuance of convertible bonds
    
    
    100,000
    
    
    
    Common stock dividends paid
    
    
    
    
    
    
    (3,180
    )Acquisition of treasury stock
    
    
    (44
    )
    
    
    (3
    )Debt fees
    
    
    (5,323
    )
    
    
    Net cash used in financing activities
    
    
    (19,367
    )
    
    
    (18,930
    )Net increase (decrease) in cash
    
    
    3,863
    
    
    
    (1,185
    )Cash at the beginning of period
    
    
    39,728
    
    
    
    44,961Cash at the end of period
    
    $
    43,591
    
    
    $
    43,776Cash payments (received)Interest
    
    $
    11,048
    
    
    $
    9,054Income taxes
    
    
    (20,567
    )
    
    
    333Non-cash investing and financing activitiesIssuance of restricted stock
    
    
    221
    
    
    
    
  6




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INTERSTATE BAKERIES CORPORATION
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (UNAUDITED) (dollars in thousands, except per share data)
 Unearned
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted
    
    
    Other
    
    TotalCommon
    
    
    Paid-in
    
    
    Retained
    
    
    
    
    
    
    
    
    
    
    Stock
    
    
    Comprehensive
    
    
    StockholdersStock Issued
    
    
    Capital
    
    
    Earnings
    
    
    Treasury Stock
    
    
    Compensation
    
    
    Loss
    
    
    EquityNumber
    
    
    Par
    
    
    
    
    
    
    
    
    
    
    Number ofof Shares
    
    
    Value
    
    
    
    
    
    
    
    
    
    
    Shares
    
    
    CostBalance May 29, 2004
    
    
    81,579
    
    
    $
    816
    
    
    $
    586,616
    
    
    $
    364,886
    
    
    
    (36,198
    )
    
    $
    (679,016
    )
    
    $
    (6,982
    )
    
    $
    (4,612
    )
    
    $
    261,708Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (243,466
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,110
    )
    
    
    (244,576
    )Restricted share award
    
    
    
    
    
    
    
    
    
    
    (155
    )
    
    
    
    
    
    
    20
    
    
    
    375
    
    
    
    (221
    )
    
    
    
    
    
    
    (1
    )Restricted share
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    571
    
    
    
    
    
    
    
    571Treasury stock acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (44
    )
    
    
    
    
    
    
    
    
    
    
    (44
    )Balance August 21, 2004
    
    
    81,579
    
    
    $
    816
    
    
    $
    586,461
    
    
    $
    121,420
    
    
    
    (36,183
    )
    
    $
    (678,685
    )
    
    $
    (6,632
    )
    
    $
    (5,722
    )
    
    $
    17,658
  7




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INTERSTATE BAKERIES CORPORATION
 
 NOTES TO 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




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Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code
 2. Restatement
  9




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##### Table of Contents



Workers Compensation Reserve
  ABA Plan
  Leases
  Depreciation
  Supplemental Executive Retirement Plans
  Cash
  Income
Taxes
   10




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Consolidated Statement of Operations
 Twelve Weeks EndedAugust 23, 2003As Previously
    
    
    Effect ofConsolidated Statement of Operations
    
    Reported
    
    
    Restatement
    
    
    As Restated(dollars in thousands, except per share data)Cost of products sold
    
    $
    406,901
    
    
    $
    404
    
    
    $
    407,305Selling, delivery and administrative expenses
    
    
    375,733
    
    
    
    146
    
    
    
    375,879Depreciation and amortization
    
    
    21,242
    
    
    
    215
    
    
    
    21,457Loss on sale or abandonment of assets
    
    
    
    
    
    
    68
    
    
    
    68Operating income
    
    
    26,507
    
    
    
    (833
    )
    
    
    25,674Interest expense
    
    
    8,865
    
    
    
    249
    
    
    
    9,114Income before income taxes
    
    
    17,650
    
    
    
    (1,082
    )
    
    
    16,568Provision for income taxes
    
    
    6,460
    
    
    
    (406
    )
    
    
    6,054Net income
    
    $
    11,190
    
    
    $
    (676
    )
    
    $
    10,514Income per share:Basic
    
    $
    0.25
    
    
    $
    (0.02
    )
    
    $
    0.23Diluted
    
    $
    0.25
    
    
    $
    (0.02
    )
    
    $
    0.23
 11




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##### Table of Contents



Consolidated Statement of Cash Flows
 Twelve Weeks EndedAugust 23, 2003As Previously
    
    
    Effect ofConsolidated Statement of Cash Flows
    
    Reported
    
    
    Restatement
    
    
    As Restated(dollars in thousands)Operating activitiesNet income
    
    $
    11,190
    
    
    $
    (676
    )
    
    $
    10,514Depreciation and amortization
    
    
    21,242
    
    
    
    215
    
    
    
    21,457Provision for deferred income taxes
    
    
    
    
    
    
    (406
    )
    
    
    (406
    )Loss on sale, write-down or abandonment
of assets
    
    
    (30
    )
    
    
    68
    
    
    
    38Change in operating assets and liabilitiesInventory
    
    
    3,695
    
    
    
    92
    
    
    
    3,787Other current assets
    
    
    8,266
    
    
    
    (92
    )
    
    
    8,174Accounts payable and accrued expenses
    
    
    (1,211
    )
    
    
    (5,165
    )
    
    
    (6,376
    )Other
    
    
    (1,324
    )
    
    
    4,991
    
    
    
    3,667Net cash from operating activities
    
    
    35,132
    
    
    
    (973
    )
    
    
    34,159Financing activitiesReduction of long-term debt
    
    
    (15,535
    )
    
    
    (212
    )
    
    
    (15,747
    )Net cash used in financing activities
    
    
    (18,718
    )
    
    
    (212
    )
    
    
    (18,930
    )Net decrease in cash
    
    
    
    
    
    
    (1,185
    )
    
    
    (1,185
    )Cash at the beginning of period
    
    
    
    
    
    
    44,961
    
    
    
    44,961Cash at the end of period
    
    $
    
    
    
    $
    43,776
    
    
    $
    43,776
 3. 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
 12




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Stock-based compensation Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure
  Twelve Weeks EndedAugust 21,
    
    
    August 23,2004
    
    
    2003(dollars in thousands,except per share data)Net income (loss), as reported
    
    $
    (243,466
    )
    
    $
    10,514Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects
    
    
    920
    
    
    
    197Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    (1,361
    )
    
    
    (1,960
    )Pro forma net income (loss)
    
    $
    (243,907
    )
    
    $
    8,751Basic earnings (loss) per share:As reported
    
    $
    (5.42
    )
    
    $
    0.23Pro forma
    
    
    (5.43
    )
    
    
    0.20Diluted earnings (loss) per share:As reported
    
    
    (5.42
    )
    
    
    0.23Pro forma
    
    
    (5.43
    )
    
    
    0.19
  Contingencies Accounting for Contingencies
 Newly Adopted Accounting Pronouncements Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction and Qualified Production Activities Provided by
the American Jobs Creation Act of 2004 Accounting for Income Taxes
 13




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Employers Disclosures about
Pensions and Other Postretirement Benefits  an amendment of FASB Statements No. 87, 88, and 106
 Recently Issued Accounting Pronouncements Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 Accounting for Rental Costs
Incurred during a Construction Period
 Accounting for Conditional Asset Retirement Obligations
 an interpretation of FASB Statement No. 143
 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 .
 14




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##### Table of Contents



Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
 4. Inventories
  August 21,
    
    
    May 29,2004
    
    
    2004(dollars in thousands)Ingredients and packaging
    
    $
    48,157
    
    
    $
    48,936Finished goods
    
    
    23,742
    
    
    
    22,965$
    71,899
    
    
    $
    71,901
 5. Property and Equipment
  May 29,August 21, 2004
    
    
    2004(dollars in thousands)Land and buildings
    
    $
    462,211
    
    
    $
    462,668Machinery and equipment
    
    
    1,085,774
    
    
    
    1,088,9851,547,985
    
    
    
    1,551,653Less accumulated depreciation
    
    
    (746,651
    )
    
    
    (738,728
    )$
    801,334
    
    
    $
    812,925
 6. Lease Obligations
  Guarantors
Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness
of Others
 15




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7. Goodwill and Other Intangible Assets
   August 21,
    
    
    May 29,2004
    
    
    2004(dollars in thousands)GoodwillGross carrying amount
    
    $
    215,346
    
    
    $
    215,346Impairment charge
    
    
    (215,346
    )
    
    
    Net carrying amount
    
    $
    
    
    
    $
    215,346Intangible assets with indefinite livesGross carrying amount
    
    $
    180,662
    
    
    $
    180,662Intangible assets with finite livesGross carrying amount
    
    $
    19,484
    
    
    $
    19,484Less:Accumulated amortization
    
    
    (10,068
    )
    
    
    (9,730
    )Net carrying amount
    
    $
    9,416
    
    
    $
    9,754
  16




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##### Table of Contents



8. Debt
  August 21,
    
    
    May 29,2004
    
    
    2004(dollars in thousands)Secured:Senior secured credit facility
    
    $
    424,500
    
    
    $
    537,626Unsecured:6% senior subordinated convertible notes
    
    
    100,000
    
    
    
    Capital leases
    
    
    14,563
    
    
    
    15,437539,063
    
    
    
    553,063Less:Current portion
    
    
    (529,518
    )
    
    
    (542,701
    )Long-term debt
    
    $
    9,545
    
    
    $
    10,362
 Post-Petition Credit Agreement
    17




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##### Table of Contents



Senior Secured Credit Facility
  6% Senior Subordinated Convertible Notes
  Other Matters
  Fiscal Years
    
    Senior Secured
    
    
    Subordinated
    
    
    CapitalEnding
    
    Credit Facility
    
    
    Notes
    
    
    Leases
    
    
    Total(dollars in thousands)2005
    
    $
    424,500
    
    
    $
    100,000
    
    
    $
    5,018
    
    
    $
    529,5182006
    
    
    
    
    
    
    
    
    
    
    4,037
    
    
    
    4,0372007
    
    
    
    
    
    
    
    
    
    
    1,940
    
    
    
    1,9402008
    
    
    
    
    
    
    
    
    
    
    757
    
    
    
    7572009
    
    
    
    
    
    
    
    
    
    
    742
    
    
    
    742Thereafter
    
    
    
    
    
    
    
    
    
    
    2,069
    
    
    
    2,069$
    424,500
    
    
    $
    100,000
    
    
    $
    14,563
    
    
    $
    539,063
 9. Derivative Instruments
 Accounting for
Derivative Instruments and Hedging Activities
 18




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10. Employee Benefit Plans
 American Bakers Association Retirement Plan
      19




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##### Table of Contents



Twelve Weeks EndedAugust 21,
    
    August 23,2004
    
    2003(dollars in thousands)Service cost
    
    $
    473
    
    
    $
    580Interest cost
    
    
    750
    
    
    
    662Expected return on negative plan assets
    
    
    92
    
    
    
    59Recognition of 

Prior service cost
    
    
    98
    
    
    
    313Actuarial (gain) loss
    
    
    1,779
    
    
    
    (245
    )Net pension expense
    
    $
    3,192
    
    
    $
    1,369
 Defined Benefit Pension Plan
  Twelve Weeks EndedAugust 21,
    
    
    August 23,2004
    
    
    2003(dollars in thousands)Service cost
    
    $
    155
    
    
    $
    162Interest cost
    
    
    860
    
    
    
    857Expected return on plan assets
    
    
    (1,003
    )
    
    
    (774
    )Recognition of

Prior service cost
    
    
    40
    
    
    
    41Actuarial loss
    
    
    46
    
    
    
    333Net pension expense
    
    $
    98
    
    
    $
    619
 Postretirement Health and Life Plans
  20




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##### Table of Contents



Twelve Weeks EndedAugust 21,
    
    August 23,2004
    
    2003(dollars in thousands)Service cost
    
    $
    674
    
    
    $
    1,151Interest cost
    
    
    1,132
    
    
    
    1,922AmortizationUnrecognized prior service cost (benefit)
    
    
    (1,511
    )
    
    
    (801
    )Unrecognized net loss
    
    
    374
    
    
    
    1,012Net postretirement benefit expense
    
    $
    669
    
    
    $
    3,284
  11. Supplemental Executive Retirement Plan
   Twelve Weeks EndedAugust 21,
    
    August 23,2004
    
    2003(dollars in thousands)Service cost
    
    $
    231
    
    
    $
    246Interest cost
    
    
    385
    
    
    
    348Recognition ofPrior service cost
    
    
    629
    
    
    
    630Actuarial loss
    
    
    29
    
    
    
    24Total SERP expense
    
    $
    1,274
    
    
    $
    1,248
  21




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12. Restructuring Charges
  Twelve Weeks EndedAugust 21,
    
    August 23,2004
    
    2003(dollars in thousands)Severance costs
    
    $
    2,181
    
    
    $
    37Long-lived asset charges
    
    
    3,354
    
    
    
    Other exit costs
    
    
    1,786
    
    
    
    595Total
    
    $
    7,321
    
    
    $
    632
 Fiscal 2005 Activity
     22




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##### Table of Contents



Long-LivedSeverance
    
    Assetand Related
    
    ChargesBenefits
    
    (Credits)
    
    Other
    
    Total(dollars in thousands)Third Quarter 2003 PlanBalance May 29, 2004
    
    $
    
    
    
    $
    
    
    
    $
    1,294
    
    
    $
    1,294Expensed in Fiscal 2005
    
    
    
    
    
    
    187
    
    
    
    105
    
    
    
    292Cash Paid in Fiscal 2005
    
    
    
    
    
    
    
    
    
    
    (265
    )
    
    
    (265
    )Noncash Utilization in
Fiscal 2005
    
    
    
    
    
    
    (187
    )
    
    
    
    
    
    
    (187
    )Balance, August 21, 2004
    
    
    
    
    
    
    
    
    
    
    1,134
    
    
    
    1,134Second Quarter 2004 PlanBalance May 29, 2004
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    117Expensed in Fiscal 2005
    
    
    
    
    
    
    
    
    
    
    336
    
    
    
    336Cash Paid in Fiscal 2005
    
    
    (66
    )
    
    
    
    
    
    
    (336
    )
    
    
    (402
    )Noncash Utilization in
Fiscal 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, August 21, 2004
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    51Fourth Quarter 2004 PlanBalance May 29, 2004
    
    
    1,243
    
    
    
    
    
    
    
    3,109
    
    
    
    4,352Expensed in Fiscal 2005
    
    
    (129
    )
    
    
    
    
    
    
    541
    
    
    
    412Cash Paid in Fiscal 2005
    
    
    (666
    )
    
    
    
    
    
    
    (1,956
    )
    
    
    (2,622
    )Noncash Utilization in
Fiscal 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, August 21, 2004
    
    
    448
    
    
    
    
    
    
    
    1,694
    
    
    
    2,142Monroe, LA Bakery ClosingExpensed in Fiscal 2005
    
    
    253
    
    
    
    200
    
    
    
    
    
    
    
    453Cash Paid in Fiscal 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Noncash Utilization in
Fiscal 2005
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    (200
    )Balance, August 21, 2004
    
    
    253
    
    
    
    
    
    
    
    
    
    
    
    253Buffalo, NY Bakery Closing
& Outlet ClosingsExpensed in Fiscal 2005
    
    
    1,376
    
    
    
    2,937
    
    
    
    247
    
    
    
    4,560Cash Paid in Fiscal 2005
    
    
    (147
    )
    
    
    
    
    
    
    
    
    
    
    (147
    )Noncash Utilization in
Fiscal 2005
    
    
    
    
    
    
    (2,937
    )
    
    
    
    
    
    
    (2,937
    )Balance, August 21, 2004
    
    
    1,229
    
    
    
    
    
    
    
    247
    
    
    
    1,476Pacific NorthwestExpensed in Fiscal 2005
    
    
    681
    
    
    
    30
    
    
    
    557
    
    
    
    1,268Cash Paid in Fiscal 2005
    
    
    (319
    )
    
    
    
    
    
    
    
    
    
    
    (319
    )Noncash Utilization in
Fiscal 2005
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )Balance, August 21, 2004
    
    
    362
    
    
    
    
    
    
    
    557
    
    
    
    919ConsolidatedBalance, May 29, 2004
    
    
    1,360
    
    
    
    
    
    
    
    4,403
    
    
    
    5,763Expensed in 2005
    
    
    2,181
    
    
    
    3,354
    
    
    
    1,786
    
    
    
    7,321Cash Paid in 2005
    
    
    (1,198
    )
    
    
    
    
    
    
    (2,557
    )
    
    
    (3,755
    )Noncash Utilization in 2005
    
    
    
    
    
    
    (3,354
    )
    
    
    
    
    
    
    (3,354
    )Balance, August 21, 2004
    
    $
    2,343
    
    
    $
    
    
    
    $
    3,632
    
    
    $
    5,975
 Fiscal 2004 Activity
   23




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Long-LivedSeverance
    
    Assetand Related
    
    Charges orBenefits
    
    (Credits)
    
    Other
    
    TotalSecond Quarter 2003 Plan
    
    $
    1,464
    
    
    $
    (1,396
    )
    
    $
    1,747
    
    
    $
    1,815Third Quarter 2003 Plan
    
    
    2,840
    
    
    
    2,829
    
    
    
    4,857
    
    
    
    10,526Second Quarter 2004 Plan
    
    
    658
    
    
    
    517
    
    
    
    1,067
    
    
    
    2,242Third Quarter 2004 Plan
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    1,200Fourth Quarter 2004 Plan
    
    
    2,184
    
    
    
    407
    
    
    
    4,642
    
    
    
    7,233Monroe, LA Bakery Closing
    
    
    253
    
    
    
    200
    
    
    
    
    
    
    
    453Buffalo, NY Bakery
Closing & Outlet
Closings
    
    
    1,376
    
    
    
    2,937
    
    
    
    247
    
    
    
    4,560Pacific Northwest
    
    
    681
    
    
    
    30
    
    
    
    557
    
    
    
    1,268
  Long-LivedSeverance
    
    Assetand Related
    
    ChargesBenefits
    
    (Credits)(1)
    
    Other
    
    TotalThird Quarter 2003 Plan
    
    $
    
    
    
    $
    192
    
    
    $
    286
    
    
    $
    478Second Quarter 2004 Plan
    
    
    (24
    )
    
    
    332
    
    
    
    727
    
    
    
    1,035Fourth Quarter 2004 Plan
    
    
    (281
    )
    
    
    295
    
    
    
    578
    
    
    
    592Monroe, LA Bakery Closing
    
    
    (37
    )
    
    
    178
    
    
    
    357
    
    
    
    498Buffalo, NY Bakery
Closing & Outlet
Closings
    
    
    (2
    )
    
    
    68
    
    
    
    1,141
    
    
    
    1,207
 
 (1)
    
    Excludes gains realized on subsequent sales of real property. 24




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13. Income Taxes
  Twelve Weeks EndedAugust 21,
    
    August 23,2004
    
    2003Statutory federal tax rate
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net
    
    
    2.7
    
    
    
    2.0Non-deductible goodwill impairment
    
    
    (25.5
    )
    
    
    Valuation allowance increase
    
    
    (9.6
    )
    
    
    Adjustments to prior year tax reserves
    
    
    3.2
    
    
    
    Other
    
    
    (0.3
    )
    
    
    (0.5
    )5.5
    %
    
    
    36.5
    %
   14. Commitments and Contingencies
   25




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15. Earnings (Loss) per Share
 Earnings per
Share
 29




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Twelve Weeks EndedAugust 21,
    
    August 23,2004
    
    2003(in thousands)Weighted average common shares
outstanding:Basic
    
    
    44,919
    
    
    
    44,805Effect of dilutive stock compensation
    
    
    
    
    
    
    202Diluted
    
    
    44,919
    
    
    
    45,007
   16. Comprehensive Income (Loss)
  Twelve Weeks EndedAugust 21,
    
    
    August 23,2004
    
    
    2003(dollars in thousands)Net income (loss)
    
    $
    (243,466
    )
    
    $
    10,514Other comprehensive income (loss):Change in fair value of cash flow hedges, net of income taxes
of $0 and $869, respectively
    
    
    (1,919
    )
    
    
    1,447Losses on interest rate swaps reclassified to interest
expense, net of income taxes of $0 and $1,013, respectively
    
    
    816
    
    
    
    1,688Commodity derivative losses reclassified to cost of products
sold, net of income taxes of $0 and $199, respectively
    
    
    (7
    )
    
    
    333Minimum pension liability adjustment, net of income taxes of $0
    
    
    
    
    
    
    (1,110
    )
    
    
    3,468Comprehensive income (loss)
    
    $
    (244,576
    )
    
    $
    13,982
 30




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17. Segment Information
 Disclosures about Segments of an Enterprise and Related Information
  Wholesale Operations
 Retail Operations
     31




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Twelve Weeks EndedConsolidated
    
    August 21, 2004(dollars in thousands)Net SalesWholesale Operations
    
    $
    707,870Retail Operations
    
    
    104,107Total net sales
    
    $
    811,977Operating Income (Loss)Wholesale Operations
    
    $
    2,414Retail Operations
    
    
    (1,101
    )1,313Corporate
    
    
    (249,721
    )Total operating loss
    
    
    (248,408
    )Interest expense
    
    
    8,994Other expense
    
    
    1499,143Loss before income taxes
    
    
    (257,551
    )Provision for income taxes
    
    
    (14,085
    )Net loss
    
    $
    (243,466
    )
 18. Subsequent Events
  Accounting for the
Impairment or Disposal of Long-Lived Assets
     32




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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
  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
 RESTATEMENT OF FINANCIAL STATEMENTS
  RESULTS OF OPERATIONS
  Twelve Weeks EndedAugust 21,
    
    August 23,2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold
    
    
    50.9
    
    
    
    49.0Selling, delivery and administrative expenses
    
    
    49.6
    
    
    
    45.2Restructuring charges
    
    
    0.9
    
    
    
    0.1Depreciation and amortization and loss on sale or abandonment of assets
    
    
    2.7
    
    
    
    2.6Goodwill and other intangible assets impairment
    
    
    26.5
    
    
    
    Operating income (loss)
    
    
    (30.6
    )
    
    
    3.1Interest expense  net
    
    
    1.1
    
    
    
    1.1Income (loss) before income taxes
    
    
    (31.7
    )
    
    
    2.0Income taxes
    
    
    (1.7
    )
    
    
    0.7Net income (loss)
    
    
    (30.0
    )%
    
    
    1.3
    %
 35




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Net sales.
 Gross profit.
 Selling, delivery and administrative expenses.
 Restructuring charges.
 Goodwill impairment. Goodwill and Other Intangible Assets
 Operating loss.
 Interest expense.
 Provision for income taxes.
 36




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CASH RESOURCES AND LIQUIDITY
 Sources of Liquidity and Capital Cash Resources and Liquidity
 CASH FLOWS
  Cash from operating activities.
 Cash used in investing activities.
 Cash used in financing activities.
 OFF-BALANCE SHEET FINANCING
  CONTRACTUAL OBLIGATIONS
    37




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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 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 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;
 38




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
    
    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 recognize, attract, motivate and/or retain 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;
    
    the results of a Securities and Exchange Commission, or SEC, investigation
concerning our financial statements following our announcement that the audit committee
of our board of directors had retained independent counsel to investigate our manner of
setting its workers compensation and other reserves;
    
    the delayed filing with the SEC of our Annual Reports on Form 10-K and of our
Quarterly Reports on Form 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 a low carbohydrate diet trend;
    
    the performance of our recent new product introductions, including the success of
such new products in achieving and retaining market share;
    
    commodity and energy costs;
    
    risks associated with price increases; 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;
 39




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
    
    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;
    
    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 rights;
    
    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 American Bakers Association Retirement 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;
 40




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
    
    acceptance of new product offerings by consumers and our ability to expand existing brands;
    
    the performance of our recent new product introductions;
    
    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 restatement of the first, second and third quarters of
fiscal 2004, 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 Disclosure about Market Risk
  Commodity prices.
 Interest rates.
 41




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Item 4. Controls and Procedures
      42




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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




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SIGNATURES
  INTERSTATE BAKERIES CORPORATIONDated:
  October 6, 2006
    
    By:

/s/
Antonio C. Alvarez IIAntonio C. Alvarez IIChief Executive Officer(Principal Executive Officer)Dated:
  October 6, 2006
    
    By:

/s/
Ronald B. HutchisonRonald B. HutchisonExecutive Vice President and Chief Financial 
Officer(Principal Financial Officer)
 44